US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-19583
ZEVEX INTERNATIONAL, INC.
(Name of Small Business Issuer as specified in its charter)
Nevada 870462807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5175 Greenpine Drive,
Salt Lake City, Utah
(Zip Code)
84123
(Address of principal executive offices)
Issuer's telephone number, including area code: (801) 264-1001
Securities Registered Pursuant to Section 12(b) of the
Exchange
Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange
Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
Check if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-B contained
in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-KSB or any amendment to this form 10-KSB: X
The Issuer's revenues for the fiscal year ended
December 31, 1996 were $5,663,732.
The aggregate market value of the Company's voting stock
held by nonaffiliates computed with reference to the average
bid and asked prices for such stock in the over-the-counter
market as quoted on the OTC Bulletin Board on February 20,
1997 was approximately $4,320,000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated
by reference and the part of the form 10-KSB (e.g., Part I,
Part II, etc.) into which the document is incorporated: (1)
any annual report to security holders; (2) any proxy or
information statement; (3) any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933, as
amended:
1) Annual Report to Security Holders.
2) Proxy Statement with respect to the Company's Annual
Meeting of Shareholders held on June 6, 1996.
_____________________________________________________________
TABLE OF CONTENTS
_____________________________________________________________
Item Number and Caption
Page PART I
1. Business 4
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Company's Common Stock and Related Stockholder
Matters 12
6. Management's Discussion and Analysis of
Financial Condition and Results of Operation 13
7. Financial Statements and Supplementary
Data 17
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
9. Directors and Executive Officers of
Company 18
10. Executive Compensation 19
11. Security Ownership of Certain Beneficial Owners
and Management 24
12. Certain Relationships and Related
Transactions 25
PART IV
13. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 26
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
ZEVEX International, Inc. (the "Company") is engaged
in manufacturing and marketing operations through its
whollyowned subsidiary, ZEVEX, Inc. The Company was
originally incorporated under the laws of Nevada on
December 30, 1987, under the name Downey Industries, Inc.
ZEVEX, Inc. was originally incorporated in Utah in
November 1986, under the name Ultronix, Inc., and
subsequently changed its name to ZEVEX, Inc. in May, 1987.
Unless the context otherwise requires, the terms "ZEVEX" and
"Company" as used throughout this report refer to both ZEVEX
International, Inc., a Nevada corporation, and its wholly-
owned subsidiary ZEVEX, Inc., a Utah corporation.
The Company designs, manufactures, markets and sells
custom and standard products utilizing
ultrasonic transducers and
related signal processing instrumentation. The
Company's
products are sold primarily to original equipment
manufacturers ("OEMs") serving the medical, industrial
and aerospace
instrumentation markets. The Company's recently
introduced
proprietary products, the EnteraLiter, and the Bottlewatchr,
are sold directly to the end user by the Company's sales
team and independent representatives. In most cases
(sales of the
Company's OEM products), the Company's design and
engineering staffs work closely with the customer to design
and develop a custom product which will perform the
function desired by the customer. The Company's products
range in complexity from simple ultrasonic transducers which
convert electrical energy to sound waves, to electronic
instrumentation systems which embody ultrasonic
technology.
The Technology
Ultrasonic transducers are used to convert electrical
energy to acoustic energy or sound waves in predetermined
configurations and intensities depending upon the specific
application. The
acoustic energy generated by the transducer is then utilized
to perform a variety of functions involving either the
transmission of sound waves as a power source or the
transmission and reception of sound waves to provide
interpretative data. In one application, the Company's
transducers are used to drive
precision surgical instruments, causing a cutting tip or
needle to oscillate or vibrate at rates exceeding 50,000
times per second. In applications, transducers are
coupled with signal processing equipment in order to
transmit sound waves to or through a particular material
or liquid. A signal processing circuit then records and
interprets the pattern and frequency of returning sound
waves to make determinations about the
characteristics of the subject material. Such devices are
used to detect the presence of air bubbles in liquids and
monitor fluid levels in vessels.
The Company designs and manufactures transducers
of a variety of sizes which can be incorporated by an OEM
into a final
instrument or piece of equipment. The Company's
ultrasonic process control products are designed to be
mounted outside surgical tubing and containers and do not
contain moving parts, which offer advantages in terms of
non-invasive application, service and durability. As the
Company has grown, its emphasis has shifted away from the
performance of engineering services to the higher margin
manufacturing operations. In addition, the Company has
developed and is developing its own products to augment
its OEM business.
Product Applications
Custom products account for most of the Company's
sales. The Company's custom products serve a variety of
applications in the medical, industrial and aerospace
instrumentation markets. In the development of custom
products, the Company generally accepts primary
responsibility for product design, having
received input and output specifications from the
potential
customer. In most cases, prototypes are developed and
delivered to the customer for evaluation before a firm order
for production quantities is placed. The Company places a
strong emphasis on developing a working relationship
between its own engineering staff and the engineering
staff of a potential customer during the product
development phase. In 1996, ZEVEX introduced the
EnteraLiter enteral feeding pump, its second proprietary
product, to the healthcare market.
Ophthalmic Surgical Products. The
Company manufactures piezoelectric handpieces,
control circuits, and instrumentation employed
in surgical procedures for the removal of
cataracts, called phacoemulsification. The
handpieces utilize ultrasonic energy to cause a
needle located at the tip of the handpiece to
oscillate at a high frequency. During the
procedure, the surgeon holds the handpiece and
inserts the needle through a small incision in the
eye.
The
actuation of the needle causes fragmentation of
the cataract tissue at the tip, which is
emulsified and aspirated through ports in the
handpiece. The
phacoemulsification procedure has led to the
treatment of cataracts as an out-patient
procedure. Sales of phacoemulsification
products accounted
for approximately 42% of the Company's revenues
in
1996, and 40% in 1995.
Air Bubble Detectors. The Company
manufactures a line of ultrasonic air bubble
detectors which are noninvasive devices used to
continuously detect the
presence of air bubbles in fluids through most
sizes and types of medical tubing. Each system
consists of a pair of ultrasonic transducers
encapsulated in a sensor housing, accompanied by a
single compact circuit board. Certain of these
circuits have been approved for use in medical
infusion systems by the TUV Product Service of
Germany, which is a technical control
organization responsible for product safety in
Europe.
The sensor is configured to meet the tubing
size and packaging requirements of the particular
customer. The sensor is clamped on the tubing in
an arrangement which
does not restrict flow, yet requires no acoustic
couplant for operation. This dry-coupling
arrangement is favored in the medical operating
environment for its simplicity and the ability to
reuse sensors with many
disposable tubing sets. The use of the sensors on the
exterior of the tubing also eliminates concerns with respect
to contamination of the fluids and the need to sterilize the
sensor housing. The system operates by causing one transducer
to project ultrasonic energy or sound waves across the path
of the fluid in the tube. A second transducer acts as a
receiver which monitors the transmission of the ultrasonic
energy across the fluid path. When a
bubble of critical size passes
between the transducers, the path of acoustic energy is
interrupted and detected, and a signal is sent by the
interface circuit to the instrument controller which in turn
shuts down the infusion pump to prevent the bubble from
entering the patient. The Company's bubble detectors
have been configured for microbore infusion tubing sizes as
small as 1/16 inch in diameter and for cardiotomy tubing as
large as 1/2 inch in diameter. Bubbles as small as a few
microliters can be detected and detection thresholds can be
set to sizes required by the specific application. The system
logic features fault detection capability and the interface
can be configured to meet the requirements of the user.
Detectors are designed to operate at both high and low fluid
rates and with fluids that vary greatly in density and
opacity. Sales of air bubble detectors account for
approximately 49% of the Company's revenues in 1996, and 56% in
1995.
Ultrasonic Liquid Level Detection Systems. These systems
provide a simple and accurate means for
measuring and monitoring liquid levels in both
industrial and medical applications. The systems contain
no moving parts and require little power for operation. A
system typically consists of an ultrasonic transducer
and a microprocessor-controlled signal processing circuit.
The circuit drives the transducer which projects a pulse of
ultrasonic energy from the bottom of the vessel toward the
surface of the liquid. At the
liquid to air (or gas) interface, the
ultrasonic pulse is reflected and returns to the
transducer, which now acts as a receiver. By precisely timing
the echo from the surface, an accurate
measurement of the liquid level can be made. Through the
use of modern microprocessor technology,
calibration factors can be used to enhance system
accuracy and to convert level data to useful volume
information.
Since the system makes and averages hundreds of
measurements each second, it is capable of producing
relatively high statistical accuracies. This
continuous inventory management feature is particularly useful
in environments where tank leak detection is required. In
industrial applications, the transducer housing is
manufactured from materials designed to resist harsh
chemical environments and to operate while immersed in
hydrocarbon products, organics and water. Level gauging
systems are used in the medical operating environment to
continuously detect liquid levels in blood oxygenators,
cardiotomy reservoirs and similar vessels. In these
applications, the transducer attaches to the exterior of
the vessel at the bottom and projects and receives the
ultrasonic energy through the plastic wall, which may vary
in composition, rigidity and thickness. In medical
applications, the product assists in process control
during critical
operations so that medical personnel can attend to other
activities. Sales of liquid level detectors have accounted
for approximately 1% of the Company's revenues during
each of the last two fiscal years.
Bottlewatchr Liquid Level
Indicators.
Bottlewatchr noninvasively monitors liquid levels
in bottles of balanced salt solutions which are
used extensively in cataract and retinal surgery.
Balanced salt solution is required to nourish and
support the delicate structure 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 Bottlewatchr, audible and visible
alarms are immediately activated. Bottlewatchr
is the first proprietary product to be trademarked
and marketed under the ZEVEX name, and worldwide
distribution was established during 1995.
