22
US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 33-19583
ZEVEX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0462807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4314 ZEVEX Park Lane
Salt Lake City, Utah 84123
(Address of principal executive offices and zip code)
Issuer's telephone number, including area code: (801) 264-1001
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Name of each
Title of each class Exchange on which registered
Capital stock, par value $0.001 per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes:
X No:
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K: X
The aggregate market value of the Company's voting stock held by
nonaffiliates computed with reference to the closing price as quoted on the
American Stock Exchange on March 24, 1998 was approximately $22,504,884.
The number of shares outstanding of the Company's Common Stock as of
March 24, 1998 was 3,294,476.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1997 Annual Report to Stockholders for the fiscal year
ended December 31, 1997, are incorporated by reference in Parts I, II and IV of
this Form 10-K to the extent stated herein. Portions of Registrant's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on June 4,
1998, are incorporated by reference in Part III of this Form 10-K to the extent
stated herein.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1 - BUSINESS ...................................................... 4
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS ......................... 4
Item 2 - PROPERTIES .................................................... 18
Item 3 - LEGAL PROCEEDINGS ............................................. 18
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 18
Part II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ................................ 18
Item 6 - SELECTED FINANCIAL DATA ....................................... 19
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 19
Item 7 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK ............................................... 19
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................... 19
Item 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE .................... 19
Part III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY .............. 19
Item 11 - EXECUTIVE COMPENSATION ....................................... 19
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .......................................... 20
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 20
Part IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ............................................................... 21
Item 14(c) - INDEX TO EXHIBITS ......................................... 22
SIGNATURES ................................................................ 23
<PAGE>
PART I
ITEM 1. BUSINESS
Except for the section below entitled "CAUTIONARY FACTORS THAT MAY
AFFECT FUTURE RESULTS," the information required by this item is included under
"Business" in the Company's 1997 Annual Report to Stockholders.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS (Cautionary Statements Under
the Private Securities Litigation Reform Act of 1995)
The disclosure and analysis set forth herein and in the Company's 1997
Annual Report to Shareholders contain certain forward-looking statements,
particularly statements relating to future actions, performance or results of
current and anticipated products, sales efforts, expenditures, and financial
results. From time to time, the Company also provides forward-looking statements
in other publicly-released materials, both written and oral. Forward-looking
statements provide current expectations or forecasts of future events such as
new products, product approvals, revenues and financial performance. These
statements are identified as any statement that does not relate strictly to
historical or current facts. They use words such as "plans," "expects," "will"
and other words and phrases of similar meaning. In all cases, a broad variety of
risks and uncertainties, both known and unknown, as well as inaccurate
assumptions can affect the realization of the expectations or forecasts in those
statements. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
The Company undertakes no obligation to update any forward-looking
statements, but investors are advised to consult any further disclosures by the
Company on this subject in its subsequent filings pursuant to the Securities
Exchange Act of 1934. Furthermore, as permitted by the Private Securities
Litigation Reform Act of 1995, the Company provides these cautionary statements
identifying factors that could cause the Company's actual results to differ
materially from expected and historical results. It is not possible to foresee
or identify all such factors. Consequently, this list should not be considered
an exhaustive statement of all potential risks, uncertainties and inaccurate
assumptions.
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, Inc., 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 the1997
fiscal year, 16% of sales were from Allergan, 25% of sales were from Paradigm,
and 26% were from Alaris. No assurances can be given that such customers will
continue to do business with the Company or that the volume of their orders for
the Company's devices will increase or remain constant. The loss of any of such
major customers, or a significant reduction in the volume of their orders for
the Company's devices, will have a material adverse impact on the Company's
operations. In addition, if one or more of these customers were to seek and
obtain price discounts from the Company for the Company's devices, the resulting
lower gross margins on those devices would have a 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.
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
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.
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 1997, 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.
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 , 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 a premarket approval ("PMA") application,
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 a PMA 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 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 adversely
affect 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.
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. Rapid change and technological innovation
characterize the marketplace for medical products. As a result, the Company and
its customers are subject to the risk of product obsolescence, whether from
prolonged development or government approval cycles or the development of
improved products or processes by competitors. In addition, the marketplace
could conclude that the task for which a customer's 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.
Customers' Future Capital Requirements. Many of the Company's
customers, especially the emerging medical technology companies, are not
profitable and may have little or no revenues, but they have significant working
capital requirements. Such customers may be required to raise additional funds
through public or private financings, including equity financings. Adequate
funds for their operations may not be available when needed, if at all.
Insufficient funds may require a customer to delay development of a product,
clinical trials (if required), or the commercial introduction of the product or
prevent such commercial introduction altogether. 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 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.
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 adversely affect 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 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.
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.
Product Development
The success of the Company will depend to a significant extent upon its
ability to enhance and expand on its current offering of proprietary products
and to develop and introduce additional innovative products that gain market
acceptance. While the Company maintains research and development programs and
has established a Technical Advisory Board to assist it, there is no assurance
that the Company will be successful in selecting, developing, manufacturing and
marketing new products or enhancing its existing products on a timely or
cost-effective basis. Moreover, the Company may encounter technical problems in
connection with its efforts to develop or introduce new products or product
enhancements. Some of the devices currently under consideration by the Company
(as well as devices of some of its customers) will require significant
additional development, pre-clinical testing and clinical trials and related
investment prior to their commercialization. There can be no assurance that such
devices will be successfully developed, prove to be safe or efficacious in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable costs, or be successfully
marketed. 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 canceled if purchase orders thereunder are not
completed when due. Potential difficulties in the design and manufacturing
process that could be experienced by the Company include difficulty in meeting
required specifications, difficulty in achieving necessary manufacturing
efficiencies, and difficulties in obtaining materials on a timely basis. 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; 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 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.
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 December 31, 1997, the Company held six U.S. patents on devices
developed by the Company. Such patents disclose certain aspects of the Company's
technologies and there can be no assurance that others will not design around
the patent and develop similar technology. The Company believes that its devices
and other proprietary rights do not infringe any proprietary rights of third
parties. There can be no assurance, however, that third parties will not assert
infringement claims in the future.
Control by Management and Certain Major Shareholders
As of March 24, 1998, 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. Accordingly,
these individuals 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.
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 its existing capital resources and amounts
available under the Company's existing bank line of credit, will satisfy the
Company's anticipated capital needs for the next 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. If adequate funds are not available, the Company's business,
results of operations, and financial condition could be materially adversely
affected.
Reliance on Efficiency of Distribution and Third Parties
The Company believes its financial performance is dependent in part on
its ability to provide prompt, accurate, and complete services to its customers
on a timely and competitive basis. Accordingly, delays in distribution in its
day-to-day operations or material increases in its costs of procuring and
delivering products could have an adverse effect on the Company's results of
operations. Any failure of either its computer operating system or its telephone
system could adversely affect its ability to receive and process customer's
orders and ship products on a timely basis. Strikes or other service
interruptions affecting Federal Express Corporation, United Parcel Service of
America, Inc., or other common carriers used by the Company to receive necessary
components or other materials or to ship its products also could impair the
Company's ability to deliver products on a timely and cost-effective basis.
Volatility of Revenues and Product Mix
The Company's annual and quarterly operating results are affected by a
number of factors, including the volume and timing of customer orders, which
vary due to (i) variation in demand for the customer's products as a result of,
among other things, product life cycles, competitive conditions, and general
economic conditions, (ii) the customer's attempt to balance its inventory, (iii)
the customer's need to adapt to changing regulatory conditions and requirements,
and (iv) changes in the customer's manufacturing strategy. Technical
difficulties and delays in the design and manufacturing processes may also
affect such results. The foregoing factors may cause fluctuations in revenues
and variations in product mix, which could in turn cause fluctuations in the
Company's gross margin. Under the terms of the Company's contracts with many of
its customers, the customers have broad discretion to control the volume and
timing of product deliveries. Further, the Company's contracts with its
customers typically have no minimum purchase requirements. As a result,
production may be reduced or discontinued at any time. Therefore, it is
difficult for the Company to forecast the level of customer orders with
certainty, making it difficult to schedule production and maximize manufacturing
capacity. Other factors that may adversely affect the Company's annual and
quarterly results of operations include inexperience in manufacturing a
particular instrument, inventory shortages or obsolescence, labor costs or
shortages, low gross margins on design projects, an increase in design revenues
as a percentage of total revenues, price competition, and regulatory
requirements. Because the Company's business organization and its related cost
structure anticipate supporting a certain minimum level of revenues, the
Company's limited ability to adjust its short term cost structure would compound
the adverse effect of any significant revenue reduction. 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 that are substantially equivalent to the products, techniques, or
information that the Company considers proprietary. In addition, proprietary
information regarding the Company could be disclosed in a manner against which
the Company has no meaningful remedy. Disputes regarding the Company's
intellectual property could force the Company into expensive and protracted
litigation or costly agreements with third parties. An adverse determination in
a judicial or administrative proceeding or failure to reach an agreement with a
third party regarding intellectual property rights could prevent the Company
from manufacturing and selling certain of its products. 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 Company's Common Stock has been limited
due to the relatively low trading volume and the small number of brokerage firms
acting as market makers. In May 1997, the Company's Common Stock was listed for
trading on the American Stock Exchange, which has increased the market for the
Common Stock. No assurance can be given, however, that the market for the Common
Stock will continue or increase, or that the prices in such market will be
maintained at their present levels.
