Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 001-12965
ZEVEX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0462807
-------- ----------
(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 6, 2001, was approximately $13,683,537. 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 6, 2001 was 3,440,064
Documents incorporated by reference: none
TABLE OF CONTENTS
PART I
Item 1 BUSINESS 3
Item 2 PROPERTIES 22
Item 3 LEGAL PROCEEDINGS 22
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 23
Item 6 SELECTED FINANCIAL DATA 23
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24
Item7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 30
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 30
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 30
Item 11 EXECUTIVE COMPENSATION 33
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 36
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 38
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 38
Item 14(c) INDEX TO EXHIBITS 40
SIGNATURES 39
2
PART I
ITEM 1. BUSINESS
GENERAL
Through its three wholly owned subsidiaries, ZEVEX(R) International, Inc.
("ZEVEX"), a Delaware corporation, is in the business of designing,
manufacturing and distributing medical devices. ZEVEX' product lines include
proprietary medical devices that it designs, manufactures, and distributes, and
contract-manufactured products that it designs and manufactures for original
equipment manufacturers ("OEM's").
ZEVEX' subsidiary, ZEVEX Inc., a Delaware corporation ("ZEVEX Inc.") provides
products for enteral nutrition delivery. Enteral nutrition delivery involves the
infusion of feeding solutions directly into the stomach or intestines of
patients. These products include electromechanical pumps, disposable delivery
sets, feeding tubes and accessories. ZEVEX Inc.'s enteral nutrition delivery
products are sold to home health care providers, nursing homes, and hospitals.
Through its OEM Division, ZEVEX Inc. is also a contract manufacturer of medical
devices, which include ultrasonic sensors, surgical handpieces, and electronic
instruments. The OEM Division customizes the design of each of these products to
meet the specific requirements of the OEM customer.
ZEVEX' subsidiary, Aborn Electronics, Inc., a California corporation ("Aborn"),
specializes in the design and manufacturing of optoelectronic components. At its
San Jose, California facility, Aborn produces optical emitters, detectors, and
transducer assemblies that include custom integrated circuits. Aborn products
are used in medical devices and instrumentation, as well as in industrial and
military applications.
ZEVEX' subsidiary, JTech Medical Industries, Inc., a Utah corporation ("JTech"),
provides musculoskeletal evaluation products to chiropractors, occupational
therapists, osteopaths, and physical therapists. The JTech product line includes
of hand-held devices used for evaluating isolated muscle strength, joint ranges
of motion, and functional capacity, which can be coupled through a JTech
interface module to a standard personal computer. JTech also develops and sells
unique, user-friendly software that is employed by the customer for assessing
and documenting clinical outcomes.
ZEVEX' current strategy is to continue to aggressively grow proprietary product
revenues with the acquisition and internal development of products that
complement its existing two lines of proprietary products. In addition, ZEVEX
will continue to manufacture products for others in order to capitalize on the
outsourcing trend in the medical device industry. ZEVEX, together with its
subsidiaries, is hereafter collectively referred to as the "Company".
DEVELOPMENTS DURING 2000
The Company substantially grew revenues during 2000, further diversifying its
offering of products and gaining market share for its proprietary products, as
well as focusing its contract manufacturing business on higher margin core
technologies that contain its ultrasonic and optoelectronic components. Key
developments this year were:
1. On April 6, 2000, ZEVEX Inc. acquired the enteral nutrition delivery device
business of Nestle USA, Inc. ("Nestle") in an asset purchase. The assets
acquired included over 19,500 enteral feeding pumps owned by Nestle and placed
with various health care facilities under arrangements whereby the facilities
agree to purchase disposable accessories for use with Nestle pumps. The assets
also included Nestle's line of pump administration sets, feeding tubes,
irrigation kits, ancillary devices for the pumps, and certain associated
intellectual property.
3
2. On September 6, 2000, the Company created an independent division, ZEVEX OEM,
to hold and manage ZEVEX Inc.'s contract manufacturing business. The creation of
ZEVEX OEM was part of a strategic initiative that will allow the Company to
operate its contract manufacturing business separately from its proprietary
product businesses.
3. On September 11, 2000, the Company introduced its EnteraLite(R) Ambulatory
Enteral Feeding Pump at the XXII Congress of the European Society for Parenteral
and Enteral Nutrition (ESPEN), in Madrid, Spain. Designed for both hospital and
home care use, the EnteraLite(R) maintains all industry standard features, as
well as new state-of-the-art improvements that lead to vastly improved mobility
for enteral patients.
4. On October 20, 2000, ZEVEX was ranked 159 on a list of 200 Best Small
Companies in America by Forbes Magazine. The list was reported in the magazine's
October 30, 2000 issue.
ZEVEX' PROPRIETARY PRODUCTS
ENTERAL NUTRITION DELIVERY PRODUCTS
Through ZEVEX Inc., the Company sells two major lines of enteral feeding pumps
and a variety of related disposable delivery sets and feeding tubes. These
products are for patients who require direct gastrointestinal nutritional
therapy. Enteral feeding is a means of providing nutrition to patients who may
have experienced head or neck trauma or have gastrointestinal disorders, such as
short bowel syndrome, Crohn's Disease, bowel pseudo-obstruction, and other
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.
The Company has successfully applied its engineering and regulatory expertise to
the development, commercialization, and marketing of the EnteraLite(R)
Ambulatory Enteral Feeding Pump for patients who require direct gastrointestinal
nutritional therapy. Management believes that the EnteraLite(R) pump is the
lightest, most compact and most mobile enteral feeding pump in the U.S. market,
possessing unprecedented safety and accuracy in enteral nutrition delivery. The
EnteraLite's(R) unique features include a 24-hour battery, the life of which is
one-third longer than the battery life of its closest competitor. The
EnteraLite(R) pump carries a two-year warranty, twice the industry average.
First introduced in 1996, the EnteraLite(R) continues to gain acceptance in the
home health care market due to the product's superior mobility and
state-of-the-art features. By improving the convenience of nutrition delivery,
the EnteraLite(R) can contribute to better clinical outcomes and improved
quality of life for enteral patients. The EnteraLite(R) requires the use of
disposable feeding bags and tubing sets, which are also sold by the Company.
ZEVEX Inc. has been awarded seven U.S. patents for technology related to the
EnteraLite(R) and its disposable sets.
The 1998 acquisition of the Nutrition Medical's line of pumps, delivery sets and
feeding tubes significantly expanded the ZEVEX line of enteral delivery
products. ZEVEX now manufactures and distributes the EnteralEZ(R) enteral
feeding pump, which is a cost-effective pump intended for applications where
patients are not mobile. Complementing this pump model is a line of disposable
delivery sets sold by ZEVEX for use with the EnteralEZ(R) pump. These sets
include bags of various sizes, as well as spike sets for use with pre-filled
containers. Additionally, as a result of the Nutrition Medical acquisition,
ZEVEX now offers the Panda(R) line of feeding tubes, which include adult and
pediatric nasoenteric tubes, replacement gastrostomy tubes and a needle catheter
jejunostomy kit. These feeding tubes are expendable devices that allow access to
the gastrointestinal tract of the patient via commonly accepted procedures, and
are discarded after a single use by the patient.
4
MUSCULOSKELETAL EVALUATION PRODUCTS
Through JTech, the Company manufactures and markets 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
Windows(R)-compatible software. JTech's product lines include musculoskeletal
evaluation, functional capacity evaluation, upper extremity and hand testing,
and pain evaluation products. They are used, for example, by chiropractors,
physical therapists, osteopaths, and occupational therapists for outcomes
assessment during rehabilitation, medical-legal evaluations for personal injury
and workers compensation claims, and clinical documentation.
ZEVEX OEM CONTRACT DESIGN AND MANUFACTURING SERVICES
Through ZEVEX OEM and Aborn, 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 them into their
products. The Company designs and manufactures surgical systems, device
components, and sensors for established and emerging technology companies, such
as Alaris Medical Systems, Inc., Allergan, Inc., various divisions of Baxter
Healthcare Corporation, Medtronic Corporation, Mentor Corporation, SIMS Deltec,
Inc., and Terumo Corp. ZEVEX OEM and Aborn each offer their customers over 15
years of specialized engineering and manufacturing expertise in their respective
areas.
Industry sources indicate that there is a strong 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 take a device from conception to
commercial use. Even larger, well-established companies, which may have the
capital to develop such expertise, may lack the required personnel and time to
accumulate such expertise or may want to focus their resources in areas other
than manufacturing. In the medical device industry in particular, there are
substantial regulatory compliance requirements, in both the United States and
overseas, that must be addressed in designing and manufacturing devices. By
focusing its resources and expertise in the design and manufacturing areas, the
Company believes it offers customers the ability to outsource engineering and
manufacturing needs on a cost-effective basis, often allowing the customer to
take a product to market more quickly and efficiently, at a lower cost, and with
higher quality than a customer could achieve with its own resources.
The Company uses extensive engineering and regulatory expertise to deliver
integrated design and manufacturing solutions to its customers. ZEVEX Inc. is
registered with the United States Food and Drug Administration ("FDA") as a
medical device manufacturer and has developed internal systems intended to
maintain compliance with the FDA's Good Manufacturing Practices ("GMP"). ZEVEX
Inc. also is certified by the International Organization for Standardization
("ISO") to 9001 and EN46001 standards, which means that it has met
internationally-recognized quality standards for the design, manufacture, and
testing of products. ZEVEX Inc. devotes significant management time and
financial resources to GMP compliance and ISO certification.
PRINCIPAL OEM PRODUCTS
A majority of the Company's contract manufacturing business involves the
following five general product categories:
5
OPHTHALMIC SURGICAL DEVICES
ZEVEX OEM designs and manufactures ultrasonic phacoemulsification handpieces and
handpiece drive circuits 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 90 percent of cataract procedures in the United States. ZEVEX OEM
manufactures handpieces of several designs for Allergan, Inc., who is a major
customer and a market leader in ophthalmology. ZEVEX OEM also provides
customized handpieces and handpiece drive circuits to many other customers
worldwide.
In addition, ZEVEX OEM manufactures the KeraVision(R) KV2000, which is a
precision vacuum instrument that facilitates the surgical insertion of
prescription Intacs(R) rings at a depth of 2/3 the thickness of the cornea.
These rings, depending upon their thickness, flatten the cornea, thereby
refocusing an eye that requires 1 to 5 diopters of correction. The KV2000
creates a vacuum that 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 to the eye, giving the surgeon both a means to hold
the eye still and a platform through which to perform the surgery.
LIPOSUCTION HANDPIECES
ZEVEX OEM designs and manufactures handpieces for ultrasonically-assisted soft
tissue aspiration for Mentor Corporation. 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 while a vacuum is applied, requiring the physician to exert a great
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 easily aspirated away, significantly
reducing patient trauma as well as the amount of force applied by the surgeon.
ULTRASONIC SENSORS
ZEVEX OEM 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 OEM'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
OEM's liquid level detectors employ the Company's patented coupling technology
and are used to monitor critical levels of liquids in various reservoirs used in
surgery, such as those employed in cardiopulmonary bypass systems.
OPTOELECTRONIC SENSORS AND CUSTOM INTEGRATED CIRCUITS
Aborn designs and manufactures a variety of optical emitters and detectors,
custom integrated circuit products, and semiconductor components used in
medical, industrial, and military applications. Aborn's products include fiber
optic links, integrated optoisolators, high-speed sensor integrated circuits,
application specific integrated circuit (ASIC) devices, and solid state relays.
Medical applications for these technology products include diagnostic and
therapeutic equipment, such as blood analyzers and dialysis machines.
MEDICAL SYSTEMS
The ultimate level of product sophistication for ZEVEX OEM's manufacturing
services involves medical systems manufacturing. During 2000, ZEVEX OEM
manufactured the Cardiac Science PowerHeart(R) AECD, which is a unique external
bedside defibrillator. Designed for the unattended monitoring of patients at
risk for heart attacks, the device detects certain abnormal heart rates and
responds automatically by delivering a charge to restore the heart to its normal
rhythm.
6
REVENUE SOURCES
The following table sets forth the source of the Company's total revenues during
the last 3 years, allocated between six product/service categories.
REVENUE BREAKDOWN BY PRODUCT/SERVICE, BY PERCENTAGE
PRODUCT 2000 1999 1998
------- ---- ---- ----
Enteral Nutrition Delivery 43.4% 32.7% 29.9%
Ultrasonic and Optoelectronic 15.1% 18.9% 24.5%
Sensors, Custom IC's
Ophthalmic Surgical Devices 13.9% 18.0% 37.3%
and Liposuction Handpieces
Medical Systems 13.9% 7.7% 2.8%
Musculoskeletal Evaluation 10.1% 14.2% 0.0%
Engineering/Tooling 3.6% 8.5% 5.5%
CAPABILITIES
DESIGN AND ENGINEERING
The Company has extensive design and engineering capabilities that it uses for
its own product development as well as for servicing its contract manufacturing
customers. ZEVEX Inc. and Aborn engineers have broad experience in designing,
engineering, and testing an array of medical technology devices and systems,
with particular expertise in ultrasonic and optoelectronic devices as well as
fluid delivery systems.
ZEVEX OEM manufacturing service customers generally rely on the Company from the
outset of their projects for complete design, engineering, component analysis,
testing, and regulatory compliance for their devices or systems. In some
instances, customers have come to the Company with final drawings for devices
that they believe are ready for manufacturing. The Company's engineers assist
ZEVEX OEM sales and marketing personnel in evaluating requests for proposals and
in developing proposed solutions, cost estimates, and bids for each product.
ZEVEX OEM's design and engineering services are generally provided on a
time-and-materials fee basis to a customer and as part of a plan to eventually
manufacture the customer's product.
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 test stations, and three-dimensional computer aided design
("CAD") software. ZEVEX Inc. has independently developed what management
believes is the most sophisticated modeling software for ultrasonic surgical
device development. Management believes that ZEVEX Inc.'s unique modeling and
design capacities hasten product development and improve the quality of the
final device.
MANUFACTURING
The Company's proprietary products are generally assembled and tested at its
manufacturing facility in Salt Lake City, Utah. ZEVEX Inc.'s enteral feeding
disposable products are sub-contracted to specialty manufacturers. Design,
engineering, and manufacturing services for other companies are provided by
ZEVEX OEM from the Salt Lake City facility, except for Aborn which provides its
design, engineering, and manufacturing services from its facility in San Jose,
California.
