<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997
REGISTRATION NO. 333-37189
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ZEVEX INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3845 87-0462807
STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4314 ZEVEX PARK LANE, SALT LAKE CITY, UTAH 84123 (801) 264-1001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DEAN G. CONSTANTINE, CHIEF EXECUTIVE OFFICER
4314 ZEVEX PARK LANE, SALT LAKE CITY, UTAH 84123 (801) 264-1001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
<S> <C>
RONALD S. POELMAN, ESQ. JAMES SHNELL, ESQ.
JONES, WALDO, HOLBROOK & MCDONOUGH RIORDAN & MCKINZIE
1500 WELLS FARGO PLAZA 695 TOWN CENTER DR.
170 SOUTH MAIN STREET SUITE 1500
SALT LAKE CITY, UTAH 84101-1644 COSTA MESA, CALIFORNIA 92626
(801) 521-3200 (714) 433-2900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as possible after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PROSPECTUS
1,200,000 SHARES
ZEVEX INTERNATIONAL, INC.
COMMON STOCK
All of the 1,200,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"), offered hereby are being sold by ZEVEX International, Inc. (the
"Company"). The shares of Common Stock offered hereby are hereafter referred to
as the "Shares" and the offering of the Shares is hereafter referred to as the
"Offering."
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "ZVX." The last reported sales price of the Common Stock, as reported
on the American Stock Exchange, on November 20, 1997 was $13.6875.
------------------------
THE PURCHASE OF THE SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS IN THIS OFFERING.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
===============================================================================================
UNDERWRITING
DISCOUNT
AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
Per Share................................... $12.50 $0.844 $11.656
- -----------------------------------------------------------------------------------------------
Total (3)................................... $15,000,000 $1,012,500 $13,987,500
===============================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. The Company has also agreed to issue to Wedbush Morgan Securities,
Inc., and EVEREN Securities, Inc. the representatives of the Underwriters
(the "Representatives"), a five-year warrant to purchase 100,000 shares of
Common Stock at 120% of the price of the Shares sold in this Offering. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company, which are
estimated to be $435,000.
(3) Certain shareholders of the Company ("Selling Shareholders") have granted
the Underwriters a 45-day option to purchase up to 180,000 additional shares
of Common Stock on the same terms and conditions as set forth above solely
to cover over-allotments, if any. If such option is exercised in full the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to Company will be $17,250,000, $1,164,375, and $13,987,500, respectively.
The total proceeds to the Selling Shareholders will be $2,098,125. The
proceeds to the Selling Shareholders include proceeds to certain Selling
Shareholders from the sale of 150,000 Shares acquired upon the exercise of
warrants at $3.50 per share or an aggregate price of $525,000, which amount
will be paid to the Company. For these warrant holders, the proceeds, after
reduction for the exercise price, will be $8.156 per share and $1,223,438 in
total. See "Principal and Selling Shareholders" and "Underwriting."
------------------------
The Shares are being offered by the several Underwriters named herein,
subject to prior sale, when, as, and if accepted by them, and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel, or modify
such offer and to reject orders in whole or in part. It is expected that the
certificates for the Shares will be available for delivery at the offices of
Wedbush Morgan Securities, Inc., 1000 Wilshire Boulevard, Los Angeles,
California, on or about November 26, 1997.
------------------------
WEDBUSH MORGAN SECURITIES EVEREN SECURITIES, INC.
The date of this Prospectus is November 21, 1997
<PAGE> 3
[PHOTOGRAPH OF PHOTON PHACOEMULSIFICATION SYSTEM]
[PHOTOGRAPH OF ENTERALITE(R) AMBULATORY ENTERAL FEEDING PUMP]
[PHOTOGRAPH OF SURGICAL HANDPIECES]
[PHOTOGRAPH OF AIR BUBBLE DETECTORS]
[PHOTOGRAPH OF LIQUID LEVEL DETECTORS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
THE EXERCISE OF OVER-ALLOTMENT OPTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------------
This Prospectus includes trade names, trademarks, and registered trademarks of
companies other than ZEVEX.
<PAGE> 4
PROSPECTUS SUMMARY
ZEVEX International, Inc. is the issuer of the shares of Common Stock (the
"Shares") offered in this Prospectus (the "Offering"). Throughout this
Prospectus, ZEVEX International, Inc. and its wholly owned subsidiary, ZEVEX,
Inc., are for convenience collectively referred to as "ZEVEX" or the "Company."
THE COMPANY
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies. The Company's design and manufacturing service
customers are medical technology companies which sell the Company's systems and
devices under private labels or incorporate the Company's devices into their
products. The Company applies its extensive engineering and regulatory
expertise, developed over its 11-year history, to provide its customers with
integrated solutions to the design and manufacture of their medical devices. The
Company has grown steadily, achieving 1996 total revenues of $5,663,733 and net
income of $345,577. Since 1994, the Company's compound annual revenue growth
rate has been approximately 30%. During the first nine months of 1997, the
Company's revenues grew to $6,311,490, approximately a 63% increase over the
comparable period of the prior year. Today, the Company designs and manufactures
over 100 different medical devices for more than 50 different established and
emerging medical technology companies, such as Alaris Medical Systems, Inc.
(formerly IVAC), Allergan, Paradigm Medical Industries, Inc., various divisions
of Baxter Healthcare Corporation, Mentor Corporation, SIMS Deltec, Inc., Staar
Surgical Company, and 3M Company Healthcare.
The Company's strategy is to augment the continuing growth in its design
and manufacturing service business with the development and commercialization of
proprietary products which utilize the Company's technologies or engineering
expertise or which are complementary to the Company's existing proprietary
products. The Company has successfully applied its engineering and regulatory
expertise to the development, commercialization, and marketing of EnteraLite(R),
the Company's proprietary Ambulatory Enteral Feeding Pump for patients who must
receive direct gastrointestinal nutritional therapy. Historically the Company
has designed and manufactured medical devices utilizing its core competency in
ultrasound technology; however the Company has a wide range of engineering
expertise. The Company's objective is to leverage its engineering and regulatory
expertise to further expand its business as a designer and manufacturer of a
wide variety of customized medical devices for medical technology companies, as
well as a designer, manufacturer, and marketer of a variety of its own
proprietary products. To accomplish this, management intends to do the
following:
- Increase the variety of medical devices and systems that the Company
designs and manufactures for its existing customers
- Expand the number of medical technology companies for which the Company
provides design and manufacturing services
- Increase sales of the Company's EnteraLite(R) Ambulatory Enteral Feeding
Pump
- Leverage the Company's design, manufacturing, and regulatory expertise to
develop new proprietary products
- Acquire other proprietary technologies, products, or manufacturing firms
similar or complementary to the Company's existing business
Management believes that this two-pronged strategy in the $30 billion medical
technology marketplace may allow the Company to benefit from the increasing
demand for design and manufacturing of medical devices and systems, as well as
from the sale of the Company's own proprietary medical devices.
Management of the Company believes that advances in technology, increasing
regulatory complexity and intensified competition will lead many medical
technology companies to expand their out-sourcing of design
3
<PAGE> 5
and manufacturing services in order to be more efficient. Many emerging medical
technology companies simply do not have the engineering, manufacturing, and
regulatory expertise necessary to quickly and efficiently bring a medical device
from the concept stage to commercial use. Even larger, well-established medical
technology companies, which may have the capital resources to develop such
expertise, may lack the required expertise or the time to accumulate such
expertise in order to meet the market demand for their particular device.
Moreover, in some instances, these medical technology companies may simply elect
not to devote their resources to the design and manufacture of their medical
devices or systems, including obtaining and maintaining the necessary regulatory
approvals and industry certifications for their manufacturing facilities.
Management believes that the Company is well positioned to benefit from this
increasing trend towards out-sourcing. Specifically, the Company may often times
be able to profitably design and manufacture medical devices or systems more
quickly, at a lower cost, and with higher quality than its medical technology
customers are able to achieve.
The Company offers its design and manufacturing customers the following
advantages:
- Broad Experience With Numerous Medical Devices. Over its 11-year history,
the Company has manufactured numerous advanced medical devices, including
surgical systems, device components, and sensors.
- Extensive Expertise. As a result of its broad experience, the Company has
developed extensive expertise in addressing the product design,
engineering, manufacturing, and regulatory issues associated with a
variety of medical devices.
- Generally Lower Cost and Higher Quality. The Company provides a wide
range of engineering services and has the capability to provide complete
device or system design, including engineering, component analysis,
testing, and regulatory compliance. The Company strives to increase the
quality and lower the overall cost of the devices or systems that it
manufactures for its customers by integrating design and engineering work
with manufacturing processes, materials acquisitions, quality issues, and
regulatory considerations.
- Rapid Product Development. The Company believes that, with its
engineering and manufacturing capabilities, it can develop and
commercialize new products more rapidly than its customers can, which
otherwise must expend significant time and financial resources to develop
internal engineering expertise and qualified manufacturing facilities.
- Regulatory Compliance. The Company is ISO 9001 and EN 46001 certified,
and the Company has developed internal systems intended to maintain
compliance with the FDA's GMP requirements. The Company devotes
significant management time and financial resources to GMP compliance and
ISO certification. By using the Company's manufacturing services,
customers relieve themselves of many stringent regulatory and industry
certification requirements.
- Production Flexibility. The Company's broad customer base permits it to
offer its customers production flexibility, which enables customers to
implement product enhancements and to adjust production volumes in
response to fluctuations in market demand.
The Company is located at 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123.
The Company's telephone number is (801) 264-1001. The Company is incorporated in
the State of Delaware. ZEVEX International, Inc., conducts all its operations
through its wholly owned subsidiary, ZEVEX, Inc. ZEVEX, Inc. is also
incorporated in the State of Delaware.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company............................ 1,200,000 shares
Common Stock outstanding after this
Offering(1)........................ 3,263,826 shares
Use of proceeds.................... Expansion of current design and manufacturing services
for existing and new customers; marketing of the
EnteraLite(R) Ambulatory Enteral Feeding Pump;
establishment of higher volume manufacturing capability
associated with EnteraLite(R)-related products;
development of proprietary products; research and
development programs; possible acquisition of other
medical products and technologies; possible acquisition
of other design and manufacturing service firms. See
"USE OF PROCEEDS."
AMEX symbol........................ ZVX
</TABLE>
- ---------------
(1) Based on shares outstanding as of September 30, 1997. Excludes 100,000
shares of Common Stock issuable upon the exercise of warrants issued to the
Representatives of the Underwriters in connection with the Offering at a
price of 120% of the price of the Shares sold in the Offering. See
"UNDERWRITING." Also, excludes 314,190 shares of Common Stock issuable upon
exercise of options granted and outstanding pursuant to the Company's
Amended 1993 Stock Option Plan at a weighted-average exercise price of
$12.37 per share. See "DESCRIPTION OF CAPITAL STOCK -- Stock Options." Also
excludes 150,000 shares of Common Stock issuable upon the exercise of
certain warrants that may be acquired and exercised by the Underwriters upon
the exercise of the over-allotment option in this Offering. See
"UNDERWRITING." Also, excludes 350,000 shares of Common Stock issuable upon
the exercise of certain warrants. See "DESCRIPTION OF CAPITAL
STOCK -- Warrants."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS
------------------------------------------ ENDED SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $2,436 $3,116 $3,333 $5,296 $5,664 $ 3,878 $6,311
Cost of sales........................... 1,357 1,600 2,017 3,066 2,936 2,122 3,475
Gross profit............................ 1,079 1,516 1,316 2,230 2,728 1,756 2,836
Operating expenses:
Selling, general, and
administrative..................... 630 776 1,024 1,325 1,892 1,215 1,727
Research and development.............. 194 199 419 502 528 360 522
Operating income (loss)................. 255 541 (127) 403 308 181 587
Net income (loss)....................... 190 381 (24) 317 346 143 411
Net income (loss) per share............. $ .20 $ .36 $ (.02) $ .24 $ .25 $ .10 $ .18
Weighted-average number of common and
common equivalent shares
outstanding(1)........................ 938 1,060 1,131 1,306 1,389 1,366 2,316
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 136 $ 12,988
Working capital.................................... 3,588 17,140
Total assets....................................... 9,814 22,666
Revolving credit facility.......................... 700 --
Industrial development bond........................ 2,000 2,000
Stockholders' equity............................... 5,611 19,163
</TABLE>
- ---------------
(1) See note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
(2) Adjusted to give effect to the sale of 1,200,000 shares of Common Stock by
the Company in this Offering at an assumed price of $12.50 per share, less
estimated underwriting discounts and expenses of this Offering. Does not
include the exercise of the Underwriters' over-allotment option in this
Offering to acquire 180,000 shares or the receipt by the Company of $525,000
upon exercise of the warrants to acquire 150,000 of those shares. See "USE
OF PROCEEDS" and "UNDERWRITING."
6
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Shares should consider carefully the risk
factors set forth below, in addition to the other information contained in this
Prospectus, before making a decision to purchase the Shares. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements as a
result of certain factors, including those set forth in the following "Risk
Factors" and elsewhere in this Prospectus. In each instance in which a risk
factor identifies an event that would or could adversely affect the Company,
such risk should be viewed as potentially adversely affecting the Company's
business, results of operations, and financial position.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's revenues historically have been, and for a substantial period
of time in the future likely will be, largely derived from the sale of its
design and manufacturing services to a small number of major customers. During
the 1993, 1994, and 1995 fiscal years, the Company had two major customers,
Allergan and Alaris Medical Systems, Inc. (formerly IVAC Corporation), who
together accounted for more than 50% of the Company's sales. In 1996, these two
customers plus a third customer, Paradigm Medical Inc., accounted for
approximately 66% of sales. These three customers each accounted for more than
ten percent of the Company's total sales in 1996. During the first nine months
of the 1997 fiscal year, 14% of sales were from Allergan, 21% of sales were from
Paradigm, 20% of sales were from Alaris, and 12% of sales were from Mentor
Corporation. No assurances can be given that such customers will continue to do
business with the Company or that the volume of their orders for the Company's
devices will increase or remain constant. The loss of any of such major
customers, or a significant reduction in the volume of their orders for the
Company's devices, will have a material adverse impact on the Company's
operations. In addition, if one or more of these customers were to seek and
obtain price discounts from the Company for the Company's devices, the resulting
lower gross margins on those devices would have a material adverse effect on the
Company's overall results of operations. If any customer with which the Company
does a substantial amount of business were to encounter financial distress, the
customer's lateness, unwillingness, or inability to pay its obligations to the
Company could result in a material adverse effect on the Company's results of
operations and financial condition. See "BUSINESS -- Significant Customers for
Which ZEVEX Provides Design and Manufacturing Services."
RISK FACTORS RELATING TO THE COMPANY'S CUSTOMERS
At the present time, and for a substantial period of time in the future,
the Company's success will depend largely on the success of the customers for
its manufacturing services and on the medical devices designed and manufactured
by the Company for those customers. Any unfavorable developments or adverse
effects on the sales of those devices or such customers' businesses, results of
operations, or financial position could have a corresponding adverse effect on
the Company. In addition, the Company sells certain types of medical devices to
multiple customers and to the extent there is an unfavorable development
affecting the sales of any such type of device generally, the adverse effect of
such development on the Company would be more substantial than that presented by
the decline in sales to a single customer for such type of device. The Company
believes that its design and manufacturing customers and their devices (and the
Company indirectly) are generally subject to the following risks:
Competitive Environment. The medical products industry is highly
competitive and subject to significant technological change. Participation in
the industry requires ongoing investment to keep pace with technological
developments and quality and regulatory requirements. The medical products
industry consists of numerous companies, ranging from start-up to
well-established companies. Many of the Company's customers have a limited
number of products, and some market only a single product. As a result, any
adverse development with respect to these customers' products may have a
material adverse effect on the business and financial condition of such
customer, which may adversely affect that customer's ability to purchase and pay
for its products manufactured by the Company. The competitors and potential
competitors of the Company's customers may succeed in developing or marketing
technologies and products that will be preferred in the marketplace over the
devices manufactured by the Company for its customers or that would render its
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<PAGE> 9
customers' technology and products obsolete or noncompetitive. In addition,
other competitors may develop alternative treatments or cures so that the need
for the products manufactured by the Company could be reduced or eliminated. See
"BUSINESS -- Overview of Medical Technology Industry."
Emerging Technology Companies. A significant number of the Company's
customers are emerging medical technology companies that have competitors and
potential competitors with substantially greater capital resources, research and
development staffs, and facilities, and substantially greater experience in
developing new products, obtaining regulatory approvals, and manufacturing and
marketing medical products. Approximately five customers, representing 15% of
the Company's revenues in fiscal year 1996, were, in management's opinion,
emerging medical technology companies. These customers may not be successful in
launching and marketing their products, or may not respond to pricing,
marketing, or other competitive pressures or the rapid technological innovation
demanded by the marketplace and, as a result, may experience a significant drop
in product revenues which would have a material adverse effect on the Company's
business, results of operations, and financial condition. See
"BUSINESS -- Overview of Medical Technology Industry."
Customer Regulatory Compliance. The Food and Drug Administration (the
"FDA") regulates many of the devices manufactured by the Company under the
Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), which requires
certain clearances from the FDA before new medical products can be marketed. As
a prerequisite to any introduction of a new device into the medical marketplace,
the Company's customers must obtain necessary product clearances from the FDA or
other regulatory agencies with applicable jurisdiction. There can be no
assurance that the Company's customers will obtain such clearances on a timely
basis, if at all.
Certain medical devices manufactured by the Company may be subject to the
need to obtain FDA clearance of an application for premarket approval ("PMA"),
which requires substantial preclinical and clinical testing and may cause delays
and prevent introduction of such devices. Currently, at least two of the
Company's customers are seeking or plan to seek such PMA clearances for devices
to be manufactured by the Company. Other devices can be marketed without a PMA,
but only by establishing in a 510(k) premarket notification "substantial
equivalence" to a predicate device. FDA clearance to market regulations depend
heavily on administrative interpretations, which may change retroactively and
may create additional barriers that prevent or delay the introduction of a
product. The process of obtaining a PMA or a 510(k) clearance could delay the
introduction of a product. A PMA for a product could be denied altogether if
clinical testing does not establish that the product is safe and effective. A
510(k) premarket notification may also need to contain clinical data. Clinical
testing must be performed in accordance with the FDA's regulations. A customer's
failure to comply with the FDA's requirements can result in the delay or denial
of its PMA. Delays in obtaining a PMA are frequent and could result in delaying
or canceling customer orders to the Company. Many products never receive a PMA.
Similarly, 510(k) clearance may be delayed, and in some instances, 510(k)
clearance is never obtained.
Once a product is in commercial distribution, discovery of product problems
or failure to comply with regulatory standards may result in restrictions on the
product's future use or withdrawal of the product from the market despite prior
governmental clearance. Additionally, once FDA clearance is obtained, a new
clearance in the form of a PMA supplement may be needed to modify the device,
its intended use, or its manufacturing. There can be no assurance that product
recalls, product defects, or modification or loss of necessary regulatory
clearance will not occur in the future. The delays and potential product
cancellations inherent in the development, regulatory clearance,
commercialization, and ongoing regulatory compliance of products manufactured by
the Company for its customers may have a material adverse effect on the
Company's business, reputation, results of operations, and financial condition.
Sales of the Company's medical products outside the United States are
subject to regulatory requirements that vary widely from country to country. The
time required to obtain clearance for sale in foreign countries may be longer or
shorter than that required for FDA clearance, and the requirements may differ.
The FDA also regulates the sale of exported medical devices, although to a
lesser extent than devices sold in the United States. For medical products
exported to countries in Europe, the Company anticipates that its
8
<PAGE> 10
customers will want their products to qualify for distribution under the "CE
Mark." The CE Mark is a designation given to products which comply with certain
European Economic Area policy directives and therefore may be freely traded in
almost every European country. Commencing in 1998, medical product manufacturers
will be required to obtain certifications necessary to enable the CE Mark to be
affixed to medical products they manufacture for sale throughout the European
Community. In addition, the Company's customers must comply with other laws
generally applicable to foreign trade, including technology export restrictions,
tariffs, and other regulatory barriers. There can be no assurance that the
Company's customers will obtain all required clearances or approvals for
exported products on a timely basis, if at all. Failure or delay by the
Company's customers in obtaining the requisite regulatory approvals for exported
instruments manufactured by the Company may have a material adverse effect on
the Company's business, results of operations, and financial condition.
Medical devices manufactured by the Company and marketed by its customers
pursuant to FDA or foreign clearances or approvals are subject to pervasive and
continuing regulation by the FDA and certain state and foreign regulatory
agencies. Regulatory requirements may include significant limitations on the
indicated uses for which the product may be marketed. FDA enforcement policy
prohibits the marketing of approved medical products for unapproved uses. The
Company's customers control the marketing of their products, including
representing to the market the approved uses of their products. If a customer
engages in prohibited marketing practices, the FDA or another regulatory agency
with applicable jurisdiction could intervene, possibly resulting in marketing
restrictions, including prohibitions on further product sales, or civil or
criminal penalties, which could have a material adverse effect on the Company's
business, the results of operations, and financial condition.
Changes in existing laws and regulations or policies could affect adversely
the ability of the Company's customers to comply with regulatory requirements.
Failure to comply with regulatory requirements could have a material adverse
effect on the customer's business, results of operations, and financial
condition, which, in turn, could affect adversely the Company's business,
results of operations, and financial condition. There can be no assurance that a
customer of the Company, or the Company, will not be required to incur
significant costs to comply with laws and regulations in the future, or that
such customer or the Company will be able to comply with such laws and
regulations, or that compliance with such laws and regulations will not have a
material adverse effect on the Company's business, results of operations, and
financial condition. See "BUSINESS--Governmental Regulation Within the United
States" and "-- Governmental Regulations Outside the United States."
Uncertain Market Acceptance of Products. There can be no assurance that the
products created for the Company's customers will gain any significant market
acceptance and market share among physicians and other health care providers,
patients, or health care payors, even if required regulatory approvals are
obtained. Market acceptance may depend on a variety of factors, including
educating health care providers regarding the use of a new product or procedure,
overcoming objections to certain effects of the product or its related treatment
regimen, and convincing health care payors that the benefits of the product and
its related treatment regimen outweigh its costs. Market acceptance and market
share are also affected by the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company's customers can
develop products, gain regulatory approval and reimbursement acceptance, and
supply commercial quantities of the product to the market are expected to be
important factors in market acceptance and market share. Some of the Company's
customers, especially emerging medical technology companies, have limited or no
experience in marketing their products and have not made marketing or
distribution arrangements for their products. The Company's customers may be
unable to establish effective sales, marketing, and distribution channels to
successfully commercialize their products. The failure by the Company's
customers to gain market acceptance of their products could have a material
adverse effect on the Company's business, results of operations, and financial
conditions.
Product Obsolescence. The marketplace for medical products is characterized
by rapid change and technological innovation. As a result, the Company and its
customers are subject to the risk of product obsolescence, whether from
prolonged development or government approval cycles or the development of
improved products or processes by competitors. In addition, the marketplace
could conclude that the task for
9
<PAGE> 11
which a customer's product was designed is no longer an element of a generally
accepted diagnostic or treatment regimen. Any development adversely affecting
the market for a product manufactured by the Company would result in the
Company's having to reduce production volumes or to discontinue manufacturing
the product, which could have a material adverse effect on the Company's
business, results of operations, and financial condition. See
"BUSINESS -- Overview of Medical Technology Industry."
Customers' Future Capital Requirements. Certain of the Company's customers,
especially the emerging medical technology companies, are not profitable and may
have little or no revenues, but they have significant working capital
requirements. Such customers may be required to raise additional funds through
public or private financings, including equity financings. Adequate funds for
their operations may not be available when needed, if at all. Insufficient funds
may require a customer to delay development of a product, clinical trials (if
required), or the commercial introduction of the product or prevent such
commercial introduction altogether. Depending on the significance of a
customer's product to the Company's revenues or profitability, any adverse
effect on a customer resulting from insufficient funding could result in a
material adverse effect on the Company's business, results of operations, and
financial condition.
Uncertainty of Third-Party Reimbursement. Sales of many of the devices
manufactured by the Company will be dependent in part on availability of
adequate reimbursement for those instruments from third-party health care
payors, such as government and private insurance plans, health maintenance
organizations, and preferred provider organizations. Third-party payors are
increasingly challenging the pricing of medical products and services. There can
be no assurance that adequate levels of reimbursement will be available to
enable the Company's customers to achieve market acceptance of their products.
Without adequate support from third-party payors, the market for the products of
the Company's customers may be limited.
Nonmedical Customers. While the Company presently does not have any
significant nonmedical customers, the Company may in the future perform
significant design and manufacturing work for such parties. Nonmedical customers
are subject to general business risks, such as competition, market acceptance of
their products, capital requirements, and credit risks. The Company's future
nonmedical customers may operate in highly competitive industries in which their
products compete on price, quality, and product enhancements and are subject to
risks of technological obsolescence. As a result, sales to nonmedical customers
may be volatile and subject to risks of cancellation. Any unfavorable
development experienced by such future nonmedical customers, whether of a
general nature or a specific risk not anticipated by the Company, could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
UNCERTAINTY OF MARKET ACCEPTANCE OF OUT-SOURCING MANUFACTURING OF MEDICAL
INSTRUMENTS
The Company believes that the market for out-sourcing the design and
manufacture of advanced medical products for medical technology companies is in
its early stages. Many of the Company's potential customers have internal design
and manufacturing facilities. The Company's engineering and manufacturing
activities require that customers provide the Company with access to their
proprietary technology and relinquish the control associated with internal
engineering and manufacturing. As a result, potential customers may decide that
the risks of out-sourcing engineering or manufacturing are too great or exceed
the anticipated benefits of out-sourcing. In addition, medical technology
companies that have previously made substantial investments to establish design
and manufacturing capabilities may be reluctant to out-source those functions.
If the medical technology industry generally, or any significant existing or
potential customer, concludes that the disadvantages of out-sourcing
manufacturing outweigh the advantages, the Company could suffer a substantial
reduction in the size of one or more of its current target markets, which could
have a material adverse effect on its business, results of operations, and
financial condition.
COMPETITION IN OUT-SOURCING MANUFACTURING OF MEDICAL INSTRUMENTS
The Company faces competition from design firms and other manufacturers
that operate in the medical technology industry. Many competitors have
substantially greater financial, research, and development
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resources than the Company. Also, manufacturers focusing in other industries may
decide to enter into the medical technology industry. Competition from any of
the foregoing sources could place pressure on the Company to accept lower
margins on its contracts or lose existing or potential business, which could
result in a material adverse effect on the Company's business, results of
operations, and financial condition. To remain competitive, the Company must
continue to provide and develop technologically advanced manufacturing services,
maintain quality levels, offer flexible delivery schedules, deliver finished
products on a reliable basis, and compete favorably on the basis of price. There
can be no assurance that the Company will be able to compete favorably with
respect to these factors. See "BUSINESS -- Competition for ZEVEX's Design and
Manufacturing Services."
EARLY TERMINATION OF AGREEMENTS
The Company's agreements with major customers generally permit the
termination of the agreements before expiration thereof if certain events occur
that are materially adverse to the design, development, manufacture or sale of
the product. Examples of such events include the failure to obtain or the
withdrawal of regulatory clearance, or an alteration of regulatory clearance
that is materially adverse to the customer or which prohibits or interferes with
the manufacture or sale of the products. The performance of agreements with
major customers may be suspended or excused if certain conditions, generally
beyond the control of the customer or the Company (so-called force majeure
events), cause the failure or delay of performance. Such early termination could
have a material adverse affect on the Company's business, results of operations,
and financial condition, including in certain instances the transfer of
manufacturing know-how to the customer.
RISK FACTORS IN MARKETING THE COMPANY'S PROPRIETARY PRODUCTS
In producing and marketing its own proprietary devices, the Company faces
many of the same risks that its design/manufacturing customers face. As
discussed above with respect to its customers, such risks include:
- The medical products industry is highly competitive. A significant number
of the Company's competitors have substantially greater capital
resources, research and development staffs, and facilities, and
substantially greater experience in developing new products, obtaining
regulatory approvals, and manufacturing and marketing medical products.
Competitors may succeed in marketing products preferable to the Company's
products or rendering the Company's products obsolete.
- The medical products industry is subject to significant technological
change and requires ongoing investment to keep pace with technological
development, quality, and regulatory requirements. In order to compete in
this marketplace, the Company will be required to make ongoing investment
in research and development with respect to its existing and future
products.
- The Company is subject to substantial risks involved in developing and
marketing products regulated by the FDA and comparable foreign agencies.
There can be no assurance that the Company will obtain the necessary FDA
or foreign clearances on a timely basis, if at all. As discussed above,
commercialized medical products are subject to further regulatory
restrictions which may adversely affect the Company. Changes in existing
laws and regulations or policies could affect adversely the ability of
the Company to comply with regulatory requirements. The delays and
potential product cancellations inherent in obtaining regulatory approval
and maintaining regulatory compliance of products manufactured by the
Company may have a material adverse effect on the Company's business,
reputation, results of operations, and financial condition.
- There can be no assurance that the Company's products will gain any
significant market acceptance among physicians and other health care
providers, patients, or health care payors, even if required regulatory
approvals are obtained.
- Revenues for many of the devices manufactured by the Company may be
dependent in part on availability of adequate reimbursement for those
devices from third-party health care payors, such as government and
private insurance plans. There is no assurance that the levels of
reimbursements
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offered by third-party payors will be sufficient to achieve market
acceptance of the Company's products.
The Company may not be successful in launching and marketing its own
proprietary devices, or may not respond to pricing, marketing, or other
competitive pressures or the rapid technological innovation demanded by the
marketplace and, as a result, may experience a significant drop in its product
revenues, which could have a material adverse effect on the Company's business,
results of operations, and financial condition. See "BUSINESS -- Overview of
Medical Technology Industry."
REGULATORY COMPLIANCE FOR MANUFACTURING FACILITIES
Applicable law requires that the Company comply with the FDA's detailed
good manufacturing practices ("GMP") regulations for the manufacture of medical
devices. The FDA monitors compliance with its GMP regulations by subjecting
medical product manufacturers to periodic FDA inspections of their manufacturing
facilities. To ensure compliance with GMP requirements, the Company expends
significant time, resources, and effort in the areas of training, production,
and quality assurance. In addition, the FDA typically inspects a manufacturer of
a PMA device before approving a PMA. The failure to pass such an inspection
could result in delay in approving a PMA. The Company is also subject to other
regulatory requirements and may need to submit reports to the FDA relating to
certain types of adverse events. Failure to comply with GMP regulations or other
applicable legal requirements can lead to warning letters, seizure of violative
products, injunctive actions brought by the U.S. government, and potential civil
or criminal liability on the part of the Company and of the officers and
employees who are responsible for the activities that lead to any violation. In
addition, the continued sale of any instruments manufactured by the Company may
be halted or otherwise restricted. Any such actions could have a material
adverse effect on the willingness of customers and prospective customers to do
business with the Company. In order for the Company's instruments to be exported
and for the Company and its customers to be qualified to use the CE Mark for
sales into the European Economic Area, the Company maintains International
Organization for Standardization ("ISO") 9001/EN 46001 certification, which
subjects the Company's operations to periodic surveillance audits. The ultimate
regulatory risks present in manufacturing products for markets governed by these
standards are currently substantially similar to those posed by GMP regulations.
There can be no assurance that the Company's manufacturing operations will be
found to comply with GMP regulations, ISO standards, or other applicable legal
requirements or that the Company will not be required to incur substantial costs
to maintain its compliance with existing or future manufacturing regulations,
standards, or other requirements. Any such noncompliance or increased cost of
compliance could have a material adverse effect on the Company's business,
results of operations, and financial condition.
The Company is also subject to numerous federal, state, and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. While the Company has not been the subject of
any material proceeding concerning such laws, and believes it is currently in
compliance with such laws in all material respects, there can be no assurance
that the Company will not be required to incur significant costs to comply with
such laws and regulations now or in the future, or that such laws or regulations
will not have a material adverse effect upon the Company's ability to do
business. Changes in existing requirements or adoption of new requirements or
policies could affect adversely the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, results of operations,
and financial condition. See "BUSINESS -- Governmental Regulation Within the
United States" and "-- Governmental Regulations Outside the United States."
PRODUCT DEVELOPMENT
The success of the Company will depend to a significant extent upon its
ability to enhance and expand on its current offering of proprietary products
and to develop and introduce additional innovative products that gain market
acceptance. While the Company maintains research and development programs and
has established a Technical Advisory Board to assist it, there is no assurance
that the Company will be successful in selecting, developing, manufacturing, and
marketing new products or enhancing its existing products on a
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timely or cost-effective basis. Moreover, the Company may encounter technical
problems in connection with its efforts to develop or introduce new products or
product enhancements. Some of the devices currently under consideration by the
Company (as well as devices of some of its customers) will require significant
additional development, pre-clinical testing and clinical trials and related
investment prior to their commercialization. There can be no assurance that such
devices will be successfully developed, prove to be safe or efficacious in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable costs, or be successfully
marketed. The failure of the Company to develop or introduce new products or
product enhancements that achieve market acceptance on a timely basis could have
a material adverse effect on the Company's business, results of operations, and
financial condition.
DESIGN AND MANUFACTURING PROCESS RISKS
While the Company has substantial experience in designing and manufacturing
devices, the Company may still experience technical difficulties and delays with
the design and manufacturing of its or its customer's products. Such
difficulties could cause significant delays in the Company's production of
products and have a material adverse effect on the Company's revenues. In some
instances, payment by a manufacturing customer is dependent on the Company's
ability to meet certain design and production milestones in a timely manner.
Also, some major contracts can be cancelled if purchase orders thereunder are
not completed when due. Potential difficulties in the design and manufacturing
process that could be experienced by the Company include difficulty in meeting
required specifications, difficulty in achieving necessary manufacturing
efficiencies, and difficulties in obtaining materials on a timely basis. Such
design and manufacturing difficulties could have a material adverse effect on
the Company's business, results of operations, and financial condition.
EXPANSION OF MARKETING ACTIVITIES; LIMITED DISTRIBUTION
The Company currently has a limited domestic direct sales force consisting
of eight individuals, complemented by a network of independent manufacturing
representatives. The Company anticipates that it will need to increase its
marketing and sales capability significantly to more fully cover its target
markets, particularly as additional proprietary devices become commercially
available. There can be no assurance that the Company will be able to compete
effectively in attracting and retaining qualified sales personnel or independent
manufacturing representatives as needed. There can be no assurance that the
Company or its independent manufacturing representatives will be successful in
marketing or selling the Company's services and products. The Company's ability
to sell its devices in certain areas may depend on alliances with independent
manufacturing representatives. There can be no assurance that the Company will
be able to identify and obtain suitable independent manufacturing
representatives in desirable markets.
PRODUCT RECALLS
If a device that is designed or manufactured by the Company is found to be
defective, whether due to design or manufacturing defects, to improper use of
the product, or to other reasons, the device may need to be recalled, possibly
at the Company's expense. Furthermore, the adverse effect of a product recall on
the Company might not be limited to the cost of a recall. For example, a product
recall could cause a general investigation of the Company by applicable
regulatory authorities as well as cause other customers to review and
potentially terminate their relationships with the Company. Recalls, especially
if accompanied by unfavorable publicity or termination of customer contracts,
could result in substantial costs, loss of revenues, and a diminution of the
Company's reputation, each of which would have a material adverse effect on the
Company's business, results of operations, and financial condition.
RISK OF PRODUCT LIABILITY
The manufacture and sale of products, and especially medical products,
entails an inherent risk of product liability. The Company does maintain product
liability insurance with limits of $1 million per occurrence and $2 million in
the aggregate. There can be no assurance that such insurance is adequate to
cover potential claims or that the Company will be able to obtain product
liability insurance on acceptable terms in the future, or that any product
liability insurance subsequently obtained will provide adequate
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coverage against all potential claims. Such claims may be large in the medical
products area where product failure may result in loss of life or injury to
persons. A successful claim brought against the Company in excess of its
insurance coverage, or any material claim for which insurance coverage was
denied or limited, could have material adverse effect on the Company's business,
results of operations, and financial condition. Additionally, the Company
generally provides a design defect warranty and in some instances indemnifies
its customers for failure to conform to design specifications and against
defects in materials and workmanship. Any substantial claim against the Company
under such warranties or indemnification could have a material adverse effect on
the Company's business, results of operations, and financial condition.
POTENTIAL INABILITY TO SUSTAIN AND MANAGE GROWTH
The Company's need to manage its growth effectively will require it to
continue to implement and improve its operational, financial, and management
information systems, to develop its managers' and project engineers' management
skills, and to train, motivate, and manage its employees. The Company must also
be able to attract and retain a sufficient number of suitable employees to
sustain its growth. If the Company cannot keep pace with the growth of its
customers, it may lose customers and its growth may be limited.
DEPENDENCE UPON MANAGEMENT
The Company is substantially dependent upon its key managerial, technical,
and engineering personnel, particularly its three executive officers, Dean G.
Constantine, Chief Executive Officer and President, David J. McNally, Vice
President and Marketing Director, and Phillip L. McStotts, Chief Financial
Officer and Secretary/Treasurer. The Company must also attract and retain highly
qualified engineering, technical, and managerial personnel. Competition for such
personnel is intense, the available pool of qualified candidates is limited, and
there can be no assurance that the Company can attract and retain such
personnel. The loss of its key personnel could have a material adverse effect on
the Company's business, results of operations, and financial condition. None of
the Company's key personnel have an employment agreement with the Company. See
"MANAGEMENT." The Company carries key-man life insurance on the lives of its
Chief Executive Officer, Chief Financial Officer, and Vice President in the
amount of $500,000 each. No assurances can be given that such insurance would
provide adequate compensation to the Company in the event of the death of such
key employee.
PATENT PROTECTION
As of September 30, 1997, the Company held three U.S. patents and had
applied for seven additional U.S. patents on devices developed by the Company.
The Company has received Notices of Allowance from the U.S. Patent and Trademark
office with respect to four of these seven applications. There is no assurance
that the patent applications will issue. Such patents disclose certain aspects
of the Company's technologies and there can be no assurance that others will not
design around the patent and develop similar technology. The Company believes
that its devices and other proprietary rights do not infringe any proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims in the future.
CONTROL BY MANAGEMENT AND CERTAIN MAJOR SHAREHOLDERS
Following this Offering, the current executive officers and directors of
the Company, together with those persons who are the beneficial owners of more
than 5% of the Company's Common Stock, will beneficially own or have voting
control over approximately 35% of the outstanding Common Stock (approximately
32% if the Underwriters' over-allotment option is exercised in full).
Accordingly, these individuals will have the ability to influence the election
of the Company's directors and most corporate actions. This concentration of
ownership, together with other provisions in the Company's charter and
applicable corporate law, may also have the effect of delaying, deterring, or
preventing a change in control of the Company. See "PRINCIPAL AND SELLING
SHAREHOLDERS."
