UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND 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 its charter)
Delaware 87-0462807
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(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)
Registrant's telephone number, including area code: (801) 264-1001
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Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K:____
The aggregate market value of the registrant's voting stock held by
nonaffiliates computed with reference to the closing price as quoted on the
NASDAQ Stock Market on March 18, 2002, was approximately $8,049,465. For the
purposes of the foregoing, the registrant assumed that affiliates included only
the registrant's directors, executive officers and principal shareholders filing
Schedules 13D or 13G with respect to the registrant's common stock.
The number of shares outstanding of ZEVEX' Common Stock as of March 18,
2002 was 3,415,197
Documents incorporated by reference: none
TABLE OF CONTENTS
Part I
Item 1 BUSINESS -- 3
Item 2 PROPERTIES -- 21
Item 3 LEGAL PROCEEDINGS -- 21
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- 21
Part II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS -- 22
Item 6 SELECTED FINANCIAL DATA -- 23
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- 23
Item7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK -- 33
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- 33
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE -- 33
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- 34
Item 11 EXECUTIVE COMPENSATION -- 36
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT -- 38
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- 39
Part IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K -- 40
Item 14(c) INDEX TO EXHIBITS -- 42
SIGNATURES -- 41
PART I
ITEM 1. BUSINESS
GENERAL
ZEVEX(R) International, Inc. ("ZEVEX"), through its divisions and subsidiaries,
engages in the business of designing, manufacturing and distributing medical
devices. ZEVEX' product lines include proprietary medical devices that it
designs, manufactures, and distributes, and contract-manufactured products that
it designs and manufactures for original equipment manufacturers ("OEM's").
Through its manufacture and sale of enteral feeding pumps and related devices,
ZEVEX has become one of the largest U.S. competitors in the enteral nutrition
delivery market. The market includes feeding pumps, disposable sets and feeding
tubes 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.
ZEVEX competes in the musculoskeletal evaluation market, through its
manufacturing and sales of stand-alone and computerized products that measure
isolated muscle strength, joint ranges of motion and sensation. ZEVEX' products
are internationally recognized as state-of-the art in physical medicine
measurement markets, for providing calibrated hardware and Windows(R)-compatible
software. ZEVEX' musculoskeletal evaluation, functional capacity evaluation,
upper extremity and hand testing, and pain evaluation products are used for
outcomes assessment during rehabilitation, medical-legal evaluations for
personal injury and workers compensation claims and clinical documentation.
ZEVEX also provides design and manufacturing services in a multi-billion dollar
market to worldwide medical device leaders who, in turn, sell ZEVEX' components
and systems under private labels or incorporate them into their products. ZEVEX'
OEM products include ultrasonic sensors and surgical handpieces, optoelectronic
components, and electronic instruments. ZEVEX' operation in Salt Lake City is a
world-class medical device manufacturer, meeting ISO9001 and EN46001
certification requirements, as well as the U. S. Food and Drug Administration's
Good Manufacturing Practices.
ZEVEX' current strategy is to foster the growth of proprietary product revenues
through market penetration and the development of products that complement its
existing two lines of proprietary products. Management intends to achieve
healthier margins resulting from engineering improvements to its enteral
nutrition delivery business, and expand the musculoskeletal evaluation sales
force so the more favorable margins associated with the musculoskeletal
evaluation product line continue to positively impact ZEVEX' profitability. In
addition, ZEVEX will continue to manufacture products for others in order to
capitalize on the outsourcing trend in the medical device industry, focusing on
manufacturing opportunities where pricing is based upon the premium value of
ZEVEX' technical competencies. ZEVEX' operations bring together common or
related technologies, enhancing the development of innovative products, quality
and service, and providing efficient sharing of business resources.
For information regarding ZEVEX' financial condition and results of operations
please see Item 8 of the report entitled "Financial Statements and Supplementary
Data" and Notes to Consolidated Financial Statements included in that item.
ZEVEX' PROPRIETARY PRODUCTS
Enteral Nutrition Delivery Products
ZEVEX sells two major lines of enteral feeding pumps and a variety of related
disposable delivery sets and feeding tubes. Enteral feeding is a means of
providing nutrition to patients who may have experienced disorders that prevent
normal digestion and need direct gastrointestinal nutritional therapy. Many
enteral feeding patients require continuous administration of nutritional
solutions throughout the day, which requires the patient to carry an enteral
feeding pump.
ZEVEX has successfully applied its engineering and regulatory expertise to the
development, commercialization, and marketing of the EnteraLite(R) Ambulatory
Enteral Feeding Pump for patients who require direct gastrointestinal
nutritional therapy. Management believes that the EnteraLite(R) pump is the
lightest, most compact and most mobile enteral feeding pump in the U.S. market,
possessing unprecedented safety and accuracy in enteral nutrition delivery. The
EnteraLite(R)'s unique features include the ability to operate in any
orientation, +/-5% accuracy and a 24-hour battery, the life of which is
one-third longer than the battery life of its closest competitor. The
EnteraLite(R) pump carries a two-year warranty, twice the industry average.
First introduced in 1996, the EnteraLite(R) continues to gain acceptance in the
home health care market due to the product's superior mobility and
state-of-the-art features. ZEVEX believes that by improving the convenience of
nutrition delivery, the EnteraLite(R) can contribute to better clinical outcomes
and improved quality of life for enteral patients. The EnteraLite(R) requires
the use of disposable feeding bags and tubing sets, which also are sold by
ZEVEX. ZEVEX has been awarded eight U.S. patents for technology related to the
EnteraLite(R) and its disposable sets.
The 1998 acquisition of Nutrition Medical's line of stationary pumps, delivery
sets and feeding tubes, followed by the 2000 acquisition of the installed base
of Nestle Clinical Nutrition pumps, have expanded the ZEVEX line of enteral
delivery products. ZEVEX now manufactures and distributes the less expensive
EnteralEZ(R) enteral feeding pump, which is intended for applications where
patients are not mobile. Complementing this pump model is a line of disposable
delivery sets sold by ZEVEX for use with the EnteralEZ(R) pump. These sets
include feeding solution bags of various sizes, as well as "spike" sets for use
with pre-filled feeding solution containers. The Nutrition Medical acquisition
included the Panda(R) line of disposable feeding tubes, which include adult and
pediatric nasoenteric tubes, replacement gastrostomy tubes and a needle catheter
jejunostomy kit. Additionally, in 1999 ZEVEX launched the EnteraFlo(TM) line of
nasoenteric feeding tubes, which improves feeding flow and ultimately patient
comfort. These single patient use disposable devices are used in conjunction
with a feeding pump to administer feeding solutions to the gastrointestinal
tract of the patient via commonly accepted procedures.
Musculoskeletal Evaluation Products
ZEVEX manufactures and markets precision instruments and software in the
physical and industrial medicine markets to improve the accuracy, efficiency and
objectivity of musculoskeletal, functional capacity, hand and upper extremity,
pain, impairment, and outcomes evaluations. ZEVEX generally refers to these
products as musculoskeletal evaluation products. ZEVEX' products test and
evaluate patients, document effects of injury, track improvements, and measure
disabilities. Products are used, for example, by chiropractors, physical
therapists, osteopaths, and occupational therapists for outcomes assessment
during rehabilitation, medical-legal evaluations for personal injury and workers
compensation claims, and clinical documentation.
The musculoskeletal evaluation product line includes Commander(TM), Dualer(TM),
Tracker(TM), IsoTrack Pro(TM), JobSite(TM) Software, and Easy Docs Plus(TM)
Software products, and embodies a unique modular component concept that gives
clinicians easy entry into advanced evaluation systems which are scalable as
their practices expand. ZEVEX' software automatically collects data and prints
reports for clinical records, legal documentation and third-party reimbursement.
ZEVEX OEM CONTRACT DESIGN AND MANUFACTURING SERVICES
ZEVEX provides design and manufacturing services to medical companies who sell
ZEVEX' components and systems under private labels or incorporate them into
their products. ZEVEX designs and manufactures surgical systems, device
components, and sensors for established and emerging technology companies, such
as Alaris Medical Systems, Inc., Allergan, Inc., various divisions of Baxter
Healthcare Corporation, Medtronic Corporation, SIMS Deltec, Inc., and Terumo
Corporation. ZEVEX offers its customers over 16 years of specialized engineering
and manufacturing expertise.
Industry sources indicate that there is a strong trend by medical device
companies to outsource their device manufacturing requirements. Many emerging
device companies do not have the engineering, manufacturing, or regulatory
expertise to quickly and efficiently take a device from conception to commercial
use. Even larger, well-established companies, which may have the capital to
develop such expertise, may lack the required personnel and time to accumulate
such expertise or may want to focus their resources in areas other than
manufacturing. In the medical device industry in particular, there are
substantial regulatory compliance requirements, in both the United States and
overseas, that must be addressed in designing and manufacturing devices. By
focusing its resources and expertise in the design and manufacturing areas,
ZEVEX believes it offers customers the ability to outsource engineering and
manufacturing needs on a cost-effective basis, often allowing the customer to
take a product to market more quickly and efficiently, at a lower cost, and with
higher quality than a customer could achieve with its own resources.
ZEVEX uses extensive engineering and regulatory expertise to deliver integrated
design and manufacturing solutions to its customers. ZEVEX is registered with
the United States Food and Drug Administration ("FDA") as a medical device
manufacturer and has developed internal systems intended to maintain compliance
with the FDA's Good Manufacturing Practices ("GMP"). ZEVEX also is certified by
the International Organization for Standardization ("ISO") to 9001 and EN46001
standards, which means that it has met internationally-recognized quality
standards for the design, manufacture, and testing of products. ZEVEX devotes
significant management time and financial resources to GMP compliance and ISO
certification.
PRINCIPAL OEM PRODUCTS
A majority of ZEVEX' contract manufacturing business involves the following four
general product categories:
Ophthalmic Surgical Devices
ZEVEX designs and manufactures ultrasonic phacoemulsification handpieces and
handpiece drive circuits for the surgical removal of cataracts.
Phacoemulsification is a method of cataract extraction that uses ultrasound
waves to break the cataract-obstructed lens of the eye into small fragments that
can be removed through a hollow needle. Phacoemulsification is currently used in
more than 90 percent of cataract procedures in the United States. ZEVEX
manufactures handpieces of several designs for Allergan, Inc., a market leader
in ophthalmology. ZEVEX also provides customized handpieces and handpiece drive
circuits to many other customers worldwide.
Ultrasonic Sensors
ZEVEX designs and manufactures a variety of non-invasive ultrasonic sensors for
the detection of air bubbles and the monitoring of liquid levels in critical
medical devices. ZEVEX' air bubble detectors monitor intravenous fluid lines in
a variety of devices and systems, including drug infusion pumps, hemodialysis
machines, blood collection systems, and cardiopulmonary bypass systems. ZEVEX'
liquid level detectors utilize ZEVEX' patented coupling technology and are used
to monitor critical liquid levels in various reservoirs used in surgery, such as
those employed in cardiopulmonary bypass systems.
Optoelectronic Sensors and Custom Integrated Circuits
ZEVEX designs and manufactures a variety of optical emitters and detectors,
custom integrated circuit products, and semiconductor components used in medical
applications. ZEVEX' product capabilities include fiber optic links, integrated
optoisolators, high-speed sensor integrated circuits, application specific
integrated circuit (ASIC) devices, and solid state relays. Medical applications
for these technology products include diagnostic and therapeutic equipment, such
as blood analyzers and dialysis machines.
Medical Systems
The ultimate level of product sophistication for ZEVEX' manufacturing services
involves medical systems manufacturing. During 2001, ZEVEX manufactured the
Power Medical Interventions, SurgASSIST(TM), which is a computer-mediated
technology platform that provides a unique level of intraluminal access,
surgical precision, and patient safety, with application in numerous surgical
stapling procedures throughout the alimentary tract.
REVENUE SOURCES
The following table sets forth the source of ZEVEX' total revenues during the
last 3 years, allocated between six product/service categories.
Revenue breakdown by product/service, by percentage
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Product 2001 2000 1999
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- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Enteral Nutrition Delivery 43.5% 43.4% 32.7%
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- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ultrasonic and Optoelectronic 24.7% 15.1% 18.9%
Sensors, Custom IC's
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Musculoskeletal Evaluation 12.6% 10.1% 14.2%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ophthalmic Surgical Devices 10.6% 13.9% 18.0%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Medical Systems 4.6% 13.9% 7.7%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Design and Engineering 4.0% 3.6% 8.5%
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CAPABILITIES
Design and Engineering
ZEVEX has extensive design and engineering capabilities that it uses for its own
product development as well as for servicing its contract manufacturing
customers. ZEVEX' engineers have broad experience in designing, engineering, and
testing an array of medical technology devices and systems, with particular
expertise in ultrasonic and optoelectronic devices, as well as fluid delivery
systems.
ZEVEX' manufacturing service customers generally rely on ZEVEX from the outset
of their projects for complete design, engineering, component analysis, testing,
and regulatory compliance for their devices or systems. In some instances,
customers have come to ZEVEX with final drawings for devices that they believe
are ready for manufacturing. ZEVEX' engineers assist sales and marketing
personnel in evaluating requests for proposals and in developing proposed
solutions, cost estimates, and bids for each product. ZEVEX' design and
engineering services are generally provided to customers on a time-and-materials
fee basis, as part of a plan to eventually manufacture the customer's product.
ZEVEX has made significant investments in state-of-the-art equipment to support
its design and engineering staff, including product performance modeling
software, custom test stations, and three-dimensional computer aided design
("CAD") software. ZEVEX has independently developed what management believes is
the most sophisticated modeling software for ultrasonic surgical device
development. Management believes that ZEVEX' unique modeling and design
capacities hasten product development and improve the quality of the final
device.
Manufacturing
ZEVEX' proprietary products are generally assembled and tested at its
manufacturing facility in Salt Lake City, Utah. ZEVEX' enteral feeding
disposable products are sub-contracted to specialty manufacturers. Design,
engineering, and manufacturing services for other companies are provided by
ZEVEX from the Salt Lake City facility.
Inventory management and MRP software programs are used to manage inventory and
control the ordering process for the more than 5,000 parts used in ZEVEX' and
its customers' products. As the evolution of a device or system reaches
production, team members with direct responsibility for purchasing,
manufacturing, and quality assurance assume a greater role in the project. The
project team develops an assembly process, product testing protocol, and quality
assurance procedures to produce high-quality products that satisfy internal and
external specifications, as well as the FDA's GMP and ISO 9001/EN 46001 quality
standards.
ZEVEX usually provides design and engineering services pursuant to negotiated
manufacturing agreements, which address quantity, pricing, warranty, indemnity,
and other terms of the relationship. Such contracts may or may not be exclusive
manufacturing arrangements, and may or may not include minimum volume
requirements. In some cases, no minimum purchase is required. In other cases, a
customer commits to purchase a minimum quantity identified in a rolling forecast
of production. ZEVEX generally warrants its products to be free from defects in
materials and workmanship for periods ranging from 90 days to the life of the
product.
SUPPLIERS
ZEVEX purchases its component parts and raw materials from a variety of approved
suppliers. ZEVEX is not dependent on a single supplier for any item, and
believes that it can acquire materials from various sources on a timely basis.
SALES AND MARKETING
Enteral Nutrition Delivery Products
ZEVEX has a network of direct territory managers and independent manufacturers'
representatives who sell enteral pumps, disposable delivery sets and feeding
tubes. These representatives have been selected for their experience within the
markets served by ZEVEX' products, and they sell directly to home health care
service providers, hospitals, and nursing homes. The direct territory managers
and manufacturers' representatives are regionally supported by independent
specialists with clinical credentials (registered dietitians or nurses), who are
employed on a contract basis by ZEVEX. ZEVEX employs a national sale manager to
deploy its sales resources effectively in these major markets.
Customers generally purchase EnteraLite(R) Ambulatory Enteral Feeding Pumps
directly from ZEVEX. In cases where a lease or rental is preferred, arrangements
are made through a third party that specializes in medical equipment financing.
Disposable sets are then purchased as needed. Customers typically purchase 20 -
30 disposable sets per month for each pump placed in service.
Due to competition, lower-cost stationary pumps generally have been placed at no
up-front cost to the user, in return for set "usage" agreements, which typically
guarantee minimum purchases of 15 disposable sets per pump per month, once the
pumps are placed in service.
The distribution of the EnteraLite(R), stationary pumps, delivery sets, and
feeding tubes are serviced by ZEVEX' national sales manager, account specialists
and a customer service department, in addition to the sales force described
above. During 2001, a version of the stationary pump was sold under private
label for distribution by another company in Europe.
Musculoskeletal Evaluation Products
ZEVEX markets its Musculoskeletal Evaluation product line worldwide through a
combination of direct sales representatives, independent dealers and
manufacturers' representatives. These direct and independent representatives and
dealers were selected for their experience in marketing to chiropractors,
osteopaths, physical therapists and occupational therapists. The sales force is
supported by regional sales managers, who are full-time employees of ZEVEX.
ZEVEX also sells its products via seminars, directed mailings, catalogs, and
telemarketing through its customer service personnel. ZEVEX also markets
internationally through a distributor network.
Contract Design and Manufacturing Services
ZEVEX generates new design and manufacturing projects from customers using
direct sales personnel who are trained in ZEVEX' engineering expertise and
manufacturing capabilities. Project engineers also participate extensively in
sales and marketing activities. ZEVEX promotes its design and manufacturing
capabilities at industry trade shows, by advertising in leading industry
publications, and by obtaining referrals from customers and other persons who
are familiar with ZEVEX' services.
COMPETITION
Enteral Nutrition Delivery Products
Two major competitors exist in the U.S. market for ambulatory enteral feeding
pumps. Ross Laboratories, a division of Abbott Laboratories, offers the
Clearstar(R) and the Companion(R) pump, which was originally introduced to the
market in the late 1980's. ZEVEX estimates that Ross holds a approximately 45%
market share for ambulatory and non-ambulatory enteral feeding applications. The
second competitor, Kendall Healthcare, a division of TYCO, offers the
kangaroo(R) PET enteral feeding pump, which has a limited market because it can
be operated only in an upright position. ZEVEX estimates that Kendall Healthcare
presently holds approximately 21% of the total market for enteral pumps and
disposable sets in both ambulatory and non-ambulatory applications. In addition
to Ross Laboratories and Kendall Healthcare, Novartis also competes in the U.S.
market for stationary enteral nutrition delivery pumps, which includes ZEVEX'
EnteralEZ(R) product line.
Well-established competitors such as Ross Laboratories and Kendall Healthcare
typically bundle products for the greatest advantage in group-purchasing
situations. Each of these competitors offers a breadth of product offerings that
exceeds that of ZEVEX. Keys to ZEVEX' ability to compete effectively are the
unique features of its product offerings and the benefits to customers who
utilize them. ZEVEX expects to build upon its reputation for innovation that was
earned by its EnteraLite(R) Ambulatory Enteral Feeding Pump for mobile enteral
patients. In order to continue to gain market share, ZEVEX plans to grow its
product line so that it too can bundle a family of products to meet the enteral
nutrition delivery needs of its customers. ZEVEX expects to develop and/or
acquire products that are complementary to its enteral nutrition delivery
product line, particularly those having features that can significantly improve
a patient's quality of life, and ensure safety and ease of enteral
administration.
Musculoskeletal Evaluation Products
ZEVEX' primary competitors in the musculoskeletal evaluation market are a
limited number of small privately held companies. Most notable are ARCON, The
Blankenship System, Key Methods, Isernhagen, Cedaron and Greenleaf Medical.
Generally, these companies concentrate on particular areas such as
musculoskeletal testing, functional capacity evaluation, or hand testing. ZEVEX'
management believes that few competitors can currently penetrate the broad
spectrum of the medical profession that ZEVEX has done with its product line,
because their products lack the full range of capabilities offered by ZEVEX, and
none offer a completely modular product line as comprehensive as its own.
Competitive factors in the musculoskeletal market include perceived quality,
price, name recognition, training capabilities, support, operating system, and
systems integration potential.
Contract Design and Manufacturing Services
ZEVEX' primary competitors for design and manufacturing services include Plexus,
Inc., Colorado MedTech Inc., United Medical Manufacturing, Inc. and Sparton
Electronics Corporation. These contract manufacturers operate in the medical
technology industry, and some have substantially greater financial and marketing
resources than ZEVEX. Competitive factors in medical device design and
manufacturing include quality, regulatory compliance, engineering competence,
cost of non-recurring engineering, price of the manufactured product,
experience, customer service, and the ability to meet design and production
schedules. ZEVEX believes that its unique expertise in ultrasound,
optoelectronics and fluid delivery systems will allow it to compete effectively
for contracts involving these technologies.
PATENTS AND TRADEMARKS
As of December 31, 2001, ZEVEX held fourteen U.S. patents and three
international patents on devices developed by ZEVEX, with nine additional U.S.
patents and ten international patents pending. The loss of certain patents, key
to ZEVEX' proprietary products, could have a materially adverse effect on its
overall business operations. ZEVEX also relies on trade secrets and
confidentiality agreements to protect the proprietary nature of its
technologies.
In addition, ZEVEX owns and has applied for numerous trademarks in the United
States and abroad. ZEVEX believes that its trademarks are well recognized in the
various markets for its products. With the exception of the EnteraLite(R) and
Enteral EZ(R) trademarks, which are registered for its enteral feeding pumps,
ZEVEX believes that the loss of any trademark would not have a material adverse
effect on its overall business operations.
RESEARCH AND DEVELOPMENT FOR ZEVEX' PROPRIETARY PRODUCTS
ZEVEX' research and development projects are primarily focused on new
proprietary products. As of December 31, 2001, ZEVEX had two full-time engineers
in research and development, and had several other designers and engineers,
including independent contractors, contributing to research and development
projects. During the first quarter of 2001, ZEVEX restructured its engineering
group to primarily focus on manufacturing and it is continuing to utilize
independent contractors for research and development projects. ZEVEX invested
$477,653 in 2001, $852,273 in 2000, and $670,886 in 1999 for research and
development of new products. In 2001, research and development costs represented
approximately 2% of ZEVEX' annual revenues, compared to 3% in 2000 and 1999.
MAJOR CUSTOMERS
Historically, large portions of ZEVEX' revenues were attributable to design and
manufacturing services for a small number of major customers. However, beginning
in 2000 and continuing during the 2001 fiscal year, ZEVEX continued to grow its
proprietary product business. Because revenues of ZEVEX' proprietary products
now exceed those of contract manufactured products, the relative percentage
represented by a few major customers has decreased. As a result, the number of
customers comprising more than 10% of ZEVEX' revenues has declined when compared
to prior years. During the 2001 fiscal year, no customer accounted for 10% or
more of ZEVEX' revenues. During the 2000 fiscal year, 10% of revenues were from
Allergan, Inc. and 14% of revenues were from Cardiac Science, Inc. During the
1999 fiscal year, 13% of revenues were from Allergan. ZEVEX management expects
that, with its continued focus toward proprietary products, the percentage of
total revenue represented by a few major customers will continue to decline, so
that the loss of a single customer would have less potential for a materially
adverse effect on the financial condition or results of operations of ZEVEX in
the future.
BACKLOG
At December 31, 2001, ZEVEX had a backlog of approximately $4,633,005 on orders
for medical devices to be manufactured for other medical technology companies,
as compared to backlogs at December 31, 2000 and 1999, of $5,295,326 and
$5,640,478, respectively. ZEVEX estimates that approximately 90% of the backlog
will be shipped before December 31, 2002. As of March 6, 2002, ZEVEX had a
backlog of $4,112,564. For purposes of the above figures, backlog includes
product not yet shipped pursuant to purchase orders that have been received by
ZEVEX. This does not include any backlog for ZEVEX' proprietary products,
because ZEVEX generally holds appropriate levels in inventory for sale to
customers. Some of the orders included in the backlog may be canceled or
modified by customers without significant penalty. In addition, because
customers may place orders for delivery at various times throughout the year,
and because of the possibility of customer changes in delivery schedules or
cancellation of orders, ZEVEX' backlog as of any particular date may not
necessarily be a reliable indicator of future revenue.
GOVERNMENTAL REGULATION
ZEVEX' manufacturing facility, its customers' medical devices, and its
proprietary medical devices are subject to extensive regulation by the FDA under
the Food Drug and Cosmetics Act ("FDC Act"). Manufacturers of medical devices
must comply with applicable provisions of the FDC Act and associated regulations
governing the development, testing, manufacturing, labeling, marketing, and
distribution of medical devices, as well as record-keeping requirements, and the
reporting of certain information regarding device safety. In addition, ZEVEX'
facility is subject to periodic inspection by the FDA for compliance with the
FDA's GMP requirements. To ensure compliance with GMP requirements, ZEVEX
expends significant time, resources, and effort in the areas of training,
production, and quality assurance.
For certain medical devices manufactured by ZEVEX, the customer may need to
obtain FDA clearance in the form of a premarket approval ("PMA") application.
Such applications require substantial preclinical and clinical testing to obtain
FDA clearance. Currently, at least one of ZEVEX' customers is seeking or plans
to seek a PMA for devices to be manufactured by ZEVEX. Other medical devices can
be marketed without a PMA, but only by establishing, in a 510(k) premarket
notification, "substantial equivalence" to a predicate device.
Besides the FDA regulations described above, ZEVEX is also subject to various
state and federal regulations with respect to such matters as safe working
conditions, manufacturing practices, fire hazard control, environmental
protection, and the disposal of hazardous or potentially hazardous materials.
ZEVEX' operations involve the use and disposal of relatively small amounts of
hazardous materials.
As such, ZEVEX does not believe significant exposure for environmental matters
exist.
Beginning in 1998, all medical device manufacturers were required to obtain the
"CE Mark" to sell their products in the European Common Market. The CE Mark is a
quality designation given to products that meet certain policy directives of the
European Economic Area. ZEVEX has received and maintained ISO 9001 and EN46001
certification, which allows ZEVEX to CE Mark its own products and assist its
customers with obtaining the CE Mark for their products.
As part of a nationwide investigation into billing practices associated with
enteral nutrition delivery products, particularly with regard to billing
practices for pumps and disposable delivery sets, on July 2, 2001, the Office of
Inspector General (OIG) served a subpoena on ZEVEX' ZEVEX, Inc. subsidiary.
According to published reports, the investigation involved most manufacturers,
distributors and health care service providers in the United States enteral pump
industry and similar subpoenas were served on many of those parties. The
subpoena requested Company documents relating to its enteral pump customers,
marketing and billing practices. ZEVEX has responded to the subpoena and it is
cooperating with the investigation. As of Mach 18, 2002, legal counsel has been
unable to determine the potential future financial impact to ZEVEX, if any,
associated with the investigation.
EMPLOYEES
As of March 6, 2002, ZEVEX employed a total of 160 people in the following
areas: 61 in Manufacturing and Testing; 30 in Design and Engineering; 23 in
Administration; 17 in Customer Service and Relations; 22 in Sales and Marketing;
and 7 in Quality Assurance. ZEVEX has 151 employees located at its corporate
headquarters and manufacturing facility in Salt Lake City, Utah, and 9 employees
at various locations throughout the United States.
ZEVEX considers its labor relations to be good, and none of its employees are
covered by a collective bargaining agreement. Currently, the local economy is
stable and the unemployment rate is moderate in the Salt Lake City metropolitan
area, which means that ZEVEX faces competition to attract and retain qualified
personnel. However, at the same time, the Salt Lake City metropolitan area has a
well-educated work force and is considered an attractive place to live.
Accordingly, ZEVEX does not anticipate having difficulty in attracting and
retaining qualified personnel to meet its projected growth, although it is
likely to experience continued moderate growth in labor costs.
ENVIRONMENTAL COMPLIANCE COSTS
ZEVEX believes it is in compliance with all applicable environmental
regulations. Compliance with federal, state, and local provisions regarding the
production and discharge of material into the environment and the protection of
the environment are not expected to have a material adverse effect on capital
expenditures, earnings and the competitive position of ZEVEX.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND SALES
During the 2001 fiscal year, ZEVEX had total revenues of $29,882,075, of which
$2,207,648 was considered foreign source revenues. During the 2000 fiscal year,
ZEVEX had total revenues of $30,778,627, of which $972,313 was considered
foreign source revenues. During the 1999 fiscal year, ZEVEX had total revenues
of $23,026,208, of which $1,567,825 was considered foreign source revenues.
During the last three fiscal years, ZEVEX has had no long-lived assets, long
term customer relationships with a financial institution, mortgage or other
servicing rights, deferred policy acquisition costs, or deferred assets, in any
foreign country.
ORGANIZATIONAL STRUCTURE
ZEVEX is a Delaware corporation organized in 1987. It serves primarily as a
holding company conducting business operations through two subsidiaries: JTech
Medical Industries, a Utah corporation, and ZEVEX, Inc., a Delaware corporation.
JTech Medical conducts ZEVEX' musculoskeletal evaluation product business.
ZEVEX, Inc. conducts ZEVEX' other businesses. ZEVEX previously held a third
subsidiary, Aborn Electronics, Inc., but that subsidiary's operations were
transferred into ZEVEX, Inc. and the remaining shell corporation sold to its
prior owner during 2001.
FACTORS THAT MAY AFFECT FUTURE RESULTS
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
The disclosure and analysis set forth in this 2001 Form 10-K contains certain
forward-looking statements, particularly statements relating to future actions,
performance or results of current and anticipated products, sales efforts,
expenditures, and future financial results. From time to time, ZEVEX also
provides forward-looking statements in other publicly-released materials, both
written and oral. These statements are statements that do not relate strictly to
historical or current facts. When used in this report, the words such as
"plans," "expects," "will," "estimates," "believes," "projects," "anticipates"
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"). In all cases, a broad variety of risks and uncertainties, known
and unknown, as well as inaccurate assumptions can affect the realization of the
expectations or forecasts in those statements. Consequently, while such
statements represent Company management's current views, no forward-looking
statement can be guaranteed. Actual future results may vary materially.
