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, 2002
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:_X_
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes ___No_X_
The aggregate market value of the registrant's common stock held by
nonaffiliates computed with reference to the closing price as quoted on the
NASDAQ Stock Market, as of the last business day of the registrant's most
recently completed second quarter, June 30, 2002, was approximately $6,345,065.
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 the registrant's common stock as
of March 18, 2003 was 3,440,197
Documents incorporated by reference: none
TABLE OF CONTENTS
Part I
Item 1 BUSINESS -- 3
Item 2 PROPERTIES -- 20
Item 3 LEGAL PROCEEDINGS -- 20
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 -- 21
Item 6 SELECTED FINANCIAL DATA -- 22
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- 22
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 AND RELATED STOCKHOLDER MATTERS -- 39
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- 42
Item 14 CONTROLS AND PROCEDURES -- 42
Part IV
Item 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K -- 42
Item 15(c) INDEX TO EXHIBITS -- 47
Item 16 PRINCIPAL ACCOUNTANT FEES AND SERVICES -- 43
SIGNATURES -- 44
PART I
ITEM 1. BUSINESS
GENERAL
ZEVEX(R) International, Inc. ("ZEVEX") through our divisions and subsidiaries,
engages in the business of designing, manufacturing, and distributing medical
devices. Our Therapeutics division markets award-winning enteral nutrition
delivery devices. Our Physical Evaluation division markets industry-leading
physical evaluation testing systems. Our Applied Technology division designs and
manufactures advanced medical components and systems for other medical
technology companies.
Through the sale of enteral feeding pumps and related devices, we have 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.
We compete in the physical evaluation market through our sales of stand-alone
and computerized products that measure isolated muscle strength, joint ranges of
motion and sensation. Our products are internationally recognized in physical
medicine measurement markets as state-of-the-art for providing calibrated
hardware and Windows(R)-compatible software. Our 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.
We also provide design and manufacturing services in a multi-billion dollar
market to worldwide medical device leaders who, in turn, sell our components and
systems under private labels or incorporate them into their products. These OEM
(Original Equipment Manufacturer) products include ultrasonic sensors and
surgical handpieces, optoelectronic components, and electronic instruments. Our
operation in Salt Lake City is a world-class medical device manufacturer,
meeting ISO9001 and EN46001 certification requirements and uses a quality system
developed to meet the U. S. Food and Drug Administration's Good Manufacturing
Practices.
Our current strategy is to foster growth of our proprietary product revenues
through market penetration and the development of products that complement our
existing two lines of proprietary products. In addition, we 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 our technical competencies. We
believe our 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 our 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. See
also the discussion of the financial performance of our segments in Note 13 to
the Consolidated Financial Statements
We maintain our executive offices and principal facility at 4314 ZEVEX Park
Lane, Salt Lake City, Utah 84123. Our telephone number is (801) 264-1001. Our
website address is www.zevex.com. The information on the website should not be
considered to be part of this report Form 10K.
OUR PROPRIETARY PRODUCTS
Therapeutic
We sell two major lines of enteral feeding pumps and a variety of related
disposable delivery sets and accessories. Enteral feeding is a method of
delivering nutrition to patients through the gastrointestinal tract. Many
enteral feeding patients require continuous administration of nutritional
solutions throughout the day, which requires the patient to carry an enteral
feeding pump.
We have successfully applied our 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. We believe 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 also carries a two-year warranty which is twice the industry
average.
First introduced in 1996, the EnteraLite(R) continues to gain acceptance in the
home health care market due to superior mobility and state-of-the-art features.
We believe 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 are also sold by us. 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 USA stationary pumps, has expanded our line of enteral delivery
products. We now manufacture and distribute these less expensive stationary
enteral feeding pumps, which are intended for applications where patients are
not mobile. Complementing these pump models are a line of disposable delivery
sets sold by us for use with the stationary pumps. These sets include feeding
solution bags of various sizes, as well as "spike" sets for use with pre-filled
feeding solution containers.
Physical Evaluation
We market 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. We generally refer to these products as
physical evaluation products. Our products test and evaluate patients, document
effects of injury, track improvements, and measure disabilities. These products
are used, for example, by chiropractors, physical therapists, osteopaths, and
occupational therapists for outcome assessment during rehabilitation,
medical-legal evaluations for personal injury and workers' compensation claims,
and clinical documentation.
The physical 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. This allows
clinicians easy entry into advanced evaluation systems, which are scalable as
their practices expand. Our software automatically collects data and prints
reports for clinical records, legal documentation and third-party reimbursement.
OUR APPLIED TECHNOLOGY CONTRACT DESIGN AND MANUFACTURING SERVICES
We provide design and manufacturing services to medical companies who sell our
components and systems under private labels or incorporate them into their
products. We provide these services for both established and emerging technology
companies, such as Alaris Medical Systems, Inc., Advanced Medical Optics, Inc.,
various divisions of Baxter Healthcare Corporation, Medtronic Corporation, SIMS
Deltec, Inc., Edwards Lifesciences and Terumo Corporation. We offer our
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
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 our resources and
expertise in the design and manufacturing areas, we believe that we offer
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.
We use extensive engineering and regulatory expertise to deliver integrated
design and manufacturing solutions to our customers. We are 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"). We also are certified by
the International Organization for Standardization ("ISO") to 9001 and EN46001
standards, which means that we have met internationally-recognized quality
standards for the design, manufacture, and testing of products. We devote
significant management time and financial resources to GMP compliance and ISO
certification.
PRINCIPAL OEM PRODUCTS
A majority of our contract manufacturing business involves the following four
general product categories:
Ophthalmic Surgical Devices
We design and manufacture 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.
Ultrasonic Sensors
We design and manufacture a variety of non-invasive ultrasonic sensors for the
detection of air bubbles and the monitoring of liquid levels in critical medical
systems. Our air bubble detectors monitor intravenous fluid lines in drug
infusion pumps, hemodialysis machines, blood collection systems, and
cardiopulmonary bypass systems. Our liquid level detectors utilize ZEVEX'
patented dry acoustic coupling technology and are used to monitor critical
liquid levels in reservoirs employed in cardiopulmonary bypass systems.
Optoelectronic Sensors and Custom Integrated Circuits
We design and manufacture a variety of optical emitters and detectors, custom
integrated circuit products, and semiconductor components used in medical
applications. Our 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 our manufacturing services
involves medical systems manufacturing. During 2002, we 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 applications in numerous surgical stapling
procedures throughout the alimentary tract. Also during 2002 we provided design
and engineering services to another company for a portable organ perfusion
system.
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
Product 2002 2001 2000
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Therapeutics 47.6% 43.5% 43.4%
Ultrasonic and Optoelectronic Sensors, Custom IC's 16.5% 24.7% 15.1%
Physical Evaluation 14.3% 12.6% 10.1%
Ophthalmic Surgical Devices 11.1% 10.6% 13.9%
Design and Engineering 7.1% 4.0% 3.6%
Medical Systems 3.4% 4.6% 13.9%
CAPABILITIES FOR DESIGN, ENGINEERING AND MANUFACTURING
Design and Engineering
We have extensive design and engineering capabilities that we use for our own
product development, as well as for servicing our contract-manufacturing
customers. Our engineers have broad experience in designing, engineering, and
testing an array of medical devices and systems, with particular expertise in
ultrasonic and optoelectronic technology, and fluid delivery systems.
Our manufacturing service customers generally rely on us 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 us with final drawings for products that they believe are
ready for manufacturing. Our engineers assist sales and marketing personnel in
evaluating requests for proposals and in developing proposed solutions, cost
estimates, and bids for each product. Our 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.
We have made significant investments in state-of-the-art equipment to support
our design and engineering staff, including product performance modeling
software, custom test stations, and three-dimensional computer aided design
("CAD") software. We have independently developed what we believe is the most
sophisticated modeling software for ultrasonic surgical device development. We
believe that our unique modeling and design capacities hasten product
development and improve the quality of the final device.
Manufacturing
Our proprietary products are generally assembled and tested at our manufacturing
facility in Salt Lake City, Utah. Our enteral feeding disposable products are
sub-contracted to specialty manufacturers. Design, engineering, and
manufacturing services for other companies are provided from the Salt Lake City
facility.
Inventory management systems are used to manage inventory and control the
ordering process for more than 5,000 parts used in ZEVEX' and our 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.
We usually provide 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. We warrant our products to be free from defects in materials and
workmanship for periods ranging from 90 days to the life of the product.
SUPPLIERS
We purchase our component parts and raw materials from a variety of approved
suppliers. We are not dependent on a single supplier for any item, and we
believe that we can acquire materials from various sources in adequate
quantities and on a timely basis.
SALES AND MARKETING
Therapeutics
We have 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 in which we sell our 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
specialists with clinical credentials (registered dietitians or nurses), who we
hire on an independent contractor basis. We employ a national sales manager to
manage and deploy our sales resources effectively in these major markets.
Customers generally purchase EnteraLite(R) ambulatory enteral feeding pumps
directly from us. In cases where a lease or rental is preferred, arrangements
are most often made through a third party that specializes in medical equipment
financing. Customers then purchase disposable sets 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
require minimum purchases of 15 disposable sets per pump per month, once the
pumps are placed in service. The cost of the pump is then amortized.
The distribution of the EnteraLite(R), stationary pumps, delivery sets, and
feeding tubes are serviced by our national sales manager, account specialists,
and customer service department, in addition to the outside sales force
described above. During 2002, a version of the stationary pump was manufactured
under private label for distribution by another company in Europe.
Physical Evaluation
We market our Physical 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. We sell our
products via seminars, directed mailings, catalogs, and telemarketing through
our customer service personnel. We also market internationally through a
distributor network.
Applied Technology Contract Design and Manufacturing Services
We generate new design and manufacturing projects using direct sales personnel
who are trained in our engineering expertise and manufacturing capabilities.
Project engineers also participate extensively in sales and marketing
activities. We promote our 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
Three major competitors exist in the U.S. market for enteral feeding pumps. Ross
Laboratories, a division of Abbott Laboratories, offers the Clearstar(R) and the
Companion(R) pumps, the first version of which was originally introduced to the
market in the late 1980's. Frost & Sullivan marketing research report estimates
that Ross holds approximately 46% market share for enteral pumps and delivery
sets in both ambulatory and non-ambulatory enteral feeding applications. 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. Frost & Sullivan marketing research report estimates that Kendall
Healthcare presently holds approximately 25% 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, the third competitor,
Novartis also competes in the U.S. market for stationary enteral nutrition
delivery pumps. Frost & Sullivan marketing research report estimates that
Novartis presently holds approximately 15% of the total market for enteral pumps
and disposable sets in both ambulatory and non-ambulatory applications.
Well-established competitors such as Ross Laboratories, Kendall Healthcare, and
Novartis typically bundle products for the greatest advantage in
group-purchasing situations. Each of these competitors offers a range of product
offerings that exceeds that of ZEVEX. We believe the keys to our ability to
compete effectively in the enteral feeding market are the unique features of our
product offerings and the benefits to customers who utilize them. We expect to
build upon our reputation for innovation that was earned by our EnteraLite(R)
ambulatory enteral feeding pump for mobile enteral patients. We expect to
develop products that are complementary to our enteral nutrition delivery
product line, particularly those having features that can significantly improve
a patient's quality of life and can ensure safety and ease of enteral
administration.
Physical Evaluation Products
Our primary competitors in the physical evaluation market are a limited number
of small privately held companies. Most notable are ARCON, Key Methods,
Isernhagen, Myologic, and Hanoun. Generally, these companies concentrate on
particular areas such as musculoskeletal testing, functional capacity
evaluation, or hand testing. We believe that few competitors can serve the broad
spectrum of the medical profession that we can with our product line, because
their products lack the full range of capabilities offered by us, and none offer
a completely modular product line as comprehensive as our own. Competitive
factors in the musculoskeletal market include perceived quality, price, name
recognition, training capabilities, support, software operating system, and
systems integration potential.
Contract Design and Manufacturing Services
Our primary competitors for design and manufacturing services include Plexus,
Inc., Medsource Technologies, Inc, Memry Corp, United Medical Manufacturing,
Inc., HEI, Benchmark, Sanmina-SCI Corp., and Sparton Electronics Corporation.
These contract manufacturers operate in the medical technology industry, and
some have substantially greater financial and marketing resources than we do.
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. We believe that our
unique expertise in ultrasound, optoelectronics, and fluid delivery systems will
allow us to compete effectively for contracts involving these technologies.
PATENTS AND TRADEMARKS
As of December 31, 2002, we held twelve U.S. patents and six international
patents on devices developed by us, with fifteen additional U.S. patents and
eight international patents pending. The loss of certain patents that are key to
our proprietary products could have a materially adverse effect on our overall
business operations. We also rely on trade secrets and confidentiality
agreements to protect the proprietary nature of our technologies.
In addition, we own and have applied for numerous trademarks in the United
States and abroad. We believe that our trademarks are well recognized in the
various markets for our products. With the exception of the EnteraLite(R)
trademarks, which is registered for our enteral feeding pump, we believe that
the loss of any trademark would not have a material adverse effect on our
overall business operations.
RESEARCH AND DEVELOPMENT FOR OUR PROPRIETARY PRODUCTS
Our research and development projects are primarily focused on new proprietary
products. As of December 31, 2002, we have two full-time engineers in research
and development, and had several other designers and engineers, including
independent contractors, contributing to research and development projects. We
invested $519,342 in 2002, $477,653 in 2001, and $852,273 in 2000 for research
and development of new products. In 2002, research and development costs
represented approximately 2% of our annual revenues, compared to 2% in 2001 and
3% in 2000.
MAJOR CUSTOMERS
Historically, large portions of our revenues were attributable to design and
manufacturing services for a small number of major customers. However, beginning
in 2000 and continuing through the 2002 fiscal year, we continued to grow our
proprietary product businesses. Because revenues of our 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 our revenues has declined when compared to
prior years. During 2002 and 2001, no customer accounted for 10% or more of our
revenues. During 2000, 10% of revenues were from Allergan, Inc. and 14% of
revenues were from Cardiac Science, Inc. In the future we expect that, if our
revenues continue to grow, 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 our operations in the future.
BACKLOG
At December 31, 2002, we had a backlog of approximately $3,217,300 on orders for
medical devices to be manufactured for other medical technology companies, as
compared to backlog at December 31, 2001 and 2000, of $4,633,005 and $5,295,326,
respectively. We estimate that approximately 90% of this backlog will be shipped
before December 31, 2003. As of March 10, 2003, we had a backlog of $3,293,659.
For purposes of the above figures, backlog includes product not yet shipped
pursuant to purchase orders that have been received by us. This does not include
any backlog for our proprietary products, because we generally hold 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, our backlog as of any particular
date may not necessarily be a reliable indicator of future revenue.
GOVERNMENTAL REGULATION
Our manufacturing facility, customers' medical devices, and our 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, our facility is
subject to periodic inspection by the FDA for compliance with the FDA's GMP
requirements. To ensure compliance with GMP requirements, we expend significant
time, resources, and effort in the areas of training, production, and quality
assurance.
For certain medical devices manufactured by us, 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. 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, we are 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.
Our operations involve the use and disposal of relatively small amounts of
hazardous materials.
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. We have received and maintained ISO 9001 and EN46001
certification, which allows us to CE Mark our own products and assist our
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 our ZEVEX, Inc. subsidiary.
According to published reports, the investigation involves 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 that ZEVEX produce documents relating to its enteral pump
customers, marketing and billing practices. We have responded to the subpoena
and are cooperating with the investigation. Presently, legal counsel has been
unable to determine the potential future financial impact to us, if any,
associated with the investigation.
EMPLOYEES
As of March 13, 2003, we employed a total of 154 people in the following areas:
48 in Manufacturing and Testing; 30 in Design and Engineering; 18 in
Administration; 12 in Customer Service and Relations; 32 in Sales and Marketing;
and 14 in Quality Assurance. We have 142 employees located at our corporate
headquarters and manufacturing facility in Salt Lake City, Utah, and 9 employees
at various locations throughout the United States.
We consider our labor relations to be good, and none of our 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 we face 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, we do not anticipate having difficulty in attracting and retaining
qualified personnel to meet our projected growth, although we believe that labor
costs will likely increase moderately.
ENVIRONMENTAL COMPLIANCE COSTS
We believe that we are in compliance with all applicable environmental
regulations. We believe that compliance with federal, state, and local
provisions regarding the production and discharge of material into the
environment and the protection of the environment will not have a materially
adverse effect on our capital expenditures, earnings and the competitive
position.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND SALES
During the 2002 fiscal year, we had total revenues of $25,495,733, of which
$3,663,730 (14%) was considered foreign source revenues. During the 2001 fiscal
year, we had total revenues of $29,882,075, of which $2,207,648 (7%) was
considered foreign source revenues. During the 2000 fiscal year, we had total
revenues of $30,778,627, of which $972,313 (3%) was considered foreign source
revenues. We believe, the upward trend in revenue from foreign sources is the
result of our efforts during the past few years to increase international sales
and distribution efforts.
During the last three fiscal years, we have 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 markets our physical evaluation product line. ZEVEX, Inc.
conducts all our other businesses.