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SUPPLIERS AND SHORTAGES OF COMPONENT PARTS
The Company relies on third-party suppliers for each of the component parts
used in manufacturing its customers' devices. Although component parts are
generally available from multiple suppliers, certain component parts may require
long lead times, and the Company may have to delay the manufacture of customer
devices from time to time due to the unavailability of certain component parts.
In addition, even if component parts are available from an alternative supplier,
the Company could experience additional delays in obtaining component parts if
the supplier has not met the Company's vendor qualifications. Component
shortages for a particular device may adversely affect the Company's ability to
satisfy customer orders for that device. Such shortages and extensions of
production schedules may delay the recognition of revenue by the Company and may
in some cases constitute a breach of a customer contract, which may have a
material adverse effect on the Company's business, results of operations, and
financial condition. If shortages of component parts continue or if additional
shortages should occur, the Company may be forced to pay higher prices for
affected components or delay manufacturing and shipping particular devices,
either of which could adversely affect subsequent customer demand for such
devices and the Company's business, results of operations, and financial
condition.
CUSTOMER CONFLICTS
The medical technology industry reflects vigorous competition among its
participants. As a result, its customers sometimes require the Company to enter
into noncompetition agreements that prevent the Company from manufacturing
instruments for its customers' competitors. For example, the Company has agreed
with one customer not to manufacture certain devices for laser cataract surgery
for any other customer or potential customer. Such restrictions generally apply
during the term of the customer's manufacturing contract and, in some instances,
for a period following termination of the contract. If the Company enters into a
noncompetition agreement, the Company may be adversely affected if its
customer's product is not successful and the Company must forgo an opportunity
to manufacture a successful instrument for such customer's competitor. Any
conflicts among its customers could prevent or deter the Company from obtaining
contracts to manufacture successful instruments, which could result in a
material adverse effect on its business, results of operations and financial
condition.
FUTURE CAPITAL REQUIREMENTS
The Company believes that the net proceeds of this offering, together with
existing capital resources and amounts available under the Company's existing
bank line of credit, will satisfy the Company's anticipated capital needs for
the next three years (depending primarily on the Company's growth rate and its
results of operations). The commercialization of proprietary products, which is
an element of the Company's growth strategy, would require increased investment
in working capital and could therefore shorten this period. Thereafter, the
Company may be required to raise additional capital or increase its borrowing
capacity, or both. There can be no assurance that alternative sources of equity
or debt will be available in the future or, if available, will be on terms
acceptance to the Company. Any additional equity financing would result in
additional dilution to the Company's shareholders, including shareholders who
purchase Common Stock in this Offering. If adequate funds are not available, the
Company's business, results of operations, and financial condition could be
materially adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RELIANCE ON EFFICIENCY OF DISTRIBUTION AND THIRD PARTIES
The Company believes its financial performance is dependent in part on its
ability to provide prompt, accurate, and complete services to its customers on a
timely and competitive basis. Accordingly, delays in distribution in its
day-to-day operations or material increases in its costs of procuring and
delivering products could have an adverse effect on the Company's results of
operations. Any failure of either its computer operating system or its telephone
system could adversely affect its ability to receive and process customer's
orders and ship products on a timely basis. Strikes or other service
interruptions affecting Federal Express Corporation, United Parcel Service of
America, Inc., or other common carriers used by the Company to
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receive necessary components or other materials or to ship its products also
could impair the Company's ability to deliver products on a timely and
cost-effective basis.
VOLATILITY OF REVENUES AND PRODUCT MIX
The Company's annual and quarterly operating results are affected by a
number of factors, including the volume and timing of customer orders, which
vary due to (i) variation in demand for the customer's products as a result of,
among other things, product life cycles, competitive conditions, and general
economic conditions, (ii) the customer's attempt to balance its inventory, (iii)
the customer's need to adapt to changing regulatory conditions and requirements,
and (iv) changes in the customer's manufacturing strategy. Such results may also
be affected by technical difficulties and delays in the design and manufacturing
processes. The foregoing factors may cause fluctuations in revenues and
variations in product mix which could in turn cause fluctuations in the
Company's gross margin. Under the terms of the Company's contracts with many of
its customers, the customers have broad discretion to control the volume and
timing of product deliveries. Further, the Company's contracts with its
customers typically have no minimum purchase requirements. As a result,
production may be reduced or discontinued at any time. Therefore, it is
difficult for the Company to forecast the level of customer orders with
certainty, making it difficult to schedule production and maximize manufacturing
capacity. Other factors that may adversely affect the Company's annual and
quarterly results of operations include inexperience in manufacturing a
particular instrument, inventory shortages or obsolescence, labor costs or
shortages, low gross margins on design projects, an increase in design revenues
as a percentage of total revenues, price competition, and regulatory
requirements. Because the Company's business organization and its related cost
structure anticipate supporting a certain minimum level of revenues, the
Company's limited ability to adjust its short term cost structure would compound
the adverse effect of any significant revenue reduction. Any one of these
factors or a combination thereof could result in a material adverse effect on
the Company's business, results of operations, and financial condition.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY
To maintain the secrecy of its proprietary information, the Company relies
on a combination of trade secret laws and internal security procedures. The
Company typically requires its employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements. There can be no
assurance, however, that the common law, statutory, and contractual rights on
which the Company relies to protect its intellectual property and confidential
and proprietary information will provide it with adequate or meaningful
protection. Third parties may independently develop products, techniques, or
information which are substantially equivalent to the products, techniques, or
information that the Company considers proprietary. In addition, proprietary
information regarding the Company could be disclosed in a manner against which
the Company has no meaningful remedy. Disputes regarding the Company's
intellectual property could force the Company into expensive and protracted
litigation or costly agreements with third parties. An adverse determination in
a judicial or administrative proceeding or failure to reach an agreement with a
third party regarding intellectual property rights could prevent the Company
from manufacturing and selling certain of its products. Any of the foregoing
circumstances could have a material adverse effect on the Company's business,
results of operations, or financial condition.
LIMITED MARKET FOR COMMON STOCK
Historically, the market for the Common Stock has been limited due to the
relatively low trading volume and the small number of brokerage firms acting as
market makers. In May 1997, the Company's Common Stock was listed for trading on
the American Stock Exchange, which may increase the market for the Common Stock.
No assurance can be given, however, that the market for the Common Stock will
continue or increase, or that the prices in such market will be maintained at
their present levels.
POSSIBLE VOLATILITY OF STOCK PRICE
Announcements of technological innovations for new commercial devices by
the Company or its competitors, developments concerning the Company's
proprietary rights, or the public concern as to safety of
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its devices may have a material adverse impact on the Company's business and on
the market price of the Common Stock, particularly as the Company expands its
efforts to become a medical technology company that manufactures and markets its
own proprietary devices. The market price of the Common Stock may be volatile
and may fluctuate based on a number of factors, including significant
announcements by the Company and its competitors, quarterly fluctuations in the
Company's operating results, and general economic conditions and conditions in
the medical technology industry. In addition, in recent years the stock market
has experienced extreme price and volume fluctuations, which have had a
substantial effect on the market prices for many medical-technology companies
and are often unrelated to the operating performance of such companies.
ISSUANCE OF ADDITIONAL SHARES FOR ACQUISITION OR EXPANSION
Any future major acquisition or expansion of the Company may result in the
issuance of additional common shares or other stocks or instruments which may be
authorized without shareholder approval. The issuance of subsequent securities
may also result in substantial dilution in the percentage of the Common Stock
held by existing shareholders at the time of any such transaction. Moreover, the
shares or warrants issued in connection with any such transaction may be valued
by the Company's management based on factors other than the trading price on the
exchange.
DIVIDENDS
While the Company has declared one stock dividend in its history, it has
never paid a cash dividend and there can be no assurance that the Company will
pay a dividend on Common Stock in the future. Any future cash dividends will
depend on earnings, if any, the Company's financial requirements, and other
factors. The Company's management does not currently intend to pay any cash
dividends in the foreseeable future. Investors who anticipate the need of an
immediate income from their investment in the Common Stock should refrain from
the purchase of the Common Stock being offered hereby. Additionally, the Company
is restricted from declaring any cash dividends under its current line of credit
arrangement.
POSSIBLE RULE 144 SALES
The shares of Common Stock presently owned by management and certain other
shareholders are deemed to be "restricted securities" as such term is defined in
Rule 144 under the Securities Act of 1933, as amended. Rule 144 provides that a
person who has held restricted securities for one year may, within a three-month
period, sell in "brokers transactions" (as defined by the Rule) an amount equal
to the greater of one percent of the issuer's outstanding securities of such
class or the average weekly reported volume of trading in such securities during
the four calendar weeks preceding the sale, if the conditions specified by the
Rule are satisfied. If such person is not an "affiliate" of the issuer, as such
term is defined by Rule 144, he may, after a holding period of two years, sell
such restricted securities without a volume limitation. Future sales under Rule
144 may have a depressing effect on the market price of the shares of Common
Stock. Of the 3,263,826 shares outstanding following this Offering (not
including 500,000 shares issuable upon exercise of certain warrants), 1,363,990
shares will be considered "restricted" stock, of which 26,202 will be eligible
for sale under Rule 144 immediately following the Offering. Beginning 180 days
after the closing of this Offering, following the expiration of certain lockup
agreements 1,139,198 additional currently outstanding shares of restricted
Common Stock will be eligible for sale in the public market under Rule 144;
provided that 350,000 shares may be sold by certain warrant holders, commencing
February 1, 1998, pursuant to certain demand registration rights. The remaining
198,590 shares of restricted Common Stock will be eligible for sale from time to
time thereafter pursuant to Rule 144. An additional 314,190 shares of Common
Stock issuable upon exercise of outstanding stock options pursuant to the
Company's Amended 1993 Stock Option Plan (the "Option Shares") may become
eligible for resale in the public market at various times after the closing of
the Offering. The Company intends to register the Option Shares for resale in
the public market following expiration of the lockup period. See "SHARES
ELIGIBLE FOR FUTURE SALE."
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BROAD DISCRETION WITH RESPECT TO ALLOCATION OF NET PROCEEDS
The Company intends to use the net proceeds of the Offering for working
capital and general corporate purposes, including the marketing of the Company's
EnteraLite(R) Ambulatory Enteral Feeding Pump and funding the growth in the
Company's manufacturing service business. Beyond those uses, if the opportunity
arises, the Company intends to acquire other medical technologies or products
that are similar to or complimentary to the Company's existing engineering
expertise or that readily can be sold through the Company's existing sales
channel. Furthermore, the Company may acquire other design and manufacturing
service firms. Accordingly, management will have significant flexibility in
applying the net proceeds of this Offering. Pending such uses, the Company
intends to invest the net proceeds in short-term interest-bearing,
investment-grade securities. See "USE OF PROCEEDS."
IMPACT OF ANTI-TAKEOVER MEASURES; POSSIBLE ISSUANCE OF PREFERRED STOCK;
CLASSIFIED BOARD
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and the Delaware General Corporation Law may have the effect of preventing,
discouraging, or delaying a change in the control of the Company and may
maintain the incumbency of the Board of Directors and management. Such
provisions could also limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock. Pursuant to the
Company's Certificate of Incorporation, the Board of Directors is authorized to
fix the rights, preferences, privileges, and restrictions, including voting
rights, of unissued shares of the Company's Preferred Stock and to issue such
stock without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock will be subject to and may be adversely
affected by the rights of the holders of any Preferred Stock that may be created
and issued in the future. In addition, stockholders do not have the right to
cumulative voting for the election of directors. Furthermore, the Company's
Certificate and Bylaws provide for a staggered board whereby only one-third of
the total number of directors are replaced or re-elected each year. The
Certificate also provides that the provisions of the Certificate relating to
number, vacancies, and classification of the Board of Directors may only be
amended by a vote of at least 66 2/3% of the shareholders. Finally, the Bylaws
provide that special meetings of the stockholders may only be called by the
President of the Company or pursuant to a resolution adopted by a majority of
the Board of Directors.
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which restricts certain transactions and business
combinations between a corporation and an "Interested Stockholder" owning 15% or
more of the corporation's outstanding voting stock for a period of three years
from the date the stockholder becomes an Interested Stockholder. Subject to
certain exceptions, unless the transaction is approved in a prescribed manner,
Section 203 prohibits significant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial benefits by
the Interested Stockholder, or any other transactions that would increase the
Interested Stockholder's proportionate ownership of any class or series of the
corporation's stock.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,200,000 shares of Common
Stock offered by the Company hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$13,552,500. Of the net proceeds, the Company intends to repay all outstanding
borrowings, if any, under the Company's revolving line of credit. As of October
21, 1997, the outstanding balance on the Company's revolving line of credit was
$727,277, bearing interest at the bank's prime rate plus 1%.
The Company intends to use the remaining proceeds to fund the growth and
development of its design and manufacturing business, as well as its proprietary
products. The Company also intends to use these proceeds for general corporate
purposes, including investment in the marketing and sales of EnteraLite(R)
products, the purchase of related manufacturing equipment, research and
development programs, purchase of raw materials, increases in working capital
associated with continuing sales growth, and acquisitions of complementary
businesses, product lines, or technologies. As of the date of this Prospectus,
the Company is not a party to any negotiations, understandings, or agreements
and has no definitive plans with respect to any such acquisitions.
In addition to the proceeds received by the Company from the Offering, the
Company will receive an additional $525,000 in the event the Underwriters
exercise their over-allotment option in full to sell an additional 150,000
shares from the exercise of warrants held by certain Selling Shareholders. The
proceeds received from the exercise of the warrants will be used for general
corporate purposes.
The above allocation of portions of the net proceeds reflects the Company's
current plans, and there are likely to be changes influenced by various factors,
including market changes and developments in the medical technology industry.
Pending use of the net proceeds as described above, the Company intends to
invest certain of the proceeds in short-term, investment grade, interest-bearing
investments. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
19
<PAGE> 21
SUMMARY MARKET PRICE OF COMMON STOCK
Since May 18, 1997, the Company's Common Stock has been listed on the
American Stock Exchange under the symbol "ZVX." Prior to that time, the
Company's Common Stock traded in the over-the-counter market in the pink sheets
published by the National Quotation Bureau, and was listed on the OTC Bulletin
Board under the symbol "ZVXI". Prior to listing on the American Stock Exchange,
the market for the Company's Common Stock was limited due to the relatively low
trading volume and the small number of brokerage firms acting as market-makers.
The Company anticipates that upon the successful completion of the Offering, the
trading volume will increase.
The following table sets forth, for the quarterly periods prior to May 18,
1997, certain information with respect to the high and low bid quotations for
the Common Stock as reported by a market maker for the Company's Common Stock.
The quotations represent inter-dealer quotations without retail markups,
markdowns, or commissions and may not represent actual transactions. For the
period after May 18, 1997, the following table sets forth the high and low
closing sales prices as reported on the American Stock Exchange.
<TABLE>
<CAPTION>
CLOSING SALES
PRICE
-----------------
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter............................................ $ 3.75 $ 2.50
Second Quarter........................................... $ 4.00 $ 2.75
Third Quarter............................................ $ 3.25 $ 2.25
Fourth Quarter........................................... $ 4.00 $ 3.25
1996
First Quarter............................................ $ 4.25 $ 3.75
Second Quarter........................................... $ 4.00 $ 2.75
Third Quarter............................................ $ 3.25 $ 2.50
Fourth Quarter........................................... $ 3.31 $ 2.75
1997
First Quarter............................................ $ 8.00 $ 3.25
Second Quarter (Up to May 18)............................ $11.25 $ 7.13
Second Quarter (After May 18)............................ $10.88 $ 8.13
Third Quarter............................................ $18.00 $13.50
</TABLE>
The Company's transfer agent reported that as of September 30, 1997, there
were 2,063,826 shares of the Company's Common Stock issued and outstanding held
by approximately 181 holders of record, including shares held of record by
brokerage firms and clearing corporations on behalf of their customers. The
Company estimates that as of September 30, 1997, there were approximately 500
beneficial owners of its Common Stock. The closing price as reported by the
American Stock Exchange as of November 20, 1997 was $13.6875 per share.
DIVIDEND POLICY
The Company currently intends to retain all future earnings after
consummation of this Offering for use in the expansion and operation of its
business. The Company does not anticipate paying dividends on its Common Stock
in the foreseeable future. The payment of future dividends will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, future earnings, capital requirements, the general financial condition
of the Company, and general business conditions. Additionally, the Company is
restricted from declaring any cash dividends under its current line of credit
arrangement.
20
<PAGE> 22
CAPITALIZATION
The following sets forth (i) the actual capitalization of the Company at
September 30, 1997, after giving effect to the reincorporation of the Company in
Delaware on November 20, 1997, and (ii) the adjusted capitalization after giving
effect to receipt of the net proceeds from the sale by the Company of the
1,200,000 shares of Common Stock offered by the Company hereby at an assumed
price of $12.50 per share, less underwriting discounts and commissions and
estimated offering expenses, and after giving effect to the reincorporation.
This information is qualified in its entirety by, and should be read in
conjunction with, the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Industrial development bond............................................. $2,000 $ 2,000
Stockholders' equity:
Common stock, $.001 par value; 10,000,000 shares authorized, 2,063,826
shares issued and outstanding; 3,263,826 shares issued and
outstanding as adjusted(1)......................................... 2 3
Additional paid-in capital............................................ 3,352 16,903
Retained earnings..................................................... 2,257 2,257
------ -------
Total stockholders' equity............................................ 5,611 19,163
------ -------
Total capitalization............................................... $7,611 $21,163
====== =======
</TABLE>
- ---------------
(1) Excludes 100,000 shares of Common Stock issuable upon the exercise of
warrants issued to the Representatives of the Underwriters in connection
with the Offering at a price of 120% of the price of the Shares sold in the
Offering. See "UNDERWRITING." Also excludes 314,190 shares of Common Stock
issuable upon the exercise of options granted pursuant to the Stock Option
Plan at a weighted average exercise price of $12.37 per share. See
"DESCRIPTION OF CAPITAL STOCK -- Stock Options." Also excludes 150,000
shares of Common Stock issuable upon the exercise of the over-allotment
option in this Offering. See "UNDERWRITING." Also excludes 350,000 shares of
Common Stock issuable upon the exercise of certain warrants. See
"DESCRIPTION OF CAPITAL STOCK -- Warrants."
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of the Company as of
December 31, 1995 and 1996, and for each of the years ended December 31, 1994,
1995, and 1996 have been derived from and are qualified by reference to the
consolidated financial statements of the Company included elsewhere in this
prospectus. The following selected consolidated financial data of the Company as
of December 31, 1992, 1993 and 1994 and for each of the years ended December 31,
1992 and 1993 have been derived from financial statements not included herein.
The selected financial data as of September 30, 1997, and the nine months ended
September 30, 1997, are derived from audited consolidated financial statements
and for the nine months ended September 30, 1996 are derived from unaudited
consolidated financial statements, which have been prepared on a basis
substantially consistent with the audited consolidated financial statements and,
in the opinion of the Company, contain all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the financial position
and results of operations of the Company as of such dates and for such periods.
The results of operations for interim periods are not necessarily indicative of
a full year's operations. This selected consolidated financial data should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $2,436 $3,116 $3,333 $5,296 $5,664 $ 3,878 $6,311
Cost of sales.................... 1,357 1,600 2,017 3,066 2,936 2,122 3,475
------ ------ ------ ------ ------ ------ ------
Gross profit..................... 1,079 1,516 1,316 2,230 2,728 1,756 2,836
Operating expenses
Selling, general, and
administrative............... 630 776 1,024 1,325 1,892 1,215 1,727
Research and development....... 194 199 419 502 528 360 522
------ ------ ------ ------ ------ ------ ------
Operating income (loss).......... 255 541 (127) 403 308 181 587
Other income (expense):
Interest income, net........... 17 37 36 41 41 36 10
Other income................... -- -- -- -- 203 -- 8
------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes.......................... 272 578 (91) 444 552 217 605
(Provision) benefit for income
taxes.......................... (82) (197) 67 (127) (206) (74) (194)
------ ------ ------ ------ ------ ------ ------
Net income (loss)................ $ 190 $ 381 $ (24) $ 317 $ 346 $ 143 $ 411
====== ====== ====== ====== ====== ====== ======
Net income (loss) per share...... $ .20 $ .36 $ (.02) $ .24 $ .25 $ .10 $ .18
====== ====== ====== ====== ====== ====== ======
Weighted-average number of common
and common equivalent shares
outstanding.................... 938 1,060 1,131 1,306 1,389 1,366 2,316
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 603 $1,463 $ 864 $ 870 $2,085 $ 136
Working capital.................. 1,109 2,305 2,270 2,528 4,521 3,588
Total assets..................... 1,410 2,912 2,824 3,247 6,369 9,814
Industrial development bond...... 5 -- -- -- 2,000 2,000
Stockholders' equity............. 1,227 2,575 2,550 2,901 3,701 5,611
</TABLE>
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies.
RESULTS OF OPERATIONS
In each of the three preceding years, a small number of customers accounted
for a significant percentage of total revenues. Fluctuations in the timing and
size of orders from such major customers resulted in changes in the Company's
revenues and product mix, which in turn affected gross margins. As a result of
the foregoing, the Company experiences variations in operating results from
quarter to quarter, and the results of operations for a specific quarter should
not be considered indicative of the results that may be achieved for longer
periods.
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the income statement bear to revenues.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA -- PERCENTAGE OF REVENUES
-------------------------------------------------
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
--------------------------- ---------------
1994 1995 1996 1996 1997
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100% 100% 100% 100% 100%
Gross profit.............................. 40% 42% 48% 45% 45%
Selling, general, and administrative
expenses................................ 31% 25% 33% 31% 28%
Research and development expenses......... 12% 9% 10% 9% 8%
Operating income/(loss)................... (3)% 8% 5% 5% 9%
Other income/(expenses)................... 1% 1% 4% 1% 1%
Income (loss) before taxes................ (2)% 9% 9% 6% 10%
Provision (benefit) for taxes............. (1)% 3% 3% 2% 3%
Net income (loss)......................... (1)% 6% 6% 4% 7%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
The Company's revenues increased to $6,311,490 for the first nine months of
1997, from $3,878,255 for the first nine months of 1996, an increase of
approximately 63%. During the first nine months of 1997, 67% of total revenues
resulted from sales to four customers, three of whom were major customers in
1996. Management attributes the increase in revenues due to an increase in the
demand for the Company's products and services.
The Company's gross profit as a percentage of revenues was 45% for the nine
months ended September 1997, compared to 45% for the nine months ended September
1996.
Selling, general, and administrative expenses for the nine months ended
September 1997, rose $512,293, from $1,214,623 in 1996, to $1,726,916 in 1997.
Management attributes the increase in these expenses to increased legal expenses
and fees associated with the Company's listing on the American Stock Exchange,
increased payroll and related employee expenses, insurance, and tax costs.
Research and development expenses vary from quarter to quarter depending on
the number and nature of pending research and development projects and their
various stages of completion. During the first nine months of 1997, research and
development expenses were $521,870, compared to $360,335 for the first nine
months of 1996. Expenses incurred during the first nine months were for the
continued development of new applications for the Company's ultrasound
technology, and proprietary products.
Operating income for the nine months ended September 1997 increased to
$587,550, or 9% of revenues, from $181,557, or 5% of revenues, in 1996. Net
income increased to $410,763 for the first nine months of 1997
23
<PAGE> 25
from a net income of $142,710 in the first nine months of 1996. The increase in
net income during 1997 compared to 1996 is principally due to increased demand
for the Company's products and services, and the mix of product delivered during
that period.
As of September 30, 1997 the Company's backlog of customer orders was
$7,726,000, compared to $4,357,000 on September 30, 1996. Management estimates
that approximately 45% of the backlog will ship before December 31, 1997.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
The Company's revenues increased to $5,663,733 in 1996 from $5,295,762 in
1995, an increase of approximately 7%. During 1996 and 1995, 67% and 56%, of
total revenues resulted from sales to three customers and two customers
respectively, two of which were major customers in both years. Management
attributes the increase in revenues to an increase in demand for the Company's
products and services during 1996.
Gross profit as a percentage of revenues was 48% in 1996, as compared to
42% in 1995. Management attributes the increase mainly to engineering contracts
completed toward the end of 1996 and to a decrease of non-recurring engineering
tooling expenses billed to customers at cost.
Selling, general, and administrative expenses increased during 1996 to
$1,892,317 or 33% of total revenues as opposed to $1,324,928 or 25% of total
revenues in 1995. Increased expenses resulted from the Company's continuing
expansion. An increase in the size of ZEVEX's physical facilities increased
rental, utility, and related expenses. An expanded sales and marketing effort
increased staffing, travel, advertising, and administrative expenses related to
the introduction of the EnteraLite(R) Ambulatory Enteral Feeding Pump. The
Company also had an increase in legal costs associated with patent and trademark
costs as well as increases in expenses related to employees, such as insurance,
taxes, and pension benefits.
The Company continued research and development activities independent of
engineering conducted on behalf of its customers, in an effort to develop new
Company owned technologies and products in areas where the Company perceived a
demand. The Company invested $527,562 in 1996 and $502,255 in 1995 directly in
new research and development projects.
Operating income decreased to $307,799, or 5% of revenues, in 1996 from
$403,026, or 8% of revenues, in 1995. Alternatively, the Company had net income
of $345,577 or 6% of revenues, in 1996 compared to $316,800, or 6% of revenues,
in 1995. A portion of this increase was due to unrealized gains on marketable
securities in 1996. The remaining changes during 1996 as compared to 1995 are
principally due to the costs addressed previously, as well as the Company's
product mix delivered during the year.
THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1994
The Company's revenues increased to $5,295,762 in 1995 from $3,332,437 in
1994, an increase of approximately 59%. During 1995 and 1994, 56% and 55% of
total revenues resulted from sales to two customers in both years. Management
attributes the increase in revenues to an increase in demand for the Company's
products and services.
The Company's gross profit as a percentage of revenues was 42% in 1995, as
compared to 40% in 1994. Management attributes this increase to efficiencies
gained through a reengineering and refixturing of its production area.
During 1995, the Company's selling, general, and administrative expenses
grew to $1,324,928 or 25% of total revenues as compared to $1,023,987 or 31% of
total revenues in 1994. The increased expenses resulted from the Company's
decision to increase the size of its operations by expanding the size of the
physical facilities, which in turn increased rental, utility, and related
expenses. The Company also improved customer service by expanding its sales,
marketing, and customer service staff, established more elaborate internal
production and management controls and documentation, and expanded quality
assurance procedures. The
24
<PAGE> 26
Company also had an increase in legal costs associated with patent and trademark
costs, as well as increases in expenses related to employees, such as insurance,
taxes, and pension benefits.
The Company continued research and development activities independent of
engineering conducted on behalf of its customers in an effort to develop new
Company-owned technologies and products in areas where the Company perceived a
demand. The Company invested $502,255 in 1995 and $419,278 in 1994 directly in
new research and development projects.
Operating income increased to $403,026, or 8% of revenues, in 1995 compared
to an operating loss of $127,498, or 3% of revenues, in 1994. Similarly, the
Company had a net income of $316,800 or 6% of revenues, in 1995 compared to a
net loss of $24,622, or 1% of revenues, in 1994. These increases during 1995 as
compared to 1994 were principally due to the costs addressed previously as well
as the Company's product mix delivered during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's increased working capital requirements during the nine months
ended September 1997 and three years ended December 1996 related to increasing
accounts receivable and inventory levels associated with growth in revenues. To
date, working capital has been funded primarily by a combination of increased
accounts payable, borrowings under the Company's revolving line of credit, and
the private placement for the Company's Common Stock.
During the nine months ended September 1997, the Company produced $410,763
in net income. Cash decreased by $1,949,356 for the nine months ended September
1997, as the Company continued to fund construction of its new manufacturing
facility, and the purchase of new equipment. During the nine months ended
September 1996, the Company had net income of $142,710.
The Company's investment in the construction of the new facility and
purchases of new research, production, test equipment, and tooling was
$2,854,004 for the first nine months of 1997. In 1996, the company negotiated a
$2,000,000 Industrial Development Bond to finance the construction of a new
51,000 square foot headquarters and manufacturing facility. On October 29, 1996,
the Company completed a transaction in the amount of $50,000 cash and 130,000
shares of unregistered Common Stock of the Company for the purchase of
approximately 3.7 acres of land in Salt Lake City, Salt Lake County, Utah, for
the purpose of constructing a manufacturing facility.
The Company's working capital at September 30, 1997, was $3,587,841,
compared to $2,403,056 at September 30, 1996. The increase is primarily
attributed to income from operations and the private placement that was
completed in February, 1997. The portion of working capital represented by cash
at such dates was $135,699 and $473,748, respectively.
In 1996, the Company used net cash flow in operating activities of
$175,141, as the Company funded an increase in accounts receivable and
inventories.
The Company's purchases of land and facilities, and new research,
production, testing equipment, and tooling increased to $619,188 in 1996 from
$241,131 in 1995. The increase in equipment purchases is primarily due to
upgrading the Company's production fixturing, tooling and research and
engineering capabilities in 1995. The Company expects to spend approximately
$240,000 in 1997 for additional manufacturing equipment as well as for normal
replacement of old equipment.
The Company's working capital at December 31, 1996, was $4,520,781, as
compared to $2,528,419 and $2,269,944 at December 31, 1995 and 1994
respectively. The portion of working capital represented by cash and cash
equivalents at such dates was $2,085,055, $870,333, and $864,332 respectively.
On February 12, 1997, the Company completed a private placement of
$1,250,000 of its securities, which consisted of 500,000 units at a price of
$2.50 per unit. Each unit consisted of one share of Common Stock and a warrant
to purchase one share of Common Stock at a price of $3.50 per share.
25
<PAGE> 27
On December 11, 1996, the Company entered into a $500,000 open line of
credit arrangement with a financial institution. The line of credit was
subsequently amended to increase the amount available under the line to the
present amount of $1,000,000. The line is due May 31, 1998. The line of credit
is collateralized by accounts receivable and bears interest at a rate of prime
plus 1%. The Company owed $60,108 on the line of credit at December 31, 1996 and
$700,000 at September 30, 1997.
During 1995, the Company generated a positive net cash flow from operating
activities of $247,132, while funding an increase in accounts receivable and
inventories. Operating activities during 1994 resulted in a net negative cash
flow from operating activities of $461,721 while the Company funded an increase
in accounts receivable and inventories.
The Company purchase of new research, production, testing equipment, and
tooling increased to $241,131 in 1995 from $136,744 in 1994. The increase in
purchases of equipment was primarily due to upgrading the Company's production
fixturing, tooling, research, and engineering capabilities in 1995. The Company
spent approximately $240,000 in 1996 for additional manufacturing equipment as
well as for normal replacement of old equipment.
The Company's working capital at December 31, 1995, was $2,528,419, as
compared to $2,269,944 at December 31, 1994. The portion of working capital
represented by cash at such dates was $870,333 and $864,332. The Company
utilizes substantial portions of its cash and cash equivalents from time to time
to fund its operations, including increases in inventories and accounts
receivable in connection with various customer orders.
The Company believes that cash generated from operations, together with its
terms under its credit line and the net proceeds from this Offering, will be
sufficient to meet its working capital needs for the next three years. However,
the Company's capital needs will depend on many factors in the execution of the
Company's future strategy, including the Company's growth rate, the need to
finance increased production and inventory levels, the success of the Company's
various sales and marketing programs, and various other factors.
26
<PAGE> 28
BUSINESS
GENERAL
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies. The Company's design and manufacturing service
customers are medical technology companies, which sell the Company's systems and
devices under private labels or incorporate the Company's devices into their
products. The Company applies its extensive engineering and regulatory
expertise, developed over its 11-year history, to provide its customers with
integrated solutions to the design and manufacture of their medical devices. The
Company designs and manufactures over 100 different, surgical systems, device
components, and sensors for more than 50 different established and emerging
medical technology companies, such as Alaris Medical Systems, Inc., Allergan,
Inc., Paradigm Medical Industries, Inc., various divisions of Baxter Healthcare
Corporation, Mentor Corporation, SIMS Deltec, Inc., Staar Surgical Company, and
3M Company Healthcare.
ZEVEX's strategy is to augment the continuing growth in its design and
manufacturing service business with the development and commercialization of
proprietary products which utilize the company's technologies or engineering
expertise or which are complementary to the Company's existing proprietary
products. The Company has successfully applied its engineering and regulatory
expertise to the development, commercialization, and marketing of EnteraLite(R),
the Company's proprietary Ambulatory Enteral Feeding Pump for patients who must
receive direct gastrointestinal nutritional therapy. The EnteraLite(R) pump
provides patients with maximum mobility while delivering enteral solutions with
unprecedented accuracy.
OVERVIEW OF MEDICAL TECHNOLOGY INDUSTRY
Growth of Medical Technologies. Demand for health care in the United States
has grown rapidly in recent years and is expected to continue to grow as the
population ages. At the same time, advancements in medical science, as well as
in electronics, computers, ultrasound, new materials, lasers, and other
technologies have dramatically expanded the number and variety of medical
devices and systems. The most advanced medical procedures and techniques, many
of which use advanced medical devices, now are common treatments under many
health insurance plans. As insurance companies and federal and state governments
have expanded the medical procedures for which health care providers are
reimbursed, demand has grown for the medical devices and systems needed for
these procedures. More recently, in response to increasing pressure in the
United States to control rising health care costs, medical technology companies
have developed advanced medical devices and systems that improve patient
outcomes and reduce the overall cost of health care.
Need for Efficient Developers of Medical Devices. As medical products have
incorporated the latest developments in various technologies, the cost of
product development and the length of the development cycle have increased
substantially. The risks in developing and launching new medical products also
have increased significantly as competition in the highly fragmented $30 billion
U.S. medical technology industry has increased. As a result, medical technology
companies face increased pressure to bring new products to market in the
shortest possible time and at the most efficient cost, while maintaining a high
level of quality in the commercial product.
Regulatory Complexity. At the same time, the FDA and the European Union
have adopted increasingly stringent and evolving regulatory requirements for the
manufacture of medical products. In the United States, certain medical products
are subject to application to the FDA for pre-market approval ("PMA") and many
other medical products require clearance to market ("510(k) approval"). In
addition, products are subject to regulation with respect to manufacturing,
labeling, distribution, post-market reporting, and promotion. Under European
Union quality standards to be effective in 1998, the design of medical products
must satisfy specific engineering design process standards. To market and sell
their products, medical technology companies must also invest significant
financial resources to establish and maintain manufacturing facilities that
comply with the FDA's Good Manufacturing Practices ("GMP") requirements in the
U.S. and the European Union's
27
<PAGE> 29
quality system standards, such as certification from the International
Organization for Standardization ("ISO"). Even after the often lengthy and
time-consuming process of obtaining FDA clearance and ISO certification, medical
technology companies must thereafter devote substantial managerial oversight to
ensure continued compliance with FDA and ISO requirements.
Opportunities for ZEVEX. Management of the Company believes that advances
in technology, increasing regulatory complexity, and intensified competition
will lead many medical technology companies to expand their out-sourcing of
design and manufacturing services in order to be more efficient. Management
believes that the Company is well positioned to benefit from this increasing
trend towards out-sourcing, given the extensive engineering and regulatory
expertise that ZEVEX has developed over its 11-year history of designing and
manufacturing medical products. Specifically, the Company may often times be
able to profitably design and manufacture medical devices or systems more
quickly, at a lower cost, and with higher quality than its medical technology
customers can do themselves. Management also believes that it can continue to
leverage that same extensive engineering and regulatory expertise into the
design and manufacture of the Company's own proprietary medical devices.
Management believes that this two-pronged strategy in the $30 billion medical
technology marketplace may allow the Company to benefit from the increasing
demand for the design and manufacturing of medical devices and systems, as well
as from the sale of the Company's own proprietary medical devices.
ADVANTAGES OF OUT-SOURCING DESIGN AND MANUFACTURING TO ZEVEX
ZEVEX provides customized integrated solutions to the design,
manufacturing, and regulatory challenges associated with advanced medical
devices and systems. Many emerging medical technology companies simply do not
have the engineering, manufacturing, and regulatory expertise necessary to
quickly and efficiently bring a medical device from the concept stage to
commercial use. Even larger, well-established medical technology companies,
which may have the capital resources to develop such expertise, may lack the
required expertise or the time to accumulate such expertise in order to meet the
market demand for their particular device. Moreover, in some instances, these
medical technology companies may simply elect not to devote their resources to
the design and manufacture of their medical devices or systems, including
obtaining and maintaining the necessary regulatory approvals and industry
certifications for their manufacturing facilities. ZEVEX can often bring its
customer's device from concept to market more quickly and efficiently, as well
as provide the on-going manufacturing capability to meet the market demand.
ZEVEX's design and manufacturing services enable its customers to focus their
resources on the research of new products and the marketing of their existing
products, including those manufactured by ZEVEX. In summary, ZEVEX offers its
manufacturing service customers the following advantages:
- BROAD EXPERIENCE WITH NUMEROUS MEDICAL DEVICES. Over its 11-year history,
the Company has manufactured numerous advanced medical devices, including
surgical systems, device components, and sensors. As a result, the
Company has developed considerable expertise in addressing the product
design, engineering, manufacturing, and regulatory issues associated with
a variety of medical devices.
- EXTENSIVE EXPERTISE. As a result of its broad experience, the Company has
developed extensive expertise in addressing the product design,
engineering, manufacturing, and regulatory issues associated with a
variety of medical devices.
- GENERALLY LOWER COST AND HIGHER QUALITY. The Company provides a wide
range of engineering services and has the capabilities to provide
complete device or system design, including engineering, component
analysis, testing, and regulatory compliance. The Company strives to
increase the quality and lower the overall cost of the devices or systems
that it manufactures for its customers by integrating design and
engineering work with manufacturing processes, materials acquisitions,
quality issues, and regulatory considerations.
- RAPID PRODUCT DEVELOPMENT. The Company believes that, with its
engineering and manufacturing capabilities, it can more rapidly develop
and commercialize new products than its customers, which otherwise must
expend significant time and financial resources to develop internal
engineering expertise and qualified manufacturing facilities.
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- REGULATORY COMPLIANCE. The Company is ISO 9001 and EN 46001 certified,
and the Company has developed internal systems intended to maintain
compliance with the FDA's GMP requirements. The Company devotes
significant management time and financial resources to GMP compliance and
ISO certification. By using the Company's manufacturing services,
customers relieve themselves of many stringent regulatory and industry
certification requirements.
- PRODUCTION FLEXIBILITY. The Company's broad customer base and
cross-trained workforce enable it to offer its customers production
flexibility, which enables customers to implement product enhancements
and to adjust production volumes in response to fluctuations in market
demand.
