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US 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, 1998
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 33-19583
ZEVEX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0462807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4314 ZEVEX Park Lane
Salt Lake City, Utah 84123
(Address of principal executive offices and zip code)
Registrant=s telephone number, including area code: (801) 264-1001
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No:____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant=s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K:____
The aggregate market value of the registrant's voting stock held by
nonaffiliates computed with reference to the closing price as quoted on the
NASDAQ Stock Market on March 15, 1999, was approximately $14,198,709. 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 Company=s Common Stock as
of March 15, 1999 was 3,418,876
Documents incorporated by reference: none
TABLE OF CONTENTS
Part I
Item 1 - BUSINESS -- 3
Item 2 - PROPERTIES -- 24
Item 3 - LEGAL PROCEEDINGS -- 24
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- 24
Part II
Item 5 - MARKET FOR REGISTRANT=S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS -- 24
Item 6 - SELECTED FINANCIAL DATA -- 26
Item 7 - MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- 27
Item 7A- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK -- 34
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- 35
Item 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE -- 35
Part III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY -- 35
Item 11 - EXECUTIVE COMPENSATION -- 38
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT -- 43
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- 45
Part IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K -- 46
Item 14(c) - INDEX TO EXHIBITS -- 48
SIGNATURES -- 47
PART I
ITEM 1. BUSINESS
GENERAL
ZEVEX International, Inc., (`'ZEVEX International" is in the business of
designing and manufacturing advanced medical and electronic devices, including
surgical systems, medical device components, and sensors for medical technology
and other companies. ZEVEX International also designs, manufactures, and markets
its own medical devices and musculoskelatal evaluation products using its
proprietary technologies.
ZEVEX International conducts its business primarily through its original wholly
owned subsidiary, ZEVEX, Inc., a Delaware corporation ("ZEVEX Inc."), and two
newly acquired, wholly owned subsidiaries, JTech Medical Technologies, Inc., a
Utah corporation ("JTech"), and Aborn Electronics, Inc., a California
corporation ("Aborn"). ZEVEX Inc. designs and manufactures medical devices for
medical technology companies, as well as for itself. JTech manufactures and
markets its own proprietary musculoskeletal evaluation products for health care
providers. Aborn designs and manufactures a variety of sophisticated optical
sensors and custom computer chips for medical technology and other companies.
ZEVEX International together with its subsidiaries may hereafter be referred to
collectively as the "Company".
The Company's current strategy is to augment continuing growth in its design and
manufacturing service business with the acquisition or internal development and
commercialization of proprietary products that either use the Company's
technologies and expertise or that complement the Company's existing line of
proprietary products. The Company has successfully applied its engineering and
regulatory expertise to the development, commercialization and marketing of
EnteraLite7, ZEVEX Inc.=s proprietary Ambulatory Enteral Feeding Pump for
patients who require direct gastrointestinal nutritional therapy. The
EnteraLite7 pump provides patients with maximum mobility, while delivering
enteral solutions with unprecedented accuracy.
DEVELOPMENTS DURING 1998
The Company substantially expanded its business during 1998, diversifying its
offering of proprietary products and improving its ability to design and
manufacture sophisticated devices for other companies. Company management
believes that this expansion fulfills a major part of the Company's plans for
growth through acquisition. The expansion took place in three major steps:
1. In July 1998, ZEVEX Inc. entered into an agreement with Nutrition Medical,
Inc., a Minnesota corporation ("Nutrition Medical "), to acquire Nutrition
Medical's enteral feeding line of products. Enteral feeding involves patient
feeding through feeding pumps, delivery sets, and feeding tubes through the
intestines or stomach. Company management believes that the addition of the
Nutrition Medical product line complements ZEVEX Inc.'s existing line of enteral
feeding products, enhancing the Company's ability to serve the enteral feeding
markets. From July 1998 to December 1998, ZEVEX Inc. marketed the Nutrition
Medical products under an exclusive marketing arrangement, allowing ZEVEX Inc.
to immediately benefit from sales of the Nutrition Medical products. The Company
completed the acquisition of the Nutrition Medical product line on December 23,
1998.
2. On December 31, 1998, the Company acquired JTech through a stock purchase
transaction with the four shareholders of JTech. JTech was organized in 1988 as
a sole proprietorship and later incorporated as JTech Medical Industries, Inc.
in 1995 to manufacture and sell range of motion measurement devices. As
mentioned above, JTech currently manufactures and markets its own proprietary
musculoskeletal evaluation products for health care providers, a line of
products not previously manufactured or sold by ZEVEX Inc.
With approximately 22 employees, JTech's gross revenues for 1998 were
$2,796,344.
3. On December 31, 1998, the Company acquired Aborn through a stock purchase
transaction with the sole shareholder of Aborn. Aborn was organized in 1984 to
design, manufacture and sell low cost commercial fiber optic components. As
mentioned above, Aborn currently designs and manufactures a variety of
sophisticated optical sensors, custom computer chips and semiconductor
components for medical technology and other companies, bringing new design and
manufacturing expertise to the Company. With approximately 8 employees, Aborn's
gross revenues for calendar 1998 were $1,250,488.
Because the acquisition of Aborn and JTech occurred at year end, the
contribution of these acquisitions to the financial performance of the Company
will not be realized until 1999.
DESIGN AND MANUFACTURING SERVICES
Through its ZEVEX Inc. and Aborn subsidiaries, the Company provides design and
manufacturing services to medical and other technology companies, who sell the
Company's systems and devices under private labels or incorporate the Company's
devices into their products. The Company designs and manufactures over 120
different surgical systems, device components and sensors for more than 85
different established and emerging technology companies, such as Alaris Medical
Systems, Inc., Allergan, Inc., various divisions of Baxter Healthcare
Corporation, Mentor Corporation, SIMS Deltec, Inc., Staar Surgical Company, and
3M Company Healthcare. ZEVEX Inc. and Aborn each offer their customers over 12
years of specialized engineering and manufacturing expertise in their respective
areas.
The Company believes that there is a general trend by medical device and other
companies to outsource their device manufacturing requirements. Many emerging
device companies do not have the engineering, manufacturing, or regulatory
expertise to quickly and efficiently bring a device from conception to
commercial use. Even larger, well-established companies, which may have the
capital to develop such expertise, may lack the required personnel and time to
accumulate such expertise or may want to focus their resources in areas other
than manufacturing. In the medical device industry in particular, there are
substantial regulatory compliance requirements, in both the United States and
overseas, that must be addressed in designing and manufacturing devices. By
focusing its resources and expertise in the design and manufacturing areas, the
Company believes it offers customers the ability to outsource its engineering
and manufacturing needs on a cost-effective basis, often allowing the customer
to bring 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.
The Company uses extensive engineering and regulatory expertise to deliver
integrated design and manufacturing solutions to its customers. For its medical
technology customers, ZEVEX Inc. has registered with the United States Food and
Drug Administration ("FDA") as a medical device manufacturer and has developed
internal systems intended to maintain compliance with the FDA's Good
Manufacturing Practices ("GMP"). ZEVEX Inc. also is certified by the
International Organization for Standardization ("ISO") to 9001 and EN46001,
which means that its has met internationally recognized quality standards for
the design, manufacture, and testing of products. ZEVEX Inc. devotes significant
management time and financial resources to GMP compliance and ISO certification
to attract customers requiring such services.
PRINCIPAL DEVICES MANUFACTURED FOR OTHERS AND THEIR MARKETS
Surgical Devices -- Ophthalmic.
ZEVEX Inc. designs and manufactures ultrasonic phacoemulsification handpieces
and systems for the surgical removal of cataracts. Phacoemulsification is a
method of cataract extraction, which 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 80
percent of cataract procedures in the United States. ZEVEX Inc. manufactures
handpieces of several designs for Allergan, Inc., who is a major customer and a
market leader in ophthalmology. ZEVEX Inc. currently manufactures two complete
phacoemulsification systems for one customer, Paradigm Medical Industries, Inc.
These two systems include a basic ultrasonic system and a high-end system that
embodies both laser and ultrasonic energy sources. Allergan, Inc., and Paradigm
Medical Industries, Inc., are ZEVEX Inc.'s two largest customers for
phacoemulsification products. However, ZEVEX Inc. provides handpieces to many
other customers worldwide. ZEVEX Inc. also manufactures the KeraVision KV2000,
which is a high precision, vacuum instrument that facilitates the surgical
insertion of prescription rings at a 2/3 depth in the cornea. These rings,
depending upon their thickness, will flatten the cornea, correcting an eye that
is 1 to 5 diopters out. The KV2000 creates a vacuum which is transmitted through
tubing to a fixture called the "vacuum centering guide (VCG)" which is placed on
top of the eye. When a vacuum is applied, the VCG attaches itself to the eye,
giving the surgeon both a way to hold the eye still and a platform through which
to perform the surgery.
Surgical Devices -- Liposuction.
ZEVEX Inc. designs and manufactures ultrasonic handpieces for liposuction.
Liposuction, the removal of body fat, is one of the most popular cosmetic
procedures performed today. Current liposuction procedures involve the use of a
metal cannula to sheer fat from a patient. The current procedure requires the
physician to exert a large amount of force. In ultrasonically assisted
liposuction, a generator sends ultrasonic waves through a probe that is inserted
under the skin. The ultrasonic energy emulsifies the fat, which is then
aspirated away. Ultrasonic liposuction surgery can significantly reduce patient
trauma.
Ultrasonic Medical Sensors.
ZEVEX Inc. designs and manufactures a variety of non-invasive ultrasonic sensors
for the detection of air bubbles and the monitoring of liquid levels in medical
devices. ZEVEX Inc.'s air bubble detectors monitor intravenous fluid lines in a
variety of devices and systems, including drug infusion pumps, hemodialysis
machines, blood collection systems, and cardiopulmonary bypass systems. ZEVEX
Inc.'s liquid level detectors are used to monitor critical levels of liquids in
various reservoirs used in surgery, such as those employed in cardiopulmonary
bypass systems.
Optical Medical Sensors and Custom Chips.
Aborn designs and manufactures a variety of optical sensors and other
components, custom integrated circuit chips, and semiconductor components used
in both medical and industrial devices. Aborn's products include fiber optic
links, integrated optoisolators, high-speed sensor integrated circuits, custom
chips, application specific integrated circuit (ASIC) chips and solid state
relays. Medical applications for these technology products include diagnostic
and therapeutic equipment, such as blood analyzers and dialysis machines.
ZEVEX INTERNATIONAL'S PROPRIETARY PRODUCTS
Enteral Feeding Products.
Through ZEVEX Inc., the Company sells two major lines of enteral feeding pumps
and a variety of related disposable feeding tubes and delivery sets. These
products are for patients who require direct gastrointestinal nutritional
therapy. Enteral feeding is a means of providing nutrition to patients who have
experienced head or neck trauma, or have gastrointestinal disorders, such as
short bowel syndrome, Crohn's Disease, bowel pseudo-obstruction, and other
serious digestive disorders that prevent them from digesting food normally. Many
enteral feeding patients require continuous administration of nutritional
solutions throughout the day, which requires the patient to carry an enteral
feeding pump.
ZEVEX Inc. manufactures and markets the EnteraLite7 Ambulatory Enteral Feeding
Pump. Management believes that the EnteraLite7 pump is the lightest, most
compact and most mobile enteral feeding pump on the market, possessing
unprecedented safety and accuracy in liquid nutrition delivery. The EnteraLite7
has a 24-hour battery, one-third longer than the battery life of its closest
competitor. The EnteraLite7 pump carries a two-year warranty, twice the industry
average and other unique features.
First introduced in 1996, the EnteraLite7 continues to gain market acceptance in
the home health care market due to the products superior mobility and other
features. Such features contribute to a better clinical outcomes and improved
quality of life for enteral patients. The EnteraLite7 requires the use of
disposable feeding bags and tube sets, both of which are sold by the Company.
ZEVEX Inc. has been awarded five U.S. patents for EnteraLite7 technology. ZEVEX
Inc. has also received Notices of Allowance from the U.S. Patent and Trademark
Office ("PTO") for one additional patent that relates to various aspects of the
EnteraLite7 pump.
The acquisition of Nutrition Medical=s pumps, delivery sets and feeding tubes
significantly expands the ZEVEX line of enteral delivery products. Nutrition
Medical=s Model EP80 and EP85 enteral feeding pumps are cost-effective pumps
intended for applications where patients are not mobile. Most of Nutrition
Medical=s installed base of feeding pumps is in the long-term care market.
Complementing the pumps is a broad line of disposable delivery sets used for the
administration of enteral nutrition. These sets include bags and bottles of
various sizes, as well as spike sets for use with pre-filled containers.
Nutrition Medical's array of Panda7 feeding tubes include adult and pediatric
nasoenteric tubes, replacement gastrostomy tubes and a needle catheter
jejunostomy kit. These feeding tubes are expendable devices which allow access
to the gastrointestinal tract of the patient via commonly accepted procedures,
and are discarded after use by a single patient.
The Nutrition Medical product line builds upon the success that ZEVEX has
achieved with its EnteraLite7 Ambulatory Feeding Pump.
Musculoskeletal Evaluation Products.
Through JTech, the Company is a manufacturer and marketer of both stand-alone
and computerized musculoskeletal evaluation products that measure isolated
muscle strength, joint ranges of motion and sensation to document the
effectiveness of treatment or extent of injury. JTech is an internationally
recognized leader in physical medicine measurement products, providing both
hardware and Windows95-compatible software. JTech provides equipment for
musculoskeletal evaluation, functional capacity evaluation, upper extremity and
hand testing and pain evaluation. These products are used by chiropractors,
physical therapists, and occupational therapists for outcome assessment during
rehabilitation, medical-legal evaluations for personal injury and workers
compensation, and clinical documentation.
The following table indicates the percentage of revenues generated by the major
categories of product and services. Notably, these percentages do not include
the products acquired in the connection with the recent acquisitions.
Revenue breakdown by product/service by percentage
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Product/Service 1998 1997 1996
--------------- ---- ---- ----
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
AIL/ADB Sensors 24.5% 35.6% 54.1%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
High Power Ultrasonics 37.3% 34.8% 27.6%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Instrumentation Mfg 2.8% 8.9% 3.2%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Enteral Feeding 29.9% 11.8% 1.4%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Engineering/Tooling 5.5% 8.9% 13.7%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
DESIGN AND ENGINEERING CAPABILITIES
The Company has extensive design and engineering capabilities that it uses for
its own product development as well as for servicing its manufacturing
customers. The Company's manufacturing service customers generally rely on the
Company from the outset of their project for complete design, engineering,
component analysis, testing, and regulatory compliance for their devices or
system. In other instances, customers have come to the Company with final
drawings for devices that they believe are ready for manufacturing. In such
cases, the Company typically revise and tests the customer's existing design
prior to manufacturing. Many times, the Company's engineers identify and offer
design alternatives, which have improved performance or produced manufacturing
efficiencies.
The Company assembles a project team of engineers and technicians from various
disciplines to support each engineering project. The Company's engineers work
closely with the customer during all phases of the design, engineering, and
testing of the customer's device or system. The cooperative approach is used to
assure that customers' expectations are met or exceeded in the final product.
The Company's engineers assist sales and marketing personnel in evaluating
requests for proposals and developing specific solutions, bids, cost estimates,
and plans for each product. The Company's project engineers act as customer
contacts throughout the design and engineering phase and have responsibility for
all aspects of a customer's project. The Company has made significant
investments in state-of-the-art equipment to support its design and engineering
staff, including product performance modeling software, custom testing stations,
and three-dimensional computer aided design ("CAD") software.
ZEVEX Inc. engineers have broad experience in designing, engineering, and
testing a broad array of medical technology devices and systems, with particular
expertise in ultrasonic devices. Using its own software design, ZEVEX Inc. has
created what management believes is the most sophisticated modeling software for
ultrasonic device development. ZEVEX Inc.'s modeling and design capacities
hasten product development for ultrasonic devices and improve the quality of the
final device. ZEVEX Inc.'s design and engineering services generally are
provided to a customer as part of a plan to eventually manufacture the
customer's product on a time and material or fixed price basis.
Aborn also has an engineering team experienced in designing, engineering,
manufacturing, and testing a broad array of optical/electronic devices, with
particular expertise in optical/electronic sensors.
MANUFACTURING CAPABILITIES
The Company's own products generally are assembled and tested at its
manufacturing facility in Salt Lake City, Utah. ZEVEX Inc. design, engineering,
and manufacturing services for other companies are provided in the same
facility. Some of ZEVEX Inc.'s enteral feeding disposable products are
manufactured by specialty manufacturers in the United States. Aborn provides its
design, engineering, and manufacturing services for other companies from its
facility in San Jose, California.
In most cases, the manufacturing process begins with technical drawings and
specifications derived through the engineering and design process. Once the
preliminary design has been completed, prototypes are manufactured and further
design refinements and adjustments are made based on the performance of the
prototypes. Following completion of final design specifications, the Company
orders the required electronic components, piezoelectric ceramic, molded plastic
and stainless steel housings, and other items from qualified suppliers of such
items. Inventory management, work order, and MRP software programs are used to
manage inventory and control the ordering process for more than 10,000 parts
used in the Company's and its customer's products. As the evolution of a device
or system reaches production, team members with direct responsibility for
manufacturing, quality assurance, test engineering, and materials assume a
greater role in the project. The project team develops an assembly process,
product testing and quality assurance procedures to produce high-quality devices
or systems that satisfy internal or customer specifications as well as the FDA's
GMP, and ISO 9001/EN 46001 quality standards where necessary.
ZEVEX International usually provides its services pursuant to negotiated
manufacturing agreements, which address quantity, pricing, warranty, indemnity,
and other terms of the relationship. Such contracts may or may not be exclusive
manufacturing arrangements, and may or may not include minimum volume
requirements. In some cases no minimum purchase is required. In other cases, a
customer commits to purchase a minimum quantity identified in a rolling forecast
of production. ZEVEX and Aborn generally warrant the products they produce
against defects in materials and workmanship and may indemnify the customer
against losses arising out of such breach of warranty.
MARKETING AND SALES
Marketing and Sales of the Company's Design and Manufacturing Services.
The Company generates new design and manufacturing projects from customers using
direct sales personnel who are trained in the Company's engineering expertise
and manufacturing capabilities. Project engineers also participate extensively
in sales and marketing activities. In addition, the Company promotes its design
and manufacturing capabilities at industry trade shows, by advertising in
leading industry publications, and by obtaining referrals from customers, former
employees of customers, and other persons who are familiar with the Company's
services.
Marketing and Sales of ZEVEX Inc.'s Enteral Feeding Products.
The Company has a network of over 50 independent manufacturer's representatives
who sell the Company's line of Enteral pumps and related disposable delivery
sets. These representatives have been selected for their experience with the
home health care market served by the Company's pumps, and they sell directly to
home health care service providers, including hospitals with divisions. The
manufacturer's representatives are regionally supported by specialists with
clinical credentials (registered dietitians or nurses), who are full-time
employees of the Company.
The installed base of Nutrition Medical=s pumps, delivery sets, and feeding
tubes are being serviced by a national accounts manager. Currently the EP80 and
EP85 models of the Nutrition Medical=s pumps are sold under private label to two
different companies. The Company is in the process of reengineering the current
Model EP85 enteral feeding pump to provide improved convenience and safety
features. After this reengineering, this product will be remarketed by the
Company=s independent manufacturer's representatives under the Enteral/EZ
trademark.
Marketing and Sales of JTech Musculoskeletal Evaluation Products.
JTech markets its products using various methods of representation and
distribution. JTech has a network of over 70 independent dealers and
manufacturer's representatives world wide who sell JTech's musculoskeletal
evaluation products. These dealers and representatives were selected for their
experience with the physical and occupational therapy markets as well as the
chiropractic market. The dealers and representatives are regionally supported by
regional sales managers, who are full-time employees of JTech. JTech also sells
its products via seminars, directed mailings, and catalogs using its customer
service personnel.
SUPPLIERS
The Company purchases its component parts and raw materials from various
approved suppliers. The Company is not dependent on any single supplier for any
item, and believes that it can acquire materials from various sources on a
timely basis.
PATENTS AND TRADEMARKS
The Company either owns or has applied for various trade names and trademarks in
the United States and abroad for use with its products and services. The Company
believes that its trade names and trademarks are well recognized with the
various markets for its products. The Company also believes that the loss of any
trade name and/or trademark would not have a material adverse effect on its
overall business operations.
In addition, the Company owns eleven patents with respect to its proprietary
medical device products. Except for the patents relating to Enteralite7 feeding
pump, the Company believes that the loss of any of its patents would not have a
materially adverse effect on its overall business operations. The Company also
relies on trade secrets and confidentiality agreements to protect the
proprietary nature of its technologies and has taken appropriate steps to
protect its trade secrets.
MAJOR CUSTOMERS
The Company's revenues historically have been, and for a substantial period of
time in the future likely will be, largely derived from the sale of its design
and manufacturing services to a small number of major customers. During the 1996
fiscal year, ZEVEX Inc. had three major customers, Allergan, Inc., Alaris
Medical Systems, Inc., (formerly IVAC Corporation), and Paradigm Medical Inc.,
these customers accounted for approximately 66% of Company revenue. These three
customers each accounted for more than ten percent of the Company's total
revenues in 1996. During the 1997 fiscal year, 15% of revenues were from
Allergan, 15% were from Paradigm, 18% were from Alaris, and 17% were from a
fourth company, Mentor H/S, Inc. During the 1998 fiscal year, 15% of revenues
were from Allergan, 16% were from Mentor, and 13% were from Alaris. No
assurances can be given that such customers will continue to do business with
the Company or that the volume of their orders for the Company's devices will
increase or remain constant. The loss of any of such major customers, or a
significant reduction in the volume of their orders for the Company's devices,
will have a material adverse impact on the Company's operations. In addition, if
one or more of these customers were to seek and obtain price discounts from the
Company for the Company's devices, the resulting lower gross margins on those
devices would have a materially adverse effect on the Company's overall results
of operations. If any customer with which the Company does a substantial amount
of business were to encounter financial distress, the customer's lateness,
unwillingness, or inability to pay its obligations to the Company could result
in a materially adverse effect on the Company's results of operations and
financial condition. Company management expects, however, that with the
acquisition of the NMI enteral feeding product line, as well as JTech and Aborn,
the percentage of total revenues represented by a few major customers will
decline, so that the loss of such a customer would have less potential to have a
materially adversely effect the financial condition or results of operations of
the Company in a material manner in the future.
BACKLOG
At December 31, 1998, the Company had a backlog of approximately $6,092,926 on
orders for medical devices to be manufactured by ZEVEX Inc. for other medical
technology companies, as compared to backlogs at December 31, 1997 and 1996, of
$6,265,007 and $3,091,000, respectively. The Company estimates that
approximately 90% of the backlog will be shipped before December 31, 1999. As of
March 23, 1999, the Company had a backlog of $6,291,768. For purposes of the
above figures, backlog includes all orders received by the Company pursuant to
purchase orders that have not been completed and shipped by the Company. This
does not include any backlog for the Company's proprietary products, because the
Company manufactures these devices and holds appropriate levels in inventory for
sale to customers. This also does not include any backlog for JTech or Aborn.
Some of the orders included in the backlog may be canceled or modified by
customers without significant penalty. In addition, since 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,
the Company's backlog as of any particular date may not necessarily be a
reliable indicator of future revenue.
COMPETITION
Competition for the Company's Design and Manufacturing Services.
The Company's primary competitors for design and manufacturing services include
a large number of other contract manufacturers and customers that operate in the
medical technology and optical/electronic product industries, some of which may
have substantially greater financial and marketing resources than the Company.
The primary competitive factors in medical and optical/electronic device design
and manufacturing include quality, regulatory compliance, engineering
competence, cost of non-recurring engineering design, price of the manufactured
product, experience, customer service, and ability to meet design and production
schedules. Competition for design and manufacturing of medical devices is
primarily limited to those companies that meet the minimum applicable regulatory
requirements of the FDA and international standards for manufacturing and
design. In the future, the Company is likely to compete against new entrants
into the industry as out-sourcing expands in the medical technology and
optical/electronic product industries. For example, medical technology companies
with design and manufacturing capabilities (especially those with excess
capacity) and large electronic contract manufacturers and defense department
contractors with extensive engineering expertise may undertake the design and/or
manufacture of medical and/or optical/electronic devices for third parties.
Competition for ZEVEX's Enteral Feeding Pumps
Two major competitors exist in the U.S. market for ambulatory enteral feeding
pumps. Ross Laboratories, a division of Abbott Laboratories, offers the
Companion7 pump, which was originally introduced to the market in the late
1980's. The Company estimates that Ross holds a market share of 45% for
ambulatory and non-ambulatory enteral feeding applications. Sherwood Medical,
the second competitor offers the kangaroo7 PET enteral feeding pump, which is
limited because it can only be operated in an upright position. It is estimated
that Sherwood presently holds greater than 35% of the total market for enteral
pumps and disposable sets in both ambulatory and non-ambulatory applications.
Well-established competitors such as Abbott and Sherwood typically bundle
products for the greatest advantage in group-purchasing situations. Each of
these competitors offers a breath of product offerings that far exceeds that of
the Company. Key to the Company's ability to compete effectively are the unique
features of its product offerings and the benefits to customers who utilize
them. The Company expects to build upon its reputation for innovation that was
earned by its EnteraLite7 Ambulatory Enteral Feeding Pump for mobile enteral
patients. In order to continue to increase revenues, the Company will grow its
product line so that it too can bundle a family of products to meet the enteral
nutrition delivery needs of its customers. The Company expects to develop and/or
acquire products which are complementary to the EnteraLite7, particularly those
having features which can significantly improve the quality of life of patients
and the safety and ease of enteral administration.
Competition for Musculoskelatal Products
The Company's primary competitors in the musculoskelatal products market are a
limited number of small privately held companies. Most notable are ARCON, The
Blankenship System, Key Methods, Isernhagen, Cedaron and Greenleaf Medical.