Inventory management, work order, and MRP software programs are used to manage
inventory and control the ordering process for the 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
purchasing, manufacturing, and quality assurance assume a greater role in the
project. The project team
7
develops an assembly process, product testing protocol, and quality assurance
procedures to produce high-quality products that satisfy internal or customer
specifications, as well as the FDA's GMP and ISO 9001/EN 46001 quality
standards.
ZEVEX OEM usually provides design and engineering services pursuant to
negotiated manufacturing agreements, which address quantity, pricing, warranty,
indemnity, and other terms of the relationship. Such contracts may or may not be
exclusive manufacturing arrangements, and may or may not include minimum volume
requirements. In some cases, no minimum purchase is required. In other cases, a
customer commits to purchase a minimum quantity identified in a rolling forecast
of production. ZEVEX generally warrants its products to be free from defects in
materials and workmanship.
SUPPLIERS
The Company purchases its component parts and raw materials from approved
suppliers. The Company is not dependent on a single supplier for any item, and
believes that it can acquire materials from various sources on a timely basis.
SALES AND MARKETING
ENTERAL NUTRITION DELIVERY PRODUCTS
ZEVEX Inc. has a network of 15 direct territory managers and independent
manufacturers' representatives who sell enteral pumps, disposable delivery sets
and feeding tubes. These representatives have been selected for their experience
within the markets served by the Company's products, and they sell directly to
home health care service providers, hospitals, and nursing homes. The direct
territory managers and manufacturer's representatives are regionally supported
by 30 independent specialists with clinical credentials (registered dietitians
or nurses), who are employed part-time by the Company. ZEVEX employs a Home Care
Sale Manager and a Long Term/Acute Care Sales Manger to deploy its sales
resources effectively in these major market segments.
Customers generally purchase EnteraLite(R) Ambulatory Enteral Feeding Pumps
directly from ZEVEX Inc. In cases where a lease or rental is preferred,
arrangements are made through a third party that specializes in medical
equipment financing. Disposable sets are then purchased as needed. Customers
typically purchase 30 disposable sets per month for each pump placed in service.
In the past, due to competition, lower-cost stationary pumps generally have been
placed at no up-front cost to the user, in return for set "usage" agreements,
which typically guarantee minimum purchases of 15 disposable sets per pump per
month, once the pumps are placed in service. In order to increase accountability
and the efficiency of the health care delivery system in the United States,
there is a trend beginning which involves minimum lease charges for enteral
pumps placed with customers on such "usage" programs
The distribution of the EnteralEZ(R) and the acquired Nestle stationary pumps,
delivery sets, and feeding tubes are serviced by two national account
specialists and a customer service department, in addition to the sales force
described above. During 2000, a version of the stationary pump was sold under
private label for distribution by another company in Europe.
MUSCULOSKELETAL EVALUATION PRODUCTS
JTech markets its products worldwide through a combination of direct sales
representatives, independent dealers and manufacturers' representatives. These
direct and independent representatives and dealers were selected for their
experience in marketing to chiropractors, osteopaths, physical therapists and
occupational therapists. The sales force is supported by regional sales
managers, who are full-time employees of JTech.
8
JTech also sells its products via seminars, directed mailings, catalogs, and
telemarketing through its customer service personnel.
OEM DIVISION - CONTRACT DESIGN AND MANUFACTURING SERVICES
ZEVEX 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. The Company promotes its design and
manufacturing capabilities at industry trade shows, by advertising in leading
industry publications, and by obtaining referrals from customers and other
persons who are familiar with the Company's services.
COMPETITION
ENTERAL NUTRITION DELIVERY PRODUCTS
Two major competitors exist in the U.S. market for ambulatory enteral feeding
pumps. Ross Laboratories, a division of Abbott Laboratories, offers the
Companion(R) 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. The second
competitor, Kendall Healthcare, a division of TYCO, offers the kangaroo(R) PET
enteral feeding pump, which has a limited market because it can be operated only
in an upright position. The Company estimates that Kendall Healthcare presently
holds greater than 21% of the total market for enteral pumps and disposable sets
in both ambulatory and non-ambulatory applications. In addition to Ross
laboratories and Kendall Healthcare, Novartis also competes in the U.S. Market
for stationary enteral nutrition delivery pumps, which includes the Company's
EnteralEZ(R) product line.
Well-established competitors such as Ross Laboratories and Kendall Healthcare
typically bundle products for the greatest advantage in group-purchasing
situations. Each of these competitors offers a breadth of product offerings that
exceeds that of 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 EnteraLite(R) Ambulatory Enteral Feeding Pump
for mobile enteral patients. In order to continue to increase revenues, the
Company plans to grow its product line so that it too can bundle a family of
products to meet the enteral nutrition delivery needs of its customers. The
Company expects to develop and/or acquire products that are complementary to its
enteral nutrition delivery product line, particularly those having features that
can significantly improve the quality of life of patients, and the safety and
ease of enteral administration.
MUSCULOSKELETAL EVALUATION PRODUCTS
The Company's primary competitors in the musculoskeletal evaluation market are a
limited number of small privately held companies. Most notable are ARCON, The
Blankenship System, Key Methods, Isernhagen, Cedaron and Greenleaf Medical.
Generally, these companies concentrate on particular areas such as
musculoskeletal testing, functional capacity evaluation, or hand testing. 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 musculoskeletal market
include perceived quality, price, name recognition, training capabilities,
support, operating system, and systems integration potential.
CONTRACT DESIGN AND MANUFACTURING SERVICES
The Company's primary competitors for design and manufacturing services include
Plexus, Inc., Colorado MedTech Inc., United Medical Manufacturing, Inc. and
Sparton Electronics Corporation. These contract
9
manufacturers operate in the medical technology industry, and some have
substantially greater financial and marketing resources than the Company.
Competitive factors in medical device design and manufacturing include quality,
regulatory compliance, engineering competence, cost of non-recurring
engineering, price of the manufactured product, experience, customer service,
and ability to meet design and production schedules. The Company believes that
its unique expertise in ultrasound, optoelectronics and fluid delivery systems
will allow it to compete effectively for contracts involving these technologies.
PATENTS AND TRADEMARKS
The Company's subsidiaries own twelve patents and have eight pending with
respect to proprietary medical products. The loss of certain of the patents, key
to the Company's proprietary products, could 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.
In addition, the Company's subsidiaries also own and have applied for numerous
trademarks in the United States and abroad. The Company believes that its
trademarks are well recognized in the various markets for its products. With
exception for the EnteraLite(R) and Enteral EZ(R) trademarks, which are
registered for its enteral feeding pumps, the Company believes that the loss of
any trademark would not have a material adverse effect on its overall business
operations.
RESEARCH AND DEVELOPMENT FOR THE COMPANY'S PROPRIETARY PRODUCTS
ZEVEX' research and development projects are primarily focused on new
proprietary products. As of December 31, 2000, ZEVEX had three full-time
engineers in research and development, and had several other designers and
engineers, including independent contractors, contributing to research and
development projects. During the first quarter of 2001, the Company restructured
its engineering group to primarily focus on manufacturing and is continuing to
utilize independent contractors for research and development projects. ZEVEX
invested $852,273 in 2000, $670,886 in 1999, and $290,669 in 1998 for research
and development of new products. In 2000, 1999 and 1998, research and
development costs represented approximately 3% of the Company's annual revenues.
MAJOR CUSTOMERS
The Company's OEM Division revenues are derived from the sale of its design and
manufacturing services to a small number of major customers. During the 2000
fiscal year, however, the Company grew its proprietary product business, with
revenues exceeding those of ZEVEX OEM and the percentage of total revenue
represented by a few major customers decreased. As a result, the number of
customers comprising more than 10% of the Company's revenues declined when
compared to prior years. During the 2000 fiscal year, 10% of revenues were from
Allergan, Inc. and 14% of revenues were from Cardiac Science Inc. These were the
only customers that contributed more than 10% of revenues for 2000. During the
1999 fiscal year, 13% of revenues were from Allergan. During the 1998 fiscal
year, 15% of revenues were from Allergan, 16% were from Mentor H/S, Inc., and
13% were from Alaris Medical Systems (formerly IVAC Corporation). Company
management expects that, with its continued focus toward proprietary products,
the percentage of total revenues represented by a few major customers will
continue to decline, so that the loss of such a customer would have less
potential to have a materially adverse effect on the financial condition or
results of operations of the Company in the future.
BACKLOG
At December 31, 2000, the Company had a backlog of approximately $5,295,326 on
orders for medical devices to be manufactured by ZEVEX OEM for other medical
technology companies, as compared to backlogs at December 31, 1999 and 1998, of
$5,640,478 and $6,092,926, respectively. The Company estimates that
approximately 90% of the backlog will be shipped before December 31, 2001. As of
March
10
6, 2001, the Company had a backlog of $4,386,066. For purposes of the above
figures, backlog includes product not yet shipped pursuant to purchase orders
that have been received by the Company. This does not include any backlog for
the Company's proprietary products, because the Company manufactures these
devices and generally holds appropriate levels in inventory for sale to
customers. Some of the orders included in the backlog may be canceled or
modified by customers without significant penalty. In addition, because
customers may place orders for delivery at various times throughout the year,
and because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
necessarily be a reliable indicator of future revenue.
GOVERNMENTAL REGULATION
ZEVEX Inc.'s manufacturing facilities, its customers' medical devices, and its
proprietary medical devices are subject to extensive regulation by the FDA under
the Food Drug and Cosmetics Act ("FDC Act"). Manufacturers of medical devices
must comply with applicable provisions of the FDC Act and associated regulations
governing the development, testing, manufacturing, labeling, marketing, and
distribution of medical devices, 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 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.
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 1, 2001, the Company employed a total of 206 people in the following
areas: 95 in Manufacturing and Testing; 34 in Design and Engineering; 34 in
Administration; 18 in Customer Service and Relations; 16 in Sales and Marketing;
and 9 in Quality Assurance. The Company has 192 employees located at its
corporate headquarters and manufacturing facility in Salt Lake City, Utah, 7
employees located at its San Jose, California, facility, and 7 employees at
various locations throughout the United States.
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,
although it is
11
likely to experience continued moderate growth in labor costs.
ENVIRONMENTAL COMPLIANCE COSTS
Compliance with federal, state, and local provisions regarding the production
and discharge of material into the environment and the protection of the
environment are not expected to have a material adverse effect on capital
expenditures, earnings and the competitive position of the Company.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND SALES
Historically, the Company's revenues largely have been derived from the sale of
its design and manufacturing services to a small number of major customers
located in the United States. During the 2000 fiscal year the revenue mix
changed as a larger percent of the Company's revenues were derived from
proprietary products in domestic and foreign markets. During the 2000 fiscal
year, the Company had total revenues of $30,778,627, of which $972,313 was
considered foreign source revenues. During the 1999 fiscal year, the Company had
total revenues of $23,026,208, of which $1,567,825 was considered foreign source
revenues. 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 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 2000 Form 10-K contain certain
forward-looking statements, particularly statements relating to future actions,
performance or results of current and anticipated products, sales efforts,
expenditures, and future financial results. From time to time, the Company also
provides forward-looking statements in other publicly-released materials, both
written and oral. These statements are statements that do not relate strictly to
historical or current facts. They use words such as "plans," "expects," "will,"
"believes," "anticipates," "intends" 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 represent 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 as amended. 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 OEM DIVISION CUSTOMERS
The Company's success in contract manufacturing depends in large part on the
success of the customers for
12
its manufacturing services and on the 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 device industry is highly competitive and
subject to significant technological change. Participation in such industries
requires ongoing investment to keep pace with technological developments and
quality and regulatory requirements. These industries consist of numerous
companies, ranging from start-up to well-established companies. Many of 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 16% of
the Company's revenues in fiscal year 2000, 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
13
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 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 DEVICES
The Company believes that acceptance in the market place for out-sourcing of
design and manufacturing of advanced medical products for medical technology
companies varies from year to year and is still uncertain.
14
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 device industry. 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. 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.
DEPENDENCE ON MAJOR CUSTOMERS.
No assurances can be given that the Company's major customers will continue to
do business with the Company or that the volume of their orders for the
Company's OEM devices and proprietary products will increase or remain constant.
The loss of a major customer, or a significant reduction in the volume of its
orders from the Company, would 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 OEM devices or
proprietary products, the resulting lower gross margins on those devices and
products 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.
EARLY TERMINATION OF AGREEMENTS
The Company's agreements with major manufacturing customers generally permit the
termination of the agreements before expiration thereof if certain events occur
that are materially adverse to the design, development, manufacture, or sale of
the product. Examples of such events include the failure to obtain or the
withdrawal of regulatory clearance, or an alteration of regulatory clearance
that is materially adverse to the customer or which prohibits or interferes with
the manufacture or sale of the products. The performance of agreements with
major customers may be suspended or excused, if certain conditions, generally
beyond the control of the customer or the Company (so-called force majeure
events), cause the failure or delay of performance.
The Company's pump usage agreements, under which enteral feeding pumps are
placed with users in exchange for a commitment by the user to buy disposable
products from the Company, generally require only monthly commitments, and users
can terminate any purchase obligation by returning the pump. Thus, there is no
assurance of continued revenue from pumps placed with such users.
15
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 ZEVEX OEM customers face. As discussed above with
respect to its customers, such risks include:
The medical products industry is highly competitive. A significant number of 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 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
16
devices currently being developed 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 customers' 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 difficulty 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 full-time employees, complemented by a network of independent
manufacturing representatives and clinical support personnel. 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 manufacturer's 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, improper use of the
product, or 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 and an umbrella policy with a $5 million limit. There can be no
assurance that such insurance is adequate to cover potential claims or that 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.
17
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' three executive officers, David
McNally, Chief Executive Officer, Leonard Smith, President, Phillip McStotts,
Chief Financial Officer and Secretary/Treasurer, and key managerial personnel,
including James Holden, Vice President and Director of OEM Manufacturing of
ZEVEX Inc. 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 will
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 Company's other key
personnel have employment agreements with the Company.
The Company carries key-man life insurance on the lives of its Chief Executive
Officer and Chief Financial Officer in the amount of $500,000 each. No
assurances can be given that such insurance would provide adequate compensation
to the Company in the event of the death of such key employee.
