<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1997
REGISTRATION NO. 333-37189
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ZEVEX INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 3845 87-0462807
STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4314 ZEVEX PARK LANE, SALT LAKE CITY, UTAH 84123 (801) 264-1001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DEAN G. CONSTANTINE, CHIEF EXECUTIVE OFFICER
4314 ZEVEX PARK LANE, SALT LAKE CITY, UTAH 84123 (801) 264-1001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
<S> <C>
RONALD S. POELMAN, ESQ. JAMES SHNELL, ESQ.
JONES, WALDO, HOLBROOK & MCDONOUGH RIORDAN & MCKINZIE
1500 WELLS FARGO PLAZA 695 TOWN CENTER DR.
170 SOUTH MAIN STREET SUITE 1500
SALT LAKE CITY, UTAH 84101-1644 COSTA MESA, CALIFORNIA 92626
(801) 521-3200 (714) 433-2900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as possible after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================
TITLE OF SECURITIES AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock.................. 1,830,000(2) $16.4375 $30,080,625 $9,116
======================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(a), solely for the purpose of computing the
registration fee.
(2) Includes the 238,500 shares of Common Stock which may be issued upon
exercise of an option granted to the underwriters to cover over-allotments.
Also, assumes that all of the warrants for the shares of Common Stock to be
offered hereby have been exercised.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED OCTOBER 24, 1997
PROSPECTUS
1,591,500 SHARES
ZEVEX INTERNATIONAL, INC.
COMMON STOCK
Of the 1,591,500 shares of Common Stock, par value $0.04 per share (the
"Common Stock"), offered hereby, 1,300,000 are being sold by ZEVEX
International, Inc. (the "Company") and 291,500 are being sold by certain
selling shareholders named herein (the "Selling Shareholders"). The shares of
Common Stock offered hereby are hereafter referred to as the "Shares" and the
offering of the Shares is hereafter referred to as the "Offering." The Company
will not receive any of the proceeds from the sale of Shares offered by the
Selling Shareholders. See "Principal and Selling Shareholders."
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "ZVX." The last reported sales price of the Common Stock, as reported
on the American Stock Exchange, on October 22, 1997 was $15.625.
------------------------
THE PURCHASE OF THE SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS IN THIS OFFERING.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=====================================================================================================
UNDERWRITING
DISCOUNT PROCEEDS
AND PROCEEDS TO TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
- -----------------------------------------------------------------------------------------------------
Per Share..........................
- -----------------------------------------------------------------------------------------------------
Total (4)..........................
=====================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. The Company has also agreed to issue to Wedbush Morgan Securities,
Inc., and EVEREN Securities, Inc. the representatives of the Underwriters
(the "Representatives"), a five-year warrant to purchase 100,000 shares of
Common Stock at 120% of the price of the Shares sold in this Offering. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company, which are
estimated to be $435,000.
(3) Certain of the Selling Shareholders will receive proceeds from the sale of
261,500 Shares acquired upon the exercise of warrants at $3.50 per share or
an aggregate exercise price of $915,250, which amount will be paid to the
Company. For these warrant holders, the proceeds, after reduction for the
exercise price, will be $ per share and $ in total. See "Principal
and Selling Shareholders" and "Underwriting."
(4) Certain of the Selling Shareholders have granted the Underwriters a 45-day
option to purchase up to 238,500 additional shares of Common Stock on the
same terms and conditions as set forth above solely to cover
over-allotments, if any. If such option is exercised in full the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to Company, and
Proceeds to the Selling Shareholders will be $ , $ ,
$ , and $ , respectively. The proceeds to the Selling
Shareholders include proceeds to certain Selling Shareholders from the sale
of 500,000 Shares acquired upon the exercise of warrants at $3.50 per share
or an aggregate price of $1,750,000, which amount will be paid to the
Company. For these warrant holders, the proceeds, after reduction for the
exercise price, will be $ per share and $ in total. See "Principal
and Selling Shareholders" and "Underwriting."
------------------------
The Shares are being offered by the several Underwriters named herein,
subject to prior sale, when, as, and if accepted by them, and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel, or modify
such offer and to reject orders in whole or in part. It is expected that the
certificates for the Shares will be available for delivery at the offices of
Wedbush Morgan Securities Inc., 1000 Wilshire Boulevard, Los Angeles,
California, on or about , 1997.
------------------------
WEDBUSH MORGAN SECURITIES EVEREN SECURITIES, INC.
The date of this Prospectus is , 1997
<PAGE> 3
[PHOTOGRAPH OF PHOTON PHACOEMULSIFICATION SYSTEM]
[PHOTOGRAPH OF ENTERALITE(R) AMBULATORY ENTERAL FEEDING PUMP]
[PHOTOGRAPH OF SURGICAL HANDPIECES]
[PHOTOGRAPH OF AIR BUBBLE DETECTORS]
[PHOTOGRAPH OF LIQUID LEVEL DETECTORS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
THE EXERCISE OF OVER-ALLOTMENT OPTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------------
This Prospectus includes trade names, trademarks, and registered trademarks of
companies other than ZEVEX.
<PAGE> 4
PROSPECTUS SUMMARY
ZEVEX International, Inc. is the issuer of the shares of Common Stock (the
"Shares") offered in this Prospectus (the "Offering"). Throughout this
Prospectus, ZEVEX International, Inc. and its wholly owned subsidiary, ZEVEX,
Inc., are for convenience collectively referred to as "ZEVEX" or the "Company."
THE COMPANY
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies. The Company's design and manufacturing service
customers are 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 applies its extensive engineering and regulatory
expertise, developed over its 11-year history, to provide its customers with
integrated solutions to the design and manufacture of their medical devices. The
Company has grown steadily, achieving 1996 total revenues of $5,663,733 and net
income of $345,577. Since 1994, the Company's compound annual revenue growth
rate has been approximately 30%. During the first nine months of 1997, the
Company's revenues grew to $6,311,490, approximately a 63% increase over the
comparable period of the prior year. Today, the Company designs and manufactures
over 100 different medical devices for more than 50 different established and
emerging medical technology companies, such as Alaris Medical Systems, Inc.
(formerly IVAC), Allergan, Paradigm Medical Industries, Inc., various divisions
of Baxter Healthcare Corporation, Mentor Corporation, SIMS Deltec, Inc., Staar
Surgical Company, and 3M Company Healthcare.
The Company's strategy is to augment the continuing growth in its design
and manufacturing service business with the development and commercialization of
proprietary products which utilize the Company's technologies or engineering
expertise or which are complementary to the Company's existing proprietary
products. The Company has successfully applied its engineering and regulatory
expertise to the development, commercialization, and marketing of EnteraLite(R),
the Company's proprietary Ambulatory Enteral Feeding Pump for patients who must
receive direct gastrointestinal nutritional therapy. Historically the Company
has designed and manufactured medical devices utilizing its core competency in
ultrasound technology; however the Company has a wide range of engineering
expertise. The Company's objective is to leverage its engineering and regulatory
expertise to further expand its business as a designer and manufacturer of a
wide variety of customized medical devices for medical technology companies, as
well as a designer, manufacturer, and marketer of a variety of its own
proprietary products. To accomplish this, management intends to do the
following:
- Increase the variety of medical devices and systems that the Company
designs and manufactures for its existing customers
- Expand the number of medical technology companies for which the Company
provides design and manufacturing services
- Increase sales of the Company's EnteraLite(R) Ambulatory Enteral Feeding
Pump
- Leverage the Company's design, manufacturing, and regulatory expertise to
develop new proprietary products
- Acquire other proprietary technologies, products, or manufacturing firms
similar or complementary to the Company's existing business
Management believes that this two-pronged strategy in the $30 billion medical
technology marketplace may allow the Company to benefit from the increasing
demand for design and manufacturing of medical devices and systems, as well as
from the sale of the Company's own proprietary medical devices.
Management of the Company believes that advances in technology, increasing
regulatory complexity and intensified competition will lead many medical
technology companies to expand their out-sourcing of design
3
<PAGE> 5
and manufacturing services in order to be more efficient. Many emerging medical
technology companies simply do not have the engineering, manufacturing, and
regulatory expertise necessary to quickly and efficiently bring a medical device
from the concept stage to commercial use. Even larger, well-established medical
technology companies, which may have the capital resources to develop such
expertise, may lack the required expertise or the time to accumulate such
expertise in order to meet the market demand for their particular device.
Moreover, in some instances, these medical technology companies may simply elect
not to devote their resources to the design and manufacture of their medical
devices or systems, including obtaining and maintaining the necessary regulatory
approvals and industry certifications for their manufacturing facilities.
Management believes that the Company is well positioned to benefit from this
increasing trend towards out-sourcing. Specifically, the Company may often times
be able to profitably design and manufacture medical devices or systems more
quickly, at a lower cost, and with higher quality than its medical technology
customers are able to achieve.
The Company offers its design and manufacturing customers the following
advantages:
- Broad Experience With Numerous Medical Devices. Over its 11-year history,
the Company has manufactured numerous advanced medical devices, including
surgical systems, device components, and sensors.
- Extensive Expertise. As a result of its broad experience, the Company has
developed extensive expertise in addressing the product design,
engineering, manufacturing, and regulatory issues associated with a
variety of medical devices.
- Generally Lower Cost and Higher Quality. The Company provides a wide
range of engineering services and has the capability to provide complete
device or system design, including engineering, component analysis,
testing, and regulatory compliance. The Company strives to increase the
quality and lower the overall cost of the devices or systems that it
manufactures for its customers by integrating design and engineering work
with manufacturing processes, materials acquisitions, quality issues, and
regulatory considerations.
- Rapid Product Development. The Company believes that, with its
engineering and manufacturing capabilities, it can develop and
commercialize new products more rapidly than its customers can, which
otherwise must expend significant time and financial resources to develop
internal engineering expertise and qualified manufacturing facilities.
- Regulatory Compliance. The Company is ISO 9001 and EN 46001 certified,
and the Company has developed internal systems intended to maintain
compliance with the FDA's GMP requirements. The Company devotes
significant management time and financial resources to GMP compliance and
ISO certification. By using the Company's manufacturing services,
customers relieve themselves of many stringent regulatory and industry
certification requirements.
- Production Flexibility. The Company's broad customer base permits it to
offer its customers production flexibility, which enables customers to
implement product enhancements and to adjust production volumes in
response to fluctuations in market demand.
The Company is located at 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123.
The Company's telephone number is (801) 264-1001. The Company is currently
incorporated in the State of Nevada, although the Company intends to
reincorporate in Delaware in the near future. ZEVEX International, Inc.,
conducts all its operations through its wholly owned subsidiary, ZEVEX, Inc.
ZEVEX, Inc. is currently incorporated in the State of Utah, although the Company
intends also to cause ZEVEX, Inc. to be reincorporated in Delaware in the near
future.
4
<PAGE> 6
THE OFFERING
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Common Stock offered by the Company
and Selling Shareholders(1)........ 1,591,500 shares
Common Stock outstanding after this
Offering(2)........................ 3,625,326 shares
Use of proceeds.................... Expansion of current design and manufacturing services
for existing and new customers; marketing of the
EnteraLite(R) Ambulatory Enteral Feeding Pump;
establishment of higher volume manufacturing capability
associated with EnteraLite(R)-related products;
development of proprietary products; research and
development programs; possible acquisition of other
medical products and technologies; possible acquisition
of other design and manufacturing service firms. See
"USE OF PROCEEDS."
AMEX symbol........................ ZVX
</TABLE>
- ---------------
(1) Includes 1,300,000 shares being sold by the Company and 291,500 shares being
sold by the Selling Shareholders. Of these 291,500 shares, 30,000 shares
will be sold by certain members of the Company management and 261,500 shares
will be sold by the remaining Selling Shareholders. These 261,500 shares are
currently held in the form of warrants, which will be sold by these Selling
Shareholders to the Underwriters. The Underwriters will exercise these
warrants and sell the acquired shares in this Offering. See "PRINCIPAL AND
SELLING SHAREHOLDERS" and "UNDERWRITING."
(2) Based on shares outstanding as of September 30, 1997. Excludes 100,000
shares of Common Stock issuable upon the exercise of warrants issued to the
Representatives of the Underwriters in connection with the Offering at a
price of 120% of the price of the Shares sold in the Offering. See
"UNDERWRITING." Also, excludes 314,190 shares of Common Stock issuable upon
exercise of options granted and outstanding pursuant to the Company's
Amended 1993 Stock Option Plan at a weighted-average exercise price of
$12.37 per share. See "DESCRIPTION OF CAPITAL STOCK -- Stock Options." Also
excludes 238,500 shares of Common Stock issuable upon the exercise of
certain warrants that will be acquired and exercised by the Underwriters
upon the exercise of the over-allotment option in this Offering. See
"UNDERWRITING."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS
------------------------------------------ ENDED SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $2,436 $3,116 $3,333 $5,296 $5,664 $ 3,878 $6,311
Cost of sales........................... 1,357 1,600 2,017 3,066 2,936 2,122 3,475
Gross profit............................ 1,079 1,516 1,316 2,230 2,728 1,756 2,836
Operating expenses:
Selling, general, and
administrative..................... 630 776 1,024 1,325 1,892 1,215 1,727
Research and development.............. 194 199 419 502 528 360 522
Operating income (loss)................. 255 541 (127) 403 308 181 587
Net income (loss)....................... 190 381 (24) 317 346 143 411
Net income (loss) per share............. $ .20 $ .36 $ (.02) $ .24 $ .25 $ .10 $ .18
Weighted-average number of common and
common equivalent shares
outstanding(1)........................ 938 1,060 1,131 1,306 1,389 1,366 2,316
</TABLE>
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<CAPTION>
SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 136 $ 18,858
Working capital.................................... 3,588 23,010
Total assets....................................... 9,814 28,536
Revolving credit facility.......................... 700 --
Industrial development bond........................ 2,000 2,000
Stockholders' equity............................... 5,611 25,033
</TABLE>
- ---------------
(1) See note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
(2) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock by
the Company in this Offering at an assumed price of $15.625 per share, less
estimated underwriting discounts and expenses of this Offering, the receipt
by the Company of $915,250 upon the exercise of outstanding warrants to
purchase 261,500 shares of Common Stock by the Selling Shareholders, and the
application of the estimated net proceeds therefrom. Does not include the
exercise of the Underwriters' over-allotment option in this Offering to
acquire 238,500 shares or the receipt by the Company of $834,750 upon
exercise of the warrants to acquire those shares. See "USE OF PROCEEDS" and
"UNDERWRITING."
6
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Shares should consider carefully the risk
factors set forth below, in addition to the other information contained in this
Prospectus, before making a decision to purchase the Shares. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements as a
result of certain factors, including those set forth in the following "Risk
Factors" and elsewhere in this Prospectus. In each instance in which a risk
factor identifies an event that would or could adversely affect the Company,
such risk should be viewed as potentially adversely affecting the Company's
business, results of operations, and financial position.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's revenues historically have been, and for a substantial period
of time in the future likely will be, largely derived from the sale of its
design and manufacturing services to a small number of major customers. During
the 1993, 1994, and 1995 fiscal years, the Company had two major customers,
Allergan and Alaris Medical Systems, Inc. (formerly IVAC Corporation), who
together accounted for more than 50% of the Company's sales. In 1996, these two
customers plus a third customer, Paradigm Medical Inc., accounted for
approximately 66% of sales. These three customers each accounted for more than
ten percent of the Company's total sales in 1996. During the first nine months
of the 1997 fiscal year, 14% of sales were from Allergan, 21% of sales were from
Paradigm, 20% of sales were from Alaris, and 12% of sales were from Mentor
Corporation. No assurances can be given that such customers will continue to do
business with the Company or that the volume of their orders for the Company's
devices will increase or remain constant. The loss of any of such major
customers, or a significant reduction in the volume of their orders for the
Company's devices, will have a material adverse impact on the Company's
operations. In addition, if one or more of these customers were to seek and
obtain price discounts from the Company for the Company's devices, the resulting
lower gross margins on those devices would have a material 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 material adverse effect on the Company's results of
operations and financial condition. See "BUSINESS -- Significant Customers for
Which ZEVEX Provides Design and Manufacturing Services."
RISK FACTORS RELATING TO THE COMPANY'S CUSTOMERS
At the present time, and for a substantial period of time in the future,
the Company's success will depend largely on the success of the customers for
its manufacturing services and on the medical 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. 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 products industry is highly
competitive and subject to significant technological change. Participation in
the industry requires ongoing investment to keep pace with technological
developments and quality and regulatory requirements. The medical products
industry consists 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
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<PAGE> 9
customers' technology and products obsolete or noncompetitive. In addition,
other competitors may develop alternative treatments or cures so that the need
for the products manufactured by the Company could be reduced or eliminated. See
"BUSINESS -- Overview of Medical Technology Industry."
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 five customers, representing 15% of
the Company's revenues in fiscal year 1996, were, in management's opinion,
emerging medical technology companies. These customers may not be successful in
launching and marketing their products, or may not respond to pricing,
marketing, or other competitive pressures or the rapid technological innovation
demanded by the marketplace and, as a result, may experience a significant drop
in product revenues which would have a material adverse effect on the Company's
business, results of operations, and financial condition. See
"BUSINESS -- Overview of Medical Technology Industry."
Customer Regulatory Compliance. The Food and Drug Administration (the
"FDA") regulates many of the devices manufactured by the Company under the
Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), which requires
certain clearances from the FDA before new medical products can be marketed. As
a prerequisite to any introduction of a new device into the medical marketplace,
the Company's customers must obtain necessary product clearances from the FDA or
other regulatory agencies with applicable jurisdiction. There can be no
assurance that the Company's customers will obtain such clearances on a timely
basis, if at all.
Certain medical devices manufactured by the Company may be subject to the
need to obtain FDA clearance of an application for premarket approval ("PMA"),
which requires substantial preclinical and clinical testing and may cause delays
and prevent introduction of such devices. Currently, at least two of the
Company's customers are seeking or plan to seek such PMA clearances for devices
to be manufactured by the Company. Other devices can be marketed without a PMA,
but only by establishing in a 510(k) premarket notification "substantial
equivalence" to a predicate device. FDA clearance to market regulations depend
heavily on administrative interpretations, which may change retroactively and
may create additional barriers that prevent or delay the introduction of a
product. The process of obtaining a PMA or a 510(k) clearance could delay the
introduction of a product. A PMA for a product could be denied altogether if
clinical testing does not establish that the product is safe and effective. A
510(k) premarket notification may also need to contain clinical data. Clinical
testing must be performed in accordance with the FDA's regulations. 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 customer 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. Additionally, once FDA clearance is obtained, a new
clearance in the form of a PMA supplement may be needed to modify the device,
its intended use, or its manufacturing. There can be no assurance that product
recalls, product defects, or modification or loss of necessary regulatory
clearance will not occur in the future. The delays and potential product
cancellations inherent in the development, regulatory clearance,
commercialization, and ongoing regulatory compliance of products manufactured by
the Company for its customers may have a material adverse effect on the
Company's business, reputation, results of operations, and financial condition.
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. For medical products
exported to countries in Europe, the Company anticipates that its
8
<PAGE> 10
customers will want their products to qualify for distribution under the "CE
Mark." The CE Mark is a designation given to products which comply with certain
European Economic Area policy directives and therefore may be freely traded in
almost every European country. Commencing in 1998, medical product manufacturers
will be required to obtain certifications necessary to enable the CE Mark to be
affixed to medical products they manufacture for sale throughout the European
Community. In addition, the Company's customers must comply with other laws
generally applicable to foreign trade, including technology export restrictions,
tariffs, and other regulatory barriers. There can be no assurance that the
Company's customers will obtain all required clearances or approvals for
exported products on a timely basis, if at all. Failure or delay by the
Company's customers in obtaining the requisite regulatory approvals for exported
instruments manufactured by the Company may have a material adverse effect on
the Company's business, results of operations, and financial condition.
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. Regulatory requirements may include significant limitations on the
indicated uses for which the product may be marketed. 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, which could have a material adverse effect on the Company's
business, the results of operations, and financial condition.
Changes in existing laws and regulations or policies could affect adversely
the ability of the Company's customers to comply with regulatory requirements.
Failure to comply with regulatory requirements could have a material adverse
effect on the customer's business, results of operations, and financial
condition, which, in turn, could affect adversely the Company's business,
results of operations, and financial condition. 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, or that compliance with such laws and regulations will not have a
material adverse effect on the Company's business, results of operations, and
financial condition. See "BUSINESS--Governmental Regulation Within the United
States" and "-- Governmental Regulations Outside the United States."
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 and market share among physicians and other health care providers,
patients, or health care payors, even if required regulatory approvals are
obtained. Market acceptance may depend on a variety of factors, including
educating health care providers regarding the use of a new product or procedure,
overcoming objections to certain effects of the product or its related treatment
regimen, and convincing health care payors that the benefits of the product and
its related treatment regimen outweigh its costs. Market acceptance and market
share are also affected by the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company's customers can
develop products, gain regulatory approval and reimbursement acceptance, and
supply commercial quantities of the product to the market are expected to be
important factors in market acceptance and market share. Some of the Company's
customers, especially emerging medical 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. The failure by the Company's
customers to gain market acceptance of their products could have a material
adverse effect on the Company's business, results of operations, and financial
conditions.
Product Obsolescence. The marketplace for medical products is characterized
by rapid change and technological innovation. As a result, the Company and its
customers are subject to the risk of product 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
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which a customer's product was designed is no longer an element of a generally
accepted diagnostic or treatment regimen. Any development adversely affecting
the market for a product manufactured by the Company would result in the
Company's having to reduce production volumes or to discontinue manufacturing
the product, which could have a material adverse effect on the Company's
business, results of operations, and financial condition. See
"BUSINESS -- Overview of Medical Technology Industry."
Customers' Future Capital Requirements. Certain 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. Depending on the significance of a
customer's product to the Company's revenues or profitability, any adverse
effect on a customer resulting from insufficient funding could result in a
material adverse effect on the Company's business, results of operations, and
financial condition.
Uncertainty of Third-Party Reimbursement. Sales of many of the devices
manufactured by the Company will be dependent in part on availability of
adequate reimbursement for those instruments from third-party health care
payors, such as government and private insurance plans, health maintenance
organizations, and preferred provider organizations. Third-party payors 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 payors, the market for the products of
the Company's customers may be limited.
Nonmedical Customers. While the Company presently does not have any
significant nonmedical customers, the Company may in the future perform
significant design and manufacturing work for such parties. Nonmedical customers
are subject to general business risks, such as competition, market acceptance of
their products, capital requirements, and credit risks. The Company's future
nonmedical customers may operate in highly competitive industries in which their
products compete on price, quality, and product enhancements and are subject to
risks of technological obsolescence. As a result, sales to nonmedical customers
may be volatile and subject to risks of cancellation. Any unfavorable
development experienced by such future nonmedical customers, whether of a
general nature or a specific risk not anticipated by the Company, could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
UNCERTAINTY OF MARKET ACCEPTANCE OF OUT-SOURCING MANUFACTURING OF MEDICAL
INSTRUMENTS
The Company believes that the market for out-sourcing the design and
manufacture of advanced medical products for medical technology companies is in
its early stages. Many of the Company's potential customers have internal design
and manufacturing facilities. The Company's engineering and manufacturing
activities require that customers provide the Company with access to their
proprietary technology and relinquish the control associated with internal
engineering and manufacturing. As a result, potential customers may decide that
the risks of out-sourcing engineering or manufacturing are too great or exceed
the anticipated benefits of out-sourcing. In addition, medical technology
companies that have previously made substantial investments to establish design
and manufacturing capabilities may be reluctant to out-source those functions.
If the medical technology industry generally, or any significant existing or
potential customer, concludes that the disadvantages of out-sourcing
manufacturing outweigh the advantages, the Company could suffer a substantial
reduction in the size of one or more of its current target markets, which could
have a material adverse effect on its business, results of operations, and
financial condition.
COMPETITION IN OUT-SOURCING MANUFACTURING OF MEDICAL INSTRUMENTS
The Company faces competition from design firms and other manufacturers
that operate in the medical technology industry. Many competitors have
substantially greater financial, research, and development
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resources than the Company. Also, manufacturers focusing in other industries may
decide to enter into the medical technology industry. Competition from any of
the foregoing sources could place pressure on the Company to accept lower
margins on its contracts or lose existing or potential business, which could
result in a material adverse effect on the Company's business, results of
operations, and financial condition. To remain competitive, the Company must
continue to provide and develop technologically advanced manufacturing services,
maintain quality levels, 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. See "BUSINESS -- Competition for ZEVEX's Design and
Manufacturing Services."
EARLY TERMINATION OF AGREEMENTS
The Company's agreements with major customers generally permit the
termination of the agreements before expiration thereof if certain events occur
that are materially adverse to the design, development, manufacture or sale of
the product. Examples of such events include the failure to obtain or the
withdrawal of regulatory clearance, or an alteration of regulatory clearance
that is materially adverse to the customer or which prohibits or interferes with
the manufacture or sale of the products. The performance of agreements with
major customers may be suspended or excused if certain conditions, generally
beyond the control of the customer or the Company (so-called force majeure
events), cause the failure or delay of performance. Such early termination could
have a material adverse affect on the Company's business, results of operations,
and financial condition, including in certain instances the transfer of
manufacturing know-how to the customer.
RISK FACTORS IN MARKETING THE COMPANY'S PROPRIETARY PRODUCTS
In producing and marketing its own proprietary devices, the Company faces
many of the same risks that its design/manufacturing customers face. As
discussed above with respect to its customers, such risks include:
- The medical products industry is highly competitive. A significant number
of the Company's competitors have substantially greater capital
resources, research and development staffs, and facilities, and
substantially greater experience in developing new products, obtaining
regulatory approvals, and manufacturing and marketing medical products.
Competitors may succeed in marketing products preferable to the Company's
products or rendering the Company's products obsolete.
- The medical products industry is subject to significant technological
change and requires ongoing investment to keep pace with technological
development, quality, and regulatory requirements. In order to compete in
this marketplace, the Company will be required to make ongoing investment
in research and development with respect to its existing and future
products.
- The Company is subject to substantial risks involved in developing and
marketing 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 affect adversely the ability of
the Company to comply with regulatory requirements. The delays and
potential product cancellations inherent in obtaining regulatory approval
and maintaining regulatory compliance of products manufactured by the
Company may have a material adverse effect on the Company's business,
reputation, results of operations, and financial condition.
- There can be no assurance that the Company's products will gain any
significant market acceptance among physicians and other health care
providers, patients, or health care payors, even if required regulatory
approvals are obtained.
- Revenues for many of the devices manufactured by the Company may be
dependent in part on availability of adequate reimbursement for those
devices from third-party health care payors, such as government and
private insurance plans. There is no assurance that the levels of
reimbursements
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offered by third-party payors will be sufficient to achieve market
acceptance of the Company's products.
The Company may not be successful in launching and marketing its own
proprietary devices, 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 its product
revenues, which could have a material adverse effect on the Company's business,
results of operations, and financial condition. See "BUSINESS -- Overview of
Medical Technology Industry."
REGULATORY COMPLIANCE FOR MANUFACTURING FACILITIES
Applicable law requires that the Company comply with the FDA's detailed
good manufacturing practices ("GMP") regulations for the manufacture of medical
devices. The FDA monitors compliance with its GMP regulations by subjecting
medical product manufacturers to periodic FDA inspections of their manufacturing
facilities. To ensure compliance with GMP requirements, the Company expends
significant time, resources, and effort in the areas of training, production,
and quality assurance. In addition, the FDA typically inspects a manufacturer of
a PMA device before approving a PMA. The failure to pass such an inspection
could result in delay in approving a PMA. The Company is also subject to other
regulatory requirements and may need to submit reports to the FDA relating to
certain types of adverse events. Failure to comply with GMP regulations or other
applicable legal requirements can lead to warning letters, seizure of violative
products, injunctive actions brought by the U.S. government, and potential civil
or criminal liability on the part of the Company and of the 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. Any such actions could have a material
adverse effect on the willingness of customers and prospective customers to do
business with the Company. In order for the Company's instruments to be exported
and for the Company and its customers to be qualified to use the CE Mark for
sales into the European Economic Area, the Company maintains International
Organization for Standardization ("ISO") 9001/EN 46001 certification, which
subjects the Company's operations to periodic surveillance audits. The ultimate
regulatory risks present in manufacturing products for markets governed by these
standards are currently substantially similar to those posed by GMP regulations.
There can be no assurance 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. Any such noncompliance or increased cost of
compliance could have a material adverse effect on the Company's business,
results of operations, and financial condition.
The Company is also subject to numerous federal, state, and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. While the Company has not been the subject of
any material proceeding concerning such laws, and believes it is currently in
compliance with such laws in all material respects, there can be no assurance
that the Company will not be required to incur significant costs to comply with
such laws and regulations now or in the future, or that such laws or regulations
will not have a material adverse effect upon the Company's ability to do
business. Changes in existing requirements or adoption of new requirements or
policies could affect adversely the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, results of operations,
and financial condition. See "BUSINESS -- Governmental Regulation Within the
United States" and "-- Governmental Regulations Outside the United States."
PRODUCT DEVELOPMENT
The success of the Company will depend to a significant extent upon its
ability to enhance and expand on its current offering of proprietary products
and to develop and introduce additional innovative products that gain market
acceptance. While the Company maintains research and development programs and
has established a Technical Advisory Board to assist it, there is no assurance
that the Company will be successful in selecting, developing, manufacturing, and
marketing new products or enhancing its existing products on a
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timely or cost-effective basis. Moreover, the Company may encounter technical
problems in connection with its efforts to develop or introduce new products or
product enhancements. Some of the devices currently under consideration by the
Company (as well as devices of some of its customers) will require significant
additional development, pre-clinical testing and clinical trials and related
investment prior to their commercialization. There can be no assurance that such
devices will be successfully developed, prove to be safe or efficacious in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable costs, or be successfully
marketed. The failure of the Company to develop or introduce new products or
product enhancements that achieve market acceptance on a timely basis could have
a material adverse effect on the Company's business, results of operations, and
financial condition.
DESIGN AND MANUFACTURING PROCESS RISKS
While the Company has substantial experience in designing and manufacturing
devices, the Company may still experience technical difficulties and delays with
the design and manufacturing of its or its customer's products. Such
difficulties could cause significant delays in the Company's production of
products and have a material adverse effect on the Company's revenues. 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 cancelled if purchase orders thereunder are
not completed when due. Potential difficulties in the design and manufacturing
process that could be experienced by the Company include difficulty in meeting
required specifications, difficulty in achieving necessary manufacturing
efficiencies, and difficulties in obtaining materials on a timely basis. Such
design and manufacturing difficulties could have a material adverse effect on
the Company's business, results of operations, and financial condition.
EXPANSION OF MARKETING ACTIVITIES; LIMITED DISTRIBUTION
The Company currently has a limited domestic direct sales force consisting
of eight individuals, complemented by a network of independent manufacturing
representatives. The Company anticipates that it will need to increase its
marketing and sales capability significantly to more fully cover its target
markets, particularly as additional proprietary devices become commercially
available. There can be no assurance that the Company will be able to compete
effectively in attracting and retaining qualified sales personnel or independent
manufacturing representatives as needed. There can be no assurance that the
Company or its independent manufacturing representatives will be successful in
marketing or selling the Company's services and products. The Company's ability
to sell its devices in certain areas may depend on alliances with independent
manufacturing representatives. There can be no assurance that the Company will
be able to identify and obtain suitable independent manufacturing
representatives in desirable markets.
PRODUCT RECALLS
If a device that is designed or manufactured by the Company is found to be
defective, whether due to design or manufacturing defects, to improper use of
the product, or to other reasons, the device may need to be recalled, possibly
at the Company's expense. Furthermore, the adverse effect of a product recall on
the Company might not be limited to the cost of a recall. For example, a product
recall could cause a general investigation of the Company by applicable
regulatory authorities as well as cause other customers to review and
potentially terminate their relationships with the Company. Recalls, especially
if accompanied by unfavorable publicity or termination of customer contracts,
could result in substantial costs, loss of revenues, and a diminution of the
Company's reputation, each of which would have a material adverse effect on the
Company's business, results of operations, and financial condition.
RISK OF PRODUCT LIABILITY
The manufacture and sale of products, and especially medical products,
entails an inherent risk of product liability. The Company does maintain product
liability insurance with limits of $1 million per occurrence and $2 million in
the aggregate. There can be no assurance that such insurance is adequate to
cover potential claims or that the Company will be able to obtain product
liability insurance on acceptable terms in the future, or that any product
liability insurance subsequently obtained will provide adequate
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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. A successful claim brought against the Company in excess of its
insurance coverage, or any material claim for which insurance coverage was
denied or limited, could have material adverse effect on the Company's business,
results of operations, and financial condition. 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. Any substantial claim against the Company
under such warranties or indemnification could have a material adverse effect on
the Company's business, results of operations, and financial condition.
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 its three executive officers, Dean G.
Constantine, Chief Executive Officer and President, David J. McNally, Vice
President and Marketing Director, and Phillip L. McStotts, Chief Financial
Officer and Secretary/Treasurer. The Company must also attract and retain highly
qualified engineering, technical, and managerial personnel. Competition for such
personnel is intense, the available pool of qualified candidates is limited, and
there can be no assurance that the Company can attract and retain such
personnel. The loss of its key personnel could have a material adverse effect on
the Company's business, results of operations, and financial condition. None of
the Company's key personnel have an employment agreement with the Company. See
"MANAGEMENT." The Company carries key-man life insurance on the lives of its
Chief Executive Officer, Chief Financial Officer, and Vice President in the
amount of $500,000 each. No assurances can be given that such insurance would
provide adequate compensation to the Company in the event of the death of such
key employee.
PATENT PROTECTION
As of September 30, 1997, the Company held three U.S. patents and had
applied for seven additional U.S. patents on devices developed by the Company.
The Company has received Notices of Allowance from the U.S. Patent and Trademark
office with respect to four of these seven applications. There is no assurance
that the patent applications will issue. 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
Following this Offering, the current executive officers and directors of
the Company, together with those persons who are the beneficial owners of more
than 5% of the Company's Common Stock, will beneficially own or have voting
control over approximately 31% of the outstanding Common Stock (approximately
29% if the Underwriters' over-allotment option is exercised in full).
Accordingly, these individuals will have the ability to influence the election
of the Company's directors and most corporate actions. This concentration of
ownership, together with other provisions in the Company's charter and
applicable corporate law, may also have the effect of delaying, deterring, or
preventing a change in control of the Company. See "PRINCIPAL AND SELLING
SHAREHOLDERS."
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SUPPLIERS AND SHORTAGES OF COMPONENT PARTS
The Company relies on third-party suppliers for each of the component parts
used in manufacturing its customers' devices. Although component parts are
generally available from multiple suppliers, certain component parts may require
long lead times, and the Company may have to delay the manufacture of customer
devices from time to time due to the unavailability of certain component parts.
In addition, even if component parts are available from an alternative supplier,
the Company could experience additional delays in obtaining component parts if
the supplier has not met the Company's vendor qualifications. Component
shortages for a particular device may adversely affect the Company's ability to
satisfy customer orders for that device. Such shortages and extensions of
production schedules may delay the recognition of revenue by the Company and may
in some cases constitute a breach of a customer contract, which may have a
material adverse effect on the Company's business, results of operations, and
financial condition. 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 and the Company's business, results of operations, and financial
condition.
CUSTOMER CONFLICTS
The medical technology industry reflects vigorous competition among its
participants. As a result, its customers sometimes require the Company to enter
into noncompetition agreements that prevent the Company from manufacturing
instruments for its customers' competitors. For example, the Company has agreed
with one customer not to manufacture certain devices for laser cataract surgery
for any other customer or potential customer. Such restrictions generally apply
during the term of the customer's manufacturing contract and, in some instances,
for a period following termination of the contract. If the Company enters into a
noncompetition agreement, the Company may be adversely affected if its
customer's product is not successful and the Company must forgo an opportunity
to manufacture a successful instrument for such customer's competitor. Any
conflicts among its customers could prevent or deter the Company from obtaining
contracts to manufacture successful instruments, which could result in a
material adverse effect on its business, results of operations and financial
condition.
FUTURE CAPITAL REQUIREMENTS
The Company believes that the net proceeds of this offering, together with
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 three years (depending primarily on the Company's growth rate and its
results of operations). The commercialization of proprietary products, which is
an element of the Company's growth strategy, would require increased investment
in working capital and could therefore shorten this period. Thereafter, the
Company may be required to raise additional capital or increase its borrowing
capacity, or both. There can be no assurance that alternative sources of equity
or debt will be available in the future or, if available, will be on terms
acceptance to the Company. Any additional equity financing would result in
additional dilution to the Company's shareholders, including shareholders who
purchase Common Stock in this Offering. If adequate funds are not available, the
Company's business, results of operations, and financial condition could be
materially adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RELIANCE ON EFFICIENCY OF DISTRIBUTION AND THIRD PARTIES
The Company believes its financial performance is dependent in part on its
ability to provide prompt, accurate, and complete services to its customers on a
timely and competitive basis. Accordingly, delays in distribution in its
day-to-day operations or material increases in its costs of procuring and
delivering products could have an adverse effect on the Company's results of
operations. Any failure of either its computer operating system or its telephone
system could adversely affect its ability to receive and process customer's
orders and ship products on a timely basis. Strikes or other service
interruptions affecting Federal Express Corporation, United Parcel Service of
America, Inc., or other common carriers used by the Company to
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receive necessary components or other materials or to ship its products also
could impair the Company's ability to deliver products on a timely and
cost-effective basis.
VOLATILITY OF REVENUES AND PRODUCT MIX
The Company's annual and quarterly operating results are affected by a
number of factors, including the volume and timing of customer orders, which
vary due to (i) variation in demand for the customer's products as a result of,
among other things, product life cycles, competitive conditions, and general
economic conditions, (ii) the customer's attempt to balance its inventory, (iii)
the customer's need to adapt to changing regulatory conditions and requirements,
and (iv) changes in the customer's manufacturing strategy. Such results may also
be affected by technical difficulties and delays in the design and manufacturing
processes. The foregoing factors may cause fluctuations in revenues and
variations in product mix which could in turn cause fluctuations in the
Company's gross margin. Under the terms of the Company's contracts with many of
its customers, the customers have broad discretion to control the volume and
timing of product deliveries. Further, the Company's contracts with its
customers typically have no minimum purchase requirements. As a result,
production may be reduced or discontinued at any time. Therefore, it is
difficult for the Company to forecast the level of customer orders with
certainty, making it difficult to schedule production and maximize manufacturing
capacity. Other factors that may adversely affect the Company's annual and
quarterly results of operations include inexperience in manufacturing a
particular instrument, inventory shortages or obsolescence, labor costs or
shortages, low gross margins on design projects, an increase in design revenues
as a percentage of total revenues, price competition, and regulatory
requirements. Because the Company's business organization and its related cost
structure anticipate supporting a certain minimum level of revenues, the
Company's limited ability to adjust its short term cost structure would compound
the adverse effect of any significant revenue reduction. Any one of these
factors or a combination thereof could result in a material adverse effect on
the Company's business, results of operations, and financial condition.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY
To maintain the secrecy of its proprietary information, the Company relies
on a combination of trade secret laws and internal security procedures. The
Company typically requires its employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements. There can be no
assurance, however, that the common law, statutory, and contractual rights on
which the Company relies to protect its intellectual property and confidential
and proprietary information will provide it with adequate or meaningful
protection. Third parties may independently develop products, techniques, or
information which 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. Any of the foregoing
circumstances could have a material adverse effect on the Company's business,
results of operations, or financial condition.
LIMITED MARKET FOR COMMON STOCK
Historically, the market for the 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, the Company's Common Stock was listed for trading on
the American Stock Exchange, which may increase the market for the Common Stock.
No assurance can be given, however, that the market for the Common Stock will
continue or increase, or that the prices in such market will be maintained at
their present levels.
POSSIBLE VOLATILITY OF STOCK PRICE
Announcements of technological innovations for new commercial devices by
the Company or its competitors, developments concerning the Company's
proprietary rights, or the public concern as to safety of
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its devices may have a material adverse impact on the Company's business and on
the market price of the 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 the Common Stock may be volatile
and may fluctuate based on a number of factors, including significant
announcements by the Company and its competitors, quarterly fluctuations in the
Company's operating results, and general economic conditions and conditions in
the medical technology industry. In addition, in recent years the stock market
has experienced extreme price and volume fluctuations, which have had a
substantial effect on the market prices for many medical-technology companies
and are often unrelated to the operating performance of such companies.
ISSUANCE OF ADDITIONAL SHARES FOR ACQUISITION OR EXPANSION
Any future major acquisition or expansion of the Company may result in the
issuance of additional common shares or other stocks or instruments which 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
exchange.
DIVIDENDS
While the Company has declared one stock dividend in its history, it has
never paid a cash dividend and there can be no assurance that the Company will
pay a dividend on Common Stock in the future. Any future cash dividends will
depend on earnings, if any, the Company's financial requirements, and other
factors. The Company's management does not currently intend to pay any cash
dividends in the foreseeable future. Investors who anticipate the need of an
immediate income from their investment in the Common Stock should refrain from
the purchase of the Common Stock being offered hereby. Additionally, the Company
is restricted from declaring any cash dividends under its current line of credit
arrangement.
POSSIBLE RULE 144 SALES
The shares of Common Stock presently owned by management and certain other
shareholders are deemed to be "restricted securities" as such term is defined in
Rule 144 under the Securities Act of 1933, as amended. Rule 144 provides that a
person who has held restricted securities for one year may, within a three-month
period, sell in "brokers transactions" (as defined by the Rule) an amount equal
to the greater of one percent of the issuer's outstanding securities of such
class or the average weekly reported volume of trading in such securities during
the four calendar weeks preceding the sale, if the conditions specified by the
Rule are satisfied. If such person is not an "affiliate" of the issuer, as such
term is defined by Rule 144, he may, after a holding period of two years, sell
such restricted securities without a volume limitation. Future sales under Rule
144 may have a depressing effect on the market price of the shares of Common
Stock. Of the 3,625,326 shares outstanding following this Offering (not
including shares obtainable upon exercise of the Underwriters' over-allotment
option), 1,333,312 shares will be considered "restricted" stock, of which 26,202
will be eligible for sale under Rule 144 immediately following the Offering.
Beginning 180 days after the closing of this Offering, following the expiration
of certain lockup agreements 1,109,198 additional currently outstanding shares
of restricted Common Stock will be eligible for sale in the public market under
Rule 144. The remaining 197,912 shares of restricted Common Stock will be
eligible for sale from time to time thereafter pursuant to Rule 144. An
additional 314,190 shares of Common Stock issuable upon exercise of outstanding
stock options pursuant to the Company's Amended 1993 Stock Option Plan (the
"Option Shares") may become eligible for resale in the public market at various
times after the closing of the Offering. The Company intends to register the
Option Shares for resale in the public market following expiration of the lockup
period. See "SHARES ELIGIBLE FOR FUTURE SALE."
17
<PAGE> 19
BROAD DISCRETION WITH RESPECT TO ALLOCATION OF NET PROCEEDS
The Company intends to use the net proceeds of the Offering for working
capital and general corporate purposes, including the marketing of the Company's
EnteraLite(R) Ambulatory Enteral Feeding Pump and funding the growth in the
Company's manufacturing service business. Beyond those uses, if the opportunity
arises, the Company intends to acquire other medical technologies or products
that are similar to or complimentary to the Company's existing engineering
expertise or that readily can be sold through the Company's existing sales
channel. Furthermore, the Company may acquire other design and manufacturing
service firms. Accordingly, management will have significant flexibility in
applying the net proceeds of this Offering. Pending such uses, the Company
intends to invest the net proceeds in short-term interest-bearing,
investment-grade securities. See "USE OF PROCEEDS."
IMPACT OF ANTI-TAKEOVER MEASURES IN NEW DELAWARE CORPORATION; POSSIBLE ISSUANCE
OF PREFERRED STOCK; CLASSIFIED BOARD
The Company's Board of Directors and shareholders have approved the
reincorporation of the Company from Nevada to Delaware. The Company anticipates
that this reincorporation will be consummated in November, 1997. See
"Description of Capital Stock -- Delaware Reincorporation." Assuming that this
reincorporation is consummated, certain provisions of the Company's Certificate
of Incorporation and Bylaws and the Delaware General Corporation Law may have
the effect of preventing, discouraging, or delaying a change in the control of
the Company and may maintain the incumbency of the Board of Directors and
management. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
is authorized to fix the rights, preferences, privileges, and restrictions,
including voting rights, of unissued shares of the Company's Preferred Stock and
to issue such stock without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be subject to and
may be adversely affected by the rights of the holders of any Preferred Stock
that may be created and issued in the future. In addition, stockholders do not
have the right to cumulative voting for the election of directors. Furthermore,
the Company's Certificate and Bylaws provide for a staggered board whereby only
one-third of the total number of directors are replaced or re-elected each year.
The Certificate also provides that the provisions of the Certificate relating to
number, vacancies, and classification of the Board of Directors may only be
amended by a vote of at least 66 2/3% of the shareholders. Finally, the Bylaws
provide that special meetings of the stockholders may only be called by the
President of the Company or pursuant to a resolution adopted by a majority of
the Board of Directors.
The Company is subject to Section 203 of the Delaware General Corporation
Law ("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.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,300,000 shares of Common
Stock offered by the Company hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$18,506,406. Of the net proceeds, the Company intends to repay all outstanding
borrowings, if any, under the Company's revolving line of credit. As of October
21, 1997, the outstanding balance on the Company's revolving line of credit was
$727,277, bearing interest at the bank's prime rate plus 1%.
The Company intends to use the remaining proceeds to fund the growth and
development of its design and manufacturing business, as well as its proprietary
products. The Company also intends to use these proceeds for general corporate
purposes, including investment in the marketing and sales of EnteraLite(R)
products, the purchase of related manufacturing equipment, research and
development programs, purchase of raw materials, increases in working capital
associated with continuing sales growth, and acquisitions of complementary
businesses, product lines, or technologies. As of the date of this Prospectus,
the Company is not a party to any negotiations, understandings, or agreements
and has no definitive plans with respect to any such acquisitions.