Generally these companies concentrate on particular areas such as
musculoskeletal testing, functional capacity evaluation of hand testing. JTech
management believes that few competitors can penetrate the broad spectrum of
medical professions possible with JTech products because their products lack the
full range of capabilities offered by JTech and none offer a completely modular
product line like JTech. Competitive factors in the musculoskelatal market
include perceived quality, price, name recognition, training capabilities,
support, operating system, defensibility, and system integration potential.
Competition in the market is primarily limited to those companies capable of
developing the necessary software and devices and meeting the FDA regulatory
requirements.
RESEARCH AND DEVELOPMENT FOR THE COMPANY'S PROPRIETARY PRODUCTS
As of December 31, 1998, ZEVEX Inc. had three full-time engineers in research
and development, and had several other designers and engineers contributing to
additional research and development projects. ZEVEX Inc.=s research and
development projects are primarily focused on new proprietary products. During
the last three fiscal years, ZEVEX Inc. continued independent research and
development activities with respect to the design and development of new and
improved devices, spending $290,699 in 1998, $702,563 in 1997, and $527,562 in
1996. In 1998 and 1997, research and development costs represented approximately
3% and 8% of the Company's revenues, respectively. Significant fluctuations
experienced in research and development are due to timing of the Company's
research projects. The most notable product from the Company=s research and
development efforts during the past two years is the EnteraLite7 Ambulatory
Enteral Feeding Pump.
GOVERNMENTAL REGULATION
ZEVEX Inc.'s manufacturing facilities, its customer's medical devices, and its
own 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, record-keeping requirements, and the reporting
of certain information regarding device safety. In addition, ZEVEX Inc.'s
facilities are subject to periodic inspection by the FDA (and certain state
agencies) for compliance with the FDA's GMP requirements. To ensure compliance
with GMP requirements, the Company expends significant time, resources, and
effort in the areas of training, production, and quality assurance.
For certain medical devices manufactured by the Company, the customer may need
to obtain FDA clearance of a premarket approval ("PMA") application. Such
applications require substantial preclinical and clinical testing to obtain FDA
clearance. Currently, at least two of the Company's customers are seeking or
plan to seek a PMA for devices to be manufactured by the Company. 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, the Company is also subject to
various state and federal regulations with respect to such matters as safe
working conditions, manufacturing practices, fire hazard control, environmental
protection, and the disposal of hazardous or potentially hazardous materials.
The Company's operations involve the use and disposal of relatively small
amounts of hazardous materials. The Company believes that compliance with
federal, state, and local regulations regarding the disposal of such materials
does not have a material effect on the capital expenditures, earnings, or
competitive position of the Company.
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. The Company has received and maintained ISO 9001 and
EN46001 certification, which allows the Company to CE Mark its own products and
assist its customers with obtaining the CE Mark for their products.
EMPLOYEES
As of March 15, 1999, the Company employed a total of 155 people in the
following areas: in Design and Engineering, 41; in Manufacturing and Test, 53;
in Quality Assurance, 12; and in Marketing and Administration, 49. The Company
has 147 people located at its corporate headquarters and manufacturing facility
in Salt Lake City, Utah, and 8 people located at its San Jose, California,
facility.
The Company also retains 4 consulting and contract personnel in the areas of
finance, engineering, and regulatory. The Company considers its labor relations
to be good, and none of its employees are covered by a collective bargaining
agreement. Currently, the local economy is growing and the unemployment rate is
low in the Salt Lake City metropolitan area, which means that the Company faces
competition to attract and retain qualified personnel. At the same time,
however, the Salt Lake City metropolitan area has a well-educated work force and
is considered an attractive place to live. Accordingly, the Company does not
anticipate having difficulty in attracting and retaining qualified personnel to
meet its projected growth.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND SALES
The Company's revenues historically have been largely derived from the sale of
its design and manufacturing services to a small number of major customers
located in the United States. During the 1998 fiscal year, the Company had total
revenues of $11,084,413, of which $623,572 was considered foreign source
revenues. During the 1997 fiscal year, the Company had total revenues of
$8,968,425, of which $457,390 was considered foreign source revenues. During the
1996 fiscal year, the Company had total revenues of $5,663,733, of which
$396,461 was considered foreign source revenues.
During the last three fiscal years, the Company has had no long-lived assets,
long term customer relationships with a financial institution, mortgage or other
servicing rights, deferred policy acquisition costs, or deferred assets, in any
foreign country.
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 1998 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 financial results. From time to time, the Company also
provides forward-looking statements in other publicly-released materials, both
written and oral. These statements are any statement that does not relate
strictly to historical or current facts. They use words such as "plans,"
"expects," "will" "believes" and other words and phrases of similar meaning. In
all cases, a broad variety of risks and uncertainties, both known and unknown,
as well as inaccurate assumptions can affect the realization of the expectations
or forecasts in those statements. Consequently, while such statements represents
Company management's current views, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
The Company undertakes no obligation to update any forward-looking statements,
but investors are advised to consult any further disclosures by the Company on
this subject in its subsequent filings pursuant to the Securities Exchange Act
of 1934. Furthermore, in accordance with the Private Securities Litigation
Reform Act of 1995, the Company provides the following cautionary statements
identifying factors that could cause the Company=s actual results to differ
materially from expected and historical results. It is not possible to foresee
or identify all such factors. Consequently, this list should not be considered
an exhaustive statement of all potential risks, uncertainties, and inaccurate
assumptions.
Additionally, the following factors should be reviewed for a full understanding
of the business of the Company and considered in evaluating the Company's
prospects for future growth. The occurrence of one or more of the
following risks or uncertainties could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Risk Factors Relating to the Company=s Customers
At the present time, and for a substantial period of time in the future, the
Company's success will depend largely on the success of the customers for its
manufacturing services and on the medical and optical/electronic devices
designed and manufactured by the Company 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 the Company. In addition, the Company sells
certain types of medical devices to multiple customers and to the extent there
is an unfavorable development affecting the sales of any such type of device
generally, the adverse effect of such development on the Company would be more
substantial than that presented by the decline in sales to a single customer for
such type of device. Additionally, the Company believes that its design and
manufacturing customers and their devices (and the Company indirectly) are
generally subject to the following risks:
Competitive Environment. The medical and optical/electronic product industries
are 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 the Company's 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 the Company. The competitors and potential
competitors of the Company's customers may succeed in developing or marketing
technologies and products that will be preferred in the marketplace over the
devices manufactured by the Company for its customers or that would render its
customers' technology and products obsolete or noncompetitive.
Emerging Technology Companies. A significant number of the Company's customers
are emerging medical technology companies that have competitors and potential
competitors with substantially greater capital resources, research and
development staffs, and facilities, and substantially greater experience in
developing new products, obtaining regulatory approvals, and manufacturing and
marketing medical products. Approximately eight customers, representing 9% of
the Company's revenues in fiscal year 1998, were, in management's opinion,
emerging medical technology companies. These customers may not be successful in
launching and marketing their products, or may not respond to pricing,
marketing, or other competitive pressures or the rapid technological innovation
demanded by the marketplace and, as a result, may experience a significant drop
in product revenues.
Customer Regulatory Compliance. The FDA regulates many of the devices
manufactured by the Company under the FDC Act, which requires certain clearances
from the FDA before new medical products can be marketed. There can be no
assurance that the Company's 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 the Company. 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 the Company's 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, the Company's
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 the Company's customers will obtain all
required clearances or approvals for exported products on a timely basis, if at
all.
Medical devices manufactured by the Company and marketed by its customers
pursuant to FDA or foreign clearances or approvals are subject to pervasive and
continuing regulation by the FDA and certain state and foreign regulatory
agencies. FDA enforcement policy prohibits the marketing of approved medical
products for unapproved uses. The Company's 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 the Company's customers to
comply with regulatory requirements. There can be no assurance that a customer
of the Company, or the Company, will not be required to incur significant costs
to comply with laws and regulations in the future, or that such customer or the
Company 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
the Company's customers will gain any significant market acceptance even if
required regulatory approvals are obtained. Some of the Company's 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. The Company's 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 and opto/electronic products. As a
result, the Company and its customers are subject to the risk of product and
inventory obsolescence, whether from prolonged development or government
approval cycles or the development of improved products or processes by
competitors. In addition, the marketplace could conclude that the task for which
a customer's medical product was designed is no longer an element of a generally
accepted diagnostic or treatment regimen.
Customers' Future Capital Requirements. Many of the Company's customers,
especially the emerging medical technology companies, are not profitable and may
have little or no revenues, but they have significant working capital
requirements. Such customers may be required to raise additional funds through
public or private financings, including equity financings. Adequate funds for
their operations may not be available when needed, if at all. Insufficient funds
may require a customer to delay development of a product, clinical trials (if
required), or the commercial introduction of the product or prevent such
commercial introduction altogether.
Uncertainty of Third-Party Reimbursement. Sales of many of the medical devices
manufactured by the Company will be dependent in part on availability of
adequate reimbursement for those instruments 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 the Company's customers to achieve market acceptance of their products.
Without adequate support from third-party payers, the market for the products of
the Company's customers may be limited.
Uncertainty of Market Acceptance of Out-Sourcing Manufacturing
of Medical Instruments
The Company believes that the market for out-sourcing the design and manufacture
of advanced medical products for medical technology companies is in its early
stages. Many of the Company's potential customers have internal design and
manufacturing facilities. The Company's engineering and manufacturing activities
require that customers provide the Company 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, the Company could suffer a substantial
reduction in the size of one or more of its current target markets, which could
have a material adverse effect on its business, results of operations, and
financial condition.
Competition in Out-Sourcing Manufacturing
The Company faces competition from design firms and other manufacturers that
operate in the medical and opto/electronic technology industries. Many
competitors have substantially greater financial and other resources than the
Company. Also, manufacturers focusing in other industries may decide to enter
into the industries served by the Company. Competition from any of the foregoing
sources could place pressure on the Company to accept lower margins on its
contracts or lose existing or potential business, which could result in a
material adverse effect on the Company's business, results of operations, and
financial condition. To remain competitive, the Company must continue to provide
and develop technologically advanced manufacturing services, maintain quality,
offer flexible delivery schedules, deliver finished products on a reliable
basis, and compete favorably on the basis of price. There can be no assurance
that the Company will be able to compete favorably with respect to these
factors.
Early Termination of Agreements
The Company's agreements with major customers generally permit the termination
of the agreements before expiration thereof if certain events occur that are
materially adverse to the design, development, manufacture, or sale of the
product. Examples of such events include the failure to obtain or the withdrawal
of regulatory clearance, or an alteration of regulatory clearance that is
materially adverse to the customer or which prohibits or interferes with the
manufacture or sale of the products. The performance of agreements with major
customers may be suspended or excused, if certain conditions, generally beyond
the control of the customer or the Company (so-called force majeure events),
cause the failure or delay of performance.
Risk Factors in Marketing the Company=s Proprietary Products
In producing and marketing its own proprietary devices, the Company faces many
of the same risks that its design/manufacturing customers face. As discussed
above with respect to its customers, such risks include:
The medical products industry is highly competitive. A significant number of the
Company's competitors have substantially greater capital resources, research and
development staffs, and 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 the Company's products or rendering the Company's 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,
the Company will be required to make ongoing investment in research and
development with respect to its existing and future products.
The Company is subject to substantial risks involved in developing and marketing
medical products regulated by the FDA and comparable foreign agencies. There can
be no assurance that the Company 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 the Company. Changes in existing laws and regulations or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. There can be no assurance that the Company's 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 the Company 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 the
Company's products.
Regulatory Compliance for Manufacturing Facilities
The Company expends significant time, resources, and effort in the areas of
training, production, and quality assurance to maintain compliance with
applicable regulatory requirements. There can be no assurance, however, that the
Company's manufacturing operations will be found to comply with GMP regulations,
ISO standards, or other applicable legal requirements or that the Company will
not be required to incur substantial costs to maintain its compliance with
existing or future manufacturing regulations, standards, or other requirements.
The Company's 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 the Company 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 the Company may be halted or
otherwise restricted.
Product Development
The success of the Company will depend to a significant extent upon its ability
to enhance and expand on its current offering of proprietary products and to
develop and introduce additional innovative products that gain market
acceptance. While the Company maintains research and development programs and
has established a Technical Advisory Board to assist it, there is no assurance
that the Company will be successful in selecting, developing, manufacturing, and
marketing new products or enhancing its existing products on a timely or
cost-effective basis. Moreover, the Company may encounter technical problems in
connection with its efforts to develop or introduce new products or product
enhancements. Some of the devices currently under consideration by the Company
(as well as devices of some of its customers) will require significant
additional development, pre-clinical testing and clinical trials, and related
investment prior to their commercialization. There can be no assurance that such
devices will be successfully developed, prove to be safe or efficacious in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable costs, or be successfully
marketed.
Design and Manufacturing Process Risks
While the Company has substantial experience in designing and manufacturing
devices, the Company may still experience technical difficulties and delays with
the design and manufacturing of its or its customer's products. Such
difficulties could cause significant delays in the Company's production of
products. In some instances, payment by a manufacturing
customer is dependent on the Company's 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 the Company include difficulty in meeting required specifications, difficulty
in achieving necessary manufacturing efficiencies, and difficulties in obtaining
materials on a timely basis.
Expansion of Marketing; Limited Distribution
The Company currently has a limited domestic direct sales force consisting of
eight individuals, complemented by a network of independent manufacturing
representatives. The Company anticipates that it will need to increase its
marketing and sales capability significantly to more fully cover its target
markets, particularly as additional proprietary devices become commercially
available. There can be no assurance that the Company will be able to compete
effectively in attracting and retaining qualified sales personnel or independent
manufacturing representatives as needed or such persons will be successful in
marketing or selling the Company's services and products.
Product Recalls
If a device that is designed or manufactured by the Company is found to be
defective, whether due to design or manufacturing defects, to improper use of
the product, or to other reasons, the device may need to be recalled, possibly
at the Company's expense. Furthermore, the adverse effect of a product recall on
the Company might not be limited to the cost of a recall. For example, a product
recall could cause a general investigation of the Company by applicable
regulatory authorities as well as cause other customers to review and
potentially terminate their relationships with the Company. Recalls, especially
if accompanied by unfavorable publicity or termination of customer contracts,
could result in substantial costs, loss of revenues, and a diminution of the
Company's reputation.
Risk of Product Liability
The manufacture and sale of products, especially medical products, entails an
inherent risk of product liability. The Company does maintain product liability
insurance with limits of $1 million per occurrence and $2 million in the
aggregate. There can be no assurance that such insurance is adequate to cover
potential claims or that the Company 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 large in the medical products area where
product failure may result in loss of life or injury to persons. Additionally,
the Company generally provides a design defect warranty and in some instances
indemnifies its customers for failure to conform to design specifications and
against defects in materials and workmanship, which could subject the Company to
a claim under such warranties or indemnification.
Potential Inability to Sustain and Manage Growth
The Company's need to manage its growth effectively will require it to continue
to implement and improve its operational, financial, and management information
systems, to develop its managers' and project engineers' management skills, and
to train, motivate, and manage its employees. The Company must also be able to
attract and retain a sufficient number of suitable employees to sustain its
growth. If the Company cannot keep pace with the growth of its customers, it may
lose customers and its growth may be limited.
Dependence Upon Management
The Company is substantially dependent upon its key managerial, technical, and
engineering personnel, particularly ZEVEX International's three executive
officers, Dean G. Constantine, Chief Executive Officer and President, David J.
McNally, Executive Vice President, Phillip L. McStotts, Chief Financial Officer
and Secretary/Treasurer, and key managerial personnel Leonard Smith, President
of JTech, and Vijay Lumba, President of Aborn. The Company 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 the Company can
attract and retain such personnel. The loss of its key personnel could have a
material adverse effect on the Company's business, results of operations, and
financial condition. Only Mr. Smith and Mr. Lumba have employment agreements
with their respective subsidiary companies. None of the other Company's key
personnel have an employment agreement with the Company.
The Company carries key-man life insurance on the lives of its Chief Executive
Officer, Chief Financial Officer, and Executive Vice President in the amount of
$500,000 each. No assurances can be given that such insurance would provide
adequate compensation to the Company in the event of the death of such key
employee.
Patent Protection
As of December 31, 1998, the Company held eleven U.S. patents on devices
developed by the Company. Such patents disclose certain aspects of the Company's
technologies and there can be no assurance that others will not design around
the patent and develop similar technology. The Company believes that its devices
and other proprietary rights do not infringe 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 15, 1999, the current executive officers and directors of ZEVEX
International, together with those persons who are the beneficial owners of more
than 5% of ZEVEX International's Common Stock, will beneficially own or have
voting control over approximately 33% of the outstanding Common Stock.
Accordingly, these individuals have the ability to influence the election of the
ZEVEX International's directors and most corporate actions. This concentration
of ownership, together with other provisions in the ZEVEX International's
charter and applicable corporate law, may also have the effect of delaying,
deterring, or preventing a change in control of the ZEVEX International.
Suppliers and Shortages of Component Parts
The Company relies on third-party suppliers for each of the component parts used
in manufacturing its customers' devices. Although component parts are generally
available from multiple suppliers, certain component parts may require long lead
times, and the Company may have to delay the manufacture of customer 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,
the Company could experience additional delays in obtaining component parts if
the supplier has not met the Company's vendor qualifications. Component
shortages for a particular device may adversely affect the Company's ability to
satisfy customer orders for that device. Such shortages and extensions of
production schedules may delay the recognition of revenue by the Company and may
in some cases constitute a breach of a customer contract. If shortages of
component parts continue or if additional shortages should occur, the Company
may be forced to pay higher prices for affected components or delay
manufacturing and shipping particular devices, either of which could adversely
affect subsequent customer demand for such devices.
Customer Conflicts
The medical technology industry reflects vigorous competition among its
participants. As a result, its customers sometimes require the Company to enter
into noncompetition agreements that prevent the Company from manufacturing
instruments for its customers' competitors. For example, the Company has agreed
with one customer not to manufacture certain devices for laser cataract surgery
for any other customer or potential customer. 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 the Company enters into a
noncompetition agreement, the Company may be adversely affected if its
customer's product is not successful and the Company must forgo an opportunity
to manufacture a successful instrument for such customer's competitor. Any
conflicts among its customers could prevent or deter the Company from obtaining
contracts to manufacture successful instruments.
Future Capital Requirements
The Company believes that its existing capital resources and amounts available
under the Company's existing bank line of credit, will satisfy the Company's
anticipated capital needs for the next two years (depending primarily on the
Company's growth rate and its results of operations). The commercialization of
proprietary products, which is an element of the Company's growth strategy,
would require increased investment in working capital and could therefore
shorten this period. Thereafter, the Company may be required to raise additional
capital or increase its borrowing capacity, or both. There can be no assurance
that alternative sources of equity or debt will be available in the future or,
if available, will be on terms acceptable to the Company. Any additional equity
financing would result in additional dilution to the Company's shareholders.
Reliance on Efficiency of Distribution and Third Parties
The Company believes its financial performance is dependent in part on its
ability to provide prompt, accurate, and complete services to its customers on a
timely and competitive basis. Accordingly, delays in distribution in its
day-to-day operations or material increases in its costs of procuring and
delivering products could have an adverse effect on the Company's results of
operations. Any failure of either its computer operating system or its telephone
system could adversely affect its ability to receive and process customer's
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 the Company to receive necessary
components or other materials or to ship its products also could impair the
Company's ability to deliver products on a timely and cost-effective basis.
Volatility of Revenues and Product Mix
The Company's annual and quarterly operating results are affected by a number of
factors, including the volume and timing of customer orders, which vary due to
(i) variation in demand for the customer's products as a result of, among other
things, product life cycles, competitive conditions, and general economic
conditions, (ii) the customer's attempt to balance its inventory, (iii) the
customer's need to adapt to changing regulatory conditions and requirements, and
(iv) changes in the customer's manufacturing strategy. 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 the Company's gross
margin. Under the terms of the Company's contracts with many of its customers,
the customers have broad discretion to control the volume and timing of product
deliveries. Further, the Company's contracts with its customers typically have
no minimum purchase requirements. As a result, production may be reduced or
discontinued at any time. Therefore, it is difficult for the Company 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 the Company's annual and quarterly results of operations include
inexperience in manufacturing a particular instrument, inventory shortages or
obsolescence, labor costs or shortages, low gross margins on design projects, an
increase in design revenues as a percentage of total revenues, price
competition, and regulatory requirements. Because the Company's business
organization and its related cost structure anticipate supporting a certain
minimum level of revenues, the Company's limited ability to adjust its short
term cost structure would compound the adverse effect of any significant revenue
reduction.
Uncertain Protection of Intellectual Property
To maintain the secrecy of its proprietary information, the Company relies on a
combination of trade secret laws and internal security procedures. The Company
typically requires its employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements. There can be no
assurance, however, that the common law, statutory, and contractual rights on
which the Company relies to protect its intellectual property and confidential
and proprietary information will provide it with adequate or meaningful
protection. Third parties may independently develop products, techniques, or
information that are substantially equivalent to the products, techniques, or
information that the Company considers proprietary. In addition, proprietary
information regarding the Company could be disclosed in a manner against which
the Company has no meaningful remedy. Disputes regarding the Company's
intellectual property could force the Company 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 the Company
from manufacturing and selling certain of its products.
Limited Market for Common Stock
Historically, the market for the ZEVEX International's 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 International's
Common Stock was listed for trading on the American Stock Exchange. In November
1998, ZEVEX International's 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 the
Company or its competitors, developments concerning the Company's proprietary
rights, or the public concern as to safety of its devices may have a material
adverse impact on the ZEVEX International's business and on the market price of
its Common Stock, particularly as the Company expands its efforts to become a
medical technology company that manufactures and markets its own proprietary
devices. The market price of ZEVEX International's Common Stock may be volatile
and may fluctuate based on a number of factors, including significant
announcements by the Company and its competitors, quarterly fluctuations in the
Company's operating results, and general economic conditions and conditions in
the medical technology 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-technology companies
and are often unrelated to the operating performance of such companies.
Issuance of Additional Shares for Acquisition or Expansion
Any future major acquisition or expansion of the Company 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 the Company's 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 the Company=s 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 the Company and may
maintain the incumbency of the Board of Directors and management. Such
provisions could also limit the price that certain investors might be willing to
pay in the future for shares of the Company=s Common Stock. Pursuant to the
Company=s Certificate of Incorporation, the Board of Directors is authorized to
fix the rights, preferences, privileges, and restrictions, including voting
rights, of unissued shares of the Company=s Preferred Stock and to issue such
stock without any further vote or action by the Company=s stockholders. The
rights of the holders of Common Stock will be subject to and may be adversely
affected by the rights of the holders of any Preferred Stock that may be created
and issued in the future. In addition, stockholders do not have the right to
cumulative voting for the election of directors. Furthermore, the Company=s
Certificate and Bylaws provide for a staggered board whereby only one-third 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
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 of the Company or pursuant to a resolution adopted by a majority of
the Board of Directors.
The Company is subject to Section 203 of the Delaware General Corporation Law
(ASection 203@), which restricts certain transactions and business combinations
between a corporation and an AInterested 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
The Company=s international business is subject to risks customarily encountered
in foreign operations, including changes in a specific country's or region's
political or economic conditions, nationalization, trade protection measures,
import or export licensing requirements, the overlap of different tax
structures, unexpected changes in regulatory requirements, other restrictive
government actions such as capital regulations, and natural disasters. The
Company is also exposed to foreign currency exchange rate risk inherent in its
foreign sales commitments and anticipated foreign sales because the prices
charged for its products are denominated in U.S. dollars. Consequently, the
Company=s foreign sales commitments and anticipated sales could be adversely
affected by an appreciation of the U.S. dollar relative to other currencies.
ITEM 2. PROPERTIES
ZEVEX International's executive offices, and the administrative offices and
manufacturing facilities of ZEVEX Inc. and JTech, are located in ZEVEX
International's 51,000 square foot, mixed-use building in Salt Lake City, Utah.
This building was constructed in 1997 to the Company's specifications. 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. The Company currently utilizes approximately 85% of
the building's available space and believes that the building will be adequate
to serve the Company's needs through the end of the year 2000. To allow the
Company to build additional facilities as growth may require, the Company has
acquired approximately 3.47 vacant acres adjacent to its facility.
Aborn's administrative and manufacturing operations are located in a leased
3,300 square foot building in San Jose, California. The building was constructed
in 1979 and is adequate for Aborn's needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the ZEVEX International's shareholders for vote in
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT=S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ZEVEX International's Common Stock has been trading on the National Market
system of The NASDAQ Stock Market since November 2, 1998, under the symbol ZVXI.
Prior to that date the stock traded on the American Stock Exchange beginning May
19, 1997, under the symbol ZVX. Prior to May 1997, the stock traded on the OTC
Bulletin Boards under the symbols ZVXI and ZVXIU. As of March 15, 1999, there
were 180 holders of record of the ZEVEX International's Common Stock (calculated
without reference to individual participants in securities position listings).
Because many of the ZEVEX International's shares of common stock are held by
brokers and other institutions on behalf of stockholders, ZEVEX International's
is unable to estimate the total number of stockholders represented by these
record holders. ZEVEX International has never declared or paid any cash
dividends on its Common Stock. Since ZEVEX International's intends to retain all
future earnings to finance future growth, it does not anticipate paying any cash
dividends in the foreseeable future. ZEVEX International's has a negative
covenant in its bank line of credit agreement that prevents the payment of any
cash dividend without prior approval of the bank.