ZEVEX undertakes no obligation to update any forward-looking statements, but
investors are advised to consult any further disclosures by ZEVEX on this
subject in its subsequent filings pursuant to the Securities Exchange Act of
1934 as amended. Furthermore, in accordance with the Private Securities
Litigation Reform Act of 1995, ZEVEX provides the following cautionary
statements identifying factors that could cause ZEVEX' actual results to differ
materially from expected and historical results. It is not possible to foresee
or identify all such factors. Consequently, this list should not be considered
an exhaustive statement of all potential risks, uncertainties, and inaccurate
assumptions.
Additionally, the following factors should be reviewed for a full understanding
of the business of ZEVEX and considered in evaluating ZEVEX' prospects for
future growth. The occurrence of one or more of the following risks or
uncertainties could have a material adverse effect on ZEVEX' business, results
of operations, and financial condition.
Risk Factors Relating to ZEVEX' OEM Customers
ZEVEX' success in contract manufacturing depends largely on the success of the
customers for its manufacturing services and on the devices designed and
manufactured by ZEVEX for those customers. Any unfavorable developments or
adverse effects on the sales of those devices or such customers' businesses,
results of operations, or financial position could have a corresponding adverse
effect on ZEVEX. In addition, ZEVEX sells certain types of medical devices to
multiple customers and to the extent there is an unfavorable development
affecting the sales of any such type of device generally, the adverse effect of
such development on ZEVEX would be more substantial than that presented by the
decline in sales to a single customer for such type of device. Additionally,
ZEVEX believes that its design and manufacturing customers and their devices
(and ZEVEX indirectly) are generally subject to the following risks:
Competitive Environment. The medical device industry is highly
competitive and subject to significant technological change.
Participation in such industries requires ongoing investment to keep
pace with technological developments and quality and regulatory
requirements. These industries consist of numerous companies, ranging
from start-up to well-established companies. Many of ZEVEX' customers
have a limited number of products, and some market only a single
product. As a result, any adverse development with respect to these
customers' products may have a material adverse effect on the business
and financial condition of such customer, which may adversely affect
that customer's ability to purchase and pay for its products
manufactured by ZEVEX. The competitors and potential competitors of
ZEVEX' customers may succeed in developing or marketing technologies
and products that will be preferred in the marketplace over the devices
manufactured by ZEVEX for its customers or that would render its
customers' technology and products obsolete or noncompetitive.
Emerging Technology Companies. A number of ZEVEX' customers are
emerging medical technology companies that have competitors and
potential competitors with substantially greater capital resources,
research and development staff, facilities, and substantially greater
experience in developing new products, obtaining regulatory approvals,
and manufacturing and marketing medical products. Approximately four
customers, representing 7% of ZEVEX' revenues in fiscal year 2001,
were, in management's opinion, emerging medical technology companies.
These customers may not be successful in launching and marketing their
products, or may not respond to pricing, marketing, or other
competitive pressures or the rapid technological innovation demanded by
the marketplace and, as a result, may experience a significant drop in
product revenues, which may hamper their ability to continue as a
customer of ZEVEX or even pay for services and products already
delivered.
Customer Regulatory Compliance. The FDA regulates many of the devices
manufactured by ZEVEX under the FDC Act, which requires certain
clearances from the FDA before new medical products can be marketed.
There can be no assurance that ZEVEX' customers will obtain such
clearances on a timely basis, if at all. The process of obtaining a PMA
or a 510(k) clearance from the FDA could delay the introduction of a
product to market. A customer's failure to comply with the FDA's
requirements can result in the delay or denial of its PMA. Delays in
obtaining a PMA are frequent and could result in delaying or canceling
orders to ZEVEX. Many products never receive a PMA. Similarly, 510(k)
clearance may be delayed, and in some instances, 510(k) clearance is
never obtained.
Once a product is in commercial distribution, discovery of product
problems or failure to comply with regulatory standards may result in
restrictions on the product's future use or withdrawal of the product
from the market despite prior governmental clearance. There can be no
assurance that product recalls, product defects, or modification or
loss of necessary regulatory clearance will not occur in the future.
Sales of ZEVEX' medical products outside the United States are subject
to regulatory requirements that vary widely from country to country.
The time required to obtain clearance for sale in foreign countries may
be longer or shorter than that required for FDA clearance, and the
requirements may differ. The FDA also regulates the sale of exported
medical devices, although to a lesser extent than devices sold in the
United States. In addition, ZEVEX' customers must comply with other
laws generally applicable to foreign trade, including technology export
restrictions, tariffs, and other regulatory barriers. There can be no
assurance that ZEVEX' customers will obtain all required clearances or
approvals for exported products on a timely basis, if at all.
Medical devices manufactured by ZEVEX and marketed by its customers
pursuant to FDA or foreign clearances or approvals are subject to
pervasive and continuing regulation by the FDA and certain state and
foreign regulatory agencies. FDA enforcement policy prohibits the
marketing of approved medical products for unapproved uses. ZEVEX'
customers control the marketing of their products, including
representing to the market the approved uses of their products. If a
customer engages in prohibited marketing practices, the FDA or another
regulatory agency with applicable jurisdiction could intervene,
possibly resulting in marketing restrictions, including prohibitions on
further product sales, or civil or criminal penalties.
Changes in existing laws and regulations or policies could adversely
affect the ability of ZEVEX' customers to comply with regulatory
requirements. There can be no assurance that a customer of ZEVEX, or
ZEVEX, will not be required to incur significant costs to comply with
laws and regulations in the future, or that such customer or ZEVEX will
be able to comply with such laws and regulations.
Uncertain Market Acceptance of Products. There can be no assurance that
the products created for ZEVEX' customers will gain any significant
market acceptance even if required regulatory approvals are obtained.
Some of ZEVEX' customers, especially emerging technology companies,
have limited or no experience in marketing their products and have not
made marketing or distribution arrangements for their products. ZEVEX'
customers may be unable to establish effective sales, marketing, and
distribution channels to successfully commercialize their products.
Product and Inventory Obsolescence. Rapid change and technological
innovation characterize the marketplace for medical products. As a
result, ZEVEX and its 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 treatment regimen.
Customers' Future Capital Requirements. Some of ZEVEX' customers,
especially the emerging medical technology companies, are not
profitable and may have little or no revenues, but they have
significant working capital requirements. Such customers may be
required to raise additional funds through public or private
financings, including equity financings. Adequate funds for their
operations may not be available when needed, if at all. Insufficient
funds may require a customer to delay development of a product,
clinical trials (if required), or the commercial introduction of the
product or prevent such commercial introduction altogether.
Uncertainty of Third-Party Reimbursement. Sales of many of the medical
devices manufactured by ZEVEX will be dependent in part on availability
of adequate reimbursement for those devices from third-party health
care payers, such as government and private insurance plans, health
maintenance organizations, and preferred provider organizations.
Third-party payers are increasingly challenging the pricing of medical
products and services. There can be no assurance that adequate levels
of reimbursement will be available to enable ZEVEX' customers to
achieve market acceptance of their products. Without adequate support
from third-party payers, the market for the products of ZEVEX'
customers may be limited.
Uncertainty of Market Acceptance of Out-Sourcing Manufacturing of
Medical Devices
ZEVEX believes that acceptance in the marketplace for out-sourcing of design and
manufacturing of advanced medical products for medical technology companies
varies from year to year and is still uncertain. Many of ZEVEX' potential
customers have internal design and manufacturing facilities. ZEVEX' engineering
and manufacturing activities require that customers provide ZEVEX with access to
their proprietary technology and relinquish the control associated with internal
engineering and manufacturing. As a result, potential customers may decide that
the risks of out-sourcing engineering or manufacturing are too great or exceed
the anticipated benefits of out-sourcing. In addition, medical technology
companies that have previously made substantial investments to establish design
and manufacturing capabilities may be reluctant to out-source those functions.
If the medical technology industry generally, or any significant existing or
potential customer, concludes that the disadvantages of out-sourcing
manufacturing outweigh the advantages, ZEVEX could suffer a substantial
reduction in the size of one or more of its current target markets, which could
have a material adverse effect on its business, results of operations, and
financial condition.
Competition in Out-Sourcing Manufacturing
ZEVEX faces competition from design firms and other manufacturers that operate
in the medical device industry. Many competitors have substantially greater
financial and other resources than ZEVEX. Also, manufacturers focusing in other
industries may decide to enter into the industries served by ZEVEX. Competition
from any of the foregoing sources could place pressure on ZEVEX to accept lower
margins on its contracts or lose existing or potential business. To remain
competitive, ZEVEX must continue to provide and develop technologically advanced
manufacturing services, maintain quality, offer flexible delivery schedules,
deliver finished products on a reliable basis, and compete favorably on the
basis of price. There can be no assurance that ZEVEX will be able to compete
favorably with respect to these factors.
Dependence on Major Customers
No assurances can be given that ZEVEX' major customers will continue to do
business with ZEVEX or that the volume of their orders for ZEVEX' OEM devices
and proprietary products will increase or remain constant. The loss of a major
customer, or a significant reduction in the volume of its orders from ZEVEX,
would have a material adverse impact on ZEVEX' operations. In addition, if one
or more of these customers were to seek and obtain price discounts from ZEVEX
for ZEVEX' OEM devices or proprietary products, the resulting lower gross
margins on those devices and products would have a materially adverse effect on
ZEVEX' overall results of operations. If any customer with which ZEVEX does a
substantial amount of business were to encounter financial distress, the
customer's lateness, unwillingness, or inability to pay its obligations to ZEVEX
could result in a materially adverse effect on ZEVEX' results of operations and
financial condition.
Early Termination of Agreements
ZEVEX' agreements with major manufacturing customers generally permit the
termination of the agreements before expiration thereof if certain events occur
that are materially adverse to the design, development, manufacture, or sale of
the product. Examples of such events include the failure to obtain or the
withdrawal of regulatory clearance, or an alteration of regulatory clearance
that is materially adverse to the customer or which prohibits or interferes with
the manufacture or sale of the products. The performance of agreements with
major customers may be suspended or excused if certain conditions, generally
beyond the control of the customer or ZEVEX (so-called force majeure events),
cause the failure or delay of performance.
ZEVEX' pump usage agreements, under which enteral feeding pumps are placed with
users in exchange for a commitment by the user to buy disposable products from
ZEVEX, generally require only monthly commitments, and users can terminate any
purchase obligation by returning the pump. Thus, there is no assurance of
continued revenue from pumps placed with such users.
Risk Factors in Marketing ZEVEX' Proprietary Products
In producing and marketing its own proprietary devices, ZEVEX faces many of the
same risks that its ZEVEX OEM customers face. As discussed above with respect to
its customers, such risks include:
The medical products industry is highly competitive. A significant number of
ZEVEX' competitors have substantially greater capital resources, research and
development staffs, facilities, and substantially greater experience in
developing new products, obtaining regulatory approvals, and manufacturing and
marketing medical products. Competitors may succeed in marketing products
preferable to ZEVEX' products or rendering ZEVEX' products obsolete.
The medical products industry is subject to significant technological change and
requires ongoing investment to keep pace with technological development,
quality, and regulatory requirements. In order to compete in this marketplace,
ZEVEX will be required to make ongoing investment in research and development
with respect to its existing and future products.
ZEVEX is subject to substantial risks involved in developing and marketing
medical products regulated by the FDA and comparable foreign agencies. There can
be no assurance that ZEVEX will obtain the necessary FDA or foreign clearances
on a timely basis, if at all. As discussed above, commercialized medical
products are subject to further regulatory restrictions, which may adversely
affect ZEVEX. Changes in existing laws and regulations or policies could
adversely affect the ability of ZEVEX to comply with regulatory requirements.
There can be no assurance that ZEVEX' products will gain any significant market
acceptance in their intended target markets, even if required regulatory
approvals are obtained. Revenues for many of the medical devices manufactured by
ZEVEX may be dependent in part on availability of adequate reimbursement for
those devices from third-party health care payers, such as government and
private insurance plans. There is no assurance that the levels of reimbursements
offered by third-party payers will be sufficient to achieve market acceptance of
ZEVEX' products.
Regulatory Compliance for Manufacturing Facilities
ZEVEX expends significant time, resources, and effort in the areas of training,
production, and quality assurance to maintain compliance with applicable
regulatory requirements. There can be no assurance, however, that ZEVEX'
manufacturing operations will be found to comply with GMP regulations, ISO
standards, or other applicable legal requirements or that ZEVEX will not be
required to incur substantial costs to maintain its compliance with existing or
future manufacturing regulations, standards, or other requirements. ZEVEX'
failure to comply with GMP regulations or other applicable legal requirements
can lead to warning letters, seizure of non-compliant products, injunctive
actions brought by the U.S. government, and potential civil or criminal
liability on the part of ZEVEX and officers and employees who are responsible
for the activities that lead to any violation. In addition, the continued sale
of any instruments manufactured by ZEVEX may be halted or otherwise restricted.
Product Development
The success of ZEVEX will depend to a significant extent upon its ability to
enhance and expand its current offering of proprietary products and to develop
and introduce additional innovative products that gain market acceptance. While
ZEVEX maintains research and development programs and has established various
Technical Advisory Boards to assist it, there is no assurance that ZEVEX will be
successful in selecting, developing, manufacturing, and marketing new products
or enhancing its existing products on a timely or cost-effective basis.
Moreover, ZEVEX may encounter technical problems in connection with its efforts
to develop or introduce new products or product enhancements. Some of the
devices currently being developed by ZEVEX (as well as devices of some of its
customers) will require significant additional development, pre-clinical testing
and clinical trials, and related investment prior to their commercialization.
There can be no assurance that such devices will be successfully developed,
prove to be safe or efficacious in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at reasonable
costs, or be successfully marketed.
Design and Manufacturing Process Risks
While ZEVEX has substantial experience in designing and manufacturing devices,
ZEVEX may still experience technical difficulties and delays with the design and
manufacturing of its or its customers' products. Such difficulties could cause
significant delays in ZEVEX' production of products. In some instances, payment
by a manufacturing customer is dependent on ZEVEX' ability to meet certain
design and production milestones in a timely manner. Also, some major contracts
can be canceled if purchase orders thereunder are not completed when due.
Potential difficulties in the design and manufacturing process that could be
experienced by ZEVEX include difficulty in meeting required specifications,
difficulty in achieving necessary manufacturing efficiencies, and difficulty in
obtaining materials on a timely basis.
Expansion of Marketing; Limited Distribution
ZEVEX currently has a limited domestic direct sales force consisting of thirteen
full-time employees, complemented by a network of independent manufacturing
representatives and clinical support personnel. ZEVEX anticipates that it will
need to increase its marketing and sales capability significantly to more fully
cover its target markets, particularly as additional proprietary devices become
commercially available. There can be no assurance that ZEVEX will be able to
compete effectively in attracting and retaining qualified sales personnel or
independent manufacturer's representatives as needed or such persons will be
successful in marketing or selling ZEVEX' services and products.
Product Recalls
If a device that is designed or manufactured by ZEVEX is found to be defective,
whether due to design or manufacturing defects, improper use of the product, or
other reasons, the device may need to be recalled, possibly at ZEVEX' expense.
Furthermore, the adverse effect of a product recall on ZEVEX might not be
limited to the cost of a recall. For example, a product recall could cause a
general investigation of ZEVEX by applicable regulatory authorities as well as
cause other customers to review and potentially terminate their relationships
with ZEVEX. Recalls, especially if accompanied by unfavorable publicity or
termination of customer contracts, could result in substantial costs, loss of
revenues, and a diminution of ZEVEX' reputation.
Risk of Product Liability
The manufacture and sale of products, especially medical products, entails an
inherent risk of product liability. ZEVEX does maintain product liability
insurance with limits of $1 million per occurrence and $2 million in the
aggregate and an umbrella policy with a $5 million limit. There can be no
assurance that such insurance is adequate to cover potential claims or that
ZEVEX will be able to obtain product liability insurance on acceptable terms in
the future or that any product liability insurance subsequently obtained will
provide adequate coverage against all potential claims. Such claims may be
significant in the medical products area where product failure may result in
loss of life or injury to persons. Additionally, ZEVEX generally provides a
design defect warranty and in some instances indemnifies its customers for
failure to conform to design specifications and against defects in materials and
workmanship, which could subject ZEVEX to a claim under such warranties or
indemnification.
Potential Inability to Sustain and Manage Growth
ZEVEX' need to manage its growth effectively will require it to continue to
implement and improve its operational, financial, and management information
systems, to develop its managers' and project engineers' management skills, and
to train, motivate, and manage its employees. ZEVEX must also be able to attract
and retain a sufficient number of suitable employees to sustain its growth. If
ZEVEX cannot keep pace with the growth of its customers, it may lose customers
and its growth may be limited.
Dependence Upon Management
ZEVEX is substantially dependent upon its key managerial, technical, and
engineering personnel, particularly ZEVEX' three executive officers, David
McNally, Chief Executive Officer, Leonard Smith, President, Phillip McStotts,
Chief Financial Officer and Secretary/Treasurer, and key managerial personnel,
including James Holden, Vice President and Director of Manufacturing. ZEVEX must
also attract and retain highly qualified engineering, technical, and managerial
personnel. Competition for such personnel is intense, the available pool of
qualified candidates is limited, and there can be no assurance that ZEVEX will
attract and retain such personnel. The loss of its key personnel could have a
material adverse effect on ZEVEX' business, results of operations, and financial
condition. None of ZEVEX' key personnel have employment agreements with ZEVEX.
ZEVEX carries key-man life insurance on the lives of its Chief Executive Officer
and Chief Financial Officer in the amount of $500,000 each. No assurances can be
given that such insurance would provide adequate compensation to ZEVEX in the
event of the death of such key employee.
Patent Protection
As of December 31, 2001, ZEVEX held fourteen U.S. patents and three
international patents on devices developed by ZEVEX, with nine additional U.S.
patents and ten international patents pending. Such patents disclose certain
aspects of ZEVEX' technologies and there can be no assurance that others will
not design around the patent and develop similar technology. ZEVEX believes that
its devices and other proprietary rights do not infringe on any proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims in the future.
Control by Management and Certain Major Shareholders
As of March 6, 2002, the current executive officers and directors of ZEVEX,
together with those persons who are the beneficial owners of more than 5% of
ZEVEX' Common Stock, will beneficially own or have voting control over
approximately 30% of the outstanding Common Stock. Accordingly, these
individuals have the ability to influence the election of ZEVEX' directors and
most corporate actions. This concentration of ownership, together with other
provisions in ZEVEX' charter and applicable corporate law, may also have the
effect of delaying, deterring, or preventing a change in control of ZEVEX.
Suppliers and Shortages of Component Parts
ZEVEX relies on third-party suppliers for many of the component parts used in
manufacturing its products. Although component parts are generally available
from multiple suppliers, certain component parts may require long lead times,
and ZEVEX may have to delay the manufacture of devices from time to time due to
the unavailability of certain component parts. In addition, even if component
parts are available from an alternative supplier, ZEVEX could experience
additional delays in obtaining component parts if the supplier has not met
ZEVEX' vendor qualifications. Component shortages for a particular device may
adversely affect ZEVEX' ability to satisfy customer orders for that device. Such
shortages and extensions of production schedules may delay the recognition of
revenue by ZEVEX and may in some cases constitute a breach of a customer
contract. If shortages of component parts continue or if additional shortages
should occur, ZEVEX may be forced to pay higher prices for affected components
or delay manufacturing and shipping particular devices, either of which could
adversely affect subsequent customer demand for such devices.
Customer Conflicts
The medical technology industry reflects vigorous competition among its
participants. As a result, its customers sometimes require ZEVEX to enter into
noncompetition agreements that prevent ZEVEX from manufacturing instruments for
its customers' competitors. Such restrictions generally apply during the term of
the customer's manufacturing contract and, in some instances, for a period
following termination of the contract. If ZEVEX enters into a noncompetition
agreement, ZEVEX may be adversely affected if its customer's product is not
successful and ZEVEX must forgo an opportunity to manufacture a successful
instrument for such customer's competitor. Any conflicts among its customers
could prevent or deter ZEVEX from obtaining contracts to manufacture successful
instruments.
Future Capital Requirements
ZEVEX believes that its existing capital resources and amounts available under
ZEVEX' existing bank line of credit, will satisfy ZEVEX' anticipated capital
needs for the next year (depending primarily on ZEVEX' growth rate and its
results of operations). The commercialization of proprietary products, which is
an element of ZEVEX' growth strategy, would require increased investment in
working capital and could therefore shorten this period. Thereafter, ZEVEX may
be required to raise additional capital or increase its borrowing capacity, or
both. There can be no assurance that alternative sources of equity or debt will
be available in the future or, if available, will be on terms acceptable to
ZEVEX. Any additional equity financing would result in additional dilution to
ZEVEX' shareholders.
Reliance on Efficiency of Distribution and Third Parties
ZEVEX believes its financial performance is dependent in part on its ability to
provide prompt, accurate, and complete services to its customers on a timely and
competitive basis. Accordingly, delays in distribution in its day-to-day
operations or material increases in its costs of procuring and delivering
products could have an adverse effect on ZEVEX' results of operations. Any
failure of either its computer operating system or its telephone system could
adversely affect its ability to receive and process customers' orders and ship
products on a timely basis. Strikes or other service interruptions affecting
Federal Express Corporation, United Parcel Service of America, Inc., or other
common carriers used by ZEVEX to receive necessary components or other materials
or to ship its products also could impair ZEVEX' ability to deliver products on
a timely and cost-effective basis.
Volatility of Revenues and Product Mix
ZEVEX' annual and quarterly operating results are affected by volume and timing
of customer orders, which vary due to (i) variation in demand for the customers'
products or services as a result of, among other things, product life cycles,
competitive conditions, and general economic conditions, (ii) the customers'
attempt to balance their inventory, (iii) the customers' need to adapt to
changing regulatory conditions and requirements, and (iv) changes in the
customers' preference or strategies. Technical difficulties and delays in the
design and manufacturing processes may also affect such results. The foregoing
factors may cause fluctuations in revenues and variations in product mix, which
could in turn cause fluctuations in ZEVEX' gross margin.
Under the terms of ZEVEX' contracts with many of its contract manufacturing
customers, the customers have broad discretion to control the volume and timing
of product deliveries. Further, ZEVEX' contracts with its customers typically
have no minimum purchase requirements. As a result, production may be reduced or
discontinued at any time. Therefore, it is difficult for ZEVEX to forecast the
level of customer orders with certainty, making it difficult to schedule
production and maximize manufacturing capacity. Other factors that may adversely
affect ZEVEX' annual and quarterly results of operations include inexperience in
manufacturing a particular product, inventory shortages or obsolescence,
increasing labor costs or shortages, low gross margins on particular projects,
an increase in lower-margin product revenue as a percentage of total revenues,
price competition, and regulatory requirements. Because ZEVEX' business
organization and its related cost structure anticipate supporting a certain
minimum level of revenues, ZEVEX' limited ability to adjust its short term cost
structure would compound the adverse effect of any significant revenue
reduction.
Uncertain Protection of Intellectual Property
To maintain the secrecy of some of its proprietary information, ZEVEX relies on
a combination of trade secret laws and internal security procedures. ZEVEX
typically requires its employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements. There can be no
assurance, however, that the common law, statutory, and contractual rights on
which ZEVEX relies to protect its intellectual property and confidential and
proprietary information will provide it with adequate or meaningful protection.
Third parties may independently develop products, techniques, or information
that are substantially equivalent to the products, techniques, or information
that ZEVEX considers proprietary. In addition, proprietary information regarding
ZEVEX could be disclosed in a manner against which ZEVEX has no meaningful
remedy. Disputes regarding ZEVEX' intellectual property could force ZEVEX into
expensive and protracted litigation or costly agreements with third parties. An
adverse determination in a judicial or administrative proceeding or failure to
reach an agreement with a third party regarding intellectual property rights
could prevent ZEVEX from manufacturing and selling certain of its products.
Limited Market for Common Stock
Historically, the market for ZEVEX' Common Stock has been limited due to the
relatively low trading volume and the small number of brokerage firms acting as
market makers. In May 1997, ZEVEX' Common Stock was listed for trading on the
American Stock Exchange. In November 1998, ZEVEX' Common Stock was changed to a
listing on the NASDAQ Stock Market, which has increased the market for the
Common Stock. No assurance can be given, however, that the market for the Common
Stock will continue or increase or that the prices in such market will be
maintained at their present levels.
Possible Volatility of Stock Price
Announcements of technological innovations for new commercial devices by ZEVEX
or its competitors, developments concerning ZEVEX' proprietary rights, or the
public concern as to the safety of its devices may have a material adverse
impact on ZEVEX' business and on the market price of its Common Stock,
particularly as ZEVEX expands its efforts to become a medical technology company
that manufactures and markets its own proprietary devices. The market price of
ZEVEX' Common Stock may be volatile and may fluctuate based on a number of
factors, including significant announcements by ZEVEX and its competitors,
quarterly fluctuations in ZEVEX' operating results, and general economic
conditions and conditions in the medical device industry. In addition, in recent
years the stock market has experienced extreme price and volume fluctuations,
which have had a substantial effect on the market prices for many medical device
companies and are often unrelated to the operating performance of such
companies.
Issuance of Additional Shares for Acquisition or Expansion
Any future major acquisition or expansion of ZEVEX may result in the issuance of
additional common shares or other stocks or instruments that may be authorized
without shareholder approval. The issuance of subsequent securities may also
result in substantial dilution in the percentage of the Common Stock held by
existing shareholders at the time of any such transaction. Moreover, the shares
or warrants issued in connection with any such transaction may be valued by
ZEVEX' management based on factors other than the trading price on the NASDAQ
Stock Market.
Impact of Anti-Takeover Measures; Possible Issuance of Preferred Stock;
Classified Board
Certain Provisions of ZEVEX' Certificate of Incorporation and Bylaws and the
Delaware General Corporation Law may have the effect of preventing,
discouraging, or delaying a change in the control of ZEVEX and may maintain the
incumbency of the Board of Directors and management. Such provisions could also
limit the price that certain investors might be willing to pay in the future for
shares of ZEVEX' Common Stock. Pursuant to ZEVEX' Certificate of Incorporation,
the Board of Directors is authorized to fix the rights, preferences, privileges,
and restrictions, including voting rights, of unissued shares of ZEVEX'
Preferred Stock and to issue such stock without any further vote or action by
ZEVEX' stockholders. The rights of the holders of Common Stock will be subject
to and may be adversely affected by the rights of the holders of any Preferred
Stock that may be created and issued in the future.
In addition, stockholders do not have the right to cumulative voting for the
election of directors. Furthermore, ZEVEX' Certificate and Bylaws provide for a
staggered board whereby only two to three of the total number of directors are
replaced or re-elected each year. The Certificate also provides that the
provisions of the Certificate relating to the number, vacancies, and
classification of the Board of Directors may only be amended by a vote of at
least 66 2/3% of the shareholders. Finally, the Bylaws provide that special
meetings of the stockholders may only be called by the President or any Director
of ZEVEX or pursuant to a resolution adopted by a majority of the Board of
Directors.
ZEVEX is subject to Section 203 of the Delaware General Corporation Law
("Section 203"), which restricts certain transactions and business combinations
between a corporation and an "Interested Stockholder" owning 15% or more of the
corporation's outstanding voting stock for a period of three years from the date
the stockholder becomes an Interested Stockholder. Subject to certain
exceptions, unless the transaction is approved in a prescribed manner, Section
203 prohibits significant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial benefits by
the Interested Stockholder, or any other transactions that would increase the
Interested Stockholder's proportionate ownership of any class or series of the
corporation's stock.
Foreign Exchange, Currency, and Political Risk
ZEVEX' international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country's or region's
political or economic conditions, nationalization, trade protection measures,
import or export licensing requirements, the overlap of different tax
structures, unexpected changes in regulatory requirements, other restrictive
government actions such as capital regulations, and natural disasters. ZEVEX is
also exposed to foreign currency exchange rate risk inherent in its foreign
sales commitments and anticipated foreign sales because the prices charged for
its products are denominated in U.S. dollars. Consequently, ZEVEX' foreign sales
commitments and anticipated sales could be adversely affected by an appreciation
of the U.S. dollar relative to other currencies.
ITEM 2. PROPERTIES
ZEVEX' executive offices and the administrative offices and manufacturing
facility are located in ZEVEX' 51,000 square foot, mixed-use building in Salt
Lake City, Utah. This building was constructed in 1997 to ZEVEX' specifications
and is subject to an Industrial Revenue Bond (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations, Liquidity and Capital
Resources"). The building is situated on nearly four acres of land a few miles
from the downtown area. It allows quick access to two major interstate freeways
and to the Salt Lake International Airport. ZEVEX currently utilizes
approximately 90% of the building's available space and believes that the
building will be adequate to serve ZEVEX' needs through the end of the year
2002.
ZEVEX owns approximately 3.47 vacant acres adjacent to its facility.
ITEM 3. LEGAL PROCEEDINGS
ZEVEX is not engaged in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ZEVEX held its Annual Meeting of the Shareholders on June 8, 2001. During the
meeting, Leonard C. Smith and Kathryn B. Hyer were elected to serve for a
three-year term expiring at the 2004 Annual Meeting. The following table
summarizes the tabulation for each director nominee.