Possible Volatility of Stock Price
Announcements of technological innovations for new commercial devices
by the Company or its competitors, developments concerning the Company's
proprietary rights, or the public concern as to safety of its devices may have a
material adverse impact on the Company's business and on the market price of its
Common Stock, particularly as the Company expands its efforts to become a
medical technology company that manufactures and markets its own proprietary
devices. The market price of the Company's Common Stock may be volatile and may
fluctuate based on a number of factors, including significant announcements by
the Company and its competitors, quarterly fluctuations in the Company's
operating results, and general economic conditions and conditions in the medical
technology industry. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations, which have had a substantial
effect on the market prices for many medical-technology companies and are often
unrelated to the operating performance of such companies.
Issuance of Additional Shares for Acquisition or Expansion
Any future major acquisition or expansion of the Company may result in the
issuance of additional common shares or other stocks or instruments that may be
authorized without shareholder approval. The issuance of subsequent securities
may also result in substantial dilution in the percentage of the Common Stock
held by existing shareholders at the time of any such transaction. Moreover, the
shares or warrants issued in connection with any such transaction may be valued
by the Company's management based on factors other than the trading price on the
American Stock Exchange.
<PAGE>
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. Additionally, the Company is restricted
from declaring any cash dividends under its current line of credit arrangement.
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.
Foreign Exchange, Currency, and Political Risk
The Company's international business is subject to risks customarily
encountered in foreign operations, including changes in a specific country's or
region's political or economic conditions, nationalization, trade protection
measures, import or export licensing requirements, the overlap of different tax
structures, unexpected changes in regulatory requirements, other restrictive
government actions such as capital regulations, and natural disasters. The
Company is also exposed to foreign currency exchange rate risk inherent in its
foreign sales commitments and anticipated foreign sales because the prices
charged for its products are denominated in U.S. dollars. Consequently, the
Company's foreign sales commitments and anticipated sales could be adversely
affected by an appreciation of the U.S. dollar relative to other currencies,
which in turn could have an adverse material effect on the Company's
consolidated financial position, results of operations and the amount and timing
of cash flows.
Year 2000
Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing both the internal readiness of its computer systems and the compliance
of its computer products and software sold to customers for handling the year
2000. The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on future results of operations.
ITEM 2. PROPERTIES
The information required by this item is included under "Properties and
Facilities" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is included under "Legal
Proceedings" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this item is included under "Submission of
Matters to a Vote of Security Holders" in the Company's 1997 Annual Report to
Stockholders and is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included under "Market for
Common Stock" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Selected
Financial Data" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 1997 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the Financial
Section in the Company's 1997 Annual Report to Stockholders and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is included under "Election of
Directors," "The Board of Directors and Committees," and "Executive Officers in
the Company's Proxy Statement to be filed in connection with its 1998 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Compensation
of Directors and Executive Officers" in the Company's Proxy Statement to be
filed in connection with its 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is included under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with its 1998 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report.
(1) - Financial Statements.
The following Consolidated Financial Statements of the Company and its
subsidiaries are included on pages 15 through 31 of the Company's Annual Report
to Stockholders for the fiscal year ended December 31, 1997.
Consolidated Statements of Operation - Years Ended December 31, 1997, 1996 and
1995.
Consolidated Balance Sheets at December 31, 1997 and December 31, 1996.
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) - Financial Statement Schedules.
The following Financial Statements Schedules of the Company and its
subsidiaries, together with the Report of Ernst & Young LLP, the Company's
independent accountants, thereon are filed as part of this Report on Form 10-K
as listed below and should be read in conjunction with the consolidated
financial statements of the Company:
Report of Ernst & Young LLP, Independent Accountants, on Financial Statement
Schedules.
(3) - Exhibits
See index to Exhibits.
(b) Reports on Form 8-K,
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
<PAGE>
INDEX TO EXHIBITS
(Item 14(c))
Number Exhibits
3.1 Articles of Incorporation of ZEVEX International, Inc.,
a Delaware corporation (1).
3.2 Bylaws of ZEVEX International, Inc., a Delaware corporation(1).
10.1 Amendment to Revolving Line of Credit Agreement between Bank
One and Registrant, dated December 31, 1997. The original
agreement was filed as an exhibit to Amendment No. 1 on Form
S-1, filed by the Company on October 24, 1997.
10.2 Stock Purchase Agreement between Blosch & Holmes, LLC and
Registrant, dated December 1, 1996, including one amendment
dated September 30, 1997(1).
10.3 Registration Rights Agreement among Kirk Blosch, Jeff W. Holmes
and Registrant, dated February 1, 1998.
10.4 ZEVEX International, Inc., Amended 1993 Stock Option Plan (2).
10.5 Industrial Development Bond Offering Memorandum, dated
October 30, 1996 (3).
10.6 Industrial Development Bond Reimbursement Agreement, dated
October 30, 1996 (3).
10.7(a) Warrant to Purchase 50,000 shares of Common Stock issued
to Wedbush Morgan Securities, Inc., dated November 20, 1997.
10.7(b) Warrant to Purchase 50,000 shares of Common Stock issued to
Everen Securities, Inc., dated November 20, 1997.
10.8 Warrant to Purchase 500,000 shares of Common Stock originally
issued to Blosch & Holmes, LLC, dated February 12, 1997.
10.9 Description of Property Acquisition, dated March 4, 1998.
10.10 Quit-Claim Deed - for purchase of 3.47 acres of land, dated
March 4, 1998.
13.1 Annual Report to Stockholders for fiscal year ended
December 31,1997.
21.1 List of Subsidiaries (2).
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Daines & Rasmussen, PC.
23.3 Consent of Nielsen, Grimmett & Company.
24.1 Power of Attorney (included on page 23)
(1) Filed as an exhibit to Amendment No. 1 on Form S-1, filed by the
Company on October 24, 1997.
(2) Filed as an exhibit to the Registration Statement on Form S-1, filed
by the Company on October 3, 1997.
(3) Filed as an exhibit to Registrant's amended Quarterly Report on
Form 10Q for the quarter ended September 30, 1996, filed on
September 29, 1997, and incorporated herein by this reference.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZEVEX INTERNATIONAL, INC.
Dated: March, 26 1997 By \s\ Dean G. Constantine
Dean G. Constantine
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints each of Dean G. Constantine and Phillip
L. McStotts, jointly and severally, his true and lawful attorney in fact and
agent, with full power of substitution for him and in his name, place and stead,
in any and all capacities to sign any or all amendments to this report on Form
10-K and to file the same, with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney in fact or his substitute
or substitutes may do or cause to be done by virtue hereof.
Signature Title Date
\s\ Dean G. Constantine Chairman of the Board of Directors, March, 26 1998
Dean G. Constantine Chief Executive Officer, and President
(Principal Executive Officer)
\s\ David J. McNally Director, Vice President, March, 26 1998
David J. McNally and Director of Marketing
\s\ Phillip L. McStotts Director, Chief Financial Officer, March, 26 1998
Phillip L. McStotts Secretary, and Treasurer (Principal
Financial and Accounting Officer)
\s\ Bradly A. Oldroyd Director March, 26 1998
Bradly A. Oldroyd
\s\ Darla R. Gill Director March, 26 1998
Darla R. Gill
<PAGE>
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Company's Which Have Not Registered Securities Pursuant to
Section 12 of the Act
<PAGE>
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<PERIOD-START> JAN-1-1997
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mod2.doc
MODIFICATION AGREEMENT
DATE: December 31, 1997
PARTIES: Borrower: Zevex, Inc.
Bank: Bank One, Utah, NA, a national banking association
RECITALS:
A. Bank has extended to Borrower credit ("Loan") in the principal amount of
$1,000,000.00 pursuant to the Line of Credit Loan Agreement dated September 29,
1997 ("Loan Agreement"). The unpaid principal of the Loan as of the date hereof
is $-0-.
B. The Loan and/or guaranty of Loan is secured by, among other things, the
Security Agreement - Accounts Receivable and Inventory, dated September 29, 1997
by Borrower for the benefit of Bank (the agreements, documents, and instruments
securing the Loan are referred to individually and collectively as the
("Security Documents").
C. The Loan Agreement, the Security Documents, any arbitration resolution,
and all other agreements, documents, and instruments evidencing, securing, or
otherwise relating to the Loan are sometimes referred to individually and
collectively as the "Loan Documents".
D. Borrower has requested that Bank modify the Loan and the Loan Documents
as provided herein. Bank is willing to so modify the Loan and the Loan
Documents, subject to the terms and conditions herein.
AGREEMENT:
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Borrower and Bank agree as follows:
1. ACCURACY OF RECITALS.
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
2.1 The Loan Documents are modified as follows:
2.1.1. The defined terms contained in Section 2.A. of the Loan Agreement
are hereby amended and restated to read as follows:
A Borrowing Base Certificate@ means the certificate in the form and
substance satisfactory to Bank, attached hereto as Exhibit AA@.