The following table lists the high and low sales prices for ZEVEX
International's Common Stock for each full quarterly period since June 1, 1997,
and the high and low bid information for the common stock during the two
quarterly periods preceding June 1, 1997:
------------------------------------- -------------------------------------
1998 1997
High Low High Low
------------------ ------------------ ------------------- ------------------
1st Quarter $12.63 $7.88 $8.00 $3.25
2nd Quarter $11.25 $6.75 $11.25 $7.13
3rd Quarter $7.63 $4.50 $20.75 $13.50
4th Quarter $7.88 $4.00 $16.25 $8.50
The figures given above for periods prior to June 1, 1997 were obtained from a
market maker for ZEVEX International's common stock and reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
During 1998, ZEVEX International sold the following securities which were not
registered under the Securities Act of 1933 (the "Securities Act"):
1. On December 23, 1998, ZEVEX International issued 115,000 shares of
common stock to Nutrition Medical as partial consideration for the acquisition
of Nutrition Medical's assets relating to its enteral feeding pump and related
disposable feeding product business. The shares were issued to Nutrition Medical
(an accredited investor) pursuant to the exemption from registration available
under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.
2. On December 31, 1998, ZEVEX International 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. The debentures were issued to Messrs. Lumba and Parmar pursuant to the
exemption from registration available under Section 4(2) of the Securities Act
and/or Rule 506 promulgated thereunder. Messrs. Lumba and Parmar are
sophisticated or accredited investors who had access to all material information
about ZEVEX International during the negotiation of the purchase transaction.
All or part of the outstanding principal of each debenture is convertible by the
holder into ZEVEX International Common Stock at a rate of $11.00 per share at
any time between one and three years from the date of issuance.
3. On December 31, 1998, ZEVEX International 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. The debentures were issued to Messrs. Smith,
Livingston and Bernardi pursuant to the exemption from registration available
under Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder.
Messrs. Smith, Livingston and Bernardi are sophisticated or accredited investors
who had access to all material information about ZEVEX International during the
negotiation of the purchase transaction. All or part of the outstanding
principal of each debenture is convertible by the holder into ZEVEX
International Common Stock at a rate of $11.00 per share at any time between one
and three years from the date of issuance.
4. During the year ending December 31, 1998, there were 9,550 shares of
Common Stock issued pursuant to exercise of stock option by employees of the
Company. The exercise price on such shares ranged from $2.50 to $5.00 per share.
The shares issued upon exercise of the options were issued pursuant to the
exemption from registration available under SEC Rule 505.
5. During the year ending December 31, 1998, there were 30,000 shares
of Common Stock issued pursuant to the exercise of warrants issued by the
Company in February 1997. The exercise price on such shares were $3.50 per
share. The shares issued upon exercise of the warrants were issued pursuant to
the exemption from registration available under Section 4(2) of the Securities
Act.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA C FIVE-YEAR REVIEW
The following selected statement of operations data for the years ended December
31, 1998, 1997 and 1996, and the balance sheet data as of December 31, 1998 and
1997 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, 1995 and 1994 and the balance sheet data as of December
31, 1996, 1995 and 1994 are derived from the audited consolidated financial
statements of the Company, which are not included herein, and are qualified by
reference to such financial statements and the notes thereto.
Fiscal Year Ended December 31
1998 1997 1996 1995 1994
---------------------------------------------------------------------
Statement of Operations Data
Revenues $11,084,413 $8,968,425 $5,663,733 $5,295,762 $3,332,437
Gross profit 4,237,970 4,211,368 2,727,678 2,230,209 1,315,767
Selling, general and administrative expenses 3,879,408 2,481,090 1,892,317 1,324,928 1,023,988
Research and development expenses 290,669 702,563 527,562 502,255 419,278
Other (income)/expenses (407,469) (47,136) (243,947) (40,829) (36,127)
Provisions (benefit) for taxes 113,169 356,609 206,169 127,055 (66,709)
Net income (loss) 362,193 718,242 345,577 316,800 (24,662)
Net income (loss) per share basic .11 .34 .25 .24 (.02)
Weighted average shares outstanding 3,298,150 2,097,831 1,388,511 1,305,812 1,130,609
Net Income (loss) per share diluted .10 .29 .24 24 (.02)
Weighted average shares outstanding B assuming
dilution
3,636,434 2,443,482 1,411,687 1,333,768 1,151.991
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets $33,760,979 $22,582,543 $6,368,670 $3,247,375 $2,824,029
Total current liabilities * 7,395,946 1,290,466 588,009 346,504 273,708
Long-term debt (less current portion) 6,150,000 1,900,000 2,000,000 -- --
Stockholders' equity 20,114,535 19,265,697 3,701,449 2,900,871 2,550,321
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
* includes $4,204,500 that was paid on 1/6/99
The Company's management anticipates that the financial performance of the
Company during 1999 and future years will be affected materially by the addition
of the Nutrition Medical line of enteral feeding products beginning in July,
1998, and the addition of the operations of JTech and Aborn, beginning December
31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
ZEVEX International, Inc., (hereafter AZEVEX International@) is in the business
of designing and manufacturing advanced medical and electronic devices,
including surgical systems, device components, and sensors for medical
technology and other companies. ZEVEX International also designs, manufactures,
and markets its own medical devices and musculoskelatal evaluation products
using its proprietary technologies.
ZEVEX International conducts its business primarily through its oringinal wholly
owned subsidiary, ZEVEX, Inc., a Delaware corporation ("ZEVEX Inc."), and two
newly acquired, wholly owned subsidiaries, JTech Medical Technologies, Inc., a
Utah corporation ("JTech"), and Aborn Electronics, Inc., a California
corporation ("Aborn"). ZEVEX Inc. designs and manufactures medical devices for
medical technology companies, as well as for itself. JTech manufactures and
markets its own proprietary musculoskeletal evaluation products for health care
providers. Aborn designs and manufactures a variety of sophisticated optical
sensors and custom computer chips for medical technology and other companies.
DEVELOPMENTS DURING 1998
ZEVEX International substantially expanded its business during 1998,
diversifying ZEVEX International's offering of proprietary products and its
ability to design and manufacture sophisticated devices for other companies.
Company management believes that this expansion fulfills a major part of the
Company's plans for growth through acquisition. The expansion took place in
three major steps:
1. In July 1998, ZEVEX Inc. entered into an agreement with Nutrition Medical,
Inc., a Minnesota corporation ("Nutrition Medical "), to acquire Nutrition
Medical's enteral feeding line of products. Enteral feeding involves patient
feeding through feeding pumps, delivery sets, and feeding tubes through the
intestines or stomach. Company management believes that the addition of the
Nutrition Medical product line greatly complement ZEVEX Inc.'s existing line of
enteral feeding products, enhancing the Company's ability to serve the enteral
feeding markets. From July 1998 to December 1998, ZEVEX Inc. marketed the
Nutrition Medical products under an exclusive marketing arrangement, under that
agreement, the Company sold the Nutrition Medical line, but at a lower margin
than the Company normally receives for its proprietary products.
2. On December 31, 1998, the Company acquired JTech through a stock purchase
transaction with the four shareholders of JTech. JTech was organized in 1988 as
a sole proprietorship and later incorporated as JTech Medical Industries, Inc.
in 1995 to initially manufacture and sell range of motion measurement devices.
As mentioned above, JTech currently manufactures and markets its own proprietary
musculoskeletal evaluation products for health care providers, a line of
products not previously made or sold by ZEVEX Inc. With approximately 22
employees, JTech's gross revenues for 1998 were $2,796,344. The Company
anticipates a significant contribution to revenues from JTech in 1999.
3. On December 31, 1998, the Company acquired Aborn through a stock
purchase transaction with the sole shareholder of Aborn. Aborn was organized
in 1984 to initially design, manufacture and sell low cost commercial
fiber optic components. As mentioned above, Aborn currently designs and
manufactures a variety of sophisticated optical sensors, custom
computer chips and semiconductor components for medical technology and
other companies, bringing new design and manufacturing expertise to the
Company. With approximately 8 employees, Aborn's gross revenues for calendar
1998 were $1,250,488. The Company anticipates a significant contribution to
revenues from Aborn in 1999.
Because the acquisition of Aborn and JTech occurred at year end, the
contribution of these acquisitions to the financial performance of the Company
will not be realized until 1999.
ZEVEX=s sales results for 1998 were the strongest in the Company=s history.
Revenues were $11,084,413, a 23% increase over revenues of $8,968,425 in 1997,
and a 96% increase over revenues of $5,663,733 in 1995. Revenues for 1998
increased primarily due to demand for the Company=s proprietary products, and
the award of significant engineering and manufacturing service contracts.
Results of Operations
In each of the three preceding years, a small number of customers accounted for
a significant percentage of total revenues. Fluctuations in the timing and size
of orders from such major customers resulted in changes in the Company=s
revenues and product mix, which in turn affected gross margins. As a result, the
Company experienced variations in operating results from quarter to quarter, and
the results of operations for a specific quarter should not be considered
indicative of the results that may be achieved for longer periods.
Manufacturing revenue growth depends upon growth in demand for systems, devices
and instruments manufactured by the Company, as well as on the Company's ability
to acquire additional manufacturing service contracts from medical technology
companies. The Company's contract manufacturing customers have complete control
over the marketing and sales of products that the Company manufacture's for
them. The Company has no ability to increase demand for instruments that it
manufactures for its contract-manufacturing customers.
The Company markets its manufacturing capabilities and rarely undertakes design
work without securing exclusive manufacturing rights (See AManufacturing
Capabilities@). The volume and timing of future manufacturing revenues related
to any specific engineering project are highly variable. Certain engineering
projects may not lead to future manufacturing revenues. The manufacturing gross
margin percentage from year to year depends primarily on the product mix, as
gross margins vary by instrument and as a result of negotiated volume discounts.
Management may negotiate volume discounts if the larger volume results in
smaller per unit overhead, improving operating margin. The gross margin
percentage for manufacturing revenues from instruments not yet approved for
commercial use is generally lower because a smaller number of units produced
limits opportunities to achieve economies of scale and the instrument and its
manufacturing process are being refined, resulting in larger per unit costs
during the initial manufacturing phase.
The Company's annual and quarterly operating results are affected by a number of
factors, including the volume and timing of customer orders, which vary due to
(i) variation in demand for the customer's products as a result of, among other
things, product life cycles, competitive conditions, and general economic
conditions, (ii) the customer's attempt to balance its inventory, (iii) the
customer's need to adapt to changing regulatory conditions and requirements, and
(iv) changes in the customer's manufacturing strategy. 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 the Company's gross
margin. During the first quarter of 1999, the Company is continuing to work on a
contract with a certain customer on a fixed price contract, which may have an
adverse impact on the Company's gross margin. The Company also is completing a
reengineering project with a major customer on a cost sharing basis which may
adversely affect gross margin. The Company is in the process of increasing
prices of the products that it acquired in the Nutrition Medical acquisition
which the Company completed on December 23, 1998, in an effort to improve gross
margins on the Nutrition Medical line in 1999.
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
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
Revenues 100% 100% 100% 100% 100%
Gross profit 38% 47% 48% 42% 40%
Selling, general and 34% 27% 33% 25% 31%
administrative expenses
Research and development expenses 3% 8% 10% 9% 12%
Operating income/(loss) 1% 12% 5% 8% (3)%
Other income 3% --% 4% 1% 1%
Income (loss) before taxes 4% 12% 9% 9% (2)%
Provisions (benefit) for taxes 1% 4% 3% 3% (1)%
Net income (loss) 3% 8% 6% 6% (1)%
During 1998, 44% of total revenues resulted from sales to three customers, all
of whom were major customers in 1997. During 1997 and 1996, 65% and 66% of total
revenues resulted from sales to four customers and three customers,
respectively, three of which were major customers in both years.
The Company=s gross profit as a percentage of sales was 38% in 1998, as compared
to 47% in 1997 and 48% in 1996. Management attributes the decrease in 1998 to
the following factors: 1) the rapid increase in sales of the Enteralite Feeding
Pump in the second quarter exceeded the production capacity of ZEVEX's outside
supplier of disposable sets, which resulted in a surge in the cost of sales
related to this product due to increased shipping and related expenses necessary
to maintain the Company's obligations to its customers and reputation for
service; 2) delays experienced in the delivery schedules dictated by three of
the Company's major customers, where the Company normally experiences a higher
gross margin; 3) increased costs of engineering staff to execute new engineering
and production jobs obtained by the Company during the second and third
quarters; 4) recorded revenue related to the Nutrition Medical product
acquisition on which the Company did not realize any gross profit and small
gross margin related to products sold under the marketing agreement with
Nutrition Medical; 5) costs associated with the reengineering project to enhance
the marketability of a customer product on a cost sharing basis; and 6) a shift
in the revenue mix of the Company's products to lower margin items.
Selling, general and administrative expenses increased during 1998 to
$3,879,408, 35% of gross sales, as compared to $2,481,090, 28% of gross sales in
1997, and $1,892,317, 33% of gross sales in 1996. Increased expenses resulted
from the Company=s continuing growth as it established marketing channels for
proprietary products. The Company incurred one-time expense related to its
application and listing on the NASDAQ National Market, as well as increased
costs associated with legal, accounting, general consulting and public and
investor relations, depreciation and general administration. Expanded sales and
marketing efforts increased staffing, travel, advertising ,and administrative
expenses related to the Company's proprietary clinical nutrition delivery
product line. The Company also had an increase in expenses related to employees,
such as insurance, taxes, and pension benefits. The Company believes that
general and administrative expenses in 1999 as related to sales will continue at
approximately the same percentage rate as averaged over the last three years.
As of December 31, 1998, ZEVEX Inc. had three full-time engineers in research
and development, and had several other designers and engineers contributing to
additional research and development projects. ZEVEX Inc.'s research and
development projects are primarily focused on new proprietary products. During
the last three fiscal years, ZEVEX Inc. continued independent research and
development activities with respect to the design and development of new and
improved devices, spending $289,938 in 1998, $702,563 in 1997, and $527,562 in
1996. In 1998 and 1997, research and development costs represented approximately
3% and 8% of the Company's revenues, respectively. The most notable product from
the Company's research and development efforts during the past two years is the
EnteraLite7 Ambulatory Enteral Feeding Pump. Significant fluctuations
experienced in research and development are due to timing of the Company's
research projects. The Company expects research and developments costs in 1999
to be approximately 3% of revenues.
Operating income decreased to $67,893, 1% of gross sales in 1998 from
$1,027,715, 11% of gross sales in 1997, and $307,799, 5% of gross sales in 1996.
Similarly, the Company had a net income of $362,193, 3% of gross sales in 1998,
compared to $718,242, 8% of gross sales in 1997, and $345,577, 6% of gross sales
in 1996. These changes during 1998 as compared to 1997 and 1996 are principally
due to the costs addressed above in relation to cost of sales and selling,
general and administrative costs as well as changes in the Company's product mix
of lower margin items delivered during the year.
Liquidity and Capital Resources
The Company's increased working capital requirements during 1998 stemmed from
increasing accounts receivable and inventory levels associated with growth in
revenues and the Company's efforts to expand its operations by acquisitions of
products and technologies. Prior to 1997, working capital had been funded
primarily by a combination of increased accounts payable, borrowings under the
Company's revolving line of credit, and a $1.25 million private placement of the
ZEVEX International's Common Stock and warrants in February, 1997. In November,
1997 the ZEVEX International completed a secondary public offering of the ZEVEX
International's Common Stock, from which the ZEVEX International received
approximately $13 million in net proceeds.
During 1998, the Company produced $362,193 in net income. Cash and cash
equivalents decreased by $1,837,748 for 1998 from operating activities, as the
Company funded an increase in accounts receivable and inventories which continue
to increase as the Company continues to expand its manufacturing base and meet
customer requirements on lead times. During 1997, the Company had net income of
$718,242, and cash and cash equivalents decreased from operating activities by
$1,326,938, as the Company funded an increase in accounts receivable and
inventories. During 1996, the Company had a net income of $345,577, and cash and
cash equivalents decreased by $175,141 from operating activities, while the
Company funded an increase in accounts receivable.
In 1997, the Company completed construction of its new 51,000 square foot
headquarters and manufacturing facility. The cost of this undertaking was
approximately $2,591,177. In 1996, the company negotiated a $2.0 million
Industrial Development Bond to finance this construction. On October 29, 1996,
the Company paid $50,000 cash and 130,000 shares of unregistered Common Stock of
the Company for the purchase of approximately 3.7 acres of land in Salt Lake
City, Salt Lake County, Utah, as the site for this facility. The Company's
purchases of land, leasehold improvements to its facilities, and new research,
production, testing equipment, and tooling totaled $1,185,805 in 1998, as
compared to $3,004,926 in 1997, and $619,188 in 1996. The amount spent during
1998 is primarily attributed to the Company's purchase of approximately 3.5
acres of land adjacent to the Company's current facility in Salt Lake City in
March 1998, as well as to continued upgrading of the Company's production
fixturing, tooling and research and engineering capabilities. The increase in
equipment purchases between 1997 and 1996 is primarily due to upgrading the
Company's production fixturing, tooling and research and engineering
capabilities.
The Company's working capital at December 31, 1998, was $11,669,033, compared to
$17,235,516 at December 31, 1997, and $4,520,781 at December 31, 1996. The
portion of working capital represented by cash and short-term investments at
such dates was $9,558,543, $12,663,535 and $2,228,164 respectively. The decrease
in working capital during 1998 is primarily attributed to (i) the acquisitions
of the product line from Nutrition Medical and the stock purchases of JTech and
Aborn, (ii) increases in accounts and accrued payables, and (iii) an increase of
the Company's line of credit. In 1997, the increase in working capital was
primarily attributed to (i) completion of a secondary offering of the Company's
common stock in November, 1997, of approximately $13 million, (ii) increased
income from operations during the year, and (iii) a private placement that was
completed in February, 1997. In 1996, the Company used net cash flow of $175,141
in operating activities, as the Company funded an increase in accounts
receivable and inventories.
On December 23, 1998, ZEVEX International issued 115,000 shares of Common Stock
and paid $500,000 to Nutrition Medical, Inc. as consideration for the
acquisition of Nutrition Medical's assets relating to its enteral feeding pump
and related disposable feeding product business.
On December 31, 1998, ZEVEX International committed to pay cash of $1,572,500
and a 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. All or part of the outstanding
principal of each debenture is convertible by the holder into ZEVEX
International Common Stock at a rate of $11.00 per share at any time between one
and three years from the date of issuance. On December 31, 1998, ZEVEX
International committed to pay cash of $2,635,000 and a 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. All or part of the outstanding principal of each
debenture is convertible by the holder into ZEVEX International Common Stock at
a rate of $11.00 per share at any time between one and three years from the date
of issuance.
On February 12, 1997, the Company completed a private placement of $1,250,000 of
its securities, which consisted of 500,000 units at a price of $2.50 per unit.
Each unit consisted of one share of Common Stock and a warrant to purchase one
share of Common Stock at a price of $3.50 per share. As of December 31, 1998,
30,000 of the warrants included in the above units have been exercised.
The Company has agreed to register on demand 350,000 shares of the outstanding
warrants issued in connection with the private placement of February 12, 1997.
The demand registration rights have been granted for a period of two years from
the registration rights agreement, dated February 1, 1998. As of December 31,
1998, demand registration rights have not been exercised.
On December 11, 1996, the Company entered into a $500,000 open line of credit
arrangement with a financial institution. The line of credit was increased to
$1,000,000 on September 10, 1997, and increased again to $5,000,000 on December
31, 1997. The line is matures on May 31, 1999. The line of credit is
collateralized by accounts receivable and inventories, and bears interest at
prime rate. The Company owed $541,993 on the line of credit at December 31,
1998, zero at December 31, 1997, and $60,108 at December 31, 1996.
Inflation and Changing Prices
The Company has not been, and in the near term is not expected to be, materially
affected by inflation or changing prices.
Year 2000 Compliance
Many existing computer programs, worldwide, use only the last two digits to
refer to a year. Such computer programs may not properly recognize a year
beginning with "20" instead of the current "19". If not corrected, many computer
applications could fail or create incorrect results. This phenomena is often
referred to as the "Year 2000" or "Y2K" problem. There is substantial concern
that if the Year 2000 problem is not adequately addressed, there may be
widespread
problems with computer applications in all areas of use, potentially affecting
the global economy.
If the Company's internal systems and products do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
the Company's operations. Additionally, if the Company's supplier, customers,
and other parties experience Y2K difficulties, the Company could be adversely
affected. The Company is continuing the process of assessing and correcting
potential Year 2000 problems with the Company's operations.
State of Readiness
With regard to its information systems (financial, supply, inventory, order,
office support, etc.) the Company has developed and begun implementing a plan to
convert all necessary systems to be ready for the year 2000. Approximately 95%
of the necessary systems have been determined to be Y2K compliant by the
Company, or have been upgraded to new systems which are certified by the
manufacturer as Year 2000 compliant. Completion of correction or upgrading of
the remaining necessary systems is expected by July 1, 1999.
With regard to its non-information system operations, the Company is in the
process of reviewing and correcting Y2K problems in the following areas:
products currently manufactured by the Company; manufacturing and engineering
systems; and building systems. This review is approximately 95% complete and the
Company has been able to correct or plans to correct prior to 2000 each material
Y2K issue identified in the review.
With regard to potential Y2K issues for the Company's major material suppliers,
the Company is in the process of communicating with such parties. Although not
all major suppliers have indicated their Y2K compliance, the Company has not yet
identified any major supplier that believes it will be unable to operate due to
Y2K problems in 2000. Generally, the Company has alternative sources for
supplies in the event a supplier experiences such difficulties and the Company
does not presently anticipate material difficulties in obtaining materials due
to suppliers' Y2K problems.
With regard to major customers, the Company has had communications with such
parties and is reviewing responses regarding the Companies Y2K compliance. To
date, the Company has insufficient information from such parties to determine
the potential impact on the Company if such parties experience Y2K difficulties.
With regard to third-party utilities and services (for example, telephone
electrical, bankcard processing and shipping services), the Company has no plans
to evaluate the Y2K readiness of such providers.
Cost to Address Y2K Issues
As of March 1, 1999, the Company has spent approximately $180,000 in hardware
and software expenses to upgrade or correct Y2K problems with the Company's
internal systems. The Company currently expects to incur approximately an
additional $20,000 in costs for further upgrades and corrections. These costs
include, however, costs to upgrade and replace systems that the Company would
otherwise would have done in the normal course of business. The estimated costs
are based on management's best projections but there can be no guarantee that
these forecasts will be achieved and actual results could differ materially from
those anticipated. Company management anticipates that these costs will be
funded through operating cash flows. The Company has not yet been able to
estimate the costs it may incur as a result of its suppliers and customers
experiencing Y2K difficulties.
Risk of the Company's Y2K Issues
The Company anticipates that the material risks related to its information and
non-information systems will be timely mitigated by current efforts being made
by the Company to identify and correct internal Y2K problems. However, there is
no guarantee that the Company will successfully identify or correct all Y2K
problems in a timely manner. For example, due to the inherent limitations of
real-time clock devices and system BIOS in the Company's manufacturing equipment
or building systems, continued review and testing could uncover additional
problems. In some cases, problems may be unforeseen, and occur regardless of the
testing and review that is done. Other major Y2K risks for the Company arise
from the potential for major customers to experience financial or operational
difficulties resulting from Y2K problems. If such customers reduce their orders
for the Company's products or services, the Company's operations could be
adversely affected.
Additionally, a major potential Y2K risk to the Company's operations is service
disruption from third-party providers that supply telephone, electrical, banking
and shipping services. Any disruption of these critical services would hinder
the Company's ability to receive, process and ship orders.
Contingency Plan.
The Company has not yet considered adoption of a formal contingency plan for Y2K
issues.
Other Matters
Summary of Quarterly Data
12/98 9/98 6/98 3/98 12/97 9/97 6/97 3/97
Revenue $3,451,206 $2,346,143 $3,099,353 $2,187,711 $2,656,935 $2,497,125 $1,603,260 $2,211,105
Gross profit 1,502,990 307,943 1,516,749 910,288 1,375,032 962,760 835,146 1,038,430
Net income 319,748 (419,844) 347,281 115,008 307,479 128,238 56,987 225,538
EPS basic .09 (.13) .11 .04 .13 .06 .03 .13
EPS diluted .09 (.13) .10 .03 .11 .05 .02 .12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the form of fluctuations in
interest rates and their potential impact upon its industrial development bond
of $1,900,000. The variable rate on the industrial development bond is based on
a weekly tax-exempt floater rate until October 1, 2016.
Additionally, the Company holds marketable securities of $1,209,235
with fixed interest rates of 5.40% and 6.375% and maturities ranging from 1999
to 2000. The Company's marketable equity securities of $388,797 consist
primarily of public companies listed in small-cap market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company=s financial statements for the fiscal years ended December
31, 1998 and 1997, are included beginning at page 50, immediately follows Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has no changes in or disagreements with its independent
auditors with regard to financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ZEVEX INTERNATIONAL
The following table sets forth the name, age, and principal position of each
ZEVEX International director and executive officer, as well as the expiration of
each director's term of office.
Expiration
Name Age Position of Term
---- --- -------- -------
Dean G. Constantine 46 President, Chief Executive Officer and Director 2001
David J. McNally 37 Executive Vice President and Director 2000
Phillip L. McStotts 41 Chief Financial Officer, Secretary/Treasurer and Director 1999
Bradly A. Oldroyd 41 Director 2000
Darla R. Gill 47 Director 1999
Kirk Blosch 43 Director 1999
ZEVEX International executive officers serve at the discretion of the Board of
Directors. None of the executive officers has an employment agreement with ZEVEX
International. Certain biographical information with respect to each of the
officers and directors is set forth below.
Dean G. Constantine is a founder of ZEVEX International and has served as ZEVEX
International=s CEO, President, and Chairman of the Board since its inception in
1986. He also serves as a director of ZEVEX Inc., JTech, and Aborn, and as
President and CEO of ZEVEX Inc. Prior to joining ZEVEX International, he was
employed by EDO Corporation, Western Division, in Salt Lake City, Utah, from
October 1985 to September 1987, and from January 1971, to June 1983. During his
nearly fifteen years of employment with EDO Corporation, Mr. Constantine had
various responsibilities including project supervision, management of
engineering for commercial and industrial transducers, and research and
development. From July 1983, through October 1985, Mr. Constantine was employed
as an engineering specialist at Northrop Corporation Electro-Mechanical
Division, Anaheim, California, where his responsibilities included engineering
project management and applications engineering.