Bottlewatchr accounted for approximately 1% of
the Company's revenue in 1996.
EnteraLiter Enteral Feeding Pumps. The new
EnteraLiter ambulatory enteral feeding pump is a
portable feeding pump for patients who cannot get
adequate nutrition orally. It passes feeding
solutions directly into the intestines. The
EnteraLiter, ZEVEX's second proprietary product, is
the lightest, most compact nutrition infusion system
on the market, possessing unprecedented safety and
accuracy in liquid nutrition delivery. The
EnteraLiter has a 24 hour battery, one-third longer
than any competitor's. The Company was awarded two
patents for EnteraLiter technology, one for its
safety and another for its delivery accuracy
components. Two patents remain pending on the pump's
technology. The EnteraLiter requires the use of
disposable feeding bags and tube sets, both of which
are sold by the Company. ZEVEX received permission
to market its EnteraLiter with 510(k) approval from
the FDA in March. Sales of the EnteraLiter began in
September of 1996.
Manufacturing
The Company's products are assembled and tested at
its manufacturing facility in Salt Lake City, Utah. In most
cases, the manufacturing process begins with technical
drawings and
specifications produced in cooperation with the customer.
Once the preliminary design has been completed, a
prototype is
manufactured and further design refinements and adjustments
are made based on the performance of the prototype.
Following
completion of final design specifications, the Company orders
the required electronic components (primarily integrated
circuits, capacitors and resistors), piezoelectric ceramic,
molded plastic and stainless steel housings, and other
items from qualified suppliers of such items. The
Company has found that the materials required for the
manufacture of its products are
available from several different sources of supply and
the Company is not dependent on any single supplier
or group of
suppliers.
The component parts and raw materials required for
the Company's products are shipped to the Company's
manufacturing
facility by the various suppliers. There, the products
are
assembled by hand in an assembly line format by the
Company's manufacturing personnel. The Company believes the
combination of an adequate supply of labor and its in-house
training programs will enable it to continue to meet its
requirements.
The performance of the Company's products is validated
by subjecting them to tests at various points in the
production process as well as to a final test by the
quality assurance staff. Completed products are then
shipped to the OEM's,
distributors, or end users. The Company accepts
standard purchase order forms from its customers, the terms of
which may vary based on negotiations with the customers.
Payment terms are generally net 30 days and the Company
generally warrants that its standard products will be free
from defects for a period of at least 14 months from the
date of manufacture.
Marketing
The Company markets its products directly to its
customers in the United States and Europe through its sales
staff and manufacturing representatives. In addition to
the marketing organization, the Company uses its technical
engineering and design staffs to assist in the marketing
effort. The Company
seeks to market opportunities or product types with
component functions which could benefit by incorporating
ultrasonic components. The Company then identifies
and contacts
manufacturers or prospective manufacturers of the
particular product types. The sales and marketing staff acts
as liaison between the potential customer and the
Company's design and engineering staffs. During 1993, and
continuing through 1996, the Company undertook research
and development activities to produce prototype products
which it believed would fill certain specialized market
niches. The Company completed its development of the
EnteraLiter product and launched its sale of the product in
September of 1996. When and if other such products
are
successfully completed, the Company will commence efforts
to market the completed products to OEM's and potential end
users.
Backlog
At December 31, 1996, the Company had a backlog of
orders for manufactured transducers and electronic
components of
$3,527,000, as compared to backlogs at December 31, 1995
and 1994, of $3,091,000 and $2,359,000, respectively. As of
February
24, 1997 , the Company had a backlog of $5,541,000. For
purposes of the above figures, backlog includes all orders
received by customers pursuant to purchase orders which
have not been completed and shipped by the Company.
Some of the orders included in the backlog may be canceled
or modified by customers without significant penalty. In
addition, since customers may place orders for delivery at
various times throughout the year, and because of the
possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any
particular date may not be a reliable indicator of future
sales.
Customers
The Company currently sells its products to
approximately 110 different customers, although a small
number of customers account for a significant portion of the
Company's total sales. In the
1996 fiscal year, three customers accounted for
approximately 62% of the Company's total sales. These
customers were IVAC Corporation, Allergan Medical Optics,
and Paradigm Medical, Inc., each of whom accounted for in
excess of 10% of the Company's total sales. None of these
customers has any
affiliation with, or relationship to the Company. The loss
of any of such major customers or a significant reduction in
the volume of their orders for the Company's products
may be anticipated to have a materially adverse impact on the
Company's operations.
Sales to foreign customers accounted for approximately 7%
of net sales during 1996 and 1995. All of such foreign sales
were made to customers in Europe, Canada and the Middle East
and were billed and paid for in US dollars. The Company's
export sales are subject to certain risks common to all
export activities, such as governmental regulation,
tariffs or other trade barriers.
Research and Development
During 1996, the Company continued independent research
and development activities with respect to the design and
development of new and improved products, spending $527,562
in 1996, and $502,255 in 1995. In 1996 and 1995
respectively research and development costs represented
approximately 9.3% and 9.5% of the
Company's net sales. The Company's research and
development
efforts during 1996 were devoted to several products, one
of which, the EnteraLiter, is for use in the burgeoning home
and institutional health care industries as a supplementary
feeding device. The Company was awarded two patents and a
trademark for EnteraLiter technology. ZEVEX received 510 (k)
approval from the FDA (permission to market) on its EnteraLiter
device in April of 1996. In September, the Company
introduced its EnteraLiter enteral feeding pump at the
National Home Infusion Association's annual trade show.
The Company was awarded a contract in 1996 to be
the exclusive developer and manufacturer of the next
generation of instruments for cataract removal. These
new surgical instruments, to be marketed by Paradigm
Medical, Inc., will incorporate both laser and ultrasonic
energy for cataract removal. ZEVEX also came under
contract in 1996 to deliver surgical components to a
major manufacturer of surgical equipment.
In addition to research funded by ZEVEX's OEM customers,
the Company is engaged in ongoing research and
development of proprietary medical products and technology,
independently and in
coordination with the University of Utah Engineering
Department. During 1996, the Company continued to sponsor
research on surgical instrumentation at the University of
Utah. That project currently has one patent pending.
All research and development is expensed as incurred.
At
December 31, 1996, 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.
Regulation
The Company supplies products to original
equipment manufacturers for incorporation into final products,
as well as manufacturing its own end-user products. Many
of these end products constitute "medical devices" which are
regulated by the Food and Drug Administration ("FDA") under a
number of statutes, including the Food and Drug and Cosmetic
Act and the regulations promulgated thereunder. ZEVEX is
responsible for obtaining regulatory approval from the FDA,
and other state agencies, on the sale of its proprietary
products. In addition, as a contract manufacturer of medical
devices, the Company is required to register with the FDA
and meet quality control and manufacturing procedures set forth
in the FDA regulations with respect to good manufacturing
practices (GMP). The Company's facilities are subject to
periodic inspection by the FDA to monitor compliance with these
regulations and the Company is subject to certain FDA mandated
record keeping requirements. In 1996, the Company was awarded
ISO 9001 and EN 46001 certifications following a rigorous audit
by the NSAI (National Standards Association of Ireland). The
Company believes that it currently meets all material GMP
requirements respecting the manufacture of its products.
Competition
Because most of the products the Company produces
are component products which are incorporated in a wide
variety of medical and industrial products, it faces
extensive and varied competition. Some of the
Company's competitors have substantially greater
financial, marketing, manufacturing, engineering and
management resources than the Company.
The
ultrasonic instrumentation industry includes large
original equipment manufacturers who manufacture exclusively
for their own use and several independent manufacturers such as
the Company who manufacture exclusively for sale to others.
The Company believes its
current share of the total ultrasonic products
and
instrumentation market is very small. The Company believes
that the primary factors of competition in the industry are
quality, on-time delivery, price and performance, and the
Company attempts to be competitive in each of those areas.
Patents and Trademarks
The Company has applied for five patents as of December
31, 1996 on products developed by ZEVEX alone, and in
conjunction with a local university. In 1996, the Company
received two patents on the EnteraLiter product, one each for
its safety and delivery accuracy devices. The Company was
also awarded a registered trademark on the EnteraLiter in
1996. The current status of the three remaining patents
applied for in 1996 is patent pending.
The Company believes that rapidly changing technology
makes its continued success dependent upon the technical
competence and creative skills of its personnel. If the
Company's research and development activities should result in
a new technology, product or application which the Company
believes is patentable and with
respect to which patent protection appears to be justified,
the Company anticipates that it will continue to file
additional necessary patent applications.
Employees
The Company employs a total of 78 persons, including
its three executive officers. Of such employees, 14 are
employed in administrative capacities, 6 in sales, 26 in
engineering and design and 32 in manufacturing. The Company's
employees are not represented by a collective bargaining
organization and the Company believes its relationship with
its employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices and manufacturing
facilities are located in a 20,150 square foot facility at
5175 Greenpine Drive, Salt Lake City, Utah 84123. The space
is leased from an unrelated third party pursuant to a written
lease which expires in May 1997. The Company currently pays
$10,019 per month in rent..
ZEVEX is building a 51,000 square foot headquarters and
manufacturing facility in Salt Lake City. The new facility
is scheduled for completion in May of 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal
proceeding, and to the best knowledge of the Company, no such
proceedings have been threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's second quarter of the year ending
December 31, 1996, matters submitted to a vote of the security
holders of the Company were to reelect the current members of
the Company's board of directors, and the selection of the
Company's auditors to be affirmed. The vote from ballots and
proxies tallied for the each
member proposed to the board of directors and the selection
of the Company's auditors were 965,247 shares voted For,
1,000 shares voted Against, and zero shares Abstained from
voting. The vote from ballots and proxies tallied for
approval of the non-
employee director stock option plan were 958,377 shares
voted For, 7,870 shares voted against, and zero shares
abstained from
voting. All proposals were approved by a majority of the
issued and outstanding shares of Company's common stock. No
matter was submitted to a vote of the Company's
shareholders during the fourth quarter of the fiscal year
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-
counter market, in the "pink sheets" published by the National
Quotation Bureau, and is listed on the OTC Bulletin Board under
the symbols "ZVXI" and "ZVXIU." The market for the Company's
common stock must be characterized as a limited market due to
the relatively low trading volume and the small number of
brokerage firms acting as market makers.