- ---------------------------- -------------------------- -------------------------- --------------------------
Director nominee Votes cast For Votes Against Votes Abstained
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Leonard C. Smith 2,805,454 94,841 0
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Kathryn B. Hyer 2,814,670 85,625 0
- ---------------------------- -------------------------- -------------------------- --------------------------
Directors whose term of office continued after the meeting were Phillip L.
McStotts, Darla R. Gill and David B. Kaysen whose term expires at the 2002
Annual Meeting, and David J. McNally and Bradly A. Oldroyd whose term expires at
the 2003 Annual Meeting. Also, at the meeting, the shareholders were asked to
ratify the appointment of Ernst & Young LLP, Certified Public Accountants, as
independent auditors for the year ending December 31, 2001. Those shareholders
voting in favor of the proposal represent 2,870,205 shares of ZEVEX' common
voting stock, which is approximately 83% of the shares entitled to vote, 22,340
shares were voted against the proposal and 7,750 shares abstained from voting.
No other matters were voted upon at the meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ZEVEX' Common Stock has been trading on the National Market system of The NASDAQ
Stock Market since November 2, 1998, under the symbol ZVXI. Prior to that date
the stock traded on the American Stock Exchange beginning May 19, 1997, under
the symbol ZVX. Prior to May 1997, the stock traded on the OTC Bulletin Board
under the symbols ZVXI and ZVXIU. As of March 6, 2002, there were 161 holders of
record of ZEVEX' Common Stock (calculated without reference to individual
participants in securities position listings). Based on the number of proxy
materials requested by brokers and other record holders for distribution to
beneficial owners for ZEVEX' 2001 Annual Meeting, ZEVEX estimates there are
roughly 1,650 beneficial owners of ZEVEX Common Stock. ZEVEX has never declared
or paid any cash dividends on its Common Stock. ZEVEX currently intends to
retain all future earnings to finance future growth and does not anticipate
paying any cash dividends in the foreseeable future. ZEVEX has a negative
covenant in its bank line of credit agreement that prevents the payment of any
cash dividend without prior approval of the bank.
The following table lists the high and low sales prices for ZEVEX Common Stock
for each full quarterly period since January 1, 2000.
------------------------------------- -------------------------------------
2001 2000
High Low High Low
------------------ ------------------ ------------------- ------------------
1st Quarter $6.00 $3.81 $14.13 $5.25
2nd Quarter $5.40 $3.55 $13.69 $4.81
3rd Quarter $4.15 $1.74 $8.69 $5.50
4th Quarter $3.00 $1.80 $6.25 $3.69
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA - FIVE-YEAR REVIEW
The following selected statement of operations data for the years ended December
31, 2001, 2000 and 1999, and the balance sheet data as of December 31, 2001 and
2000 are derived from the audited consolidated financial statements included in
this report and should be read in conjunction with those consolidated financial
statements and notes thereto. The selected statement of operations data for the
years ended December 31, 1998 and 1997 and the balance sheet data as of December
31, 1999, 1998 and 1997 are derived from the audited consolidated financial
statements of ZEVEX, which are not included herein, and are qualified by
reference to such financial statements and the notes thereto. The selected
consolidated financial data set forth below is also qualified in its entirety
by, and should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
Fiscal Year Ended December 31,
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
2001 2000 1999 1998 1997
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Statement of Operations Data
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Revenues $29,882,075 $30,778,627 $23,026,208 $11,084,413 $8,968,425
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Gross profit 11,018,928 10,848,772 10,551,998 4,237,970 4,211,368
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Selling, general and administrative 9,522,443 8,405,833 6,988,044 3,879,408 2,481,090
expenses
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Research and development expenses 477,653 852,273 670,886 290,669 702,563
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Operating income 1,018,832 1,590,666 2,893,068 67,893 1,027,715
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Impairment loss on marketable securities (917,628) -- -- -- --
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Other (income)/expenses (688,414) 196,828 78,706 (407,469) (47,136)
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Provisions for taxes (99,507) 669,698 1,187,989 113,169 356,609
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Net (loss) income (487,703) 724,140 1,626,373 362,193 718,242
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Net (loss) income per share basic (.14) .21 .48 .11 .34
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Weighted average shares outstanding 3,431,639 3,425,254 3,413,023 3,298,150 2,097,831
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Net (loss) income per share diluted (.14) .19 .47 .10 .29
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Weighted average shares outstanding, 3,431,639 3,748,032 3,431,566 3,636,434 2,443,482
assuming dilution
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
2001 2000 1999 1998 1997
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Balance Sheet Data
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Total assets $33,639,146 $38,687,962 $34,049,689 $33,760,979 $22,582,543
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Total current liabilities 5,918,660 9,967,768 5,782,319 7,395,946 1,290,466
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Long-term debt (less current portion) 6,411,351 7,511,022 7,170,000 6,150,000 1,900,000
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Stockholders' equity 21,032,401 21,057,505 21,090,722 20,114,535 19,265,697
- ------------------------------------------- ------------ ------------- ------------ ------------ ------------
Please refer to Item 7 for a discussion of the main factors causing the
substantial changes in certain of the items set forth above, particularly when
comparing the year 2001 to earlier periods. Also refer to Item 1 for a
discussion of Risk Factors that may describe material uncertainties that might
cause the items set forth above to no be indicative of ZEVEX' future financial
condition or results of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
ZEVEX, through its divisions and subsidiaries, engages in the business of
designing, manufacturing and distributing medical devices. ZEVEX' product lines
include proprietary medical devices that it designs, manufactures, and
distributes, and contract-manufactured products that it designs and manufactures
for original equipment manufacturers ("OEM's").
Recent Major Developments
From 1997 through 2000 ZEVEX had substantially increased its revenues in the
previous four years. It accomplished this by diversifying its offering of
proprietary products and gaining market share in the markets served by them, as
well as focusing its contract manufacturing business on higher margin core
technologies that contain its ultrasonic and optoelectronic components, and
fluid delivery systems. Key developments during this period were:
1. In July 1998, ZEVEX entered into an agreement with Nutrition Medical, Inc., a
Minnesota corporation, to acquire Nutrition Medical's product line of stationary
feeding pumps, disposable sets and feeding tubes for enteral nutrition delivery.
The addition of the Nutrition Medical stationary pump and feeding tube product
lines complemented the line of ambulatory enteral feeding pumps and disposable
sets that ZEVEX developed internally. ZEVEX completed the acquisition of the
Nutrition Medical product line on December 23, 1998.
2. On December 31, 1998, ZEVEX acquired JTech Medical Industries, Inc.,
("JTech") a Utah corporation through a stock purchase transaction with the four
shareholders of JTech. JTech was organized in 1988 as a sole proprietorship and
later incorporated as JTech Medical Industries, Inc. in 1995 to manufacture and
sell range of motion measurement devices. Now a wholly-owned subsidiary of ZEVEX
International, Inc., JTech manufactures and markets its own proprietary
musculoskeletal evaluation products for health care providers, a line of
products not previously manufactured or sold by ZEVEX.
3. On December 31, 1998, ZEVEX acquired Aborn Electronics, Inc., ("Aborn") a
California corporation, through a stock purchase transaction with the sole
shareholder of Aborn. Aborn has been fully integrated into ZEVEX, Inc. and has
brought new design and manufacturing expertise to ZEVEX; ZEVEX now designs and
manufactures a variety of sophisticated optical sensors, custom integrated
circuit chips, and semiconductor components for medical technology and other
companies. On December 31, 2001, ZEVEX sold the Aborn corporate shell back to
the previous sole shareholder in a stock purchase transaction. ZEVEX maintained
certain manufacturing rights, cash, accounts receivable, equipment and
inventory. Therefore, ZEVEX will continue to manufacture, market and sell
optoelectronic products.
4. In April 2000, ZEVEX acquired the enteral nutrition delivery device business
of Nestle USA, Inc. in an asset purchase. The assets acquired included over
19,500 enteral feeding pumps owned by Nestle and placed with various health care
facilities under arrangements whereby the facilities agree to purchase
disposable sets for use with Nestle pumps. The assets also included Nestle's
line of pump administration sets, feeding tubes, irrigation kits, ancillary
devices for the pumps, and certain associated intellectual property With the
completion of the acquisition, ZEVEX no longer will sell stationary feeding
pumps to Nestle. Instead, ZEVEX generates revenue from the sale of disposable
sets to users of the approximately 19,500 feeding pumps acquired from Nestle. In
addition to the installed base of stationary pumps acquired from Nestle, ZEVEX
plans to place more stationary feeding pumps with new users under arrangements
where the pump users commit to buy disposable products from ZEVEX while using
the pumps.
In 2001, ZEVEX did not undertake any acquisition and instead focused on market
penetration, the development of products that complement its existing two lines
of proprietary products and on manufacturing opportunities based upon ZEVEX'
technical competencies. The trend in revenue growth in the prior years ceased
and ZEVEX experienced a period of largely flat sales, increased expenses, and an
impairment loss write-down on marketable securities resulting in the first net
loss experienced by ZEVEX since 1994. Management attributes the decline in
revenues compared to those of the prior year primarily to the completion of a
major contract manufacturing agreement in 2000 that was not entirely replaced
with new work 2001, a significant reduction in private-label enteral feeding
pump orders from a European customer, the significant decrease in revenues after
the September 11th terrorist attacks for approximately a 30 day period, the
general overall economic slump in 2001, and more aggressive pricing from
competitors in the enteral market place. During the year, sales of stationary
enteral nutrition delivery products and optoelectronic components also declined,
although sales on the EnteraLite(R) ambulatory enteral feeding pump,
musculoskeletal evaluation products and ultrasonic sensors that grew over ten
percent each. ZEVEX also made progress during 2001 in reducing debt by over $5
million.
To return to its historical pattern of growth and profitability, ZEVEX' current
strategy is to continue to foster the growth of proprietary product revenues
through targeted market penetration and the development of products that
complement its existing two lines of proprietary products. Management intends to
achieve healthier margins resulting from engineering improvements to its enteral
nutrition delivery business, and expand the musculoskeletal evaluation sales
force so the more favorable margins associated with the musculoskeletal
evaluation product line continue to positively impact ZEVEX' profitability. In
addition, ZEVEX will continue to manufacture products for others in order to
capitalize on the outsourcing trend in the medical device industry, focusing on
manufacturing opportunities where pricing is based upon the premium value of
ZEVEX' technical competencies.
Results of Operations
As an aid to understanding ZEVEX' operating results, the following table sets
forth, for the periods indicated, the relative percentages that certain items in
the income statement bear to revenues.
Year Ended December 31 Income Statement Data -- Percentage of Gross Sales
2001 2000 1999 1998 1997
------------- ------------- -------------- ------------- -------------
Revenues 100% 100% 100% 100% 100%
Gross profit 37% 35% 46% 38% 47%
Selling, general and administrative 32% 27% 30% 34% 27%
expenses
Research and development expenses 2% 3% 3% 3% 8%
Operating income 3% 5% 13% 1% 12%
Impairment loss on securities (3)% --% --% --% --%
Other income/(expense) (2)% --% (1)% 3% --%
Income (loss) before taxes (2)% 5% 12% 4% 12%
Provisions for taxes --% 2% 5% 1% 4%
Net income (loss) (2)% 3% 7% 3% 8%
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenues were $29,882,075 for the year ended December 31, 2001, compared to
$30,778,627 for the prior year, a 3% decrease. As described above, management
attributes the decline to the 2001 economy, slowdown on placement of orders from
customers, competitor pricing, and difficulty in maintaining a steady flow of
contract manufacturing products upon completion of certain projects.
In line with ZEVEX' strategy over the past few years, the percentage of revenues
from proprietary products increased when compared to revenues from contract
manufacturing. In 2001, 56% of ZEVEX' revenue was derived from proprietary
products sold by ZEVEX, in comparison to 53% in 2000. Sales of ZEVEX'
proprietary enteral feeding products accounted for approximately 43% of total
revenues for the years ended December 31, 2001 and 2000. Sales of ZEVEX'
proprietary JTech product line accounted for approximately 13% of total revenues
for the year ended December 31, 2001, compared to 10% for the year ended
December 31, 2000. Forty-four percent of ZEVEX' revenues during 2001 were
derived from products manufactured for and sold to OEM customers, compared to
47% in 2000. This shift in revenue sources from OEM customers to proprietary
products over the last two years has the benefit of decreasing the percentage of
ZEVEX' revenues generated by a small number of major customers. During 2001, no
single customer accounted for over 10% of ZEVEX' revenues, as compared to 2000,
where two customers accounted for over 24% of ZEVEX' revenues.
ZEVEX' gross profit as a percentage of sales was 37% in 2001, as compared to 35%
in 2000. Management attributes the slight increase in gross profit percentage
from 2000 to 2001, to recognizing the benefits of its manufacturing resource
planning software, but was offset by higher than expected cost of goods and
distribution costs associated with the acquired Nestle business.
Selling, general and administrative expenses increased during 2001 to
$9,522,443, 32% of gross sales, as compared to $8,405,833, 27% of gross sales in
2000. General and administrative expenses increased as ZEVEX hired additional
accounting and administrative personnel to implement financial controls, hired
specialists to manage inventories, and incurred over $200,000 in support
expenses and depreciation related to ZEVEX' manufacturing resource planning
software. Legal and professional costs increased $200,000 over the prior year,
due to a record number of patent applications, and ZEVEX' response to the Office
of the Inspector General's nationwide investigation into billing practices in
the enteral device market. At this time, legal counsel does not believe that it
is possible to quantify the potential future financial impact to ZEVEX from the
investigation. ZEVEX also experienced an increase in expenses related to
employees, such as insurance, taxes, and pension benefits. ZEVEX believes that
selling, general and administrative expenses, will decrease to approximately 30%
of gross sales in 2002.
As of December 31, 2001, ZEVEX had two full-time engineers engaged in research
and development, and had several other designers and engineers, including
independent contractors, contributing to research and development projects.
During the first quarter of 2001, ZEVEX restructured its engineering group to
primarily focus on manufacturing, and it is continuing to utilize independent
contractors for research and development projects. ZEVEX invested $477,653 in
2001, $852,273 in 2000, and $670,886 in 1999 for research and development of new
products. In 2001, research and development costs represented approximately 2%
of ZEVEX' annual revenues, compared to 2000, when research and development costs
represented approximately 3% of ZEVEX' annual revenues. ZEVEX expects research
and development costs to be maintained at approximately 3% of revenues during
2002.
Depreciation and amortization expenses increased to $2,086,379 in 2001 from
$1,756,682 in 2000. This increase primarily reflects increased depreciation and
amortization from the Nestle purchased assets and ZEVEX self-constructed enteral
pumps placed in service under usage programs during 2001. Depreciation and
amortization expenses also include depreciation of capital expenditures for
property and equipment used in engineering and manufacturing, as well as ZEVEX'
new manufacturing resource planning (MRP) software.
Goodwill held by ZEVEX represents the excess of the purchase price over the fair
value of the tangible and other specifically identified intangible assets
obtained in acquisitions by ZEVEX. Goodwill amortization lives were determined
by comparing recent acquisitions of similar companies and within similar
industries. Goodwill is amortized over periods ranging from 15 to 23 years. The
current value of goodwill included in the financial statements is $10,154,757,
and represents approximately 30% of total assets.
During the third quarter of 2001, under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and Staff Accounting Bulletin No.
59, "Accounting for Noncurrent Marketable Equity Securities", ZEVEX recorded an
"other-than-temporary" impairment loss on its available for sale securities of
$917,628.
ZEVEX had an income tax benefit of $99,507 in 2001 compared to an income tax
expense of $669,698 for 2000. The decrease from 2000 to 2001 is primarily due to
decreased income before taxes. ZEVEX' effective tax rate differs from the
statutory rate largely as a result of nondeductible goodwill amortization.
At December 31, 2001, ZEVEX had net current deferred tax assets of approximately
$568,000. Realization of these deferred tax assets is dependent on ZEVEX'
ability to generate approximately $1,523,000 in taxable income in the year the
assets are realized. Management believes that sufficient income will be earned
in the future to realize these assets. ZEVEX, through its sale of the Aborn
corporate shell in 2001, generated a capital loss carryover of approximately
$5,000,000. Because management has not determined that it is more likely than
not that this carryover will be realized prior to its expiration, a valuation
allowance has been established for the full amount. Management evaluates the
realizability of the deferred tax assets and assesses the need for valuation
allowances annually.
Operating income decreased to $1,018,832, 3% of gross revenue in 2001 compared
to $1,590,666, 5% of gross revenue in 2000. Similarly, ZEVEX had a net loss of
$487,703, (2%) of gross revenues in 2001, compared to net income of $724,140, 3%
of gross revenue in 2000. The changes during 2001 as compared to 2000 are
principally due to the costs addressed above.
ZEVEX' annual and quarterly operating results are affected by acceptance in the
markets for ZEVEX' proprietary and contract manufactured products, including the
volume and timing of customer orders, which vary due to (i) variation in demand
for the customers' products or services as a result of, among other things,
product life cycles, competitive conditions, and general economic conditions,
(ii) the customers' attempt to balance their inventory, (iii) the customers'
need to adapt to changing regulatory conditions and requirements, and (iv)
changes in the customers' preferences or strategies. Technical difficulties and
delays in the design and manufacturing processes may also affect such results.
The foregoing factors may cause fluctuations in revenues and variations in
product mix, which could in turn cause fluctuations in ZEVEX' gross margin.
Fiscal Year 2000 Compared to Fiscal Year 1999
ZEVEX' sales results for 2000 were the strongest in ZEVEX' history. Revenues
were $30,778,627, a 34% increase over revenues of $23,026,208 in 1999. Revenues
for 2000 increased primarily due to the contribution of the acquisition of the
Nestle product line.
As a result of the growth of ZEVEX' proprietary product businesses, the portion
of ZEVEX' revenues represented by those businesses increased significantly over
prior years. In 2000, 53% of ZEVEX' revenue was derived from proprietary
products sold by ZEVEX, in comparison to 47% in 1999. Sales of ZEVEX'
proprietary enteral feeding products accounted for approximately 43% of total
revenues for the year ended December 31, 2000, compared to 33% for the year
ended December 31, 1999. Sales of ZEVEX' proprietary JTech product line
accounted for approximately 10% of total revenues for the year ended December
31, 2000, compared to 14% for the year ended December 31, 1999. Forty-seven
percent of ZEVEX' revenues during the 2000 year were products manufactured for
and sold to OEM customers, compared to 53% in 1999. During 2000, two customers
accounted for over 10% of ZEVEX' revenues, generating 24% of total revenues.
During 1999, only one customer accounted for over 10% of ZEVEX' revenues,
generating 13% of total revenues.
During the fourth quarter of 2000, ZEVEX completed installation of an advanced
new manufacturing resource planning system and implemented an electronic data
interchange with ZEVEX' remote warehousing partners. As part of implementing the
system, a complete physical inventory was completed in January 2001, requiring
an inventory adjustment in all product areas, including obsolete inventory from
acquisitions, past OEM contracts and discontinued proprietary products. This
adjustment, which totaled approximately $1 million, adversely affected ZEVEX'
gross margin and results of operations for the fourth quarter 2000 and the year
ending December 31, 2000.
ZEVEX' gross profit as a percentage of sales was 35% in 2000, as compared to 46%
in 1999. Management attributes the decrease in gross profit percentage from 1999
to 2000 to a number of matters, including (1) the purchase of the lower margin
Nestle enteral delivery business mentioned above, (2) startup costs related to
bringing in-house the manufacturing of the EnteralEZ(R) enteral feeding pump,
and the servicing of the Nestle pumps acquired, which included labor, tooling,
setup costs, and non-recurring engineering (NRE), (3) the growth of lower margin
complete system contract manufacturing business, and (4) the approximately $1
million write down in inventory from acquisitions, past OEM contracts and
discontinued proprietary products as described above.
Selling, general and administrative expenses increased during 2000 to
$8,405,833, 27% of gross sales, as compared to $6,988,044, 30% of gross sales in
1999. The reduction in selling, general and administrative expenses, as
expressed as a percentage of sales is attributable to sales revenue growth far
exceeding growth of selling, general and administrative expenses over the prior
years. During 2000, increased expenses resulted from ZEVEX' continuing growth,
which occurred primarily from the acquisition of the Nestle product line. An
expanded sales and marketing initiative increased staffing, travel, advertising,
and administrative expenses related to ZEVEX' proprietary enteral nutrition
delivery product line and JTech product line. ZEVEX also experienced an increase
in expenses related to employees, such as insurance, taxes, and pension
benefits.
Depreciation and amortization expenses increased to $1,756,682 in 2000 from
$1,157,221 in 1999. This increase primarily reflects increased depreciation and
amortization from the Nestle purchased assets and ZEVEX manufactured
EnteralEZ(R) pumps placed in service under usage programs during 2000.
Depreciation and amortization expenses also include depreciation for capital
expenditures for property and equipment used in engineering and manufacturing as
well as ZEVEX' new manufacturing resource planning (MRP) software.
The value of goodwill included in the 2000 financial statements was $10,688,271,
and represented approximately 28% of total assets.
Income tax expenses declined to $669,698 in 2000 as compared to $1,187,989 in
1999. The decrease was primarily due to decreased income before taxes.
At December 31, 2000, ZEVEX had deferred tax assets of approximately $629,000.
Operating income decreased to $1,590,666, 5% of gross revenue in 2000 compared
to $2,893,068, 13% of gross revenue in 1999. Similarly, ZEVEX had a net income
of $724,140, 3% of gross revenue in 2000, compared to $1,626,373, 7% of gross
revenue in 1999. The changes during 2000 as compared to 1999 are principally due
to the costs addressed above and the growth of lower margin products delivered
during the 2000 year.
Liquidity and Capital Resources
ZEVEX' primary sources of liquidity have consisted of cash flow from operations,
borrowings under ZEVEX' revolving line of credit and other financial
arrangements. In prior years, ZEVEX also has increased working capital through
the issuance of stock and it may do so in the future.
Cash flows provided from operating activities for 2001 were $4,626,574 compared
to cash flows used in 2000 of $3,056,284. In 2001, cash provided by operating
activities was primarily associated with reduction of accounts receivable due to
better collection procedures and reduction in inventories as ZEVEX recognized
the benefit of its manufacturing resource planning software and converted
inventory into self-constructed enteral pumps for placement in the enteral
marketplace. Cash flows provided by investing activities were $775,931 largely
as a result of the sale of securities held by ZEVEX.
Cash flows used in operating activities were $3,056,284 in 2000, as ZEVEX had
increases in accounts receivable and inventories, which were partially offset by
an increase in payables. Accounts receivable and inventories increased during
2000 as ZEVEX continued to expand its proprietary businesses and meet customer
demands. During 1999, cash flows provided by operating activities were
$1,803,429, as ZEVEX had an increase in accounts payable, and a decrease in
inventories offset by an increase in accounts receivable as ZEVEX continued to
expand its proprietary businesses and meet customer demands. Cash flow used in
investing activities were $3,145,624 in 2000, compared to $1,281,534 in 1999.
The increase in cash flows used in investing activities in 2000 compared to 1999
relates primarily to the purchase of a product line during 2000.
ZEVEX' working capital at December 31, 2001 was $9,493,376, compared to
$9,689,758 at December 31, 2000. ZEVEX' decrease in working capital of $196,382
in 2001 was primarily due to the reduction of accounts receivable and inventory
offset by the reduction in current debt outstanding. The portion of working
capital represented by cash and short-term investments at such dates was
$1,247,985, and $1,392,432 respectively. The ratio of current assets to current
liabilities increased to 2.60 to 1 at December 31, 2001 from 1.97 to 1 at
December 31, 2000.
On December 31, 1998, ZEVEX committed to pay up to $1,850,000 in cash and issued
convertible debentures in the aggregate amount of $1,350,000 to Vijay Lumba and
Harry Parmar as partial consideration for the acquisition of all issued and
outstanding stock of Aborn. ZEVEX completed the cash payment and issued the
debentures in 1999. Amounts due under the convertible debentures were to be paid
by January 6, 2002. On December 31, 1999, ZEVEX committed to pay $950,000 in
cash and issue convertible debentures in the aggregate amount of $950,000 due
March 31, 2003, to Vijay Lumba and Harry Parmar as payment of the earn-out
portion of the purchase price related to the acquisition of all issued and
outstanding stock of Aborn. ZEVEX completed the cash payment and issued the
debentures in 2000. On December 31, 2001, ZEVEX paid $556,030 in cash to the
debenture holders and negotiated an extension of time, until January 6, 2003, to
pay the remaining balance on the original debenture of $793,970, with all other
terms remaining the same. All or part of the outstanding principal of each
debenture is convertible at the holder's option into ZEVEX' Common Stock at a
rate of $11.00 per share at any time prior to maturity of the debentures.
On December 31, 1998, ZEVEX committed to pay up to of $3,100,000 in cash and
issued convertible debentures in the aggregate amount of $3,000,000 to Leonard
Smith, Tracy Livingston, and David Bernardi as partial consideration for the
acquisition of all issued and outstanding stock of JTech. ZEVEX completed the
cash payment and issued the debentures in 1999. Amounts due under the
convertible debentures were to be paid by January 6, 2002. On December 31, 1999,
ZEVEX committed to pay $147,188 in cash and convertible debentures in the
aggregate amount of $147,188 due March 31, 2003, to Leonard Smith, Tracy
Livingston, and David Bernardi as payment of the earn-out portion of the
purchase price related to the acquisition of all issued and outstanding stock of
JTech. ZEVEX completed the cash payment and issued the debentures in 2000. On
December 31, 2001 ZEVEX paid $968,000 in cash to the debenture holders and
negotiated an extension of time, through January 6, 2003, to pay the remaining
balance on the original debenture of $2,032,000, with all other terms remaining
the same. All or part of the outstanding principal of each debenture is
convertible at the holder's option into ZEVEX Common Stock at a rate of $11.00
per share at any time prior to maturity of the debentures.
On February 12, 1997, ZEVEX completed a private placement of $1,250,000 of its
securities, which consisted of 500,000 units at a price of $2.50 per unit. Each
unit consisted of one share of Common Stock and a warrant to purchase one share
of Common Stock at a price of $3.50 per share. As of December 31, 1998, 30,000
of the warrants included in the above units were exercised. In June 1999 ZEVEX
repurchased for $1,175,000 the remaining 470,000 common stock warrants related
to the above units.
ZEVEX has a $6,000,000 open line of credit arrangement with a financial
institution. The line matures on May 31, 2002. The line of credit is
collateralized by accounts receivable and inventories, and bears interest at the
financial institution's prime rate. ZEVEX owed $1,713,610 on the line of credit
at December 31, 2001 and $5,936,995 at December 31, 2000.
On March 15, 2001, ZEVEX entered into a Secured Financing Agreement with a bank
for the amount of $1,500,000. The agreement is secured by ZEVEX' enteral feeding
pumps, which were purchased from Nestle and are now manufactured by ZEVEX. The
proceeds from the agreement were used to reduce ZEVEX' line of credit balance.
The agreement has a 36 month term, is due on February 15, 2004, and bears
interest at a rate of 8.24%. ZEVEX owed $1,158,890 on the agreement at December
31, 2001.
On April 18, 2001, ZEVEX entered into a Term Loan Agreement with a bank for the
amount of $1,000,000. The agreement is secured by ZEVEX' manufacturing facility.
The proceeds from the Promissory Note were used to reduce ZEVEX' line of credit
balance. The note is due on May 15, 2003 and is amortized over a fifteen-year
term at the interest rate of 8.5%. ZEVEX owed $973,821 on the Term Loan
Agreement at December 31, 2001.
In 1997, ZEVEX completed construction of its new 51,000 square foot headquarters
and manufacturing facility. The cost of this undertaking was approximately
$2,591,177. In 1996, ZEVEX negotiated a $2.0 million Industrial Development Bond
("IDB") to finance this construction. As of December 31, 2001, the remaining
principal balance on the IBD was $1,600,000. During 2001, the interest paid
monthly ranged from 1.69% to 3.74% (APR).
ZEVEX' purchases of leasehold improvements to its facilities, self-constructed
enteral feeding pumps, MRP software system and new engineering, production,
testing equipment, and tooling totaled $1,233,843 in 2001, as compared to
$1,887,480 in 2000, and $566,958 in 1999. The amount invested during 2000 was
primarily attributed to ZEVEX' purchase of a new MRP software system and self-
constructed enteral feeding pumps.
ZEVEX' expected principal liquidity requirements are working capital,
investments in capital expenditures, and convertible debt reduction. The Company
believes its sources of liquidity are sufficient for operations during the
coming twelve months with its projected cash flows from operations and if
necessary, the availability of funds under its revolving line of credit.
Other
As part of a nationwide investigation into billing practices associated with
enteral nutrition delivery products, particularly in regard to billing practices
for pumps and disposable delivery sets, on July 2, 2001, the Office of Inspector
General (OIG), served a subpoena on ZEVEX' ZEVEX, Inc. subsidiary. According to
published reports, the investigation involved most manufacturers, distributors
and health care service providers in the United States enteral pump industry and
similar subpoenas were served on many of those parties. The subpoena requested
Company documents relating to its enteral pump customers, marketing and billing
practices. ZEVEX has responded to the subpoena and it is cooperating with the
investigation. At this time ZEVEX is uncertain as to any future impact this
investigation will have on its operations or financial position.
Inflation and Changing Prices
ZEVEX has not been, and in the near term is not expected to be, materially
affected by inflation or changing prices.