David J. McNally is a founder of ZEVEX International and has served as ZEVEX
International=s Executive Vice President, and as a director since its inception
in 1986. He also serves as a director of ZEVEX Inc., JTech, and Aborn, and as a
Vice President of ZEVEX Inc. Prior to joining ZEVEX International, he was
employed by EDO Corporation in Salt Lake City, Utah as a marketing manager of
transducers from October 1985 to September 1987. From June 1984 to October 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 June 1983, to June 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 a Master of Business
Administration Degree from the University of Utah in June 1992.
Phillip L. McStotts is a founder of ZEVEX International and has served as ZEVEX
International=s CFO, Secretary, and Treasurer, and as a director since its
inception. He also serves as a director of ZEVEX Inc., JTech, and Aborn, as CFO,
Secretary and Treasurer of ZEVEX Inc., and as Vice President and Secretary of
Aborn and as CFO and Secretary of JTech. In addition to running his own
professional corporation , Phillip L. McStotts, CPA P.C. since October 1986, Mr.
McStotts was employed from May 1985 to September 1986, as an accountant with the
Salt Lake City firm of Chachas & Associates, where he was tax manager. He has
also worked in the tax departments of the regional accounting firms of Pearson,
Del Prete & Company, and Petersen, Sorensen & Brough. Mr. McStotts received a
Bachelor of Science Degree in Accounting from Westminster College in May 1980,
and received a Master of Business Administration Degree in Taxation from Golden
Gate University in May 1982.
Bradly A. Oldroyd has been a director of ZEVEX International since October 1991.
He is the founder, principal shareholder of Pinnacle Management Group, a Salt
Lake City-based personnel services firm, serving as its president since 1986. 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.
Darla R. Gill is the owner of DRG Enterprises, a consulting company specializing
in marketing, sales and new product development. Ms.Gill was also the founder,
President and Chairman of Momentum Medical Corp., a Salt Lake City-based
manufacturer and distributor of home health care products from 1993 to 1998. She
continues to serve as a Director. Ms. Gill was a founder of Merit Medical
Systems, Inc., in Salt Lake City, and served until 1992 as Executive Vice
President and Director. She was also previously employed by Utah Medical
Products, Inc., where she served as Vice President of Marketing and Sales. Ms.
Gill also currently serves as a Director of the Board of NYB Corporation in Salt
Lake City. Ms. Gill graduated from the University of Phoenix with a Bachelors
Degree in Business Administration in 1988.
Kirk Blosch has been a general partner in the partnership of Blosch and Holmes ,
a business consulting and private venture funding general partnership since
1984. For the past fifteen years Mr. Blosch has been an advisor for various
public and private companies. During 1995 and 1996 Mr. Blosch provide bridge
financing for private companies prior to their initial offerings. Mr. Blosch
graduated from the University of Utah with a Bachelors Degree in Speech
Communications in 1977.
OTHER KEY EMPLOYEES
The other key employees of ZEVEX International are as follows:
Name Age Position
Leonard C. Smith 50 President and director of JTech
Vijay Lumba 50 President, CEO and director of Aborn
Certain biographical information with respect to each key employee is set forth
below.
Leonard C. Smith is a founder of JTech and has served as its President since
1995. Prior to joining JTech, in 1994 he established Athe Charles Group@, a
medical marketing company specializing in diagnostic and rehabilitation
products. From 1993 to 1994, Mr. Smith was Vice President with Four Corners, a
large chain of health clubs, based in the Southwest. From 1979 to 1993, Mr.
Smith was a partner and Vice President of Sales and Marketing at Hoggan Health
Industries, a manufacturer of commercial fitness equipment. Mr. Smith received a
Bachelor of Science Degree in Business Management from the University of Utah in
June 1977.
Vijay Lumba is the founder of Aborn and has served as the President since 1983.
He was also previously employed by Fairchild Semicondutor Optoelectronics
Division, where he served as a Product Manager with responsibilities of design
and development of new products and the transfer of manufacturing technologies
to the Far East for high volume production. Mr. Lumba graduated from Delhi
University, India with a Bachelors Degree in Physics, Chemistry and Mathematics
in 1969. Mr. Lumba also graduated from Heald Engineering College, in San
Francisco, California with a Bachelors Degree in Electrical Engineering in 1972.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, the Audit Committee and the
Compensation Committee. The Audit Committee is composed of Ms. Darla R. Gill
and Mr. Bradly A. Oldroyd. The Compensation Committee is also composed of
Ms. Gill and Mr. Oldroyd. The Audit Committee is authorized to review
proposals of ZEVEX International=s independent auditors regarding annual audits
, recommend the engagement or discharge of ZEVEX International=s independent
auditors, review recommendations of such auditors concerning accounting
principles and the adequacy of internal controls and accounting procedures and
practices, to 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 to review and discuss the audited
financial statements with the auditors. The Compensation Committee makes
recommendations to the Board of Directors regarding remuneration of the
executive officers and directors of ZEVEX International and oversee the
administration of the Company's stock option plan.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held seven meetings during the last fiscal year. The
Audit Committee held one meeting during the last fiscal year. The Compensation
Committee held two meetings during the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by ZEVEX International to
each of ZEVEX International's executive officers during the three-year period
ended December 31, 1998.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Position Year Salary Bonus Comp. Awards Options Payouts Comp.
- ------------------ ---- ------ ----- ----- ------ ------- ------- -----
Dean G. Constantine 1998 $107,755 $50,000 0 0 0 0 $5,000(1)
CEO and President 1997 $105,000 $11,125 0 0 0 0 $4,207(1)
1996 $77,917 $12,189 0 0 0 0 $6,286(1)
David J. McNally 1998 $107,755 $50,000 0 0 0 0 $5,000(1)
Executive Vice President 1997 $105,000 $11,125 0 0 0 0 $4,207(1)
1996 $77,917 $12,189 0 0 0 0 $6,286(1)
Phillip L. McStotts 1998 $107,755 $50,000 0 0 0 0 $5,000(1)
Secretary/Treasurer 1997 $105,000 $11,125 0 0 0 0 $4,207(1)
1996 $77,917 $12,189 0 0 0 0 $6,286(1)
(1) Represents the amount paid by ZEVEX International as a contribution to ZEVEX
International's 401(k) Pension and Profit Sharing Plan on the officer's behalf.
OPTIONS GRANTS IN LAST FISCAL YEAR
The Company made no grants of stock options to its executive officers during the
last fiscal year.
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, 1998, by each executive officer of ZEVEX International 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 on Exercise Realized Unexercisable Unexercisable
- --------- -------- -- -------- -------- ------------- -------------
Dean G. Constantine
CEO, President 0 0 29,900/52,500 $6,300/0
David J. McNally
Executive Vice President 0 0 29,900/52,500 $6,300/0
Phillip J. McStotts
Secretary/Treasurer 0 0 29,900/52,50 $6,300/0
Of the unexercised options listed above for each of Messrs. Constantine,
McNally, and McStotts, 5,400 were granted on December 17, 1992, and expire on
December 16, 2001. The exercise price on such options is $5.00. Of the
unexercised options listed above for each of Messrs. Constantine, McNally, and
McStotts, 7,000 were granted on February 13, 1997, and expire on February 12,
2002. The exercise price on such options is $3.85. Of the unexercised options
listed above for each of Messrs. Constantine, McNally, and McStotts, 70,000 were
granted on September 30, 1997 and expire on September 29, 2002. The exercise
price on such options is $5.00. The value of the unexercised options was
determined by reference to the closing sales price for ZEVEX International's
Common Stock on the NASDAQ Stock Market as of the end of 1998.
REPORT ON OPTION REPRICING
The following table sets forth information with respect to the repricing of
options held by ZEVEX International's executive officers. For further
information see Report of Compensation Committee.
Repriced Options Table
(a) (b) (c) (d) (e) (f) (g)
Number Original Repriced Time Remaining
Market
Name and Date of Of Price at Exercise Exercise Before option
Principal Position Reprice Options Repricing Price Price Expired
Dean G. Constantine 10/22/98 70,000 $4.875 $16.44 $5.00 3yrs 11mo.
CEO and President
David J. McNally 10/22/98 70,000 $4.875 $16.44 $5.00 3yrs 11mo.
Executive Vice Pres.
Phillip L. McStotts 10/22/98 70,000 $4.875 $16.44 $5.00 3yrs 11mo.
Secretary/Treasurer
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors reviews and
approves salaries, bonuses, and other benefits payable to the ZEVEX
International's officers. The Compensation Committee is composed of
Ms. Darla R. Gill and Mr. Bradly A. Oldroyd, both independent non-employee
directors.
The goals of the Compensation Committee in establishing compensation
for executive officers are to align executive compensation with business
objectives and performance and to enable ZEVEX International to attract, retain
and reward executive officers who contribute to the long-term success of the
ZEVEX International. The compensation policies and programs utilized by the
Compensation Committee and endorsed by the Board of Directors generally consist
of the following:
i. Recommending executive officer total compensation in relation to ZEVEX
International's performance; ii. Providing a competitive compensation program in
order to attract, motivate and retain qualified personnel; iii. Providing a
management tool for focusing and directing the energies of the ZEVEX
International's three executives toward
achieving individual and corporate objectives; and
iv. Providing long-term incentive compensation in the form of annual
stock option awards and performance-based stock option awards to
link individual success to that of the ZEVEX International.
ZEVEX International's executive compensation consists of three
components: base salary, annual incentive compensation in the form of cash
bonuses, and stock options, each of which is intended to complement the others,
and together are designed to satisfy the ZEVEX International's compensation
objectives. The Compensation Committee's policies with respect to each of the
three components are discussed below:
Base Salary. The Compensation Committee considers several factors in
determining base salaries for ZEVEX International's three executive officers,
including industry averages for comparative positions, responsibilities of the
executive officers, length of service with the ZEVEX International's, and
corporate and individual performance.
Cash Bonuses. Cash bonuses paid to ZEVEX International's three
executive officers are discretionary and are based on the relative success of
ZEVEX International in attaining certain financial objectives and the three
officers' contribution to the achievement of those financial objectives.
Stock Options. Stock options provide additional incentives to ZEVEX
International's three executive officers to maximize long-term shareholder
value. The options that have been granted vest over a defined period to
encourage these officers to continue their employment with the ZEVEX
International. ZEVEX International also grants stock options to all employees,
commensurate with their potential contributions to the ZEVEX International.
Committee Meeting Report October 22, 1998. It was resolved at a meeting
of the compensation Committee that it is in the best interest of the Company to
motivate several of its current option holders by reducing the exercise price of
their outstanding stock option grants. Effective October 22, 1998, the
Compensation Committee approved the repricing of the grants of Common Stock
purchase options for 70,000 shares each to Messrs. Constantine, McNally, and
McStotts issued on September 30, 1997. The options vest over a four-year period
and are now exercisable at a price of $5.00 per share. Also, effective October
22, 1998, the Compensation Committee approved the repricing of grants of Common
Stock purchase options to ZEVEX International=s three non-employee directors as
follows: (1) 15,000 shares to Mr. Oldroyd and 13,000 shares to Ms. Gill, of
which 14,000 and 12,000 respectively were issued on June 4, 1998 and vest over a
four-year period and 1,000 each were issued on June 19, 1997 which are fully
vested and are now exercisable at a price of $5.00 and 10,000 share to Mr.
Blosch which were issued on June 4, 1998 and vest over a four-year period are
now exercisable at a price of $5.00.
Chief Executive Officer Compensation
Dean G. Constantine has been President and Chief Executive Officer of
the ZEVEX International since its incorporation in 1986. For fiscal year 1998,
Mr. Constantine received compensation consisting of a salary of $107,755, and a
cash bonus of $50,000. The bonus was awarded because ZEVEX International met
certain financial and other corporate goals. Also, options to purchase 70,000
additional shares of ZEVEX International's Common Stock held by Mr. Constantine
were repriced from $16.44 per share to $5.00 per share. In determining Mr.
Constantine's compensation, the Compensation Committee evaluates corporate
performance, individual performance, compensation paid to the Company's two
other executive officers, and compensation paid to chief executive officers of
comparable companies. Through his equity ownership in ZEVEX International,
consisting of 257,200 shares of Common Stock and options to purchase 82,400
shares of Common Stock, Mr. Constantine shares with other shareholders of the
ZEVEX International have a significant stake in the success of the ZEVEX
International's business.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Darla R. Gill
Bradly A. Oldroyd
COMPANY STOCK PRICE PERFORMANCE
The following graph shows a comparison of the cumulative total
shareholder return on the ZEVEX International's Common Stock over the past five
fiscal years with the cumulative total return of the Russell 2000 Stock Index
and the Company's Peer Group, consisting of Novametrix Medical, Applied
Biometrics, Inc., Candela Laser Corporation, Invivo Corporation, Zoll Med
Corporation, Lectec Corporation and Medstone International. The graph assumes
$100 is invested in ZEVEX International's Common Stock and in each of the two
indices at the closing market quotation on December 31, 1993 and that dividends
are reinvested.
The stock price performance graph depicted below shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934. The stock price performance on the graph is
not necessarily an indicator of future price performance.
[OBJECT OMITTED]
1993 1994 1995 1996 1997 1998
-------- ------- -------- -------- -------- --------
Russell 2000 100 98 122 143 164 164
Peer Group 100 66 89 90 68 78
ZEVEX 100 75 80 66 183 95
COMPENSATION OF DIRECTORS
The Company pays each director who is not an employee of the Company a
director's fee of $625 per Board of Directors meeting attended, $250 for any
annual meeting attended, and $125 per hour for any special meeting attended.
Additionally, the Company has issued stock options to the non-employee directors
in the past and may do so in the future. Although the Company 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of ZEVEX International's Common Stock (par value $0.001) as of March
15, 1999, by (i) each person (or group of affiliated persons) who is known by
ZEVEX International to beneficially own more than 5% of the outstanding shares
of ZEVEX International's Common Stock, (ii) each director and executive officer
of ZEVEX International, and (iii) all executive officers and directors of ZEVEX
International as a group. As of such date, ZEVEX International had a total of
3,418,876 shares of Common Stock outstanding. Unless indicated otherwise, the
address for each officer, director and 5% shareholder is c/o ZEVEX
International, 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123.
Number of Percent
Name Shares Owned Of Class(1)
Kirk Blosch(2) 550,000 14.8%
Jeff Holmes(3) 550,000 14.8%
Blosch & Holmes, L.L.C.(4) 250,000 7.6%
Dean G. Constantine(5) 287,130 8.3%
David J. McNally(6) 270,098 7.8%
Phillip L. McStotts(7) 179,300 5.2%
Bradly A. Oldroyd(8) 11,500 *
Darla R. Gill(9) 9,480 *
All Officers and Directors
as a Group (6 persons) 757,508 21.5%
*Less than 1%
(1) For each shareholder, the calculation of percentage of beneficial ownership
is based on 3,418,876 shares of Common Stock outstanding as of March 15, 1999,
and shares of Common Stock subject to options held by the shareholder that are
currently exercisable or exercisable within 60 days, which are deemed to be
outstanding and to be beneficially owned by the shareholder holding such
options. The percentage ownership of any shareholder is determined by assuming
that the shareholder has exercised all options and conversion rights to obtain
additional securities and that no other shareholder has exercised such rights.
Except as indicated otherwise below, the persons and entity named in the table
have 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) Director. Includes 125,000 shares of Common Stock held directly by Mr.
Blosch, 175,000 shares of Common Stock issuable upon exercise of warrants that
are currently exercisable or will become exercisable within 60 days, and 250,000
shares of Common Stock held by Blosch & Holmes, L.L.C. of which Mr. Blosch is a
principal (and which 250,000 shares are also reported as beneficially owned by
Mr. Holmes and Blosch & Holmes, L.L.C.). Excludes 10,000 shares of Common Stock
issuable upon exercise of options held by Mr. Blosch that are not currently
exercisable and will not become exercisable within 60 days. Mr. Blosch's address
is 2081 S. Lakeline Drive, Salt Lake City, UT 84109.
(3) Includes 125,000 shares of Common Stock held directly by Mr. Holmes, 175,000
shares of Common Stock issuable upon exercise of warrants that are currently
exercisable or will become exercisable within 60 days, and 250,000 shares of
Common Stock held by Blosch & Holmes, L.L.C. of which Mr. Holmes is a principal
(and which 250,000 shares are also reported as beneficially owned by Mr. Blosch
and Blosch & Holmes, L.L.C.). Mr. Holmes' address is 8555 E. Voltaire Ave.,
Scottsdale, AZ 85260.
(4) Includes 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of
which Messrs. Blosch and Holmes are principals (and which 250,000 shares are
also reported as beneficially owned by Mr. Holmes and Mr. Blosch). The address
for Blosch & Holmes, L.L.C.
is 2081 S. Lakeline Drive, Salt Lake City, UT 84109.
(5) Chief Executive Officer, President and Chairman of ZEVEX International.
Includes 257,000 shares of Common Stock held directly, 29,900 shares of Common
Stock issuable upon exercise of options held by Mr. Constantine that are
currently exercisable or will become exercisable within 60 days, and 230 shares
of Common Stock owned by his dependent child. Excludes 52,500 shares of Common
Stock issuable upon exercise of options held by Mr. Constantine that are not
currently exercisable and will not become exercisable within 60 days.
(6) Executive Vice President and director of ZEVEX International. Includes
240,198 shares of Common Stock held directly and 29,900 shares of Common Stock
issuable upon exercise of options held by Mr. McNally that are currently
exercisable or will become exercisable within 60 days. Excludes 52,500 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.
(7) Chief Financial Officer, Secretary, Treasurer, and director of ZEVEX
International. Includes 149,400 shares of Common Stock held directly and 29,900
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 52,500 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.
(8) Director. Includes 11,500 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days. Excludes 10,500 shares of Common Stock issuable upon exercise of options
held by Mr. Oldroyd that are not currently exercisable and will not become
exercisable within 60 days. (9) Director. Includes 480 shares of Common Stock
held directly and 9,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days.
Excludes 9,000 shares of Common Stock issuable upon exercise of options held by
Ms. Gill that are not currently exercisable and will not become exercisable
within 60 days.
SECTION 16(a) BENEFICIAL REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the AExchange
Act@), requires ZEVEX International=s directors, executive officers, and 10%
shareholders to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of Common Stock. Based solely
on a review of the copies of such reports furnished to ZEVEX International and
written representations that no other reports were required, ZEVEX International
believes that all directors, executive officers, and 10% shareholders during
1998 complied on a timely basis with all applicable filing requirements under
Section 16(a) of the Exchange Act, except as follows: Dean G. Constantine, David
J. McNally. Phillip L. McStotts, Bradly A. Oldroyd, Darla R. Gill, and Kirk
Blosch each filed one late report on of Form 5, due in February 1999, for one
transaction regarding the October repricing of certain options held by such
persons.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ZEVEX International has granted demand registration rights, for a two-year
period commencing February 1, 1998, with respect to 350,000 shares of Common
Stock issuable upon the exercise of warrants held by Kirk Blosch and Jeff W.
Holmes, two of ZEVEX International=s principal shareholders. ZEVEX International
has agreed to pay the registration expenses arising in connection with the
registration of these shares. The selling expenses will be paid by Messrs.
Blosch and Holmes.
On April 15, 1997, ZEVEX International entered into a consulting contract with
DMG Advisors, L.L.C., a Nevada limited liability company (ADMG@). Kirk Blosch
and Jeff W. Holmes, two of ZEVEX International=s principal shareholders, are
members and managers of DMG. Under the consulting contract, ZEVEX International
paid an initial fee of $50,000 and is paying $10,000 per month through March 15,
1999 in exchange for the consulting services of DMG in the nature of strategic
planning, public relations, advice regarding financings, and the identification
and evaluation of potential acquisitions of new products or companies. ZEVEX
International is also obligated to pay reasonable business expenses incurred by
DMG.
Pursuant to a Stock Purchase Agreement, dated December 31, 1996 between ZEVEX
International and Blosch & Holmes, L.L.C., a Utah limited liability company
(ABlosch & Holmes@), as amended on September 30, 1997, Blosch & Holmes has the
right to appoint one member of ZEVEX International=s board of directors,
provided that such nominee must be acceptable to ZEVEX International. Kirk
Blosch and Jeff W. Holmes, principal shareholders of ZEVEX International, are
the two member/managers of Blosch & Holmes. The right to appoint a member of
ZEVEX International=s board of directors expires when Blosch & Holmes, together
with Kirk Blosch and Jeff W. Holmes, no longer holds at least 6.5% of the voting
stock of ZEVEX International. Blosch & Holmes have exercised this right with the
appointment of Mr. Blosch to the board in June 1998.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report.
(1) - Financial Statements.
The following Consolidated Financial Statements of ZEVEX International and its
subsidiaries for the years ended December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998, are filed as part
of this report:
Report of Ernst & Young LLP, Independent Auditors
Report of Daines and Rasmussen, P.C., 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
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
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, __, 1999 By: DEAN G. CONSTANTINE
---- -- -----------
Dean G. Constantine
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 indicates.
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints each of Dean G. Constantine 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
DEAN G. CONSTANTINE Chairman of the Board of Directors, March __, 1999
Dean G. Constantine Chief Executive Officer, and President
(Principal Executive Officer)
DAVID J. MCNALLY Director, Executive Vice President, March __, 1999
- ----- -- -------
David J. McNally
PHILLIP L. McSTOTTS Director, Chief Financial Officer, March __, 1999
Phillip L. McStotts Secretary, and Treasurer (Principal
Financial and Accounting Officer)
BRADLY A. OLDROYD Director March __, 1999
- ------ -- -------
Bradly A. Oldroyd
DARLA R. GILL Director March __, 1999
Darla R. Gill
KIRK BLOSCH Director March __, 1999
Kirk Blosch
INDEX TO EXHIBITS
(Item 14(c))
Number Exhibits
3.1 Articles of Incorporation of ZEVEX International, Inc., a Delaware
corporation (1).
3.2 Bylaws of ZEVEX International, Inc., a Delaware corporation (1).
10.1 Revolving Line of Credit Agreement between Bank One and ZEVEX
International, dated September 29, 1997 (1).
10.2 Amendment to Revolving Line of Credit Agreement between Bank One and
ZEVEX International, dated December
31, 1997 (2).
10.3 Stock Purchase Agreement between Blosch & Holmes, LLC and ZEVEX
International, 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, dated February 1,
1998 (2).
10.5 ZEVEX International, Inc., Amended 1993 Stock Option Plan (3).
10.6 Industrial Development Bond Offering Memorandum,
dated October 30, 1996 (4).
10.7 Industrial Development Bond Reimbursement Agreement, dated October
30, 1996 (4).
10.8 Warrant to Purchase 50,000 shares of Common Stock issued to Wedbush
Morgan Securities, Inc., dated November
20, 1997 (2).
10.9 Warrant to Purchase 50,000 shares of Common Stock issued to Everen
Securities, Inc., dated November 20,
1997 (2).
10.10 Warrant to Purchase 500,000 shares of Common Stock originally issued to
Blosch & Holmes, LLC, dated
February 12, 1997 (2).
10.11 Description of Property Acquisition, dated March 4, 1998 (2).
10.12 Quit-Claim Deed for purchase of 3.47 acres of land, dated March
4, 1998 (2).
10.13 Stock Purchase Agreement, dated December 31, 1998, between ZEVEX
International and Vijay Lumba (5).
10.14 Stock Purchase Agreement, dated December 31, 1998, among ZEVEX
International, Leonard Smith, Tracy
Livingston, David Bernardi, and Corporation of the
President of the Church of Jesus Christ of Latter Day
Saints (5).
10.15 Convertible Debenture, dated January 6, 1999, issued to Vijay Lumba.
10.16 Convertible Debenture, dated January 6, 1999, issued to Leonard Smith.
10.17 Convertible Debenture, dated January 6, 1999, issued to Tracy
Livingston.
10.18 Convertible Debenture, dated January 6, 1999, issued to David Bernardi.
10.19 1998 Stock Option Plan and Form of Stock Option Grant
21 List of Subsidiaries.
27 Financial Data Schedule.
(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 the Company's 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. 333-37189).
(4) Incorporated by reference to the Company's amended Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 033-19583).
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed January 14, 1999 (File No. 001-12965).
# Identifies a "management contract or compensatory plan or arrangement".
Consolidated Financial Statements
ZEVEX International, Inc.
For the years ended December 31, 1998 and
December 31, 1997
with Independent Auditors' Reports
ZEVEX International, Inc.
Consolidated Financial Statements
For the years ended December 31, 1998 and
December 31, 1997
Contents
Report of Daines & Rasmussen, P.C., Independent Auditors.......................
Report of Ernst & Young LLP, Independent Auditors..............................
Consolidated Financial Statements
Consolidated Balance Sheets ...................................................
Consolidated Statements of Operations .........................................
Consolidated Statements of Stockholders' Equity ...............................
Consolidated Statements of Cash Flows .........................................
Notes to Consolidated Financial Statements ....................................
Independent Auditors' Report
Board of Directors and Stockholders
ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheets of ZEVEX
International, Inc. and its subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ZEVEX
International, Inc. and its subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Salt Lake City, Utah /Daines & Rasmussen, P.C.
February 13, 1997
Independent Auditors' Report
Board of Directors and Stockholders
ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheets of ZEVEX
International, Inc. and its subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ZEVEX
International, Inc. and its subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Salt Lake City, Utah /Ernst & Young LLP
February 24, 1999
ZEVEX International, Inc.