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 2002 Form 10-K contain 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, we also provide
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 or our other
publicly-released materials, 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 and Section 21E of the Securities Exchange
Act of 1934, as amended . 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 our current views, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to update any forward-looking statements, but
investors are advised to consult any further disclosures by us in our subsequent
filings pursuant to the Securities Exchange Act of 1934 as amended. Furthermore,
in accordance with the Private Securities Litigation Reform Act of 1995, we
provide the following cautionary statements identifying factors that could cause
our 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 our business and considered in evaluating our prospects for future growth.
The occurrence of one or more of the following risks or uncertainties could have
a material adverse effect on our business, results of operations, and financial
condition.
Risk Factors Relating to Our OEM Customers
Our success in contract manufacturing depends largely on the success of our
customers and their need for our manufacturing services and on the devices
designed and manufactured by us 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 us. In addition, we sell 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 us would be more substantial than that
presented by the decline in sales to a single customer for such type of device.
Additionally, we believe that our design and manufacturing customers and their
devices (and ours 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 our 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
us. The competitors and potential competitors of our customers may
succeed in developing or marketing technologies and products that will
be preferred in the marketplace over the devices manufactured by us for
our customers or that would render our customers' technology and
products obsolete or noncompetitive.
Emerging Technology Companies. A number of our customers are emerging
medical technology companies that have competitors and potential
competitors with substantially greater capital resources, research and
development staff and facilities, and substantially greater experience
in developing new products, obtaining regulatory approvals, and
manufacturing and marketing medical products. Approximately four
customers, representing 9% of our revenues in fiscal year 2002, were,
in our 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. As a
result, these customers may experience a significant drop in product
revenues, which may hamper their ability to continue as our customer or
even pay for services and products that we have already delivered.
Customer Regulatory Compliance. The FDA regulates many of the devices
manufactured by us under the FDC Act, which requires certain clearances
from the FDA before new medical products can be marketed. There can be
no assurance that our 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 us. 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 our 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, our 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 our customers will obtain all required clearances or
approvals for exported products on a timely basis, if at all.
Medical devices manufactured by us and marketed by our 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. Our
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 our customers to comply with regulatory
requirements. There can be no assurance that we or a customer of ours
will not be required to incur significant costs to comply with laws and
regulations in the future, or that such customer or we 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 our customers will gain any significant market
acceptance, even if required regulatory approvals are obtained. Some of
our 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. Our
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 our customers are subject to the risk of product and
inventory obsolescence, whether from prolonged development, government
approval cycles or the development of improved products or processes by
competitors. In addition, the marketplace could conclude that the task
for which a customer's medical product was designed is no longer an
element of a generally accepted diagnostic or treatment regimen.
Customers' Future Capital Requirements. Some of our 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 may prevent such commercial introduction altogether.
Uncertainty of Third-Party Reimbursement. Sales of many of the medical
devices that are manufactured by us 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 our
customers to achieve market acceptance of their products. Without
adequate support from third-party payers, the market for the products
of our customers may be limited.
Uncertainty of Market Acceptance of Out-Sourcing Manufacturing of
Medical Devices
We believe 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 our potential customers
have internal design and manufacturing facilities. Our engineering and
manufacturing activities require that customers provide us 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, we could suffer a substantial reduction
in the size of one or more of our current target markets, which could have a
material adverse effect on our business, results of operations, and financial
condition.
Competition in Out-Sourcing Manufacturing
We face competition from design firms and other manufacturers that operate in
the medical device industry. Many competitors have substantially greater
financial and other resources than we do. Also, manufacturers focusing in other
industries may decide to enter into the industries served by us. Competition
from any of the foregoing sources could place pressure on us to accept lower
margins on our contracts or lose existing or potential business. To remain
competitive, we 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 and the value that we provide. There can be no assurance that we
will be able to compete favorably with respect to these factors.
Dependence on Major Customers
No assurances can be given that our customers will continue to do business with
us or that the volume of their orders for our contract manufactured devices and
proprietary products will increase or remain constant. The loss of several
customers, or a significant reduction in the volume of their orders to us, could
have a material adverse impact on our operations. In addition, if one or more of
these customers were to seek and obtain price discounts from us for our contract
manufactured devices or proprietary products, the resulting lower gross margins
on those devices and products could have a materially adverse effect on our
overall results of operations. If any customer with which we do a substantial
amount of business were to encounter financial distress, the customer's
lateness, unwillingness, or inability to pay its obligations to us could result
in a materially adverse effect on our results of operations and financial
condition.
Early Termination of Agreements
Our agreements with major manufacturing customers generally permit the
termination of the agreements before their expiration 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 us (so-called force majeure events), cause the
failure or delay of performance.
Our 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
us, 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 Our Proprietary Products
In producing and marketing our own proprietary devices, we face many of the same
risks that our contract manufacturing customers face. As discussed above with
respect to our customers, such risks include:
The medical products industry is highly competitive. A significant number of our
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 our products or rendering our 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,
we will be required to make ongoing investment in research and development with
respect to our existing and future products.
We are 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 we 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 us.
Changes in existing laws and regulations or policies could adversely affect our
ability to comply with regulatory requirements.
There can be no assurance that our 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 us 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 our products.
Regulatory Compliance for Manufacturing Facilities
We expend 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 we will not be
required to incur substantial costs to maintain our compliance with existing or
future manufacturing regulations, standards, or other requirements. Our 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 us may be halted or otherwise restricted.
Product Development
The success of ZEVEX will depend to a significant extent upon our ability to
enhance and expand our current offering of proprietary products and to develop
and introduce additional innovative products that gain market acceptance. While
we maintain research and development programs and have established various
Technical Advisory Boards to assist us, there is no assurance that we will be
successful in selecting, developing, manufacturing, and marketing new products
or enhancing our existing products on a timely or cost-effective basis.
Moreover, we may encounter technical problems in connection with our efforts to
develop or introduce new products or product enhancements. Some of the devices
currently being developed by us (as well as devices of some of our 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 we have substantial experience in designing and manufacturing devices, we
may still experience technical difficulties and delays with the design and
manufacturing of our or our customers' products. Such difficulties could cause
significant delays in our production of products. In some instances, payment by
a manufacturing customer is dependent on our 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 us 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
We currently have a limited domestic direct sales force consisting of fourteen
full-time employees, complemented by a network of independent manufacturing
representatives and clinical support personnel. We anticipate that we will need
to increase our marketing and sales capability significantly to more fully
penetrate our target markets, particularly as additional proprietary devices
become commercially available. There can be no assurance that we will be able to
compete effectively in attracting and retaining qualified sales personnel or
independent manufacturer's representatives as needed or that such persons will
be successful in marketing or selling our services and products.
Product Recalls
If a device that is designed or manufactured by us 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 our expense.
Furthermore, the adverse effect of a product recall on us 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 us.
Recalls, especially if accompanied by unfavorable publicity or termination of
customer contracts, could result in substantial costs, loss of revenues, and a
diminution of our reputation.
Risk of Product Liability
The manufacture and sale of products, especially medical products, entails an
inherent risk of product liability. We 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 we 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, we generally provide a design defect warranty and in some
instances indemnification to customers for failure to conform to design
specifications and against defects in materials and workmanship, which could
subject us to a claim under such warranties or indemnification.
Dependence Upon Management
ZEVEX is substantially dependent upon our key managerial, technical and
engineering personnel, particularly our three executive officers, David McNally,
President and Chief Executive Officer, Leonard Smith, Sr. Vice President, and
Phillip McStotts, Chief Financial Officer and Secretary/Treasurer. 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 we will
attract and retain such personnel. The loss of our key personnel could have a
material adverse effect on our business, results of operations, and financial
condition. None of our key personnel have employment agreements with ZEVEX.
We carry key-man life insurance on the lives of our 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 either key employee.
Patent Protection
As of December 31, 2002, we hold twelve U.S. patents and six international
patents on devices developed by us, with fifteen additional U.S. patents and
eight international patents pending. Such patents disclose certain aspects of
our technologies and there can be no assurance that others will not design
around the patent and develop similar technology. We believe that our 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 13, 2003, 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, beneficially own or have voting control over approximately
24% 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
We rely on third-party suppliers for many of the component parts used in
manufacturing our own products and those of our customers. Although component
parts are generally available from multiple suppliers, certain component parts
may require long lead times, and we 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, we
could experience additional delays in obtaining component parts if the supplier
has not met our vendor qualifications. Component shortages for a particular
device may adversely affect our ability either to meet the production plans for
our own devices or to satisfy customer orders for that device. Such shortages
and extensions of production schedules may delay the recognition of revenue by
us and may in some cases constitute a breach of a customer contract. If
shortages of component parts continue or if additional shortages should occur,
we 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, our customers sometimes require us to enter into
noncompetition agreements that prevent us from manufacturing instruments or
components for our customers' competitors in certain fields of use. 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 we enter into a noncompetition agreement, we may be adversely
affected if our customer's product is not successful and we must forgo an
opportunity to manufacture a successful product for such customer's competitor.
Any conflicts among our customers could prevent or deter us from obtaining
contracts to manufacture successful products.
Future Capital Requirements
We believe that our existing capital resources and amounts available under our
existing bank line of credit, will satisfy our anticipated capital needs for the
next year (depending primarily on our growth rate and our results of
operations). The commercialization of proprietary products, which is an element
of our growth strategy, would require increased investment in working capital
and could therefore shorten this period. Thereafter, we may be required to raise
additional capital or increase our 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 us. Any additional
equity financing would result in additional dilution to ZEVEX' shareholders.
Reliance on Efficiency of Distribution and Third Parties
We believe our financial performance is dependent in part on our ability to
provide prompt, accurate, and complete services to our customers on a timely and
competitive basis. Accordingly, delays in distribution in our day-to-day
operations or material increases in the costs of procuring and delivering
products could have an adverse effect on our results of operations. Any failure
of either our computer operating system or our telephone system could adversely
affect our 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 us to receive necessary components or other materials or to ship our
products also could impair our ability to deliver products on a timely and
cost-effective basis.
Volatility of Revenues and Product Mix
Our 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 our gross margin.
Under the terms of our contracts with many of our contract manufacturing
customers, the customers have broad discretion to control the volume and timing
of product deliveries. Further, the contracts with our customers typically have
no minimum purchase requirements. As a result, production may be reduced or
discontinued at any time. Therefore, it is difficult for us 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 our 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 our business
organization and our related cost structure anticipate supporting a certain
minimum level of revenues, our limited ability to adjust the 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 our proprietary information, we rely on a
combination of trade secret laws and internal security procedures. We typically
require our 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 we rely to protect
our intellectual property and confidential and proprietary information will
provide us 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 we
consider proprietary. In addition, proprietary information regarding us could be
disclosed in a manner against which we have no meaningful remedy. Disputes
regarding our intellectual property could force us 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 us from
manufacturing and selling certain of our 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 us or
our competitors, developments concerning our proprietary rights, or the public
concern as to the safety of our devices may have a material adverse impact on
our business and on the market price of our Common Stock, particularly as we
expand our 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 us and our competitors, quarterly fluctuations in
our 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 by us 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 our 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 our 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 our 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 ZEVEX 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, our 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
Our 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, or other restrictive
government actions such as capital regulations. We are also exposed to foreign
currency exchange rate risk inherent in our foreign sales commitments and
anticipated foreign sales because the prices charged for our products are
denominated in U.S. dollars. Consequently, our 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
Our executive offices, administrative offices, and manufacturing facility are
located in our 51,000 square foot, mixed-use building in Salt Lake City, Utah.
This building was constructed in 1997 to our 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. We currently utilize approximately 70% of the
building's available space and believe that the building will be adequate to
serve our needs through the end of the year 2003. We own approximately 3.47
vacant acres adjacent to our facility.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following disclosure in this Item 4 should have been reported as part of the
Company's Form 10-Q for the quarter ended September 30, 2002. We held our Annual
Meeting of the Shareholders on July 30, 2002. During the meeting, Phillip L.
McStotts, David B. Kaysen and Dan M. Robertson were elected to serve for a
three-year term expiring at the 2005 Annual Meeting. The following table
summarizes the tabulation for each director nominee.
Director nominee Votes cast For Votes Against Votes Abstained
- ---------------- -------------- ------------- ---------------
Phillip L. McStotts 2,767,603 49,600 0
David B. Kaysen 2,787,053 35,150 0
Dan M. Robertson 2,788,453 33,750 0
Directors whose term of office continued after the meeting were Leonard C. Smith
and Kathryn Hyer, whose term expires at the 2004 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, 2002. On that matter, 2,843,830 shares voted for the
proposal, 2,194 shares were voted against the proposal and 1,700 shares
abstained from voting. No other matters were voted upon at the meeting. Ms. Hyer
subsequently resigned in November 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ZEVEX' Common Stock is traded on the National Market system of The NASDAQ Stock
Market, under the symbol ZVXI. As of March 13, 2003, there were 157 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' 2002 Annual Meeting, we estimate there are roughly
1,600 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. We have a negative covenant in our 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, 2001.
------------------------------------- -------------------------------------
2002 2001
High Low High Low
------------------ ------------------ ------------------- ------------------
1st Quarter 3.93 2.61 $6.00 $3.81
2nd Quarter 3.45 2.65 $5.40 $3.55
3 rd Quarter 3.00 2.00 $4.15 $1.74
4th Quarter 2.25 1.75 $3.00 $1.80
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA - FIVE-YEAR REVIEW
The following selected statement of operations data for the years ended December
31, 2002, 2001 and 2000, and the balance sheet data as of December 31, 2002 and
2001 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, 1999 and 1998 and the balance sheet data as of December
31, 2000, 1999, and 1998 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 in Item 7 of this report.
Fiscal Year Ended December 31
Statement of Operations Data 2002 2001 2000 1999 1998
Revenues $25,495,733 $29,882,075 $30,778,627 $23,026,208 $11,084,413
Gross profit 9,973,492 11,018,928 10,848,772 10,551,998 4,237,970
Selling, general and administrative expenses 8,747,967 9,522,443 8,405,833 6,988,044 3,879,408
Research and development expenses 519,342 477,653 852,273 670,886 290,669
Operating income 706,183 1,018,832 1,590,666 2,893,068 67,893
Impairment loss on marketable securities -- (917,628) -- -- --
Other (income)/expenses 486,664 688,414 196,828 78,706 (407,469)
Provision (benefit) for taxes 5,216 (99,507) 669,698 1,187,989 113,169
Net income (loss) 214,303 (487,703) 724,140 1,626,373 362,193
Net income (loss) per share basic .06 (.14) .21 .48 .11
Weighted average shares outstanding 3,414,846 3,431,639 3,425,288 3,413,023 3,298,150
Net income (loss) per share diluted .06 (.14) .19 .47 .10
Weighted average shares outstanding,
assuming dilution 3,418,278 3,431,639 3,748,032 3,431,566 3,636,434
2002 2001 2000 1999 1998
Balance Sheet Data
Total assets 28,798,236 $33,639,146 $38,687,962 $34,049,689 $33,760,979
Total current liabilities 5,679,446 5,918,660 9,967,768 5,782,319 7,395,946
Long-term debt (less current portion) 1,662,536 6,411,351 7,511,022 7,170,000 6,150,000
Stockholders' equity 21,198,061 21,032,401 21,057,505 21,090,722 20,114,535
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 2002 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 not be indicative of our future financial
condition or results of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Through our divisions and subsidiaries, we engage in the business of designing,
manufacturing and distributing medical devices. Our Therapeutics division
markets award-winning enteral nutrition delivery devices. Our Physical
Evaluation division markets industry-leading physical evaluation testing
systems. Our Applied Technology division designs and manufactures advanced
medical components and systems for original equipment manufacturers ("OEM's").
See discussion of our segments in Note 13 to the Consolidated Financial
Statements.
Results of Operations
As an aid to understanding our 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
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- --------------
Revenue 100% 100% 100% 100% 100%
Gross profit 39% 37% 35% 46% 38%
Selling, general and administrative
expenses 34% 32% 27% 30% 34%
Research and development expenses 2% 2% 3% 3% 3%
Operating income 3% 3% 5% 13% 1%
Impairment loss on securities --% (3)% --% --% --%
Other income/(expense) (2)% (2)% --% (1)% 3%
Income (loss) before taxes 1% (2)% 5% 12% 4%
Provisions for taxes --% --% 2% 5% 1%
Net income (loss) 1% (2)% 3% 7% 3%
Fiscal Year 2002 Compared to Fiscal Year 2001
Revenue was $25,495,733 for the year ended December 31, 2002, compared to
$29,882,075 for the prior year, a 15% decrease. We believe the decrease in
revenue is largely due to (1) the delay and decrease of several orders for
contract-manufactured products, including those related to a customer which has
reorganized its corporate structure through a spin-out from its parent, a
customer which has been reducing inventory levels and safety stock, and a
customer which has delayed orders due to an issue not involving us, (2) an
overall decline in orders for stationary enteral nutrition delivery pump
disposable sets, (3) our difficulty in maintaining a steady flow of contract
manufacturing products upon completion of certain projects, and (4) weaker
demand for Physical Evaluation products, as clinicians were hesitant to make
capital equipment purchases during a period of economic uncertainty.
We did experience, however, a number of developments that positively impacted
revenue in 2002. During the second half of 2002 scheduled shipments of surgical
handpieces and ultrasonic sensors increased compared to the first six months of
2002. Through the last three quarters of 2002, we continued our engineering on a
time-and-materials development program for a mobile organ perfusion system.