ZEVEX'S GROWTH STRATEGY
The Company's objective is to continue to expand its business as a designer
and manufacturer of a wide variety of customized medical devices for medical
technology companies, as well as a designer, manufacturer, and marketer of a
variety of its own proprietary products. To accomplish this, management intends
to do the following:
- INCREASE PENETRATION INTO EXISTING CUSTOMER BASE. Within the Company's
current customer base, management believes there are numerous
opportunities to expand the design and manufacturing services which the
Company is providing. Management intends to aggressively seek
opportunities to design and manufacture more devices or complete systems
for customers for which the Company is currently manufacturing only a few
devices or components of systems. Additionally, the Company intends to
expand beyond its current, primary focus on ultrasonic devices and
systems by designing and manufacturing a wider variety of medical devices
that incorporate diverse technologies.
- EXPAND CUSTOMER BASE. Management intends to aggressively market its
capabilities in order to increase its number of medical technology
customers for which it provides design and manufacturing services.
Management believes that there are numerous medical technology companies,
which are not current customers, that would benefit from utilizing the
Company's services.
- INCREASE SALES OF THE COMPANY'S ENTERALITE(R) AMBULATORY ENTERAL FEEDING
PUMP. The Company began selling the EnteraLite(R) pump in September 1996,
and management believes there are significant opportunities to increase
sales of EnteraLite(R) pumps and related products. The Company is
pursuing sales opportunities with national home health provider networks,
hospitals, and group purchasing organizations, while expanding its
network of independent manufacturer's representatives. The Company is
simultaneously increasing its marketing and clinical support efforts.
- LEVERAGE ENGINEERING AND REGULATORY EXPERTISE TO DEVELOP NEW PROPRIETARY
PRODUCTS. Management intends to augment the continuing growth in its
design and manufacturing services business with the development and
commercialization of new proprietary products. The Company intends to
identify significant market opportunities for products which can benefit
from the Company's engineering or regulatory expertise or which are
complementary to the Company's existing proprietary products. The Company
intends to design, develop, and market medical devices and related
products that meet the specific needs of the customer.
- ACQUIRE OTHER TECHNOLOGIES OR FIRMS. Management believes that there are
significant opportunities to increase revenues and profitability through
the acquisition of technologies or products that are complementary to the
Company's existing engineering expertise or proprietary technologies or
that can be sold through the Company's existing distribution channels.
Additionally, the Company may seek to acquire other design and
manufacturing service firms in appropriate instances in order to capture
additional revenue and customers.
MEDICAL DEVICES MANUFACTURED BY ZEVEX
The Company designs and manufactures advanced medical devices, including
surgical systems, device components, and sensors for medical technology
companies. Within the category of surgical devices and systems, the Company
designs and manufactures both advanced ultrasonic surgical handpieces and
complete
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surgical systems. These handpieces and systems are used in ultrasonic
phacoemulsification procedures for the removal of cataracts and for
ultrasonically assisted liposuction. Within the category of medical sensors, the
Company designs and manufactures both ultrasonic air bubble detectors and
ultrasonic liquid level detectors that are used in a variety of medical devices.
In addition to these medical sensors and surgical devices that ZEVEX designs and
manufactures for others, ZEVEX also has designed and manufactures two of its own
proprietary medical devices, namely the EnteraLite(R) Ambulatory Enteral Feeding
Pump for patients who must receive direct gastrointestinal nutritional therapy
and the BottleWatch(R) liquid level indicator. The EnteraLite(R) pump provides
patients with maximum mobility while delivering enteral solutions with
unprecedented accuracy. The BottleWatch(R) liquid level indicator is an
ultrasonic device that is used to monitor critical levels of saline solution
contained in bottles used in ophthalmic surgery. The following tables summarize
the surgical devices and systems and medical sensors that ZEVEX designs and
manufactures for its significant customers, as well as the two proprietary
products that it has designed and manufactured for itself. Following the tables
are sections that contain a description of the devices within each category,
together with an explanation of their applications, markets, and the Company's
primary customers for such devices.
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PRODUCTS MANUFACTURED BY ZEVEX FOR OTHERS
<TABLE>
<CAPTION>
STATUS OF
FDA OR
OTHER
REGULATORY
CUSTOMER PRODUCT DESCRIPTION CLEARANCE
-------------------- ------------------------------------------------------ -----------
<S> <C> <C>
SURGICAL DEVICES AND SYSTEMS
Allergan Handpiece for Proficient phacoemulsification system FDA cleared
Handpiece for Profinesse II phacoemulsification system FDA cleared
Handpiece for Sensory V phacoemulsification system FDA cleared
Appasamy Handpiece for Appa Phaco phacoemulsification system Cleared in
India
Drive circuit for Appa Phaco phacoemulsification Cleared in
system India
Mentor Ophthalmics Handpiece for Odyssey phacoemulsification system FDA cleared
Handpiece for Sistem phacoemulsification system FDA cleared
Mentor H/S Handpiece for Contour Genesis liposuction system PMA pending
Paradigm Precisionist Thirty Thousand phacoemulsification FDA cleared
system
Photon laser/ultrasound phacoemulsification system PMA pending
Staar Surgical Handpiece for Phaco XL phacoemulsification system FDA cleared
Drive circuit for Phaco XL phacoemulsification system FDA cleared
MEDICAL SENSORS
Alaris Air detector for Model 570 infusion pump FDA cleared
Air detector for Model 571 infusion pump FDA cleared
Air detector for Model 599 infusion pump FDA cleared
Air detector for Signature infusion pump FDA cleared
Air detector for Medsystems III infusion pump FDA cleared
Althin Air/saline detector for System 1000 hemodialysis FDA cleared
machine
Baxter Air detector for Amicus pheresis machine FDA cleared
Liquid detector for Isolex stem cell analyzer FDA cleared
Cobe B.C.T. Liquid level detector for Spectra pheresis machine FDA cleared
Air detector for Spectra pheresis machine FDA cleared
Air detector for Trima pheresis machine FDA cleared
Liquid level detector for Trima pheresis machine FDA cleared
3M Company Air detector for Model 9000 cardiopulmonary bypass FDA cleared
Healthcare system
Liquid level detector for Model 9000 cardiopulmonary FDA cleared
bypass system
SIMS Deltec Air detector for Prizm ambulatory infusion pump FDA cleared
Haemonetics Air detector for Mobile Collection System (MCS) FDA cleared
</TABLE>
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<PAGE> 33
ZEVEX'S PROPRIETARY DEVICES
<TABLE>
<CAPTION>
STATUS OF FDA
PRODUCT CLEARANCE
------------------------------------------------ -----------------
<S> <C>
EnteraLite(R) Ambulatory Enteral Feeding Pump FDA cleared
BottleWatch(R) non-invasive liquid level
indicator FDA cleared
</TABLE>
DEVICES THAT ZEVEX MANUFACTURES FOR OTHERS AND THEIR MARKETS
Surgical Devices -- Ophthalmic. The Company designs and manufactures
several ultrasonic phacoemulsification handpieces and systems for the surgical
removal of cataracts. Cataracts are a condition, usually age related, in which
the natural lens of the eye becomes progressively clouded. This clouding
obstructs the passage of light into the eye and can lead to blindness. Most
patients blinded by cataracts can be surgically cured by removing the clouded
lens and replacing it with an intraocular lens. Phacoemulsification is a method
of cataract extraction that uses ultrasound waves to break the natural lens into
small fragments that can be removed through a hollow needle. Phacoemulsification
requires only a three to four millimeter incision, compared to incisions of up
to 12 millimeters for other techniques. Phacoemulsification is currently
utilized in more than 80 percent of cataract procedures in the United States.
Based on a recent market study, the world market for phacoemulsification systems
exceeds $100 million per year. The Company currently manufactures two complete
phacoemulsification systems for one customer, Paradigm Medical Industries, Inc.
These two systems include a basic ultrasonic system and a high-end system which
embodies both laser and ultrasound energy sources. The Company's two major
customers for these phacoemulsification handpieces and systems used in
ophthalmic surgery are Allergan and Paradigm Medical Industries, Inc.
Surgical Devices -- Liposuction. The Company has recently applied its
engineering and manufacturing expertise with respect to ultrasonic handpieces
used in ophthalmic surgery to the design and manufacture of ultrasonic
handpieces to be used in liposuction surgery. Liposuction, or the removal of
body fat, is one of the most popular cosmetic procedures performed today.
Current liposuction procedures involve the use of a metal cannula to sheer the
fat from the patient. This requires the physician to exert a large amount of
force to facilitate the procedure. In ultrasonically assisted liposuction, a
generator sends ultrasonic waves through a probe which is inserted under the
skin. The ultrasonic energy emulsifies the fat, which can then be easily
aspirated away. This form of liposuction surgery can significantly reduce trauma
to the patient as compared with the results from the metal cannula handpieces
that have been used primarily in the past for such surgery. According to the
American Society of Plastic and Reconstructive Surgeons, the number of
liposuction procedures performed in the United States more than doubled from
approximately 51,000 in 1994 to approximately 109,000 in 1996. The Company's
customer for its ultrasonic liposuction surgery handpiece is Mentor Corporation,
which had total sales in its fiscal year ended March 31, 1997 of approximately
$203 million from sales of various products in the plastic surgery, urology, and
ophthalmology marketplaces. Mentor Corporation produces an ultrasonic
liposuction system for plastic surgery of which the ZEVEX manufactured handpiece
is one component.
Medical Sensors. The Company designs and manufactures a variety of
non-invasive ultrasonic sensors for the detection of air bubbles and the
monitoring of liquid levels in medical devices. These sensors can be applied to
the exterior of a liquid-containing vessel or tubing, thereby eliminating the
possibility of liquid contamination, and are designed to meet the specifications
of customers which then incorporate the sensor into their own medical devices.
The Company's air bubble detectors monitor intravenous fluid lines in a variety
of devices and systems, including drug infusion pumps, hemodialysis machines,
blood collection systems, and cardiopulmonary bypass systems. Ultrasonic sensors
include a piezoelectric sensing element and can include a circuit board which
drives the element, processes signals, and interfaces with the customer's
device. The Company's liquid level detectors are used to monitor critical levels
of liquids in various reservoirs used in surgery, such as those employed in
cardiopulmonary bypass systems. The Company holds a patent with respect to key
features of its non-invasive, ultrasonic liquid level detectors. The Company
estimates that
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the 1997 U.S. market for air bubble and liquid level detectors for medical uses
is approximately $60 million. The Company's primary customer for these medical
sensors is Alaris Medical Systems, Inc. (a company recently formed as a merger
of several companies, including the Company's customer formerly known as IVAC).
ZEVEX'S PROPRIETARY PRODUCTS
EnteraLite(R) Ambulatory Enteral Feeding Pump. In September 1996, the
Company began selling the EnteraLite(R) Ambulatory Enteral Feeding Pump for
patients who must receive direct gastrointestinal nutritional therapy. Enteral
feeding is a means of providing nutrition to patients who have gastrointestinal
disorders, such as short bowel syndrome, Crohn's Disease, bowel
pseudo-obstruction, and other serious digestive disorders, which prevent them
from normally digesting food. Many enteral feeding patients require the
continuous administration of nutritional solutions throughout the day, which
requires the patient to carry an enteral feeding pump throughout the day.
Management believes that the EnteraLite(R) pump is the lightest, most compact
enteral feeding pump on the market, possessing unprecedented safety and accuracy
in liquid nutrition delivery for the patient. The EnteraLite(R) has a 24-hour
battery, which is one-third longer than the battery life of any competing
device. The EnteraLite(R) pump carries a two-year warranty, which is twice the
average in the industry. The EnteraLite(R) requires the use of disposable
feeding bags and tube sets, both of which are sold by the Company. The Company
has been awarded two U.S. patents for technology used in the EnteraLite(R) pump.
The Company has also received Notices of Allowance from the U.S. Patent and
Trademark Office ("PTO") for four additional patents which relate to various
aspects of the EnteraLite(R) pump. Additional patents are pending with the PTO.
Industry sources estimate that the total 1997 U.S. market for enteral feeding
pumps and related sets of disposable products, such as feeding bags and tube
sets, is nearly $200 million.
BottleWatch(R) Liquid Level Indicator. BottleWatch(R) noninvasively
monitors liquid levels in bottles of saline solutions which are used extensively
in cataract and retinal surgery. Saline solution is required to nourish and
support the delicate structures of the eye during ocular surgery, the depletion
of which can complicate surgery, or in the worst case lead to irreparable damage
to the patient's eye. When the liquid level drops below the user-specified
position of the BottleWatch(R), audible and visible alarms are immediately
activated. Revenues from BottleWatch(R) have been immaterial and the Company
does not anticipate significant revenues from this product in the future.
SIGNIFICANT CUSTOMERS FOR WHICH ZEVEX PROVIDES DESIGN AND MANUFACTURING SERVICES
During the first nine months of 1997, the Company provided design and
manufacturing services for over 100 devices to more than 50 customers. Sales of
its design and manufacturing services to foreign customers accounted for
approximately 7% of revenues during 1996 and 1995. The Company's customers for
its design and manufacturing services are medical technology companies, which
sell the Company's systems and devices under private labels or incorporate the
Company's devices into their products. Generally, the Company seeks to obtain
design and manufacturing arrangements from its customers for a specified period
of time, typically with initial periods of three to five years followed by
annual renewals. The Company rarely undertakes design work if it does also not
obtain a contract for the accompanying manufacturing work. Three of the
Company's design and manufacturing customers, Alaris Medical Systems, Inc.,
Allergan, and Paradigm Medical, Inc. accounted for approximately 66% of the
Company's total revenues in 1996. During the first nine months of 1997, these
same three customers, plus a fourth customer, Mentor Corporation, accounted for
67% of the Company's total revenues for that same period. Each of those major
customers are discussed below.
Alaris Medical Systems, Inc. Alaris Medical Systems, Inc. ("Alaris") is a
leading provider of infusion systems and related technologies to markets in
North America, Western Europe, Latin America, and Asia. Alaris is the surviving
corporation from a series of mergers in 1996 among IMED International Trading
Corp., IVAC Medical Systems, Inc., IVAC Holdings, Inc., and Alaris. In 1996,
Alaris generated revenues in excess of $346 million principally from sales of
infusion therapy systems (which includes infusion pumps and disposable fluid
administration sets) and vital signs measurement products. During 1996, Alaris
had pro forma revenues of approximately $292 million from its infusion systems
and approximately $33 million from its vital
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signs measurement products. In 1996, Alaris had approximately 214,000 large
volume infusion pumps installed in the United States, with a U.S. market share
of approximately 40% of the installed base. Since 1987, the Company has designed
and manufactured ultrasonic air bubble detectors for Alaris infusion pumps under
the Alaris name or under the name of an Alaris predecessor. During the first
nine months of 1997, revenues from Alaris comprised approximately 20% of the
Company's revenues.
Allergan. Allergan is a leading provider of specialty therapeutic eye care
products throughout the world. In 1996, Allergan generated revenues in excess of
$1 billion principally by selling prescription and non-prescription
pharmaceutical products in the areas of ophthalmology and skin care, intraocular
lenses and other ophthalmic surgical products, and contact lens care products.
During 1996, Allergan had revenues of $148 million in its surgical product
business, the business in which Allergan sells different phacoemulsification
devices for the surgical removal of cataracts. Since 1989, ZEVEX has designed
and manufactured phacoemulsification devices marketed by Allergan. During the
first nine months of 1997, revenues from Allergan comprised approximately 14% of
the Company's revenues. The Company's current, nonexclusive manufacturing
contract with Allergan has a three-year term beginning January 1, 1997.
Paradigm Medical Industries, Inc. Paradigm Medical Industries, Inc.
("Paradigm") develops and markets ophthalmic surgical systems designed for
minimally invasive cataract removal. In 1996, it generated revenues of $295,000,
principally from the sale of an ultrasonic surgery system used to remove
cataracts. Since 1993, the Company has manufactured phacoemulsification systems
for Paradigm. Beginning in late 1996, the Company designed and manufactured for
Paradigm the prototypes of Paradigm's Photon laser cataract surgical system
(except for certain laser-related components). This new system integrates
ultrasound and laser technologies and includes a custom computer monitor user
interface and unique software developed by the Company. Paradigm's PMA
application for the Photon system with respect to ophthalmic surgery is pending
with the FDA. Until clearance is received from the FDA to market the Photon,
including the laser component, in the United States, the Company is
manufacturing for Paradigm an ultrasonic-only version of the Photon which
Paradigm markets under the name "Precisionist Thirty-Thousand." The Precisionist
Thirty-Thousand is the platform for the Photon which can be upgraded by adding
the laser module. The Company's contract with Paradigm, which expires September
23, 1999, prohibits the Company from selling, distributing, developing, or
manufacturing ophthalmic medical lasers in competition with Paradigm during the
term of the contract and for a period of two years following termination. During
the first nine months of 1997, revenues from Paradigm comprised approximately
21% of the Company's revenues.
Mentor Corporation. Mentor Corporation ("Mentor") develops, manufactures,
and markets a broad range of products for the medical specialties of plastic and
reconstructive surgery, urology, and ophthalmology. For its fiscal year ended
March 31, 1997, Mentor generated revenues of approximately $203 million, of
which approximately $106 million was from sales of plastic surgery products and
approximately $36 million was from sales of ophthalmology products. Since 1992,
ZEVEX has designed and manufactured phacoemulsification devices marketed by
Mentor. ZEVEX recently designed and began the manufacture of handpieces for an
ultrasonic liposuction surgery system produced by Mentor. The Company's contract
with Mentor, which expires September 30, 1998, prohibits the Company from
designing or manufacturing ultrasonic liposuction handpieces in competition with
Mentor during the term of the contract and for a period of three years following
termination. During the first nine months of 1997, revenues from Mentor
comprised approximately 12% of the Company's revenues.
BACKLOG
At September 30, 1997, the Company had a backlog of orders for medical
devices to be manufactured by the Company for other medical technology companies
of approximately $7,726,000. Management estimates that approximately 45% of the
backlog will ship before December 31, 1997. For purposes of the above figures,
backlog includes all orders received by the Company pursuant to purchase orders
which have not been completed and shipped by the Company. This does not include
any backlog for the Company's proprietary products, because the Company
manufactures these devices and holds appropriate levels in inventory for sale to
customers. Some of the orders included in the backlog may be canceled or
modified by customers without significant penalty. In addition, since customers
may place orders for delivery at various times throughout the
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<PAGE> 36
year, and because of the possibility of customer changes in delivery schedules
or cancellation of orders, the Company's backlog as of any particular date may
not be a reliable indicator of future sales.
DESIGN AND ENGINEERING CAPABILITIES
The Company has extensive design and engineering capabilities. In most
instances, the Company's manufacturing service customers rely on the Company
from the outset of their project for complete design, engineering, testing,
component analysis, and regulatory compliance for their medical device or
system. Indeed, over the Company's 11-year history, the Company's engineering
staff has performed substantially all of the design and engineering work for
such medical devices or systems. In other instances, customers have come to the
Company with final drawings for devices that they believe are ready for
manufacturing. In such cases, the Company has revised and tested the customer's
existing design prior to manufacturing the device or system, and, in many cases,
the Company's engineers have been able to identify and offer alternatives to the
customer's design that have improved performance or produced manufacturing
efficiencies.
Team Approach. The Company approaches each engineering project using a team
of engineers and technicians of various disciplines who understand the technical
requirements of the particular project. Each team includes representatives from
various engineering disciplines, including manufacturing, test, and quality
engineers, who help design a device that can be manufactured in a manner that
meets or exceeds customer specifications and the applicable regulatory
requirements.
Close Cooperation with the Customer. The Company's team of engineers work
closely with the customer during all phases of the design, engineering, and
testing of the customer's device or system. This cooperative approach is used to
assure that the customers' expectations are met or exceeded in the final
product.
Integration of Engineering Staff. The Company integrates its engineering
staff throughout its operations, including sales and marketing, customer
relations, materials management, quality assurance, regulatory compliance, and
manufacturing. The Company's engineers assist the Company's sales and marketing
personnel in evaluating requests for proposals and developing project-specific,
solution-oriented responses, bids, cost estimates, and project plans. Similarly,
the Company's project engineers act as customer contacts throughout the design
and engineering phase and have responsibility for all aspects of a customer's
project, including coordinating the component parts necessary for the device,
quality assurance procedures, regulatory compliance, and the manufacturing
process. The Company also provides its customers with design information and
other support during the FDA's 510(k) approval or PMA process, but does not
assist in the testing, studies, and human clinical trials associated with these
approvals.
State-of-the-Art Engineering Technologies. The Company has made significant
investments in state-of-the-art equipment to support its design and engineering
staff, including engineering design and testing stations and three-dimensional
computer aided design ("CAD") software. The Company's engineers use computers to
design software, to design and lay out surface mount circuit boards, and to
design custom integrated circuits. The Company's engineers utilize
stereolithography which allows for rapid production of prototypes from CAD
drawing files before commencement of manufacturing of the commercial device or
system. Utilizing its own software design capabilities, the Company has also
created what management believes is the most sophisticated modeling software for
ultrasonic device development. This capability speeds the product development
process for ultrasonic devices and improves the quality of the final device.
Engineering Service Contracts. The Company performs design and
manufacturing services for many customers under purchase orders. With major
customers the Company enters into manufacturing contracts which allow for
recurring purchase orders. Under these contracts, each device, product design,
patent, and other proprietary right developed by the Company in performing
engineering services becomes the property of the customer. The Company usually
receives the manufacturing rights to a device for a period generally ranging
from three to five years, with annual renewals thereafter. Generally, the
Company provides non-recurring engineering services under a project plan that
identifies the engineering tasks, deliverables, and time schedule. Typically,
such services are billed as progress milestones are attained and are cancelable
at any time.
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<PAGE> 37
Engineering Staff. At September 30, 1997, the Company's engineering staff
consisted of 27 engineers. The engineering staff has experience in a variety of
disciplines, as follows:
<TABLE>
<CAPTION>
COLLECTIVE YEARS
ENGINEERING CATEGORY NUMBER OF EXPERIENCE
--------------------------------------------- ------ ----------------
<S> <C> <C>
Electrical Engineering....................... 4 32 years
Mechanical Engineering....................... 3 15 years
Ultrasonic Engineering....................... 5 80 years
Software Development......................... 2 19 years
Design Validation............................ 3 12 years
Computer Aided Design........................ 4 29 years
Engineering Technicians...................... 6 36 years
--
TOTAL.............................. 27
</TABLE>
MANUFACTURING CAPABILITIES
As the design and engineering of a device or system nears completion, the
members of the project team with direct responsibility for manufacturing,
quality assurance, test engineering, and materials assume a greater role. The
project team implements a materials management system and develops an assembly
process and product testing and quality assurance procedures to produce
high-quality devices or systems that satisfy customer specifications as well as
the FDA's GMP and ISO 9001/EN 46001 quality standards. Often, manufacturing
begins with a relatively small number of pre-production units, which are used by
the customer for clinical trials. The Company and the customer frequently work
closely together to make engineering and manufacturing refinements during this
pre-production phase.
Manufacturing Cells and Computerization of the Manufacturing Process. Each
instrument is manufactured in a dedicated manufacturing cell on the Company's
manufacturing floor. These cells are flexible and can be expanded or modified as
needed, enabling the Company to adjust production volumes quickly in response to
customer orders. Each cell is equipped with computer instruction centers.
Production personnel actually view pictures of the device that they are making
or assembling on the computer screen in its various stages of production or
assembly, along with the pertinent instructions for each step of the process.
This computerized manufacturing system also allows test data to be entered and
archived in the course of the manufacturing process. The advantage of this
system is that production personnel always have access to the current version of
instructions, thereby eliminating the possibility of using obsolete
instructions. This system also allows accurate entry and retrieval of test data,
again without the difficulties of a tracking system documented on paper.
Materials Requirements System. The Company uses a fully integrated
materials requirements system. This system includes sales order entry,
purchasing, inventory control, production control, and cost accounting and helps
the Company manage material acquisitions and inventory for the various projects
in production at any one time and facilitates the planning and control essential
to building products on accelerated time schedules.
Manufacturing Contracts. The Company generally executes manufacturing
contracts with major customers at the beginning of engineering projects, at
which time the Company provides customers with budgetary estimates of
manufacturing costs. Pricing is typically based on the Company's expected cost
plus a mark-up. Although manufacturing contracts rarely include minimum
production requirements, they usually grant the Company exclusive manufacturing
rights for initial periods generally ranging from three to five years, with
annual renewals thereafter. The Company generally warrants conformity to design
specifications, warrants against defects in materials and workmanship, and in
certain instances indemnifies its customers against losses arising out of
product defects. Such warranties customarily last at least 14 months from the
date of manufacture and sometimes longer. The Company has not experienced any
material claims against these warranties from its manufacturing service
customers. In addition, the Company in many cases enters into repair and service
agreements with these customers that set forth the pricing and terms under which
the
36
<PAGE> 38
Company provides repair, replacement parts, and needed services or upgrades that
are not covered under warranty. Although most of the Company's manufacturing is
performed under manufacturing contracts, some devices are manufactured only
under purchase orders.
Suppliers. The Company purchases its component parts and raw materials from
various suppliers. The Company is not dependent on any single supplier for any
item. The Company believes that it can acquire from various sources on a timely
basis, the component parts and raw materials necessary for the Company to meet
obligations to its manufacturing service customers, and to manufacture its own
proprietary products.
QUALITY ASSURANCE AND REGULATORY COMPLIANCE
The Company emphasizes quality throughout its operations and integrates its
quality assurance and quality engineering programs throughout each engineering
and manufacturing phase, a process that involves the Company's senior management
and executive officers. At September 30, 1997, the Company employed 8 personnel
in its quality assurance, quality engineering, and regulatory departments.
Quality Assurance Procedures. Quality assurance procedures are integrated
into every aspect of a device's manufacturing cycle. The Company establishes a
quality assurance program for each instrument, which includes a "zero defects"
objective. Substantially all component parts and product subassemblies that are
manufactured by others receive a control number, and samples are inspected and
tested. The Company requires all vendors that supply components to satisfy
certain quality standards. On the manufacturing floor, quality assurance
personnel implement testing procedures at interim points during the assembly
process. A separate product test group which reports to the production manager
conducts a final test when the instrument is fully-assembled and ready for
shipping. In addition, prior to shipping, a quality inspector reviews each
instrument for proper labeling and paperwork.
Compliance with FDA GMP Requirements. The Company is registered with the
FDA as a medical device manufacturer. Management believes that the Company is in
compliance with FDA GMP requirements and has implemented internal systems to
maintain such compliance. The Company has experienced regularly scheduled and
unscheduled FDA audits in past years, none of which required significant changes
to its facilities or processes and none of which required discontinuation of
normal operations. See "BUSINESS -- Governmental Regulation Within the United
States."
ISO Certifications. The Company has obtained certifications from the
International Organization for Standardization ("ISO"), the first quality system
standard to gain worldwide recognition, including the European Union, Japan, and
the United States. As many medical technology companies expand sales of products
in international markets, compliance with these international quality standards
has increased in importance. The Company first obtained the ISO 9001
certification from the National Standards Authority of Ireland, an ISO notified
body, in 1996. This designation is the highest level of ISO 9000 certification
and indicates that the Company has met stringent design, manufacturing, and
testing standards for its devices. The Company also has achieved an additional
EN 46001 certification from the same organization, which indicates that the
Company has met additional quality standards specific to medical devices. The
Company's ISO 9001/EN 46001 certifications serve as a marketing tool that
enhances the Company's competitive position in the industry, especially with
respect to medical technology companies with internal manufacturing facilities
that have not gone through the costly and time-consuming ISO certification
processes.
RESEARCH AND DEVELOPMENT FOR ZEVEX'S PROPRIETARY PRODUCTS
As of September 30, 1997, the Company employed three employees in full-time
research and development capacities and utilized the efforts of its other design
and engineering staffs in connection with certain research and development
projects. The research and development efforts of the Company are focused on new
and existing proprietary products. During the last two fiscal years, the Company
continued independent research and development activities with respect to the
design and development of new and improved devices, spending $527,562 in 1996
and $502,255 in 1995. In both 1996 and 1995, research and development costs
represented approximately 9% of the Company's revenues. During the first nine
months of 1997, the Company's research and development expenditures totalled
$521,870, representing 8% of revenues
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<PAGE> 39
for the same period. The Company's research and development efforts during these
periods were devoted to several products, most notably the EnteraLite(R)
Ambulatory Enteral Feeding Pump.
MARKETING AND SALES
Marketing and Sales of ZEVEX's Design and Manufacturing Services. The
Company generates new design and manufacturing projects from customers using
direct sales personnel who are trained in the Company's engineering expertise
and manufacturing capabilities. Project engineers also participate extensively
in sales and marketing activities. In addition, the Company promotes its design
and manufacturing capabilities at industry trade shows, by advertising in
leading industry publications, and by obtaining referrals from customers, former
employees of customers, and other persons who are familiar with the Company's
services.
Marketing and Sales of ZEVEX's EnteraLite(R) Ambulatory Enteral Feeding
Pump. The Company has developed a network of over 50 independent manufacturer's
representatives who sell the EnteraLite(R) pump and related disposable delivery
sets. These representatives are selected based upon their experience with the
home healthcare market served by EnteraLite(R) and they sell directly to home
healthcare service providers, including hospitals with such divisions. These
representatives are compensated solely on a commission basis. The efforts of
these representatives are supported by a clinical support coordinator and are
overseen by a national sales manager, both of whom are full-time employees of
the Company. Presently, EnteraLite(R) pumps are purchased directly from the
Company. In the larger market for enteral products, pumps are often placed with
the customer free of initial capital investment, with the cost of the equipment
recovered through the customer's commitment to purchase disposable delivery sets
for a specified period of time. In the future, the Company intends to offer
similar programs directly to its customers to improve its competitive market
position.
COMPETITION
Competition for ZEVEX's Design and Manufacturing Services. The Company's
primary competitors in design and manufacturing services are other manufacturers
that operate in the medical technology industry. The primary competitive factors
in medical instrument design and manufacturing include quality, regulatory
compliance, engineering competence, cost of the non-recurring engineering design
component, price of the manufactured product, experience, customer service, and
ability to meet design and production schedules. Competition is primarily
limited to those companies that meet the minimum applicable regulatory
requirements of the FDA and international standards for manufacturing and
design. In the future, the Company is likely to compete against new entrants
into the industry as out-sourcing expands in medical technology products. For
example, medical technology companies with design and manufacturing capabilities
(especially those with excess capacity) and large electronic contract
manufacturers and defense department contractors with extensive engineering
expertise may undertake the design and/or manufacture of medical devices.
Competition for ZEVEX's EnteraLite(R) Ambulatory Enteral Feeding Pump. Two
competitors exist in the U.S. market for ambulatory enteral feeding pumps. Ross
Laboratories, a division of Abbott Laboratories, offers the Companion pump,
which was originally introduced to the market in the late 1980's. The Company
estimates that Ross holds a market share of 45% for ambulatory and
non-ambulatory enteral feeding applications. Also, Sherwood Medical offers the
kangaroo PET enteral feeding pump, which is limited because it can only be
operated in an upright position. It is estimated that Sherwood presently holds
greater than 35% of the total market for enteral pumps and disposable sets in
both ambulatory and non-ambulatory applications.
PATENTS, TRADEMARKS, AND OTHER PROPRIETARY RIGHTS
Patents. The Company currently holds three United States patents. The
Company's first patent, U.S. Patent No. 5,438,868, relates to a non-invasive
ultrasonic liquid level indicator. The technology disclosed in the patent is
embodied in a liquid level indicator currently marketed by the Company under the
trademark BottleWatch(R). The Company also holds two patents, U.S. Patent Nos.
5,514,102 and 5,531,680, which relate to its EnteraLite(R) Ambulatory Enteral
Feeding Pump. U.S. Patent No. 5,514,102 relates to the use of pressure
monitoring to improve the accuracy of fluid delivery by the pump. The accuracy
provided by the pressure
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monitoring technology is complemented by the novel mechanism for monitoring pump
rotor movement disclosed in U.S. Patent No. 5,531,680. By using optical sensors,
the EnteraLite(R) pump is able to ensure that rotor movement occurs properly and
allows confirmation of the solution delivery rate. This technology enables the
EnteraLite(R) pump to operate without drip chambers and similar devices which
limit the mobility of the patient, while maintaining a high degree of flow rate
accuracy.
Patent Applications. The Company is actively pursuing seven U.S. patent
applications, four of which have been allowed by the United States Patent and
Trademark Office. Two of the allowed patent applications relate to the
disposable delivery sets which are loaded into the EnteraLite(R) pump and which
carry the enteral feeding solution to the patient. The technology disclosed in
these patent applications prevents accidental flow through the delivery set
which passes through the pump. This helps to prevent accidental overdosing of
solution in the event that the patient or caregiver forgets to load the delivery
set in the pump or loads the delivery set improperly. The allowed patent
applications also include a patent for a clamp which holds the pump to a fixed
object, such as a hospital bed, and allows the user to change the position of
the pump to ensure comfort. The Company has also received a notice of allowance
on a patent application which claims a novel apparatus and method for detecting
occlusions in the delivery set which might prevent proper administration of the
enteral feeding solution. While the United States is currently the Company's
primary market, the Company has also pursued foreign patents on its proprietary
technology. Specifically, the Company has filed six patent applications under
the Patent Cooperation Treaty and is in the process of nationalizing several of
these applications. The Company intends to file appropriate applications for
additional patents, both in the United States and in foreign countries on
additional technology it is currently developing.
Trademarks. The Company has registered the trademarks EnteraLite(R) and
BottleWatch(R) with the United States Patent and Trademark Office and has
pending registrations for ZEVEX(TM). Additionally, the Company has procured
registrations for BottleWatch(R) in Australia, Belgium, Canada, France, Germany,
Italy, Japan, Luxembourg, the Netherlands, and the United Kingdom. The Company
intends to file appropriate applications for additional trademarks in the United
States and foreign countries.
Agreements with Employees and Others. The Company enters into appropriate
confidentiality agreements, noncompetition agreements, and invention assignment
agreements with its employees, consultants, contractors, vendors, customers, and
others to protect the confidential information of its customers, to establish
the Company's rights or the rights of its customers in the technologies it
develops, and to establish contractual grounds upon which the Company can
enforce such rights, if necessary.
GOVERNMENTAL REGULATION WITHIN THE UNITED STATES
Because the Company provides design and manufacturing services to producers
of medical devices, as well as designs and manufactures its own medical devices,
the Company's manufacturing facilities, the medical devices of the Company's
customers, and the Company's own medical devices are subject to extensive
regulation by the FDA under the Food Drug and Cosmetics Act ("FDC Act").
Manufacturers of medical devices must comply with applicable provisions of the
FDC Act and associated regulations governing the development, testing,
manufacturing, labeling, marketing, and distribution of medical devices and the
reporting of certain information regarding their safety. The FDA's regulation of
medical devices and of the manufacturing facilities in which those devices are
made are summarized in the following sections.
FDA's Approval of Medical Devices. The FDA classifies medical devices into
three classes (Class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure product safety and efficacy. Class I
devices are subject to general controls (e.g., labeling, premarket notification
and adherence to GMP) and Class II devices are subject to general and special
controls (e.g., performance standard and guidelines). Generally, Class III
devices are higher-risk devices and cannot be marketed until after receiving FDA
"pre-market approval" ("PMA"). The Company currently manufactures two Class III
medical devices that require PMA application prior to commercialization. A PMA
application must be supported by valid scientific evidence, which typically
includes extensive data, including preclinical and clinical trial data to
demonstrate safety and efficacy of the device. The application also must contain
the results of all relevant bench tests, laboratory and animal studies, a
complete description of the instrument and its components, and a detailed
description of the methods, facilities, and controls used to manufacture the
device. In addition, the
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<PAGE> 41
application must include the proposed labeling. Although the Company's services
do not extend to assistance with testing, studies, and human clinical trials,
the Company does provide its customers with required design information and
other support during the PMA process. Typically, the FDA will inspect the
manufacturer prior to granting PMA approval. If the FDA identifies deficiencies
in the manufacturing process, it could delay PMA approval. Delays in the PMA
process could affect the timing of manufacturing services provided by the
Company. Currently, an FDA review of a PMA application generally takes one to
two years from the date the application is submitted, but often is significantly
extended by an FDA request for more information or clarification of information
previously submitted. The PMA process can be expensive, uncertain, and lengthy,
and a number of devices for which PMA approval has been sought have never been
approved for marketing. Until a device subject to the PMA process receives the
FDA's approval, it cannot be sold commercially in the United States. Notably,
after PMA approval has been obtained, subsequent modifications to the device,
its labeling or manufacturing may require additional FDA approvals. For Class I
and Class II devices, and certain Class III devices, FDA clearance may be
obtained through a "510(k) notification process" pursuant to which the FDA
determines that a medical device is "substantially equivalent" to an existing,
legally marketed predicate device or a predicate device marketed before May 28,
1976. Clinical testing of certain devices may be required as part of the 510(k)
notification process. Currently, several of the Company's customers have
submitted or intend to submit a request to the FDA for clearance for marketing
under a 510(k) notification for devices to be manufactured by the Company.
Additionally, the Company is required to follow the FDA's 510(k) notification
procedures with respect to its own medical devices. The time required to receive
510(k) approval can vary, but may take several months. There can be no assurance
that the FDA will find a device substantially equivalent and allow marketing of
such device. Even if the device is found substantially equivalent, the clearance
process may be delayed if the FDA requires additional information.
Ongoing FDA Requirements for Commercialized Medical Devices. Any medical
device manufactured or distributed by the Company for its customers or for
itself pursuant to FDA clearances or approvals is subject to pervasive and
continuing regulation by the FDA, including record-keeping requirements and
reporting of adverse experiences associated with the use of the instrument.
FDA's GMP Requirements. In addition to the regulation of medical devices
described above, any manufacturing facility of a medical device that requires
FDA approval is also subject to regulation by the FDA, as well as by certain
state agencies. The FDA regulations in this regard are referred to as "good
manufacturing practices" ("GMP"). Pursuant to these GMP requirements, medical
device manufacturers are required to register their establishments and list
their devices with the FDA (as well as with certain state agencies) and are
subject to periodic inspections by the FDA (and certain state agencies). The FDC
Act requires devices to be manufactured in accordance with GMP regulations,
which impose certain procedural and documentation requirements upon the Company
with respect to manufacturing and quality assurance activities. The FDA has
recently amended the GMP regulations. Among other things, the new regulations
will require design controls and maintenance of service records. The Company
believes that the new regulations will not substantially increase the Company's
costs of complying with GMP requirements. The Company currently has implemented
training and procedural changes with respect to the changes to these GMP
requirements.
Consequences of Non-Compliance with FDA Regulations. Non-compliance with
these GMP regulations can result in, among other things, the Company and its
customers being subject to fines, limitations, civil penalties, criminal
prosecution, recall or seizure of devices, total or partial suspension of
production, failure of the government to grant premarket clearance or PMA
approval for products, withdrawal of marketing approvals, or a recommendation by
the FDA that a customer or the Company not be permitted to enter into government
contracts. The FDA also has the authority to require repair, replacement, or
refund of the cost of any device manufactured or distributed by a customer of
the Company or by the Company itself. In addition, the failure to be found in
compliance with the FDA regulations could have an adverse effect on the
Company's reputation. The FDA periodically inspects medical device manufacturers
for compliance with FDA regulations. In addition, the FDA generally inspects a
manufacturer prior to approving a PMA for a medical device. There can be no
assurance that the Company will be found in compliance with all applicable
regulations during such an inspection. The failure to be found in compliance
with the GMP regulations would result in
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<PAGE> 42
FDA enforcement action against the Company, which could result in a diminution
of the Company's reputation and an adverse effect on the Company's business.