The following table sets forth, for the periods
indicated, 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. No assurances can be
given that the prices for the Company's securities will be
maintained at their present levels.
High Bid High Bid Low Bid Low Bid
Common Units Common Units
Fiscal Year 1996
First Quarter $ 4.25 $ 4.50 $3.75 $ 4.00
Second Quarter $ 4.00 $ 4.25 $ 2.75 $ 3.00
Third Quarter $ 3.25 $ 3.25 $ 2.50 $ 2.50
Fourth Quarter $ 3.31 EXPIRED $ 2.75 EXPIRED
Fiscal Year 1995
First Quarter $ 3.75 $ 3.75 $ 2.50 $ 2.50
Second Quarter $ 4.00 $ 4.00 $ 2.75 $ 2.75
Third Quarter $ 3.25 $ 3.50 $ 2.25 $ 2.25
Fourth Quarter $ 4.00 $ 4.25 $ 3.25 $ 3.25
On February 28, 1997, the high bid and low asked prices
for the Company's shares as quoted on the OTC Bulletin Board were
$6.25 and $6.75 for common stock.
The Company's transfer agent reported that as of February 1
8, 1997, there were 1,995,716 shares of the Company's common
stock issued and outstanding held by approximately 509 holders
of record, including shares held of record by brokerage firms
and clearing corporations on behalf of their customers.
No cash dividends have been paid on the Company's
securities, and the Company does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company designs, manufactures, markets and sells
custom and standard products utilizing ultrasonic
transducers and
related signal processing instrumentation. The
Company's
products are sold primarily to original equipment
manufacturers ("OEMs") serving the
medical, industrial and aerospace
instrumentation markets. The Company's recently
introduced
proprietary products, the EnteraLiter and the Bottlewatchr,
are sold directly to the end user by the Company's sales
team and
independent representatives. In most cases (sales of
the
Company's OEM products), the Company's design and
engineering staffs work closely with the customer to design
and develop a custom product which will perform the function
desired by the customer. The Company's products
range in complexity from simple
ultrasonic transducers which convert electrical energy to
sound waves, to transducers coupled with advanced drive
circuits and signal processing systems which are capable of
signal generation, signal detection and analysis of electrical
wave forms.
As detailed previously, in each of the three preceding
years individual customers accounted for significant
percentages of total revenue so fluctuations in the timing and
size of orders from such major customers
resulted in changes in the Company's
results of operation. 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. As the
Company increases the number of products manufactured and the
proportion of products based on its own technologies, it
expects that the quarterly fluctuations
experienced in the past may moderate.
Selected Financial Data
The selected financial data set forth below with respect
to
the Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 are derived from the
Consolidated Financial Statements included elsewhere herein and
are qualified by reference to such financial statements and the
notes thereto. The selected financial data with respect to the
Consolidated Statements of Income for the years ended December
31, 1993 and 1992 are derived from the Consolidated Financial
Statements of the Company for the years then ended and are
qualified by reference to such financial statements and the notes
thereto.
Fiscal Year Ended December 31
1996 1995 1994 1993 1992
Statement of Operations Data
Sales 5,663,733 5,295,762 3,332,437 3,115,878 2,435,979
Gross Profit 2,727,678 2,230,209 1,315,767 1,515,806 1,078,753
Selling, general 1,892,317 1,324,749 1,023,988 775,760 629,960
and administrative
expenses
Research and
development 527,562 502,255 419,278 198,804 194,057
expenses
Other (income) (243,947) (40,649) (36,127) (37,096) (16,875)
/expenses
Provisions
(credit) for taxes 206,169 127,055 (66,709) 196,940 81,510
Net income (loss) 345,577 316,800 (24,662) 381,398 190,101
Net income (loss)
per share .25 .24 (.02) .36 .20
Weighted average
shares outstanding 1,388,511 1,305,812 1,130,609 1,060,403 938,125
Results of Operations
The following table sets forth, for the periods indicated,
the relative percentages that certain items in the income
statement bear to net sales.
Year Ended December 31
Income Statement Data -- Percentage of Net Sales
1996 1995 1994 1993 1992
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross Profit 48.2% 42.1% 39.5% 48.6% 44.3%
Selling, general 33.4% 25.0% 30.7% 24.9% 25.8%
and administrative
expenses
Operating income 14.8% 17.1% 8.8% 23.7% 18.5%
Research and 9.3% 9.5% 12.6% 6.4% 8.0%
development
expenses
Other (4.3)% (0.8)% (1.1)% (1.1)% (0.7)%
(income)/expenses
Income (loss) 9.7% 8.4% (2.7)% 18.6% 11.2%
before taxes
Provisions 3.6% 2.4% (2.0)% 6.3% 3.3%
(credit) for
taxes
Net income (loss) 6.1% 6.0% (.7)% 12.3% 7.9%
The Company's sales increased to $5,663,733 in 1996
from $5,295,762 in 1995, an increase of approximately 7%.
During 1996 and 1995, 62% and 56%, of total revenues resulted
from sales to three customers and two customers respectively,
two of which were major customers in both years. Since the
Company's products are primarily sold to OEMs as
components for incorporation into products manufactured by
them, demand for the Company's products is affected by the
demand for the final products manufactured by the OEMs, which
is beyond the control of the Company. Management attributes
the increase in sales to an increase in demand for the
Company's products and an increase in engineering
contracts during 1996 and anticipates that the demand will
continue during 1997.
The Company's customers have no contractual or other
obligation to purchase products from the Company, and
no assurances can be given that orders from any customer
will increase or remain at current levels or that they
will not decline.
Gross profit as a percentage of sales was 48.2% in 1996,
as compared to 42.1% in 1995. Management attributes the
increase mainly to engineering contracts toward the end of the
year, and to a
decrease of pass-thru, non-recurring engineering tooling
expenses.
General and Administrative expenses increased during 1996
to $1,892,317 or 33.4% of total sales as opposed to
$1,324,749 or 25% of total sales 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 incurred. An
expanded sales and marketing effort increased staffing,
travel, advertising and administrative expenses related to
the introduction of the EnteraLiter 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 believes that general and
administrative expenses in 1997 as related to sales
will continue at approximately the same rate as in the
previous two years.
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. (See "BUSINESS: Research and
Development.") The Company invested $527,562 in 1996 and
$502,255 in 1995 directly in new research and development
projects.
Operating income decreased to $835,361, or 14.8% of
net sales, in 1996 from $905,460, or 17.1% of net sales, in
1995. Similarly, the Company had a net income of $345,577 or
6.1% of net sales, in 1996 compared to $316,800, or 6.0% of
net sales, in 1995.
These 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.
Liquidity and Capital Resources
The Company generated net income of $345,577
from operations. As a result of increased
expenditures for
inventories, accounts receivable, financing, and work in
progress for future sale, the Company used total cash of
$175,141.
Operating activities during 1995 created net cash of $214,361
on net income of $316,800, as the Company funded an
increase in accounts receivable and inventories.
The Company's purchases of land, facilities, new
research, production, testing equipment and tooling increased
to $670,245 in 1996 from $237,331 in 1995. The increase in
purchases of equipment 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 also anticipates spending
approximately $500,000 in additional research and
development expenses during 1997. It is estimated that
overhead increases related to the new manufacturing facility
will increase by approximately $6,000 pr month as
compared to the rent currently being paid by the Company.
In 1996, the company negotiated a $2,000,000
Industrial Development Bond to finance a land acquisition and
construction of a new 45,000 square foot headquarters and
manufacturing facility. On October 29, 1996, the Company
completed a
transaction for the amount of $50,000 cash and 130,000 shares
of unregistered stock of the Company for the
purchase of
approximately 3.7 acres of land within Murray City, Salt
Lake
County, Utah, for the purpose of constructing a
manufacturing facility with an unrelated party. The Company
expects to spend approximately $2,500,000 on the new
manufacturing facility to be completed in 1997.
The Company's working capital at December 31, 1996,
was $4,520,781, as compared to $2,528,418 and $2,269,944 at
December 31, 1995 and 1994 respectively. Increase in working
capital is primarily due to the $2,000,000 industrial
development bond obtained by the company for financing the
new manufacturing facility. The portion of working capital
represented by cash at such dates was $2,085,055, $870,333,
and $864,332 respectively. The Company utilizes substantial
portions of its cash from time to time to fund its
operations including increases in
inventories, accounts receivable and work in progress
in
connection with various customer orders.
On December 16, 1996, the Company entered into a
Private Placement memorandum agreement to offer, on a best
efforts basis, $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 offering was sold directly by the Company through
its officers and directors. The
offering
successfully closed on February 12, 1997. The offering
proceeds will be used for general corporate purposes.
On December 11, 1996, the Company entered into a
$500,000 open line of credit arrangement with a financial
institution. The line is
due May 31, 1997. The line of credit is
collateralized by accounts receivable rights and bears
interest at a rate of prime plus 1%. The Company owes $60,108
on the line of credit at December 31, 1996.
Inflation and Changing Prices
The Company has not been, and in the near term is
not expected to be, materially affected by inflation or
changing prices.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements for the fiscal years
ended December 31, 1996 and 1995, are included beginning at page
30 which follows the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF COMPANY
The directors and executive officers of the Company are as
follows. Each of the officers and directors also holds the same
offices with ZEVEX, Inc.