Consolidated Balance Sheets
December 31
1998 1997
------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,960,511 $ 2,260,426
Cash restricted for sinking fund payment on industrial
development bond 182,049 76,164
Accounts receivable, net of allowance for doubtful
accounts of $138,000 in 1998 and $33,000 in 1997 3,435,181 2,095,455
Inventories 5,574,394 3,540,591
Marketable securities 1,598,032 10,403,109
Deferred income taxes 249,251 82,930
Prepaid expenses 65,561 67,307
------------------------------------
------------------------------------
Total current assets 19,064,979 18,525,982
Property and equipment, net 5,505,643 3,933,804
Patents and trademarks, net of amortization of $17,439
and $7,718 139,792 122,002
Goodwill 8,998,006 -
Other assets 52,559 755
====================================
$ 33,760,979 $ 22,582,543
====================================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 1,076,110 $ 640,579
Accrued liabilities 469,079 244,484
Income taxes payable 50,891 285,403
Bank lines of credit 541,993 -
Current portion of long-term debt 5,042,000 100,000
Other 215,873 20,000
------------------------------------
Total current liabilities 7,395,946 1,290,466
Deferred income taxes 97,228 126,380
Industrial development bond 1,800,000 1,900,000
Convertible debt, long-term portion 4,350,000 -
Other long-term liabilities 3,270 -
Stockholders' equity:
Common stock, $.001 par value: 10,000,000 shares
authorized; 3,418,876 and 3,264,326 shares issued
and outstanding in 1998 and 1997, respectively 3,419 3,265
Additional paid in capital 17,381,793 16,697,203
Retained earnings 2,927,422 2,565,229
Treasury stock, 6,700 shares at cost (50,790) -
Unrealized loss on available-for-sale securities, net
of tax benefit of $87,633 (147,309) -
------------------------------------
Total stockholders' equity 20,114,535 19,265,697
====================================
$ 33,760,979 $ 22,582,543
====================================
See accompanying notes.
ZEVEX International, Inc.
Consolidated Statements of Operations
Year ended December 31
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
Revenues:
Product sales $10,475,256 $ 8,176,155 $ 4,891,272
Engineering services 609,157 792,270 772,461
-----------------------------------------------------
11,084,413 8,968,425 5,663,733
Cost of sales 6,846,443 4,757,057 2,936,055
-----------------------------------------------------
Gross profit 4,237,970 4,211,368 2,727,678
Operating expenses:
General and administrative 2,609,763 1,738,375 1,363,900
Selling and marketing 1,269,645 742,715 528,417
Research and development 290,669 702,563 527,562
-----------------------------------------------------
4,170,077 3,183,653 2,419,879
-----------------------------------------------------
Operating income 67,893 1,027,715 307,799
Other income (expense):
Interest income 567,991 125,315 53,819
Interest expense (92,152) (78,179) (12,981)
Unrealized gain (loss) on marketable securities (68,370) - 203,109
-----------------------------------------------------
Income before provision for income taxes 475,362 1,074,851 551,746
Provision for income taxes (113,169) (356,609) (206,169)
-----------------------------------------------------
Net income $ 362,193 $ 718,242 $ 345,577
=====================================================
Basic net income per common share $ .11 $ .34 $ .25
=====================================================
Diluted net income per common share $ .10 $ .29 $ .24
=====================================================
See accompanying notes.
ZEVEX International, Inc.
Consolidated Statements of Stockholders' Equity
Unrealized
Loss on
Additional Available-for-Sale
Common Stock Paid-in Retained Treasury
------------------------
Shares Amount Capital Earnings Stock Securities Total
-----------------------------------------------------------------------------------------
Balances at December 31, 1995 1,365,716 $1,366 $ 1,398,096 $1,501,410 $ $ -$ 2,900,872
-
Issuance of common stock for
acquisition of land 130,000 130 454,870 - - - 455,000
Net income - - - 345,577 - - 345,577
-----------------------------------------------------------------------------------------
Balances at December 31, 1996 1,495,716 1,496 1,852,966 1,846,987 - 3,701,449
Issuance of common stock for
cash 1,700,000 1,700 14,592,681 - - - 14,594,381
Exercise of stock options for
cash 44,610 45 70,580 - - - 70,625
Exercise of warrants for cash 24,000 24 179,976 - - - 180,000
Issuance of warrants to
purchase 100,000 shares of
common stock for cash - - 1,000 - - - 1,000
Net income - - - 718,242 - - 718,242
-----------------------------------------------------------------------------------------
Balances at December 31, 1997 3,264,326 $3,265 16,697,203 2,565,229 - - 19,265,697
Comprehensive income:
Net income - - - 362,193 - - 362,193
Other comprehensive income,
net of tax:
Unrealized loss on
available-for-sale
securities - - - - - (147,309) (147,309)
--------------
Total comprehensive income 214,884
--------------
Exercise of stock options for
cash 9,550 9 33,485 - - - 33,494
Exercise of warrants for cash 30,000 30 104,970 - - - 105,000
Issuance of common stock for
product line acquisition 115,000 115 546,135 - - - 546,250
Purchase of 6,700 shares of
treasury stock - - - - (50,790) - (50,790)
=========================================================================================
Balances at December 31, 1998 3,418,876 $3,419 $17,381,793 $2,927,422 $(50,790) $(147,309) $20,114,535
=========================================================================================
See accompanying notes.
ZEVEX International, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Cash flows from operating activities
Net income $ 362,193 $ 718,242 $ 345,577
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization expense 471,752 284,174 232,625
Provision (benefit) for deferred income taxes (136,473) (35,762) 79,212
Unrealized loss (gain) on marketable securities 68,370 - (203,109)
Changes in operating assets and liabilities, net of
acquisitions:
Increase in restricted cash for sinking fund
payment on industrial development bond (105,885) (76,164) -
Increase in accounts receivable (989,046) (665,934) (219,727)
Increase in inventories (1,612,638) (2,196,294) (552,337)
(Increase) decrease prepaid expenses 12,411 (20,499) (43,973)
(Increase) decrease in other assets (46,539) 2,734 5,193
Increase in accounts payable 260,235 301,556 147,461
Increase in accrued liabilities and other 112,384 75,606 92,672
Increase (decrease) in income taxes payable (234,512) 285,403 (58,735)
-----------------------------------------------
Net cash flows used in operating activities (1,837,748) (1,326,938) (175,141)
Cash flows from investing activities
Purchase of property and equipment (1,185,805) (3,004,926) (619,188)
Purchase of businesses, net of cash acquired (9,480,313) - -
Purchases of available-for-sale marketable securities (1,698,235) (10,200,000) -
Redemptions of available-for-sale marketable securities 10,200,000 - -
Addition of patents and trademarks (27,511) (78,663) (51,057)
-----------------------------------------------
Net cash flows used in investing activities (2,191,864) (13,283,589) (670,245)
Cash flows from financing activities
Proceeds from issuance of common stock - 14,594,381 -
Proceeds from exercise of warrants 105,000 180,000 -
Proceeds from exercise of stock options 33,494 70,625 -
Proceeds from sale of 100,000 warrants - 1,000 -
Issuance of debt related to business acquisitions 9,300,000 - -
Proceeds from bank line of credit 441,993 639,892 60,108
Repayments of bank line of credit - (700,000) -
Purchase of treasury stock (50,790) - -
Proceeds from industrial development bonds - - 2,000,000
Payments on industrial development bond (100,000) - -
-----------------------------------------------
Net cash flows provided by financing activities 9,729,697 14,785,898 2,060,108
-----------------------------------------------
Net increase in cash and cash equivalents 5,700,085 175,371 1,214,722
Cash and cash equivalents at beginning of year 2,260,426 2,085,055 870,333
-----------------------------------------------
Cash and cash equivalents at end of year $ 7,960,511 $ 2,260,426 $2,085,055
===============================================
See accompanying notes.
1. Summary of Significant Accounting Policies
Description of Organization and Business
The Company was incorporated under the laws of the State of Nevada on December
30, 1987. The Company was originally incorporated as Downey Industries, Inc. and
changed its name to ZEVEX International, Inc. on August 15, 1988. In November
1998 the Company reincorporated into Delaware. During 1998, the Company's
operations consisted of the business of its wholly-owned subsidiary, ZEVEX, Inc.
In December 1998, the Company acquired an additional product line and completed
the acquisition of two additional subsidiaries (See Note 2). The Company and its
subsidiaries design and manufacture advanced medical devices, including surgical
systems, device components, and sensors for medical and industrial technology
companies. The Company and its subsidiaries also design, manufacture, and market
their own medical devices using its proprietary technologies. The Company's
design and manufacturing service customers are primarily medical technology
companies, which sell the Company's systems and devices under private labels or
incorporate the Company's devices into their products.
Principles of Consolidation
The consolidated balance sheet at December 31, 1998 includes the accounts of
ZEVEX International, Inc. (Company) and its wholly-owned operating subsidiaries
ZEVEX, Inc., Aborn Electronics, Inc., and JTech Medical Industries, Inc. The
consolidated statement of operations excludes the results of Aborn and JTech for
1998, because these two acquisitions were consummated effective as of December
31, 1998. At December 31, 1997, the consolidated financial statements include
the accounts of ZEVEX International, Inc. (Company) and its wholly-owned
operating subsidiary ZEVEX, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
1. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Cash and Cash Equivalents
The Company considers all certificates of deposit and highly liquid debt
instruments with a maturity of three months or less when purchased to be cash
equivalents.
Concentration of Credit Risk
The Company's financial instruments consist primarily of cash, cash equivalents,
marketable securities and trade accounts receivable. 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 high grade corporate and municipal
bonds. 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. During the years ended December 31, 1998 and 1996,
three of the Company's customers each accounted for more than 10% of net product
sales; whereas, for the year ended December 31, 1997, four of the Company's
customers each accounted for more than 10% of net product sales. Less than 10%
of product sales are to foreign customers.
As a general policy, collateral is not required for accounts receivable;
however, the Company periodically monitors the need for an allowance for
doubtful accounts based upon expected collections of accounts receivable and
specific identification of uncollectible accounts. Additionally, customers'
financial condition and credit worthiness are regularly evaluated. Historical
losses have not been material.
Inventories
Inventories are stated at the lower of cost or market; cost is determined using
the first-in, first-out method.
1. Summary of Significant Accounting Policies (continued)
Marketable Securities
The Company's short-term investments are comprised of debt and equity
securities, all classified as either trading or available-for-sale securities,
which are carried at their fair value based upon quoted market prices of those
investments at December 31, 1998 and 1997. Unrealized gains or losses for
trading securities are included in income. Unrealized gains and losses on
available-for-sale securities are reported, net of tax, in a separate component
of stockholders' equity. The amortized cost of debt securities in this category
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. 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 investment income.
Net unrealized holding losses on trading securities for the periods ending
December 31, 1998 and 1997 of $68,370 and zero, respectively, are included in
net income; and, net unrealized holding losses on available-for-sale securities
for the periods ending December 31, 1998 and 1997 of $234,942 ($147,309 net of
taxes) and zero, respectively, are included in stockholders' equity.
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. Leasehold improvements are amortized on a
straight-line basis over the lesser of the remaining lease term or their
estimated useful lives.
Major replacements, which extend the useful lives of equipment, are capitalized
and depreciated over the remaining useful life. Normal maintenance and repair
items are charged to costs and expenses as incurred.
1. Summary of Significant Accounting Policies (continued)
Patents and Trademarks
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 the straight-line basis. The Company periodically reviews
the recoverability of patents and trademarks as well as other long-term assets
and, where impairment in value has occurred, such intangibles are written down
to net realizable value.
Goodwill
Goodwill is recorded at the lower of cost or its net realizable value and is
being amortized on a straight-line basis over fifteen years. At December 31,
1998, no accumulated amortization for goodwill has been recorded, since the
acquisitions giving rise to the goodwill were consummated effective December 31,
1998 The Company periodically reviews the recoverability of these intangible
assets in order to determine if they should be written down to their net
realizable value.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of," the
Company reviews long-lived and intangible assets for impairment whenever events
or circumstances indicate the carrying value of an asset may not be recoverable.
Income Taxes
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on differences
between financial reporting and tax bases of assets and liabilities measured
using enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
1. Summary of Significant Accounting Policies (continued)
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options rather than adopting the alternative
fair value accounting provided for under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-based Compensation. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
New Accounting Pronouncement
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130 requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The items of
other comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. The
effect of adoption of SFAS No. 130 was a decrease in comprehensive income to
$214,884, which reflects the change in the unrealized loss on available-for-sale
securities of $147,309, net of tax benefit of $87,633, for the year ended
December 31, 1998. There were no items of other comprehensive income prior to
1998.
Revenue Recognition
The Company records revenue from the sale of manufactured products upon
shipment. Revenue from contracts to perform engineering design and product
development services are generally recognized as milestones are achieved; costs
are expensed as incurred.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $137,627, $82,530 and $113,566, respectively for
the years ended December 31, 1998, 1997 and 1996.
1. Summary of Significant Accounting Policies (continued)
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income for the
period by the weighted-average number of the Company's common shares
outstanding.
Diluted net income per common share includes the dilutive effect of options and
warrants in the weighted-average number of the Company's common shares
outstanding as calculated using the treasury stock method.
Net income as presented on the statement of operations represents the numerator
used in calculating basic and diluted net income per common share. The following
table sets forth the computation of the shares used in determining basic and
diluted net income per common share:
(in thousands) 1998 1997 1996
----------- ----------- ------------
Denominator for basic net income per common share -
weighted average shares 3,298 2,098 1,389
Dilutive securities: warrants and stock options 338 345 23
=========== =========== ============
Denominator for diluted net income per common share -
adjusted weighted average shares 3,636 2,443 1,412
=========== =========== ============
Options and warrants to purchase 229,500, 312,000, and 56,100 shares of common
stock were outstanding at December 31, 1998, 1997, and 1996, respectively, but
were not included in the computation of diluted earnings per share because they
were anti-dilutive.
All shares held in the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding for both basic and diluted earnings per share
calculations.
1. Summary of Significant Accounting Policies (continued)
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information were as follows:
1998 1997 1996
-----------------------------------------------
Cash paid during the year for:
Interest $ 92,887 $ 77,641 $ 6,530
Income taxes 481,589 71,206 170,839
Schedule of non cash financing activities
Issuance of common stock for acquisition
of land, 130,000 shares - - 455,000
Issuance of common stock for acquisition
of Nutrition Medical product line 546,250 - -
2. Acquisitions
On December 23, 1998, the Company acquired a product line of enteral feeding
pumps from Nutrition Medical, Inc. to complement its own existing product line.
The aggregate purchase price of $1,072,469, including legal expenses of $26,219,
is payable in cash of $500,000 (see Note 15 - Subsequent Event), which is
included in current portion of long-term debt and 115,000 shares of the
Company's common stock. In addition, Nutrition Medical, Inc. entered into a
noncompete agreement. The acquisition has been accounted for as a purchase and,
accordingly, the 1998 consolidated statement of income includes the results of
operations of the product line from the date of acquisition.
On December 31, 1998, the Company acquired all of the issued and outstanding
capital stock of Aborn Electronics, Inc. (Aborn), a California corporation
engaged in designing, developing and manufacturing optical sensor components for
medical and industrial applications. These components are incorporated into the
end products of Aborn's design and manufacturing service customers, which are
primarily medical products and electronic products companies. The aggregate
purchase price of $5,100,000 is payable in cash of $1,350,000 (see Note 15 -
Subsequent Event), which is included in current portion of long-term debt, and a
7% interest bearing convertible debenture of $1,350,000. Included in the
purchase price is an earn-out provision that provides additional consideration,
not to exceed cash of $950,000 and a convertible debenture of $950,000.
2. Acquisitions (continued)
This earn-out provision is triggered if Aborn achieves certain levels of revenue
and pretax income. Additional consideration may range from zero to the full
$1,900,000, depending on achievement of levels of revenue and income within the
earn-out formula. Any additional consideration paid will result in an adjustment
to goodwill. The convertible debentures are convertible into ZEVEX common stock
at $11 per share between one to three years from the issuance dates. The
acquisition has been accounted for as a purchase.
On December 31, 1998, the Company acquired all of the issued and outstanding
capital stock of JTech Medical Industries, Inc. (JTech), a Utah corporation
engaged in designing, developing and manufacturing advanced medical devices for
use in several medical specialties, including occupational medicine,
orthopedics, physical medicine and rehabilitation, chiropractic, physical
therapy, neurology, podiatry and athletic training. JTech also provides
educational products and services, such as in-office training, seminars, and
multimedia disks. The aggregate purchase price of $7,250,000 is payable in cash
of $3,100,000 (see Note 15 Subsequent Event), which is included in current
portion of long-term debt, and a 8% interest bearing convertible debenture of
$3,000,000. Included in the aggregate purchase price are earn-out provisions
over the following two years that provide additional consideration not to exceed
cash of $575,000 and a convertible debenture of $575,000. The earn-out provision
is triggered if JTech achieves certain levels of pretax income. Additional
consideration may range from zero to the full $1,150,000, depending on
achievement of pretax income within the earn-out formula. Any additional
consideration paid will result in an adjustment to goodwill. The convertible
debentures are convertible into common stock at $11 per share between December
31, 1999 and 2001. The acquisition has been accounted for as a purchase.
The unaudited pro forma results of operations assuming consummation of these
acquisitions as of January 1, 1997 are as follows:
1998 1997
----------------------------------------
Revenues $ 15,131,000 $ 13,049,000
Net income 461,000 894,000
Basic net income per common share $ .14 $ .43
Diluted net income per common share .13 .35
========================================
3. Inventories
Inventories consist of the following at December 31, 1998 and 1997:
1998 1997
---------------------------------------
Materials $ 3,156,276 $ 2,306,818
Work in Progress 1,831,112 1,044,331
Finished goods, including completed subassemblies
587,006 189,442
=======================================
$ 5,574,394 $ 3,540,591
=======================================
4. Marketable Securities
The following is a summary of available-for-sale securities at December 31,
1998:
Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
---------------- ----------------- ----------------------------------
U.S. corporate securities $1,209,235 $ - $ - $1,209,235
Equity securities 489,000 - 234,942 254,058
---------------- ----------------- ----------------------------------
$1,698,235 $ - $ 234,942 $1,463,293
================ ================= ==================================
4. Marketable Securities (continued)
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
Estimated Fair
Cost Value
----------------------------------
U.S. corporate securities:
Due within 1 year $ 717,536 $ 717,536
Due after 1 to 5 years 491,699 491,699
----------------------------------
1,209,235 1,209,235
Equity securities 489,000 254,058
----------------------------------
Total $1,698,235 $1,463,293
==================================
5. Property and Equipment
At December 31, 1998 and 1997, property and equipment consists of the following:
1998 1997
------------------ -------------------
Machinery and equipment $ 1,351,078 $ 497,540
Furniture and fixtures 1,017,847 592,889
Vehicles 13,000 4,500
Tooling costs 753,786 495,986
Building 2,755,644 2,717,962
Land 1,084,415 505,000
------------------ -------------------
6,975,770 4,813,877
Less accumulated depreciation and amortization
1,470,127 880,073
------------------ -------------------
$ 5,505,643 $ 3,933,804
================== ===================
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
amounted to $462,031, $278,156 and $230,925, respectively.
6. Accrued Liabilities
Accrued liabilities consist of the following:
1998 1997
------------------ -------------------
Accrued payroll and related taxes and benefits
$311,558 $167,164
Accrued vacation 86,267 45,331
Warranty reserve 65,000 25,000
Accrued interest 6,254 6,989
------------------ -------------------
$469,079 $244,484
================== ===================
7. Income Taxes
The provision for income taxes is made, at Federal and State statutory rates,
based on pretax income reported in the 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, 1998 and 1997 are as follows:
1998 1997
------------------- --------------------
Deferred tax assets:
Non-deductible accruals and expenses $ 161,618 $ 82,930
Unrealized loss on available-for-sale securities 87,633 -
------------------- --------------------
Total deferred tax assets 249,251 82,930
Deferred tax liabilities:
Accelerated depreciation (46,970) (50,620)
Net unrealized gains on trading securities (50,258) (75,760)
------------------- --------------------
Total deferred tax liabilities (97,228) (126,380)
=================== ====================
$ 152,023 $(43,450)
=================== ====================
7. Income Taxes (continued)
The provision for income taxes consists of the following:
1998 1997 1996
---------------- ---------------- ----------------
Current taxes:
Federal $(165,840) $(333,620) $(137,196)
State (24,244) (56,793) (17,936)
R&D credit 28,075 69,565 28,175
Deferred taxes:
Federal 44,519 (31,176) (69,057)
State 4,321 (4,585) (10,155)
---------------- ---------------- ----------------
Provision for income taxes $ (113,169) $(356,609) $(206,169)
================ ================ ================
The actual tax expense differs from the 34% Federal statutory rate as follows:
1998 1997 1996
---------------- ---------------- ----------------
Expected tax (expense) at federal rate $(161,623) $(365,449) $(187,594)
State income tax expense, net of federal benefit
(15,687) (35,470) (18,208)
Research and development credit 28,075 69,565 28,175
Non-deductible expenses (11,985) (8,782) (6,164)
Tax-exempt interest 57,549 7,381 -
Other (9,498) (23,854) (22,378)
---------------- ---------------- ----------------
Total provision for income taxes $(113,169) $(356,609) $(206,169)
================ ================ ================
8. Debt
Bank Lines of Credit
The Company renewed its line of credit arrangement with a financial institution
for $5 million. The line matures on May 31, 1999. The line of credit is
collateralized by accounts receivable and inventory and bears interest at the
prime rate, which is 7.75% at December 31, 1998 and 8.25% at December 31, 1997.
The Company's balance on its line of credit was $441,993 at December 31, 1998
and zero at December 31, 1997. Under the line of credit agreement, the Company
is restricted from declaring cash dividends. In addition, the Company's line of
credit contains certain financial covenants. As of December 31, 1998, the
Company was in compliance with these financial covenants.
In addition, JTech also has a line of credit with a financial institution for
$150,000. The line bears interest at the prime rate plus 1% (8.75% at December
31, 1998) and matures on March 15, 1999. The balance under this line of credit
was $100,000 at December 31, 1998. The line of credit is collateralized by all
of the assets of JTech and contains certain covenants. JTech was in compliance
with the debt covenants at December 31, 1998.
Industrial Development Bond
On October 30, 1996, the Company completed a transaction defined as "Murray
City, Utah, Adjustable Rate Industrial Development Revenue Bonds, Series 1997
(ZEVEX, Inc. Project)" in the amount of $2,000,000. The bonds are secured by an
irrevocable Letter of Credit issued by a bank, which is subject to expiration no
later than April 15, 2002. The bonds bear interest at an adjustable rate based
on the weekly tax-exempt floater rate as determined by the remarketing agent.
The bonds mature on October 1, 2016. Principal reductions occur in the amount of
$100,000 per year at a rate of $8,333 per month starting April 1, 1997. The
outstanding balance was $1,900,000 at December 31, 1998, of which $100,000 is
classified as current.
Convertible Debt
In connection with the acquisitions of Aborn and JTech, the Company issued
$1,350,000 in 7% interest bearing convertible debentures and $3,000,000 in 8%
interest bearing convertible debentures (See Note 2). Accrued interest is due
and payable quarterly beginning on April 1, 1999. All accrued interest and
principal is due and payable December 31, 2002. The bonds are convertible
between December 31, 1999 and December 31, 2002 at $11 per share.
9. Employee Benefit Plans
401(k) Profit Sharing Plan
During 1991, the Company established a qualified 401(k) profit sharing plan
covering substantially all employees. Eligible employees may defer a portion of
their salary. At the discretion of the Board of Directors, the Company may make
a contribution of an additional amount of up to four percent (4%) of the
eligible employees' salary and a discretionary amount to be determined each year
by the Board of Directors. Employees are fully vested after seven years.
Contributions to the plan for the year ended December 31, 1998, 1997 and 1996
were $98,865, $60,274 and $86,035, respectively. The Company has recorded a
payable to the plan of $18,844 and $25,410 at December 31, 1998 and 1997,
respectively, which is included in accrued liabilities.
Employees' 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.
Full vesting will occur after seven years of service or upon normal retirement
at 65 years of age. Contributions to the plan are at the discretion of the Board
of Directors with no minimum annual funding requirements. Contributions to the
plan will be primarily made with common stock of the Company.
No contribution was made for the years ended December 31, 1998 and 1997.
10. Stockholders' Equity
Change in Authorized Shares and Par Value
In connection with the 1997 reincorporation into Delaware, the Company adopted
an Amended and Restated Certificate of Incorporation which provides that the
Company is authorized to issue 2,000,000 shares of $.001 par value preferred
stock and 10,000,000 shares of $.001 par value common stock.
10. Stockholders' Equity (continued)
Issuance of Common Stock
On November 29, 1996, the Company paid cash of $50,000 and issued 130,000 shares
of the Company's common stock for the purchase of 3.7 acres of land in Murray,
Utah for the purpose of constructing a manufacturing facility.
On February 12, 1997, the Company completed a private placement offering for
$1,250,000 of its securities, which consist of 500,000 units at a price of $2.50
per unit. Each unit consists of one share of common stock and a warrant to
purchase one share of common stock at a price of $3.50 per share. The issued
shares and shares underlying the warrants are entitled to registration rights
for a period of five years from completion of the offering.
In November 1997 the Company completed a secondary public offering of 1,200,000
shares of its common stock. Total net proceeds from the offering were
$13,344,381.
Warrants
In February 1997, the Company issued 500,000 warrants in connection with a
$1,250,000 private placement offering, as discussed above. As of December 31,
1998, 30,000 warrants have been exercised for a total consideration of $105,000.
In connection with the secondary public offering in November 1997, the Company
issued the underwriters warrants to purchase 100,000 shares of common stock at
$15 per share. The underwriters paid a price of $.01 per warrant. These warrants
expire 5 years from the date of the offering. The underwriters' warrants are
restricted from exercise, sale, transfer, assignment or hypothecation for a
period of one year commencing from the offering date. These warrants are
entitled to certain registration rights.
Common Stock Reserved for Future Issuance
At December 31, 1998, the Company had reserved 1,135,840 shares of common stock
for future issuance, including 590,000 shares reserved for exercise of warrants
and 545,840 shares reserved under the Company's stock option plan.