<PAGE>
"Eligible Accounts Receivable" means an Account owing to Borrower, as
determined by Bank in its sole and absolute discretion, which has arisen from
the delivery and/or shipment of products previously made and/or from services
rendered for which an invoice has been issued by Borrower to its customer
("Customer") and (a) which amount is not subject to any offset, counterclaim or
defense asserted by the Customer, (b) which amount is subject to a perfected
security interest in favor of Bank and is not subject to any other security
interest, lien, claim or encumbrance, and (c) which amount has not remained
unpaid for more than 59 days after the due date of the related invoice, (d)
where not more than fifteen percent (15%) of the total amount owing from a
Customer accounting for 5% or more of the total amount owing to Borrower has
remained unpaid for more than 89 days after the due date of the related
invoice(s), excepting amounts due from Allergan, Mentor, Alaris and Paradigm,
(e) amounts due from Allergan, Mentor, Alaris and Paradigm which have not
remained unpaid for more than 30 days after the due date of the related invoice
and do not exceed 25% of the total accounts owing to Borrower, (f) which amount
is not an uninsured amount owing from a customer located in a foreign country,
(g) which amount is not owing from the United States of America or any agency,
department of subdivision thereof, unless a properly executed assignment of
claims has been received by Bank, (h) which amount is not the subject of any
threatened or actual litigation, (I) which amount is not owing from a Customer
who is also a supplier or creditor of the Borrower, (j) which amount is not
owing from a Subsidiary, Affiliate, officer or employee of the Borrower or an
intercompany transaction, (k) which amounts are not cash, C.O.D. accounts or
deposit payments for future products, and (l) which amounts are not consignment
accounts, manufacturer representative accounts, buy/sell accounts, or bill and
hold accounts.
"Eligible Inventory" means the Inventory (valued at the lower of cost or
market) of Borrower as determined by Bank in its sole and absolute discretion,
to be (a) in good condition and salable in the ordinary course of Borrower's
business, (b) owned by Borrower free and clear of any mortgages, liens, security
interests, claims, encumbrances or rights of others, excepting only the security
interest in favor of Bank, subject to a perfected security interest in favor of
bank, (d) not subject to any consignment to any Customer, (e) not acquired by
Borrower in or as part of a bulk transfer of sale or assets unless Borrower has
complied with all applicable bulk sales or bulk transfer laws, and (f) Work in
progress and unsaleable raw materials.
ALine of Credit Limit@ means Five Million and 00/100 Dollars
($5,000,000.00).
2.1.2. There shall be added a new paragraph J. to Section 12 bearing the
heading NEGATIVE COVENANTS which shall read as follows:
J. Acquisitions. Enter into any acquisitions over $5,000,000.00 per fiscal
year without prior written approval of Bank.
2.1.3. Section 13.A. bearing the heading FINANCIAL COVENANTS of the Loan
Agreement is modified to read in its entirety as follows:
A. Debt Coverage. The Borrower will maintain on a consolidated basis as of
the end of each fiscal year a ratio of (earnings before interest expense +
depreciation + amortization) less unrealized gains/(losses) on securities,
divided by the sum of (current maturities of long term debt and capital lease
payments and interest expense) of not less than 1.4 to 1.0.
2.1.4. Section 13.B. bearing the heading FINANCIAL COVENANTS of the Loan
Agreement is modified to read in its entirety as follows:
B. Tangible Net Worth. At each date as set forth below the Borrower will
achieve and maintain a consolidated tangible net worth of not less than:
Date: Tangible Net Worth:
December 31, 1997 $10,000,000.00
December 31, 1998 $15,000,000.00
2.1.5. The additional percentage points (AMargin@) to be added to the Loan
Index Rate are 0.0 percentage points. The Loan Interest Rate payable on Advances
made under the Line of Credit as of the date of this agreement is 8.5% per
annum.
2.2 Each of the Loan Documents is modified to provide that it shall be a
default or an event of default thereunder if Borrower shall fail to comply with
any of the covenants of Borrower herein or if any representation or warranty by
Borrower herein is materially incomplete, incorrect, or misleading as of the
date hereof.
<PAGE>
2.3 Each reference in the Loan Documents to any of the Loan Documents shall
be a reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or interests
in property granted as security in the Loan Documents shall remain as security
for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial condition of
Borrower or any other person whose financial statement has been delivered to
Bank in connection with the Loan from the most recent financial statement
received by Bank.
4.3 Each and all representations and warranties of Borrower in the Loan
Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and binding
obligations of Borrower, enforceable against Borrower in accordance with their
terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified herein.
The execution and delivery of this Agreement and the performance of the Loan
Documents as modified herein have been duly authorized by all requisite action
by or on behalf of Borrower. This Agreement has been duly executed and delivered
on behalf of Borrower.
5. BORROWER COVENANTS.
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such additional
agreements, documents, and instruments as reasonably required by Bank to
effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank and
its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in law
or equity of Borrower, whether now known or unknown to Borrower, (I) in respect
of the Loan, the Loan Documents, or the actions or omissions of Bank in respect
of the Loan or the Loan Documents and (ii) arising from events occurring prior
to the date of this Agreement.
5.3 Contemporaneously with the execution and delivery of this Agreement,
Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Loan Agreement and all
amounts, other than interest and principal, due and payable by Borrower under
the Loan Documents as of the date hereof.
<PAGE>
5.3.2 All the internal and external costs and expenses incurred by Bank in
connection with this Agreement (including, without limitation, inside and
outside attorneys, title, filing, and recording costs, expenses, and fees).
5.3.3 A commitment fee of $4,170.00.
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
Bank shall not be bound by this Agreement until (I) Bank has executed and
delivered this Agreement, (ii) Borrower has performed all of the obligations of
Borrower under this Agreement to be performed contemporaneously with the
execution and delivery of this Agreement, (iii) if required by Bank, Borrower
and any guarantor(s) of the Loan have executed and delivered to Bank an
arbitration resolution, and (iv) each guarantor of the Loan has executed the
Consent of Guarantor(s) below.
7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
The Loan Documents as modified herein contain the complete understanding
and agreement of Borrower and Bank in respect of the Loan and supersede all
prior representations, warranties, agreements, arrangements, understandings, and
negotiations. No provision of the Loan Documents as modified herein may be
changed, discharged, supplemented, terminated, or waived except in a writing
signed by the parties thereto.
8. BINDING EFFECT.
The Loan Documents as modified herein shall be binding upon and shall inure
to the benefit of Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Arizona, without giving effect to conflicts of law
principles.
10. COUNTERPART EXECUTION.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
BANK: BORROWER::
BANK ONE, UTAH, NA, ZEVEX, INC.
a national banking association
BY: /s/ Randy S. Cameron BY: /s/ Phillip L. McStotts
Randy S. Cameron Phillip L. McStotts
Its: Sr. Vice President Its: CFO
<PAGE>
CONSENT OF GUARANTOR(S)
The undersigned (i) consent to the modification of the Loan Documents and
all other matters in the foregoing Agreement, (ii) reaffirm the Continuing
Guaranty, dated September 29, 1997 and any other agreements, documents and
instruments securing or otherwise relating thereto ("Guarantor Documents"),
(iii) acknowledge that the Guarantor Documents continue in full force and
effect, remain unchanged, except as specifically modified hereby, and are valid,
binding and enforceable in accordance with their respective terms, (iv) agree
that all references, if any, in the Guarantor Documents to any of the Loan
Documents are modified to refer to those documents as modified by the Agreement,
and (v) agree to be bound by the release of Bank set forth in the Agreement.
Dated as of the date of the Agreement.
ZEVEX INTERNATIONAL, INC.
BY:/s/ Phillip L. McStotts
Phillip L. McStotts, Secretary/Treasurer
DRAFT
03/27/98
2:32 PM
248983.1
ZEVEX INTERNATIONAL, INC.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
this 1st day of February, 1998, by and among ZEVEX International, Inc., a
Delaware corporation (the "Company"), Kirk Blosch, an individual residing in the
State of Utah and Jeff W. Holmes, an individual residing in the State of
Nevada. Messrs. Blosch and Holmes are purchasers of warrants to acquire three
hundred fifty thousand (350,000) shares of the Company's Common Stock
(hereinafter referred to "Purchaser" or "Purchasers"). This Agreement shall be
effective as to any Purchaser on the date that it is executed by such Purchaser.
Definitions. As used in this Agreement, the following terms shall have the
following meanings:
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the SEC
thereunder.
"Holder" or "Holders" shall mean any Purchaser or any assignee under this
Agreement who holds any Registrable Securities (as defined below).
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (as defined below), including the declaration
or ordering of the effectiveness of such registration statement.
"Registrable Securities" means the Shares (as defined below) held by
Purchasers which have not been registered pursuant to this Agreement.
"Registration Expenses" shall mean all expenses incurred by the Company in
connection with a registration hereunder, including, without limitation, all
registration and filing fees, printing expenses, blue sky fees and expenses, the
expense of any special audits incident to or required by any such registration,
the fees and disbursements of counsel for the Company.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the SEC thereunder.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of the Shares and all fees and disbursements
of counsel for any Holder in connection with the sale of the Shares.
"Shares" means shares of the Company's Common Stock that are acquired or
acquirable from the conversion of warrants purchased from the Company
("Conversion Shares"), including additional shares of Common Stock issued as a
result of any stock split, stock dividend, recapitalization, or similar event
applicable to such Conversion Shares.
Demand Registration.
If the Company shall receive, at any time after two years from the
effective date of this Agreement, a written request from the Holders of at least
50% of the Registrable Securities then outstanding that the Company file a
registration statement under the Securities Act covering the registration of all
of the Registrable Securities held by such Holders, then the Company shall
promptly give written notice of such request to all Holders. As soon as
practicable thereafter, and subject to the limitations and restrictions
contained in this Section 2, the Company shall use its reasonable best efforts
to effect the registration of all Registrable Securities which the Holders
request to be registered, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request given within twenty (20) days after receipt of such notice
from the Company. Notwithstanding the above, the Company shall not be obligated
to take any action to effect such registration within ninety (90) days prior to
the good faith estimated date of filing of a registration statement for public
offering of securities of the Company for its own account or within ninety (90)
days following the effective date of such registration.