In addition to the proceeds received by the Company from the Offering, the
Company will receive $915,250 from the exercise of warrants by certain Selling
Shareholders in connection with this Offering. The Company will receive an
additional $834,750 in the event the Underwriters exercise their over-allotment
option in full to sell an additional 238,500 shares from the exercise of
warrants held by certain Selling Shareholders. The proceeds received from the
exercise of the warrants will be used for general corporate purposes.
The above allocation of portions of the net proceeds reflects the Company's
current plans, and there are likely to be changes influenced by various factors,
including market changes and developments in the medical technology industry.
Pending use of the net proceeds as described above, the Company intends to
invest certain of the proceeds in short-term, investment grade, interest-bearing
investments. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
19
<PAGE> 21
SUMMARY MARKET PRICE OF COMMON STOCK
Since May 18, 1997, the Company's Common Stock has been listed on the
American Stock Exchange under the symbol "ZVX." Prior to that time, the
Company's Common Stock traded in the over-the-counter market in the pink sheets
published by the National Quotation Bureau, and was listed on the OTC Bulletin
Board under the symbol "ZVXI". Prior to listing on the American Stock Exchange,
the market for the Company's Common Stock was limited due to the relatively low
trading volume and the small number of brokerage firms acting as market-makers.
The Company anticipates that upon the successful completion of the Offering, the
trading volume will increase.
The following table sets forth, for the quarterly periods prior to May 18,
1997, certain information with respect to the high and low bid quotations for
the Common Stock as reported by a market maker for the Company's Common Stock.
The quotations represent inter-dealer quotations without retail markups,
markdowns, or commissions and may not represent actual transactions. For the
period after May 18, 1997, the following table sets forth the high and low
closing sales prices as reported on the American Stock Exchange.
<TABLE>
<CAPTION>
CLOSING SALES
PRICE
-----------------
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter............................................ $ 3.75 $ 2.50
Second Quarter........................................... $ 4.00 $ 2.75
Third Quarter............................................ $ 3.25 $ 2.25
Fourth Quarter........................................... $ 4.00 $ 3.25
1996
First Quarter............................................ $ 4.25 $ 3.75
Second Quarter........................................... $ 4.00 $ 2.75
Third Quarter............................................ $ 3.25 $ 2.50
Fourth Quarter........................................... $ 3.31 $ 2.75
1997
First Quarter............................................ $ 8.00 $ 3.25
Second Quarter (Up to May 18)............................ $11.25 $ 7.13
Second Quarter (After May 18)............................ $10.88 $ 8.13
Third Quarter............................................ $18.00 $13.50
</TABLE>
The Company's transfer agent reported that as of September 30, 1997, there
were 2,063,826 shares of the Company's Common Stock issued and outstanding held
by approximately 181 holders of record, including shares held of record by
brokerage firms and clearing corporations on behalf of their customers. The
Company estimates that as of September 30, 1997, there were approximately 500
beneficial owners of its Common Stock. The closing price as reported by the
American Stock Exchange as of October 22, 1997 was $15.625 per share.
DIVIDEND POLICY
The Company currently intends to retain all future earnings after
consummation of this Offering for use in the expansion and operation of its
business. The Company does not anticipate paying dividends on its Common Stock
in the foreseeable future. The payment of future dividends will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, future earnings, capital requirements, the general financial condition
of the Company, and general business conditions. Additionally, the Company is
restricted from declaring any cash dividends under its current line of credit
arrangement.
20
<PAGE> 22
CAPITALIZATION
The following sets forth (i) the actual capitalization of the Company at
September 30, 1997, and (ii) the adjusted capitalization after giving effect to
receipt of the net proceeds from the sale by the Company of the 1,300,000 shares
of Common Stock offered by the Company hereby at an assumed price of $15.625 per
share, less underwriting discounts and commissions and estimated offering
expenses, and receipt by the Company of $915,250 upon the acquisition from
certain Selling Shareholders and exercise by the Underwriters of outstanding
warrants to purchase 261,500 shares of Common Stock to be sold in this Offering.
This information is qualified in its entirety by, and should be read in
conjunction with, the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Industrial development bond............................................. $2,000 $ 2,000
Stockholders' equity:
Common stock, $.04 par value; 5,000,000 shares authorized, 2,063,826
shares issued and outstanding; 3,625,326 shares issued and
outstanding as adjusted(1)......................................... 83 145
Additional paid-in capital............................................ 3,271 22,631
Retained earnings..................................................... 2,257 2,257
------ -------
Total stockholders' equity............................................ 5,611 25,033
------ -------
Total capitalization............................................... $7,611 $27,033
====== =======
</TABLE>
- ---------------
(1) Excludes 100,000 shares of Common Stock issuable upon the exercise of
warrants issued to the Representatives of the Underwriters in connection
with the Offering at a price of 120% of the price of the Shares sold in the
Offering. See "UNDERWRITING." Also excludes 314,190 shares of Common Stock
issuable upon the exercise of options granted pursuant to the Stock Option
Plan at a weighted average exercise price of $12.37 per share. See
"DESCRIPTION OF CAPITAL STOCK -- Stock Options." Also excludes 238,500
shares of Common Stock issuable upon the exercise of the over-allotment
option in this Offering. See "UNDERWRITING."
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of the Company as of
December 31, 1995 and 1996, and for each of the years ended December 31, 1994,
1995, and 1996 have been derived from and are qualified by reference to the
consolidated financial statements of the Company included elsewhere in this
prospectus. The following selected consolidated financial data of the Company as
of December 31, 1992, 1993 and 1994 and for each of the years ended December 31,
1992 and 1993 have been derived from financial statements not included herein.
The selected financial data as of September 30, 1997, and the nine months ended
September 30, 1997, are derived from audited consolidated financial statements
and for the nine months ended September 30, 1996 are derived from unaudited
consolidated financial statements, which have been prepared on a basis
substantially consistent with the audited consolidated financial statements and,
in the opinion of the Company, contain all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the financial position
and results of operations of the Company as of such dates and for such periods.
The results of operations for interim periods are not necessarily indicative of
a full year's operations. This selected consolidated financial data should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $2,436 $3,116 $3,333 $5,296 $5,664 $ 3,878 $6,311
Cost of sales.................... 1,357 1,600 2,017 3,066 2,936 2,122 3,475
------ ------ ------ ------ ------ ------ ------
Gross profit..................... 1,079 1,516 1,316 2,230 2,728 1,756 2,836
Operating expenses
Selling, general, and
administrative............... 630 776 1,024 1,325 1,892 1,215 1,727
Research and development....... 194 199 419 502 528 360 522
------ ------ ------ ------ ------ ------ ------
Operating income (loss).......... 255 541 (127) 403 308 181 587
Other income (expense):
Interest income, net........... 17 37 36 41 41 36 10
Other income................... -- -- -- -- 203 -- 8
------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes.......................... 272 578 (91) 444 552 217 605
(Provision) benefit for income
taxes.......................... (82) (197) 67 (127) (206) (74) (194)
------ ------ ------ ------ ------ ------ ------
Net income (loss)................ $ 190 $ 381 $ (24) $ 317 $ 346 $ 143 $ 411
====== ====== ====== ====== ====== ====== ======
Net income (loss) per share...... $ .20 $ .36 $ (.02) $ .24 $ .25 $ .10 $ .18
====== ====== ====== ====== ====== ====== ======
Weighted-average number of common
and common equivalent shares
outstanding.................... 938 1,060 1,131 1,306 1,389 1,366 2,316
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 603 $1,463 $ 864 $ 870 $2,085 $ 136
Working capital.................. 1,109 2,305 2,270 2,528 4,521 3,588
Total assets..................... 1,410 2,912 2,824 3,247 6,369 9,814
Industrial development bond...... 5 -- -- -- 2,000 2,000
Stockholders' equity............. 1,227 2,575 2,550 2,901 3,701 5,611
</TABLE>
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies.
RESULTS OF OPERATIONS
In each of the three preceding years, a small number of customers accounted
for a significant percentage of total revenues. Fluctuations in the timing and
size of orders from such major customers resulted in changes in the Company's
revenues and product mix, which in turn affected gross margins. As a result of
the foregoing, the Company experiences variations in operating results from
quarter to quarter, and the results of operations for a specific quarter should
not be considered indicative of the results that may be achieved for longer
periods.
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the income statement bear to revenues.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA -- PERCENTAGE OF REVENUES
-------------------------------------------------
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
--------------------------- ---------------
1994 1995 1996 1996 1997
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100% 100% 100% 100% 100%
Gross profit.............................. 40% 42% 48% 45% 45%
Selling, general, and administrative
expenses................................ 31% 25% 33% 31% 28%
Research and development expenses......... 12% 9% 10% 9% 8%
Operating income/(loss)................... (3)% 8% 5% 5% 9%
Other income/(expenses)................... 1% 1% 4% 1% 1%
Income (loss) before taxes................ (2)% 9% 9% 6% 10%
Provision (benefit) for taxes............. (1)% 3% 3% 2% 3%
Net income (loss)......................... (1)% 6% 6% 4% 7%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
The Company's revenues increased to $6,311,490 for the first nine months of
1997, from $3,878,255 for the first nine months of 1996, an increase of
approximately 63%. During the first nine months of 1997, 67% of total revenues
resulted from sales to four customers, three of whom were major customers in
1996. Management attributes the increase in revenues due to an increase in the
demand for the Company's products and services.
The Company's gross profit as a percentage of revenues was 45% for the nine
months ended September 1997, compared to 45% for the nine months ended September
1996.
Selling, general, and administrative expenses for the nine months ended
September 1997, rose $512,293, from $1,214,623 in 1996, to $1,726,916 in 1997.
Management attributes the increase in these expenses to increased legal expenses
and fees associated with the Company's listing on the American Stock Exchange,
increased payroll and related employee expenses, insurance, and tax costs.
Research and development expenses vary from quarter to quarter depending on
the number and nature of pending research and development projects and their
various stages of completion. During the first nine months of 1997, research and
development expenses were $521,870, compared to $360,335 for the first nine
months of 1996. Expenses incurred during the first nine months were for the
continued development of new applications for the Company's ultrasound
technology, and proprietary products.
Operating income for the nine months ended September 1997 increased to
$587,550, or 9% of revenues, from $181,557, or 5% of revenues, in 1996. Net
income increased to $410,763 for the first nine months of 1997
23
<PAGE> 25
from a net income of $142,710 in the first nine months of 1996. The increase in
net income during 1997 compared to 1996 is principally due to increased demand
for the Company's products and services, and the mix of product delivered during
that period.
As of September 30, 1997 the Company's backlog of customer orders was
$7,726,000, compared to $4,357,000 on September 30, 1996. Management estimates
that approximately 45% of the backlog will ship before December 31, 1997.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
The Company's revenues increased to $5,663,733 in 1996 from $5,295,762 in
1995, an increase of approximately 7%. During 1996 and 1995, 67% and 56%, of
total revenues resulted from sales to three customers and two customers
respectively, two of which were major customers in both years. Management
attributes the increase in revenues to an increase in demand for the Company's
products and services during 1996.
Gross profit as a percentage of revenues was 48% in 1996, as compared to
42% in 1995. Management attributes the increase mainly to engineering contracts
completed toward the end of 1996 and to a decrease of non-recurring engineering
tooling expenses billed to customers at cost.
Selling, general, and administrative expenses increased during 1996 to
$1,892,317 or 33% of total revenues as opposed to $1,324,928 or 25% of total
revenues in 1995. Increased expenses resulted from the Company's continuing
expansion. An increase in the size of ZEVEX's physical facilities increased
rental, utility, and related expenses. An expanded sales and marketing effort
increased staffing, travel, advertising, and administrative expenses related to
the introduction of the EnteraLite(R) Ambulatory Enteral Feeding Pump. The
Company also had an increase in legal costs associated with patent and trademark
costs as well as increases in expenses related to employees, such as insurance,
taxes, and pension benefits.
The Company continued research and development activities independent of
engineering conducted on behalf of its customers, in an effort to develop new
Company owned technologies and products in areas where the Company perceived a
demand. The Company invested $527,562 in 1996 and $502,255 in 1995 directly in
new research and development projects.
Operating income decreased to $307,799, or 5% of revenues, in 1996 from
$403,026, or 8% of revenues, in 1995. Alternatively, the Company had net income
of $345,577 or 6% of revenues, in 1996 compared to $316,800, or 6% of revenues,
in 1995. A portion of this increase was due to unrealized gains on marketable
securities in 1996. The remaining changes during 1996 as compared to 1995 are
principally due to the costs addressed previously, as well as the Company's
product mix delivered during the year.
THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1994
The Company's revenues increased to $5,295,762 in 1995 from $3,332,437 in
1994, an increase of approximately 59%. During 1995 and 1994, 56% and 55% of
total revenues resulted from sales to two customers in both years. Management
attributes the increase in revenues to an increase in demand for the Company's
products and services.
The Company's gross profit as a percentage of revenues was 42% in 1995, as
compared to 40% in 1994. Management attributes this increase to efficiencies
gained through a reengineering and refixturing of its production area.
During 1995, the Company's selling, general, and administrative expenses
grew to $1,324,928 or 25% of total revenues as compared to $1,023,987 or 31% of
total revenues in 1994. The increased expenses resulted from the Company's
decision to increase the size of its operations by expanding the size of the
physical facilities, which in turn increased rental, utility, and related
expenses. The Company also improved customer service by expanding its sales,
marketing, and customer service staff, established more elaborate internal
production and management controls and documentation, and expanded quality
assurance procedures. The
24
<PAGE> 26
Company also had an increase in legal costs associated with patent and trademark
costs, as well as increases in expenses related to employees, such as insurance,
taxes, and pension benefits.
The Company continued research and development activities independent of
engineering conducted on behalf of its customers in an effort to develop new
Company-owned technologies and products in areas where the Company perceived a
demand. The Company invested $502,255 in 1995 and $419,278 in 1994 directly in
new research and development projects.
Operating income increased to $403,026, or 8% of revenues, in 1995 compared
to an operating loss of ($127,498), or (3)% of revenues, in 1994. Similarly, the
Company had a net income of $316,800 or 6% of revenues, in 1995 compared to a
net loss of $24,622, or 1% of revenues, in 1994. These increases during 1995 as
compared to 1994 were principally due to the costs addressed previously as well
as the Company's product mix delivered during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's increased working capital requirements during the nine months
ended September 1997 and three years ended December 1996 related to increasing
accounts receivable and inventory levels associated with growth in revenues. To
date, working capital has been funded primarily by a combination of increased
accounts payable, borrowings under the Company's revolving line of credit, and
the private placement for the Company's Common Stock.
During the nine months ended September 1997, the Company produced $410,763
in net income. Cash decreased by $1,949,356 for the nine months ended September
1997, as the Company continued to fund construction of its new manufacturing
facility, and the purchase of new equipment. During the nine months ended
September 1996, the Company had net income of $142,710.
The Company's investment in the construction of the new facility and
purchases of new research, production, test equipment, and tooling was
$2,854,004 for the first nine months of 1997. In 1996, the company negotiated a
$2,000,000 Industrial Development Bond to finance the construction of a new
51,000 square foot headquarters and manufacturing facility. On October 29, 1996,
the Company completed a transaction in the amount of $50,000 cash and 130,000
shares of unregistered Common Stock of the Company for the purchase of
approximately 3.7 acres of land in Salt Lake City, Salt Lake County, Utah, for
the purpose of constructing a manufacturing facility.
The Company's working capital at September 30, 1997, was $3,587,841,
compared to $2,403,056 at September 30, 1996. The increase is primarily
attributed to income from operations and the private placement that was
completed in February, 1997. The portion of working capital represented by cash
at such dates was $135,699 and $473,748, respectively.
In 1996, the Company used net cash flow in operating activities of
$175,141, as the Company funded an increase in accounts receivable and
inventories.
The Company's purchases of land and facilities, and new research,
production, testing equipment, and tooling increased to $619,188 in 1996 from
$241,131 in 1995. The increase in equipment purchases is primarily due to
upgrading the Company's production fixturing, tooling and research and
engineering capabilities in 1995. The Company expects to spend approximately
$240,000 in 1997 for additional manufacturing equipment as well as for normal
replacement of old equipment.
The Company's working capital at December 31, 1996, was $4,520,781, as
compared to $2,528,419 and $2,269,944 at December 31, 1995 and 1994
respectively. The portion of working capital represented by cash and cash
equivalents at such dates was $2,085,055, $870,333, and $864,332 respectively.
On February 12, 1997, the Company completed a private placement of
$1,250,000 of its securities, which consisted of 500,000 units at a price of
$2.50 per unit. Each unit consisted of one share of Common Stock and a warrant
to purchase one share of Common Stock at a price of $3.50 per share.
25
<PAGE> 27
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
subsequently amended to increase the amount available under the line to the
present amount of $1,000,000. The line is due May 31, 1998. The line of credit
is collateralized by accounts receivable and bears interest at a rate of prime
plus 1%. The Company owed $60,108 on the line of credit at December 31, 1996 and
$700,000 at September 30, 1997.
During 1995, the Company generated a positive net cash flow from operating
activities of $247,132, while funding an increase in accounts receivable and
inventories. Operating activities during 1994 resulted in a net negative cash
flow from operating activities of $461,721 while the Company funded an increase
in accounts receivable and inventories.
The Company purchase of new research, production, testing equipment, and
tooling increased to $241,131 in 1995 from $136,744 in 1994. The increase in
purchases of equipment was primarily due to upgrading the Company's production
fixturing, tooling, research, and engineering capabilities in 1995. The Company
spent approximately $240,000 in 1996 for additional manufacturing equipment as
well as for normal replacement of old equipment.
The Company's working capital at December 31, 1995, was $2,528,419, as
compared to $2,269,944 at December 31, 1994. The portion of working capital
represented by cash at such dates was $870,333 and $864,332. The Company
utilizes substantial portions of its cash and cash equivalents from time to time
to fund its operations, including increases in inventories and accounts
receivable in connection with various customer orders.
The Company believes that cash generated from operations, together with its
terms under its credit line and the net proceeds from this Offering, will be
sufficient to meet its working capital needs for the next three years. However,
the Company's capital needs will depend on many factors in the execution of the
Company's future strategy, including the Company's growth rate, the need to
finance increased production and inventory levels, the success of the Company's
various sales and marketing programs, and various other factors.
26
<PAGE> 28
BUSINESS
GENERAL
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies. The Company's design and manufacturing service
customers are 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 applies its extensive engineering and regulatory
expertise, developed over its 11-year history, to provide its customers with
integrated solutions to the design and manufacture of their medical devices. The
Company designs and manufactures over 100 different, surgical systems, device
components, and sensors for more than 50 different established and emerging
medical technology companies, such as Alaris Medical Systems, Inc., Allergan,
Inc., Paradigm Medical Industries, Inc., various divisions of Baxter Healthcare
Corporation, Mentor Corporation, SIMS Deltec, Inc., Staar Surgical Company, and
3M Company Healthcare.
ZEVEX's strategy is to augment the continuing growth in its design and
manufacturing service business with the development and commercialization of
proprietary products which utilize the company's technologies or engineering
expertise or which are complementary to the Company's existing proprietary
products. The Company has successfully applied its engineering and regulatory
expertise to the development, commercialization, and marketing of EnteraLite(R),
the Company's proprietary Ambulatory Enteral Feeding Pump for patients who must
receive direct gastrointestinal nutritional therapy. The EnteraLite(R) pump
provides patients with maximum mobility while delivering enteral solutions with
unprecedented accuracy.
OVERVIEW OF MEDICAL TECHNOLOGY INDUSTRY
Growth of Medical Technologies. Demand for health care in the United States
has grown rapidly in recent years and is expected to continue to grow as the
population ages. At the same time, advancements in medical science, as well as
in electronics, computers, ultrasound, new materials, lasers, and other
technologies have dramatically expanded the number and variety of medical
devices and systems. The most advanced medical procedures and techniques, many
of which use advanced medical devices, now are common treatments under many
health insurance plans. As insurance companies and federal and state governments
have expanded the medical procedures for which health care providers are
reimbursed, demand has grown for the medical devices and systems needed for
these procedures. More recently, in response to increasing pressure in the
United States to control rising health care costs, medical technology companies
have developed advanced medical devices and systems that improve patient
outcomes and reduce the overall cost of health care.
Need for Efficient Developers of Medical Devices. As medical products have
incorporated the latest developments in various technologies, the cost of
product development and the length of the development cycle have increased
substantially. The risks in developing and launching new medical products also
have increased significantly as competition in the highly fragmented $30 billion
U.S. medical technology industry has increased. As a result, medical technology
companies face increased pressure to bring new products to market in the
shortest possible time and at the most efficient cost, while maintaining a high
level of quality in the commercial product.
Regulatory Complexity. At the same time, the FDA and the European Union
have adopted increasingly stringent and evolving regulatory requirements for the
manufacture of medical products. In the United States, certain medical products
are subject to application to the FDA for pre-market approval ("PMA") and many
other medical products require clearance to market ("510(k) approval"). In
addition, products are subject to regulation with respect to manufacturing,
labeling, distribution, post-market reporting, and promotion. Under European
Union quality standards to be effective in 1998, the design of medical products
must satisfy specific engineering design process standards. To market and sell
their products, medical technology companies must also invest significant
financial resources to establish and maintain manufacturing facilities that
comply with the FDA's Good Manufacturing Practices ("GMP") requirements in the
U.S. and the European Union's
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quality system standards, such as certification from the International
Organization for Standardization ("ISO"). Even after the often lengthy and
time-consuming process of obtaining FDA clearance and ISO certification, medical
technology companies must thereafter devote substantial managerial oversight to
ensure continued compliance with FDA and ISO requirements.
Opportunities for ZEVEX. Management of the Company believes that advances
in technology, increasing regulatory complexity, and intensified competition
will lead many medical technology companies to expand their out-sourcing of
design and manufacturing services in order to be more efficient. Management
believes that the Company is well positioned to benefit from this increasing
trend towards out-sourcing, given the extensive engineering and regulatory
expertise that ZEVEX has developed over its 11-year history of designing and
manufacturing medical products. Specifically, the Company may often times be
able to profitably design and manufacture medical devices or systems more
quickly, at a lower cost, and with higher quality than its medical technology
customers can do themselves. Management also believes that it can continue to
leverage that same extensive engineering and regulatory expertise into the
design and manufacture of the Company's own proprietary medical devices.
Management believes that this two-pronged strategy in the $30 billion medical
technology marketplace may allow the Company to benefit from the increasing
demand for the design and manufacturing of medical devices and systems, as well
as from the sale of the Company's own proprietary medical devices.
ADVANTAGES OF OUT-SOURCING DESIGN AND MANUFACTURING TO ZEVEX
ZEVEX provides customized integrated solutions to the design,
manufacturing, and regulatory challenges associated with advanced medical
devices and systems. Many emerging medical technology companies simply do not
have the engineering, manufacturing, and regulatory expertise necessary to
quickly and efficiently bring a medical device from the concept stage to
commercial use. Even larger, well-established medical technology companies,
which may have the capital resources to develop such expertise, may lack the
required expertise or the time to accumulate such expertise in order to meet the
market demand for their particular device. Moreover, in some instances, these
medical technology companies may simply elect not to devote their resources to
the design and manufacture of their medical devices or systems, including
obtaining and maintaining the necessary regulatory approvals and industry
certifications for their manufacturing facilities. ZEVEX can often bring its
customer's device from concept to market more quickly and efficiently, as well
as provide the on-going manufacturing capability to meet the market demand.
ZEVEX's design and manufacturing services enable its customers to focus their
resources on the research of new products and the marketing of their existing
products, including those manufactured by ZEVEX. In summary, ZEVEX offers its
manufacturing service customers the following advantages:
- BROAD EXPERIENCE WITH NUMEROUS MEDICAL DEVICES. Over its 11-year history,
the Company has manufactured numerous advanced medical devices, including
surgical systems, device components, and sensors. As a result, the
Company has developed considerable expertise in addressing the product
design, engineering, manufacturing, and regulatory issues associated with
a variety of medical devices.
- EXTENSIVE EXPERTISE. As a result of its broad experience, the Company has
developed extensive expertise in addressing the product design,
engineering, manufacturing, and regulatory issues associated with a
variety of medical devices.
- GENERALLY LOWER COST AND HIGHER QUALITY. The Company provides a wide
range of engineering services and has the capabilities to provide
complete device or system design, including engineering, component
analysis, testing, and regulatory compliance. The Company strives to
increase the quality and lower the overall cost of the devices or systems
that it manufactures for its customers by integrating design and
engineering work with manufacturing processes, materials acquisitions,
quality issues, and regulatory considerations.
- RAPID PRODUCT DEVELOPMENT. The Company believes that, with its
engineering and manufacturing capabilities, it can more rapidly develop
and commercialize new products than its customers, which otherwise must
expend significant time and financial resources to develop internal
engineering expertise and qualified manufacturing facilities.
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- REGULATORY COMPLIANCE. The Company is ISO 9001 and EN 46001 certified,
and the Company has developed internal systems intended to maintain
compliance with the FDA's GMP requirements. The Company devotes
significant management time and financial resources to GMP compliance and
ISO certification. By using the Company's manufacturing services,
customers relieve themselves of many stringent regulatory and industry
certification requirements.
- PRODUCTION FLEXIBILITY. The Company's broad customer base and
cross-trained workforce enable it to offer its customers production
flexibility, which enables customers to implement product enhancements
and to adjust production volumes in response to fluctuations in market
demand.
ZEVEX'S GROWTH STRATEGY
The Company's objective is to continue to expand its business as a designer
and manufacturer of a wide variety of customized medical devices for medical
technology companies, as well as a designer, manufacturer, and marketer of a
variety of its own proprietary products. To accomplish this, management intends
to do the following:
- INCREASE PENETRATION INTO EXISTING CUSTOMER BASE. Within the Company's
current customer base, management believes there are numerous
opportunities to expand the design and manufacturing services which the
Company is providing. Management intends to aggressively seek
opportunities to design and manufacture more devices or complete systems
for customers for which the Company is currently manufacturing only a few
devices or components of systems. Additionally, the Company intends to
expand beyond its current, primary focus on ultrasonic devices and
systems by designing and manufacturing a wider variety of medical devices
that incorporate diverse technologies.
- EXPAND CUSTOMER BASE. Management intends to aggressively market its
capabilities in order to increase its number of medical technology
customers for which it provides design and manufacturing services.
Management believes that there are numerous medical technology companies,
which are not current customers, that would benefit from utilizing the
Company's services.
- INCREASE SALES OF THE COMPANY'S ENTERALITE(R) AMBULATORY ENTERAL FEEDING
PUMP. The Company began selling the EnteraLite(R) pump in September 1996,
and management believes there are significant opportunities to increase
sales of EnteraLite(R) pumps and related products. The Company is
pursuing sales opportunities with national home health provider networks,
hospitals, and group purchasing organizations, while expanding its
network of independent manufacturer's representatives. The Company is
simultaneously increasing its marketing and clinical support efforts.
- LEVERAGE ENGINEERING AND REGULATORY EXPERTISE TO DEVELOP NEW PROPRIETARY
PRODUCTS. Management intends to augment the continuing growth in its
design and manufacturing services business with the development and
commercialization of new proprietary products. The Company intends to
identify significant market opportunities for products which can benefit
from the Company's engineering or regulatory expertise or which are
complementary to the Company's existing proprietary products. The Company
intends to design, develop, and market medical devices and related
products that meet the specific needs of the customer.
- ACQUIRE OTHER TECHNOLOGIES OR FIRMS. Management believes that there are
significant opportunities to increase revenues and profitability through
the acquisition of technologies or products that are complementary to the
Company's existing engineering expertise or proprietary technologies or
that can be sold through the Company's existing distribution channels.
Additionally, the Company may seek to acquire other design and
manufacturing service firms in appropriate instances in order to capture
additional revenue and customers.
MEDICAL DEVICES MANUFACTURED BY ZEVEX
The Company designs and manufactures advanced medical devices, including
surgical systems, device components, and sensors for medical technology
companies. Within the category of surgical devices and systems, the Company
designs and manufactures both advanced ultrasonic surgical handpieces and
complete
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surgical systems. These handpieces and systems are used in ultrasonic
phacoemulsification procedures for the removal of cataracts and for
ultrasonically assisted liposuction. Within the category of medical sensors, the
Company designs and manufactures both ultrasonic air bubble detectors and
ultrasonic liquid level detectors that are used in a variety of medical devices.
In addition to these medical sensors and surgical devices that ZEVEX designs and
manufactures for others, ZEVEX also has designed and manufactures two of its own
proprietary medical devices, namely the EnteraLite(R) Ambulatory Enteral Feeding
Pump for patients who must receive direct gastrointestinal nutritional therapy
and the BottleWatch(R) liquid level indicator. The EnteraLite(R) pump provides
patients with maximum mobility while delivering enteral solutions with
unprecedented accuracy. The BottleWatch(R) liquid level indicator is an
ultrasonic device that is used to monitor critical levels of saline solution
contained in bottles used in ophthalmic surgery. The following tables summarize
the surgical devices and systems and medical sensors that ZEVEX designs and
manufactures for its significant customers, as well as the two proprietary
products that it has designed and manufactured for itself. Following the tables
are sections that contain a description of the devices within each category,
together with an explanation of their applications, markets, and the Company's
primary customers for such devices.
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PRODUCTS MANUFACTURED BY ZEVEX FOR OTHERS
<TABLE>
<CAPTION>
STATUS OF
FDA OR
OTHER
REGULATORY
CUSTOMER PRODUCT DESCRIPTION CLEARANCE
-------------------- ------------------------------------------------------ -----------
<S> <C> <C>
SURGICAL DEVICES AND SYSTEMS
Allergan Handpiece for Proficient phacoemulsification system FDA cleared
Handpiece for Profinesse II phacoemulsification system FDA cleared
Handpiece for Sensory V phacoemulsification system FDA cleared
Appasamy Handpiece for Appa Phaco phacoemulsification system Cleared in
India
Drive circuit for Appa Phaco phacoemulsification Cleared in
system India
Mentor Ophthalmics Handpiece for Odyssey phacoemulsification system FDA cleared
Handpiece for Sistem phacoemulsification system FDA cleared
Mentor H/S Handpiece for Contour Genesis liposuction system PMA pending
Paradigm Precisionist Thirty Thousand phacoemulsification FDA cleared
system
Photon laser/ultrasound phacoemulsification system PMA pending
Staar Surgical Handpiece for Phaco XL phacoemulsification system FDA cleared
Drive circuit for Phaco XL phacoemulsification system FDA cleared
MEDICAL SENSORS
Alaris Air detector for Model 570 infusion pump FDA cleared
Air detector for Model 571 infusion pump FDA cleared
Air detector for Model 599 infusion pump FDA cleared
Air detector for Signature infusion pump FDA cleared
Air detector for Medsystems III infusion pump FDA cleared
Althin Air/saline detector for System 1000 hemodialysis FDA cleared
machine
Baxter Air detector for Amicus pheresis machine FDA cleared
Liquid detector for Isolex stem cell analyzer FDA cleared
Cobe B.C.T. Liquid level detector for Spectra pheresis machine FDA cleared
Air detector for Spectra pheresis machine FDA cleared
Air detector for Trima pheresis machine FDA cleared
Liquid level detector for Trima pheresis machine FDA cleared
3M Company Air detector for Model 9000 cardiopulmonary bypass FDA cleared
Healthcare system
Liquid level detector for Model 9000 cardiopulmonary FDA cleared
bypass system
SIMS Deltec Air detector for Prizm ambulatory infusion pump FDA cleared
Haemonetics Air detector for Mobile Collection System (MCS) FDA cleared
</TABLE>
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<PAGE> 33
ZEVEX'S PROPRIETARY DEVICES
<TABLE>
<CAPTION>
STATUS OF FDA
PRODUCT CLEARANCE
------------------------------------------------ -----------------
<S> <C>
EnteraLite(R) Ambulatory Enteral Feeding Pump FDA cleared
BottleWatch(R) non-invasive liquid level
indicator FDA cleared
</TABLE>
DEVICES THAT ZEVEX MANUFACTURES FOR OTHERS AND THEIR MARKETS
Surgical Devices -- Ophthalmic. The Company designs and manufactures
several ultrasonic phacoemulsification handpieces and systems for the surgical
removal of cataracts. Cataracts are a condition, usually age related, in which
the natural lens of the eye becomes progressively clouded. This clouding
obstructs the passage of light into the eye and can lead to blindness. Most
patients blinded by cataracts can be surgically cured by removing the clouded
lens and replacing it with an intraocular lens. Phacoemulsification is a method
of cataract extraction that uses ultrasound waves to break the natural lens into
small fragments that can be removed through a hollow needle. Phacoemulsification
requires only a three to four millimeter incision, compared to incisions of up
to 12 millimeters for other techniques. Phacoemulsification is currently
utilized in more than 80 percent of cataract procedures in the United States.
Based on a recent market study, the world market for phacoemulsification systems
exceeds $100 million per year. The Company currently manufactures two complete
phacoemulsification systems for one customer, Paradigm Medical Industries, Inc.
These two systems include a basic ultrasonic system and a high-end system which
embodies both laser and ultrasound energy sources. The Company's two major
customers for these phacoemulsification handpieces and systems used in
ophthalmic surgery are Allergan and Paradigm Medical Industries, Inc.
Surgical Devices -- Liposuction. The Company has recently applied its
engineering and manufacturing expertise with respect to ultrasonic handpieces
used in ophthalmic surgery to the design and manufacture of ultrasonic
handpieces to be used in liposuction surgery. Liposuction, or 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 the
fat from the patient. This requires the physician to exert a large amount of
force to facilitate the procedure. In ultrasonically assisted liposuction, a
generator sends ultrasonic waves through a probe which is inserted under the
skin. The ultrasonic energy emulsifies the fat, which can then be easily
aspirated away. This form of liposuction surgery can significantly reduce trauma
to the patient as compared with the results from the metal cannula handpieces
that have been used primarily in the past for such surgery. According to the
American Society of Plastic and Reconstructive Surgeons, the number of
liposuction procedures performed in the United States more than doubled from
approximately 51,000 in 1994 to approximately 109,000 in 1996. The Company's
customer for its ultrasonic liposuction surgery handpiece is Mentor Corporation,
which had total sales in its fiscal year ended March 31, 1997 of approximately
$203 million from sales of various products in the plastic surgery, urology, and
ophthalmology marketplaces. Mentor Corporation produces an ultrasonic
liposuction system for plastic surgery of which the ZEVEX manufactured handpiece
is one component.
Medical Sensors. The Company 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. These sensors can be applied to
the exterior of a liquid-containing vessel or tubing, thereby eliminating the
possibility of liquid contamination, and are designed to meet the specifications
of customers which then incorporate the sensor into their own medical devices.
The Company'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. Ultrasonic sensors
include a piezoelectric sensing element and can include a circuit board which
drives the element, processes signals, and interfaces with the customer's
device. The Company's liquid level detectors are used to monitor critical levels
of liquids in various reservoirs used in surgery, such as those employed in
cardiopulmonary bypass systems. The Company holds a patent with respect to key
features of its non-invasive, ultrasonic liquid level detectors. The Company
estimates that
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the 1997 U.S. market for air bubble and liquid level detectors for medical uses
is approximately $60 million. The Company's primary customer for these medical
sensors is Alaris Medical Systems, Inc. (a company recently formed as a merger
of several companies, including the Company's customer formerly known as IVAC).
ZEVEX'S PROPRIETARY PRODUCTS
EnteraLite(R) Ambulatory Enteral Feeding Pump. In September 1996, the
Company began selling the EnteraLite(R) Ambulatory Enteral Feeding Pump for
patients who must receive direct gastrointestinal nutritional therapy. Enteral
feeding is a means of providing nutrition to patients who have gastrointestinal
disorders, such as short bowel syndrome, Crohn's Disease, bowel
pseudo-obstruction, and other serious digestive disorders, which prevent them
from normally digesting food. Many enteral feeding patients require the
continuous administration of nutritional solutions throughout the day, which
requires the patient to carry an enteral feeding pump throughout the day.
Management believes that the EnteraLite(R) pump is the lightest, most compact
enteral feeding pump on the market, possessing unprecedented safety and accuracy
in liquid nutrition delivery for the patient. The EnteraLite(R) has a 24-hour
battery, which is one-third longer than the battery life of any competing
device. The EnteraLite(R) pump carries a two-year warranty, which is twice the
average in the industry. The EnteraLite(R) requires the use of disposable
feeding bags and tube sets, both of which are sold by the Company. The Company
has been awarded two U.S. patents for technology used in the EnteraLite(R) pump.
The Company has also received Notices of Allowance from the U.S. Patent and
Trademark Office ("PTO") for four additional patents which relate to various
aspects of the EnteraLite(R) pump. Additional patents are pending with the PTO.
Industry sources estimate that the total 1997 U.S. market for enteral feeding
pumps and related sets of disposable products, such as feeding bags and tube
sets, is nearly $200 million.
BottleWatch(R) Liquid Level Indicator. BottleWatch(R) noninvasively
monitors liquid levels in bottles of saline solutions which are used extensively
in cataract and retinal surgery. Saline solution is required to nourish and
support the delicate structures of the eye during ocular surgery, the depletion
of which can complicate surgery, or in the worst case lead to irreparable damage
to the patient's eye. When the liquid level drops below the user-specified
position of the BottleWatch(R), audible and visible alarms are immediately
activated. Revenues from BottleWatch(R) have been immaterial and the Company
does not anticipate significant revenues from this product in the future.
SIGNIFICANT CUSTOMERS FOR WHICH ZEVEX PROVIDES DESIGN AND MANUFACTURING SERVICES
During the first nine months of 1997, the Company provided design and
manufacturing services for over 100 devices to more than 50 customers. Sales of
its design and manufacturing services to foreign customers accounted for
approximately 7% of revenues during 1996 and 1995. The Company's customers for
its design and manufacturing services are medical technology companies, which
sell the Company's systems and devices under private labels or incorporate the
Company's devices into their products. Generally, the Company seeks to obtain
design and manufacturing arrangements from its customers for a specified period
of time, typically with initial periods of three to five years followed by
annual renewals. The Company rarely undertakes design work if it does also not
obtain a contract for the accompanying manufacturing work. Three of the
Company's design and manufacturing customers, Alaris Medical Systems, Inc.,
Allergan, and Paradigm Medical, Inc. accounted for approximately 66% of the
Company's total revenues in 1996. During the first nine months of 1997, these
same three customers, plus a fourth customer, Mentor Corporation, accounted for
67% of the Company's total revenues for that same period. Each of those major
customers are discussed below.
Alaris Medical Systems, Inc. Alaris Medical Systems, Inc. ("Alaris") is a
leading provider of infusion systems and related technologies to markets in
North America, Western Europe, Latin America, and Asia. Alaris is the surviving
corporation from a series of mergers in 1996 among IMED International Trading
Corp., IVAC Medical Systems, Inc., IVAC Holdings, Inc., and Alaris. In 1996,
Alaris generated revenues in excess of $346 million principally from sales of
infusion therapy systems (which includes infusion pumps and disposable fluid
administration sets) and vital signs measurement products. During 1996, Alaris
had pro forma revenues of approximately $292 million from its infusion systems
and approximately $33 million from its vital
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signs measurement products. In 1996, Alaris had approximately 214,000 large
volume infusion pumps installed in the United States, with a U.S. market share
of approximately 40% of the installed base. Since 1987, the Company has designed
and manufactured ultrasonic air bubble detectors for Alaris infusion pumps under
the Alaris name or under the name of an Alaris predecessor. During the first
nine months of 1997, revenues from Alaris comprised approximately 20% of the
Company's revenues.
Allergan. Allergan is a leading provider of specialty therapeutic eye care
products throughout the world. In 1996, Allergan generated revenues in excess of
$1 billion principally by selling prescription and non-prescription
pharmaceutical products in the areas of ophthalmology and skin care, intraocular
lenses and other ophthalmic surgical products, and contact lens care products.
During 1996, Allergan had revenues of $148 million in its surgical product
business, the business in which Allergan sells different phacoemulsification
devices for the surgical removal of cataracts. Since 1989, ZEVEX has designed
and manufactured phacoemulsification devices marketed by Allergan. During the
first nine months of 1997, revenues from Allergan comprised approximately 14% of
the Company's revenues. The Company's current, nonexclusive manufacturing
contract with Allergan has a three-year term beginning January 1, 1997.
Paradigm Medical Industries, Inc. Paradigm Medical Industries, Inc.
("Paradigm") develops and markets ophthalmic surgical systems designed for
minimally invasive cataract removal. In 1996, it generated revenues of $295,000,
principally from the sale of an ultrasonic surgery system used to remove
cataracts. Since 1993, the Company has manufactured phacoemulsification systems
for Paradigm. Beginning in late 1996, the Company designed and manufactured for
Paradigm the prototypes of Paradigm's Photon laser cataract surgical system
(except for certain laser-related components). This new system integrates
ultrasound and laser technologies and includes a custom computer monitor user
interface and unique software developed by the Company. Paradigm's PMA
application for the Photon system with respect to ophthalmic surgery is pending
with the FDA. Until clearance is received from the FDA to market the Photon,
including the laser component, in the United States, the Company is
manufacturing for Paradigm an ultrasonic-only version of the Photon which
Paradigm markets under the name "Precisionist Thirty-Thousand." The Precisionist
Thirty-Thousand is the platform for the Photon which can be upgraded by adding
the laser module. The Company's contract with Paradigm, which expires September
23, 1999, prohibits the Company from selling, distributing, developing, or
manufacturing ophthalmic medical lasers in competition with Paradigm during the
term of the contract and for a period of two years following termination. During
the first nine months of 1997, revenues from Paradigm comprised approximately
21% of the Company's revenues.
Mentor Corporation. Mentor Corporation ("Mentor") develops, manufactures
and markets a broad range of products for the medical specialties of plastic and
reconstructive surgery, urology, and ophthalmology. For its fiscal year ended
March 31, 1997, Mentor generated revenues of approximately $203 million, of
which approximately $106 million was from sales of plastic surgery products and
approximately $36 million was from sales of ophthalmology products. Since 1992,
ZEVEX has designed and manufactured phacoemulsification devices marketed by
Mentor. ZEVEX recently designed and began the manufacture of handpieces for an
ultrasonic liposuction surgery system produced by Mentor. The Company's contract
with Mentor, which expires September 30, 1998, prohibits the Company from
designing or manufacturing ultrasonic liposuction handpieces in competition with
Mentor during the term of the contract and for a period of three years following
termination. During the first nine months of 1997, revenues from Mentor
comprised approximately 12% of the Company's revenues.
BACKLOG
At September 30, 1997, the Company had a backlog of orders for medical
devices to be manufactured by the Company for other medical technology companies
of approximately $7,726,000. Management estimates that approximately 45% of the
backlog will ship before December 31, 1997. For purposes of the above figures,
backlog includes all orders received by the Company pursuant to purchase orders
which have not been completed and shipped by the Company. This does not include
any backlog for the Company's proprietary products, because the Company
manufactures these devices and holds appropriate levels in inventory for sale to
customers. Some of the orders included in the backlog may be canceled or
modified by customers without significant penalty. In addition, since customers
may place orders for delivery at various times throughout the
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<PAGE> 36
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 be a reliable indicator of future sales.
DESIGN AND ENGINEERING CAPABILITIES
The Company has extensive design and engineering capabilities. In most
instances, the Company's manufacturing service customers rely on the Company
from the outset of their project for complete design, engineering, testing,
component analysis, and regulatory compliance for their medical device or
system. Indeed, over the Company's 11-year history, the Company's engineering
staff has performed substantially all of the design and engineering work for
such medical devices or systems. In other instances, customers have come to the
Company with final drawings for devices that they believe are ready for
manufacturing. In such cases, the Company has revised and tested the customer's
existing design prior to manufacturing the device or system, and, in many cases,
the Company's engineers have been able to identify and offer alternatives to the
customer's design that have improved performance or produced manufacturing
efficiencies.
Team Approach. The Company approaches each engineering project using a team
of engineers and technicians of various disciplines who understand the technical
requirements of the particular project. Each team includes representatives from
various engineering disciplines, including manufacturing, test, and quality
engineers, who help design a device that can be manufactured in a manner that
meets or exceeds customer specifications and the applicable regulatory
requirements.
Close Cooperation with the Customer. The Company's team of engineers work
closely with the customer during all phases of the design, engineering, and
testing of the customer's device or system. This cooperative approach is used to
assure that the customers' expectations are met or exceeded in the final
product.
Integration of Engineering Staff. The Company integrates its engineering
staff throughout its operations, including sales and marketing, customer
relations, materials management, quality assurance, regulatory compliance, and
manufacturing. The Company's engineers assist the Company's sales and marketing
personnel in evaluating requests for proposals and developing project-specific,
solution-oriented responses, bids, cost estimates, and project plans. Similarly,
the Company's project engineers act as customer contacts throughout the design
and engineering phase and have responsibility for all aspects of a customer's
project, including coordinating the component parts necessary for the device,
quality assurance procedures, regulatory compliance, and the manufacturing
process. The Company also provides its customers with design information and
other support during the FDA's 510(k) approval or PMA process, but does not
assist in the testing, studies, and human clinical trials associated with these
approvals.
State-of-the-Art Engineering Technologies. The Company has made significant
investments in state-of-the-art equipment to support its design and engineering
staff, including engineering design and testing stations and three-dimensional
computer aided design ("CAD") software. The Company's engineers use computers to
design software, to design and lay out surface mount circuit boards, and to
design custom integrated circuits. The Company's engineers utilize
stereolithography which allows for rapid production of prototypes from CAD
drawing files before commencement of manufacturing of the commercial device or
system. Utilizing its own software design capabilities, the Company has also
created what management believes is the most sophisticated modeling software for
ultrasonic device development. This capability speeds the product development
process for ultrasonic devices and improves the quality of the final device.