Name Age Position
Dean G. Constantine 44 President, Chief Executive Officer
and
Director
David J. McNally 35 Vice President, Director of Marketing
and Director
Phillip L. McStotts 39 Chief Financial Officer,
Secretary/Treasurer and Director
Bradly A. Oldroyd 39 Director
Darla R. Gill 45 Director
*The term of office of each director is one year and until
their successor is elected at the Company's annual
shareholders' meeting and is qualified, subject to removal
by the shareholders. The term of office for each officer is
for one year and 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.
Certain biographical information with respect to each of
such persons is set forth below.
Dean G. Constantine, is a founder of the Company and has
served as an executive officer and director since its inception.
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 an executive officer and 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., in Magna, Utah, as an advanced methods
development engineer. Mr. McNally received a Bachelor of Science
Degree in Mechanical Engineering from LaFayette College in May
1983, and a Master of Business Administration Degree from the
University of Utah in June 1992.
Phillip L. McStotts, is a founder of the Company and has
served as an executive officer and director since its inception.
He is also self employed, and has been since October 1986, as
president of Phillip L. McStotts CPA, a professional corporation.
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 an 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 Bachelor of Science
degree in Marketing from Utah State University in 1981, and a
Master of Business Administration Degree from the University of
Utah in 1982.
Darla R. Gill, is the founder 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
also currently serves as a Director of the Board of NYB
Corporation in Salt Lake City. Ms. Gill graduated from the
University of Phoenix with a Bachelors Degree in Business
Administration in 1988.
ITEM 10. EXECUTIVE COMPENSATION
General
The Company's executive officers and directors receive
compensation in the form of salaries, bonuses, benefits realized
under the Company's 401(k) plan, ESOP plan and stock options
granted under the 1993 ZEVEX Stock Option and Stock Award plan.
The board of directors has appointed a compensation committee
which consists of Bradly Oldroyd and Darla Gill to address the
compensation of executive officers and directors. The Company
has not entered into employment agreements with its executive
officers and compensation levels are determined by the board of
directors on an annual basis.
Compensation of Executive Officers
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.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annua Awards Payouts
l
Compe
nsati
on
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock LTIP Other
Principal Year Salary Bonus Comp Awards Optio Payouts Comp.
Position
Dean G. 1996 $72,073 $12,189 $5,844 0 0 0 0
Constantine
CEO and 1995 $64,114 $10,102 $5,261 0 0 0 0
President 1994 $61,238 $10,000 $5,162 0 0 0 0
David J. 1996 $72,073 $12,189 $5,844 0 0 0 0
McNally
Vice President 1995 $64,114 $10,102 $5,261 0 0 0 0
1994 $61,238 $10,000 $5,162 0 0 0 0
Phillip L. 1996 $72,073 $12,189 $5,844 0 0 0 0
McStotts
Secretary
/Treasurer 1995 $64,114 $10,102 $5,261 0 0 0 0
1994 $61,238 $10,000 $5,162 0 0 0 0
The Other Annual Compensation listed in the above table is
contribution by the officer into a deferred compensation 401(K)
plan.
Options 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.
Aggregated Option Exercises in Last Fiscal Year and Fiscal YearEnd
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 year
end.
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End FY-End
Shares
Name and Acquired Value Exercisable/ Exercisable/
Principal Position on Exercise Realized Unexercisable Unexercisable
Dean G. Constantine
President 0 0 5,400/0 0/0
David J. McNally
Vice President 0 0 5,400/0 0/0
Phillip J. McStotts
Secretary/Treasurer 0 0 5,400/0 0/0
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.
Compensation of Directors
The Company pays each director who is not an
employee of the Company or its subsidiary a director's fee of
$50 per board of directors meeting attended by them. Directors
who
are employees of the Company receive no
additional
compensation for serving as directors or attending meetings of
directors. During 1996, and as of the date hereof, Bradly
Oldroyd and Darla Gill are the only directors receiving
compensation under this arrangement.
Non-Employee Stock Option Plan
In 1996, the Company established and the shareholders
approved the 1996 Non-Employee Stock Option Plan under which
the Company could grant options to purchase up to 100,000
shares of the Company's Common Stock (subject to adjustment
for such matters as stock splits and stock dividends). This
Plan is a nonstatutory or non-qualified stock option plan
pursuant to which Options may be granted to non-employee
directors of the Company. This Plan is intended to meet
requirements of Rule 16b-3 of the Exchange Act and the
Options granted hereunder are intended to be "Formula"
Options under section 16b-3(c)(2)(ii) of the Exchange Act.
The capital stock that may be delivered under this Plan
shall be shares of the Company's authorized but unissued
Common Stock and any shares of its Common Stock held as
treasury shares. The Option Plan may be administered by the
board of directors of the Company or by a committee
appointed by the board of directors. The board, or the
committee if and when appointed, will interpret the Option
Plan, its rules and regulations, and the instruments
evidencing the restrictions imposed upon stock sold under
the Option Plan, and will make all determinations deemed
necessary or advisable for administration of the Option
Plan. During 1996, 12,000 options were granted under the
plan.
Stock Option Plan
In 1993, the Company established and the shareholders
approved the 1993 Stock Option and Stock Award Plan under
which the Company could grant options to purchase up to
200,000 shares of the Company's Common Stock (subject to
adjustment for such matters as stock splits and stock
dividends) which may be incentive stock options within the
meaning of section 422A of the Internal Revenue Code of
1986, as amended, or options which do not qualify as
incentive stock options. The Option Plan also provides for
grant of stock appreciation rights and stock awards to
eligible participants, subject to forfeiture restrictions.
The Option Plan may be administered by the board of
directors of the Company or by a committee appointed by the
board of directors. The board, or the committee if and when
appointed, will interpret the Option Plan, its rules and
regulations, and the instruments evidencing the restrictions
imposed upon stock
sold under the Option Plan, and will make all determinations
deemed necessary or advisable for administration of the
Option Plan. During 1994, 19,000 options were granted under
the plan.
In connection with the underwriting of the
Company's 1993 public offering of Units, the Company agreeed
that for a period of three years subsequent to the date
of the prospectus for the offering (April 29, 1993), it
would not grant any stock options without the prior written
consent of the underwriter except that the Company may grant
incentive stock options for up to 100,000 shares of the
Company's common stock to persons who are not directors of the
Company without the underwriter consent.
Profit Sharing Plan
During 1991, the Company established a qualified 401(k)
profit sharing plan. Eligible employees may defer a portion
of their salary. At the discretion of the board of
directors, the Company may make a matching contribution of
an additional amount of up to four percent of eligible
employee deferrals and a discretionary amount to be
determined by the board of directors each year. Employees
are fully vested after seven years. Contributions to the
plan for the year ended December 31, 1996, 1995, 1994, 1993
and 1992 were $86,035, $45,997, $35,436, $22,981 and
$34,223, respectively.
Employee Stock Ownership Plan
In 1993, the Company established and the shareholders approved
t he 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 plan for the year ended December 31, 1996, 1995, 1994
and 1993, were $0, $33,750, $0 and $16,650, respectively.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of February 18
1997, the number of shares of the Company's common stock,
par value $0.04, owned of record or beneficially by each of
the executive officers and directors of the Company and by
all directors as a group. Such persons are the only
persons known to the Company to be the beneficial owner of
5% or more of the issued and outstanding shares of the
Company's common stock. As of such date, the Company had a
total of 1,995,716 shares of common stock issued and
1,995,716 outstanding.
Number of Percent
Name Shares of
Class
Owned(1)(4)(5)
Dean G. Constantine 264,400(2)
13.00%
David J. McNally 252,598 (2)
12.43%
Phillip L. McStotts 159,400(2)
7.84%
Bradly A. Oldroyd 7,000(3)
.34%
Darla R. Gill 5,480(3)
.27%
All Officers and Directors
as a Group (5 persons) 688,878(2)(3)
33.69%
Other Beneficial Owners
Douglas K. Anderson 130,000
6.39%
Kirk Blosch 550,000(4)(5)
22.04%
Jeff Holmes 550,000(4)(5)
22.04%
All Individuals As
A Group (8 Persons) 1,659,878(2)(3
66.51%
)(4)(5)
(1) Unless otherwise indicated, all shares are held
beneficially and of record by the person indicated.
(2) Includes options to purchase up to 12,400 shares of
Common Stock held by each of Messrs. Constantine,
McNally and McStotts.
(3) Includes options to purchase up to 7,000 shares of
Common Stock held by Mr. Oldroyd, and 5,000 by Ms.
Gill.
(4) Includes options to purchase up to 175,000 shares of
common stock held by Messrs. Blosch and Holmes.
(5) Includes 250,000 shares of common stock held by Blosch
and Holmes LLC of which Messrs. Blosch and Holmes are
principles.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years, the Company has not entered
into any transaction with any affiliate which requires
disclosure in this Item 12.
PART IV
ITEM 13 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
Financial Statements
The following financial statements are included
immediately following this report.
Page
No.
Independent Auditor's Report
32
Consolidated Balance Sheets
33
Consolidated Statements of Operations
34
Consolidated Statements of Stockholders' Equity
35
Consolidated Statements of Cash Flows
36
Schedule of Noncash Activities 37
Notes to Consolidated Financial Statements 38
Exhibits
SEC
Exhibit Reference
No. No.