If the requesting Holders intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to Subsection 2(a) and the
Company shall include such information in the written notice referred to in
Subsection 2(a). In such event, the right of any Holder to include his or its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed) to
the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the representative of the underwriter or underwriters selected by the Company
and reasonably acceptable to a majority in interest of such Holders according to
the number of Registerable Securities held by such Holders. Notwithstanding any
other provision of this Section 2, the Company shall not be required to include
in the registration the securities of any Holder unless the Holder accepts and
agrees to the terms proposed by the underwriters selected by the Company.
<PAGE>
If, in the opinion of the underwriters and based on marketing factors
identified by such underwriters, the proposed timing of the offering would
jeopardize the success of the offering, then the Company shall have a one-time
right to defer the filing of the registration statement for a period of not more
than ninety (90) days after receipt of the request of the Holders. If any Holder
disapproves of the terms of the underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company, the underwriter and the other
Holders. The securities so withdrawn shall also be withdrawn from registration.
If the underwriter has not limited the number of Registrable Securities to be
underwritten, the Company and its officers or directors may include their
securities for their own account in such registration, if the underwriter so
agrees.
In the case that no underwriter is involved in the proposed distribution by
the Holders, if the Company shall furnish to the Holders requesting a
registration statement pursuant to this Section 2 a certificate signed by the
President of the Company stating that, in the good faith judgment of the board
of directors of the Company, it would be seriously detrimental to the Company
and its shareholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer such filing for a period of not more than
ninety (90) days after receipt of the request of the Holders.
The Company is obligated to effect only one (1) demand registration
pursuant to this Section 2.
"Piggy-Back" Registration.
If the Company shall determine at any time to register any of its Common
Stock or securities which are convertible into or exercisable for Common Stock
(other than a registration relating solely to employee benefit plans, or a
registration relating solely to an SEC Rule 145 transaction, or a registration
on any registration form which does not permit secondary sales or does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities), the
Company will: (i) promptly give to the Holders written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws), and (ii) use its best efforts to cause to be included in such
registration and in any underwriting involved therein all the Registrable
Securities specified in a written request or requests made by the Holders within
twenty (20) days after receipt of such written notice from the Company;
provided, however, that the number of Registrable Securities so registered may
be limited by the underwriter's cut-back provision set forth in Subsection 3(c)
below.
If the registration of which the Company gives notice is for a registered
public offering involving an underwriting, the Company shall so advise the
Holders as part of the written notice given pursuant to Subsection 3(a). In such
event, the right of each Holder to register pursuant to Section 3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein.
Any Holders proposing to distribute their securities through such
underwriting shall (together with the Company) enter into an underwriting
agreement in customary form with the representative of the underwriter or
underwriters selected for underwriting by the Company. Notwithstanding any other
provision of this Section 3, the Company shall not be required to include in the
registration the securities of any Holder unless the Holder accepts and agrees
to the terms proposed by the underwriters selected by the Company, and then only
in such quantity as will not, in the opinion of the underwriters and based on
marketing factors identified by such underwriters, jeopardize the success of the
offering by the Company. If the total number of Registrable Securities which the
Holders request to be included in any offering exceeds the number of Shares
which the underwriters reasonably believe is compatible with the success of the
offering, the Company shall only be required to include in the offering so many
of the Shares as the underwriters believe will not jeopardize the success of the
offering. In such instance, the Registrable Securities of the Holders to be
included in the registration shall be allocated among all the Holders thereof in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders at the time of filing the registration
statement. If any Holder disapproves of the terms of the underwriting, such
Holder may elect to withdraw therefrom by written notice to the Company, the
underwriters and the other Holders. The securities so withdrawn shall also be
withdrawn from registration. The number of Shares proposed to be registered by
the Company and the price therefore as proposed by the Company shall have
priority in the above process and shall not be reduced until after all
Registrable Securities of the Holders have been excluded from the proposed
registration. Obligations of the Company. Whenever required under Sections 2 or
3 to use its reasonable best efforts to effect the registration of any
Registrable Securities, the Company shall do the following as expeditiously as
possible:
Prepare and file with the SEC a registration statement with respect to such
Registrable Securities and use its reasonable best efforts to cause such
registration statement to become and remain effective; provided, however, that,
except as set forth in Subsection 4(b) below, the Company shall in no event be
obligated to cause such registration statement to remain effective for more than
one hundred twenty (120) days. If the registration is effected pursuant to Rule
415 under the Securities Act, which rule allows for the registration of
securities to be offered on a continuous or delayed basis, the Company shall
promptly (i) take all actions that may be necessary or advisable to maintain the
effectiveness of such registration, including but not limited to complying with
the undertakings of the registrant in Item 512(a) of Regulation S-K under the
Securities Act, (ii) at Purchaser's request, file with the SEC a supplement or
supplements to the previously filed prospectus as required by Rule 424 under the
Securities Act, and (iii) maintain the effectiveness of such registration
statement for at least one hundred twenty (120) days following the filing of any
such supplements. Prepare and file with the SEC such amendments and supplements
to such registration statements and the prospectus used in connection therewith
to comply with the requirements of the Securities Act.
Furnish to the Holders such number of copies of a prospectus (including a
preliminary prospectus), in conformity with the requirements of the Securities
Act, and such other documents as such Holders may reasonably request in order to
facilitate the disposition of the Registrable Securities to be sold under the
registration statement.
Use its reasonable best efforts to register and qualify the securities
covered by such registration statements under the securities laws of such states
of the United States as shall be reasonably appropriate for the distribution of
the securities covered by such registration statement.
Information by Holder. It shall be a condition precedent to the obligations
of the Company to take any action pursuant to this Agreement that the Holders of
Registrable Securities included in any registration shall cooperate with the
Company and any underwriters to effect such registration, including providing to
the Company any consents and furnishing to the Company such information
regarding such Holders and the distribution proposed by such Holders as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification, or compliance referred to in this
Agreement. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification, or compliance pursuant to
Sections 2 or 3 of this Agreement shall be borne by the Company, and all Selling
Expenses shall be borne by the Holders of the securities so registered pro rata
on the basis of the number of their Shares so registered.
No Delay of Registration. No Holder shall have any right to take any action
to restrain, enjoin, or otherwise delay any registration under this Agreement as
a result of any controversy that might arise with respect to the interpretation
or implementation hereof; provided that this restriction shall in no way limit a
Holder's right to damages for breach of this Agreement by the Company.
Indemnification. In the event that the Registrable Securities of a Holder
are included in a registration statement filed under this Agreement:
To the extent permitted by law, the Company will indemnify each such
Holder, each of its officers, directors and partners, and each person
controlling such Holder, with respect to which registration, qualification, or
compliance of Registrable Securities of such Holder has been effected pursuant
to this Agreement, and each underwriter, if any, and each person who controls
any underwriter against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document incident to any such
registration, qualification, or compliance, or based on 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, or any violation by the
Company of the Securities Act or of any rule or regulation promulgated under the
Securities Act applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration, qualification,
or compliance, and will reimburse each such Holder, each of its officers,
directors and partners, each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability, or action; provided that the
Company will not be liable in any such case for amounts paid in settlement of
any such claim, loss, damage, liability, or action if such settlement is
effected without the reasonable consent of the Company (which consent shall not
be unreasonably withheld), nor shall the Company be liable to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission in written information furnished to the Company
by such Holder with the knowledge that it would be used in the registration
statement.
To the extent permitted by law, each Holder will, if Registrable Securities
held by such Holder are included in the securities as to which registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each legal counsel and independent accountant of the
Company, each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such underwriter
within the meaning of the Securities Act, and each other Holder, each of such
other Holder's officers, directors, and partners, and each person controlling
such other Holder, against all claims, losses, damages, and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or 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, and will reimburse
the Company, such other Holders, such directors, officers, partners, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder with the knowledge that it
would be used therein, provided that the Holder will not be liable in any case
for amounts paid in settlement of any such claim, loss, damage, liability, or
action if such settlement is effected without the reasonable consent of the
Holder (which consent shall not be unreasonably withheld).
Each party entitled to indemnification under this Section (the "Indemnified
Party") shall give notice to the party required to provide indemnification (the
"Indemnifying Party") promptly after such Indemnified Party has actual knowledge
of any claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or any litigation resulting therefrom, shall
be approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein, if substantially prejudicial to the ability
of the Indemnifying Party to defend against such claim or any litigation
resulting therefrom, shall relieve such Indemnifying Party of any obligations
under this Agreement to the extent such Indemnifying Party is damaged solely as
a result of such failure to give notice, but such failure shall not relieve such
Indemnifying Party of any of its obligations otherwise than under this
Agreement. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
Rule 144 Reporting. With a view to making available the benefits of certain
rules and regulations of the SEC which may permit the sale of any outstanding
Shares to the public without registration, the Company agrees after any
registration to use its best efforts to: make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act, at all times; 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, as long as it is subject to such reporting requirements; and so
long as a Holder holds any Shares, furnish to the Holder forthwith upon request
a written statement by the Company as to its compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act, a copy
of the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as a Holder may reasonably request
in availing itself of any rule or regulation of the SEC allowing a Holder to
sell any such securities without registration.
Registrations on Form S-3. If and when the Company becomes eligible to use
SEC Form S-3 for registration of its securities, then a Holder or Holders may
request that the Company register on Form S-3 Registrable Securities if the
aggregate price of all Registrable Securities proposed for sale is not less than
$500,000, and, upon receipt of such a request, the Company shall use its best
efforts to cause such shares to be registered on Form S-3. All Registration
Expenses incurred in connection with such a Form S-3 registration shall be borne
by the Company. All Selling Expenses shall be borne pro rata by the Holders.