Engineering Service Contracts. The Company performs design and
manufacturing services for many customers under purchase orders. With major
customers the Company enters into manufacturing contracts which allow for
recurring purchase orders. Under these contracts, each device, product design,
patent, and other proprietary right developed by the Company in performing
engineering services becomes the property of the customer. The Company usually
receives the manufacturing rights to a device for a period generally ranging
from three to five years, with annual renewals thereafter. Generally, the
Company provides non-recurring engineering services under a project plan that
identifies the engineering tasks, deliverables, and time schedule. Typically,
such services are billed as progress milestones are attained and are cancelable
at any time.
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Engineering Staff. At September 30, 1997, the Company's engineering staff
consisted of 27 engineers. The engineering staff has experience in a variety of
disciplines, as follows:
<TABLE>
<CAPTION>
COLLECTIVE YEARS
ENGINEERING CATEGORY NUMBER OF EXPERIENCE
--------------------------------------------- ------ ----------------
<S> <C> <C>
Electrical Engineering....................... 4 32 years
Mechanical Engineering....................... 3 15 years
Ultrasonic Engineering....................... 5 80 years
Software Development......................... 2 19 years
Design Validation............................ 3 12 years
Computer Aided Design........................ 4 29 years
Engineering Technicians...................... 6 36 years
--
TOTAL.............................. 27
</TABLE>
MANUFACTURING CAPABILITIES
As the design and engineering of a device or system nears completion, the
members of the project team with direct responsibility for manufacturing,
quality assurance, test engineering, and materials assume a greater role. The
project team implements a materials management system and develops an assembly
process and product testing and quality assurance procedures to produce
high-quality devices or systems that satisfy customer specifications as well as
the FDA's GMP and ISO 9001/EN 46001 quality standards. Often, manufacturing
begins with a relatively small number of pre-production units, which are used by
the customer for clinical trials. The Company and the customer frequently work
closely together to make engineering and manufacturing refinements during this
pre-production phase.
Manufacturing Cells and Computerization of the Manufacturing Process. Each
instrument is manufactured in a dedicated manufacturing cell on the Company's
manufacturing floor. These cells are flexible and can be expanded or modified as
needed, enabling the Company to adjust production volumes quickly in response to
customer orders. Each cell is equipped with computer instruction centers.
Production personnel actually view pictures of the device that they are making
or assembling on the computer screen in its various stages of production or
assembly, along with the pertinent instructions for each step of the process.
This computerized manufacturing system also allows test data to be entered and
archived in the course of the manufacturing process. The advantage of this
system is that production personnel always have access to the current version of
instructions, thereby eliminating the possibility of using obsolete
instructions. This system also allows accurate entry and retrieval of test data,
again without the difficulties of a tracking system documented on paper.
Materials Requirements System. The Company uses a fully integrated
materials requirements system. This system includes sales order entry,
purchasing, inventory control, production control, and cost accounting and helps
the Company manage material acquisitions and inventory for the various projects
in production at any one time and facilitates the planning and control essential
to building products on accelerated time schedules.
Manufacturing Contracts. The Company generally executes manufacturing
contracts with major customers at the beginning of engineering projects, at
which time the Company provides customers with budgetary estimates of
manufacturing costs. Pricing is typically based on the Company's expected cost
plus a mark-up. Although manufacturing contracts rarely include minimum
production requirements, they usually grant the Company exclusive manufacturing
rights for initial periods generally ranging from three to five years, with
annual renewals thereafter. The Company generally warrants conformity to design
specifications, warrants against defects in materials and workmanship, and in
certain instances indemnifies its customers against losses arising out of
product defects. Such warranties customarily last at least 14 months from the
date of manufacture and sometimes longer. The Company has not experienced any
material claims against these warranties from its manufacturing service
customers. In addition, the Company in many cases enters into repair and service
agreements with these customers that set forth the pricing and terms under which
the
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<PAGE> 38
Company provides repair, replacement parts, and needed services or upgrades that
are not covered under warranty. Although most of the Company's manufacturing is
performed under manufacturing contracts, some devices are manufactured only
under purchase orders.
Suppliers. The Company purchases its component parts and raw materials from
various suppliers. The Company is not dependent on any single supplier for any
item. The Company believes that it can acquire from various sources on a timely
basis, the component parts and raw materials necessary for the Company to meet
obligations to its manufacturing service customers, and to manufacture its own
proprietary products.
QUALITY ASSURANCE AND REGULATORY COMPLIANCE
The Company emphasizes quality throughout its operations and integrates its
quality assurance and quality engineering programs throughout each engineering
and manufacturing phase, a process that involves the Company's senior management
and executive officers. At September 30, 1997, the Company employed 8 personnel
in its quality assurance, quality engineering, and regulatory departments.
Quality Assurance Procedures. Quality assurance procedures are integrated
into every aspect of a device's manufacturing cycle. The Company establishes a
quality assurance program for each instrument, which includes a "zero defects"
objective. Substantially all component parts and product subassemblies that are
manufactured by others receive a control number, and samples are inspected and
tested. The Company requires all vendors that supply components to satisfy
certain quality standards. On the manufacturing floor, quality assurance
personnel implement testing procedures at interim points during the assembly
process. A separate product test group which reports to the production manager
conducts a final test when the instrument is fully-assembled and ready for
shipping. In addition, prior to shipping, a quality inspector reviews each
instrument for proper labeling and paperwork.
Compliance with FDA GMP Requirements. The Company is registered with the
FDA as a medical device manufacturer. Management believes that the Company is in
compliance with FDA GMP requirements and has implemented internal systems to
maintain such compliance. The Company has experienced regularly scheduled and
unscheduled FDA audits in past years, none of which required significant changes
to its facilities or processes and none of which required discontinuation of
normal operations. See "BUSINESS -- Governmental Regulation Within the United
States."
ISO Certifications. The Company has obtained certifications from the
International Organization for Standardization ("ISO"), the first quality system
standard to gain worldwide recognition, including the European Union, Japan, and
the United States. As many medical technology companies expand sales of products
in international markets, compliance with these international quality standards
has increased in importance. The Company first obtained the ISO 9001
certification from the National Standards Authority of Ireland, an ISO notified
body, in 1996. This designation is the highest level of ISO 9000 certification
and indicates that the Company has met stringent design, manufacturing, and
testing standards for its devices. The Company also has achieved an additional
EN 46001 certification from the same organization, which indicates that the
Company has met additional quality standards specific to medical devices. The
Company's ISO 9001/EN 46001 certifications serve as a marketing tool that
enhances the Company's competitive position in the industry, especially with
respect to medical technology companies with internal manufacturing facilities
that have not gone through the costly and time-consuming ISO certification
processes.
RESEARCH AND DEVELOPMENT FOR ZEVEX'S PROPRIETARY PRODUCTS
As of September 30, 1997, the Company employed three employees in full-time
research and development capacities and utilized the efforts of its other design
and engineering staffs in connection with certain research and development
projects. The research and development efforts of the Company are focused on new
and existing proprietary products. During the last two fiscal years, the Company
continued independent research and development activities with respect to the
design and development of new and improved devices, spending $527,562 in 1996
and $502,255 in 1995. In both 1996 and 1995, research and development costs
represented approximately 9% of the Company's revenues. During the first nine
months of 1997, the Company's research and development expenditures totalled
$521,870, representing 8% of revenues
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<PAGE> 39
for the same period. The Company's research and development efforts during these
periods were devoted to several products, most notably the EnteraLite(R)
Ambulatory Enteral Feeding Pump.
MARKETING AND SALES
Marketing and Sales of ZEVEX's Design and Manufacturing Services. The
Company generates new design and manufacturing projects from customers using
direct sales personnel who are trained in the Company's engineering expertise
and manufacturing capabilities. Project engineers also participate extensively
in sales and marketing activities. In addition, the Company promotes its design
and manufacturing capabilities at industry trade shows, by advertising in
leading industry publications, and by obtaining referrals from customers, former
employees of customers, and other persons who are familiar with the Company's
services.
Marketing and Sales of ZEVEX's EnteraLite(R) Ambulatory Enteral Feeding
Pump. The Company has developed a network of over 50 independent manufacturer's
representatives who sell the EnteraLite(R) pump and related disposable delivery
sets. These representatives are selected based upon their experience with the
home healthcare market served by EnteraLite(R) and they sell directly to home
healthcare service providers, including hospitals with such divisions. These
representatives are compensated solely on a commission basis. The efforts of
these representatives are supported by a clinical support coordinator and are
overseen by a national sales manager, both of whom are full-time employees of
the Company. Presently, EnteraLite(R) pumps are purchased directly from the
Company. In the larger market for enteral products, pumps are often placed with
the customer free of initial capital investment, with the cost of the equipment
recovered through the customer's commitment to purchase disposable delivery sets
for a specified period of time. In the future, the Company intends to offer
similar programs directly to its customers to improve its competitive market
position.
COMPETITION
Competition for ZEVEX's Design and Manufacturing Services. The Company's
primary competitors in design and manufacturing services are other manufacturers
that operate in the medical technology industry. The primary competitive factors
in medical instrument design and manufacturing include quality, regulatory
compliance, engineering competence, cost of the non-recurring engineering design
component, price of the manufactured product, experience, customer service, and
ability to meet design and production schedules. Competition is primarily
limited to those companies that meet the minimum applicable regulatory
requirements of the FDA and international standards for manufacturing and
design. In the future, the Company is likely to compete against new entrants
into the industry as out-sourcing expands in medical technology products. For
example, medical technology companies with design and manufacturing capabilities
(especially those with excess capacity) and large electronic contract
manufacturers and defense department contractors with extensive engineering
expertise may undertake the design and/or manufacture of medical devices.
Competition for ZEVEX's EnteraLite(R) Ambulatory Enteral Feeding Pump. Two
competitors exist in the U.S. market for ambulatory enteral feeding pumps. Ross
Laboratories, a division of Abbott Laboratories, offers the Companion 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. Also, Sherwood Medical offers the
kangaroo PET enteral feeding pump, which is limited because it can only be
operated in an upright position. It is estimated that Sherwood presently holds
greater than 35% of the total market for enteral pumps and disposable sets in
both ambulatory and non-ambulatory applications.
PATENTS, TRADEMARKS, AND OTHER PROPRIETARY RIGHTS
Patents. The Company currently holds three United States patents. The
Company's first patent, U.S. Patent No. 5,438,868, relates to a non-invasive
ultrasonic liquid level indicator. The technology disclosed in the patent is
embodied in a liquid level indicator currently marketed by the Company under the
trademark BottleWatch(R). The Company also holds two patents, U.S. Patent Nos.
5,514,102 and 5,531,680, which relate to its EnteraLite(R) Ambulatory Enteral
Feeding Pump. U.S. Patent No. 5,514,102 relates to the use of pressure
monitoring to improve the accuracy of fluid delivery by the pump. The accuracy
provided by the pressure
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monitoring technology is complemented by the novel mechanism for monitoring pump
rotor movement disclosed in U.S. Patent No. 5,531,680. By using optical sensors,
the EnteraLite(R) pump is able to ensure that rotor movement occurs properly and
allows confirmation of the solution delivery rate. This technology enables the
EnteraLite(R) pump to operate without drip chambers and similar devices which
limit the mobility of the patient, while maintaining a high degree of flow rate
accuracy.
Patent Applications. The Company is actively pursuing seven U.S. patent
applications, four of which have been allowed by the United States Patent and
Trademark Office. Two of the allowed patent applications relate to the
disposable delivery sets which are loaded into the EnteraLite(R) pump and which
carry the enteral feeding solution to the patient. The technology disclosed in
these patent applications prevents accidental flow through the delivery set
which passes through the pump. This helps to prevent accidental overdosing of
solution in the event that the patient or caregiver forgets to load the delivery
set in the pump or loads the delivery set improperly. The allowed patent
applications also include a patent for a clamp which holds the pump to a fixed
object, such as a hospital bed, and allows the user to change the position of
the pump to ensure comfort. The Company has also received a notice of allowance
on a patent application which claims a novel apparatus and method for detecting
occlusions in the delivery set which might prevent proper administration of the
enteral feeding solution. While the United States is currently the Company's
primary market, the Company has also pursued foreign patents on its proprietary
technology. Specifically, the Company has filed six patent applications under
the Patent Cooperation Treaty and is in the process of nationalizing several of
these applications. The Company intends to file appropriate applications for
additional patents, both in the United States and in foreign countries on
additional technology it is currently developing.
Trademarks. The Company has registered the trademarks EnteraLite(R) and
BottleWatch(R) with the United States Patent and Trademark Office and has
pending registrations for ZEVEX(TM). Additionally, the Company has procured
registrations for BottleWatch(R) in Australia, Belgium, Canada, France, Germany,
Italy, Japan, Luxembourg, the Netherlands, and the United Kingdom. The Company
intends to file appropriate applications for additional trademarks in the United
States and foreign countries.
Agreements with Employees and Others. The Company enters into appropriate
confidentiality agreements, noncompetition agreements, and invention assignment
agreements with its employees, consultants, contractors, vendors, customers, and
others to protect the confidential information of its customers, to establish
the Company's rights or the rights of its customers in the technologies it
develops, and to establish contractual grounds upon which the Company can
enforce such rights, if necessary.
GOVERNMENTAL REGULATION WITHIN THE UNITED STATES
Because the Company provides design and manufacturing services to producers
of medical devices, as well as designs and manufactures its own medical devices,
the Company's manufacturing facilities, the medical devices of the Company's
customers, and the Company's own medical devices are subject to extensive
regulation by the FDA under the Food Drug and Cosmetics Act ("FDC Act").
Manufacturers of medical devices must comply with applicable provisions of the
FDC Act and associated regulations governing the development, testing,
manufacturing, labeling, marketing, and distribution of medical devices and the
reporting of certain information regarding their safety. The FDA's regulation of
medical devices and of the manufacturing facilities in which those devices are
made are summarized in the following sections.
FDA's Approval of Medical Devices. The FDA classifies medical devices into
three classes (Class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure product safety and efficacy. Class I
devices are subject to general controls (e.g., labeling, premarket notification
and adherence to GMP) and Class II devices are subject to general and special
controls (e.g., performance standard and guidelines). Generally, Class III
devices are higher-risk devices and cannot be marketed until after receiving FDA
"pre-market approval" ("PMA"). The Company currently manufactures two Class III
medical devices that require PMA application prior to commercialization. A PMA
application must be supported by valid scientific evidence, which typically
includes extensive data, including preclinical and clinical trial data to
demonstrate safety and efficacy of the device. The application also must contain
the results of all relevant bench tests, laboratory and animal studies, a
complete description of the instrument and its components, and a detailed
description of the methods, facilities, and controls used to manufacture the
device. In addition, the
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application must include the proposed labeling. Although the Company's services
do not extend to assistance with testing, studies, and human clinical trials,
the Company does provide its customers with required design information and
other support during the PMA process. Typically, the FDA will inspect the
manufacturer prior to granting PMA approval. If the FDA identifies deficiencies
in the manufacturing process, it could delay PMA approval. Delays in the PMA
process could affect the timing of manufacturing services provided by the
Company. Currently, an FDA review of a PMA application generally takes one to
two years from the date the application is submitted, but often is significantly
extended by an FDA request for more information or clarification of information
previously submitted. The PMA process can be expensive, uncertain, and lengthy,
and a number of devices for which PMA approval has been sought have never been
approved for marketing. Until a device subject to the PMA process receives the
FDA's approval, it cannot be sold commercially in the United States. Notably,
after PMA approval has been obtained, subsequent modifications to the device,
its labeling or manufacturing may require additional FDA approvals. For Class I
and Class II devices, and certain Class III devices, FDA clearance may be
obtained through a "510(k) notification process" pursuant to which the FDA
determines that a medical device is "substantially equivalent" to an existing,
legally marketed predicate device or a predicate device marketed before May 28,
1976. Clinical testing of certain devices may be required as part of the 510(k)
notification process. Currently, several of the Company's customers have
submitted or intend to submit a request to the FDA for clearance for marketing
under a 510(k) notification for devices to be manufactured by the Company.
Additionally, the Company is required to follow the FDA's 510(k) notification
procedures with respect to its own medical devices. The time required to receive
510(k) approval can vary, but may take several months. There can be no assurance
that the FDA will find a device substantially equivalent and allow marketing of
such device. Even if the device is found substantially equivalent, the clearance
process may be delayed if the FDA requires additional information.
Ongoing FDA Requirements for Commercialized Medical Devices. Any medical
device manufactured or distributed by the Company for its customers or for
itself pursuant to FDA clearances or approvals is subject to pervasive and
continuing regulation by the FDA, including record-keeping requirements and
reporting of adverse experiences associated with the use of the instrument.
FDA's GMP Requirements. In addition to the regulation of medical devices
described above, any manufacturing facility of a medical device that requires
FDA approval is also subject to regulation by the FDA, as well as by certain
state agencies. The FDA regulations in this regard are referred to as "good
manufacturing practices" ("GMP"). Pursuant to these GMP requirements, medical
device manufacturers are required to register their establishments and list
their devices with the FDA (as well as with certain state agencies) and are
subject to periodic inspections by the FDA (and certain state agencies). The FDC
Act requires devices to be manufactured in accordance with GMP regulations,
which impose certain procedural and documentation requirements upon the Company
with respect to manufacturing and quality assurance activities. The FDA has
recently amended the GMP regulations. Among other things, the new regulations
will require design controls and maintenance of service records. The Company
believes that the new regulations will not substantially increase the Company's
costs of complying with GMP requirements. The Company currently has implemented
training and procedural changes with respect to the changes to these GMP
requirements.
Consequences of Non-Compliance with FDA Regulations. Non-compliance with
these GMP regulations can result in, among other things, the Company and its
customers being subject to fines, limitations, civil penalties, criminal
prosecution, recall or seizure of devices, total or partial suspension of
production, failure of the government to grant premarket clearance or PMA
approval for products, withdrawal of marketing approvals, or a recommendation by
the FDA that a customer or the Company not be permitted to enter into government
contracts. The FDA also has the authority to require repair, replacement, or
refund of the cost of any device manufactured or distributed by a customer of
the Company or by the Company itself. In addition, the failure to be found in
compliance with the FDA regulations could have an adverse effect on the
Company's reputation. The FDA periodically inspects medical device manufacturers
for compliance with FDA regulations. In addition, the FDA generally inspects a
manufacturer prior to approving a PMA for a medical device. There can be no
assurance that the Company will be found in compliance with all applicable
regulations during such an inspection. The failure to be found in compliance
with the GMP regulations would result in
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FDA enforcement action against the Company, which could result in a diminution
of the Company's reputation and an adverse effect on the Company's business.
Non-FDA Regulations Within the United States. Beside 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, environmental protection, fire hazard control, and the
disposal of hazardous or potentially hazardous materials.
GOVERNMENTAL REGULATIONS OUTSIDE THE UNITED STATES
Sales of medical devices outside the United States are subject to
regulatory requirements that vary from country to country. The time required to
obtain approval for sale in foreign countries my be longer or shorter than that
required for FDA approval, and the requirements may differ. The export of
devices is subject to FDA regulation. In some instances, prior FDA approval is
needed. Commencing in 1998, all medical device manufacturers will be required to
obtain certifications necessary to enable the "CE Mark" to be affixed to their
products sold in the European Union. The CE Mark is a quality designation given
to products that meet certain policy directives of the European Economic Area
(an association of 15 European nations). A product designated with the CE Mark
is freely tradeable in all European Economic Area countries. In 1996, the
Company received and has maintained ISO 9001/EN 46001 certification. If a
Company customer is also ISO 9001 certified, the customer may be permitted to
affix the CE Mark to an instrument manufactured by the Company without the
customer being subject to additional requirements. In addition, all medical
device manufacturers must comply with other laws generally applicable to foreign
trade, including technology export restrictions, tariffs, and other regulatory
requirements.
EMPLOYEES
As of September 30, 1997, the Company employed a total of 89 people in the
following areas:
<TABLE>
<CAPTION>
CATEGORY NUMBER
--------------------------------------------------- ------
<S> <C>
Design and Engineering............................. 27
Manufacturing and Test............................. 33
Quality Assurance.................................. 8
Marketing and Administration....................... 21
--
TOTAL............................................ 89
</TABLE>
The Company also retains 4 consulting and contract personnel in the areas of
finance, engineering, and regulation. The Company considers its labor relations
to be good, and none of its employees is 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 generally well-educated
workforce and is generally considered to be an attractive place to live.
Accordingly, the Company does not anticipate having difficulty in attracting and
retaining qualified personnel to meet its projected growth in the foreseeable
future.
FACILITIES
The Company's executive offices and manufacturing facilities are located in
its new 51,000 square foot facility in Salt Lake City, Utah, which was financed
using a $2 million industrial development bond from a local municipality. 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 believes that its current facilities are
adequate for its needs and does not anticipate any difficulty locating
additional facilities, if necessary.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information as of September 30, 1997
concerning the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ------------------------------------------------------
<S> <C> <C>
Dean G. Constantine.... 45 Chief Executive Officer, President, and Director
David J. McNally....... 36 Vice President, Marketing Director, and Director
Chief Financial Officer, Secretary/Treasurer, and
Phillip L. McStotts.... 39 Director
Bradly A. Oldroyd...... 39 Director(1)(2)
Darla R. Gill.......... 46 Director(1)(2)
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The following table sets forth certain information as of September 30, 1997
concerning certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ---------------------------------------------
<S> <C> <C>
James Holden........... 33 Co-Director of Engineering
George Bromfield....... 53 Co-Director of Engineering
</TABLE>
Dean G. Constantine is a founder of the Company and has served as the
Company's CEO, President, and Chairman of the Board since its inception in 1986.
Prior to joining the Company, he was employed by EDO Corporation, Western
Division, in Salt Lake City, Utah, from October 1985 to September 1987, and from
January 1971 to June 1983. During his nearly fifteen years of employment with
EDO Corporation, Mr. Constantine had various responsibilities, including project
supervision, management of engineering for commercial and industrial
transducers, and research and development. From July 1983 through October 1985,
Mr. Constantine was employed as an engineering specialist at Northrop
Corporation -- Electro Mechanical Division, Anaheim, California, where his
responsibilities included engineering project management and applications
engineering.
David J. McNally is a founder of the Company and has served as the
Company's Vice President and Marketing Director, and as a director, since its
inception. Prior to joining the Company, he was employed by EDO Corporation in
Salt Lake City, Utah, as a marketing manager of transducers from October 1985 to
September 1987. From June 1984 to October 1985, Mr. McNally was employed by
Physical Acoustics Corporation, a Princeton, New Jersey based manufacturer of
acoustic testing systems, as its regional sales manager for the southeastern
United States. From June 1983 to June 1984, he was employed by Hercules, Inc.,
Magna, Utah, as an advanced methods development engineer. Mr. McNally received a
Bachelor of Science Degree in Mechanical Engineering from LaFayette College in
May 1983, and a Master of Business Administration Degree from the University of
Utah in June 1992.
Phillip L. McStotts is a founder of the Company and has served as the
Company's CFO, Secretary, and Treasurer, and as a director, since its inception.
From May 1985 to September 1986, he was employed as an accountant with the Salt
Lake City firm of Chachas & Associates, where he was tax manager. He has also
worked in the tax departments of the regional accounting firms of Pearson, Del
Prete & Company and Petersen, Sorensen & Brough. Mr. McStotts received a
Bachelor of Science Degree in Accounting from Westminster College in May 1980,
and received a Master of Business Administration Degree in taxation from Golden
Gate University in May 1982.
Bradly A. Oldroyd has been a director of the Company since October, 1991.
He is the founder, president, and principal shareholder of Pinnacle Management
Group, a Salt Lake City-based personnel services firm. 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
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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 the Company since 1993. She is the
founder, CEO, and President of Momentum Medical Corp., a Salt Lake City-based
manufacturer and distributor of home health care products. Ms. Gill is also sole
proprietor of DRG Enterprises, a consulting company specializing in marketing,
sales, and new product development. Ms. Gill was a founder of Merit Medical
Systems, Inc. in Salt Lake City and served until 1992 as Executive Vice
President and Director. She was also previously employed by Utah Medical
Products, Inc. where she served as Vice President of Marketing and Sales. Ms.
Gill graduated from the University of Phoenix with a Bachelors Degree in
Business Administration in 1988.
James Holden is Co-Director of Engineering for the Company. He previously
held the position of Instrumentation Engineering Manager and was a director of
the Company from January 1991 to October 1996. Prior to joining the Company, he
was employed by EDO Corporation, Western Division, from March 1984 to March
1988, where he developed tactical sonar systems for undersea warfare. Mr. Holden
received a Bachelor of Science degree in Electrical Engineering from the
University of Utah in 1986, and has completed post-graduate course work at the
University of Utah on design of medical ultrasound instrumentation.
George Bromfield is Co-Director of Engineering for the Company and
previously held the position of Acoustics Engineering Manager. He graduated from
South Dorset Technical College with a distinction level Higher National
Certificate in Electrical Engineering and received further formal post-graduate
training in Underwater Acoustics at Birmingham University. He was employed as a
professional grade scientist at the Admiralty Research Establishment in
Portland, England for 28 years. During this time, he specialized in transducer
and array design and sonar self noise. He has represented the United Kingdom as
a member of an International Transducer Technical Committee and has published
papers relating to low frequency flextensional transducer technology.
Each of the executive officers and directors of the Company currently also
holds the same offices with ZEVEX, Inc. The term of office of each director is
one year or until his or her successor is elected at the Company's annual
stockholders' meeting and is qualified, subject to removal by the stockholders.
The term of office for each executive officer is for one year or until a
successor is elected at the annual meeting of the Board of Directors and is
qualified, subject to removal by the Board of Directors. The Company has no
employment agreements with its executive officers or other employees.
BOARD OF DIRECTOR COMPOSITION
The Company's Board of Directors consists of five directors. Pursuant to a
Stock Purchase Agreement, dated December 1, 1996, between the Company and Blosch
& Holmes, L.L.C., a Utah limited liability company, as amended on September 30,
1997, Blosch & Holmes has the right to appoint one member of the Company's board
of directors, provided that such nominee must be acceptable to the Company. This
right expires when Blosch & Holmes, together with Kirk Blosch and Jeff W.
Holmes, its two member/managers, no longer holds at least 6.5% of the
outstanding voting stock of the Company. Blosch & Holmes has not exercised this
right.
TECHNICAL ADVISORY BOARD
The Company's Technical Advisory Board ("TAB") is composed of leading
academic engineers and physicians with expertise in the fields related to
medical technology devices. The multidisciplinary TAB team is involved with the
Company's efforts to evaluate potential new products and product enhancements
and provides general assistance in its commercial efforts. The TAB meets two or
three times annually with the Company's scientific staff and management to
discuss its research and development programs and product-development strategy.
TAB members also consult with the Company more frequently on an informal basis.
For their services, TAB members will be paid certain consulting fees, granted
options for the Company's
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Common Stock which will vest over time, and are reimbursed for their expenses.
The following individuals are currently serving on the Company's TAB:
Douglas A. Christensen, Ph.D. is a Professor of Electrical and
Bioengineering at the University of Utah. Dr. Christensen has a B.S.E.E. from
BYU (1962), an M.S.E.E. from Stanford University (1963), and a Ph.D. in
Electrical Engineering from the University of Utah (1967). In addition, Dr.
Christensen has been a visiting Professor at Cornell University in the
Electrical Engineering Department and Submicron Facility (1984-5). He has also
been a Visiting Scholar at the University of Washington, performing Postdoctoral
studies in Bioengineering (1972-4), and a Researcher at the University of
California, Santa Barbara (1970-2). Dr. Christensen is the author of one
textbook, Ultrasonic Bioinstrumentation, published by John Wiley & Sons, New
York, 1988, and has over 30 papers published in trade and technical journals.
Dr. Christensen has been a technical consultant to General Motors Research
Laboratories, in Santa Barbara, International Business Machines, in San Jose,
Hewlett Packard, in Palo Alto, and Bell Telephone Laboratories, Inc., in Murray
Hill, New Jersey.
Alan S. Crandall, M.D. is a Clinical Professor at the University of Utah
Medical Center, in Salt Lake City, where he specializes in Ophthalmology. He has
a B.S. in Chemistry from the University of Utah (1969), and an M.D. from the
University of Utah (1973). He also has extensive postgraduate training in
surgery at Presbyterian Hospital, University of Pennsylvania Medical Center, and
Sheie Eye Institute, at the University of Pennsylvania, where he completed a
Residency in Ophthalmology and a Fellowship in Glaucoma. Dr. Crandall is a
member of numerous professional societies, including the American Academy of
Ophthalmology, the Association for Research in Vision and Ophthalmology, the
American Society of Contemporary Ophthalmology, and the International Glaucoma
Congress, and several other distinguished organizations. In 1993, he was
presented with the American Academy of Ophthalmology Honor Award. Dr. Crandall
has received over 30 high-profile, private-sector Research Awards, and has
presented more than 140 papers in his specialty. He has published over 67 papers
in trade and technical journals, and three book chapters, including
"Streptococcal and the Eye," in Current Ocular Therapy, published by Saunders,
1990, F. Fraunfelder, editor, "Small Capsulotomy Intraocular Lenses," in
Textbook of Advanced Phacoemulsufication Techniques, published by Slack, Inc.,
1991, S.K. Koch and J.A. Davidson, editors; and "Diseases of the Eye," in
Essentials of Surgical Specialties, Volume II, published by Wilkins & Williams,
1993, P.F. Lawrence, editor. In addition, Dr. Crandall has been a contributing
editor of The Journal of Cataract and Refractive Surgery, and Ocular Surgery
News since 1996.
Alejandro Francisco Flores Sandoval, M.D. is a specialist in pediatric
gastroenterology and has been a member of Pediatric Gastroenterology Associates
in Waltham, Massachusetts since 1982. He was an Assistant Clinical Professor
with the Boston University School of Medicine for five years prior his
appointment as Assistant Clinical Professor with the Department of Pediatrics of
Tufts University School of Medicine in 1995. From 1984 to 1987, he was Clinical
Instructor of Pediatrics at Harvard Medical School. He has an M.D. from the
Universidad de San Carlos de Guatemala (1975) with extended postgraduate
training, including Fellowships in Medicine and Pediatrics at Harvard Medical
School. Dr. Flores' awards and honors include the "Because You Care Bear Award"
from the Western New York Intestinal Pseudo-obstruction Foundation, the Caremark
Vision Award, the Sidney Farber House Staff Award from the Department of
Pediatrics at Harvard Medical School, and the George Von L. Meyer Award from
Children's Hospital Medical Center, Boston, MA. He has served on the editorial
board for the Manual of Pediatric Therapeutics, Department of Medicine,
Children's Hospital Medical Center, Boston, MA. With numerous publications in
the area of pediatric medicine, and the performance of more than 30 visiting
professorships, Dr. Flores has become established as a renowned expert in
pediatric gastroenterology.
Magdy F. Iskander, Ph.D. is Professor of Electrical Engineering at the
University of Utah. He is the Director of the NSF/IEEE Center for Computer
Applications in Engineering Education (CAEME), and Director of the State Center
of Excellence for Multimedia Education and Technology. In 1986, Dr. Iskander
established the Engineering Clinic Program to attract industrial support for
projects to be performed by engineering students at the University of Utah.
Since then, more than 80 projects have been sponsored by 26 corporations from
across the United States. He is also the Director of the Conceptual Learning of
Science (CoLoS) USA Consortium, which is sponsored by Hewlett-Packard Company
and has eleven member
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<PAGE> 46
universities across the United States. He has received the Curtis W. McGraw ASEE
National research award for outstanding early achievements, the ASEE George
Westinghouse National Award for innovation in engineering education, and the
1992 Richard R. Stoddard Award from the IEEE EMC Society. Dr. Iskander authored
a textbook on Electromagnetic Fields and Waves, published by Prentice Hall,
1992; edited the CAEME Software Book, Vol. I, 1991; Vol. II, 1994; and edited
four other books on microwave processing of materials, all published by the
Materials Research Society in 1990, 1992, 1994, and 1996. He has published over
150 papers in technical journals and has made numerous presentations in
technical conferences. He is also a Distinguished Lecturer for the Antennas and
Propagation Society of IEEE. Dr. Iskander is the editor of the journal Computer
Applications in Engineering Education (CAE), published by John Wiley & Sons,
Inc., an associated editor of the journal IEEE Transactions on Antennas and
Propagation, and an associate editor of the AP-S Magazine. He is a fellow of
IEEE and a member of the National Research Council Committee on Microwave
Processing of Materials.
COMPENSATION OF DIRECTORS
The Company pays each director who is not an employee of the Company or its
subsidiary a director's fee of $500 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 (see "PRINCIPAL AND SELLING SHAREHOLDERS") and may do so
in the future. Directors who are employees of the Company receive no additional
compensation for serving as directors or attending meetings of directors or
shareholders.
COMPENSATION OF EXECUTIVE OFFICERS
None of the executive officers of the Company has an employment agreement
with the Company. The following table sets forth the cash compensation paid by
the Company to each of the Company's executive officers during the three
year-period ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------- -------------------- PAYOUTS
OTHER RESTRICTED ------- ALL
NAME AND ANNUAL STOCK LTIP OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMP. AWARDS OPTIONS PAYOUTS COMP.
- ------------------------------- ---- ------- ------- ------ ---------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dean G. Constantine............ 1996 $77,917 $12,189 0 0 0 0 $6,286(1)
CEO and President 1995 $69,375 $10,102 0 0 0 0 $4,712(2)
1994 $66,400 $10,000 0 0 0 0 $2,581(1)
David J. McNally............... 1996 $77,917 $12,189 0 0 0 0 $6,286(1)
Vice President and 1995 $69,375 $10,102 0 0 0 0 $4,712(2)
Marketing Director 1994 $66,400 $10,000 0 0 0 0 $2,581(1)
Phillip L. McStotts............ 1996 $77,917 $12,189 0 0 0 0 $6,286(1)
CFO and Secretary/Treasurer 1995 $69,375 $10,102 0 0 0 0 $4,712(2)
1994 $66,400 $10,000 0 0 0 0 $2,581(1)
</TABLE>
- ---------------
(1) Represents the amount paid by the Company as a contribution to the Company's
401(k) Pension and Profit Sharing Plan on the officer's behalf.
(2) Represents $2,631 paid by the Company as a contribution to the Company's
401(k) Pension and Profit Sharing Plan on the officer's behalf and $2,081 as
each officer's portion of the contribution made by the Company into its
Employee Stock Ownership Plan.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the persons listed in the Summary Compensation
Table during the year ended December 31, 1996.
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<PAGE> 47
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, 1996, by each executive officer of the Company, and the value of
options held by such persons at such year end.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
AT FY-END FY-END
------------------- -------------------
NAME AND SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Dean G. Constantine............... 0 0 5,400/0 0/0
CEO and President
David J. McNally.................. 0 0 5,400/0 0/0
Vice President and
Marketing Director
Phillip J. McStotts............... 0 0 5,400/0 0/0
CFO and Secretary/Treasurer
</TABLE>
The unexercised options listed above were granted on December 17, 1992 and
expire on December 16, 2001. The exercise price on the above options is $5.00.
The value of unexercised options was determined by reference to average bid and
asked prices for the Company's Common Stock in the over-the-counter market as
quoted on the OTC Bulletin Board as of the end of last fiscal year.
RECENT INCREASE IN COMPENSATION OF EXECUTIVE OFFICERS
Effective January 1, 1997, the Compensation Committee approved an increase
in the salaries to $105,000 per year for each of Mr. Constantine, Mr. McNally,
and Mr. McStotts. Additionally, effective September 30, 1997, the Compensation
Committee approved the grant of Common Stock purchase options for 70,000 shares
each to Messrs. Constantine, McNally, and McStotts. The options vest over a
four-year period, and are exercisable at a price of $16.4375 per share. Lastly,
the Compensation Committee approved a new executive officer bonus plan,
commencing January 1, 1997, which provides for annual bonuses of 10% to 40% of
base salary to each officer depending on the attainment of certain annual
revenue and profit targets as a percentage of budgeted amounts. The amount of
the bonus is discretionary within certain ranges as determined by the
Compensation Committee in certain instances. Also, the Compensation Committee
has the authority to pay bonuses in excess of 40% based upon extraordinary
performance, but not to exceed 100% of base salary.
AMENDED 1993 STOCK OPTION PLAN
The Company has established the Amended 1993 Stock Option Plan ("Stock
Option Plan") under which the Company may grant options to purchase up to
600,000 shares of the Company's Common Stock (subject to adjustment for such
matters as stock splits and stock dividends) to officers, directors, employees,
agents, and consultants of the Company. The purpose of the Stock Option Plan is
to provide incentives to such persons who are key to the Company's success,
thereby aligning the personal interests of such persons, through ownership of
Common Stock and other incentives, with those of the Company's shareholders.
The options granted under the plan may be incentive stock options within
the meaning of section 422 of the Internal Revenue Code of 1986, as amended, or
options which do not qualify as incentive stock options. The Stock Option Plan
also provides for grant of stock appreciation rights and stock awards to
eligible participants, subject to certain forfeiture restrictions. The Stock
Option Plan may be administered by the Board of Directors of the Company or by
the Compensation Committee. The Board of Directors or the Compensation Committee
will interpret the Stock Option Plan, its rules and regulations, and the
instruments evidencing the restrictions imposed upon Common Stock sold under the
Stock Option Plan, and will make all determinations deemed necessary or
advisable for administration of the Stock Option Plan.
As of September 30, 1997, options to purchase 314,190 shares of Common
Stock with a weighted average exercise price of $12.37 had been granted under
the Stock Option Plan. As of September 30, 1997, the Company had granted no
stock appreciation rights or stock awards under the Stock Option Plan. Out of
the
46
<PAGE> 48
600,000 shares reserved under the Stock Option Plan, as of September 30, 1997,
241,700 shares are available for future grants.
PROFIT SHARING PLAN
During 1991, the Company established a qualified 401(k) profit sharing
plan. Eligible employees may defer a portion of their salary under this plan. At
the discretion of the Board of Directors, the Company may make a contribution of
an additional amount of up to 4% of the eligible employee's salary and a
discretionary amount to be determined by the Board of Directors each year.
Employees are fully vested with respect to Company contributions after seven
years. Contributions to the plan for the nine months ended September 30, 1997
and the years ended December 31, 1996, 1995, 1994, 1993, and 1992 were $49,261,
$86,035, $77,037, $35,436, $22,981, and $34,223, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1993, the Company established and the stockholders approved the Employee
Stock Ownership Plan (ESOP). The ESOP is a defined contribution plan, and
benefits are payable under the ESOP only to the extent of Company contributions
and earnings of the ESOP. The ESOP has no minimum funding requirements and the
Company's Board of Directors has sole discretion to determine the amounts to be
contributed. Contributions by the Company will be invested primarily in Common
Stock of the Company by the trustees appointed for the ESOP or in savings
accounts, certificates of deposit, higher grade short term securities, equity
stocks, bonds, other investments, or cash. Employees are fully vested after
seven years. Contributions to the ESOP for the nine months ended September 30,
1997 and the years ended December 31, 1996, 1995, 1994, and 1993, were $0, $0,
$33,750, $0, and $16,650, respectively.
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<PAGE> 49
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of Common Stock offered in this Offering (not
including the over-allotment option granted to the Underwriters), by (i) each
person (or group of affiliated persons) who is known by the Company to
beneficially own more than 5% of the outstanding shares of its Common Stock,
(ii) each director and executive officer of the Company, and (iii) the Selling
Shareholders, and (iv) all executive officers and directors of the Company as a
group. Unless indicated otherwise, the address for each officer, director and 5%
stockholder is c/o the Company, 4314 ZEVEX Park Lane, Salt Lake City, Utah
84123.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP(1) OWNERSHIP(1)
PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------- SHARES TO BE SOLD ----------------------
NAME AND ADDRESS SHARES PERCENTAGE IN THE OFFERING SHARES PERCENTAGE
- ---------------------------------- ------- ---------- ----------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Dean G. Constantine(2)............ 264,600 12.9% 10,000 254,600 7.0%
David J. McNally(3)............... 252,598 12.3% 10,000 242,598 6.7%
Phillip L. McStotts(4)............ 159,400 7.8% 10,000 149,400 4.1%
Bradly A. Oldroyd(5).............. 8,000 * -- 8,000 *
Darla R. Gill(6).................. 6,480 * -- 6,480 *
Kirk Blosch(7).................... 550,000 24.8% 55,750 494,250 13.1%
Jeff W. Holmes(8)................. 550,000 24.8% 55,750 494,250 13.1%
Blosch & Holmes, L.L.C.(9)........ 250,000 12.3% -- 250,000 6.9%
Douglas K. Anderson(10)........... 130,000 6.4% -- 130,000 3.6%
Gregory A. Bernett................ 7,500 * 7,500 -- --
Craig D. Clayson.................. 7,500 * 7,500 -- --
John Freed........................ 3,750 * 3,750 -- --
George C. and Joan M. Hofer....... 15,000 * 15,000 -- --
Thomas E. Hofer................... 15,000 * 15,000 -- --
John and Angeline Marusiak........ 7,500 * 7,500 -- --
Ronald J. Marusiak................ 7,500 * 7,500 -- --
George N. McDonald................ 15,000 * 15,000 -- --
Gerald A. Morgan.................. 30,000 1.4% 30,000 -- --
Robert E. Freed, Family Trust..... 3,750 * 3,750 -- --
Snake Eyes Investment, L.C........ 7,500 * 7,500 -- --
Ray C. Unrath..................... 12,000 * 12,000 -- --
Ray M. Unrath..................... 3,000 * 3,000 -- --
Charles Wafer..................... 15,000 * 15,000 -- --
Executive officers and directors
as a group (5 persons).......... 691,078 33.0% 30,000 661,078 18.1%
</TABLE>
- ---------------
* Less than 1%.
(1) For each stockholder, the calculation of percentage of shares and
beneficial ownership prior to the Offering is based on 2,063,826 shares of
Common Stock outstanding as of September 30, 1997, and shares of Common
Stock subject to options held by the stockholder that are currently
exercisable or exercisable within 60 days, which are deemed to be
outstanding and to be beneficially owned by the stockholder holding such
options. The calculation of percentage of shares and beneficial ownership
after the Offering is based on 3,625,326 shares of Common Stock outstanding
and shares of Common Stock subject to warrants or options held by the
stockholder that will be currently exercisable or exercisable within 60
days of the closing of the Offering, which are deemed to be outstanding and
to be beneficially owned by the stockholder holding such warrants or
options. Except as indicated otherwise below, the persons and entity named
in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
applicable community property laws.
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<PAGE> 50
(2) Chief Executive Officer, President, and Chairman of the Company. Includes
12,400 shares of Common Stock issuable upon exercise of options held by Mr.
Constantine that are currently exercisable or will become exercisable
within 60 days, and 100 shares owned by each of his two dependent children.
Excludes 70,000 shares of Common Stock issuable upon exercise of options
held by Mr. Constantine that are not currently exercisable and will not
become exercisable within 60 days.
(3) Vice President, Marketing Director, and director of the Company. Includes
12,400 shares of Common Stock issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days. Excludes
70,000 shares of Common Stock issuable upon exercise of options held by Mr.
McNally that are not currently exercisable and will not become exercisable
within 60 days.
(4) Chief Financial Officer, Secretary, Treasurer, and director of the Company.
Includes 12,400 shares of Common Stock issuable upon exercise of options
that are currently exercisable of will become exercisable within 60 days.
Excludes 70,000 shares of Common Stock issuable upon exercise of options
held by Mr. McStotts that are not currently exercisable and will not become
exercisable within 60 days.
(5) Director. Includes 8,000 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will be come exercisable within
60 days.
(6) Director. Includes 480 shares held directly and 6000 shares of Common Stock
issuable upon exercise of options that are currently exercisable or will be
come exercisable within 60 days.
(7) Includes 175,000 shares of Common Stock issuable upon exercise of warrants
that are currently exercisable or will become exercisable within 60 days,
and 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of which
Mr. Blosch is a principal (and which 250,000 shares are also reported as
beneficially owned by Mr. Holmes and Blosch & Holmes, L.L.C.). Mr. Blosch's
address is 2081 S. Lakeline Drive, Salt Lake City, UT 84109.
(8) Includes 175,000 shares of Common Stock issuable upon exercise of warrants
that are currently exercisable or will become exercisable within 60 days,
and 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of which
Mr. Holmes is a principal (and which 250,000 shares are also reported as
beneficially owned by Mr. Blosch and Blosch & Holmes, L.L.C.). Mr. Holmes'
address is 8555 E. Voltaire Ave., Scottsdale, AZ 85260.
(9) Includes 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of
which Messrs. Blosch and Holmes are principals (and which 250,000 shares
are also reported as beneficially owned by Mr. Holmes and Mr. Blosch). The
address for Blosch & Holmes, L.L.C. is 2081 S. Lakeline Drive, Salt Lake
City, UT 84109
(10) Mr. Anderson's address is 1132 South 500 West, Salt Lake City, Utah 84101.
CERTAIN TRANSACTIONS
On April 15, 1997, the Company entered into a consulting contract with DMG
Advisors, L.L.C., a Nevada limited liability corporation ("DMG"). Kirk Blosch
and Jeff W. Holmes, two of the Company's principal shareholders, are members and
managers of DMG. Under the consulting contract, the Company paid an initial fee
of $50,000 and is paying $10,000 per month through April 15, 1999 in exchange
for the consulting services of DMG in the nature of strategic planning, public
relations, advice regarding financings, and the identification and evaluation of
potential acquisitions of new products or companies. The Company is also
obligated to pay reasonable business expenses incurred by DMG.
Pursuant to a Stock Purchase Agreement, dated December 1, 1996 between the
Company and Blosch & Holmes, L.L.C., a Utah limited liability company, as
amended on September 30, 1997, Blosch & Holmes has the right to appoint one
member of the Company's board of directors, provided that such nominee must be
acceptable to the Company. Kirk Blosch and Jeff W. Holmes, principal
shareholders of the Company, are the two member/managers of Blosch & Holmes. The
right to appoint a member of the Company's board of
49
<PAGE> 51
directors expires when Blosch & Holmes, together with Kirk Blosch and Jeff W.
Holmes, no longer holds at least 6.5% of the outstanding voting stock of the
Company. Blosch & Holmes has not exercised this right.