Non-FDA Regulations Within the United States. Beside the FDA regulations
described above, the Company is also subject to various state and federal
regulations with respect to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control, and the
disposal of hazardous or potentially hazardous materials.
GOVERNMENTAL REGULATIONS OUTSIDE THE UNITED STATES
Sales of medical devices outside the United States are subject to
regulatory requirements that vary from country to country. The time required to
obtain approval for sale in foreign countries may be longer or shorter than that
required for FDA approval, and the requirements may differ. The export of
devices is subject to FDA regulation. In some instances, prior FDA approval is
needed. Commencing in 1998, all medical device manufacturers will be required to
obtain certifications necessary to enable the "CE Mark" to be affixed to their
products sold in the European Union. The CE Mark is a quality designation given
to products that meet certain policy directives of the European Economic Area
(an association of 15 European nations). A product designated with the CE Mark
is freely tradeable in all European Economic Area countries. In 1996, the
Company received and has maintained ISO 9001/EN 46001 certification. If a
Company customer is also ISO 9001 certified, the customer may be permitted to
affix the CE Mark to an instrument manufactured by the Company without the
customer being subject to additional requirements. In addition, all medical
device manufacturers must comply with other laws generally applicable to foreign
trade, including technology export restrictions, tariffs, and other regulatory
requirements.
EMPLOYEES
As of September 30, 1997, the Company employed a total of 89 people in the
following areas:
<TABLE>
<CAPTION>
CATEGORY NUMBER
--------------------------------------------------- ------
<S> <C>
Design and Engineering............................. 27
Manufacturing and Test............................. 33
Quality Assurance.................................. 8
Marketing and Administration....................... 21
--
TOTAL............................................ 89
</TABLE>
The Company also retains 4 consulting and contract personnel in the areas of
finance, engineering, and regulation. The Company considers its labor relations
to be good, and none of its employees is covered by a collective bargaining
agreement. Currently, the local economy is growing and the unemployment rate is
low in the Salt Lake City metropolitan area, which means that the Company faces
competition to attract and retain qualified personnel. At the same time,
however, the Salt Lake City metropolitan area has a generally well-educated
workforce and is generally considered to be an attractive place to live.
Accordingly, the Company does not anticipate having difficulty in attracting and
retaining qualified personnel to meet its projected growth in the foreseeable
future.
FACILITIES
The Company's executive offices and manufacturing facilities are located in
its new 51,000 square foot facility in Salt Lake City, Utah, which was financed
using a $2 million industrial development bond from a local municipality. The
building is situated on nearly four acres of land a few miles from the downtown
area. It allows quick access to two major interstate freeways and to the Salt
Lake International Airport. The Company believes that its current facilities are
adequate for its needs and does not anticipate any difficulty locating
additional facilities, if necessary.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information as of September 30, 1997
concerning the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ------------------------------------------------------
<S> <C> <C>
Dean G. Constantine.... 45 Chief Executive Officer, President, and Director
David J. McNally....... 36 Vice President, Marketing Director, and Director
Chief Financial Officer, Secretary/Treasurer, and
Phillip L. McStotts.... 39 Director
Bradly A. Oldroyd...... 39 Director(1)(2)
Darla R. Gill.......... 46 Director(1)(2)
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The following table sets forth certain information as of September 30, 1997
concerning certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ---------------------------------------------
<S> <C> <C>
James Holden........... 33 Co-Director of Engineering
George Bromfield....... 53 Co-Director of Engineering
</TABLE>
Dean G. Constantine is a founder of the Company and has served as the
Company's CEO, President, and Chairman of the Board since its inception in 1986.
Prior to joining the Company, he was employed by EDO Corporation, Western
Division, in Salt Lake City, Utah, from October 1985 to September 1987, and from
January 1971 to June 1983. During his nearly fifteen years of employment with
EDO Corporation, Mr. Constantine had various responsibilities, including project
supervision, management of engineering for commercial and industrial
transducers, and research and development. From July 1983 through October 1985,
Mr. Constantine was employed as an engineering specialist at Northrop
Corporation -- Electro Mechanical Division, Anaheim, California, where his
responsibilities included engineering project management and applications
engineering.
David J. McNally is a founder of the Company and has served as the
Company's Vice President and Marketing Director, and as a director, since its
inception. Prior to joining the Company, he was employed by EDO Corporation in
Salt Lake City, Utah, as a marketing manager of transducers from October 1985 to
September 1987. From June 1984 to October 1985, Mr. McNally was employed by
Physical Acoustics Corporation, a Princeton, New Jersey based manufacturer of
acoustic testing systems, as its regional sales manager for the southeastern
United States. From June 1983 to June 1984, he was employed by Hercules, Inc.,
Magna, Utah, as an advanced methods development engineer. Mr. McNally received a
Bachelor of Science Degree in Mechanical Engineering from LaFayette College in
May 1983, and a Master of Business Administration Degree from the University of
Utah in June 1992.
Phillip L. McStotts is a founder of the Company and has served as the
Company's CFO, Secretary, and Treasurer, and as a director, since its inception.
From May 1985 to September 1986, he was employed as an accountant with the Salt
Lake City firm of Chachas & Associates, where he was tax manager. He has also
worked in the tax departments of the regional accounting firms of Pearson, Del
Prete & Company and Petersen, Sorensen & Brough. Mr. McStotts received a
Bachelor of Science Degree in Accounting from Westminster College in May 1980,
and received a Master of Business Administration Degree in taxation from Golden
Gate University in May 1982.
Bradly A. Oldroyd has been a director of the Company since October, 1991.
He is the founder, president, and principal shareholder of Pinnacle Management
Group, a Salt Lake City-based personnel services firm. He is also a member of
the faculty of the University of Phoenix campus in Salt Lake City where he
teaches management and marketing courses in undergraduate and graduate programs.
Mr. Oldroyd received a
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<PAGE> 44
Bachelor of Science degree in Marketing from Utah State University in 1981, and
a Master of Business Administration Degree from the University of Utah in 1982.
Darla R. Gill has been a director of the Company since 1993. She is the
founder, CEO, and President of Momentum Medical Corp., a Salt Lake City-based
manufacturer and distributor of home health care products. Ms. Gill is also sole
proprietor of DRG Enterprises, a consulting company specializing in marketing,
sales, and new product development. Ms. Gill was a founder of Merit Medical
Systems, Inc. in Salt Lake City and served until 1992 as Executive Vice
President and Director. She was also previously employed by Utah Medical
Products, Inc. where she served as Vice President of Marketing and Sales. Ms.
Gill graduated from the University of Phoenix with a Bachelors Degree in
Business Administration in 1988.
James Holden is Co-Director of Engineering for the Company. He previously
held the position of Instrumentation Engineering Manager and was a director of
the Company from January 1991 to October 1996. Prior to joining the Company, he
was employed by EDO Corporation, Western Division, from March 1984 to March
1988, where he developed tactical sonar systems for undersea warfare. Mr. Holden
received a Bachelor of Science degree in Electrical Engineering from the
University of Utah in 1986, and has completed post-graduate course work at the
University of Utah on design of medical ultrasound instrumentation.
George Bromfield is Co-Director of Engineering for the Company and
previously held the position of Acoustics Engineering Manager. He graduated from
South Dorset Technical College with a distinction level Higher National
Certificate in Electrical Engineering and received further formal post-graduate
training in Underwater Acoustics at Birmingham University. He was employed as a
professional grade scientist at the Admiralty Research Establishment in
Portland, England for 28 years. During this time, he specialized in transducer
and array design and sonar self noise. He has represented the United Kingdom as
a member of an International Transducer Technical Committee and has published
papers relating to low frequency flextensional transducer technology.
Each of the executive officers and directors of the Company currently also
holds the same offices with ZEVEX, Inc. The term of office of each director is
one year or until his or her successor is elected at the Company's annual
stockholders' meeting and is qualified, subject to removal by the stockholders.
The term of office for each executive officer is for one year or until a
successor is elected at the annual meeting of the Board of Directors and is
qualified, subject to removal by the Board of Directors. The Company has no
employment agreements with its executive officers or other employees.
BOARD OF DIRECTOR COMPOSITION
The Company's Board of Directors consists of five directors. Pursuant to a
Stock Purchase Agreement, dated December 1, 1996, between the Company and Blosch
& Holmes, L.L.C., a Utah limited liability company, as amended on September 30,
1997, Blosch & Holmes has the right to appoint one member of the Company's board
of directors, provided that such nominee must be acceptable to the Company. This
right expires when Blosch & Holmes, together with Kirk Blosch and Jeff W.
Holmes, its two member/managers, no longer holds at least 6.5% of the
outstanding voting stock of the Company. Blosch & Holmes has not exercised this
right.
TECHNICAL ADVISORY BOARD
The Company's Technical Advisory Board ("TAB") is composed of leading
academic engineers and physicians with expertise in the fields related to
medical technology devices. The multidisciplinary TAB team is involved with the
Company's efforts to evaluate potential new products and product enhancements
and provides general assistance in its commercial efforts. The TAB meets two or
three times annually with the Company's scientific staff and management to
discuss its research and development programs and product-development strategy.
TAB members also consult with the Company more frequently on an informal basis.
For their services, TAB members will be paid certain consulting fees, granted
options for the Company's
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<PAGE> 45
Common Stock which will vest over time, and are reimbursed for their expenses.
The following individuals are currently serving on the Company's TAB:
Douglas A. Christensen, Ph.D. is a Professor of Electrical and
Bioengineering at the University of Utah. Dr. Christensen has a B.S.E.E. from
BYU (1962), an M.S.E.E. from Stanford University (1963), and a Ph.D. in
Electrical Engineering from the University of Utah (1967). In addition, Dr.
Christensen has been a visiting Professor at Cornell University in the
Electrical Engineering Department and Submicron Facility (1984-5). He has also
been a Visiting Scholar at the University of Washington, performing Postdoctoral
studies in Bioengineering (1972-4), and a Researcher at the University of
California, Santa Barbara (1970-2). Dr. Christensen is the author of one
textbook, Ultrasonic Bioinstrumentation, published by John Wiley & Sons, New
York, 1988, and has over 30 papers published in trade and technical journals.
Dr. Christensen has been a technical consultant to General Motors Research
Laboratories, in Santa Barbara, International Business Machines, in San Jose,
Hewlett Packard, in Palo Alto, and Bell Telephone Laboratories, Inc., in Murray
Hill, New Jersey.
Alan S. Crandall, M.D. is a Clinical Professor at the University of Utah
Medical Center, in Salt Lake City, where he specializes in Ophthalmology. He has
a B.S. in Chemistry from the University of Utah (1969), and an M.D. from the
University of Utah (1973). He also has extensive postgraduate training in
surgery at Presbyterian Hospital, University of Pennsylvania Medical Center, and
Sheie Eye Institute, at the University of Pennsylvania, where he completed a
Residency in Ophthalmology and a Fellowship in Glaucoma. Dr. Crandall is a
member of numerous professional societies, including the American Academy of
Ophthalmology, the Association for Research in Vision and Ophthalmology, the
American Society of Contemporary Ophthalmology, and the International Glaucoma
Congress, and several other distinguished organizations. In 1993, he was
presented with the American Academy of Ophthalmology Honor Award. Dr. Crandall
has received over 30 high-profile, private-sector Research Awards, and has
presented more than 140 papers in his specialty. He has published over 67 papers
in trade and technical journals, and three book chapters, including
"Streptococcal and the Eye," in Current Ocular Therapy, published by Saunders,
1990, F. Fraunfelder, editor, "Small Capsulotomy Intraocular Lenses," in
Textbook of Advanced Phacoemulsufication Techniques, published by Slack, Inc.,
1991, S.K. Koch and J.A. Davidson, editors; and "Diseases of the Eye," in
Essentials of Surgical Specialties, Volume II, published by Wilkins & Williams,
1993, P.F. Lawrence, editor. In addition, Dr. Crandall has been a contributing
editor of The Journal of Cataract and Refractive Surgery, and Ocular Surgery
News since 1996.
Alejandro Francisco Flores Sandoval, M.D. is a specialist in pediatric
gastroenterology and has been a member of Pediatric Gastroenterology Associates
in Waltham, Massachusetts since 1982. He was an Assistant Clinical Professor
with the Boston University School of Medicine for five years prior his
appointment as Assistant Clinical Professor with the Department of Pediatrics of
Tufts University School of Medicine in 1995. From 1984 to 1987, he was Clinical
Instructor of Pediatrics at Harvard Medical School. He has an M.D. from the
Universidad de San Carlos de Guatemala (1975) with extended postgraduate
training, including Fellowships in Medicine and Pediatrics at Harvard Medical
School. Dr. Flores' awards and honors include the "Because You Care Bear Award"
from the Western New York Intestinal Pseudo-obstruction Foundation, the Caremark
Vision Award, the Sidney Farber House Staff Award from the Department of
Pediatrics at Harvard Medical School, and the George Von L. Meyer Award from
Children's Hospital Medical Center, Boston, MA. He has served on the editorial
board for the Manual of Pediatric Therapeutics, Department of Medicine,
Children's Hospital Medical Center, Boston, MA. With numerous publications in
the area of pediatric medicine, and the performance of more than 30 visiting
professorships, Dr. Flores has become established as a renowned expert in
pediatric gastroenterology.
Magdy F. Iskander, Ph.D. is Professor of Electrical Engineering at the
University of Utah. He is the Director of the NSF/IEEE Center for Computer
Applications in Engineering Education (CAEME), and Director of the State Center
of Excellence for Multimedia Education and Technology. In 1986, Dr. Iskander
established the Engineering Clinic Program to attract industrial support for
projects to be performed by engineering students at the University of Utah.
Since then, more than 80 projects have been sponsored by 26 corporations from
across the United States. He is also the Director of the Conceptual Learning of
Science (CoLoS) USA Consortium, which is sponsored by Hewlett-Packard Company
and has eleven member
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<PAGE> 46
universities across the United States. He has received the Curtis W. McGraw ASEE
National research award for outstanding early achievements, the ASEE George
Westinghouse National Award for innovation in engineering education, and the
1992 Richard R. Stoddard Award from the IEEE EMC Society. Dr. Iskander authored
a textbook on Electromagnetic Fields and Waves, published by Prentice Hall,
1992; edited the CAEME Software Book, Vol. I, 1991; Vol. II, 1994; and edited
four other books on microwave processing of materials, all published by the
Materials Research Society in 1990, 1992, 1994, and 1996. He has published over
150 papers in technical journals and has made numerous presentations in
technical conferences. He is also a Distinguished Lecturer for the Antennas and
Propagation Society of IEEE. Dr. Iskander is the editor of the journal Computer
Applications in Engineering Education (CAE), published by John Wiley & Sons,
Inc., an associated editor of the journal IEEE Transactions on Antennas and
Propagation, and an associate editor of the AP-S Magazine. He is a fellow of
IEEE and a member of the National Research Council Committee on Microwave
Processing of Materials.
COMPENSATION OF DIRECTORS
The Company pays each director who is not an employee of the Company or its
subsidiary a director's fee of $500 per Board of Directors meeting attended,
$250 for any annual meeting attended, and $125 per hour for any special meeting
attended. Additionally, the Company has issued stock options to the non-employee
directors in the past (see "PRINCIPAL AND SELLING SHAREHOLDERS") and may do so
in the future. Directors who are employees of the Company receive no additional
compensation for serving as directors or attending meetings of directors or
shareholders.
COMPENSATION OF EXECUTIVE OFFICERS
None of the executive officers of the Company has an employment agreement
with the Company. The following table sets forth the cash compensation paid by
the Company to each of the Company's executive officers during the three-year
period ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------- -------------------- PAYOUTS
OTHER RESTRICTED ------- ALL
NAME AND ANNUAL STOCK LTIP OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMP. AWARDS OPTIONS PAYOUTS COMP.
- ------------------------------- ---- ------- ------- ------ ---------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dean G. Constantine............ 1996 $77,917 $12,189 0 0 0 0 $6,286(1)
CEO and President 1995 $69,375 $10,102 0 0 0 0 $4,712(2)
1994 $66,400 $10,000 0 0 0 0 $2,581(1)
David J. McNally............... 1996 $77,917 $12,189 0 0 0 0 $6,286(1)
Vice President and 1995 $69,375 $10,102 0 0 0 0 $4,712(2)
Marketing Director 1994 $66,400 $10,000 0 0 0 0 $2,581(1)
Phillip L. McStotts............ 1996 $77,917 $12,189 0 0 0 0 $6,286(1)
CFO and Secretary/Treasurer 1995 $69,375 $10,102 0 0 0 0 $4,712(2)
1994 $66,400 $10,000 0 0 0 0 $2,581(1)
</TABLE>
- ---------------
(1) Represents the amount paid by the Company as a contribution to the Company's
401(k) Pension and Profit Sharing Plan on the officer's behalf.
(2) Represents $2,631 paid by the Company as a contribution to the Company's
401(k) Pension and Profit Sharing Plan on the officer's behalf and $2,081 as
each officer's portion of the contribution made by the Company into its
Employee Stock Ownership Plan.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the persons listed in the Summary Compensation
Table during the year ended December 31, 1996.
45
<PAGE> 47
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth the options exercised during the year ended
December 31, 1996, by each executive officer of the Company, and the value of
options held by such persons at such year end.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
AT FY-END FY-END
------------------- -------------------
NAME AND SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Dean G. Constantine............... 0 0 5,400/0 0/0
CEO and President
David J. McNally.................. 0 0 5,400/0 0/0
Vice President and
Marketing Director
Phillip J. McStotts............... 0 0 5,400/0 0/0
CFO and Secretary/Treasurer
</TABLE>
The unexercised options listed above were granted on December 17, 1992 and
expire on December 16, 2001. The exercise price on the above options is $5.00.
The value of unexercised options was determined by reference to average bid and
asked prices for the Company's Common Stock in the over-the-counter market as
quoted on the OTC Bulletin Board as of the end of last fiscal year.
RECENT INCREASE IN COMPENSATION OF EXECUTIVE OFFICERS
Effective January 1, 1997, the Compensation Committee approved an increase
in the salaries to $105,000 per year for each of Mr. Constantine, Mr. McNally,
and Mr. McStotts. Additionally, effective September 30, 1997, the Compensation
Committee approved the grant of Common Stock purchase options for 70,000 shares
each to Messrs. Constantine, McNally, and McStotts. The options vest over a
four-year period, and are exercisable at a price of $16.4375 per share. Lastly,
the Compensation Committee approved a new executive officer bonus plan,
commencing January 1, 1997, which provides for annual bonuses of 10% to 40% of
base salary to each officer depending on the attainment of certain annual
revenue and profit targets as a percentage of budgeted amounts. The amount of
the bonus is discretionary within certain ranges as determined by the
Compensation Committee in certain instances. Also, the Compensation Committee
has the authority to pay bonuses in excess of 40% based upon extraordinary
performance, but not to exceed 100% of base salary.
AMENDED 1993 STOCK OPTION PLAN
The Company has established the Amended 1993 Stock Option Plan ("Stock
Option Plan") under which the Company may grant options to purchase up to
600,000 shares of the Company's Common Stock (subject to adjustment for such
matters as stock splits and stock dividends) to officers, directors, employees,
agents, and consultants of the Company. The purpose of the Stock Option Plan is
to provide incentives to such persons who are key to the Company's success,
thereby aligning the personal interests of such persons, through ownership of
Common Stock and other incentives, with those of the Company's shareholders.
The options granted under the plan may be incentive stock options within
the meaning of section 422 of the Internal Revenue Code of 1986, as amended, or
options which do not qualify as incentive stock options. The Stock Option Plan
also provides for grant of stock appreciation rights and stock awards to
eligible participants, subject to certain forfeiture restrictions. The Stock
Option Plan may be administered by the Board of Directors of the Company or by
the Compensation Committee. The Board of Directors or the Compensation Committee
will interpret the Stock Option Plan, its rules and regulations, and the
instruments evidencing the restrictions imposed upon Common Stock sold under the
Stock Option Plan, and will make all determinations deemed necessary or
advisable for administration of the Stock Option Plan.
As of September 30, 1997, options to purchase 314,190 shares of Common
Stock with a weighted average exercise price of $12.37 had been granted under
the Stock Option Plan. As of September 30, 1997, the Company had granted no
stock appreciation rights or stock awards under the Stock Option Plan. Out of
the
46
<PAGE> 48
600,000 shares reserved under the Stock Option Plan, as of September 30, 1997,
241,700 shares are available for future grants.
PROFIT SHARING PLAN
During 1991, the Company established a qualified 401(k) profit sharing
plan. Eligible employees may defer a portion of their salary under this plan. At
the discretion of the Board of Directors, the Company may make a contribution of
an additional amount of up to 4% of the eligible employee's salary and a
discretionary amount to be determined by the Board of Directors each year.
Employees are fully vested with respect to Company contributions after seven
years. Contributions to the plan for the nine months ended September 30, 1997
and the years ended December 31, 1996, 1995, 1994, 1993, and 1992 were $49,261,
$86,035, $77,037, $35,436, $22,981, and $34,223, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1993, the Company established and the stockholders approved the Employee
Stock Ownership Plan (ESOP). The ESOP is a defined contribution plan, and
benefits are payable under the ESOP only to the extent of Company contributions
and earnings of the ESOP. The ESOP has no minimum funding requirements and the
Company's Board of Directors has sole discretion to determine the amounts to be
contributed. Contributions by the Company will be invested primarily in Common
Stock of the Company by the trustees appointed for the ESOP or in savings
accounts, certificates of deposit, higher grade short term securities, equity
stocks, bonds, other investments, or cash. Employees are fully vested after
seven years. Contributions to the ESOP for the nine months ended September 30,
1997 and the years ended December 31, 1996, 1995, 1994, and 1993, were $0, $0,
$33,750, $0, and $16,650, respectively.
47
<PAGE> 49
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of Common Stock offered in this Offering, by (i)
each person (or group of affiliated persons) who is known by the Company to
beneficially own more than 5% of the outstanding shares of its Common Stock,
(ii) each director and executive officer of the Company, (iii) the Selling
Shareholders, and (iv) all executive officers and directors of the Company as a
group. This table also assumes that the Underwriter's over-allotment option has
been exercised in full. Unless indicated otherwise, the address for each
officer, director and 5% stockholder is c/o the Company, 4314 ZEVEX Park Lane,
Salt Lake City, Utah 84123.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP(1) OWNERSHIP(1)
PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------- SHARES TO BE SOLD ----------------------
NAME AND ADDRESS SHARES PERCENTAGE IN THE OFFERING SHARES PERCENTAGE
- ---------------------------------- ------- ---------- ----------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Dean G. Constantine(2)............ 264,600 12.7% 10,000 254,600 7.4%
David J. McNally(3)............... 252,598 12.2% 10,000 242,598 7.1%
Phillip L. McStotts(4)............ 159,400 7.7% 10,000 149,400 4.4%
Bradly A. Oldroyd(5).............. 8,000 * -- 8,000 *
Darla R. Gill(6).................. 6,480 * -- 6,480 *
Kirk Blosch(7).................... 550,000 24.6% -- 550,000 15.3%
Jeff W. Holmes(8)................. 550,000 24.6% -- 550,000 15.3%
Blosch & Holmes, L.L.C.(9)........ 250,000 12.1% -- 250,000 7.3%
Douglas K. Anderson(10)........... 130,000 6.3% -- 130,000 3.8%
Gregory A. Bernett................ 7,500 * 7,500 -- --
Craig D. Clayson.................. 7,500 * 7,500 -- --
John Freed........................ 3,750 * 3,750 -- --
George C. and Joan M. Hofer....... 15,000 * 15,000 -- --
Thomas E. Hofer................... 15,000 * 15,000 -- --
John and Angeline Marusiak........ 7,500 * 7,500 -- --
Ronald J. Marusiak................ 7,500 * 7,500 -- --
George N. McDonald................ 15,000 * 15,000 -- --
Gerald A. Morgan.................. 30,000 1.4% 30,000 -- --
Robert E. Freed, Family Trust..... 3,750 * 3,750 -- --
Snake Eyes Investment, L.C........ 7,500 * 7,500 -- --
Ray C. Unrath..................... 12,000 * 12,000 -- --
Ray M. Unrath..................... 3,000 * 3,000 -- --
Charles Wafer..................... 15,000 * 15,000 -- --
Executive officers and directors
as a group (5 persons).......... 691,078 32.6% 30,000 661,078 18.9%
</TABLE>
- ---------------
* Less than 1%.
(1) For each stockholder, the calculation of percentage of shares and
beneficial ownership prior to the Offering is based on 2,063,826 shares of
Common Stock outstanding as of September 30, 1997, and shares of Common
Stock subject to options held by the stockholder that are currently
exercisable or exercisable within 60 days, which are deemed to be
outstanding and to be beneficially owned by the stockholder holding such
options. The calculation of percentage of shares and beneficial ownership
after the Offering is based on 3,413,826 shares of Common Stock outstanding
and shares of Common Stock subject to warrants or options held by the
stockholder that will be currently exercisable or exercisable within 60
days of the closing of the Offering, which are deemed to be outstanding and
to be beneficially owned by the stockholder holding such warrants or
options. Except as indicated otherwise below, the persons and entity named
in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
applicable community property laws.
48
<PAGE> 50
(2) Chief Executive Officer, President, and Chairman of the Company. Includes
12,400 shares of Common Stock issuable upon exercise of options held by Mr.
Constantine that are currently exercisable or will become exercisable
within 60 days, and 100 shares owned by each of his two dependent children.
Excludes 70,000 shares of Common Stock issuable upon exercise of options
held by Mr. Constantine that are not currently exercisable and will not
become exercisable within 60 days.
(3) Vice President, Marketing Director, and director of the Company. Includes
12,400 shares of Common Stock issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days. Excludes
70,000 shares of Common Stock issuable upon exercise of options held by Mr.
McNally that are not currently exercisable and will not become exercisable
within 60 days.
(4) Chief Financial Officer, Secretary, Treasurer, and director of the Company.
Includes 12,400 shares of Common Stock issuable upon exercise of options
that are currently exercisable of will become exercisable within 60 days.
Excludes 70,000 shares of Common Stock issuable upon exercise of options
held by Mr. McStotts that are not currently exercisable and will not become
exercisable within 60 days.
(5) Director. Includes 8,000 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will be come exercisable within
60 days.
(6) Director. Includes 480 shares held directly and 6000 shares of Common Stock
issuable upon exercise of options that are currently exercisable or will be
come exercisable within 60 days.
(7) Includes 175,000 shares of Common Stock issuable upon exercise of warrants
that are currently exercisable or will become exercisable within 60 days,
and 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of which
Mr. Blosch is a principal (and which 250,000 shares are also reported as
beneficially owned by Mr. Holmes and Blosch & Holmes, L.L.C.). Mr. Blosch's
address is 2081 S. Lakeline Drive, Salt Lake City, UT 84109.
(8) Includes 175,000 shares of Common Stock issuable upon exercise of warrants
that are currently exercisable or will become exercisable within 60 days,
and 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of which
Mr. Holmes is a principal (and which 250,000 shares are also reported as
beneficially owned by Mr. Blosch and Blosch & Holmes, L.L.C.). Mr. Holmes'
address is 8555 E. Voltaire Ave., Scottsdale, AZ 85260.
(9) Includes 250,000 shares of Common Stock held by Blosch & Holmes, L.L.C. of
which Messrs. Blosch and Holmes are principals (and which 250,000 shares
are also reported as beneficially owned by Mr. Holmes and Mr. Blosch). The
address for Blosch & Holmes, L.L.C. is 2081 S. Lakeline Drive, Salt Lake
City, UT 84109
(10) Mr. Anderson's address is 1132 South 500 West, Salt Lake City, Utah 84101.
CERTAIN TRANSACTIONS
Subject to consummation of the Offering, the Company has granted demand
registration rights, for a two-year period commencing February 1, 1998, with
respect to 350,000 shares of Common Stock issuable upon the exercise of warrants
held by Kirk Blosch and Jeff W. Holmes, two of the Company's principal
shareholders. The Company has agreed to pay the registration expenses arising in
connection with the registration of these shares. The selling expenses will be
paid by Messrs. Blosch and Holmes.
On April 15, 1997, the Company entered into a consulting contract with DMG
Advisors, L.L.C., a Nevada limited liability corporation ("DMG"). Kirk Blosch
and Jeff W. Holmes, two of the Company's principal shareholders, are members and
managers of DMG. Under the consulting contract, the Company paid an initial fee
of $50,000 and is paying $10,000 per month through April 15, 1999 in exchange
for the consulting services of DMG in the nature of strategic planning, public
relations, advice regarding financings, and the identification and evaluation of
potential acquisitions of new products or companies. The Company is also
obligated to pay reasonable business expenses incurred by DMG.
49
<PAGE> 51
Pursuant to a Stock Purchase Agreement, dated December 1, 1996 between the
Company and Blosch & Holmes, L.L.C., a Utah limited liability company, as
amended on September 30, 1997, Blosch & Holmes has the right to appoint one
member of the Company's board of directors, provided that such nominee must be
acceptable to the Company. Kirk Blosch and Jeff W. Holmes, principal
shareholders of the Company, are the two member/managers of Blosch & Holmes. The
right to appoint a member of the Company's board of directors expires when
Blosch & Holmes, together with Kirk Blosch and Jeff W. Holmes, no longer holds
at least 6.5% of the outstanding voting stock of the Company. Blosch & Holmes
has not exercised this right.
For a description of the compensation arrangements between the Company and
its officers and directors, see "MANAGEMENT -- Compensation of Executive
Officers" and "-- Compensation of Directors."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $0.001 per share. As of November 20, 1997, there were 2,063,826 shares of
Common Stock outstanding. Holders of Common Stock are entitled to one vote per
share for the election of directors and with respect to all other matters to be
voted on by stockholders. Shares of Common Stock do not carry cumulative voting
rights and, therefore, holders of a majority of the outstanding shares of Common
Stock will be able to elect the entire Board of Directors, and if they do so,
minority shareholders would not be able to elect any members to the Board of
Directors. The Company's Board of Directors has authority, without action by the
Company's shareholders, to issue all or any portion of the authorized but
unissued shares of Common Stock, which would reduce the percentage ownership of
the Company by its existing shareholders and which may dilute the book value of
the Common Stock.
Shareholders of the Company have no pre-emptive rights to acquire
additional shares of Common Stock. The Common Stock is not subject to redemption
and carries no subscription, sinking fund, or conversion rights. Holders of
Common Stock will be entitled to receive ratably such dividends as may be
declared by the Company's Board of Directors from time to time out of funds
legally available therefor. The Company has not paid cash dividends on its
Common Stock in the past and does not anticipate that it will pay dividends in
the foreseeable future. Additionally, the Company is restricted from declaring
any cash dividends under its current line of credit arrangement. In the event of
liquidation of the Company, the shares of the Company's Common Stock are
entitled to share equally in the corporate assets after satisfaction of all
liabilities.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 2,000,000 shares of
Preferred Stock, par value $0.001 per share, in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations, and
restrictions thereof, and the number of shares constituting any series or the
designation of such series. The existence of unissued Preferred Stock may enable
the Board of Directors, without further action by the stockholders, to issue
such stock to persons friendly to current management or to issue such stock with
terms that could render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest, or
otherwise, thereby protecting the continuity of the Company's management. In
addition, the issuance of Preferred Stock may also have the effect of
discouraging bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of and the
voting and other rights of the holders of Common Stock. No shares of Preferred
Stock are currently outstanding and the Company has no current plans to issue
any shares of Preferred Stock.
WARRANTS
As of November 20, 1997, the Company had outstanding warrants to acquire
500,000 shares of Common Stock. These warrants were originally granted to Blosch
& Holmes, L.L.C., a Utah limited liability company ("BH") pursuant to a Stock
Purchase Agreement entered into by the Company and BH on December 1,
50
<PAGE> 52
1996. This transaction closed on February 12, 1997. The transaction included the
sale by the Company of 500,000 shares of Common Stock and warrants to acquire
500,000 shares of Common Stock at $3.50 per share for a period of five years
from the date of closing. BH subsequently assigned all 500,000 of these warrants
to sixteen persons. Of these 500,000 warrant shares, 150,000 will be sold in
this Offering if the Underwriters' over-allotment option is exercised in full.
Of these 500,000 warrant shares, 350,000 will still be purchaseable upon
exercise of the warrants following this Offering. See "UNDERWRITING."
STOCK OPTIONS
As of September 30, 1997, the Company had outstanding options for 314,190
shares of Common Stock pursuant to the Company's Stock Option Plan at a
weighted-average exercise price of $12.37 per share. The Company has reserved
600,000 shares of Common Stock for issuance under the Stock Option Plan. Out of
these 600,000 shares, as of September 30, 1997, 241,700 shares were available
for future grants.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation (the
"Certificate") and the Bylaws may have the effect of preventing, discouraging,
or delaying a change in the control of the Company and may maintain the
incumbency of the Board of Directors and management. The Certificate and Bylaws
provide that the Board of Directors shall have authority to fix the number of
directors and to fill vacancies of the Board of Directors as such vacancies
occur. The Certificate and Bylaws also provide for the Board of Directors to be
classified into three classes of directors serving staggered three-year terms.
As a result, one-third of the Board of Directors will be elected each year.
Moreover, the Certificate provides that these provisions of the Certificate
relating to number, vacancies, and classification of the Board of Directors may
only be amended by a vote of at least 66 2/3% of the shareholders. Finally, the
Bylaws provide that special meetings of the stockholders may only be called by
the President of the Company or pursuant to a resolution adopted by a majority
of the Board of Directors.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) after consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, such stockholder owns at least 85% of the voting stock of the
Company then outstanding (exclusive of voting stock held by certain employee
stock plans and voting stock held by persons who are both directors and officers
of the Company), or (iii) on or subsequent to such date, the transaction is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. For
purposes of Section 203, a "business combination" includes a merger, asset sale,
or other transaction resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the
previous three years did own, 15% or more of Company's voting stock.
TRANSFER AGENTS AND REGISTRARS
The Transfer Agents and Registrars of the Common Stock offered hereby are
ChaseMellon Shareholder Services, New York, New York, and Colonial Stock
Transfer Company, Salt Lake City, Utah.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,263,826 shares of
Common Stock outstanding (3,413,826 if the Underwriters' over-allotment option
is exercised in full). Of the outstanding shares of Common Stock, 2,049,836
(2,229,836 if the Underwriter's over-allotment option is exercised in full)
51
<PAGE> 53
will be freely tradeable without restriction or further registration under the
Securities Act of 1933 (the "Securities Act"), unless held by "affiliates" of
the Company, as that term is defined in Rule 144 of the Securities Act
("Affiliates").
The remaining 1,363,990 shares of Common Stock are "restricted securities"
within the meaning of Rule 144 under the Securities Act and were issued and sold
by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144. Of these restricted securities,
26,202 shares are not subject to lockup agreements and will be immediately
eligible for sale in the public market following this Offering, pursuant to Rule
144(k). An additional 198,590 shares of restricted securities are not subject to
lockup agreements and will become eligible for sale in the public markets from
time to time pursuant to Rule 144.
Certain members of the Company's Board of Directors (hereafter referred to
as the "Founders"), Kirk Blosch, Jeff W. Holmes, and Blosch & Holmes, L.L.C.
(owning the remaining 1,139,198 shares of restricted securities) have agreed,
pursuant to lockup agreements contained in the Underwriting Agreement in this
Offering, that they will not sell, directly or indirectly, any Common Stock
without the prior written consent of the Representatives for a period of 180
days after the closing date of this Offering. Upon the expiration of the 180 day
period, these shares will become eligible for sale in the public market subject
to the limitations for sales by Affiliates under Rule 144. Conditioned on the
Offering, the Company has granted demand registration rights with respect to
350,000 shares of Common Stock issuable upon the exercise of warrants held by
Kirk Blosch and Jeff W. Holmes. These registration rights become exercisable for
a two-year period commencing February 1, 1997. The Founders also hold vested
options to purchase 37,200 shares of Common Stock at exercise prices ranging
between $3.85 and $5.00 per share pursuant to the Company's Amended 1993 Stock
Option Plan (the "Stock Option Plan"). Additionally, the Founders hold options
to purchase 210,000 shares of Common Stock which become exercisable in four
equal annual installments beginning September 30, 1998 at an exercise price of
$16.4375. All of these options could be exercised and the shares received
therefrom could also be eligible for sale in the public market subject to the
limitations for sales by Affiliates under Rule 144. Notably, at some time
following this Offering, the Company may register for public sale the shares
issued pursuant to the Stock Option Plan. The Founders have included 30,000
shares of Common Stock (exclusive of the 1,139,198 shares that will be subject
to lockup agreements) owned by them in the over-allotment option in this
Offering.
On October 26, 1996, the Company paid $50,000 in cash and issued 130,000
shares of unregistered Common Stock to a non-Affiliate in exchange for 3.7 acres
of land for its new headquarters and manufacturing facility. This non-Affiliate
has agreed, pursuant to a lockup agreement, that he will not sell any of the
130,000 shares of Common Stock for a period of two years ending October 29,
1998. This individual has further agreed not to sell more than 25,000 shares of
Common Stock during any 90-day period after the expiration of the two-year
lockup period. Pursuant to Rule 144(k), this individual will not be subject to
the volume, notice, and other restrictions of Rule 144, and (subject to the
90-day 25,000 shares limitation described above), may freely sell his shares in
the public markets after the two-year lockup period.
Pursuant to the Company's Stock Option Plan, certain non-Affiliate holders
of vested options to purchase 52,990 shares of Common Stock are not subject to
lockup agreements and could exercise their options and sell these shares after
one year from the date of exercise under Rule 144. The exercise prices of the
options granted and outstanding under the Stock Option Plan range from $2.50 to
$5.00. The Company has authorized 600,000 shares of Common Stock to be issued
under the Stock Option Plan. Out of these 600,000 shares, as of September 30,
1997, 241,700 shares were available for future grants. Notably, at some time
following this Offering, the Company may register for public sale the shares
issued pursuant to the Stock Option Plan.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year, as well as persons who may be deemed Affiliates, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other
52
<PAGE> 54
requirements relating to manners of sale, notice and availability of current
public information about the Company. A person (or person whose shares are
aggregated) who is not deemed to have been an Affiliate at any time during the
three months immediately preceding the sale is entitled to sell restricted
shares pursuant to Rule 144(k) without regard to the limitations described
above, provided that two years have expired since the later of the date on which
such restricted shares were first acquired from the Company or from an
Affiliate.
The Company cannot predict the effect, if any, that sales of shares of
Common Stock, or the availability of such shares for sale will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.