Further, during the fourth quarter of 2002 we have experienced an increase in
orders for private label enteral feeding pumps from a European customer. During
2002, revenue of the stationary enteral nutrition delivery pump disposable sets
stabilized, achieving sales of approximately $1 million in each quarter. Revenue
of our Physical Evaluation products were greatest during the fourth quarter of
2002, when we achieved sales of $1 million.
Looking forward, there are some developments that we believe will contribute to
revenue in 2003. We are in the process of completing the development of new
surgical handpieces, which we expect will be followed by production orders. We
are also developing several new ultrasonic and optoelectronic sensor products
applications for certain customers.
The percentage of revenue generated from the marketing of our proprietary
products increased when compared to revenues from contract manufacturing. In
2002, 62% of our revenue was derived from proprietary products marketed by us,
in comparison to 56% in 2001. Sales of our Therapeutics products accounted for
approximately 48% of total revenue for the year ended December 31, 2002,
compared to 43% for the year ended December 31, 2001. Sales from our Physical
Evaluation product line accounted for approximately 14% of total revenue for the
year ended December 31, 2002, compared to 13% for the year ended December 31,
2001. Thirty-eight percent of our revenue during 2002 was derived from products
manufactured for and sold to our contract manufacturing customers, compared to
44% in 2001. This shift in revenue sources from our contract manufacturing
customers to proprietary products over the last three years has the benefit of
decreasing the percentage of our revenues generated by a small number of major
customers. During 2002 and 2001, no single customer accounted for over 10% of
our revenue.
Our gross profit as a percentage of sales was 39% in 2002, compared to 37% in
2001. We attribute the increase in gross profit percentage from 2001 to 2002 to
improvements in manufacturing and distribution efficiencies and the particular
product mix delivered during the year.
Selling, general, and administrative expenses decreased during 2002 to
$8,747,967, 34% of sales, as compared to $9,522,443, 32% of sales in 2001.
Although we have decreased certain general and administrative costs, we are
continuing our investment in building our domestic sales forces for the Physical
Evaluation and Therapeutics divisions, and in growing international revenue of
all product lines. The decrease in general and administrative expenses from 2001
was partially due to additional legal and professional costs incurred due to a
record number of patent applications, our response to the Office of the
Inspector General's nationwide investigation into billing practices in the
enteral device market, and the elimination of goodwill amortization as of
January 1, 2002 with the adoption of SFAS No. 142. See Note 1 of the Financial
Statements for more information on the effect of this accounting change. We
believe that selling, general, and administrative expenses will decrease to
approximately 30% of gross revenue in 2003.
We combine the resources of our full-time engineers and several other
independent contractors, to perform research and development projects. We
invested $519,342 in 2002, $477,653 in 2001, and $852,273 in 2000 for research
and development of new products. In 2002, research and development costs
represented approximately 2% of our annual revenue, compared to 2% in 2001 and
3% in 2000. We are continuing our efforts to develop and introduce new
proprietary products and are currently planning new product introductions during
the next fiscal year. Additionally, we are investing in developing proprietary
component technologies for our contract manufacturing services. We expect
research and development costs to be approximately 3% of revenue during 2003.
Depreciation and amortization expenses decreased to $1,618,682 in 2002 from
$2,086,379 in 2001. The decrease is due to the elimination of goodwill
amortization as of January 1, 2002 with the adoption of SFAS No. 142. See Note 1
of the Financial Statements for more information on the effect of this
accounting change.
Goodwill held by us 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. The current value of goodwill included in the
financial statements is $10,089,035, and represents approximately 35% of total
assets. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. See Note 1 of the Financial
Statements for more information on the effect of adopting these pronouncements.
We had income tax expense of $5,216 in 2002 compared to an income tax benefit of
$99,507 for 2001. The increase from 2001 to 2002 is primarily due to increased
income before taxes as described above. For 2002, our effective tax rate
differed from the statutory rate largely as a result of a reduction in our
valuation allowance (see below), research and development tax credits, and
charitable contribution deductions. For 2001 our effective tax rate differed
from the statutory rate largely as a result of nondeductible goodwill
amortization.
At December 31, 2002, we had net current deferred tax assets of approximately
$349,000. Realization of these deferred tax assets is dependent on our ability
to generate approximately $936,000 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 our sale of the Aborn corporate
shell in 2001, generated a capital loss carryover of approximately $5,000,000.
In 2001, a valuation allowance of $1,865,000 was established. In 2002, $50,000
of the carryover was utilized and the valuation allowance was reduced. Because
we have not determined that it is more likely than not that the remaining
carryover will be realized prior to its expiration, a valuation allowance has
been established for the remaining amount. During 2002, we made a charitable
contribution of certain patent rights to an institution of higher education with
a fair market value of $5,048,000. During 2002 a tax benefit of $11,944, as
determined based upon applicable federal rates, was recognized for the
charitable contribution. For income tax purposes, charitable contributions are
only recognizable if a company has taxable income. A valuation allowance of
approximately $1,704,000 has been provided for the contribution carryover of
$5,012,000 generated from the patent donation because we do not consider it to
be more likely than not that this carryover will be utilized. We evaluate the
realizability of the deferred tax assets and assess the need for valuation
allowances annually.
Operating income decreased to $706,183, 3% of revenue in 2002 compared to
$1,018,832, 3% of revenue in 2001. We had net income of $214,303, 1% of gross
revenue in 2002, compared to a net loss of $487,703, (2)% of revenue in 2001.
The increase in net income during 2002, as compared to 2001, is due to a number
of factors, including, (1) the one-time impairment loss on marketable securities
in the amount of $917,628 in the third quarter 2001, (2) higher gross profit
achieved in 2002, (3) a reduction in interest expense from $1,059,593 to
$543,340, due to decreased debt and lower interest rates, (4) nonamortization of
goodwill under SFAS No. 142, which was adopted as of January 1, 2002, and (5)
the tax benefit derived from a capital loss, which, for the State of Utah, was
treated as a net operating loss carryback for income tax purposes and resulted
in a refund recognized in 2002. However, the impact of these changes was reduced
by lower revenue during of 2002.
Our annual and quarterly operating results are affected by acceptance in the
markets for our 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 our gross margin.
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenue was $29,882,075 for the year ended December 31, 2001, compared to
$30,778,627 for the prior year, a 3% decrease. We attribute the decline to the
poor overall economic conditions in 2001, a slowdown on placement of orders from
manufacturing customers, and a decline in the sales of stationary enteral
delivery sets.
In line with our strategy over the past few years, the percentage of revenues
from the marketing of our proprietary products increased when compared to
revenue from contract manufacturing. In 2001, 56% of our revenue was derived
from proprietary products sold by us, in comparison to 53% in 2000. Revenue of
our Therapeutics products accounted for approximately 43% of total revenue for
the years ended December 31, 2001 and 2000. Revenue from our Physical Evaluation
product line accounted for approximately 13% of total revenue for the year ended
December 31, 2001, compared to 10% for the year ended December 31, 2000.
Forty-four percent of our revenues during 2001 were derived from products
manufactured for and sold to contract manufacturing customers, compared to 47%
in 2000. During 2001, no single customer accounted for over 10% of our revenue,
as compared to 2000, where two customers accounted for over 24% of our revenues.
Our 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 our manufacturing resource planning
system, but this 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 revenue, as compared to $8,405,833, 27% of gross revenue in 2000. General
and administrative expenses increased as we 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 our manufacturing resource planning software. Legal and
professional costs increased $200,000 over the prior year, due to a record
number of patent applications and our response to the Office of the Inspector
General's nationwide investigation into billing practices in the enteral device
market. We also experienced an increase in expenses related to employees, such
as insurance, taxes, and pension benefits.
During 2001, we utilized a combination of our full-time engineers and
independent contractors to perform research and development projects. During the
first quarter of 2001, we restructured our engineering group to primarily focus
on manufacturing, and utilizing more independent contractors for research and
development projects. We 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 our annual revenues,
compared to 2000, when research and development costs represented approximately
3% of our annual revenues.
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 our self-manufactured 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 our
manufacturing resource planning (MRP) software.
Goodwill held by us 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. Prior to 2002, goodwill was amortized over periods ranging from 15
to 23 years. The value of goodwill included in the financial statements at
December 31, 2001 was $10,154,757, and represented 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", We recorded an
"other-than-temporary" impairment loss on our available-for-sale securities of
$917,628. We subsequently sold all of those securities during the first quarter
of 2002.
We 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. Our effective tax rate differs from the statutory
rate largely as a result of nondeductible goodwill amortization.
At December 31, 2001, we had net current deferred tax assets of approximately
$568,000. Realization of these deferred tax assets is dependent on our ability
to generate approximately $1,523,000 in taxable income in the year the assets
are realized
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, we had a net loss of
$487,703, (2%) of revenue in 2001, compared to net income of $724,140, 3% of
revenue in 2000. The changes during 2001 as compared to 2000 are principally due
to the items addressed above.
Liquidity and Capital Resources
Our primary sources of liquidity have consisted of cash flow from operations,
borrowings under our revolving line of credit, and the other financial
arrangements described below. In some prior years, we also increased working
capital through the issuance of stock and may do so in the future.
Cash flow provided from operating activities for 2002 was $4,074,874 compared to
cash flow provided in 2001 of $4,626,574. In 2002, cash flow provided by
operating activities was primarily associated with the reduction of accounts
receivable due to better collection procedures and reduction in inventories as
we continued to stream-line our purchasing and manufacturing processes. Cash
flow used in investing activities during 2002 was $225,648 and relates primarily
to the purchase of equipment used for manufacturing, offset by the sale of
marketable securities.
Cash flow provided from operating activities for 2001 was $4,626,574. 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 we recognized the benefit of our 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.
Our working capital at December 31, 2002 was $6,102,500, compared to $9,493,376
at December 31, 2001. Our decrease in working capital of $3,390,876 in 2002 was
primarily due to the reduction of accounts receivable and inventories and
payment of current debt outstanding at December 31, 2001. The portion of working
capital represented by cash and short-term investments at such dates was $0, and
$1,247,985 respectively. The ratio of current assets to current liabilities
decreased to 2.07 to 1 at December 31, 2002 from 2.60 to 1 at December 31, 2001.
On December 31, 1998, we 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. We 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, we 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. We completed the cash payment and issued the debentures in 2000.
On December 31, 2001, we 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
unchanged. We paid $793,970 in cash to the debenture holders on January 6, 2003.
All or part of the outstanding principal of the remaining 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, we 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. We 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, we
committed to pay $147,188 in cash and convertible debentures in the aggregate
amount of $147,188 due March 31, 2002, 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. We completed
the cash payment and issued the debentures in 2000. On December 31, 2001 we 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 unchanged. We made principal
payment during 2002 of $2,179,188 in full payment of the debentures.
We have a $6,000,000 open line of credit arrangement with a financial
institution. The line matures on May 31, 2003. The line of credit is
collateralized by accounts receivable and inventories, and bears interest at
the financial institution's prime rate. We owed $0 on the line of credit at
December 31, 2002 and $1,713,610 at December 31, 2001.
On March 15, 2001, we entered into a Secured Financing Agreement with a bank for
the amount of $1,500,000. The agreement is secured by our enteral feeding pumps,
which were purchased from Nestle and are now manufactured by us. The proceeds
from the agreement were used to reduce our 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%. We owed $670,145 on the agreement at December 31, 2002.
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 our manufacturing facility and
bears a fixed interest rate of 8.5%. On September 23, 2002 the Company
renegotiated the note, which currently bears interest at the prime rate (4.25%
at December 31, 2002). 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, 2002 was $931,081. It is anticipated that, upon maturity we will be
able to refinance the Term Loan Agreement under terms similar to the existing
terms.
In 1997, we completed construction of our new 51,000 square foot headquarters
and manufacturing facility. The cost of this undertaking was approximately
$2,591,177. In 1996, we negotiated a $2.0 million Industrial Development Bond
("IDB") to finance this construction. As of December 31, 2002, the remaining
principal balance on the IDB was $1,500,000. During 2002, the interest paid
monthly ranged from 1.45% to 2.03% (APR).
The following is a summary of the our long-term liabilities:
Payment due by period
More More More More More
Contractual Less than than than than than than
Obligation Total 1 -year 1- year 2- year 3- year 4- year 5- year
- ------------------- ------------- ------------- ----------- ----------- ----------- ----------- -------------
- ------------------- ------------- ------------- ----------- ----------- ----------- ----------- -------------
Line of Credit $ - $ - $ - $ - $ - $ - $ -
Industrial
Development
Bond 1,500,000 100,000 100,000 100,000 100,000 100,000 1,000,000
Convertible
Debt 1,738,970 1,738,970 - - - - -
Other
Long-term 1,601,226 1,461,640 139,586 - - - -
Capital Leases 300,751 177,801 122,950 - - - -
------------- ------------- ----------- ----------- ----------- ----------- -------------
------------- ------------- ----------- ----------- ----------- ----------- -------------
Total $5,140,947 $3,478,411 $362,536 $100,000 $100,000 $100,000 $1,000,000
============= ============= =========== =========== =========== =========== =============
Purchases of leasehold improvements to our facilities, self-manufactured enteral
feeding pumps, new engineering, production, testing equipment, and tooling
totaled $399,565 in 2002, as compared to $1,233,843 in 2001, and $1,887,480 in
2000. The amount invested during 2001 was primarily attributed to
self-manufactured enteral feeding pumps. The amount invested during 2000 was
primarily attributed to our purchase of a new MRP software system and
self-manufactured enteral feeding pumps.
Our expected principal liquidity requirements are working capital, investments
in capital expenditures, and convertible debt reduction. We believe our sources
of liquidity are sufficient for operations during the coming twelve months with
our projected cash flows from operations and, if necessary, the availability of
funds under our revolving line of credit.
Off-Balance Sheet Items
We have no off-balance sheet items.
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 our 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
documents relating to our enteral pump customers, marketing and billing
practices. We have responded to the subpoena and are cooperating with the
investigation. At this time we are uncertain as to any future impact this
investigation will have on our operations or financial position.
Inflation and Changing Prices
We have not been, and in the near term are not expected to be, materially
affected by inflation or changing prices.
Critical Accounting Policies and Estimates
In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and 33-8056, "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of the consolidated financial statements. The preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect our reported amounts of assets and liabilities, revenues
and expenses, and related disclosures. Our significant accounting policies are
included in Note 1 to the Consolidated Financial Statements.
We evaluate our estimates and judgments on an on-going basis. We base our
estimates on historical experience and on assumptions that we believe to be
reasonable under the circumstances. Our experience and assumptions form the
basis for our judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may vary from what
we anticipate and different assumptions or estimates about the future could
change our reported results. We believe the following accounting policies are
the most critical to us, in that they are important to the portrayal of our
financial statements and they require our most difficult, subjective, or complex
judgments in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts
As a general policy, collateral is not required for accounts receivable;
however, we periodically monitor the need for an allowance for doubtful accounts
based upon expected collections of accounts receivable and specific
identification of uncollectible accounts. Additionally, customers' financial
condition and credit worthiness are regularly evaluated. Historically losses on
collections have not been material. As of December 31, 2002, we have recorded an
allowance for bad debts of $200,000, approximately 4% of accounts receivable.
Product and Inventory Obsolescence
Rapid change and technological innovation characterize the marketplace for
medical products. As a result, we and our customers are subject to the risk of
product and inventory obsolescence, whether from prolonged development 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, 2002, we have recorded an obsolescence reserve in the
amount of $254,000, which is approximately 3.8% of inventories.
Sales Returns and Warranty
We record a provision for estimated sales returns and allowances and warranty
reserve on products we have sold. These estimates are based on historical sales
returns and warranty expenses and other known factors. If the historical data we
use to calculate these estimates does not properly reflect future returns and
warranty expenses, revenue could be overstated and expenses could be
understated. We have recorded a sales return and warranty expense allowance in
the amount of $85,000 as of December 31, 2002.
Revenue Recognition
The Company recognizes revenue from products sold directly to end customers when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, shipment is made and collectibility is reasonably assured.
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 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 revenue recognition, applies to all entities that earn revenue from
licensing, selling or otherwise marketing software. Our Physical Evaluation
product line derives a portion of its revenue from software products that
include post-contract customer support. We have recorded deferred revenue in the
amount of $25,000 for such post-contract customer support as of December 31,
2002.
Impairment
We have made acquisitions in the past that included a significant amount of
fixed assets, goodwill, and other intangible assets. The cost of the acquired
companies was allocated first to identifiable assets based, on estimated fair
values. Intangible assets consist of goodwill, contracts, patents, and licenses.
Effective in 2002, as discussed in New Accounting Pronouncements, goodwill is no
longer amortized but is subject to an annual (or, under certain circumstances,
more frequent) impairment test, based on its estimated fair value. Other
intangible assets will generally continue to be amortized over their useful
lives and also will be subject to an impairment test based on estimated fair
value. Estimated fair value is typically less than values based on undiscounted
operating earnings because fair value estimates include a discount factor in
valuing future cash flows. There are many assumptions and estimates underlying
the determination of an impairment loss. Another estimate using different, but
still reasonable, assumptions could produce a significantly different result.
Therefore, impairment losses could be recorded in the future.