PATENT PROTECTION
As of December 31, 2000, the Company held twelve U.S. patents on devices
developed by the Company, with eight additional patents pending. 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 6, 2001, the current executive officers and directors of ZEVEX,
together with those persons who are the beneficial owners of more than 5% of
ZEVEX' Common Stock, will beneficially own or have voting control over
approximately 33% of the outstanding Common Stock. Accordingly, these
individuals have the ability to influence the election of ZEVEX' directors and
most corporate actions. This concentration of ownership, together with other
provisions in ZEVEX' charter and applicable corporate law, may also have the
effect of delaying, deterring, or preventing a change in control of ZEVEX.
SUPPLIERS AND SHORTAGES OF COMPONENT PARTS
The Company relies on third-party suppliers for many of the component parts used
in manufacturing its products. Although component parts are generally available
from multiple suppliers, certain component parts may require long lead times,
and the Company may have to delay the manufacture of devices from time to time
due to the unavailability of certain component parts. In addition, even if
component parts are available from an alternative supplier, 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.
18
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 OEM Division's customers sometimes require the
Company to enter into noncompetition agreements that prevent the Company from
manufacturing instruments for its customers' competitors. Such restrictions
generally apply during the term of the customer's manufacturing contract and, in
some instances, for a period following termination of the contract. If 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 year (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 customers'
orders and ship products on a timely basis. Strikes or other service
interruptions affecting Federal Express Corporation, United Parcel Service of
America, Inc., or other common carriers used by 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 volume and
timing of customer orders, which vary due to (i) variation in demand for the
customers' products or services as a result of, among other things, product life
cycles, competitive conditions, and general economic conditions, (ii) the
customers' attempt to balance its inventory, (iii) the customers' need to adapt
to changing regulatory conditions and requirements, and (iv) changes in the
customers' preference or strategies. Technical difficulties and delays in the
design and manufacturing processes may also affect such results. The foregoing
factors may cause fluctuations in revenues and variations in product mix, which
could in turn cause fluctuations in the Company's gross margin.
19
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 product, inventory shortages or
obsolescence, increasing labor costs or shortages, low gross margins on
particular projects, an increase in lower-margin product revenue as a percentage
of total revenues, price competition, and regulatory requirements. Because 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 some 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 ZEVEX' Common Stock has been limited due to the
relatively low trading volume and the small number of brokerage firms acting as
market makers. In May 1997, ZEVEX' Common Stock was listed for trading on the
American Stock Exchange. In November 1998, ZEVEX' Common Stock was changed to a
listing on the NASDAQ Stock Market, which has increased the market for the
Common Stock. No assurance can be given, however, that the market for the Common
Stock will continue or increase or that the prices in such market will be
maintained at their present levels.
POSSIBLE VOLATILITY OF STOCK PRICE
Announcements of technological innovations for new commercial devices by the
Company or its competitors, developments concerning the Company's proprietary
rights, or the public concern as to the safety of its devices may have a
material adverse impact on ZEVEX' business and on the market price of its Common
Stock, particularly as the Company expands its efforts to become a medical
technology company that manufactures and markets its own proprietary devices.
The market price of ZEVEX' Common Stock may be volatile and may fluctuate based
on a number of factors, including significant announcements by the Company and
its competitors, quarterly fluctuations in the Company's operating results, and
general economic conditions and conditions in the medical device industry. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations, which have had a substantial effect on the market prices
for many medical device companies and are often unrelated to the operating
performance of such companies.
20
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 two to three of the total number of directors
are replaced or re-elected each year. The Certificate also provides that the
provisions of the Certificate relating to 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
("Section 203"), which restricts certain transactions and business combinations
between a corporation and an "Interested Stockholder" owning 15% or more of the
corporation's outstanding voting stock for a period of three years from the date
the stockholder becomes an Interested Stockholder. Subject to certain
exceptions, unless the transaction is approved in a prescribed manner, Section
203 prohibits significant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial benefits by
the Interested Stockholder, or any other transactions that would increase the
Interested Stockholder's proportionate ownership of any class or series of the
corporation's stock.
FOREIGN EXCHANGE, CURRENCY, AND POLITICAL RISK
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.
21
ITEM 2. PROPERTIES
ZEVEX' executive offices, and the administrative offices and manufacturing
facilities of ZEVEX Inc. and JTech, are located in ZEVEX' 51,000 square foot,
mixed-use building in Salt Lake City, Utah. This building was constructed in
1997 to the Company's specifications and is subject to an Industrial Revenue
Bond (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources"). The building is
situated on nearly four acres of land a few miles from the downtown area. It
allows quick access to two major interstate freeways and to the Salt Lake
International Airport. The Company currently utilizes approximately 90% 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 2001.
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.
The Company also leases on a month to month basis approximately 10,000 square
feet of warehouse space adjacent to its facility for storage of its disposable
sets for enteral delivery.
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
In the fourth quarter of 2000, the Company held its Annual Meeting of the
Shareholders on December 18, 2000. During the meeting David J. McNally and
Bradly A. Oldroyd were elected to serve for a three-year term expiring at the
2003 Annual Meeting. The following table summarizes the tabulation for each
director nominee.
DIRECTOR NOMINEE VOTES CAST FOR VOTES CAST AGAINST VOTES ABSTAINED
- ---------------- -------------- ------------------ ---------------
David J. McNally 2,620,315 15,665 0
Bradly A. Oldroyd 2,620,315 15,665 0
Directors whose term of office continued after the meeting are Phillip L.
McStotts, Darla R. Gill and David B. Kaysen whose term expires at the 2002
Annual Meeting, and Leonard C. Smith and Kathryn B. Hyer whose term expires at
the 2001 Annual Meeting. Also, at the meeting the shareholders were asked to
ratify the appointment of Ernst & Young LLP, Certified Public Accountants, as
independent auditors for the year ending December 31, 2000. Those shareholders
voting in favor of the proposal represent 2,623,330 Shares of the Company's
common voting stock which is approximately 76% of the shares entitled to vote.
4,250 Shares were voted against the proposal and 8,400 Shares abstained from
voting. No other matters were voted upon at the meeting.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ZEVEX' Common Stock has been trading on the National Market system of The NASDAQ
Stock Market since November 2, 1998, under the symbol ZVXI. Prior to that date
the stock traded on the American Stock Exchange beginning May 19, 1997, under
the symbol ZVX. Prior to May 1997, the stock traded on the OTC Bulletin Board
under the symbols ZVXI and ZVXIU. As of March 6, 2001, there were 172 holders of
record of ZEVEX' Common Stock (calculated without reference to individual
participants in securities position listings). Based on the number of proxy
materials requested by brokers and other record holders for distribution to
beneficial owners for the Company's 2000 Annual Meeting, ZEVEX estimates there
are roughly 1,650 beneficial owners of ZEVEX Common Stock. ZEVEX has never
declared or paid any cash dividends on its Common Stock. ZEVEX currently intends
to retain all future earnings to finance future growth and does not anticipate
paying any cash dividends in the foreseeable future. ZEVEX has a negative
covenant in its bank line of credit agreement that prevents the payment of any
cash dividend without prior approval of the bank.
The following table lists the high and low closing sales prices for ZEVEX Common
Stock for each full quarterly period since January 1, 1999.
2000 1999
---------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
1ST QUARTER $14.13 $5.25 $7.25 $4.75
2ND QUARTER $13.69 $4.81 $6.63 $4.13
3RD QUARTER $8.69 $5.50 $6.50 $4.13
4TH QUARTER $6.25 $3.69 $5.50 $4.00
During 2000, ZEVEX issued 19,338 shares of Common Stock which were not
registered under the Securities Act of 1933 (the "Securities Act"). The shares
were issued pursuant to the exercise of stock options by employees of the
Company and as such are exempt from registration under Securities Act Rule 505.
The exercise price on such shares ranged from $2.50 to $5.00 per share. The
aggregate exercise price of the securities issued was $76,840.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA - FIVE-YEAR REVIEW
The following selected statement of operations data for the years ended December
31, 2000, 1999 and 1998, and the balance sheet data as of December 31, 2000 and
1999 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, 1997 and 1996 and the balance sheet data as of December
31, 1998, 1997 and 1996 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.
23
FISCAL YEAR ENDED DECEMBER 31
2000 1999 1998 1997 1996
--------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues $30,778,627 $23,026,208 $11,084,413 $8,968,425 $5,663,733
Gross profit 10,848,772 10,551,998 4,237,970 4,211,368 2,727,678
Selling, general and administrative expenses 8,405,833 6,988,044 3,879,408 2,481,090 1,892,317
Research and development expenses 852,273 670,886 290,669 702,563 527,562
Operating income 1,590,666 2,893,068 67,893 1,027,715 307,799
Other (income)/expenses 196,828 78,706 (407,469) (47,136) (243,947)
Provisions for taxes 669,698 1,187,989 113,169 356,609 206,169
Net income 724,140 1,626,373 362,193 718,242 345,577
Net income per share basic .21 .48 .11 .34 .25
Weighted average shares outstanding 3,425,254 3,413,023 3,298,150 2,097,831 1,388,511
Net Income per share diluted .19 .47 .10 .29 .24
Weighted average shares outstanding, assuming 3,748,032 3,431,566 3,636,434 2,443,482 1,411,687
dilution
- -----------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $38,687,962 $34,049,689 $33,760,979 $22,582,543 $6,368,670
Total current liabilities 9,967,768 5,782,319 7,395,946 1,290,466 588,009
Long-term debt (less current portion) 7,511,022 7,170,000 6,150,000 1,900,000 2,000,000
Stockholders' equity 21,057,505 21,090,722 20,114,535 19,265,697 3,701,449
Please refer to Item 7 for a discussion of the main factors causing the
substantial changes in certain of the items set forth above, particularly when
comparing the year 2000 to earlier periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Through its subsidiaries, ZEVEX is in the business of designing, manufacturing
and distributing medical devices. The Company's product lines include
proprietary medical devices which it designs, manufactures, and distributes, and
contract-manufactured products which it designs and manufactures for original
equipment manufacturers (OEM's).
ZEVEX' current strategy is to continue to aggressively grow proprietary product
revenues with the acquisition and internal development of products that
complement its existing two lines of proprietary products. In addition, ZEVEX
will continue to manufacture products for others in order to capitalize on the
outsourcing trend in the medical device industry.
RECENT DEVELOPMENTS
The Company substantially grew revenues during 2000, diversifying its offering
of proprietary products further and gaining market share in the markets served
by them, as well as focusing its contract manufacturing business on higher
margin core technologies that contain its ultrasonic and optoelectronic
components, and fluid delivery systems. Recent key developments were:
1. In July 1998, ZEVEX Inc. entered into an agreement with Nutrition Medical,
Inc., a Minnesota corporation, to acquire Nutrition Medical's product line of
stationary feeding pumps, disposable sets and feeding tubes for enteral
nutrition delivery. Company management believes that the addition of the
Nutrition Medical stationary pump and feeding tube product lines complements the
line of ambulatory enteral feeding pumps and disposable sets that the Company
has developed internally. The Company completed the acquisition of the Nutrition
Medical product line on December 23, 1998, providing for a full year of revenue
generation in 1999.
2. On December 31, 1998, the Company acquired JTech through a stock purchase
transaction with
24
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 the CompanyZEVEX. JTech's revenues combined with
revenues from the Company's proprietary enteral nutrition delivery products,
accounted for more than 47% of total ZEVEX revenues in 1999.
3. On December 31, 1998, the Company acquired Aborn through a stock purchase
transaction with the sole shareholder of Aborn. Aborn contributed to the
Company's ZEVEX revenues and earnings throughout the entire 1999 year. As
described above, Aborn currently designs and manufactures a variety of
sophisticated optical sensors, custom computer chips, and semiconductor
components for medical technology and other companies, and has brought new
design and manufacturing expertise to the Company.
4. In April 2000, ZEVEX Inc. acquired a portion of the enteral nutrition
delivery device business of Nestle USA, Inc. in an asset purchase. The assets
acquired included over 19,500 enteral feeding pumps owned by Nestle and placed
with various health care facilities under arrangements whereby the facilities
agree to purchase disposable sets for use with Nestle pumps. The assets also
included Nestle's line of pump administration sets, feeding tubes, irrigation
kits, ancillary devices for the pumps, and certain associated intellectual
property With the completion of the acquisition, the Company no longer will sell
stationary feeding pumps to Nestle. Instead, the Company believes it will
generate more revenue from the sale of disposable sets to users of the
approximately 19,500 feeding pumps acquired from Nestle than that which the
Company expected to generate from possible pump sales to Nestle.In addition to
the installed based of stationary pumps acquired from Nestle, the Company plans
to place more stationary feeding pumps with new users (at little or no cost to
the user) under arrangements where the pump users commit to buy disposable
products from the Company while using the pumps.
5. On September 6, 2000, the Company created an independent division, ZEVEX OEM,
to hold and manage the Company's contract manufacturing business. The creation
of the OEM Division was part of a strategic initiative that will allow the
Company to operate ZEVEX Inc.'s contract manufacturing business separately from
its proprietary product businesses.
RESULTS OF OPERATIONS
The Company's sales results for 2000 were the strongest in the Company's
history. Revenues were $30,778,627, a 34% increase over revenues of $23,026,208
in 1999, which in turn represented a 108% increase over revenues of $11,084,413
in 1998. Revenues for 2000 increased primarily due to the contribution of the
acquisition of the Nestle product line.
As a result of the growth of the Company's proprietary product businesses, the
portion of the Company's revenues represented by those businesses has risen
significantly over prior years. In 2000, 53% of the Company's revenue was
derived from proprietary products sold by the Company, in comparison to 47% in
1999 and 30% in 1998. Sales of the Company's proprietary enteral feeding
products accounted for approximately 43% of total revenues for the year ended
December 31, 2000, compared to 33% and 30% for the years ended December 31, 1999
and 1998, respectively. Sales of the Company's proprietary JTech product line
accounted for approximately 10% of total revenues for the year ended December
31, 2000, compared to 14% for the year ended December 31, 1999. Forty-seven
percent of the Company's revenues during the 2000 year were products
manufactured for and sold to OEM customers, compared to 53% in 1999 and 70% in
1998. This shift in revenue sources has the benefit of decreasing the percentage
of the Company's revenues generated by a small number of major customers. During
2000, two customers accounted for over 10% of the Company's revenues, generating
24% of total revenues. During 1999 only one customer accounted for over 10% of
the Company's revenues, generating 13% of total revenues, and in 1998, three
customers each accounted for over 10% of the Company's revenues, together
generating 44% of total revenues.