53
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company have agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of such Underwriters for whom Wedbush Morgan
Securities, Inc. and EVEREN Securities, Inc. (the "Representatives") are acting
as representatives, has agreed severally to purchase from the Company and the
Selling Shareholders the respective number of shares of Common Stock set forth
opposite its name below. The Underwriters are committed to purchase and pay for
all such shares if any such shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Wedbush Morgan Securities, Inc. .................................................. 420,000
---------
EVEREN Securities, Inc............................................................ 420,000
Cowen & Company................................................................... 30,000
A.G. Edwards & Sons, Inc.......................................................... 30,000
Advest Inc. ...................................................................... 20,000
Crowell, Weedon & Co. ............................................................ 20,000
Cruttenden Roth Incorporated...................................................... 20,000
D.A. Davidson & Co. .............................................................. 20,000
Fahnestock & Co. Inc. ............................................................ 20,000
John G. Kinnard and Co. Inc ...................................................... 20,000
LT Lawrence & Co., Inc. .......................................................... 20,000
The Ohio Company.................................................................. 20,000
Pennsylvania Merchant Group Ltd. ................................................. 20,000
Sands Brothers & Co., Ltd. ....................................................... 20,000
The Seidler Companies Incorporated................................................ 20,000
Southwest Securities, Inc. ....................................................... 20,000
Sutro & Co. Incorporated.......................................................... 20,000
Vector Securities International, Inc. ............................................ 20,000
GBS Financial Corp. .............................................................. 10,000
TriQuest Financial Inc. .......................................................... 10,000
---------
Total................................................................... 1,200,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Security
Holders that the several Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain selected dealers at such price less a concession
not in excess of $0.43 per share, and that the Underwriters and those dealers
may reallow certain dealers, including any Underwriters, a discount not in
excess of $0.10 per share. After the Offering, the public offering price,
concessions, and reallowance to dealers may be changed by the Representatives.
The Shares are being offered by the several Underwriters named herein
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel, or modify the offer and to reject any order in
whole or in part.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may bid for and purchase shares of
Common Stock in the open market to stabilize the price of the Common Stock.
These activities may stabilize or maintain the price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end these activities at any time.
Pursuant to the Underwriting Agreement, the Company and the Selling
Shareholders have agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the Offering,
54
<PAGE> 56
including liabilities under the Securities Act, or to contribute payments that
the Underwriters may be required to make in respect thereof.
OVER-ALLOTMENT OPTION
The Selling Shareholders have granted an option to the Underwriters,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to a maximum of 30,000 Shares that are currently held by management
of the Company and 150,000 warrants for the purchase of Shares. The Underwriters
may exercise the option only to cover overallotments in the sale of the Shares
that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise the option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the Shares or to purchase
and exercise the warrants in the same percentage as the number of Shares to be
purchased and offered by such Underwriter in the above table bears to 1,200,000.
The Underwriters will exercise the 150,000 warrants so acquired and resell all
of the shares. The Underwriters will pay the aggregate exercise price ($525,000)
to the Company and will pay to the Warrant Holders the difference between the
aggregate exercise price and the aggregate sales price (less underwriting
discounts and commissions).
REPRESENTATIVES' WARRANTS
Upon purchase by the Underwriters of the 1,200,000 Shares of Common Stock
offered hereby, the Company will sell to the Representatives for their own
account, stock purchase warrants covering an aggregate of 100,000 shares of
Common Stock exercisable at a price equal to 120% of the public offering price
set forth on the cover of this Prospectus and expiring five years from the
effective date ("Effective Date") of this Offering. The Representatives will pay
a price of $.01 per warrant. The Representatives' warrants are restricted from
sale, transfer, assignment, or hypothecation for a period of one year from the
Effective Date and may be exercised as to all or any lesser number of shares of
Common Stock commencing 12 months after the effective date of this Offering. The
Representatives' warrants will contain provisions that require the Company,
under certain circumstances, to register one time for sale (at any time prior to
the fifth anniversary of the Effective Date) or to qualify for an exemption from
time to time under applicable securities laws the shares of Common Stock
issuable upon exercise of the Representatives' warrants. The Representatives'
warrants also have additional registration rights permitting the warrant
holders, with certain restrictions, to elect to participate in registered public
offerings of securities by the Company at any time prior to the seventh
anniversary of the Effective Date. Except by operation of law or by reason of
the reorganization of the Company, the Representatives' warrants are not
transferrable by the warrant holders prior to November 21, 1998 other than to
officers or partners of the Representatives and members of any selling group in
connection with this Offering and/or their officers or partners. The
Representatives' warrants' exercise price and the number of shares of Common
Stock are subject to adjustment to protect the warrant holders against dilution
in certain events.
LOCK-UP AGREEMENTS
The Company, its officers and directors, and certain other stockholders of
the Company holding 1,139,198 shares of Common Stock and warrants to acquire an
additional 500,000 shares of Common Stock in the aggregate have agreed, pursuant
to lock-up agreements contained in the Underwriting Agreement in this Offering,
that for a period of 180 days following the date of this Prospectus, they will
not, without the prior written consent of the Representatives, offer, sell,
pledge, offer to sell, contract to sell, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, pledge, offer of sale,
contract of sale, grant of any option to purchase or other sale or disposition)
of any shares of the Common Stock or other capital stock or securities
convertible into or exercisable or exchangeable for any shares of Common Stock
or other capital stock, except that the Company may, without consent, issue
shares of Common Stock upon exercise of outstanding stock options, and except
that the holders of certain warrants to acquire 350,000 shares have the right to
require that the Company register the shares issuable upon exercise of such
warrants for sale pursuant to the Securities Act once during the two-year period
commencing February 1, 1998.
55
<PAGE> 57
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Jones, Waldo, Holbrook &
McDonough, Salt Lake City, Utah. Certain legal matters will be passed upon for
the Underwriters by Riordan & McKinzie, Orange County, California.
EXPERTS
The consolidated financial statements of ZEVEX International, Inc. (i) as
of September 30, 1997, and for the nine-month period ended September 30, 1997,
appearing in this Prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, (ii) as of December 31, 1996, and for
the year ended December 31, 1996, appearing in this Prospectus and registration
statement have been audited by Daines and Rasmussen, P.C., independent auditors,
and (iii) as of December 31, 1995, and for each of the two years in the period
ended December 31, 1995, appearing in this Prospectus and registration statement
have been audited by Nielsen, Grimmett & Company, independent auditors, each as
set forth in their respective reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement under the
Securities Act with respect to the Shares. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, with respect to any contract or other document filed as an exhibit to the
Registration Statement, each statement is qualified in all respects by reference
to such exhibit. The Registration Statement, including exhibits thereto, may be
inspected without charge at the Commission's public reference facility at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Pacific
regional offices of the Commission at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036-3648. Copies of all or any part of such materials may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 after payment of fees
prescribed by the Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements, and other information with the Securities and Exchange
Commission (the "Commission") under File No. 33-19583. Such reports, proxy
statements, and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates, and at the
following regional offices of the Commission: Midwest Regional Office, 500 West
Madison Street, Chicago, Illinois 60661 and Northeast Regional Office, 7 World
Trade Center, New York, New York 10048. The Commission maintains a Web site that
contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The address
of the Web site is http://www.sec.gov. The Company's stock is traded on the
American Stock Exchange under the symbol "ZVX," and reports and other
information concerning the Company may also be inspected at the
American Stock Exchange.
56
<PAGE> 58
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Nielsen, Grimmett & Company, Independent Auditors........................... F-2
Report of Daines and Rasmussen, P.C., Independent Auditors............................ F-3
Report of Ernst & Young LLP, Independent Auditors..................................... F-4
Consolidated Balance Sheets -- December 31, 1995 and 1996 and September 30, 1997...... F-5
Consolidated Statements of Operations -- Years ended December 31, 1994, 1995, and 1996
and the nine months ended September 30, 1996 (unaudited) and 1997................... F-6
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1994,
1995, and 1996 and the nine months ended September 30, 1997......................... F-7
Consolidated Statements of Cash Flows -- Years ended December 31, 1994, 1995, and 1996
and the nine months ended September 30, 1996 (unaudited) and 1997................... F-8
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheets of Zevex
International, Inc. and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Zevex International, Inc. and Subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Nielsen, Grimmett & Company
Salt Lake City, Utah
February 12, 1996
F-2
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheet of ZEVEX
International, Inc. and Subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
The consolidated financial statements of ZEVEX International, Inc. and
Subsidiary as of December 31, 1995 and 1994, were audited by other auditors
whose report dated February 12, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ZEVEX International, Inc. and Subsidiary as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Daines and Rasmussen, P.C.
Salt Lake City, Utah
February 13, 1997
F-3
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ZEVEX International, Inc.
We have audited the accompanying consolidated balance sheet of ZEVEX
International, Inc. and subsidiary as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the nine months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ZEVEX International, Inc. and subsidiary as of September 30, 1997, and the
results of their operations and their cash flows for the nine months then ended,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Salt Lake City, Utah
October 15, 1997
F-4
<PAGE> 62
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996 SEPTEMBER 30, 1997
---------- ---------- ------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 870,333 $2,085,055 $ 135,699
Cash restricted for sinking fund payment on
industrial development bond................ -- -- 50,306
Accounts receivable, net of allowance for
doubtful accounts of none (1995 and 1996)
and $33,000, respectively.................. 1,209,794 1,429,521 1,835,011
Inventories................................... 791,960 1,344,297 3,341,095
Marketable securities......................... -- 203,109 210,921
Deferred offering costs....................... -- -- 154,694
Deferred income taxes......................... -- -- 113,161
Prepaid expenses.............................. 2,835 46,808 9,064
---------- ---------- ----------
Total current assets.................. 2,874,922 5,108,790 5,849,951
Property and equipment, net..................... 363,771 1,207,034 3,887,302
Patents and trademarks, net of amortization of
none, $1,700 and $4,985, respectively......... -- 49,357 75,656
Other assets.................................... 8,682 3,489 755
---------- ---------- ----------
$3,247,375 $6,368,670 $9,813,664
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 191,562 $ 339,023 $ 855,147
Accrued liabilities........................... 96,206 188,878 339,584
Income taxes payable.......................... 58,735 -- 267,379
Bank line of credit........................... -- 60,108 700,000
Current portion of industrial development
bond....................................... -- -- 100,000
---------- ---------- ----------
Total current liabilities............. 346,503 588,009 2,262,110
Deferred income taxes........................... -- 79,212 40,367
Industrial development bond..................... -- 2,000,000 1,900,000
Stockholders' equity:
Common stock, $.04 par value: authorized
5,000,000 shares, issued 1,365,716,
1,495,716 and 2,063,826 shares,
respectively............................... 54,629 59,829 82,553
Additional paid in capital.................... 1,344,833 1,794,633 3,270,884
Retained earnings............................. 1,501,410 1,846,987 2,257,750
---------- ---------- ----------
Total stockholders' equity............ 2,900,872 3,701,449 5,611,187
---------- ---------- ----------
$3,247,375 $6,368,670 $9,813,664
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1997
---------- ---------- ---------- 1996 ----------
----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales...................... $3,295,714 $4,968,108 $4,891,272 $3,513,581 $5,534,205
Engineering services............... 36,723 327,654 772,461 364,674 777,285
---------- ---------- ---------- ---------- ----------
3,332,437 5,295,762 5,663,733 3,878,255 6,311,490
Cost of sales...................... 2,016,670 3,065,553 2,936,055 2,121,740 3,475,154
---------- ---------- ---------- ---------- ----------
Gross profit....................... 1,315,767 2,230,209 2,727,678 1,756,515 2,836,336
Operating expenses:
General and administrative......... 840,063 1,060,275 1,363,900 833,115 1,198,499
Selling and marketing.............. 183,924 264,653 528,417 381,508 528,417
Research and development........... 419,278 502,255 527,562 360,335 521,870
---------- ---------- ---------- ---------- ----------
Total operating expenses............. 1,443,265 1,827,183 2,419,879 1,574,958 2,248,786
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. (127,498) 403,026 307,799 181,557 587,550
Other income (expense):
Interest income.................... 36,127 40,829 53,819 35,804 66,367
Interest expense................... -- -- (12,981) -- (56,381)
Unrealized gain on marketable
securities...................... -- -- 203,109 -- 7,812
---------- ---------- ---------- ---------- ----------
Income (loss) before (provision)
benefit for income taxes........... (91,371) 443,855 551,746 217,361 605,348
(Provision) benefit for income
taxes.............................. 66,709 (127,055) (206,169) (74,651) (194,585)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (24,662) $ 316,800 $ 345,577 $ 142,710 $ 410,763
========== ========== ========== ========== ==========
Net income (loss) per common
share........................... $ (.02) $ .24 $ .25 $ .10 $ .18
========== ========== ========== ========== ==========
Weighted average number of common
shares............................. 1,130,609 1,305,812 1,388,511 1,365,716 2,315,802
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 64
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- ------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993......................... 1,138,109 $45,525 $1,344,833 $1,218,376 $(33,750) $2,574,984
Net loss..................... -- -- -- (24,662) -- (24,662)
--------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1994......................... 1,138,109 45,525 1,344,833 1,193,714 (33,750) 2,550,322
Contribution of treasury
stock to employee stock
ownership plan............ -- -- -- -- 33,750 33,750
Common stock dividend........ 227,607 9,104 -- (9,104) -- --
Net income................... -- -- -- 316,800 -- 316,800
--------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1995......................... 1,365,716 54,629 1,344,833 1,501,410 -- 2,900,872
Issuance of common stock for
acquisition of land....... 130,000 5,200 449,800 -- -- 455,000
Net income................... -- -- -- 345,577 -- 345,577
--------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1996......................... 1,495,716 59,829 1,794,633 1,846,987 -- 3,701,449
Issuance of common stock for
cash...................... 500,000 20,000 1,230,000 -- -- 1,250,000
Exercise of stock options for
cash...................... 44,110 1,764 67,211 -- -- 68,975
Exercise of warrants for
cash...................... 24,000 960 179,040 -- -- 180,000
Net income................... -- -- -- 410,763 -- 410,763
--------- -------- ---------- ---------- -------- ----------
Balances at September 30,
1997......................... 2,063,826 $82,553 $3,270,884 $2,257,750 $ -- $5,611,187
========= ======== ========== ========== ======== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE> 65
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ (24,662) $ 316,800 $ 345,577 $ 142,710 $ 410,763
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 128,672 153,523 232,625 156,570 177,021
Provision (benefit) for deferred income taxes.... -- -- 79,212 -- (152,006)
Contribution of treasury stock to ESOP........... -- 33,750 -- -- --
Unrealized gain on marketable securities......... -- -- (203,109) -- (7,812)
Changes in operating assets and liabilities:
Increase in restricted cash for sinking fund
payment on industrial development bond...... -- -- -- -- (50,306)
(Increase) decrease in accounts receivable..... (110,044) (357,915) (219,727) 346,859 (405,490)
Increase in inventories........................ (276,529) (100,895) (552,337) (664,780) (1,996,798)
Increase in deferred offering costs............ -- -- -- -- (154,694)
(Increase) decrease in prepaid expenses........ (113,472) 133,540 (43,973) (48,348) 37,744
(Increase) decrease in other assets............ (2,306) (4,467) 5,193 -- 2,734
Increase (decrease) in accounts payable........ 32,520 (660) 147,461 153,042 516,124
Increase in accrued liabilities................ 15,440 14,721 92,672 5,932 150,706
Increase (decrease) in income taxes payable.... (111,340) 58,735 (58,735) (58,735) 267,379
----------- --------- ----------- --------- -----------
Net cash provided by (used in) operating
activities......................................... (461,721) 247,132 (175,141) 33,250 (1,204,635)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................... (136,744) (241,131) (619,188) (429,835) (2,854,004)
Addition of patents and trademarks................... -- -- (51,057) -- (29,584)
----------- --------- ----------- --------- -----------
Net cash used in investing activities................ (136,744) (241,131) (670,245) (429,835) (2,883,588)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock............... -- -- -- -- 1,498,975
Proceeds from bank line of credit.................... -- -- 60,108 -- 700,000
Repayment of bank line of credit..................... -- -- -- -- (60,108)
Proceeds from industrial development bond............ -- -- 2,000,000 -- --
----------- --------- ----------- --------- -----------
Net cash provided by financing activities............ -- -- 2,060,108 -- 2,138,867
----------- --------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (598,465) 6,001 1,214,722 (396,585) (1,949,356)
Cash and cash equivalents at beginning of period..... 1,462,797 864,332 870,333 870,333 2,085,055
----------- --------- ----------- --------- -----------
Cash and cash equivalents at end of period........... $ 864,332 $ 870,333 $ 2,085,055 $ 473,748 $ 135,699
=========== ========= =========== ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest......................................... $ -- $ 438 $ 6,530 $ -- $ 56,678
Income taxes..................................... 156,499 19,200 170,839 39,035 80,218
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING
ACTIVITIES
Issuance of common stock dividend, 227,607 shares.... $ -- $ 9,104 $ -- $ -- $ --
Issuance of common stock for acquisition of land,
130,000 shares..................................... -- -- 455,000 -- --
</TABLE>
See accompanying notes.
F-8
<PAGE> 66
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company was incorporated under the laws of the State of Nevada on
December 30, 1987. The Company was originally incorporated as Downey Industries,
Inc. and changed its name to ZEVEX International, Inc. on August 15, 1988. The
Company designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medical technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies. The Company's design and manufacturing service
customers are medical technology companies, which sell the Company's systems and
devices under private labels or incorporate the Company's devices into their
products.
Principles of Consolidation
The consolidated financial statements include the accounts of ZEVEX
International, Inc. (Company) and its wholly-owned subsidiary ZEVEX, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Interim Financial Information
The financial statements for the nine months ended September 30, 1996 and
related notes are unaudited but include all adjustments (consisting solely of
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations for
the interim periods. The results of operations for the nine-month periods ended
September 30, 1996 and 1997 are not necessarily indicative of the operating
results to be expected for the full year.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all certificates of deposit and highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk
The Company's financial instruments consist primarily of cash, cash
equivalents and trade accounts receivable. Cash and cash equivalents are held in
federally insured financial institutions or invested in high grade short-term
commercial paper issued by major United States corporations. The Company sells
its products primarily to, and has trade receivables with, independent durable
medical equipment manufacturers and dealers in the United States and abroad.
During the periods presented, four of the Company's customers
F-9
<PAGE> 67
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
accounted for more that 10% of net product sales. (see Note 12 -- Major
Customers) Less than 10% of product sales are to foreign customers.
As a general policy, collateral is not required for accounts receivable;
however, the Company periodically monitors the need for an allowance for
doubtful accounts based upon expected collections of accounts receivable and
specific identification of uncollectible accounts. Additionally, customers'
financial condition and credit worthiness are regularly evaluated. Historical
losses have not been material.
Inventories
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
Marketable Securities
The Company's short-term investments are comprised of equity securities,
all classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at December 31, 1996 and
September 30, 1997. Accordingly, net unrealized holding gains for the periods
ending December 31, 1996 and September 30, 1997 of $203,109 and $7,812,
respectively, are included in net income.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over expected useful lives of three to twenty-five
years using the straight-line method. Leasehold improvements are amortized on a
straight-line basis over the lesser of the remaining lease term or their
estimated useful lives.
Major replacements, which extend the useful lives of equipment, are
capitalized and depreciated over the remaining useful life. Normal maintenance
and repair items are charged to costs and expenses as incurred.
Patents and Trademarks
The costs of acquired and internally developed patents and trademarks are
amortized over the lesser of fifteen years or the estimated useful life of the
intangible asset on the straight-line basis. The Company periodically reviews
the recoverability of patents and trademarks as well as other long-term assets
and, where impairment in value has occurred, such intangibles are written down
to net realizable value.
Income Taxes
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on differences
between financial reporting and tax bases of assets and liabilities measured
using enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees(APB 25) and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-based Compensation.
Under APB 25, because the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-10
<PAGE> 68
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Revenue Recognition
The Company records revenue from the sale of manufactured products upon
shipment. Revenue from contracts to perform engineering design and product
development services are generally recognized as milestones are achieved and
costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $39,027, $39,237, $113,566, $78,961 and $64,832,
respectively for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997.
Net Income (Loss) Per Common Share
Primary earnings (loss) per common share is calculated by dividing net
income (loss) for the period by the weighted average number of the Company's
common shares outstanding and dilutive common equivalent shares from stock
options and warrants, as calculated using the treasury stock method. The
treasury stock method requires calculating commons stock equivalents using the
average stock price for the period.
Fully diluted earnings (loss) per common share reflect the calculation of
the number of common equivalent shares based on the stock price at the end of
the period. Fully diluted per common share amounts were not reported in 1995 and
1996 because the difference was not material from primary earnings per common
share. The fully diluted earnings per common share was $.17 for the nine months
ended September 30, 1997. The weighted average number of common shares
outstanding used in the fully diluted calculation was 2,390,186.
All shares held in the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding for both primary and fully diluted earnings per share
calculations. All share and per share data is stated to reflect a 20 percent
stock dividend declared by the Board of Directors in March 1995 (see Note 9 --
Stockholders' Equity).
New Accounting Pronouncements
In 1997 the FASB issued SFAS No. 128, Earnings Per Share, SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. As of September 30, 1997, these standards
were either not effective or not yet adopted by the Company. The Company
believes the new standards will not have a material impact on the Company's
consolidated financial statements presented herein or in the future.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Materials.............................. $545,927 $ 936,938 $ 2,223,633
Work in progress....................... 227,154 292,423 957,860
Finished goods, including completed
subassemblies........................ 18,879 114,936 159,602
-------- ---------- ----------
$791,960 $1,344,297 $ 3,341,095
======== ========== ==========
</TABLE>
F-11
<PAGE> 69
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Machinery and equipment................ $341,929 $ 433,171 $ 490,845
Furniture and fixtures................. 271,868 365,797 507,942
Vehicles............................... 4,500 4,500 4,500
Tooling costs.......................... 165,260 406,219 495,986
Leasehold improvements................. 40,429 54,464 54,464
Building............................... -- 129,023 2,693,441
Land................................... -- 505,000 505,000
-------- ---------- ----------
823,986 1,898,174 4,752,178
Less accumulated depreciation and
amortization......................... 460,215 691,140 864,876
-------- ---------- ----------
$363,771 $1,207,034 $ 3,887,302
======== ========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 and 1997 amounted to $128,672,
$153,523, $230,925, $155,680 and $173,736, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Accrued payroll and related taxes and benefits........ $96,206 $182,427 $ 153,737
Professional fees..................................... -- -- 154,694
Warranty reserve...................................... -- -- 25,000
Accrued interest...................................... -- 6,451 6,153
------- -------- --------
$96,206 $188,878 $ 339,584
======= ======== ========
</TABLE>
5. INCOME TAXES
The (provision) benefit for income taxes is made, at Federal and State
statutory rates, based on earnings reported in the financial statements for the
amount of income taxes payable currently.
Deferred taxes are classified as current or non-current, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse.
Temporary differences giving rise to the deferred tax liability consist
primarily of the excess of depreciation for tax purposes over the amount
recorded for financial reporting purposes and unrealized gains on marketable
securities being reported differently for financial reporting and tax purposes.
F-12
<PAGE> 70
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Current taxes:
Federal................................. $21,480 $(153,228) $(137,196) $(63,783) $(278,501)
State................................... 3,790 (22,440) (17,936) (10,868) (40,400)
R&D credit.............................. 41,439 48,613 28,175 -- 51,522
Deferred taxes:
Federal................................. -- -- (69,057) -- 63,572
State................................... -- -- (10,155) -- 9,222
------- --------- --------- -------- ---------
(Provision) benefit for
income taxes............................ $66,709 $(127,055) $(206,169) $(74,651) $(194,585)
======= ========= ========= ======== =========
</TABLE>
The actual tax (expense) benefit differs from the 34% Federal statutory
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Expected tax (expense) benefit at
federal rate............................ $31,066 $(153,461) $(187,594) $(73,902) $(205,818)
State income tax (expense) benefit,
net of federal benefit.................. 3,280 (16,064) (18,208) (749) (15,069)
Research and development credit........... 41,439 48,613 28,175 -- 34,005
Non-deductible expenses................... (9,076) (5,366) (6,164) -- (7,121)
Other..................................... -- (777) (22,378) -- (582)
------- --------- --------- -------- ---------
Total (provision) benefit for
income taxes.................. $66,709 $(127,055) $(206,169) $(74,651) $(194,585)
======= ========= ========= ======== =========
</TABLE>
6. BANK LINE OF CREDIT
On September 29, 1996, the Company renewed its line of credit arrangement
with a financial institution for which total indebtedness may not exceed
$3,024,658. The line matures on May 31, 1998. The line of credit is
collateralized by accounts receivable, inventory and property and equipment and
bears interest at a rate of prime plus 1%; 9.25% and 9.50% at December 31, 1996
and September 30, 1997, respectively. The Company owes $700,000 on the line of
credit at September 30, 1997. Under the current line of credit agreement, the
Company is restricted from declaring cash dividends.
7. INDUSTRIAL DEVELOPMENT BOND
On October 30, 1996, the Company completed a transaction defined as "Murray
City, Utah, Adjustable Rate Industrial Development Revenue Bonds, Series 1996
(ZEVEX, Inc. Project)" in the amount of $2,000,000. The bonds are secured by an
irrevocable Letter of Credit issued by a bank, which is subject to expiration no
later than April 15, 2002. The bonds bear interest at an adjustable rate based
on the weekly tax-exempt floater rate as determined by the remarketing agent.
The bonds mature on October 1, 2016. Principal reductions occur in the amount of
$100,000 per year at a rate of $8,333 per month starting April 1, 1997. The
outstanding balance was $2,000,000 at September 30, 1997.
F-13
<PAGE> 71
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
8. EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan
During 1991, the Company established a qualified 401(k) profit sharing plan
covering substantially all employees. Eligible employees may defer a portion of
their salary. At the discretion of the Board of Directors, the Company may make
a contribution of an additional amount of up to four percent (4%) of the
eligible employees' salary and a discretionary amount to be determined each year
by the Board of Directors. Employees are fully vested after seven years.
Contributions to the plan for the year ended December 31, 1994, 1995 and 1996
were $35,436, $77,037 and $86,035, respectively, and $36,866 and $49,261 for the
nine months ended September 30, 1996 and 1997, respectively. The Company shows a
payable to the plan of $9,718, $38,000, and $12,606 at December 31, 1995 and
1996, and September 30, 1997 respectively.
Employees' Stock Ownership Plan
Effective October 14, 1993, the Company adopted an Employee Stock Ownership
Plan, that covers all employees who are over the age of 21, have been employed
for at least 90 days and who provide at least 1,000 hours of service.
Full vesting will occur after seven years of service or upon normal
retirement at 65 years of age. Contributions to the plan are at the discretion
of the Board of Directors with no minimum annual funding requirements.
Contributions to the plan primarily will be made with common stock of the
Company.
The Company had previously made a contribution to the plan for the year
ended December 31, 1995 of 9,500 shares with a cost of $33,750. No contribution
was made for the year ended December 31, 1994 and 1996 or for the nine months
ended September 30, 1997.
9. STOCKHOLDERS' EQUITY
Stock Dividend
On March 8, 1995, the Company declared a 20% stock dividend payable on
April 3, 1995 to all stockholders of record on March 23, 1995.
Issuance of Common Stock
On November 29, 1996, the Company paid cash of $50,000 and issued 130,000
shares of the Company's common stock for the purchase of 3.7 acres of land in
Murray, Utah for the purpose of constructing a manufacturing facility.
On February 12, 1997, the Company completed a private placement offering
for $1,250,000 of its securities, which consist of 500,000 units at a price of
$2.50 per unit. Each unit consists of one share of common stock and a warrant to
purchase one share of common stock at a price of $3.50 per share. The issued
shares and shares underlying the warrants are entitled to registration rights
for a period of five years from completion of the offering.
Repurchase of Common Stock Units
The Company previously repurchased 13,440 shares of outstanding common
stock for $50,400. The Company subsequently in 1993 and 1995 contributed all
13,440 shares to the Employee's Stock Ownership Plan (see Note 8 -- Employees'
Stock Ownership Plan).
F-14
<PAGE> 72
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Warrants
The Company issued a warrant to purchase 24,000 shares of common stock at
$7.50 per share pursuant to a public offering of the Company's common stock in
1993. This warrant expires May 7, 1998. The shares underlying this warrant are
entitled to registration rights. On September 30, 1997, the warrant was
exercised and the warrant holders waived their registration rights.
In February 1997, the Company issued 500,000 warrants in connection with a
$1,250,000 private placement offering, as discussed above.
Common Stock Reserved for Future Issuance
At September 30, 1997, the Company had reserved 1,055,890 shares of common
stock for future issuance, including 500,000 shares reserved for exercise of
warrants and 555,890 shares reserved under the Company's stock option plan.
Stock Option Plan
In September 1997, the Board of Directors consolidated its previous three
stock option plans into one plan and established the Amended 1993 Stock Option
Plan (the "Stock Option Plan"). There are currently 600,000 shares of common
stock authorized for issuance under the Stock Option Plan, subject to adjustment
for such matters as stock splits and stock dividends.
The Stock Option Plan provides for the grant of incentive stock options,
stock appreciation rights and stock awards to eligible participants and may be
administered by the Board of Directors or by the Compensation Committee.
On September 30, 1997, the Company granted a total of 210,000 options with
an exercise price of $16.44 to three officers/directors. The options vest
ratably over a four year period from the grant date.
All options granted under the Stock Option Plan expire after five to seven
years from the grant date and become exercisable no later than four years from
the grant date.
F-15
<PAGE> 73
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
A summary of stock option activity, and related information for the years
ended December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1997 follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK
OPTIONS
SHARES ----------------------- WEIGHTED-
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
--------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................... 241,500 58,500 $0.79- 5.00 $ 2.84
Options granted................................ (22,800) 22,800 $2.50 $ 2.50
Options canceled............................... 600 (600) $5.00 $ 5.00
-------- ------- ----------- ------
Balance at December 31, 1994..................... 219,300 80,700 $0.79- 5.00 $ 2.73
Options canceled............................... 3,540 (3,540) $2.50- 5.00 $ 3.35
-------- ------- ----------- ------
Balance at December 31, 1995..................... 222,840 77,160 $0.79- 5.00 $ 2.70
Additional authorization....................... 100,000 -- -- --
Options granted................................ (12,000) 12,000 $4.50 $ 4.50
Options canceled............................... 3,060 (3,060) $2.50- 5.00 $ 3.24
-------- ------- ----------- ------
Balance at December 31, 1996..................... 313,900 86,100 $0.79- 5.00 $ 2.93
Additional authorization....................... 200,000 -- -- --
Options granted................................ (275,050) 275,050 $3.50-17.50 $13.51
Options exercised.............................. -- (44,110) $0.79- 5.00 $ 1.56
Options canceled............................... 2,850 (2,850) $3.50- 5.00 $ 3.97
-------- ------- ----------- ------
Balance at September 30, 1997.................... 241,700 314,190 $2.50-17.50 $12.37
======== ======= =========== ======
</TABLE>
The weighted average fair value of options granted in the year ended
December 31, 1996 and for the nine months ended September 30, 1997, were $1.33
and $9.98 (none in 1995). At December 31, 1996 and September 30, 1997, 86,100
and 104,190 shares, respectively, were exercisable.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively: risk-free interest rate of 6.1% and
5.9%, dividend yield of 0%; volatility factors of the expected market price of
the Company's common stock of .40 and .90; and a weighted-average expected life
of the option of 3 years and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Because the effect of
SFAS No. 123 is prospective, the initial impact on pro forma net income (loss)
may not be representative of compensation expense in future years. The effect on
the Company's pro forma results for each of the fiscal years 1995 and 1996 was
not material (less than $.01 per share). For the nine months ended September 30,
1997, pro forma net income and pro forma net income per common share were
$246,434 and $.11, respectively.
F-16
<PAGE> 74
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
Additionally, SFAS No. 123 requires that companies with wide ranges between
the high and low exercise prices of its stock options segregate the exercise
prices into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises. Below are the segregated ranges of exercise
prices as of September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ----------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.50-3.50 45,440 3.73 years $ 3.24 45,440 $ 3.24
$3.85-5.00 56,750 2.45 years $ 4.46 56,750 $ 4.46
$16.44-17.50 212,000 5.00 years $16.45 2,000 $17.50
------- ------ ------- ------
$2.50-$17.50 314,190 3.64 years $12.37 104,190 $ 4.18
======= ====== ======= ======
</TABLE>
10. LEASE COMMITMENTS
In 1996 the Company and its subsidiary occupied an administrative and
manufacturing facility under the terms of an operating lease agreement. In June
1997 the Company moved into a new facility owned by and constructed for the
Company.
Lease expense of $54,508, $74,551, $109,505, $76,181 and $55,558 has been
charged to operations for the years ended December 31, 1994, 1995 and 1996 and
nine months ended September 30, 1996 and 1997, respectively. The lease expired
in April 1997.
Future minimum lease payments required under non-cancelable operating
leases at December 31, 1996 were $30,698 (none at September 30, 1997).
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Marketable securities: The Company determines fair values based on
quoted market values.
Industrial development bond: The fair values of the Company's
long-term debt are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements. Due to the recent issuance of the Industrial
Development Revenue Bond, the estimated fair value approximates the
carrying amount.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1996 SEPTEMBER 30, 1997
------------------- ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents.............. $870,333 $870,333 $2,085,055 2,085,055 $ 135,699 $ 135,699
Marketable securities...... -- -- -- 203,109 -- 210,921
Industrial development
bond..................... -- -- 2,000,000 2,000,000 2,000,000 2,000,000
</TABLE>
F-17
<PAGE> 75
ZEVEX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
12. MAJOR CUSTOMERS
Sales to major customers for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1997, are summarized as follows
(percent of product sales):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS
31, ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Customer A.............................. 10% *% 10% 21%
Customer B.............................. 43% 32% 33% 20%
Customer C.............................. 12% 24% 23% 14%
Customer D.............................. *% *% *% 12%
-- -- -- --
65% 56% 66% 67%
== == == ==
</TABLE>
- ---------------
* Less than 10% of sales.
13. RELATED PARTY TRANSACTIONS
On April 15, 1997, the Company entered into a consulting agreement with
another company owned by certain stockholders to provide services related to
strategic planning, public relations, financing and potential acquisition of new
products or companies. Under the consulting agreement, the Company must pay an
initial fee of $50,000 and $10,000 per month for two years.
14. SUBSEQUENT EVENT
The Offering
In September, 1997 the board of directors authorized management of the
Company to file a Registration Statement on Form S-1 with the Securities and
Exchange Commission permitting the Company to sell up to 1,591,500 shares of
common stock to the public (the "Offering"). In conjunction with the offering,
the board of directors authorized, subject to stockholder approval, the
reincorporation of the Company into Delaware. In connection with the
reincorporation, the Company will adopt an Amended and Restated Certificate of
Incorporation which provides that the Company will be authorized to issue
2,000,000 shares of $.001 par value preferred stock and 10,000,000 shares of
$.001 par value common stock.
F-18
<PAGE> 76
[Photograph of ZEVEX's facility in Salt Lake City, Utah]
<PAGE> 77
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS
PROSPECTUS RELATES, OR ANY OFFER IN ANY JURISDICTION IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 19
Summary Market Price of Common Stock... 20
Dividend Policy........................ 20
Capitalization......................... 21
Selected Consolidated Financial Data... 22
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations........................... 23
Business............................... 27
Management............................. 42
Principal and Selling Shareholders..... 48
Certain Transactions................... 49
Description of Capital Stock........... 50
Shares Eligible for Future Sale........ 52
Underwriting........................... 54
Legal Matters.......................... 56
Experts................................ 56
Additional Information................. 56
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
1,200,000 SHARES
ZEVEX
INTERNATIONAL, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
WEDBUSH MORGAN SECURITIES
EVEREN SECURITIES, INC.
November 21, 1997
======================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the securities being registered. All amounts are estimates
except for the fees payable to the Commission and to the NASD.
<TABLE>
<S> <C>
SEC Registration Fee.............................. $ 9,116
Printing and engraving expenses................... 85,000
Legal fees and expenses........................... 150,000
Accounting fees and expenses...................... 150,000
NASD filing fees.................................. 3,500
AMEX listing fees................................. 22,500
Escrow agent fees and expenses.................... 2,000
Miscellaneous..................................... 12,884
--------
Total................................... $435,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DELAWARE GENERAL CORPORATION LAW
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") allows a
corporation to eliminate or limit the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for: (i) any breach of the duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
declaration of unlawful dividends or unlawful stock repurchases or redemptions;
(iv) any transaction from which the director derived an improper personal
benefit; or (v) any act or omission occurring prior to the date any such
provision eliminating or limiting such liability became effective.
Section 145(a) of the DGCL provides that a corporation may indemnify an
officer or director who is or is threatened to be made a party to a proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such officer or director is or was (i) serving as an officer,
director, employee, or agent of the corporation, or (ii) served at the request
of such corporation as a director, officer, employee, or agent of another
corporation or other enterprise or entity. Such indemnification may only be made
if the officer or director's conduct was in good faith and in a manner such
person reasonably believed to be in or not opposed to the corporation's best
interest, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful. Section 145(c) of the
DGCL provides that a corporation shall indemnify an officer or director for his
reasonable expenses in connection with the defense of any proceeding if the
officer or director has been successful, on the merits or otherwise. Section
145(e) provides that a corporation may advance expenses to an officer or
director who is made a party to a criminal or civil proceeding before a final
disposition is made, if the corporation receives an undertaking by or on behalf
of such officer or director to repay any amounts advanced if it is determined
that such officer or director is not entitled to indemnification. Section 145(j)
provides that the indemnification provisions of Section 145 continue for a
person who has ceased to be an officer or director, and inures to the benefit of
the heirs, executors, and administrators of such person. Section 145(g) provides
that a corporation may purchase and maintain insurance on behalf of officers or
directors, among others, against liabilities imposed upon them by reason of
actions in their capacities as such, and whether or not the corporation would
have the power to indemnify them against such liability under Section 145.
II-1
<PAGE> 79
CERTIFICATE OF INCORPORATION
Article VII of the Certificate of Incorporation provides that the liability
of directors to the Company or its stockholders is eliminated to the fullest
extent permitted under the DGCL, as described in the preceding section.
BYLAWS
Article VI, Section 6.1(a) of the Bylaws provides that an officer or
director who was or is made party to, or is threatened to made a party to, or is
involved in any proceeding by reason of the fact that he or she is or was an
officer or director, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, or as its
representative in another enterprise shall be indemnified and held harmless to
the fullest extent permitted and subject to the standards of conduct, procedures
and other requirements under Delaware law. Article VI, Section 6.1(a) further
provides that ZEVEX may purchase and maintain insurance on behalf of an officer
or director against any liability arising out of their status as such, whether
or not the corporation would have the power to indemnify such officer or
director.