For a description of the compensation arrangements between the Company and
its officers and directors, see "MANAGEMENT -- Compensation of Executive
Officers" and "-- Compensation of Directors."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 5,000,000 shares of Common Stock, par
value $0.04 per share. As of September 30, 1997, there were 2,063,826 shares of
Common Stock outstanding. Holders of Common Stock are entitled to one vote per
share for the election of directors and with respect to all other matters to be
voted on by stockholders. Shares of Common Stock do not carry cumulative voting
rights and, therefore, holders of a majority of the outstanding shares of Common
Stock will be able to elect the entire Board of Directors, and if they do so,
minority shareholders would not be able to elect any members to the Board of
Directors. The Company's Board of Directors has authority, without action by the
Company's shareholders, to issue all or any portion of the authorized but
unissued shares of Common Stock, which would reduce the percentage ownership of
the Company by its existing shareholders and which may dilute the book value of
the Common Stock.
Shareholders of the Company have no pre-emptive rights to acquire
additional shares of Common Stock. The Common Stock is not subject to redemption
and carries no subscription, sinking fund, or conversion rights. Holders of
Common Stock will be entitled to receive ratably such dividends as may be
declared by the Company's Board of Directors from time to time out of funds
legally available therefor. The Company has not paid cash dividends on its
Common Stock in the past and does not anticipate that it will pay dividends in
the foreseeable future. Additionally, the Company is restricted from declaring
any cash dividends under its current line of credit arrangement. In the event of
liquidation of the Company, the shares of the Company's Common Stock are
entitled to share equally in the corporate assets after satisfaction of all
liabilities.
WARRANTS
As of September 30, 1997, the Company had outstanding warrants to acquire
500,000 shares of Common Stock. These warrants were originally granted to Blosch
& Holmes, L.L.C., a Utah limited liability company ("BH") pursuant to a Stock
Purchase Agreement entered into by the Company and BH on December 1, 1996. This
transaction closed on February 12, 1997. The transaction included the sale by
the Company of 500,000 shares of Common Stock and warrants to acquire 500,000
shares of Common Stock at $3.50 per share for a period of five years from the
date of closing. BH subsequently assigned all 500,000 of these warrants to
sixteen persons. Of these 500,000 warrants, 261,500 will be sold in this
Offering (500,000 if the Underwriters' over-allotment option is exercised in
full). See "UNDERWRITING."
STOCK OPTIONS
As of September 30, 1997, the Company had outstanding options for 314,190
shares of Common Stock pursuant to the Company's Stock Option Plan at a
weighted-average exercise price of $12.37 per share. The Company has reserved
600,000 shares of Common Stock for issuance under the Stock Option Plan. Out of
these 600,000 shares, as of September 30, 1997, 241,700 shares were available
for future grants.
TRANSFER AGENTS AND REGISTRARS
The Transfer Agents and Registrars of the Common Stock offered hereby are
ChaseMellon Shareholder Services, New York, New York, and Colonial Stock
Transfer Company, Salt Lake City, Utah.
50
<PAGE> 52
DELAWARE REINCORPORATION
On October 23, 1997, by unanimous written consent, the Board of Directors
of the Company approved the merger of the Company into a wholly-owned subsidiary
of the Company, ZEVEX International, Inc., a Delaware corporation (hereafter,
"ZEVEX Delaware"), in order to change the Company's state of incorporation from
Nevada to Delaware (the preceding transaction is hereafter referred to as the
"Merger"). On October 23, 1997, the holders of a majority of the outstanding
shares of Common Stock of ZEVEX approved the Merger by written consent.
Additionally, the Merger has been approved by the Board of Directors and the
sole shareholder of ZEVEX Delaware as of October 23, 1997. The Company intends
to deliver an information statement to its shareholders in connection with the
Merger as required by applicable SEC regulations and anticipates that the Merger
will be consummated in November, 1997.
Pursuant to the Merger, shareholders of the Company will receive one share
of ZEVEX Delaware common stock in exchange for each share of Common Stock of the
Company held by such shareholder. In addition, ZEVEX Delaware will succeed to
all of the assets and liabilities of the Company as a result of the Merger (for
convenience, the combination of ZEVEX Delaware and ZEVEX will continue to be
referred to herein as "ZEVEX" or the "Company," and the common stock of the
combined entities will continue to be referred to herein as the "Common Stock").
Certain changes in the Company's capital structure and corporate governance as a
result of the Merger are summarized below. The following summary does not
purport to be complete and is qualified by the provisions of the Company's
Certificate of Incorporation and Bylaws adopted in connection with the Merger
and by the provisions of applicable law. The Certificate of Incorporation and
Bylaws of ZEVEX Delaware are included as exhibits to the registration statement
of which this Prospectus forms a part.
Common Stock. After the Merger, the Board of Directors will have the
authority to issue up to 10,000,000 shares of Common Stock, par value $0.001 per
share. Such Common Stock will have the same rights, preferences, and limitations
as before the Merger, except as described in this section below.
Preferred Stock. Pursuant to the Delaware Certificate of Incorporation, the
Board of Directors will have the authority to issue up to 2,000,000 shares of
Preferred Stock, par value $0.001 per share, in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations, and
restrictions thereof, and the number of shares constituting any series or the
designation of such series. The existence of unissued Preferred Stock may enable
the Board of Directors, without further action by the stockholders, to issue
such stock to persons friendly to current management or to issue such stock with
terms that could render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest, or
otherwise, thereby protecting the continuity of the Company's management. In
addition, the issuance of Preferred Stock may also have the effect of
discouraging bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of and the
voting and other rights of the holders of Common Stock. No shares of Preferred
Stock are currently outstanding and the Company has no current plans to issue
any shares of Preferred Stock.
Certain Provisions of the Delaware Certificate of Incorporation and
Bylaws. Certain provisions of the Company's Certificate of Incorporation filed
with the state of Delaware (the "Certificate") and the Bylaws adopted therefrom
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. The Certificate and Bylaws provide that the Board of Directors
shall have authority to fix the number of directors and to fill vacancies of the
Board of Directors as such vacancies occur. The Certificate and Bylaws also
provide for the Board of Directors to be classified into three classes of
directors serving staggered three-year terms. As a result, one-third of the
Board of Directors will be elected each year. Moreover, the Certificate provides
that these 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.
Certain Provisions of Delaware Law. After the Merger, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits a publicly-held
51
<PAGE> 53
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) after consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, such stockholder owns at least 85% of the voting stock of the
Company then outstanding (exclusive of voting stock held by certain employee
stock plans and voting stock held by persons who are both directors and officers
of the Company), or (iii) on or subsequent to such date, the transaction is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. For
purposes of Section 203, a "business combination" includes a merger, asset sale,
or other transaction resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the
previous three years did own, 15% or more of Company's voting stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,625,326 shares of
Common Stock outstanding (3,863,826 if the Underwriters' over-allotment option
is exercised in full). Of the outstanding shares of Common Stock, 2,292,014
(2,530,514 if the Underwriter's over-allotment option is exercised in full) will
be freely tradeable without restriction or further registration under the
Securities Act of 1933 (the "Securities Act"), unless held by "affiliates" of
the Company, as that term is defined in Rule 144 of the Securities Act
("Affiliates").
The remaining 1,333,312 shares of Common Stock are "restricted securities"
within the meaning of Rule 144 under the Securities Act and were issued and sold
by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144. Of these restricted securities,
26,202 shares are not subject to lockup agreements and will be immediately
eligible for sale in the public market following this Offering, pursuant to Rule
144(k). An additional 197,912 shares of restricted securities are not subject to
lockup agreements and will become eligible for sale in the public markets from
time to time pursuant to Rule 144.
Certain members of the Company's Board of Directors (hereafter referred to
as the "Founders"), Kirk Blosch, Jeff W. Holmes, and Blosch & Holmes, L.L.C.
(owning the remaining 1,109,198 shares of restricted securities) have agreed,
pursuant to lockup agreements to be contained in the Underwriting Agreement in
this Offering, that they will not sell, directly or indirectly, any Common Stock
without the prior written consent of the Representatives for a period of 180
days after the closing date of this Offering. Upon the expiration of the 180 day
period, these shares will become eligible for sale in the public market subject
to the limitations for sales by Affiliates under Rule 144. The Founders also
hold vested options to purchase 37,200 shares of Common Stock at exercise prices
ranging between $3.85 and $5.00 per share pursuant to the Company's Amended 1993
Stock Option Plan (the "Stock Option Plan"). Additionally, the Founders hold
options to purchase 210,000 shares of Common Stock which become exercisable in
four equal annual installments beginning September 30, 1998 at an exercise price
of $16.4375. All of these options could be exercised and the shares received
therefrom could also be eligible for sale in the public market subject to the
limitations for sales by Affiliates under Rule 144. Notably, at some time
following this Offering, the Company may register for public sale the shares
issued pursuant to the Stock Option Plan. The Founders have included 30,000
shares of Common Stock (exclusive of the 1,109,198 shares that will be subject
to lockup agreements) owned by them in this Offering.
On October 26, 1996, the Company paid $50,000 in cash and issued 130,000
shares of unregistered Common Stock to a non-Affiliate in exchange for 3.7 acres
of land for its new headquarters and manufacturing facility. This non-Affiliate
has agreed, pursuant to a lockup agreement, that he will not sell any of the
130,000 shares of Common Stock for a period of two years ending October 29,
1998. This individual has further agreed not to sell more than 25,000 shares of
Common Stock during any 90-day period after the expiration of the two-year
lockup period. Pursuant to Rule 144(k), this individual will not be subject to
the volume, notice, and
52
<PAGE> 54
other restrictions of Rule 144, and (subject to the 90-day 25,000 shares
limitation described above), may freely sell his shares in the public markets
after the two-year lockup period.
Pursuant to the Company's Stock Option Plan, certain non-Affiliate holders
of vested options to purchase 52,990 shares of Common Stock are not subject to
lockup agreements and could exercise their options and sell these shares after
one year from the date of exercise under Rule 144. The exercise prices of the
options granted and outstanding under the Stock Option Plan range from $2.50 to
$5.00. The Company has authorized 600,000 shares of Common Stock to be issued
under the Stock Option Plan. Out of these 600,000 shares, as of September 30,
1997, 241,700 shares were available for future grants. Notably, at some time
following this Offering, the Company may register for public sale the shares
issued pursuant to the Stock Option Plan.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year, as well as persons who may be deemed Affiliates, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manners of sale,
notice and availability of current public information about the Company. A
person (or person whose shares are aggregated) who is not deemed to have been an
Affiliate at any time during the three months immediately preceding the sale is
entitled to sell restricted shares pursuant to Rule 144(k) without regard to the
limitations described above, provided that two years have expired since the
later of the date on which such restricted shares were first acquired from the
Company or from an Affiliate.
The Company cannot predict the effect, if any, that sales of shares of
Common Stock, or the availability of such shares for sale will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.
53
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of such Underwriters for
whom Wedbush Morgan Securities, Inc. and EVEREN Securities, Inc. (the
"Representatives") are acting as representatives, has agreed severally to
purchase from the Company and the Selling Shareholders the respective number of
shares of Common Stock (including warrants to purchase shares of Common Stock
purchased by the Underwriters from certain of the Selling Shareholders (the
"Warrant Holders") and exercised in connection with this Offering) set forth
opposite its name below. The Underwriters are committed to purchase and pay for
all such shares if any such shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Wedbush Morgan Securities Inc. ...................................................
---------
EVEREN Securities, Inc............................................................
---------
Total................................................................... 1,591,500
=========
</TABLE>
The Representatives have advised the Company and the Selling Security
Holders that the several Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain selected dealers at such price less a concession
not in excess of $ per share, and that the Underwriters and those
dealers may reallow certain dealers, including any Underwriters, a discount not
in excess of $ per share. After the Offering, the public offering
price, concessions, and reallowance to dealers may be changed by the
Representatives.
The Shares are being offered by the several Underwriters named herein
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel, or modify the offer and to reject any order in
whole or in part.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may bid for and purchase shares of
Common Stock in the open market to stabilize the price of the Common Stock.
These activities may stabilize or maintain the price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end these activities at any time.
Pursuant to the Underwriting Agreement, the Company and the Selling
Shareholders have agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the Offering, including
liabilities under the Securities Act, or to contribute payments that the
Underwriters may be required to make in respect thereof.
OVER-ALLOTMENT OPTION
The Selling Security Holders have granted an option to the Underwriters,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to a maximum of 238,500 warrants for the purchase of Shares. The
Underwriters may exercise the option only to cover overallotments in the sale of
the shares that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise the option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase and exercise the same
percentage of the warrants as the number of shares to be purchased and offered
by such Underwriter in the above table bears to 1,591,500.
SELLING SHAREHOLDERS
Of the 291,500 shares to be sold in the Offering on behalf of the Selling
Shareholders, 30,000 shares will be sold to the Underwriters by certain members
of the Company's management at the price of the Shares sold in the Offering
(less the Underwriter's discount and commissions described below). The
Underwriters will acquire from certain other Selling Shareholders warrants to
purchase the remaining 261,500 shares. The Underwriters will exercise the
warrants so acquired and resell all of the Shares in the Offering. The
54
<PAGE> 56
Underwriters will pay the aggregate exercise price of the warrants to the
Company ($915,250) and will pay to the Warrant Holders the difference between
the aggregate exercise price and the aggregate sales price (less the
underwriting discount and commissions). If the Underwriters exercise in full the
over-allotment option as described below, they will acquire from certain Selling
Shareholders warrants to purchase an additional 238,500 shares. The Underwriters
will exercise these warrants and will sell the acquired Shares as part of the
Offering. The Underwriters will pay to the Company the aggregate exercise price
of these warrants ($834,750) and to the Warrant Holders the difference between
the aggregate exercise price and the aggregate sales price (less the
underwriting discounts and commissions).
REPRESENTATIVES' WARRANTS
Upon purchase by the Underwriters of the 1,591,500 shares of Common Stock
offered hereby, the Company will sell to the Representatives for their own
account, stock purchase warrants covering an aggregate of 100,000 shares of
Common Stock exercisable at a price equal to 120% of the public offering price
set forth on the cover of this Prospectus and expiring five years from the
effective date ("Effective Date") of this Offering. The Representatives will pay
a price of $.01 per warrant. The Representatives' warrants are restricted from
sale, transfer, assignment, or hypothecation for a period of one year from the
Effective Date and may be exercised as to all or any lesser number of shares of
Common Stock commencing 12 months after the effective date of this Offering. The
Representatives' warrants will contain provisions that require the Company,
under certain circumstances, to register one time for sale (at any time prior to
the fifth anniversary of the Effective Date) or to qualify for an exemption from
time to time under applicable securities laws the shares of Common Stock
issuable upon exercise of the Representatives' warrants. The Representatives'
warrants also have additional registration rights permitting the warrant
holders, with certain restrictions, to elect to participate in registered public
offerings of securities by the Company at any time prior to the seventh
anniversary of the Effective Date. The Representatives' warrants are not
transferrable by the warrant holders other than to officers or partners of the
Representatives and members of any selling group in connection with this
Offering and/or their officers or partners. The Representatives' warrants'
exercise price and the number of shares of Common Stock are subject to
adjustment to protect the warrant holders against dilution in certain events.
LOCK-UP AGREEMENTS
The Company, its officers and directors, and certain other stockholders of
the Company holding 1,109,198 shares of Common Stock in the aggregate have
agreed, pursuant to lock-up agreements to be contained in Underwriting Agreement
in this Offering, that for a period of 180 days following the date of this
Prospectus, they will not, without the prior written consent of the
Representatives, offer, sell, pledge, offer to sell, contract to sell, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
pledge, offer of sale, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of the Common Stock or other capital
stock or securities convertible into or exercisable or exchangeable for any
shares of Common Stock or other capital stock, except that the Company may,
without consent, issue shares of Common Stock upon exercise of outstanding stock
options.
55
<PAGE> 57
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Jones, Waldo, Holbrook &
McDonough, Salt Lake City, Utah. Certain legal matters will be passed upon for
the Underwriters by Riordan & McKinzie, Orange County, California.
EXPERTS
The consolidated financial statements of ZEVEX International, Inc. (i) as
of September 30, 1997, and for the nine-month period ended September 30, 1997,
appearing in this Prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, (ii) as of December 31, 1996, and for
the year ended December 31, 1996, appearing in this Prospectus and registration
statement have been audited by Daines and Rasmussen, P.C., independent auditors,
and (iii) as of December 31, 1995, and for each of the two years in the period
ended December 31, 1995, appearing in this Prospectus and registration statement
have been audited by Nielsen, Grimmett & Company, independent auditors, each as
set forth in their respective reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement under the
Securities Act with respect to the Shares. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, with respect to any contract or other document filed as an exhibit to the
Registration Statement, each statement is qualified in all respects by reference
to such exhibit. The Registration Statement, including exhibits thereto, may be
inspected without charge at the Commission's public reference facility at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Pacific
regional offices of the Commission at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036-3648. Copies of all or any part of such materials may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 after payment of fees
prescribed by the Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements, and other information with the Securities and Exchange
Commission (the "Commission") under File No. 33-19583. Such reports, proxy
statements, and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates, and at the
following regional offices of the Commission: Midwest Regional Office, 500 West
Madison Street, Chicago, Illinois 60661 and Northeast Regional Office, 7 World
Trade Center, New York, New York 10048. The Commission maintains a Web site that
contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The address
of the Web site is http://www.sec.gov. The Company's stock is traded on the
American Stock Exchange under the symbol "ZVX," and reports and other
information concerning the Company may also be inspected at the American Stock
Exchange.
56
<PAGE> 58
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Nielsen, Grimmett & Company, Independent Auditors........................... F-2
Report of Daines and Rasmussen, P.C., Independent Auditors............................ F-3
Report of Ernst & Young LLP, Independent Auditors..................................... F-4
Consolidated Balance Sheets -- December 31, 1995 and 1996 and September 30, 1997...... F-5
Consolidated Statements of Operations -- Years ended December 31, 1994, 1995, and 1996
and the nine months ended September 30, 1996 (unaudited) and 1997................... F-6
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1994,
1995, and 1996 and the nine months ended September 30, 1997......................... F-7
Consolidated Statements of Cash Flows -- Years ended December 31, 1994, 1995, and 1996
and the nine months ended September 30, 1996 (unaudited) and 1997................... F-8
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheets of Zevex
International, Inc. and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Zevex International, Inc. and Subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Nielsen, Grimmett & Company
Salt Lake City, Utah
February 12, 1996
F-2
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheet of ZEVEX
International, Inc. and Subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
The consolidated financial statements of ZEVEX International, Inc. and
Subsidiary as of December 31, 1995 and 1994, were audited by other auditors
whose report dated February 12, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ZEVEX International, Inc. and Subsidiary as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Daines and Rasmussen, P.C.
Salt Lake City, Utah
February 13, 1997
F-3
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheet of ZEVEX
International, Inc. and subsidiary as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the nine months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ZEVEX International, Inc. and subsidiary as of September 30, 1997, and the
results of their operations and their cash flows for the nine months then ended,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Salt Lake City, Utah
October 15, 1997
F-4
<PAGE> 62
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996 SEPTEMBER 30, 1997
---------- ---------- ------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 870,333 $2,085,055 $ 135,699
Cash restricted for sinking fund payment on
industrial development bond................ -- -- 50,306
Accounts receivable, net of allowance for
doubtful accounts of none (1995 and 1996)
and $33,000, respectively.................. 1,209,794 1,429,521 1,835,011
Inventories................................... 791,960 1,344,297 3,341,095
Marketable securities......................... -- 203,109 210,921
Deferred offering costs....................... -- -- 154,694
Deferred income taxes......................... -- -- 113,161
Prepaid expenses.............................. 2,835 46,808 9,064
---------- ---------- ----------
Total current assets.................. 2,874,922 5,108,790 5,849,951
Property and equipment, net..................... 363,771 1,207,034 3,887,302
Patents and trademarks, net of amortization of
none, $1,700 and $4,985, respectively......... -- 49,357 75,656
Other assets.................................... 8,682 3,489 755
---------- ---------- ----------
$3,247,375 $6,368,670 $9,813,664
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 191,562 $ 339,023 $ 855,147
Accrued liabilities........................... 96,206 188,878 339,584
Income taxes payable.......................... 58,735 -- 267,379
Bank line of credit........................... -- 60,108 700,000
Current portion of industrial development
bond....................................... -- -- 100,000
---------- ---------- ----------
Total current liabilities............. 346,503 588,009 2,262,110
Deferred income taxes........................... -- 79,212 40,367
Industrial development bond..................... -- 2,000,000 1,900,000
Stockholders' equity:
Common stock, $.04 par value: authorized
5,000,000 shares, issued 1,365,716,
1,495,716 and 2,063,826 shares,
respectively............................... 54,629 59,829 82,553
Additional paid in capital.................... 1,344,833 1,794,633 3,270,884
Retained earnings............................. 1,501,410 1,846,987 2,257,750
---------- ---------- ----------
Total stockholders' equity............ 2,900,872 3,701,449 5,611,187
---------- ---------- ----------
$3,247,375 $6,368,670 $9,813,664
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1997
---------- ---------- ---------- 1996 ----------
----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales...................... $3,295,714 $4,968,108 $4,891,272 $3,513,581 $5,534,205
Engineering services............... 36,723 327,654 772,461 364,674 777,285
---------- ---------- ---------- ---------- ----------
3,332,437 5,295,762 5,663,733 3,878,255 6,311,490
Cost of sales...................... 2,016,670 3,065,553 2,936,055 2,121,740 3,475,154
---------- ---------- ---------- ---------- ----------
Gross profit....................... 1,315,767 2,230,209 2,727,678 1,756,515 2,836,336
Operating expenses:
General and administrative......... 840,063 1,060,275 1,363,900 833,115 1,198,499
Selling and marketing.............. 183,924 264,653 528,417 381,508 528,417
Research and development........... 419,278 502,255 527,562 360,335 521,870
---------- ---------- ---------- ---------- ----------
Total operating expenses............. 1,443,265 1,827,183 2,419,879 1,574,958 2,248,786
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. (127,498) 403,026 307,799 181,557 587,550
Other income (expense):
Interest income.................... 36,127 40,829 53,819 35,804 66,367
Interest expense................... -- -- (12,981) -- (56,381)
Unrealized gain on marketable
securities...................... -- -- 203,109 -- 7,812
---------- ---------- ---------- ---------- ----------
Income (loss) before (provision)
benefit for income taxes........... (91,371) 443,855 551,746 217,361 605,348
(Provision) benefit for income
taxes.............................. 66,709 (127,055) (206,169) (74,651) (194,585)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (24,662) $ 316,800 $ 345,577 $ 142,710 $ 410,763
========== ========== ========== ========== ==========
Net income (loss) per common
share........................... $ (.02) $ .24 $ .25 $ .10 $ .18
========== ========== ========== ========== ==========
Weighted average number of common
shares............................. 1,130,609 1,305,812 1,388,511 1,365,716 2,315,802
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 64
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- ------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993......................... 1,138,109 $45,525 $1,344,833 $1,218,376 $(33,750) $2,574,984
Net loss..................... -- -- -- (24,662) -- (24,662)
--------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1994......................... 1,138,109 45,525 1,344,833 1,193,714 (33,750) 2,550,322
Contribution of treasury
stock to employee stock
ownership plan............ -- -- -- -- 33,750 33,750
Common stock dividend........ 227,607 9,104 -- (9,104) -- --
Net income................... -- -- -- 316,800 -- 316,800
--------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1995......................... 1,365,716 54,629 1,344,833 1,501,410 -- 2,900,872
Issuance of common stock for
acquisition of land....... 130,000 5,200 449,800 -- -- 455,000
Net income................... -- -- -- 345,577 -- 345,577
--------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1996......................... 1,495,716 59,829 1,794,633 1,846,987 -- 3,701,449
Issuance of common stock for
cash...................... 500,000 20,000 1,230,000 -- -- 1,250,000
Exercise of stock options for
cash...................... 44,110 1,764 67,211 -- -- 68,975
Exercise of warrants for
cash...................... 24,000 960 179,040 -- -- 180,000
Net income................... -- -- -- 410,763 -- 410,763
--------- -------- ---------- ---------- -------- ----------
Balances at September 30,
1997......................... 2,063,826 $82,553 $3,270,884 $2,257,750 $ -- $5,611,187
========= ======== ========== ========== ======== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE> 65
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ (24,662) $ 316,800 $ 345,577 $ 142,710 $ 410,763
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 128,672 153,523 232,625 156,570 177,021
Provision (benefit) for deferred income taxes.... -- -- 79,212 -- (152,006)
Contribution of treasury stock to ESOP........... -- 33,750 -- -- --
Unrealized gain on marketable securities......... -- -- (203,109) -- (7,812)
Changes in operating assets and liabilities:
Increase in restricted cash for sinking fund
payment on industrial development bond...... -- -- -- -- (50,306)
(Increase) decrease in accounts receivable..... (110,044) (357,915) (219,727) 346,859 (405,490)
Increase in inventories........................ (276,529) (100,895) (552,337) (664,780) (1,996,798)
Increase in deferred offering costs............ -- -- -- -- (154,694)
(Increase) decrease in prepaid expenses........ (113,472) 133,540 (43,973) (48,348) 37,744
(Increase) decrease in other assets............ (2,306) (4,467) 5,193 -- 2,734
Increase (decrease) in accounts payable........ 32,520 (660) 147,461 153,042 516,124
Increase in accrued liabilities................ 15,440 14,721 92,672 5,932 150,706
Increase (decrease) in income taxes payable.... (111,340) 58,735 (58,735) (58,735) 267,379
----------- --------- ----------- --------- -----------
Net cash provided by (used in) operating
activities......................................... (461,721) 247,132 (175,141) 33,250 (1,204,635)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................... (136,744) (241,131) (619,188) (429,835) (2,854,004)
Addition of patents and trademarks................... -- -- (51,057) -- (29,584)
----------- --------- ----------- --------- -----------
Net cash used in investing activities................ (136,744) (241,131) (670,245) (429,835) (2,883,588)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock............... -- -- -- -- 1,498,975
Proceeds from bank line of credit.................... -- -- 60,108 -- 700,000
Repayment of bank line of credit..................... -- -- -- -- (60,108)
Proceeds from industrial development bond............ -- -- 2,000,000 -- --
----------- --------- ----------- --------- -----------
Net cash provided by financing activities............ -- -- 2,060,108 -- 2,138,867
----------- --------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (598,465) 6,001 1,214,722 (396,585) (1,949,356)
Cash and cash equivalents at beginning of period..... 1,462,797 864,332 870,333 870,333 2,085,055
----------- --------- ----------- --------- -----------
Cash and cash equivalents at end of period........... $ 864,332 $ 870,333 $ 2,085,055 $ 473,748 $ 135,699
=========== ========= =========== ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest......................................... $ -- $ 438 $ 6,530 $ -- $ 56,678
Income taxes..................................... 156,499 19,200 170,839 39,035 80,218
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING
ACTIVITIES
Issuance of common stock dividend, 227,607 shares.... $ -- $ 9,104 $ -- $ -- $ --
Issuance of common stock for acquisition of land,
130,000 shares..................................... -- -- 455,000 -- --
</TABLE>
See accompanying notes.
F-8
<PAGE> 66
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of 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. The
Company designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies. The Company's design and manufacturing service
customers are medical technology companies, which sell the Company's systems and
devices under private labels or incorporate the Company's devices into their
products.
Principles of Consolidation
The consolidated financial statements include the accounts of ZEVEX
International, Inc. (Company) and its wholly-owned subsidiary ZEVEX, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Interim Financial Information
The financial statements for the nine months ended September 30, 1996 and
related notes are unaudited but include all adjustments (consisting solely of
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations for
the interim periods. The results of operations for the nine-month periods ended
September 30, 1996 and 1997 are not necessarily indicative of the operating
results to be expected for the full year.
Reclassifications
Certain prior year amounts have been reclassified to conform with 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 purchased with a maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk
The Company's financial instruments consist primarily of cash, cash
equivalents and trade accounts receivable. Cash and cash equivalents are held in
federally insured financial institutions or invested in high grade short-term
commercial paper issued by major United States corporations. The Company sells
its products primarily to, and has trade receivables with, independent durable
medical equipment manufacturers and dealers in the United States and abroad.
During the periods presented, four of the Company's customers
F-9
<PAGE> 67
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
accounted for more that 10% of net product sales. (see Note 12 -- Major
Customers) 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 short-term investments are comprised of equity securities,
all classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at December 31, 1996 and
September 30, 1997. Accordingly, net unrealized holding gains for the periods
ending December 31, 1996 and September 30, 1997 of $203,109 and $7,812,
respectively, are included in net income.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over expected useful lives of three to twenty-five
years using the straight-line method. Leasehold improvements are amortized on a
straight-line basis over the lesser of the remaining lease term or their
estimated useful lives.
Major replacements, which extend the useful lives of equipment, are
capitalized and depreciated over the remaining useful life. Normal maintenance
and repair items are charged to costs and expenses as incurred.
Patents and Trademarks
The costs of acquired and internally developed patents and trademarks are
amortized over the lesser of fifteen years or the estimated useful life of the
intangible asset on the straight-line basis. The Company periodically reviews
the recoverability of patents and trademarks as well as other long-term assets
and, where impairment in value has occurred, such intangibles are written down
to net realizable value.
Income Taxes
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on differences
between financial reporting and tax bases of assets and liabilities measured
using enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees(APB 25) and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard (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.
F-10
<PAGE> 68
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Revenue Recognition
The Company records revenue from the sale of manufactured products upon
shipment. Revenue from contracts to perform engineering design and product
development services are generally recognized as milestones are achieved and
costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $39,027, $39,237, $113,566, $78,961 and $64,832,
respectively for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997.
Net Income (Loss) Per Common Share
Primary earnings (loss) per common share is calculated by dividing net
income (loss) for the period by the weighted average number of the Company's
common shares outstanding and dilutive common equivalent shares from stock
options and warrants, as calculated using the treasury stock method. The
treasury stock method requires calculating commons stock equivalents using the
average stock price for the period.
Fully diluted earnings (loss) per common share reflect the calculation of
the number of common equivalent shares based on the stock price at the end of
the period. Fully diluted per common share amounts were not reported in 1995 and
1996 because the difference was not material from primary earnings per common
share. The fully diluted earnings per common share was $.17 for the nine months
ended September 30, 1997. The weighted average number of common shares
outstanding used in the fully diluted calculation was 2,390,186.
All shares held in the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding for both primary and fully diluted earnings per share
calculations. All share and per share data is stated to reflect a 20 percent
stock dividend declared by the Board of Directors in March 1995 (see Note 9 --
Stockholders' Equity).
New Accounting Pronouncements
In 1997 the FASB issued SFAS No. 128, Earnings Per Share, SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. As of September 30, 1997, these standards
were either not effective or not yet adopted by the Company. The Company
believes the new standards will not have a material impact on the Company's
consolidated financial statements presented herein or in the future.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Materials.............................. $545,927 $ 936,938 $ 2,223,633
Work in progress....................... 227,154 292,423 957,860
Finished goods, including completed
subassemblies........................ 18,879 114,936 159,602
-------- ---------- ----------
$791,960 $1,344,297 $ 3,341,095
======== ========== ==========
</TABLE>
F-11
<PAGE> 69
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Machinery and equipment................ $341,929 $ 433,171 $ 490,845
Furniture and fixtures................. 271,868 365,797 507,942
Vehicles............................... 4,500 4,500 4,500
Tooling costs.......................... 165,260 406,219 495,986
Leasehold improvements................. 40,429 54,464 54,464
Building............................... -- 129,023 2,693,441
Land................................... -- 505,000 505,000
-------- ---------- ----------
823,986 1,898,174 4,752,178
Less accumulated depreciation and
amortization......................... 460,215 691,140 864,876
-------- ---------- ----------
$363,771 $1,207,034 $ 3,887,302
======== ========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 and 1997 amounted to $128,672,
$153,523, $230,925, $155,680 and $173,736, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Accrued payroll and related taxes and benefits........ $96,206 $182,427 $ 153,737
Professional fees..................................... -- -- 154,694
Warranty reserve...................................... -- -- 25,000
Accrued interest...................................... -- 6,451 6,153
------- -------- --------
$96,206 $188,878 $ 339,584
======= ======== ========
</TABLE>
5. INCOME TAXES
The (provision) benefit for income taxes is made, at Federal and State
statutory rates, based on earnings reported in the financial statements for the
amount of income taxes payable currently.
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.
Temporary differences giving rise to the deferred tax liability consist
primarily of the excess of depreciation for tax purposes over the amount
recorded for financial reporting purposes and unrealized gains on marketable
securities being reported differently for financial reporting and tax purposes.
F-12
<PAGE> 70
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Current taxes:
Federal................................. $21,480 $(153,228) $(137,196) $(63,783) $(278,501)
State................................... 3,790 (22,440) (17,936) (10,868) (40,400)
R&D credit.............................. 41,439 48,613 28,175 -- 51,522
Deferred taxes:
Federal................................. -- -- (69,057) -- 63,572
State................................... -- -- (10,155) -- 9,222
------- --------- --------- -------- ---------
(Provision) benefit for
income taxes............................ $66,709 $(127,055) $(206,169) $(74,651) $(194,585)
======= ========= ========= ======== =========
</TABLE>
The actual tax (expense) benefit differs from the 34% Federal statutory
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Expected tax (expense) benefit at
federal rate............................ $31,066 $(153,461) $(187,594) $(73,902) $(205,818)
State income tax (expense) benefit,
net of federal benefit.................. 3,280 (16,064) (18,208) (749) (15,069)
Research and development credit........... 41,439 48,613 28,175 -- 34,005
Non-deductible expenses................... (9,076) (5,366) (6,164) -- (7,121)
Other..................................... -- (777) (22,378) -- (582)
------- --------- --------- -------- ---------
Total (provision) benefit for
income taxes.................. $66,709 $(127,055) $(206,169) $(74,651) $(194,585)
======= ========= ========= ======== =========
</TABLE>
6. BANK LINE OF CREDIT
On September 29, 1996, the Company renewed its line of credit arrangement
with a financial institution for which total indebtedness may not exceed
$3,024,658. The line matures on May 31, 1998. The line of credit is
collateralized by accounts receivable, inventory and property and equipment and
bears interest at a rate of prime plus 1%; 9.25% and 9.50% at December 31, 1996
and September 30, 1997, respectively. The Company owes $700,000 on the line of
credit at September 30, 1997. Under the current line of credit agreement, the
Company is restricted from declaring cash dividends.
7. INDUSTRIAL DEVELOPMENT BOND
On October 30, 1996, the Company completed a transaction defined as "Murray
City, Utah, Adjustable Rate Industrial Development Revenue Bonds, Series 1996
(ZEVEX, Inc. Project)" in the amount of $2,000,000. The bonds are secured by an
irrevocable Letter of Credit issued by a bank, which is subject to expiration no
later than April 15, 2002. The bonds bear interest at an adjustable rate based
on the weekly tax-exempt floater rate as determined by the remarketing agent.
The bonds mature on October 1, 2016. Principal reductions occur in the amount of
$100,000 per year at a rate of $8,333 per month starting April 1, 1997. The
outstanding balance was $2,000,000 at September 30, 1997.
F-13
<PAGE> 71
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
8. EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan
During 1991, the Company established a qualified 401(k) profit sharing plan
covering substantially all employees. Eligible employees may defer a portion of
their salary. At the discretion of the Board of Directors, the Company may make
a contribution of an additional amount of up to four percent (4%) of the
eligible employees' salary and a discretionary amount to be determined each year
by the Board of Directors. Employees are fully vested after seven years.
Contributions to the plan for the year ended December 31, 1994, 1995 and 1996
were $35,436, $77,037 and $86,035, respectively, and $36,866 and $49,261 for the
nine months ended September 30, 1996 and 1997, respectively. The Company shows a
payable to the plan of $9,718, $38,000, and $12,606 at December 31, 1995 and
1996, and September 30, 1997 respectively.
Employees' Stock Ownership Plan
Effective October 14, 1993, the Company adopted an Employee Stock Ownership
Plan, that covers all employees who are over the age of 21, have been employed
for at least 90 days and who provide at least 1,000 hours of service.
Full vesting will occur after seven years of service or upon normal
retirement at 65 years of age. Contributions to the plan are at the discretion
of the Board of Directors with no minimum annual funding requirements.
Contributions to the plan primarily will be made with common stock of the
Company.
The Company had previously made a contribution to the plan for the year
ended December 31, 1995 of 9,500 shares with a cost of $33,750. No contribution
was made for the year ended December 31, 1994 and 1996 or for the nine months
ended September 30, 1997.
9. STOCKHOLDERS' EQUITY
Stock Dividend
On March 8, 1995, the Company declared a 20% stock dividend payable on
April 3, 1995 to all stockholders of record on March 23, 1995.
Issuance of Common Stock
On November 29, 1996, the Company paid cash of $50,000 and issued 130,000
shares of the Company's common stock for the purchase of 3.7 acres of land in
Murray, Utah for the purpose of constructing a manufacturing facility.
On February 12, 1997, the Company completed a private placement offering
for $1,250,000 of its securities, which consist of 500,000 units at a price of
$2.50 per unit. Each unit consists of one share of common stock and a warrant to
purchase one share of common stock at a price of $3.50 per share. The issued
shares and shares underlying the warrants are entitled to registration rights
for a period of five years from completion of the offering.
Repurchase of Common Stock Units
The Company previously repurchased 13,440 shares of outstanding common
stock for $50,400. The Company subsequently in 1993 and 1995 contributed all
13,440 shares to the Employee's Stock Ownership Plan (see Note 8 -- Employees'
Stock Ownership Plan).
F-14
<PAGE> 72
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Warrants
The Company issued a warrant to purchase 24,000 shares of common stock at
$7.50 per share pursuant to a public offering of the Company's common stock in
1993. This warrant expires May 7, 1998. The shares underlying this warrant are
entitled to registration rights. On September 30, 1997, the warrant was
exercised and the warrant holders waived their registration rights.
In February 1997, the Company issued 500,000 warrants in connection with a
$1,250,000 private placement offering, as discussed above.
Common Stock Reserved for Future Issuance
At September 30, 1997, the Company had reserved 1,055,890 shares of common
stock for future issuance, including 500,000 shares reserved for exercise of
warrants and 555,890 shares reserved under the Company's stock option plan.
Stock Option Plan
In September 1997, the Board of Directors consolidated its previous three
stock option plans into one plan and established the Amended 1993 Stock Option
Plan (the "Stock Option Plan"). There are currently 600,000 shares of common
stock authorized for issuance under the Stock Option Plan, subject to adjustment
for such matters as stock splits and stock dividends.
The Stock Option Plan provides for the grant of incentive stock options,
stock appreciation rights and stock awards to eligible participants and may be
administered by the Board of Directors or by the Compensation Committee.
On September 30, 1997, the Company granted a total of 210,000 options with
an exercise price of $16.44 to three officers/directors. The options vest
ratably over a four year period from the grant date.
All options granted under the Stock Option Plan expire after five to seven
years from the grant date and become exercisable no later than four years from
the grant date.
F-15
<PAGE> 73
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
A summary of stock option activity, and related information for the years
ended December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1997 follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK
OPTIONS
SHARES ----------------------- WEIGHTED-
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
--------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................... 241,500 58,500 $0.79- 5.00 $ 2.84
Options granted................................ (22,800) 22,800 $2.50 $ 2.50
Options canceled............................... 600 (600) $5.00 $ 5.00
-------- ------- ----------- ------
Balance at December 31, 1994..................... 219,300 80,700 $0.79- 5.00 $ 2.73
Options canceled............................... 3,540 (3,540) $2.50- 5.00 $ 3.35
-------- ------- ----------- ------
Balance at December 31, 1995..................... 222,840 77,160 $0.79- 5.00 $ 2.70
Additional authorization....................... 100,000 -- -- --
Options granted................................ (12,000) 12,000 $4.50 $ 4.50
Options canceled............................... 3,060 (3,060) $2.50- 5.00 $ 3.24
-------- ------- ----------- ------
Balance at December 31, 1996..................... 313,900 86,100 $0.79- 5.00 $ 2.93
Additional authorization....................... 200,000 -- -- --
Options granted................................ (275,050) 275,050 $3.50-17.50 $13.51
Options exercised.............................. -- (44,110) $0.79- 5.00 $ 1.56
Options canceled............................... 2,850 (2,850) $3.50- 5.00 $ 3.97
-------- ------- ----------- ------
Balance at September 30, 1997.................... 241,700 314,190 $2.50-17.50 $12.37
======== ======= =========== ======
</TABLE>
The weighted average fair value of options granted in the year ended
December 31, 1996 and for the nine months ended September 30, 1997, were $1.33
and $9.98 (none in 1995). At December 31, 1996 and September 30, 1997, 86,100
and 104,190 shares, respectively, were exercisable.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 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 the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively: risk-free interest rate of 6.1% and
5.9%, dividend yield of 0%; volatility factors of the expected market price of
the Company's common stock of .40 and .90; and a weighted-average expected life
of the option of 3 years and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Because the effect of
SFAS No. 123 is prospective, the initial impact on pro forma net income (loss)
may not be representative of compensation expense in future years. The effect on
the Company's pro forma results for each of the fiscal years 1995 and 1996 was
not material (less than $.01 per share). For the nine months ended September 30,
1997, pro forma net income and pro forma net income per common share were
$246,434 and $.11, respectively.
F-16
<PAGE> 74
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
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 September 30, 1997:
<TABLE>
<CAPTION>
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
- ------------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.50-3.50 45,440 3.73 years $ 3.24 45,440 $ 3.24
$3.85-5.00 56,750 2.45 years $ 4.46 56,750 $ 4.46
$16.44-17.50 212,000 5.00 years $16.45 2,000 $17.50
------- ------ ------- ------
$2.50-$17.50 314,190 3.64 years $12.37 104,190 $ 4.18
======= ====== ======= ======
</TABLE>
10. LEASE COMMITMENTS
In 1996 the Company and its subsidiary occupied an administrative and
manufacturing facility under the terms of an operating lease agreement. In June
1997 the Company moved into a new facility owned by and constructed for the
Company.
Lease expense of $54,508, $74,551, $109,505, $76,181 and $55,558 has been
charged to operations for the years ended December 31, 1994, 1995 and 1996 and
nine months ended September 30, 1996 and 1997, respectively. The lease expired
in April 1997.
Future minimum lease payments required under non-cancelable operating
leases at December 31, 1996 were $30,698 (none at September 30, 1997).
11. 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 values.
Industrial development bond: The fair values of the Company's
long-term debt are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements. Due to the recent issuance of the Industrial
Development Revenue Bond, the estimated fair value approximates the
carrying amount.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1996 SEPTEMBER 30, 1997
------------------- ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents.............. $870,333 $870,333 $2,085,055 2,085,055 $ 135,699 $ 135,699
Marketable securities...... -- -- -- 203,109 -- 210,921
Industrial development
bond..................... -- -- 2,000,000 2,000,000 2,000,000 2,000,000
</TABLE>
F-17
<PAGE> 75
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
12. MAJOR CUSTOMERS
Sales to major customers for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1997, are summarized as follows
(percent of product sales):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS
31, ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Customer A.............................. 10% *% 10% 21%
Customer B.............................. 43% 32% 33% 20%
Customer C.............................. 12% 24% 23% 14%
Customer D.............................. *% *% *% 12%
-- -- -- --
65% 56% 66% 67%
== == == ==
</TABLE>
- ---------------
* Less than 10% of sales.
13. 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 must pay an
initial fee of $50,000 and $10,000 per month for two years.
14. SUBSEQUENT EVENT
The Offering
In September, 1997 the board of directors authorized management of the
Company to file a Registration Statement on Form S-1 with the Securities and
Exchange Commission permitting the Company to sell up to 1,591,500 shares of
common stock to the public (the "Offering"). In conjunction with the offering,
the board of directors authorized, subject to stockholder approval, the
reincorporation of the Company into Delaware. In connection with the
reincorporation, the Company will adopt an Amended and Restated Certificate of
Incorporation which provides that the Company will be authorized to issue
2,000,000 shares of $.001 par value preferred stock and 10,000,000 shares of
$.001 par value common stock.
F-18
<PAGE> 76
[Photograph of ZEVEX's facility in Salt Lake City, Utah]
<PAGE> 77
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS
PROSPECTUS RELATES, OR ANY OFFER IN ANY JURISDICTION IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 19
Summary Market Price of Common Stock... 20
Dividend Policy........................ 20
Capitalization......................... 21
Selected Consolidated Financial Data... 22
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations........................... 23
Business............................... 27
Management............................. 42
Principal and Selling Shareholders..... 48
Certain Transactions................... 49
Description of Capital Stock........... 50
Shares Eligible for Future Sale........ 52
Underwriting........................... 54
Legal Matters.......................... 56
Experts................................ 56
Additional Information................. 56
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
1,591,500 SHARES
ZEVEX
INTERNATIONAL, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
WEDBUSH MORGAN SECURITIES
EVEREN SECURITIES, INC.
, 1997
======================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the securities being registered. All amounts are estimates
except for the fees payable to the Commission and to the NASD.
<TABLE>
<S> <C>
SEC Registration Fee................................ $9,116
Printing and engraving expenses..................... *
Legal fees and expenses............................. *
Accounting fees and expenses........................ *
Blue Sky and NASD filing fees....................... *
Rating Agency fees and expenses..................... *
Trustee fees and expenses........................... *
Escrow agent fees and expenses...................... *
Miscellaneous....................................... *
------
Total.....................................
======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
NEVADA LAW
Section 78.037 of the Nevada Revised Statutes ("NRS") provides, in general,
that a corporation may eliminate or limit, with certain exceptions, the
liability of officers and directors to the corporation or its shareholders for
damages for breach of fiduciary duty as an officer or director.