Currently, we assess the impairment of fixed assets and identifiable intangibles
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important that could trigger an
impairment review include the following:
o A significant underperformance relative to expected historical or
projected future operating results;
o A significant change in the manner of how we use the acquired asset
or the strategy for our overall business;
o A significant negative industry or economic trend.
When we determine that one or more of the above indicators of impairment exist,
we evaluate the carrying amounts of the affected assets. The evaluation, which
involves significant management judgment, is based on various analyses including
cash flow and profitability projections. To the extent such projections indicate
that future undiscounted cash flows are not sufficient to recover the carrying
amounts of the related long-lived assets, the carrying amount of the underlying
assets will be reduced, with the reduction charged to expense, so that the
carrying amount is equal to fair value, primarily determined based on future
discounted cash flows, using a discount rate determined by management to be
commensurate with the risk inherent in our current business model.
Net intangible assets and goodwill amounted to approximately $10.5 million as of
December 31, 2002. Net fixed assets amounted to approximately $6.5 million as of
December 31, 2002. The effect of eliminating amortization for goodwill will be a
reduction of expenses of approximately $530,000 annually. For further
information, see the discussion under New Accounting Pronouncements below.
Income Taxes
Income taxes are recorded 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. A valuation allowance is recorded to reduce
our deferred tax asset to an amount that is more likely than not to be realized,
as determined based on our analyses of projected taxable income, including tax
strategies available to generate future taxable income. Our analyses of future
taxable income are subject to a wide range of variables, many of which involve
our estimates, and therefore our deferred tax asset may not be ultimately
realized.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) 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. 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. 144 (see below). We
adopted SFAS No. 142 effective January 1, 2002. SFAS No. 142 provided a
six-month period from the effective date of adoption for the Company to complete
Step 1 (determining and comparing the fair value of our reporting units to their
carrying values) of the transitional impairment test. Step 2 is required to be
completed if Step 1 indicates that the carrying value of the reportable units
exceeds their fair value and involves the calculation of the implied fair value
of goodwill and must be completed by December 31, 2002. We completed Step 1 of
the impairment assessment. Based upon our valuation procedures, we have
determined that the fair value of the reporting units exceeds the carrying value
including goodwill. As such we are not required to complete Step 2 of the
impairment assessment and no impairment loss has been recognized in 2002.
In August 2001, the FASB issued 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. We
adopted SFAS No. 144, effective January 1, 2002. As expected, the adoption of
SFAS No. 144 did not have a material impact on our consolidated financial
position, consolidated results of operations, or liquidity.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement provides guidance on the classification of gains and losses from the
extinguishment of debt and on the accounting for certain specified lease
transactions. Generally, provisions of this statement are applicable for
transactions initiated after May 15, 2002. The adoption of this statement did
not have a material impact on our consolidated financial position, consolidated
results of operations, or liquidity.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for us on January 1, 2003. It is not anticipated that the
adoption of this statement will have a material impact on our consolidated
financial position, consolidated results of operations, or liquidity.
In November of 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables". This issue addresses certain aspects
of accounting for arrangements whereby a vendor performs multiple
revenue-generating activities. This issue addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how the related revenue should be measured and allocated to the
separate units of accounting. This issue is effective for revenue arrangements
entered into for fiscal periods beginning after June 15, 2003. We plan to adopt
EITF 00-21 in the third quarter which begins on July 1, 2003. We believe that
the effect of EITF 00-21 on our results of operations, financial position or
liquidity will not be material as we currently have few multiple deliverable
revenue arrangements.
In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation and Disclosure". SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock based employee compensation and the effect of the method
used on reported results. The provisions of SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The disclosure provisions of SFAS No.
148 have been adopted by us. SFAS No. 148 did not require us to change to the
fair value based method of accounting for stock-based compensation. We have
elected to continue to follow the intrinsic value method of accounting as
prescribed by APB No. 25, to account for employee stock options. No stock-based
employee compensation cost is reflected in net income, as all options granted
had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
Quarterly Financial Data
The following table sets forth a summary of our quarterly income statement data
for the fiscal years ended 2002 and 2001.
Summary of Quarterly Data
12/02 9/02 6/02 3/02 12/01 9/01 6/01 3/01
Revenue $7,070,368 $6,525,270 $5,804,441 $6,095,654 $8,019,727 $6,899,297 $7,570,632 $7,392,419
Gross profit 2,858,615 2,414,038 2,261,186 2,439,653 3,047,476 2,340,704 2,741,051 2,889,697
Impairment loss -- -- -- -- -- (917,628) -- --
Net income
(loss) 30,887 56,256 4,784 122,376 244,912 (809,629) (10,448) 87,462
EPS basic .01 .02 .00 .04 .07 (.24) .00 .03
EPS diluted .01 .02 .00 .04 .07 (.24) .00 .03
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the form of fluctuations in interest rates and
their potential impact upon our line of credit, currently with a balance of $0,
a term loan agreement with a balance of $931,081, and our industrial development
bond of $1,500,000. 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 and term loan agreement is the prime bank lending
rate, and the variable rate on the industrial development bond is based on a
weekly tax-exempt floater rate. The line of credit matures annually in May. The
maturity date of the term loan agreement is May 15, 2003, with principal and
interest amortized over a 15-year term.
We are also exposed to market risk in the form of fluctuations in interest rates
and their potential impact on our fixed rate debt, which includes our secured
financing agreement, with a balance of $670,145 as of December 31, 2002, which
is due on February 15, 2004 and bears interest at a rate of 8.24%. We are also
exposed to this risk on our convertible debenture with a balance of $1,738,970
as of December 31, 2002. An additional principal payment of $788,970 was made on
January 6, 2003 with thr remaining balance due March 30, 2003, and bears
interest at a rate of 7%.
Additionally, we held marketable equity securities with a fair value of $219,899
at December 31, 2001,consisting of stocks of public companies in the small-cap
market. We 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. We did not
hold any marketable securities at December 31, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZEVEX' financial statements as of December 31, 2002 and 2001 and for each of the
three years in the period ended December 31, 2002, are included beginning at
page 49, immediately following Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have no changes in or disagreements with our independent auditors with regard
to accounting or 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 our
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 41 Chief Executive Officer, President, and Chairman 2003
Phillip L. McStotts 45 Chief Financial Officer, Secretary/Treasurer, and 2005
Director
Bradly A. Oldroyd 45 Director 2003
David B. Kaysen 52 Director 2005
Dan Robertson 55 Director 2005
Richard L. Shanaman 67 Director 2004
John T. Lemley 59 Director 2004
- ---------------------------- ------ --------------------------------------------------------- -------------
Our executive officers serve at the discretion of the Board of Directors. None
of the executive officers have employment agreements with us. Certain
biographical information with respect to each of the officers and directors is
set forth below.
David J. McNally is one of our founders and has served as our Chief Executive
Officer and Chairman since September 2000. Prior to September 2000, Mr. McNally
served as our Executive Vice President and as a director since our inception in
1986. He also serves as CEO and director of our wholly-owned subsidiaries, ZEVEX
Inc. and JTech. Mr. McNally was an Ernst & Young Entrepreneur of the Year
Finalist in 1998, and again in 1999. Prior to joining us, 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.
Phillip L. McStotts is one of our founders and has served as our CFO,
Secretary, and Treasurer, and as a director since our inception. He also
serves as a director of our wholly-owned subsidiaries, as CFO, Secretary and
Treasurer of ZEVEX Inc. and as CFO and Secretary of JTech. Mr. McStotts was
an Ernst & Young Entrepreneur of the Year Finalist in 1998, and again in
1999. 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 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 Food 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 since November 2000. Mr. Kaysen has
served since December 2002 as President, Chief Executive Officer and Director
of Diametrics Medical, Inc. a publicly traded (NASDAQ: DMED) manufacturer
and marketer of critical care blood analysis systems that provide immediate or
continuous diagnostic results at the point-of-care. From 1992 to 2002, Mr.
Kaysen served 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 currently serves as a director on the Board of American
Telecare, Inc., a privately held company that markets home telemedicine
products and Medical CV, Inc. a publicly traded (NASDAQ Small Cap: MDCVU)
manufacturer and marketer of mechanical heart valves . Mr. Kaysen graduated
with a Bachelor of Science Degree in Business Administration from the
University of Minnesota in 1972.
Dan Robertson, has been a director since April 2002. Mr. Robertson is a
Managing Director of Insurance Offices of America, where he has been
responsible for managing reinsurance relationships and risk sharing programs
since 2001. From 1997 to 2001, Mr. Robertson was Senior Vice President of
Protegrity Services Inc., where he developed comprehensive insurance products
and underwriting programs with national carriers and reinsurers. From 1992 to
1997, Mr. Robertson was President of Berkley Risk Managers, a full service
risk management company within the W.R. Berkley Group. Prior to 1992, Mr.
Robertson was Field Operations Vice-President in charge of CIGNA Corporation's
network of workers compensation claim-management centers. Mr. Robertson
graduated with a Bachelor of Science Degree in Psychology from the Arizona
State University in 1970.
John T. Lemley has been a director since February 2003. From 1999 to 2001 Mr.
Lemley served as Executive Vice President and Chief Financial Officer of emWare
Inc. a privately held supplier in the emerging market for device-networking
solutions. From 1995 to 1999, Mr. Lemley served as Vice President and Chief
Financial Officer of Evans & Sutherland Computer Corporation, a leading supplier
of 3-D graphic technology for aerospace defense, simulation applications, and
high performance NT workstation markets. From 1994 to 1995, Mr. Lemley served as
Sr. Vice President and Chief Financial Officer of Megahertz Holding Corporation,
a publicly traded manufacturer of data and fax modems for portable computer that
was acquired by U.S. Robotics, Inc. in 1995. From 1990 to 1994, Mr. Lemley
served as Vice President, Corporate Controller and Acting Chief Financial
Officer for Medtronic, Inc. (NYSE: MDT) the world's leading producer of medical
devices. From 1973 to 1990, Mr. Lemley served in various Corporate Controller
positions for Hewlett Packard Company. Mr. Lemley graduated with a Bachelor of
Science Degree in Civil Engineering from the University of California, Berkley
in 1965, and an MBA in Finance from the University of Oregon in 1967.
Richard L. Shanaman, has been a director since February 2003. Mr. Shanaman is
retired. From 1987 to 2003, Mr. Shanaman served as a Director of Lombard
Investments, a San Francisco, California-based Private Equity fund with $1.2
billion under management. Mr. Shanaman is highly regarded in business circles
throughout the Western United States as the founder of the first venture capital
fund in Utah, Utah Ventures, where he served as both General and Limited
Partner. From 1978 to 1983 Mr. Shanaman served as Vice-Chair, Chief Financial
Officer and Treasurer of American Stores, a NYSE company, prior to its merger
with Albertsons. Mr. Shanaman also currently serves as a director of TruVision,
a privately held company that markets vision care services through health plans
nationwide. Mr. Shanaman graduated with a Bachelor of Science Degree in
Economics from Dartmouth College in 1958, and a Degree in Credit and Finance
Management from Stanford University in 1969.
OTHER KEY EMPLOYEES
Leonard C. Smith has served as Sr. Vice President since March 2002, and served
as a director from April 1999 through December 2002. Mr. Smith is a founder of
JTech and has served as its President since 1995. He also serves as Sr. Vice
President and a director of our wholly-owned JTech subsidiary. 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 1977.
SECTION 16(a) BENEFICIAL REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
our directors, executive officers, and 10% shareholders to file with the
Securities and Exchange Commission and with Nasdaq 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 us and written representations that no
other reports were required, we believe that during 2002 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation we paid to each of our executive
officers during the three-year period ended December 31, 2002.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities All
Name and Annual Stock Underlying LTIP Other
Principal Position Year Salary Bonus Comp. Awards Options Payouts Comp.
- ------------------ ---- ------ ----- ----- ------ ------- ------- -----
David J. McNally 2002 $194,543 $0 0 0 40,000 0 $5,500(a)
Chief Executive Officer 2001 $185,500 $7,500 0 0 0 0 $5,250(a)
President, Chairman 2000 $142,528 $27,500 0 0 40,000 0 $5,250(a)
Leonard C. Smith 2002 $181,931 $20,000 0 0 40,000 0 $6,000(a)
Sr. Vice President 2001 $175,000 $0 0 0 0 0 $5,250(a)
2000 $128,563 $15,500 0 0 40,000 0 $5,250(a)
Phillip L. McStotts 2002 $172,030 $15,000 0 0 40,000 0 $5,500(a)
Chief Financial Officer 2001 $165,000 $0 0 0 0 0 $5,250(a)
Secretary/Treasurer 2000 $133,061 $17,500 0 0 40,000 0 $5,250(a)
(a) Represents the amount we paid as a contribution to the ZEVEX 401(k) Pension
and Profit Sharing Plan on the officer's behalf.
OPTIONS GRANTS IN LAST FISCAL YEAR
Individual Grants
Potential Realizable Value
At Assumed Annual Rate Of
Stock Price Appreciation
For Option Term
Percent Of
Number Of Total
Securities Options/
Underlying SARs
Options/ Granted To
SARs Employees Exercise Or
Granted In Fiscal Base Price Expiration
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- ----------------------- ------------- ------------- -------------- ------------ ------------- ---------------
- ----------------------- ------------- ------------- -------------- ------------ ------------- ---------------
David J. McNally 40,000 17.43% $3.15 1/17/2009 $51,295 $119,538
Phillip L. McStotts 40,000 17.43% $3.15 1/17/2009 $51,295 $119,538
Leonard C. Smith 40,000 17.43% $3.15 1/17/2009 $51,295 $119,538
Effective January 18, 2002, the Compensation Committee approved the grant of
Common Stock purchase options for 40,000 shares each to Messrs. McNally,
McStotts, and Smith. The options vest over a period of four years. The options
are exercisable at $3.15 per share.
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, 2002, 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 26,250/83,750 $0/0
Leonard C. Smith
Sr. Vice President 0 0 50,000/70,000 $0/0
Phillip L. McStotts
Secretary/Treasurer 0 0 26,250/83,750 $0/0
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. Of the
unexercised options listed above for each of Messrs. McNally, Smith and
McStotts, 40,000 were granted effective on January 17, 2002 and expire on
January 17, 2009. The exercise price on such options is $3.15. 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, 2002, which
was $1.90.
COMPENSATION OF DIRECTORS
We pay each director who is not an employee of ZEVEX or its subsidiaries a
director's fee of $2,000 per quarter and $1,000 per year for each committee the
director is elected to. Each director is also granted 10,000 stock options upon
first being elected to the board, with 25% vesting on an annual basis over four
years, in addition to being granted 2,500 stock options annually, which vest one
year after issue, while a member of the Board of Directors. Although we 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.
TERMINATION OF EMPLOYMENT AND CHANGE-OF- CONTROL ARRANGEMENTS
Messrs. McNally, McStotts, and Smith have entered into Executive Severance
Package Agreements with ZEVEX that provide for certain benefits to be paid to
the executive under circumstances following a change-in-control. In the event
that ZEVEX experiences a "change-in-control" (as defined by the Executive
Severance Package Agreement) and the executive is terminated without "cause", or
if he is "constructively terminated" within eighteen months following a
change-in-control, or a relocation of executive's principal office of more than
50 miles is required, the executive will receive the following benefits:
(a) Mr. McNally: (i) a severance payment equal to 24 months of his current
salary and annual bonus; (ii) the full acceleration of the vesting of
his options; (iii) in the event that the severance triggers a
non-deductible excise tax under Section 280G of the Internal Revenue
Code, the severance shall be reduced to a level that will not trigger
the excise tax; and (iv) one-third of the severance is future
compensation for a non-compete obligation.
(b) Mr. McStotts: (i) a severance payment equal to 18 months of his current
salary and annual bonus; (ii) the full acceleration of the vesting of
his options; (iii) in the event that the severance triggers a
non-deductible excise tax under Section 280G of the Internal Revenue
Code, the severance shall be reduced to a level that will not trigger
the excise tax; and (iv) one-third of the severance is future
compensation for a non-compete obligation.
(c) Mr. Smith: (i) a severance payment equal to 12 months of his current
salary and annual bonus; (ii) the full acceleration of the vesting of
his options; (iii) in the event that the severance triggers a
non-deductible excise tax under Section 280G of the Internal Revenue
Code, the severance shall be reduced to a level that will not trigger
the excise tax; and (iv) one-third of the severance is future
compensation for a non-compete obligation.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three committees, the Audit Committee, Nominating
Committee, and the Compensation Committee. The Audit Committee is composed of
John T. Lemley, Richard L. Shanaman, and David B. Kaysen. The Nominating
Committee is composed of David B. Kaysen, Bradly A. Oldroyd, Dan Robertson,
John T. Lemley, and Richard L. Shanaman. The Compensation Committee is
composed of David B. Kaysen, Bradly A. Oldroyd, and Dan Robertson. 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 Nominating Committee reviews and recommends candidates to
fill vacancies or additions to the Board of Directors. The Compensation
Committee establishes remuneration of the executive officers and directors of
ZEVEX and oversees the administration of ZEVEX' stock option plan.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that both John T. Lemley and Richard L.
Shanaman qualify as an "Audit Committee Financial Expert" under the SEC rules.
Both of these individuals are "independent" under the Nasdaq rules.