Transfer of Registration Rights. The rights to cause the Company to
register a Holder's Shares under this Agreement may be assigned by such Holder
(or its assignee) to (i) any affiliate of the Holder to which Registrable
Securities have been transferred or (ii) to a transferee that acquires from a
Holder (or its assignee) at least twenty-five percent (25%) or more of the
Registrable Securities (or related promissory Notes) originally acquired by the
transferring Holder, provided that the Company is given notice by the Holder at
the time of such transfer stating the name and address of the transferee and
identifying the securities with respect to which these rights are being
assigned.
"Market Stand-Off" Agreement. Holder agrees, if requested by the Company or
an underwriter of Common Stock (or other securities) of the Company, not to sell
or otherwise transfer or dispose of any Common Stock (or other securities) of
the Company held by the Holder (other than those included in the registration)
during the 180-day period following the effective date of a registration
statement of the Company filed under the Securities Act.
Termination of Registration Rights. The obligations of the Company to
register the Registerable Securities pursuant to Section 3 shall terminate as to
any holder upon the date when all Registerable Securities held by such Holder
may be sold by the Holder during a 12-month period pursuant to SEC Rule 144. All
other obligations of the Company to register Registerable Securities pursuant to
this Agreement shall terminate as to any holder on the earlier of: (i) the date
when all Registerable Securities held by such Holder may be sold by the Holder
during a 12-month period pursuant to SEC Rule 144, or (ii) two (2)years from the
effective date of this Agreement.
Modifications and Waivers. This Agreement may not be amended or modified,
nor may the rights of any party hereunder be waived, except by a written
document that is executed by the Purchasers holding a majority of the
Registrable Securities. No waiver of any provision of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof, nor shall any
waiver constitute a continuing waiver.
Successors. This Agreement is and shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, neither the Company nor the Purchasers shall assign this
Agreement to any third party, except in the case of the Purchasers in accordance
with Section 11 above.
Rights and Obligations of Third Parties. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and their
respective successors and permitted assigns, nor is anything in this Agreement
intended to relieve or discharge the obligation or liability of any third
parties to any party to this Agreement, nor shall any provision give any third
party any right of subrogation or action against any party to this Agreement.
Notices. Any notice, request, consent, or other communication hereunder
shall be in writing and shall be sent by one of the following means: (i) mailed
by registered or certified first class air mail, postage prepaid; (ii) by
facsimile transmission; (iii) by reputable overnight courier; or (iv) by
personal delivery, and shall be properly addressed to the Company at the address
set forth above, to the Purchasers at the address set forth on the attached
signature page, or to such other address or addresses as the Company or
Purchasers shall hereafter designate to the other parties in writing. Notices
shall be effective when sent.
Entire Agreement. This Agreement and the exhibits hereto constitute the
entire agreement between the parties hereto in relation to the subject matter
hereof. Any prior written or oral negotiations, correspondence, or
understandings relating to the subject matter hereof shall be superseded by this
Agreement and shall have no force or effect.
Severability. If any provision which is not essential to the effectuation
of the basic purpose of this Agreement is determined by a court of competent
jurisdiction to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation of the remaining provisions of this
Agreement.
Headings. The headings of the Sections of this Agreement and in the
exhibits to this Agreement are inserted for convenience of reference only and
shall not affect the construction or interpretation of any provisions hereof.
Exhibits. The exhibits attached hereto and referred to herein are a part of
this Agreement for all purposes.
Counterparts. This Agreement may be executed in any number of counterparts,
each of which when executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument.
Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of Utah (applicable to contracts to be
performed wholly within the State).
Jurisdiction, Service of Process, and Venue. Each of the parties hereby
consents to the jurisdiction of the State of Utah in the United States of
America for the adjudication of any dispute that may arise between them
hereunder. Each party agrees that the requirements of service of legal process
in such jurisdiction shall be satisfied if served pursuant to the notice
requirement set forth in Section 17 herein.
IN WITNESS WHEREOF, the Company and each Purchaser has caused this
Agreement to be executed by his or its duly authorized representative.
ZEVEX INTERNATIONAL, INC. PURCHASERS
a Delaware corporation
By:/s/ Phillip L. McStotts /s/ Kirk Blosch
Kirk Blosch
Name: Phillip L. McStotts
(please print)
/s/ Jeff Holmes
Jeff W. Holmes
Its:
WARRANT AGREEMENT
VOID AFTER 5:00 P.M., NEW YORK TIME, ON NOVEMBER 20, 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
50,000
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, Wedbush Morgan
Securities, Inc., (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 21, 1998 and before 5:00
p.m., New York time on November 20, 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 50,000 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.
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: $15.00 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 20, 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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(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 21, 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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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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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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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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(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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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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(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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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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(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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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 21, 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 21, 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 21, 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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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
- 14 -
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
- 15 -
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 Everen Securities, Inc., 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 Everen Securities, Inc., 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
- 16 -
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
- 17 -
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
- 18 -
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
- 19 -
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
- 20 -
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
- 21 -
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.
- 22 -
(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.
- 23 -
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.
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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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In Witness Whereof, this Warrant has been duly executed by the Company
under its corporate seal as of the 26th day of November, 1997.
ZEVEX INTERNATIONAL, INC.
By: /s/ Dean G. Constantine
Title: President
Attest: /S/ Phillip L. McStotts
Secretary
WARRANT AGREEMENT
VOID AFTER 5:00 P.M., NEW YORK TIME, ON NOVEMBER 20, 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
50,000
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, Everen
Securities, Inc., (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 21, 1998 and before 5:00
p.m., New York time on November 20, 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 50,000 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.
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: $15.00 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 20, 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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(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 21, 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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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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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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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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(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
- 8 -
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.
- 9 -
(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
- 10 -
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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(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
- 12 -
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 21, 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 21, 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 21, 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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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
- 14 -
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
- 15 -
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 Everen Securities, Inc., 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 Everen Securities, Inc., 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
- 16 -
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
- 17 -
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
- 18 -
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
- 19 -
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
- 20 -
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
- 21 -
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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(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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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.
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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 Everen Securities, Inc., 77 West Wacker Dr., Suite 3100, Chicago, IL,
60601, 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.
- 25 -
In Witness Whereof, this Warrant has been duly executed by the Company
under its corporate seal as of the 26th day of November, 1997.
ZEVEX INTERNATIONAL, INC.
By: /s/ Dean G. Constantine
Title: President
Attest: /S/ Phillip L. McStotts
Secretary
255883.1
These Warrants and the securities to be issued upon their exercise have not been
registered under the Securities Act of 1933 and the Warrants may not be
exercised by or on behalf of any U.S. person unless registered under the Act or
an exemption from such registration is available.
SERIES "B" WARRANTS
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY
BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT
PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION
FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE.
ZEVEX INTERNATIONAL, INC.
Incorporated Under the Laws of the State of Nevada
No. B- 0001 Series B 500,000 Common Stock Purchase Warrants
CERTIFICATE FOR SERIES "B" COMMON STOCK
PURCHASE WARRANTS
A. Warrant. This Warrant Certificate certifies that Blosch & Holmes, LLC, or
registered assigns (the "Registered Holder"), is the registered owner of the
above indicated number of Warrants expiring on the Expiration Date, as
hereinafter defined. One (1) Warrant entitles the Registered Holder to purchase
one (1) share of the common stock, $0.04 par value ("Shares"), of ZEVEX
International, Inc., a Nevada corporation (the "Company"), from the Company at a
purchase price of Three Dollars and 50/100 ($3.50) (the "Exercise Price") at any
time during the Exercise Period, as hereinafter defined, upon surrender of this
Warrant Certificate with the exercise form hereon duly completed and executed
and accompanied by payment of the Exercise Price at the principal office of the
Company.
Upon due presentment for transfer or exchange of this Warrant
Certificate at the principal office of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued in exchange for this Warrant Certificate, subject to
the limitations provided herein, upon payment of any tax or governmental charge
imposed in connection with such transfer. Subject to the terms hereof, the
Company shall deliver Warrant Certificates in required whole number
denominations to Registered Holders in connection with any transfer or exchange
permitted hereunder.
A. Restrictive Legend. Each Warrant Certificate and each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are
then registered under the Securities Act of 1933, as amended (the "Act"), shall
bear a legend in substantially the following form:
"THE (SECURITIES] REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE
SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY BE OFFERED AND SOLD
ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF
FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION FROM
SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE."
A. Exercise. Subject to the terms hereof, the Warrants, evidenced by this
Warrant Certificate, may be exercised at the Exercise Price in whole or in part
at any time during the period (the "Exercise Period") commencing on the date
hereof and terminating at the close of business on that day (the "Expiration
Date") five years from the date hereof. The Exercise Period may be extended by
the Company's Board of Directors.
A Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date (the "Exercise Date") of the surrender to the
Company at its principal offices of this Warrant Certificate with the exercise
form attached hereto executed by the Registered Holder and accompanied by
payment to the Company, in cash, wire transfer, or by official bank or certified
check, of an amount equal to the aggregate Exercise Price, in lawful money of
the United States of America.
The person entitled to receive the Shares issuable upon exercise of a
Warrant or Warrants ("Warrant Shares") shall be treated for all purposes as the
holder of such Warrant Shares as of the close of business on the Exercise Date.