During the fourth quarter of 2000, the Company completed installation of an
advanced new manufacturing resource
25
planning system and is implementing electronic data interchange with the
Company's remote warehousing partners. As part of implementing the system, a
complete physical inventory was completed in January 2001, requiring an
inventory adjustment in all product areas, including obsolete inventory from
acquisitions, past OEM contracts and discontinued proprietary products. This
adjustment, which totaled approximately $1 million, adversely affected the
Company's gross margin and results of operation for the fourth quarter 2000 and
the year ending December 31, 2000.
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
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------- -------------
Revenues 100% 100% 100% 100% 100%
Gross profit 35% 46% 38% 47% 48%
Selling, general and administrative 27% 30% 34% 27% 33%
expenses
Research and development expenses 3% 3% 3% 8% 10%
Operating income 5% 13% 1% 12% 5%
Other income/(expense) --% (1)% 3% --% 4%
Income before taxes 5% 12% 4% 12% 9%
Provisions for taxes 2% 5% 1% 4% 3%
Net income 3% 7% 3% 8% 6%
The Company's gross profit as a percentage of sales was 35% in 2000, as compared
to 46% in 1999 and 38% in 1998. Management attributes the decrease in gross
profit percentage from 1999 to 2000 to a number of matters, including (1) the
purchase of the lower margin Nestle enteral delivery business mentioned above,
(2) startup costs related to bringing in-house the manufacturing of the
EnteralEZ(R) enteral feeding pump, and the servicing of the Nestle pumps
acquired, which included labor, tooling, setup costs, and non-recurring
engineering (NRE), (3) the growth of lower margin complete system manufacturing
in ZEVEX OEM, and (4) the approximately $1 million write down in inventory from
acquisitions, past OEM contracts and discontinued proprietary products as
described above.
Selling, general and administrative expenses increased during 2000 to
$8,405,833, 27% of gross sales, as compared to $6,988,044, 30% of gross sales in
1999, and $3,879,408, 34% of gross sales in 1998. The reduction in selling,
general and administrative expenses, as expressed as a percentage of sales is
attributable to sales revenue growth far exceeding growth of selling, general
and administrative expenses over the prior years. During 2000, increased
expenses resulted from the Company's continuing growth, which occurred primarily
from the acquisition of Nestle product line. An expanded sales and marketing
initiative increased staffing, travel, advertising, and administrative expenses
related to the Company's proprietary enteral nutrition delivery product line and
JTech product line. The Company also experienced an increase in expenses related
to employees, such as insurance, taxes, and pension benefits. The Company
believes that selling, general and administrative expenses in 2001 as a
percentage of sales will continue at approximately the same rate as 2000.
ZEVEX' research and development projects are primarily focused on new
proprietary products. As of December 31, 2000, ZEVEX had three full-time
engineers in research and development, and had several other designers and
engineers, including independent contractors, contributing to research and
development projects. During the first quarter of 2001, the Company restructured
its engineering group to primarily focus on manufacturing and is continuing to
utilize independent contractors for research and development projects. ZEVEX
invested $852,273 in 2000, $670,886 in 1999, and $290,669 in 1998 for research
and development of new products. In 2000, 1999 and 1998, research and
development costs represented approximately 3% of the Company's annual revenues.
The Company expects research and development costs to be maintained at
approximately 3% of revenues during the coming year.
Depreciation and amortization expenses increased to $1,756,682 in 2000 from
$1,157,221 in 1999, and
26
$471,752 in 1998. This increase primarily reflects increased depreciation and
amortization from the Nestle purchased assets and ZEVEX manufactured
EnteralEZ(R) pumps placed in service under usage programs during 2000.
Depreciation and amortization expenses also include depreciation for capital
expenditures for property and equipment used in engineering and manufacturing as
well as the Company's new manufacturing resource planning (MRP) system.
Goodwill held by the Company represents the excess of the purchase price over
the fair value of the tangible and other specifically identified intangible
assets obtained in acquisitions by the Company. Goodwill amortization lives were
determined by comparing recent acquisitions of similar companies and within
similar industries. Goodwill is amortized over periods ranging from 15 to 23
years. The current value of goodwill included in the financial statements is
$10,688,271, and represents approximately 28% of total assets.
Income tax expenses declined to $669,698 in 2000 from $1,187,989 in 1999, as
compared to $113,169 in 1998. The decrease from 1999 to 2000 is primarily due to
decreased income before taxes. The increase from 1998 to 1999 was primarily due
to increased income before taxes and non-deductible goodwill amortization.
At December 31, 2000, the Company had deferred tax assets of approximately
$629,000. Realization of the deferred tax assets is dependent on the Company's
ability to generate approximately $1,686,000 in taxable income in the year the
assets are realized. Management believes that sufficient income will be earned
in the future to realize these assets. Management will evaluate the
realizability of the deferred tax assets annually and assess the need for
valuation allowances.
Operating income decreased to $1,590,666, 5% of gross revenue in 2000 compared
to $2,893,068, 13% of gross revenue in 1999, compared to $67,893, 1% of gross
revenue in 1998. Similarly, the Company had a net income of $724,140, 3% of
gross revenue in 2000, compared to $1,626,373, 7% of gross revenue in 1999, and
$362,193, 3% of gross revenue in 1998. The changes during 2000 as compared to
1999 and 1998 are principally due to the costs addressed above and the growth of
lower margin products delivered during the 2000 year.
The Company's annual and quarterly operating results are affected by acceptance
of the markets for the Company's proprietary and contract manufactured products,
including the volume and timing of customer orders, which vary due to (i)
variation in demand for the customers' products or services as a result of,
among other things, product life cycles, competitive conditions, and general
economic conditions, (ii) the customers' attempt to balance its inventory, (iii)
the customers' need to adapt to changing regulatory conditions and requirements,
and (iv) changes in the customers' preferences or strategies. Technical
difficulties and delays in the design and manufacturing processes may also
affect such results. The foregoing factors may cause fluctuations in revenues
and variations in product mix, which could in turn cause fluctuations in the
Company's gross margin.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its working capital requirements during 2000, mostly as a
result of increasing accounts receivable and inventories associated with rapid
revenue growth and the Company's efforts to expand its operations through
acquisitions. Prior to 1997, working capital had been funded primarily by a
combination of increased accounts payable and borrowings under the Company's
revolving line of credit. Working capital was also supplemented by a $1.25
million private placement of ZEVEX' Common Stock and warrants in February, 1997
and a secondary public offering of ZEVEX' Common Stock in November 1997, from
which ZEVEX received approximately $13 million in net proceeds.
During 2000, the Company produced $724,140 in net income. Cash and cash
equivalents decreased by $3,056,284 in 2000 from operating activities, as the
Company had an increase in payables which was offset
27
by increased accounts receivable and inventories. Accounts receivable and
inventories increased during 2000 as the Company continued to expand its
proprietary businesses and meet customer demands. During 1999, the Company had
net income of $1,626,373, and cash and cash equivalents increased from operating
activities by $1,803,429, as the Company had an increase in accounts payable, a
decrease in inventories and an increase in accounts receivable as the Company
continued to expand its proprietary businesses and meet customer demands. During
1998, the Company had net income of $362,193, and cash and cash equivalents
decreased by $1,837,748 from operating activities, while the Company funded an
increase in accounts receivable and inventories.
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. The Company's
purchases of leasehold improvements to its facilities, new MRP software system
and new engineering, production, testing equipment, and tooling totaled
$1,887,480 in 2000, as compared to $566,958 in 1999, and $1,185,805 in 1998. The
amount invested 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 Company's working capital at December 31, 2000, was $9,689,758, compared to
$11,935,524 at December 31, 1999, and $11,669,033 at December 31, 1998. The
portion of working capital represented by cash and short-term investments at
such dates was $1,392,432, $6,608,361 and $9,558,543 respectively. In 2000, the
Company's decrease in working capital of $2,245,766 was primarily due to (i)
cash outlays and current payables related to the acquisitions of the product
line from Nestle and the earn-out portion of 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 for operating activities. The increase in working
capital during 1999 compared to 1998 is primarily attributed to operating
activities.
On December 23, 1998, ZEVEX 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 set business.
On December 31, 1998, ZEVEX committed to pay up to $1,850,000 in cash and issue
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 Company completed the cash payment and issued
the debentures in 1999. All or part of the outstanding principal of each
debenture is convertible at the holder's option into ZEVEX Common Stock at a
rate of $11.00 per share at any time between one and three years from the date
of issuance. On December 31, 1999, ZEVEX committed to pay $950,000 in cash and
issue convertible debentures in the aggregate amount of $950,000 to Vijay Lumba
and Harry Parmar as payment of the earn-out portion of the acquisition of all
issued and outstanding stock of Aborn.
On December 31, 1998, ZEVEX committed to pay up to of $3,100,000 in cash and
issue 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 Company completed
the cash payment and issued the debentures in 1999. All or part of the
outstanding principal of each debenture is convertible at the holder's option
into ZEVEX Common Stock at a rate of $11.00 per share at any time between one
and three years from the date of issuance. On December 31, 1999, ZEVEX committed
to pay up to $147,188 in cash and convertible debentures in the aggregate amount
of $147,188 to Leonard Smith, Tracy Livingston, and David Bernardi as payment of
the earn-out portion of the acquisition of all issued and outstanding stock of
JTech.
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
28
and a warrant to purchase one share of Common Stock at a price of $3.50 per
share. As of December 31, 1998, 30,000 of the warrants included in the above
units were exercised. In June 1999 the Company repurchased for $1,175,000 the
remaining 470,000 common stock warrants related to the above units.
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 to $5,000,000 on December 31,
1997 and increased again to $7,000,000 on October 5, 2000. The line matures on
May 31, 2001. The line of credit is collateralized by accounts receivable and
inventories, and bears interest at the financial institution's prime rate. The
Company owed $5,936,995 on the line of credit at December 31, 2000, $1,613,453
at December 31, 1999, and $541,993 at December 31, 1998.
On March 15, 2001, the Company entered into a 36 month financing lease in the
amount of $1,500,000 that bears an interest rate of 8.21% and secured by
approximately 23,000 stationary enteral feeding pumps. The proceeds from the
lease were used to reduce the current outstanding Line of Credit balance.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. (The SAB
clarifies proper methods of revenue recognition given certain circumstances
surrounding sales transactions.) The Company adopted SAB 101, in the fourth
quarter of 2000, As expected, the adoption of SAB 101 did not have a material
effect on Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, as
amended by SFAS Nos. 137 and 138, is effective for the Company as of January 1,
2001. The new rule establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Historically, the Company has not used
derivative instruments, and the Company does not hold any derivative instruments
at December 31, 2000. As a result, the Company does not expect that the adoption
of SFAS no. 133, as amended, will have a significant effect on earnings or the
financial position of the Company.
OTHER MATTERS
SUMMARY OF QUARTERLY DATA
12/00 9/00 6/00 3/00 12/99 9/99 6/99 3/99
Revenue $8,356,260 $7,726,721 $9,037,599 $5,658,047 $7,195,220 $5,688,131 $5,481,404 $4,661,453
Gross profit 2,140,127 2,963,435 3,215,777 2,529,433 3,266,877 2,520,801 2,489,974 2,274,346
Net income(loss) (505,218) 356,829 552,516 320,015 700,869 331,741 305,995 287,768
EPS basic (.15) .10 .16 .09 .21 .10 .09 .08
EPS diluted (.15) .10 .15 .09 .20 .10 .09 .08
29
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 line of credit with a balance
of $5,936,995 and its industrial development bond of $1,700,000. The variable
rate on the line of credit is prime and the industrial development bond is based
on a weekly tax-exempt floater rate. The line of credit matures annually in May.
Principle payments of $100,000 are made annually on the industrial development
bond with the balance due October 1, 2016.
Additionally, the Company holds marketable equity securities with a
fair value of $1,065,275 at December 31, 2000, and $2,970,000 at December 31,
1999, consisting of public companies in the small-cap market. Gross unrealized
losses on marketable equity securities were $801,775 for the year ended December
31, 2000. However, the Company does not believe the decline in value of such
securities is "other than temporary". At December 31, 1999 the Company held
marketable debt securities with a fair value of $254,817with fixed interest
rates of 5.40% and 6.375% and maturities in 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements for the fiscal years ended December
31, 2000 and 1999, are included beginning at page 42, immediately following 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 THE REGISTRANT
The following table sets forth the name, age, and principal position of each
ZEVEX director and executive officer, as well as the expiration of each
director's term of office.
NAME AGE POSITION OF TERM
- ------------------- --- ------------------------------------ -------
David J. McNally 39 Chief Executive Officer and Chairman 2003
Leonard C. Smith 51 President and Director 2001
Phillip L. McStotts 43 Chief Financial Officer, Secretary/ 2002
Treasurer and Director
Bradly A. Oldroyd 43 Director 2003
Darla R. Gill 48 Director 2002
David B. Kaysen 50 Director 2002
Kathryn B. Hyer 45 Director 2001
ZEVEX' executive officers serve at the discretion of the Board of Directors.
None of the executive officers have employment agreements with ZEVEX with the
exception of Mr. Smith. Certain biographical information with respect to each of
the officers and directors is set forth below.
DAVID J. MCNALLY is a founder of the Company and has served as the
Company's Chief Executive Officer and as Chairman since September 2000. Prior to
September 2000, Mr. McNally served as the
30
Company's Executive Vice President and as a director since its inception in
1986. He also serves as CEO and director of the Company's three wholly-owned
subsidiaries, ZEVEX Inc., JTech, and Aborn. Prior to joining the Company, he was
employed by EDO Corporation in Salt Lake City, Utah as a marketing manager 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 an Executive Master of Business Administration
Degree from the University of Utah in June 1992.
LEONARD C. SMITH has served as President since September 2000, and as a
director since April 1999. Mr. Smith is a founder of JTech and has served as its
President since 1995. He also serves as President and director of the Company's
three wholly-owned subsidiaries. Prior to joining JTech, in 1994 he established
"the Charles Group", a medical marketing company specializing in diagnostic and
rehabilitation products. From 1993 to 1994, Mr. Smith was Vice President of Four
Corners, a large chain of health clubs based in the Southwest. From 1979 to
1993, Mr. Smith was a partner and Vice President of Sales and Marketing at
Hoggan Health Industries, a manufacturer of commercial fitness equipment. Mr.