CODE OF ETHICS
On March 6, 2003, the board of directors adopted a Code of Ethics for Certain
Senior Officers and for All Directors. This Code of Ethics covers the Chief
Executive Officer, the Chief Financial Officer, the Chief Accounting Officer,
the Controller, and any other officer who performs a function similar to those
performed by the officers named above. This Code of Ethics meets the
requirements of the SEC. A copy of this Code of Ethics has been filed as an
exhibit to this report.
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 13, 2003, 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 3,440,197 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) 278,448 8.0%
E*Capital Corporation(3) 196,000 5.7%
Jeff Holmes(4) 195,000 5.7%
Phillip L. McStotts. (5) 185,650 5.3%
Leonard C. Smith(6) 81,700 2.3%
Bradly A. Oldroyd(7) 30,750 *
David B. Kaysen(8) 10,000 *
Richard L. Shanaman(9) 2,000 *
Dan M. Robertson(10) 0 *
John T. Lemley(11) 0 *
All Officers and Directors
As a Group (2) (5) (6) (7) (8) (9) (10) (11) 588,548 16.3%
*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 March 13, 2003. 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, President and Chairman. Includes 240,198 shares of
Common Stock held directly, 36,250 shares of Common Stock issuable upon exercise
of options held by Mr. McNally that are currently exercisable or will become
exercisable within 60 days, and 2,000 shares held by Mr. McNally as custodian
for his child. Excludes 93,750 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) This information is based on Schedule 13G filed February 10, 2003, with the
SEC by E*Capital Corporation, a California Corporation, and certain of its
affiliates. Includes 128,500 of such shares of Common Stock held by E*Capital
Corporation, 38,000 shares of Common Stock held by Edward W. Wedbush, and 15,200
shares of Common Stock held by Wedbush Morgan Securities, Inc. Edward W. Wedbush
is the Chairman of E*Capital Corporation and owns a majority of the outstanding
shares of E*Capital Corporation. Edward W. Wedbush is the President and Chief
Executive Officer of Wedbush Morgan Securities, Inc. E*Capital Corporation owns
a majority of the outstanding shares of Wedbush Morgan Securities, Inc.
Accordingly, Edward W. Wedbush may be deemed the beneficial owner of the ZEVEX
Common Stock owned by E*Capital Corporation. However, beneficial ownership of
the ZEVEX Common Stock is disclaimed by Edward W. Wedbush.
(4) Beneficial owner. Includes 195,000 shares of Common Stock held directly
by Mr. Holmes. Mr. Holmes' address is P.O. Box 11207, Zephyr Cove, NV 89448.
(5) Chief Financial Officer, Secretary, Treasurer, and director. Includes
149,400 shares of Common Stock held directly and 36,250 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 93,750 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.
(6) Sr. Vice President. Includes 31,700 shares of Common Stock held directly and
50,000 shares of Common Stock issuable upon exercise of options held by Mr.
Smith that are currently exercisable or will become exercisable within 60 days.
Excludes 70,000 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.
(7) Director. Includes 30,750 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days. Excludes 3,750 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.
(8) Director. Includes 10,000 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days. Excludes 5,000 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.
(9) Director. Includes 2,000 shares of Common Stock held directly. Excludes
10,000 shares of Common Stock issuable upon exercise of options held by Mr.
Shanaman that are not currently exercisable and will not become exercisable
within 60 days.
(10) Director. Excludes 10,000 shares of Common Stock issuable upon exercise of
options held by Mr. Robertson that are not currently exercisable and will not
become exercisable within 60 days.
(11) Director. Excludes 10,000 shares of Common Stock issuable upon exercise of
options held by Mr. Lemley that are not currently exercisable and will not
become exercisable within 60 days.
Equity Compensation Plan Information
The following table lists information for equity compensation plans approved and
not approved by security holders.
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation
of outstanding options, outstanding options, plans (excluding
Plan category warrants and rights warrants and rights securities reflected in
column (a))
(a) (b) (c)
- ----------------------------- ------------------------- -------------------------- --------------------------
- ----------------------------- ------------------------- -------------------------- --------------------------
Equity compensation plans
approved by security holders
632,850 $4.25 491,669
Equity compensation plans
not approved by security
holders 0 0
- ----------------------------- ------------------------- -------------------------- --------------------------
- ----------------------------- ------------------------- -------------------------- --------------------------
Total 632,850 $4.25 491,669
======= ===== =======
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.
ITEM 14 CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, our management, including our
CEO and CFO, evaluated the effectiveness of our "disclosure controls and
procedures" (the controls and other procedures for recording, processing,
summarizing and reporting on a timely basis the information required to be
disclosed in the periodic reports that we file with the U.S. Securities and
Exchange Commission). Based on that evaluation, and subject to the limitations
noted below, our management concluded that our disclosure controls and
procedures are effective to ensure that material information about us and our
subsidiaries is made known to management by others in our company on a timely
basis for preparation of our periodic reports. While we believe our disclosure
controls and procedures are effective, we note that controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the controls and procedures are met.
There are inherent limitations, including the possibility that judgments in
decision-making can be faulty, that breakdowns can occur because of simple error
or mistake, or that a person may circumvent the controls. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Additionally, since the date of our last evaluation of our internal controls
(the controls and procedures designed to permit the preparation of our financial
statements in conformity with generally accepted accounting principles), there
have been no significant changes in such controls or in other factors that could
significantly affect those controls.
PART IV
ITEM 15 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 balance sheets of ZEVEX International, Inc. as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2002, 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) Reports on Form 8-K
Item(s) Reported Date Filed
----------------- ----------
Item 9. Regulation FD Disclosure Certification November 11, 2002
Pursuant to 18 U.S.C. Section 1350
ITEM 16 PRINCIPAL ACCOUNTANT FEES AND SERVICES
During 2002 and 2001, Ernst & Young LLP examined the accounts of ZEVEX and its
subsidiaries and also provided other audit services to us in connection with
Securities and Exchange Commission filings. A summary of these fees is set forth
in the following table.
Fees Paid to Independent Auditors
Service provided 2002 2001
- ---------------- ---- ----
Audit Fees $95,000 $68,000
Audit-Related Fees 16,000(1) 18,000(2)
Tax Fees 2,335 2,288
All Other Fees 0 0
(1) Fees are related to the audit of employee benefit plans.
(2) Fees are related to the audit of employee benefit plans.
In the Charter of the Audit Committee, as amended March 6, 2003, the Audit
Committee has the sole authority to approve the non-audit services of the
auditors. The non-audit services that were provided by the auditors in 2001 and
2002 were not approved by the Audit Committee. In the future, however, the Audit
Committee will approve all non-audit services by the auditors.
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 27, 2003 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 27, 2003
- ---------------------------
David J. McNally Chief Executive Officer,
(Principal Executive Officer)
/s/ PHILLIP L. McSTOTTS Director, Chief Financial Officer, March 27, 2003
- -----------------------
Phillip L. McStotts Secretary, and Treasurer (Principal
Financial and Accounting Officer)
/s/ BRADLY A. OLDROYD Director March 27, 2003
- ---------------------
Bradly A. Oldroyd
/s/ DAVID B. KAYSEN Director March 27, 2003
- -------------------
David B. Kaysen
/s/ DAN M. ROBERTSON Director March 27, 2003
- --------------------
Dan M. Robertson
/s/ RICHARD L. SHANAMAN Director March 27, 2003
- -----------------------
Richard L. Shanaman
/s/ JOHN T. LEMLEY Director March 27, 2003
- ------------------
John T. Lemley
CERTIFICATIONS*
I, David J. McNally, certify that:
1. I have reviewed this annual report on Form 10-K of ZEVEX
International, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ DAVID J. MCNALLY
---------------------
David J. McNally, CEO
I, Phillip L. McStotts, certify that:
1. I have reviewed this annual report on Form 10-K of ZEVEX
International, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ PHILLIP L. McSTOTTS
-----------------------
Phillip L. McStotts, CFO
INDEX TO EXHIBITS
(Item 15(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).
10.13 Stock Purchase Agreement, dated December 31, 1998, between ZEVEX International, Inc., and Vijay Lumba (5).
10.15 Convertible Debenture, dated January 6, 1999, issued to Vijay Lumba (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)
10.22 Convertible Debenture, dated March 30, 2000, issued to Vijay Lumba. (8)
10.25 Amendment to Revolving Line of Credit Agreement between Bank One and ZEVEX International, Inc., dated June 29,
2001. (9)
10.26 Amendment to Convertible Debenture, dated December 20, 2001, issued to Vijay
Lumba. (9)
10.27# Executive Severance Package Agreement for Mr. McNally
10.28# Executive Severance Package Agreement for Mr. McStotts
10.29# Executive Severance Package Agreement for Mr. Smith
14 Code of Ethic for Certain Senior Officers and all the Directors, dated March 6, 2003
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).
(9) Incorporated by reference to ZEVEX' Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-12965).
# Identifies a "management contract or compensatory plan or arrangement".
CONSOLIDATED FINANCIAL STATEMENTS
ZEVEX International, Inc.
Years Ended December 31, 2002, 2001 and 2000
with Report of Independent Auditors
ZEVEX International, Inc.
Consolidated Financial Statements
For the years ended December 31, 2002, 2001 and 2000
Contents
Report of Independent Auditors................................................51
Audited Consolidated Financial Statements
Consolidated Balance Sheets ..................................................52
Consolidated Statements of Operations ........................................53
Consolidated Statements of Stockholders' Equity ..............................54
Consolidated Statements of Cash Flows ........................................55
Notes to Consolidated Financial Statements ...................................56
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, 2002 and 2001 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ZEVEX
International, Inc. at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Accounting for Goodwill and Other Intangible Assets.
Salt Lake City, Utah /s/ Ernst & Young LLP
February 28, 2003
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 2002 2001
---------------------------------------------
Current assets
Cash and cash equivalents $ - $ 1,028,086
Designated cash for sinking fund payment on industrial
development bond 93,785 93,076
Accounts receivable, net of allowance for doubtful
accounts of $200,000 in 2002 and $240,000 in 2001 4,522,785 5,748,578
Inventories 6,348,856 7,272,842
Marketable securities - 219,899
Deferred income taxes 348,506 568,387
Income taxes receivable 283,522 418,506
Prepaid expenses and other current assets 184,492 62,662
Total current assets 11,781,946 15,412,036
Property and equipment, net 6,498,957 7,688,088
Patents, trademarks and acquisition costs, net 364,640 342,746
Goodwill, net 10,089,035 10,154,757
Other assets 63,658 41,519
Total assets $ 28,798,236 $ 33,639,146
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,572,313 $ 1,711,429
Bank overdraft 42,957 -
Other accrued liabilities 585,765 563,067
Bank line of credit - 1,713,610
Current portion of industrial development bond 100,000 100,000
Payable related to product line acquisition and
convertible debt, short-term 1,738,970 1,143,390
Current portion of other long-term debt 1,461,640 524,381
Current portion of capital leases 177,801 162,783
Total current liabilities 5,679,446 5,918,660
Deferred income taxes 258,193 276,734
Industrial development bond 1,400,000 1,500,000
Convertible debt, long-term - 3,001,970
Other long-term debt 139,586 1,608,330
Capital lease obligations 122,950 301,051
Stockholders' equity
Common stock; $.001 par value, 10,000,000
authorized shares, 3,440,197 issued and outstanding
at December 31, 2002 and 2001 3,440 3,440
Additional paid in capital 16,290,452 16,290,452
Unrealized gain on marketable securities, net of tax
expense of $12,003 in 2001 - 20,177
Treasury stock, 39,233 shares (at cost) at December 31, 2002
and 25,000 shares (at cost) at December 31, 2001 (89,422) (60,956)
Retained earnings 4,993,591 4,779,288
Total stockholders' equity 21,198,061 21,032,401
Total liabilities and stockholders' equity $ 28,798,236 $ 33,639,146
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
2002 2001 2000
-----------------------------------------------------
-----------------------------------------------------
Revenue:
Product sales $ 23,683,355 $ 28,678,317 $ 29,661,205
Engineering services 1,812,378 1,203,758 1,117,422
Total revenue 25,495,733 29,882,075 30,778,627
Cost of sales 15,522,241 18,863,147 19,929,855
Gross profit 9,973,492 11,018,928 10,848,772
Operating expenses:
General and administrative 6,010,948 6,306,795 5,169,944
Selling and marketing 2,737,019 2,682,134 2,712,702
Research and development 519,342 477,653 852,273
Goodwill amortization - 533,514 523,187
Total operating expenses 9,267,309 10,000,096 9,258,106
Operating income 706,183 1,018,832 1,590,666
Other income (expense):
Interest and other income 56,676 371,179 506,858
Interest expense (543,340) (1,059,593) (703,686)
Other-than-temporary impairment loss
on available for sale marketable securities - (917,628) -
Income (loss) before income taxes 219,519 (587,210) 1,393,838
(Provision) benefit for income taxes (5,216) 99,507 (669,698)
Net income (loss) $ 214,303 $ (487,703) $ 724,140
Basis net income (loss) per share $ 0.06 $ (0.14) $ 0.21
Weighted average shares outstanding 3,414,846 3,431,639 3,425,288
Diluted net income (loss) per share $ 0.06 $ (0.14) $ 0.19
Diluted weighted average shares outstanding 3,418,278 3,431,639 3,748,032
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrealized (Loss) Gain
Common Stock Additional Paid-in Treasury Retained on Available-for-sale
Shares Amount Capital Stock Earnings Securities Total
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Balances at January 1, 2000 3,420,726 $ 3,421 $ 16,212,966 $ - $ 4,542,851 $ 331,484 $ 21,090,722
Comprehensive loss:
Net income -- -- -- -- 724,140 -- 724,140
Other comprehensive 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 19,338 19 76,821 -- -- -- 76,840
------------------------------------------------------------------------------------------------
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Balances at December 31, 2000 3,440,064 3,440 16,289,787 -- 5,266,991 (502,713) 21,057,505
Comprehensive income:
Net loss -- -- -- -- (487,703) -- (487,703)
Other comprehensive income, net of tax:
Unrealized gain on available-for-
sale securities, net of
reclassificaion adjustments -- -- -- -- -- 522,890 522,890
------------
Total comprehensive income 35,187
Exercise of stock options for cash 133 -- 665 -- -- -- 665
Purchase of 25,000 shares of
treasury stock, at cost -- -- -- (60,956) -- -- (60,956)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Balances at December 31, 2001 3,440,197 3,440 16,290,452 (60,956) 4,779,288 20,177 21,032,401
Comprehensive income:
Net income -- -- -- -- 214,303 -- 214,303
Other comprehensive loss, net of tax:
Change in unrealized gain on
available-for-sale securities -- -- -- -- -- (20,177) (20,177)
----------
Total comprehensive income 194,126
Purchase of 14,233 shares of
treasury stock, at cost -- -- -- (28,466) -- -- (28,466)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Balances at December 31, 2002 3,440,197 $ 3,440 $ 16,290,452 $(89,422) $ 4,993,591 $ - $ 21,198,061
=================================================================================================
=================================================================================================
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
2002 2001 2000
---------------------- ------------------- --------------------
---------------------- ------------------- --------------------
Cash flows from operating activities
Net income (loss) $ 214,303 $ (487,703) $ 724,140
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 1,618,682 2,086,379 1,756,682
Provision for bad debts (64,620) (143,060) -
Deferred income taxes 213,343 (125,707) (97,672)
Realized gain on marketable securities (38,078) (241,434) (379,620)
Other-than-temporary loss on available for sale
marketable securities - 917,628 -
Changes in operating assets and liabilities, net of
acquisitions:
Designated cash for sinking fund payment
on industrial development bond (709) (3,006) (3,521)
Accounts receivable 1,290,413 1,895,571 (1,657,860)
Inventories 923,986 1,380,855 (3,360,100)
Prepaid expenses and other assets (143,969) (46,939) 9,782
Bank overdraft 42,957 - -
Trading securities - - 313,992
Accounts payable (139,116) (501,297) 1,077,780
Accrued and other liabilities 22,698 (6,197) (162,588)
Income taxes receivable/payable 134,984 (98,516) (1,277,299)
Net cash provided by (used in) operating activities 4,074,874 4,626,574 (3,056,284)
Cash flows from investing activities
Purchase of property and equipment (399,565) (200,094) (1,224,760)
Purchase of product line - - (2,794,146)
Additions of patents and trademarks (51,880) (27,110) (21,430)
Redemption of available-for-sale marketable securities 225,797 1,003,135 894,712
Net cash (used in) provided by investing activities (225,648) 775,931 (3,145,624)
Cash flows from financing activities
Proceeds from capital lease and long-term debt - 2,500,000 -
Principal payments on capital lease and long-term debt (694,568) (516,072) (50,103)
Payments on business and product line acquisition debt (2,340,668) (2,301,828) (1,104,758)
Payment on industrial development bond (100,000) (100,000) (100,000)
Net (payments on) proceeds from bank line of credit (1,713,610) (4,223,385) 4,323,542
Purchase of treasury stock (28,466) (60,956) -
Proceeds from exercise of stock options - 665 76,840
Net cash (used in) provided by financing activities (4,877,312) (4,701,576) 3,145,521
Net (decrease) increase in cash and cash equivalents (1,028,086) 700,929 (3,056,387)
Cash and cash equivalents at beginning of period 1,028,086 327,157 3,383,544
Cash and cash equivalents at end of period $ - $ 1,028,086 $ 327,157
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. The Company's 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, 2002 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 statement of operations for the year ended December
31, 2000 also includes 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 insignificant interest rate risk and an original maturity of
three months or less when purchased to be cash equivalents.