The Company shall not be obligated to issue any fractional share interests in
Warrant Shares issuable or deliverable on the exercise of any Warrant or scrip
or cash with respect thereto, and such right to a fractional share shall be of
no value whatsoever. If more than one Warrant shall be exercised at one time by
the same Registered Holder, the number of full Shares which shall be issuable on
exercise thereof shall be computed on the basis of the aggregate number of full
shares issuable on such exercise.
Promptly, and in any event within ten business days after the Exercise
Date, the Company shall cause to be issued and delivered to the person or
persons entitled to receive the same, a certificate or certificates for the
number of Warrant Shares deliverable on such exercise.
The Company may deem and treat the Registered Holder of the Warrants at
any time as the absolute owner thereof for all purposes, and the Company shall
not be affected by any notice to the contrary. The Warrants shall not entitle
the Registered Holder thereof to any of the rights of shareholders or to any
dividend declared on the Shares unless the Registered Holder shall have
exercised the Warrants and thereby purchased the Warrant Shares prior to the
record date for the determination of holders of Shares entitled to such dividend
or other right. A. Reservation of Shares and Payment of Taxes. The Company
covenants that it will at all times reserve and have available from its
authorized Common Stock such number of shares as shall then be issuable on the
exercise of outstanding Warrants. The Company covenants that all Warrant Shares
which shall be so issuable shall be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
The Registered Holder shall pay all documentary, stamp or similar taxes
and other government charges that may be imposed with respect to the issuance,
transfer or delivery of any Warrant Shares on exercise of the Warrants. In the
event the Warrant Shares are to be delivered in a name other than the name of
the Registered Holder of the Warrant Certificate, no such delivery shall be made
unless the person requesting the same has paid the amount of any such taxes or
charges incident thereto.
A. Registration of Transfer. The Warrant Certificates may be transferred in
whole or in part, provided any such transfer complies with all applicable
federal and state securities laws and, if requested by the Company, the
Registered Holder delivers to the Company an opinion of counsel to that effect,
in form and substance reasonably acceptable to the Company. Warrant Certificates
to be transferred shall be surrendered to the Company at its principal office.
The Company shall execute, issue and deliver in exchange therefor the Warrant
Certificate or Certificates which the Registered Holder making the transfer
shall be entitled to receive.
The Company shall keep transfer books at its principal office or at the
office of its warrant agent which shall register Warrant Certificates and the
transfer thereof. On due presentment of any Warrant Certificate for registration
of transfer at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants. All Warrant Certificates presented for
registration of transfer or exercise shall be duly endorsed or be accompanied by
a written instrument or instruments of transfer in form satisfactory to the
Company. The Company may require payment of a sum sufficient to cover any tax or
other government charge that may be imposed in connection therewith.
All Warrant Certificates so surrendered, or surrendered for exercise,
or for exchange in case of mutilated Warrant Certificates, shall be promptly
canceled by the Company and thereafter retained by the Company until the
Expiration Date. Prior to due presentment for registration of transfer thereof,
the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company), and the Company shall not be
affected by any notice to the contrary.
A. Loss or Mutilation. On receipt by the Company of evidence satisfactory as to
the ownership of and the loss, theft, destruction or mutilation of this Warrant
Certificate, the Company shall execute and deliver, in lieu thereof, a new
Warrant Certificate representing an equal aggregate number of Warrants. In the
case of loss, theft or destruction of any Warrant Certificate, the individual
requesting issuance of a new Warrant Certificate shall be required to indemnify
the Company in an amount satisfactory to the Company. In the event a Warrant
Certificate is mutilated, such Certificate shall be surrendered and canceled by
the Company prior to delivery of a new Warrant Certificate. Applicants for a new
Warrant Certificate shall also comply with such other regulations and pay such
other reasonable charges as the Company may prescribe.
A. Adjustment of Shares. The number and kind of securities issuable upon
exercise of a Warrant shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
1. Stock Splits, Stock Combinations and Certain Stock Dividends. If the Company
shall at any time subdivide or combine its outstanding Shares, or declare a
dividend in Shares or other securities of the Company convertible into or
exchangeable for Shares, a Warrant shall, after such subdivision or combination
or after the record date for such dividend, be exercisable for that number of
Shares and other securities of the Company that the Registered Holder would have
owned immediately after such event with respect to the Shares and other
securities for which a Warrant may have been exercised immediately before such
event had the Warrant been exercised immediately before such event. Any
adjustment under this Section 7 (a) shall become effective at the close of
business on the date the subdivision, combination or dividend becomes effective.
1. Adjustment for Reorganization, Consolidation, Merger. In case of any
reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable upon exercise of a Warrant) or in
case the Company (or any such other corporation) shall merge into or with or
consolidate with another corporation or convey all or substantially all of its
assets to another corporation or enter into a business combination of any form
as a result of which the Shares or other securities receivable upon exercise of
a Warrant are converted into other stock or securities of the same or another
corporation, then and in each such case, the Registered Holder of a Warrant,
upon exercise of the purchase right at any time after the consummation of such
reorganization, consolidation, merger, conveyance or combination, shall be
entitled to receive, in lieu of the Shares or other securities to which such
Registered Holder would have been entitled had he exercised the purchase right
immediately prior thereto, such stock and securities which such Registered
Holder would have owned immediately after such event with respect to the Shares
and 'other securities for which a Warrant may have been exercised immediately
before such event had the Warrant been exercised immediately prior to such
event.
In each case of an adjustment in the Shares or other securities
receivable upon the exercise of a Warrant, the Company shall promptly notify the
Registered Holder of such adjustment. Such notice shall set forth the facts upon
which such adjustment is based.
A. Reduction in Exercise Price at Company's Option. The Company's Board of
Directors may, at its sole discretion, reduce the Exercise Price of the Warrants
in effect at any time either for the life of the Warrants or any shorter period
of time determined by the Company's Board of Directors. The Company shall
promptly notify the Registered Holders of any such reduction in the Exercise
Price.
A. Registration Rights.
1. Certain Definitions. As used in this Section 10, the following
definitions shall apply:
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Act.
"Holder" means any holder of a Warrant or outstanding Registrable
Securities.
"Registrable Securities" means the Warrant Shares issued or issuable upon
the exercise of a Warrant, provided, however, that Registrable Securities shall
not include any Shares and other securities which have previously' been
registered and sold to the public.
"Registration Expenses" means all expenses incurred by the Company in
complying with Section 10(b) including, without limitation, all registration,
qualification and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required in connection with any such registration.
Registration Expenses shall not include selling commissions, discounts or other
compensation paid to underwriters or other agents or brokers to effect the sale.
The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act (and any post-effective amendments filed in connection
therewith), and the declaration of the effectiveness of such registration
statement.
1. Registration. The Company shall:
a) Following the original issuance of the Warrants represented by this Warrant
Certificate at such time or times during the time of the exercise period as the
Company prepares and files with the Commission a registration statement or
statements on an appropriate form that would permit inclusion of the Registrable
Securities in such registration statement or a pre-effective amendment to such a
registration statement, include the Registrable Securities among the securities
being registered pursuant to such registration statements and or upon the demand
of warrant holder at least (30%) of the issued and outstanding warrants in this
series "B" warrant, the company shall prepare and file a registration statement
to register the REGISTRABLE SECURITIES The Company shall diligently prosecute
any such registration statements to effectiveness. Such registration statements
shall cover both the issuance of Warrant Shares upon exercise of this Warrant
and, to the extent appropriate. The resale of such Warrant Shares by the
Holder. The Company will promptly notify the Holder regarding (i) the filing of
such registration statement and all amendments thereto, (ii) the effectiveness
of such registration statement and any post-effective amendments thereto, (iii)
the occurrence of any event or condition that causes the prospectus that is part
of such registration statement no longer to comply with the requirements of the
Act, and (iv) any request by the Commission for any amendment or supplement to
such registration statement or any prospectus relating thereto;
a) Prepare and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and current and to
comply with the provisions of the Act with respect to the issuance, sale or
resale of the Registrable Securities, including such amendments and supplements
as may be necessary to reflect the intended method of disposition of the Holder,
but for no longer than one hundred eighty (180) days subsequent to the
Expiration Date or the Redemption Date;
a) Furnish to each Holder such number of copies of a prospectus, including a
preliminary prospectus, in conformity with the requirements of the Act, and such
other documents as such Holder may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities by such Holder;
a) Use its best efforts to register or qualify the Registrable Securities under
such securities or blue sky laws of any state as a Holder may reasonably
request, and do any and all other acts which may be reasonably necessary or
advisable to enable such Holder to dispose of Registrable Securities in such
jurisdictions;
a) Use its best efforts to comply with all applicable rules and regulations of
the Commission, including without limitation the rules and regulations relating
to the periodic reporting requirements under the Securities Exchange Act of
1934, as amended; and
a) Make available for inspection by the Holder or by any underwriter, attorney,
accountant or other agent acting for such Holder in connection with the
disposition of Registrable Securities, in each case upon receipt of an
appropriate confidentiality agreement, all corporate records, documents and
properties as may be reasonably requested.
1. Expenses of Registration. All Registration Expenses incurred in connection
with the registration, qualification or compliance pursuant to Section 10(b)
hereof shall be borne by the Company, except in the case of the registration
demanded by the warrant holder and not in connection with the company's prior
plan to file a registration statement.