Smith received a Bachelor of Science Degree in Business Management from the
University of Utah in June 1977.
PHILLIP L. MCSTOTTS is a founder of the Company and has served as the
Company's CFO, Secretary, and Treasurer, and as a director since its inception.
He also serves as a director of the Company's three wholly-owned subsidiaries,
as CFO, Secretary and Treasurer of ZEVEX Inc., 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 a tax manager. He has
also worked in the tax departments of the regional accounting firms of Pearson,
Del Prete & Company, and Petersen, Sorensen & Brough. Mr. McStotts received a
Bachelor of Science Degree in Accounting from Westminster College in May 1980,
and received a Master of Business Administration Degree in Taxation from Golden
Gate University in May 1982.
BRADLY A. OLDROYD has been a director of the Company since October
1991. He is the founder and principal shareholder of Pinnacle Management Group,
a Salt Lake City-based personnel services firm, serving as its President since
1986. Mr. Oldroyd is also the founder and CEO of TeamONE Ford and Fuel Centers,
a Salt Lake City-based petroleum and convenience goods retailer. He is also a
member of the faculty of the University of Phoenix campus in Salt Lake City,
where he teaches management and marketing courses in undergraduate and graduate
programs. Mr. Oldroyd received a Bachelor of Science degree in Marketing from
Utah State University in 1981 and a Master of Business Administration Degree
from the University of Utah in 1982.
DARLA R. GILL has been a director of ZEVEX since May 1993. She is a
founder of Merit Medical Systems, Inc., in Salt Lake City, and served until 1992
as Executive Vice President and Director. In 1999, she became Vice President of
International Sales and Marketing for Merit Medical Systems. Ms. Gill is also
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 for Momentum Medical. She was also previously employed by
Utah Medical Products, Inc., a company where she served as Vice President of
Marketing and Sales. Ms. Gill also currently serves as a director of the Board
of NYB Corporation located in Salt Lake City. Ms. Gill graduated from the
University of Phoenix with a Bachelors Degree in Business Administration in
1988.
DAVID B. KAYSEN has been a director of the Company since November 2000,
filling a vacancy on
31
the board left by the resignation of Kirk Blosch. Mr. Kaysen has served since
1992 as Chief Executive Officer, President, and director of Rehabilicare Inc., a
publicly traded (NASDAQ: REHB) manufacturer and marketer of electromedical
rehabilitation and pain management products for clinician, home and industrial
use. From 1989 to 1992, Mr. Kaysen served as Executive Vice President for
Emeritus, a company that developed and marketed clinical assessment software for
the nursing home industry. Mr. Kaysen also served as President and CEO of
Surgidyne, Inc., which markets specialty medical and surgical products, from
1988 to 1989. From 1986 to 1988, Mr. Kaysen was Vice President of Marketing for
Red Line/XVIIIB Medimart, a medical product distributor. Mr. Kaysen also served
in various general management positions with the V. Mueller Division of American
Hospital Supply Corporation from 1974 to 1986. Mr. Kaysen graduated with a
Bachelor of Science Degree in Business Administration from the University of
Minnesota in 1972.
KATHRYN B. HYER has been a director of the Company since November 2000,
filling a vacancy on the board left by the resignation of Dean Constantine. Ms.
Hyer is the Chief Financial Officer of Quark Biotech, Inc., Chicago, Illinois,
in charge of Finance, Human Resources and Administration since April 2000. Prior
to joining Quark, from 1996 to 2000, Ms. Hyer was a Managing Director of the
Health Care Corporate Finance group for First Union Securities, which acquired
Everen Securities, Inc. in September 1999. In October 1996, Ms. Hyer founded
Everen Securities' Health Care Group, where she defined strategy and hired a
banking team that focused on medical devices, biotechnology, specialty
pharmaceuticals, and healthcare information technology companies. From 1994 to
1996, Ms Hyer served as the Director of Finance for the City of Cleveland.
Previously, Ms. Hyer held Senior Vice President and vice president positions in
the Corporate Finance and Public Finance Departments at predecessors of Everen
Securities, Inc. from 1984 to 1994. Ms. Hyer graduated with a Bachelor of Arts
Degree in Political Science and Sociology from Aquinas College in Grand Rapids,
Michigan in 1977, and a Juris Doctorate from Cleveland Marshall College of Law
in Cleveland, Ohio in 1982.
OTHER KEY EMPLOYEES
VIJAY LUMBA, 51, is the founder of Aborn and has served as its President and a
director since 1983. He was previously employed by Fairchild Semiconductor
Optoelectronics Division, where he served as a Product Manager with
responsibilities for 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 Kathryn B. Hyer,
David B. Kaysen and Bradly A. Oldroyd. The Compensation Committee is composed of
Darla R. Gill and Bradly A. Oldroyd. The Audit Committee is authorized to review
proposals of the Company's auditors regarding annual audits, recommend the
engagement or discharge of the Company's auditors, review recommendations of
such auditors concerning accounting principles and the adequacy of internal
controls and accounting procedures and practices, review the scope of the annual
audit, approve or disprove each professional service or type of service other
than standard auditing services to be provided by the auditors, and review and
discuss the audited financial statements with the auditors. The Compensation
Committee establishes remuneration of the executive officers and directors of
the Company and oversees the administration of the Company's stock option plan.
MEETINGS OF THE BOARD OF DIRECTORS
32
The Board of Directors held three meetings during the last fiscal year.
The Audit Committee held one meeting during the last fiscal year. The
Compensation Committee held four meetings during the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by ZEVEX to each of ZEVEX'
executive officers during the three-year period ended December 31, 2000.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
OTHER RESTRICTED ALL
NAME AND ANNUAL STOCK LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMP. AWARDS OPTIONS PAYOUTS COMP.
- ------------------ ---- ------ ----- ----- ------ ------- ------- -----
David J. McNally(a) 2000 $142,528 $0 0 0 0 0 $5,250(d)
Chief Executive Officer 1999 $114,070 $48,000 0 0 0 0 $4,605(d)
Chairman 1998 $107,755 $50,000 0 0 0 0 $5,000(d)
Leonard C. Smith(b) 2000 $128,563 $0 0 0 0 0 $5,250(d)
President 1999 $100,000 $40,000 0 0 0 0 $4,000(d)
1998 N/A N/A N/A N/A N/A N/A N/A
Phillip L. McStotts 2000 $133,061 $0 0 0 0 0 $5,250(d)
Chief Financial Officer 1999 $114,070 $48,000 0 0 0 0 $4,605(d)
Secretary/Treasurer 1998 $107,755 $50,000 0 0 0 0 $5,000(d)
Dean G. Constantine(c) 2000 $141,087 $0 0 0 0 0 $4,250(d)
CEO and President 1999 $114,070 $48,000 0 0 0 0 $4,605(d)
1998 $107,755 $50,000 0 0 0 0 $5,000(d)
(a) Mr. McNally was appointed Chief Executive Officer effective September 1, 2000. Previously, Mr. McNally was
the Executive Vice President of the Company.
(b) Mr. Smith was appointed President effective September 1, 2000. Previously, Mr. Smith was the Vice President
of Sales and Marketing of the Company and President of JTech.
(c) Mr. Constantine resigned as CEO and President of the Company effective September 1, 2000. The 2000
salary includes $50,000 paid to Mr. Constantine of part of a severance package.
(d) Represents the amount paid by ZEVEX as a contribution to ZEVEX' 401(k) Pension and Profit Sharing Plan
on the officer's behalf.
33
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted during the year ended
December 31, 2000, by the Company to each executive officer of ZEVEX.
INDIVIDUAL GRANTS
-----------------
Percent Of
Number of Total
Securities Options/
Underlying SAR's Potential Realizable Value At
Options/ Granted To Assumed Annual Rates Of
SARs Employees Exercise or Stock Price Appreciation For
Granted In Fiscal Base Price Expiration Option Term
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- --- ---- ------ ---- ------ -------
(A) (B) (C) (D) (E) (F) (G)
--- --- --- --- --- --- ---
David J. McNally 40,000 12.2% $4.75 11/27/07 $119,489 $302,811
Leonard C. Smith 40,000 12.2% $4.75 11/27/07 $119,489 $302,811
Phillip L. McStotts 40,000 12.2% $4.75 11/27/07 $119,489 $302,811
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, 2000, by each executive officer of ZEVEX and the value of options
held by such persons at such year-end.
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END FY-END
SHARES
NAME AND ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION OR EXERCISED REALIZED UNEXERCISABLE UNEXERCISABLE
David J. McNally
Chief Executive Officer 0 0 71,150/81,250 $1,890/0
Leonard C. Smith
President 0 0 10,000/70,000 $0/0
Phillip L. McStotts
Secretary/Treasurer 0 0 71,150/81,250 $1,890/0
Dean G. Constantine
CEO, President 0 0 68,650/0 $1,890/0
Of the unexercised options listed above for each of Messrs. McNally and
McStotts, 5,400 were granted on December 17, 1992, and expire on December 16,
2001. Of the unexercised options listed above for Mr. C
34
onstantine 5,400 were granted on December 17, 1992, and expire on September 1,
2001. The exercise price on such options is $5.00. Of the unexercised options
listed above for each of Messrs. 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 Mr. Constantine,
7,000 were granted on February 13, 1997, and expire on September 1, 2001. The
exercise price on such options is $3.85. Of the unexercised options listed above
for each of Messrs. McNally and McStotts, 70,000 were granted on September 30,
1997 and expire on September 29, 2002. The exercise price on such options is
$5.00. Of the unexercised options listed above for Mr. Constantine, 52,500 were
granted on September 30, 1997 and expire on September 1, 2001. The exercise
price on such options is $5.00. Of the unexercised options listed above for each
of Messrs. McNally and McStotts, 30,000 were granted effective on January 1,
1999 and expire on January 7, 2005. The exercise price on such options is $5.00.
Of the unexercised options listed above for Mr. Constantine, 3,750 were granted
effective on January 1, 1999 and expire on September 1, 2001. The exercise price
on such options is $5.00. Mr. Constantine resigned his position as CEO and
President of the Company effective September 1, 2000. Of the unexercised options
listed above for Mr. Smith, 40,000 were granted on January 5, 1999 and expire on
January 4, 2004. The exercise price on such options is $4.875. Of the
unexercised options listed above for each of Messrs. McNally, Smith and
McStotts, 40,000 were granted effective on November 27, 2000 and expire on
November 27, 2007. The exercise price on such options is $4.75. The value of the
unexercised options was determined by reference to the closing sales price for
ZEVEX' Common Stock on the NASDAQ Stock Market as of December 31, 2000, which
was $4.13.
COMPENSATION OF DIRECTORS
The Company pays each director who is not an employee of the Company or its
subsidiaries a director's fee of $2,000 per quarter and $1,000 per day
honorarium for special assignments effective December 1, 2000. Prior to December
1, 2000 the Company paid each director who was not an employee of the Company or
its subsidiaries 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.
EMPLOYMENT AGREEMENTS
Except for Leonard Smith, the Company has no employment agreements with its
executive officers. Mr. Smith's employment agreement is for a term of three
years beginning December 31, 1998. Under the agreement Mr. Smith is paid a base
salary of at least $100,000 and cash bonuses at the end of each year as
determined by the Company's Compensation Committee. Termination without "cause"
or termination for "good reason" by Mr. Smith will result in certain severance
payments to Mr. Smith. Termination for "cause" by the Company or termination
without good reason by Mr. Smith will reduce certain of the Company's further
payment obligations to Mr. Smith under the JTech Purchase Agreement between the
Company and Mr. Smith.
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of ZEVEX' Common Stock (par value $0.001) as of March 6, 2001, by (i)
each person (or group of affiliated persons) who is known by ZEVEX to
beneficially own more than 5% of the outstanding shares of ZEVEX' Common Stock,
(ii) each director and executive officer of ZEVEX, and (iii) all executive
officers and directors of ZEVEX as a group. As of such date, ZEVEX had a total
of 3,440,064 shares of Common Stock outstanding. Unless indicated otherwise, the
address for each officer, director and 5% shareholder is c/o ZEVEX
International, Inc., 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123.
NUMBER OF PERCENT
NAME SHARES OWNED OF CLASS(1)
---------------- ------------ -----------
Dean G. Constantine(2) 320,550 9.1%
David J. McNally(3) 311,348 8.9%
Kirk Blosch(4) 244,500 7.1%
Jeff Holmes(5) 244,500 7.1%
Phillip L. McStotts(6) 220,550 6.3%
Leonard C. Smith(7) 153,163 4.3%
Bradly A. Oldroyd(8) 17,000 *
Darla R. Gill(9) 13,480 *
Kathryn B. Hyer(10) 8,250 *
David B. Kaysen(11) 0 *
All Officers and Directors
as a Group(3) (6) (7) (8) (9) (10) (11) 723,791 19.2%
*Less than 1%
(1) For purposes of the table, "beneficial ownership" includes stock that a
shareholder has the right to acquire pursuant to options or rights of conversion
within 60 days of January 6, 2001. The percentage ownership for each shareholder
is calculated assuming that all the stock that could be so acquired by that
shareholder within 60 days, by option exercise or otherwise, has in fact been
acquired and that no other shareholder has exercised a similar right to acquire
additional shares. Except as indicated otherwise below, the shareholder named in
the table has sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to applicable
community property laws.
(2) Beneficial owner. Includes 251,900 shares of Common Stock held directly and
68,650 shares of Common Stock issuable upon exercise of options held by Mr.
Constantine that are currently exercisable or will become exercisable within 60
days. Mr. Constantine's address is 3175 E. Oldridge Circle, Salt Lake City, Utah
84121.
(3) Chief Executive Officer and Chairman of the Company. Includes 240,198 shares
of Common Stock held directly and 71,150 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 81,250 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.
36
(4) Beneficial owner. Includes 244,500 shares of Common Stock held directly by
Mr. Blosch. Mr. Blosch's address is 2081 S. Lakeline Drive, Salt Lake City, UT
84109.
(5) Beneficial owner. Includes 244,500 shares of Common Stock held directly by
Mr. Holmes. Mr. Holmes' address is 8555 E. Voltaire Ave., Scottsdale, AZ 85260.
(6) Chief Financial Officer, Secretary, Treasurer, and director of the Company.