Concentrations of Credit Risk
The Company's financial instruments consist primarily of cash and 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. Approximately 14% 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. Historically
losses on collection 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 did not have any marketable securities classified as
available-for-sale at December 31, 2002. As of December 31, 2001, the Company's
marketable securities consisted of equity securities classified as
available-for-sale. Such securities were carried at their fair value based upon
their quoted market prices at December 31, 2001.
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.
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
for the year ending December 31, 2001. 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, 2002, the Company did not have any unrealized holding gains
or losses. As of December 31, 2001, the Company had net unrealized holding gains
of $32,180 ($20,177 net of taxes).
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,
2002 and 2001, accumulated amortization related to patents, trademarks, and
acquisition costs was $128,627 and $98,641, respectively. The Company
periodically reviews the recoverability of its intangible 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 was,
prior to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets,
being amortized on a straight-line basis over 15 to 23 years. At December 31,
2002 and 2001, accumulated amortization related to goodwill of $1,448,843 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. (See New Accounting Pronouncements in this Note 1)
Impairment of Long-Lived Assets
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 are 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
intangible assets other than goodwill, 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 the
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 (FIN No. 44) 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 2002, 2001,
and 2000, no stock-based compensation expense was recognized by the Company.
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. 1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $128,616,
$233,418, and $249,542, respectively, for the years ended December 31, 2002,
2001, and 2000.
Revenue Recognition
The Company recognizes revenue from products sold directly to end customers when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, shipment is made and collectibility is reasonably assured.
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 generally is
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 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.
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. 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. 144 (see below). The
Company has adopted SFAS No. 142 effective January 1, 2002. SFAS No. 142
provides a six-month period from the effective date of adoption for the Company
to complete Step 1 (determining and comparing the fair value of the Company's
reporting units to their carrying values) of the transitional impairment test.
Step 2 is required to be completed if Step 1 indicates that the carrying value
of the reporting unit exceeds the fair value, involves the calculation of the
implied fair value of goodwill and must be completed by December 31, 2002. The
Company has completed Step 1 of the impairment assessment. Based upon the
Company's valuation procedures, the Company has determined that the fair value
of the reporting units exceeds the carrying value including goodwill. As such
the Company was not required to complete Step 2 of the impairment assessment and
no impairment loss has been recognized in 2002.
New Accounting Pronouncements
As of December 31, 2002, the Company's gross goodwill balance is $11,537,878
with accumulated amortization of $1,448,843. The adoption of SFAS No. 142 will
reduce the Company's amortization expense by approximately $533,000 annually
beginning in 2002, due to the nonamortization of goodwill. Amortization expense
for goodwill for the year ended December 31, 2001 was $533,514. Adjusted net
income and net income per common share for the years ended December 31, 2001 and
2000 compared to the actual results for the year ended December 31, 2002 are as
follows:
For Year Ended
December 31
2002 2001 2000
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Reported net income (loss) $ 214,303 $ (487,703) $ 724,140
Goodwill amortization -- 533,514 523,186
--------------- ------------ --------------
Adjusted net income $ 214,303 $ 45,811 $ 1,247,326
========= ========= ===========
Basic net income per share reported $ .06 $ (.14) $ .21
Goodwill amortization -- .16 .15
--------------- ---------------- ----------------
Adjusted $ .06 $ .02 $ .36
======= ======== ========
Diluted net income per share reported $ .06 $ (.14) $ .19
Goodwill amortization -- .16 .14
--------------- ---------------- ----------------
Adjusted $ .06 $ .02 $ .33
======= ======== ========
In August 2001, the FASB issued SFAS No. 144, Accounting 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). The Company adopted SFAS No. 144 effective January
1, 2002. As expected, the adoption of SFAS No. 144 did not have a material
impact on the consolidated financial position, consolidated results of
operations or liquidity of the Company.
In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections was issued. This
statement provides guidance on the classification of gains and losses from the
extinguishment of debt and on the accounting for certain specified lease
transactions. Generally, the provisions of this statement are applicable for
transactions initiated after May 15, 2002. The adoption of this statement did
not have a material impact on the consolidated financial position or
consolidated results of operations of the Company.
In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. It is not anticipated that
the adoption of this statement will have a material impact on the consolidated
financial position or consolidated results of operations of the Company.
New Accounting Pronouncements
In November of 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. This issue addresses certain aspects of
accounting for arrangements whereby a vendor performs multiple
revenue-generating activities. This issue addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how the related revenue should be measured and allocated to the
separate units of accounting. This issue is effective for revenue arrangements
entered into for fiscal periods beginning after June 15, 2003. The Company plans
to adopt EITF No. 00-21 in the third quarter which begins on July 1, 2003. The
Company believes that the effect of EITF No. 00-21 on the Company's results of
operations, financial position or liquidity will not be material because the
Company currently has few multiple deliverable revenue arrangements.
In December of 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002 and interim periods
beginning after December 31, 2002. The disclosure provisions of SFAS No. 148
have been adopted by the Company. SFAS No. 148 did not require the Company to
change to the fair value based method of accounting for stock-based
compensation. The Company has elected to continue to follow the intrinsic value
method of accounting as prescribed by APB No. 25, to account for employee stock
options. No stock-based employee compensation cost is reflected in net income,
as all options granted had an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant.
Had compensation expense for options under the Company's two stock-based
compensation plans, which are not subject to variable plan accounting, been
determined based on the fair value of the option at the grant dates for awards
under those plans consistent with SFAS 123, the Company's net income (loss) and
earnings (loss) per share would have been adjusted to the pro forma amounts for
the years ended December 31 as indicated below:
2002 2001 2000
---------------- ---------------- --------------
Net income (loss) as reported $ 214,303 $ (487,703) $ 724,140
Less: Stock compensation expense determined under fair
value method, net of related tax effects 249,613 507,303 308,635
---------------- ---------------- --------------
---------------- ---------------- --------------
Pro forma net income (loss) $ (35,310) $ (995,006) $ 415,505
================ ================ ==============
================ ================ ==============
Earnings per share:
Basic - as reported $ 0.06 $ (0.14) $ 0.21
Basic - pro forma $ (0.01) $ (0.29) $ 0.12
Diluted - as reported $ 0.06 $ (0.14) $ 0.19
Diluted - pro forma $ (0.01) $ (0.29) $ 0.11
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) 2002 2001 2000
--------------- --------------- --------------
Denominator for basic net income (loss) per common
share - weighted-average shares 3,415 3,432 3,425
Dilutive securities: options, convertible debentures,
and warrants 3 - 323
--------------- --------------- --------------
Denominator for diluted net income (loss) per common
share - adjusted weighted-average shares 3,418 3,432 3,748
=============== =============== ==============
Options, convertible debentures, and warrants to purchase approximately 776,000,
1,197,000, and 595,000 shares of common stock were outstanding at December 31,
2002, 2001, and 2000, respectively, but were not included in the computation of
diluted earnings per share because they were anti-dilutive.
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information are as follows:
For Year Ended
December 31
2002 2001 2000
-----------------------------------------------
Cash paid during the year for:
Interest $ 520,951 $ 1,151,226 $ 679,283
Income taxes - 150,500 2,122,006
Schedule of non-cash investing and financing activities:
Equipment internally manufactured - 1,033,749 -
Unrealized gain (loss) on available-for-sale
marketable securities (32,180) 32,180 (1,330,458)
Equipment acquired under capital leases - - 662,720
Purchase price adjustments related to earn-out
provisions for acquisitions (65,722) - (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 was being amortized over 15 years for the
year ended December 31, 2001 and December 31, 2000. No goodwill amortization was
recorded during the year ended December 31, 2002. (See New Accounting
Pronouncements SFAS No. 141 & 142 in Note 1)
The purchase price of $3,800,000 included an earn-out of $1,000,000 based upon
achievement of certain operating goals. Such goals were met and, through
December 31, 2001 approximately $778,000 had been paid. In 2002 after
negotiation with Nestle, the Company paid approximately $156,000 in final
settlement of the earn-out. The difference of $66,000 was recorded as an
adjustment to goodwill.
3. Inventories
Inventories consist of the following at December 31:
2002 2001
---------------------------------------
Materials $3,028,782 $3,355,793
Work-in-progress 1,087,474 1,241,034
Finished goods, including completed subassemblies 2,232,600 2,676,015
---------------------------------------
$6,348,856 $7,272,842
=======================================
4. Marketable Securities
The Company did not hold any marketable securities at December 31, 2002.
The following is a summary of marketable securities at December 31, 2001:
Gross Gross Unrealized
Unrealized Estimated Fair
Available-for-Sale Cost Gains Losses Value
----------------- ---------------- ----------------- -----------------
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.
5. Property and Equipment
Property and equipment consist of the following at December 31:
2002 2001
------------------ -------------------
Machinery and equipment $ 1,238,357 $ 1,180,928
Stationary enteral feeding pumps 4,233,699 4,206,699
Furniture and fixtures 1,668,961 1,594,205
Software 627,661 606,049
Tooling costs 1,257,967 1,053,694
Building 2,872,373 2,857,878
Land 1,084,415 1,084,415
------------------ -------------------
12,983,433 12,583,868
Less accumulated depreciation and amortization 6,484,476 4,895,780
------------------ -------------------
$ 6,498,957 $ 7,688,088
================== ===================
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, 2002, 2001, and 2000
amounted to $1,588,696, $1,524,816, and $1,206,396, respectively.
6. Accrued Liabilities
Accrued liabilities consist of the following at December 31:
2002 2001
------------------- ------------------
Accrued payroll and related taxes and benefits $247,607 $256,810
Accrued vacation 187,321 177,809
Warranty reserve 85,000 85,000
Deferred revenue 25,000 25,000
Accrued interest 40,837 18,448
------------------- ------------------
$585,765 $563,067
=================== ==================
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:
2002 2001
------------------- -------------------
Deferred tax assets:
Non-deductible accruals and expenses $ 345,145 $ 416,529
Charitable contribution carryover 1,704,377 -
Capital loss carryover 1,781,308 2,028,863
------------------- -------------------
Total deferred tax assets 3,830,830 2,445,392
Deferred tax liabilities:
Fixed asset and other basis differences (254,832) (276,736)
Unrealized gains on available-for-sale securities - (12,003)
------------------- -------------------
Total deferred tax liabilities (254,832) (288,739)
Valuation allowance for carryover items (3,485,685) (1,865,000)
------------------- -------------------
Net deferred taxes $ 90,313 $ 291,653
=================== ===================
The benefit (provision) for income taxes consists of the following:
2002 2001 2000
------------------ ----------------- ------------------
Current taxes:
Federal $ 144,194 $ (84,497) $ (725,521)
State 49,700 14,325 (114,387)
R&D credit 14,233 43,972 72,537
Deferred taxes:
Federal (194,468) 114,586 89,031
State (18,875) 11,121 8,642
------------------ ----------------- ------------------
(Provision) benefit for income taxes $ (5,216) $ 99,507 $ (669,698)
================== ================= ==================
The actual tax benefit (expense) differs from the 34% federal statutory rate as
follows:
2002 2001 2000
---------------- ---------------- -----------------
Federal tax benefit (expense) at statutory rate $ (74,636) $ 199,652 $ (473,905)
State income tax, net (12,655) 16,795 (69,792)
Non-taxable items - 37,300 -
Research and development credit 14,233 43,972 72,537
Non-deductible goodwill amortization - (172,464) (172,464)
Benefit from charitable contribution 11,944 - -
Reduction of valuation allowance 83,692 - -
Other non-deductible expenses (27,794) (25,748) (26,074)
---------------- ---------------- -----------------
Total (provision) benefit for income taxes $ (5,216) $ 99,507 $ (669,698)
================ ================ =================
The Company's capital loss carryover generated in 2001 related to the loss on
sale of marketable securities and the sale of the Aborn corporate shell of
approximately $5,450,000 expires December 31, 2006. A valuation allowance of
$1,865,000 was provided in 2001 for the capital loss of $5,000,000 generated
from the sale of the Aborn corporate shell because the Company did not consider
it to be more likely than not that this carryover will be utilized. During 2002,
a tax benefit derived from the capital loss which, for the State of Utah, was
treated as a net operating loss carryback for income tax purposes resulted in a
refund of $50,000 recognized in 2002. Additionally, the Company was able to
recognize certain of its other capital losses which resulted in an additional
tax refund of approximately $34,000 during 2002. The valuation allowance was
reduced accordingly for these two items. The remaining capital loss carryforward
for Federal purposes is approximately $4,837,000 and for State purposes is
approximately $4,146,000. A full valuation allowance has been provided.
During 2002, the Company made a charitable contribution of certain patent rights
to an institution of higher education with a fair market value of $5,048,000.
During 2002 a tax benefit of $11,944, as determined based upon applicable
federal rates, was recognized for the charitable contribution. For income tax
purposes, charitable contributions are only recognizable if a company has
taxable income. A valuation allowance of approximately $1,704,000 has been
provided for the contribution carryover of $5,012,000 generated from the patent
donation because the Company does not consider it to be more likely than not
that this carryover will be utilized. The contribution carryover expires in
2007.
8. Debt
Bank Line of Credit
The Company renewed its line of credit arrangement with a financial institution
with availability of $6 million. The line matures on May 28, 2003. The line of
credit is collateralized by accounts receivable and inventory and bears interest
at the prime rate, which was 4.25% at December 31, 2002 and 4.75% at December
31, 2001. The Company's balance on this line of credit was $0 at December 31,
2002 and $1,713,610 at December 31, 2001. 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, 2002.
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 August 30, 2003. The bonds bear interest at an adjustable rate based
on the weekly tax-exempt floater rate, as determined by the remarketing agent.
The average rate for 2002 was 1.7%. The bonds mature on October 1, 2016.
Principal reductions occur in the amount of $100,000 per year. The outstanding
balance was $1,500,000 at December 31, 2002, 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. 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.
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, resulting in accrued interest and principal
maturity dates between March 30, 2002 and March 30, 2003. The debentures are
convertible to common stock through March 30, 2003 at $11 per share. The Company
made principal payments during 2002 of $2,184,188, which reduced the outstanding
balance to $1,738,970 at December 31, 2002. An additional principal payment of
$788,970 was made on January 6, 2003, with the remaining balance due March 30,
2003.
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%. On September 23, 2002
the Company renegotiated the note and it currently bears interest at the prime
rate (4.25% at December 31, 2002). 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, 2002 was $931,081, all of which 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, 2002 was $670,145, of which $530,559 is classified as
current.
The following is a summary of the Company long-term liabilities:
Payment due by period
More than More than More than More than
Contractual Less than 1- year 2- year 3- year 4- year More than
Obligation Total 1 -year 5- year
- ------------------- ------------- ------------- ----------- ----------- ----------- ----------- -------------
- ------------------- ------------- ------------- ----------- ----------- ----------- ----------- -------------
Line of Credit $ - $ - $ - $ - $ - $ - $ -
Industrial
Development
Bond 1,500,000 100,000 100,000 100,000 100,000 100,000 1,000,000
Convertible
Debt 1,738,970 1,738,970 - - - - -
Other
Long-term 1,601,226 1,461,640 139,586 - - - -
Capital Leases 300,751 177,801 122,950 - - - -
------------- ------------- ----------- ----------- ----------- ----------- -------------
------------- ------------- ----------- ----------- ----------- ----------- -------------
Total $5,140,947 $3,478,411 $362,536 $100,000 $100,000 $100,000 $1,000,000
============= ============= =========== =========== =========== =========== =============
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 is $495,350 and $289,020 at
December 31, 2002 and 2001, respectively. Such depreciation is included in
depreciation and amortization expense for the years then ended.
Future minimum lease payments under capital leases consisted of the following at
December 31, 2002:
Fiscal Year
2003 $ 198,000
2004 127,220
---------------
Total minimum lease payments 325,220
Amount representing interest 24,469
---------------
---------------
Present value of minimum lease payments 300,751
Current portion 177,801
---------------
Long-term portion $ 122,950
===============
The Company has entered into certain cancelable operating leases. Rental expense
for the years ended December 31, 2002, 2001, and 2000 was $14,283, $82,503, and
$54,562, respectively.
10. Employee Benefit Plans
401(k) Profit Sharing Plan
The Company maintains 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. Employees are fully vested in the employer contributions after six
years. Contributions to the plan for the years ended December 31, 2002, 2001,
and 2000 were $130,823, $138,716, and $115,791, 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 occurs after six 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.
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.
No contributions were made for the years ended December 31, 2001 and 2000.
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,
2002 or 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 expired in November 2002.
Common Stock Reserved for Future Issuance
At December 31, 2002, the Company had reserved 1,282,607 shares of common stock
for future issuance, including 158,088 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") which was ratified by shareholders in October 1993. 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.