Critical Accounting Principles 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," ZEVEX has 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 ZEVEX to make estimates and
judgments that affect ZEVEX' reported amounts of assets and liabilities,
revenues and expenses and related disclosures. ZEVEX' significant accounting
policies are included in Note 1 to the Consolidated Financial Statements.
ZEVEX evaluates its estimates and judgments on an on-going basis. ZEVEX bases
its estimates on historical experience and on assumptions that it believes to be
reasonable under the circumstances. ZEVEX' experience and assumptions form the
basis for its judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may vary from what
ZEVEX anticipates and different assumptions or estimates about the future could
change its reported results. ZEVEX believes the following accounting policies
are the most critical to ZEVEX, in that they are important to the portrayal of
its financial statements and they require ZEVEX' most difficult, subjective or
complex judgments in the preparation of its consolidated financial statements:
Allowance for Doubtful Accounts
As a general policy, collateral is not required for accounts receivable;
however, ZEVEX periodically monitors the need for an allowance for doubtful
accounts based upon expected collections of accounts receivable and specific
identification of uncollectible accounts. Additionally, customers' financial
condition and credit worthiness are regularly evaluated. Historical losses have
not been material. As of December 31, 2001, ZEVEX has recorded an allowance for
bad debt of $240,000, approximately 4% of accounts receivable.
Product and Inventory Obsolescence.
Rapid change and technological innovation characterize the marketplace for
medical products. As a result, ZEVEX and its customers are subject to the risk
of product and inventory obsolescence, whether from prolonged development or
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 treatment regimen. Inventories are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method. As of December 31, 2001, ZEVEX has recorded an obsolescence reserve in
the amount of $224,000, approximately 3% of inventories.
Sales Returns and Warranty
ZEVEX records a provision for estimated sales returns and allowances and
warranty reserve on products it has sold. These estimates are based on
historical sales returns and warranty expenses and other known factors. If the
historical data ZEVEX uses to calculate these estimates does not properly
reflect future returns and warranty, revenue could be overstated and expenses
could be understated. ZEVEX has recorded a sales return and warranty expense
allowance in the amount of $85,000.
Revenue Recognition
ZEVEX records revenue from the sale of manufactured products upon shipment.
Shipping and handling costs are expensed as incurred and are included in cost of
sales. Contracts to perform engineering design and product development services
are generally performed on a time and materials basis. Revenue is generally
recognized as milestones are achieved; costs are expensed as incurred.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, in October 1997. SOP 97-2, provides authoritative guidance
on software recognition, applies to all entities that earn revenue from
licensing, selling or otherwise marketing software. ZEVEX' JTech product line
derives a portion of its revenue from its software products that include
postcontract customer support. ZEVEX has recorded deferred revenue in the amount
of $25,000 for such postcontract customer support.
Impairment
ZEVEX has made acquisitions in the past that included a significant amount of
fixed assets, goodwill and other intangible assets. The cost of acquired
companies was allocated first to identifiable assets based on estimated fair
values. Cost allocated to identifiable assets, including fixed assets, are
amortized on a straight-line basis over the remaining estimated useful lives of
the assets, as determined principally by the underlying characteristics of the
assets acquired, net of assumed liabilities. Intangible assets consist of
goodwill, contracts, patents and licenses.
Effective in 2002, as discussed in New Accounting Pronouncements, goodwill will
no longer be amortized but will be 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, additional impairment losses could be recorded in
the future. Fixed assets are not included in the new accounting pronouncement;
thus, the fixed asset policies noted above are not expected to change in
adopting the new accounting pronouncement.
Currently, ZEVEX assesses the impairment of fixed assets, identifiable
intangibles and goodwill whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors ZEVEX considers
important that could trigger an impairment review include the following:
o A significant underperformance relative to expected historical or
projected future operating results;
o A significant change in the manner of its use of the
acquired asset or the strategy for its overall business;
o A significant negative industry or economic trend;
When ZEVEX determines that one or more of the above indicators of impairment
exist, ZEVEX evaluates 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 ZEVEX'
current business model.
Net intangible assets and goodwill amounted to approximately $10.5 million as of
December 31, 2001. Net fixed assets amounted to approximately $7.7 million as of
December 31, 2001. The effect of eliminating amortization for goodwill will
approximate $530,000 annually. For further information, see the discussion under
New Accounting Pronouncements.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS Nos. 137 and 138, was effective for ZEVEX as of January 1, 2001.
The new rule establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Historically, ZEVEX has not used
derivative instruments, and ZEVEX does not hold any derivative instruments at
December 31, 2001. ZEVEX adopted SFAS No. 133, as amended, in the first quarter
of 2001. The adoption of SFAS No. 133 did not have an impact on earnings
or the financial position of ZEVEX, as expected.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method is no
longer permitted. SFAS No. 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets
acquired in a business combination that is completed after June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions), for impairment in accordance with this
statement. This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121, or SFAS No. 144 (see below), once applied. ZEVEX
is required to adopt SFAS No. 142 effective January 1, 2002. ZEVEX does not
anticipate recognizing an impairment charge related to goodwill upon adoption of
the Statement.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations and Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions", for the disposal of a segment
of a business (as previously defined in that opinion). This Statement also
amends ARB No. 51, "Consolidated Financial Statements", to eliminate the
consolidation for a subsidiary for which control is likely to be temporary.
ZEVEX is required to adopt SFAS No. 144, effective January 1, 2002. ZEVEX does
not expect the adoption of SFAS No. 144 to have a material impact on the
consolidated financial position, results of operations or liquidity of ZEVEX.
Other Matters
Summary of Quarterly Data
12/01 9/01 6/01 3/01 12/00 9/00 6/00 3/00
Revenue $8,019,727 $6,899,297 $7,570,632 $7,392,419 $8,356,260 $7,726,721 $9,037,599 $5,658,047
Gross profit 3,047,478 2,340,704 2,741,051 2,889,697 2,140,127 2,963,435 3,215,777 2,529,433
Impairment loss -- (917,628) -- -- -- -- -- --
Net income (loss) 244,918 (809,629) (10,448) 87,462 (505,218) 356,829 552,516 320,015
EPS basic .07 (.24) .00 .03 (.15) .10 .16 .09
EPS diluted .07 (.24) .00 .03 (.15) .10 .15 .09
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ZEVEX is exposed to market risk in the form of fluctuations in interest rates
and their potential impact upon its line of credit, with a balance of
$1,713,610, and its industrial development bond of $1,600,000. Principal
payments of $100,000 are made annually on the industrial development bond, with
the balance due October 1, 2016. The variable rate on the line of credit is
prime and the industrial development bond is based on a weekly tax-exempt
floater rate. The line of credit matures annually in May.
ZEVEX is also exposed to market risk in the form of fluctuations in interest
rates and their potential impact on its fixed rate debt which includes its
Secured Financing Agreement, with a balance of $1,158,890, which is due on
February 15, 2004 and bears interest at a rate of 8.24%, its Term Loan
Agreement, with a balance of $973,821, which is due on May 15, 2003 and bears
interest at a rate of 8.5%, and its convertible debenture with a balance of
$3,923,158, which is due through April 1, 2003 and bears interest at a rate of
7% and 8%.
Additionally, ZEVEX held marketable equity securities with a fair value of
$219,899 at December 31, 2001, and $1,065,275 at December 31, 2000, consisting
of stocks of public companies in the small-cap market. ZEVEX realized an
"other-than-temporary" loss on available-for-sale marketable securities in the
third quarter ending September 30, 2001 and the year ended December 31, 2001 of
$917,628. Gross unrealized gains on marketable equity securities were $32,180
for the year ended December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZEVEX' financial statements for the fiscal years ended December 31, 2001 and
2000, are included beginning at page 44, immediately following Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ZEVEX has no changes in or disagreements with its independent auditors with
regard to financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age, and principal position of each
ZEVEX director and executive officer, as well as the expiration of each
director's term of office.
- ---------------------- ------- ----------------------------------------------------- -------------
Expiration
Name Age Position of Term
- ---------------------- ------- ----------------------------------------------------- -------------
- ---------------------- ------- ----------------------------------------------------- -------------
David J. McNally 40 Chief Executive Officer and Chairman 2003
- ----------------------
- ----------------------
Leonard C. Smith 52 President and Director 2004
- ----------------------
Phillip L. McStotts 44 Chief Financial Officer, Secretary/Treasurer and 2002
Director
- ----------------------
Bradly A. Oldroyd 44 Director 2003
- ----------------------
David B. Kaysen 51 Director 2002
- ----------------------
Kathryn B. Hyer 47 Director 2004
- ---------------------- ------- ----------------------------------------------------- -------------
ZEVEX' executive officers serve at the discretion of the Board of Directors.
None of the executive officers have employment agreements with ZEVEX. Certain
biographical information with respect to each of the officers and directors is
set forth below.
David J. McNally is a founder of ZEVEX and has served as ZEVEX' Chief Executive
Officer and Chairman since September 2000. Prior to September 2000, Mr. McNally
served as ZEVEX' Executive Vice President and as a director since its inception
in 1986. He also serves as CEO and director of ZEVEX' wholly-owned subsidiaries,
ZEVEX Inc. and JTech. Prior to joining ZEVEX, he was employed by EDO Corporation
in Salt Lake City, Utah as a marketing manager from 1985 to 1987. From 1984 to
1985, Mr. McNally was employed by Physical Acoustics Corporation, a Princeton,
New Jersey based manufacturer of acoustic testing systems, as its regional sales
manager for the Southeastern United States. From 1983 to 1984, he was employed
by Hercules, Inc., in Magna, Utah, as an advanced methods development engineer.
Mr. McNally received a Bachelor of Science Degree in Mechanical Engineering from
Lafayette College in May 1983 and an Executive Master of Business Administration
Degree from the University of Utah in June 1992.
Leonard C. Smith has served as President since September 2000, and as a director
since April 1999. Mr. Smith is a founder of JTech and has served as its
President since 1995. He also serves as President and director of ZEVEX'
wholly-owned subsidiaries. Prior to joining JTech, in 1994 he established "the
Charles Group", a medical marketing company specializing in diagnostic and
rehabilitation products. From 1993 to 1994, Mr. Smith was Vice President of Four
Corners, a large chain of health clubs based in the Southwest. From 1979 to
1993, Mr. Smith was a partner and Vice President of Sales and Marketing at
Hoggan Health Industries, a manufacturer of commercial fitness equipment. Mr.
Smith received a Bachelor of Science Degree in Business Management from the
University of Utah in June 1977.
Phillip L. McStotts is a founder of ZEVEX and has served as ZEVEX' CFO,
Secretary, and Treasurer, and as a director since its inception. He also serves
as a director of ZEVEX' wholly-owned subsidiaries, as CFO, Secretary and
Treasurer of ZEVEX Inc. and as CFO and Secretary of JTech. Mr. McStotts was a
practicing CPA running his own professional corporation, Phillip L. McStotts,
CPA P.C., from 1986 to 1992. Prior to starting his own firm, Mr. McStotts was
employed from 1985 to 1986 as an accountant with the Salt Lake City firm of
Chachas & Associates, where he was a tax manager. He has also worked in the tax
departments of the regional accounting firms of Pearson, Del Prete & Company,
and Petersen, Sorensen & Brough. Mr. McStotts received a Bachelor of Science
Degree in Accounting from Westminster College in May 1980, and received a Master
of Business Administration Degree in Taxation from Golden Gate University in May
1982.
Bradly A. Oldroyd has been a director of ZEVEX since October 1991. He is the
founder and principal shareholder of Pinnacle Management Group, a Salt Lake
City-based personnel services firm, serving as its President since 1986. Mr.
Oldroyd is also the founder and CEO of TeamONE Ford and Fuel Centers, a Salt
Lake City-based petroleum and convenience goods retailer. He is also a member of
the faculty of the University of Phoenix campus in Salt Lake City, where he
teaches management and marketing courses in undergraduate and graduate programs.
Mr. Oldroyd received a Bachelor of Science degree in Marketing from Utah State
University in 1981 and a Master of Business Administration Degree from the
University of Utah in 1982.
David B. Kaysen has been a director of ZEVEX since November 2000. Mr. Kaysen
has served since 1992 as Chief Executive Officer, President, and director of
Rehabilicare Inc., a publicly traded (NASDAQ: REHB) manufacturer and marketer of
electromedical rehabilitation and pain management products for clinician, home
and industrial use. From 1989 to 1992, Mr. Kaysen served as Executive Vice
President for Emeritus, a company that developed and marketed clinical
assessment software for the nursing home industry. Mr. Kaysen also served as
President and CEO of Surgidyne, Inc., which markets specialty medical and
surgical products, from 1988 to 1989. From 1986 to 1988, Mr. Kaysen was Vice
President of Marketing for Red Line/XVIIIB Medimart, a medical product
distributor. Mr. Kaysen also served in various general management positions
with American Hospital Supply Corporation from 1974 to 1986. Mr. Kaysen also
currently serves as a director on the Board of American Telecare, Inc., a
privately held company that markets home telemedicine products. Mr. Kaysen
graduated with a Bachelor of Science Degree in Business Administration from the
University of Minnesota in 1972.
Kathryn B. Hyer has been a director of ZEVEX since November 2000. Ms. Hyer has
served since August 2001 as an Assistant Vice President at the University of
Illinois, in the Office of the Vice President for Economic Development and
Corporate Relations. From 2000 to 2001, Ms. Hyer was the Chief Financial Officer
of Quark Biotech, Inc., Chicago, Illinois, in charge of Finance, Human Resources
and Administration. Prior to joining Quark, from 1996 to 2000, Ms. Hyer was a
Managing Director of the Health Care Corporate Finance group for First Union
Securities, which acquired Everen Securities, Inc. in September 1999. In October
1996, Ms. Hyer founded Everen Securities' Health Care Group, where she defined
strategy and hired a banking team that focused on medical devices,
biotechnology, specialty pharmaceuticals, and healthcare information technology
companies. From 1994 to 1996, Ms Hyer served as the Director of Finance for the
City of Cleveland. Previously, Ms. Hyer held Senior Vice President and Vice
President positions in the Corporate Finance and Public Finance Departments at
predecessors of Everen Securities, Inc. from 1983 to 1994. Ms. Hyer graduated
with a Bachelor of Arts Degree in Political Science and Sociology from Aquinas
College in Grand Rapids, Michigan in 1977, and a Juris Doctorate from Cleveland
Marshall College of Law in Cleveland, Ohio in 1982.
OTHER KEY EMPLOYEES
James L. Holden, 38, is Vice President and Director of Manufacturing for
Company. Mr. Holden has been employed with ZEVEX since 1988, and has held
various positions including Vice President, Director of OEM Operations and
Director of Engineering. Prior to joining ZEVEX, he was employed by EDO
Corporation, Western Division from 1984 to 1988, where he developed tactical
sonar systems for use in undersea warfare. Mr. Holden received a Bachelor of
Science degree in Electrical Engineering from the University of Utah in 1986,
and has completed post-graduate course work at the University of Utah in the
design of medical ultrasound instrumentation.
SECTION 16(a) BENEFICIAL REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires ZEVEX' directors, executive officers, and 10% shareholders to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of Common Stock. Based solely on a review of
the copies of such reports furnished to ZEVEX and written representations that
no other reports were required, ZEVEX believes that during 2001 all directors,
executive officers, and 10% shareholders complied on a timely basis with all
applicable filing requirements under Section 16(a) of the Exchange Act, except
as follows: (1) Mr. Oldroyd, Mr. Kaysen and Ms. Hyer each filed one late report
on Form 4, due December 2001, for one transaction involving the grant of Company
options to purchase common stock.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by ZEVEX to each of ZEVEX'
executive officers during the three-year period ended December 31, 2001.
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
------- ---------- ------ ---
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Position Year Salary Bonus Comp. Awards Options Payouts Comp.
- ------------------ ---- ------ ----- ----- ------ ------- ------- -----
David J. McNally 2001 $185,500 $7,500 0 0 0 0 $5,250(a)
Chief Executive Officer 2000 $142,528 $27,421 0 0 0 0 $5,250(a)
Chairman 1999 $114,070 $48,000 0 0 0 0 $4,605(a)
Leonard C. Smith 2001 $175,000 $0 0 0 0 0 $5,250(a)
President 2000 $128,563 $15,553 0 0 0 0 $5,250(a)
1999 $100,000 $40,000 0 0 0 0 $4,000(a)
Phillip L. McStotts 2001 $165,000 $0 0 0 0 0 $5,250(a)
Chief Financial Officer 2000 $133,061 $17,500 0 0 0 0 $5,250(a)
Secretary/Treasurer 1999 $114,070 $48,000 0 0 0 0 $4,605(a)
(a) Represents the amount paid by ZEVEX as a contribution to ZEVEX' 401(k)
Pension and Profit Sharing Plan on the officer's behalf.
OPTIONS GRANTS IN LAST FISCAL YEAR
ZEVEX did not grant any options during the year ended December 31, 2001 to
executive officers of ZEVEX.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth the options exercised during the year ended
December 31, 2001, by each executive officer of ZEVEX and the value of options
held by such persons at such year-end.
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End FY-End
Shares
Name and Acquired Value Exercisable/ Exercisable/
Principal Position or Exercised Realized Unexercisable Unexercisable
David J. McNally
Chief Executive Officer 0 0 93,250/53,750 $0/0
Leonard C. Smith
President 0 0 30,000/50,000 $0/0
Phillip L. McStotts
Secretary/Treasurer 0 0 93,250/53,750 $0/0
Of the unexercised options listed above for each of Messrs. McNally and
McStotts, 7,000 were granted on February 13, 1997, and expired on February 12,
2002. The exercise price on such options is $3.85. Of the unexercised options
listed above for each of Messrs. McNally and McStotts, 70,000 were granted on
September 30, 1997 and expire on September 29, 2002. The exercise price on such
options is $5.00. Of the unexercised options listed above for each of Messrs.
McNally and McStotts, 30,000 were granted effective on January 1, 1999 and
expire on January 7, 2005. The exercise price on such options is $5.00. Of the
unexercised options listed above for Mr. Smith, 40,000 were granted on January
5, 1999 and expire on January 4, 2004. The exercise price on such options is
$4.875. Of the unexercised options listed above for each of Messrs. McNally,
Smith and McStotts, 40,000 were granted effective on November 27, 2000 and
expire on November 27, 2007. The exercise price on such options is $4.75. The
value of the unexercised options was determined by reference to the closing
sales price for ZEVEX' Common Stock on the NASDAQ Stock Market as of December
31, 2001, which was $2.80.
COMPENSATION OF DIRECTORS
ZEVEX pays each director who is not an employee of ZEVEX or its subsidiaries a
director's fee of $2,000 per quarter, $1,000 per year for each committee the
director is elected to, and $1,000 per day honorarium for special assignments.
Each director is also granted 10,000 stock options upon first being elected to
the board, with 25% vesting on an annual basis, in addition to being granted
2,500 stock options annually while a member of the Board of Directors. Although
ZEVEX may also issue stock options to directors who are employees for their
service as directors, these employee directors currently receive no additional
compensation for serving as directors or attending meetings of directors or
shareholders.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, the Audit Committee and the
Compensation Committee. The Audit Committee is composed of Kathryn B. Hyer,
David B. Kaysen and Bradly A. Oldroyd. The Compensation Committee is composed of
David B. Kaysen and Bradly A. Oldroyd. The Audit Committee is authorized to
review proposals of ZEVEX' auditors regarding annual audits, recommend the
engagement or discharge of ZEVEX' auditors, review recommendations of such
auditors concerning accounting principles and the adequacy of internal controls
and accounting procedures and practices, review the scope of the annual audit,
approve or disprove each professional service or type of service other than
standard auditing services to be provided by the auditors, and review and
discuss the audited financial statements with the auditors. The Compensation
Committee establishes remuneration of the executive officers and directors of
ZEVEX and oversees the administration of ZEVEX' stock option plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of ZEVEX' Common Stock (par value $0.001) as of March 6, 2002, by (i)
each person (or group of affiliated persons) who is known by ZEVEX to
beneficially own more than 5% of the outstanding shares of ZEVEX' Common Stock,
(ii) each director and executive officer of ZEVEX, and (iii) all executive
officers and directors of ZEVEX as a group. As of such date, ZEVEX had a total
of 3,415,197 shares of Common Stock outstanding. Unless indicated otherwise, the
address for each officer, director and 5% shareholder is c/o ZEVEX
International, Inc., 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123.
Number of Percent
Name Shares Owned Of Class(1)
- ---------------- ------------ -----------
David J. McNally(2) 326,448 9.3%
Dean G. Constantine(3) 251,900 7.4%
Phillip L. McStotts. (4) 235,650 6.7%
Jeff Holmes(5) 205,725 6.0%
Kirk Blosch(6) 185,000 5.4%
Leonard C. Smith(7) 164,299 4.6%
Bradly A. Oldroyd(8) 13,375 *
Kathryn B. Hyer(9) 10,750 *
David B. Kaysen(10) 2,500 *
All Officers and Directors
as a Group(2) (4) (7) (8) (9) (10) 753,022 20.6%
*Less than 1%
(1) For purposes of the table, "beneficial ownership" includes stock that a
shareholder has the right to acquire pursuant to options or rights of conversion
within 60 days of January 6, 2002. The percentage ownership for each shareholder
is calculated assuming that all the stock that could be so acquired by that
shareholder within 60 days, by option exercise or otherwise, has in fact been
acquired and that no other shareholder has exercised a similar right to acquire
additional shares. Except as indicated otherwise below, the shareholder named in
the table has sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to applicable
community property laws.
(2) Chief Executive Officer and Chairman of ZEVEX. Includes 240,198 shares of
Common Stock held directly and 86,250 shares of Common Stock issuable upon
exercise of options held by Mr. McNally that are currently exercisable or will
become exercisable within 60 days. Excludes 53,750 shares of Common Stock
issuable upon exercise of options held by Mr. McNally that are not currently
exercisable and will not become exercisable within 60 days.
(3) Beneficial owner. Includes 251,900 shares of Common Stock held directly by
Mr. Constantine. The beneficial owned shares listed was determined with the
latest available information provided to ZEVEX from Mr. Constantine in August
2000. Mr. Constantine's address is 3175 E. Oldridge Circle, Salt Lake City,
Utah 84121.
(4) Chief Financial Officer, Secretary, Treasurer, and director of ZEVEX.
Includes 149,400 shares of Common Stock held directly and 86,250 shares of
Common Stock issuable upon exercise of options held by Mr. McStotts that are
currently exercisable or will become exercisable within 60 days. Excludes 53,750
shares of Common Stock issuable upon exercise of options held by Mr. McStotts
that are not currently exercisable and will not become exercisable within 60
days.
(5) Beneficial owner. Includes 205,725 shares of Common Stock held directly by
Mr. Holmes. Mr. Holmes' address is P.O. Box 11207, Zephyr Cove, NV 89448.
(6) Beneficial owner. Includes 185,000 shares of Common Stock held directly by
Mr. Blosch. Mr. Blosch's address is 2081 S. Lakeline Drive, Salt Lake City,
UT 84109.
(7) President and director of ZEVEX. Includes 26,700 shares of Common Stock held
directly and 40,000 shares of Common Stock issuable upon exercise of options
held by Mr. Smith that are currently exercisable or will become exercisable
within 60 days by Mr. Smith. Also includes 97,599 shares of Common Stock that
are issuable at $11 per share upon conversion of debentures held by Mr. Smith in
the principal amount of $1,073,594. Excludes 40,000 shares of Common Stock
issuable upon exercise of options held by Mr. Smith that are not currently
exercisable or will not become exercisable within 60 days.
(8) Director. Includes 13,375 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days. Excludes 10,625 shares of Common Stock issuable upon exercise of options
held by Mr. Oldroyd that are not currently exercisable and will not become
exercisable within 60 days.
(9) Director. Includes 10,750 shares of Common Stock issuable upon exercise of
options and warrants that are currently exercisable or will become exercisable
within 60 days. Excludes 10,000 shares of Common Stock issuable upon exercise of
options held by Ms. Hyer that are not currently exercisable and will not become
exercisable within 60 days.
(10) Director. Includes 2,500 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days. Excludes 10,000 shares of Common Stock issuable upon exercise of options
held by Mr. Kaysen that are not currently exercisable and will not become
exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please refer to the description of Mr. Leonard Smith's involvement with ZEVEX'
acquisition of JTech described in Item 7.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report.
(1) - Financial Statements.
The following Consolidated Financial Statements of ZEVEX for the years ended
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001, are filed as part of this report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
(2) - Financial Statement Schedules.
Not required in accordance with the applicable rules and regulations.
(3) - Exhibits
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZEVEX INTERNATIONAL, INC.
Dated: March 28, 2002 By: /s/ DAVID J. MCNALLY
----------------------
David J. McNally
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears below
constitutes and appoints each of David J. McNally and Phillip L. McStotts,
jointly and severally, his true and lawful attorney in fact and agent, with full
power of substitution for him and in his name, place and stead, in any and all
capacities to sign any or all amendments to this report on Form 10-K and to file
the same, with all exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each said attorney in fact or his substitute or substitutes may do or cause
to be done by virtue hereof.
Signature Title Date
/s/ DAVID J. MCNALLY Chairman of the Board of Directors, March 28, 2002
- ---------------------------
David J. McNally Chief Executive Officer,
(Principal Executive Officer)
/s/ LEONARD C. SMITH Director and President, March 28, 2002
- ---------------------------
Leonard C. Smith
/s/ PHILLIP L. McSTOTTS Director, Chief Financial Officer, March 28, 2002
- -----------------------
Phillip L. McStotts Secretary, and Treasurer (Principal
Financial and Accounting Officer)
/s/ BRADLY A. OLDROYD Director March 28, 2002
- ---------------------
Bradly A. Oldroyd
/s/ DAVID B. KAYSEN Director March 28, 2002
- -------------------
David B. Kaysen
/s/ KATHRYN B. HYER Director March 28, 2002
- -------------------
Kathryn B. Hyer
INDEX TO EXHIBITS
(Item 14(c))
Number Exhibits
3.1 Articles of Incorporation of ZEVEX International, Inc., a
Delaware corporation (1).
3.2 Bylaws of ZEVEX International, Inc., a Delaware corporation (1).
10.1 Revolving Line of Credit Agreement between Bank One and ZEVEX International, Inc., dated September 29, 1997 (1).
10.3 Stock Purchase Agreement between Blosch & Holmes, LLC and ZEVEX International, Inc., dated December 1, 1996,
including one amendment dated September 30, 1997 (1).
10.4 Registration Rights Agreement among Kirk Blosch, Jeff W. Holmes and ZEVEX International, Inc., dated February 1,
1998 (2).
10.5# ZEVEX International, Inc., Amended 1993 Stock Option Plan (3).
10.6 Industrial Development Bond Offering Memorandum, dated October 30, 1996 (4).
10.7 Industrial Development Bond Reimbursement Agreement, dated October 30, 1996 (4).
10.8 Warrant to Purchase 50,000 shares of Common Stock issued to Wedbush Morgan Securities, Inc., dated November 20,
1997 (2).
10.9 Warrant to Purchase 50,000 shares of Common Stock issued to Everen Securities, Inc., dated November 20, 1997 (2).
10.13 Stock Purchase Agreement, dated December 31, 1998, between ZEVEX International, Inc., and Vijay Lumba (5).
10.14 Stock Purchase Agreement, dated December 31, 1998, among ZEVEX International, Inc., Leonard Smith, Tracy
Livingston,
David Bernardi, and Corporation of the President of the Church of Jesus Christ of Latter Day Saints (5).
10.15 Convertible Debenture, dated January 6, 1999, issued to Vijay Lumba (6).
10.16 Convertible Debenture, dated January 6, 1999, issued to Leonard Smith (6).
10.17 Convertible Debenture, dated January 6, 1999, issued to Tracy Livingston (6).
10.19# ZEVEX International, Inc., 1999 Stock Option Plan and Form of Stock Option Grant (6).
10.20 Form of Stock Option Grant to Messrs. Constantine, McNally, McStotts and Smith. (7)
10.21 Asset Purchase Agreement, dated March 29, 2000, between ZEVEX, Inc. and Nestle (7)
10.22 Convertible Debenture, dated March 30, 2000, issued to Vijay Lumba. (8)
10.23 Convertible Debenture, dated March 30, 2000, issued to Leonard Smith. (8)
10.24# Severance Settlement Agreement and Release, between Dean G. Constantine and ZEVEX International, Inc. (8)
10.25 Amendment to Revolving Line of Credit Agreement between Bank One and ZEVEX International, Inc., dated June 29,
2001.
10.26 Amendment to Convertible Debenture, dated December 20, 2001, issued to Vijay Lumba.
10.27 Amendment to Convertible Debenture, dated December 20, 2001, issued to Leonard Smith.
10.28 Amendment to Convertible Debenture, dated December 20, 2001, issued to Tracy Livingston.
21 List of Subsidiaries.
(1) Incorporated by reference to Amendment No. 1 on Registration Statement on Form S-1 filed October 24, 1997 (File No.
333-37189).
(2) Incorporated by reference to ZEVEX' Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-12965).
(3) Incorporated by reference to Registration Statement on Form S-1 filed October 3, 1997 (File No. 001-12965).
(4) Incorporated by reference to ZEVEX' amended Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(File No. 033-19583).
(5) Incorporated by reference to ZEVEX' Current Report on Form 8-K filed January 14, 1999 (File No. 001-12965).
(6) Incorporated by reference to ZEVEX' Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 001-12965).
(7) Incorporated by reference to ZEVEX' Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-12965).
(8) Incorporated by reference to ZEVEX' Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 001-12965).
# Identifies a "management contract or compensatory plan or arrangement".
CONSOLIDATED FINANCIAL STATEMENTS
ZEVEX International, Inc.