Title of Document
Location
1 3 Articles of Incorporation
Incorporated By Reference*
2 3 Bylaws
Incorporated By Reference*
3 10 Industrial Lease
Agreement
Incorporated By Reference*
Dated September 22,
1987
4 10 ZEVEX 1991 Stock Option
Plan
Incorporated By Reference*
5 10 ZEVEX 401(K) Profit Sharing
Plan
Incorporated By Reference*
6 10 ZEVEX 1993 Stock Option
And
Incorporated By Reference(a)
Stock Award Plan
7 10 ZEVEX Employee Stock
Incorporated By Reference(a)
Ownership Plan
8 10 ZEVEX Non-
Employee
Incorporated by Reference(b) Director's
Stock
Option Plan
*Incorporated by reference from Registrant's annual
report on Form 10-K for the fiscal year ended
December 31, 1992,
dated February 15, 1993.
(a)Incorporated by reference from Registrant's annual
report on Form 10-K for the fiscal year
ended
December 31, 1993,
dated March 25, 1994.
(b)10-KSB December 31, 1995, Dated March 25, 1996
Reports on Form 8-K
During the last quarter of the fiscal year
ended December 31, 1996, the Company filed no reports
on form 8-K.
Pursuant to the requirements of section 13 or
15(d) of the Securities Exchange of 1934, as amended,
the Company has duly caused this report to be
signed on
its behalf by the
undersigned, thereunto duly authorized.
ZEVEX INTERNATIONAL, INC.
Dated: March, 26 1997
By \s\ Phillip L. McStotts By \s\ Dean G. Constantine
Phillip L. McStotts Dean G. Constantine
Principal Financial Officer Principal Executive Officer
Pursuant to the requirements of section 13 or
15(d) of the Securities Exchange of 1934, as amended,
the Company has duly caused this report to be
signed on
its behalf by the
following persons on behalf of the Company and in
the capacities and on the dates indicated.
Name
Title
Date
\s\ Dean G. Constantine
President March 26, 1997
Dean G. Constantine and Director
\s\ David J. McNally
Vice President and Director March 26, 1997
David J. McNally
\s\ Phillip L. McStotts
Secretary, Treasurer and Director March 26, 1997
Phillip L. McStotts
\s\ Bradly A. Oldroyd
Director March, 26 1997
Bradly A. Oldroyd
\s\ Darla R. Gill
Director March, 26 1997
Darla R. Gill
Supplemental Information to be Furnished With Reports
Filed Pursuant to Section 15(d) of the Act by
Company's Which Have Not Registered Securities
Pursuant to Section 12 of the Act
ZEVEX INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL
STATEMENTS
WITH
INDEPENDENT AUDITORS' REPORT
For The Three Years Ended December 31,
1996 TABLE OF CONTENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . .
.
.
32
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . .
.
.
33
Consolidated Statements of Operations. . . . . . . . . . . . . .
.
.
34
Consolidated Statements of Stockholders' Equity. . . . . . . . .
. .
35
Consolidated Statements of Cash Flows. . . . . . . . . . . . . .
.
. 36-
7
Notes to Consolidated Financial Statements . . . . . . . . . . .
. . 38-
47
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.
Salt Lake City, Utah
February 13, 1997
1996 1995
ASSETS
CURRENT ASSETS
Cash $ 2,085,055 $ 870,333
Accounts Receivable 1,429,521 1,209,794
Inventories 1,344,297 791,960
Marketable 203,109 0
securities
Income tax deposits 41,458 0
Employee advances 5,350 2,835
TOTAL CURRENT ASSETS 5,108,790 2,874,922
Property and equipment
at cost, less accumulated
depreciation of
$692,840 and $460,215 1,207,034 363,771
Patents and trademarks, net
of amortization of $1,700
and $0 49,357 0
Other assets 3,489 8,682
TOTAL ASSETS $ 6,368,670 $ 3,247,375
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 339,023 $ 191,562
191,562 Accrued expenses 188,878 96,206
Income taxes payable 0 58,735
Bank line of credit 60,108 0
TOTAL CURRENT LIABILITIES 588,009 346,503
Deferred taxes 79,212 0
Industrial development bond 2,000,000 0
STOCKHOLDERS' EQUITY
Common stock, $.04 par value,
authorized 5,000,000 shares,
issued 1,495,716 and 1,365,716 59,829 54,629
shares in 1996 and 1995
Additional paid in capital 1,794,633 1,344,833
Retained earnings 1,846,987 1,501,410
TOTAL STOCKHOLDERS EQUITY 3,701,449 2,900,872
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 6,368,670 $ 3,247,375
1996 1995 1994
REVENUES
Sales $ 5,663,733 $ 5,295,762 $ 3,332,437
Cost of sales 2,936,055 3,065,553 2,016,670
GROSS PROFIT 2,727,678 2,230,209 1,315,767
Selling, general and
administrative expenses 1,892,317 1,324,749 1,023,987
OPERATING INCOME 835,361 905,460 291,780
OTHER INCOME (EXPENSE)
Int erest income 53,819 40,829 36,127
Interest expense (12,981) 0 0
Unrealized gain
on marketable
securities 203,109 0 0
Loss on retirement
of equipment 0 (179) 0
Research and development (527,562) (502,255) (419,278)
Income (loss) before
(provision) benefit for income 551,746 443,855 (91,371)
taxes
(Provision) benefit
for income taxes (206,169) (127,055) 66,709
Net Income (Loss) $ 345,577 $ 316,800 $ (24,662)
Net Income (Loss) per Common Share $ 0.2489 $ 0.2426 $ (0.0218)
Weighted Average
Number of
Common Shares Outstanding 1,388,511 1,305,812 1,130,609
Additional
Stock Paid-In Treasury
Common Retained
Shares Amount Capital Earnings Stock Total
Balances at
December 31,
1993 1,138,109 $ 45,525 $1,344,833 $1,218,376 $ (33,750) $2,574,984
Net(loss) for
the year
ended December
31, 1994 0 0 0 (24,662) 0 (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 0 0 0 0 33,750 33,750
Common stock
dividend 227,607 9,104 0 (9,104) 0 0
Net income for
the year ended
December 31, 1995 0 0 0 316,800 0 316,800
Balances at
December 31, 1995 1,365,716 54,629 1,344,833 1,501,410 0 2,900,872
Issuance of
common stock
for acquisition
of land 130,000 5,200 449,800 0 0 455,000
Net income for
the year ended
December 31, 1996 0 0 0 345,577 0 345,577
Balances at
December 31, 1996 1,495,716 $ 59,829 $ 1,794,633 $ 1,846,987 $ 0 $3,701,449
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 345,577 $ 316,800 $ (24,662)
Adjustments to reconcile
net cash 232,625 153,523 128,672
provided by operating
activities:
Depreciation and amortization 232,625 153,523 128,672
expense
Deferred tax expense 79,212 0 0
Unrealized gain on marketable
securities (203,109) 0 0
Loss on retirement of
equipment 0 979 0
Change in asset and liability accounts:
(Increase) in
accounts receivable (219,727) (357,915) (110,044)
(Increase) in
inventories (552,337) (100,895) (276,529)
(Increase) decrease in
employee advances (2,515) 1,459 976
Decrease in prepaid
expenses 0 16,235 1,398
(Increase) decrease in income
tax deposits (41,458) 115,846 (115,846)
(Increase) decrease in
other assets 5,193 (4,467) (2,306)
Increase (decrease) in
accounts payable 147,461 (660) 32,520
Increase in accrued expenses 92,672 14,721 22,140
(Decrease) in pension
plan payable 0 0 (6,700)
Increase(decrease) in income
taxes payable (58,735) 58,735 (111,340)
Net cash flows provided (used)
by operating activities (175,141) 214,361 (461,721)
Cash Flows from
Investing Activities:
Acquisition
of property and
equipment (619,188) (242,110) (136,744)
Acquisition of patents
and trademarks (51,057) 0 0
Net cash flows (used)
by investing activities (670,245) (242,110) (136,744)
Cash Flows from Financing Activities:
Proceeds from bank line
of credit 60,108 0 0
Repurchase of common
stock by Company 0 33,750 0
Proceeds from industrial
development bond 2,000,000 0 0
Net cash flows provided by
financing activities 2,060,108 33,750 0
Net increase (decrease) in cash 1,214,722 6,001 (598,465)
Cash and cash equivalents
at beginning of period 870,333 864,332 1,462,797
Cash and cash equivalents
at end of period $ 2,085,055 $ 870,333 $ 864,332
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid during the year for:
1996 1995 1994
Interest paid $ 6,530 $ 438 $ 0
Income taxes paid $ 170,839 $ 19,200 $ 156,499
Schedule of Non Cash Financing Activities:
Issuance of common stock
dividend, 227,607 shares $ 0 $ 9,104 $ 0
Issuance of common stock
for acquisition of land
130,000 shares $ 455,000 $ 0 $ 0
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business Information
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 develops and manufactures electronic
components, transducers and transformers.
b. Principles of Consolidation
The consolidated financial statements include the
accounts of ZEVEX International, Inc. (Company) and its
wholly-owned subsidiary ZEVEX, Inc. All significant inter
company balances and transactions have been eliminated in
the consolidation.
c. Inventories
Inventories are accounted for at the lower of cost or
market by using the first-in, first-out method, which
prices the inventories at the most current purchase cost.
d. Marketable Securities
Securities classified as available for sale are stated
at their fair market values. If there is a decline in
market value below costs, the resulting valuation reserve
is shown separately as a reduction of the cost. The cost
of securities sold is determined by the specific
identification method. These securities are being
accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No.115, "Accounting for Certain
Investments in Debt and Equity Securities."
e. Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over
expected useful lives of five or seven years on accelerated
methods, which provide for more depreciation expense in the
early years of the estimated life of the asset.