A summary of stock option activity for both plans, and related information for
the years ended December 31, 2000, 2001, and 2002 follows:
Shares Outstanding Stock Options Weighted-
------------------------------------
Available Number of Price Average
for Grant Shares Per Share Exercise Price
-------------------------------- --------------------------------------
Balance at January 1, 2000 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
Options granted (229,500) 229,500 1.90-3.40 3.09
Options exercised - -
- -
Options canceled 336,867 (336,867) 2.47-7.00 4.71
-------------------------------- --------------------------------------
Balance at December 31, 2002 491,669 632,850 $1.90-5.00 $4.25
================================ ======================================
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 2002, 2001, and 2000,
respectively, for options where the stock price equals the exercise price:
risk-free interest rate of 3.4%, 3.8%, and 5.3%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
..53, .85, and .85; and a weighted-average expected life of the option of 3.5,
2.9, and 3.5 years. The estimated weighted-average fair values of options
granted in the years ended December 31, 2002, 2001, and 2000 were $1.28, $1.84,
and $2.85, respectively. The following are 2002 weighted-average assumptions for
options where the stock price is less than the exercise price, no such options
were granted in the previous years: risk-free
interest rate of 2.3%; dividend yield of 0%; volatility factors of the expected
market price of the Company's common stock of .53, and a weighted-average
expected life of the option of 3.5 years. The estimated weighted-average fair
values of options where the stock price is less than the exercise price was
$0.70.
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.
For the years ended December 31, 2002, 2001, and 2000, pro forma net income
(loss) and pro forma net income (loss) per common share were as follows:
2002 2001 2000
---------------- ---------------- --------------
Pro forma net income (loss) $ (35,310) $ (995,006) $415,505
Pro forma basic net income (loss) per common share (.01) (.29) .12
Pro forma diluted net income (loss) per common share (.01) (.29) .11
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, 2002:
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
- ----------------- ---------------------------------- ----------------- ----------------- ---------------
$1.90-3.40 209,500 5.9 years $3.09 5,000 $2.47
4.00-5.00 423,350 3.7 years 4.83 244,913 4.86
- ----------------- ---------------------------------- ----------------- ----------------- ---------------
$1.90-5.00 632,850 4.5 years $4.25 249,913 $4.81
================= ================================== ================= ================= ===============
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.
The carrying amounts and fair values of the Company's financial instruments are
as follows at December 31:
2002 2001
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ---------------- -----------------
Cash and cash equivalents $ - $ - $ 1,028,086 $ 1,028,086
Accounts receivable 4,522,785 4,522,785 5,748,578 5,748,578
Marketable securities - - 219,899 219,899
Accounts payable 1,572,313 1,572,313 1,711,429 1,711,429
Bank line of credit - - 1,713,610 1,713,610
Convertible debt 1,738,970 1,745,760 3,923,158 4,024,791
Industrial development bond 1,500,000 1,500,000 1,600,000 1,600,000
Other long-term debt 1,601,226 1,631,632 2,132,711 2,216,136
Capital leases 300,751 328,254 463,834 483,319
13. Business Segments
The Company operates in three business segments, Therapeutics, Physical
Evaluation, and Applied Technology. The Therapeutics segment includes feeding
pumps, disposable sets and feeding tubes used by patients who require direct
gastrointestinal nutrition therapy (also called enteral feeding). The Physical
Evaluation segment includes the sale of stand-alone and computerized products
that measure isolated muscle strength, joint ranges of motion and sensation. In
the Applied Technology segment the Company provides design and manufacturing
services to global medical device leaders who, in turn, sell the Company's
components and systems under private labels or incorporate them into their
products. The Company evaluates the performance of the segments through gross
profit, less selling and marketing expenses, and research and development
expenses (or contribution margin). The Company does not allocate general and
administrative expenses by segment. General and Administrative expenses are
included in Corporate and Unallocated amounts indicated below.
For the year ended December 31, 2002 (in thousands):
Corporate
Physical Applied and
Therapeutics Evaluation Technology Unallocated Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 12,124 $ 3,650 $ 9,721 $ -- $ 25,496
Cost of sales 8,313 1,459 5,750 -- 15,522
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 3,812 2,191 3,971 -- 9,974
Selling and marketing 1,547 911 227 52 2,737
Research and development 363 156 -- -- 519
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Contribution margin 1,902 1,124 3,744 (52) 6,718
General and administrative -- -- -- 6,011 6,011
Other (income)/expenses -- -- -- 488 488
Provision for income taxes -- -- -- 5 5
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Net income $ 214
=============
=============
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Total assets $ 8,563 $ 8,509 $ 8,073 $ 3,653 $ 28,798
=============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable,
inventories, specifically identified fixed assets and goodwill. Goodwill
represents approximately $842,000 in Therapeutics, $5,199,000 in Physical
Evaluation, and $ 4,075,000 in Applied Technology.
For the year ended December 31, 2001 (in thousands):
Corporate
Physical Applied and
Therapeutics Evaluation Technology Unallocated Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 13,009 $ 3,754 $ 13,119 $ -- $ 29,882
Cost of sales 9,178 1,398 8,287 -- 18,863
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 3,831 2,356 4,832 -- 11,019
Selling and marketing 1,430 796 207 249 2,682
Research and development 171 247 60 -- 478
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Contribution margin 2,230 1,313 4,565 (249) 7,859
General and administrative -- -- -- 6,840 6,840
Other (income)/expenses -- -- -- 1,606 1,606
Benefit for income taxes -- -- -- (99) (99)
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Net loss $ (488)
=============
=============
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Total assets $ 9,851 $ 7,815 $ 9,105 $ 6,868 $ 33,639
=============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable,
inventories, specifically identified fixed assets and goodwill. Goodwill
represents approximately $907,000 in Therapeutics, $5,199,000 in Physical
Evaluation, and $ 4,103,000 in Applied Technology.
For the year ended December 31, 2000 (in thousands):
Corporate
Physical Applied and
Therapeutics Evaluation Technology Unallocated Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 13,356 $ 3,095 $ 14,328 $ -- $ 30,779
Cost of sales 9,449 1,201 9,280 -- 19,930
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 3,907 1,894 5,048 -- 10,849
Selling and marketing 1,412 743 238 320 2,713
Research and development 682 170 -- -- 852
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Contribution margin 1,813 981 4,810 (320) 7,284
General and administrative -- -- -- 5,693 5,693
Other (income)/expenses -- -- -- 197 197
Provision for taxes -- -- -- 670 670
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Net income $ 724
=============
=============
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Total assets $ 12,905 $ 7,390 $ 11,112 $ 7,281 $ 38,688
=============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable,
inventories, specifically identified fixed assets and goodwill. Goodwill
represents approximately $978,000 in Therapeutics, $5,459,000 in Physical
Evaluation, and $ 4,333,000 in Applied Technology.
14. Major Customers
Sales to major customers for the years ended December 31, 2002, 2001, and 2000
are summarized as follows (percent of product sales):
Year Ended December 31
2002 2001 2000
----------------- ---------------- -------------
Customer A * * 10%
Customer B * * 14%
----------------- ---------------- -------------
N/A N/A 24%
================= ================ =============
* Less than 10% of sales.
15. 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) was paid on December 31, 2002.
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 15. Related-Party Transactions (continued)
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
and served until December 2002. Mr. Smith also serves as Sr. Vice 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 10.27
EXECUTIVE SEVERANCE PACKAGE AGREEMENT
This Executive Severance Package Agreement ("Agreement") between
ZEVEX International, Inc., a Delaware corporation (the "Company") and David J.
McNally ("Executive") is effective as of the 18th day of June, 2002.
Recitals
WHEREAS, Executive is a key employee of the Company employed in the
capacity of Chief Executive Officer;
WHEREAS, Company desires to provide a severance package to
Executive as new and additional consideration for Executive's past services to
Company and Executive's continued services from the date of this Agreement.
NOW THEREFORE, in consideration of the mutual promises and
covenants set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by each party, the
parties agree as follows:
1. Recitals. The above Recitals are hereby incorporated into
this Agreement.
2. Grant of Severance Benefits. Within thirty (30) days from the
occurrence of the events described below, Company hereby agrees to pay Executive
a severance equal to twenty-four (24) months of Executive's current salary and
annual bonus (the "Severance"); provided, however, that in the event that the
Executive determines that the Severance will trigger a non-deductible excise tax
under Section 280G of the Internal Revenue Code, the Severance shall be reduced
to a level that the Executive determines will not trigger the excise tax. The
parties acknowledge and agree that one-third (1/3rd) of the Severance is future
compensation to Executive for the non-compete obligations set forth herein. At
the election of Executive, the Severance may be in the form of either an
immediate lump sum payment or payments over the term of the Severance consistent
with Executive's previous pay schedule. If Executive elects to be paid over the
term of the Severance, Executive may at any time during the Severance period
elect to accelerate the remaining amount payable upon written request to the
Company. For the purposes of determining the Severance amount, "current salary"
shall mean the highest monthly salary level paid to Executive over the six (6)
month period prior to the date of the Triggering Event (as defined below) and
"annual bonus" shall mean the aggregate of all bonuses paid to Executive during
the twelve (12) month period prior to the date of the Triggering Event. The
above Severance benefit shall be triggered by the occurrence of both of the
following two events (combined, the "Triggering Event"):
(a) A Change of Control of the Company. For the purposes
of this Agreement, "Change of Control" is defined as any one of the
following: (i) a majority change in the composition of the
Company's board of directors following the date of this Agreement;
(ii) the Company's sale, acquisition, or consolidation, whether by
merger or otherwise, resulting in the Company's current
shareholders no longer owning at least 50% of the outstanding
capital stock of the Company, or (iii) the Company's sale of
substantially all of its assets.
(b) The occurrence of either of the following within
eighteen (18) months following a Change of Control: (i) the
Company's termination of Executive without Cause, or (ii) the
Company's constructive termination of Executive due to a reduction
in Executive's salary, a diminution of Executive's duties and
responsibilities, or a required relocation of Executive's principal
office of more than 50 miles. For the purposes of this Agreement,
"Cause" is defined as: (1) neglect or deliberate or intentional
refusal to perform assigned duties and obligations or follow
policies or procedures, (2) embezzlement, theft, or any other
criminal conduct, (3) any grossly negligent activity, or (4) any
activity that causes material harm to the company, its reputation,
or to its directors or employees.
As and to the extent required under the COBRA laws, Executive will be offered
access at Executive's expense to the Company's health and major medical plans
then in effect. All stock options granted to Executive under any plan or
agreement shall immediately vest upon the occurrence of any Triggering Event and
shall be exercisable for a period of one (1) year after the later occurrence of
any Triggering Event.
3. Confidential Information. Executive acknowledges that he
is bound by an obligation of confidentiality to the Company. Upon the
occurrence of the Triggering Event, and to the extent that Executive possesses
materials containing confidential information of the Company, Executive will
immediately, return such materials to the Company.
4. Inventions. Upon the occurrence of the Triggering Event and to
the extent not previously assigned to the Company, Executive agrees to
immediately assign all "employment inventions," if any, to the Company developed
in the course of Executive's employment by the Company. Executive agrees to
execute all instruments as may be reasonably requested by the Company to give
full effect to the assignment set forth in this section. For purposes hereof,
"employment inventions" shall have the meaning set forth in Section 34-39-2 of
the Utah Employment Inventions Act.
5. Covenant Not to Compete. Executive agrees that from the date of
the Triggering Event and throughout the term prescribed for the Severance
payment in Section 2 above (the "Non-Compete Period)(whether or not the
Severance is paid as a lump sum or over the entirety of the Severance period),
he will not directly or indirectly compete with the Company. For purposes
hereof, "compete" means owning, managing, operating or controlling, or
participating in the ownership, management, operation or control, or being
connected with or having any interest in, as a stockholder, director, officer,
employee, agent, consultant, sole proprietor, partner or otherwise, of any
business (other than the Company) which competes with the Company or
participates in the current or planned future markets of the Company; provided,
however, that this prohibition shall not apply to ownership of less than one
percent (1%) of the voting stock in companies whose stock is traded on a
national securities exchange or in the over the counter market. Additionally,
during the Non-Compete Period, Executive agrees that he will not solicit
employees of the Company for the purpose of inducing them to leave the Company's
employ. During the Non-Compete Period, Executive also agrees that he will not
solicit the Company's customers, sales representatives, and dealers for the
purpose of providing them with products or services competing with those of the
Company.
6. Release of Claims.
-----------------
(a) On the date of the first payment of Severance (and subject
to the Company's continued fulfillment of its duties hereunder),
Executive, on behalf of himself and each of his partners, affiliates,
associates, agents, representatives, predecessors, successors, and
assigns, past, present, and future, releases and forever discharges
the Company and each of its respective affiliates, associates,
officers, directors, shareholders, employees, attorneys, accountants,
insurers, agents, representatives, predecessors, successors, and
assigns, past, present, and future, from any and all legal claims,
demands, liens, agreements, contracts, covenants, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses,
damages, judgments, orders, and liabilities of whatever kind or
nature in law, equity, or otherwise, whether now known or unknown,
suspected or unsuspected, concealed or hidden, of any kind or nature
whatsoever arising from his separation from the Company, employment
by the Company, service as a director and officer of the Company.
(b) On the date of the first payment of Severance (and subject
to Executive's continued fulfillment of his duties hereunder), the
Company, on behalf of itself, board of directors, officers, its
employees, attorneys, accountants, insurers, associates, agents,
representatives, predecessors, successors, and assigns, past,
present, and future, releases and forever discharges Executive from
any and all legal claims, demands, liens, agreements, contracts,
covenants, actions, suits, causes of action, obligations,
controversies, debts, costs, expenses, damages, judgments, orders,
and liabilities of any kind or nature whatsoever arising from
Executive's service to the Company as an employee, officer, director
or shareholder.
7. No Impairment of Prior Granted Employment Rights. This Agreement
does not infringe upon or impair any rights granted to Executive under any
previous employment agreements. Notwithstanding the above, this Agreement does
supercede and replace any severance rights set forth in any previous employment
agreements or pursuant to any severance plan offered by the Company.
8. Interpretation. If any part of this Agreement violates any statute
or public policy, that part will have no effect, and the rest of the Agreement
shall be fully enforceable. If any part of this Agreement is unenforceable
because it is overly broad, the court shall narrow its scope and then enforce
that part to the effect permissible.
9. Assignment. This Agreement shall be binding upon and enure to
the benefit of the successors and assigns of the parties.
10. Entire Agreement. This Agreement replaces and supercedes all
other severance agreements that may have been entered into by the Parties. This
Agreement constitutes the entire understanding between the Company and Executive
concerning the subject matter hereof. This Agreement may not be modified
except in writing.
11. Attorney Fees. In the event any action in law or equity or other
proceeding is brought for the enforcement of this Agreement or in connection
with any of the provisions of this Agreement, the successful or prevailing party
shall be entitled to reasonable attorney's fees and other costs reasonably
incurred in such action or proceeding.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah. Any dispute
concerning this Agreement can only be brought in the state or federal courts
located in Utah.
13. Authority. The persons signing below warrant that they are
authorized to enter into this Agreement on behalf of their respective principals
identified below and that by their signatures they bind such principals to this
Agreement.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have
read, understand and agree to all of the terms and provisions of this Agreement
and have caused this Agreement to be executed as of the date first written
above.
ZEVEX INTERNATIONAL, INC.
By
------------------------
Its
-----------------------
EXECUTIVE
David J. McNally
Exhibit 10.28
EXECUTIVE SEVERANCE PACKAGE AGREEMENT
This Executive Severance Package Agreement ("Agreement") between
ZEVEX International, Inc., a Delaware corporation (the "Company") and Phillip L.
McStotts ("Executive") is effective as of the 18th day of June, 2002.
Recitals
WHEREAS, Executive is a key employee of the Company employed in the
capacity of Chief Financial Officer;
WHEREAS, Company desires to provide a severance package to
Executive as new and additional consideration for Executive's past services to
Company and Executive's continued services from the date of this Agreement.
NOW THEREFORE, in consideration of the mutual promises and
covenants set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by each party, the
parties agree as follows:
1. Recitals. The above Recitals are hereby incorporated into
this Agreement.
2. Grant of Severance Benefits. Within thirty (30) days from the
occurrence of the events described below, Company hereby agrees to pay Executive
a severance equal to eighteen (18) months of Executive's current salary and
annual bonus (the "Severance"); provided, however, that in the event that the
Executive determines that the Severance will trigger a non-deductible excise tax
under Section 280G of the Internal Revenue Code, the Severance shall be reduced
to a level that the Executive determines will not trigger the excise tax. The
parties acknowledge and agree that one-third (1/3rd) of the Severance is future
compensation to Executive for the non-compete obligations set forth herein. At
the election of Executive, the Severance may be in the form of either an
immediate lump sum payment or payments over the term of the Severance consistent
with Executive's previous pay schedule. If Executive elects to be paid over the
term of the Severance, Executive may at any time during the Severance period
elect to accelerate the remaining amount payable upon written request to the
Company. For the purposes of determining the Severance amount, "current salary"
shall mean the highest monthly salary level paid to Executive over the six (6)
month period prior to the date of the Triggering Event (as defined below) and
"annual bonus" shall mean the aggregate of all bonuses paid to Executive during
the twelve (12) month period prior to the date of the Triggering Event. The
above Severance benefit shall be triggered by the occurrence of both of the
following two events (combined, the "Triggering Event"):
(a) A Change of Control of the Company. For the purposes
of this Agreement, "Change of Control" is defined as any one of the
following: (i) a majority change in the composition of the
Company's board of directors following the date of this Agreement;
(ii) the Company's sale, acquisition, or consolidation, whether by
merger or otherwise, resulting in the Company's current
shareholders no longer owning at least 50% of the outstanding
capital stock of the Company, or (iii) the Company's sale of
substantially all of its assets.