NRS Section 78.751(1) provides, in general, that a corporation may
indemnify an officer or director who is a party to a proceeding if the officer
or director's conduct was in good faith and not opposed to the corporation's
best interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. NRS Section 78.751(3)
provides, in general, that a corporation must indemnify an officer or director
for his expenses in connection with the defense of any proceeding if the
director has been successful, on the merits or otherwise. NRS Section 78.751(5)
provides, in general, that a corporation may advance expenses to an officer or
director who is made a party to a criminal or civil proceeding before a final
disposition is made, if the corporation receives an undertaking by or on behalf
of the officer or director to repay any amounts advanced if it is determined by
a court that such officer or director is not entitled to indemnification. NRS
Section 78.751(6) provides, in general, that the indemnification provisions of
Section 78.751 continue for a person who has ceased to be an officer or
director, and inures to the benefit of the heirs, executors, and administrators
of such person. NRS Section 78.752 provides, in general, that a corporation may
purchase and maintain insurance, or may make other financial arrangements on
behalf of officers and directors, among others, against liabilities imposed on
them by reason of actions in their official capacity or arising from service
performed on behalf of the corporation.
ARTICLES OF INCORPORATION
Article Three of the Company's Articles of Incorporation provides, in
general, that the Company shall indemnify, purchase and maintain insurance, or
make other financial arrangements on behalf of officers and directors, to the
fullest extent permitted under NRS Sections 78.751 and 78.752, as described in
the preceding section. Article Eleven of the Company's Articles of Incorporation
provides, in general, that except for acts or omissions involving intentional
misconduct, fraud, or a known improper payment of dividends, no officer or
II-1
<PAGE> 79
director shall be personally liable to the Company or to the shareholders of the
Company for breach of such officer's or director's fiduciary duty.
BYLAWS
Article Five, Section (1)(b) of the Company's Bylaws provides, in general,
that the Company shall indemnify, to the fullest extent permitted in Article
Three of the Company's Articles of Incorporation, any officer or director who is
a party to a proceeding if the officer or director's conduct was in good faith
and not opposed to the corporation's best interests, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Article Five, Section (1)(d) of the Company's Bylaws provides, in general,
that the Company must indemnify an officer or director for his actual and
reasonable expenses in connection with the defense of any proceeding if the
officer or director has been successful, on the merits or otherwise. Article
Five, Section (1)(e) provides, in general, that any indemnification by the
Company must be approved on a case-by-case basis by a majority of a quorum of
directors who are not parties to such proceeding, a written opinion from
independent legal counsel to the Company, a majority vote at a duly held meeting
of a quorum of disinterested shares, a majority written consent of outstanding
disinterested shares, or upon application to the court in such proceeding
against the officer or director.
Article Five, Section (1)(f) of the Company's Bylaws provides, in general,
that the Company may advance expenses to an officer or director who is made a
party to a criminal or civil proceeding before a final disposition is made, if
the Company receives an undertaking by or on behalf of the officer or director
to repay any amounts advanced unless it is determined by a court that such
officer or director is entitled to indemnification. Article Five, Section (1)(g)
provides, in general, that the indemnification provisions of Article Five,
Section (1) shall continue for a person who has ceased to be an officer or
director, and inures to the benefit of the heirs, executors, and administrators
of such person. Article Five, Section (2) provides, in general, that the Company
may purchase and maintain insurance, or may make other financial arrangements on
behalf of officers or directors to the fullest extent provided in Article Three
of the Company's Articles of Incorporation.
REINCORPORATION IN DELAWARE
On October 23, 1997, by unanimous written consent, the Board of Directors
of the Company approved the merger of the Company into a wholly-owned subsidiary
of the Company, ZEVEX International, Inc., a Delaware corporation (hereafter,
"ZEVEX Delaware"), in order to change the Company's state of incorporation from
Nevada to Delaware (the preceding transaction is hereafter referred to as the
"Merger"). The Merger has been approved by the Company's shareholders and by the
Board of Directors and sole shareholder of ZEVEX Delaware as of October 23,
1997. The Company anticipates that the Merger will be consummated in November,
1997. See "DESCRIPTION OF CAPITAL STOCK -- Delaware Reincorporation" in the
Prospectus. Because the surviving entity of the Merger will be subject to
different statutory, charter, and internal governance provisions, certain
indemnification provisions relating to the Delaware General Corporate Law
("DGCL"), the Certificate of Incorporation filed in Delaware, and the Bylaws
adopted in connection therewith are described below.
DELAWARE LAW
Section 102(b)(7) of the DGCL allows a corporation to eliminate or limit
the personal liability of a director to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director except for: (i) any
breach of the duty of loyalty to the corporation or its stockholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) declaration of unlawful dividends or unlawful
stock repurchases or redemptions; (iv) any transaction from which the director
derived an improper personal benefit; or (v) any act or omission occurring prior
to the date any such provision eliminating or limiting such liability became
effective.
II-2
<PAGE> 80
Section 145(a) of the DGCL provides that a corporation may indemnify an
officer or director who is or is threatened to be made a party to a proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such officer or director is or was (i) serving as an officer,
director, employee, or agent of the corporation, or (ii) served at the request
of such corporation as a director, officer, employee, or agent of another
corporation or other enterprise or entity. Such indemnification may only be made
if the officer or director's conduct was in good faith and in a manner such
person reasonably believed to be in or not opposed to the corporation's best
interest, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful. Section 145(c) of the
DGCL provides that a corporation shall indemnify an officer or director for his
reasonable expenses in connection with the defense of any proceeding if the
officer or director has been successful, on the merits or otherwise. Section
145(e) provides that a corporation may advance expenses to an officer or
director who is made a party to a criminal or civil proceeding before a final
disposition is made, if the corporation receives an undertaking by or on behalf
of such officer or director to repay any amounts advanced if it is determined
that such officer or director is not entitled to indemnification. Section 145(j)
provides that the indemnification provisions of Section 145 continue for a
person who has ceased to be an officer or director, and inures to the benefit of
the heirs, executors, and administrators of such person. Section 145(g) provides
that a corporation may purchase and maintain insurance on behalf of officers or
directors, among others, against liabilities imposed upon them by reason of
actions in their capacities as such, and whether or not the corporation would
have the power to indemnify them against such liability under Section 145.
DELAWARE CERTIFICATE OF INCORPORATION
Article VII of the Certificate of Incorporation provides that the liability
of directors to the Company or its stockholders is eliminated to the fullest
extent permitted under the DGCL, as described in the preceding section.
BYLAWS OF ZEVEX DELAWARE
Article VI, Section 6.1(a) of the Bylaws of ZEVEX Delaware provides that an
officer or director who was or is made party to, or is threatened to made a
party to, or is involved in any proceeding by reason of the fact that he or she
is or was an officer or director, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
or as its representative in another enterprise shall be indemnified and held
harmless to the fullest extent permitted and subject to the standards of
conduct, procedures and other requirements under Delaware law. Article VI,
Section 6.1(a) further provides that ZEVEX Delaware may purchase and maintain
insurance on behalf of an officer or director against any liability arising out
of their status as such, whether or not the corporation would have the power to
indemnify such officer or director.
Article VI, Section 6.1(b) of the Bylaws provides that the right of an
officer or director to indemnification shall continue beyond termination as such
and inures to the benefit of the heirs and personal representatives of such
officer or director.
Article VI, Section 6.1(d) of the Bylaws provides that ZEVEX Delaware
shall, from time to time, reimburse or advance to an officer or director the
funds necessary for payment of expenses incurred in connection with defending
any proceeding for which he or she is indemnified by the corporation, in advance
of the final disposition of such proceeding, provided that, if then required by
the DGCL, such advancements may only be paid upon receipt by the corporation of
an undertaking by or on behalf of such officer or director to repay any such
amount so advanced if it is ultimately determined by a final and unappealable
judicial decision that the officer or director is not entitled to be indemnified
for such expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On September 30, 1997, the Company sold and issued 24,000 shares of Common
Stock to three individuals in connection with the exercise of warrants
originally issued to Wilson-Davis & Co. on May 7,
II-3
<PAGE> 81
1993. The Company believes that the transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) of such Act.
On February 12, 1997, in consideration for $1,250,000, the Company sold and
issued 500,000 shares of Common Stock together with warrants for 500,000 shares
of Common Stock to Blosch & Holmes, L.L.C., a Utah limited liability company. No
underwriting discounts or commissions were given or paid in connection with the
transaction. The warrants and shares were subsequently assigned to 16
individuals. All of the aforementioned purchasers represented to the
satisfaction of the Company that they qualify as "accredited investors" as that
term is defined under the Securities Act of 1933 (the "Securities Act"). The
Company believes that the transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) of such Act and Rule
506 promulgated thereunder.
On October 29, 1996, the Company sold and issued 130,000 shares of Common
Stock together with $50,000 cash to an individual in exchange for 3.7 acres of
certain real property valued at approximately $505,000. The property, which now
serves as the site for the Company's headquarters and manufacturing facility,
was conveyed to the Company by a General Warranty Deed dated December 29, 1996.
The Company believes that the transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) of such Act.
Since July 1, 1997, a few employees of the Company have exercised options
to purchase Common Stock of the Company under the Company's Stock Option Plan.
The exercise prices of the options ranged from $0.79 to $5.00 per share. The
shares of Common Stock issued under the Stock Option Plan have not been
registered under the Securities Act. As of September 30, 1997, the total number
of shares of Common Stock issued pursuant to such exercises is 44,110. The
Company believes that the aforementioned transactions are exempt from
registration under Section 3(b) of the Securities Act and Rule 505 promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Index of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE OF DOCUMENT
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of ZEVEX International, Inc., a Nevada
corporation(1)
3.2 Bylaws of ZEVEX International, Inc., a Nevada corporation(1)
3.3 Certificate of Incorporation of ZEVEX International, Inc., a Delaware
corporation
3.4 Bylaws of ZEVEX International, Inc., a Delaware corporation
5.1 Opinion of Jones, Waldo, Holbrook & McDonough*
10.1 Revolving Line of Credit Agreement between Bank One and Registrant, dated
September 29, 1997
10.2 ZEVEX Amended 1993 Stock Option Plan
10.3 Industrial Development Bond Offering Memorandum, dated October 30, 1996(2)
10.4 Industrial Development Bond Reimbursement Agreement, dated October 30, 1996(2)
10.5 Stock Purchase Agreement between Blosch & Holmes, L.L.C. and Registrant, dated
December 1, 1996, including one amendment(3)
11.1 Statement re Computation of Per Share Earnings(3)
21.1 List of Subsidiaries(3)
23.1 Consent of Jones, Waldo, Holbrook & McDonough (included in Exhibit 5.1)*
23.2 Consent of Daines & Rasmussen, P.C.(3)
23.3 Consent of Nielsen, Grimmett & Company(3)
</TABLE>
II-4
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE OF DOCUMENT
------ ------------------------------------------------------------------------------
<C> <S>
23.4 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on page II-6)
</TABLE>
- ---------------
(1) Filed as an exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992, filed on February 15, 1993, and
incorporated herein by this reference.
(2) Filed as an exhibit to Registrant's amended Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed on September 29, 1997, and
incorporated herein by this reference.
(3) Filed as an exhibit to the Registration Statement on Form S-1 filed by the
Company on October 3, 1997.
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and controlling
persons of the registrant pursuant to any provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by a controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a new form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 83
POWER OF ATTORNEY
Each person whose signature appears below hereby designates and appoints
Dean G. Constantine and Phillip L. McStotts and each of them, as his/her
attorneys-in-fact (the "Attorneys-in-Fact") with full power to act alone, and to
execute in the name and on behalf of each such person, individually in each
capacity stated below, one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as the Attorneys-in-Fact, or either of
them, deem appropriate, including any post-effective amendments, as well as any
related registration statement (or amendment thereto) filed in reliance upon
Rule 462(b) under the Securities Act of 1933, and to file each such amendment to
this Registration Statement, together with all exhibits thereto and any and all
documents in connection therewith with the U.S. Securities and Exchange
Commission, hereby granting unto said Attorneys-in-Fact and agents, and each of
them, full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said Attorneys-in-Fact and agents, or either
of them, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Salt Lake City, State of Utah, on October 24, 1997.
ZEVEX INTERNATIONAL, INC.
By: /s/ DEAN G. CONSTANTINE
------------------------------------
Dean G. Constantine
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement on Form S-1 was signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- -----------------
<C> <S> <C>
/s/ DEAN G. CONSTANTINE President, Chief Executive October 24, 1997
- ----------------------------------------------- Officer, and Director
Dean G. Constantine (Principal Executive
Officer)
* Vice President, Director of October 24, 1997
- ----------------------------------------------- Marketing, and Director
David J. McNally
* Chief Financial Officer, October 24, 1997
- ----------------------------------------------- Secretary/Treasurer, and
Phillip L. McStotts Director (Principal
Accounting Officer)
* Director October 24, 1997
- -----------------------------------------------
Bradly A. Oldroyd
* Director October 24, 1997
- -----------------------------------------------
Darla R. Gill
</TABLE>
*By: /s/ DEAN G. CONSTANTINE
---------------------------------
Dean G. Constantine
Attorney-in-Fact
II-6
<PAGE> 84
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE OF DOCUMENT PAGE NO.
------ -------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*.....................................
3.1 Articles of Incorporation of ZEVEX International, Inc., a Nevada
Corporation(1)......................................................
3.2 Bylaws of ZEVEX International, Inc., a Nevada Corporation(1)........
3.3 Certificate of Incorporation of ZEVEX International, Inc., a
Delaware corporation................................................
3.4 Bylaws of ZEVEX International, Inc., a Delaware corporation.........
5.1 Opinion of Jones, Waldo, Holbrook & McDonough*......................
10.1 Revolving Line of Credit Agreement between Bank One and Registrant,
dated September 29, 1997............................................
10.2 ZEVEX Amended 1993 Stock Option Plan................................
10.3 Industrial Development Bond Offering Memorandum, dated October 30,
1996(2).............................................................
10.4 Industrial Development Bond Reimbursement Agreement, dated October
30, 1996(2).........................................................
10.5 Stock Purchase Agreement between Blosch & Holmes, L.L.C. and
Registrant, dated December 1, 1996, including one amendment.........
11.1 Statement re Computation of Per Share Earnings......................
21.1 List of Subsidiaries................................................
23.1 Consent of Jones, Waldo, Holbrook & McDonough (included in Exhibit
5.1)*...............................................................
23.2 Consent of Daines & Rasmussen, P.C..................................
23.3 Consent of Nielsen, Grimmett & Company..............................
24.1 Power of Attorney (included on page II-5)...........................
</TABLE>
- ---------------
(1) Filed as an exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992, filed on February 15, 1993, and
incorporated herein by this reference.
(2) Filed as an exhibit to Registrant's amended Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed on September 29, 1997, and
incorporated herein by this reference.
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF INCORPORATION
OF
ZEVEX INTERNATIONAL, INC.
ARTICLE I. NAME
The name of the corporation is ZEVEX INTERNATIONAL, INC. (the
"Corporation").
ARTICLE II. REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in
the County of New Castle, in the State of Delaware. The name of the registered
agent at such address is the Corporation Trust Company.
ARTICLE III. PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV. CAPITAL STOCK
The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Preferred Stock" and "Common Stock." The number of
shares of Preferred Stock authorized to be issued is Two Million (2,000,000).
The number of shares of Common Stock authorized to be issued is Ten Million
(10,000,000). The Preferred Stock and the Common Stock shall each have a par
value of $0.001 per share.
(a) Provisions Relating to the Common Stock.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock standing in such holder's name on the records of the Corporation on
each matter submitted to a vote of the stockholders, except as otherwise
required by law.
(b) Provisions Relating to the Preferred Stock. The Board of Directors (the
"Board") is authorized, subject to limitations prescribed by law and the
provisions of this Article IV, to provide for the issuance of the shares of
Preferred Stock in accordance with Sections 102(a) and 151(a) of the General
Corporation Law of Delaware, in one or more series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
ARTICLE V. BOARD OF DIRECTORS
<PAGE> 2
(a) Number. The number of directors constituting the entire Board shall be
as fixed from time to time by vote of a majority of the entire Board, provided,
however, that the number of directors shall not be reduced so as to shorten the
term of any director at the time in office.
(b) Classified Board. The Board shall be divided into three classes, as
nearly equal in numbers as the then total number of directors constituting the
entire Board permits with the term of office of one class expiring each year. At
the first annual meeting of the stockholders, directors of the first class will
be elected to hold office for a term expiring at the next succeeding annual
meeting, directors of the second class will be elected to hold office for a term
expiring at the second succeeding annual meeting, and directors of the third
class will be elected to hold office for a term expiring at the third succeeding
annual meeting.
(c) Vacancies. Vacancies on the Board shall be filled by the affirmative
vote of the majority of the remaining directors, though less than a quorum of
the Board, or by election at an annual meeting or at a special meeting of the
stockholders called for that purpose.
(d) Initial Directors. The initial Board shall consist of the following
persons:
Dean G. Constantine
David J. McNally
Philip L. McStotts
Bradly A. Oldroyd
Darla R. Gill
(e) The election of directors need not be by written ballot.
ARTICLE VI. BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the Board is expressly authorized to make, alter, amend or repeal the By-Laws of
the Corporation.
ARTICLE VII. LIABILITY
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for or with
respect to any acts or omissions in the performance of his or her duties as a
director of the Corporation. Any amendment or repeal of this Article VII will
not eliminate or reduce the affect of any right or protection of a director of
the Corporation existing immediately prior to such amendment or repeal.
ARTICLE VIII. SPECIAL VOTING REQUIREMENTS
The following actions, when submitted to the stockholders of the
Corporation for their consideration, shall require the affirmative vote of at
least 66 2/3% of the outstanding Common Stock of the Corporation: amendment of
<PAGE> 3
Sections (a), (b), or (c) of Article V of the Certificate of Incorporation. The
foregoing voting requirements shall not otherwise be deemed to affect the voting
rights granted by this Certificate of Incorporation, the Bylaws, or the Delaware
General Corporation Law, to the Board.
ARTICLE IX. INCORPORATOR
The name and mailing address of the incorporator is as follows:
Ronald S. Poelman, Esq.
Jones, Waldo, Holbrook & McDonough
1500 Wells Fargo Plaza
170 South Main Street
Salt Lake City, Utah 84101
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying,
under penalties of perjury, that this is my act and deed and the facts herein
stated are true, and accordingly have hereunto set my hand this ____ day of
October, 1997.
/s/ RONALD S. POELMAN
-----------------------------------
Ronald S. Poelman
Incorporator
<PAGE> 1
EXHIBIT 3.4
BYLAWS
OF
ZEVEX INTERNATIONAL, INC.
ARTICLE I
SHAREHOLDERS
SECTION 1.1. ANNUAL MEETINGS. An annual meeting of shareholders shall be
held for the election of directors on such date, and at such time and place as
the Board of Directors may, from time to time, determine. Any other proper
business may be transacted at an annual meeting. If the annual meeting is not
held on the date designated, it may be held as soon thereafter as convenient and
shall be called the annual meeting.
SECTION 1.2. SPECIAL MEETINGS. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by the General Corporation
Law of the State of Delaware, may be called by the President or the Board of
Directors. The shareholders do not have the authority to call a special meeting
of the shareholders.
SECTION 1.3. SHAREHOLDER PROPOSALS/NOMINEES.
a. Shareholder Proposals. Shareholders seeking to place shareholder
proposals on the agenda for a shareholders' meeting must (i) notify the
Corporation of such proposal not less than 30 nor more than 60 days prior to the
date of the meeting; provided, however, that if the Corporation provides
shareholders with less than 40 days advance notice of the date of the meeting,
the shareholder notice must be given no later than the close of business on the
10th day following the day the Corporation's notice was mailed or publicly
disclosed. Such notice must provide the Corporation with adequate information
regarding the proposal.
b. Shareholder Director Nominees. Shareholders director nominations
must (i) be in writing and contain adequate information about the nominee; and
(ii) be received by the secretary of the Corporation not less than 30 nor more
than 60 days prior to the date of the meeting at which Directors will be
elected; provided, however, that if the Corporation provides shareholders with
less than 40 days advance notice of the date of the meeting, the shareholder
notice must be given no later than the close of business on the 10th day
following the day
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the Corporation's notice was mailed or publicly disclosed.
SECTION 1.4. NOTICE OF MEETINGS. Whenever shareholders are required or
permitted to take any action at a meeting, a written notice of the meeting will
be given that states the place, date, and hour of the meeting, and in the case
of a special meeting, the purpose(s) for which the meeting is called. Unless
otherwise provided by law, the Certificate of Incorporation, or these Bylaws,
the written notice of any meeting will be given not less than ten nor more than
sixty days before the date of the meeting to each shareholder entitled to vote
at such meeting. If mailed, such notice will be deemed to be given when
deposited in the United States mail, postage prepaid, directed to the
shareholder at his or her address as it appears in the records of the
Corporation.
SECTION 1.5. WAIVER OF NOTICE. A shareholder may waive notice of any
meeting; provided that a shareholder's attendance at a meeting shall constitute
waiver of notice of such meeting, except when the shareholder attends a meeting
for the express purpose of objecting to the transaction of any business to be
transacted at the meeting, and not for the purpose of objecting to the purpose
of the meeting.
SECTION 1.6. ADJOURNMENTS. Any meeting of shareholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, pursuant to Section 1.3, notice of the adjourned meeting will be given
to each shareholder of record entitled to vote at the meeting.
SECTION 1.7. RECORD DATE.
a. Determination of Record Date.
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For purposes of determining the number and identity of shareholders for any
purpose, the Board of Directors may fix a date in advance as the record date for
any such determination of shareholders, provided that the record date may not
precede the date of the resolution fixing the record date. The record date may
not be more than sixty days prior to the date that the particular action
requiring the determination of shareholders is to occur. If to determine the
shareholders entitled to notice of, or to vote at, a meeting of shareholders,
the record date may not be fewer than ten days prior to the meeting. The record
date for determining shareholders for any other purpose shall be at the close of
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business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of shareholders of record entitled to notice
of, or to vote at, a meeting of shareholders will apply to any adjournment of
the meeting; provided that the Board of Directors may fix a new record date for
the adjourned meeting.
b. Failure to Fix Record Date.
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If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice or to vote, or to receive
payment of a dividend, the date on which the notice is mailed or the Board of
Directors resolution declaring the dividend is adopted, as the case may be, will
be the record date for such determination of shareholders.
SECTION 1.8. LIST OF SHAREHOLDERS ENTITLED TO VOTE. At least ten days
before each meeting of shareholders, the officer or agent charged with
overseeing the stock transfer books of the Corporation will compile a complete
list of the shareholders entitled to vote at such meeting, or any adjournment
thereof, arranged in alphabetical order, with the address of and the number of
shares held by each. Such list will be kept on file at the Corporation's
principal office for the ten days before the meeting and will be subject to the
inspection of any shareholder during that ten day period during normal business
hours for any purpose related to the meeting and during the meeting.
SECTION 1.9. QUORUM. Except as otherwise provided by law, the Certificate
of Incorporation, or these Bylaws, a majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, will constitute
a quorum at a meeting of shareholders. If less than a majority of the
outstanding shares are represented at the meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. If
a quorum is present or represented at such adjourned meeting, any business may
be transacted that might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
SECTION 1.10. VOTING.
a. One Vote Per Share.
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Unless otherwise provided by the Certificate of Incorporation (or action of the
Board of Directors as provided therein) or these Bylaws, each outstanding share
entitled to vote will be entitled to one vote on each matter submitted to a vote
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at a meeting of shareholders.
b. Required Vote.
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Article VIII of the Certificate of Incorporation provides for super-majority
voting in certain circumstances. Except as set forth therein, or as provided in
the General Corporation Law of the State of Delaware, a majority vote of those
shares present and voting at a duly organized meeting will suffice to defeat or
enact any proposal; provided that with respect to votes to elect directors, a
plurality of the votes cast will be sufficient to elect.
c. Shares Held By Other Than the Record Owner.
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Shares held by an administrator, executor, guardian, or conservator may be voted
by him or her, in person or by proxy, without the transfer of such shares into
his or her name. Shares held in the name of a trustee may be voted by him or
her, in person or by proxy, only if the shares are transferred into the
trustee's name. Shares held in the name of, by or under the control of a
receiver may be voted by the receiver without transferring the shares into the
receiver's name if authority to do so is evidenced in an order from the court
that appointed the receiver. A shareholder whose shares are pledged shall be
entitled to vote his or her shares until the shares are transferred into the
name of the pledgee, and thereafter, the pledgee will be entitled to vote the
shares so transferred. Shares belonging to the Corporation or held by it in a
fiduciary capacity may not be voted, directly or indirectly, at any meeting, and
will not be counted in determining the total number of outstanding shares at any
given time.
SECTION 1.11. PROXIES.
a. General.
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At all meetings of shareholders, a shareholder may vote by proxy. Proxies must
be written, signed by the shareholder or by his or her duly authorized attorney
in-fact, and filed with the Secretary of the Corporation before or at the time
of a meeting where a proxy is granted. No proxy is valid after six months from
the date of its execution, unless otherwise provided in the proxy or such proxy
is coupled with an interest.
b. Irrevocable Proxies.
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A proxy may be irrevocable if it states that it is irrevocable and if, and only
as long as, it is coupled with an interest sufficient in law to support an
irrevocable power.
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c. Revocation of a Proxy.
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A shareholder may revoke any proxy that is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or by delivering a proxy in accordance with applicable law bearing a later
date to the Secretary of the Corporation.
Section 1.12. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
a. Action.
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Any action required to be taken at any annual or special meeting of shareholders
of the Corporation, or any action that may be taken at any annual or special
meeting of such shareholders may be taken without a meeting, without prior
notice, and without a vote, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
b. Notice.
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Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those shareholders who have not
consented in writing. If the action which is consented to is such as would have
required the filing of a certificate under any Section of the General
Corporation Law of Delaware, if such action had been voted on by shareholders at
a meeting thereof, then the certificate filed under such Section shall state, in
lieu of any statement required by such Section concerning any vote of
shareholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
ARTICLE II
Board of Directors
SECTION 2.1. NUMBER, QUALIFICATIONS. The Board of Directors shall consist
of that number of directors as are set from time to time by the affirmative vote
of a majority of the members of the Board of Directors. The Board of Directors
shall be divided into three classes, with only a single class subject to
re-election in a given year. Subject to Section 2.2, below, a director will hold
office until the next annual meeting of shareholders at which his or her class
is subject to re-election and until his or her successor is elected and
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qualified. Directors need not be shareholders of the corporation.
SECTION 2.2. ELECTION; RESIGNATION; VACANCIES. The Board of Directors will
initially consist of the persons named as directors in the Certificate of
Incorporation, and each director so elected will hold office until the first
annual meeting of shareholders and until his or her successor is elected and
qualified. At the first annual meeting of shareholders, the shareholders will
elect directors to serve in all three classes of the Board of Directors as
provided by the Certificate of Incorporation. Thereafter, one class of directors
will be elected each year at either an annual or special meeting of the
shareholders to hold office for the period of time designated for that class. If
there is only one nominee for any directorship, it will be in order to move
that the Secretary cast the elective ballot to elect the nominee. A director may
resign at any time on written notice to the Corporation. Any vacancy occurring
in the Board of Directors, whether by reason of death, resignation, removal, or
an increase in the number of directors, may be filled by the affirmative vote of
the majority of the remaining directors, though less than a quorum of the Board
of Directors, or by election at an annual meeting or at a special meeting of the
shareholders called for that purpose. A director elected to fill a vacancy will
be elected for the unexpired term of his predecessor in office.
SECTION 2.3. REGULAR MEETINGS. A regular meeting of the Board of Directors
for the election of officers and the transaction of any other business that may
properly come before the meeting shall be held immediately after, and at the
same place as, each annual meeting of shareholders, if a quorum of directors is
then present or as soon thereafter as may be convenient. Regular meetings of the
Board of Directors may be held at such places within or without the State of
Delaware and at such times as the Board of Directors may from time to time
determine. The Board of Directors may provide, by resolution, the date, time,
and place for the holding of additional regular meetings without other notice
than such resolution.
SECTION 2.4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the President or any director. The
person(s) authorized to call special meetings of the Board of Directors may fix
any place, within or without the State of Delaware, to hold a special meeting of
the Board of Directors. Notice of a special meeting must be given to each
director by the person(s) calling the meeting at least two days before the
meeting.
SECTION 2.5. WAIVER OF NOTICE. A director may waive notice of any meeting.
A director's attendance at a meeting shall constitute waiver of notice of such
meeting; provided that, when a director attends a meeting for the express
purpose
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of objecting to the transaction of any business to be transacted at the
meeting, the director will not be deemed to have waived notice of such meeting.
SECTION 2.6. TELEPHONIC MEETINGS PERMITTED. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of telephonic conference, or similar
communications equipment that permits all persons participating in the meeting
to hear each other, and participation in a meeting pursuant to this Bylaw will
constitute presence at such meeting.
SECTION 2.7. QUORUM. Vote Required for Action. At all meetings of the
Board of Directors, a majority of the whole Board of Directors will constitute a
quorum for the transaction of business. Unless required by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
these Bylaws, the vote of a majority of the directors present at a meeting at
which a quorum is present will be the act of the Board of Directors. If less
than a majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice. Once a quorum has
been established at a duly organized meeting, the Board of Directors may
continue to transact corporate business until adjournment, notwithstanding the
withdrawal of enough members to leave less than a quorum.
SECTION 2.8. PAYMENT OF EXPENSES. By resolution of the Board of Directors,
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors. Directors may be paid also either a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary as
director. Such payment will not preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 2.9. DISSENT TO CORPORATE ACTION. A director who is present at a
meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless he or she
(i) enters his or her dissent in the minutes of the meeting, (ii) files written
dissent to such action with the Secretary of the meeting before adjournment, or
(iii) expresses such dissent by written notice to the Secretary of the
Corporation within one (1) day after the adjournment of the meeting. The right
to dissent shall not apply to a director who voted in favor of such action.
SECTION 2.10. ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken at a meeting of the Board of Directors may be taken without a
meeting if all members of the Board of Directors sign a written consent with
respect to such action. Such consent shall be filed with the minutes of
proceedings of the Board of Directors.
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ARTICLE III
Committees
SECTION 3.1. COMMITTEES. The Board of Directors may, by resolution passed
by a majority of the whole Board of Directors, designate one or more committees,
each to consist of one or more of the directors. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not constituting a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent permitted by the General
Corporation Law of the State of Delaware and to the extent provided in the
resolution of the Board of Directors, will have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers that may require it.
SECTION 3.2. COMMITTEE RULES. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may make, alter,
and repeal rules for the conduct of its business. In the absence of such rules,
each committee will conduct its business pursuant to Article II of these Bylaws.
ARTICLE IV
Officers
SECTION 4.1. OFFICERS. The officers of the Corporation are President, Vice
President, Secretary, and Treasurer. Other officers and assistant officers may
be authorized and elected or appointed by the Board of Directors. An individual
is permitted to hold more than one office.
SECTION 4.2. ELECTION. The officers of the Corporation will be elected
annually by the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of the shareholders. If the election of
officers is not held at such meeting, it will be held as soon thereafter as
convenient. Each officer will hold office until his or her successor is duly
elected and qualified, or until his or her death, resignation or removal.
SECTION 4.3. REMOVAL. Any officer, elected or appointed, may be removed
by the Board of Directors, but such removal shall be without prejudice to the
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contract rights, if any, of the person so removed.
SECTION 4.4. VACANCY. A vacancy in any office for any reason may be filled
by majority vote of the Board of Directors, and any officer so elected will
serve for the unexpired portion of the term of such office.
SECTION 4.5. PRESIDENT. The President presides at all meetings of the Board
of Directors and of shareholders and has general charge and control over the
affairs of the Corporation subject to the Board of Directors. The President
signs or countersigns all certificates, contracts, and other instruments of the
Corporation as authorized by the Board of Directors and performs such other
duties incident to the office or required by the Board of Directors.
SECTION 4.6. VICE PRESIDENT. The Vice President exercises the functions
of the President in the President's absence, and has such powers and duties as
may be assigned to him or her from time to time by the Board of Directors.
SECTION 4.7. SECRETARY. The Secretary issues all required notices for
meetings of the Board of Directors and of the shareholders, keeps a record of
the minutes of the proceedings of the meetings of the Board of Directors and of
the shareholders, has charge of the Corporate Seal and the corporate books, and
makes such reports and performs such other duties as are incident to the office
or required by the Board of Directors.
SECTION 4.8. TREASURER. The Treasurer has custody of all monies and
securities of the Corporation, keeps regular books of account, disburses the
funds of the Corporation, renders account to the Board of Directors of all
transactions made on behalf of the Corporation and of the financial condition of
the Corporation from time to time as the Board requires, and performs all duties
incident to the office or properly required by the Board of Directors.
SECTION 4.9. ADDITIONAL OFFICERS. The Corporation may have such additional
officers as the Board of Directors deems necessary or appropriate including,
without limitation, a Chairman of the Board, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Assistant Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Each such officer shall perform those
duties as determined or assigned by the Board of Directors.
SECTION 4.10. SALARIES. The salaries of all officers will be fixed by the
Board of Directors, and may be changed from time to time by a majority vote of
the Board of Directors.
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ARTICLE V
Certificate of Shares
SECTION 5.1. CERTIFICATES. Certificates representing shares of the
Corporation will be in the form determined by the Board of Directors, and will
be signed by the Chairman of the Corporation or any officer, certifying the
number of shares owned by him or her in the Corporation. Any of or all the
signatures on the certificate may be a facsimile. If any officer, transfer agent
or registrar who has signed, or whose facsimile signature has been placed upon,
a certificate ceases to hold that position before the certificate is issued, it
may be issued by the Corporation with the same effect as if the officer,
transfer agent or registrar continued to hold that position at the date of
issue.
SECTION 5.2. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF NEW
CERTIFICATES. If a certificate is lost, stolen or destroyed, a new one may be
issued on such terms and indemnity to the Corporation as the Board of Directors
may prescribe.
ARTICLE VI
Indemnification of Directors and Officers
SECTION 6.1. DIRECTORS.
a. Right to Indemnification Insurance.
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Every person who was or is a party to, or is threatened to be made a party to,
or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she, or a
person of whom he is the legal representative, is or was a director or officer,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, or as its representative in another
enterprise (an "Indemnitee"), shall be indemnified and held harmless by the
Corporation to the fullest extent legally permissible under the laws of the
State of Delaware against all judgments, fines, penalties, excise taxes, amounts
paid in settlement and costs, charges and expenses (including attorneys' fees
and disbursements) actually and reasonably incurred or suffered by him or her in
connection therewith, subject to the standards of conduct, the procedures, and
other applicable provisions of the General Corporation Law of the State of
Delaware. Such right of indemnification is a contract right which may be
enforced in any manner desired by such person. The Corporation may purchase and
maintain insurance on behalf of an Indemnitee against any liability arising out
of such status, whether or not the corporation would have the power to indemnify
such
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person.
b. Inurement.
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The right to indemnification shall inure whether or not the claim asserted is
based on matters that predate the adoption of this Article VI, will continue as
to an Indemnitee who has ceased to hold the position by virtue of which he or
she was entitled to indemnification, and will inure to the benefit of his or her
heirs and personal representatives.
c. Non-exclusivity of Rights.
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The right to indemnification and to the advancement of expenses conferred by
this Section 6.1 are not exclusive of any other rights that an Indemnitee may
have or acquire under any statute, bylaw, agreement, vote of shareholders or
disinterested directors, this Certificate of Incorporation or otherwise.
d. Advancement of Expenses.
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The Corporation shall, from time to time, reimburse or advance to any Indemnitee
the funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with defending any proceeding for which he
or she is indemnified by the Corporation, in advance of the final disposition of
such proceeding; provided that, if then required by the General Corporation Law
of the State of Delaware, the expenses incurred by or on behalf of an Indemnitee
may be paid in advance of the final disposition of a proceedings only upon
receipt by the Corporation of an undertaking by or on behalf of such Indemnitee
to repay any such amount so advanced if it is ultimately determined by a final
and unappealable judicial decision that the Indemnitee is not entitled to be
indemnified for such expenses.
SECTION 6.2. OFFICERS, EMPLOYEES AND AGENTS. The Board of Directors may, on
behalf of the Corporation, grant indemnification to any officer, employee, agent
or other individual to such extent and in such manner as the Board of Directors
in its sole discretion may from time to time and at any time determine, in
accordance with the General Corporation Law of the State of Delaware.
ARTICLE VII
General Provisions
SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation will be fixed
by the Board of Directors.
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SECTION 7.2. AMENDMENTS. These Bylaws may be amended or repealed or new
Bylaws may be adopted (i) at any regular or special meeting of shareholders at
which a quorum is present or represented, by the vote of the holders of a
majority of the shares entitled to vote in the election of any directors,
provided notice of the proposed alteration, amendment or repeal is contained in
the notice of such meeting; or (ii) by affirmative vote of a majority of the
Board of Directors at any regular or special meeting thereof.
SECTION 7.3. BOOKS AND RECORDS; EXAMINATION. Any records maintained by the
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in any form of
information storage, provided that the records can be converted into clearly
legible form within a reasonable time. The books and records of the Corporation
may be kept outside of the State of Delaware. Except as may otherwise be
provided by the General Corporation Law of the State of Delaware, the Board of
Directors will have the power to determine from time to time whether and to what
extent and at what times and places and under what conditions any of the
accounts, records and books of the Corporation are to be open to the inspection
of any shareholder.
SECTION 7.4. DIVIDENDS. Subject to the provisions, if any, of the General
Corporation Law of Delaware and the Certificate of Incorporation, dividends on
the capital shares of the Corporation may be declared by the Board of Directors
at any regular or special meeting. Dividends may be paid in cash, in property or
in shares of the capital stock. Before payment of any dividend, the Board of
Directors may set aside out of any funds of the Corporation available for
dividends such reserves for any purpose that the directors will think conducive
to the interests of the Corporation.
SECTION 7.5. SEAL. The Corporation may or may not have a corporate seal, as
may from time to time be determined by resolution of the Board of Directors. If
a corporate seal is adopted, it will have inscribed thereon the name of the
corporation and the words "Corporate Seal" and "Delaware". The seal may be used
by causing it or a facsimile thereof to be impressed or affixed or in any manner
reproduced or by causing the word {SEAL}, in brackets, to appear where the seal
is required to be impressed or affixed.
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EXHIBIT 10.1
LINE OF CREDIT
LOAN AGREEMENT
(With Deposit Account Sweep)
In consideration of the covenants and conditions hereafter contained,
BANK ONE, UTAH, NA ("Bank" hereafter) and ZEVEX, INC. ("Borrower" hereafter)
and agree as follows:
1. REPRESENTATIONS.
A. To fund current operations and growth, Borrower has requested
that Bank extend to Borrower a revolving line or credit (Line of Credit).
B. Bank desires to lend to Borrower, on a revolving line of credit
basis, the amount set forth herein as the Line of Credit Limit, pursuant to the
terms and conditions of this Agreement and pursuant to the Loan Documents
executed in connection herewith.
C. All advances made to Borrower under this Line of Credit shall
be secured by the Collateral described herein or in a Security Agreement or
other lien instrument executed at any time prior to or in connection herewith.
D. Borrower has also established one or more demand deposit
accounts and an investment management account with Bank and desires to direct
and authorize Bank to transfer deposits from such deposit accounts to the line
of credit and from the line of credit to such accounts.
2. DEFINITIONS AND ACCOUNTING TERMS.
A. Defined Terms. As used in this Agreement, the following terms
have the following meanings (terms defined in the singular to have the same
meaning when used in the plural and vice versa):
"Accounts" means "accounts" as defined in the Utah Uniform Commercial
Code adopted in the state of Utah.
"Advances" means a borrowing under this Agreement.
"Affiliate" means any Person, (1) which directly or indirectly
controls, or is controlled by, or is under common control with the Borrower or
a Subsidiary; (2) which directly or indirectly beneficially owns or holds five
percent (5%) or more of any class of voting stock of the Borrower or any
Subsidiary; or (3) five percent (5%) or more of the voting stock of which is
directly or indirectly beneficially owned or held by the Borrower or a
Subsidiary. The term "control" means the possession, directly or
<PAGE> 2
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise.
"Agreement" means this Line of Credit Loan Agreement, as amended,
supplemented, or modified from time to time.
"Authorized Agent" means the Person or Persons authorized to execute
and deliver this Agreement or any instrument or agreement required hereunder on
behalf of the Borrower, as well as the Person or Persons authorized to obtain
Advances on behalf of Borrower as described in this Agreement.
"Borrowing Base" shall have the meaning as described in Section 3,
Paragraph A.
"Borrowing Base Certificate" means the certificate in the form and
substance satisfactory to Bank.
"Business Day" means any day other than a Saturday, Sunday, or other
day on which commercial banks in Salt Lake City, Utah are authorized or
required to close under the laws of the State of Utah.
"Collateral" means all property which is subject to the Lien granted
by a Security Agreement, or any other lien instrument.
"Debt" means (1) indebtedness or liability for borrowed money; (2)
obligations evidenced by bonds, debentures, notes, or other similar
instruments; (3) obligations for the deferred purchase price of property or
services (including trade obligations); (4) obligations as lessee under Capital
Leases; (5) current liabilities in respect of unfunded vested benefits under
Plans covered by ERISA; (6) obligations under letters of credit; (7) obligations
under acceptance facilities; and (8) all guaranties, endorsements (other than
for collection or deposit in the ordinary course of business), and other
contingent obligations to purchase, to provide funds for payment, to supply
funds to invest in any Person or entity, or otherwise to assure a creditor
against loss; and, (9) obligations secured by any Liens, whether or not the
obligations have been assumed.
"Default" means any of the events specified in this Agreement under
"Events of Default; Remedies", whether or not any requirement for the giving
of notice, the lapse of time, or both, or any other condition, has been
satisfied.
"Eligible Accounts Receivable" means an Account owing to Borrower, as
determined by Bank in its sole and absolute discretion, which has arisen from
the delivery and/or shipment of
<PAGE> 3
products previously made and/or from services rendered for which an invoice has
been issued by Borrower to its customer ("Customer") and (a) which amount is not
subject to any offset, counterclaim or defense asserted by the Customer, (b)
which amount is subject to a perfected security interest in favor of Bank and is
not subject to any other security interest, lien, claim or encumbrance, and (c)
which amount has not remained unpaid for more than 89 days after the date of the
related invoice, (d) where not more than fifteen percent (15%) of the total
amount owing from a Customer accounting for 5% or more of the total amount owing
to Borrower has remained unpaid for more than 89 days after the date of the
related invoice(s), excepting amounts due from Allergan, Mentor, Alaris and
Paradigm, (e) amounts due from Allergan, Mentor, Alaris and Paradigm which have
not remained unpaid for more than 30 days after the due date of the related
invoice and do not exceed 25% of the total accounts owing to Borrower, (f) which
amount is not an uninsured amount owing from a customer located in a foreign
country, (g) which amount is not owing from the United States of America or any
agency, department or subdivision thereof, unless a properly executed assignment
of claims has been received by Bank, (h) which amount is not the subject of any
threatened or actual litigation, (I) which amount is not owing from a Customer
who is also a supplier or creditor of the Borrower, (j) which amount is not
owing from a Subsidiary, Affiliate, officer or employee of the Borrower or an
intercompany transaction, (k) which amounts are not cash, C.O.D. accounts or
deposit payments for future products, and (i) which amounts are not consignment
accounts, manufacturer representative accounts, buy/sell accounts, or bill and
hold accounts.
"Eligible Inventory" means the Inventory (valued at the lower of cost
or market) of Borrower as determined by Bank in its sole and absolute
discretion, to be (a) in good condition and salable in the ordinary course of
Borrower's business, (b) owned by Borrower free and clear of any mortgages,
liens, security interests, claims, encumbrances or rights of others, excepting
only the security interest in favor of Bank, subject to a perfected security
interest in favor of bank, (d) not subject to any consignment to any Customer
and (e) not acquired by Borrower in or as part of a bulk transfer of sale or
assets unless Borrower has complied with all applicable bulk sales or bulk
transfer laws.
"Event of Default" means any of the events specified in this Agreement
under "Events of Default; Remedies," provided that any requirement for the
giving of notice, the lapse of time, or both, or any other condition, has been
satisfied.
"GAAP" means generally accepted accounting principles in the
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<PAGE> 4
United States.
"Guarantors" mean ZEVEX INTERNATIONAL, INC.
"Guaranty" means the Guaranty to be delivered by the Guarantors under
the terms of this Agreement.
"Inventory" means "inventory" as defined in the Uniform Commercial
Code, adopted in the State of Utah.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
any of the foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction to evidence any
of the foregoing).
"Line of Credit Limit" means One Million Dollars ($1,000,000).
"Loan Document" means this Agreement, any Security Agreement, Guaranty,
or hypothecation or other document executed in connection with this Agreement.
"Loan Index Rate" means the rate per annum charged and announced by
Bank One, Columbus, NA, or its successors, from time to time as its "prime
rate", which rate is not intended to be the lowest rate of interest charged by
the Bank to its borrowers. The Loan Index Rate will change on each day that the
"prime rate" changes.
"Loan Interest Rate" means a variable interest rate which shall at all
times during the term of this Agreement be equal to the total of the Loan Index
Rate plus the applicable Margin as defined herein.
"Margin" means the percentage points added to the Loan Index Rate to
determine the Loan Interest Rate pursuant to this Agreement. The Margin is set
forth above the signatures to this Agreement.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority, or other entity of whatever nature.
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<PAGE> 5
"Security Agreement" means the Security Agreement to be delivered by
the Borrower under the terms of this Agreement.
"Subsidiary" means, as to the Borrower, a other corporation of which
shares of stock having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation are at the time owned,
or the management of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both, by the Borrower.
B. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistent with those applied in the preparation of the financial
statements and all financial data submitted pursuant to this Agreement shall be
prepared in accordance with such principles.
3. CREDIT LIMIT.
A. Notwithstanding the Line of Credit Limit, Bank shall not be
required to Advance to Borrower at any one time under the provisions of this
Agreement an amount in excess of the Line of Credit Limit or the Borrowing Base,
whichever is less. The Borrowing Base shall be equal to the sum of (i) 75% x
Eligible Accounts Receivable; plus (ii) 25% x Eligible Inventory, not to exceed
$500,000.00.