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.
f. Intangible Assets
The costs of internally developed patents and trade
marks are being amortized over a fifteen year life on the
straight-line basis.
g. Bad Debts
Management believes that all accounts receivable as of
December 31, 1996 and 1995, were fully collectible;
therefore, no allowance for doubtful accounts was recorded.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. Cash and Cash Equivalents
For purposes of preparing the statements of cash
flows, 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.
i. Concentration of Credit Risk
The Company extends credit to many of its customers.
The Company's clients are located throughout the United
States and Europe. The Company performs ongoing credit
evaluations of customers and requires no collateral on
accounts receivable.
j. Net Income (Loss) Per Share
The computation of net income (loss) per share of
common stock is computed by dividing net income (loss) for
the period by the weighted average number of shares
outstanding during the period. Common stock equivalents
which dilute earnings per share were not taken into
consideration in the calculation because they had no
material impact. The number of common shares and per share
amounts presented in the accompanying consolidated
financial statements have been adjusted to reflect the
effects of a forty-to-one stock split in March 1995 (see
Note 10.a). The accompanying financial statement gives
effect to this action on a retroactive basis.
2. CASH ACCOUNTS
At December 31, 1996 and 1995, the Company's cash
consists of the following:
1996
1995
Checking and Money Market $ 68,983
$
54,977
Savings and trust 2,016,072
815,355
$ 2,085,055 $
870,332
The Company maintains its cash balances in three
separate financial institutions. At December 31, 1996 and
1995 the Company had $1,928,564 and $715,355 in excess of
federally insured limits for deposits.
3. INVENTORIES
Inventories consist of the following at December 31,
1996 and 1995:
1996
1995
Work in Progress $ 292,423
$
227,154
Materials 1,051,874
564,806
$ 1,344,297 $
791,960
4. MARKETABLE SECURITIES
The book and approximate market values of marketable
securities at December 31, 1996 and 1995 is as follows:
Security A 1996 Security A
1995 Book Approximate Unrealized
Book Approximate Unrealized
Value Market Value Gain Value Market
Value
Gain
$ 0 $ 203,109 $ 203,109 $ 0 $ 0
$
0
The unrealized gain, included in the consolidated
statements of operations for the years ended December 31,
1996, 1995, and 1994 was $203,109, $0, and $0, respectively.
Market values were obtained from a brokerage firm.
5. PROPERTY AND EQUIPMENT
At December 31, 1996 and 1995, property and equipment
consists of the following:
1996
1995
Machinery and equipment $ 433,171
$ 341,929
Furniture and fixtures 365,797
271,868
Vehicles 4,500
4,500
Tooling costs 406,219
165,260
Leasehold improvements 54,464
40,429
Building 129,023
0
Land 505,000
0
1,898,174
823,986
Less: accumulated depreciation 691,140
460,215
Property and equipment - net $ 1,207,034
$ 363,771
Depreciation expense for the years ended December 31,
1996, 1995 and 1994 amounted to $230,625, $153,523 and $128,672
respectively.
6. 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 income taxes arise from temporary differences
resulting from income and expense items reported for financial
accounting and tax purposes in different periods. 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.
6. INCOME TAXES (CONTINUED)
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 for
financial reporting purposes and unrealized gain on
marketable securities being reported differently for
financial reporting and tax purposes.
The (provision) benefit for income taxes consists of
the following:
1996 1995
1994
Current taxes:
Federal $ (137,196) $ (153,228) $
21,480
State (17,936)
(22,440)
3,790
R & D credit 28,175 48,613
41,439
Deferred taxes:
Federal (69,057) 0
0
State (10,155)
0
0
(Provision) benefit for
income taxes $ (206,169) $ (127,055) $
66,709
The actual tax (expense) benefit differs from the 34%
Federal statutory rate as follows:
1996 1995
1994
Expected tax (expense)
benefit at Federal rate $ (137,196) $
(153,461) $ 31,066
State income tax (expense)
benefit, net of federal
benefit (12,735) (16,064)
3,280
Research & development credit 28,175 48,613
41,439
Non-deductible expenses (6,164) (5,366)
(9,076)
Other (78,249) (777)
0
Total (provision) benefit
for income taxes $ (206,169) $ (127,055)
$
66,709
7. BANK LINE OF CREDIT
On December 11, 1996, the Company entered into a
$500,000 open line of credit arrangement with a financial
institution. The line is due May 31, 1997. The line of
credit is collateralized by accounts receivable rights and
bears interest at a rate of prime plus 1%. The Company owes
$60,108 on the line of credit at December 31, 1996.
8. 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. The
bonds bear interest at an adjustable rate based on the
weekly taxexempt floater rate as determined by the
remarketing agent. The bonds mature on October 1, 2016.
Principle reductions occur in the amount of $100,000 per
year at a rate of $8,333 per month starting April 1, 1997.
The bonds will bear interest only until March 31, 1997.
9. RESEARCH AND DEVELOPMENT COSTS
Costs of planning, designing and related engineering
expenditures are charged to expense when incurred. During
the years ended December 31, 1996, 1995, and 1994 the
Company expensed $527,562, $502,255 and $419,278,
respectively. These costs are included in selling, general
and administrative expenses in the consolidated statements
of operations.
10. EMPLOYEE BENEFIT PLANS
During 1991, the Company established a qualified 401(k)
profit sharing plan. Eligible employees may defer a portion
of their salary. At the discretion of the Board of
Directors, the Company may make a matching contribution of
an additional amount up to four percent (4%) of eligible
employees deferrals 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, 1996, 1995 and 1994
were $86,035, $77,037 and $35,436, respectively. The
Company shows a payable to the plan of $38,000, $9,718 and $0-,
at December 31, 1996, 1995 and 1994, respectively.
11. STOCKHOLDERS' EQUITY
a. Reverse Stock Split
On March 16, 1993, the Company effected a 1-for-40
reverse split on its issued and outstanding shares of common
stock which reduced the number of outstanding shares from
37,500,000 shares to 938,109 shares. The Company also
changed its authorized capital from 200,000,000 shares of
common stock, par value $0.001, to 5,000,000 shares of
common stock, par value $0.04. Such actions were
implemented by an amendment to the Company's Articles of
Incorporation filed with the Nevada Secretary of State on
March 16, 1993.
b. Issuance of Common Stock
11. STOCKHOLDERS' EQUITY (CONTINUED)
On May 10, 1993 the Company completed a firm commitment
public offering of 200,000 units at $6 per unit of common
stock. The net proceeds from the sale were $1,000,594 after
deducting underwriting commissions and expenses of $156,000
and direct offering costs of $43,606.
Each unit consists of one post-split share of common
stock, par value $0.04, and one common stock purchase
warrant. The warrants are exercisable for a period of three
years commencing on October 29, 1993, at a price of $7.00
per share during the first year of the exercise period,
$7.50 per share during the second year, and $8.00 per share
during the third year. The warrants may not be exercised in
the absence of an effective registration statement
pertaining to the shares of common stock issuable upon
exercise of the warrants (the "warrant shares") and the
Company is only obligated to file a registration statement
with respect to the warrant shares under certain conditions.
The warrants are detachable from the units, but the warrants
and common stock are still traded as a unit. The warrants
are subject to redemption by the Company upon thirty days'
advance notice at a price of $0.01 per warrant at any time
that a current registration statement
pertaining to the warrant shares is effective.
On March 8, 1995, the Company declared a 20% stock
dividend payable on April 3, 1995 to all shareholders of
record on March 23, 1995. The warrants included in the
Company units will be adjusted as a result of the stock
dividend so that the number of shares subject to warrants
will be increased by 20% and the exercise price(s) of the
warrant will be proportionally reduced. The exercise
price(s) of the warrants after the dividend was $6.25 until
October 29, 1995, when they increased to an exercise price
of $6.67 until they expire on October 29, 1996.
The Company did not extend the exercise period of the
warrants issued.
12. EMPLOYEES' STOCK OWNERSHIP PLAN
Effective October 14, 1993, the Company adopted an
Employee Stock Ownership Plan which covers all employees
who are over the age of 21, has been employed for at least
90 days and who provides 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 plan will be primarily 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 units
with a cost of $33,750. No contribution was made for the
year ended December 31, 1996 and 1994.
13. STOCK OPTION PLAN
The Company has a stock option plan (1991 plan) under
which certain key employees have the option to purchase
2,000,000 shares of the Company's common stock at a price
determined by the committee. Such price may be more, equal
to, or less than the current market price of the Company's
common stock. No option shall be granted under this plan
after December 31, 1996.
During 1992, 1,000,000 shares were granted under this
plan at an option price of $.15 per share. During 1991,
1,000,000 shares were granted under this plan at an option
price of $0.02375 per share. At December 31, 1996, 1995
and 1994, none of the option shares granted had been
exercised.
Effective October 14, 1993, the Company adopted the
1993 Stock Option Plan (the "Plan"). The plan authorizes
the grant to key employees, and consultants, including
officers and directors who are also employees, options to
purchase up to 200,000 shares of the Company's common stock
(subject to adjustment for such matters as stock splits and
stock dividends), which may be incentive stock options
within the meaning of section 422A of the Internal Revenue
code of 1986, as amended, or options which do not qualify
as incentive stock options. The plan also provides for the
grant of stock appreciation rights and stock awards to
eligible participants, subject to forfeiture restrictions.
The plan will be administered by the Board of Directors of
the Company or by a committee appointed by the Board of
Directors. The Board, or the committee if and when
appointed, will interpret the plan, its rules and
regulations, and the instruments evidencing the
restrictions imposed upon the stock sold under the plan,
and will make all the determinations deemed necessary or
advisable for administration of the plan.