(b) The occurrence of either of the following within
eighteen (18) months following a Change of Control: (i) the
Company's termination of Executive without Cause, or (ii) the
Company's constructive termination of Executive due to a reduction
in Executive's salary, a diminution of Executive's duties and
responsibilities, or a required relocation of Executive's principal
office of more than 50 miles. For the purposes of this Agreement,
"Cause" is defined as: (1) neglect or deliberate or intentional
refusal to perform assigned duties and obligations or follow
policies or procedures, (2) embezzlement, theft, or any other
criminal conduct, (3) any grossly negligent activity, or (4) any
activity that causes material harm to the company, its reputation,
or to its directors or employees.
As and to the extent required under the COBRA laws, Executive will be offered
access at Executive's expense to the Company's health and major medical plans
then in effect. All stock options granted to Executive under any plan or
agreement shall immediately vest upon the occurrence of any Triggering Event and
shall be exercisable for a period of one (1) year after the later occurrence of
any Triggering Event.
3. Confidential Information. Executive acknowledges that he
is bound by an obligation of confidentiality to the
Company. Upon the occurrence of the Triggering Event, and to the extent that
Executive possesses materials containing confidential information of the
Company, Executive will immediately, return such materials to the Company.
4. Inventions. Upon the occurrence of the Triggering Event and to
the extent not previously assigned to the Company, Executive agrees to
immediately assign all "employment inventions," if any, to the Company developed
in the course of Executive's employment by the Company. Executive agrees to
execute all instruments as may be reasonably requested by the Company to give
full effect to the assignment set forth in this section. For purposes hereof,
"employment inventions" shall have the meaning set forth in Section 34-39-2 of
the Utah Employment Inventions Act.
5. Covenant Not to Compete. Executive agrees that from the date of
the Triggering Event and throughout the term prescribed for the Severance
payment in Section 2 above (the "Non-Compete Period)(whether or not the
Severance is paid as a lump sum or over the entirety of the Severance period),
he will not directly or indirectly compete with the Company. For purposes
hereof, "compete" means owning, managing, operating or controlling, or
participating in the ownership, management, operation or control, or being
connected with or having any interest in, as a stockholder, director, officer,
employee, agent, consultant, sole proprietor, partner or otherwise, of any
business (other than the Company) which competes with the Company or
participates in the current or planned future markets of the Company; provided,
however, that this prohibition shall not apply to ownership of less than one
percent (1%) of the voting stock in companies whose stock is traded on a
national securities exchange or in the over the counter market. Additionally,
during the Non-Compete Period, Executive agrees that he will not solicit
employees of the Company for the purpose of inducing them to leave the Company's
employ. During the Non-Compete Period, Executive also agrees that he will not
solicit the Company's customers, sales representatives, and dealers for the
purpose of providing them with products or services competing with those of the
Company.
6. Release of Claims.
(a) On the date of the first payment of Severance (and subject
to the Company's continued fulfillment of its duties hereunder),
Executive, on behalf of himself and each of his partners, affiliates,
associates, agents, representatives, predecessors, successors, and
assigns, past, present, and future, releases and forever discharges
the Company and each of its respective affiliates, associates,
officers, directors, shareholders, employees, attorneys, accountants,
insurers, agents, representatives, predecessors, successors, and
assigns, past, present, and future, from any and all legal claims,
demands, liens, agreements, contracts, covenants, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses,
damages, judgments, orders, and liabilities of whatever kind or
nature in law, equity, or otherwise, whether now known or unknown,
suspected or unsuspected, concealed or hidden, of any kind or nature
whatsoever arising from his separation from the Company, employment
by the Company, service as a director and officer of the Company.
(b) On the date of the first payment of Severance (and subject
to Executive's continued fulfillment of his duties hereunder), the
Company, on behalf of itself, board of directors, officers, its
employees, attorneys, accountants, insurers, associates, agents,
representatives, predecessors, successors, and assigns, past,
present, and future, releases and forever discharges Executive from
any and all legal claims, demands, liens, agreements, contracts,
covenants, actions, suits, causes of action, obligations,
controversies, debts, costs, expenses, damages, judgments, orders,
and liabilities of any kind or nature whatsoever arising from
Executive's service to the Company as an employee, officer, director
or shareholder.
7. No Impairment of Prior Granted Employment Rights. This Agreement
does not infringe upon or impair any rights granted to Executive under any
previous employment agreements. Notwithstanding the above, this Agreement does
supercede and replace any severance rights set forth in any previous employment
agreements or pursuant to any severance plan offered by the Company.
8. Interpretation. If any part of this Agreement violates any statute
or public policy, that part will have no effect, and the rest of the Agreement
shall be fully enforceable. If any part of this Agreement is unenforceable
because it is overly broad, the court shall narrow its scope and then enforce
that part to the effect permissible.
9. Assignment. This Agreement shall be binding upon and enure to
the benefit of the successors and assigns of the parties.
10. Entire Agreement. This Agreement replaces and supercedes all
other severance agreements that may have been entered into by the Parties. This
Agreement constitutes the entire understanding between the Company and Executive
concerning the subject matter hereof. This Agreement may not be modified except
in writing.
11. Attorney Fees. In the event any action in law or equity or other
proceeding is brought for the enforcement of this Agreement or in connection
with any of the provisions of this Agreement, the successful or prevailing party
shall be entitled to reasonable attorney's fees and other costs reasonably
incurred in such action or proceeding.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah. Any dispute
concerning this Agreement can only be brought in the state or federal courts
located in Utah.
13. Authority. The persons signing below warrant that they are
authorized to enter into this Agreement on behalf of their respective principals
identified below and that by their signatures they bind such principals to this
Agreement.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have
read, understand and agree to all of the terms and provisions of this Agreement
and have caused this Agreement to be executed as of the date first written
above.
ZEVEX INTERNATIONAL, INC.
By
------------------------
Its
-----------------------
EXECUTIVE
Phillip L. McStotts
Exhibit 10.29
EXECUTIVE SEVERANCE PACKAGE AGREEMENT
This Executive Severance Package Agreement ("Agreement") between
ZEVEX International, Inc., a Delaware corporation (the "Company") and Leonard C.
Smith ("Executive") is effective as of the 18th day of June, 2002.
Recitals
WHEREAS, Executive is a key employee of the Company employed in the
capacity of President;
WHEREAS, Company desires to provide a severance package to
Executive as new and additional consideration for Executive's past services to
Company and Executive's continued services from the date of this Agreement.
NOW THEREFORE, in consideration of the mutual promises and
covenants set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by each party, the
parties agree as follows:
1. Recitals. The above Recitals are hereby incorporated into
this Agreement.
2. Grant of Severance Benefits. Within thirty (30) days from the
occurrence of the events described below, Company hereby agrees to pay Executive
a severance equal to twelve (12) months of Executive's current salary and annual
bonus (the "Severance"); provided, however, that in the event that the Executive
determines that the Severance will trigger a non-deductible excise tax under
Section 280G of the Internal Revenue Code, the Severance shall be reduced to a
level that the Executive determines will not trigger the excise tax. The parties
acknowledge and agree that one-third (1/3rd) of the Severance is future
compensation to Executive for the non-compete obligations set forth herein. At
the election of Executive, the Severance may be in the form of either an
immediate lump sum payment or payments over the term of the Severance consistent
with Executive's previous pay schedule. If Executive elects to be paid over the
term of the Severance, Executive may at any time during the Severance period
elect to accelerate the remaining amount payable upon written request to the
Company. For the purposes of determining the Severance amount, "current salary"
shall mean the highest monthly salary level paid to Executive over the six (6)
month period prior to the date of the Triggering Event (as defined below) and
"annual bonus" shall mean the aggregate of all bonuses paid to Executive during
the twelve (12) month period prior to the date of the Triggering Event. The
above Severance benefit shall be triggered by the occurrence of both of the
following two events (combined, the "Triggering Event"):
(a) A Change of Control of the Company. For the purposes
of this Agreement, "Change of Control" is defined as any one of the
following: (i) a majority change in the composition of the
Company's board of directors following the date of this Agreement;
(ii) the Company's sale, acquisition, or consolidation, whether by
merger or otherwise, resulting in the Company's current
shareholders no longer owning at least 50% of the outstanding
capital stock of the Company, or (iii) the Company's sale of
substantially all of its assets.
(b) The occurrence of either of the following within
eighteen (18) months following a Change of Control: (i) the
Company's termination of Executive without Cause, or (ii) the
Company's constructive termination of Executive due to a reduction
in Executive's salary, a diminution of Executive's duties and
responsibilities, or a required relocation of Executive's principal
office of more than 50 miles. For the purposes of this Agreement,
"Cause" is defined as: (1) neglect or deliberate or intentional
refusal to perform assigned duties and obligations or follow
policies or procedures, (2) embezzlement, theft, or any other
criminal conduct, (3) any grossly negligent activity, or (4) any
activity that causes material harm to the company, its reputation,
or to its directors or employees.
As and to the extent required under the COBRA laws, Executive will be offered
access at Executive's expense to the Company's health and major medical plans
then in effect. All stock options granted to Executive under any plan or
agreement shall immediately vest upon the occurrence of any Triggering Event and
shall be exercisable for a period of one (1) year after the later occurrence of
any Triggering Event.
3. Confidential Information. Executive acknowledges that he
is bound by an obligation of confidentiality to the Company. Upon the
occurrence of the Triggering Event, and to the extent that Executive possesses
materials containing confidential information of the Company, Executive will
immediately, return such materials to the Company.
4. Inventions. Upon the occurrence of the Triggering Event and to
the extent not previously assigned to the Company, Executive agrees to
immediately assign all "employment inventions," if any, to the Company developed
in the course of Executive's employment by the Company. Executive agrees to
execute all instruments as may be reasonably requested by the Company to give
full effect to the assignment set forth in this section. For purposes hereof,
"employment inventions" shall have the meaning set forth in Section 34-39-2 of
the Utah Employment Inventions Act.
5. Covenant Not to Compete. Executive agrees that from the date of
the Triggering Event and throughout the term prescribed for the Severance
payment in Section 2 above (the "Non-Compete Period)(whether or not the
Severance is paid as a lump sum or over the entirety of the Severance period),
he will not directly or indirectly compete with the Company. For purposes
hereof, "compete" means owning, managing, operating or controlling, or
participating in the ownership, management, operation or control, or being
connected with or having any interest in, as a stockholder, director, officer,
employee, agent, consultant, sole proprietor, partner or otherwise, of any
business (other than the Company) which competes with the Company or
participates in the current or planned future markets of the Company; provided,
however, that this prohibition shall not apply to ownership of less than one
percent (1%) of the voting stock in companies whose stock is traded on a
national securities exchange or in the over the counter market. Additionally,
during the Non-Compete Period, Executive agrees that he will not solicit
employees of the Company for the purpose of inducing them to leave the Company's
employ. During the Non-Compete Period, Executive also agrees that he will not
solicit the Company's customers, sales representatives, and dealers for the
purpose of providing them with products or services competing with those of the
Company.
6. Release of Claims.
(a) On the date of the first payment of Severance (and subject
to the Company's continued fulfillment of its duties hereunder),
Executive, on behalf of himself and each of his partners, affiliates,
associates, agents, representatives, predecessors, successors, and
assigns, past, present, and future, releases and forever discharges
the Company and each of its respective affiliates, associates,
officers, directors, shareholders, employees, attorneys, accountants,
insurers, agents, representatives, predecessors, successors, and
assigns, past, present, and future, from any and all legal claims,
demands, liens, agreements, contracts, covenants, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses,
damages, judgments, orders, and liabilities of whatever kind or
nature in law, equity, or otherwise, whether now known or unknown,
suspected or unsuspected, concealed or hidden, of any kind or nature
whatsoever arising from his separation from the Company, employment
by the Company, service as a director and officer of the Company.
(b) On the date of the first payment of Severance (and subject
to Executive's continued fulfillment of his duties hereunder), the
Company, on behalf of itself, board of directors, officers, its
employees, attorneys, accountants, insurers, associates, agents,
representatives, predecessors, successors, and assigns, past,
present, and future, releases and forever discharges Executive from
any and all legal claims, demands, liens, agreements, contracts,
covenants, actions, suits, causes of action, obligations,
controversies, debts, costs, expenses, damages, judgments, orders,
and liabilities of any kind or nature whatsoever arising from
Executive's service to the Company as an employee, officer, director
or shareholder.
7. No Impairment of Prior Granted Employment Rights. This Agreement
does not infringe upon or impair any rights granted to Executive under any
previous employment agreements. Notwithstanding the above, this Agreement does
supercede and replace any severance rights set forth in any previous employment
agreements or pursuant to any severance plan offered by the Company.
8. Interpretation. If any part of this Agreement violates any statute
or public policy, that part will have no effect, and the rest of the Agreement
shall be fully enforceable. If any part of this Agreement is unenforceable
because it is overly broad, the court shall narrow its scope and then enforce
that part to the effect permissible.
9. Assignment. This Agreement shall be binding upon and enure to
the benefit of the successors and assigns of the parties.
10. Entire Agreement. This Agreement replaces and supercedes all
other severance agreements that may have been entered into by the Parties. This
Agreement constitutes the entire understanding between the Company and Executive
concerning the subject matter hereof. This Agreement may not be modified except
in writing.
11. Attorney Fees. In the event any action in law or equity or other
proceeding is brought for the enforcement of this Agreement or in connection
with any of the provisions of this Agreement, the successful or prevailing party
shall be entitled to reasonable attorney's fees and other costs reasonably
incurred in such action or proceeding.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah. Any dispute
concerning this Agreement can only be brought in the state or federal courts
located in Utah.
13. Authority. The persons signing below warrant that they are
authorized to enter into this Agreement on behalf of their respective principals
identified below and that by their signatures they bind such principals to this
Agreement.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have
read, understand and agree to all of the terms and provisions of this Agreement
and have caused this Agreement to be executed as of the date first written
above.
ZEVEX INTERNATIONAL, INC.
By
-----------------------
Its
----------------------
EXECUTIVE
Leonard C. Smith
Exhibit 14
ZEVEX International, Inc.
CODE OF ETHICS FOR CERTAIN SENIOR OFFICERS AND ALL THE DIRECTORS
Effective March 6, 2003
This Code of Ethics for Certain Senior Officers and all the Directors
(the "Code) has been adopted by the Board of Directors of ZEVEX International,
Inc. (the "Board" and the "Company"), effective as of the above date. The
purpose of this Code is to encourage certain senior officers and all the
directors of the Company to conduct themselves in a ethical manner and to deter
them from wrong-doing. This Code has been adopted pursuant to the requirements
of Section 406 of the Sarbanes-Oxley Act of 2002 (the "Act") and the related
regulations that have been promulgated by the U.S. Securities and Exchange
Commission (the "SEC").
Covered Persons. The persons who shall be covered by this Code are the
following officers of the Company and no other officers: the Chief Executive
Officer, the Chief Financial Officer, the Chief Accounting Officer, and the
Controller, and any other officer by whatever title who performs a similar
function to the above-named officers. Additionally, this Code shall apply to all
the members of the Company's Board. The persons described in this paragraph are
hereafter referred to as the "Senior Officers."
Honest and Ethical Behavior. The Senior Officers shall act in a
reasonably honest and ethical manner.
Conflicts of Interest. Whenever a Senior Officer shall have a direct or
indirect personal interest in a transaction with the Company, the Senior Officer
shall make reasonable efforts to disclose both the fact and the nature of such
conflict to the Chairman of the Board and/or other appropriate Senior Officers
in advance of the Company's taking any action with respect thereto.
Disclosures to the SEC and to the Public. The Company is required from
time to time to file reports and documents with the SEC (the "Reports").
Additionally, the Company may from time to time make other required or permitted
disclosures to the public ("Public Disclosures"). Whenever a Senior Officer
shall have responsibility for the preparation of these Reports and/or Public
Disclosures, or shall be involved in the process of preparing such Reports
and/or Public Disclosures, the Senior Officer shall take reasonable steps to
ensure that they are materially accurate and complete, that they are reasonably
understandable to an average, adult investor, and, if they are required to be
filed with the SEC, that they are so filed in a timely manner.
Compliance with Laws. The Senior Officers shall make reasonable efforts
to comply materially with all applicable governmental laws, rules, and
regulations.
Reports of Violations of this Code. If a Senior Officer either
personally violates this Code or becomes aware that another Senior Officer has
violated this Code, the Senior Officer shall promptly notify the Chairman of the
Board of Directors of the Company of such violation. If the Senior Officer
believes that such notification to the Chairman would not result in a reasonable
remedying response, the Senior Officer shall promptly notify such other
directors and/or Senior Officers of the Company who the Senior Officer believes
will provide a reasonable remedying response.
Sanctions. If, after a reasonable inquiry, the Board (including an
appropriate committee thereof) determines that a Senior Officer has violated any
provision of this Code, then the Board shall have the authority to impose such
sanctions, including dismissal, on such Senior Officer as the Board shall
determine in its discretion.