Years Ended December 31, 2001, 2000 and 1999
with Report of Independent Auditors
ZEVEX International, Inc.
Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
Contents
Report of Independent Auditors...........................................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets .............................................................................2
Consolidated Statements of Operations ...................................................................3
Consolidated Statements of Stockholders' Equity .........................................................4
Consolidated Statements of Cash Flows ...................................................................5
Notes to Consolidated Financial Statements ..............................................................6
Report of Independent Auditors
Board of Directors and Stockholders
ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheets of ZEVEX
International, Inc. as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ZEVEX
International, Inc. as of December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Salt Lake City, Utah
March 1, 2002
ZEVEX International, Inc.
Consolidated Balance Sheets
December 31
2001 2000
------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,028,086 $ 327,157
Cash restricted for sinking fund payment on industrial
development bond 93,076 90,070
Accounts receivable, net of allowance for doubtful
accounts of $240,000 in 2001 and $300,000 in 2000 5,748,578 7,501,089
Inventories 7,272,842 9,687,446
Marketable securities 219,899 1,065,275
Deferred income taxes 568,387 628,676
Income taxes receivable 418,506 319,990
Prepaid expenses and other current assets 62,662 37,823
------------------------------------
------------------------------------
Total current assets 15,412,036 19,657,526
Property and equipment, net 7,688,088 7,979,061
Patents, trademarks, and acquisition costs, net 342,746 343,685
Goodwill, net 10,154,757 10,688,271
Other assets 41,519 19,419
------------------------------------
Total assets $ 33,639,146 $ 38,687,962
====================================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 1,711,429 $ 2,212,726
Accrued liabilities 563,067 569,264
Payable related to product line acquisition 222,202 1,000,000
Bank line of credit 1,713,610 5,936,995
Current portion of industrial development bond 100,000 100,000
Current portion of convertible debt 921,188 -
Current portion of other long-term debt 524,381 -
Current portion of capital leases 162,783 148,783
------------------------------------
------------------------------------
Total current liabilities 5,918,660 9,967,768
Deferred income taxes 276,734 151,667
Industrial development bond 1,500,000 1,600,000
Convertible debt 3,001,970 5,447,188
Other long-term debt 1,608,330 -
Capital lease obligations 301,051 463,834
Stockholders' equity:
Common stock, $.001 par value: 10,000,000 shares authorized;
3,440,197 shares issued and 3,415,197 shares outstanding in
2001 and 3,440,064 shares issued and outstanding in 2000 3,440 3,440
Additional paid-in capital 16,290,452 16,289,787
Retained earnings 4,779,288 5,266,991
Unrealized gain (loss) on available-for-sale securities, net
of tax (expense) benefit of $(12,003) and $299,062 in 2001
and 2000, respectively 20,177 (502,713)
Treasury stock, 25,000 shares (at cost) (60,956) -
------------------------------------
Total stockholders' equity 21,032,401 21,057,505
------------------------------------
Total liabilities and stockholders' equity $ 33,639,146 $ 38,687,962
====================================
See accompanying notes.
ZEVEX International, Inc.
Consolidated Statements of Operations
Year Ended December 31
2001 2000 1999
-----------------------------------------------------
Revenues:
Product sales $28,678,317 $29,661,205 $21,070,153
Engineering services 1,203,758 1,117,422 1,956,055
-----------------------------------------------------
29,882,075 30,778,627 23,026,208
Cost of sales 18,863,147 19,929,855 12,474,210
-----------------------------------------------------
Gross profit 11,018,928 10,848,772 10,551,998
Operating expenses:
General and administrative 6,306,795 5,169,944 4,357,273
Selling and marketing 2,682,134 2,712,702 2,238,629
Research and development 477,653 852,273 670,886
Goodwill amortization 533,514 523,187 392,142
-----------------------------------------------------
10,000,096 9,258,106 7,658,930
-----------------------------------------------------
Operating income 1,018,832 1,590,666 2,893,068
Other income (expense):
Interest/other income 371,179 506,858 235,148
Interest expense (1,059,593) (703,686) (481,615)
Impairment loss on marketable securities (917,628) - -
Unrealized gain on trading marketable securities - - 167,761
-----------------------------------------------------
Income (loss) before benefit from (provision for) income
taxes (587,210) 1,393,838 2,814,362
Benefit from (provision for) income taxes 99,507 (669,698) (1,187,989)
-----------------------------------------------------
Net income (loss) $ (487,703) $ 724,140 $ 1,626,373
=====================================================
Basic net income (loss) per common share $ (.14) $ .21 $ .48
=====================================================
Diluted net income (loss) per common share $ (.14) $ .19 $ .47
=====================================================
See accompanying notes.
ZEVEX International, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Additional Paid-in Retained Treasury
---------------------------
Shares Amount Capital Earnings Stock
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Balances at January 1, 1999 3,418,876 $3,419 $17,381,793 $2,927,422 $ 50,790)
Comprehensive income:
Net income - - - 1,626,373 -
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities - - - - -
Total comprehensive income
Exercise of stock options for cash 1,850 2 6,173 - -
Purchase of warrants for cash - - (1,175,000) - -
Purchase of 10,000 shares of treasury stock - - - - (45,731)
Transfer of 16,700 shares of treasury stock to ESOP - - - (10,944) 96,521
-----------------------------------------------------------------------
Balances at December 31, 1999 3,420,726 3,421 16,212,966 4,542,851 -
Comprehensive income:
Net income - - - 724,140 -
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale securities - - - - -
Total comprehensive loss
Exercise of stock options for cash 19,338 19 76,821 - -
-----------------------------------------------------------------------
Balances at December 31, 2000 3,440,064 3,440 16,289,787 5,266,991 -
Comprehensive income:
Net loss - - - (487,703) -
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of reclassification - - - - -
adjustments (see Note 1)
Total comprehensive income
Exercise of stock options for cash 133 - 665 - -
Purchase of 25,000 shares of treasury stock, at cost - - - - (60,956)
-----------------------------------------------------------------------
Balances at December 31, 2001 3,440,197 $3,440 $16,290,452 $4,779,288 $ (60,956)
=======================================================================
Unrealized (Loss) Gain
on Available-for-Sale
-----------------------------------
Securities Total
-----------------------------------
-----------------------------------
Balances at January 1, 1999 $ (147,309) $20,114,535
Comprehensive income:
Net income - 1,626,373
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities 478,793 478,793
Total comprehensive income 2,105,166
Exercise of stock options for cash - 6,175
Purchase of warrants for cash - (1,175,000)
Purchase of 10,000 shares of treasury stock - (45,731)
Transfer of 16,700 shares of treasury stock to ESOP - 85,577
------------------------------------
Balances at December 31, 1999 331,484 21,090,722
Comprehensive income:
Net income - 724,140
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale securities (834,197) (834,197)
Total comprehensive loss (110,057)
Exercise of stock options for cash - 76,840
------------------------------------
Balances at December 31, 2000 (502,713) 21,057,505
Comprehensive income:
Net loss - (487,703)
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of reclassification 522,890 522,890
adjustments (see Note 1)
Total comprehensive income 35,187
Exercise of stock options for cash - 665
Purchase of 25,000 shares of treasury stock, at cost - (60,956)
-------------------------------------
Balances at December 31, 2001 $ 20,177 $21,032,401
=====================================
ZEVEX International, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31
2001 2000 1999
------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (487,703) $ 724,140 $ 1,626,373
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 2,086,379 1,756,682 1,157,221
Benefit for deferred income taxes (125,707) (97,672) (15,885)
Realized gain on marketable securities (241,434) (379,620) (65,816)
Unrealized gain on trading marketable securities - - (167,761)
Other-than-temporary impairment loss on
available-for-sale marketable securities 917,628 - -
Changes in operating assets and liabilities, net of
acquisitions:
Restricted cash for sinking fund payment on
industrial development bond (3,006) (3,521) 95,500
Accounts receivable 1,752,511 (1,657,860) (2,408,048)
Inventories 1,380,855 (3,360,100) 455,103
Trading securities - 313,992 80,623
Prepaid expenses and other assets (46,939) 9,782 37,235
Accounts payable (501,297) 1,077,780 58,836
Accrued liabilities (6,197) (162,588) 43,630
Income taxes payable/receivable (98,516) (1,277,299) 906,418
------------------------------------------------
Net cash flows provided by (used in) operating activities 4,626,574 (3,056,284) 1,803,429
Cash flows from investing activities
Purchase of property and equipment (200,094) (1,224,760) (566,958)
Purchase of product line - (2,794,146) -
Purchases of available-for-sale marketable securities - - (1,827,150)
Redemption of available-for-sale marketable securities 1,003,135 894,712 1,116,944
Addition of patents and trademarks (27,110) (21,430) (4,370)
------------------------------------------------
Net cash flows provided by (used in) investing activities 775,931 (3,145,624) (1,281,534)
Cash flows from financing activities
Repurchase of common stock warrants - - (1,175,000)
Proceeds from exercise of stock options 665 76,840 6,175
Net (payments on) proceeds from bank line of credit (4,223,385) 4,323,542 1,071,460
Stock contribution to Employee Stock Ownership Plan - - 85,577
Purchase of treasury stock (60,956) - (45,731)
Payments related to business acquisitions (2,301,828) (1,104,758) (4,941,343)
Payments on industrial development bond (100,000) (100,000) (100,000)
Proceeds from long-term debt 2,500,000 - -
Principal payments on capital leases and long-term debt (516,072) (50,103) -
------------------------------------------------
Net cash flows (used in) provided by financing activities (4,701,576) 3,145,521 (5,098,862)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 700,929 (3,056,387) (4,576,967)
Cash and cash equivalents at beginning of year 327,157 3,383,544 7,960,511
------------------------------------------------
Cash and cash equivalents at end of year $ 1,028,086 $ 327,157 $ 3,383,544
================================================
See accompanying notes.
1. Description of Organization and Business and 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 in Delaware. In December 1998, the Company
acquired an additional product line and completed the acquisition of two
additional subsidiaries. Additionally, the Company acquired a product line from
Nestle USA, Inc. in April of 2000 (see Note 2). The Company, through its
divisions and subsidiaries, engages in the business of designing, manufacturing
and distributing medical devices. ZEVEX' product lines include proprietary
medical devices that it designs, manufactures, and distributes, and
contract-manufactured products that it designs and manufactures for original
equipment manufacturers ("OEM's").
Principles of Consolidation
The consolidated financial statements at December 31, 2001 include the
accounts of ZEVEX International, Inc. (the Company) and its wholly owned
operating subsidiaries: ZEVEX, Inc. and JTech Medical Industries, Inc.
(JTech). The consolidated financial statements at December 31, 2000 also
include the subsidiary Aborn Electronics, Inc. (Aborn). All significant
intercompany balances and transactions have been eliminated in consolidation.
During December 2001, the corporate shell of Aborn was sold to a related party
for $100,000. A gain was recorded for this amount and is included in
interest/other income on the consolidated statement of operations. The Company
maintained certain manufacturing rights, cash, accounts receivable, equipment,
and inventory, which now are included within the subsidiary, ZEVEX, Inc.
Use of Estimates
The preparation of financial statements in conformity with accounting policies
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Cash and Cash Equivalents
The Company considers all certificates of deposit and highly liquid debt
instruments with an original maturity of three months or less when purchased to
be cash equivalents.
1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
Concentrations of Credit Risk
The Company's financial instruments consist primarily of cash, cash equivalents,
marketable securities, trade accounts receivable and certain debt issuances (see
Note 8). Cash and cash equivalents are held in federally insured financial
institutions or invested in high-grade, short-term commercial paper issued by
major United States corporations. Marketable securities consist principally of
corporate stocks. The Company sells its products primarily to, and has trade
receivables with, independent durable medical equipment manufacturers and
dealers in the United States and abroad. Sales to major customers are discussed
in Note 13. Less than 10% of product sales are to foreign customers.
As a general policy, collateral is not required for accounts receivable;
however, the Company periodically monitors the need for an allowance for
doubtful accounts based upon expected collections of accounts receivable and
specific identification of uncollectible accounts. Additionally, customers'
financial condition and creditworthiness are regularly evaluated. Historical
losses have not been material.
Inventories
Inventories are stated at the lower of cost or market; cost is determined using
the first-in, first-out method.
Marketable Securities
The Company's marketable securities consist of equity securities classified as
available-for-sale at December 31, 2001 and 2000. Such securities are carried at
their fair value based upon their quoted market prices at December 31, 2001 and
2000.
Unrealized gains and losses on available-for-sale securities are reported, net
of tax, in a separate component of stockholders' equity.
Realized gains and losses and declines in value, judged to be
other-than-temporary on available-for-sale securities are included in other
income (expense). The cost of securities sold is based on the
specific-identification method. Interest and dividends on securities classified
as available-for-sale are included in other income.
The Company held no trading securities at December 31, 2001 and 2000. Net
unrealized holding gains on trading securities for the period ended December 31,
1999 of $167,761 were included in net income.
In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and Staff Accounting Bulletin No. 59, Accounting for Noncurrent
Marketable Equity Securities, in 2001, the Company recorded an
other-than-temporary impairment loss on its available-for-sale securities of
$917,628 ($575,353 net of taxes), which is reflected as a component of net loss.
This writedown represents the amount of the unrealized loss as of the date of
the writedown on the Company's available-for-sale marketable securities that had
previously been recorded in equity as part of other comprehensive income.
As of December 31, 2001, the Company had net unrealized holding gains of $32,180
($20,177 net of taxes). The Company had net unrealized holding losses as of
December 31, 2000 of $801,775 ($502,713 net of taxes).
1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over expected useful lives of three to twenty-five
years using the straight-line method.
Major replacements and refurbishment costs, which extend the useful lives of
equipment, are capitalized and depreciated over the remaining useful life.
Normal maintenance and repairs are expensed as incurred.
Patents, Trademarks, and Acquisition Costs
Acquisition costs and the costs of acquired and internally developed patents and
trademarks are amortized over the lesser of fifteen years or the estimated
useful life of the intangible asset on a straight-line basis. At December 31,
2001 and 2000, accumulated amortization related to patents, trademarks, and
acquisition costs of $98,641 and $70,592, respectively, has been recorded by the
Company. The Company periodically reviews the recoverability of its intangible
assets and other long-term assets and, where impairment in value has occurred,
such intangibles are written down to net realizable value.
Goodwill
Goodwill is recorded at the lower of cost or its net realizable value and is
being amortized on a straight-line basis over 15 to 23 years. At December 31,
2001 and 2000, accumulated amortization related to goodwill of $1,448,843 and
$915,329, respectively, has been recorded by the Company. The Company
periodically reviews the recoverability of these intangible assets in order to
record them at their net realizable value.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and For Long-Lived Assets to be Disposed Of, the Company assesses, on an
ongoing basis, the recoverability of long-lived assets, comparing estimates of
future undiscounted cash flows to net book value. If future undiscounted cash
flow estimates were less than net book value, net book value would be reduced to
fair value based on estimates of discounted cash flows. The Company also
evaluates amortization periods of assets, including goodwill and other
intangible costs, to determine if events or circumstances warrant revised
estimates of useful lives.
Income Taxes
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on differences
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.
Stock Options
The Company has elected to follow the intrinsic value method under Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
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. During 2001, 2000, and 1999, no
stock-based compensation expense was recognized by the Company.
1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
Capitalized Software Development Costs for Internal Use
In accordance with the provisions of Statement of Position (SOP) No. 98-1,
Accounting for the Costs of Software Developed or Obtained for Internal Use, the
Company capitalizes internal and external costs to develop or obtain internal
use software during the application development stage. Costs incurred during the
preliminary project stage are expensed as incurred, as are training and
maintenance costs. The Company capitalized $606,049 relating to a new accounting
system during 2000. Amortization is computed using the straight-line method over
the estimated useful life of the assets, which has been determined to be three
years.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $233,418,
$249,542, and $284,452, respectively, for the years ended December 31, 2001,
2000, and 1999.
Revenue Recognition
The Company records revenue from the sale of manufactured products upon
shipment. Shipping and handling costs are expensed as incurred and are included
in cost of sales. Contracts to perform engineering design and product
development services are generally performed on a time and materials basis.
Revenue is generally recognized as milestones are achieved; costs are expensed
as incurred.
The Company accounts for revenue from software transactions pursuant to SOP No.
97-2, Software Revenue Recognition, as amended by SOP No. 98-4 and SOP No. 98-9.
SOP No. 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements,
post-contract customer support, installation, or training. Under SOP No. 97-2,
the determination of fair value is based on objective evidence, which is
specific to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS Nos. 137 and 138, is effective for the Company as of January
1, 2001. The new rule establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Historically, the Company has not
used derivative instruments, and the Company does not hold any derivative
instruments at December 31, 2001. As a result of the adoption of this
pronouncement, the Company has experienced no material effect on its
consolidated earnings or consolidated financial position.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the pooling-of-
interests method is no longer permitted. SFAS No. 141 also includes guidance
on the initial recognition and measurement of goodwill and other intangible
assets acquired in a business combination that is completed after June 30, 2001.
1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
New Accounting Pronouncements (continued)
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
Statement. This impairment test uses a fair value approach, rather than the
undiscounted cash flows approach previously required by SFAS No. 121. Intangible
assets that do not have indefinite lives will continue to be amortized over
their useful lives and reviewed for impairment in accordance with SFAS No. 121
or SFAS No. 144 (see below), once adopted. The Company is required to adopt SFAS
No. 142 effective January 1, 2002. The adoption of SFAS No. 142 is expected to
reduce the Company's amortization expense by approximately $500,000 annually
beginning in 2002, due to the nonamortization of goodwill. The Company does not
anticipate recognizing an impairment charge related to goodwill upon adoption of
the Statement.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes SFAS No. 121, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations and Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
business (as previously defined in that Opinion). This Statement also amends ARB
No. 51, Consolidated Financial Statements, to eliminate the consolidation for a
subsidiary for which control is likely to be temporary. The Company is required
to adopt SFAS No. 144 effective January 1, 2002. The Company does not expect the
adoption of SFAS No. 144 to have a material impact on the consolidated financial
position, consolidated results of operations or liquidity of the Company.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income
(loss) for the period by the weighted-average number of the Company's common
shares outstanding.
Diluted net income (loss) per common share includes the dilutive effect of
options, convertible debentures, and warrants in the weighted-average number of
the Company's common shares outstanding, as calculated using the treasury stock
method.
Net income (loss), as presented on the statements of operations, represents the
numerator used in calculating basic and diluted net income (loss) per common
share. The following table sets forth the computation of the shares used in
determining basic and diluted net income (loss) per common share for the years
ended December 31 (in thousands):
(in thousands) 2001 2000 1999
--------------- --------------- --------------
Denominator for basic net income (loss) per common
share - weighted-average shares 3,432 3,425 3,413
Dilutive securities: options, convertible debentures,
and warrants - 323 25
--------------- --------------- --------------
Denominator for diluted net income (loss) per common
share - adjusted weighted-average shares 3,432 3,748 3,438
=============== =============== ==============
1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
Net Income (Loss) Per Common Share (continued)
Options, convertible debentures, and warrants to purchase approximately
1,197,000, 595,000, and 597,000 shares of common stock were outstanding at
December 31, 2001, 2000, and 1999, respectively, but were not included in the
computation of diluted earnings per share because they were anti-dilutive.
All shares held in the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding for both basic and diluted earnings per share
calculations.
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information were as follows:
2001 2000 1999
-----------------------------------------------
Cash paid during the year for:
Interest $ 1,151,226 $ 679,283 $ 402,191
Income taxes 150,500 2,122,006 263,279
Schedule of non-cash investing and financing activities:
Equipment internally manufactured 1,033,749 - -
Issuance of convertible debentures for earn-out
provisions relating to acquisitions - - 2,253,826
Unrealized gain (loss) on available-for-sale
marketable securities 32,180 (1,330,458) 763,625
Equipment acquired under capital leases - 662,720 -
Purchase price adjustments related to earn-out
provisions for acquisitions - (52,537) -
Payable for earn-out provisions related to product
line acquisition - 1,000,000 -
2. Acquisitions
On April 6, 2000, the Company acquired the enteral nutrition delivery device
business of Nestle USA, Inc. ("Nestle") in an asset purchase. The assets
acquired included approximately 19,500 enteral feeding pumps owned by Nestle and
placed with various health care facilities under arrangements whereby the
facilities agree to purchase disposable accessories for use with Nestle pumps.
The assets purchased also included Nestle's line of pump accessories, including
administration sets, feeding tubes, irrigation kits, and ancillary devices for
pumps, and certain associated intellectual property. The purchase price was
approximately $3,800,000, which included the purchase of Nestle's inventory
(accessories) for approximately $1,210,000 and the purchase of enteral feeding
pumps for approximately $1,970,000. The excess of the purchase price over the
fair value of the assets acquired was approximately $620,000, which the Company
recorded as goodwill. The goodwill is being amortized over 15 years.
3. Inventories
Inventories consist of the following at December 31:
2001 2000
---------------------------------------
Materials $3,355,793 $4,832,947
Work-in-progress 1,241,034 1,057,146
Finished goods, including completed subassemblies 2,676,015 3,797,353
---------------------------------------
$7,272,842 $9,687,446
=======================================
4. Marketable Securities
The following is a summary of marketable securities at December 31, 2001:
Gross Gross Unrealized Estimated Fair
Unrealized
Cost Gains Losses Value
----------------- ---------------- ----------------- -----------------
Available-for-Sale
Equity securities $187,719 $ 32,180 $ - $219,899
As discussed in Note 1 above, an other-than-temporary impairment loss of
$917,628 on available-for-sale marketable securities was recognized during 2001.
The following is a summary of marketable securities at December 31, 2000:
Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
----------------- ---------------------------------- -----------------
Available-for-Sale
Equity securities $1,867,050 $ - $801,775 $1,065,275
5. Property and Equipment
Property and equipment consist of the following at December 31:
2001 2000
------------------ -------------------
Machinery and equipment $ 1,150,928 $ 1,096,236
Stationary enteral feeding pumps 4,236,699 3,172,950
Furniture and fixtures 1,594,205 1,584,039
Software 606,049 606,049
Tooling costs 1,053,694 992,344
Building 2,857,878 2,853,880
Land 1,084,415 1,084,415
------------------ -------------------
12,583,868 11,389,913
Less accumulated depreciation and amortization 4,895,780 3,410,852
------------------ -------------------
$ 7,688,088 $ 7,979,061
================== ===================
5. Property and Equipment (continued)
Stationary enteral feeding pumps represent acquired and self-constructed pumps
that are placed with businesses and other users (at little or no cost to the
users) under arrangements in which the pump users have an obligation to buy
disposable products from the Company while they are using the pumps. To the
extent that the users discontinue purchase of the disposables, the pumps are
generally returned to the Company.
Depreciation and amortization expense (including software amortization expense)
for property and equipment for the years ended December 31, 2001, 2000, and 1999
amounted to $1,524,816, $1,206,396, and $739,024, respectively.
6. Accrued Liabilities
Accrued liabilities consist of the following at December 31:
2001 2000
------------------- ------------------
Accrued payroll and related taxes and benefits $256,810 $263,498
Accrued vacation 177,809 110,685
Warranty reserve 85,000 85,000
Deferred revenue 25,000 -
Accrued interest 18,448 110,081
------------------- ------------------
$563,067 $569,264
=================== ==================
7. Income Taxes
The provision for income taxes is made, at federal and state statutory rates,
based on pre-tax income (loss) reported in the consolidated financial
statements.
Deferred taxes are classified as current or non-current, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current, depending on the periods in
which the temporary differences are expected to reverse.
Significant components of the Company's net deferred income taxes as of December
31 are as follows:
2001 2000
------------------- -------------------
Deferred tax assets:
Non-deductible accruals and expenses $ 416,527 $ 329,614
Unrealized loss on available-for-sale securities - 299,062
Capital loss carryover 2,028,863 -
------------------- -------------------
Total deferred tax assets 2,445,390 628,676
Deferred tax liabilities:
Fixed asset and other basis differences (276,736) (151,667)
Unrealized gains on available-for-sale securities (12,003) -
------------------- -------------------
Total deferred tax liabilities (288,739) (151,667)
Valuation allowance for capital loss carryover (1,865,000) -
------------------- -------------------
Net deferred taxes $ 291,651 $ 477,009
=================== ===================
7. Income Taxes (continued)
The benefit (provision) for income taxes consists of the following:
2001 2000 1999
------------------ ----------------- ------------------
Current taxes:
Federal $ (84,497) $ (725,521) $(1,063,807)
State 14,325 (114,387) (199,595)
R&D credit 43,972 72,537 59,528
Deferred taxes:
Federal 114,586 89,031 14,480
State 11,121 8,642 1,405
------------------ ----------------- ------------------
Benefit (provision) for income taxes $ 99,507 $ (669,698) $(1,187,989)
================== ================= ==================
The actual tax benefit (expense) differs from the 34% federal statutory rate as
follows:
2001 2000 1999
---------------- ---------------- -----------------
Federal tax benefit (expense) at statutory rate $ 199,652 $ (473,905) $ (956,883)
State income tax, net 16,795 (69,792) (130,805)
Non-taxable items 37,300 - -
Research and development credit 43,972 72,537 59,528
Non-deductible goodwill amortization (172,464) (172,464) (135,142)
Other non-deductible expenses (29,372) (23,097) (28,750)
Other 3,624 (2,977) 4,063
---------------- ---------------- -----------------
Total benefit (provision) for income taxes $ 99,507 $ (669,698) $(1,187,989)
================ ================ =================
The Company's capital loss carryover related to the loss on sale of marketable
securities and the sale of the Aborn corporate shell of $5,439,312 expires
December 31, 2006. A valuation allowance has been provided for the capital loss
of $5,000,000 generated from the sale of the Aborn corporate shell because the
Company does not consider it to be more likely than not that this carryover will
be utilized.
8. Debt
Bank Line of Credit
The Company renewed its line of credit arrangement with a financial institution
for $7 million as of September 30, 2001. In the fourth quarter of 2001, the
availability was reduced to $6 million. The line matures on May 28, 2002. The
line of credit is collateralized by accounts receivable and inventory and bears
interest at the prime rate, which was 4.75% at December 31, 2001 and 9.5% at
December 31, 2000. The Company's balance on its line of credit was $1,713,610 at
December 31, 2001 and $5,936,995 at December 31, 2000. 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 December 31,
2001.
8. Debt (continued)
Industrial Development Bond
On October 30, 1996, the Company completed a transaction defined as "Murray
City, Utah, Adjustable Rate Industrial Development Revenue Bonds, Series 1997
(ZEVEX, Inc. Project)" in the amount of $2,000,000. The bonds are secured by an
irrevocable Letter of Credit issued by a bank, which is subject to expiration no
later than April 15, 2002. The bonds bear interest at an adjustable rate based
on the weekly tax-exempt floater rate, as determined by the remarketing agent.
The bonds mature on October 1, 2016. Principal reductions occur in the amount of
$100,000 per year. The outstanding balance was $1,600,000 at December 31, 2001,
of which $100,000 is classified as current.
Convertible Debentures
In connection with the acquisitions of Aborn and JTech on December 31, 1998, the
Company issued $1,350,000 of 7% interest-bearing convertible debentures and
$3,000,000 of 8% interest-bearing convertible debentures, respectively. Accrued
interest is due and payable quarterly beginning on April 1, 1999. During
December 2001, some of the convertible debentures were amended and the maturity
dates were extended one year. The accrued interest and principal mature between
March 30, 2002 and March 30, 2003. The debentures are convertible to common
stock between January 6, 2000 and March 30, 2003 at $11 per share. The
convertible debentures increased from their original amounts at the acquisition
date to $5,447,188 at the end of 2000 due to certain earn-out provisions. The
Company made a principal payment in December 2001 of $1,524,030, which reduced
the outstanding balance to $3,923,158 at December 31, 2001.
Other Long-term Debt
The Company negotiated a $1,000,000 secured promissory note on April 18, 2001
from a financial institution. The note is secured by certain real property held
by the Company and bears a fixed interest rate of 8.5%. The maturity date of the
loan is May 15, 2003 with principal and interest amortized over a 15-year term.
The outstanding balance at December 31, 2001 was $973,822, of which $35,636 is
classified as current.
On March 15, 2001, the Company entered into a secured financing agreement for
$1,500,000 with a financial institution. The financing is secured by the
Company's stationary enteral feeding pumps. The financing agreement has a term
of 36 months and a fixed implicit borrowing rate of 8.24%. The outstanding
balance at December 31, 2001 was $1,158,889, of which $488,745 is classified as
current.
The proceeds from both arrangements were used to reduce the Company's line of
credit.
9. Lease Commitments
During the year ended December 31, 2000, the Company acquired certain equipment
with a cost of $662,720 under capital leases with terms of four years or less.
Accumulated depreciation related to such equipment of $289,020 and $82,689 has
been recorded by the Company at December 31, 2001 and 2000, respectively. Such
depreciation is included in depreciation and amortization expense for the years
then ended.
9. Lease Commitments (continued)
Future minimum lease payments under capital leases consisted of the following at
December 31, 2001:
Fiscal Year
2002 $198,000
2003 198,000
2004 127,520
---------------
Total minimum lease payments 523,520
Amount representing interest 59,686
---------------
---------------
Present value of minimum lease payments 463,834
Current portion 162,783
---------------
---------------
Long-term portion $301,051
===============
The Company has entered into certain cancelable operating leases. Rental expense
for the years ended December 31, 2001, 2000, and 1999 was $82,503, $54,562, and
$15,563, respectively.