Options issued under the plan which are intended to
qualify as incentive stock options within the meaning of
section 422A of the Internal Revenue Code will be subject
to certain restrictions and conditions including the
following: the exercise price may not be less than the fair
market value of the common stock on the date of grant; no
incentive options may be granted to any person who holds
more than 10% of the Company's issued and outstanding
shares unless the exercise price is at least 110% of the
fair market value of the common stock on the date of grant
and the term of the option is for five years or less; the
aggregate fair market value of the common stock with
respect to which incentive stock options are exercisable
for the first time by an employee during any calendar year
may not exceed $100,000; the right to exercise an option
terminates three months after the termination of employment
unless
13. STOCK OPTION PLAN (CONTINUED)
the employee dies or is disabled; and the options may not
be transferred except by will or the laws of decent and
distribution.
During 1994, 19,000 shares were granted under this
plan at an option price of $3.00 per share. None of the
shares granted were exercised as of December 31, 1996, 1995
and 1994.
In connection with the underwriting of the Company's
1993 public offering of units, the Company agreed that for
a period of three years subsequent to the date of the
prospectus for the offering (April 29, 1993), it would not
grant any stock options without the prior written consent
of the underwriter except that the Company may grant
incentive stock options for up to 100,000 shares of the
Company's common stock to persons who are not directors of
the Company without the underwriter's consent.
14. REPURCHASE OF COMMON STOCK UNITS
The Company repurchased 11,200 units of outstanding
common stock for $50,400. The Company subsequently
contributed all 11,200 units to the Employee's Stock
Ownership Plan (see Note 12).
15. LEASE COMMITMENTS
The Company and its subsidiary occupy an
administrative and manufacturing facility under the terms
of an operating lease agreement.
Lease expense of $109,505 $74,551, and $54,508 has
been charged to operations for the years ended December 31,
1996, 1995 and 1994, respectively. The lease expires in
April 1997.
The following is a schedule by years of future minimum
lease payments required under the non-cancelable operating
leases:
1997 $ 38,698
16. MAJOR CUSTOMERS
The Company had sales to certain customers in 1996,
1995 and 1994 which represented 10% or more of total sales.
In
1996, 66% of total sales were derived from three customers
(33%, 23% and 10%). In 1995, 56% of total sales were
derived from two customers (32%, and 24%) and in 1994, 65%
of total sales were derived from three customers (43%, 12%,
and 10%).
17. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Effective April 16, 1996, the Company adopted a Non
Employee Directors' Stock Option Plan. The Plan will
remain in effect until it is terminated by the Company or
until May 31, 2001, whichever occurs first.
This Plan is a non-statutory, or non-qualified stock
plan pursuant to which options may be granted to
nonemployee directors of the Company. This Plan is
intended to meet the requirements of Rule 16b-3 of the
Exchange Act.
The maximum number of shares of stock that may be
issued is 100,000 shares, subject to some adjustments.
Each person who was a non-employee director of the
Company as of April 16, 1996 was granted an option to
purchase 1,000 shares at an exercisable price of $4.50 per
share. Each person who becomes a non-employee director
subsequent to April 16, 1996, but prior to termination of
the Plan, will automatically (without action by Board or
Committee) be granted an option to purchase 2,000 shares at
a fair market value on the date such person is appointed a
nonemployee director.
In each calendar year during the term of this Plan,
commencing in 1997, there shall be granted automatically
(without any action by the Board or Committee) an option to
purchase 2,000 shares of the Company's common stock to each
non-employee director. The grant date of such options
shall be May 31, of each year.
A participant shall not receive more than one option
under this Plan in any calendar year, nor more than 8,000
shares on the exercise of all options granted pursuant to
this Plan.
The purchase price per share of the common stock
covered by each option granted pursuant to this Plan shall
be 100% of the fair market value of the Common Stock on the
grant date. The exercise price of all options granted under
this Plan on April 16, 1996 is $4.50 per share. The
exercise price of all options granted under this Plan shall
be the fair market value of the date of such grant.
Each option granted under this Plan and all rights or
obligations thereunder shall commence on the grant date and
expire at the earlier of five (5) years thereafter and
shall be subject to earlier termination as provided below.
No option granted under this Plan shall be exercisable
until at least six months after the later of (i) its grant
date or (ii) shareholder approval of the Plan.
18. PRIVATE PLACEMENT
On December 16, 1996, the Company entered into a
memorandum agreement to offer, on a best efforts basis,
$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 offering will be sold directly by the Company
through it's officers and directors. The Company will not
pay any broker/dealer a commission for any units sold by
the Company's officers and directors.
The offering successfully closed on February 12,
1997. The offering proceeds will be used for general
corporate purposes.
ACCOUNTANTS' CONSENT
We consent to the use of our report dated February 13, 1997
accompanying the financial statements and Form 10-KSB of ZEVEX
International, Inc. and Subsidiary as of December 31, 1996 for the
purpose of filing with the Securities and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,085,055
<SECURITIES> 0
<RECEIVABLES> 1,429,521
<ALLOWANCES> 0
<INVENTORY> 1,344,297
<CURRENT-ASSETS> 5,108,790
<PP&E> 1,898,174
<DEPRECIATION> 691,140
<TOTAL-ASSETS> 6,368,670
<CURRENT-LIABILITIES> 588,009
<BONDS> 2,000,000
0
0
<COMMON> 59,829
<OTHER-SE> 3,641,620
<TOTAL-LIABILITY-AND-EQUITY> 6,368,670
<SALES> 5,663,733
<TOTAL-REVENUES> 5,663,733
<CGS> 2,936,055
<TOTAL-COSTS> 1,892,317
<OTHER-EXPENSES> 527,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,981
<INCOME-PRETAX> 551,746
<INCOME-TAX> 206,169
<INCOME-CONTINUING> 345,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345,577
<EPS-PRIMARY> .249
<EPS-DILUTED> .249
</TABLE>
ABOUT OUR COMPANY
ZEVEX ZEVEX International, through its wholly owned
subsidiary, ZEVEX Incorporated, International manufactures
and markets niche products using ultrasound technology and
sophisticated electronic components.
ZEVEX' s core business is the design and manufacture
ofmarkets ultrasonic sensor components embodying ultrasound
technology forto Original Equipment Manufacturers (OEM's),
who incorporate our components into their products. In
recent years, the Company ZEVEX has opened new markets
evolved to become a manufacturer by introducing its first
proprietary product, the BottleWatchr. Our company is
further expanding its market potential with the development
of new proprietary products and complete electronic
instruments for sale under private label.
The ZEVEX's growth strategy of the Company includes
expanding our OEM business and increasing sales of our
proprietary products expansion. ZEVEX is committed to
growing its business by sales of proprietary ZEVEX products.
ZEVEX is committed to grow its business by aligning our
goals with the needs of our customers in the following ways:
in the following ways:
-growing the baseIntroducing innovative proprietary
products for niche applications.
-Producing new component products and private-label
instruments.
-Achieving further market penetration with our
company's existing OEM products.
ZEVEX's products are currently sold directly and through
distributors to customers worldwide. Our The Company's
headquarters and 18,000-square foot manufacturing facility
are located at 5175 Greenpine Drive, Salt Lake City, Utah.
The common stock of ZEVEX is traded in Over the Counter
(OTC) markets under the symbols ZVXI and ZVXIU.
U.
REVENUES1995 HIGHLIGHTS
ZEVEX achieved excellent sales results for fiscal year 1995.
During 1995 revenues soared 59% to a record $5,295,762,
versus revenues of $3,332,437 for 1994.
Net ZEVEX achieved excellent results for fiscal year 1995 --
the best in the company's nine year history. We enjoyed a
phenomenal 60% increase in revenues on record earnings of
. Net income was up to $316,800, compared to a net loss of
$24,662 in 1994. Net income per share rose to $0.24 over a
net loss of $0.02 per share in 1994was up .
Earnings per share increased .
1995 HIGHLIGHTS
PATENTING INNOVATION
Nineteen ninety-five was a year of triumphant firsts for
ZEVEX. Our company filed six patent applications in 1995,
and was awarded the first of those patents for its
BottleWatchr sensing technology . ZEVEX has five patents
pending for future products.
INTRODUCING NEW PRODUCTS
In 1995, ZEVEX discovered the trials and the rewards of
bringing our first proprietary product to market. ZEVEX
successfully launched the production version of
BottleWatchr, a non-invasive liquid level indicator used
with bottles of irrigating solution during cataract
surgery..
The patented technology of BottleWatchr enjoys a unique
sales position as the only product of its kind in a
worldwide an international market. BottleWatchr, which has
been well-received by the market, generated tremendous
enthusiasm at the American Academy of Ophthalmology and the
European Society for Cataract and Refractive Surgery trade
shows in 1995. Exclusive distribution agreements for
ZEVEX's BottleWatchr have been established with dealers in
Western Europe, Japan, and Australia. We expect sales of
BottleWatchr to increase significantly with product
awareness in 1996.
STREAMLINING DESIGN EFFICIENCIES
This last year has seen us make In 1995, ZEVEX made great
strides in refining and streamlining our design and
production processes to to accommodate a doubling of ZEVEX's
production demands. We have realized the need to streamline
our technical efforts, placing special emphasis on the
importance of the initial design and validation stages to
speed up production, and get our products to market
fasteraccelerate project development time from prototype to
market-ready product. For example, ZEVEXX's introducedtion
of 3-D CAD (three-dimensional Computer Aided Design)
technology to its design group to facilitates the rapid
creation of a working prototype directly from our files
through a process called stereo-lithography. IThe
introducingtion of CAD technology allows us to get our
products to market faster and more economically, because we
can assess a working model before investing in production
tooling. ZEVEX will continue to introduce strategic
technology, like 3-D CAD, to its design group where such
investments will clearly contribute to our bottom line.
ZEVEX will continue to introduce strategic technology, like
3D CAD, to its design group where such investments will
clearly contribute to our bottom line.