4. TERMS OF LINE OF CREDIT.
A. Bank agrees to lend and Advance to Borrower from the date
hereof amounts which do not exceed the Line of Credit Limit or the Borrowing
Base, whichever is less. Borrower agrees to repay all Advances pursuant to
this Agreement in accordance with the terms described herein. The Line of
Credit Limit is the maximum amount Bank may be required to Advance to Borrower
under this Agreement.
B. It is understood that the amount available to Borrower will
vary in accordance with Advances to Borrower and payments by Borrower.
C. All funds available to Borrower under this Line of Credit will
be Advanced pursuant to the sweep provisions described in this Agreement and
Bank shall not have the right to deny any such Advance unless this Agreement
has been terminated.
D. Borrower, above the signatures to this Agreement, shall
designate demand deposit operating accounts ("Operating Accounts")
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<PAGE> 6
maintained at Bank and the minimum balance to be maintained in each. The
Borrower will designate which Operating Account or Consolidation Account will
be used for depositing advances under this Line of Credit.
E. Borrower authorizes Bank during each Business Day to transfer
Borrower's funds among and between the designated Operating Account, a
Consolidation Account established by Bank, if applicable, an Investment
Management Account (established by separate agreement) and this Line of Credit,
without any further written or oral authorization from Borrower, in accordance
with the following procedures:
(1) Each regular banking day, Bank will withdraw all collected
funds (as defined by Bank's existing funds availability policy) in the
Operating Accounts and deposit the same in the Consolidation Account (if
used), or in the Operating Account used for disbursement purposes if no
Consolidation Account is designated. All funds so consolidated shall be
applied in the following priority:
(i) First: Bank shall pay all checks and charges drawn
or incurred on Borrower's designated Operating Accounts,
including checks drawn for the purpose of accessing funds
available under this Line of Credit and further including wire
transfers, cash advances and charges pre-authorized by Borrower.
(ii) Second: Bank shall deposit into each Operating
Account the minimum balance described above the signatures to
this Agreement.
(iii) Third: Any excess funds shall be applied to the
outstanding principal due on this Line of Credit.
(iv) Fourth: Any remaining funds shall be deposited to
Borrower's Investment Management Account to be invested in
accordance with the terms of the agreement establishing the
Investment Management Account. All interest earned on the
Investment Management Account shall inure to the benefit of the
Borrower.
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<PAGE> 7
F. If sufficient collected funds are not available in the
Consolidation Account or Operating Account to provide for the requirements of
the first and second priorities described above, then funds sufficient to pay
the checks and charges and any overdrafts and to maintain the minimum balances
required, if any, shall be advanced first from the available balance in
Borrower's Investment Management Account and second from the Line of Credit. If
sufficient collected funds are still not available, Bank shall not be required
to satisfy the first and second priorities described above.
G. Every transaction contemplated herein is complete and binding
upon all parties hereto at such time as the Bank records the transaction on its
records.
H. The parties authorized to act for Borrower under this Agreement
shall be those parties specifically described herein as Authorized Agents or as
may be authorized to transact business or issue checks or other pre-authorized
charges on the Borrower's Operating Accounts or the Investment Management
Account.
I. All principal payments on this Line of Credit shall be made at
Borrower's discretion through appropriate deposits to one or more of the
Operating Accounts.
J. Bank, in its sole discretion, may make the transfers described
herein based upon the deposit of uncollected funds and any such transfers or
disbursements shall be reversed at the time of the receipt of any returned item.
K. Loan Interest Rate. Borrower shall pay to Bank interest on the
outstanding principal balance of all Advances obtained under the Line of Credit.
The interest rate shall be the Loan Interest Rate. The Loan Interest Rate may
change from time to time and the interest payable on the outstanding principal
balance will fluctuate with changes in the Loan Interest Rate. Interest shall be
computed daily on the basis of a 360 day year and charged on the number of
actual days Advances are outstanding.
L. Interest Payments. Bank will bill Borrower each month for
interest due for the preceding month on total outstanding Advances from the Line
of Credit. Interest will be due in arrears and the interest due must be paid to
Bank on the due date shown on each billing statement. If payment is not received
within ten (10) Business Days after the due date shown on the billing statement,
Borrower authorizes Bank to charge the Line of Credit for the amount of the
interest due for the preceding month so long as such charge does not cause the
outstanding principal balance to exceed
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<PAGE> 8
the Line of Credit Limit or the Borrowing Base, whichever is less. Bank, in
failing to render an interest statement, does not waive its right to receive or
collect interest payments.
M. Principal Payments. Until Bank declares a termination of the
Line of Credit following the occurrence and during the continuance of an Event
of Default, or otherwise notifies Borrower in writing, Borrower may make
payments on the principal balance of Advances outstanding on the Line of Credit
in amounts and at such times as Borrower, in its sole discretion, determines.
There shall be no pre-payment penalty. Principal payments may be paid directly
to Bank or pursuant to one or more deposits made to the Operating Account.
N. Compliance with Borrowing Base. If at any time during the term
of this Agreement, the Borrower obtains knowledge that the total principal
amount of all Advances outstanding exceeds the Line of Credit Limit or the
Borrowing Base whichever is less, the Borrower shall immediately reduce the
principal amount of the Advances outstanding at that time by an amount equal to
such excess.
O. Origination Fee. At the time of closing this Agreement,
Borrower shall pay to Bank a loan origination fee of $500.00. All other fees
and costs of documenting this Agreement, including attorney's fees, will be
paid for by Borrower at the time of closing.
P. Other Fees. Borrower shall pay to Bank a reasonable fee,
including outside attorneys' fees, to amend the Loan Agreement or any of the
Loan Documents. A reasonable fee may also be charged for Bank's review of any
request by the Borrower to modify or waive any restrictive covenants. A fee
charged to modify or waive a restrictive covenant does not imply that Bank
consented to the modification or waiver, but is only to reimburse Bank for its
time and effort in reviewing the request by Borrower. Bank shall issue a
statement for these fees. If the fees are not paid by the 15th day of the
following month, Borrower directs Bank to add the amount to the principal
balance of the Loan. Failing to render a statement does not waive the right to
receive or collect these fees.
Q. Initial Disbursement. The initial disbursement shall be used to
payoff the principal balance and terminate Borrower's existing line of credit
with Bank.
5. COLLATERAL.
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<PAGE> 9
A. The Collateral for all Advances made to Borrower under the Line
of Credit and all accrued interest, costs and fees shall be all of the
Borrower's Inventory and all rights to payment of money including but not
limited to Accounts, contract rights, chattel paper, instruments, general
intangibles, choses in action, furniture, fixtures and equipment now owned or
hereafter acquired and as further described in a Security Agreement or other
lien instrument executed at any time prior to or in connection with this
Agreement. In enforcing the terms of any Security Agreement, following
Borrower's default, Bank shall not be required to liquidate the Collateral in
any particular order. The Collateral is provided in consideration of the
availability of funds under this Agreement, and no security interest shall be
released or be deemed released until this Agreement has been terminated and all
amounts Advanced have been paid in full. No junior Lien on any of Bank's
Collateral shall affect the priority of any Advance made to Borrower under this
Agreement.
B. Borrower agrees that any and all Collateral given to secure
Borrower's obligations and indebtedness under this Agreement shall also secure
any and all liabilities and obligations of Borrower to Bank existing now or in
the future (including that certain Reimbursement Agreement in the initial amount
of $2,024,658 dated on or about October 1, 1996, whether for the payment of
money or otherwise, whether absolute or contingent, whether as principal,
endorser, guarantor, or otherwise, whether originally due to Bank or to a third
Person and assigned endorsed to Bank and whether several, joint, or joint and
several, all as they may be amended, modified, extended, renewed, restated, or
supplemented from time to
6. TERMINATION.
A. Termination by Borrower. Borrower may terminate this Agreement
at any time by furnishing Bank with a written notice that this Agreement is
terminated and coincidentally therewith paying all Advances, including
interest, fees and charges, outstanding under the Line of Credit.
B. Termination by Bank. In the event of Borrower's Default, and
following notice and failure by Borrower to cure as required herein, Bank may
terminate its obligation to make further Advances under this Agreement.
Borrower's default is not waived by any action of Bank other than by a written
waiver of Default.
7. MATURITY.
Notwithstanding any provision herein to the contrary, all outstanding
Advances together with accrued and unpaid interest,
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<PAGE> 10
fees and charges shall mature and be due and payable in full May 31, 1998.
8. PLEDGE.
Borrower does hereby pledge to Bank and grant to Bank a security
interest, perfected by possession, on all of Borrower's accounts, credits,
assets or things of value that from time to time are in the possession and/or
control of Bank. In the event of Default, as defined herein, and Borrower's
failure to cure the Default, Bank may exercise its rights under the pledge and
apply the pledged property to the outstanding balance of Advances due to Bank.
9. CONDITIONS PRECEDENT.
A. Condition Precedent to the Loan. The obligation of Bank to make
the Line of Credit Loan to Borrower is subject to the condition precedent that
the Bank shall have received on or before the date of such Line of Credit each
of the following, in form and substance satisfactory to Bank and its counsel:
(I) Agreement. This Line of Credit Agreement duly executed
by the Borrower.
(ii) Security Agreement. A Security Agreement, duly executed
by the Borrower, together with acknowledged copies of Financing
Statements (UCC-1) duly filed under the Uniform Commercial Code of all
jurisdictions necessary or, in the opinion of the Bank, desirable to
perfect the security interest created by the Security Agreement.
(iii) Evidence of all corporate action by the Borrower.
Certified (as of the date of this Agreement) copies of all corporate
action taken by the borrower, including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of this
Agreement and each other document to be delivered pursuant to this
Agreement.
(iv) Evidence of all corporate action by the Guarantor.
Certified (as of the date of this Agreement) copies of all corporate
action taken by the Guarantor, including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of the
Guaranty and each other document to be delivered pursuant to the
Guaranty.
(v) Guaranty. The Guaranty duly executed by the Guarantor.
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<PAGE> 11
(vi) Additional Documentation. The Bank shall have received
such other approvals, opinions, or documents as the Bank may reasonably
request.
10. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Bank that:
A. Incorporation, Good Standing and Due Qualification. The
Borrower and each of its Subsidiaries is a corporation duly incorporated,
validly existing, and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own its assets and
to transact the business in which it is now engaged or proposed to be engaged
in; and is duly qualified as a foreign corporation and in good standing under
the laws of each other jurisdiction in which such qualification is required.
B. Corporate Power and Authority. The execution, delivery, and
performance by the Borrower of this Agreement have been duly authorized by all
necessary action and do not and will not (1) require any consent or approval of
the stockholders of Borrower; (2) contravene Borrower's charter or bylaws;
(3) violate any provision of any law, rule, regulation (including, without
limitation, Regulations U and X of the Board of Governors of the Federal
Reserve System), order, writ, judgment, injunction, decree, determination or
award presently in effect having applicability to Borrower; (4) result in a
breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease, or instrument to which Borrower is a
party or by which it or its properties may be bound or affected; (5) result in,
or require, the creation or imposition of any Lien, upon or with respect to any
of the properties now owned or hereafter acquired by Borrower; and (6) cause
Borrower to be in default under any such law, rule, regulation, order, writ,
judgment, injunction, decree, determination, or award or any such indenture,
agreement, lease, or instrument.
C. Legally Enforceable Agreement. This Agreement is, and each of
the other Loan Documents when delivered under this Agreement will be, legal,
valid and binding obligations of the Borrower enforceable against the Borrower
in accordance with their respective terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency, and other
similar laws affecting creditors' rights generally.
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<PAGE> 12
D. Financial Statements. The balance sheet of the Borrower and its
Subsidiaries as of December 31, 1996, and the related statements of income and
retained earnings of the Borrower and its Subsidiaries for the fiscal year then
ended, copies of which have been furnished to the Bank, are complete and
correct and fairly present the financial condition of the Borrower and its
Subsidiaries as at such dates and the results of the operations of the Borrower
and its Subsidiaries for the periods covered by such statements, all in
accordance with GAAP consistently applied (subject to year-end adjustments in
the case of the interim financial statements), and since June 30, 1997, there
has been no material adverse change in the condition (financial or otherwise),
business, or operations of the Borrower or any Subsidiary. Except as stated
above, there are no liabilities of the Borrower or any Subsidiary, fixed or
contingent, which are material but are not reflected in the financial
statements or in the notes thereto, other than liabilities arising in the
ordinary course of business. No information, exhibit, or report furnished by
the Borrower to the Bank in connection with the negotiation of this Agreement
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statement contained therein not materially
misleading.
E. Other Agreements. Neither the Borrower, nor any Subsidiary, is
a party to any indenture, loan, or credit agreement, or to any lease or other
agreement or instrument, or subject to any charter or corporate restriction
which could have a material adverse effect on the business, properties, assets,
operations or conditions, financial or otherwise, of the Borrower or any
Subsidiary, or the ability of the Borrower to carry out its obligations under
this Agreement. Neither the Borrower nor any Subsidiary is in default in any
respect in the performance, observance, or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or instrument
material to its business to which it is a party.
F. Litigation. There is no pending or threatened action or
proceeding against or affecting the Borrower or any of its Subsidiaries before
any court, governmental agency, or arbitrator, which may, in any one case or in
the aggregate, materially adversely affect the financial condition, operations,
properties, or business of the Borrower to perform its obligations under this
Agreement.
G. No Defaults on Outstanding Judgments or Orders. The Borrower and
its Subsidiaries have satisfied all judgments, and neither the Borrower nor any
Subsidiary is in default with respect to any judgment, writ, injunction,
decree, rule, or regulation of
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<PAGE> 13
any court, arbitrator, or federal, state, municipal, or other governmental
authority, commission, board, bureau, agency, or instrumentality, domestic or
foreign.
H. Ownership and Liens. The Borrower and each Subsidiary have
title to, or valid leasehold interests in, all of their properties and assets,
real and personal, including the properties and assets and leasehold interest
reflected in the financial statements referred to herein (other than any
properties or assets disposed of in the ordinary course of business), and none
of the properties and assets owned by the Borrower or any Subsidiary and none
of their leasehold interests is subject to any Lien, except such as may be
permitted pursuant to this Agreement.
I. Operation of Business. The Borrower and its Subsidiaries
possess all licenses, permits, franchises, patents, copyrights, trademarks, and
trade names, or rights thereto, to conduct their respective businesses
substantially as now conducted and as presently proposed to be conducted, and
the Borrower and its Subsidiaries are not in violation of any valid rights of
others with respect to any of the foregoing.
J. Taxes. The Borrower and each of its Subsidiaries have filed
all tax returns (federal, state and local) required to be filed and have paid
all taxes, assessments, and governmental charges and levies thereon to be due,
including interest and penalties.
11. AFFIRMATIVE COVENANTS.
So long as this Agreement shall remain in effect, the Borrower will:
A. Maintenance of Existence. Preserve and maintain, and cause each
Subsidiary to preserve and maintain, its corporate existence and good standing
in the jurisdiction of its incorporation, and qualify and remain qualified, and
cause each Subsidiary to qualify and remain qualified, as a foreign corporation
in each jurisdiction in which such qualification is required.
B. Maintenance of Records. Keep, and cause each Subsidiary to
keep, adequate records and books of account, in which complete entries will be
made in accordance with GAAP consistently applied, reflecting all financial
transactions of the Borrower and its Subsidiaries.
C. Maintenance of Properties. Maintain, keep, and preserve,
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<PAGE> 14
and cause each Subsidiary to maintain, keep, and preserve, all of its properties
(tangible and intangible) necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
D. Conduct of Business. Continue, and cause each Subsidiary to
continue, to engage in an efficient and economical manner in a business of the
same general type as now conducted by it on the date of this Agreement.
E. Maintenance of Insurance. Maintain, and cause each Subsidiary to
maintain, insurance with financially sound and reputable insurance companies or
associations in such amounts and covering such risks as are usually carried by
companies engaged in the same or a similar business and similarly situated,
which insurance may provide for reasonable deductibility from coverage thereof.
F. Compliance with Laws. Comply, and cause each Subsidiary to comply,
in all respects with all applicable laws, rules, regulations, and orders, such
compliance to include, without limitation, paying before the same become
delinquent all taxes, assessments, and governmental charges imposed upon it or
upon its property.
G. Right of Inspection. At any reasonable time and from time to time,
permit the Bank or any agent or representative thereof to examine and make
copies of and abstracts from the records and books of account of, and visit the
properties of, the Borrower and any Subsidiary, and to discuss the affairs,
finances, and accounts of the Borrower and any Subsidiary with any of their
respective officers and directors and the Borrower's independent accountants.
H. Reporting Requirement. Furnish to the Bank:
(1) Quarterly financial statements. As soon as available
and in any event within 60 days after the end of each of the first three
quarters of each fiscal year of the Borrower, consolidated balance
sheets of the Borrower and Guarantor as of the end of such quarter,
statements of income and retained earnings of the Borrower and Guarantor
for the period commencing at the end of the previous fiscal year and
ending with the end of such quarter, all in reasonable detail and all
prepared in accordance with GAAP consistently applied (subject to
year-end adjustments);
(2) Annual financial statements. As soon as available and
in any event within 120 days after the end of each fiscal
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<PAGE> 15
year of the Borrower, audited consolidated balance sheets of the
Borrower and Guarantor as of the end of such fiscal year and statements
of income and retained earnings of the Borrower and Guarantor for such
fiscal year and statements of cash flows of the Borrower and Guarantor
for such fiscal year, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and
period in the prior fiscal year and all prepared in accordance with GAAP
consistently applied and as to the consolidated statements accompanied
by an opinion thereon acceptable to the Bank by certified public
accountants selected by the Borrower and acceptable to the Bank.
(3) Notice of litigation. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any court
or governmental department, commission, board, bureau, agency, or
instrumentality, domestic or foreign, affecting the borrower or any
Subsidiary which, if determined adversely to the Borrower or such
Subsidiary, could have a material adverse effect on the financial
condition, properties, or operations of the Borrower or such Subsidiary;
(4) Other Reporting Requirements. Borrower will furnish to
Bank within ten (10) days after the end of each month: (1) current lists
of all accounts receivable showing the name of the account debtor, the
amount and age of the account, and, at Bank's request, addresses of the
account debtors, (2) current lists of all trade accounts payable showing
the name of the trade creditor, the age of the payable, and, at Bank's
request, the addresses of the trade creditors, (3) a current Inventory
summary report, and (4) a Borrowing Base Certificate in a form approved
by Bank. Bank shall have the right to verify the validity, amount, or
any other matter relating to any account.
(5) Notice of Default and Events of Default. As soon as
possible and in any event within fifteen (15) days after the occurrence
of each Default or Event of Default, a written notice setting forth the
details of such Default or Event of Default and the action which is
proposed to be taken by the Borrower with respect thereto;
(6) General information. Such other information respecting the
condition or operations, financial or otherwise, of the Borrower or any
Subsidiary as the Bank may from time to time reasonably request;
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<PAGE> 16
I. Environment. Be and remain, and cause each Subsidiary to be and
remain, in compliance with the provisions of all federal, state, and local
environmental, health, and safety laws, codes and ordinances, and all rules and
regulations issued thereunder, notify the Bank immediately of any notice of a
hazardous discharge or environmental complaint received from any governmental
agency or any other party; notify the Bank immediately of any hazardous
discharge from or affecting its premises; immediately contain and remove the
same, in compliance with all applicable laws; promptly pay any fine or penalty
assessed in connection therewith; permit the Bank to inspect the premises, to
conduct tests thereon, and to inspect all books, correspondence, and records
pertaining thereto; and at the Bank's request, and at the Borrower's expense,
provide a report of a qualified environmental engineer, satisfactory in scope,
form, and content to the Bank, and such other and further assurances reasonably
satisfactory to the Bank that the condition has been corrected.
J. Banking Relationship. Bank shall be the Borrower's sole Bank of
account for all receipts and disbursements in connection with the Borrower's
business.
12. NEGATIVE COVENANTS.
So long as any Advance shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower will not:
A. Liens. Create, incur, assume, or suffer to exist, or permit any
Subsidiary to create, incur, assume, or suffer to exist, any Lien upon or with
respect to any of its properties, now owned or hereafter acquired, except:
(1) Liens in favor of the Bank;
(2) Liens for taxes and assessments or other governmental
charges or levies if not yet due and payable or, if due and payable, if
they are being contested in good faith by appropriate proceedings and
for which appropriate reserves are maintained;
(3) Liens imposed by law, such as mechanics', materialmen's,
landlord's, warehousemen's, and carriers' Liens, and other similar
Liens, securing obligations incurred in the ordinary course of business
which are not past due for more than ninety (90) days or which are being
contested in good faith in appropriate proceedings and for which
appropriate reserves have been established;
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<PAGE> 17
(4) Liens under workers' compensation, unemployment insurance,
Social Security, or similar legislation;
(5) Liens, deposits, or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance, or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(6) Liens existing as of the date of this Agreement.
(7) Judgment and other similar Liens arising in connection with
Court proceedings, provided the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings;
(8) Easements, rights-of-way, restrictions, and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use, and enjoyment by the Borrower or any Subsidiary of the property
or assets encumbered thereby in the normal course of its business or materially
impair the value of the property subject thereto;
(9) Liens securing obligations of a Subsidiary to the Borrower or
another Subsidiary; and,
B. Debt. Create, incur, assume, or suffer to exist, or permit any
Subsidiary to create, incur, assume, or suffer to exist, any Debt, except:
(1) Debt of the Borrower to Bank;
(2) Debt as of the date of this Agreement as shown on the financial
statement dated June 30, 1997.
(3) Debt of the Borrower subordinated on terms satisfactory to the
Bank to the Borrower's obligations under this Agreement;
(4) Debt of the Borrower to any Subsidiary or of any Subsidiary to
the Borrower or another Subsidiary;
(5) Accounts payable to trade creditors for goods or services which
are acquired in the ordinary course of Borrower's and Subsidiaries business.
-17-
<PAGE> 18
C. Mergers, Etc. Wind up, liquidate or dissolve itself,
reorganize, merge or consolidate with or into, or convey, sell, assign,
transfer, lease, or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to any Person, or acquire all or substantially all
of the assets or the business of any Person, or permit any Subsidiary to do so,
except that (1) any Subsidiary may merge into or transfer assets to the
Borrower and (2) any Subsidiary may merge into or consolidate with or transfer
assets to any other Subsidiary.
D. Leases. Create, incur, assume, or suffer to exist, or permit
any Subsidiary to create, incur, assume, or suffer to exist, any obligation as
lessee for the rental or hire of any real or personal property, except: (1)
leases existing on the date of this Agreement and any extensions or renewals
thereof; (2) leases which do not in the aggregate require the Borrower and its
Subsidiaries on a consolidated basis to make payments (including taxes,
insurance, maintenance, and similar expenses which the Borrower or any
Subsidiary is required to pay under the terms of any lease) in any fiscal year
of the Borrower in excess of $25,000.00; and, (4) leases between the Borrower
and any Subsidiary or between any Subsidiaries.
E. Sale and Leaseback. Sell, transfer, or otherwise dispose of, or
permit any Subsidiary to sell, transfer, or otherwise dispose of, any real or
personal property to any Person and thereafter directly or indirectly lease
back the same or similar property.
F. Dividends. Declare or pay any dividends; or purchase, redeem,
retire, or otherwise acquire for value any of its capital stock now or
hereafter outstanding; or make any distribution of assets to its stockholders
as such whether in cash, assets, or obligations of the Borrower; or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption, or retirement of any shares of its capital
stock; or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock; or permit any of its Subsidiaries
to purchase or otherwise acquire for value any stock of the Borrower or another
Subsidiary, except that the Borrower (1) may declare and deliver dividends and
make distributions payable solely in common stock of the Borrower and (2) may
purchase or otherwise acquire shares of its capital stock by exchange for or
out of the proceeds received from a substantially concurrent issue of new
shares of its capital stock.
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<PAGE> 19
G. Sale of Assets. Sell, lease, assign, transfer, or otherwise
dispose of, or permit any Subsidiary to sell, lease, assign, transfer or
otherwise dispose of, any of its now owned or hereafter acquired assets
(including, without limitation, shares of stock and indebtedness of
Subsidiaries, receivables, and leasehold interests), except: (1) inventory
disposed of in the ordinary course of business; (2) the sale or other
disposition of assets no longer used or useful in the conduct of its business;
and (3) that any Subsidiary may sell, lease, assign, or otherwise transfer its
assets to the Borrower.
H. Guaranties, Etc. Assume, guaranty, endorse, or otherwise be or
become directly or contingently responsible or liable, or permit any Subsidiary
to assume, guaranty, endorse, or otherwise be or become directly or
contingently responsible or liable (including, but not limited to, an agreement
to purchase any obligation, stock, assets, goods, or services, or an agreement
to maintain or cause such Person to maintain a minimum working capital or net
work, or otherwise to assure the creditors of any Person against loss) for
obligations of any Person, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
I. Transactions With Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale, or exchange of property or
the rendering of any service, with any Affiliate, or permit any Subsidiary to
enter into any transaction, including, without limitation, the purchase, sale,
or exchange of property or the rendering of any service, with any Affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
the Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Borrower or such Subsidiary than would obtain
in a comparable arm's length transaction with a Person not an Affiliate.
13. FINANCIAL COVENANTS.
So long as Advances under the Line of Credit shall remain unpaid or the
Bank shall have any commitment under this Agreement:
A. Debt Coverage. The Borrower will maintain on a consolidated
basis as of the end of each fiscal year a ratio of (earnings + interest expense
+ depreciation + amortization) to (interest expense + current maturity of long
term debt + capital lease payments) of not less than 1.4 to 1.0.
B. Net Worth. At each date as set forth below the Borrower will
achieve and maintain a consolidated tangible net worth of not
-19-
<PAGE> 20
less than:
Date Tangible Net Worth
---- ------------------
December 31, 1997 $3,500,000
December 31, 1998 $4,000,000
C. Debt to Worth. The Borrower shall maintain at all times ratio
of consolidated Debt to consolidated tangible net worth of not less than
1.25:1.0.
D. Working Capital. The Borrower shall maintain at all times an
excess of consolidated current assets over consolidated current liabilities of
not less than $750,000.00.
14. EVENTS OF DEFAULT; REMEDIES.
If one or more of the following events shall occur ("Events of Default"
or an "Event of Default"):
A. Borrower shall default in the due and punctual payment of
principal or interest on the Line of Credit or any other of its obligations due
to Bank or any part thereof, when the same become due and payable, whether at
maturity or otherwise; or
B. Borrower shall fail to pay any other of its debts or fail to
perform or observe any other of the terms, provisions, covenants, restrictions,
agreements or obligations to be performed by it under this Agreement, or under
agreements or instruments given under this Agreement; or
C. Any representation or warranty made in writing by or on behalf
of Borrower or Guarantor herein or pursuant hereto or otherwise in any report,
certificate or other instrument furnished in connection with this Agreement
shall prove to have been inaccurate or incomplete in any material respect on
the date which it was made; or
D. Borrower or Guarantor shall be adjudicated bankrupt or
insolvent, or generally not pay its debts as they become due, or make an
assignment for the benefit of creditors; or Borrower shall apply for or consent
to the appointment of a custodian, receiver, trustee, or similar officer for it
or for all or substantially all of its property.
E. Guarantor shall fail to perform or observe any of the terms,
provisions, covenants, restrictions, agreements or obligations to be performed
by it under the Guaranty or take any
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<PAGE> 21
action to repudiate the Guaranty.
THEN, Bank, upon the occurrence of any Event(s) of Default, may terminate
this Agreement and, in addition, without presentment, demand, protest, or notice
of any kind, all of which are hereby expressly waived by Borrower:
(a) declare the unpaid principal balance, and all interest thereon
and all other amounts payable under this Agreement immediately due and
payable.
(b) immediately, without expiration of any further period of grace,
enforce payment of all obligations of Borrower to Bank under this Agreement
and under agreements executed in connection herewith and may exercise any
and all other remedies granted to Bank at law, in equity or otherwise.
(c) exercise all of Bank's rights under the terms of any security
agreement, assignment, trust deed, pledge or other lien document executed
in connection herewith.
E. Borrower agrees that after the exercise by Bank of the remedies
specified above and both before and after judgment, the obligations due
hereunder shall accrue interest until paid at the rate of eighteen percent (18%)
per annum.
F. After default, Borrower agrees to pay all reasonable expenses and fees
including reasonable attorney's fees and court costs incurred in the collection
of the obligations and/or incurred in any bankruptcy or insolvency proceedings
or in any arbitration proceedings.
15. MISCELLANEOUS.
A. Amendments, Etc. No amendment, modification, termination, or waiver
of any provision of any Loan Document to which the Borrower is a party, nor
consent to any departure by the Borrower from any Loan Document to which it is
a party, shall in any event be effective unless the same shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
B. Notices, Etc. All notices and other communications provided for under
this Agreement and under the other Loan Documents to which the Borrower is a
party shall be in writing (including telegraphic, telex, and facsimile
transmissions) and mailed or transmitted or delivered, if to the Borrower, at
its address shown above the signatures to this Agreement, and if to the
-21-
<PAGE> 22
Bank, at its address shown above the signatures to this Agreement; or, as to
each party, at such other address as shall be designated by such party in a
written notice to the other party complying as to delivery with the terms of
this Section. Except as otherwise provided in this Agreement, all such notices
and communications shall be effective when deposited in the mails or delivered
to the telegraph company, or sent, answer back received, respectively,
addressed as aforesaid.
C. No Waiver. No failure or delay on the part of the Bank in exercising any
right, power, or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right, power, or remedy preclude any
other or further exercise thereof or the exercise of any other right, power, or
remedy hereunder. The rights and remedies provided herein are cumulative, and
are not exclusive of any other rights, powers, privileges, or remedies, now or
hereafter existing, at law or in equity or otherwise.
D. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the Borrower and the Bank and their respective successors and
assigns, except that the Borrower may not assign or transfer any of its rights
under this Agreement or document to which the Borrower is a party without the
prior written consent of the Bank.
E. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all
costs and expenses incurred by the Bank in connection with the preparation,
execution, delivery, filing, and administration of this Agreement, and of any
amendment, modification, or supplement to this Agreement, including, without
limitation, the fees and out-of-pocket expenses of counsel for the Bank incurred
in connection with advising the Bank as to its rights and responsibilities
hereunder. The Borrower also agrees to pay all such costs and expenses,
including courts costs, incurred in connection with enforcement of this
Agreement, or any amendment, modification, or supplement thereto, whether by
negotiation, legal proceedings, or otherwise.
F. Integration. This Agreement contains the entire agreement between the
parties relating to the subject matter hereof and supersedes all oral statements
and prior writings with respect thereto.
G. Indemnity. The Borrower hereby agrees to defend, indemnify, and hold the
Bank harmless from and against any and all claims, damages, judgments,
penalties, costs and expenses
-22-
<PAGE> 23
(including attorney fees and court costs now or hereafter arising from the
aforesaid enforcement of this clause) arising directly or indirectly from the
activities of the Borrower and its Subsidiaries, its predecessors in interest,
or third parties with whom it has a contractual relationship, or arising
directly or indirectly from the violation of any environmental protection,
health, or safety law, whether such claims are asserted by any governmental
agency or other person. This indemnity shall survive termination of this
Agreement.
H. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Utah.
I. Severability of Provisions. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of such Loan Document or affecting the
validity or enforceability of such provision in any other jurisdiction.
J. Jury Trial Wavier. THE BANK AND THE BORROWER HEREBY WAIVE TRIAL BY JURY
IN ANY ACTION, PROCEEDING, CLAIM, OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT,
AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR
THE LOAN DOCUMENTS. NO OFFICER OF THE BANK HAS AUTHORITY TO WAIVE, CONDITION, OR
MODIFY THIS PROVISION.
The Agents authorized to act for Borrower under this Agreement are:
NAME SIGNATURE
---- ---------
Dean G. Constantine /s/ DEAN G. CONSTANTINE
- ------------------------ -----------------------------
Phillip L. McStotts /s/ PHILLIP L. MCSTOTTS
- ------------------------ -----------------------------
The additional percentage points ("Margin") to be added to the Loan
Index Rate are 1.0 percentage points. The initial Loan Interest Rate payable on
Advances made under the Line of Credit is 9.5% per annum.
All Advances on the Line of Credit shall be deposited into
Consolidation Account No. 1260-4637.
The Borrower's Operating Accounts and the minimum deposits to be
maintained in each are follows:
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<PAGE> 24
Operating Account Number Minimum Balance
- ------------------------ ---------------
1135-7769 -0-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by authority duly given as of this 29th day of September, 1997.
BANK: BORROWER:
BANK ONE, UTAH, NA ZEVEX, INC.
By: /s/ RANDY S. CAMERON By: /s/ PHILLIP L. MCSTOTTS
------------------------------ -------------------------------
RANDY S. CAMERON PHILLIP L. MCSTOTTS
Title: SR. VICE PRESIDENT Its: CFO
Address: Address:
80 West Broadway, Suite 200 5175 Greenpine Drive
Salt Lake City, Utah 84101 Salt Lake City, Utah 84123
-24-
<PAGE> 25
SECURITY AGREEMENT - ACCOUNTS RECEIVABLE AND INVENTORY
For value received, the undersigned hereinafter called "Borrower" hereby
assigns and grants to Bank One, Utah, NA, the secured party hereunder and
hereafter called "Bank", a security interest in the personal property hereafter
described and hereinafter called "Collateral" and agrees and acknowledges that
Bank has and shall continue to have a security interest in said Collateral
whether the same is now owned, whether acquired from the proceeds of loans by
the Bank, hereafter acquired and in the proceeds from said Collateral for the
purpose of securing the payment of any and all indebtednesses and liabilities
whatsoever of Borrower to Bank whether direct, indirect, absolute or
contingent, due or to become due, whether now existing or hereafter arising and
howsoever evidenced or acquired and whether several, joint or joint and
several. It is understood that this agreement is for the purpose of supporting
a continuing and varying credit relationship between Bank and Borrower and that
the amounts of indebtedness may vary from time to time and may be indicated by
the Borrower's loan accounts, promissory notes, receipts and other evidences
of indebtedness.
COLLATERAL:
1. All rights to payment of money now owned or hereafter acquired
by the Borrower whether due or to become due and whether or not
earned by performance and including but not limited to accounts,
contract rights, chattel paper, instruments, general intangibles
and choses in action, all of which are hereinafter called
"Receivables".
2. All inventory now owned or hereafter acquired by Borrower and
whether or not held for sale or lease or to be furnished under
contracts of service, including without limitation, all goods in
process, raw materials, parts, components, demonstrators, and
things held for sale, resale or manufacture.
3. All proceeds of Receivables and inventory.
4. All rights to insurance and the proceeds thereof covering any of
the above property.
5. In addition to the foregoing, the Collateral includes the
following specifically described property:
All furniture, fixtures and equipment of whatever type or kind, wherever
located, now owned or hereafter acquired.
BORROWER'S REPRESENTATIONS AND WARRANTIES:
1. That Borrower is the owner of all existing Collateral free of
any claim whatsoever except the claim of the Bank and that as to
all Collateral to be acquired after the date hereof Borrower
will be the owner of said Collateral and that the ownership of
the Borrower is free of any claim whatsoever except the claim of
the Bank and Borrower will defend the Collateral and title
thereto.
2. That all Receivables have arisen from actual bona fide
transactions of Borrower and have been duly and regularly
entered to the books and accounts of the Borrower and are not
and will not be proceeds of any encumbered inventory. That all
inventory encumbrances will be completely discharged prior to
sale of the inventory.
3. Borrower will not sell or otherwise dispose of any inventory
except in the ordinary course of business and will not dispose
of any other Collateral without first obtaining written approval
of Bank.
4. Borrower will promptly notify Bank in writing of any event which
affects the value of the Collateral, the ability of the Borrower
or Bank to dispose of the collateral or the rights and remedies
of the Bank in relation thereto including but not limited to the
levy of any legal process against the Collateral and the
adoption of any marketing order, arrangement or procedure
affecting the Collateral whether governmental or otherwise.
5. If any Collateral becomes subject of any negotiable document of
title including any warehouse receipt or bill of lading,
Borrower shall duly assign, endorse and deliver such document to
Bank.
6. Borrower will diligently collect all Receivables and keep
accurate books and records of the Receivables and collections
thereof and deposit all receipts therefrom in Borrower's
operating checking account at Bank or at Bank's request in a
separate account at Bank which account is only subject to
withdrawal by Bank. Borrower will withdraw from its operating
checking account only for routing, ordinary and necessary
business expenses.
MAINTENANCE
Borrower agrees:
1. To use, maintain and register (if required) the Collateral in
accordance with law and maintain Collateral and all books in
current condition.
2. To pay and keep Collateral free from all liens, taxes or other
encumbrances.
3. At the option of the Bank and at any time requested by the Bank,
to segregate all Collateral and collections and proceeds
therefrom so that they are capable of identification and
delivery daily such collections and proceeds to Bank in kind and
to deliver any other Collateral to locations designated by Bank.
4. To periodically deliver to Bank records, schedules and reports
which show the status and condition of the Collateral, its
location and such other contracts or other matters which affect
the Collateral.
5. To allow Bank to verify the Collateral and inspect the books and
records of the Borrower and make copies or extracts therefrom.
6. To deliver to Bank any evidences of Receivables including but
not limited to instruments or chattel paper.
7. At Bank's request to notify any account debtors, any buyers of
Collateral or any other persons of Bank's interest in the
Collateral and proceeds thereof and Borrower specifically
authorizes Bank, at its option, to notify all debtors of
Borrower and direct them to pay amounts due to Borrower directly
to Bank.
8. To demand and collect any Receivables and any proceeds of the
Collateral and in furtherance of such purpose Borrower
irrevocably authorizes Bank to endorse or sign Borrower's name
on all collections, receipts or other documents and take
possession of and open the mail addressed to Borrower and remove
therefrom payments of Receivables and proceeds of Collateral.
RIGHT TO PROTECT COLLATERAL:
If Borrower fails to perform any duty herein required or pay any expense
which the Borrower is hereunder required to pay, Bank may make expenditures for
such purposes and the amounts so expended shall become immediately due and
payable by Borrower to Bank or at election of Bank may be added to the unpaid
balance of debt together with a loan finance charge, as permitted by the Utah
Uniform Commercial and Consumer Credit Codes, and such amounts are secured
hereby.
12
<PAGE> 26
DEFAULT:
Borrower shall be in default if any of the following events occur:
1. Borrower fails to pay any indebtedness to Bank when due;
2. Borrower fails to timely perform any other obligation to Bank;
3. If any statement, representation or warranty of the Borrower to Bank
or to Bank's Assignee, regardless of when made, is determined to be
untrue as of the date made;
4. Borrower becomes insolvent or unable to pay debts as they mature or
makes an assignment for the benefit of creditors or any proceeding
is instituted by or against Borrower alleging that Borrower is
insolvent or unable to pay debts as they mature;
5. Entry of any judgment against Borrower;
6. Death of Borrower who is a natural person or of any partner of
Borrower which is a partnership;
7. Dissolution, merger or consolidation or transfer of a substantial
part of the property of Borrower which is a corporation or a
partnership;
8. The issuing of an attachment or garnishment or the filing of a lien
against any property of Borrower;
9. The assignment by Borrower of any equity in the Collateral without
the written consent of the Bank;
10. The Collateral is lost, stolen or materially damaged;
11. Bank shall deem itself insecure for any reason.
REMEDIES:
Upon and after the occurrence of any default, the Bank may without
notice to Borrower, declare immediately due and payable all amounts secured
hereby and shall have the remedies of a secured party under the Utah Uniform
Commercial Code or other applicable law, and:
1. Bank shall have the right to enter upon any premises where the
Collateral may be and take possession thereof to sell the Collateral
in accordance with law and after deducting all expenses for
maintaining, repairing and/or selling the Collateral and all
attorney's fees, legal or other expenses of collection, sale and
delivery, to apply the residue of the proceeds of such sale or sales
to pay (or to hold as a reserve against) all obligations owing to
Bank and secured by the Collateral.
2. Bank shall have the right immediately and without sale of Collateral
or further action by it, to set off against Borrower's obligations,
whether or not due, all money or other liabilities owed by Bank or
Bank's Assignee in any capacity to Borrower, and such charge as is
made or entered on the books of Bank or Bank's Assignee subsequent
to a default shall be deemed to have been exercised immediately upon
occurrence of such default.
3. Bank may, without notice to or demand on the Borrower, demand,
collect, receipt for, settle, compromise, adjust, use, sue for,
foreclose or realize upon Collateral as the Bank may determine,
whether or not obligations or Collateral are then due and for the
purpose of realizing the Bank's rights therein, the Bank may
receive, open and dispose of mail addressed to the Borrower and
endorse notes, checks, drafts, money orders, documents of title or
other evidences of payment, shipment or storage or any form of
Collateral on behalf of and in the name of the Borrower. The powers
conferred on the Bank by this Section are solely to protect the
interest of the Bank and shall not impose any duties on the Bank to
exercise any powers.
NOTICES:
Notice of sale or other disposition of the Collateral or any other
notice required or desired, unless otherwise provided, in connection with this
agreement shall be deemed reasonable and sufficient if mailed to Borrower at
Borrower's address stated in this agreement, postage prepaid, at least five (5)
days prior to the sale or disposition of the Collateral or five (5) days prior
to the date a response to the notice is required, except that payments must be
made as specified in demand for payment. Notice to Bank is deemed sufficient
one (1) day after the same has been delivered to Bank and, if Borrower has
knowledge of the Assignment of this instrument, to Bank's Assignee.
GENERAL:
All costs and expenses of Bank in retaking, holding, preparing for sale
and selling or otherwise realizing upon the Collateral in the event of default
by Borrower, including court costs and reasonable attorney's fees and legal
expenses, shall constitute additional indebtedness of the Borrower secured
hereby which Borrower promises to pay on demand.
This agreement may not be altered or amended except by a writing signed
by the Borrower, accepted by Bank and attached hereto. Any provision found to
be invalid shall not invalidate the remainder hereof. Waiver of any default or
failure to exercise any option shall not constitute a waiver of any other or
subsequent default or right. If this instrument is signed by more than one
Borrower, the obligations of Borrowers shall be joint and several. THE RIGHTS
OR PRIVILEGES GRANTED BANK (INCLUDING, WITHOUT LIMITATION, ALL REMEDIES AND
RIGHTS OF SET OFF) ARE ALSO GRANTED TO BANK'S ASSIGNEE. All words herein shall
be construed to be of such gender and number as the circumstances require and
the references to Borrower is joint and endorsers agree that the payments and
performances hereunder may from time to time be extended and/or modified and/or
renewed. Bank shall have the right to inspect the Collateral at any reasonable
time and place. Bank shall have the right to date this instrument and fill in
any blanks. Bank is appointed the agent of Borrower for the limited purpose of
signing a Financing Statement or other required instruments. This instrument
shall be binding upon the heirs, personal representatives, successors and
assigns of the Borrower and shall inure to the benefit of the Bank, its
successors and assigns.
INSURANCE:
Borrower represents that he has and will maintain insurance and
fidelity bonds that cover the Collateral to its full insurable value and hereby
assigns to Bank such portion of any proceeds thereof as may result from a
casualty, loss of Collateral or loss or embezzlement of the proceeds and
appoints Bank Borrower's agent to make claim for and receipt for insurance
proceeds. If Borrower does not have such insurance or bonds, then Borrower, at
his own expense agrees to obtain the same. Proceeds from policies shall be
payable to Bank as its interest may appear and all policies shall provide for
ten (10) days minimum written cancellation notice to Bank. Certificates
attesting the coverage shall be deposited with Bank. Proceeds may be applied by
Bank toward payment of any obligation of Borrower whether or not due and in
such order of application as Bank may determine.
Borrower acknowledges receipt of a complete and legible copy of this
Agreement and executes this Agreement as of this 29th day of September, 1997,
and if executed by a corporation, an association or partnership by officers
thereof thereunto authorized in accordance with duly and regularly adopted
existing authority and resolution of the governing body of such organization.
BANK ONE, UTAH, NA BORROWER:
ZEVEX, INC.
By /s/ RANDY S. CAMERON By /s/ PHILLIP L. MCSTOTTS
----------------------------- ---------------------------------
Phillip L. McStotts
Its SR. VICE PRESIDENT Its CFO
---------------------------- --------------------------------
5175 Greepine Drive
Salt Lake City, Utah 84123
--------------------------------
Address
<PAGE> 27
CONTINUING GUARANTY
TO: BANK ONE, UTAH, NA
1. For valuable consideration, the undersigned (hereinafter called
"Guarantor") jointly and severally with Borrower and any other guarantor(s),
unconditionally guarantees payment and promises to pay to BANK ONE, UTAH,
NATIONAL ASSOCIATION (hereinafter called "Bank"), or order, on demand, in
lawful money of the United States, any and all indebtedness of _________________
ZEVEX, INC.
- -------------------------------------------------------------------------------
(hereinafter called "Borrower") to Bank. The word "Indebtedness" is used herein
in its most comprehensive sense and includes any and all advances, debts,
obligations, interest, and liabilities of Borrower, and any and all contracts,
letters of credit or commitments of Bank made for the benefit or at the request
of Guarantor or Borrower, or any one or more of them, heretofore, now or
hereafter made, incurred or created, whether voluntary or involuntary, and
however arising whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether Borrower may be liable
individually or jointly with others, or whether recovery upon such indebtedness
may be, or hereafter becomes, barred by any statute of limitations, or whether
such indebtedness may be, or hereafter becomes, otherwise unenforceable.