10. Stockholders' Equity (continued)
Stock Option Plan
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 "Stock Option Plan"). There are currently 600,000 shares of common stock
authorized for issuance under the Stock Option Plan, subject to adjustment for
such matters as stock splits and stock dividends.
The Stock Option 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.
On September 30, 1997, the Company granted a total of 210,000 options with an
exercise price of $16.44 to three officers/directors. In 1998, the options were
subsequently repriced with an exercise price of $5.00. The options vest ratably
over a four year period from the grant date.
All options granted under the Stock Option Plan expire after five to seven years
from the grant date and becomes exercisable no later than four years from the
grant date.
A summary of stock option activity, and related information for the years ended
December 31, 1996, 1997 and 1998 follows:
Shares Outstanding Stock Options Weighted-
------------------------------------
Available Number of Price Average
for Grant shares Per Share Exercise Price
------------------------------------ ----------------- ------------------
Balance at December 31, 1995 222,840 77,160 $.79-5.00 $ 2.70
Additional authorization 100,000 - - -
Options granted (12,000) 12,000 $4.50 $ 4.50
Options canceled 3,060 (3,060) $2.50-5.00 $ 3.24
------------------------------------ ----------------- ------------------
Balance at December 31, 1996 313,900 86,100 $.79-5.00 $ 2.93
Additional authorization 200,000 - - -
Options granted (275,050) 275,050 $3.50-17.50 $13.51
Options exercised - (44,610) $.79-$5.00 $ 1.58
Options canceled 2,850 (2,850) $3.50-$5.00 $ 3.97
------------------------------------ ----------------- ------------------
Balance at December 31, 1997 241,700 313,690 $2.50-17.50 $12.39
Options granted (390,000) 390,000 $5.00-7.64 $ 6.48
Options exercised - (9,550) $2.50-5.00 $ 3.51
Options canceled 299,500 (299,500) $3.50-17.50 $15.77
------------------------------------ ----------------- ------------------
Balance at December 31, 1998 151,200 394,640 $2.50-5.00 $ 4.76
==================================== ================= ==================
10. Stockholders' Equity (continued)
Stock Option Plan
The weighted average fair value of options granted in the years ended December
31, 1998, 1997, and 1996 were $3.29, $9.98, and $1.33, respectively. During
1998, the Company canceled options to purchase up to 298,000 shares with
exercise prices ranging from $7.63 to $17.50 and regranted options to purchase
the same number shares at an exercise price of $5.00 per share. Of these 298,000
options, 212,000 were outstanding at the beginning of the year, with the
remaining 86,000 shares granted in early 1998.
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 1998, 1997, and 1996,
respectively: risk-free interest rate of 5.3%, 5.9%, and 6.1%, dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of .88, .90, and .40; and a weighted-average expected life of the option
of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which 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. The effect on the
Company's pro forma results for fiscal year 1996 was not material (less than
$.01 per share).
10. Stockholders' Equity (continued)
Stock Option Plan (continued)
For the years ended December 31, 1998 and 1997, pro forma net income and pro
forma net income per common share were as follows:
1998 1997
------------------ -------------------
Pro forma:
Net income $10,000 $554,000
Basic net income per common share - .26
Diluted net income per common share - .23
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, 1998:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------- ----------------- ---------------- ----------------- --------------- ---------------
$2.50-3.50 35,140 2.48 years $3.20 35,140 $3.20
$3.85-5.00 359,500 4.17 years $4.92 124,750 $4.76
- ----------------- ----------------- ---------------- ----------------- --------------- ---------------
-----------------
$2.50-5.00 394,640 4.02 years $4.76 159,890 $4.42
================= ================= ================ ================= =============== ===============
11. Lease Commitments
In 1996 the Company and its subsidiary occupied an administrative and
manufacturing facility under the terms of an operating lease agreement. In June
1997 the Company moved into a new facility owned by and constructed for the
Company.
Lease expense of $55,695 and $109,505 has been charged to operations for the
years ended December 31, 1997 and 1996, respectively. The lease expired in April
1997.
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: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Marketable securities: The Company determines fair values based on quoted
market prices.
Convertible debt and Industrial development bond: The fair values of the
Company's long-term debt are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments are
as follows:
1998 1997
----------------------------------------------------------------------
Carrying Amount Fair Carrying Amount Fair
Value Value
----------------- ---------------------------------- -----------------
Cash and cash equivalents $ 7,960,511 $ 7,960,511 $ 2,260,426 $ 2,260,426
Marketable securities:
Trading securities 134,739 134,739 10,403,109 10,403,109
Available-for-sale securities 1,463,293 1,463,293 - -
Convertible debt 4,350,000 4,350,000 - -
Industrial development bond 1,900,000 1,900,000 2,000,000 2,000,000
13. Major Customers
Sales to major customers for the years ended December 31, 1998, 1997 and 1996,
are summarized as follows (percent of product sales):
Year ended December 31,
-----------------------------------------------
1998 1997 1996
----------------- ---------------- ------------
Customer A 16% 17% *%
Customer B 15% 15% 23%
Customer C 13% 18% 33%
Customer D *% 15% 10%
----------------- ---------------- ------------
44% 65% 66%
================= ================ ============
- -----------------
* Less than 10% of sales.
14. Related Party Transactions
On April 15 1997, the Company entered into a consulting agreement with another
company owned by certain stockholders to provide services related to strategic
planning, public relations, financing and potential acquisition of new products
or companies. Under the consulting agreement, the Company paid an initial fee of
$50,000 and must pay $10,000 per month for two years. In addition, these certain
stockholders have the right to appoint one director to the Company's Board of
Directors.
In connection with the secondary public offering completed in November 1997,
certain stockholders waived their registration rights on 350,000 warrants. In
exchange, the Company and the stockholders executed a registration rights
agreement, entitling the stockholders to certain demand registration rights for
a period of two years from the agreement's effective date.
15. Subsequent Event
In January 1999, the Company paid cash of $4,950,000 to Nutrition Medical, Inc.
and to the former stockholders of Aborn and JTech in connection with the
acquisitions described in Note 2.
Exhibit 10.15
Convertible Debenture, dated January 6, 1999, issued to Vijay Lumba
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE LAW AND MAY NOT
BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER THE ACT OR STATE LAW OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE, OR HYPOTHECATION
IS IN COMPLIANCE THEREWITH.
CONVERTIBLE DEBENTURE
(Due January 5, 2002)
January 6, 1999 $1,134,000.00
-------------
(the "Issuance Date")
The undersigned, ZEVEX INTERNATIONAL, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to the order of VIJAY
LUMBA (the "Holder") the principal amount of One Million One Hundred Thirty-Four
Thousand Dollars ($1,134,000.00) together with interest on such principal amount
and any other amounts due under this Debenture.
This Debenture (the "Debenture") is issued pursuant to that certain
Stock Purchase Agreement, dated December 31, 1998, entered into between the
Company and the Holder of this Debenture (the "Agreement"). This Debenture is
also subject to the following additional terms and conditions:
1. Interest. Commencing on the date of this Debenture and continuing until all
principal and interest due under this Debenture are paid in full, the
outstanding principal balance of this Debenture shall bear interest at the rate
of seven percent (7%) per annum, compounded annually. Interest shall accrue
daily and be calculated on the basis of a three hundred sixty (360) day year and
the actual number of days elapsed in any partial calendar month.
2. Payment. Accrued interest shall be due and payable beginning April 1, 1999
and on each July 1, October 1, January 1, and April 1 thereafter until this
Debenture is paid in full. The unpaid principal balance of this Debenture,
together with any and all accrued but unpaid interest, shall be due and payable
in full three (3) years from the Issuance Date. All payments of principal and
interest shall be made in lawful money of the United States of America at the
address of the Holder set forth in Section 7.1 below. Unless the Holder shall
elect otherwise, each payment made under this Debenture shall be applied first
to interest due under this Debenture and any balance shall be applied to reduce
the principal balance of this Debenture.
3. Right of Conversion
3.1 Conversion Into Company Securities. At any time after a date one
(1) year from the Issuance Date until a date three (3) years after the Issuance
Date, and from time to time during such period, the Holder may elect to convert
all or a portion of the unpaid principal amount and all accrued but unpaid
interest of this Debenture into fully paid and nonassessable shares of Company
Common Stock, $0.001 par value (the "Conversion Shares") at the conversion price
of eleven dollars ($11.00) per share (the "Conversion Price"); provided that any
partial conversion of less than the entire remaining principal balance of this
Debenture may not be less than $25,000 in principal and accrued and unpaid
interest.
3.2 Mechanics of Conversion. Upon the Holder's election to convert
pursuant to Section 3.1 above, the Holder shall send written notice of its
election to the Company and shall surrender this Debenture to the Company at its
principal office. The written election shall specify the amount of principal and
accrued and unpaid interest that is to be converted. Each conversion shall be
deemed to have been effected as of the close of the business on the date on
which the notice is delivered to the Company and the outstanding principal
balance and accrued and unpaid interest shall be reduced by the amount converted
as set forth in the notice. Within a reasonable time thereafter, the Company
shall cancel the designated portion of the unpaid principal amount of this
Debenture converted by the Holder and issue and deliver to the Holder a
certificate or certificates (the "Conversion Certificates"), registered in the
name of such Holder, for the number of full shares of the Conversion Shares
issuable at the Conversion Price, bearing such restrictive legends as may be
required by federal and state securities laws. In the event of a partial
Conversion, the Company shall return with the Conversion Certificates this
Debenture, bearing a proper notation of the principal amount that remains due
and payable after Holder's partial conversion, but otherwise unaltered.
3.3 Effects of Conversion. Upon conversion of the entire amount of
principal and unpaid interest of this Debenture, the rights of the Holder of the
Debenture as such shall cease. The person or persons in whose name or names the
Conversion Certificates are issued shall be deemed to have become the holder or
holders of record of the Conversion Shares represented thereby.
3.4 No Fractional Shares. No fractional share of the Conversion Shares
will be issued in connection with any conversion hereunder. Instead of any
fractional share the Company shall pay a cash adjustment in respect of such
fractional interest as determined by reference to the Conversion Price.
3.5 No Rights as Stockholders. Prior to the conversion of all or any
portion of this Debenture, the Holder shall not be entitled to any right as a
stockholder, including without limitation the right to vote or to receive
dividends or other distribution, and shall not be entitled to receive any notice
of any proceeding of the Company, except as provided herein.
3.6 Taxes on Conversion. Any taxes required upon the issuance of
Conversion Certificates on conversion of this Debenture shall be paid by the
Holder.
3.7 Adjustments. In the event of any Company stock split, stock
combination, merger, consolidation or recapitalization affecting the Common
Stock of the Company prior to repayment or conversion under this Debenture, the
Company shall make appropriate, proportionate adjustments to the Conversion
Shares issued to Holder under Holder's conversion right.
3.8 Notices of Record Date. In the event of (i) any taking by the
Company of a record of the holders of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution or (ii) any reclassification or recapitalization of the capital
stock of the Company, any merger or consolidation of the Company, or any
transfer of all or substantially all of the assets of the Company to any other
corporation, entity, or person, or any voluntary or involuntary dissolution,
liquidation, or a winding-up of the Company, which occurs during the conversion
period, the Company shall mail to the Holder of the Debenture, at least fifteen
(15) days prior to the record date specified therein, a notice specifying (A)
the date on which any such record is to be taken for the purpose of such
dividend or distribution and a description of such dividend or distribution, (B)
the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation, or winding-up is expected to
become effective, and (C) the time, if any is to be set, as to when the holders
of record of such security shall be entitled to exchange their shares for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up.
4. Events of Default; Acceleration
4.1 Events, Remedy. If any of the following conditions or events
("Events of Default") shall occur:
(a) if the Company shall default in the payment of the
principal or interest on the Debenture when due and such default continues for a
period of 30 days after written notice thereof to the Company from Holder; or
(b) if the Company shall default in the performance of or
compliance with any term or covenant contained in this Debenture, the Agreement,
or the Stock Pledge Agreement (defined below) and such default shall not have
been remedied within 30 days after written notice thereof shall have been given
to the Company by Holder (provided, however, if such default is not cured within
such 30-day period and the Company is diligently pursuing such cure, the Company
shall have an additional period of time not to exceed ninety (90) days in which
to cure such default); or
(c) if the Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due, or shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against the Company in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of the Company or of all or any substantial part
of the properties of the Company, or if the Company or its directors or majority
stockholders shall take any action looking to the dissolution or liquidation of
the Company; or
(d) if, within 60 days after the service of process on Company
following commencement of an action against the Company seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, such
action shall not have been dismissed or if, alternatively, all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within 60 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated;
then and in any such event Holder may at any time (unless all defaults shall
theretofore have been remedied) at his option, by written notice to the Company,
declare the entire principal and interest of the Debenture then remaining unpaid
to be due and payable immediately. Notwithstanding the foregoing, this Debenture
shall not be in default to the extent that the Company has exercised its rights
of recoupment under Section 8(f) of the Agreement.
4.2 Other Remedies on Default, Etc. In case any one or more Events of
Default shall occur, be continuing, and not have been waived, Holder may proceed
to protect and enforce the rights of such Holder by an action at law, suit in
equity, or other appropriate proceeding, whether for the specific performance of
any agreement contained herein or under terms of the Agreement or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law. In case of a
default in the payment of principal or interest on the Debenture, the Company
will pay to the Holder thereof such further amount as shall be sufficient to
cover the costs and expenses of collection, including, without limitation,
reasonable attorneys' fees. No course of dealing and no delay on the part of any
Holder in exercising any right shall operate as a waiver thereof or otherwise
prejudice such Holder's rights. No right conferred hereby or by the Agreement
upon any Holder shall be exclusive of any other right referred to herein or
therein or now or hereafter available at law, in equity, by statute or
otherwise.
5. Prepayment
This Debenture may be prepaid (including a recoupment deemed a
prepayment hereof under Section 8(f) of the Agreement) without penalty upon
thirty (30) days prior written notice by the Company to Holder. Except in the
event of a deemed prepayment in accordance with Section 8(f) of the Agreement,
Holder shall have the right within such thirty day period to convert all or part
of this Debenture at Holder's election pursuant to Section 3 above.
6. Security for Debenture
This Debenture is secured by a Stock Pledge Agreement (the "Stock
Pledge Agreement") of even date herewith by and between the Company and Holder.
7. Miscellaneous Provisions
7.1 Notices. Any notice herein required or payment required hereunder
shall be made or given to the address of the parties as specified in the
Agreement.
7.2 Amendments or Waivers. Any provision of this Debenture may be
amended, waived, or modified, but only upon the written consent of the Company
and the Holder.
7.3 Governing Law. This Debenture has been executed in and shall be
governed by the laws of the State of Utah excluding that body of law pertaining
to conflicts of law.
7.4 Miscellaneous. The unenforceability or invalidity of any provision
of this Debenture shall not affect the enforceability or validity of any other
provision of this Debenture. The terms of this Debenture shall bind the
undersigned and inure to the benefit of Holder and their respective heirs,
successors, assigns and legal representatives. The Holder may, with prior
written notice to the Company in accordance with the terms of the Agreement,
assign all or part of Holder's interest under this Debenture.
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued
this 6th day of January, 1999.
ZEVEX INTERNATIONAL, INC.
Phillip L. McStotts,
Chief Financial Officer
Exhibit 10.16
Convertible Debenture, dated January 6, 1999, issued to Leonard Smith
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE LAW AND MAY NOT
BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER THE ACT OR STATE LAW OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE, OR HYPOTHECATION
IS IN COMPLIANCE THEREWITH.
CONVERTIBLE DEBENTURE
(Due January 6, 2002)
January 6, 1999 $1,290,000.00
(the "Issuance Date")
The undersigned, ZEVEX INTERNATIONAL, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to the order of Leonard
C. Smith (the "Holder") the principal amount of One Million Two Hundred Ninety
Thousand Dollars ($1,290,000.00) together with interest on such principal amount
and any other amounts due under this Debenture.
This Debenture (the "Debenture") is issued pursuant to that certain
Stock Purchase Agreement, dated December 31, 1998, entered into between the
Company and the Holder of this Debenture (the "Agreement"). This Debenture is
also subject to the following additional terms and conditions:
1. Interest. Commencing on the date of this Debenture and continuing until all
principal and interest due under this Debenture are paid in full, the
outstanding principal balance of this Debenture shall bear interest at the rate
of eight percent (8%) per annum, compounded annually. Interest shall accrue
daily and be calculated on the basis of a three hundred sixty (360) day year and
the actual number of days elapsed in any partial calendar month.
2. Payment. Accrued interest shall be due and payable beginning April, 1, 1999,
and on each July 1, October 1, January 1, and April 1 thereafter until this
Debenture is paid in full. The unpaid principal balance of this Debenture,
together with any and all accrued but unpaid interest, shall be due and payable
in full three (3) years from the Issuance Date. All payments of principal and
interest shall be made in lawful money of the United States of America at the
address of the holder set forth in Section 8.1 below. Unless the Holder shall
elect otherwise, each payment made under this Debenture shall be applied first
to interest due under this Debenture and any balance shall be applied to reduce
the principal balance of this Debenture.
3. Right of Conversion
3.1 Conversion Into Company Securities. At any time after a date one
(1) year from the Issuance Date until a date three (3) years after the Issuance
Date, and from time to time during such period, the Holder may elect to convert
all or a portion of the unpaid principal amount and all accrued but unpaid
interest of this Debenture into fully paid and nonassessable shares of Company
Common Stock, $0.001 par value (the "Conversion Shares") at the conversion price
of eleven dollars ($11.00) per share (the "Conversion Price"); provided that any
partial conversion of less than the entire remaining principal balance of this
Debenture may not be less than $25,000 in principal and accrued and unpaid
interest.
3.2 Mechanics of Conversion. Upon the Holder's election to convert
pursuant to Section 3.1 above, the Holder shall send written notice of its
election to the Company and shall surrender this Debenture to the Company at its
principal office. The written election shall specify the amount of principal and
accrued and unpaid interest that is to be converted. Each conversion shall be
deemed to have been effected as of the close of the business on the date on
which the notice is delivered to the Company and the outstanding principal
balance and accrued and unpaid interest shall be reduced by the amount converted
as set forth in the notice. Within a reasonable time thereafter, the Company
shall cancel the designated portion of the unpaid principal amount of this
Debenture converted by the Holder and issue a certificate or certificates (the
"Conversion Certificates"), registered in the name of such Holder, for the
number of full shares of the Conversion Shares issuable at the Conversion Price,
bearing such restrictive legends as may be required by federal and state
securities laws. In the event of a Partial Conversion, the Company shall return
with the Conversion Certificates this Debenture, bearing a proper notation of
the principal amount that remains due and payable after Holder's partial
conversion, but otherwise unaltered. Conversion Certificates will be delivered
promptly to the Holder after issuance by the Company; provided, however, the
Company may, in its discretion, hold in its possession Conversion Certificates
for that number of Conversion Shares which are subject to forfeiture as
described in Section 7 below. Each Conversion Certificate shall bear a legend to
the extent it is subject to forfeiture.
3.3 Effects of Conversion. Upon conversion of the entire amount of
principal and unpaid interest of this Debenture, the rights of the Holder of the
Debenture as such shall cease. The person or persons in whose name or names the
Conversion Certificates are issued shall be deemed to have become the holder or
holders of record of the Conversion Shares represented thereby.
3.4 No Fractional Shares. No fractional share of the Conversion Shares
will be issued in connection with any conversion hereunder. Instead of any
fractional share the Company shall pay a cash adjustment in respect of such
fractional interest as determined by reference to the Conversion Price.
3.5 No Rights as Stockholders. Prior to the conversion of all or any
portion of this Debenture, the Holder shall not be entitled to any right as a
stockholder, including without limitation the right to vote or to receive
dividends or other distribution, and shall not be entitled to receive any notice
of any proceeding of the Company, except as provided herein.
3.6 Taxes on Conversion. Any taxes required upon the issuance of
Conversion Certificates on conversion of this Debenture shall be paid by the
Holder.
3.7 Adjustments. In the event of any Company stock split, stock
combination, merger, consolidation or recapitalization affecting the Common
Stock of the Company prior to repayment or conversion under this Debenture, the
Company shall make appropriate, proportionate adjustments to the Conversion
Shares issued to Holder under Holder's conversion right.
3.8 Notices of Record Date. In the event of (i) any taking by the
Company of a record of the holders of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution or (ii) any reclassification or recapitalization of the capital
stock of the Company, any merger or consolidation of the Company, or any
transfer of all or substantially all of the assets of the Company to any other
corporation, entity, or person, or any voluntary or involuntary dissolution,
liquidation, or a winding-up of the Company, which occurs during the conversion
period, the Company shall mail to the Holder of the Debenture, at least fifteen
(15) days prior to the record date specified therein, a notice specifying (A)
the date on which any such record is to be taken for the purpose of such
dividend or distribution and a description of such dividend or distribution, (B)
the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation, or winding-up is expected to
become effective, and (C) the time, if any is to be set, as to when the holders
of record of such security shall be entitled to exchange their shares for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up.
4. Events of Default; Acceleration
4.1 Events, Remedy. If any of the following conditions or events
("Events of Default") shall occur:
(a) if the Company shall default in the payment of the
principal or interest on the Debenture when due and such default continues for a
period of 30 days after written notice thereof to the Company from Holder; or
(b) if the Company shall default in the performance of or
compliance with any term or covenant contained in this Debenture, the Agreement,
or the Pledge Agreement and such default shall not have been remedied within 30
days after written notice thereof shall have been given to the Company by Holder
(provided, however, if such default is not cured within such 30-day period and
the Company is diligently pursuing such cure, the Company shall have an
additional period of time not to exceed ninety (90) days in which to cure such
default); or
(c) if the Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due, or shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against the Company in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of the Company or of all or any substantial part
of the properties of the Company, or if the Company or its directors or majority
stockholders shall take any action looking to the dissolution or liquidation of
the Company; or
(d) if, within 60 days after the service of process on Company
following commencement of an action against the Company seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, such
action shall not have been dismissed or if, alternatively, all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within 60 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated;
then and in any such event Holder may at any time (unless all defaults shall
theretofore have been remedied) at his option, by written notice to the Company,
declare the entire principal and interest of the Debenture then remaining unpaid
to be due and payable immediately. Notwithstanding the foregoing, this Debenture
shall not be in default to the extent that the Company has exercised its rights
of recoupment under Section 8(f) of the Agreement.
4.2 Other Remedies on Default, Etc. In case any one or more Events of
Default shall occur, be continuing, and not have been waived, Holder may proceed
to protect and enforce the rights of such Holder by an action at law, suit in
equity, or other appropriate proceeding, whether for the specific performance of
any agreement contained herein or under terms of the Agreement or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law. In case of a
default in the payment of principal or interest on the Debenture, the Company
will pay to the Holder thereof such further amount as shall be sufficient to
cover the costs and expenses of collection, including, without limitation,
reasonable attorneys' fees. No course of dealing and no delay on the part of any
Holder in exercising any right shall operate as a waiver thereof or otherwise
prejudice such Holder's rights. No right conferred hereby or by the Agreement
upon any Holder shall be exclusive of any other right referred to herein or
therein or now or hereafter available at law, in equity, by statute or
otherwise.
5. Prepayment
This Debenture may be prepaid (including a deemed prepayment under
Section 8(f) of the Purchase Agreement) without penalty upon thirty (30) days
prior written notice by the Company to Holder. Except in the event of a deemed
prepayment in accordance with Section 8(f) of the Purchase Agreement, Holder
shall have the right within such thirty day period to convert all or part of
this Debenture at Holder's election pursuant to Section 3 above.
6. Security for Debenture
This Debenture is secured by a Stock Pledge Agreement of even date
herewith by and between the Company and Holder.
7. Forfeiture of Debenture/Conversion Shares
Holder acknowledges and agrees that this Debenture and any Conversion
Shares issued upon conversion of this Debenture are subject to the forfeiture
provisions of Section 10.1(iii) of that certain Employment Agreement between
Holder and JTech Medical Industries, Inc., dated as of the date hereof. In the
event of a forfeiture of this Debenture in accordance with the terms of such
Section 10.1(iii), Holder shall promptly surrender this Debenture to the Company
at its principal office. The Company shall promptly thereafter return this
Debenture to Holder, bearing a proper notation of the principal amount that
remains due and payable after such forfeiture, but otherwise unaltered. In the
event of a forfeiture of Conversion Shares in accordance with the terms of
Section 10.1(iii) of the Employment Agreement, the Company shall promptly cancel
the Conversion Certificates applicable to the forfeited Conversion Shares and
issue and deliver to Holder new certificates for any Conversion Shares that were
not forfeited by Holder.
8. Miscellaneous Provisions
8.1 Notices. Any notice herein required or payment required hereunder
shall be made or given to the address of the parties as specified in the
Agreement.
8.2 Amendments or Waivers. Any provision of this Debenture may be
amended, waived, or modified, but only upon the written consent of the Company
and the Holder.
8.3 Governing Law. This Debenture has been executed in and shall be
governed by the laws of the State of Utah excluding that body of law pertaining
to conflicts of law.
8.4 Miscellaneous. The unenforceability or invalidity of any provision
of this Debenture shall not affect the enforceability or validity of any other
provision of this Debenture. The terms of this Debenture shall bind the
undersigned and inure to the benefit of Holder and their respective heirs,
successors, assigns and legal representatives. The Holder may, in accordance
with the terms of the Agreement, assign all or part of Holder's interest under
this Debenture upon prior written notice to the Company.
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued
this 6th day of January, 1999.
ZEVEX INTERNATIONAL, INC.
Phillip L. McStotts,
Chief Financial Officer
Exhibit 10.17
Convertible Debenture, dated January 6, 1999, issued to Tracy Livingston
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE LAW AND MAY
NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED, OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR STATE LAW OR,
IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE, OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
CONVERTIBLE DEBENTURE
(Due January 6, 2002)
January 6, 1999 $1,290,000.00
(the "Issuance Date")
The undersigned, ZEVEX INTERNATIONAL, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to the order of J. Tracy
Livingston (the "Holder") the principal amount of One Million Two Hundred Ninety
Thousand Dollars ($1,290,000.00) together with interest on such principal amount
and any other amounts due under this Debenture.