1. Indemnification. In the event any of the Registrable Securities are
included in a registration statement under this Section 10:
a) The Company will indemnify each Holder, each of its officers and directors
and partners and each person controlling such Holder within the meaning of
Section 15 of the Act, and each underwriter, if any, and each person who
controls any underwriter within the meaning of Section 15 of the Act, against
all expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of any rule or regulation promulgated under the
Act applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse the Holder, each of
its officers and directors and partners and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission or alleged untrue statement or omission, made
in reliance upon and in conformity with written information furnished to the
Company by such Holder or underwriter for use therein.
a) In order to include Registrable Securities in a registration statement under
this Section 10, a Holder will be required to indemnify the Company, each of its
directors and officers, its legal counsel and independent accountants, each
underwriter, if any, of the Company's securities covered by such registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Act, and each other selling shareholder, each of
its officers and directors and partners and each person controlling such selling
shareholder within the meaning of Section 15 of the Act, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or 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 and will reimburse the Company, such holders, such
directors, officers, counsel, accountants, persons, underwriters or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by the Holder for use therein.
a) Each party entitled to indemnification under this Section (the "Indemnified
Party") shall give notice to the party required to provide indemnification (the
"Indemnifying Party") promptly after such Indemnified Party has actual knowledge
of any claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by the
Indemnified Party (which approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such Indemnified Party's
expense. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
a) If the indemnification provided for in this Section is held by a court of
competent jurisdiction to be unavailable to an Indemnified Party with respect to
any loss, liability, claim, damage or expense referred to herein, then the
Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party with respect
to such loss, liability, claim, damage or expense in the proportion that is
appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party in connection with the statements or omissions that resulted
in such loss, liability, claim, damage or expense, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of material fact or the omission
to state a material fact relates to information supplied by the Indemnifying
Party or by the Indemnified Party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
1. Information by Holder. Each Holder of Registrable Securities included in any
registration shall furnish to the Company such information regarding such
Holder, such securities and the distribution proposed by such Holder as the
Company may request in writing.
A. Notices. All notices, demands, elections, or requests (however characterized
or described) required or authorized hereunder shall be deemed given
sufficiently if in writing and sent by registered or certified mail, return
receipt requested and postage prepaid, or by facsimile or telegram to the
Company, at its principal executive office, and of the Registered Holder, at the
address of such holder as set forth on the books maintained by the Company.
A. General Provisions. This Warrant Certificate shall be construed and enforced
in accordance with, and governed by, the laws of the State of Nevada. Except as
otherwise expressly stated herein, time is of the essence in performing
hereunder. The headings of this Warrant Certificate are for convenience in
reference only and shall not limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed as of the 12th day of February, 1997.
ZEVEX INTERNATIONAL, INC.
/s/ Phillip L. McStotts /s/ Dean G. Constantine
By: Phillip L McStotts Dean G. Constantine,
Secretary President
<PAGE>
ZEVEX INTERNATIONAL, INC.
The following abbreviations, when used in the inscription on the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-- TEN ENT - as tenants by the
entireties Custodian JR TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts tenants in common to Minors Act
(State)
Additional abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To be Executed by the Registered Holder if He or She
Desires to Assign Warrants Evidenced by the
Within Warrant Certificate)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto ( ) Warrants,
evidenced by the within Warrant Certificate, and does hereby irrevocably
constitute and appoint __________________ _______________ Attorney to transfer
the said Warrants evidenced by the within Warrant Certificates on the books of
the Company, with full power of substitution.
Dated:
Signature
Notice: The above signature must correspond with the name as written upon
the face of the Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signature Guaranteed:
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if he Desires to Exercise
Warrants Evidenced by the Warrant Certificate)
To ZEVEX International, Inc.
The undersigned hereby irrevocably elects to exercise ( ) Warrants,
evidenced by the within Warrant Certificate for, and to purchase thereunder, ( )
full shares of Common Stock issuable upon exercise of said Warrants and delivery
of $ and any applicable taxes.
The undersigned requests that certificates for such shares be issued in the
name of:
PLEASE INSERT SOCIAL SECURITY
OR TAX IDENTIFICATION NUMBER
(Please print name and address)
If said number of Warrants shall not be all the Warrants evidenced by
the within Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercised by issued in the name of
and delivered to:
(Please print name and address)
(SIGNATURES CONTINUED ON FOLLOWING PAGE)
<PAGE>
Dated: Signature:
NOTICE: The above signature must correspond with the name as written upon
the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever, or if
signed by any other person the Form of Assignment hereon must be
duly executed and if the certificate representing the shares or
any Warrant Certificate representing Warrants not exercised is to
be registered in a name other than that in which the within
Warrant Certificate is registered, the signature of the holder
hereof must be guaranteed.
Signature Guaranteed:
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
The Company has exercised its right of first refusal to purchase a parcel
of land, approximately 3.47 acres, to the north of its facility. The transaction
was completed on March 4, 1998, for a purchase price of $580,000 based on MAI
appraisal.
Recorded at the request of: Metro Title Company
File Number: 98020211
Mail Tax Notice to
ZEVEX, Inc.
4314 ZEVEX Park Lane
Murray, Utah 84123
QUIT-CLAIM DEED
COTTONWOOD CONFLUENCE I, L.L.C., a Utah Limited Liability Company, GRANTOR
hereby QUIT-CLAIMS TO: ZEVEX, Inc., a Delaware Corporation, GRANTEE of Salt Lake
City, State of Utah, for the sum of TEN AND 00/100 DOLLARS AND OTHER GOOD AND
VALUABLE CONSIDERATION, the following described tract(s) of land in Salt Lake
County, State of Utah:
BEGINNING at a point 52.229 feet South from the Northeast Corner of Lot 3,
COTTONWOOD CONFLUENCE CENTER PHASE 2, AMENDED; thence South 495.811 feet; thence
West 1 foot; thence North 495.811 feet; thence East 1 foot to the beginning.
Continuing 0.01 acres, more of less (being a 1 foot protection strip in
COTTONWOOD CONFLUENCE CENTER PHASE 2, AMENDED)
AND SUBJECT TO all Easements, Appurtenances, Covenants, Conditions and
Restrictions pertaining thereto.
WITNESS, the hand(s) of said grantor(s) the 4th day of March, 1998.
COTTONWOOD CONFLUENCE I, L.L.C.
By:/s/ Douglas K. Anderson
Its: Manager
State of Utah ) ) ss. County of Salt Lake )
On this 4th day of March , 1998, personally appeared before me Douglas K.
Anderson who being by me duly sworn acknowledged that he is the Manager of
COTTONWOOD CONFLUENCE I, L.L.C., the limited liability company that executed the
above and foregoing instrument and that said instrument was signed on behalf of
said company by authority of its by-laws (of authority of a resolution of its
board of managers/members) and said Douglas K. Anderson acknowledged to me that
said limited liability company executed the same.
My Commission Expires: Nov. 21, 1998 /s/Amy Thiede
Residing at: Salt Lake NOTARY PUBLIC
Cover: [PHOTOGRAPH OF ZEVEX BUILDING CORNER AGAINST BLUE SKY]
Inside: [PHOTOGRAPH OF THE MANUFACTURING FLOOR, WITH INSET OF SECOND PHOTO]
[PHOTOGRAPH OF ENGINEERING LAB]
[PHOTOGRAPH OF ENGINEERING DESIGN]
[PHOTOGRAPH OF DOCUMENT CONTROL]
CAPTION: WORLD CLASS OEM ELECTRONICS DESIGN AND MANUFACTURING
"ZEVEX operations are located in a modern 51,000 square foot manufacturing
facility in Salt Lake City, Utah. The computer-based assembly instruction
system is state-of-the-art and one of many production capabilities available
to technicians and assembly personnel.
Products are designed by ZEVEX to meet specific customer requirements by
integrating core technologies of acoustics, ultrasound, sensor design,
transducer modeling and electro-mechanical systems development.
The engineering and design staff work closely with each client to turn
specifications into validated product solutions.
Designers utilize a variety of software packages including the industry-standard
Pro/ENGINEER[R]CAD system for mechanical design and Cadence[R] software for
electronic design.
ZEVEX has been evaluated by the National Standards Authority of Ireland and
awarded the ISO-9001 and EN-46001 certifications. ZEVEX specializes in
developing and manufacturing products for the medical marketplace and is an FDA-
registered device manufacturer."
1997 ANNUAL REPORT LETTER TO STOCKHOLDERS
Dear Stockholders
It is with great satisfaction that we issue the following 1997 Annual Report to
the stockholders of ZEVEX International, Inc. ZEVEX had an exceptional 1997, as
the Company experienced tremendous growth, change and achievement. Some of the
most significant developments of 1997 included the following: record revenues
and profitability; relocation into the Company's new 51,000 square foot
headquarters and manufacturing facility; completion of a successful private
placement and secondary offering of common stock that raised $14.25 million for
future growth and development; listing of ZEVEX common stock on the American
Stock Exchange; and changing the Company's state of incorporation from Nevada to
Delaware. As we enter 1998, ZEVEX is a stronger, more mature company, with
increased momentum for growth.
In 1997, the Company achieved record revenues totaling almost $9.0 million, or a
58% increase over $5.7 million in 1996. Net income also increased 108% to
$718,242 in 1997, compared to net income of $345,577 in 1996. Net income per
share rose 36% to $.34 compared to earnings per share of $.25 in 1996.
In June, 1997, we moved into our new 51,000 square foot world headquarters and
manufacturing facility. The timely construction of this facility was expedited
by securing a $2 million industrial development bond (the Company's only debt)
with an average interest rate of approximately 3.7%. This facility more than
doubled the Company's available manufacturing and administrative space.