EMPHASIZING SKILLED MANUFACTURING
In manufacturing during 1995, we emphasized the acquisition
and training of a more skilled workforce as an investment in
longterm efficiency. We also increased the size of our
physical plant by over 4,000 square feet to accomodate
increased production demands. In 1996 we will further
enhance training programs. In addition, over the next year,
we will concentrate on upgrading our equipment and
facilities to keep up with rapid production growth while
enhancing speed and accuracy. As the leaders of progress at
ZEVEX, management will use master
scheduling and planning to capitalize on our top-notch
production force. ZEVEX's concentration on planning and
building from within will allow us to realize the fullest
potential of our resources -- both economic and human.
Our success in 1995 illustrated the benefits of harmonizing
the interests of our customers, our vendors, and our
employees to foster a strong and highly effective
manufacturing team. In 1996 we are poised to team even
better with our vendors to ensure the consistency and
reliability of supplies necessary to meet our dramatically
increased production demands.
LOOKING TOWARD 1996
Our success in 1995 illustrated the benfits of harmonizing
the interests of our customers, our vendors, and our
employees to foster a strong and highly effective
manufacturing team. In 1996 we are poised to team even
better with our vendors to ensure the consistency and
reliability of supplies necessary to meet our dramatically
increased production demands.
ZEVEX's growth in 1995 facilitates our company's
diversification in the new year. In 1996 we will continue
to grow and nurture our established customer base
relationships. Simultaneously, we will focus on the
introduction and production of innovative proprietary
products to expand and diversify our revenue base sources.
In 1996 we will strive to improve the margins on our current
products through measures already introduced to streamline
design and increase production efficiencies.
In the new year, wWe will continue to direct our
energiesengergies toward the growth of our resources, our
revenues and our people. (ZEVEX's most important assets).
We will continue to be competitive with larger companies by
tapping the depth of our unique and multi-talented team at
ZEVEX. We know our company is only as successful as the
many dedicated individuals making it run.leaders of
innovation in a competitive industry.
Every employee at ZEVEX is committed to our company's and
our customers' success. Nineteen ninety-five has shown us
that we can deliver an outstanding products to an eager
markets, and 1996 looks even brighter. ZEVEX is on the
threshold of phenomenal growth. We are proud of the
accomplishments of our employees as the life force of our
company, and we are grateful to our shareholders for their
continued support and confidence in our future. Nineteen
ninety-six promises once again to reward that confidence.
ZEVEX'S PRODUCTS
Ultrasonic air bubble detectors are noninvasive sensors that
are used to detect air bubbles in solutions flowing through
intravenous fluid lines. These devices, which employ our
company's proprietary ultrasound technology, are used to
prevent the infusion of air into the bloodstreams of
patients connected to blood collection systems, drug
infusion pumps, hemodialysis machines and cardiopulmonary
bypass systems.
Ultrasonic liquid level detectors employ ultrasound to
detect liquid volumes, or simply the presence of liquids,
within a
vessel. Our company has patented its noninvasive sensor
technology, which provides efficient transmission of
ultrasonic energy in the absence of a viscous coupling
medium, such as gel. Liquid level detectors are presently
employed in medical applications, which include blood level
monitoring in reservoirs of cardiopulmonary bypass systems.
Ultrasonic phacoemulsification handpieces, drive circuits
and instruments are employed in ophthalmic surgery for the
removal of cataracts. Ultrasonic phacoemulsification refers
to an outpatient procedure whereby ultrasonic energy is
harnessed to fragment cataract tissue while an irrigating
solution emulsifies the material for removal via aspiration.
Our company produces handpieces, drive circuits, and
complete instruments under private label, which are in turn
used by ophthalmologists to perform cataract surgery.
BottleWatchr liquid level indicators noninvasively monitor
liquid levels in bottles of balanced salt solution
that are used extensively in cataract and retinal
surgery. Balanced salt 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 of the patient's eye. When the liquid
level drops below the user-specified position of the
BottleWatchr, audible and visible alarms immediately
activate. BottleWatchr is the first proprietary product
to be trademarked and marketed under the ZEVEX name, and
worldwide distribution was successfully established
during 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
ZEVEX's sales results for 1995 were the strongest in our
company's history. Revenues increased 59%, from $3,332,437
in 1994 to $5,295,762 in 1995. Management attributes
increased sales in 1995 to an aggressive marketing operation
that emphasized unsurpassed customer service and increased
product visibility, both nationally and internationally.
In 1996, management plans to continue our successful
marketing practices. In addition, we will enhance sales by
developing and introducing new products for specialized
applications in medicine and industry. We will align our
development of new products with the needs of our customers
through strategic alliances with our customers and our
vendors. Management intends to open new and expand existing
markets for our proprietary products by anticipating needed
technology, achieving high-visibility and maintaining a
reputation for quality.
In the past, ZEVEX has experienced variations in operating
results from quarter to quarter due to fluctuations in the
timing and size of orders from major OEM customers.
Management believes that increased demand for ZEVEX's
proprietary products will offset such modulations of our
company's quarterly results in the future.
ZEVEX's gross profit as a percentage of sales was 42.1% in
1995, as compared to 39.5% in 1994. Management attributes
the increase to product mix and management's concentration
on improving
manufacturing efficiencies.
During 1995, ZEVEX's general and administrative expenses
increased to $1,324,749 or 25.0% of gross sales as opposed
to $1,023,988 or 30.7% of gross sales in 1994. The
increased expenses resulted from our company's expansion of
its physical facilities, which in turn increased rental,
utility and related expenses. Our company also increased
overhead when it improved customer service by expanding its
sales, marketing and customer service staff. In addition,
certain administrative costs were associated with our
company's establishment of more extensive internal
production and management controls, and improved quality
assurance procedures and documentation. Our company also
had an increase in legal expenses associated with patent and
trademank costs as well as increases in employee-related
expenses such as insurance, taxation and pension benefits.
Management anticipates that general and administrative
expenses in 1996 will continue at approximately the same
rate as in the previous year.
In 1995, ZEVEX 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 management
perceived a demand. Our company invested $502,255 in 1995
and $419,278 in 1994 directly in new research and
development projects. Management remains committed to
aggressive research and development activities and
anticipates an investment of $500,000 in 1996.
Operating income increased to $905,460, or 17.1% of gross
sales, in 1995, from $291,780, or 8.8% of gross sales, in
1994. Similarly, ZEVEX earned a net income of $316,800, or
6.0% of gross sales, in 1995, compared to a net loss of
$24,622, or (.7)% of gross sales, in 1994. These increases
during 1995 as compared to 1994 are principally due to
ZEVEX's product mix delivered during the year.
Liquidity and Capital Resources
During 1995, the $316,800 net income from operating
activities created net cash of $214,361 as our company
funded an increase in accounts receivable, inventories and
work in process for future sale. Operating activities
during 1994 used net cash of $461,721 as ZEVEX funded an
increase in accounts receivable and inventories.
ZEVEX's purchases of new research, production, testing
equipment and tooling increased to $237,331 in 1995 from
$136,744 in 1994. The increase in purchases of equipment is
primarily due to upgrading our company's production
fixturing, tooling and research and engineering capabilities
in 1995. Our company expects to spend approximately
$240,000 in 1996 for additional manufacturing equipment as
well as for normal replacement of obsolete equipment.
Financing activities used nominal amounts of cash during
each of the preceding three years for interest on long-term
indebtedness.
Our company's working capital at December 31, 1995, was
$2,528,418, as compared to $2,269,944 and $2,304,984 at
December 31, 1994 and 1993 respectively. The portion of
working capital represented by cash at such dates was
$870,333, $864,332 and $1,462,979 respectively. Our company
utilizes substantial portions of its cash from time to time
to fund its operations including increases in inventories,
accounts receivable and work in process in connection with
various customer orders. Management
anticipates that ZEVEX's current working capital will meet
our company's working capital requirements for current sales
volumes.
Inflation and Changing Prices
Our company has not been, and in the near term is not
expected to be, materially affected by inflation or changing
prices.
SHAREHOLDER'S INFORMATION
CORPORATE ADDRESS TRANSFER AGENT
5175 Greenpine Drive Colonial Stock Transfer
Salt Lake City, Utah 84123 440 East 400 South, Suite
100
Telephone: (801) 264-1001 Salt Lake City, Utah
84111
FAX: (801) 264-1051
INDEPENDENT AUDITORS
FORM 10K Nielsen, Grimmett and
Company
Available from our company 175 East 400 South, Suite
600
upon request. Salt Lake City, Utah
84111
ANNUAL MEETING
The Annual Meeting of ZEVEX
stockholders will be held on
April 18, 1996
PRICE RANGE OF COMMON STOCK
The common stock shares and units of ZEVEX International,
Inc. are traded on the OTC (Over-the-Counter) Bulletin Board
and listed on the OTC pink sheets under ZVXI and ZVXIU.
High Bid High Bid Low Bid Low Bid
Common Units Common Units
Fiscal Year 1994
First Quarter $4.50 $4.75 $3.75 $4.00
Second Quarter $3.75 $4.00 $2.75 $3.00
Third Quarter $3.25 $3.25 $2.50 $2.50
Fourth Quarter $3.25 $3.25 $2.00 $2.00
Fiscal Year 1995
First Quarter $3.75 $3.75 $2.50 $2.50
Second Quarter $4.00 $4.00 $2.75 $2.75
Third Quarter $3.25 $3.50 $2.25 $2.25
Fourth Quarter $4.00 $4.25 $3.25 $3.20
On March 18, 1994, ZEVEX warrants began trading on the OTC
Bulletin Board System.
As of February 12, 1996, our company had 580 shareholders of
record, including shares held of record by brokerage houses
and clearing corporations on behalf of their customers.