This Debenture (the "Debenture") is issued pursuant to that certain
Stock Purchase Agreement, dated December 31, 1998, entered into between the
Company and the Holder of this Debenture (the "Agreement"). This Debenture is
also subject to the following additional terms and conditions:
92
1. Interest. Commencing on the date of this Debenture and continuing until all
principal and interest due under this Debenture are paid in full, the
outstanding principal balance of this Debenture shall bear interest at the rate
of eight percent (8%) per annum, compounded annually. Interest shall accrue
daily and be calculated on the basis of a three hundred sixty (360) day year and
the actual number of days elapsed in any partial calendar month.
2. Payment. Accrued interest shall be due and payable beginning April, 1, 1999,
and on each July 1, October 1, January 1, and April 1 thereafter until this
Debenture is paid in full. The unpaid principal balance of this Debenture,
together with any and all accrued but unpaid interest, shall be due and payable
in full three (3) years from the Issuance Date. All payments of principal and
interest shall be made in lawful money of the United States of America at the
address of the holder set forth in Section 8.1 below. Unless the Holder shall
elect otherwise, each payment made under this Debenture shall be applied first
to interest due under this Debenture and any balance shall be applied to reduce
the principal balance of this Debenture.
3. Right of Conversion
3.1 Conversion Into Company Securities. At any time after a date one
(1) year from the Issuance Date until a date three (3) years after the Issuance
Date, and from time to time during such period, the Holder may elect to convert
all or a portion of the unpaid principal amount and all accrued but unpaid
interest of this Debenture into fully paid and nonassessable shares of Company
Common Stock, $0.001 par value (the "Conversion Shares") at the conversion price
of eleven dollars ($11.00) per share (the "Conversion Price"); provided that any
partial conversion of less than the entire remaining principal balance of this
Debenture may not be less than $25,000 in principal and accrued and unpaid
interest.
3.2 Mechanics of Conversion. Upon the Holder's election to convert
pursuant to Section 3.1 above, the Holder shall send written notice of its
election to the Company and shall surrender this Debenture to the Company at its
principal office. The written election shall specify the amount of principal and
accrued and unpaid interest that is to be converted. Each conversion shall be
deemed to have been effected as of the close of the business on the date on
which the notice is delivered to the Company and the outstanding principal
balance and accrued and unpaid interest shall be reduced by the amount converted
as set forth in the notice. Within a reasonable time thereafter, the Company
shall cancel the designated portion of the unpaid principal amount of this
Debenture converted by the Holder and issue a certificate or certificates (the
"Conversion Certificates"), registered in the name of such Holder, for the
number of full shares of the Conversion Shares issuable at the Conversion Price,
bearing such restrictive legends as may be required by federal and state
securities laws. In the event of a Partial Conversion, the Company shall return
with the Conversion Certificates this Debenture, bearing a proper notation of
the principal amount that remains due and payable after Holder's partial
conversion, but otherwise unaltered. Conversion Certificates will be delivered
promptly to the Holder after issuance by the Company; provided, however, the
Company may, in its discretion, hold in its possession Conversion Certificates
for that number of Conversion Shares which are subject to forfeiture as
described in Section 7 below. Each Conversion Certificate shall bear a legend to
the extent it is subject to forfeiture.
3.3 Effects of Conversion. Upon conversion of the entire amount of
principal and unpaid interest of this Debenture, the rights of the Holder of the
Debenture as such shall cease. The person or persons in whose name or names the
Conversion Certificates are issued shall be deemed to have become the holder or
holders of record of the Conversion Shares represented thereby.
3.4 No Fractional Shares. No fractional share of the Conversion Shares
will be issued in connection with any conversion hereunder. Instead of any
fractional share the Company shall pay a cash adjustment in respect of such
fractional interest as determined by reference to the Conversion Price.
3.5 No Rights as Stockholders. Prior to the conversion of all or any
portion of this Debenture, the Holder shall not be entitled to any right as a
stockholder, including without limitation the right to vote or to receive
dividends or other distribution, and shall not be entitled to receive any notice
of any proceeding of the Company, except as provided herein.
3.6 Taxes on Conversion. Any taxes required upon the issuance of
Conversion Certificates on conversion of this Debenture shall be paid by the
Holder.
3.7 Adjustments. In the event of any Company stock split, stock
combination, merger, consolidation or recapitalization affecting the Common
Stock of the Company prior to repayment or conversion under this Debenture, the
Company shall make appropriate, proportionate adjustments to the Conversion
Shares issued to Holder under Holder's conversion right.
3.8 Notices of Record Date. In the event of (i) any taking by the
Company of a record of the holders of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution or (ii) any reclassification or recapitalization of the capital
stock of the Company, any merger or consolidation of the Company, or any
transfer of all or substantially all of the assets of the Company to any other
corporation, entity, or person, or any voluntary or involuntary dissolution,
liquidation, or a winding-up of the Company, which occurs during the conversion
period, the Company shall mail to the Holder of the Debenture, at least fifteen
(15) days prior to the record date specified therein, a notice specifying (A)
the date on which any such record is to be taken for the purpose of such
dividend or distribution and a description of such dividend or distribution, (B)
the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation, or winding-up is expected to
become effective, and (C) the time, if any is to be set, as to when the holders
of record of such security shall be entitled to exchange their shares for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up.
4. Events of Default; Acceleration
4.1 Events, Remedy. If any of the following conditions or events
("Events of Default") shall occur:
(a) if the Company shall default in the payment of the
principal or interest on the Debenture when due and such default continues for a
period of 30 days after written notice thereof to the Company from Holder; or
(b) if the Company shall default in the performance of or
compliance with any term or covenant contained in this Debenture, the Agreement,
or the Pledge Agreement and such default shall not have been remedied within 30
days after written notice thereof shall have been given to the Company by Holder
(provided, however, if such default is not cured within such 30-day period and
the Company is diligently pursuing such cure, the Company shall have an
additional period of time not to exceed ninety (90) days in which to cure such
default); or
(c) if the Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due, or shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against the Company in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of the Company or of all or any substantial part
of the properties of the Company, or if the Company or its directors or majority
stockholders shall take any action looking to the dissolution or liquidation of
the Company; or
(d) if, within 60 days after the service of process on Company
following commencement of an action against the Company seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, such
action shall not have been dismissed or if, alternatively, all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within 60 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated;
then and in any such event Holder may at any time (unless all defaults shall
theretofore have been remedied) at his option, by written notice to the Company,
declare the entire principal and interest of the Debenture then remaining unpaid
to be due and payable immediately. Notwithstanding the foregoing, this Debenture
shall not be in default to the extent that the Company has exercised its rights
of recoupment under Section 8(f) of the Agreement.
4.2 Other Remedies on Default, Etc. In case any one or more Events of
Default shall occur, be continuing, and not have been waived, Holder may proceed
to protect and enforce the rights of such Holder by an action at law, suit in
equity, or other appropriate proceeding, whether for the specific performance of
any agreement contained herein or under terms of the Agreement or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law. In case of a
default in the payment of principal or interest on the Debenture, the Company
will pay to the Holder thereof such further amount as shall be sufficient to
cover the costs and expenses of collection, including, without limitation,
reasonable attorneys' fees. No course of dealing and no delay on the part of any
Holder in exercising any right shall operate as a waiver thereof or otherwise
prejudice such Holder's rights. No right conferred hereby or by the Agreement
upon any Holder shall be exclusive of any other right referred to herein or
therein or now or hereafter available at law, in equity, by statute or
otherwise.
5. Prepayment
This Debenture may be prepaid (including a deemed prepayment under
Section 8(f) of the Purchase Agreement) without penalty upon thirty (30) days
prior written notice by the Company to Holder. Except in the event of a deemed
prepayment in accordance with Section 8(f) of the Purchase Agreement, Holder
shall have the right within such thirty day period to convert all or part of
this Debenture at Holder's election pursuant to Section 3 above.
6. Security for Debenture
This Debenture is secured by a Stock Pledge Agreement of even date
herewith by and between the Company and Holder.
7. Forfeiture of Debenture/Conversion Shares
Holder acknowledges and agrees that this Debenture and any Conversion
Shares issued upon conversion of this Debenture are subject to the forfeiture
provisions of Section 10.1(iii) of that certain Employment Agreement between
Holder and JTech Medical Industries, Inc., dated as of the date hereof. In the
event of a forfeiture of this Debenture in accordance with the terms of such
Section 10.1(iii), Holder shall promptly surrender this Debenture to the Company
at its principal office. The Company shall promptly thereafter return this
Debenture to Holder, bearing a proper notation of the principal amount that
remains due and payable after such forfeiture, but otherwise unaltered. In the
event of a forfeiture of Conversion Shares in accordance with the terms of
Section 10.1(iii) of the Employment Agreement, the Company shall promptly cancel
the Conversion Certificates applicable to the forfeited Conversion Shares and
issue and deliver to Holder new certificates for any Conversion Shares that were
not forfeited by Holder.
8. Miscellaneous Provisions
8.1 Notices. Any notice herein required or payment required hereunder
shall be made or given to the address of the parties as specified in the
Agreement.
8.2 Amendments or Waivers. Any provision of this Debenture may be
amended, waived, or modified, but only upon the written consent of the Company
and the Holder.
8.3 Governing Law. This Debenture has been executed in and shall be
governed by the laws of the State of Utah excluding that body of law pertaining
to conflicts of law.
8.4 Miscellaneous. The unenforceability or invalidity of any provision
of this Debenture shall not affect the enforceability or validity of any other
provision of this Debenture. The terms of this Debenture shall bind the
undersigned and inure to the benefit of Holder and their respective heirs,
successors, assigns and legal representatives. The Holder may, in accordance
with the terms of the Agreement, assign all or part of Holder's interest under
this Debenture upon prior written notice to the Company.
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued
this 6th day of January, 1999.
ZEVEX INTERNATIONAL, INC.
Phillip L. McStotts,
Chief Financial Officer
Exhibit 10.18
Convertible Debenture, dated January 6, 1999, issued to David Bernardi
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE LAW AND MAY NOT
BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER THE ACT OR STATE LAW OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE, OR HYPOTHECATION
IS IN COMPLIANCE THEREWITH.
CONVERTIBLE DEBENTURE
(Due January 6, 2002)
January 6, 1999 $420,000.00
(the "Issuance Date")
The undersigned, ZEVEX INTERNATIONAL, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to the order of David W.
Bernardi (the "Holder") the principal amount of Four Hundred Twenty Thousand
Dollars ($420,000.00) together with interest on such principal amount and any
other amounts due under this Debenture.
This Debenture (the "Debenture") is issued pursuant to that certain
Stock Purchase Agreement, dated December 31, 1998, entered into between the
Company and the Holder of this Debenture (the "Agreement"). This Debenture is
also subject to the following additional terms and conditions:
109
1. Interest. Commencing on the date of this Debenture and continuing until all
principal and interest due under this Debenture are paid in full, the
outstanding principal balance of this Debenture shall bear interest at the rate
of eight percent (8%) per annum, compounded annually. Interest shall accrue
daily and be calculated on the basis of a three hundred sixty (360) day year and
the actual number of days elapsed in any partial calendar month.
2. Payment. Accrued interest shall be due and payable beginning April, 1, 1999,
and on each July 1, October 1, January 1, and April 1 thereafter until this
Debenture is paid in full. The unpaid principal balance of this Debenture,
together with any and all accrued but unpaid interest, shall be due and payable
in full three (3) years from the Issuance Date. All payments of principal and
interest shall be made in lawful money of the United States of America at the
address of the holder set forth in Section 8.1 below. Unless the Holder shall
elect otherwise, each payment made under this Debenture shall be applied first
to interest due under this Debenture and any balance shall be applied to reduce
the principal balance of this Debenture.
3. Right of Conversion
3.1 Conversion Into Company Securities. At any time after a date one
(1) year from the Issuance Date until a date three (3) years after the Issuance
Date, and from time to time during such period, the Holder may elect to convert
all or a portion of the unpaid principal amount and all accrued but unpaid
interest of this Debenture into fully paid and nonassessable shares of Company
Common Stock, $0.001 par value (the "Conversion Shares") at the conversion price
of eleven dollars ($11.00) per share (the "Conversion Price"); provided that any
partial conversion of less than the entire remaining principal balance of this
Debenture may not be less than $25,000 in principal and accrued and unpaid
interest.
3.2 Mechanics of Conversion. Upon the Holder's election to convert
pursuant to Section 3.1 above, the Holder shall send written notice of its
election to the Company and shall surrender this Debenture to the Company at its
principal office. The written election shall specify the amount of principal and
accrued and unpaid interest that is to be converted. Each conversion shall be
deemed to have been effected as of the close of the business on the date on
which the notice is delivered to the Company and the outstanding principal
balance and accrued and unpaid interest shall be reduced by the amount converted
as set forth in the notice. Within a reasonable time thereafter, the Company
shall cancel the designated portion of the unpaid principal amount of this
Debenture converted by the Holder and issue a certificate or certificates (the
"Conversion Certificates"), registered in the name of such Holder, for the
number of full shares of the Conversion Shares issuable at the Conversion Price,
bearing such restrictive legends as may be required by federal and state
securities laws. In the event of a Partial Conversion, the Company shall return
with the Conversion Certificates this Debenture, bearing a proper notation of
the principal amount that remains due and payable after Holder's partial
conversion, but otherwise unaltered. Conversion Certificates will be delivered
promptly to the Holder after issuance by the Company; provided, however, the
Company may, in its discretion, hold in its possession Conversion Certificates
for that number of Conversion Shares which are subject to forfeiture as
described in Section 7 below. Each Conversion Certificate shall bear a legend to
the extent it is subject to forfeiture.
3.3 Effects of Conversion. Upon conversion of the entire amount of
principal and unpaid interest of this Debenture, the rights of the Holder of the
Debenture as such shall cease. The person or persons in whose name or names the
Conversion Certificates are issued shall be deemed to have become the holder or
holders of record of the Conversion Shares represented thereby.
3.4 No Fractional Shares. No fractional share of the Conversion Shares
will be issued in connection with any conversion hereunder. Instead of any
fractional share the Company shall pay a cash adjustment in respect of such
fractional interest as determined by reference to the Conversion Price.
3.5 No Rights as Stockholders. Prior to the conversion of all or any
portion of this Debenture, the Holder shall not be entitled to any right as a
stockholder, including without limitation the right to vote or to receive
dividends or other distribution, and shall not be entitled to receive any notice
of any proceeding of the Company, except as provided herein.
3.6 Taxes on Conversion. Any taxes required upon the issuance of
Conversion Certificates on conversion of this Debenture shall be paid by the
Holder.
3.7 Adjustments. In the event of any Company stock split, stock
combination, merger, consolidation or recapitalization affecting the Common
Stock of the Company prior to repayment or conversion under this Debenture, the
Company shall make appropriate, proportionate adjustments to the Conversion
Shares issued to Holder under Holder's conversion right.
3.8 Notices of Record Date. In the event of (i) any taking by the
Company of a record of the holders of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution or (ii) any reclassification or recapitalization of the capital
stock of the Company, any merger or consolidation of the Company, or any
transfer of all or substantially all of the assets of the Company to any other
corporation, entity, or person, or any voluntary or involuntary dissolution,
liquidation, or a winding-up of the Company, which occurs during the conversion
period, the Company shall mail to the Holder of the Debenture, at least fifteen
(15) days prior to the record date specified therein, a notice specifying (A)
the date on which any such record is to be taken for the purpose of such
dividend or distribution and a description of such dividend or distribution, (B)
the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation, or winding-up is expected to
become effective, and (C) the time, if any is to be set, as to when the holders
of record of such security shall be entitled to exchange their shares for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up.
4. Events of Default; Acceleration
4.1 Events, Remedy. If any of the following conditions or events
("Events of Default") shall occur:
(a) if the Company shall default in the payment of the
principal or interest on the Debenture when due and such default continues for a
period of 30 days after written notice thereof to the Company from Holder; or
(b) if the Company shall default in the performance of or
compliance with any term or covenant contained in this Debenture, the Agreement,
or the Pledge Agreement and such default shall not have been remedied within 30
days after written notice thereof shall have been given to the Company by Holder
(provided, however, if such default is not cured within such 30-day period and
the Company is diligently pursuing such cure, the Company shall have an
additional period of time not to exceed ninety (90) days in which to cure such
default); or
(c) if the Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due, or shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against the Company in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of the Company or of all or any substantial part
of the properties of the Company, or if the Company or its directors or majority
stockholders shall take any action looking to the dissolution or liquidation of
the Company; or
(d) if, within 60 days after the service of process on Company
following commencement of an action against the Company seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, such
action shall not have been dismissed or if, alternatively, all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within 60 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated;
then and in any such event Holder may at any time (unless all defaults shall
theretofore have been remedied) at his option, by written notice to the Company,
declare the entire principal and interest of the Debenture then remaining unpaid
to be due and payable immediately. Notwithstanding the foregoing, this Debenture
shall not be in default to the extent that the Company has exercised its rights
of recoupment under Section 8(f) of the Agreement.
4.2 Other Remedies on Default, Etc. In case any one or more Events of
Default shall occur, be continuing, and not have been waived, Holder may proceed
to protect and enforce the rights of such Holder by an action at law, suit in
equity, or other appropriate proceeding, whether for the specific performance of
any agreement contained herein or under terms of the Agreement or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law. In case of a
default in the payment of principal or interest on the Debenture, the Company
will pay to the Holder thereof such further amount as shall be sufficient to
cover the costs and expenses of collection, including, without limitation,
reasonable attorneys' fees. No course of dealing and no delay on the part of any
Holder in exercising any right shall operate as a waiver thereof or otherwise
prejudice such Holder's rights. No right conferred hereby or by the Agreement
upon any Holder shall be exclusive of any other right referred to herein or
therein or now or hereafter available at law, in equity, by statute or
otherwise.
5. Prepayment
This Debenture may be prepaid (including a deemed prepayment under
Section 8(f) of the Purchase Agreement) without penalty upon thirty (30) days
prior written notice by the Company to Holder. Except in the event of a deemed
prepayment in accordance with Section 8(f) of the Purchase Agreement, Holder
shall have the right within such thirty day period to convert all or part of
this Debenture at Holder's election pursuant to Section 3 above.
6. Security for Debenture
This Debenture is secured by a Stock Pledge Agreement of even date
herewith by and between the Company and Holder.
7. Forfeiture of Debenture/Conversion Shares
Holder acknowledges and agrees that this Debenture and any Conversion
Shares issued upon conversion of this Debenture are subject to the forfeiture
provisions of Section 10.1(iii) of that certain Employment Agreement between
Holder and JTech Medical Industries, Inc., dated as of the date hereof. In the
event of a forfeiture of this Debenture in accordance with the terms of such
Section 10.1(iii), Holder shall promptly surrender this Debenture to the Company
at its principal office. The Company shall promptly thereafter return this
Debenture to Holder, bearing a proper notation of the principal amount that
remains due and payable after such forfeiture, but otherwise unaltered. In the
event of a forfeiture of Conversion Shares in accordance with the terms of
Section 10.1(iii) of the Employment Agreement, the Company shall promptly cancel
the Conversion Certificates applicable to the forfeited Conversion Shares and
issue and deliver to Holder new certificates for any Conversion Shares that were
not forfeited by Holder.
8. Miscellaneous Provisions
8.1 Notices. Any notice herein required or payment required hereunder
shall be made or given to the address of the parties as specified in the
Agreement.
8.2 Amendments or Waivers. Any provision of this Debenture may be
amended, waived, or modified, but only upon the written consent of the Company
and the Holder.
8.3 Governing Law. This Debenture has been executed in and shall be
governed by the laws of the State of Utah excluding that body of law pertaining
to conflicts of law.
8.4 Miscellaneous. The unenforceability or invalidity of any provision
of this Debenture shall not affect the enforceability or validity of any other
provision of this Debenture. The terms of this Debenture shall bind the
undersigned and inure to the benefit of Holder and their respective heirs,
successors, assigns and legal representatives. The Holder may, in accordance
with the terms of the Agreement, assign all or part of Holder's interest under
this Debenture upon prior written notice to the Company.
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued
this 6th day of January, 1999.
ZEVEX INTERNATIONAL, INC.
Phillip L. McStotts,
Chief Financial Officer
Exhibit 10.19
1999 Stock Option Plan and Stock Option Grant Form
ZEVEX INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
Effective January 1, 1999
ARTICLE 1.
GENERAL PROVISIONS
1.1. PURPOSE OF THE PLAN
This 1999 Stock Option Plan (the "Plan") is intended to
promote the interests of ZEVEX International Inc., a Delaware corporation (the
"Corporation"), by providing eligible persons with the opportunity to acquire or
increase their proprietary interest in the Corporation as an incentive for them
to remain in the Service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
1.2. ADMINISTRATION OF THE PLAN
a. The Plan shall be administered by the Board or, to the
extent required under applicable Stock Exchange requirements or if desired by
the Board, a committee of the Board. If administered by a committee, the Primary
Committee shall have sole and exclusive authority to administer the Plan with
respect to Section 16 Insiders. The authority to administer the Plan with
respect to persons other than Section 16 Insiders may be vested in either the
Primary Committee or a Secondary Committee, as determined by the Board.
b. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may terminate the functions of any
Secondary Committee at any time and delegate all powers and authority previously
delegated to such committee to the Primary Committee. To the extent committee
administration is no longer required by applicable law, regulation, or Stock
Exchange requirement, the Board may also terminate the functions of any
committee at any time and reassume all powers and authority previously delegated
to such committee.
c. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue such
interpretations of, the provisions of the Plan and any outstanding options
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the Plan under
its jurisdiction or any option thereunder.
d. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants under the Plan.
e. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine which eligible persons are to receive
option grants, the time or times when such option grants are to be made, the
number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares, the acceleration of such vesting schedule,
and all other terms and conditions of the option grants.
1.3. ELIGIBILITY
The following persons shall be eligible to participate in the
Plan:
a. Employees,
b. non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
c. consultants and other independent advisors who
provide Services to the Corporation or any Parent or
Subsidiary.
1.4. STOCK SUBJECT TO THE PLAN
a. The stock issuable under the Plan shall be shares of
authorized but unissued Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 600,000 shares,
which number of shares may be changed from time to time in accordance with
Article 3.4 below.
b. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article 2.4. However, should the Exercise Price be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option under the Plan, then the number of
shares of Common Stock available for issuance under the Plan shall be reduced by
the gross number of shares for which the option is exercised, and not by the net
number of shares of Common Stock issued to the holder of such option.
c. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities for which
any one person may be granted options per calendar year, and (iii) the number
and/or class of securities and the Exercise Price in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
ARTICLE 2.
OPTION GRANT PROGRAM
2.1. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of Article
2.2 of the Plan, below.
a. Exercise Price
(1) The Exercise Price shall be fixed by the
Plan Administrator but shall not be less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the Grant Date.
(2) The Exercise Price shall become immediately
due upon exercise of the option and shall, subject to the documents evidencing
the option, be payable in one or more of the forms specified below:
(a) cash or check made payable to the
Corporation,
(b) an adequately collateralized
promissory note, payable to the Corporation, but only to the extent authorized
by the Administrator pursuant to Section 3.1 of the Plan,
(c) shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(d) to the extent the option is
exercised for vested shares, through a special sale and
remittance procedure pursuant to which the Optionee shall concurrently
provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of
the Purchased Shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price payable for the Purchased Shares plus all
applicable federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) the
Corporation to deliver the certificates for the Purchased Shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the Exercise Price for the Purchased Shares must be made on
the Exercise Date.
b. Exercise and Term of Options. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in excess
of ten (10) years measured from the Grant Date.
c. Effect of Termination of Service
(1) The following provisions shall govern the
exercise of any options held by the Optionee at the time of cessation
of Service:
(a) Any option outstanding at the time
of the Optionee's cessation of Service for any reason
except death, Permanent Disability or Misconduct shall remain
exercisable for a three (3) month period thereafter, provided no option
shall be exercisable after the Expiration Date.
(b) Any option outstanding at the time
of the Optionee's cessation of Service due to death or
Permanent Disability shall remain exercisable for a twelve (12) month
period thereafter, provided no option shall be exercisable after the
Expiration Date. Subject to the foregoing, any option exercisable in
whole or in part by the Optionee at the time of death may be exercised
subsequently by the personal representative of the Optionee's estate or
by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and
distribution.
(c) Should the Optionee's Service be
terminated for Misconduct, then all outstanding options
held by the Optionee shall terminate immediately and cease to be
outstanding.
(d) The option shall, immediately upon
the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at
that time exercisable. During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of shares for which the option is exercisable on the date of
the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the Expiration Date,
the option shall terminate and cease to be outstanding for any shares
for which the option has not been exercised.