Includes 149,400 shares of Common Stock held directly and 71,150 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 81,250
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.
(7) President and director of the Company. Includes 9,200 shares of Common Stock
held directly and 20,000 shares of Common Stock issuable upon exercise of
options held by Mr. Smith that are currently exercisable or will become
exercisable within 60 days by Mr. Smith. Also includes 123,963 shares of Common
Stock that are issuable at $11 per share upon conversion of debentures held by
Mr. Smith in the principal amount of $1,363,594. Excludes 60,000 shares of
Common Stock issuable upon exercise of options held by Mr. Smith that are not
currently exercisable or will not become exercisable within 60 days.
(8) Director. Includes 17,000 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days. Excludes 12,500 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 13,000
shares of Common Stock issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days. Excludes 12,500 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.
(10) Director. Includes 8,250 shares of Common Stock issuable upon exercise of
warrants that are currently exercisable or will become exercisable within 60
days. Excludes 10,000 shares of Common Stock issuable upon exercise of options
held by Ms. Hyer that are not currently exercisable and will not become
exercisable within 60 days.
(11) Director. Excludes 10,000 shares of Common Stock issuable upon exercise of
options held by Mr. Kaysen that are not currently exercisable and will not
become exercisable within 60 days.
SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company'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 the Company and written
representations that no other reports were required, the Company believes that
during 2000 all directors, executive officers, and 10% shareholders complied on
a timely basis with all applicable filing requirements under Section 16(a) of
the Exchange Act, except as follows: (1) Mr. Kaysen and Ms. Hyer each filed one
late report on Form 3, due December 2000, for their initial filing and for one
transaction involving the grant of Company options to purchase common stock, and
(2) Messrs. McNally, Smith, Oldroyd and McStotts and Ms. Gill each filed one
late report on Form 4, due December 2000, for one transaction involving the
grant of Company options to purchase common stock.
37
CONTROL ARRANGEMENTS
Pursuant to a Stock Purchase Agreement, dated December 31, 1996 between ZEVEX
and Blosch USA, Inc. & Holmes, L.L.C., a Utah limited liability company ("Blosch
& Holmes"), as amended on September 30, 1997, Blosch & Holmes has the right to
appoint one member of ZEVEX' board of directors, provided that such nominee must
be acceptable to ZEVEX. Kirk Blosch and Jeff W. Holmes, principal shareholders
of ZEVEX, are the two member/managers of Blosch & Holmes. The right to appoint a
member of ZEVEX' 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. Blosch & Holmes exercised this right with the appointment of Mr.
Blosch to the board in June 1998. Mr. Blosch resigned from the Board in November
2000 and Blosch & Holmes did not exercise its right to appoint another person to
replace Mr. Blosch.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please refer to the description of Mr. Leonard Smith's employment agreement in
Item 11 and his involvement with the Company's acquisition of JTech described in
Item 7.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report.
(1) - Financial Statements.
The following Consolidated Financial Statements of ZEVEX for the years ended
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000, are filed as part of this report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
(2) - Financial Statement Schedules.
Not required in accordance with the applicable rules and regulations.
(3) - Exhibits
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
2000.
38
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 29, 2001 By: /S/ DAVID J. MCNALLY
----------------------
David J. McNally
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints each of David J. McNally and Phillip L.
McStotts, jointly and severally, his true and lawful attorney in fact and agent,
with full power of substitution for him and in his name, place and stead, in any
and all capacities to sign any or all amendments to this report on Form 10-K and
to file the same, with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorney in fact or his substitute or substitutes
may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/S/ DAVID J. MCNALLY Chairman of the Board of Directors, March 29, 2001
- --------------------------- Chief Executive Officer,
David J. McNally (Principal Executive Officer)
/S/ LEONARD C. SMITH Director and President, March 29, 2001
- ---------------------------
Leonard C. Smith
/S/ PHILLIP L. MCSTOTTS Director, Chief Financial Officer, March 29, 2001
- ----------------------- Secretary, and Treasurer (Principal
Phillip L. McStotts Financial and Accounting Officer)
/S/ BRADLY A. OLDROYD Director March 29, 2001
- ---------------------
Bradly A. Oldroyd
/S/ DARLA R. GILL Director March 29, 2001
- -----------------
Darla R. Gill
/S/ DAVID B. KAYSEN Director March 29, 2001
- -------------------
David B. Kaysen
/S/ KATHRYN B. HYER Director March 29, 2001
- -------------------
Kathryn B. Hyer
39
INDEX TO EXHIBITS
(ITEM 14(C))
NUMBER EXHIBITS
- ------ --------
3.1 Articles of Incorporation of ZEVEX International, Inc., a Delaware
corporation (1).
3.2 Bylaws of ZEVEX International, Inc., a Delaware corporation (1).
10.1 Revolving Line of Credit Agreement between Bank One and ZEVEX International, Inc., dated
September 29, 1997 (1).
10.2 Amendment to Revolving Line of Credit Agreement between Bank One and ZEVEX International, Inc.,
dated December 31, 1997 (2).
10.3 Stock Purchase Agreement between Blosch & Holmes, LLC and ZEVEX International, Inc., dated
December 1, 1996, including one amendment dated September 30, 1997 (1).
10.4 Registration Rights Agreement among Kirk Blosch, Jeff W. Holmes and ZEVEX International, Inc.,
dated February 1, 1998 (2).
10.5# ZEVEX International, Inc., Amended 1993 Stock Option Plan (3).
10.6 Industrial Development Bond Offering Memorandum, dated October 30, 1996 (4).
10.7 Industrial Development Bond Reimbursement Agreement, dated October 30, 1996 (4).
10.8 Warrant to Purchase 50,000 shares of Common Stock issued to Wedbush Morgan Securities, Inc.,
dated November 20, 1997 (2).
10.9 Warrant to Purchase 50,000 shares of Common Stock issued to Everen Securities, Inc., dated
November 20, 1997 (2).
10.10 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, Inc., and Vijay
Lumba (5).
10.14 Stock Purchase Agreement, dated December 31, 1998, among ZEVEX International, Inc., Leonard
Smith, Tracy Livingston, David Bernardi, and Corporation of the President of the Church of
Jesus Christ of Latter Day Saints (5).
10.15 Convertible Debenture, dated January 6, 1999, issued to Vijay Lumba (6).
10.16 Convertible Debenture, dated January 6, 1999, issued to Leonard Smith (6).
10.17 Convertible Debenture, dated January 6, 1999, issued to Tracy Livingston (6).
10.18 Convertible Debenture, dated January 6, 1999, issued to David Bernardi (6).
10.19# ZEVEX International, Inc., 1999 Stock Option Plan and Form of Stock Option Grant (6).
10.20 Form of Stock Option Grant to Messrs. Constantine, McNally, McStotts and Smith. (7)
10.21 Asset Purchase Agreement, dated March 29, 2000, between ZEVEX, Inc. and Nestle (7)
10.22 Convertible Debenture, dated March 30, 2000, issued to Vijay Lumba.
10.23 Convertible Debenture, dated March 30, 2000, issued to Leonard Smith.
10.24# Severance Settlement Agreement and Release, between Dean G. Constantine and ZEVEX
International, Inc.
21 List of Subsidiaries.
(1) Incorporated by reference to Amendment No. 1 on Registration Statement on Form S-1 filed October 24,
1997 (File No. 333-37189).
(2) Incorporated by reference to 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.
001-12965).
40
(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).
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 001-12965).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1999 (File No. 001-12965).
# Identifies a "management contract or compensatory plan or arrangement".
41
CONSOLIDATED FINANCIAL STATEMENTS
ZEVEX International, Inc.
Years Ended December 31, 2000, 1999 and 1998
with Report of Independent Auditors
42
ZEVEX International, Inc.
Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
CONTENTS
Report of Independent Auditors.................................................1
Consolidated Financial Statements
Consolidated Balance Sheets ...................................................2
Consolidated Statements of Operations .........................................3
Consolidated Statements of Stockholders' Equity ...............................4
Consolidated Statements of Cash Flows .........................................5
Notes to Consolidated Financial Statements ....................................6
43
Report of Independent Auditors
Board of Directors and Stockholders
ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheets of ZEVEX
International, Inc. as of December 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ZEVEX
International, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Salt Lake City, UT
March 9, 2001
44
ZEVEX International, Inc.
Consolidated Balance Sheets
DECEMBER 31
2000 1999
------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 327,157 $ 3,383,544
Cash restricted for sinking fund payment on industrial
development bond 90,070 86,549
Accounts receivable, net of allowance for doubtful
accounts of $300,000 in 2000 and $175,000 in 1999 7,501,089 5,843,229
Inventories 9,687,446 5,119,291
Marketable securities 1,065,275 3,224,817
Prepaid expenses 27,956 33,554
Deferred income taxes 628,676 -
Income taxes receivable 319,990 -
Other current assets 9,867 26,859
------------------------------------
Total current assets 19,657,526 17,717,843
Property and equipment, net 7,979,061 5,333,577
Patents, trademarks, and acquisition costs, net 343,685 349,354
Goodwill, net 10,688,271 10,642,304
Other assets 19,419 6,611
------------------------------------
TOTAL ASSETS $ 38,687,962 $ 34,049,689
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 2,212,726 $ 1,134,946
Accrued liabilities 569,264 731,852
Income taxes payable - 957,309
Payables related to product line and business 1,000,000 1,134,483
acquisitions
Bank line of credit 5,936,995 1,613,453
Current portion of industrial development bond 100,000 100,000
Current portion of capital leases 148,783 -
Deferred income taxes - 110,276
------------------------------------
Total current liabilities 9,967,768 5,782,319
Deferred income taxes 151,667 6,648
Industrial development bond 1,600,000 1,700,000
Convertible debt, long-term portion 5,447,188 5,470,000
Capital lease obligations 463,834 -
Stockholders' equity:
Common stock, $.001 par value: 10,000,000 shares
authorized; 3,440,064 and 3,420,726 shares issued and
outstanding in 2000 and 1999, respectively 3,440 3,421
Additional paid in capital 16,289,787 16,212,966
Retained earnings 5,266,991 4,542,851
Unrealized (loss) gain on available-for-sale
securities, net of tax benefit (expense) of $299,062
and $(197,199) in 2000 and 1999, respectively (502,713) 331,484
------------------------------------
Total stockholders' equity 21,057,505 21,090,722
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,687,962 $ 34,049,689
====================================
SEE ACCOMPANYING NOTES.
45
ZEVEX International, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
-----------------------------------------------------
2000 1999 1998
-----------------------------------------------------
Revenues:
Product sales $29,661,205 $21,070,153 $10,475,256
Engineering services 1,117,422 1,956,055 609,157
-----------------------------------------------------
30,778,627 23,026,208 11,084,413
Cost of sales 19,929,855 12,474,210 6,846,443
-----------------------------------------------------
Gross profit 10,848,772 10,551,998 4,237,970
Operating expenses:
General and administrative 5,169,944 4,357,273 2,609,763
Selling and marketing 2,712,702 2,238,629 1,269,645
Research and development 852,273 670,886 290,669
Goodwill amortization 523,187 392,142 -
-----------------------------------------------------
9,258,106 7,658,930 4,170,077
-----------------------------------------------------
Operating income 1,590,666 2,893,068 67,893
Other income (expense):
Interest / other income 506,858 235,148 567,991
Interest expense (703,686) (481,615) (92,152)
Unrealized gain (loss) on marketable securities - 167,761 (68,370)
-----------------------------------------------------
Income before provision for income taxes 1,393,838 2,814,362 475,362
Provision for income taxes (669,698) (1,187,989) (113,169)
-----------------------------------------------------
Net income $ 724,140 $ 1,626,373 $ 362,193
=====================================================
Basic net income per common share $ .21 $ .48 $ .11
=====================================================
Diluted net income per common share $ .19 $ .47 $ .10
=====================================================
SEE ACCOMPANYING NOTES.
46
ZEVEX International, Inc.
Consolidated Statements of Stockholders' Equity
COMMON STOCK ADDITIONAL PAID-IN RETAINED TREASURY
---------------------------
SHARES AMOUNT CAPITAL EARNINGS STOCK
------------------------------------------------------------------------
Balances at December 31, 1997 3,264,326 $3,265 $16,697,203 $2,565,229 $ -
Comprehensive income:
Net income - - - 362,193 -
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale securities - - - - -
Total comprehensive income
Exercise of stock options for cash 9,550 9 33,485 - -
Exercise of warrants for cash 30,000 30 104,970 - -
Issuance of common stock for product line acquisition 115,000 115 546,135 - -
Purchase of 6,700 shares of treasury stock - - - - (50,790)
------------------------------------------------------------------------
Balances at December 31, 1998 3,418,876 3,419 17,381,793 2,927,422 (50,790)
Comprehensive income:
Net income - - - 1,626,373 -
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities - - - - -
Total comprehensive income
Exercise of stock options for cash 1,850 2 6,173 - -
Purchase of warrants for cash - - (1,175,000) - -
Purchase of 10,000 shares of treasury stock - - - - (45,731)
Transfer of 16,700 shares of treasury stock to ESOP - - - (10,944) 96,521
------------------------------------------------------------------------
Balances at December 31, 1999 3,420,726 3,421 16,212,966 4,542,851 -
Comprehensive income:
Net income - - - 724,140 -
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale securities - - - - -
Total comprehensive loss
Exercise of stock options for cash 19,338 19 76,821 - -
------------------------------------------------------------------------
Balances at December 31, 2000 3,440,064 $3,440 $16,289,787 $5,266,991 $ -
========================================================================
UNREALIZED (LOSS) GAIN
ON AVAILABLE-FOR-SALE
SECURITIES TOTAL
----------------------------------------
Balances at December 31, 1997 $ - $19,265,697
Comprehensive income:
Net income - 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 - 33,494
Exercise of warrants for cash - 105,000
Issuance of common stock for product line acquisition - 546,250
Purchase of 6,700 shares of treasury stock - (50,790)
----------------------------------------
Balances at December 31, 1998 (147,309) 20,114,535
Comprehensive income:
Net income - 1,626,373
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities 478,793 478,793
----------------
----------------
Total comprehensive income 2,105,166
Exercise of stock options for cash - 6,175
Purchase of warrants for cash - (1,175,000)
Purchase of 10,000 shares of treasury stock - (45,731)
Transfer of 16,700 shares of treasury stock to ESOP - 85,577
----------------------------------------
Balances at December 31, 1999 331,484 21,090,722
Comprehensive income:
Net income - 724,140
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale securities (834,197) (834,197)
----------------
----------------
Total comprehensive loss (110,057)
Exercise of stock options for cash - 76,840
----------------------------------------
Balances at December 31, 2000 $(502,713) $21,057,505
========================================
SEE ACCOMPANYING NOTES.