Article VI, Section 6.1(b) of the Bylaws provides that the right of an
officer or director to indemnification shall continue beyond termination as such
and inures to the benefit of the heirs and personal representatives of such
officer or director.
Article VI, Section 6.1(d) of the Bylaws provides that ZEVEX shall, from
time to time, reimburse or advance to an officer or director the funds necessary
for payment of expenses incurred in connection with defending any proceeding for
which he or she is indemnified by the corporation, in advance of the final
disposition of such proceeding, provided that, if then required by the DGCL,
such advancements may only be paid upon receipt by the corporation of an
undertaking by or on behalf of such officer or director to repay any such amount
so advanced if it is ultimately determined by a final and unappealable judicial
decision that the officer or director is not entitled to be indemnified for such
expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On September 30, 1997, the Company sold and issued 24,000 shares of Common
Stock to three individuals in connection with the exercise of warrants
originally issued to Wilson-Davis & Co. on May 7, 1993. The Company believes
that the transaction was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) of such Act.
On February 12, 1997, in consideration for $1,250,000, the Company sold and
issued 500,000 shares of Common Stock together with warrants for 500,000 shares
of Common Stock to Blosch & Holmes, L.L.C., a Utah limited liability company. No
underwriting discounts or commissions were given or paid in connection with the
transaction. The warrants and shares were subsequently assigned to 16
individuals. All of the aforementioned purchasers represented to the
satisfaction of the Company that they qualify as "accredited investors" as that
term is defined under the Securities Act of 1933 (the "Securities Act"). The
Company believes that the transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) of such Act and Rule
506 promulgated thereunder.
On October 29, 1996, the Company sold and issued 130,000 shares of Common
Stock together with $50,000 cash to an individual in exchange for 3.7 acres of
certain real property valued at approximately $505,000. The property, which now
serves as the site for the Company's headquarters and manufacturing facility,
was conveyed to the Company by a General Warranty Deed dated December 29, 1996.
The Company believes that the transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) of such Act.
Since July 1, 1997, a few employees of the Company have exercised options
to purchase Common Stock of the Company under the Company's Stock Option Plan.
The exercise prices of the options ranged from $0.79 to $5.00 per share. The
shares of Common Stock issued under the Stock Option Plan have not been
registered under the Securities Act. As of September 30, 1997, the total number
of shares of Common Stock
II-2
<PAGE> 80
issued pursuant to such exercises is 44,110. The Company believes that the
aforementioned transactions are exempt from registration under Section 3(b) of
the Securities Act and Rule 505 promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Index of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE OF DOCUMENT
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of ZEVEX International, Inc., a Nevada
corporation(1)*
3.2 Bylaws of ZEVEX International, Inc., a Nevada corporation(1)*
3.3 Certificate of Incorporation of ZEVEX International, Inc., a Delaware
corporation(4)
3.4 Bylaws of ZEVEX International, Inc., a Delaware corporation(4)
5.1 Opinion of Jones, Waldo, Holbrook & McDonough
10.1 Revolving Line of Credit Agreement between Bank One and Registrant, dated
September 29, 1997(4)
10.2 ZEVEX Amended 1993 Stock Option Plan(4)
10.3 Industrial Development Bond Offering Memorandum, dated October 30, 1996(2)
10.4 Industrial Development Bond Reimbursement Agreement, dated October 30, 1996(2)
10.5 Stock Purchase Agreement between Blosch & Holmes, L.L.C. and Registrant, dated
December 1, 1996, including one amendment(3)
11.1 Statement re Computation of Per Share Earnings(3)
21.1 List of Subsidiaries(3)
23.1 Consent of Jones, Waldo, Holbrook & McDonough (included in Exhibit 5.1)
23.2 Consent of Daines & Rasmussen, P.C.
23.3 Consent of Nielsen, Grimmett & Company
23.4 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on page II-6)
</TABLE>
- ---------------
(1) Filed as an exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992, filed on February 15, 1993, and
incorporated herein by this reference.
(2) Filed as an exhibit to Registrant's amended Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed on September 29, 1997, and
incorporated herein by this reference.
(3) Filed as an exhibit to the Registration Statement on Form S-1, filed by the
Company on October 3, 1997.
(4) Filed as an exhibit to Amendment No. 1 on Form S-1, filed by the Company on
October 24, 1997.
* These Articles of Incorporation and Bylaws were previously filed by the
Company as a Nevada corporation prior to its reincorporation in Delaware,
effective November 20, 1997.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and controlling
persons of the registrant pursuant to any provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been
II-3
<PAGE> 81
settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a new form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 82
POWER OF ATTORNEY
Each person whose signature appears below hereby designates and appoints
Dean G. Constantine and Phillip L. McStotts and each of them, as his/her
attorneys-in-fact (the "Attorneys-in-Fact") with full power to act alone, and to
execute in the name and on behalf of each such person, individually in each
capacity stated below, one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as the Attorneys-in-Fact, or either of
them, deem appropriate, including any post-effective amendments, as well as any
related registration statement (or amendment thereto) filed in reliance upon
Rule 462(b) under the Securities Act of 1933, and to file each such amendment to
this Registration Statement, together with all exhibits thereto and any and all
documents in connection therewith with the U.S. Securities and Exchange
Commission, hereby granting unto said Attorneys-in-Fact and agents, and each of
them, full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said Attorneys-in-Fact and agents, or either
of them, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Salt Lake City, State of Utah, on November 21, 1997.
ZEVEX INTERNATIONAL, INC.
By: *
------------------------------------
Dean G. Constantine
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement on Form S-1 was signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
* President, Chief November 21, 1997
- ----------------------------------------------- Executive Officer, and
Dean G. Constantine Director
(Principal Executive
Officer)
* Vice President, Director November 21, 1997
- ----------------------------------------------- of Marketing, and
David J. McNally Director
/s/ PHILLIP L. MCSTOTTS Chief Financial Officer, November 21, 1997
- ----------------------------------------------- Secretary/Treasurer, and
Phillip L. McStotts Director (Principal
Accounting Officer)
* Director November 21, 1997
- -----------------------------------------------
Bradly A. Oldroyd
* Director November 21, 1997
- -----------------------------------------------
Darla R. Gill
</TABLE>
*By: /s/ PHILLIP L. MCSTOTTS
---------------------------------
Phillip L. McStotts
Attorney-in-Fact
II-5
<PAGE> 83
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE OF DOCUMENT PAGE NO.
------ -------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of ZEVEX International, Inc., a Nevada
corporation(1)*
3.2 Bylaws of ZEVEX International, Inc., a Nevada corporation(1)*
3.3 Certificate of Incorporation of ZEVEX International, Inc., a
Delaware corporation(4)
3.4 Bylaws of ZEVEX International, Inc., a Delaware corporation(4)
5.1 Opinion of Jones, Waldo, Holbrook & McDonough
10.1 Revolving Line of Credit Agreement between Bank One and Registrant,
dated September 29, 1997(4)
10.2 ZEVEX Amended 1993 Stock Option Plan(4)
10.3 Industrial Development Bond Offering Memorandum, dated October 30,
1996(2)
10.4 Industrial Development Bond Reimbursement Agreement, dated October
30, 1996(2)
10.5 Stock Purchase Agreement between Blosch & Holmes, L.L.C. and
Registrant, dated December 1, 1996, including one amendment(3)
11.1 Statement re Computation of Per Share Earnings(3)
21.1 List of Subsidiaries(3)
23.1 Consent of Jones, Waldo, Holbrook & McDonough (included in Exhibit
5.1)
23.2 Consent of Daines & Rasmussen, P.C.
23.3 Consent of Nielsen, Grimmett & Company
23.4 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on page II-6)
</TABLE>
- ---------------
(1) Filed as an exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992, filed on February 15, 1993, and
incorporated herein by this reference.
(2) Filed as an exhibit to Registrant's amended Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed on September 29, 1997, and
incorporated herein by this reference.
(3) Filed as an exhibit to the Registration Statement on Form S-1, filed by the
Company on October 3, 1997.
(4) Filed as an exhibit to Amendment No. 1 on Form S-1, filed by the Company on
October 24, 1997.
* These Articles of Incorporation and Bylaws were previously filed by the
Company as a Nevada corporation prior to its reincorporation in Delaware,
effective November 20, 1997.
<PAGE> 1
EXHIBIT 1.1
1,200,000 SHARES
ZEVEX INTERNATIONAL, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
November 21, 1997
WEDBUSH MORGAN SECURITIES, INC.
EVEREN SECURITIES, INC.
As Representatives of the several Underwriters
c/o Wedbush Morgan Securities
1000 Wilshire Boulevard, 10th Floor
Los Angeles, California 90017-2465
Gentlemen:
Zevex International, Inc., a Delaware corporation (the "Company")
proposes to issue and sell to you and other firms and corporations named in
Schedule A attached hereto (the "Underwriters," which term shall also include
any underwriter substituted as provided in Section 10 hereof), for which you are
acting as representatives ("Representatives"), One Million Two Hundred Thousand
(1,200,000) shares of the Company's Common Stock (the "Primary Securities"). In
addition, the selling securityholders named in Schedule B hereto (the "Selling
Securityholders") propose to grant to the Underwriters an option to purchase,
for the purpose of covering over-allotments, Thirty Thousand (30,000) shares of
the Company's Common Stock (the "Secondary Shares") and warrants to purchase up
to One Hundred Fifty Thousand (150,000) shares of the Company's Common Stock
(the "Warrants" and, together with the shares to be acquired upon the exercise
thereof, if any, and the Secondary Shares, the "Over-Allotment Securities"). The
Primary Securities and the Over-Allotment Securities are collectively referred
to below as the "Securities." The Company and the Selling Securityholders agree
with the several Underwriters as set forth below.
1. Representations, Warranties and Certain Covenants of the
Company. The Company represents and warrants to, and the Company also covenants
and agrees with, each of the Underwriters as follows:
(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form
S-1 (No. 333-37189), including a preliminary prospectus, relating to
the Securities and such amendments to the registration statement and
prospectus included therein as may have been required to the date
hereof. The Company will file with the Commission either: (i) prior to
effectiveness of such registration statement, a further amendment
thereto, including a form of prospectus, and if required after
effectiveness of such registration statement, a final prospectus in
accordance with Rule 424(b) of the rules and regulations ("Rules and
Regulations") under the Securities Act of 1933, as amended (the "Act"),
or (ii) after effectiveness of such registration statement, a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. Any such preliminary prospectus and any prospectus
included in the registration statement at the time it becomes effective
that omits information pursuant to Rule
<PAGE> 2
430A of the Rules and Regulations, is referred to herein as a
"preliminary prospectus"; such registration statement, as it may have
been amended at the time when it becomes effective, including financial
statements, exhibits, and the information, if any, deemed to be a part
of such registration statement by virtue of Rule 430A of the Rules and
Regulations, is referred to herein as the "Registration Statement"; and
such final form of prospectus, in the form in which it was first filed
pursuant to Rule 424(b) of the Rules and Regulations or, if no filing
pursuant to Rule 424(b) of the Rules and Regulations is made, in the
form included in the Registration Statement at the time it becomes
effective, is referred to herein as the "Prospectus."
(b) The Commission has not issued, nor has it had cause
to issue, an order preventing or suspending the use of any preliminary
prospectus and each such preliminary prospectus has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and has not included any untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. At the date
of this Agreement, when the Registration Statement becomes effective
and at the Closing Date (as defined below) (i) the Registration
Statement and Prospectus and any amendments or supplements thereto will
contain all statements that are required to be stated therein by the
Act and the Rules and Regulations and will in all material respects
conform to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement will not include any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, and (iii) the Prospectus will not include any untrue
statement of a material fact and will not omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations, warranties or agreements as to information contained
in or omitted from the Registration Statement or Prospectus or any such
amendment or supplement in reliance upon, and in conformity with,
written information furnished to the Company by the Underwriters
expressly for use therein.
(c) The consolidated financial statements of the Company
set forth in the Registration Statement and Prospectus present fairly,
in all material respects, the financial condition of the Company and
its subsidiary, Zevex, Inc. (the "Subsidiary") as of the dates
indicated and the results of operations and cash flows for the periods
therein specified in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except
as otherwise stated therein).
(d) Each of the Company and the Subsidiary has been duly
organized and is validly existing in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and the
Subsidiary has all requisite power and authority to own, lease and
operate its properties and to conduct its business as is described in
the Prospectus. Each of the Company and the Subsidiary is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which such qualification is required
except where the failure to so qualify will not have a material adverse
effect on the Company and the Subsidiary taken as a whole.
(e) The authorized, issued and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in
the Prospectus and the issued and outstanding shares of Common Stock of
the Company have been duly authorized and validly issued and are fully
paid and nonassessable. The sale of the Securities has been duly
authorized and after issuance of and payment for the Securities in
accordance with this Agreement, the Securities will be validly issued,
fully paid and nonassessable; the Underwriters will acquire good and
marketable title to the Securities (other than the Securities sold by
Selling Securityholders), free and clear of any adverse claims
whatsoever, and the holders of the Common Stock of the Company are not
entitled to any preemptive rights. All of the issued and outstanding
shares of the capital stock of the Subsidiary, which have been duly
authorized and validly issued, are fully paid and nonassessable and are
owned beneficially and of record by the Company free and clear of all
liens, claims or encumbrances whatsoever. Except as disclosed in the
Prospectus and the financial statements of the
2
<PAGE> 3
Company, and the related notes thereto, included in the Prospectus,
neither the Company nor the Subsidiary has outstanding any options or
warrants to purchase, any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its
capital stock or any such options, warrants, rights, convertible
securities or obligations. The Company's Common Stock has been approved
for listing and is listed on the American Stock Exchange ("AMEX").
(f) Except as contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor the
Subsidiary has incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary
course of business, that are material to the Company and the Subsidiary
taken as a whole, and there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company, or any
material adverse change in the condition (financial or other),
business, properties, prospects, net worth or results of operations of
the Company and the Subsidiary taken as a whole.
(g) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Company, threatened, any action,
suit or proceeding of which the Company or the Subsidiary is a party,
before or by any court or governmental agency or body, that would
result in any material adverse change in the condition (financial or
other), business, properties, prospects, net worth or results of
operations of the Company and the Subsidiary taken as a whole, or might
materially and adversely affect the properties or assets thereof.
(h) There are no contracts or documents that are required
to be filed as exhibits to the Registration Statement by the Act or by
the Rules and Regulations that have not been so filed.
(i) Except as set forth in the Prospectus, the Company
and the Subsidiary owns or has valid leasehold interests in all
properties and assets required for the operation of their business as
now conducted or as proposed to be conducted, including those described
in the Registration Statement and the Prospectus as being owned by
them; and each of the Company and the Subsidiary has good title to all
properties and assets owned by it material to its business. All leases
to which the Company or the Subsidiary is a party are valid, subsisting
and enforceable and no default by the Company or the Subsidiary has
occurred and is continuing thereunder; and each of the Company and the
Subsidiary enjoys peaceful and undisturbed possession under all such
leases to which it is a party as lessee.
(j) The Company has full right, power and authority to
enter into this Agreement and the Warrant Agreement, in the form of
Exhibit 1 hereto (the "Warrant Agreement"), and to perform all of its
obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and the Warrant Agreement by the Company
does not and will not violate, breach or conflict with the Articles of
Incorporation or bylaws of the Company or the Subsidiary or any
agreement to which the Company or the Subsidiary is a party or by which
the Company or the Subsidiary or any of their properties is bound or
any statute or order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or the Subsidiary
or any of their properties; and no consent, approval, authorization or
order of, or filing with, any court or governmental agency or body is
required in connection with the transactions contemplated hereby except
as may be required under the Act or state securities or "Blue Sky"
laws. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding obligation of the
Company in accordance with its terms.
(k) The business of the Company and the Subsidiary, as
presently conducted, does not violate any patent, trademark, service
mark or proprietary interest of any other individual, corporation,
partnership or other business entity, the violation of which might have
a material adverse effect upon the Company and the Subsidiary taken as
a whole.
3
<PAGE> 4
(l) Except as set forth in the Registration Statement, the Company
does not own any shares of capital stock or any other securities of any
corporation or have any equity interest in any firm, partnership, association or
other entity or subsidiary.
2. Representations, Warranties and Covenants of the Selling
Securityholders. Each Selling Securityholder, severally and not jointly,
represents and warrants to, and covenants and agrees with, each of the
Underwriters as follows:
(a) Such Selling Securityholder has full power and
authority to enter into this Agreement, the Power of Attorney
appointing Dean G. Constantine and Phillip L. McStotts (in the case of
those Selling Securityholders who are selling the Secondary Shares) or
Dean G. Constantine and Kirk Blosch (in the case of those Selling
Securityholders who are selling the Warrants), and each of them, as
attorneys-in-fact (the "Power of Attorney") and the Custody Agreement
with U.S. Trust Company of California, N.A. as Custodian (the "Custody
Agreement"). All authorizations and consents necessary for the
execution and delivery by or on behalf of such Selling Securityholder
of this Agreement, the Power of Attorney and the Custody Agreement have
been given. Each of this Agreement, the Power of Attorney and the
Custody Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Securityholder and each of this Agreement,
the Power of Attorney and the Custody Agreement constitutes a valid and
binding agreement of such Selling Securityholder and is enforceable
against such Selling Securityholder in accordance with the terms hereof
and thereof.
(b) Such Selling Securityholder now has, and at the time
of delivery thereof hereunder will have, (i) good and marketable title
to the Securities to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances and claims whatsoever (other
than pursuant to the Custody Agreement and the Power of Attorney), and
(ii) full legal right and power, and all authorizations and approvals
(other than those imposed by the Act and the securities or "Blue Sky"
laws of certain jurisdictions) required by law, to sell, transfer and
deliver such Securities to the Underwriters hereunder and to make the
representations, warranties and agreements made by such Selling
Securityholder herein. Upon the delivery of and payment for such
Securities hereunder, such Selling Securityholder will deliver good and
marketable title thereto, free and clear of all liens, encumbrances and
claims whatsoever.
(c) On the Closing Date, all stock transfer or other
taxes (other than income taxes), if any, that are required to be paid
in connection with the sale and transfer of the Securities to be sold
by such Selling Securityholder to the several Underwriters hereunder
will have been fully paid or provided for by such Selling
Securityholder and all laws imposing such taxes will have been fully
complied with.
(d) No consent, approval, authorization or order of, or
any filing with, any court or governmental agency or body is required
for the consummation by such Selling Securityholder of the transactions
on its part contemplated in this Agreement, the Power of Attorney or
the Custody Agreement, except as may be required under the Act or state
securities or "blue sky" laws.
(e) All information with respect to such Selling
Securityholder provided in writing to the Company by such Selling
Securityholder expressly for use in the Registration Statement and the
Prospectus, (i) complied and will comply with all applicable provisions
of the Act and the Rules and Regulations, (ii) contains and will
contain all statements required to be stated therein in accordance with
the Act and the Rules and Regulations, and (iii) does not and will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein not misleading.
4
<PAGE> 5
(f) Other than as permitted by the Act and the Rules and
Regulations, such Selling Securityholder has not distributed and will
not distribute any preliminary prospectus, the Prospectus or any other
offering material in connection with the offering and sale of the
Securities. Such Selling Securityholder has not taken, directly or
indirectly, any action designed, or which might reasonably be expected,
to cause or result in, under the Act or otherwise, or which has caused
or resulted in, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(g) Certificates in negotiable form for the Securities to
be sold hereunder by such Selling Securityholder have been placed in
custody, for the purpose of making delivery of such Securities under
this Agreement, under the Custody Agreement for each Selling
Securityholder. Such Selling Securityholder agrees that the Securities
represented by the certificates held in custody for him, her or it
under the Custody Agreement are for the benefit of and coupled with and
subject to the interest of the Custodian, the Committee (as that term
is defined in the Power of Attorney), the Underwriters, each other
Selling Securityholder and the Company, that the arrangements made by
such Selling Securityholder for such custody and the appointment of the
Custodian and the Committee by such Selling Securityholder are
irrevocable, and that the obligations of such Selling Securityholder
hereunder shall not be terminated by operation of law, whether by the
death, disability, incapacity or liquidation of any Selling
Securityholder or the occurrence of any other event. If any Selling
Securityholder should die, become disabled or incapacitated or if any
other such event should occur before the delivery of the Securities
hereunder, certificates for the Securities shall be delivered by the
Custodian in accordance with the terms and conditions of the Power of
Attorney, Custody Agreement and this Agreement and actions taken by the
Custodian and the Committee pursuant to the Custody Agreement and the
Power of Attorney shall be as valid as if such death, disability,
incapacity or other event had not occurred, regardless of whether or
not the Custodian or the Committee, or either of them, shall have
received notice thereof.
(h) None of the proceeds received by such Selling
Securityholder from the sale of the Securities will be paid to a member
of the National Association of Securities Dealers, Inc. or any
affiliate of such member.
3. Sale and Purchase of the Securities.
(a) The Company hereby agrees to sell the Primary
Securities to the several Underwriters as set forth in Schedule A
attached hereto, and the several Underwriters, in reliance upon the
representations, warranties and agreements herein contained, but
subject to the conditions hereinafter stated, agree, severally and not
jointly, to purchase from the Company, at the place and the time
specified below, the respective aggregate numbers of Primary Securities
set forth in Schedule A opposite their respective names, plus any
additional Securities which such Underwriters may become obligated to
purchase pursuant to the provisions of Section 3(b) hereof, at a price
of $11.65625 per share of Common Stock.
(b) In addition, on the basis of the representations and
warranties herein contained, upon not less than five days' notice from
the Representatives to the Selling Securityholders, the Selling
Securityholders
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<PAGE> 6
agree to sell to the Underwriters (but only for the purpose of covering
over-allotments in the sale of the Primary Securities), all or any
portion of the Over-Allotment Securities, as specified by the
Representatives in such Notice, at a price of $11.65625 per share of
Common Stock and $8.15625 per Warrant. The Company agrees to issue and
sell to the Underwriters the number of shares of the Company's Common
Stock issuable upon exercise of the Warrants included in the
Over-Allotment Securities so acquired and the Underwriters, in reliance
upon the representations, warranties and agreements herein contained,
agree, severally and not jointly, to exercise such warrants and
purchase such shares of Common Stock from the Company. Such shares of
Common Stock shall thereupon become Over-Allotment Securities. The
Over-Allotment Securities may be purchased on the Closing Date or at
any time or times thereafter so long as the notice to purchase is given
within a period of 45 days following the effective date of the
Registration Statement. Over-Allotment Securities shall be purchased by
each Underwriter in the proportion which the number of Primary
Securities set opposite the name of each Underwriter in Schedule A
hereto bears to the total number of Primary Securities. No
Over-Allotment Securities shall be delivered to or for the accounts of
the Underwriters unless the Primary Securities shall be simultaneously
delivered and paid for or shall theretofore have been delivered and
paid for as herein provided.
(c) The respective purchase obligation of each
Underwriter shall be subject to such adjustments as the Representatives
may in their absolute discretion make.
4. Terms of Offering and Authority to Use Prospectus. The terms
of the public offering by the Underwriters of the Securities to be purchased by
them shall be as set forth in the Registration Statement and the Prospectus.
The Company and the Selling Securityholders have authorized the
Representatives to use preliminary prospectuses and to make them available for
use by prospective Underwriters and dealers and authorize the Underwriters and
all dealers acquiring Securities from an Underwriter to use the Prospectus (as
amended or supplemented, if the Company shall have furnished any amendments or
supplements thereto) in connection with the sale of the Securities until the
earlier of completion of the public offering or the 90th day following
effectiveness of the Registration Statement.
5. Payment and Delivery.
(a) Payment for the Primary Securities which the
Underwriters agree to purchase hereunder shall be made to the Company
by bank cashier's checks payable in Los Angeles Clearing House funds at
the offices of Wedbush Morgan Securities, Inc., 1000 Wilshire
Boulevard, 9th Floor, Los Angeles, California 90017-2465, or, in the
case of payment to the Company, by wire transfer of immediately
available funds to such account as the Company shall designate in
writing, at 10:00 a.m., Pacific Time, on November 26, 1997, (unless
postponed in accordance with the provisions of Section 10 hereof), or
at the time, date (not later than seven full business days thereafter)
and place agreed upon by the Representatives and the Company, against
delivery to the Representatives for the respective accounts of the
several Underwriters of the Primary Securities in the form of
certificates for the securities comprising the Primary Securities. The
date and time of this payment and delivery (which may be postponed as
provided in Section 10 hereof) are sometimes referred to below as the
"First Closing Date."
(b) Payment for the Over-Allotment Securities which the
Underwriters have the right to purchase hereunder and payment to the
Company of the exercise price thereof shall be made to the Selling
Securityholders or the Company, as applicable, by bank cashier's check
or checks payable in Los Angeles Clearing House funds at the office
specified in the immediately preceding paragraph at the time or times
and on the date or dates specified in the notice or notices delivered
by the Representatives against delivery for the respective accounts of
the several Underwriters of the Over-Allotment Securities in the form
of certificates for the securities comprising the Over-Allotment
Securities. The dates and times of these
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<PAGE> 7
payments and deliveries are herein singularly or collectively sometimes
referred to as the "Second Closing Date." The term "Closing Date"
refers to both the First Closing Date and the Second Closing Date.
(c) You, individually and not as Representatives of the
Underwriters, may (but shall not be obligated to) make payment to the
Company or the Selling Securityholders, as applicable, for Securities
to be purchased by any Underwriter whose check shall not have been
received by you at the date of payment therefor for the account of that
Underwriter. Any payment by you shall not relieve that Underwriter from
any of its obligations hereunder.
(d) The certificates for the Securities shall be
registered in the name or names and shall be in the denominations you,
as Representatives, at least three full business days prior to the
First Closing Date, in the case of the Primary Securities, and at least
three full business days prior to the Second Closing Date, in the case
of the Over-Allotment Securities, may request. The Company and the
Selling Securityholders agree to cause certificates for the Securities
to be delivered pursuant to this Agreement at your offices, at the
offices of The Depositary Trust Company, New York, New York, or at such
other places as may be designated by you as Representatives, and to be
made available for checking and packaging at one of the above offices
or such other places as may be designated by you as the Representatives
at least one full business day prior to the First Closing Date in the
case of the Primary Securities, and at least one full business day
prior to the Second Closing Date, in the case of the Over-Allotment
Securities.
6. Conditions of the Underwriters' Obligations. The several
obligations of the Underwriters hereunder are subject to the following
conditions:
(a) The Registration Statement shall have become
effective under the Act not later than (i) 2:00 p.m., Pacific Time, on
the day following the date of this Agreement or (ii) such other time
and date, but not later than 2:00 p.m, Pacific Time, on the second day
following the date of this Agreement, as may be approved by the
Underwriters (including the Representatives) that are obligated to
purchase an aggregate of more than 50% of the Securities; and, at the
Closing Date, no stop order suspending the effectiveness of the
Registration Statement or the qualifications of the Securities shall
have been issued and no proceedings for that purpose shall be pending
before or threatened by the Commission or any state securities or "Blue
Sky" commissioner or authority.
(b) At each Closing Date, (i) the representations and
warranties of the Company and the Selling Securityholders contained in
this Agreement shall be true and correct with the same effect as if
made on and as of such Closing Date and the Company and the Selling
Securityholders shall have performed all of the obligations and
complied with all of the conditions hereunder on their part to be
performed or complied with on or prior to the Closing Date; (ii) the
Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations and
shall in all material respects conform to the requirements thereof, and
neither the Registration Statement nor the Prospectus nor any amendment
or supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, not misleading; (iii)
there shall have been, since the respective dates as of which
information is given, no material adverse change in the business,
properties or condition (financial or otherwise), results of
operations, properties, prospects, capital stock, long-term debt or
general affairs of the Company from that set forth in the Registration
Statement and the Prospectus, except changes which the Registration
Statement indicates might occur after the effective date of the
Registration Statement, and neither the Company nor the Subsidiary
shall have incurred any material liabilities or material obligations,
direct or contingent, or entered into any material transaction,
contract or agreement not in the ordinary course of business other than
as referred to or contemplated in the Registration Statement; and, (iv)
except as set forth in the Prospectus, no action, suit or proceeding at
law or in equity shall be pending or threatened against the Company or
the Subsidiary which would be required to be set forth in the
Registration Statement, and no proceedings shall be pending or
threatened against the Company or the Subsidiary before or by any
commission, board or administrative agency in the United States or
elsewhere, wherein an unfavorable
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<PAGE> 8
decision, ruling or finding would materially and adversely affect the
business, property, condition (financial or otherwise), results of
operations, properties, prospects, or general affairs of the Company
and the Subsidiary considered as a whole; and you shall have received
at each Closing Date, (i) a certificate of the principal executive
officer and the principal financial or accounting officer of the
Company, dated as of such Closing Date, evidencing compliance with the
provisions of this subsection (b), and confirming the accuracy of the
representations of the Company set forth in Section 1 hereof and
confirming that all conditions set forth herein have been met as of
such date, and (ii) a certificate from each Selling Securityholder,
dated as of such Closing Date, confirming the accuracy of the
representations of such Selling Securityholder set forth in Section 2
hereof and confirming that all conditions set forth herein to be met by
such Selling Securityholder have been met as of such date.
(c) No Underwriter shall have discovered and disclosed to
the Company prior to either Closing Date that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of a fact that in the reasonable opinion
of the Representatives is material, or omits to state any material fact
required to be stated therein or necessary in order to make the
statements therein, not misleading.
(d) On each Closing Date you shall have received a signed
opinion, dated as of such date, of Riordan & McKinzie, counsel to the
several Underwriters, with respect to the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby, and the Company and the Selling
Securityholders shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon
such matters.
(e) On each Closing Date you shall have received the
signed opinion, dated as of such date, of Jones, Waldo, Holbrook &
McDonough, counsel to the Company, in form reasonably satisfactory to
counsel for the Underwriters, together with signed or photostatic
copies thereof for each of the other Underwriters to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries taken as a whole;
(ii) except as set forth in the Registration
Statement, the Company does not own any shares of capital stock or any
other securities of any corporation or have any equity interest in any
firm, partnership, association or other entity or subsidiary. All of
the issued and outstanding shares of the capital stock of the
Subsidiary have been duly authorized and validly issued to the Company
and are fully paid and nonassessable.
(iii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries taken as a whole;
(iv) the authorized capital stock of the Company
conforms as to legal matters to the description thereof contained in
the Prospectus;
8
<PAGE> 9
(v) the shares of Common Stock (including the
Securities, other than the Warrants, to be sold by the Selling
Securityholders) outstanding prior to the issuance of the Securities to
be sold by the Company have been duly authorized and are validly
issued, fully paid and nonassessable;
(vi) the Securities to be sold by the Company
have been duly authorized and, when issued and delivered in accordance
with the terms of this Agreement, will be validly issued, fully paid
and nonassessable, and the issuance of such Securities will not be
subject to any preemptive or similar rights and the shares of Common
Stock to be issued upon exercise of the Warrants by the Underwriters,
when issued and delivered in accordance with the terms of the Warrants,
will be duly authorized, validly issued, fully paid and nonassessable,
and the issuance of such shares will not be subject to any preemptive
or similar rights;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the execution and delivery by the Company
of, and the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or the
Subsidiary or, to such counsel's knowledge, any agreement or other
instrument binding upon the Company or the Subsidiary that is material
to the Company and the Subsidiary, taken as a whole, or, to the best of
such counsel's knowledge, any judgment, or decree of any governmental
body, agency or court having jurisdiction over the Company or the
Subsidiary, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or "blue sky" laws of
the various states in connection with the offer and sale of the
Securities by the Underwriters;
(ix) the statements (1) in the Prospectus under
the captions "Risk Factors--Possible Rule 144 Sales," "Risk
Factors--Impact of Anti-Takeover Measures in New Delaware Corporation;
Possible Issuance of Preferred Stock; Classified Board,"
"Business--Manufacturing Capabilities--Manufacturing Contracts," the
final paragraph of "Management--Directors, Executive Officers and
Certain Key Employees," "Management--Amended 1993 Stock Option Plan,"
"Management--Profit Sharing Plan," "Management--Employee Stock
Ownership Plan," "Description of Capital Stock" and "Shares Eligible
for Future Sale" and (2) in the Registration Statement in Item 14
(which opinion shall be accompanied by the signed opinion, dated as of
the same date, of Thorpe, North & Western, with respect to the
statements in the Prospectus under the caption "Business--Patents,
Trademarks and Other Proprietary Rights"), in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein;
(x) such counsel does not know of any legal or
governmental proceeding pending or threatened to which the Company or
the Subsidiary is a party or to which any of the properties of the
Company or the Subsidiary is subject that are required to be described
in the Registration Statement or the Prospectus and which are not so
described or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(xi) the Company is not an "investment company"
or an entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended;
(xii) such counsel is of the opinion that the
Registration Statement and Prospectus (except for financial statements
and schedules included therein as to which such counsel need not
express any opinion) comply as to form in all material respects with
the Act and the Rules and Regulations; to such counsel's knowledge,
except for financial statements and schedules as to which such counsel
need not express any opinion, the Registration Statement and the
prospectus included therein at the time the
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<PAGE> 10
Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and to such counsel's knowledge, except for financial
statements and schedules as to which such counsel need not express any
opinion, the Prospectus, as of its date and as of the date of the
opinion, did not and does not contain any untrue statement of a
material fact or omitted or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(xiii) to the best of such counsel's knowledge,
there are no outstanding options, warrants or other rights calling for
the issuance of, and no commitments, plans or arrangements to issue,
any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company, except as
disclosed in the Prospectus;
(xiv) the certificates for the Securities comply
with the provisions of Delaware law and have been duly approved by the
Board of Directors of the Company;
(xv) the Registration Statement has become
effective under the Act and, to the best knowledge of such counsel, no
stop order proceedings suspending the effectiveness of the Registration
Statement have been instituted or threatened or are pending under the
Act;
(xvi) the Warrant Agreement has been duly
authorized, executed and delivered by the Company and constitutes a
valid and binding obligation of the Company, enforceable in accordance
with its terms, except as limited by bankruptcy, reorganization or
similar laws affecting creditors' rights generally; the Warrant
Agreement, upon payment by the Representatives to the Company of
$1,000, will be validly issued, fully paid and nonassessable; and the
shares of Common Stock of the Company to be delivered upon exercise of
the Warrant Agreement have been duly reserved for issuance and if, as
and when issued and paid for in accordance with the provisions of the
Warrant Agreement, will be validly issued, fully paid and
nonassessable; and
(xvii) such counsel has participated in conferences
with officers and other representatives of the Company, representatives
of the independent public accountants of the Company and
representatives of the Underwriters and their counsel, at which the
contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon,
and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement
and the Prospectus (except as set forth above) and has not made any
independent check or verification thereof, on the basis of the
foregoing (relying as to materiality upon the statements of officers
and other representatives of the Company), no facts have come to such
counsel's attention that have made such counsel aware that either the
Registration Statement or any amendment (including any post-effective
amendment) thereto at the time such Registration Statement or amendment
became effective, and as of the Closing Date contained or contains an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus or any amendment or
supplement thereto as of their respective dates and as of the Closing
Date contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that
such counsel need express no opinion with respect to the financial
statements, schedules and other financial data included in the
Registration Statement or the Prospectus.
(f) On the Second Closing Date you shall have received
the signed opinion, dated as of such date, of counsel to the Selling
Securityholders, in form reasonably satisfactory to counsel to the
Underwriters, together with signed or photostatic copies thereof for
each of the other Underwriters, to the effect that:
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<PAGE> 11
(i) this Agreement has been duly authorized,
executed and delivered by or on behalf of each of the Selling
Securityholders;
(ii) the execution and delivery by each Selling
Securityholder of, and the performance by such Selling Securityholder
of its obligations under, this Agreement, the Custody Agreement and
Powers of Attorney of such Selling Securityholder will not contravene
any provision of applicable law, or the certificate of incorporation or
by-laws of such Selling Securityholder (if such Selling Securityholder
is a corporation), or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon such Selling Securityholder
or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction
over such Selling Securityholder, and no consent, approval,
authorization or order of or qualification with any governmental body
or agency is required for the performance by such Selling
Securityholder of its obligations under this Agreement, the Custody
Agreement or Power of Attorney of such Selling Securityholder, except
such as may be required by the securities or "blue sky" laws of the
various states in connection with the offer and sale of the Securities;
(iii) each of the Selling Securityholders has
valid marketable title to the Securities to be sold by such Selling
Securityholder and has the legal right and power, and all authorization
and approval required by law, to enter into this Agreement, the Custody
Agreement and Power of Attorney of such Selling Securityholder and to
sell, transfer and deliver the Securities to be sold by such Selling
Securityholder;
(iv) the Custody Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Securityholder and is a valid and binding agreement of such Selling
Securityholder; and
(v) delivery of the Securities to be sold by
each Selling Securityholder pursuant to this Agreement will pass
marketable title to such Securities free and clear of any security
interests, claims, liens, equities and other encumbrances.
(g) At the time of the signing of this Agreement and on
each Closing Date, you shall have received a signed letter, dated,
respectively, as of each such date, from each of Nielsen, Grimmett &
Company, Daines & Rasmussen P.C., and Ernst & Young LLP in form and
substance satisfactory to you, together with, in each case, signed or
photostatic copies thereof for each of the other Underwriters, to the
effect that:
(i) they are (or were in respect of the period
covered by the Company's financial statements audited by them)
independent auditors with respect to the Company within the meaning of
the Act and the published Rules and Regulations thereunder;
(ii) in their opinion, the financial statements
and schedules audited by them and included in the Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the published Rules
and Regulations thereunder.
Any such letter from Ernst & Young LLP shall also be to the effect
that:
(i) on the basis of procedures referred to in
such letter, including a reading of the latest available interim
financial statements of the Company, inquiries of officials of the
Company responsible for financial and accounting matters and the
performance of procedures specified by the American Institute of
Certified Public Accountants for a review of interim financial
statements as described in SAS No. 71, Interim Financial Information,
nothing caused them to believe that:
(A) at the date of the latest available
internal balance sheet of the Company and at a subsequent
specified date not more than five days prior to the date of
such letter,
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<PAGE> 12
there was any change in the capital stock or long-term debt of
the Company or any decrease in net current assets or net
assets as compared with amounts shown in the September 30,
1997, unaudited balance sheet included in the Registration
Statement, except in all instances for changes or decreases
that the Registration Statement discloses have occurred or may
occur or as may be set forth in such letter; or
(B) for the period from the date of the
latest available internal balance sheet of the Company to a
subsequent specified date not more than five days prior to the
date of such letter, there was any change in the capital
stock, increase in long-term debt or decrease in consolidated
net current assets or stockholders' equity of the Company;
(ii) they have inquired of certain officials of the
Company who have responsibility for financial and accounting matters
and those officials stated that the unaudited financial statements for
the month ended October 31, 1997, are in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements; and
(iii) they shall have carried out certain procedures
specified by you and shall have disclosed to you their findings with
respect to the amounts, percentages and financial information specified
by you and set forth in the Registration Statement and the Prospectus
and derived from general accounting and financial records of the
Company.