(2) The Plan Administrator shall have the
discretion, exercisable either at the time an option is granted
or at any time while the option remains outstanding, to:
(a) extend the period of time for which
the option is to remain exercisable following the
Optionee's cessation of Service from the period otherwise in effect for
that option to such greater period of time as the Plan Administrator
shall deem appropriate, but in no event beyond the Expiration Date,
and/or
(b) permit the option to be exercised,
during the applicable post-Service exercise period,
not only with respect to the number of shares of Common Stock for which
such option is exercisable at the time of the Optionee's cessation of
Service but also with respect to one or more additional shares that
would have vested under the option had the Optionee continued in
Service.
d. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the Exercise Price, and become a
holder of record of the Purchased Shares.
e. Limited Transferability of Options. During the lifetime of
the Optionee, Incentive Options may be exercised only by the Optionee, and shall
not be assignable or transferable except by will or the laws of descent and
distribution following the Optionee's death. Non-Statutory Options may be
assigned or transferred in whole or in part only (i) during the Optionee's
lifetime if in connection with the Optionee's estate plan to one or more members
of the Optionee's immediate family (spouse and children) or to a trust
established exclusively for the benefit of one or more such immediate family
members, or (ii) by will or the laws of descent and distribution following the
Optionee's death. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
2.2. INCENTIVE OPTIONS
The terms specified below shall apply to all Incentive
Options. Except as modified by the provisions of this Article 2.2, all the
provisions of this Plan shall apply to Incentive Options. Options specifically
designated as Non-Statutory Options when issued under the Plan shall not be
subject to the terms of this Article 2.2.
a. Eligibility. Incentive Options may only be granted
to Employees.
b. Exercise Price. The Exercise Price shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the Grant Date.
c. Dollar Limitation. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one (1) calendar
year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied in the
order in which such options are granted.
d. 10% Stockholder. If an Employee to whom an Incentive Option
is granted is a 10% Stockholder, then the Exercise Price shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the Grant Date, and the option term shall not exceed five (5) years
measured from the Grant Date.
e. Holding Period. Shares purchased pursuant to an option
shall cease to qualify for favorable tax treatment as Incentive Option Shares if
and to the extent Optionee disposes of such shares within two (2) years of the
Grant Date or within one (1) year of Optionee's purchase of said shares.
2.3. CORPORATE TRANSACTION/CHANGE IN CONTROL
a. In the event of any Corporate Transaction, the Plan
Administrator shall have the sole discretion to elect that any outstanding
option shall automatically accelerate so that such option shall, immediately
prior to the effective date of the Corporate Transaction, becomes fully
exercisable for all or a greater portion of the shares of Common Stock at the
time subject to such option. The Plan Administrator's discretion under this
Article 2.3.a. shall be exercisable either at the time the option is granted or
at any time while the option remains outstanding.
b. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities that would have been
issuable to the Optionee in consummation of such Corporate Transaction had the
option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction, (ii) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same and (iii) the maximum number of securities
and/or class of securities for which any one person may be granted stock
options.
c. The Plan Administrator shall have the discretion,
exercisable at the time the option is granted or at any time while the option
remains outstanding, to provide for the automatic acceleration of any options
assumed or replaced in a Corporate Transaction that do not otherwise accelerate
at that time in the event the Optionee's Service should subsequently terminate
by reason of an Involuntary Termination within eighteen (18) months following
the effective date of such Corporate Transaction. Any options so accelerated
shall remain exercisable for shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination.
d. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to (i) provide for the automatic acceleration of one
or more outstanding options upon the occurrence of a Change in Control or (ii)
condition any such option acceleration upon the subsequent Involuntary
Termination of the Optionee's Service within a specified period (not to exceed
eighteen (18) months) following the effective date of such Change in Control.
Any options accelerated in connection with a Change in Control shall remain
fully exercisable until the expiration of the option term.
e. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Non-Statutory Option under the federal tax laws.
f. The grant of options under the Plan shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
ARTICLE 3.
MISCELLANEOUS
3.1. FINANCING
The Plan Administrator may permit any Optionee to pay the
option Exercise Price by delivering an adequately collateralized promissory note
payable in one or more installments. The terms of any such promissory note
(including the interest rate and the terms of repayment) shall be established by
the Plan Administrator in its sole discretion. In all events, the maximum credit
available to the Optionee may not exceed the sum of (i) the aggregate option
Exercise Price payable for the Purchased Shares plus (ii) the amount of any
federal, state and local income and employment tax liability incurred by the
Optionee in connection with the option exercise.
3.2. TAX WITHHOLDING
a. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options under the Plan shall be subject to the
satisfaction of all applicable federal, state and local income and employment
tax withholding requirements.
b. The Plan Administrator may, in its discretion, provide any
or all holders of Non-Statutory Options under the Plan with the right to use
shares of Common Stock in satisfaction of all or part of the Taxes incurred by
such holders in connection with the exercise of their options. Such right may be
provided to any such holder in either or both of the following formats:
(1) Stock Withholding: The election to have the
Corporation withhold, from the shares of Common Stock otherwise
issuable upon the exercise of such Non-Statutory Option, a portion of
those shares with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.
(2) Stock Delivery: The election to deliver to the
Corporation, at the time the Non-Statutory Option is exercised, one or
more shares of Common Stock previously acquired by such holder (other
than in connection with the option exercise triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
3.3. EFFECTIVE DATE AND TERM OF THE PLAN
a. The Plan shall become effective on the Plan Effective Date.
However, no shares shall be issued under the Plan pursuant to Incentive Options
until the Plan is approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all Incentive Options previously granted under this Plan
shall automatically convert into Non-Statutory Options.
b. The Plan shall terminate upon the earliest of (i) December
31, 2008, (ii) the date on which all shares available for issuance under the
Plan shall have been issued, or (iii) the termination of all outstanding options
in connection with a Corporate Transaction. Upon such Plan termination, all
outstanding options shall continue to have force and effect in accordance with
the provisions of the documents evidencing such options.
3.4. AMENDMENT OF THE PLAN
a. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects, or to cancel any
grants made thereunder; provided, however, that no such amendment, modification,
or cancellation shall adversely affect any rights and obligations with respect
to options at the time outstanding under the Plan unless each affected Optionee
consents to such amendment, modification, or cancellation. In addition,
amendments to the Plan shall be subject to approval of the Corporation's
stockholders to the extent required by applicable laws, regulations, or Stock
Exchange requirements.
b. Options to purchase shares of Common Stock may be granted
under the Plan that are in each instance in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued are held in escrow until there is obtained Board approval (and
shareholder approval if required by applicable laws, regulations, or Stock
Exchange requirements) of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan.
3.5. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
3.6. REGULATORY APPROVALS
a. The implementation of the Plan, the granting of any option
under the Plan, and the issuance of any shares of Common Stock upon the exercise
of any option shall be subject to the Corporation's obtaining all approvals and
permits required by regulatory authorities having jurisdiction over the Plan and
the options and shares of Common Stock issued pursuant to the Plan.
b. No shares of Common Stock shall be issued or delivered
under the Plan unless and until there shall have been compliance with all
applicable requirements of federal and state securities laws and all applicable
listing requirements of any Stock Exchange on which Common Stock is then listed
for trading.
3.7. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right
to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee to terminate
such person's Service at any time for any reason, with or without cause.
APPENDIX
The following definitions shall be in effect under the Plan
and the Plan Documents:
0.1. Board shall mean the Corporation's Board of Directors.
117
110
2. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders,
which the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
3. Code shall mean the Internal Revenue Code of 1986, as amended.
4. Common Stock shall mean the Corporation's common stock.
5. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all
or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
6. Corporation shall mean ZEVEX International, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of ZEVEX International, Inc., which shall assume the Plan
by appropriate action.
7. Eligible Director shall mean a non-employee Board member eligible to
participate in the Plan.
8. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
9. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise pursuant to the Stock Option
Exercise Notice and Purchase Agreement.
10. Exercise Price shall mean the exercise price per share as specified
in the Stock Option Grant.
11. Expiration Date shall mean the date on which the option expires as
specified in the Stock Option Grant.
12. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is traded at the time on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is not listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
13. Grant Date shall mean the date on which the option is granted to
Optionee as specified in the Stock Option Grant.
14. Incentive Option shall mean an option which satisfies the
requirements of an "incentive stock option" under Code Section 422.
15. Involuntary Termination shall mean the termination of the Service
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation
following (A) a change in his or her position with the Corporation
which materially reduces his or her level of responsibility, (B) a
reduction in his or her level of compensation (including base salary,
fringe benefits and participation in corporate-performance based bonus
or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
16. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee or other person in the Service of the Corporation (or any Parent
or Subsidiary).
17. 1933 Act shall mean the Securities Act of 1933, as amended.
18. 1934 Act shall mean the Securities Exchange Act of 1934, as
amended.
19. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of an "incentive stock option" under Code Section 422.
20. Optionee shall mean any person to whom an option is granted under
Plan.
21. Option Shares shall mean the number of shares of Common Stock
subject to the option as specified in the Stock Option Grant.
22. Parent shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one or the other corporations
in such chain.
23. Permanent Disability or Permanently Disabled shall mean the
inability of the Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
24. Plan shall mean the Corporation's 1999 Stock Option Plan as set
forth herein.
25. Plan Administrator shall mean the particular entity, whether the
Board or a committee of the Board, which is authorized to administer the Plan
with respect to one or more classes of eligible persons, to the extent such
entity is carrying out its administrative functions under the Plan with respect
to the persons under its jurisdiction.
26. Plan Documents shall mean the Plan, the Stock Option Grant, and
Stock Option Exercise Notice and Purchase Agreement, collectively.
27. Plan Effective Date shall mean January 1, 1999, the date on which
the Plan was adopted by the Board.
28. Primary Committee shall mean the committee of two (2) or more
non-employee Board members (as defined in the regulations to Section 16 of the
1934 Act) appointed by the Board to administer the Plan with respect to Section
16 Insiders.
29. Purchased Shares shall mean the shares purchased upon exercise of
the Option pursuant to the Stock Option Exercise Notice and Purchase Agreement.
30. SEC shall mean the Securities and Exchange Commission.
31. Secondary Committee shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Plan with respect to eligible
persons other than Section 16 Insiders.
32. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
33. Service shall mean the performance of services to the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.
34. Stock Exchange shall mean either the American Stock Exchange, the
New York Stock Exchange, another regional stock exchange, or the Nasdaq market
as established by the National Association of Securities Dealers.
35. Stock Option Exercise Notice and Purchase Agreement shall mean the
agreement of said title in substantially the form of Exhibit A to the Stock
Option Grant, pursuant to which Optionee gives notice of his intent to exercise
the option.
36. Stock Option Grant shall mean the Stock Option Grant document,
pursuant to which Optionee has been informed of the terms of the option granted
under the Plan.
37. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
38. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options in connection
with the exercise of those options.
39. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
Grant No. ________
ZEVEX INTERNATIONAL, INC.
STOCK OPTION GRANT
Optionee:
Address:
Grant Date:
Exercise Price: $ ________________ per share
Number of Option Shares: _________________ shares
Expiration Date:
Type of Option: Incentive Option Non-Statutory Option
Exercise Schedule: The option shall become exercisable annually with
respect to _____ percent of the total number of Option Shares on each
of the first _____ anniversary dates of the Grant Date. In no event
shall the option become exercisable for any Option Shares not vested at
the time of Optionee's cessation of Service.
1. Grant of Option. ZEVEX International, Inc, a Delaware
corporation (the "Corporation"), hereby grants to the Optionee named above, as
of the Grant Date, an option to purchase up to the total number of Option Shares
specified above. This grant includes the terms of the Stock Option Exercise
Notice and Purchase Agreement attached hereto as Exhibit A, and is subject to
all of the terms and conditions of this Grant and the Corporation's 1999 Stock
Option Plan, a copy of which is attached hereto as Exhibit B. All capitalized
terms not defined herein have the meaning set for the in the Appendix to the
Plan.
2. Option Term. The option term shall be measured from the
Grant Date and shall accordingly expire at the close of business on the
Expiration Date specified above, unless sooner terminated in accordance with
paragraph 5 below.
3. Limited Transferability. This option shall be neither
transferable nor assignable, in whole or in part, by Optionee other than by will
or by the laws of descent and distribution following Optionee's death and may be
exercised, during Optionee's lifetime, only by Optionee. However, if this option
is designated a Non-Statutory Option above, then this option may also, in
connection with Optionee's estate plan, be assigned in whole or in part during
Optionee's lifetime to one or more members of Optionee's immediate family
(spouse or children) or to a trust established exclusively for the benefit of
one or more such immediate family members. Optionee must give written notice of
any such assignment during Optionee's lifetime to the Corporation 10 days prior
to the effective date of the assignment. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for this option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
4. Exercisability. This option shall become exercisable for
the Option Shares in one or more installments as provided in the Exercise
Schedule specified above. As the option becomes exercisable for such
installments, those installments shall accumulate and the option shall remain
exercisable for the accumulated installments until the Expiration Date or sooner
termination of the option term under paragraph 5 below. This option shall not be
exercisable for fewer than 100 shares unless otherwise approved by the Plan
Administrator.
5. Cessation of Service. The option term specified in
paragraph 2 above shall terminate, and this option shall cease to be outstanding
prior to the Expiration Date, upon Optionee's ceasing to be in the Service of
the Corporation. In such event, the following provisions shall apply:
a. Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct)
while this option is outstanding, then Optionee shall have a
period of three (3) months (commencing with the date of such
cessation of Service) during which to exercise this option as
to vested Option Shares.
b. Should Optionee die while this option is
outstanding, then the personal representative of Optionee's
estate (or the person or persons to whom the option is
transferred pursuant to Optionee's will or in accordance with
the laws of descent and distribution) shall have a period of
twelve (12) months (commencing with the date of such cessation
of Service) during which to exercise this option as to vested
Option Shares.
c. Should Optionee cease Service by reason of
Permanent Disability while this option is outstanding, then
Optionee shall have a period of twelve (12) months (commencing
with the date of such cessation of Service) during which to
exercise this option as to vested Option Shares.
d. Should Optionee's Service be terminated for
Misconduct, then this option shall terminate immediately and
cease to remain outstanding.
e. During the limited post-Service exercise period,
this option may not be exercised in the aggregate for more
than the number of vested Option Shares for which the option
is exercisable on the date of the Optionee's cessation of
Service. Upon the expiration of such limited post-Service
exercise period or upon the Expiration Date (if earlier), this
option shall terminate and cease to be outstanding for any
vested Option Shares for which the option has not been
exercised. In no event shall this option be exercisable at any
time after the Expiration Date. To the extent this option is
not otherwise exercisable for vested Option Shares at the time
of Optionee's cessation of Service, this option shall
immediately terminate and cease to be outstanding with respect
to those shares.
6. Adjustment in Option Shares. If this option is assumed in
connection with a Corporate Transaction, then this option shall be appropriately
adjusted, immediately after such Corporate Transaction, to apply to the number
and class securities which would have been issuable to Optionee in consummation
of such Corporate Transaction had the Option been exercised immediately prior to
such Corporate Transaction, and appropriate adjustments shall also be made to
the Exercise Price; provided that the aggregate Exercise Price shall remain the
same. Should any change be made to the Common Stock by reason of any split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made to
(i) the total number and/or class of securities subject to this option, and (ii)
the Exercise Price, in order to reflect such change and thereby preclude a
dilution or enlargement of benefits hereunder.
7. Stockholder Rights. The holder of this option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the option, paid the Exercise Price, and become a holder of
record of the Purchased Shares.
8. Manner of Exercising Options
a. In order to exercise this option with respect
to all or any part of the Option Shares for which this option is at the time
exercisable, Optionee (or any other person or persons exercising this
option) must take the following actions:
(1) Execute and deliver to the Corporation
a Stock Option Exercise Notice and Purchase Agreement for the
Option Shares for which the option is exercised.
(2) Pay the aggregate Exercise Price for
the Purchased Shares in one or more of the following forms:
(a) Cash or check made payable to
the Corporation; or
(b) An adequately collateralized
promissory note payable to the Corporation, but only to
the extent authorized by the Plan Administrator in accordance
with paragraph 12 hereof.
(c) In shares of Common Stock
held by Optionee (or any other person or persons
exercising the option) for the requisite period necessary to
avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(d) Through a special sale and
remittance procedure pursuant to which Optionee (or any
other person or persons exercising the option) shall
concurrently provide irrevocable written instructions (1) to a
Corporation-designated brokerage firm to effect the immediate
sale of the Purchased Shares and remit to the Corporation, out
of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate Exercise Price payable
for the Purchased Shares plus all applicable federal, state
and local income and employment taxes required to be withheld
by the Corporation by reason of
such exercise and (2) to the Corporation to deliver the
certificates for the Purchased Shares directly to such
brokerage firm in order to complete the sale.
Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise,
payment of the Exercise Price must accompany the Stock Option
Exercise Notice and Purchase Agreement delivered to the
Corporation in connection with the option exercise.
(3) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option
(if other than Optionee) have the right to exercise this option.
(4) Execute and deliver to the Corporation
such written representations as may be requested by the Corporation
in order for it to comply with the applicable requirements of
federal and state securities laws.
(5) Make appropriate arrangements with
the Corporation (or Parent or Subsidiary employing or
retaining Optionee) for the satisfaction of all federal, state and
local income and employment tax withholding requirements applicable to
the option exercise.
b. As soon as practical after the Exercise Date, the
Corporation shall issue to, or, on behalf of Optionee
(or any other person or persons exercising this option),a share certificate for
the Purchased Shares.
c. In no event may this option be exercised for any
fractional shares.
9. Compliance with Laws and Regulations
a. The exercise of this option and the issuance of
the Option Shares upon such exercise shall be subject
to compliance by the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of any Stock
Exchange on which the Common Stock may be listed for trading at the time of such
exercise and issuance.
b. The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by
the Corporation to be necessary to the lawful issuance and sale of any Common
Stock pursuant to this option shall relieve the Corporation of any liability
with respect to the non-issuance or sale of the Common Stock as to which such
approval shall not have been obtained. The Corporation, however, shall use its
best efforts to obtain all such approvals.
10. Successors and Assigns. Except to the extent otherwise
provided in paragraph 3, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's permitted assigns and the legal representatives, heirs
and legatees of Optionee's estate.
11. Notices. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated on the Stock Option Grant. All notices
shall be deemed effective upon personal delivery or upon deposit in the U.S.
mail, postage prepaid and properly addressed to the party to be notified.
12. Financing. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchase Option Shares by delivering an adequately
collateralized promissory note payable to the Corporation. The terms of any such
promissory note (including the interest rate, the requirements for collateral,
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion.
13. Construction. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects limited
by and subject to the terms of the Plan and the Stock Option Exercise Notice and
Purchase Agreement. All decisions of the Plan Administrator with respect to any
question or issue arising under the Plan or this Agreement shall be conclusive
and binding on all persons having an interest in this option.
14. Governing Law. The interpretation, performance
and enforcement of this Agreement shall be governed by the
laws of the State of Utah without resort to its conflict-of-laws rules.
15. Additional Terms Applicable to an Incentive Option. In the
event this option is designated an Incentive Option above, the following terms
and conditions shall also apply to the grant:
a. This option shall cease to qualify for favorable
tax treatment as an Incentive Option if (and to the extent) this option
is exercised for one or more Option Shares: (1) more than three (3)
months after the date Optionee ceases to be an Employee or in the
Service of the Corporation for any reason other than death or Permanent
Disability or (2) more than twelve (12) months after the date Optionee
ceases to be an Employee by reason of death or Permanent Disability.
b. No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the extent)
the aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which such installment first becomes exercisable
hereunder would, when added to the aggregate value (determined as of
the respective date or dates of grant) of any earlier installments of
the Common Stock and any other securities for which this option or any
other Incentive Options granted to Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or
any Parent or Subsidiary) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should such One Hundred Thousand Dollar ($100,000)
limitation be exceeded in any calendar year, this option shall
nevertheless become exercisable for the excess shares in such calendar
year, but shall be taxed as a Non-Statutory Option.
c. Should the Board elect to accelerate the
exercisability of this option upon a Corporate Transaction, then this
option shall qualify as an Incentive Option only to the extent the
aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which this option first becomes exercisable in the
calendar year in which the Corporate Transaction occurs does not, when
added to the aggregate value (determined as of the respective date or
dates of grant) of the Common Stock or other securities for which this
option or one or more other Incentive Options granted to Optionee prior
to the Grant Date (whether under the Plan or any other option plan of
the Corporation or any Parent or Subsidiary) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should the applicable One Hundred Thousand
Dollar ($100,000) limitation be exceeded in the calendar year of such
Corporate Transaction, the option may nevertheless be exercised for the
excess shares in such calendar year, but shall be taxed as a
Non-Statutory Option.
d. Should Optionee hold, in addition to this option,
one or more other options to purchase Common Stock which become
exercisable for the first time in the same calendar year as this
option, then the foregoing limitations on the exercisability of such
options as Incentive Options shall be applied on the basis of the order
in which such options are granted.
e. The grant of this option is subject to approval of
the Plan by Corporation's stockholders within twelve (12) months after
the adoption of the Plan by the Board. In the event that such
stockholder approval is not obtained, then this option shall not
qualify as an Incentive Option.
f. If the Option Shares covered by this Agreement
exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then
this option shall cease to qualify as an Incentive Option unless
stockholder approval of an amendment sufficiently increasing the number
of shares of Common Stock issuable under the Plan is obtained in
accordance with the provisions of the Plan.
g. If Optionee is a 10% Stockholder, then the
Exercise Price shall not be less than one hundred ten percent (110%) of
the Fair Market Value per share of Common Stock on the Grant Date, and
the option term shall not exceed five (5) years measured from the Grant
Date.
h. Shares purchased pursuant to this option shall
cease to qualify for favorable tax treatment as Incentive Option shares
if and to the extent Optionee disposes of such shares within two (2)
years from the Grant Date or within one (1) year of Optionee's purchase
of said shares.
i. Optionee acknowledges that the rules regarding
Incentive Options as contained in the Internal Revenue Code are subject
to amendment in the future. Optionee should consult his or her tax
advisor prior to taking any action with respect to this option or the
shares purchased hereunder.
IN WITNESS WHEREOF, this Agreement is executed as of the Grant Date
first noted above.
ZEVEX INTERNATIONAL, INC.
By
Title
ACKNOWLEDGEMENT
Optionee understands and agrees that the option is granted subject to
and in accordance with the terms of the Corporation's 1998 Stock Option Plan
(the "Plan"). Optionee further agrees to be bound by the terms of the Plan and
the terms of the option as set forth in this Agreement. Optionee understands
that any Option Shares purchased under the option shall be subject to the terms
set forth in the Stock Option Exercise Notice and Purchase Agreement attached
hereto as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the Plan in the form
attached hereto as Exhibit B, and represents that Optionee has read and
understands the Plan, and accepts this option subject to all terms and
provisions of the Plan and the Plan documents. Optionee hereby agrees to accept
as binding, conclusive and final, all decisions and interpretations of the Plan
Administrator upon any questions arising under the Plan. Optionee acknowledges
that there may be adverse tax consequences upon exercise of this option and/or
upon disposition of the Purchased Shares, and that Optionee should consult a tax
advisor prior to such exercise or disposition.
OPTIONEE
Optionee
Date
EXHIBIT A
ZEVEX INTERNATIONAL, INC.
STOCK OPTION EXERCISE NOTICE
AND PURCHASE AGREEMENT
This Stock Option Exercise Notice and Purchase Agreement ("Agreement")
is made as of this ____ day of ___________, ______, by and between ZEVEX
International, Inc., a Delaware corporation, and ______________________,
Optionee under the Corporation's 1999 Stock Option Plan (the "Plan").
All capitalized terms used in this Agreement and not defined herein
shall have the meaning assigned to them in the Appendix to the Plan.
1. Exercise of Option
a. Exercise. Optionee hereby elects to exercise Optionee's
option to purchase ___________________________________ (_____________) shares of
Common Stock (the "Purchased Shares") of the Corporation, pursuant to that
certain option (the "Option") granted Optionee on __________________, ______
(the "Grant Date") to purchase _____________ shares of Common Stock under the
Plan at the exercise price of $___________ per share (the "Exercise Price").
b. Payment. Concurrent with the delivery of this Agreement to
the Corporation, Optionee shall pay the Exercise Price for the Purchased Shares
in accordance with the provisions of the Stock Option Grant and shall deliver
whatever additional documents may be required by the Stock Option Grant as a
condition for exercise with respect to the Purchased Shares.
2. Market Stand-off Agreement
a. Restriction on Transfer. In connection with any
underwritten public offering by the Corporation of its equity
securities pursuant to an effective registration statement filed under
the 1933 Act, including the Corporation's initial public offering,
Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or
transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to, any Purchased Shares without the prior
written consent of the Corporation or its underwriters. Such
restrictions (the "Market Stand-Off") shall be in effect for such
period of time from and after the effective date of the final
prospectus for the offering as may be requested by the Corporation or
such underwriters. In no event, however, shall such period exceed one
hundred eighty (180) days.
b. Officers and Directors. Optionee shall be subject to the
Market Stand-Off provided and only if the officers and directors of the
Corporation are also subject to similar restrictions.
c. Additional Shares. Any new, substituted or additional
securities which are, by reason of any recapitalization or
reorganization, distributed with respect to the Purchased Shares shall
be immediately subject to the Market Stand-Off, to the same extent the
Purchased Shares are at such time covered by such provisions.
d. Stop Transfer. In order to enforce the Market Stand-Off,
the Corporation may impose stop-transfer instructions with respect to
the Purchased Shares until the end of the applicable stand-off period.
3. Miscellaneous Provisions
a. No Employment or Service Contract. Nothing in this
Agreement or in the Plan shall confer upon Optionee any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee's Service at any time for any
reason with or without cause.
b. Notices. Any notice required to be given under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party's signature line on this Agreement or at such
other address as such party may designate by ten (10) days' advance written
notice under this paragraph to all other parties to this Agreement.
c. Amendments and Waivers. No waiver or amendment of this
Agreement shall be effective unless agreed to in writing by the parties hereto.
No waiver of any breach or condition of this Agreement shall be deemed to be a
waiver of any other or subsequent breach or condition, whether of like or
different nature.
d. Optionee Undertaking. Optionee hereby agrees to take
whatever additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Optionee or the
Purchased Shares pursuant to the provisions of this Agreement.
e. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Utah without\
resort to that State's conflict-of-laws rules.
f. Successors and Assigns. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and upon Optionee, Optionee's permitted assigns and the
legal representatives, heirs and legatees of Optionee's estate, whether or not
any such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first indicated above.
ZEVEX INTERNATIONAL, INC.
By:
Title:
OPTIONEE
Address:
Exhibit 21
List of Subsidiaries
1. ZEVEX, Inc., a Delaware corporation
2. JTech Medical Industries, Inc., a Utah corporation
3. Aborn Electronics, Inc., a California corporation