47
ZEVEX International, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 724,140 $ 1,626,373 $ 362,193
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization expense 1,756,682 1,157,221 471,752
Benefit for deferred income taxes (97,672) (15,885) (136,473)
Realized gain on marketable securities (379,620) (65,816) -
Unrealized (gain) loss on trading marketable - (167,761) 68,370
securities
Changes in operating assets and liabilities, net of
acquisitions:
Restricted cash for sinking fund payment on
industrial development bond (3,521) 95,500 (105,885)
Accounts receivable (1,657,860) (2,408,048) (989,046)
Inventories (3,360,100) 455,103 (1,612,638)
Trading securities 313,992 80,623 -
Prepaid expenses 5,598 32,007 12,411
Other assets 4,184 5,228 (46,539)
Accounts payable 1,077,780 58,836 260,235
Accrued liabilities (162,588) 43,630 112,384
Income taxes payable/receivable (1,277,299) 906,418 (234,512)
------------------------------------------------
Net cash flows (used in) provided by operating activities (3,056,284) 1,803,429 (1,837,748)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,224,760) (566,958) (1,185,805)
Purchase of businesses, net of cash acquired - - (9,480,313)
Purchase of product line (2,794,146) - -
Purchases of available-for-sale marketable securities - (1,827,150) (1,698,235)
Redemption of available-for-sale marketable securities 894,712 1,116,944 10,200,000
Addition of patents and trademarks (21,430) (4,370) (27,511)
------------------------------------------------
Net cash flows used in investing activities (3,145,624) (1,281,534) (2,191,864)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of warrants - - 105,000
Repurchase of common stock warrants - (1,175,000) -
Proceeds from exercise of stock options 76,840 6,175 33,494
Issuance of debt related to business acquisitions - - 9,300,000
Net proceeds from bank line of credit 4,323,542 1,071,460 441,993
Stock contribution to Employee Stock Ownership Plan - 85,577 -
Purchase of treasury stock - (45,731) (50,790)
Payments related to business acquisitions (1,104,758) (4,941,343) -
Payments on industrial development bond (100,000) (100,000) (100,000)
Principal payments on capital leases (50,103) - -
------------------------------------------------
Net cash flows provided by (used in) financing activities 3,145,521 (5,098,862) 9,729,697
------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,056,387) (4,576,967) 5,700,085
Cash and cash equivalents at beginning of year 3,383,544 7,960,511 2,260,426
------------------------------------------------
Cash and cash equivalents at end of year $ 327,157 $ 3,383,544 $ 7,960,511
================================================
SEE ACCOMPANYING NOTES.
48
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF ORGANIZATION AND BUSINESS
The Company was incorporated under the laws of the State of Nevada on December
30, 1987. The Company was originally incorporated as Downey Industries, Inc. and
changed its name to ZEVEX International, Inc. on August 15, 1988. In November
1997, the Company reincorporated in Delaware. In December 1998, the Company
acquired an additional product line and completed the acquisition of two
additional subsidiaries (see Note 2). Additionally, the Company acquired a
product line from Nestle USA, Inc. in April of 2000. The Company and its
subsidiaries design and manufacture advanced medical devices, including surgical
systems, device components, and sensors for medical and industrial technology
companies. The Company and its subsidiaries also design, manufacture, and market
their own medical devices using proprietary technologies. The Company's design
and manufacturing service customers are primarily medical technology companies,
which sell the Company's systems and devices under private labels or incorporate
the Company's devices into their products. The Company also resells disposable
accessories for use with some of its manufactured pump devices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at December 31, 2000 and 1999 include the
accounts of ZEVEX International, Inc. (the Company) and its wholly-owned
operating subsidiaries: ZEVEX, Inc., Aborn Electronics, Inc. (Aborn), and JTech
Medical Industries, Inc. (JTech). The consolidated statement of operations for
1998 excludes the results of Aborn and JTech, because these two acquisitions
were consummated as of December 31, 1998. 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.
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.
49
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's financial instruments consist primarily of cash, cash equivalents,
marketable securities, trade accounts receivable and certain debt issuances (see
Note 8). Cash and cash equivalents are held in federally insured financial
institutions or invested in high grade short-term commercial paper issued by
major United States corporations. Marketable securities consist principally of
corporate stocks and 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. The
Company's customers accounting for more than 10% of net product sales were two,
one, and three for the years ended December 31, 2000, 1999 and 1998,
respectively (see Note 13). Less than 10% of product sales are to foreign
customers.
As a general policy, collateral is not required for accounts receivable;
however, the Company periodically monitors the need for an allowance for
doubtful accounts based upon expected collections of accounts receivable and
specific identification of uncollectible accounts. Additionally, customers'
financial condition and 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.
MARKETABLE SECURITIES
The Company's marketable securities are comprised of equity securities
classified as available-for-sale at December 31, 2000, and of debt and equity
securities classified as trading or available-for-sale at December 31, 1999.
Such securities are carried at their fair value based upon their quoted market
prices at December 31, 2000 and 1999. 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.
The Company held no trading securities at December 31, 2000. Net unrealized
holding gains (losses) on trading securities for the periods ending December 31,
1999 and 1998 of $167,761 and ($68,370), respectively, were included in net
income. Net unrealized holding losses on available-for-sale securities for the
periods ending December 31, 2000 and 1998 of $801,775 ($502,713 net of taxes)
and $234,942 ($147,309 net of taxes), respectively, and net unrealized holding
gains for the period ending December 31, 1999 of $528,683 ($331,484 net of
taxes), are included in stockholders' equity.
50
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over expected useful lives of three to twenty-five
years using the straight-line method.
Major replacements and refurbishment costs, which extend the useful lives of
equipment, are capitalized and depreciated over the remaining useful life.
Normal maintenance and repair items are charged to costs and expenses as
incurred.
PATENTS, TRADEMARKS, AND ACQUISITION COSTS
Acquisition costs and the costs of acquired and internally developed patents and
trademarks are amortized over the lesser of fifteen years or the estimated
useful life of the intangible asset on a straight-line basis. At December 31,
2000 and 1999, accumulated amortization related to patents, trademarks, and
acquisition costs of $70,592 and $43,493, respectively, has been recorded by the
Company. The Company periodically reviews the recoverability of its intangible
assets and other long-term assets and, where impairment in value has occurred,
such intangibles are written down to net realizable value.
GOODWILL
Goodwill is recorded at the lower of cost or its net realizable value and is
being amortized on a straight-line basis over 15 to 23 years. At December 31,
2000 and 1999, accumulated amortization related to goodwill of $915,329 and
$392,142, respectively, has been recorded by the Company. The Company
periodically reviews the recoverability of these intangible assets in order to
record them at their net realizable value.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF, the
Company assesses on an ongoing basis the recoverability of long-lived assets,
comparing estimates of future undiscounted cash flows to net book value. If
future undiscounted cash flow estimates were less than net book value, net book
value would be reduced to fair value based on estimates of discounted cash
flows. The Company also evaluates amortization periods of assets, including
goodwill and other intangible costs, to determine if events or circumstances
warrant revised estimates of useful lives.
INCOME TAXES
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on differences
between financial reporting and tax bases of assets and liabilities measured
using enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
51
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 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.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS FOR INTERNAL USE
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 98-1 ("SOP 98-1"), ACCOUNTING FOR THE COSTS OF SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 provides guidance for
capitalization of internal and external costs associated with the development or
purchase of software for internal use. The Company adopted SOP 98-1 as required
and capitalizes internal and external costs to develop or obtain internal use
software during the application development stage. Costs incurred during the
preliminary project stage are expensed as incurred, as are training and
maintenance costs. The Company capitalized $606,049 relating to a new accounting
system during the third and fourth quarter of 2000 and recorded related
amortization expense of $75,527. Amortization is computed using the
straight-line method over the estimated useful life of the assets, which has
been determined to be 3 years.
ADVERTISING COSTS
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $249,542, $284,452 and $137,627, respectively, for the
years ended December 31, 2000, 1999 and 1998.
REVENUE RECOGNITION
The Company records revenue from the sale of manufactured products upon
shipment. Shipping and handling costs are expensed as incurred and are included
in cost of sales. Revenue from contracts to perform engineering design and
product development services are generally recognized as milestones are
achieved; costs are expensed as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The SAB
clarifies proper methods of revenue recognition given certain circumstances
surrounding sales transactions. The Company adopted SAB 101 in the fourth
quarter of 2000. As expected, SAB 101 did not have a material effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, as
amended by SFAS Nos. 137 and 138, is effective for the Company as of January 1,
2001. The new rule establishes accounting and reporting standards for derivative
instruments,
52
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
including certain derivative instruments embedded in other contracts, and for
hedging activities. Historically, the Company has not used derivative
instruments, and the Company does not hold any derivative instruments at
December 31, 2000. As a result, the Company does not expect that the adoption of
SFAS No. 133, as amended, will have a significant effect on earnings or the
financial position of the Company.
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,
convertible debentures and warrants in the weighted-average number of the
Company's common shares outstanding as calculated using the treasury stock
method.
Net income as presented on the statements 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 for the years ended December 31:
(IN THOUSANDS) 2000 1999 1998
-------------- --------------- --------------
Denominator for basic net income per common share -
weighted average shares 3,425 3,413 3,298
Dilutive securities: warrants and stock options
323 25 428
-------------- --------------- --------------
Denominator for diluted net income per common share -
adjusted weighted average shares
3,748 3,438 3,726
============== =============== ==============
Options, convertible debentures, and warrants to purchase approximately 595,000,
597,000 and 495,000 shares of common stock were outstanding at December 31,
2000, 1999 and 1998, 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.
53
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information were as follows:
2000 1999 1998
-----------------------------------------------
Cash paid during the year for:
Interest $ 679,283 $ 402,191 $ 92,887
Income taxes 2,122,006 263,279 481,589
Schedule of non-cash investing and financing activities:
Issuance of common stock for acquisition
of Nutrition Medical product line - - 546,250
Issuance of convertible debentures for earn-out
provisions relating to prior year acquisitions
- 2,253,826 -
Unrealized (loss) gain on available-for-sale
marketable securities (1,330,458) 763,625 (234,942)
Equipment acquired under capital leases 662,720 - -
Purchase price adjustments related to earn-out
provisions for prior year business acquisitions
(52,537) - -
Payable for earn-out provisions relating to current
year product line acquisition 1,000,000 - -
2. ACQUISITIONS
On April 6, 2000, the Company acquired the enteral nutrition delivery device
business of Nestle USA, Inc. ("Nestle") in an asset purchase. The assets
acquired included over 19,500 enteral feeding pumps owned by Nestle and placed
with various health care facilities under arrangements whereby the facilities
agree to purchase disposable accessories for use with Nestle pumps. The assets
purchased also included Nestle's line of pump accessories, including
administration sets, feeding tubes, irrigation kits, and ancillary devices for
pumps, and all associated intellectual property. The purchase price was
approximately $3,800,000, which included the purchase of Nestle inventory
(accessories) for approximately $1,210,000 and the purchase of enteral feeding
pumps for approximately $1,970,000. The excess of the purchase price over the
fair value of the assets acquired was approximately $620,000, which the Company
recorded as goodwill. The goodwill will be amortized over 15 years. On December
31, 1998, the Company acquired all of the issued and outstanding capital stock
of 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 was
paid in cash of $1,850,000 and a 7% interest bearing convertible debenture of
$1,350,000.
54
2. ACQUISITIONS (CONTINUED)
The purchase price also included an earn-out provision that provides additional
consideration, not to exceed cash of $950,000 and a convertible debenture of
$950,000, which was triggered based on Aborn achieving certain levels of revenue
and pretax income for the year ended December 31, 1999. Based on the earn-out
formula, additional consideration equal to the full $1,900,000 was earned and
was recorded as an adjustment to goodwill at December 31, 1999. 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, 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 was paid in cash of $3,100,000 and a 8% interest bearing
convertible debenture of $3,000,000. The purchase price also included earn-out
provisions related to the years ending December 31, 1999 and 2001 that provide
additional consideration, not to exceed, in total, cash of $575,000 and a
convertible debenture of $575,000, which are triggered based on JTech achieving
certain levels of revenue and pretax income. Based on the earn-out formula, the
Company estimated that additional consideration equal to approximately $350,000
had been earned for the year ended December 31, 1999, which was recorded as an
adjustment to goodwill at that date. 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.
In 2000, upon finalization of the earn-out calculations for JTech and Aborn, a
total reduction of $52,537 was recorded to goodwill.
The unaudited pro forma results of operations assuming consummation of the Aborn
and JTech acquisitions as of January 1, 1998 are as follows:
1998
--------------------
Revenues $ 15,131,000
Net income 461,000
Basic net income per common share $ .14
Diluted net income per common share $ .12
====================
In addition, 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 was paid in
cash of $500,000 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.
55
3. INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
---------------------------------------
Materials $4,832,947 $2,228,174
Work in Progress 1,057,146 1,867,894
Finished goods, including
completed subassemblies 3,797,353 1,023,223
---------------------------------------
$9,687,446 $5,119,291
=======================================
4. MARKETABLE SECURITIES
The following is a summary of marketable securities at December 31, 2000:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
----------------- ---------------- ----------------- -----------------
AVAILABLE-FOR-SALE
Equity securities $1,867,050 $ - $801,775 $1,065,275
----------------- ---------------- ----------------- -----------------
Total Marketable Securities $1,867,050 $ - $801,775 $1,065,275
================= ================ ================= =================
The following is a summary of marketable securities at December 31, 1999:
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
----------------- ---------------------------------- -----------------
AVAILABLE-FOR-SALE
U.S. corporate securities $ 254,817 $ - $ - $ 254,817
Equity securities 2,138,817 528,683 - 2,667,500
----------------- ---------------------------------- -----------------
2,393,634 528,683 - 2,922,317
TRADING
Equity Securities - 302,500 - 302,500
----------------- ---------------------------------- -----------------
Total Marketable Securities $ 2,393,634 $ 831,183 $ - $3,224,817
================= ================================== =================
56
4. MARKETABLE SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt and marketable equity
securities, 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.