10. Employee Benefit Plans
401(k) Profit Sharing Plan
During 1991, the Company established a qualified 401(k) profit sharing plan
covering substantially all employees. Eligible employees may defer a portion of
their salary. At the discretion of the Board of Directors, the Company may make
a contribution of up to four percent (4%) of the eligible employees' salaries
and an additional discretionary amount to be determined each year by the Board
of Directors. As of December 31, 2001, employees are fully vested in employer
contributions after seven years. Effective January 1, 2002, this changed to six
years. Contributions to the plan for the years ended December 31, 2001, 2000,
and 1999 were $138,716, $115,791, and $143,645, respectively.
Employee Stock Ownership Plan
Effective October 14, 1993, the Company adopted an Employee Stock Ownership Plan
that covers all employees who are over the age of 21, have been employed for at
least 90 days, and who provide at least 1,000 hours of service per year.
Full vesting will occur after seven years of service or upon normal retirement
at 65 years of age. Contributions to the plan are at the discretion of the Board
of Directors, with no minimum annual funding requirements. Contributions to the
plan will be made primarily with common stock of the Company.
No contributions were made for the years ended December 31, 2001 and 2000. A
contribution of 16,700 shares with a value of $85,577 was made to the Employee
Stock Ownership Plan in December 1999.
The Employee Stock Ownership Plan was terminated effective December 31, 2001. As
part of the termination, all assets were transferred into the Company's 401(k)
profit sharing plan.
11. Stockholders' Equity
Preferred Stock
The Company is authorized to issue 2,000,000 shares of $.001 par value preferred
stock. None of the preferred stock was issued or outstanding at December 31,
2001.
Warrants
In connection with the secondary public offering in November 1997, the Company
issued to the underwriters warrants to purchase 100,000 shares of common stock
at $15 per share. The underwriters paid a price of $.01 per warrant. These
warrants expire five years from the date of the offering and are entitled to
certain registration rights.
Common Stock Reserved for Future Issuance
At December 31, 2001, the Company had reserved 1,581,170 shares of common stock
for future issuance, including 456,651 shares reserved for exercise of warrants
and debentures and 1,124,519 shares reserved under the Company's stock option
plans.
Stock Option Plans
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"). Under the 1993 Plan, 600,000 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 600,000 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.
11. Stockholders' Equity (continued)
Stock Option Plans (continued)
A summary of stock option activity for both plans, and related information for
the years ended December 31, 1999, 2000, and 2001 follows:
Shares Outstanding Stock Options Weighted-
------------------------------------
Available Number of Price Average
for Grant Shares Per Share Exercise Price
-------------------------------- --------------------------------------
Balance at December 31, 1998 151,200 394,640 $2.50-5.00 $4.76
Additional authorization 600,000 - - -
Options granted (331,000) 331,000 4.88-5.00 4.98
Options exercised - (1,850) 2.50-5.00 3.34
Options canceled 19,750 (19,750) 2.50-5.00 4.71
-------------------------------- --------------------------------------
Balance at December 31, 1999 439,950 704,040 2.50-5.00 4.80
Options granted (322,000) 322,000 4.75-7.00 4.77
Options exercised - (19,338) 2.50-5.00 3.99
Options canceled 96,017 (96,017) 3.50-5.25 4.98
-------------------------------- --------------------------------------
-------------------------------- --------------------------------------
Balance at December 31, 2000 213,967 910,685 2.50-7.00 4.84
Options granted (17,500) 17,500 2.47-4.00 3.34
Options exercised - (133) 5.00 5.00
Options canceled 187,835 (187,835) 2.50-5.00 4.78
-------------------------------- --------------------------------------
Balance at December 31, 2001 384,302 740,217 $2.47-7.00 $4.82
================================ ======================================
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2001, 2000, and 1999,
respectively: risk-free interest rate of 3.8%, 5.3%, and 4.7%; dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of .85, .85, and .68; and a weighted-average expected life of the option
of 2.9, 3.5, and 3.6 years. The estimated weighted-average fair values of
options granted in the years ended December 31, 2001, 2000, and 1999 were $1.84,
$2.85, and $2.53, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. Because the effect of SFAS No.
123 is prospective, the initial impact on pro forma net income may not be
representative of compensation expense in future years.
11. Stockholders' Equity (continued)
Stock Option Plans (continued)
For the years ended December 31, 2001, 2000, and 1999, pro forma net income
(loss) and pro forma net income (loss) per common share were as follows:
2001 2000 1999
---------------- --------------- ---------------
Pro forma net income (loss) $ (995,006) $415,505 $1,072,713
Pro forma basic net income (loss) per common share
(.29) .12 .31
Pro forma diluted net income (loss) per common share
(.29) .11 .31
Additionally, SFAS No. 123 requires that companies with wide ranges between the
high and low exercise prices of its stock options segregate the exercise prices
into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises.
Below are the segregated ranges of exercise prices as of December 31, 2001:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ---------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------- ---------------------------------- ----------------- ----------------- ---------------
$2.47-3.50 19,200 2.8 years $3.10 11,700 $3.50
3.85-5.00 719,017 3.7 years 4.86 356,605 4.90
7.00 2,000 3.7 years 7.00 1,000 7.00
- ----------------- ---------------------------------- ----------------- ----------------- ---------------
$2.47-7.00 740,217 3.7 years $4.82 369,305 $4.86
================= ================================== ================= ================= ===============
12. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, accounts receivable, and accounts payable: The
carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, and accounts payable approximate their
fair values.
Marketable securities: The Company determines fair values based on quoted
market prices.
Bank line of credit, convertible debt, industrial development bond, other
long-term debt and capital leases: The fair values of the Company's bank
line of credit and long-term debt and leases are estimated using discounted
cash flow analyses, based on the Company's current estimated incremental
borrowing rates for similar types of borrowing arrangements.
12. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments are
as follows at December 31:
2001 2000
----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ---------------------------------- -----------------
Cash and cash equivalents $ 1,028,086 $ 1,028,086 $ 327,157 $ 327,157
Accounts receivable 5,748,578 5,748,578 7,501,089 7,501,089
Marketable securities 219,899 219,899 1,065,275 1,065,275
Accounts payable 1,711,429 1,711,429 2,212,726 2,212,726
Bank line of credit 1,713,610 1,713,610 5,936,995 5,936,995
Convertible debt 3,923,158 4,024,791 5,447,188 5,348,414
Industrial development bond 1,600,000 1,600,000 1,700,000 1,700,000
Other long-term debt 2,132,711 2,216,136 - -
Capital leases 463,834 483,319 612,617 610,023
13. Major Customers
Sales to major customers for the years ended December 31, 2001, 2000, and 1999
are summarized as follows (percent of product sales):
Year Ended December 31,
2001 2000 1999
----------------- ---------------- -----------------
Customer A * 10 13
Customer B * 14 *
----------------- ---------------- -----------------
N/A 24% 13%
================= ================ =================
* Less than 10% of sales.
14. 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
$1,311,188 in cash and a convertible debenture in connection with the JTech
Stock Purchase. The Company paid $290,000 of the convertible debenture in
December 2001, and the remaining principal amount of $1,073,594 (inclusive of
the 1999 earn-out provision of $52,406) is due January 6, 2003 (as modified in
December 2001) and is convertible to common stock at Mr. Smith's option during
the period from January 6, 2000 to January 6, 2003 at $11 per share.
JTech also entered into an employment agreement with Mr. 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 2004 annual meeting
of shareholders, but is subject to extension based upon election. On September
1, 14. Related-Party Transactions (continued)
2000, Mr. Smith was also appointed to serve as President of ZEVEX International,
Inc. and of ZEVEX, Inc.
During December 2001, the Company sold the corporate shell of Aborn for $100,000
to Vijay Lumba, a former Company employee. The Company maintained certain
manufacturing rights, cash, accounts receivable, equipment, and inventory (see
Note 1).
Exhibit 10.25
AMENDED AND RESTATED
LINE OF CREDIT LOAN AGREEMENT
THIS AMENDED AND RESTATED LINE OF CREDIT LOAN AGREEMENT is made as of
June 29, 2001, by and between ZEVEX, INC., a Delaware corporation; JTECH MEDICAL
INDUSTRIES, INC., a Utah corporation; and ABORN ELECTRONICS, INC., a California
corporation (collectively and individually, as the context requires, the
"Borrower") whose address is 4314 Zevex Park Lane, Salt Lake City, Utah 84123,
and BANK ONE, UTAH, NATIONAL ASSOCIATION, a national banking association (the
"Bank"), whose address is 80 West Broadway, Suite 200, Salt Lake City, Utah
84101.
RECITALS:
A. On September 27, 1997, Bank and Borrower entered into a Line of
Credit Loan Agreement (with Deposit Account Sweep) as previously modified and
amended ("Prior Agreement"), wherein Bank agreed to loan to Borrower on a Line
of Credit basis the sum of $1,000,000.00 (subsequently increased to
$7,000,000.00).
B. By this Amended and Restated Line of Credit Loan Agreement
("Agreement"), the parties desire to amend and restate the Prior Agreement in
its entirety in order to extend the Maturity Date, and to make other changes
deemed appropriate by the parties. Except as specifically amended by this
Agreement or as replaced by documents executed in connection with this
Agreement, all resolutions, guarantees, security agreements, financing
statements and other documents executed in connection with the Prior Agreement
shall remain in full force and effect.
C. Bank desires to lend to Borrower, on a revolving line of credit
basis, the amount set forth herein pursuant to the terms and conditions of this
Agreement and pursuant to the Loan Documents executed in connection herewith or
in connection with the Prior Agreement.
D. All advances made to Borrower under this Line of Credit shall be
secured by the Borrower' Accounts and Inventory described herein or in a
Security Agreement or other lien instrument executed at any time prior to or in
connection herewith.
E. Based on the foregoing and upon the terms and subject to the
conditions set forth herein, Bank is willing to extend the loan to Borrower.
NOW, THEREFORE, in consideration of the covenants and conditions herein
contained, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used herein, the following terms shall have the
meanings set forth below:
"Accounts" means "accounts" as defined in the Utah Uniform Commercial
Code adopted in the state of Utah.
"Advance" means a disbursement of Loan proceeds.
"Affiliate" as to any Person shall mean any other Person (a) which
directly or indirectly controls, is controlled by, or is under common control
with such Person, (b) which beneficially owns or holds five percent (5%) or more
of any class of the voting stock (or in the case of a Person which is not a
corporation, more than five percent (5%) of the equity interest) of such Person,
or (c) five percent (5%) or more of the voting stock (or in the case of a Person
which is not a corporation, five percent (5%) or more of the equity interest) of
which is beneficially owned or held, directly or indirectly, by such Person.
"Control", as used in this definition, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities or
equity, by contract or otherwise, including the power to elect a majority of the
directors, managers, members or trustees of a corporation, limited liability
company or trust, as the case may be.
"Agreement" means this Restated and Amended Line of Credit Loan
Agreement, as the same may be amended and supplemented as hereinafter provided.
"Authorized Agent" means the Person or Persons authorized to execute
and deliver this Agreement or any instrument or agreement required hereunder on
behalf of the Borrower, as well as the Person or Persons authorized to obtain
Advances on behalf of Borrower as described in this Agreement.
"Bank" means Bank One, Utah, National Association, a national banking
association, whose address is as set forth in the introductory paragraph of this
Agreement, its successors and assigns.
"Borrower" has the meaning set forth in the introductory paragraph of
this Agreement.
"Borrowing Base" shall have the meaning as described in Article 2.
"Borrowing Base Certificate" means the certificate in the form of
attached Exhibit "A".
"Business Day" means a day of the year other than Saturdays, Sundays,
and legal holidays on which Bank's branch located at 80 West Broadway, Salt Lake
City, Utah is closed
"Collateral" means the property, interests in property, and rights to
property securing any or all of Borrower's payment and other obligations of
Borrower under the Loan Documents from time to time.
"Debt Service Coverage Ratio" means, as of any date, the ratio of (i)
EBIDA for the prior twelve (12) month period to (ii) the current maturities of
Borrower's long-term debt plus Borrower's current capital lease payments plus
interest expense for the prior twelve (12) month period, each determined in
accordance with GAAP. With respect to the foregoing calculation, "current
maturities of Borrower's long-term debt" shall mean (i) through December 31,
2001, all current maturities of Borrower's long term debt except for the amounts
payable to Nestle, and (ii) from and after January 1, 2002, all current
maturities of Borrower's long-term debt except for the amounts payable to Nestle
and maturities or payments required under those certain convertible debentures
previously issued by Borrower in the amount of approximately $4,300,000, which
debentures mature and are due and payable in January 2002.
"Default" means any of the events specified in this Agreement under
Section 11.1 whether or not any requirement for the giving of notice, the lapse
of time, or both, or any other condition, has been satisfied.
"Default Interest Rate" means a rate of interest equal to the lesser of
(a) the aggregate of THREE PERCENT (3%) per annum plus the Interest Rate and (b)
the highest rate legally permissible under applicable law. The Default Interest
Rate shall change from time to time as and when the Interest Rate changes.
"EBIDA" means the sum of the Borrower's net income less unrealized
gains on securities held directly or indirectly by Borrower, plus interest,
depreciation and amortization expenses, each determined in accordance with GAAP.
"EBITDA" means the sum of the Borrower's net income less unrealized
gains on securities held directly or indirectly by Borrower, plus interest,
income taxes, depreciation and amortization expenses, each determined in
accordance with GAAP.
"Eligible Accounts Receivable" means an Account owing to Borrower, as
determined by Bank in its sole and absolute discretion, which has arisen from
the delivery and/or shipment of products previously made and/or from services
rendered for which an invoice has been issued by Borrower to its customer
("Customer") and (a) which amount is not subject to any offset, counterclaim or
defense asserted by the Customer, (b) which amount is subject to a perfected
security interest in favor of Bank and is not subject to any other security
interest, lien, claim or encumbrance, (c) which amount has not remained unpaid
for more than ninety (90) days after the date of the related invoice, (d) where
not more than fifteen percent (15%) of the total amount owing from a Customer
accounting for five percent (5%) or more of the total amount owing to Borrower
has remained unpaid for more than eighty-nine (89) days after the date of the
related invoice(s), excepting amounts due from Allergan, Mentor, Alaris and
Paradigm, (e) amounts due from Allergan, Mentor, Alaris and Paradigm which have
note remained unpaid for more than thirty (30) days after the due date of the
related invoice and do not exceed twenty-five percent (25%) of the total
accounts owing to Borrower, (f) which amount is not an uninsured amount owing
from a customer located in a foreign country, (g) which amount is not owing from
the United States of America or any agency, department of subdivision thereof,
unless a properly executed assignment of claims has been received by Bank, (h)
which amount is not the subject of any threatened or actual litigation, (i)
which amount is not owing from a Customer who is also a supplier or creditor of
the Borrower, (j) which amount is not owing from a Subsidiary, Affiliate,
officer or employee of the Borrower or an intercompany transaction, (k) which
amounts are not cash, C.O.D. accounts or deposit payments for future products,
and (l) which amounts are not consignment accounts, manufacturer representative
accounts, buy/sell accounts, or bill and hold accounts.
"Eligible Inventory" means the Inventory (valued at the lower of cost
or market) of Borrower as determined by Bank in its sole and absolute
discretion, to be (a) in good condition and salable in the ordinary course of
Borrower's business, (b) owned by Borrower free and clear of any mortgages,
liens, security interests, claims, encumbrances or rights of others, excepting
only the security interest in favor of Bank, (c) subject to a perfected security
interest in favor of Bank, (d) not subject to any consignment to any Customer,
(e) not classifiable as work in process, and (f) not acquired by Borrower in or
as part of a bulk transfer or sale of assets unless Borrower has complied with
all applicable bulk sales or bulk transfer laws.
"Event of Default" means the occurrence of any of the events listed in
Section 11.1 and the expiration of any applicable notice and cure period
provided in said section.
"Financing Statement" means one or more UCC-1 financing statements
executed by Borrower, as debtor, in favor of Bank as secured party, and
perfecting Bank's security interest in the Collateral now owned or hereafter
acquired by Borrower, in form and substance satisfactory to Bank, filed with the
Delaware Uniform Commercial Code Department, Utah Department of Commerce,
Division of Corporations and Commercial Code and in such other offices for
recording or filing such statements in such jurisdictions as Bank desires to
perfect Bank's security interest or reflect such interest in appropriate public
records.
"Funded Debt to EBITDA Ratio" means Funded Debt divided by the EBITDA.
"Funded Debt" means the outstanding balance of the Loan plus all other
Indebtedness of Borrower including, without limitation, amounts payable to
Nestle and any Indebtedness to any parent or affiliate of Bank, any finance
company, institutional Bank, equipment lessor or any other bank or financial
institution.
"GAAP" shall have the meaning given in Section 1.2.
"Governmental Authority" means any arbitrator, other private
adjudicator, court, government or governmental authority (federal, state, local
or foreign).
"Guarantor" means Zevex International, Inc., a Delaware corporation.
"Guarantor Loan Documents" means the Guaranty and all other documents,
agreements and instruments containing the obligations of Guarantor to Bank.
"Guaranty" means that certain Repayment Guaranty executed by Guarantor,
as the same may be amended, modified, supplemented and restated from time to
time.
"Inventory" means "inventory" as defined in the Uniform Commercial
Code, adopted in the State of Utah.
"Indebtedness" shall mean, as to any Person (a) indebtedness created,
issued, incurred or assumed by such Person for borrowed money or evidenced by
bonds, debentures, notes or similar instruments; (b) all obligations of such
Person to pay the deferred purchase price of property or services (other than
accounts payable arising in the ordinary course of such Person's business
payable on terms customary in the trade); (c) all indebtedness secured by a lien
on any asset of such Person whether or not such indebtedness is assumed by such
Person; (d) all obligations, contingent or otherwise, of such Person directly or
indirectly guaranteeing any indebtedness or other obligation of any other Person
or in any manner providing for the payment of any indebtedness or other
obligation of any other Person or otherwise protecting the Bank of such
indebtedness against loss (excluding endorsements for collection or deposit in
the ordinary course of business); (e) the amount of all reimbursement
obligations and other obligations of such Person (whether due or to become due,
contingent or otherwise) in respect of letters of credit, bankers' acceptances,
surety or other bonds (but excluding surety or other bonds in favor of
Governmental Authorities obtained by Borrower in connection with the development
of subdivisions in the ordinary course of Borrower's business) and similar
instruments; (f) all obligations under leases capitalized in accordance with
GAAP; and (g) all other obligations that would be included as liabilities on a
balance sheet prepared in accordance with GAAP.
"Intangible Assets" means all intangible assets under GAAP, including,
without limitation, copyrights, franchises, goodwill, licenses, loan origination
fees, non-competition covenants, organization or formation expenses, patents,
service marks, service names, trademarks, trade names, write-up in the book
value of any asset in excess of the acquisition cost of the asset, any amount,
however designated on the balance sheet, representing the excess of the purchase
price paid for assets or stock acquired over the value assigned thereto on the
books of a person, loans and advances to family members, partners and officers,
employees, directors of the person (or members of their immediate families),
unamortized leasehold improvement expense not recoverable at the end of the
lease term, unamortized debt discount, and deferred discount.
"Leverage Ratio" means, as of any date, the ratio of (i) Borrower's
total Indebtedness to (ii) the Borrower's Tangible Net Worth.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction to evidence any of the
foregoing).
"Line of Credit Limit" means Seven Million and No/100 Dollars
($7,000,000.00)
"Loan" means the loan from Bank to Borrower described in this
Agreement.
"Loan Documents" means this Agreement, any Security Agreement, Guaranty
or hypothecation or other document executed in connection with this Agreement.
"Loan Interest Rate" means a rate per annum equal to the prime rate of
interest announced from time to time by Bank One, Utah, NA or its parent (which
is not necessarily the lowest rate charged to any customer), changing when and
as said prime rate changes.
"Loan Party" means each Borrower, Guarantor and each other Person that
from time to time is or becomes obligated to Bank under any Loan Document or
grants any lien or encumbrance to Bank with respect to any Collateral.
"Maturity Date" means May 28, 2002.
"Nestle" means Nestle USA, Inc.
"Payment Date" means July 30th, 2001 and the thirtieth day of each
calendar month thereafter until the Maturity Date, unless any such day is not a
Business Day in which case the Payment Date shall be the next succeeding
Business Day.
"Person" means any natural person, any unincorporated association, any
corporation, any partnership, any joint venture, any limited liability company,
any trust, any other legal entity, or any Governmental Authority.
"Quarterly Compliance Date" shall mean each March 31, June 30,
September 30 and December 31 of each year.
"Tangible Net Worth" means the gross fair market value of the
Borrower's aggregate assets less Intangible Assets less total liabilities,
including, but not limited to, estimated taxes on asset appreciation and any
reserves or offsets against assets, in each case as determined in accordance
with GAAP.
"Security Agreement" means the Security Agreement - Accounts Receivable
and Inventory, dated September 29, 1997 by Zevex, Inc. for the benefit of Bank;
the Security Agreement - Accounts Receivable and Inventory, dated May 30, 1999
by JTech Medical Industries, Inc. for the benefit of Bank; and the Security
Agreement - Accounts Receivable and Inventory, dated May 30, 1999 by Aborn
Electronics, Inc. for the benefit of Bank
"Subsidiary" means, as to the Borrower, other corporation of which
shares of stock having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation are at the time owned,
or the management of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both by the Borrower.
1.2 Accounting Terms. For purposes of this Agreement, all accounting terms not
otherwise defined herein or in the Recitals shall have the meanings assigned to
them in conformity with generally accepted accounting practices and principles
("GAAP"), consistently applied.
ARTICLE 2
CREDIT LIMIT
Notwithstanding the Line of Credit Limit, Bank shall not be required to
Advance to Borrower at any one time under the provisions of this Agreement an
amount in excess of the Line of Credit Limit or the Borrowing Base, whichever is
less. The Borrowing Base shall be equal to the sum of (i) 80% of Eligible
Accounts Receivable; plus (ii) 40% of Eligible Inventory, which amount shall not
exceed $2,400,000.00.
ARTICLE 3
TERMS OF LINE OF CREDIT
3.1. Procedure for Advances.
-----------------------
(a) Bank agrees to lend to Borrower from the date hereof
amounts which do not exceed the Line of Credit Limit or the Borrowing
Base, whichever is less. Borrower agrees to repay all amounts borrowed
and advanced in accordance with the terms described herein. The Line of
Credit Limit is the maximum amount Bank may be required to advance to
Borrower under this Agreement.
(b) It is understood that the amount available to Borrower
will vary in accordance with Advances to Borrower and payments by
Borrower.
(c) All funds available to Borrower under this Line of Credit
will be advanced on the oral or written request of Borrower, except as
provided pursuant to the sweep provisions described in this Agreement,
except where, prior to such request, in accordance with the provisions
of this Agreement, Bank has suspended its commitment to make Advances
upon the occurrence of any Event(s) of Default, or this Agreement has
been terminated.
(d) Borrower, above the signatures to this Agreement, shall
designate its demand deposit operating accounts ("Deposit Accounts")
maintained at Bank and the minimum balance to be maintained in each.
The Borrower will designate which Deposit Accounts or Consolidation
Account will be used for depositing Advances under this Line of Credit.
(e) Borrower authorizes Bank during each Business Day to
transfer Borrower's funds among and between the designated Deposit
Accounts, a Consolidation Account established by Bank ,if applicable,
the investment management account (established by separate agreement)
and this Line of Credit, without any further written or oral
authorization from Borrower, in accordance with the following
procedures:
(f) Each regular banking day, Bank will withdraw all collected
funds (as defined by Bank's existing funds availability policy) in the
Deposit Accounts and deposit the same in the Consolidation Account (if
used), or in the Deposit Account used for disbursement purposes if no
Consolidation Account is designated. All funds so consolidated shall be
applied in the following priority:
(i) First: Bank shall pay all checks and charges
drawn or incurred on Borrower's designated Deposit Accounts,
including checks drawn for the purpose of accessing funds
available under this Line of Credit and further including wire
transfers, automated clearing house transfers, cash advances
and charges pre-authorized by Borrower.
(ii) Second: Bank shall deposit into each Deposit
Account the minimum balance described above the signatures to
this Agreement.
(iii) Third: Any excess funds shall be applied to
the outstanding principal due on this Line of Credit.
(iv) Fourth: Any remaining funds shall be transferred
to Borrower's investment management account to be invested in
accordance with the terms of the investment management
account. All interest earned on the investment management
account shall inure to the benefit of the Borrower.
(g) If sufficient collected funds are not available in the
Consolidation Account or Deposit Accounts to provide for the
requirements of the first and second priorities described above, then
funds sufficient to pay the checks and charges and any overdrafts and
to maintain the minimum balances required, if any, shall be advanced
first from the available balance in Borrower's investment management
account and second from the Line of Credit. If sufficient collected
funds are still not available, Bank shall not be required to satisfy
the first and second priorities described above.
(h) Every transaction contemplated herein is complete and
binding upon all parties hereto at such time as the Bank records the
transaction on its records.
(i) The parties authorized to act for Borrower under this
Agreement shall be those parties specifically described herein as
Authorized Agents or as may be authorized to transact business or issue
checks or other pre-authorized charges on the Borrower's Deposit
Accounts or the investment management account.
(j) All principal payments on this Line of Credit shall be
made at Borrower's discretion through appropriate deposits to one or
more of the Deposit Accounts.
(k) Bank, in its sole discretion, may make the transfers
described herein based upon the deposit of uncollected funds and any
such transfers or disbursements shall be reversed at the time of the
receipt of any returned item.
(l) Bank will maintain a written or computerized ledger which
will reflect all Advances, charges and payments made on the Line of
Credit.
(m) All of Borrower's transactions on the Line of Credit
(except as provided pursuant to the sweep provisions described in this
Agreement) shall be executed solely through an Authorized Agent. These
are the only persons authorized to execute transactions for Borrower
under this Agreement and Borrower shall cause these Authorized Agents
to provide a specimen of their signatures. Borrower shall revoke the
authority of its Authorized Agents or appoints other Authorized Agents
only upon written notice to Bank given in accordance with this
Agreement.
(n) All Advances made to Borrower under this Line of Credit
shall be deposited immediately; but in no event later than the next
regular banking day, into the deposit account designated by Borrower
above the signatures to this Agreement.
(o) Notwithstanding any provision of this Agreement to the
contrary, Bank may fund and maintain its funding of all or any part of
any Advance in any manner Bank determines.
3.2 Loan Interest Rate. Borrower shall pay to Bank interest on the
outstanding principal balance of all Advances obtained under the Line of Credit.
The interest rate shall be the Loan Interest Rate. The Loan Interest Rate may
change from time to time and the interest payable on the outstanding principal
balance will fluctuate with changes in the Loan Interest Rate. Interest shall be
computed daily on the basis of a 360 day year and charged on the number of
actual days Advances are outstanding.
3.3 Interest Payments. Bank will bill Borrower each month for interest
due for the preceding month on total outstanding Advances from the Line of
Credit. Interest will be due in arrears and the interest due must be paid to
Bank on the due date shown on each billing statement. If payment is not received
within ten (10) Business Days after the due date shown on the billing statement,
Borrower authorizes Bank to charge the Line of Credit for the amount of the
interest due for the preceding month so long as such charge does not cause the
outstanding principal balance to exceed the Line of Credit Limit or the
Borrowing Base, whichever is less. Bank, in failing to render an interest
statement, does not waive its right to receive or collect interest payments.
3.4 Principal Payments. Until Bank declares a termination of the Line
of Credit following the occurrence and during the continuance of an Event of
Default, or otherwise notifies Borrower in writing, Borrower may make payments
on the principal balance of Advances outstanding on the Line of Credit in
amounts and at such times as Borrower, in its sole discretion, determines. There
shall be no pre-payment penalty.
3.5 Compliance with Borrowing Base. If at any time during the term of
this Agreement, the Borrower obtains knowledge that the total principal amount
of all Advances outstanding exceeds the Line of Credit Limit or the Borrowing
Base whichever is less, the Borrower shall immediately reduce the principal
amount of the Advances outstanding at that time by an amount equal to such
excess.
3.6 Renewal Fee. At the time of closing this Agreement, Borrower shall
pay to Bank a renewal fee of $16,041.67. All other fees and costs of documenting
this Agreement, including attorney's fees, will be paid for by Borrower at the
time of closing.
3.7 Other Fees. Borrower shall pay to Bank a reasonable fee, including
outside attorneys' fees, to amend the Loan Agreement or any of the Loan
Documents. A reasonable fee may also be charged for Bank's review of any request
by the Borrower to modify or waive any restrictive covenants. A fee charged to
modify or waive a restrictive covenant does not imply that Bank consented to the
modification or waiver, but is only to reimburse Bank for its time and effort in
reviewing the request by Borrower. Bank shall issue a statement for these fees.
If the fees are not paid by the 15th day of the following month, Borrower
directs Bank to add the amount to the principal balance of the Loan. Failing to
render a statement does not waive the right to receive or collect these fees.
ARTICLE 4
COLLATERAL
4.1 The Collateral for all Advances made to Borrower under the Line of Credit
and all accrued interest, costs and fees shall be all of the Borrower's
Inventory and all rights to payment of money including but not limited to
Accounts, contract rights, chattel paper, instruments, general intangibles and
choses in action now owned or hereafter acquired and as further described in a
Security Agreement or other lien instrument executed at any time prior to or in
connection with this Agreement. In enforcing the terms of any Security
Agreement, following Borrower's default, Bank shall not be required to liquidate
the Collateral in any particular order. The Collateral is provided in
consideration of the availability of funds under this Agreement, and no security
interest shall be released or be deemed released until this Agreement has been
terminated and all amounts Advanced have been paid in full. No junior Lien on
any of Bank's Collateral shall affect the priority of any Advance made to
Borrower under this Agreement.