Any changes (increases or decreases) in the items set forth in these
letters which, in the reasonable judgment of the Representatives, are
materially adverse with respect to the financial position or results of
operations of the Company and the Subsidiary taken as a whole shall be
deemed to constitute a failure of the Company to comply with the
conditions to the obligations of the Underwriters hereunder.
(h) On or prior to the First Closing Date, the Company shall
execute and deliver to the Representatives the Warrant Agreement.
(i) All proceedings taken at or prior to each Closing Date in
connection with the sale of the Securities shall be satisfactory in
form and substance to you and Riordan & McKinzie, counsel to the
several Underwriters, and at the time of signing this Agreement and on
the Closing Date, you and such counsel shall have received each and
every additional document, letter, opinion, certificate or other item
dated and executed in a manner reasonably satisfactory to you and such
counsel, as you or such counsel may reasonably request in connection
with the Prospectus, the Registration Statement, the offer and sale of
the Securities hereunder, or proceedings at the Closing Date.
If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, all obligations of the several
Underwriters under this Agreement may be cancelled by the Representatives by
notifying the Company and the Selling Securityholders of such cancellation on or
prior to the applicable Closing Date.
7. Covenants of the Company and the Selling Securityholders.
7.1 The Company covenants and agrees as follows:
(a) To use its best efforts to bring about the
effectiveness of the Registration Statement and not, at any
time, whether before or after the effective date, file any
amendment to the Registration Statement or Prospectus or
supplement thereto of which you shall not previously have been
advised and furnished with a copy or to which you or your
counsel reasonably shall have objected or which is not in
compliance with the Act and the Rules and Regulations, and as
soon as the Company is advised thereof, to advise the
Representatives and confirm this advice in writing (i) when
the Registration Statement has become effective and (ii) of
the issuance by the Commission or any state securities or
"blue sky" commissioner or authority of any order suspending
the effectiveness of the
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<PAGE> 13
Registration Statement or any qualification of the Securities
or prohibiting the sale of the Securities or the initiation or
threatening of any proceedings for any such purpose.
(b) To deliver, on or before the effective date
of the Registration Statement and from time to time thereafter
until the earlier of completion of the offering or 90 days
following effectiveness of the Registration Statement, without
charge, to the Representatives and to send to the several
Underwriters, at such office or offices as the Representatives
may designate, as many copies of the preliminary prospectus
and Prospectus as the Representatives may reasonably request.
(c) To furnish each of the Representatives,
without charge, one executed copy of the Registration
Statement (including exhibits) and of any amendments thereto
and to furnish the Representatives, without charge, a
reasonable number of conformed copies of the Registration
Statement (excluding exhibits) and of any amendments thereto.
(d) To furnish each of the Representatives with
a copy of each proposed amendment or supplement before
amending or supplementing the Registration Statement or the
Prospectus.
(e) Until the earlier of completion of the
offering or 90 days following effectiveness of the
Registration Statement, if any event shall occur as a result
of which it shall be necessary to amend or supplement the
Prospectus in order to make the statements therein, in light
of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, forthwith to prepare and furnish,
at its own expense, to the Underwriters and to dealers (whose
names and addresses the Representatives will furnish to the
Company) to whom Securities may have been sold by the
Representatives and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented,
will not, in light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading.
(f) To make generally available to the Company's
security holders, as soon as practicable, but not later than
fifteen months after the end of the Company's current fiscal
quarter, an earnings statement (which need not be audited)
covering a period of twelve months beginning after the
effective date of the Registration Statement, which earnings
statement shall satisfy the provisions of the last paragraph
of Section 11(a) of the Act.
(g) For a period of three years following the
date of this Agreement, to supply to the Representatives, and
to each other Underwriter who may so request in writing,
copies of such financial statements and other periodic and
special reports as the Company may from time to time furnish
generally to holders of any class of its securities, and to
furnish each of the Representatives a copy of each annual
report on Form 10-K which it files with the Commission.
(h) To cooperate with the Representatives in an
endeavor to qualify the Securities for offer and sale under
the "blue sky" laws of such jurisdictions of the United States
as the Representatives may request, and to pay, or reimburse
if paid by the Representatives, fees and disbursements of
counsel for the Underwriters and all other expenses and filing
fees in connection therewith; provided, however, that the
Company shall not be required to file any general consent to
service of process or to qualify as a foreign corporation or
as a dealer in securities in any jurisdiction in which it is
not so qualified or to subject itself to taxation as doing
business in any jurisdiction.
(i) For a period of three years following the
date of this Agreement, to comply to the best of its ability
with the Act, the Rules and Regulations and the Securities
Exchange Act of 1934, as amended, and the rules and
regulations thereunder so as to permit the continuance of
sales and dealings in the Common Stock of the Company.
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<PAGE> 14
(j) To apply the net proceeds from the sale of
the Securities in accordance with the statement made under
"Use of Proceeds" in the Prospectus.
(k) To supply the Representatives with copies of
all correspondence to and from and all documents issued to and
by the Commission in connection with the registration of the
Securities under the Act.
7.2 The Company covenants and agrees to pay, or reimburse
if paid by the Representatives, whether or not the transactions
contemplated hereunder are consummated or this Agreement is terminated,
all costs and expenses incident to the entry into and performance under
this Agreement by the Company, and without limiting the generality of
the foregoing, all costs and expenses incident to (a) the issuance,
purchase, sale and delivery of the Securities to the Underwriters, (b)
the registration of the Securities and preparing, printing and shipping
the Registration Statement and the underwriting documents, (c) the
filing fees of the Commission, the National Association of Securities
Dealers, Inc. and state securities and "blue sky" commissioners and
authorities in connection with the Registration Statement and this
Agreement, and the fees, disbursements and expenses of counsel in
connection with state securities or "blue sky" matters, (d) the fees
and disbursements of counsel and accountants for the Company, (e) the
furnishing to the Representatives and the other Underwriters of copies
of the Registration Statement, any preliminary prospectus, the
Prospectus, this Agreement, the Blue Sky Survey (preliminary and
final), and of the documents required by paragraphs (b), (c), (d) and
(e) of Section 7.1, to be so furnished, including costs of preparing,
printing and shipment, (f) the preparation, printing, mailing,
delivery, filing and distribution by the Company of all supplements and
amendments to the Prospectus required by paragraph (e) of Section 7.1,
(g) the furnishing to the Representatives and the other Underwriters of
all reports and financial statements required by paragraphs (f) and (g)
of Section 7.1, and (h) the holding of informational meetings related
to the offer and sale of the Securities, other than the Underwriters'
expenses for air transportation and hotel accommodations. Except as set
forth above, the Representatives will pay the fees and costs of their
counsel, the costs of "tombstone" advertisements and their travel and
lodging costs incident to the due diligence and informational meetings.
If the sale of any of the Securities to the several Underwriters
pursuant to this Agreement is not consummated for any reason, the
Company will reimburse the several Underwriters for their out-of-pocket
expenses (including fees and expenses of counsel) in an amount not to
exceed $100,000, incurred by the Underwriters in connection with this
Agreement or in investigating, preparing to market or marketing the
Securities.
Each Selling Securityholder, severally and not jointly, agrees
to pay or cause to be paid all taxes, if any, on the transfer and sale
of the Securities being sold by such Selling Securityholder.
7.3 The Company, Kirk Blosch and Jeff W. Holmes
(shareholders of the Company) and each of the Selling Securityholders,
severally and not jointly, covenant and agree that it will not offer to
sell, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, any shares of Common Stock of the Company, or securities
convertible or exchangeable for, or any rights to purchase or acquire,
Common Stock, or enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of ownership of
Common Stock other than as provided in this Agreement or as
contemplated by the Registration Statement, for a period of 180 days
after the effective date of the Registration Statement, without the
prior written consent of the Representatives; provided, however, that
Kirk Blosch and Jeff W. Holmes shall have a demand registration right,
for a period of two years commencing February 1, 1998, with respect to
350,000 shares of Common Stock issuable upon the exercise of warrants
held by them on the date hereof. The Company also will, at or prior to
the First Closing Date, furnish you with a written agreement of each of
the persons listed on Schedule C hereto to the effect that they will
not offer to sell, sell or otherwise dispose of any shares of Common
Stock or securities convertible into or exchangeable for, or any rights
to purchase or acquire, Common Stock, for a period of 180 days after
the effective date of the Registration Statement, without the prior
written consent of the Representatives. This Section 7.3 shall not
apply to the transactions contemplated hereby or to the granting of
options or sale of Common Stock pursuant to the Company's Amended 1993
Stock Option Plan.
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<PAGE> 15
7.4 Each of the Selling Securityholders will, prior to or
concurrent with the execution and delivery of this Agreement, deliver
to the Representatives an executed copy of the Power of Attorney and
Custody Agreement relating to such Selling Securityholder.
8. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter (including specifically each person who may be substituted
for an Underwriter as provided in Section 10 hereof) and each person,
if any, who controls any Underwriter within the meaning of Section 15
of the Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them
may become subject under the Act or any other statute or at common law
or otherwise, and except as provided below, will reimburse each of the
Underwriters and each such controlling person, if any, for any legal or
other expenses incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement, in any preliminary prospectus or in the
Prospectus or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus or the omission or alleged
omission to state therein a material fact necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading, unless the untrue statement or omission or
alleged untrue statement or omission was made in such Registration
Statement, preliminary prospectus or Prospectus in reliance upon and in
conformity with information furnished in writing to the Company by you
or any Underwriter or any Selling Securityholder through you expressly
for use therein. Promptly after receipt by any Underwriter or any
person controlling the Underwriter of notice of the commencement of any
action in respect of which indemnity may be sought against the Company
under this Section 8, the Underwriter will notify the Company in
writing of the commencement thereof, and, subject to the provisions
stated below, the Company shall assume the defense of the action
(including the employment of counsel, who shall be counsel reasonably
satisfactory to such Underwriter or such person, as the case may be,
and the payment of expenses) insofar as such action shall relate to any
alleged liability in respect of which indemnity may be sought against
it. Any Underwriter or any controlling person shall have the right to
employ separate counsel in the action and to participate in the defense
thereof, but the fees and expenses of its counsel shall not be at the
expense of the Company unless the employment of that counsel has been
specifically authorized by the Company. The Company shall not be liable
to indemnify any person for any settlement of any action effected
without the Company's consent.
(b) Each Selling Securityholder, severally and not
jointly, will indemnify and hold harmless each Underwriter (including
specifically each person who may be substituted for an Underwriter as
provided in Section 10 hereof) and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act, from and
against any and all losses, claims, damages, expenses or liabilities,
joint or several, to which they or any of them may become subject under
the Act or any other statute or at common law or otherwise, and except
as provided below, will reimburse each of the Underwriters and each
such controlling person, if any, for any legal or other expenses
incurred by them or any of them in connection with investigating or
defending any actions whether or not resulting in any liability,
insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, in any preliminary prospectus or in the
Prospectus or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus or the omission or alleged
omission to state therein a material fact necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading, but only in so far as such untrue statement
or omission or alleged untrue statement or omission was made in such
Registration Statement, preliminary prospectus or Prospectus (if used
within the time period set forth in Section 7.1(b) hereof) in
15
<PAGE> 16
reliance upon and in conformity with information furnished in writing
to the Company by such Selling Securityholder expressly for use
therein. Promptly after receipt by any Underwriter or any person
controlling the Underwriter of notice of the commencement of any action
in respect of which indemnity may be sought against a Selling
Securityholder under this Section 8, the Underwriter will notify such
Selling Securityholder in writing of the commencement thereof, and,
subject to the provisions stated below, such Selling Securityholder may
assume the defense of the action (including the employment of counsel,
who shall be counsel reasonably satisfactory to such Underwriter or
such person, as the case may be, and the payment of expenses) insofar
as such action shall relate to any alleged liability in respect of
which indemnity may be sought against it. Any Underwriter or any
controlling person shall have the right to employ separate counsel in
the action and to participate in the defense thereof, but the fees and
expenses of its counsel shall not be at the expense of such Selling
Securityholder unless the employment of that counsel has been
specifically authorized by such Selling Securityholder. Each Selling
Securityholder shall not be liable to indemnify any person for any
settlement of any action effected without such Selling Securityholder's
consent.
(c) Each Underwriter will severally, and not jointly,
indemnify and hold harmless the Company, each of its directors, each of
its officers who have signed the Registration Statement, each person,
if any, who controls the Company within the meaning of Section 15 of
the Act and each Selling Securityholder and each person, if any, who
controls such Selling Securityholder within the meaning of Section 15
of the Act from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them
may become subject under the Act or any other statute or at common law
or otherwise, and, except as provided below, will reimburse the Company
and each such director, officer or controlling person and each Selling
Securityholder for any legal or other expenses incurred by them or any
of them in connection with investigating or defending any actions
whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, in any
preliminary prospectus or in the Prospectus or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading,
but only insofar as any such untrue statement or omission or alleged
untrue statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by you
or any Underwriter through you expressly for use therein. Promptly
after receipt of notice of the commencement of any action in respect of
which indemnity may be sought against one or more Underwriters under
this Section 8, the indemnified party will notify the Representatives
in writing of the commencement thereof, and the Underwriter or
Underwriters against whom indemnity may be sought shall, subject to the
provisions stated below, assume the defense of the action (including
the employment of counsel, who shall be counsel reasonably satisfactory
to the Company and the Selling Securityholders, as applicable, and the
payment of expenses) insofar as such action shall relate to any alleged
liability in respect to which indemnity my be sought against the
Underwriter or Underwriters. The Company and each director, officer or
controlling person and each Selling Securityholder shall have the right
to employ separate counsel in any action and to participate in the
defense thereof, but the fees and expenses of their counsel shall not
be at the expense of any Underwriter unless the employment of that
counsel has been specifically authorized by the Underwriter or
Underwriters obligated to defend the action. The Underwriter against
whom indemnity may be sought shall not be liable to indemnify any
person for any settlement of any action effected without the
Underwriter's consent.
(d) It is agreed that the only information supplied by
the Underwriters in writing for use in the Registration Statement, the
preliminary prospectus or the Prospectus are set forth in the last
paragraph on the cover of the Prospectus, the first paragraph under the
table under the heading "Underwriting" and the third paragraph under
the table under the heading "Underwriting" in the Prospectus and that
no information
16
<PAGE> 17
has been omitted from the Registration Statement in reliance on
information supplied by the Underwriters in writing.
(e) In order to provide for just and equitable
contribution under the Act in any case in which (i) any indemnified
party makes claim for indemnification pursuant to this Section 8, but
it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 8 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party; then the Company, each
Selling Securityholder and any such Underwriter shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be
subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all
attorneys' fees) in either such case (after contribution from others)
in such proportions so that all such Underwriters are responsible in
the aggregate for that portion of such losses, claims, damages or
liabilities as is determined by multiplying the total amount of such
losses, claims, damages or liabilities times the difference between the
public offering price and the purchase price to the Underwriter and
dividing the product thereof by the public offering price, and the
Company and the Selling Securityholders shall be responsible for the
portion of such losses, claims, damages or liabilities as determined by
multiplying the total amount of such losses, claims, damages or
liabilities times the purchase price to the Underwriters and dividing
the product thereof by the public offering price; provided, however,
that the contribution of each contributing Underwriter shall not be in
excess of its proportionate share (based on the ratio of the number of
Securities purchased by such Underwriter to the number of Securities
purchased by all contributing Underwriters) of the portion of such
losses, claims, damages or liabilities for which the Underwriters are
responsible and the contribution of the Company and each Selling
Securityholder shall not be in excess of their proportionate share
(based on the ratio of the number of Securities sold by the Company or
such Selling Securityholder to the total number of Securities sold) of
the portion of such losses, claims, damages or liabilities for which
the Company and the Selling Securityholders are responsible. No person
guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. The foregoing
contribution agreement shall in no way affect the contribution
liabilities of any person having liability under Section 11 of the Act
other than the Company, the Selling Securityholders and the
Underwriters. If the full amount of the contribution specified in this
paragraph is not permitted by law, then the Company and the Selling
Securityholders and any Underwriter, as the case may be, shall be
entitled to contribution from the Company and the Selling
Securityholders and/or the Underwriters, as the case may be, to the
full extent permitted by law.
9. Effective Date and Termination.
(a) This Agreement shall become effective at 10:00 a.m.,
Pacific Time, on the first full business day following the day on which
the Registration Statement becomes effective or at the time of the
initial public offering of any of the Securities by the Underwriters
after the Registration Statement becomes effective, whichever time
shall first occur. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement, which is subsequently published, relating to the
Securities, or the time at which the Securities are first generally
offered by the Underwriters to dealers by letter or telegram, whichever
shall first occur. You may prevent this Agreement from becoming
effective without liability of any party to any other party, except as
otherwise provided in Sections 9(b) and (c), by giving notice as
indicated below in Section 9(b) prior to the time when this Agreement
would otherwise become effective as herein provided.
(b) This Agreement, except for Sections 7.2, 8, 11, 12
and 13, may be terminated by the Representatives by notifying the
Company and the Selling Securityholders at any time at or prior to the
First Closing Date, and the option referred to in Section 4(b) hereof,
if exercised, may be cancelled at any time prior to the Second Closing
Date, if, in the Representatives' judgment, payment for and delivery of
the
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<PAGE> 18
Securities is rendered impracticable or inadvisable by reason of (i)
the Company having sustained a material loss, whether or not insured,
by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree,
(ii) trading in securities on the New York Stock Exchange, the American
Stock Exchange or Nasdaq-NMS having been suspended or limited, (iii)
material governmental restrictions having been imposed on trading in
securities generally, (iv) a banking moratorium having been declared by
Federal or California or New York state authorities, (v) an outbreak of
major international hostilities or other national or international
calamity having occurred, (vi) the passage by the Congress of the
United States or by any state legislative body, of any act or measure,
or the adoption or proposed adoption of any orders, rules, legislation
or regulations by any governmental body or any authoritative accounting
institute or board, or any governmental executive, which is believed
likely by the Representatives to have a material adverse impact on the
business, financial condition or financial statements of the Company or
the market for the securities offered hereby, (vii) any material
adverse change having occurred, since the respective dates as of which
information is given in the Registration Statement and Prospectus, in
the condition of the Company, financial or otherwise, or in the
earnings, affairs or business prospects of the Company, whether or not
arising in the ordinary course of business which, in your judgment,
makes it impracticable or inadvisable to offer or deliver the
Securities on the terms contemplated by the Prospectus, or (viii) any
of the conditions specified in Section 6 hereof not having been
fulfilled or waived in writing by the Representatives, at or prior to
the Closing Date, when and as required by this Agreement to be
fulfilled.
(c) If this Agreement shall be terminated pursuant to any
of the provisions hereof, except as provided in Sections 7.2 and 8,
neither the Company nor the Selling Securityholders shall be under any
liability to any Underwriter nor shall any Underwriter be under any
liability to the Company or the Selling Securityholders, except that no
Underwriter which shall have failed or refused to purchase the
Securities agreed to be purchased by it hereunder, without some reason
sufficient hereunder to justify its cancellation or termination of its
obligations hereunder, shall be relieved of liability to the Company,
to the Selling Securityholders or to the other Underwriters for damages
occasioned by its default.
10. Default of Underwriters. If one or more of the Underwriters
shall fail or refuse (other than for a reason sufficient to justify the
termination of this Agreement) to purchase on the First Closing Date or the
Second Closing Date the aggregate number of Primary Securities or Over-Allotment
Securities agreed to be purchased by such Underwriter or Underwriters and the
aggregate number of Primary Securities or Over-Allotment Securities agreed to be
purchased by the Underwriter or Underwriters shall not exceed 10% of the total
number of Primary Securities or Over-Allotment Securities (as the case may be)
to be sold hereunder to the Underwriters, then each of the non-defaulting
Underwriters shall be obligated to purchase these Primary Securities or
Over-Allotment Securities on the terms herein set forth in proportion to their
respective obligations hereunder. In that case, the Representatives and the
Company shall have the right to postpone the First Closing Date or the Second
Closing Date (as the case may be) for a period of not more than seven days in
order that necessary changes and arrangements may be effected.
If one or more of the Underwriters shall fail or refuse (other than for
a reason sufficient to justify the termination of this Agreement) to purchase on
the First Closing Date or the Second Closing Date the aggregate number of
Primary Securities or Over-Allotment Securities agreed to be purchased by such
Underwriter or Underwriters and the aggregate number of Primary Securities or
Over-Allotment Securities agreed to be purchased by such Underwriter or
Underwriters shall exceed 10% of the total number of Primary Securities or
Over-Allotment Securities (as the case may be) to be sold hereunder to the
Underwriters, then the non-defaulting Underwriters shall have the right to
purchase, or procure one or more Underwriters reasonably acceptable to the
Company, to purchase, in such proportions as they may agree upon and upon the
terms herein set forth, the Primary Securities or Over-Allotment Securities
which such defaulting Underwriter or Underwriters agreed to purchase, and this
Agreement shall be carried out accordingly. If such other Underwriters do not
exercise this right within twenty-four hours after receiving notice of the
default, then the Company shall be entitled to an additional period of
twenty-four hours within which to procure another party or parties satisfactory
to the Representatives to purchase or agree to purchase these Primary Securities
or Over-Allotment Securities on the terms herein set forth. In any such case,
the Representatives and the Company shall have the right to postpone the First
Closing Date or the Second Closing Date (as the case may be) for a period of not
more than seven
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<PAGE> 19
days in order that necessary changes and arrangements may be effected. If this
paragraph becomes applicable and neither the non-defaulting Underwriters nor the
Company shall make arrangements within the period stated for the purchase of the
Primary Securities or Over-Allotment Securities which the defaulting Underwriter
or Underwriters agreed to purchase, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Securityholders and without liability on the part of the Company or the
Selling Securityholders except as provided in Sections 7.2 and 8. The provisions
of this Section 10 shall not in any way affect the liability of any defaulting
Underwriter to the Company or the Selling Securityholders arising out of the
default.
11. Representations and Agreement to Remain in Effect. The
expense, reimbursement and indemnification agreements contained in Sections 7, 8
and 9 shall survive any termination of this Agreement; and the representations,
warranties and covenants of the Company and the Selling Securityholders set
forth in this Agreement shall remain operative and in full force and effect
regardless of (i) any investigation made by or on behalf of any of the
Underwriters, the Company, any controlling person, director or officer of the
Company or the Underwriters, or the Selling Securityholders, and (ii) delivery,
acceptance of and payment for the Securities under this Agreement.
12. Parties in Interest. This Agreement has been and is made
solely for the benefit of the Underwriters, the Company and the Selling
Securityholders, and their respective successors and assigns, to the extent
expressed herein, for the benefit of persons controlling any of the Company, any
of Selling Securityholders or any of the Underwriters, directors and officers of
the Company and their respective successors and assigns, and no other person,
partnership, association or corporation shall acquire or have any right under or
by virtue of this Agreement. The term "successors and assigns" shall not include
any purchaser of Securities from any Underwriter merely because of such
purchase.
13. Notices, Headings, Applicable Law. Except as otherwise
provided in this Agreement, all statements, requests, notices and other
communications hereunder shall be in writing and shall be mailed, delivered,
telegraphed or sent by facsimile transmission and confirmed to the
Representatives at the address set forth above, attention: Investment Banking
(facsimile number: (213) 688-6642); and if to the Company or the Selling
Securityholders to Dean G. Constantine, President, ZEVEX International, Inc.,
4314 ZEVEX Park Lane, Salt Lake City, Utah 84123 (facsimile number: (801)
264-1051). Any party may change the address at which it is to receive
communications hereunder upon notice to the other parties as provided above. The
headings in this Agreement have been inserted as a matter of convenience and
reference and are not a part of this Agreement. The Agreement shall be construed
in accordance with the internal laws, and not the laws pertaining to choice or
conflict of laws, of the State of California.
19
<PAGE> 20
Please confirm that the foregoing correctly sets forth the agreement
among us.
Sincerely yours,
ZEVEX INTERNATIONAL, INC.
By __________________________________
Title:
SELLING SECURITYHOLDERS
DEAN G. CONSTANTINE
DAVID J. McNALLY
PHILLIP L. McSTOTTS
KIRK BLOSCH
JEFF W. HOLMES
GREGORY A. BERNETT
CRAIG D. CLAYSON
JOHN FREED
GEORGE C. AND JOAN M. HOFER
THOMAS E. HOFER
JOHN AND ANGELINE MARUSIAK
RONALD J. MARUSIAK
GEORGE N. McDONALD
GERALD A. MORGAN
ROBERT E. FREED, FAMILY TRUST
SNAKE EYES INVESTMENT, L.C.
RAY C. UNRATH
RAY M. UNRATH
CHARLES WAFER
By __________________________________
Attorney-in-Fact
Confirmed and Accepted as of the
date first above written.
WEDBUSH MORGAN SECURITIES, INC.
EVEREN SECURITIES, INC.
By____________________________________
For themselves and as the Representatives
of the several Underwriters.
20
<PAGE> 21
SCHEDULE A
UNDERWRITERS
Number of
Underwriter Securities
Wedbush Morgan Securities, Inc...................................... 420,000
EVEREN Securities, Inc. ............................................ 420,000
Cowen & Company..................................................... 30,000
A.G. Edwards & Sons, Inc. .......................................... 30,000
Advest Inc. ........................................................ 20,000
Crowell, Weedon & Co. .............................................. 20,000
Cruttenden Roth Incorporated........................................ 20,000
D.A. Davidson & Co. ................................................ 20,000
Fahnestock & Co. Inc. .............................................. 20,000
John G. Kinnard and Co. Inc. ....................................... 20,000
LT Lawrence & Co., Inc. ............................................ 20,000
The Ohio Company.................................................... 20,000
Pennsylvania Merchant Group Ltd. ................................... 20,000
Sands Brothers & Co., Ltd. ......................................... 20,000
The Seidler Companies Incorporated.................................. 20,000
Southwest Securities, Inc. ......................................... 20,000
Sutro & Co. Incorporated............................................ 20,000
Vector Securities International, Inc. .............................. 20,000
GBS Financial Corp. ................................................ 10,000
TriQuest Financial Inc. ............................................ 10,000
---------
Total.................................................... 1,200,000
21
<PAGE> 22
SCHEDULE B
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
Selling Number of Shares Number of
Securityholder of Stock to be Sold Warrants to be Sold
<S> <C> <C>
Dean G. Constantine 10,000
David J. McNally 10,000
Phillip L. McStotts 10,000
Gregory A. Bernett 7,500
Craig D. Clayson 7,500
John Freed 3,750
George C. and Joan M. Hofer 15,000
Thomas E. Hofer 15,000
John and Angeline Marusiak 7,500
Ronald J. Marusiak 7,500
George N. McDonald 15,000
Gerald A. Morgan 30,000
Robert E. Freed, Family Trust 3,750
Snake Eyes Investment, L.C. 7,500
Ray C. Unrath 12,000
Ray M. Unrath 3,000
Charles Wafer 15,000
</TABLE>
22
<PAGE> 23
SCHEDULE C
LIST OF SECURITYHOLDERS
Name Number of Securities
- ---- --------------------
None
23
<PAGE> 24
EXHIBIT 1
WARRANT AGREEMENT
24
<PAGE> 25
VOID AFTER 5:00 P.M., NEW YORK TIME, ON NOVEMBER __, 2002, OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING
BUSINESS DAY.
WARRANT TO PURCHASE
100,000
SHARES OF COMMON STOCK
OF
ZEVEX INTERNATIONAL, INC.
No. W-__
This certificates that, for and in consideration of services rendered and
in connection with the public offering of Common Stock of the Company named
below (the "Offering") and other good and valuable consideration,
__________________________ (the "Representative") and its registered, permitted
assigns (collectively, the "Warrantholder"), is entitled to purchase from ZEVEX
International, Inc., a corporation incorporated under the laws of the State of
Delaware (the "Company"), subject to the terms and conditions hereof, at any
time on or after 9:00 a.m., New York time, on November __, 1998 and before 5:00
p.m., New York time on November __, 2002 (or, if such day is not a Business Day,
at or before 5:00 p.m., New York time, on the next following Business Day), up
to 100,000 fully paid and nonassessable shares of Common Stock of the Company at
the Exercise Price (as defined herein). The Exercise Price and the number of
shares purchasable hereunder are subject to adjustment from time to time as
provided in Article 3 hereof.
<PAGE> 26
ARTICLE 1
DEFINITION OF TERMS
As used in this Warrant, the following capitalized terms shall have the
following respective meanings:
(a) Business Day: A day other than a Saturday, Sunday or other day
on which banks in the State of New York are authorized by law to remain Closed.
(b) Common Stock: Common Stock, $0.001 par value, of the Company.
(c) Common Stock Equivalents: Securities that are convertible into
or exercisable for shares of Common Stock.
(d) Demand Registration: See Section 6.2.
(e) Exchange Act: The Securities Exchange Act of 1934, as amended.
(f) Exercise Price: $__________ per Warrant Share, 120% of the
initial price to public in the Offering as set forth on the cover page of the
Prospectus with respect to the Offering as such Price may be adjusted from time
to time pursuant to Article 3 hereof.
(g) Expiration Date: 5:00 p.m., New York time on November __, 2002
or if such day is not a Business Day, the next succeeding day which is a
Business Day.
(h) 25% Holder: At any time as to which a Demand Registration is
requested, the Holder and/or the holders of any other Warrants and/or the
holders of Warrant Shares who have the right to acquire or hold, as the case may
be, not less than 25% of the continued total of Warrant Shares issuable and
Warrant Shares outstanding at the time such Demand registration is requested.
(i) Holder: A Holder of Registrable Securities.
(j) NASD: National Association of Securities Dealers, Inc.
(k) Net Issuance Exercise Date: See Section 2.2.
(l) Net Issuance Right: See Section 2.3.
(m) Net Issuance Warrant Shares: See Section 2.3.
(n) Person: An individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or agency
thereof.
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(o) Piggyback Registration: See Section 6.1.
(p) Prospectus: Any prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with respect
to the terms of the offering of any portion of the Registrable Securities
covered by such Registration Statement and all other amendments and supplements
to the Prospectus, including post-effective amendments and all materials
incorporated by reference in such Prospectus.
(q) Public Offering: A public offering of any of the Company's
equity or debt securities pursuant to a Registration Statement under the
Securities Act.
(r) Registration Expenses: Any and all expenses incurred in
connection with any registration or action incident to performance of or
compliance by the Company with Article 6, including, without limitation, (i) all
SEC, national securities exchange and NASD registration and filing fees; all
listing fees and all transfer agent fees; (ii) all fees and expenses of
complying with state securities or blue sky laws (including the fees and
disbursements of counsel of the underwriters in connection with blue sky
qualifications of the Registrable Securities); (iii) all printing, mailing,
messenger and delivery expenses; (iv) all fees and disbursements of counsel for
the Company and of its accountants, including the expenses of any special audits
and/or "cold comfort" letters (provided that the Company shall not be required
to incur expenses in respect of such special audits or "cold comfort" letters in
excess of $15,000) required by or incident to such performance and compliance;
and (v) any disbursements of underwriters customarily paid by issuers or sellers
of securities including the reasonable fees and expenses of any special experts
retained by the underwriters in connection with the requested registration, but
excluding underwriting discounts and commissions, brokerage fees and transfer
taxes, if any, and fees of counsel or accountants retained by the holders of
Registrable Securities to advise them in their capacity as Holders of
Registrable Securities.
(s) Registrable Securities: Any Warrant Shares issued to the
Representative and/or its designees or transferees and/or other securities that
may be or are issued by the Company upon exercise of the Warrants, including
those which may thereafter be issued by the Company in respect of any such
securities by means of any stock splits, stock dividends, recapitalizations,
reclassifications or the like, and as adjusted pursuant to Article 3 hereof;
provided, however, that as to any particular security contained in Registrable
Securities, such securities shall cease to be Registrable Securities when (i) a
Registration Statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance with such Registration Statement; or (ii) they shall
have been sold to the public pursuant to Rule 144 (or any successor provision)
under the Securities Act.
(t) Registration Statement: Any Registration Statement of the
Company filed or to be filed with the SEC which covers any of the Registrable
Securities pursuant to the provisions of this Agreement, including all
amendments (including post-effective amendments) and supplements thereto, all
exhibits thereto and all material incorporated therein by reference.
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<PAGE> 28
(u) SEC: The Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
(v) Securities Act: The Securities Act of 1933, as amended.
(w) Warrantholder: The person(s) or entity(ies) to whom this Warrant
is originally issued, or any successor in interest thereto, or any assignee or
transferee thereof, in whose name this Warrant is registered upon the books to
be maintained by the Company for that purpose.
(x) Warrants: This Warrant, all other warrants issued on the date
hereof and all other warrants that may be issued in its or their place (together
evidencing the right to purchase an aggregate of up to 100,000 shares of Common
Stock), originally issued as set forth in the definition of Registrable
Securities.
(y) Warrant Shares: Common Stock, Common Stock Equivalents and other
securities purchased or purchasable upon exercise or conversion of the Warrants.
ARTICLE 2
DURATION AND EXERCISE OF WARRANT
2.1 Duration of Warrant
The Warrantholder may exercise this Warrant at any time and from
time to time after 9:00 a.m., New York time, on November __, 1998 and before
5:00 p.m., New York time, on the Expiration Date (which is the date five years
after the effective date of the Offering). If this Warrant is not exercised on
the Expiration Date, it shall become void, and all rights hereunder shall
thereupon cease.
2.2 Method of Exercise
(a) The Warrantholder may exercise this Warrant, in whole or in
part, by presentation and surrender of this Warrant to the Company at its
corporate office at 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123 or at the
office of its stock transfer agent, if any, with the Exercise Form annexed
hereto duly executed and, in the event of an exercise for cash pursuant to
Section 2.3(a), accompanied by payment of the full Exercise Price for each
Warrant Share to be purchased.
(b) Upon receipt of this Warrant with the Exercise Form fully
executed and, in the event of an exercise for cash pursuant to Section 2.3(a),
accompanied by payment of the aggregate Exercise Price for the Warrant Shares
for which this Warrant is then being exercised, the Company shall cause to be
issued certificates for the total number of whole shares of Common Stock
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<PAGE> 29
for which this Warrant is being exercised (adjusted to reflect the effect of the
anti-dilution provisions contained in Article 3 hereof, if any, and as provided
in Section 2.5 hereof) in such denominations as are requested for delivery to
the Warrantholder, and the Company shall thereupon deliver such certificates to
the Warrantholder. A net issuance exercise pursuant to Section 2.3(b) shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Net Issuance Exercise Date"), and, at the election of the Holder hereof may be
made contingent upon the closing of the sale of the Warrant Shares in a Public
Offering. The Warrantholder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise as of the time of receipt of
the Exercise Form and payment in accordance with the preceding sentence, in the
case of an exercise for cash pursuant to Section 2.3(a), or as of the Net
Issuance Exercise Date, in the case of a net issuance exercise pursuant to
Section 2.3(b), notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Warrantholder. If at the time
this Warrant is exercised, a Registration Statement is not in effect to register
under the Securities Act the Warrant Shares issuable upon exercise of this
Warrant, the Company may, in the case of an exercise for cash pursuant to
Section 2.3(a) or in the case of a net issuance exercise prior to the
satisfaction of any holding period required by Rule 144 promulgated under the
Securities Act require the Warrantholder to make such representations, and may
place such legends on certificates representing the Warrant Shares, as may be
reasonably required in the opinion of counsel to the Company to permit Warrant
Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Warrant Shares that may be purchased under this
Warrant, the Company shall execute as of the exercise date (or, if later, the
Net Issuance Exercise Date) a new warrant in the form of this Warrant for the
balance of such Warrant Shares and deliver such new warrant to the Warrantholder
within 30 days following the exercise date (or, if later, the Net Issuance
Exercise Date).
(d) The Company shall pay any and all stock transfer and similar
taxes which may be payable in respect of the issuance of any Warrant Shares.
2.3 Exercise of Warrant
(a) Right to Exercise for Cash. This Warrant may be exercised by the
Holder by delivery of payment to the Company, for the account of the Company, by
cash, by certified or bank cashier's check or by wire transfer, of the Exercise
Price for the number of Warrant Shares specified in the Exercise Form in lawful
money of the United States of America.
(b) Right to Exercise on a Net Issuance Basis. In lieu of exercising
this Warrant for cash pursuant to Section 2.3(a), the Holder shall have the
right to exercise this Warrant or any portion thereof (the "Net Issuance Right")
into shares of Common Stock as provided in this Section 2.3(b) at any time or
from time to time during the period specified in Section 2.1 hereof by the
surrender of this Warrant to the Company, with a duly executed and completed
Exercise Form
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<PAGE> 30
marked to reflect net issuance exercise. Upon exercise of the Net Issuance Right
with respect to a particular number of shares subject to this Warrant and noted
on the Exercise Form (the "Net Issuance Warrant Shares"), the Company shall
deliver to the Holder (without payment by the Holder of any Exercise Price or
any cash or other consideration) (X) that number of shares of fully paid and
nonassessable Common Stock equal to the quotient obtained by dividing the value
of this Warrant (or the specified portion hereof) on the Net Issuance Exercise
Date, which value shall be determined by subtracting (A) the aggregate Exercise
Price of the Net Issuance Warrant Shares immediately prior to the exercise of
the Net Issuance Right from (B) the aggregate fair market value of the Net
Issuance Warrant Shares issuable upon exercise of this Warrant (or the specified
portion hereof) on the Net Issuance Exercise Date (as herein defined) by (Y) the
fair market value of one share of Common Stock on the Net Issuance Exercise Date
(as herein defined).
Expressed as a formula such net issuance exercise shall be computed as
follows:
X = B-A
---
Y
Where: X = the number of shares of Common Stock that may be issued
to the Holder
Y = the fair market value (FMV) of one share of
Common Stock as of the Net Issuance Exercise Date
A = the aggregate Exercise Price (i.e., Net Issuance Warrant
Shares x Exercise Price)
B = the aggregate FMV (i.e., FMV x Net Issuance Warrant
Shares)
(c) Determination of Fair Market Value. For purposes of this Section
2.3, "fair market value" of a share of Common Stock as of the Net Issuance
Exercise Date shall mean:
(i) If the Net Issuance Right is exercised in connection
with a Public Offering, and if the Company's Registration Statement relating to
such Public Offering has been declared effective by the SEC, then the initial
"Price to Public" specified in the final Prospectus with respect to such
offering.