2. The liability of Guarantor for Borrower's Indebtedness shall not
exceed at any one time the total of the guaranteed principal sum of
THREE MILLION TWENTY FOUR THOUSAND SIX HUNDRED FIFTY EIGHT DOLLARS AND NO/100
- --------------------------------------------------------------------------------
($3,024,658.00) Dollars plus all accrued and accruing interest upon such
guaranteed principal sum to the same extent such interest is contracted and
agreed by Borrower, plus all of Bank's costs, expenses and attorney's fees
incurred in connection with or relating to the collection or enforcement of
this Guaranty. This Guaranty shall bind and obligate the undersigned, his
heirs, devisees, personal representatives, successors and assigns, with
Borrower, jointly and severally, for the payment of the Indebtedness precisely
as if the same had been contracted and was due and owing by him in person. The
obligations hereunder are joint and several and independent of the
obligations of Borrower or any other Guarantor and a separate action or actions
may be brought and prosecuted against Guarantor whether action is brought
against Borrower or whether Borrower be joined in any such action or actions;
and Guarantor waives the benefit of any statute of limitations or any other
statute affecting his ability hereunder or the enforcement thereof. Guarantor
further waives any action against the Borrower or Guarantor required by any
statute. Guarantor submits himself to the jurisdiction of the District Court of
Salt Lake County, State of Utah, and agrees that the laws of the State of Utah
shall govern this agreement.
3. Guarantor authorizes Bank, without notice or demand and without
affecting his liability hereunder, to (a) renew, compromise, extend, revise,
accelerate or otherwise change the time for payment of, or otherwise change
the terms of, the Indebtedness or any part thereof, including increase or
decrease of the rate of interest thereon, before and after any revocation of
this Guaranty; (b) take and hold security for the payment of this Guaranty or
the Indebtedness guaranteed; (c) exchange, enforce, waive and release any such
security; (d) take additional security; (e) apply such security and direct the
order or manner of sale thereof as Bank, in its discretion, may determine; and
(f) release or substitute any one or more of the endorsers or guarantors or
acquire additional guarantors. Bank may, without notice, assign this Guaranty
in whole or in part.
4. Guarantor waives any right to require Bank to (a) proceed against
Borrower or other guarantors; (b) proceed against or exhaust any security held
from Borrower or Guarantor; or (c) pursue any other remedy in Bank's power
whatsoever. Guarantor waives any defense arising by reason of any disability
or other defense of Borrower or by reason of the cessation, from any cause
whatsoever, of the liability of Borrower. Until all Indebtedness of Borrower to
Bank shall have been paid in full, even though such Indebtedness is in excess
of Guarantor's liability hereunder, Guarantor shall have no right of subrogation
unless Bank, at its option, so elects, and Guarantor hereby waives any right to
enforce any remedy which Bank now has, or may hereafter have, against
Borrower, and hereby waives any benefit of, and any right to participate in,
any security now or hereafter held by Bank. Guarantor waives all presentments,
demands for performance, notices of non-performance, protests, notices of
protest, notices of dishonor and notices of acceptance of this Guaranty and of
the existence, creation, or incurring of new or additional Indebtedness.
5. Guarantor also hereby waives any claim, right or remedy which such
Guarantor may now have or hereafter acquire against Borrower that arises
hereunder and/or from the performance by any Guarantor hereunder including,
without limitation, and claim, remedy or right of subrogation, reimbursement,
exoneration, contribution, indemnification, or participation in any claim,
right or remedy of Bank against the Borrower or any security which Bank now has
or hereafter acquires, whether or not such claim, right or remedy arises in
equity, under contract, by statute, under common law or otherwise.
6. If any payment received by the Bank from the Borrower in respect of
the indebtedness is subsequently recovered from or repaid by the Bank as the
result of any bankruptcy, dissolution, reorganization, arrangement, or
liquidation proceedings (or proceedings similar thereto), the Guarantor's
payment obligation hereunder shall be reinstated and shall continue to be
effective as though such payment had not been made. The provisions of this
Section shall survive termination of this Guaranty.
7. This Guaranty is continuing in nature and no written revocation
hereof received by Bank shall affect in any manner rights arising under this
Guaranty with respect to (a) liabilities which shall have been created,
contracted, assumed or incurred prior to actual receipt by the Bank of written
notice of such revocation; (b) liabilities which shall have been created,
contracted, assumed or incurred after actual receipt by Bank of such written
notice pursuant to any contract, letter of credit or commitment entered into
by the Bank prior to receipt of such notice, or (c) any of the aforementioned
liabilities arising out of or in any way related to the Indebtedness, which
shall have been renewed, modified, extended, consolidated, amended or revised
after revocation of this Guaranty, any or all of which actions are contemplated
and hereby permitted by Guarantor, and this Guaranty shall continue in full
force and effect, and Bank shall have the rights herein provided for, as if no
such revocation had
<PAGE> 28
occurred. The sole effect of revocation hereof shall be to exclude from this
Guaranty liabilities and Indebtedness thereafter arising which are unconnected
with liabilities and Indebtedness theretofore arising and existing. Any such
revocation of this Guaranty at any time by one or more other guarantors shall
not affect the liability hereunder of Guarantor as to any Indebtedness of the
Borrower, but this Guaranty shall in all respects remain in force and effect as
to such Indebtedness and transactions. The death of any Guarantor shall not
operate as a revocation of liability hereunder of the estate of any such
Guarantor until actual receipt by Bank of written notice of the death of such
Guarantor. Any such revocation by written notice of death shall have the same
effect as any other written revocation hereunder. Guarantor waives notice of
revocation given by any other Guarantor or Guarantors. Any payment by Guarantor
shall not reduce his maximum obligation hereunder, unless written notice to
that effect be actually received by Bank at, or prior to, the time of such
payment. Revocation of this Guaranty shall not in any way affect the rights,
duties, obligations or liabilities of either Bank or Guarantor hereunder with
respect to transactions occurring or Indebtedness incurred prior to the
effectiveness of such revocation.
8. In addition to all liens upon, and the right of set-off against, the
monies, securities or other property of Guarantor given to Bank by law, Bank
shall have a lien upon, and a right of set-off against, to the extent permitted
by law, all monies, securities and other property of Guarantor now or hereafter
in the possession of or on deposit with Bank, whether held for safekeeping or
otherwise; and every such lien and right of set-off may be exercised without
demand upon, or notice to, Guarantor. No lien or right of set-off shall be
deemed to have been waived by any act or conduct on the part of Bank, or by any
neglect to exercise such right of set-off, or to enforce such lien, or by any
delay in so doing, and every right of set-off and lien shall continue in full
force and effect until such right of set-off or lien is specifically waived or
released by an instrument in writing executed by Bank.
9. Guarantor agrees to pay upon demand all of Bank's costs and expenses,
including reasonable attorneys' fees and legal expenses, incurred in
connection with the enforcement of this Guaranty. Costs and expenses include
Bank's reasonable attorneys' fees and legal expenses whether or not the
attorney is a salaried employee of Bank and whether or not there is a lawsuit,
including reasonable attorneys' fees and legal expenses for bankruptcy or
insolvency proceedings, appeals, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional fees as
may be directed by the court.
10. Guarantor represents and warrants to Bank that (a) no representations
or agreements of any kind have been made to Guarantor which would limit or
qualify in any way the terms of this Guaranty; (b) this Guaranty is executed at
Borrower's request and not at the request of Bank; (c) Bank has made no
representation to Guarantor as to the creditworthiness of Borrower; and, (d)
upon Bank's request, Guarantor will provide to Bank financial and credit
information in a form acceptable to Bank.
11. This Guaranty is exclusive and cumulative as to amounts and shall not
serve to revoke or alter any Guaranty previously delivered to Bank nor (unless
otherwise specifically provided in writing at the date and execution thereof) be
revoked by any Guaranty subsequently delivered to Bank. This Guaranty does not
in any manner whatsoever limit the amount of any borrowing heretofore or
hereafter made under any other financing agreement between Bank and Borrower.
12. Bank shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Bank. No delay or
omission on the part of Bank in exercising any right shall operate as a waiver
of such right or any other right. A waiver by Bank of a provision of this
Guaranty shall not prejudice or constitute a waiver of Bank's right otherwise
to demand strict compliance with any other provision of this Guaranty. No prior
waiver by Bank, nor any course of dealing between Bank and Guarantor, shall
constitute a waiver of any of Bank's rights or of any of Guarantor's
obligations as to any future transactions. Whenever the consent of Bank is
required under this Guaranty, the granting of such consent by Bank in any
instance shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted or
withheld at the sole discretion of Bank.
13. In all cases where there is but a single Guarantor, all words used
herein in the plural shall be deemed to have been used in the singular where
the context and construction so require; and when there is more than one
Borrower named herein, the word "Borrower" shall mean all and any one or more
of them; and any reference to "his" shall also include "her" or "its" where
appropriate.
14. This Agreement is a final expression of the agreement between the
Guarantor and Bank and this written agreement may not be contradicted by
evidence of any alleged oral agreement.
15. Guarantor authorizes all financial institutions and credit reporting
agencies to furnish Bank opinions and credit information on or affecting
Guarantor, and Guarantor authorizes Bank to report opinions and credit
information affecting Guarantor to all credit reporting agencies or other
financial institutions.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty
this 29th day of September, 1997.
ZEVEX INTERNATIONAL, INC.
-------------------------------
Guarantor (Type Name)
BY /s/ PHILLIP L. McSTOTTS
------------------------------
Phillip L. McStotts, Sec/Treas.
5175 Greenpine Dr.
------------------------------
Salt Lake City, Utah 84123
------------------------------
Address
<PAGE> 29
ARBITRATION AGREEMENT
A. Binding Arbitration. The undersigned hereby agree that all
controversies and claims of any nature arising directly or indirectly out of any
and all loan transactions between or among them and any related agreements,
instruments or documents, and including but not limited to a claim based on or
arising from an alleged tort, shall at the written request of any party be
arbitrated pursuant to the applicable Commercial Arbitration Rules of the
American Arbitration Association ("AAA"). The arbitration shall occur in Salt
Lake City, Utah. Judgment upon any award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. The Federal Arbitration Act shall
apply to the construction and interpretation of this arbitration agreement.
B. Arbitration Panel. A single arbitrator shall have the power to
render a maximum award of one hundred thousand dollars ($100,000). A single
arbitrator shall be knowledgeable in the subject matter of the dispute. When any
party files a claim in excess of this amount, the arbitration decision shall be
made by the majority vote of three (3) arbitrators selected as provided herein.
No arbitrator shall have the power to restrain any act of any party.
If arbitration hereunder is required to be before a three (3) person
panel of neutral arbitrators, the panel shall consist of one (1) person from
each of the following categories:
(1) An attorney who has practiced in the area of commercial
law for at least ten (10) years or a retired judge at the State or
Federal District Court or Appellate Court level;
(2) A person with at least ten (10) years experience in
commercial lending; and,
(3) A person with at least ten (10) years experience in
the borrower's industry.
The AAA shall submit a list of persons meeting the criteria outlined above for
each category of arbitrator, and the parties shall select one (1) person from
each category in the manner established by the AAA.
The arbitrator(s) shall award costs and expenses of the arbitration
proceeding in accordance with the provisions of the loan agreement, promissory
note and/or other loan documents relating to the credit which is the subject of
the arbitrated claim or dispute.
<PAGE> 30
C. Provisional Remedies, Self-Help and Foreclosure. No provision
of paragraph A shall limit the right of any party to exercise self help
remedies, to foreclose against any real or personal property collateral, or to
obtain any provisions or ancillary remedies (including but not limited to
injunctive relief or the appointment of a receiver) from a court of competent
jurisdiction. At Bank's option, it may enforce its rights under a mortgage by
judicial foreclosure, and under a deed of trust either by exercise of power of
sale or by judicial foreclosure. The institution and maintenance of any remedy
permitted above shall not constitute a waiver of the right to submit any
controversy or claim to arbitration. The statute of limitations, estoppel,
waiver, laches, and similar doctrines which would otherwise be applicable in an
action brought by a party shall be applicable in any arbitration proceeding.
Agreed to this 29th day of September, 1997.
BANK: BORROWER:
BANK ONE, UTAH, NA ZEVEX, INC.
BY: /s/ RANDY S. CAMERON BY: /s/ PHILLIP L. MCSTOTTS
----------------------------- -----------------------------
Randy S. Cameron, Phillip L. McStotts
ITS: Sr. Vice President ITS: CFO
GUARANTOR:
ZEVEX INTERNATIONAL, INC.,
a Nevada corporation
BY: /s/ PHILLIP L. MCSTOTTS
----------------------------
ITS: CFO
---------------------------
<PAGE> 1
EXHIBIT 10.2
AMENDED 1993 STOCK OPTION PLAN
OF
ZEVEX INTERNATIONAL INC.
ZEVEX INTERNATIONAL, INC., a Nevada corporation (the "Company"), hereby
adopts this Amended 1993 Stock Option Plan of ZEVEX INTERNATIONAL, INC. (the
"Plan"), which amends and restates the 1993 Incentive Stock Option Plan adopted
by the Company on October 28, 1993. Under this Plan, stock, options to acquire
stock, and/or stock appreciation rights may be granted from time to time to
directors and employees of the Company or its subsidiaries, or others who
contribute to the success of the Company, all on the terms and conditions set
forth herein.
1. Purpose of the Plan. The Plan is intended to aid the Company in
maintaining and developing a management team, attracting qualified employees and
directors capable of assuring the future success of the Company, and rewarding
those individuals who have contributed to the success of the Company. It is
designed to aid the Company in retaining the services of executives and
employees and in attracting new personnel when needed for future operations and
growth, and to provide such personnel with an incentive to remain employees
and/or directors of the Company, to use their best efforts to promote the
success of the Company's business and to provide them with an opportunity to
obtain or increase a proprietary interest in the Company. It is also designed to
permit the Company to reward those individuals who are not employees or
directors of the Company but who are perceived by management as having
contributed to the success of the Company or who are important to the continued
business and operations of the Company. The above aims will be effectuated
through the granting of shares of common stock of the Company (the "Stock"),
options ("Options") to purchase shares of the Company's Stock on a favorable
basis, and/or stock appreciation or other rights ("SAR's"), subject to the terms
and conditions of this Plan. It is intended that the Options issued pursuant to
this Plan include, where designated as such at the time of grant, options which
qualify as Incentive Stock Options within the meaning of 422 of the Internal
Revenue Code or any amendment or successor provision thereto ("Incentive
Options"). Further, all stock options issued by the Company under the Company's
1991 Stock Option Plan and the 1996 Non-employee Director's Stock Option Plan
(collectively, the "Prior Plans") shall be subject to the terms of the Plan, and
the Prior Plans shall become of no further force and effect upon the written
consent of each remaining holder of options or other rights issued under the
Prior Plans.
2. Administration of the Plan.
The Plan shall be administered by the Company's Board of Directors (the
"Board") or, in whole or in part, by a committee designated by the Board (the
"Administrator"). Such committee (the "Committee") shall consist of not less
than two (2) persons, all of whom shall be "nonemployee directors" as that term
is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Subject to the foregoing, the Board may remove
or add members to the Committee and the Board or the remaining members of the
Committee shall fill any vacancies that occur. Additionally, the Board may at
any time terminate the functions of the Committee and reassume all powers and
authority previously delegated to the Committee. Any director or officer of the
Company may from time to time make recommendations to the Board or Committee
with respect to individuals to be considered for an award under the Plan and the
nature
<PAGE> 2
and amount of such award. Any award approved by the Board or Committee shall be
approved by a majority vote of those members of the Board or Committee, as the
case may be, in attendance at a meeting at which a quorum is present or, if the
award under consideration is to a member of the Board or Committee, by a
majority vote of the members of the Board or Committee in attendance at a
meeting at which a quorum is present who are disinterested with respect to the
award under consideration.
The interpretation and construction of the terms of the Plan or any
award under the Plan by the Committee or the Board shall be final and binding on
all participants in the Plan absent a showing of demonstrable error. No member
of the Board or Committee shall be liable for any action taken or determination
made in good faith with respect to the Plan or any award.
3. Shares of Stock Subject to the Plan. A total of 600,000 shares of
Stock may be subject to or issued under awards granted pursuant to the terms of
this Plan. Any shares subject to an Option or other right under the Plan, which
Option or right for any reason expires or is terminated, or is surrendered
unexercised as to such shares, may be reserved for issuance pursuant to future
awards under the Plan. If any right to acquire Stock granted under the Plan is
exercised by the delivery of shares of Stock or the relinquishment of rights to
shares of Stock, only the net shares of Stock issued (the shares of Stock issued
less the shares of Stock surrendered) shall count against the total number of
shares reserved for issuance under the terms of this Plan.
4. Reservation of Stock on Granting of Option. At the time of granting
any Option or other right to acquire Stock under the terms of this Plan, there
will be reserved for issuance on the exercise of the Option or right the number
of shares of Stock of the Company subject to such Option or right. The Company
may reserve either authorized but unissued shares or issued shares that have
been reacquired by the Company.
5. Eligibility. Awards under the Plan may be granted to directors,
officers, and other employees of the Company or its subsidiaries, as may be
existing from time to time, and to other individuals as may be deemed in the
best interest of the Company by the Board or Committee. Such awards shall be in
the amounts, and shall have the rights and be subject to the restrictions, which
are determined by the Board or the Committee in accordance with the provisions
of this Plan.
6. Term of Award and Certain limitations on Right to Exercise Award.
(a) Each award shall have the term established by the Board or
Committee at the time the award is granted.
(b) The term of the award, once it is granted, may be reduced
only as provided for in this Plan or in the terms of the award.
(c) Unless otherwise specifically provided by the written
terms of the award, no holder or his legal representatives, legatees,
or distributees, will be, or shall be deemed to be, a holder of any
shares subject to an award unless and until the holder exercises his
right to acquire Stock and delivers the required consideration to the
Company in accordance with the
<PAGE> 3
terms of this Plan and the provisions of the award. Unless otherwise
specifically provided by the written terms of the award, no adjustment shall be
made for dividends or other rights for which the record date is prior to the
date such Stock is acquired by the holder.
(d) Awards under the Plan shall vest at such time or times and
on such terms as the Board or Committee may determine at the time of
the grant of the award.
(e) If any award is granted to a directors, officer or
employee of the Company and such individual is terminated or resigns
from the Company within six (6) months of such award, the unexercised
portion of the award shall be null and void, and such individual shall
have no further rights thereunder as of the date of such termination or
resignation.
(f) Awards granted under the Plan shall contain such other
provisions as the Board or Committee shall deem advisable, including
without limitation (i) further restrictions on the exercise of the
award, (ii) provisions regarding exercise of awards following
termination or death different that provided in Sections 15 and 16, and
(iii) provisions regarding the acceleration of vesting of awards upon
the occurrence of certain events.
(g) In no event may an award be exercised after the expiration
of its term.
7. Payment of Exercise Price. The exercise of any award shall be
contingent on receipt by the Company of cash, certified bank check to its order,
or other consideration acceptable to the Company; provided that at the
discretion of the Board or the Committee, payment may be made in whole or in
part in shares of Stock of the Company, which Stock shall be valued at its then
fair market value as determined by the Board or Committee, the surrender or
cancellation of other rights to Stock of the Company, or the surrender or
cancellation of tandem rights granted with the award. Any consideration approved
by the Company that calls for the payment of the exercise price over a period of
more than one (1) year shall provide for interest, which shall be included as
part of the exercise price, that is equal to or exceeds the imputed interest
provided for in Internal Revenue Code Section 483 or any amendment or successor
section of like tenor.
8. Withholding. If the grant or exercise of an award pursuant to this
Plan is subject to withholding or other trust fund payment requirements of the
Internal Revenue Code or applicable state or local laws, such requirements may,
to the extent permitted by the terms of the award and the then governing
provisions of the Internal Revenue Code, be met by the holder of the award
delivering shares of Stock or canceling options or other rights to acquire Stock
or by the Company withholding shares of Stock subject to the option, all with a
fair market value equal to such requirements.
9. Incentive Options. In addition to the other restrictions and
provisions of this Plan and any award under this Plan, any option granted that
is intended to be an Incentive Option shall meet the following further
requirements:
(a) The exercise price of an Incentive Option shall not be
less than the fair
<PAGE> 4
market value of the Stock on the date the Incentive Option is granted
as determined by the Board or Committee and permitted by the applicable
provisions of the Internal Revenue Code.
(b) No Incentive Option may be granted under the Plan to any
employee that owns (either of record or beneficially) Stock possessing
more than ten percent (10%) of the combined voting power of the Company
or any parent or subsidiary corporation unless both the exercise price
is at least one hundred and ten percent (110%) of the fair market value
of the Stock on the date the Option is granted and the Incentive Option
by its terms is not exercisable more than five (5) years after the date
it is granted.
(c) Incentive Options may be granted only to employees of the
Company or its subsidiaries, and only in connection with the employee's
employment by the Company or the subsidiary. Notwithstanding the above,
directors may be granted Incentive Options under the Plan, subject to,
and to the extent permitted by, applicable tax statutes and
regulations.
(d) The aggregate fair market value (determined as of the date
the Incentive Option is granted) of the shares of Stock with respect to
which Incentive Options are exercisable for the first time by any
individual during any calendar year under the Plan (and all other Plans
of the Company and its subsidiaries) may not exceed $100,000.00.
(e) No Incentive Option shall be transferable other than by
will or the laws of descent distribution, and shall be exercisable
during the lifetime of the optionee, only by the optionee to whom the
Incentive Option is granted.
(f) No stock appreciation rights or other rights can be
granted in tandem with an Incentive Option.
(g) Any employee acquiring shares of Stock pursuant to any
Incentive Option granted under this Plan shall not sell, transfer or
otherwise convey the Stock until after the date that is both two (2)
years from the date the Incentive Option was granted and one (1) year
from the date the Stock was acquired by the Employee pursuant to the
exercise of the Incentive Option. If any employee makes a disqualifying
disposition, he shall notify the Company within thirty (30) days of
such transaction.
(h) No Incentive Option may be exercised unless the optionee
was, within three (3) months of such exercise, and had been since the
date the Incentive Option was granted, an eligible employee of the
Company as specified in the applicable
<PAGE> 5
provisions of the Internal Revenue Code, unless the optionee dies
during such three (3) month period; provided an Incentive Option may be
exercised by any optionee who ceases employment due to a disability as
defined in Internal Revenue Code 22(e)(3), or any amendment to that
section or any successor section of like tenor, within twelve (12)
months of such termination. An authorized absence or leave approved by
the Board or Committee shall not be considered an interruption of
employment for any purpose under the Plan.
(i) All Incentive Options shall be deemed to contain such
other limitations and restrictions as are necessary to conform the
Incentive Option to the requirements for "incentive stock options" as
defined in Section 422 of the Internal Revenue Code, or any amendment
or successor statute of like tenor.
(j) All of the foregoing restrictions and limitations are
based on the governing provisions of the Internal Revenue Code as of
the date of adoption of this Plan. If at any time the Internal Revenue
Code is amended to permit the qualification of an Option as an
incentive stock option without one or more of the foregoing
restrictions or limitations or the terms of such restriction or
limitation are modified, the Board or Committee may issue Incentive
Options, and may modify existing Incentive Options in accordance with
the amendments to the Internal Revenue Code, all to the extent that
such action by the Board or Committee does not disqualify the Incentive
Options from treatment as incentive stock options under the provisions
of the Internal Revenue Code.
10. Stock Appreciation Rights and Other Tandem Rights. The Board or
Committee, at the time of granting any award under the terms of this Plan, shall
have the authority to grant stock appreciation rights or other tandem rights
with respect to all or some of the shares of Stock covered by such award
pursuant to which the holder shall have the right to surrender all or part of
such award and thereby exercise the tandem rights; provided, however, that the
holder shall not have such right to surrender and obtain payment during the
first six (6) months of the term of the award, except in the event of death or
disability of the holder during such six (6) month period. Any payment under the
terms of the tandem rights may be made by the Company, at the discretion of the
Board or Committee as set forth in the written award, in Stock (at its fair
market value on the date of the notice of exercise, as determined by the Board
or Committee) or in cash, or partly in such Stock and partly in cash, as the
Board or Committee may determine. Any stock appreciation rights or other tandem
rights granted under the terms of this section may be exercised only when, and
only to the extent that, the holder is entitled to exercise all or a portion of
the underlying award. The terms of any Stock appreciation or other rights
granted shall, within the provisions of this Plan, be established by the Board
or Committee at the time of the grant, and any rights created thereby can only
be transferred in connection with the transfer of the underlying award. Stock
appreciation rights may only be exercised at a time when the fair
<PAGE> 6
market value of the Stock subject to the award exceeds the exercise price of the
award.
11. Dilution or Other Adjustment. In the event that shares of Stock of
the Company from time to time issued and outstanding are increased pursuant to a
stock split or a stock dividend, the number of shares of Stock then covered by
each outstanding Option granted hereunder shall be increased proportionately
with no increase in the total purchase price of the shares then so covered and
the number of shares of stock reserved for the purposes of the Plan shall be
increased by the same proportion. In the event that the shares of Stock of the
Company from time to time issued and outstanding are reduced by a combination or
consolidation of shares, the number of shares of Stock then covered by each
outstanding Option granted hereunder shall be reduced proportionately, with no
reduction in the total purchase price of the shares then so covered and the
number of shares of Stock reserved for the purposes of the Plan shall be reduced
by the same proportion. In the event that the Company should transfer assets to
another corporation and distribute the stock of such other corporation without
the surrender of Stock of the Company, and if such distribution is not taxable
as a dividend and no gain or loss is recognized by reason of Section 355 of the
Internal Revenue Code or a similar section, then the total purchase price of the
Stock then covered by each outstanding Option shall be reduced by an amount that
bears the same ratio to the total purchase price then in effect as the market
value of the stock distributed in respect of a share of the Stock of the
Company, immediately following the distribution, bears to the aggregate of the
market value at such time of a share of the Stock of the Company and the stock
distributed in respect thereof. In the event that the Company distributes the
stock of a subsidiary to its shareholders, makes a distribution of a major
portion of its assets, or otherwise distributes a significant portion of the
value of its issued and outstanding Stock to its shareholders, the number of
shares then subject to each outstanding award and the Plan may be adjusted, in
the discretion of the Board. All such adjustments shall be made by the Board,
whose determination upon the same shall be final and binding on all participants
under the Plan. No fractional share shall be issued, and any fractional shares
resulting from the computations pursuant to this section shall be eliminated
from the respective award. No adjustment shall be made for cash dividends or the
issuance to stockholders of rights to subscribe for additional Stock or other
securities.
12. Awards to Foreign Nationals. The Board or Committee may, in order
to fulfill the purposes of this Plan and without amending the Plan, grant awards
to foreign nationals or individuals residing in foreign countries that contain
provisions, restrictions, and limitations different from those set forth in this
Plan and the awards made to United States residents, in order to recognize
differences amongst the countries in law, tax policy, and custom. Such awards
shall be made in an attempt to provide such individuals with essentially the
same benefits as contemplated by an award to United States residents under the
terms of this Plan.
13. Assignment. No award granted under this Plan shall be transferable
other
<PAGE> 7
than to a family member, a trust for the benefit of the holder or a family
member, a charity, or by will or the laws of descent and distribution. If any
award is transferred in accordance with the provisions of this section, it
cannot thereafter be transferred by the new holder, except to reconvey it to the
original holder. Except as permitted by the foregoing, each award granted under
the Plan and the rights and privileges thereby conferred shall not be
transferred, assigned, pledged, or hypothecated in any way (whether by operation
of law or otherwise, and shall not be subject to execution, attachment, or
similar process. On any attempt to transfer, assign, pledge, hypothecate, or
otherwise dispose of the award, or of any right or privilege conferred thereby,
contrary to the provisions hereof, or on the levy of any attachment or similar
process on such rights and privileges, the award and such rights and privileges
shall immediately become null and void.
14. Stock Transfer Restrictions. All stock issued pursuant to the Plan
will be "restricted" securities as defined in Rule 144 of the Securities Act of
1933, as amended, registration statements under said Act or pursuant to an
exemption therefrom. All certificates evidencing shares covered by an Option and
any securities issued or placed or exchanged therefor, shall bear a restrictive
legend to such effect. The Company shall be under no obligation to register or
assist any Optionee in registering either the Options or the Stock issuable upon
exercise of the Option under the Federal Securities laws or any state securities
laws.
15. Effect of Termination of Employment. In the event that any holder
is terminated or resigns from his position with the Company or a subsidiary
within six (6) months of the grant of an award, any unexercised portion of such
award shall immediately become null and void, and such holder shall have no
further rights thereunder. In the event that any officer, director, or employee
of the Company or a subsidiary is terminated at any time for, in the
determination of the Board, materially breaching the terms of his employment,
gross negligence in the performance of his duties, substantial failure to meet
written standards established by the Company for the performance of his duties,
criminal misconduct, or willful or gross misconduct in the performance of his
duties, the Board may cancel any and all rights such individual may have in the
unexercised portion of any award held at the time of termination. Except as
provided above, the Stock Option may be exercised within three (3) months of
termination; provided, however, that the Stock Option may be exercised by the
Optionee for twelve (12) months following termination or cessation of employment
if termination is due to a disability as defined in Internal Revenue Code
22(e)(3) or any amendment to that section or any successor section of like
tenor. The Board or Committee may establish any other restriction on the
exercise of award subsequent to the termination or resignation of any individual
that it deems appropriate at the time of the grant of the award.
16. Death of Optionee. The Stock Options granted under the Plan shall
be exercisable during the Employee's lifetime and until the expiration of twelve
(12) months
<PAGE> 8
after the Employee's death, subject to the ten-year limitation described herein.
17. Listing and Registration of Shares. Each award shall be subject to
the requirement that if at any time the Board shall determine, in its sole
discretion, that it is necessary or desirable to list, register, or qualify the
shares covered thereby on any securities exchange or under any state or federal
law or obtain the consent or approval of any governmental agency or regulatory
body as a condition of, or in connection with, the granting of such award or the
issuance or purchase of shares thereunder, such award may not be exercised in
whole or in part unless and until such listing, registration, consent, or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board.
18. Expiration and Termination of the Plan. The Plan may be abandoned
or terminated at any time by the Board except with respect to any awards then
outstanding under the Plan. No Incentive Option shall be granted pursuant to the
Plan after the earlier of (i) ten (10) years after the date the Plan is adopted
by the Board; or (ii) ten (10) years after the date the Plan is approved by the
shareholders of the Company.
19. Form of Awards. Awards granted under the Plan shall be represented
by a written agreement which shall be executed by the Company and the holder,
and which shall contain such terms and conditions as may be determined by the
Board or Committee and permitted under the terms of this Plan. Option agreements
evidencing Incentive Options shall contain such terms and conditions, among
others, as may be necessary, in the opinion of the Board or Committee, to
qualify them as Incentive Stock Options under Internal Revenue Code 422 or any
amendment or successor statute of like tenor.
20. Amendment of the Plan. The Board may at any time, and from time to
time, modify and amend the Plan in any respect; provided, however, that no such
amendment shall, without the approval of the shareholders, cause the Plan to no
longer comply with the applicable provisions of the Internal Revenue Code with
respect to Incentive Options.
21. Continuing Compliance with Applicable Law. Notwithstanding any
provision to the contrary contained herein, the Plan shall be deemed to be
automatically amended as is necessary with respect to the issuance of Incentive
Options to maintain the Plan in compliance with the provisions of Section 422 of
the Internal Revenue Code, and regulations promulgated hereunder from time to
time, or any amendment or successor statute thereto.
DATED this 1st day of October, 1997.
<PAGE> 9
ZEVEX INTERNATIONAL, INC.,
a Nevada corporation
By /s/ PHILLIP MCSTOTTS
-----------------------------------------
Phillip McStotts, Secretary
<PAGE> 10
CERTIFICATE OF ADOPTION BY SHAREHOLDERS
THE UNDERSIGNED, Phillip McStotts, Secretary of the Corporation, hereby
certifies that the foregoing Amended 1993 Stock Option Plan was approved by the
Corporation's shareholders by written consent effective as of
October 24, 1997.
/s/ PHILLIP McSTOTTS
--------------------------------------
Phillip McStotts, Secretary
<PAGE> 1
EXHIBIT 10.5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered
into this 1 day of December, 1996, by and among Zevex International, Inc., a
Nevada corporation (hereinafter referred to as the "Company") and Blosch and
Holmes, a partnership composed of Kirk Blosch and Jeff Holmes, (hereinafter
referred to as "BH"), on the following:
PREMISES
A. The Company is interested in raising capital through the sale of
up to 500,000 shares of its common stock, par value $0.001 per share (the
"Common Stock") and 500,000 common stock purchase warrants (the "Warrants") a
copy of which is attached hereto as exhibit "A," to purchase shares of Common
Stock at an exercise price of $3.50 per share. The shares of Common Stock and
the Warrants will be sold for an aggregate price of $2.50 per share of Common
Stock and Warrant.
B. BH has engaged in preliminary discussions with the Company regarding
the purchase of the shares of Common Stock and the Warrants which would be
offered and sold in a transaction or transactions complying with exemptions from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), as well as under the securities laws of certain states.
C. The Company and BH want to set forth their understanding as to the
terms and conditions of the purchase by BH of the shares of Common Stock and
Warrants.
AGREEMENT
BASED, upon the foregoing premises, which are incorporated herein by
this reference, and for and in consideration of the mutual promises and
covenants hereinafter set forth, and other good and valuable consideration the
receipt and adequacy of which are hereby acknowledged, it is agreed as follows:
ARTICLE 1
PURCHASE OF COMMON STOCK AND WARRANTS
1.01 Purchase and Sale of Common Stock and Warrants. BH agrees to
purchase from the Company and the Company agrees to sell to BH 500,000 shares of
Common Stock and 500,000 Warrants for a purchase price of $2.50 per share of
Common Stock and Warrant. BH, at its option, may purchase the shares of Common
Stock and Warrants in an entity or entities that it shall create which may
contain partners, members or shareholders; provided that, all such individuals
or entities who are members, shareholders or partners of such entity shall
themselves meet certain suitability and accredited investor standards which, if
such entity did not exist, would allow them to purchase shares of Common Stock
and Warrants directly from the Company without adversely affecting the
exemption(s) from the registration requirements of the Securities Act relied
upon in this transaction.
1.02. Closing Date. The offer and sale of the shares of Common Stock
and Warrants shall be consummated within sixty (60) days of the date the
Company delivers the private placement memorandum to BH as set forth herein.
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<PAGE> 2
1.03 Closing Events.
(a) The Company Deliveries. Subject to fulfillment or waiver of the
conditions set forth in herein, the Company shall deliver to BH or such other
entities as BH shall designate at closing all the following:
(i) A certificate of good standing from the secretary of
State of Nevada, issued as of a date within five days prior to the
Closing Date, certifying that the Company is in good standing as a
corporation in the State of Nevada;
(ii) Copies of the resolutions of the Company's board of
directors authorizing the execution and performance of this Agreement
and the contemplated transactions including the issuance of the shares
of Common Stock and the Warrants, certified by the secretary or an
assistant secretary of the Company as of the closing date; and
(iii) Certificates for 500,000 shares of restricted Common
Stock and 500,000 Warrants in the names of BH, its assigns, or such
other names and amounts as BH shall designate;
In addition to the above deliveries, the Company shall take all steps and
actions as BH may reasonably request or as may otherwise be reasonably
necessary to consummate the transactions contemplated hereby.
(b) BH Deliveries. Subject to fulfillment or waiver of the
conditions set forth in herein, BH shall deliver to the Company at closing all
the following:
(i) A cashier or bank checks in the amount of $1,250,000;
and
(ii) Signed subscription and suitability documents by all
persons and entities who have purchased shares of the Common
Stock and Warrants.
In addition to the above deliveries, BH shall take all steps and
actions as the Company may reasonably request or as may otherwise be
reasonably necessary to consummate the transactions contemplated hereby.
1.04 Termination.
(a) BH shall have the right to terminate this Agreement by giving
notice as hereinafter specified if:
(i) The Company shall have failed or been unable to comply
with any of the terms, conditions or provisions of this Agreement on the
part of the Company to be performed, complied with or fulfilled within
the respective times herein provided for, unless compliance therewith or
performance or satisfaction thereof shall have been expressly waived by
the BH in writing.
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<PAGE> 3
(ii) BH believes in its sole judgment that any
adverse changes have occurred in the management of the Company
or that material adverse changes have occurred in the financial
condition or obligations of the Company.
(b) The Company shall have the right to terminate this
Agreement by giving notice as hereinafter specified if either Kirk
Blosch or Jeff Holmes are currently or have ever been subject to the so
called "Bad Boy" disqualification provisions of the Securities Act,
regulation A, rule 262(c), (d), (e), or (f).
(c) The parties shall be able to terminate this Agreement
upon the mutual consent of the board of directors of the Company and of
Kirk Blosch and Jeff Holmes the partners of BH.
In the event of termination pursuant to this paragraph (c) of Section
1.04, no obligation, right, or liability shall arise hereunder, and each
party shall bear all of the expenses incurred by it in connection with
the negotiation, preparation, and execution of this Agreement and the
transactions contemplated hereby.
ARTICLE II
REPRESENTATIONS, COVENANTS, AND WARRANTIES
OF THE COMPANY
As an inducement to, and to obtain the reliance of BH in connection
with its purchase of the shares of Common Stock and Warrants, the Company
represents and warrants as follows:
2.01 Private Offering. The offer, offer for sale, and sale of the
shares of Common Stock and Warrants have not been and will not be registered
with the Securities and Exchange Commission (the "Commission"). The shares of
Common Stock and Warrants shall be offered for sale and sold pursuant to the
exemptions from the registration requirements of Section 5 of the Securities
Act provided by Sections 3(b) and/or 4(2) thereof. The Company shall, insofar
as its own actions are concerned, conduct the offer and sale in compliance with
the requirements of Regulation D of the general rules and regulations under the
Securities Act, and the Company will file appropriate notices of the offer and
sale on Form D with the Securities and Exchange Commission.
2.02 Approval of Agreement. The Company has full corporate power,
authority, and legal right and has taken, or will take, all action required by
law, its articles of incorporation, bylaws, and otherwise to execute and
deliver this Agreement and to consummate the transactions herein contemplated
including the issuance of the shares of Common Stock and Warrants. The board of
directors of the Company has authorized and approved the execution, delivery,
and performance of this Agreement and the transactions contemplated hereby
including the issuance of the shares of Common Stock and the Warrants.
2.03 Legal Right. To the best knowledge of the Company, the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a material breach or violation of any of the
terms and provisions of, or constitute a default under, any statute (except
federal and state securities laws, compliance with which is elsewhere provided
for in particular detail), indenture, mortgage or other agreement or instrument
to which the Company is a party or by which it is bound by any
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<PAGE> 4
order, rule or regulation directed to the Company or its affiliates by any
court or governmental agency or body having jurisdiction over them; and no
other consent, approval, authorization or action is required for the
consummation of the transactions herein contemplated other than such as have
been obtained.
2.04 Validly Issued. The Common Stock, when issued, will be duly
authorized, validly and legally issued, and non-assessable.
2.05 Warrants' Designations. The Warrants when issued will contain
(i) the right to receive one share of Common Stock at an exercise price of
$3.50 for a period of five years from the date of issuance; (ii) standard
"piggy back" registration rights which provide the holder of the Warrant the
right to have shares of Common Stock issuable on exercise of the Warrants
included in any registration statement the Company should file with the
Securities and Exchange Commission during any time the Warrants are
exercisable; and (iii) the right to transfer the Warrants, subject to
compliance with applicable federal and state securities laws.
2.06 Organization. The Company has been duly organized and is now,
and always during the period of the offer and sale will be, a validly existing
corporation under the laws of the state of Nevada, lawfully qualified to
conduct the business for which it was organized and which it proposes to
conduct. The Company will always during the period of the offer and sale of the
shares of Common Stock and Warrants be qualified to conduct business as a
foreign corporation in each jurisdiction where the nature of its business
requires such qualification.
2.07 Capitalization. The Company has an authorized capitalization of
5,000,000 shares of Common Stock, $0.001 par value. The Company currently has
1,495,716 shares of Common Stock issued and outstanding and no shares of Common
Stock reserved for issuance pursuant to outstanding warrants. There are 94,800
outstanding options, and no outstanding warrants or other rights to purchase
securities, the Company, to the best of its knowledge, has not made any
intentional or reckless violations of the anti-fraud provisions of the federal
securities laws, rules or regulations promulgated there under or the laws,
rules or regulations of any jurisdiction wherein such securities transactions
or solicitations occurred.
2.08 Integration. The Company:
(a) To the best of its knowledge has not offered, offered to
sell, offered for sale or sold any other securities (as hereinafter
defined) the offer, offer to sell, offer for sale or sale of which would
be "integrated" under the standards of existing published rules and
regulations under the Securities Act with the offers, offers to sell,
offers for sale or sales of the Common Stock and Warrant proposed to be
made by the Company pursuant hereto in determining whether a public
offering of the shares of Common Stock and Warrants has been made so as
to render the exemptions provided by Section 3(b) or 4(2) of the
Securities Act unavailable with respect to the proposed offer and sale
of the shares of Common Stock and Warrants hereunder; and
(b) To the best of its ability shall not offer, offer to sell,
offer for sale or sell any shares of Common Stock, Warrants or other
securities except and to the extent any such offer, offer to sell, offer
for sale or sale, shall not render unavailable the exemptions from
registration and
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<PAGE> 5
qualification requirements of applicable federal and state securities
laws relied upon with respect to the offer and sale of the shares of
Common Stock and Warrants contemplated by this Agreement.
The term "Other Securities" as used elsewhere herein refers to
the offers, offers for sale, offers to sell and sales of any Common
Stock or any other securities of the Company other than any offers,
offers to sell, offers for sale, or sales of the shares of Common Stock
and Warrants to be made by or through the Company hereunder.
2.09 Administrative Action. The Company will notify you immediately
and confirm the notice in writing of the issuance by the Commission or by any
state securities administration of any stop order suspending the effectiveness
of any qualification of the shares of Common Stock and Warrants for sale or
enjoining the offer or sale of the shares of Common Stock and Warrants or of
the initiation of any proceedings for that purpose. The Company will make every
reasonable effort to prevent the issuance of any such stop order and, if any
such stop order shall at any time be issued, to obtain the lifting thereof at
the earliest possible moment.
2.10 Financial Statements.
(a) The Company's financial statements for the dates and
years ended December 31, 1995, and 1994, and for the dates and periods
ended September 31, 1996, and 1995, present fairly the financial
position, the results of operations and cash flows of the Company. The
Company did not have, as of the date of any such balance sheets, except
as and to the extent reflected or reserved against therein, any
liabilities or obligations (absolute or contingent) which should be
reflected in a balance sheet or the notes thereto prepared in accordance
with generally accepted accounting principles, and all assets reflected
therein present fairly the assets of the Company, in accordance with
generally accepted accounting principles. The Company maintains and will
continue to maintain a standard system of accounting established and
maintained in a manner permitting the preparation of financial
statements in accordance with generally accepted accounting principles.
The financial statements have been presented in accordance with the
requirements of regulation S-B, item 310 promulgated by the Securities
and Exchange Commission (the "Commission") regarding the form, content
and requirements for financial presentation to be filed with the
Commission.
(b) To the best knowledge of the Company, the books and
records, financial and otherwise, of the Company are in all material
respects complete and correct and have been maintained in accordance
with sound business and bookkeeping practices so as to accurately and
fairly reflect, in reasonable detail, the transactions and dispositions
of the assets of the Company. The Company has maintained a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions have been and are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit the preparation of financial statements
in conformity with generally accepted accounting principles or any other
criteria applicable to such statements and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to
any differences.
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<PAGE> 6
(c) The Company has filed or will have filed as of the Closing
Date all tax returns required to be filed by it from inception to the Closing
Date. All such returns and reports are accurate and correct in all material
respects, except for returns or reports that are not material or that would not
create an adverse effect. The Company has no liabilities with respect to the
payment of any federal, state, county, local, or other taxes (including any
deficiencies, interest, or penalties) accrued for or applicable to the period
ended on the date of the most recent unaudited balance sheet of the Company,
except to the extent reflected on such balance sheet and adequately provided
for, and all such dates and years and periods prior thereto and for which the
Company may at said date have been liable in its own right or as transferee of
the assets of, or as successor to, any other corporation or entity, except for
taxes accrued but not yet due and payable, and no deficiency assessment or
proposed adjustment of any such tax return is pending, proposed or
contemplated. Proper and accurate amounts of taxes have been withheld by or on
behalf of the Company with respect to all compensation paid to employees of the
Company for all periods ending on or before the date hereof, and all deposits
required with respect to compensation paid to such employees have been made, in
complete compliance with the provisions of all applicable federal, state, and
local tax and other laws. None of such income tax returns has been examined or
is currently being examined by the Internal Revenue Service, and no deficiency
assessment or proposed adjustment of any such return is pending, proposed, or
contemplated. The Company has not made any election pursuant to the provisions
of any applicable tax laws (other than elections that relate solely to methods
of accounting, depreciation, or amortization) that would have a material
adverse affect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted, or any of its properties or
material assets. There are no tax liens upon any of the assets of the Company.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any tax return of the Company.
2.11 Absence of Certain Changes of Events. Except as set forth in
this Agreement since the date of the Company balance sheet for its most
recently completed fiscal quarter in 1996:
(a) Except as disclosed on a separate schedule, there has
not been (i) any material adverse change in the business, operations,
properties, level of inventory, assets, or condition of the Company or (ii) any
damage, destruction, or loss to the Company (whether or not covered by
insurance) materially and adversely affecting the business, operations,
properties, assets, or conditions of the Company.