4.2 Borrower agrees than any and all Collateral given to secure Borrower's
obligations and Indebtedness under this Agreement shall also secure any and all
liabilities and obligations of Borrower to Bank existing now or in the future,
and the obligations of Zevex, Inc. (a) due under that certain Reimbursement
Agreement in the initial amount of $2,024,658.000 dated on or about October 1,
1996 and (b) due under that certain Promissory Note in the initial amount of
$1,000,000.00 dated on or about April 19, 2001, whether for the payment of money
or otherwise, whether absolute or contingent, whether as principal, endorser,
guarantor or otherwise, whether originally due to Bank or to a third Person and
assigned endorsed to Bank and whether several, joint or joint and several, all
as they may be amended, modified, extended, renewed, restated, or supplemented
from time to time.
ARTICLE 5
TERMINATION
5.1 Termination by Borrower. Borrower may terminate this Agreement at
any time by furnishing Bank with a written notice that this Agreement is
terminated and coincidentally therewith paying all Advances, including interest,
fees and charges, outstanding under the Line of Credit.
5.2 Termination by Bank. In the event of Borrower's Default, and
following notice and failure by Borrower to cure as required herein, Bank may
terminate its obligation to make further Advances under this Agreement.
Borrower's default is not waived by any action of Bank other than by a written
waiver of Default.
ARTICLE 6
MATURITY
Notwithstanding any provision herein to the contrary, all outstanding
Advances together with accrued and unpaid interest, fees and charges shall
mature and be due and payable in full on the Maturity Date.
ARTICLE 7
PLEDGE
Borrower does hereby pledge to Bank and grant to Bank a security
interest, perfected by possession, on all of Borrower's accounts, credits,
assets or things of value that from time to time are in the possession and/or
control of Bank. In the event of Default, as defined herein, and Borrower's
failure to cure the Default, Bank may exercise its rights under the pledge and
apply the pledged property to the outstanding balance of Advances due to Bank.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank that:
8.1 Incorporation, Good Standing and Due Qualification. The Borrower
and each of its Subsidiaries is a corporation duly incorporated, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation; has the corporate power and authority to own its assets and to
transact the business in which it is now engaged or proposed to be engaged in;
and is duly qualified as a foreign corporation and in good standing under the
laws of each other jurisdiction in which such qualification is required.
8.2 Corporate Power and Authority. The execution, delivery, and
performance by the Borrower of this Agreement have been duly authorized by all
necessary action and do not and will not (a) require any consent or approval of
the stockholders of Borrower; (b) contravene Borrower's charter or bylaws; (c)
violate any provision of any law, rule, regulation (including, without
limitation, Regulations U and X of the Board of Governors of the Federal Reserve
System), order, writ, judgment, injunction, decree, determination, or award
presently in effect having applicability to Borrower; (d) result in a breach of
or constitute a default under any indenture or loan or credit agreement or any
other agreement, lease, or instrument to which Borrower is a party or by which
it or its properties may be bound or affected; (e) result in, or require, the
creation or imposition of any Lien, upon or with respect to any of the
properties now owned or hereafter acquired by Borrower; and, (f) cause Borrower
to be in default under any such law, rule, regulation, order, writ, judgment,
injunction, decree, determination, or award or any such indenture, agreement,
lease, or instrument.
8.3 Legally Enforceable Agreement. This Agreement is, and each of the
other Loan Documents when delivered under this Agreement will be, legal, valid
and binding obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency, and other
similar laws affecting creditors' rights generally.
8.4 Financial Statements. The balance sheet of the Borrower and its
Subsidiaries as of December 31, 2000, and the related statements of income and
retained earnings of the Borrower and its Subsidiaries for the fiscal year then
ended, copies of which have been furnished to the Bank, are complete and correct
and fairly present the financial condition of the Borrower and its Subsidiaries
as at such dates and the results of the operations of the Borrower and its
Subsidiaries for the periods covered by such statements, all in accordance with
GAAP consistently applied (subject to year-end adjustments in the case of the
interim financial statements), and since March 31, 2001, there has been no
material adverse change in the condition (financial or otherwise), business, or
operations of the Borrower or any Subsidiary. Except as stated above, there are
no liabilities of the Borrower or any Subsidiary, fixed or contingent, which are
material but are not reflected in the financial statements or in the notes
thereto, other than liabilities arising in the ordinary course of business. No
information, exhibit, or report furnished by the Borrower to the Bank in
connection with the negotiation of this Agreement contained any material
misstatement of fact or omitted to state a material fact or any fact necessary
to make the statement contained therein not materially misleading.
8.5 Other Agreements. Neither the Borrower, nor any Subsidiary, is a
party to any indenture, loan, or credit agreement, or to any lease or other
agreement or instrument, or subject to any charter or corporate restriction
which could have a material adverse effect on the business, properties, assets,
operations or conditions, financial or otherwise, of the Borrower or any
Subsidiary, or the ability of the Borrower to carry out its obligations under
this Agreement. Neither the Borrower nor any Subsidiary is in default in any
respect in the performance, observance, or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or instrument
material to its business to which it is a party.
8.6 Litigation. There is no pending or threatened action or proceeding
against or affecting the Borrower or any of its Subsidiaries before any court,
governmental agency, or arbitrator, which may, in any one case or in the
aggregate, materially adversely affect the financial condition, operations,
properties, or business of the Borrower to perform its obligation under this
Agreement.
8.7 No Defaults on Outstanding Judgments or Orders. The Borrower and
its Subsidiaries have satisfied all judgments, and neither the Borrower nor any
Subsidiary is in default with respect to any judgment, writ, injunction, decree,
rule, or regulation of any court, arbitrator, or federal, state, municipal, or
other governmental authority, commission, board, bureau, agency, or
instrumentality, domestic or foreign.
8.8 Ownership and Liens. The Borrower and each Subsidiary have title
to, or valid leasehold interests in, all of their properties and assets, real
and personal, including the properties and assets and leasehold interest
reflected in the financial statements referred to herein (other than any
properties or assets disposed of in the ordinary course of business), and none
of the properties and assets owned by the Borrower or any Subsidiary and none of
their leasehold interests is subject to any Lien, except such as may be
permitted pursuant to this Agreement.
8.9 Operation of Business. The Borrower and its Subsidiaries possess
all licenses, permits, franchises, patents, copyrights, trademarks, and trade
names, or rights thereto, to conduct their respective businesses substantially
as now conducted and as presently proposed to be conducted, and the Borrower and
its Subsidiaries are not in violation of any valid rights of others with respect
to any of the foregoing.
8.10 Taxes. The Borrower and each of its Subsidiaries have filed all
tax returns (federal, state and local) required to be filed and have paid all
taxes, assessments, and governmental charges and levies thereon to be due,
including interest and penalties.
ARTICLE 9
AFFIRMATIVE COVENANTS
9.1 Consideration. As an inducement to Bank to execute this Agreement
and to disburse the Loan Amount, Borrower hereby covenants as set forth in this
Article 9, which covenants shall remain in effect so long as the Note shall
remain unpaid.
9.2 Compliance with Laws. Borrower will comply and will cause Guarantor
to comply and, to the extent Borrower is able, will require others to comply
with all laws and requirements of all Governmental Authorities having
jurisdiction over the Collateral, and will furnish Bank with reports of any
official searches for violation of any requirements established by such
Governmental Authorities.
9.3 Bank Inspections. At any reasonable time and from time to time, permit the
Bank or any agent or representative thereof to examine and make copies of and
abstracts from the records and books of account of, and visit the properties of,
the Borrower and any Subsidiary, and to discuss the affairs, finances, and
accounts of the Borrower and any Subsidiary with any of their respective
officers and directors and the Borrower's independent accountants.
9.4 Ownership of Collateral. Borrower will be the sole owner of all Collateral,
whether acquired before or after the Closing Date, free from any adverse lien,
security interest, or adverse claim of any kind whatsoever, except for security
interests and liens in favor of the interest of a lessor pursuant to a lease of
personal property approved by Bank and the liens and security interests approved
by Bank pursuant to the Loan Documents.
9.5 Information and Statements.
--------------------------
(a) Borrower. Borrower shall provide the following to Bank:
--------
(i) Quarterly Financial Statements. Within sixty (60) days after
the end of each Quarterly Compliance Date (except for December
31), a copy of the current Borrower-prepared consolidated
financial statements of Borrower, Guarantor and their
consolidated affiliates, which shall consist of a balance
sheet and income statement as of the end of the relevant
period.
(ii) Annual Financial Statements. Within one-hundred twenty (120)
days after the end of each calendar year, a copy of the
current audited consolidated financial statements of Borrower,
Guarantor and their consolidated affiliates, together with an
unqualified opinion from a nationally recognized accounting
firm acceptable to Bank in its discretion, which shall consist
of a balance sheet and income statement as of the end of the
relevant fiscal period.
(iii) Borrowing Base Certificate. Within twenty (20) days after the
end of each calendar month, a Borrowing Base Certificate as of
the end of such month, substantially in the form of Exhibit A
hereto, and in form and content acceptable to Bank, together
with a summary aging of Accounts and a listing of Inventory,
both in form and content acceptable to Bank.
(iv) Other Information. Borrower shall also furnish to Bank such
information concerning Borrower and the assets, business,
financial condition, operations, property, prospects, and
results of operations of Borrower as Bank reasonably requests
from time to time.
(b) Covenant Compliance Information. Notwithstanding anything in this
Agreement to the contrary, Borrower will be required to timely deliver
such financial information as may be necessary to promptly and
accurately calculate any financial ratio or covenant required under
this Agreement even if such information is not specifically enumerated
herein. Any review of any Borrower-prepared or Guarantor-prepared
financial statements used to test any financial ratio or covenant will
not waive Bank's rights to require further review or audit of such
information or any rights if such further review or audit indicates
financial information contrary to Borrower-prepared or
Guarantor-prepared financial statements.
9.6 Trade Names. Borrower shall immediately notify Bank in writing of any change
in the legal, trade, or fictitious business names used by Borrower or Guarantor
and shall, upon Bank's request, execute or cause to be executed any additional
financing statements and other certificates necessary to reflect the change in
legal, trade, or fictitious business names.
9.7 Further Assurances. Borrower shall execute and deliver or shall cause
Guarantor to execute and deliver from time to time, promptly after any request
therefor by Bank, any and all documents, instruments, and agreements, and shall
take such other action as may be necessary or desirable in the opinion of Bank,
to maintain, perfect or insure Bank's security provided for herein and in the
other Loan Documents, including, without limitation, the execution of UCC-1
renewal statements, the execution of such amendments to other Loan Documents,
and Borrower shall pay all fees and expenses (including reasonable attorneys'
fees) related thereto.
9.8 Notice of Litigation. Borrower will give, or cause to be given, prompt
written notice to Bank of (a) any action or proceeding which is instituted by or
against Borrower or Guarantor in any Federal or state court, or before any
commission or other regulatory body, Federal, state or local, foreign or
domestic, or any such proceedings which are threatened against it which, if
adversely determined, could have a material and adverse effect upon Borrower's
or Guarantor's business, operations, properties, assets, management, ownership,
or condition (financial or otherwise), (b) any other action, event, or condition
of any nature which may have a material and adverse effect upon Borrower's or
Guarantor's business, operations, management, assets, properties, ownership, or
condition (financial or otherwise), or which, with notice or lapse of time or
both, would constitute an Event of Default or a default under any other
contract, instrument, or agreement to which it is a party, or to which it or any
of its properties or assets may be bound or subject, and (c) any actions,
proceedings, or notices adversely affecting the Collateral, or Bank's interest
therein.
9.9 Insurance Requirements. Borrower, at its expense, shall obtain and
deliver to Bank policies of insurance providing the following:
(a) Policies of insurance evidencing bodily injury, death or property
damage liability coverages in amounts not less than $1,000,000
(combined single limit), and an excess/umbrella liability coverage in
an amount not less than $5,000,000 shall be in effect with respect to
Borrower. Such policies must be written on an occurrence basis so as to
provide blanket contractual liability, broad form property damage
coverage, and coverage for products and completed operations.
(b) If applicable, evidence or worker's compensation
insurance coverage satisfactory to Bank.
(c) Such other insurance as Bank may reasonably require, which
may include, without limitation, errors and omissions insurance with
respect to the contractors, architects and engineers, earthquake
insurance, rent abatement and/or business loss.
All insurance policies shall (i) be issued by an insurance company having a
rating of "A" VII or better by A.M. Best Co., in Best's Rating Guide, (ii) name
Bank as additional insured on all liability insurance and as mortgagee and loss
payee on all casualty insurance, (iii) provide that Bank is to receive thirty
(30) days written notice prior to non-renewal or cancellation, (iv) be evidence
by a certificate of insurance to be held by Bank, and (v) be in form and amounts
acceptable to Bank.
9.10 Maintenance of Existence and Business. Borrower shall preserve and
maintain, and shall cause Guarantor and each Subsidiary to preserve maintain (a)
its corporate existence and good standing in the jurisdiction of its
incorporation, and qualify, and remain qualified, as a foreign corporation in
each jurisdiction in which such qualification is required, and (b) all rights
and franchises material to their respective businesses.
9.11 Maintenance of Records. Borrower shall keep, and cause Guarantor and each
Subsidiary to keep, adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied, reflecting
all financial transactions of the Borrower, Guarantor and each Subsidiary.
9.12 Maintenance of Properties. Borrower shall maintain, keep and preserve, and
cause Guarantor and each Subsidiary to maintain, keep, and preserve, all of its
properties (tangible and intangible) necessary or useful in the proper conduct
of its business in good working order and condition, ordinary wear and tear
accepted.
9.13 Notice of Default and Events of Default. Borrower shall notify Bank in
writing, as soon as possible, and in any event, within fifteen (15) days after
the occurrence of any Default or Event of Default, including the details of such
Default or Event of Default and the action which is proposed to be taken by the
Borrower with respect thereto.
9.14 Banking Relationship. Borrower shall maintain its primary operating
account(s) with Bank.
ARTICLE 10
NEGATIVE COVENANTS
10.1 Amendments to Operating Documents. Borrower shall not allow any amendments
to be made in the terms of the Borrower's operating documents, or to the
Guarantor's operating documents, without Bank's prior written consent, which
consent will not be unreasonably withheld or delayed.
10.2 Purchase of Ineligible Securities. Borrower represents and warrants that no
portion of any Advance or Loan made hereunder shall be used directly or
indirectly to purchase ineligible securities, as defined by applicable
regulations of the Federal Reserve Board, underwritten by any affiliate of Banc
One Corporation during the underwriting period and for thirty (30) days
thereafter.
10.3 No Liens. Borrower shall not, create, incur, assume, or suffer to exist, or
permit any Subsidiary to create, incur, assume, or suffer to exist any Lien upon
or with respect to any of its properties, now owned or hereafter acquired,
except:
(a) Liens in favor of the Bank;
(b) Liens for taxes and assessments or other governmental
charges or levies if not yet due and payable or, if due and payable, if
they are being contested in good faith by appropriate proceedings and
for which appropriate reserves are maintained;
(c) Liens imposed by law, such as mechanics', materialmen's,
landlord's, warehousemen's, and carriers' Liens, and other similar
Liens, securing obligations incurred in the ordinary course of business
which are not past due for more than ninety (90) days or which are
being contested in good faith in appropriate proceedings and for which
appropriate reserves have been established;
(d) Liens under workers' compensation, unemployment
insurance, Social Security, or similar legislation;
(e) Liens, deposits, or pledges to secure the performance of
bids, tenders, contracts (other than contracts for the payment of
money), leases (permitted under the terms of this Agreement), public or
statutory obligations, surety, stay, appeal, indemnity, performance, or
other similar bonds, or other similar obligations arising in the
ordinary course of business;
(f) Liens existing as of the date of this Agreement.
(g) Judgment and other similar Liens arising in connection
with Court proceedings, provided the execution or other enforcement of
such Liens is effectively stayed and the claims secured thereby are
being actively contested in good faith and by appropriate proceedings;
(h) Easements, rights-of-way, restrictions, and other similar
encumbrances which, in the aggregate, do not materially interfere with
the occupation, use, and enjoyment by the Borrower or any Subsidiary of
the property or assets encumbered thereby in the normal course of its
business or materially impair the value of the property subject
thereto; and
(i) Liens securing obligations of a Subsidiary to the
Borrower or another Subsidiary.
10.4 Negative Pledge. Borrower shall not grant, create, incur, suffer or
permit any Lien upon the stock in Cardiac Science, Inc. and Paradigm
Medical Industries which is owned by Borrower.
10.5 No Transfer of Assets. Borrower shall not sell, convey, transfer, assign,
dispose of or further encumber any of its properties or assets, or any right,
title or interest therein, or any part thereof, or enter into a lease covering
all or any portion thereof or an undivided interest therein, either voluntarily,
involuntarily, or otherwise, without the prior written consent of Bank being
first had and obtained, which consent may be withheld or conditioned in the sole
and absolute discretion of Bank.
10.6 Change in Management. Borrower shall not cause, make or permit any
change in the management of Borrower.
10.7 Change of Ownership. Without the prior written consent of Bank, Borrower
shall not, and Borrower shall not permit any director, officer or shareholder of
Borrower to cause, permit, or suffer any change, direct or indirect, in the
capital ownership or the composition of the current shareholders of Borrower.
Borrower shall not reorganize itself or consolidate with or merge into any other
corporation or permit any other corporation to be merged into Borrower.
10.8 Maintain Basic Business. Borrower shall not engage in any business
activities substantially different than those in which Borrower is
presently engaged.
10.9 Continuity of Operations. Borrower shall not cease operations, liquidate,
dissolve or consolidate with or into any other entity. Furthermore, without
prior written consent of Bank, Borrower shall not merge with any other entity.
10.10 Loans, Investments, Guaranties, Subordinations. Other than in the ordinary
course of business, Borrower shall not directly or indirectly (i) make any loan
or advance to any other Person, (ii) purchase or otherwise acquire any capital
stock or other securities of any other Person, any limited liability company
interest or partnership interest in any other Person, or any warrants or other
options or rights to acquire any capital stock or securities of any other Person
or any limited liability company interest or partnership interest in any other
Person, (iii) make any capital contribution to any other Person, (iv) otherwise
invest in or acquire any interest in any other Person, (v) guaranty or otherwise
become obligated in respect of any indebtedness of any other Person, or (vi)
except for rights and obligations arising under the Purchase Agreements,
subordinate any claim against or obligation of any other Person to Borrower to
any other indebtedness of such Person.
10.11 Dividends and Other Distributions. Borrower will not directly or
indirectly declare or pay any dividend or other distribution to its shareholders
or others on or on account of any stock or other securities of Borrower, except
a dividend payable to the shareholders of Borrower in the minimum amount
necessary to satisfy such shareholder's actual federal, state and local income
tax liability with respect to the operations and income of Borrower.
10.12 Transactions with Affiliates. Borrower shall not enter into, carry on or
otherwise be engaged in any transactions, business relationships or other
similar arrangements with any Affiliate of Borrower.
10.13 Maximum Lease Payments under Operating Leases. Borrower shall not, from
and after the date hereof, enter into new operating leases (as defined under
GAAP) requiring, or make any actual payments under such new operating leases, in
excess of Twenty-Five Thousand and No/100 Dollars ($25,000.00), in the
aggregate. Notwithstanding the foregoing, Borrower and Bank agree that such
limitation on operating leases shall not apply with respect to any current
operating leases of Borrower in existence as of the date hereof or with respect
to operating leases with Bank or any affiliate of Bank, including, without
limitation, Banc One Leasing Corp.
10.14 Indebtedness. Borrower will not assume, create, incur, or permit to exist
any Indebtedness in excess of One Hundred Thousand and No/100 Dollars
($100,000.00) in the aggregate, except existing indebtedness disclosed on
financial statements delivered to Bank prior to the date of this Agreement
(subject to the foregoing limitation on the maximum amount of such indebtedness)
and the obligations to Bank hereunder.
10.15 Financial Covenants.
-------------------
(a) Working Capital. Borrower shall, at all times, maintain on a
consolidated basis current assets in excess of current liabilities by
at least SIX MILLION TWO HUNDRED THOUSAND AND NO/100 Dollars
($6,200,000.00) (determined in accordance with GAAP). Bank shall test
Borrower's compliance with such covenant quarterly, based on the
financial statements provided to Bank as of each Quarterly Compliance
Date.
(b) Debt Service Coverage Ratio. Borrower shall at all times maintain a
Debt Service Coverage Ratio of at least 1.40 to 1.00 or greater. Bank
shall test Borrower's compliance with such covenant quarterly (on a
rolling past four calendar quarter basis), based on the financial
statements provided to Bank as of each Quarterly Compliance Date.
(c) Maximum Leverage Ratio. Borrower shall at all times maintain a Leverage
Ratio of not greater than 1.80 to 1.00. Bank shall test Borrower's
compliance with such covenant quarterly, based on the financial
statements provided to Bank as of each Quarterly Compliance Date.
(d) Funded Debt to EBITDA Ratio. Borrower shall, at all times, maintain a
Funded Debt to EBITDA Ratio of not greater than 3.75 to 1.00 (as
determined in accordance with GAAP). Bank shall test Borrower's
compliance with such covenant quarterly(on a rolling past four calendar
quarter basis), based on the financial statements provided to Bank as
of each Quarterly Compliance Date.
ARTICLE 11
EVENTS OF DEFAULT AND REMEDIES
11.1 Events of Default. The occurrence of any one or more of the
following shall constitute an Event of Default under this
Agreement:
(a) Failure by Borrower of Guarantor to pay any monetary amount
within ten (10) days of the date when due under any Loan Document.
(b) Except as otherwise provided in this Section 11.1, any failure by
Borrower or Guarantor to perform any obligation not involving the
payment of money, or to comply with any other term or condition
applicable to Borrower or Guarantor under any Loan Document and the
expiration of thirty (30) days after written notice of such failure by
Bank to Borrower or Guarantor, unless cured within such 30-day period.
(c) Any representation or warranty by Borrower or Guarantor in any Loan
Document is materially false, incorrect, or misleading as of the date
made.
(d) The occurrence of any event (including, without limitation, a change in
the financial condition, business, or operations of Borrower or
Guarantor for any reason whatsoever) that materially and adversely
affects the ability of Borrower or Guarantor to perform any of its
obligations under the Loan Documents.
(e) Borrower or Guarantor (i) is unable or admits in writing
Borrower's or Guarantor's inability to pay Borrower's or
Guarantor's monetary obligations as they become due, (ii) fails to
pay when due any monetary obligation, whether such obligation be
direct or contingent, to any person in excess of Ten Thousand
Dollars ($10,000), unless such obligation is being contested in
good faith by Borrower or Guarantor, as determined by Bank in its
reasonable discretion (iii) makes a general assignment for the
benefit of creditors, or (iv) applies for, consents to, or acquiesces
in, the appointment of a trustee, receiver, or other custodian for
Borrower or Guarantor or the property of Borrower or Guarantor or
any part thereof, or in the absence of such application, consent,
or acquiescence, a trustee, receiver, or other custodian is
appointed for Borrower or Guarantor or the property of Borrower or
Guarantor or any part thereof, and such appointment is not
discharged within sixty (60) days.
(f) Commencement of any case under the Bankruptcy Code, Title 11 of the
United State Code, or commencement of any other bankruptcy arrangement,
reorganization, receivership, custodianship, or similar proceeding
under any federal, state, or foreign law by or against Borrower or
Guarantor and with respect to any such case or proceeding that is
involuntary, and such case or proceeding is not dismissed with
prejudice within sixty (60) days of the filing thereof.
(g) Any litigation or proceeding is commenced before any Governmental
Authority against or affecting Borrower, Guarantor or the property of
Borrower or Guarantor or any part thereof, and such litigation or
proceeding is not defended diligently and in good faith by Borrower or
Guarantor.
(h) A final judgment or decree for monetary damages or a monetary fine or
penalty (not subject to appeal or as to which the time for appeal has
expired) is entered against Borrower or Guarantor by any Government
Authority, which together with the aggregate amount of all other such
judgments or decrees against Borrower or Guarantor that remain unpaid
or that have not been discharged or stayed, exceeds Five Thousand
Dollars ($5,000), and such judgment or decree is not paid and
discharged or stayed or appealed within thirty (30) days after the
entry thereof.
(i) Commencement of any action or proceeding which seeks as one of its
remedies the dissolution of Guarantor.
(j) All or any part of the property of Borrower or Guarantor is attached,
levied upon, or otherwise seized by legal process, and such attachment,
levy, or seizure is not quashed, stayed, or released within twenty (20)
days of the date thereof.
(k) The occurrence of any Transfer, unless prior to such Transfer the
holder of the Note has delivered to Borrower the written consent of
such holder to such Transfer.
(l) Guarantor shall take any action to repudiate Guarantor's Guaranty, or
the Guaranty shall otherwise cease to be in full force and effect.
(m) The occurrence of any Event of Default, as such term is defined in any
other Loan Document.
(n) The occurrence of any Event of Default under any other loan from Bank or
affiliate of Bank to Borrower or Guarantor.
11.2 Remedies.
(a) Notwithstanding any provision to the contrary herein or any of the
other Loan Documents, upon the happening of any Event of Default
under this Agreement, or upon an Event of Default under any of the
other Loan Documents, Bank shall, at its option, have the remedies
provided in the Loan Document breached by Borrower, including,
without limitation, the option to declare all outstanding
indebtedness to be immediately due and payable without presentment,
demand, protest or notice of any kind, and the following remedies:
Bank may, at its option, apply any of Borrower's funds in its
possession to the outstanding indebtedness under the Note whether
or not such indebtedness is then due; Bank may exercise all
rights and remedies available to it under any or all of the Loan
Documents; and Bank shall have the right to perform Borrower's
obligations under this Agreement.
(b) Borrower hereby constitutes and appoints Bank, or an independent
contractor selected by Bank, as its true and lawful attorney-in-fact
with full power of substitution for the purposes of performance of
Borrower's obligations under this Agreement in the name of Borrower. It
is understood and agreed that the foregoing power of attorney shall be
deemed to be a power coupled with an interest which cannot be revoked
until repayment of the Loan.
(c) In addition to any other rights and remedies of Bank, if an Event of
Default exists and is continuing, Bank is authorized at any time and
from time to time during the continuance of the Event of Default,
without prior notice to Borrower (any such notice being waived by
Borrower to the fullest extent permitted by law) to setoff and apply
any and all deposits (general or special, time or demand,
provisional or final) at any time held by Bank to or for the credit or
the account of Borrower against any and all obligations of Borrower
under the Loan Documents, now or hereafter existing, irrespective of
whether or not Bank shall have made demand under this Loan Agreement
or any other Loan Document and although such amounts owed may be
contingent or unmatured. If Bank exercises such setoff right, Bank
exercising such right agrees promptly to notify Borrower after any such
setoff and application made by Bank; provided, however, that the
failure to give such notice shall not affect the validity of such
setoff and application.
ARTICLE 12
MISCELLANEOUS
12.1 Assignment. Borrower shall not assign any of its rights under this
Agreement.
12.2 Notices. All notices, requests, demands and consents to be made hereunder
to the parties hereto shall be in writing and shall be delivered by hand or sent
by registered mail or certified mail, postage prepaid, return receipt requested
(except for any notice address which is a post office box, in which case notice
may be given by first class mail), through the United States Postal Service to
the addresses shown below, or such other address which the parties may provide
to one another in accordance herewith. Such notices, requests, demands and
consents, if sent by mail, shall be deemed given two (2) Business Days after
deposit in the United States mail, and if delivered by hand, shall be deemed
given when delivered.
To Bank: Bank One, Utah, National Association
80 West Broadway, Suite 200
Salt Lake City, Utah 84101
Attention: Tony C. Nielsen
With a copy to: Snell & Wilmer L.L.P.
15 West South Temple, Suite 1200
Gateway Tower West
Salt Lake City, Utah 84101
Attn: Brian D. Cunningham, Esq.
To Borrower: Zevex, Inc.
4314 Zevex Park Lane
Salt Lake City, Utah 84123
Attn: Phillip L. McStotts
12.3 Authority to File Notices. Borrower irrevocably appoints Bank as its
attorney-in-fact, with full power of substitution, to file for record, at
Borrower's cost and expense and in Borrower's name, any notices of completion,
notices of cessation of labor, or any other notices that Bank considers
necessary or desirable to protect its security.
12.4 Inconsistencies with the Loan Documents. In the event of any
inconsistencies between the terms of this Agreement and any terms of any of the
Loan Documents, the terms of this Agreement shall govern and prevail.
12.5 No Waiver. No disbursement of Loan proceeds shall constitute a waiver of
any conditions to Bank's obligation to make further disbursements nor, in the
event Borrower is unable to satisfy any such conditions, shall any such waiver
have the effect of precluding Bank from thereafter declaring such inability to
constitute a default or Event of Default under this Agreement.
12.6 Bank Approval of Instruments and Parties. All proceedings taken in
accordance with transactions provided for herein, and all surveys, appraisals,
and documents required or contemplated by this Agreement and the persons
responsible for the execution and preparation thereof shall be satisfactory to
and subject to approval by Bank. Bank's counsel shall be provided with copies of
all documents which they may reasonably request in connection with the
Agreement.
12.7 Bank Determination of Facts. Bank shall at all times be free to
establish independently, to its satisfaction, the existence or nonexistence
of any fact or facts, the existence or nonexistence of which is a condition of
this Agreement.