(ii) If the Net Issuance Right is not exercised in
connection with and contingent upon a Public Offering, then as follows:
(A) If the Common Stock is traded on a securities
exchange, the fair market value of a share of the Common Stock shall be deemed
to be the average of the closing
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<PAGE> 31
prices of the Common Stock on such exchange over the 20 consecutive trading days
ending five business days prior to the Net Issuance Exercise Date;
(B) If the Common Stock is traded on the Nasdaq National
Market or the Nasdaq SmallCap Market, the fair market value of a share of the
Common Stock shall be deemed to be the average of the last reported sales prices
of the Common Stock on such Market over the 30-day period ending five business
days prior to the Net Issuance Exercise Date;
(C) If the Common Stock is traded over-the-counter other
than on the Nasdaq National Market or the Nasdaq SmallCap Market, the fair
market value of a share of the Common Stock shall be deemed to be the average of
the closing bid prices of the Common Stock over the 30-day period ending five
business days prior to the Net Issuance Exercise Date; and
(D) If there is no public market for the Common Stock,
then the fair market value of a share of the Common Stock shall be determined by
mutual agreement of the Warrantholder and the Company, and if the Warrantholder
and the Company are unable to so agree, at the Company's sole expense, by an
investment banker of national reputation selected by the Company and reasonably
acceptable to the Warrantholder.
2.4 Reservation of Shares
The Company hereby agrees that at all times there shall be reserved
for issuance and delivery upon exercise of this Warrant such number of shares of
Common Stock or other shares of capital stock of the Company from time to time
issuable upon exercise of this Warrant. All such shares shall be duly
authorized, and when issued upon such exercise, shall be validly issued, fully
paid and non-assessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale (except as contemplated
by Sections 2.2(b) and 5.2) and free and clear of all preemptive rights.
2.5 Fractional Shares
The Company shall not be required to issue any fraction of a share
of its capital stock in connection with the exercise of this Warrant, and in any
case where the Warrantholder would, except for the provisions of this Section
2.5, be entitled under the terms of this Warrant to receive a fraction of a
share upon the exercise of this Warrant, the Company shall, upon the exercise of
this Warrant, pay to the Warrantholder an amount in cash equal to the fair
market value of such fractional share as of the exercise date (or, if applicable
and a later date, the Net Issuance Exercise Date).
2.6 Listing
Prior to the issuance of any shares of Common Stock upon exercise of
this Warrant, the Company shall secure the listing of such shares of Common
Stock upon each national securities exchange or automated quotation system, if
any, upon which shares of Common Stock are then listed
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<PAGE> 32
(subject to official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Company shall so list on each national
securities exchange or automated quotation system, and shall maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of this Warrant if and so long as any shares of the same class shall be
listed on such national securities exchange or automated quotation system.
ARTICLE 3
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article 3.
3.1 Mechanical Adjustments
(a) If at any time prior to the exercise of this Warrant in full,
the Company shall (i) declare a dividend or make a distribution on the Common
Stock payable in shares of its capital stock (whether shares of Common Stock or
of capital stock of any other class); (ii) subdivide, reclassify or recapitalize
its outstanding Common Stock into a greater number of shares; (iii) combine,
reclassify or recapitalize its outstanding Common Stock into a smaller number of
shares; or (iv) issue any shares of its capital stock by reclassification of its
Common Stock (including any such reclassification in connection with a
consolidation or a merger in which the Company is the continuing corporation),
the number of Warrant Shares issuable upon exercise of the Warrant and/or the
Exercise Price in effect at the time of the record date of such dividend,
distribution, subdivision, combination, reclassification or recapitalization
shall be adjusted so that the Warrantholder shall be entitled to receive the
aggregate number and kind of shares which, if this Warrant had been exercised in
full immediately prior to such event, the Warrantholder would have owned upon
such exercise and had been entitled to receive by virtue of such dividend,
distribution, subdivision, combination, reclassification or recapitalization.
Any adjustment required by this Section 3.1(a) shall be made successively
immediately after the record date, in the case of a dividend or distribution, or
the effective date, in the case of a subdivision, combination, reclassification
or recapitalization, to allow the purchase of such aggregate number and kind of
shares.
(b) If at any time prior to the exercise of this Warrant in full,
the Company shall fix a record date for the issuance or making of a distribution
to all holders of the Common Stock (including any such distribution to be made
in connection with a consolidation or merger in which the Company is to be the
continuing corporation) of evidences of its indebtedness, any other securities
of the company or any cash, property or other assets (excluding a combination,
reclassification or recapitalization referred to in Section 3.1(a), regular cash
dividends or cash
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<PAGE> 33
distributions paid out of net profits legally available therefor and in the
ordinary course of business or subscription rights, options or warrants for
Common Stock or Common Stock Equivalents (excluding those referred to in Section
3.1(b)) (any such nonexcluded event being herein called a "Special Dividend"),
the Exercise Price shall be decreased immediately after the record date for such
Special Dividend to a price determined by multiplying the Exercise Price then in
effect by a fraction, the numerator of which shall be the then current market
price of the Common Stock (as defined in Section 3.1(e)) on such record date
less the fair market value (as determined by the Company's Board of Directors)
of the evidences of indebtedness, securities or property, or other assets issued
or distributed in such Special Dividend applicable to one share of Common Stock
or of such subscription rights or warrants applicable to one share of Common
Stock and the denominator of which shall be such then current market price per
share of Common Stock (as so determined). Any adjustments required by this
Section 3.1 (b) shall be made successively whenever such a record date is fixed
and in the event that such distribution is not so made, the Exercise Price shall
again be adjusted to be the Exercise Price that was in effect immediately prior
to such record date.
(c) If at any time prior to the exercise of this Warrant in full,
the Company shall make a distribution to all holders of the Common Stock of
stock of a subsidiary or securities convertible into or exercisable for such
stock, then in lieu of an adjustment in the Exercise Price or the number of
Warrant Shares purchasable upon the exercise of this Warrant, each
Warrantholder, upon the exercise hereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary or both, as the
Company shall determine, the stock or other securities to which such
Warrantholder would have been entitled if such Warrantholder had exercised this
Warrant immediately prior thereto, all subject to further adjustment as provided
in this Article 3, and the Company shall reserve, for the life of the Warrant,
such securities of such subsidiary, or other corporation; provided, however,
that no adjustment in respect of dividends or interest on such stock or other
securities shall be made during the term of this Warrant or upon its exercise.
(d) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to paragraph (b) of this Section 3.1, the Warrant
Shares shall simultaneously be adjusted by multiplying the number of Warrant
Shares then issuable upon exercise of each Warrant by the Exercise Price in
effect on the date thereof and dividing the product so obtained by the Exercise
Price, as adjusted.
(e) For the purpose of any computation under this Section 3.1, the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing prices for 20 consecutive trading days
commencing 30 trading days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such reported sales take
place on such day, the average of the last reported bid and asked prices regular
way, in either case on the principal national securities exchange on which the
Common Stock is admitted to trading or listed, or if not listed or admitted to
trading on such exchange, the representative closing bid price as reported by
Nasdaq, or other similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as determined in good
faith by the Board of Directors of the Company.
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<PAGE> 34
(f) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($.05) in such price; provided, however, that any adjustments which by reason of
this paragraph (f) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 3.1 shall be made to the nearest cent or to the nearest one-hundredth of
a share, as the case may be. Notwithstanding anything in this Section 3.1 to the
contrary, the Exercise Price shall not be reduced to less than the then existing
par value of the Common Stock as a result of any adjustment made hereunder.
(g) In the event that at any time, as a result of any adjustment
made pursuant to Section 3.1(a), the Warrantholder thereafter shall become
entitled to receive any shares of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Section 3.1(a) or this Section 3.1(g).
3.2 Notices of Adjustment
Whenever the number of Warrant Shares or the Exercise Price is
adjusted as herein provided, the Company shall prepare and deliver forthwith to
the Warrantholder a certificate signed by its President, and by any Vice
President, Treasurer or Secretary, setting forth the adjusted number of shares
purchasable upon the exercise of this Warrant and the Exercise Price of such
shares after such adjustment setting forth a brief statement of the facts
requiring such adjustment, and setting forth the computation by which such
adjustment was made.
3.3 No Adjustment for Dividends
Except as provided in Section 3.1 of this Agreement, no adjustment
in respect of any cash dividends shall be made during the term of this Warrant
or upon the exercise of this Warrant.
3.4 Preservation of Purchase Rights in Certain Transactions
In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in case of any consolidation or merger of the
Company with or into another corporation (other than merger with a subsidiary in
which the Company is the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in the
case of any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, the Company may, as a condition precedent to such transaction cause
such successor or purchasing corporation, as the case may be, to execute with
the Warrantholder an agreement granting the Warrantholder the right thereafter,
upon payment of the Exercise Price in effect immediately prior
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<PAGE> 35
to such action, to receive upon exercise of this Warrant the kind and amount of
shares and other securities and property which he would have owned or have been
entitled to receive after the happening of such reclassification, change,
consolidation, merger, sale, or conveyance had this Warrant been exercised
immediately prior to such action. In the event that in connection with any such
reclassification, capital reorganization, change, consolidation, merger, sale or
conveyance, additional shares of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for, or of, a security
of the Company other than Common Stock, any such issue shall be treated as an
issue of Common Stock covered by the provisions of Article 3. The provisions of
this Section 3.4 shall similarly apply to successive reclassifications, capital
reorganizations, consolidations, mergers, sales or conveyances.
3.5 Form of Warrant After Adjustments
The form of this Warrant need not be changed because of any
adjustments in the Exercise Price or the number or kind of the Warrant Shares,
and Warrants theretofore or thereafter issued may continue to express the same
price and number and kind of shares as are stated in this Warrant, as initially
issued.
3.6 Treatment of Warrantholder
Prior to due presentment for registration of transfer of this
Warrant, the Company may deem and treat the Warrantholder as the absolute owner
of this Warrant (notwithstanding any notation of ownership or other writing
hereon) for all purposes and shall not be affected by any notice to the
contrary.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
4.1 No Rights as Shareholders; Notice to Warrantholders
Nothing contained in this Warrant shall be construed as conferring
upon the Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Company or of any
other matter, or any rights whatsoever as shareholders of the Company. The
Company shall give notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any dividend payable
in any securities upon shares of Common Stock or authorize the making of any
distribution (other than a cash dividend excluded from the definition of
"Special Dividend" by the second parenthetical comment set forth in Section
3.1(b)) to all holders of Common Stock;
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<PAGE> 36
(b) the Company shall authorize the issuance to all holders of
Common Stock of any additional shares of Common Stock or Common Stock
Equivalents or of rights, options or warrants to subscribe for or purchase
Common Stock or Common Stock Equivalents or of any other subscription rights,
options or warrants;
(c) a dissolution, liquidation or winding up of the Company shall be
proposed; or
(d) a capital reorganization or reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock and
other than a change in the par value of the Common Stock) or any consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
that does not result in any reclassification or change of Common Stock
outstanding) or in the case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety.
Such giving of notice shall be initiated (i) at least 10 Business Days
prior to the date fixed as a record date or effective date or the date of
closing of the Company's stock transfer books for the determination of the
shareholders entitled to such dividend, distribution or subscription rights, or
for the determination of the shareholders entitled to vote on such proposed
merger, consolidation, sale, conveyance, dissolution, liquidation or winding up.
Such notice shall specify such record date or the date of closing the stock
transfer books, as the case may be. Failure to provide such notice shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or proposed merger, consolidation, sale,
conveyance, dissolution, liquidation or winding up.
4.2 Lost, Stolen, Mutilated or Destroyed Warrants
If this Warrant is lost, stolen, mutilated or destroyed, the Company
may, on such terms as to indemnity or otherwise as it may in its reasonable
judgment impose (which shall, in the case of a mutilated Warrant, including the
surrender thereof), issue a new Warrant of like denomination and tenor as, and
in substitution for, this Warrant.
ARTICLE 5
SPLIT-UP, COMBINATION, EXCHANGE AND
TRANSFER OF WARRANTS AND WARRANTY SHARES
5.1 Split-Up, Combination and Exchange of Warrants
This Warrant may be split-up, combined or exchanged for another
Warrant or Warrants containing the same terms to purchase a like aggregate
number of Warrant Shares. If the Warrantholder desires to split-up, combine or
exchange this Warrant, he or it shall make such request
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<PAGE> 37
in writing delivered to the Company and shall surrender to the Company this
Warrant and any other Warrants to be so split-up, combined or exchanged. Upon
any such surrender for a split-up, combination or exchange, the Company shall
execute and deliver to the person entitled thereto a Warrant or Warrants, as the
case may be, as so requested. The Company shall not be required to effect any
split-up, combination or exchange which will result in the issuance of a Warrant
entitling the Warrantholder to purchase upon exercise a fraction of a share of
Common Stock or a fractional Warrant. The Company may require such Warrantholder
to pay a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any split-up, combination or exchange of Warrants.
5.2 Restrictions on Transfer, Restrictive Legends
Except for transfers of a Warrant by operation of law or by reason
of the reorganization of the issuer, no Warrant may be sold, transferred,
assigned or hypothecated prior to November ____, 1998 (which is the date one
year after the effective date of the Offering), other than Warrants transferred
to an underwriter or dealer participating in the Offering or to an officer or
partner of such a participant. Each Warrant (and each Warrant issued upon direct
or indirect transfer of or in substitution for any Warrant) issued prior to
November ___, 1998, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION
OF THIS WARRANT PRIOR TO NOVEMBER ____, 1998 IS
RESTRICTED."
In addition, except as otherwise permitted by this Section 5.2, each
Warrant shall (and each Warrant issued upon direct or indirect transfer or in
substitution for any Warrant issued pursuant to Section 5.1 shall) be stamped or
otherwise imprinted with a legend in substantially the following form:
"THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
Except as otherwise permitted by this Section 5.2, each stock certificate
for Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or indirect transfer of any such Warrant
Shares shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
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<PAGE> 38
REGISTRATION STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
Notwithstanding the foregoing, the Warrantholder may require the Company
to issue a Warrant or a stock certificate for Warrant Shares, in each case
without a legend, if the issuance of such Warrant is not in contravention of the
initial sentence of this Section 5.2 and (i) the issuance of such Warrant Shares
has been registered under the Securities Act, (ii) such Warrant or such Warrant
Shares, as the case may be, have been registered for resale under the Securities
Act or sold pursuant to Rule 144 under the Securities Act (or a successor
thereto) or (iii) the Warrantholder has received an opinion of counsel (who may
be house counsel for such Warrantholder) reasonably satisfactory to the Company
that such registration is not required with respect to such Warrant or such
Warrant Shares, as the case may be.
ARTICLE 6
REGISTRATION UNDER THE SECURITIES ACT OF 1933
6.1 Piggyback Registration
(a) Right to include Registrable Securities. If at any time or from
time to time prior to the second anniversary of the Expiration Date (which is
the date seven years after the effective date of the Offering), the Company
proposes to register any of its securities under the Securities Act on any form
for the registration of securities under such Act, whether or not for its own
account (other than by a registration statement on Form S-8 or other form which
does not include substantially the same information as would be required in a
form for the general registration of securities or would not be available for
the Registrable Securities) (a "Piggyback Registration"), it shall as
expeditiously as possible give written notice to all Holders of its intention to
do so and of such Holders' rights under this Section 6.1. Such rights are
referred to hereinafter as "Piggyback Registration Rights." Upon the written
request of any such Holder made within 20 days after receipt of any such notice
(which request shall specify the Registrable Securities intended to be disposed
of by such Holder), the Company shall include in the Registration Statement the
Registrable Securities which the Company has been so requested to register by
the Holders thereof and the Company shall keep such registration statement in
effect and maintain compliance with each federal and state law or regulation for
the period necessary for such Holder to effect the proposed sale or other
disposition (but in no event for a period greater than 90 days).
(b) Withdrawal of Piggyback Registration by Company. If, at any time
after giving written notice of its intention to register any securities in a
Piggyback Registration but prior to the effective date of the related
Registration Statement, the Company shall determine for any reason not to
register such securities, the Company shall give notice of such determination to
each Holder and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such Piggyback Registration. All best
efforts obligations of the Company pursuant
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<PAGE> 39
to Section 6.4 shall cease if the Company determines to terminate prior to such
effective date any registration where Registrable Securities are being
registered pursuant to this Section 6.1.
(c) Piggyback Registration of Underwritten Public Offering. If a
Piggyback Registration involves an offering by or through underwriters, then (i)
all Holders requesting to have their Registrable Securities included in the
Company's Registration Statement must sell their Registrable Securities to the
underwriters selected by the Company on the same terms and conditions as apply
to other selling shareholders and (ii) any Holder requesting to have his or its
Registrable Securities included in such Registration Statement may elect in
writing, not later than three Business Days prior to the effectiveness of the
Registration Statement filed in connection with such registration, not to have
his or its Registrable Securities so included in connection with such
registration.
(d) Payment of Registration Expenses for Piggyback Registration. The
Company shall pay all Registration Expenses in connection with each registration
of Registrable Securities requested pursuant to a Piggyback Registration Right
contained in this Section 6. 1.
(e) Priority in Piggyback Registration. If a Piggyback Registration
involves an offering by or through underwriters, the Company, except as
otherwise provided herein, shall not be required to include Registrable Shares
therein if and to the extent the underwriter managing the offering reasonably
believes in good faith and advises each Holder requesting to have Registrable
Securities included in the Company's Registration Statement that such inclusion
would materially adversely affect such offering; provided that (i) if other
selling shareholders without contractual registration rights have requested
registration of securities in the proposed offering, the Company will reduce or
eliminate such securities held by selling shareholders without registration
rights before any reduction or elimination of Registrable Securities; and (ii)
any such reduction or elimination (after taking into account the effect of
clause (i)) shall be pro rata to all other selling shareholders with contractual
registration rights.
6.2 Demand Registration
(a) Request for Registration. If, at any time prior to the
Expiration Date (which is the date five years after the effective date of the
Offering), any 25% Holders request that the Company file a registration
statement under the Securities Act, as soon as practicable thereafter the
Company shall use its best efforts to file a registration statement with respect
to all Warrant Shares that it has been so requested to include and to obtain the
effectiveness thereof, and shall take all other action necessary under federal
or state law or regulation to permit the Warrant Shares that are held and/or
that may be acquired upon the exercise of the Warrants specified in the notices
of the Holders or holders hereof to be sold or otherwise disposed of, and the
Company shall maintain such compliance with each such federal and state law and
regulation for the period necessary for such Holders or holders to effect the
proposed sale or other disposition; provided, however, the Company shall be
entitled to defer such registration for a period of up to 60 days if and to the
extent that its Board of Directors shall determine that such registration would
interfere with a pending corporate
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<PAGE> 40
transaction. The Company shall also promptly give written notice to the Holders
and the holders of any other Warrants and/or the holders of any Warrant Shares
who or that have not made a request to the Company pursuant to the provisions of
this Section 6.2(a) of its intention to effect any required registration or
qualification, and shall use its best efforts to effect as expeditiously as
possible such registration or qualification of all such other Warrant Shares
that are then held and/or that may be acquired upon the exercise of the
Warrants, the Holder or holders of which have requested such registration or
qualification, within 15 days after such notice has been given by the Company,
as provided in the preceding sentence. The Company shall be required to effect a
registration or qualification pursuant to this Section 6.2(a) on one occasion
only.
(b) Payment of Registration Expenses for Demand Registration. The
Company shall pay all Registration Expenses in connection with the Demand
Registration.
(c) Selection of Underwriters. If any Demand Registration is
requested to be in the form of an underwritten offering, the managing
underwriters shall be Wedbush Morgan Securities and __________ and the other
co-manager (if any) and the independent price required under the rules of the
NASD (if any) shall be selected and obtained by the Holders of a majority of the
Warrant Shares to be registered. Such selection shall be subject to the
Company's consent, which consent shall not be unreasonably withheld. All fees
and expenses (other than Registration Expenses otherwise required to be paid) of
any managing underwriter, any co-manager or any independent underwriter or other
independent price required under the rules of the NASD shall be paid for by such
underwriters or by the Holders or holders whose shares are being registered. If
Wedbush Morgan Securities and __________ should decline to serve as managing
underwriter, the Holders of a majority of the Warrant Shares to be registered
may select and obtain one or more managing underwriters. Such selection shall be
subject to the Company's consent, which shall not be unreasonably withheld.
(d) Procedure for Requesting Demand Registration. Any request for a
Demand Registration shall specify the aggregate number of Registrable Securities
proposed to be sold and the intended method of disposition. Within 10 days after
receipt of such a request the Company will give written notice of such
registration request to all Holders and, subject to the limitations of Section
6.2(b), the Company will include in such registration all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within 15 Business Days after the date on which such notice is given.
Each such request shall also specify the aggregate number of Registrable
Securities to be registered and the intended method of disposition thereof.
6.3 Buy-Outs of Registration Demand.
In lieu of carrying out its obligations to effect a Piggyback
Registration or Demand Registration of any Registrable Securities pursuant to
this Article 6, the Company may carry out such obligation by offering to
purchase and purchasing such Registrable Securities requested to be registered
in an amount in cash equal to the difference between (a) 95% of the last sale
price of the Common Stock on the day the request for registration is made and
(b) the Exercise Price in effect
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<PAGE> 41
on such day; provided, however, that the Holder or Holders may withdraw such
request for registration rather than accept such offer by the Company.
6.4 Registration Procedures.
If and whenever the Company is required to use its best efforts to
take action pursuant to any Federal or state law or regulation to permit the
sale or other disposition of any Registrable Securities that are then held or
that may be acquired upon exercise of the Warrants in order to effect or cause
the registration of any Registrable Securities under the Securities Act as
provided in this Article 6, the Company shall, as expeditiously as practicable:
(a) prepare and file with the SEC, as soon as practicable within 90
days after the end of the period within which requests for registration may be
given to the Company (but subject to the provisions for deferral contained in
Section 6.2(a) hereof) a Registration Statement or Registration Statements
relating to the registration on any appropriate form under the Securities Act,
which form shall be available for the sale of the Registrable Securities in
accordance with the intended method or methods of distribution thereof, subject
to Section 6.1(d) hereof, and use its best efforts to cause such Registration
Statements to become effective; provided that before filing a Registration
Statement or Prospectus or any amendment or supplements thereto, including
documents incorporated by reference after the initial filing of any Registration
Statement, the Company will furnish to the Holders of the Registrable Securities
covered by such Registration Statements and the underwriters, if any, copies of
all such documents proposed to be filed, which documents will be subject to the
review of such Holders and underwriters;
(b) prepare and file with the SEC such amendments and post-effective
amendments to a Registration Statement as may be necessary to keep such
Registration Statement effective for a reasonable period not to exceed 180 days;
cause the related Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement or
supplement to such Prospectus;
(c) notify the selling Holders of Registrable Securities and the
managing underwriters, if any, promptly and (if requested by any such Person)
confirm such advice in writing, (i) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the SEC for amendments or supplements to a
Registration Statement or related Prospectus or for additional information;
(iii) of the issuance by the SEC of any stop order suspending the effectiveness
of a Registration Statement or the initiation of any proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contemplated by paragraph (m) below ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the
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<PAGE> 42
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purposes; and (vi)
of the happening of any event that makes any statement of a material fact made
in the Registration Statement, the Prospectus or any document incorporated
therein by reference untrue or which requires the making of any changes in the
Registration Statement or Prospectus so that they will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriters,
immediately incorporate in a Prospectus supplement or post-effective amendment
such information as the managing underwriters believe (on advice of counsel)
should be included therein as required by applicable law relating to such sale
of Registrable Securities, including, without limitation, information with
respect to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or "best
efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(f) furnish to each selling Holder of Registrable Securities and
each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment therein, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(g) deliver to each selling Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Prospectus or
Prospectuses (including each preliminary Prospectus) and any amendment or
supplement thereto as such Persons may reasonably request; the Company consents
to the use of such Prospectus or any amendment or supplement thereto by each of
the selling Holders of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus or any amendment or supplement thereto;
(h) prior to any public offering of Registrable Securities,
cooperate with the selling Holders of Registrable Securities, the underwriters,
if any, and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder or underwriter reasonably requests in writing, keep each such
registration or qualification effective during the period such Registration
Statement is required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the applicable Registration Statement,
provided that the Company will not be required to qualify to do business in any
jurisdiction where it is not then so
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<PAGE> 43
qualified or to take any action which would subject the Company to general
service of process in any jurisdiction where it is not at the time so subject;
(i) cooperate with the selling Holders of Registrable Securities and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not bearing
any restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two Business Days prior to any sale of Registrable Securities
to the underwriters;
(j) use its best efforts to cause the Registrable Securities covered by
the applicable Registration Statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriters, if any,
to consummate the disposition of such Registrable Securities;
(k) upon the occurrence of any event contemplated by Section 6.4(c)(vi)
above, prepare a post-effective amendment or supplement to the applicable
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
such Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading;
(l) with respect to each issue or class of Registrable Securities, use its
best efforts to cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange or automated quotation
system, if any, on which similar securities issued by the Company are then
listed if requested by the Holders of a majority of such issue or class of
Registrable Securities;
(m) enter into such agreements (including any underwriting agreement) and
take all such other action reasonably required in connection therewith in order
to expedite or facilitate the disposition of such Registrable Securities and in
such connection, if the registration is in connection with an underwritten
offering (i) make such representations and warranties to the underwriters in
such form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions shall be in form, scope and substance reasonably
satisfactory to the underwriters) addressed to the underwriters covering the
matters customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such underwriters; (iii)
obtain "cold comfort" letters and updates thereof from the Company's accountants
addressed to the underwriters, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with underwritten offerings; (iv) set forth in full
in any underwriting agreement entered into the indemnification provisions and
procedures of Section 6.5 hereof with respect to all parties to be indemnified
pursuant to said Section; and (v) deliver such documents and certificates as may
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<PAGE> 44
be reasonably requested by the underwriters to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company; the above shall be
done at each closing under such underwriting or similar agreement as and to the
extent required hereunder;
(n) make available for inspection by one or more representatives of the
Holders of Registrable Securities being sold, any underwriter participating in
any disposition pursuant to such registration, and any attorney or accountant
retained by such Holders or underwriter, all financial and other record,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such representatives, in connection with such; and
(o) otherwise use its best efforts to comply with all applicable Federal
and state regulations; and take such other action as may be reasonably necessary
or advisable to enable each such Holder and each such underwriter to consummate
the sale or disposition in such jurisdiction or jurisdictions in which any such
Holder or underwriter shall have requested that the Registrable Securities be
sold.
Except as otherwise provided in this Agreement, the Company shall have
sole control in connection with the preparation, filing, withdrawal, amendment
or supplementing of each Registration Statement, the selection of underwriters,
and the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders.
The Company may require each Seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such securities and such other information as may
otherwise be required by the Securities Act to be included in such Registration
Statement.
6.5 Indemnification.
(a) Indemnification by Company. In connection with each Registration
Statement relating to the disposition of Registrable Securities, the Company
shall indemnify and hold harmless each Holder and each underwriter of
Registrable Securities and each Person, if any, who controls such Holder or
underwriter (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation, legal and
other expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted), to which they, or any
of them, may become subject under the Securities Act, the Exchange Act or other
federal or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or
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<PAGE> 45
any amendment thereof or supplement thereto, or arise out of or are based upon
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that such indemnity shall not inure to the benefit of any
Holder or underwriter (or any person controlling such Holder or underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) on account of any losses, claims, damages or liabilities arising
from the sale of the Registrable Securities if such untrue statement or omission
or alleged untrue statement or omission was made in such Registration Statement,
Prospectus or preliminary prospectus or such amendment or supplement, in
reliance upon and in conformity with information furnished in writing to the
Company by such Holder or underwriter specifically for use therein. The Company
shall also indemnify selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, their officers and
directors and each Person who controls such Persons (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Holders of
Registrable Securities, if requested. This indemnity agreement shall be in
addition to any liability which the Company may otherwise have.
(b) Indemnification by Holder. In connection with each Registration
Statement, each Holder shall indemnify, to the same extent as the
indemnification provided by the Company in Section 6.5(a), the Company, its
directors and each officer who signs the Registration Statement and each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act) but only insofar as such losses, claims,
damages and liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in the
Registration Statement, the Prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, in reliance upon and in conformity with
information furnished in writing by such Holder to the Company specifically for
use therein. In no event shall the liability of any selling Holder of
Registrable Securities hereunder be greater in amount than the dollar amount of
the net proceeds received by such Holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation. The Company shall be
entitled to receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respect to information
so furnished in writing by such Persons specifically for inclusion in any
Registration Statement, Prospectus or preliminary prospectus or any amendment
thereof or supplement thereto.
(c) Conduct of Indemnification Procedure. Any party that proposes to
assert the right to be indemnified hereunder will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or parties
under this Section, notify each such indemnifying party of the commencement of
such action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 6.5(a) or 6.5(b) shall be available to
any party who shall fail to give notice as provided in this Section 6.5(c) if
the party to whom notice was not given was unaware of the proceeding in which
such notice would have related and was prejudiced by the failure to give such
notice, but the omission so to notify such indemnifying party of any such
action, suit
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<PAGE> 46
or proceeding shall not relieve it from any liability that it may have to any
indemnified party for contribution otherwise than under this Section. In case
any such action, suit or proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in, and to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and the
approval by the indemnified party of such counsel, the indemnifying party shall
not be liable to such indemnified party for any legal or other expenses, except
as provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the defense
thereof. The indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the employment of counsel by such
indemnified party has been authorized in writing by the indemnifying parties,
(ii) the indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the indemnified party
in the conduct of the defense of such action (in which case the indemnifying
parties shall not have the right to direct the defense of such action on behalf
of the indemnified party) or (iii) the indemnifying parties shall not have
employed counsel to assume the defense of such action within a reasonable time
after notice of the commencement thereof, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying parties. An
indemnified party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent.
(d) Contribution. In connection with each Registration Statement
relating to the disposition of Registrable Securities, if the indemnification
provided for in subsection (a) hereof is unavailable to an indemnified party
thereunder in respect to any losses, claims, damages or liabilities referred to
therein, then the indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6.5 in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
(e) Underwriting Agreement to Control. Notwithstanding the foregoing
provisions of the Section 6.5, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement entered
into in connection with the underwritten public offering of the Registrable
Securities are in conflict with the foregoing provisions, the provisions in such
underwriting agreement shall control.
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<PAGE> 47
(f) Specific Performance. The Company and the Holder acknowledge
that remedies at law for the enforcement of this Section 6.5 may be inadequate
and intend that this Section 6.5 shall be specifically enforceable.
(g) Survival of Obligations. The obligations of the Company and the
Holder under this Section 6.5 shall survive the completion of any offering of
Registrable Securities pursuant to a Registration Statement under this Article
6, and otherwise.
6.6 Reports Under Securities Exchange Act of 1934.
With a view to making available to the Holders the benefits of Rule 144
promulgated under the Securities Act and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of the Company to the
public without registration or pursuant to a registration on Form S-3, the
Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after 90 days after the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and (iii) such other reports and information as may be
required pursuant to the provisions of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant to
such form.
ARTICLE 7
OTHER MATTERS
7.1 Binding Effects; Benefits.
This Warrant shall inure to the benefit of and shall be binding upon
the Company and the Warrantholder and their respective heirs, legal
representatives, successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any person other than the Company and
the Warrantholder or their respective heirs, legal representatives, successors
or assigns, any rights, remedies, obligations or liabilities under or by reason
of this Warrant.
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<PAGE> 48
7.2 No Inconsistent Agreements.
The Company will not on or after the date of this Warrant enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the Holders in this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to holders of the
Company's securities under any other agreements.
7.3 Adjustments Affecting Registrable Securities.
The Company will not take any action outside the ordinary course of
business, or permit any change within its control to occur outside the ordinary
course of business, with respect to the Registrable Securities which is without
a bona fide business purpose, and which is intended to interfere with the
ability of the Holders of Registrable Securities to include such Registrable
Securities in a registration undertaken pursuant to this Agreement.
7.4 Integration/Entire Agreement.
This Warrant is intended by the parties as a final expression of
their agreement and intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the Warrants.
This Warrant supersedes all prior agreements and understandings between the
parties with respect to such subject matter (other than warrants previously
issued by the Company to the Warrantholder).
7.5 Amendments and Waivers.
The provisions of this Warrant, including the provisions of this
sentence, may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given unless the Company has
obtained the written consent of holders of at least a majority of the
outstanding Registrable Securities. Holders shall be bound by any consent
authorized by this Section whether or not certificates representing such
Registrable Securities have been marked to indicate such consent.
7.6 Counterparts.
This Warrant may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
- 24 -
<PAGE> 49
7.7 Governing Law.
This Warrant shall be governed by and construed in accordance with
the laws of the State of New York.
7.8 Severability.
In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
7.9 Attorneys' Fees.
In any action or proceeding brought to enforce any provisions of
this Warrant, or where any provision hereof is validly asserted as a defense,
the successful party shall be entitled to recover reasonable attorneys' fees and
disbursements in addition to its costs and expenses and any other available
remedy.
7.10 Computations of Consent.
Whenever the consent or approval of Holders of a specified
percentage of Registrable Securities is required hereunder, Registrable
Securities held by the Company or its affiliates (other than the Warrantholder
or subsequent Holders if they are deemed to be such affiliates solely by reason
of their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
7.11 Notice.
Any notices or certificates by the Company to the Holder and by the
Holder to the Company shall be deemed delivered if in writing and delivered in
person or by registered mail (return receipt requested) to the Holder addressed
to it in care of Wedbush Morgan Securities Inc., 1000 Wilshire Boulevard, Los
Angeles, California 90017, or, if the Holder has designated by notice in writing
to the Company, any other address, to each other address and if to the Company,
addressed to it at: 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123, Attention:
President, with a copy to Jones, Waldo, Holbrook & McDonough, 1500 Wells Fargo
Plaza, 170 South Main Street, Salt Lake City, Utah 84101-1644, Attention: Ronald
S. Poelman, Esq., or if the Company has designated, by notice in writing to the
Holder, any other address, to such other address.
The Company may change its address by written notice to the Holder and the
Holder may change its address by written notice to the Company.
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<PAGE> 50
In Witness Whereof, this Warrant has been duly executed by the Company
under its corporate seal as of the __ day of December, 1997.
ZEVEX INTERNATIONAL, INC.
By:_______________
Title:____________
Attest:___________________
Assistant Secretary
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<PAGE> 51
EXERCISE FORM
(To be executed upon exercise of Warrant)
ZEVEX International, Inc.
4314 ZEVEX Park Lane
Salt Lake City, Utah 84123
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase Warrant Shares and (check one):
herewith tenders payment for _____ of the Warrant Shares to the order of
_______________ in the amount of $___________ in accordance with the terms
of this Warrant; or
herewith tenders this Warrant for ________ Warrant Shares pursuant to the
net issuance exercise provisions of Section 2.3(b) of this Warrant.
Please issue a certificate or certificates for such Warrant Shares in the
name of, and pay any cash for any fractional share to:
Name_________________
_________________
_________________
_________________
(Please print Name, Address and Social
Security Number)
Signature_______________________________
Note: The above signature should correspond
exactly with the name on the first page of this
Warrant Certificate or with the name of the
assignee appearing in the assignment form below
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder.
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<PAGE> 52
ASSIGNMENT
(To be executed only upon assignment of Warrant)
For value received, _______________ hereby sells, assigns and transfers unto
______________ the within Warrant, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
_____________________ its attorney, to transfer said Warrant on the books of the
within-named Company with respect to the number of Warrant Shares set forth
below, with full power of substitution in the premises.
Name(s) of No. of
Assignees Address Warrant Shares
--------- ------- --------------
And if said number of Warrant Shares shall not be all the Warrant Shares
represented by the Warrant, a new Warrant is to be issued in the name of said
undersigned for the balance remaining of the Warrant Shares registered by said
Warrant.
Dated: ______________, ___ Signature _______________________________
Note: The above signature should correspond exactly
with the name on the face of this Warrant.
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<PAGE> 1
EXHIBIT 5.1
Salt Lake City
November 21, 1997
ZEVEX International, Inc.
4314 ZEVEX Park Lane
Salt Lake City, UT 84123
Gentlemen:
We have examined the Registration Statement on Form S-1 that was filed by
you with the Securities and Exchange Commission on October 3, 1997 (Registration
No. 333-37189), Amendment No. 1 thereto that was filed on October 24, 1997, and
Amendment No. 2 thereto that was filed on November 21, 1997 (the "Registration
Statement") in connection with the registration under the Securities Act of
1933, as amended, of 1,200,000 shares of your Common Stock, $0.001 par value
(the "Shares"). The Shares are to be sold to underwriters for resale to the
public as described in the Registration Statement and pursuant to the
underwriting agreement filed as an exhibit thereto (the "Underwriting
Agreement"). As your counsel in connection with this transaction, we have
examined the action proposed to be taken in connection with the sale and
issuance of the Shares.
This opinion letter is governed by and shall be interpreted in accordance
with the Legal Opinion Accord (the "Accord") of the American Bar Association
Section of Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage, and other
limitations, all as more particularly described in the Accord, and this opinion
letter should be read in conjunction therewith. The law relevant to the opinions
expressed herein is limited to the Laws of the State of Delaware.
Based on the foregoing, we are of the opinion that, upon completion of the
actions being taken or contemplated by us, as your counsel, to be taken prior to
the issuance of the Shares and upon completion of the action being taken to
permit such transaction to be carried out in accordance with the securities laws
of the various states where required, the Shares, when issued and sold in the
manner referred to in the Registration Statement and in the Underwriting
Agreement, will be legally issued, fully paid, and non-assessable.
The phrase "Primary Lawyer Group", as used in the Accord, is hereby
modified. For purposes of applying the Accord to this opinion letter, the
Primary Lawyer Group means the lawyers in this firm who have given substantive
legal attention to the representation of the Company in this matter, namely
Ronald S. Poelman, Rob A. Alston, and Kenneth I. Denos.
We hereby consent to the inclusion of this opinion as Exhibit 5.1 of the
Registration Statement and to the statement regarding our firm under the
heading, "Legal Matters" in the prospectus which is part of the Registration
Statement. This opinion is furnished solely to the Company for use in connection
with the Registration Statement and may not be relied upon by the Company or any
other person for any other purpose whatsoever, except to the extent authorized
in the Accord, without in each instance our prior written consent.
Very truly yours,
JONES, WALDO, HOLBROOK & McDONOUGH
By /s/ JONES, WALDO, HOLBROOK & McDONOUGH
----------------------------------------
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 13, 1997, in the Registration Statement (Form
S-1 Amendment No. 2 No. 33-37189) and related prospectus of Zevex International,
Inc. for the registration of 1,200,000 shares of its common stock, with the
Securities and Exchange Commission.
/s/ Daines and Rasmussen P.C.
Salt Lake City, Utah
November 20, 1997
<PAGE> 1
EXHIBIT 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 12, 1996, in the Registration Statement (Form
S-1 Amendment No. 2 No. 33-37189) and related prospectus of Zevex International,
Inc. for the registration of 1,200,000 shares of its common stock, with the
Securities and Exchange Commission.
/s/ NIELSEN, GRIMMETT & COMPANY
Salt Lake City, Utah
November 20, 1997
<PAGE> 1
EXHIBIT 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 15, 1997, in the Registration Statement
(Form S-1 Amendment No. 2 No. 33-37189) and related prospectus of Zevex
International, Inc. for the registration of 1,200,000 shares of its common
stock, with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Salt Lake City, Utah
November 18, 1997