DECEMBER 31, 2000 DECEMBER 31, 1999
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
-------------------------------------------------------------------
U.S. corporate securities:
Due within 1 year $ - $ - $ 254,817 $ 254,817
Equity securities 1,867,050 1,065,275 2,138,817 2,970,000
------------------------------------------------------------------
Total $1,867,050 $1,065,275 $2,393,634 $3,224,817
===================================================================
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2000 1999
------------------ -------------------
Machinery and equipment $ 1,096,236 $1,073,531
Stationary enteral feeding pumps 3,172,950 375,000
Furniture and fixtures 1,584,039 1,290,979
Software 606,049 -
Tooling costs 992,344 914,610
Building 2,853,880 2,841,005
Land 1,084,415 1,084,415
------------------ -------------------
11,389,913 7,579,540
Less accumulated depreciation and amortization 3,410,852 2,245,963
------------------ -------------------
$ 7,979,061 $5,333,577
================== ===================
Stationary enteral feeding pumps represent acquired and self-constructed pumps
that are placed with businesses and other users (at little or no cost to the
users) under arrangements in which the pump users have an obligation to buy
disposable products from the Company while they are using the pumps. To the
extent that the users discontinue purchase of the disposables, the pumps are
returned to the Company.
Depreciation and amortization expense (including software amortization expense)
for property and equipment for the years ended December 31, 2000, 1999 and 1998
amounted to $1,206,396, $739,024 and $462,031, respectively.
57
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
2000 1999
------------------- ------------------
Accrued payroll and
related taxes and benefits $263,498 $478,639
Accrued vacation 110,685 102,535
Warranty reserve 85,000 65,000
Accrued interest 110,081 85,678
------------------- ------------------
$569,264 $731,852
=================== ==================
7. INCOME TAXES
The provision for income taxes is made, at Federal and state statutory rates,
based on pre-tax 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 are as follows:
2000 1999
------------------- -------------------
Deferred tax assets:
Non-deductible accruals and expenses $ 329,614 $ 199,755
Unrealized loss on available-for-sale securities 299,062 -
------------------- -------------------
Total deferred tax assets 628,676 199,755
Deferred tax liabilities:
Fixed asset and other basis differences (151,667) (6,648)
Unrealized gains on trading securities - (112,833)
Unrealized gains on available-for-sale securities - (197,198)
------------------- -------------------
Total deferred tax liabilities (151,667) (316,679)
------------------- -------------------
$ 477,009 $ (116,924)
=================== ===================
58
7. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
2000 1999 1998
------------------ ----------------- ----------------
Current taxes:
Federal $ (725,521) $(1,063,807) $(165,840)
State (114,387) (199,595) (24,244)
R&D credit 72,537 59,528 28,075
Deferred taxes:
Federal 89,031 14,480 44,519
State 8,642 1,405 4,321
------------------ ----------------- ----------------
Provision for income taxes $ (669,698) $(1,187,989) $(113,169)
================== ================= ================
The actual tax expense differs from the 34% Federal statutory rate as follows:
2000 1999 1998
------------------ ----------------- ----------------
Expected tax expense at federal rate $ (473,905) $ $(161,623)
(956,883)
State income tax expense, net of federal benefit
(69,792) (130,805) (15,687)
Research and development credit 72,537 59,528 28,075
Non-deductible goodwill amortization (172,464) (135,142) -
Other non-deductible expenses (23,097) (28,750) (11,985)
Tax-exempt interest - - 57,549
Other (2,977) 4,063 (9,498)
------------------ ----------------- ----------------
Total provision for income taxes $ (669,698) $(1,187,989) $(113,169)
================== ================= ================
8. DEBT
BANK LINES OF CREDIT
The Company renewed its line of credit arrangement with a financial institution
for $7 million. The line matures on May 31, 2001. The line of credit is
collateralized by accounts receivable and inventory and bears interest at the
prime rate, which is 9.5% at December 31, 2000 and 8.5% at December 31, 1999.
The Company's balance on its line of credit was $5,936,995 at December 31, 2000
and $1,613,453 at December 31, 1999. Under the line of credit agreement, the
Company is restricted from declaring cash dividends and must maintain certain
levels of working capital and meet certain other financial covenants.
59
8. DEBT (CONTINUED)
INDUSTRIAL DEVELOPMENT BOND
On October 30, 1996, the Company completed a transaction defined as "Murray
City, Utah, Adjustable Rate Industrial Development Revenue Bonds, Series 1997
(ZEVEX, Inc. Project)" in the amount of $2,000,000. The bonds are secured by an
irrevocable Letter of Credit issued by a bank, which is subject to expiration no
later than April 15, 2002. The bonds bear interest at an adjustable rate based
on the weekly tax-exempt floater rate as determined by the remarketing agent.
The bonds mature on October 1, 2016. Principal reductions occur in the amount of
$100,000 per year. The outstanding balance was $1,700,000 at December 31, 2000,
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, respectively (see Note 2). Accrued
interest is due and payable quarterly beginning on April 1, 1999. All accrued
interest and principal is due and payable January 6, 2002. The debentures are
convertible to common stock between January 6, 2000 and January 6, 2002 at $11
per share. The convertible debt increased from original amounts at the
acquisition date to $5,447,188 at the end of 2000 due to the earn-out provisions
(see Note 2).
9. LEASE COMMITMENTS
During the year ended December 31, 2000, the Company acquired certain equipment
with a cost of $662,720 under capital leases with terms of four years or less.
Accumulated depreciation related to such equipment of $82,689 has been recorded
by the Company at December 31, 2000, which is included with depreciation and
amortization expense for the year then ended.
Future minimum lease payments under capital leases consisted of the following at
December 31, 2000:
FISCAL YEAR
2001 $198,000
2002 198,000
2003 198,000
2004 127,520
2005 -
---------
Total minimum lease payments 721,520
Amount representing interest 108,903
---------
Present value of minimum lease payments 612,617
Current portion 148,783
---------
Long-term portion $463,834
=========
60
9. LEASE COMMITMENTS (CONTINUED)
The Company has entered into certain cancelable operating leases. Rental expense
for the years ended December 31, 2000 and 1999 was $54,562 and $15,563,
respectively. There was no rental expense related to 1998.
10. EMPLOYEE BENEFIT PLANS
401(K) PROFIT SHARING PLAN
During 1991, the Company established a qualified 401(k) profit sharing plan
covering substantially all employees. Eligible employees may defer a portion of
their salary. At the discretion of the Board of Directors, the Company may make
a contribution of 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 in employer contributions
after seven years. Contributions to the plan for the years ended December 31,
2000, 1999 and 1998 were $115,791, $143,645 and $98,865, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective October 14, 1993, the Company adopted an Employee Stock Ownership Plan
that covers all employees who are over the age of 21, have been employed for at
least 90 days, and who provide at least 1,000 hours of service.
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 contributions were made for the years ended December 31, 2000 and 1998. A
contribution of 16,700 shares with a value of $85,577 was made to the Employee
Stock Ownership Plan in December 1999.
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of $.001 par value preferred
stock. None of the preferred stock was issued or outstanding at December 31,
2000.
WARRANTS
In February 1997, the Company issued 500,000 warrants in connection with a
$1,250,000 private placement offering. During 1998, 30,000 warrants were
exercised for a total consideration of $105,000 and in 1999, the remaining
470,000 warrants were purchased by the Company for cash of $1,175,000.
61
11. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
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. These warrants are entitled to
certain registration rights.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 2000, the Company had reserved 1,719,901 shares of common stock
for future issuance, including 595,199 shares reserved for exercise of warrants
and debentures and 1,124,702 shares reserved under the Company's stock option
plans.
STOCK OPTION PLANS
In September 1997, the Board of Directors consolidated its previous three stock
option plans into one plan and established the Amended 1993 Stock Option Plan
(the "1993 Plan"). Under the 1993 Plan, 600,000 shares of common stock were
authorized for issuance, subject to adjustment for such matters as stock splits
and stock dividends.
The 1993 Plan provides for the grant of incentive stock options, stock
appreciation rights, and stock awards to eligible participants and may be
administered by the Board of Directors or by the Compensation Committee.
All options granted under the 1993 Plan expire after five to seven years from
the grant date and become exercisable no later than four years from the grant
date.
During 1999, the Board of Directors established the 1999 Stock Option Plan (the
"1999 Plan"), which was ratified by shareholders in June 1999. The 1999 Plan
authorized 600,000 shares of common stock for issuance, subject to adjustment
for such matters as stock splits and stock dividends.
The 1999 Plan provides for the grant of incentive stock options, stock
appreciation rights, and stock awards to eligible participants and may be
administered by the Board of Directors or by the Compensation Committee.
All options granted under the 1999 Plan expire after five to ten years from the
grant date and become exercisable either immediately or up to six years from the
grant date.
62
11. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS PLANS (CONTINUED)
A summary of stock option activity for both plans, and related information for
the years ended December 31, 1998, 1999 and 2000 follows:
OUTSTANDING STOCK OPTIONS
SHARES ------------------------------------ WEIGHTED-
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
-------------------------------- --------------------------------------
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
Additional authorization 600,000 - - -
Options granted (331,000) 331,000 4.88-5.00 4.98
Options exercised - (1,850) 2.50-5.00 3.34
Options canceled 19,750 (19,750) 2.50-5.00 4.71
-------------------------------- --------------------------------------
Balance at December 31, 1999 439,950 704,040 2.50-5.00 4.80
Options granted (322,000) 322,000 4.75-7.00 4.77
Options exercised - (19,338) 2.50-5.00 3.99
Options canceled 96,067 (96,017) 3.50-5.25 4.98
-------------------------------- --------------------------------------
Balance at December 31, 2000 214,017 910,685 $2.50-7.00 $4.84
================================ ======================================
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 1998, 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 2000, 1999, and 1998,
respectively: risk-free interest rate of 5.3%, 4.7% and 5.3%; dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of .85, .68, and .88; and a weighted-average expected life of the option
of 3.5, 3.6, and 4 years. The estimated weighted average fair value of options
granted in the years ended December 31, 2000, 1999 and 1998 were $2.85, $2.53
and $3.29, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
63
11. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. Because the effect of SFAS No.
123 is prospective, the initial impact on pro forma net income may not be
representative of compensation expense in future years.
For the years ended December 31, 2000, 1999, and 1998, pro forma net income
(loss) and pro forma net income (loss) per common share were as follows:
2000 1999 1998
-------- ---------- ---------
Pro forma net income (loss) $415,505 $1,072,713 $(96,762)
Pro forma basic net income per common share .12 .31 (.03)
Pro forma diluted net income per common share .11 .31 (.03)
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, 2000:
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
- ----------------- ---------------------------------- ----------------- ----------------- ---------------
$2.50-3.85 40,000 1.10 YEARS $3.58 40,000 $3.58
4.50-7.00 870,685 4.55 YEARS 4.90 307,630 4.98
- ----------------- ---------------------------------- ----------------- ----------------- ---------------
$2.5-7.00 910,685 4.40 YEARS $4.84 347,630 $4.82
================= ================================== ================= ================= ===============
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.
64
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
BANK LINE OF CREDIT, CONVERTIBLE DEBT AND INDUSTRIAL DEVELOPMENT BOND: The
fair values of the Company's bank line of credit and 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:
2000 1999
----------------------------------------------------------------------
CARRYING AMOUNT FAIR CARRYING AMOUNT FAIR
VALUE VALUE
----------------- ---------------------------------- -----------------
Cash and cash equivalents $ 327,157 $ 327,157 $3,383,544 $3,383,544
Marketable securities:
Trading securities - - 302,500 302,500
Available-for-sale securities 1,065,275 1,065,275 2,922,317 2,922,317
Bank line of credit 5,936,995 5,936,995 1,613,453 1,613,453
Convertible debt 5,447,188 5,348,414 5,470,000 5,378,376
Industrial development bond 1,700,000 1,700,000 1,800,000 1,800,000
13. MAJOR CUSTOMERS
Sales to major customers for the years ended December 31, 2000, 1999 and 1998
are summarized as follows (percent of product sales):
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
----------------- ---------------- -----------------
Customer A *% *% 16%
Customer B 10% 13% 15%
Customer C *% *% 13%
Customer D 14% *% *%
----------------- ---------------- -----------------
24% 13% 44%
================= ================ =================
- -----------------
* 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 paid $10,000 per month for two years. The agreement expired in April
1999.
In addition, these certain stockholders were granted the right to appoint one
member to the Company's Board of Directors. These stockholders exercised this
right with their nomination of Kirk Blosch in June 1998. Mr. Blosch resigned
from the Board in November 2000. At that time, these stockholders did not
exercise their right to appoint another member to the Company's Board of
Directors.
65
14. RELATED PARTY TRANSACTIONS (CONTINUED)
Of the 470,000 warrants purchased by the Company in 1999 (see Note 11), 350,000
were purchased from a related party for $875,000.
On December 31, 1998, the Company acquired JTech pursuant to a Stock Purchase
Agreement among the Company and the four shareholders of JTech (the "JTech Stock
Purchase"). Leonard C. Smith, one of the selling JTech shareholders, received
$1,311,188 in cash and a convertible debenture in connection with the JTech
Stock Purchase. The convertible debenture, in the principal amount of $1,363,594
(inclusive of the 1999 earn-out provision) is due January 6, 2002 and is
convertible to common stock at Mr. Smith's option during the period from January
6, 2000 to January 6, 2002 at $11 per share.
JTech also entered into an Employment Agreement with Leonard C. Smith, dated
December 31, 1998, which provides that Mr. Smith serve as President of JTech for
three years at a salary of $100,000 per year. Pursuant to the employment
agreement, Mr. Smith also received an option to purchase 40,000 shares of the
Company's common stock, vesting over four years, at $5.00 per share, the closing
price of such stock on Nasdaq on the date of the JTech Stock Purchase. Mr. Smith
was appointed to fill a vacancy on the Company's Board of Directors, effective
April 26, 1999. Mr. Smith's term on the Board will expire at the 2001 annual
meeting of shareholders, but is subject to extension based upon election. On
September 1, 2000, Mr. Smith was also appointed to serve as President of ZEVEX
International, Inc. and of ZEVEX, Inc.
66