12.8 Incorporation of Preamble, Recitals and Exhibits. The preamble,
recitals, and exhibits hereto are hereby incorporated into
12.9 Payment of Expenses. Borrower shall pay all taxes and assessments and all
expenses, charges, costs, and fees provided for in this Agreement or relating to
the Loan or the Premises, including, without limitation, any fees incurred for
recording or filing any of the Loan Documents, title insurance premiums and
charges, tax service contract fees, fees of any consultants, reasonable fees and
expenses of Bank's counsel, documentation and processing fees, printing,
photostating and duplicating expenses, air freight charges, escrow fees, costs
of surveys, costs of inspections of the Premises, premiums of hazard insurance
policies and surety bonds, and fees for any appraisal and appraisal review,
market or feasibility study required by Bank. Borrower hereby authorizes Bank to
disburse the proceeds of the Loan to pay such expenses, charges, costs, and fees
notwithstanding that Borrower may not have requested a disbursement of such
amount. Bank may make such disbursements notwithstanding the fact that the Loan
is not "in balance" or that Borrower is in default under the terms of this
Agreement or any other Loan Document. Such disbursement shall be added to the
outstanding principal balance of the Note. The authorization hereby granted
shall be irrevocable, and no further direction or authorization from Borrower
shall be necessary for Bank to make such disbursements. However, the provision
of this Section 12.9 shall not prevent Borrower from paying such expense,
charges, costs, and fees from its own funds. All such expenses, charges, costs,
and fees shall be Borrower's obligation regardless of whether or not Borrower
has requested and met the conditions for an Advance. The obligations on the part
of Borrower under this Section 12.9 shall survive the closing of the Loan and
the repayment thereof. Borrower hereby authorizes Bank, in its discretion, to
pay such expenses, charges, costs, and fees at any time by a disbursement of the
Loan.
12.10 Disclaimer by Bank. Bank shall not be liable to any contractor,
subcontractor, supplier, laborer, architect, engineer, or any other party for
services performed or materials supplied in connection with the Premises. Bank
shall not be liable for any debts or claims accruing in favor of any such
parties against Borrower or others or against the Premises or the Collateral.
Borrower is not and shall not be an agent of Bank for any purpose. Bank is not a
joint venture partner with Borrower, the Guarantor or with the directors,
officers or shareholders of Borrower or Guarantor in any manner whatsoever.
Prior to default by Borrower under this Agreement and the exercise of remedies
granted herein, Bank shall not be deemed to be in privity of contract with any
contractor or provider of services to the Premises, nor shall any payment of
funds directly to a contractor, subcontractor, or provider of services be deemed
to create any third party beneficiary status or recognition of same by Bank.
Approvals granted by Bank for any matters covered under this Agreement shall be
narrowly construed to cover only the parties and facts identified in any written
approval or, if not in writing, such approvals shall be solely for the benefit
of Borrower.
12.11 Indemnification. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER AGREES
TO PROTECT, INDEMNIFY, DEFEND AND SAVE HARMLESS BANK, ITS DIRECTORS, OFFICERS,
AGENTS, AND EMPLOYEES FOR, FROM, AND AGAINST ANY AND ALL LIABILITY, EXPENSE, OR
DAMAGE OF ANY KIND OR NATURE AND FOR, FROM, AND AGAINST ANY SUITS, CLAIMS, OR
DEMANDS, INCLUDING REASONABLE LEGAL FEES AND EXPENSES ON ACCOUNT OF ANY MATTER
OR THING OR ACTION , WHETHER IN SUIT OR NOT, ARISING OUT OF THIS AGREEMENT OR IN
CONNECTION HEREWITH, EXCLUDING HOWEVER, ANY MATTERS ARISING OUT OF AN
INDEMNIFIED PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Upon receiving
knowledge of any suit, claim, or demand asserted by a third party that Bank
believes is covered by this indemnity, Bank shall give Borrower notice of the
matter and an opportunity to defend it, at Borrower's sole cost and expense,
with legal counsel satisfactory to Bank. Bank may also require Borrower to so
defend the matter. The obligations on the part of Borrower under this Section
12.11 shall survive the closing of the Loan and the repayment thereof.
12.12 Titles and Headings. The headings at the beginning of each section of this
Agreement are solely for convenience and are not part of this Agreement. Unless
otherwise indicated, each reference in this Agreement to a section or an exhibit
is a reference to the respective section herein or exhibit hereto.
12.13 Number and Gender. In this Agreement the singular shall include the plural
and the masculine shall include the feminine and neuter gender and vice versa,
if the context so requires.
12.14 Brokers. Borrower and Bank represent to each other that neither of them
knows of any brokerage commissions or finders' fee due or claimed with respect
to the transaction contemplated hereby. Borrower and Bank shall indemnify and
hold harmless the other party for, from and against any and all loss, damage,
liability, or expense, including costs and reasonable attorney fees, which such
other party may incur or sustain by reason of or in connection with any
misrepresentation by the indemnifying party with respect to the foregoing.
12.15 Change, Discharge, Termination, or Waiver. No provision of this Agreement
may be changed, discharged, terminated, or waived except in writing signed by
the party against whom enforcement of the change, discharge, termination, or
waiver is sought. No failure on the part of Bank to exercise, and no delay by
Bank in exercising, any right or remedy under the Loan Documents or under the
law shall operate as a waiver thereof.
12.16 Choice of Law. THIS AGREEMENT AND THE TRANSACTION CONTEMPLATED HEREUNDER
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
UTAH WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES.
12.17 Participations. Bank shall have the right at any time to sell, assign,
transfer, negotiate, or grant participations in all or any part of the Loan or
the Note to one or more participants. Borrower hereby acknowledges and agrees
that any such disposition will give rise to a direct obligation of Borrower to
each such participant.
12.18 Counterparts. This Agreement may be executed in any number of counterparts
each of which shall be deemed an original, but all such counterparts together
shall constitute but one agreement. Borrower and Bank agree and acknowledge that
facsimile signature pages will be acceptable and shall be conclusive evidence of
execution of any Loan Document, resolution or other agreement relating to the
Loan.
12.19 Time is of the Essence. Time is of the essence of this Agreement.
----------------------
12.20 Attorneys' Fees. Borrower agrees to pay all costs of enforcement and
collection and preparation for any Event of Default or any action taken by Bank
(including, without limitation, reasonable attorney's fees), whether or not any
action or proceeding is brought (including, without limitation, all such costs
incurred in connection with any bankruptcy, receivership, or other court
proceedings (whether at the trial or appellate level), together with interest
thereon from the date of demand at the Default Interest Rate.
12.21 Arbitration. Bank and Borrower agree that upon the written demand of
either party, whether made before or after the institution of any legal
proceedings, but prior to the rendering of any judgment in that proceeding, all
disputes, claims and controversies between them, whether individual, joint, or
class in nature, arising from this Loan Agreement or any other Loan Document or
otherwise, including without limitation contract disputes and tort claims, shall
be resolved by binding arbitration pursuant to the Commercial Rules of the
American Arbitration Association ("AAA"). Any arbitration proceeding held
pursuant to this arbitration provision shall be conducted in the city nearest
the Borrower's address having an AAA regional office, or at any other place
selected by mutual agreement of the parties. No act to take or dispose of any
Collateral shall constitute a waiver of this arbitration agreement or be
prohibited by this arbitration agreement. This arbitration provision shall not
limit the right of either party during any dispute, claim or controversy to
seek, use, and employ ancillary, or preliminary rights and/or remedies, judicial
or otherwise, for the purposes of realizing upon, preserving, protecting,
foreclosing upon or proceeding under forcible entry and detainer for possession
of, any real or personal property, and any such action shall not be deemed an
election of remedies. Such remedies include, without limitation, obtaining
injunctive relief or a temporary restraining order, invoking a power of sale
under any deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receivership, or exercising any rights relating to personal
property, including exercising the right of set-off, or taking or disposing of
such property with or without judicial process pursuant to Article 9 of the
Uniform Commercial Code. Any disputes, claims or controversies concerning the
lawfulness or reasonableness of an act, or exercise of any right or remedy
concerning any Collateral, including any claim to rescind, reform, or otherwise
modify any agreement relating to the Collateral, shall also be arbitrated;
provided, however that no arbitrator shall have the right or the power to enjoin
or restrain any act of either party. Judgment upon any award rendered by any
arbitrator may be entered in any court having jurisdiction. The statute of
limitations, estoppel, waiver, laches and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of any action for these purposes. The Federal
Arbitration Act (Title 9 of the United States Code) shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
12.22 Jury Waiver. BORROWER AND BANK HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY
AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THEM
ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, ANY OTHER LOAN DOCUMENT
OR ANY RELATIONSHIP BETWEEN BANK AND BORROWER. THIS PROVISION IS A MATERIAL
INDUCEMENT TO BANK TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER
LOAN DOCUMENTS.
12.23 Integration. The Loan Documents contain the complete understanding and
agreement of Borrower and Bank and supersede all prior representations,
warranties, agreements, arrangements, understandings, and negotiations. THE
WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
12.24 Binding Effect. The Loan Documents will be binding upon, and inure to
the benefit of, Borrower and Bank and their respective successors and assigns.
Borrower may not delegate its obligations under the Loan Documents.
12.25 Survival. The representations, warranties, and covenants of Borrower and
the Loan Documents shall survive the execution and delivery of the Loan
Documents and the making of the Loan.
12.26 Exchange of Information. Borrower agrees that Bank may exchange financial
information about Borrower with its affiliates and other related entities and
its participants and prospective participants. Borrower agrees that the Bank may
provide any information the Bank may have about the Borrower or about any matter
relating to this Agreement or any of the Loan Documents to Bank One Corporation,
or any of its subsidiaries or affiliates or their successors, or to any one or
more purchasers or potential purchasers of the Loan. The Borrower agrees that
the Bank may at any time sell, assign, or transfer one or more interests or
participations in all or any part of its rights or obligations in and to this
Agreement and the other Loan Documents to one or more purchasers whether or not
related to or affiliated with the Bank.
ARTICLE 13
EXHIBITS
The following exhibits to this Agreement are fully incorporated herein
as if set forth at length:
Exhibit A. Borrowing Base Certificate
ARTICLE 14
DESIGNATIONS
14.1 The Agents authorized to act for Borrower under this Agreement are:
NAME SIGNATURE
Phillip L.McStotts _________________________
------------------
------------------------ --------------------------
14.2 All Advances on the Line of Credit shall be deposited into:
Consolidation Account No. 1260-4637.
14.3 The Borrower's Operating Accounts and the minimum deposits to be
maintained on each are as follows:
OPERATING ACCOUNT NUMBER MINIMUM BALANCE
1135-7769 -0-
IN WITNESS WHEREOF, Bank and Borrower have caused this Agreement to be duly
executed and delivered as of the date first above written.
ZEVEX, INC.
a Delaware corporation
By: /s/ Phillip L. McStotts
-------------------------------
Name: Phillip L. McStotts
-----------------------------
Title: Secretary/CFO
--------------------------
JTECH MEDICAL INDUSTRIES, INC.,
a Utah corporation
By: /s/ Phillip L. McStotts
Name: Phillip L. McStotts
-----------------------------
Title: Secretary/Treasurer
ABORN ELECTRONICS, INC.,
a California corporation
By: /s/ Phillip L. McStotts
Name: Phillip L. McStotts
-----------------------------
Title: Secretary/Treasurer
"Borrower"
BANK ONE, UTAH, NATIONAL ASSOCIATION
a national banking association
By: /s/ Tony C. Nielsen
Name: Tony C. Nielsen
Title: First Vice President
"Bank"
EXHIBIT A
Borrowing Base Certificate
Bank One, Utah, National Association
80 West Broadway, Suite 200
Salt Lake City, Utah 84101
Re: Amended and Restated Line of Credit Loan Agreement dated
June 29, 2001 (the "Loan Agreement") by and between Bank
One, Utah, National Association, as Bank, and the undersigned
as Borrower.
Gentlemen:
The undersigned acknowledges that pursuant to Section 9.5 of the Loan
Agreement, the undersigned must provide a monthly Borrowing Base Certificate to
Bank. Therefore, the undersigned hereby certifies to Bank as follows:
Borrowing Base Formula
"Borrowing Base" means the Eligible Accounts Receivable plus the
Eligible Inventory.
Borrowing Base as of: __________________, 20___
Borrowing Base on Accounts
Total assigned Accounts as of $
-----------------------
-------------------------------------
-------------------------------------
Less: Accounts which are 90 or more days past due $
-------------------------------------
Less: Account from Account Debtors accounting for 5% or
more of the total amount owing to Borrower,
where15% of aggregate account balance is aged over
90 or days past due from date of invoice (all
Accounts of such Account Debtor are ineligible),
not including amounts due from Allergan, Mentor,
Alaris and Paradigm. $
-------------------------------------
Less: Accounts from Allergan, Mentor, Alaris and Paradigm
which are 30 or more days past due $
-------------------------------------
Less: Accounts which exceed 25% of total Accounts
receivable $
-------------------------------------
Less: Other - Foreign Accounts $
-------------------------------------
-------------------------------------
Government Accounts $
-------------------------------------
-------------------------------------
Intercompany Accounts $
-------------------------------------
-------------------------------------
Otherwise excluded Accounts $
-------------------------------------
-------------------------------------
SUBTOTAL (A) $
-------------------------------------
Borrowing potential on Accounts Receivable: 80%
TOTAL Eligible Accounts Receivable (A X 80%) $
-------------------------------------
Borrowing Base on Inventory
Total Inventory as of: $
------------------------------ -------------------------------------
Less: Work-In-Process $
-------------------------------------
SUBTOTAL (B) $
-------------------------------------
Borrowing potential on Inventory: 40%
TOTAL Eligible Inventory (B X 40%) $
-------------------------------------
Borrowing Base Availability
TOTAL Eligible Accounts (C) $
-------------------------------------
-------------------------------------
TOTAL Eligible Inventory (D) $
-------------------------------------
Borrowing Base Potential (E)
(The lesser of C+D or $7,000,000) $
-------------------------------------
Line of Credit outstandings (F) as
of: $
------------------- -------------------------------------
Borrowing Base Availability (E - F) $
-------------------------------------
Dated as of this Certification __________________, 20____
Certified by:
---------------------------------------
Title:
-------------------------------------
Exhibit 10.26
AMENDMENT TO CONVERTIBLE DEBENTURE
THIS AMENDMENT (the "Amendment") is made and entered into as of
December 20, 2001, by and among ZEVEX International, Inc., a Delaware
corporation ("ZEVEX") and Vijay Lumba ("Holder").
A. On January 6, 1999, ZEVEX issued to the Holder a Convertible
Debenture in the principal amount of $1,134,000 (the "Debenture").
B. ZEVEX and the Holder now wish to amend the Debenture in
certain respects as set forth below.
Now, therefore, in consideration of the covenants made herein, the
parties hereby agree as follows.
1. Amendments.
----------
a. The text of Section 2 of the Debenture is hereby deleted and replaced
in its entirety with thefollowing:
"Payment. On or before January 6, 2002, the Company shall pay
to the Holder a principal payment plus an amount equal to all
interest accrued under the Debenture and unpaid as of the date
of such principal payment. The payment shall consist of one
hundred thousand dollars and an additional amount equal to
Accounts Receivable less inter-company invoices (which shall
be cancelled) and less Accounts Payable, related to Aborn
Electronics, Inc. as of December 31, 2001. All remaining
unpaid principal and interest due under this Debenture shall
be due and payable on January 6, 2003. All payments of
principal and interest shall be made in lawful money of the
United States of America at the address of the Holder set
forth in Section 8.1 below. Unless the Holder shall elect
otherwise, each payment made under this Debenture shall be
applied first to interest due under this Debenture and any
balance shall be applied to reduce the principal balance of
this Debenture."
b. Section 4.1 of the Debenture is hereby amended to delete the last
sentence of Section 4.1.
c. Section 4.1 of the Debenture is hereby amended to include the following
additional subsections defining
"Events of Default":
(e) the acquisition or change of control of the Company by reason of:
(i) a sale of all or substantially all of the assets of the Company; or
(ii) the consummation of a merger or consolidation of the Company with or
into another entity or any other corporate reorganization, if more than
50% of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such merger,
consolidation or other reorganization;
(f) the sale by the Company of either (i) its subsidiary, JTech Medical
Industries, Inc., (ii) the OEM Division of its subsidiary ZEVEX, Inc.,
or(iii) the proprietary product division of its subsidiary ZEVEX, Inc."
d. The text of Section 5 of the Debenture is hereby deleted and replaced
in its entirety with the following:
"This Debenture may be prepaid without penalty upon thirty
(30) days prior written notice by the Company to Holder.
Holder shall have the right within such thirty day period to
convert all or part of this Debenture at Holder's election
pursuant to Section 3 above."
e. Section 7 of the Debenture is hereby deleted and replaced in its
entirety with the following:
"7. Intentionally Omitted"
---------------------
2. Payments to Date. The parties acknowledge that the currently
outstanding principal balance of the Debenture is $1,134,000.00, prior
to any payments made under this Amendment, and that all interest
accrued under the Debenture as of December 20, 2001, has been paid in
full as of that date by ZEVEX.
3. Legal Fees. The Company agrees to pay all legal fees incurred by the
Holder in connection with this Amendment.
4. Miscellaneous. This Amendment to the Debenture is incorporated in and
supersedes the terms of the Debenture only with regard to the sections
specifically identified herein. All other terms and provisions in the
Debenture remain in full force and effect. The Debenture and this
Amendment contain the entire understanding between the parties related
to the subject matter hereof and thereof and supersede all prior oral
or written agreements or understandings with respect to the subject
matter hereof and thereof. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Holder has personally executed this Agreement
and ZEVEX has caused this Agreement to be executed by its duly authorized
representative, to be effective as of the date first stated above.
VIJAY LUMBA ZEVEX INTERNATIONAL, INC.
By:/s/ Vijay Lumba By:/s/ David J. McNally
Its:__________________________ Its: Chief Executive Officer
Exhibit 10.27
AMENDMENT TO CONVERTIBLE DEBENTURE
THIS AMENDMENT (the "Amendment") is made and entered into as of
December 20, 2001, by and among ZEVEX International, Inc., a Delaware
corporation ("ZEVEX") and Leonard C. Smith ("Holder").
A. On January 6, 1999, ZEVEX issued to the Holder a Convertible
Debenture in the principal amount of $1,290,000 (the "Debenture").
B. ZEVEX and the Holder now wish to amend the Debenture in
certain respects as set forth below.
Now, therefore, in consideration of the covenants made herein, the
parties hereby agree as follows.
1. Amendments.
----------
a. The text of Section 2 of the Debenture is hereby deleted and replaced
in its entirety with the following:
"Payment. On or before January 6, 2002, the Company shall pay
to the Holder a principal payment of two hundred ninety
thousand dollars ($290,000.00) plus an amount equal to all
interest accrued under the Debenture and unpaid as of the date
of such principal payment. Accrued interest shall thereafter
be due and payable on April, 1, 2002, July 1, 2002, and
October 1, 2002. All remaining unpaid principal and interest
due under this Debenture shall be due and payable on January
6, 2003. All payments of principal and interest shall be made
in lawful money of the United States of America at the address
of the Holder set forth in Section 8.1 below. Unless the
Holder shall elect otherwise, each payment made under this
Debenture shall be applied first to interest due under this
Debenture and any balance shall be applied to reduce the
principal balance of this Debenture."
b. The text of Section 3.1 of the Debenture is hereby deleted and replaced
in its entirety with the following:
"Conversion Into Company Securities. At any time, or from time
to time, prior to January 6, 2003, the Holder may elect to
convert all or a portion of the unpaid principal amount and
all accrued but unpaid interest of this Debenture into fully
paid and nonassessable shares of Company Common Stock, $0.001
par value (the "Conversion Shares") at the conversion price of
eleven dollars ($11.00) per share (the "Conversion Price");
provided that any partial conversion of less than the entire
remaining principal balance of this Debenture may not be less
than $25,000 in principal and accrued and unpaid interest."
c. The last two sentences of Section 3.2 are hereby deleted and replaced
with the following sentence:
"Conversion Certificates will be delivered promptly to the
Holder after issuance by the Company."
d. Section 4.1 of the Debenture is hereby amended to delete the last
sentence of Section 4.1.
e. Section 4.1 of the Debenture is hereby amended to include the following
additional subsections defining
"Events of Default":
(e) resignation by the Holder from employment with the
Company for Good Reason (as defined in the Holder's
Employment Agreement with the Company dated December
31, 1998 (the "Employment Agreement"));
(f) termination of the Holder by the Company without
Cause (as defined in the Employment Agreement);
(g) any reduction in the Holder's base salary in an
amount greater that fifteen percent (15%) of the
Holder's current base salary;
(h) any assignment to the Holder of duties that are
materially inconsistent with, or that constitute a
material alteration in the status of, the Holder's
current duties and responsibilities (provided the
Company shall have the ability to cure such Event of
Default in the manner provided in Section 4.1(b)
above);
(i) the Holder's death or Disability (for the purposes of
the foregoing, "Disability" means the Holder's
involuntary inability to fulfill his duties as an
employee for a period of 90 days by reason of any
medically determinable physical and/or mental
disability (but not including disability as a result
of alcohol, drug or other substance abuse);
(j) the acquisition or change of control of the Company
by reason of:
(i) a sale of all or substantially all of the
assets of the Company;
(ii) the consummation of a merger or consolidation
of the Company with or into another entity or
any other corporate reorganization, if more
than 50% of the combined voting power of the
continuing or surviving entity's securities
outstanding immediately after such merger,
consolidation or other reorganization is
owned by persons who were not stockholders of
the Company immediately prior to such merger,
consolidation or other reorganization; or
(iii) any person or any two or more persons acting
in concert shall have acquired beneficial
ownership, directly or indirectly, of
securities of the Company (or other
securities convertible into such securities)
representing 50% or more of the combined
voting power of all securities of the Company
entitled to vote in the election of directors
, other than a person or persons who
immediately prior to such transaction are the
beneficial owners of at least 5% of the
Company's outstanding voting securities
(determined in accordance with Securities and
Exchange Commission Rule 13d).
(k) the sale by the Company of either (i) its subsidiary,
JTech Medical Industries, Inc., (ii) the OEM Division
of its subsidiary ZEVEX, Inc., or (iii) the
proprietary product division of its subsidiary
ZEVEX, Inc."
f. The text of Section 5 of the Debenture is hereby deleted and replaced
in its entirety with the following:
"This Debenture may be prepaid without penalty upon thirty
(30) days prior written notice by the Company to Holder.
Holder shall have the right within such thirty day period to
convert all or part of this Debenture at Holder's election
pursuant to Section 3 above."
g. Section 7 of the Debenture is hereby deleted and replaced in its
entirety with the following:
"7. Intentionally Omitted"
---------------------
2. Payments to Date. The parties acknowledge that the currently
outstanding principal balance of the Debenture is $1,290,000.00 and
that all interest accrued under the Debenture as of October 1, 2001,
has been paid in full as of that date by ZEVEX.
3. Termination of Right of Recoupment. Notwithstanding Section 8(f) of the
Stock Purchase Agreement, dated December 31, 1998, entered into between
ZEVEX, the Holder and certain other parties, ZEVEX will have no right
of recoupment or set-off applicable to the Debenture for any amounts
owed by the Holder to ZEVEX under such Stock Purchase Agreement.
4. Legal Fees. The Company agrees to pay all legal fees incurred by the
Holder in connection with this Amendment.
5. Miscellaneous. This Amendment to the Debenture is incorporated in and
supersedes the terms of the Debenture only with regard to the sections
specifically identified herein. All other terms and provisions in the
Debenture remain in full force and effect. The Debenture and this
Amendment contain the entire understanding between the parties related
to the subject matter hereof and thereof and supersede all prior oral
or written agreements or understandings with respect to the subject
matter hereof and thereof. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Holder has personally executed this Agreement
and ZEVEX has caused this Agreement to be executed by its duly authorized
representative, to be effective as of the date first stated above.
LEONARD D. SMITH ZEVEX INTERNATIONAL, INC.
By:/s/ Leonard D. Smith By:/s/ Phillip L. McStotts
Its:__________________________ Its: Chief Financial Officer
Exhibit 10.28
AMENDMENT TO CONVERTIBLE DEBENTURE
THIS AMENDMENT (the "Amendment") is made and entered into as of
December 20, 2001, by and among ZEVEX International, Inc., a Delaware
corporation ("ZEVEX") and J. Tracy Livingston ("Holder").
A. On January 6, 1999, ZEVEX issued to the Holder a Convertible
Debenture in the principal amount of $1,290,000 (the "Debenture").
B. ZEVEX and the Holder now wish to amend the Debenture in
certain respects as set forth below.
Now, therefore, in consideration of the covenants made herein, the
parties hereby agree as follows.
1. Amendments.
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a. The text of Section 2 of the Debenture is hereby deleted and replaced
in its entirety with the following:
"Payment. On or before January 6, 2002, the Company shall pay
to the Holder a principal payment of two hundred fifty eight
thousand dollars ($258,000.00) plus an amount equal to all
interest accrued under the Debenture and unpaid as of the date
of such principal payment. Principal and accrued interest
shall thereafter be due and payable on April, 6, 2002, July 6,
2002, October 6, 2002, and January 6, 2003. All payments of
principal and interest shall be made in lawful money of the
United States of America at the address of the Holder set
forth in Section 8.1 below. Unless the Holder shall elect
otherwise, each payment made under this Debenture shall be
applied first to interest due under this Debenture and any
balance shall be applied to reduce the principal balance of
this Debenture."
b. The text of Section 3.1 of the Debenture is hereby deleted and replaced
in its entirety with the following:
"Conversion Into Company Securities. At any time, or from time
to time, prior to January 6, 2003, the Holder may elect to
convert all or a portion of the unpaid principal amount and
all accrued but unpaid interest of this Debenture into fully
paid and nonassessable shares of Company Common Stock, $0.001
par value (the "Conversion Shares") at the conversion price of
eleven dollars ($11.00) per share (the "Conversion Price");
provided that any partial conversion of less than the entire
remaining principal balance of this Debenture may not be less
than $25,000 in principal and accrued and unpaid interest."
c. The last two sentences of Section 3.2 are hereby deleted and replaced
with the following sentence:
"Conversion Certificates will be delivered promptly to the
Holder after issuance by the Company."
d. Section 4.1 of the Debenture is hereby amended to delete the last
sentence of Section 4.1.
e. Section 4.1 of the Debenture is hereby amended to include the following
additional subsections defining
"Events of Default":
(e) the Holder's death;
(f) the acquisition or change of control of the Company
by reason of:
(i) a sale of all or substantially all of the
assets of the Company;
(ii) the consummation of a merger or
consolidation of the Company with or into
another entity or any other corporate
reorganization, if more than 50% of the
combined voting power of the continuing or
surviving entity's securities outstanding
immediately after such merger, consolidation
or other reorganization is owned by persons
who were not stockholders of the Company
immediately prior to such merger,
consolidation or other reorganization; or
(iii) any person or any two or more persons acting
in concert shall have acquired beneficial
ownership, directly or indirectly, of
securities of the Company (or other
securities convertible into such securities)
representing 50% or more of the combined
voting power of all securities of the
Company entitled to vote in the election of
directors, other than a person or persons
who immediately prior to such transaction
are the beneficial owners of at least 5% of
the Company's outstanding voting securities
(determined in accordance with Securities
and Exchange Commission Rule 13d).
(g) the sale by the Company of either (i) its subsidiary,
JTech Medical Industries, Inc., (ii) the OEM Division
of its subsidiary ZEVEX, Inc., or (iii) the
proprietary product division of its subsidiary ZEVEX,
Inc."
f. The text of Section 5 of the Debenture is hereby
deleted and replaced in its entirety with thefollowing:
"This Debenture may be prepaid without penalty upon thirty
(30) days prior written notice by the Company to Holder.
Holder shall have the right within such thirty day period to
convert all or part of this Debenture at Holder's election
pursuant to Section 3 above."
g. Section 7 of the Debenture is hereby deleted and
replaced in its entirety with the following:
"7. Intentionally Omitted"
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2. Payments to Date. The parties acknowledge that the currently
outstanding principal balance of the Debenture is
$1,290,000.00 and that all interest accrued under
the Debenture as of October 1, 2001, has been paid
in full as of that date by ZEVEX.
3. Termination of Right of Recoupment. Notwithstanding Section 8(f) of the
Stock Purchase Agreement, dated December 31, 1998, entered into between
ZEVEX, the Holder and certain other parties, ZEVEX will have no right
of recoupment or set-off applicable to the Debenture for any amounts
owed by the Holder to ZEVEX under such Stock Purchase Agreement.
4. Legal Fees. The Company agrees to pay all legal fees incurred by the
Holder in connection with this Amendment.
5. Miscellaneous. This Amendment to the Debenture is incorporated in and
supersedes the terms of the Debenture only with regard to the sections
specifically identified herein. All other terms and provisions in the
Debenture remain in full force and effect. The Debenture and this
Amendment contain the entire understanding between the parties related
to the subject matter hereof and thereof and supersede all prior oral
or written agreements or understandings with respect to the subject
matter hereof and thereof. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Holder has personally executed this Agreement
and ZEVEX has caused this Agreement to be executed by its duly authorized
representative, to be effective as of the date first stated above.
J. TRACY LIVINGSTON ZEVEX INTERNATIONAL, INC.
By:/s/ J. Tracy Livingston By: /s/ Phillip L. McStotts
Its:__________________________ Its: Chief Financial Officer