(b) The Company has not (i) amended its articles of
incorporation or bylaws; (ii) declared or made, or agreed to declare or make,
any payment of dividends or distributions of any assets of any kind whatsoever
to stockholders or purchased or redeemed, or agreed to purchase or redeem, any
of its capital stock; (iii) waived any rights of value which in the aggregate
are extraordinary or material considering the business of the Company; (iv) made
any material change in its method of management, operation, or accounting; (v)
entered into any other material transactions outside normal business operations;
(c) Except as disclosed on a separate schedule, the Company
has not (i) granted or agreed to grant any options, warrants, or other rights
for its stocks, bonds, or other corporate securities calling for the issuance
thereof; (ii) borrowed or agreed to borrow any funds or incurred, or become
subject to, any material obligation or liability (absolute or contingent)
except liabilities
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<PAGE> 7
incurred in the ordinary course of business; (iii) paid any material
obligation or liability (absolute or contingent) other than current
liabilities reflected in or shown on the most recent balance sheet of
the Company and current liabilities incurred since that date in the
ordinary course of business; (iv) sold or transferred, or agreed to sell
or transfer, any of its assets, properties, or rights (except assets,
properties, or rights not used or useful in its business which, in the
aggregate have a value of less than $5,000 or canceled, or agreed to
cancel, any debts or claims (except debts and claims which in the
aggregate are of a value of less than $5,000); (v) made or permitted any
amendment or termination of any contract, agreement, or license to which
it is a party if such amendment or termination is material, considering
the business of the Company; or (vi) issued, delivered, or agreed to
issue or deliver any stock, bonds, or other corporate securities
including debentures (whether authorized and unissued or held as
treasury stock); and
(d) To the best knowledge of the Company, it has not become
subject to any law or regulation which materially and adversely affects,
or in the future may adversely affect, the business, operations,
properties, assets, or condition of the Company.
2.12 Title and Related Matters. Except as provided herein,
disclosed on a separate schedule attached hereto or disclosed in the most
recent balance sheet of the Company and the notes thereto, the
Company has good and marketable title to all of its properties, inventory,
interests in properties, and assets, which are reflected in the most recent
balance sheet of the Company or acquired after that date (except properties,
interests in properties, and assets sold or otherwise disposed of since such
date in the ordinary course of business), free and clear of all mortgages,
liens, pledges, charges, or encumbrances, except (i) statutory liens or claims
not yet delinquent; and (ii) such imperfections of title and easements as do
not, and will not, materially detract from, or interfere with, the present or
proposed use of the properties subject thereto or affected thereby or otherwise
materially impair present business operations on such properties.
2.13 Litigation and Proceedings. Except as otherwise disclosed
herein, to the best knowledge of the Company there are no actions, suits, or
proceedings pending or, to the knowledge of the Company, threatened by or
against the Company or affecting the Company, at law or in equity, before any
court or other governmental agency or instrumentality, domestic or foreign, or
before any arbitrator of any kind. The Company does not have any knowledge of
any default on its part with respect to any judgment, order, writ, injunction,
decree, award, rule, or regulation of any court, arbitrator, or governmental
agency or instrumentality.
2.14 Material Contract Defaults. The Company, to the best of its
knowledge, is not in default in any material respect under the terms of any
outstanding contract, agreement, lease, or other commitment which is material
to the business, operations, properties, assets, or condition of the Company,
and there is no event of default or other event which, with notice or lapse of
time or both, would constitute a default in any material respect under any such
contract, agreement, lease, or other commitment in respect of which the Company
has not taken adequate steps to prevent such a default from occurring.
2.15 Compliance with Laws and Regulations. The Company, to the best
of its knowledge, has all licenses, franchises, permits, and other governmental
authorizations that are legally required to enable it to conduct its business
in all material respects as conducted on the date of this Agreement. Except for
compliance with federal and state securities and corporation laws, as
hereinafter provided, no authorization, approval, consent, or order of, or
registration, declaration, or filing with, any court or other governmental
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<PAGE> 8
body is required in connection with the execution and delivery by the Company
of this Agreement and the consummation by the Company of the transactions
contemplated hereby. The Company has complied with all applicable statutes and
regulations of any federal, state, or other governmental entity or agency
thereof, except to the extent that noncompliance would not materially and
adversely affect the business, operations, properties, assets, or condition of
the Company or except to the extent that noncompliance would not result in the
occurrence of any material liability for the Company.
2.16 Insurance. All of the insurable properties of the Company are
insured for full replacement value (subject to reasonable deductibles) against
losses due to fire and other casualty, with extended coverage, and other risks
customarily insured against by persons operating similar properties in the
localities where such properties are located and under valid and enforceable
policies issued by insurers of recognized responsibility. Such policy or
policies containing substantially equivalent coverage will be outstanding and
in full force at the Closing Date, as hereinafter defined.
2.17 Commission Filings. The Company, to the best of its knowledge,
has furnished or will furnish prior to closing a true and complete copy of each
statement, report, registration statement, and other filings filed with the
Commission by the Company since December 31, 1994, and, prior to the closing,
the Company will have furnished the Company with true and complete copies of
any additional documents filed with the Commission by the Company (collectively
referred to as the "Commission Documents"). In addition, the Company has made
or will make available all exhibits to the Commission documents filed and will
promptly make available to BH all exhibits required to be filed as exhibits to
the Commission Documents filed prior to the closing. All documents required to
be filed as exhibits to the Commission Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect, except
those which have expired in accordance with the terms, and neither the Company
nor any of its subsidiaries is in default thereunder. As of their respective
filing dates, the Commission Documents complied in all material respects
with the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the Securities Act, and none of the Commission
Documents contained any untrue statements of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed
Commission Document.
2.18 Intellectual Property. All patents, patent applications,
trademarks, trade secrets, knowhow, software and technical data (collectively
referred to as the "Intellectual Property") owned by the Company constitutes
all of the intellectual property, whether or not owned by the Company used by
it to any material extent in the conduct of the business in which it is
presently engaged. None of such Intellectual Property has been assigned,
transferred or licensed to or from any third party and the validity or
enforceability of such Intellectual Property as used in the conduct of such
business has not been challenged by others in any proceeding or dispute about
which the Company has received written notice in writing, nor is there any
pending or, to the best knowledge of the Company, threatened litigation or
proceeding challenging any of their right to use any such Intellectual
Property. The consummation of the transactions contemplated by this Agreement
will not adversely affect the Company's rights to the Intellectual Property.
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ARTICLE III
CONDITION PRECEDENT TO OBLIGATION OF BH
The obligations of the BH under this Agreement are subject to the
satisfaction, at or before the closing date, of the following conditions:
3.01 Offering Documents. The Company will prepare a private placement
memorandum setting forth a description of the Company, risk associated with an
investment in the Company and a description of the securities to be purchased.
The private placement memorandum will not do not contain any untrue statements
of any material fact or omit to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
3.02 Filings. The Company will cause to be prepared, executed and
timely filed with respect to the offer and sale of the shares of Common Stock
and Warrants one or more notices on Form D with the appropriate office of the
Commission and will take all action necessary to comply with Rule 503 of the
general rules and regulations under the Securities Act regarding the filing of
notice(s) of sales.
3.03 State Compliance. The Company will use its best efforts to
either take all necessary action and file all necessary forms and documents in
order to qualify or register the shares of Common Stock and Warrants for sale as
BH shall from time to time request or will take any necessary action and file
any and all forms which are required to obtain an exemption from such
qualification or registration in such states as BH and the Company mutually
agree upon including filing a form D with the appropriate federal and state
securities agencies.
3.04 Additional Documentation. The Company will promptly provide BH
for delivery to all members, partners or shareholders in any entity that BH
forms to purchase the shares of Common Stock and Warrants any additional
information, documents, and instruments or assist in the preparation of any
documents or instruments which BH or the Company deem necessary to comply with
the rules, regulations, and judicial and administrative interpretations
respecting compliance with exemptions or qualifications and registration
requirements in those states where BH deems necessary.
3.05 Expenses. The Company shall bear the expenses incurred in
qualifying or otherwise clearing the shares of Common Stock and Warrants under
the securities or blue sky laws of the States of Arizona and Utah, including
the fees and charges of such states and the cost of preparing a Blue Sky
Memorandum with respect thereto, setting forth the states in which such
registration and/or qualification or other clearance has been completed and
specifying any and all conditions thereto. From time to time BH may request a
review to reflect the registration and/or qualification requirements in
additional states and after such review may request the Company to register or
qualify the offer and sale of the shares of Common Stock and Warrants in such
states; provided that, all cost and expenses associated with the review of such
states and any subsequent qualification or registration in such state other
than Arizona or Utah shall be born by BH.
3.06 Approval of Counsel. Counsel for BH shall have completed a
review of the form and content of the private placement memorandum, the
Company's organization and present legal status, the Company's financial
conditions and of the legality and validity of the authorization and issuance
of the shares of Common Stock.
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3.07 Outstanding Obligations. The Company shall have performed all
of its obligations under this Agreement. All of the statements, representations
and warranties contained in this Agreement shall be complete and true.
3.08 Pending Litigation. From the date of this Agreement until the
closing, no claims or litigation shall have been instituted or threatened
against the Company for substantial amounts or which would materially adversely
affect the Company, its business or its property and no reasonable basis exists
for such claims or threats. Further, no proceeding shall have been instituted
or threatened against the Company before any regulatory body wherein an
unfavorable ruling would have a material adverse effect on the Company.
ARTICLE IV
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE COMPANY
The obligations of the Company under this Agreement are subject to the
satisfaction, at or before the closing date, of the following conditions:
4.01 Representations. BH, or any entity which it creates to
purchase the shares of Common Stock and Warrants, shall provide the Company
such representations and warrants necessary to satisfy the Company and its
counsel that BH and any partners, member or shareholder in any entity
purchasing the shares of Common Stock and Warrants meets certain suitability
requirements and that such sale will comply with exemptions from the
registration processes of the Securities Act and of certain state statutes.
ARTICLE V
SPECIAL COVENANTS
5.01 Activities of the Company.
(a) From and after the date of this Agreement until the
closing date and except as set forth herein or as permitted or
contemplated by this Agreement, the Company will:
(i) Carry on its business in substantially the same
manner as it has heretofore;
(ii) Maintain in full force and effect insurance
comparable in amount and in scope of coverage to that now
maintained by it;
(iii) Perform in all material respects all of its
obligations under material contracts, leases, and instruments
relating to or affecting its assets, properties, and business;
(iv) Use its best efforts to maintain and preserve
its business organization intact, to retain its key employees,
and to maintain its relationships with its material suppliers
and customers;
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(v) Except to the extent that non compliance is not material
or adverse to the Company, duly and timely file for all taxable periods
ending on or prior to the Closing Date all federal, state, county, and
local tax returns required to be filed by or on behalf of such entity or
for which such entity may be held responsible and shall pay, or cause to
pay, all taxes required to be shown as due and payable on such returns,
as well as all installments of tax due and payable during the period
commencing on the date of this Agreement and ending on the closing date;
and
(vi) Fully comply with and perform in all material respects
all obligations and duties imposed on it by all federal and state laws
and all rules, regulations, and orders imposed by federal or state
governmental authorities.
(b) From and after the date of this Agreement and except as provided
herein until the closing date, the Company will not:
(i) Make any change in its articles of incorporation or
bylaws;
(ii) Enter into or amend any material contract, agreement, or
other instrument, except in the ordinary course of business; and
(iii) Enter into any agreement for the sale of the Company's
securities without the prior approval of the other party.
5.02 Access to Books and Records. Until the closing date, the Company
will afford to BH and its authorized representatives full access to the
properties, books, and records of the Company in order that BH may have full
opportunity to make such reasonable investigation as it shall desire to make of
the affairs of the Company and will furnish the BH with such additional
financial and other information as to the business and properties of the
Company as BH shall from time to time reasonably request.
5.03 Piggy Back Registration Rights. If at any time during the next
five years the Company shall prepare and file a registration statement with the
Commission to register shares of its Common Stock, excluding an S-8 or S-4
registration statement, the Company agrees to register the 500,000 shares of
Common Stock to be issued hereunder as well as the shares of Common Stock
issueable on the exercise of the Warrants in such registration statement as
follows:
(a) The Company shall promptly give written notice that it
intends to file a registration statement to the holders of the shares of
Common Stock and Warrants at least 45 days prior to any such filing. The
holders of the shares of Common Stock and Warrants will have 20 days
after receipt of the notice from the Company to notify, in writing, the
Company of their desire to include in such registration statement shares
of Common Stock. The Company shall include in such registration
statement that number of shares of Common Stock requested by the holders
subject to the provisions herein.
(b) The Company will pay all expenses of such registration
statement, including, without limitation, printing charges, legal fees,
and disbursements of counsel for the Company,
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<PAGE> 12
blue sky expenses, accounting fees, and filing fees, but not including legal
fees and disbursements of counsel to the Holders.
(c) If the Company, in its sole discretion, determines to file a
registration statement or registration statements during the next five years,
except for registration statements for the sole purpose of registering shares
for employees, directors or consultants of the Company, it shall take all steps
reasonably necessary to permit the registration of the shares of Common Stock
and the exercise of the Warrants and the issuance of the shares of Common Stock
pursuant to such exercise under the applicable state securities laws of those
states in which the shares of Common Stock and Warrants were issued or
originally registered or qualified for sale and issuance by the Company. The
Company will take such reasonable steps which it determines, in its sole
discretion, are necessary to permit the registration or qualification of the
shares of Common Stock and the exercise of Warrants and the issuance of the
shares of Common Stock pursuant to such exercise under the laws of any other
state in which a holder of the shares of Common Stock or Warrants then resides
on the written request to do so by such holder, but in no event shall the
Company be required to take such steps in any state other than those states in
which the shares of Common Stock and Warrants were originally qualified or
registered, and the Company shall not be obligated to execute or file any
general consent to service of process or to qualify as a foreign corporation to
do business under the laws of any such jurisdiction. Holders of shares of
Common Stock and Warrants who reside in any state where the Company cannot,
with the exercise of reasonable diligence, obtain qualification for the
exercise of the Warrants, and the issuance of the shares of Common Stock may
not, as a result thereof be able to exercise their Warrants, and the Company is
under no obligation to make such exercise possible in such circumstances. In
the event that the Company determines to proceed with the qualification of the
exercise of the Warrants and the issuance of the shares of Common Stock under
the securities laws of a particular state, then the exercise of such Warrants
shall not be effective and the shares of Common Stock shall not be issued until
such qualification becomes effective. When qualification under applicable state
securities laws is required, the Company shall take such action within ten days
following the date on which the Company first files the registration statement.
The costs of obtaining such state qualification shall be borne by the Company.
(d) The Company shall promptly notify the holders of the shares of
Common Stock and the Warrants of the effective date of any registration
statement filed by the Company and the date on which the shares of Common Stock
become qualified or registered under the state securities laws of any state in
which the Company obtains qualification or registration with respect to such
shares.
(e) Notwithstanding any provisions to the contrary contained
herein, the Company shall not be required to include any of the shares of
Common Stock in any registration statement or post-effective amendment with
respect to shares offered in any underwriting:
(i) Unless the holders of the shares of Common Stock and
Warrants agree to offer such shares of Common Stock, on the same terms
and conditions as the Company's shares of Common Stock are being
offered, and to sign an underwriting agreement in the form to be signed
by the other offerors; or
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<PAGE> 13
(ii) If, in the good faith and reasonable opinion of
the managing underwriter of the offering, the sale of the shares
of Common Stock to be included would be materially detrimental
to the remainder of the offerors.
(f) The shareholders desiring to sell shares of Common Stock
pursuant to the registration rights granted herein shall provide the
Company with all information relating to such sale and on which the
Company shall be entitled to rely and to include such information in any
such registration statement. The holders of the shares of Common Stock
and Warrants shall indemnify and save harmless the Company (and all
other persons who may be subject to liability under the Act or
otherwise) from and against any and all claims, actions, suits,
liabilities, losses, damages, and expenses of every nature and character
(including, but not by way of limitation, all reasonable attorneys' fees
and all amounts paid in settlement of any claim, action, or suit) which
arise or result directly or indirectly from any untrue statement of a
material fact furnished by such holder in connection with such
registration or qualification, or from the failure of the holder of the
shares of Common Stock to furnish material information in connection
with the facts required to be included in such registration statement,
notification, or post-effective amendment necessary to make the
statements therein not misleading, or from any sales or offers of the
shares of Common Stock so registered after ninety (90) days from the
effective date of such registration statement or notification.
(g) All sales pursuant to any such registration statement
shall be made in accordance with the provisions of the Securities Act
and the Securities Exchange Act of 1934, as amended, and the Company
shall not be required to include any such shares of Common Stock in any
registration until it has received written assurances satisfactory in
form and substance to the Company from the shareholders offering such
shares of Common Stock that such sales shall be so conducted. On notice
to any shareholder offering shares of Common Stock covered by a
registration statement that such registration statement or prospectus
relating thereto requires revision, such holder will immediately cease
to make offers or sales pursuant to such registration statement, return
all such registration statements and prospectuses to the Company, and
not resume offers until he or she has been provided with an updated
prospectus by the Company. The Company is under no obligation to
maintain the effectiveness of any registration statement for more than
an aggregate of 90 days.
5.04 Securities Representations. BH understands and agrees that the
consummation of this Agreement including the issuance of shares of Common Stock
and Warrants as contemplated hereby, constitutes the offer and sale of
securities under the Securities Act and applicable state statutes. BH agrees
that such transactions shall be consummated in reliance on exemptions from the
registration and prospectus delivery requirements of such statutes which depend,
among other items, on the circumstances under which such securities are
acquired. In order to provide documentation for reliance upon exemptions from
the registration and prospectus delivery requirements for such transactions, BH,
or the entities it creates to purchase the securities, agrees that it will sign
appropriate representations and warrants related to its suitability to invest in
the Company, including an investment letter and suitability questionnaire.
5.05. Additional Filings. In connection with the transaction
contemplated by this Agreement, the Company and BH shall each file, with the
assistance of the other and their respective legal counsel, such notices,
applications, reports, or other instruments as may be deemed by them to be
necessary or
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<PAGE> 14
appropriate in an effort to document reliance on such exemptions, and the
appropriate regulatory authority in the states where the shares of Common Stock
and Warrants will be deemed to have been offered and sold, all to the extent
and in the manner as may be deemed by such parties to be appropriate.
5.06 Legal Opinions. BH acknowledges that the basis for relying on
exemptions from registration or qualifications are factual, depending on the
conduct of the various parties, and that no legal opinion or other assurance
will be required or given to the effect that the transactions contemplated
hereby are in fact exempt from registration or qualification.
5.07 Compliance with Rule 144.
(a) The Company will use its best efforts to at all times
satisfy the current public information requirements of rule 144
promulgated under the Securities Act so that its shareholders can sell
restricted securities that have been held for two years or more or such
other restricted period as required by rule 144 as it is from time to
time amended. This covenant shall survive the closing of this Agreement.
(b) Upon being informed in writing by any person holding
restricted stock sold pursuant to this Agreement that such person
intends to sell any shares under rule 144 promulgated under the
Securities Act (including any rule adopted in substitution or
replacement thereof), the Company will certify in writing to such person
that it is compliance with rule 144 current public information
requirement to enable such person to sell such person's restricted stock
under rule 144, as may be applicable under the circumstances.
(c) If any certificate representing any such restricted
stock is presented to the Company's transfer agent for registration or
transfer in connection with any sales theretofore made under rule 144,
provided such certificate is duly endorsed for transfer by the
appropriate person(s) or accompanied by a separate stock power duly
executed by the appropriate person(s) in each case with reasonable
assurances that such endorsements are genuine and effective, and is
accompanied by an opinion of counsel satisfactory to the Company and its
counsel that such transfer has complied with the requirements of rule
144, as the case may be, the Company will promptly instruct its transfer
agent to register such transfer and to issue one or more new
certificates representing such shares to the transferee and, if
appropriate under the provisions of rule 144, as the case may be, free
of any stop transfer order or restrictive legend.
5.08 New Directorships. Upon closing of the transactions
contemplated by this Agreement, a nominee of BH shall be appointed to the board
of directors of the Company to fill a currently vacant directorship, and at the
request of BH, the current board of directors of the Company may be expanded to
seven directorships with the new directorship being filled with an individual
mutually acceptable to the Company and BH. The Company's current management
shall support the nominee(s) of BH at any and all shareholder meeting where
directors are to be nominated and elected.
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<PAGE> 15
5.09 Future Obligations. The Company shall upon the closing of this
Agreement:
(a) Retain as auditors to the Company a "big six"
accounting firm for purposes of auditing the Company's future financial
statements commencing with the December 31, 1997, financial statements;
(b) Create an advisory board of professional advisors who
shall be selected in conjunction with BH;
(c) Retain a public relations firm with national marketing
experience and provide a maximum annual budget of $30,000 for public
relations expense; and
(d) Require all directors to be shareholders holding at
least 5,000 shares of Common Stock unless waived by BH.
This covenant shall survive the closing of this Agreement.
5.10. Expenses of Sale. The Company will pay all expenses incident to
the performance of its obligations hereunder, including but not limited to the
fees and expenses of its counsel and accountants, the cost of preparation of a
private placement memorandum and the cost of qualifying the offer and sale of
the shares of Common Stock and Warrants in various states or obtaining an
exemption from state registration requirements.
5.11 Company's Indemnification. The Company will indemnify and hold
harmless BH and Kirk Blosch and Jeff Holmes, individually, from and against any
and all losses, claims, damages, expenses, liabilities, or actions to which any
of them may become subject under applicable law (including the Securities Act
and the Securities Exchange Act) and will reimburse them for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any claims or actions, whether or not resulting in liability, insofar
as such losses, claims, damages, expenses, liabilities, or actions arise out of
or are based upon any untrue statement or alleged untrue statement of material
fact contained in any application or statement filed with a governmental body
or arising out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary in order to
make the statements therein not misleading, but only insofar as any such
statement or omission was made in reliance upon and in conformity with
information furnished in writing by the Company expressly for use therein. The
indemnity agreement contained herein shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of BH, Kirk
Blosch and Jeff Holmes and shall survive the consummation of the transactions
contemplated by this Agreement.
5.12 BH's Indemnification. BH will indemnify and hold harmless the
Company and its directors and officers, and each person, if any, who controls
the Company within the meaning of the Securities Act, from and against any and
all losses, claims, damages, expenses, liabilities, or actions to which any of
them may become subject under applicable law (including the Securities Act and
the Securities Exchange Act) and will reimburse them for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any claims or actions, whether or not resulting in liability, insofar
as such losses, claims, damages, expenses, liabilities, or actions arise out of
or are based upon any untrue statement or alleged untrue statement of material
fact contained in any application or
-15-
<PAGE> 16
statement filed with a governmental body or arising out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein, or necessary in order to make the statements therein not
misleading, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished in writing by BH
expressly for use therein. The indemnity agreement contained herein shall
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of the Company and shall survive the consummation of the
transactions contemplated by this Agreement.
5.13 Future Compensation. The Company will not use the funds obtained
hereunder for (i) paying any accrual or arrangement for or payment of bonuses
or special compensation of any kind or any severance or termination pay to any
present or former officer or employee; (ii) paying any increase in the rate of
compensation payable or to become payable by it to any of its officers or
directors or any of its employees whose monthly compensation exceeds $4,000; or
(iii) paying any increase in any profit-sharing, bonus, deferred compensation,
insurance, pension, retirement, or other employee benefit plan, payment, or
arrangement made to, for, or with their officers or directors;
5.14 Lock Up of Shares. The Company agrees to obtain a two year lock
up on the 130,000 shares of Common Stock held by Doug Anderson and received by
Mr. Anderson in relation to his sale of property to the Company. The lock up
agreement shall prevent Mr. Anderson from selling any of the 130,000 shares of
Common Stock for a period of two years and after the two year period Mr.
Anderson shall be permitted to sell only 25,000 shares of Common Stock during
any 90 day period. The terms and conditions of the agreement to prevent the sale
of Mr. Anderson shares of Common Stock shall be subject to the approval of BH.
Mr. Anderson, subject to the terms and conditions of the above "lock up," shall
be given the same "piggy back" registration rights of BH set forth in section
5.03 hereof; provided that, during all periods where Mr. Anderson would be
subject to the above "lock up," the Company will not be obligated to include Mr.
Anderson as a selling shareholder in any registration statement the company
files in that Mr. Anderson would not be able to sell the shares of Common Stock
registered in such registration statement due to the "lock up." This covenant
shall survive the closing of this Agreement.
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<PAGE> 17
ARTICLE VI
MISCELLANEOUS
6.01 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if personally delivered, if sent
by facsimile or telecopy transmission or other electronic communication
confirmed by registered or certified mail, postage prepaid, or if sent by
prepaid overnight courier addressed as follows:
If to Blosch and Holmes, to: Kirk Blosch, President
Blosch and Holmes
2081 South Lakeline Drive
Salt Lake City, Utah 84109
Fax: (801) 487-8117
With Copies to: Victor D. Schwarz, Esq.
3090 East 3300 South, Suite 400
Salt Lake City, Utah 84109
If to the Company, to: Dean G. Constantine, President
Zevex International, Inc.
5175 Greenpine Drive
Salt Lake City, Utah 84123
Fax: (801) 264-1051
With copies to: A.O. "Bud" Headman, Esq.
Cohne Rappaport & Segal
525 East 100 South, Suite 500
Salt Lake City, Utah 84102
E. Nordell Weeks, Esq.
Weeks Law Firm
136 South Main, Suite 320
Salt Lake City, Utah 84101
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices, hereunder, and any such notice or communication
shall be deemed to have been given as of the date so delivered or sent by
facsimile or telecopy transmission or other electronic communication, or one
day after the date so sent by overnight courier.
6.02 Attorney's Fees. In the event that any party institutes any
action or suit to enforce this Agreement or to secure relief from any default
hereunder or breach hereof, the breaching party or parties shall reimburse the
nonbreaching party or parties for all costs, including reasonable attorneys'
fees, incurred in connection therewith and in enforcing or collecting any
judgment rendered therein.
6.03 Entire Agreement. This Agreement represents the entire agreement
between the parties relating to the subject matter hereof. All previous
agreements between the parties, whether written or oral, have been merged into
this Agreement. This Agreement alone fully and completely expresses the
agreement of the parties relating to the subject matter hereof. There are no
other courses of dealing, understandings, agreements, representations, or
warranties, written or oral, except as set forth herein.
6.04 Survival; Termination. The representations, warranties, and
covenants of the respective parties shall survive the Closing Date and the
consummation of the transactions herein contemplated for a period of six months
from the Closing Date, unless otherwise provided herein.
6.05 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
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<PAGE> 18
6.06 Amendment or Waiver. Every right and remedy provided herein
shall be cumulative with every other right and remedy, whether conferred
herein, at law, or in equity, and such remedies may be enforced concurrently,
and no waiver by any party of the performance of any obligation by the other
shall be construed as a waiver of the same or any other default then,
theretofore, or thereafter occurring or existing. At any time prior to the
Closing Date, this Agreement may be amended by a writing signed by all parties
hereto, with respect to any of the terms contained herein, and any term or
condition of this Agreement may be waived or the time for performance thereof
may be extended by a writing signed by the party or parties for whose benefit
the provision is intended.
6.07 Binding Effect. This Agreement shall inure to the benefit of
and be binding upon the Company and the Placement Agent and their successors.
Nothing expressed in this Agreement is intended to give any person other than
the persons mentioned in the preceding sentence any legal or equitable right,
remedy or claim under this Agreement. However, the representations, warranties
and indemnity, and defense obligations of the Company included in this
Agreement also inure to the benefit of any person who controls the Placement
Agent within the meaning of Section 15 of the Securities Act and the
representations, warranties and indemnities, and defense obligations of the
Placement Agent inure to the benefit of each officer and director of the
Company, and each person who controls the Company within the meaning of Section
15 of the Act.
6.08 Severability. Every provision of this Agreement is intended to
be severable. If any term or provision hereof is illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the validity
of the remainder hereof.
6.09 Captions. The captions or headings in this Agreement are
inserted for convenience and identification only and are not intended to
describe, interpret, define, or limit the scope, extent, or intent of this
Agreement or any provisions hereof.
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<PAGE> 19
6.10 Applicable Law. This Agreement shall be governed by and construed
and enforced under and in accordance with the laws of the state of Utah, except
to the extent any law, rule or regulation of the United States may be
applicable, in which case such federal law, rule or regulation shall control.
IN WITNESS WHEREOF, the corporate parties hereto have caused this Agreement to
be executed by their respective officers, hereunto duly authorized, as of the
date first above written.
Zevex International, Inc. Blosch and Holmes
a Nevada corporation
By: /s/ DEAN G. CONSTANTINE By: /s/ KIRK BLOSCH
------------------------------ -----------------------------
Dean G. Constantine, President Kirk Blosch (individually and
on behalf of Blosch and
Holmes)
By: /s/ JEFF HOLMES
-----------------------------
Jeff Holmes (individually and
on behalf of Blosch and
Holmes)
STATE OF UTAH )
ss.
COUNTY OF SALT LAKE)
On this 1st day of December, 1996, personally appeared before me Dean
G. Constantine, whose identity is personally known to me and who by me duly
sworn, did say that he is the President of Zevex International, Inc. and that
said document was signed by him of behalf of said corporation by authority of
its bylaws, and said Dean G. Constantine acknowledged to me that said
corporation executed the same.
[SIG] PHILLIP L. McSTOTTS
--------------------- NOTARY PUBLIC - STATE of UTAH
NOTARY PUBLIC [SEAL] 746 QUAKING ASPEN
MURRAY, UT 84123
COMM. EXPIRES 9-27-98
STATE OF UTAH )
ss.
COUNTY OF SALT LAKE)
On this 1st day of December, 1996, personally appeared before me Kirk
Blosch, whose identity is personally known to me and who by me duly sworn, did
say that he a partner in Blosch and Holmes and that said document was signed by
him of behalf of said partnership and by him individually.
[SIG] PHILLIP L. McSTOTTS
--------------------- NOTARY PUBLIC - STATE of UTAH
NOTARY PUBLIC [SEAL] 746 QUAKING ASPEN
STATE OF ARIZONA ) MURRAY, UT 84123
ss. COMM. EXPIRES 9-27-98
COUNTY OF MARICOPA)
On this 3rd day of December, 1996, personally appeared before me Jeff
Holmes, whose identity is personally known to me and who by me duly sworn, did
say that he a partner in Blosch and Holmes and that said document was signed by
him of behalf of said partnership and by him individually.
/s/ LINDA GORAL OFFICIAL SEAL
--------------------- LINDA GORAL
NOTARY PUBLIC [SEAL] Notary Public - State of Arizona
MARICOPA COUNTY
My Commission Expires Aug. 24, 1997
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<PAGE> 20
Schedules to Stock Purchase Agreement dated November , 1996.
Section 2.08
1)130,000 Common Stock issued to Doug Anderson 10/29/96, for
3.65 acres of land in Murray, Utah,
2)82,800 Employee Incentive Stock Options, issued to
employees between 10/17/90 - 9/30/96,
3)12,000 Non-Employee Stock Options issued to Directors.
Section 2.10(a)
1)As described in schedule 2.10(b).
Section 2.10(b)
1)$2,000,000 in proceeds from Murray City, Utah Adjustable
Rate Industrial Development Bond,
2)$2,024,658 Letter of Credit with Bank One Utah,
3)$2,000,000 Murray City, Utah Adjustable Rate Industrial
Development Bond, $100,000 principal plus interest due
annually,
4)$500,000 Line of Credit with Bank One Utah.
Section 2.11(a)
1)As described in schedule 2.10(b).
Section 2.11(b)
1)As described in schedule 2.10(b).
Section 2.11(c)
====================================================================
Plan Shares Shares Issued Shares Expired
Authorized or Cancelled
- --------------------------------------------------------------------
1990 ISOP 60,000 60,000 4,200
- --------------------------------------------------------------------
1993 ISOP 240,000 22,800 4,500
- --------------------------------------------------------------------
1996 NESOP 100,000 12,000 0
====================================================================
<PAGE> 21
Section 2.12
1)UCC filings related to transactions described in Section
2.10(b).
Section 2.13
1)Ranae E. Tarro v. ZEVEX Inc. UADD No. 97-0054 (Title VII
of the Civil Rights Act of 1964)
2)ZEVEX, Inc. v. Richard Crangle DBA Crantec (Bad Debt
Collection)
<PAGE> 22
AMENDMENT TO STOCK PURCHASE AGREEMENT
This Amendment to Stock Purchase Agreement (this "Amendment") is
entered into as of September 30, 1997 by and among Zevex International, Inc., a
Nevada corporation (the "Company") and Blosch & Holmes, L.L.C., a Utah limited
liability company (hereinafter referred to as "BH"), collectively referred to
hereinafter as the "Parties" or individually, a "Party."
WHEREAS the Parties hereto have previously entered into a certain
Stock Purchase Agreement, dated December 1, 1996 (the "Agreement"), wherein BH
agreed to purchase 500,000 shares of Common Stock of the Company ("Common
Stock") and warrants for an additional 500,000 shares of Common Stock;
WHEREAS BH has transferred the warrants and certain rights pursuant
thereto;
WHEREAS the parties desire to amend the Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual promises contained in
the Agreement and in this Amendment, the Parties hereto agree as follows:
1. Article V of the Agreement shall be amended in its entirety to
read as follows:
ARTICLE V
SPECIAL COVENANTS
5.01 Piggy Back Registration Rights. If at any time
during the next five years the Company shall file a registration
statement with the Commission to register shares of its Common Stock,
excluding an S-8 or S-4 registration statement, the Company agrees to
register the 500,000 shares of Common Stock to be issued hereunder as
well as the shares of Common Stock issuable on the exercise of the
Warrants in such registration statement as follows:
(a) The Company shall promptly give written notice that
it intends to file a registration statement to the holders of the
shares of Common Stock and Warrants at least 45 days prior to any such
filing. The holders of the shares and Warrants will have 20 days
after receipt of the notice from the Company to notify, in writing,
the Company of their desire to include in such registration statement
shares of Common Stock. The Company shall include in such
registration statement that number of shares of Common Stock requested
by the holders subject to the provisions herein.
(b) The Company will pay all expenses of such
registration statement, including, without limitation, printing
charges, legal fees, and disbursements of counsel for the Company,
blue sky expenses, accounting fees, and filing fees, but not including
legal fees and disbursements of counsel to the Holders.
<PAGE> 23
(c) If the Company, in its sole discretion, determines to
file a registration statement or registration statements during the
next five years, except for registration statements for the sole
purpose of registering shares for employees, directors or consultants
of the Company, it shall take all steps reasonably necessary to permit
the registration of the shares of Common Stock and the exercise of the
Warrants and the issuance of the shares of Common Stock pursuant to
such exercise under the applicable state securities laws of those
states in which the shares of Common Stock and Warrants were issued or
originally registered or qualified for sale and issuance by the
Company. The Company will take such reasonable steps which it
determines, in its sole discretion, are necessary to permit the
registration or qualification of the shares of Common Stock and the
exercise of Warrants and the issuance of the shares of Common Stock
pursuant to such exercise under the laws of any other state in which a
holder of the shares of Common Stock or Warrants then resides on the
written request to do so by such holder, but in no event shall the
Company be required to take such steps in any state other than those
states in which the shares of Common Stock and Warrants were
originally qualified or registered, and the Company shall not be
obligated to execute or file any general consent to service of process
or to qualify as a foreign corporation to do business under the laws
of any such jurisdiction. Holders of shares of Common Stock and
Warrants who reside in any state where the Company cannot, with the
exercise of reasonable diligence, obtain qualification for the
exercise of the Warrants, and the issuance of the shares of Common
Stock may not, as a result thereof be able to exercise their Warrants,
and the Company is under no obligation to make such exercise possible
in such circumstances. In the event that the Company determines to
proceed with the qualification of the exercise of the Warrants and the
issuance of the shares of Common Stock under the securities laws of a
particular state, then the exercise of such Warrants shall not be
effective and the shares of Common Stock shall not be issued until
such qualification becomes effective. When qualification under
applicable state securities laws is required, the Company shall take
such action within ten days following the date on which the Company
first files the registration statement. The costs of obtaining such
state qualification shall be borne by the Company.
(d) The Company shall promptly notify the holders of the
shares of Common Stock and the Warrants of the effective date of any
registration statement filed by the Company and the date on which the
shares of Common Stock become qualified or registered under the state
securities laws of any state in which the Company obtains
qualification or registration with respect to such shares.
(e) Notwithstanding any provisions to the contrary
contained herein, the Company shall not be required to include any of
the shares of Common Stock in any registration statement or
post-effective amendment with respect to shares offered in any
underwriting:
2
<PAGE> 24
(i) Unless the holders of the shares of
Common Stock and Warrants agree to offer such shares
of Common Stock, on the same terms and conditions as
the Company's shares of Common Stock are being
offered, and to sign an underwriting agreement in the
form to be signed by the other offerors; or
(ii) If, in the good faith and reasonable
opinion of the managing underwriter of the offering,
the sale of the shares of Common Stock to be included
would be materially detrimental to the remainder of
the offerors.
(f) The shareholders desiring to sell shares of Common
Stock pursuant to the registration rights granted herein shall provide
the Company with all information relating to such sale and on which
the Company shall be entitled to rely and to include such information
in any such registration statement. The holders of the shares of
Common Stock and Warrants shall indemnify and save harmless the
Company (and all other persons who may be subject to liability under
the Act or otherwise) from and against any and all claims, actions,
suits, liabilities, losses, damages, and expenses of every nature and
character (including, but not by way of limitation, all reasonable
attorneys' fees and all amounts paid in settlement of any claim,
action, or suit) which arise or result directly or indirectly from any
untrue statement of a material fact furnished by such holder in
connection with such registration or qualification, or from the
failure of the holder of the shares of Common stock to furnish
material information in connection with the facts required to be
included in such registration statement, notification, or
post-effective amendment necessary to make the statements therein not
misleading, or from any sales or offers of the shares of Common Stock
so registered after ninety (90) days from the effective date of such
registration statement or notification.
(g) All sales pursuant to any such registration statement
shall be made in accordance with the provisions of the Securities Act
and the Securities Exchange Act of 1934, as amended, and the Company
shall not be required to include any such shares of Common Stock in
any registration until it has received written assurances satisfactory
in form and substance to the Company from the shareholders offering
such shares of Common Stock that such sales shall be so conducted. On
notice to any shareholder offering shares of Common Stock covered by a
registration statement that such registration statement or
prospectuses relating thereto requires revision, such holder will
immediately cease to make offers or sales pursuant to such
registration statement, return all such registration statements and
prospectus to the Company, and not resume offers until he or she has
been provided with an updated prospectus by the Company. The Company
is under no obligation to maintain the effectiveness of any
registration statement for more than an aggregate of 90 days.
3
<PAGE> 25
5.02 Compliance with Rule 144.
(a) The Company will use its best efforts to at all times
satisfy the current public information requirements of rule 144
promulgated under the Securities Act so that its shareholders can sell
restricted securities that have been held for two years or more or
such other restricted period as required by rule 144 as it is from
time to time amended. This covenant shall survive the closing of this
Agreement.
(b) Upon being informed in writing by any person holding
restricted stock sold pursuant to this Agreement that such person
intends to sell any shares under rule 144 promulgated under the
Securities Act (including any rule adopted in substitution or
replacement thereof), the Company will certify in writing to such
person that it is in compliance with rule 144 current public
information requirement to enable such person to sell such person's
restricted stock under rule 144, as may be applicable under the
circumstances.
(c) If any certificate representing any such restricted
stock is presented to the Company's transfer agent for registration or
transfer in connection with any sales theretofore made under rule 144,
provided such certificate is duly endorsed for transfer by the
appropriate person(s) or accompanied by a separate stock power duly
executed by the appropriate person(s) in each case with reasonable
assurances that such endorsements are genuine and effective, and is
accompanied by an opinion of counsel satisfactory to the Company and
its counsel and that such transfer has complied with the requirements
of rule 144, as the case may be, the Company will promptly instruct
its transfer agent to register such transfer and to issue one or more
new certificates representing such shares to the transferee and, if
appropriate under the provisions of rule 144, as the case may be, free
of any stop transfer order or restrictive legend.
5.03 New Directorships. BH shall have the right to
nominate one (1) person to serve as a director of the Company;
provided that such person shall be mutually satisfactory to BH and the
Company.
5.04 Future Obligations. The Company covenants to:
(a) Retain as auditors to the Company a "big six"
accounting firm for purposes of auditing the Company's future
financial statements commencing with the December 31, 1997, financial
statements;
(b) Create an advisory board of professional advisors who
shall be selected in conjunction with BH; and
(c) Retain a public relations firm with national
marketing experience and provide a maximum annual budget of $30,000
for public relations expense.
4
<PAGE> 26
(d) Require all directors to be either a shareholder or
option holder of the Company.
5.05 Company's Indemnification. The Company will
indemnify and hold harmless BH and Kirk Blosch and Jeff Holmes,
individually, from and against any and all losses, claims, damages,
expenses, liabilities, or actions to which any of them may become
subject under applicable law (including the Securities Act and the
Securities Exchange Act) and will reimburse them for any legal or
other expenses reasonably incurred by them in connection with
investigating or defending any claims or actions, whether or not
resulting in liability, insofar as such losses, claims, damages,
expenses, liabilities, or actions arise out of or are based upon any
untrue statement or alleged untrue statement of material fact
contained in any application or statement filed with a governmental
body or arising out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated
therein, or necessary in order to make the statements therein not
misleading, but only insofar as any such statement or omission was
made in reliance upon and in conformity with information furnished in
writing by the Company expressly for use therein. Subject to Section
5.07 herein, the indemnity agreement contained herein shall remain
operative and in full force and effect, regardless of any
investigation made by or on behalf of BH, Kirk Blosch and Jeff Holmes.
5.06 BH's Indemnification. BH will indemnify and hold
harmless the Company and its directors and officers, and each person,
if any, who controls the Company within the meaning of the Securities
Act, from and against any and all losses, claims, damages, expenses,
liabilities, or actions to which any of them may become subject under
applicable law (including the Securities Act and the Securities
Exchange Act) and will reimburse them for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any claims or actions, whether or not resulting in
liability, insofar as such losses, claims, damages, expenses,
liabilities, or actions arise out of or are based upon any untrue
statement or alleged untrue statement of material fact contained in
any application or statement filed with a governmental body or arising
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary in
order to make the statements therein not misleading, but only insofar
as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing by BH expressly for
use therein. Subject to Section 5.07 herein, the indemnity agreement
contained herein shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Company.
5.07 Expiration of Covenants. The covenants contained in
this Article V shall expire when BH, together with Kirk Blosch, an
individual residing in the State of Utah, and Jeff W. Holmes, an
individual residing in the State of Arizona, no
5
<PAGE> 27
longer holds at least six and one-half percent (6.5%) of the then
outstanding voting securities of the Company.
2. BH hereby acknowledges that the previous assignment of the
warrants included only an assignment of the registration rights of such
warrants and no other rights in Article V of the Agreement.
3. This Amendment shall terminate in the event that, prior to
December 31, 1997, the Company fails to close a public offering of its Common
Stock with net proceeds to the Company of at least $15 million.
4. This Amendment is and shall be binding upon and inure to the
benefit of the Parties hereto and their respective successors, assigns, and
personal representatives.
5. If any provision of the Amendment is deemed by a court of
competent jurisdiction to be invalid and contrary to any existing or future
law, such invalidity shall not impair the operation of the remaining provisions
of the Amendment.
6. This Amendment, together with the Agreement, constitutes the
entire agreement of the Parties with respect to the subject matter hereof and
supersedes any prior oral or written agreements with respect to the subject
matter contained herein.
7. This Amendment shall be construed in accordance with and
governed by the laws of the State of Utah without regard to the conflict of
laws.
IN WITNESS WHEREOF, the Parties have executed this Amendment to be
effective as of the date and year first written above. This Amendment may be
signed in counterparts, all of which together shall constitute one and the same
instrument.
ZEVEX INTERNATIONAL, INC.
a Nevada corporation
By: /s/ DEAN G. CONSTANTINE
------------------------------------
Dean G. Constantine, President
BLOSCH & HOLMES, L.L.C.
a Utah limited liability company
By: /s/ JEFF HOLMES
-------------------------------------
Jeff Holmes, managing member
6
<PAGE> 1
EXHIBIT 11.1
ZEVEX International, Inc.
Statement re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Primary
Net income (loss) $ (24,662) $ 316,800 $ 345,577 $ 142,710 $ 410,763
=========== ============ ============ ============ ============
Weighted average shares
of common stock
outstanding 1,130,609 1,305,812 1,388,466 1,365,716 1,918,793
----------- ------------ ------------ ------------ ------------
Dilutive common stock
equivalents (stock
options and warrants) -- -- -- -- 397,009
----------- ------------ ------------ ------------ ------------
Shares used in computing
net income (loss)
per share 1,130,609 1,305,812 1,388,466 1,365,716 2,315,802
=========== ============ ============ ============ ============
Net income (loss) per share $ (0.02) $ 0.24 $ 0.25 $ 0.10 $ 0.18
=========== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Fully Diluted
Net income (loss) $ (24,662) $ 316,800 $ 345,577 $ 142,710 $ 410,763
=========== ============ ============ ============ ============
Weighted average shares
of common stock
outstanding 1,130,609 1,305,812 1,388,466 1,365,716 1,918,793
Dilutive common stock
equivalents (stock
options and warrants) -- -- -- -- 471,393
----------- ------------ ------------ ------------ ------------
Shares used in
computing net income
(loss) per share 1,130,609 1,305,812 1,388,466 1,365,716 2,390,186
=========== ============ ============ ============ ============
Net income (loss) per
share $ (0.02) $ 0.24 $ 0.25 $ 0.10 $ 0.17
=========== ============ ============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries
Zevex, Inc., a Utah corporation
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 13, 1997, in the Registration Statement
(Form S-1 No. 33-00000) and related prospectus of Zevex International, Inc. for
the registration of 1,591,500 shares of its common stock, with the Securities
and Exchange Commission.
/s/ Davies and Rasmussen P.C.
Salt Lake City, Utah
October 3, 1997
<PAGE> 1
EXHIBIT 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 12, 1996, in the Registration Statement
(Form S-1 No. 33-00000) and related prospectus of Zevex International, Inc. for
the registration of 1,591,500 shares of its common stock, with the Securities
and Exchange Commission.
/s/ NIELSEN, GRIMMETT & COMPANY
Salt Lake City, Utah
October 3, 1997
<PAGE> 1
EXHIBIT 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 15, 1997, in the Registration Statement
(Form S-1 No. 33-37189) and related prospectus of Zevex International, Inc. for
the registration of 1,591,500 shares of its common stock, with the Securities
and Exchange Commission.
/s/ ERNST & YOUNG LLP
Salt Lake City, Utah
October 23, 1997