In February, 1997, the Company successfully completed a private offering of
500,000 Units (each Unit consisting of one common share and a warrant to
purchase one common share), which provided $1.25 million in net proceeds to the
Company. In November, 1997, the Company commenced a secondary public offering of
its common stock that provided $13 million in net proceeds to the Company. The
additional capital raised through these offerings has provided the Company with
the necessary funding to stimulate future growth and development.
In May, 1997, the Company became listed on the American Stock Exchange.
Previously, ZEVEX common stock was listed on the OTC market and traded in the
pink sheets. The move to Amex increased the Company's visibility and interest in
its common stock, and contributed to a sharp increase in the price of the
Company's common stock during 1997.
In November, 1997, the Company changed its state of incorporation from Nevada to
Delaware. We expect that the move to Delaware corporate law will strengthen the
Company's profile with institutional investors and industry analysts.
The achievement of these milestones in 1997 has positioned the Company well for
future growth. As to the future, we believe that the OEM market for the
manufacture of medical devices will continue to grow, and ZEVEX is now well
positioned to take advantage of that growth. Our goal is to become recognized as
one of the dominant providers of manufacturing services to medical device
companies.
<PAGE>
Also, we will pursue the development of additional proprietary products. We have
achieved success with the introduction of our EnteraLite(R) Ambulatory Enteral
Feeding Pump, and we plan to follow that with other proprietary products to
provide diversity to our revenue mix.
We are grateful to all of our stakeholders for their commitment in helping ZEVEX
grow to this point, and we look forward to an even brighter future.
Sincerely,
Dean G. Constantine David J. McNally Phillip L. McStotts
President and CEO Vice President and Secretary/Treasurer and CFO
Marketing Director
<PAGE>
BUSINESS
ZEVEX International, Inc., is the issuer of the following Annual Report to
Stockholders for fiscal year ended December 31, 1997. Throughout this report,
ZEVEX International, Inc., and its wholly-owned subsidiary, ZEVEX,Inc., are
collectively referred to for convenience as "ZEVEX," or the "Company."
General
ZEVEX International, Inc., (hereafter "ZEVEX," or 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. ZEVEX's design and manufacturing service customers are medical
technology companies, who sell ZEVEX's systems and devices under private labels
or incorporate the Company's devices into their products. ZEVEX 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 uses extensive engineering and regulatory expertise to deliver
integrated design and manufacturing solutions to its medical device customers.
ZEVEX offers its manufacturing service customers the following advantages:
Broad Experience and Expertise with Numerous Medical Devices.
Over its 11-year history, the Company has manufactured numerous advanced medical
devices, including surgical systems, device components and sensors. The Company
has developed considerable expertise in product design, engineering,
manufacturing and regulatory compliance associated with a variety of medical
devices.
Generally Lower Cost and Higher Quality.
ZEVEX provides a wide range of engineering services for 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 manufactured for its customers by integrating
design and engineering work with manufacturing processes, materials
acquisitions, quality assurance and regulatory considerations.
Rapid Product Development.
With its extensive engineering and manufacturing capabilities, the Company often
can develop and commercialize new products faster than its competitors or its
customers, who otherwise must expend significant time and financial resources to
develop internal engineering expertise and qualified manufacturing facilities.
Regulatory Compliance
ZEVEX is ISO 9001 and EN 46001 certified, and 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
can take advantage of ZEVEX's investment in regulatory and industry
certifications.
Production Flexibility
A broad customer base and cross-trained work force allow ZEVEX to offer its
customers production flexibility, enabling customers to effect product
enhancements and to adjust production volumes in response to demand
fluctuations.
ZEVEX's strategy is to augment continuing growth in its design and manufacturing
service business with the development and commercialization of proprietary
products that use the Company's technologies or engineering expertise, or that
complement 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), ZEVEX's
proprietary Ambulatory Enteral Feeding Pump for patients who require direct
gastrointestinal nutritional therapy. The EnteraLite(R) pump provides patients
with maximum mobility, while delivering enteral solutions with unprecedented
accuracy.
<PAGE>
DEVICES THAT ZEVEX MANUFACTURES FOR OTHERS AND THEIR MARKETS
Surgical Devices -- Ophthalmic.
The Company designs and manufactures ultrasonic phacoemulsification handpieces
and systems for the surgical removal of cataracts. Phacoemulsification is a
method of cataract extraction, which uses ultrasound waves to break the
cataract-obstructed lens of the eye into small fragments that can be removed
through a hollow needle. Phacoemulsification requires only a three to four
millimeter incision, compared to incisions of up to 12 millimeters for other
techniques. Phacoemulsification is currently used in more than 80 percent of
cataract procedures in the United States. ZEVEX manufactures handpieces of
several designs for Allergan, Inc., who is a major customer and a market leader
in ophthalmology. 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 that
embodies both laser and ultrasonic energy sources. Allergan, Inc., and Paradigm
Medical Industries, Inc., are the Company's two largest customers for
phacoemulsification products. However, ZEVEX provides handpieces to many more
customers worldwide.
Surgical Devices -- Liposuction.
The Company designs and manufactures ultrasonic handpieces for liposuction.
Liposuction, the removal of body fat, is one of the most popular cosmetic
procedures performed today. Current liposuction procedures involve the use of a
metal cannula to sheer fat from a patient. The current procedure requires the
physician to exert a large amount of force. In ultrasonically assisted
liposuction, a generator sends ultrasonic waves through a probe that is inserted
under the skin. The ultrasonic energy emulsifies the fat, which can then be
easily aspirated away. Ultrasonic liposuction surgery can significantly reduce
patient trauma.
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. 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. 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.
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 require direct gastrointestinal
nutritional therapy. Enteral feeding is a means of providing nutrition to
patients who have experienced head or neck trauma, or have gastrointestinal
disorders, such as short bowel syndrome, Crohn's Disease, bowel
pseudo-obstruction, and other serious digestive disorders that prevent them from
digesting food normally. Many enteral feeding patients require continuous
administration of nutritional solutions throughout the day, which requires the
patient to carry an enteral feeding pump. The EnteraLite(R) pump is the
lightest, most compact enteral feeding pump on the market, possessing
unprecedented safety and accuracy in liquid nutrition delivery. The
EnteraLite(R) has a 24-hour battery, one-third longer than the battery life of
its closest competitor. The EnteraLite(R) pump carries a two-year warranty,
twice the industry average. 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 five US patents for EnteraLite(R) technology. ZEVEX has also
received Notices of Allowance from the US Patent and Trademark Office ("PTO")
for one additional patents that relate to various aspects of the EnteraLite(R)
pump.
<PAGE>
DESIGN AND ENGINEERING CAPABILITIES
The Company has extensive design and engineering capabilities. In most
instances, ZEVEX's manufacturing service customers rely on the Company from the
outset of their project for complete design, engineering, component analysis,
testing and regulatory compliance for their medical device or system. Over its
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. Many
times, ZEVEX's engineers have identified and offered design alternatives, which
have improved performance or produced manufacturing efficiencies.
Team Approach.
The Company puts together a project team of engineers and technicians from
various disciplines for each engineering project.
Close Cooperation with the Customer.
The Company's engineers work closely with the customer during all phases of the
design, engineering, and testing of the customer's device or system. The
cooperative approach is used to assure that customers' expectations are met or
exceeded in the final product.
Integration of Engineering Staff.
ZEVEX's engineers assist sales and marketing personnel in evaluating requests
for proposals and developing specific solutions, bids, cost estimates, and plans
for each product. The Company's project engineers act as customer contacts
throughout the design and engineering phase and have responsibility for all
aspects of a customer's project.
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 product performance modeling
software, custom testing stations and three-dimensional computer aided design
("CAD") software. Using its own software design, ZEVEX has created what
management believes is the most sophisticated modeling software for ultrasonic
device development. The Company's modeling and design capacities hasten product
development for ultrasonic devices and improve the quality of the final device.
MANUFACTURING CAPABILITIES
The Company's products are assembled and tested at its manufacturing facility in
Salt Lake City, Utah. In most cases, the manufacturing process begins with
technical drawings and specifications derived through the engineering and design
process. Once the preliminary design has been completed, prototypes are
manufactured and further design refinements and adjustments are made based on
the performance of the prototypes. Following completion of final design
specifications, the Company orders the required electronic components,
piezoelectric ceramic, molded plastic and stainless steel housings, and other
items from qualified suppliers of such items. A state-of-the-art software
program and data base are used to manage inventory and control the ordering
process for the more than 30,000 parts used in ZEVEX's products. As the
evolution of a device or system reaches production, members of the project team
with direct responsibility for manufacturing, quality assurance, test
engineering, and materials assume a greater role. The project team develops an
assembly process, 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 that 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.
<PAGE>
Suppliers.
ZEVEX purchases its component parts and raw materials from various suppliers.
The Company is not dependent on any single supplier for any item, and believes
that it can acquire materials from various sources on a timely basis.
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 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 health care market served by EnteraLite(R), and they sell directly to home
health care service providers, including hospitals with such divisions. The
manufacturer's representatives are regionally supported by specialists with
clinical credentials (registered dietitians or nurses), who are full-time
employees of the Company.
SIGNIFICANT CUSTOMERS
During 1997, ZEVEX provided design and manufacturing services for over 100
devices to more than 50 customers. Four of the Company's design and
manufacturing customers, Alaris Medical Systems, Inc., Allergan, Inc., Mentor
Corporation and Paradigm Medical, Inc., accounted for approximately 65% of the
Company's total revenues in 1997. Three of these customers accounted for 66% of
the Company's total revenues in 1996, and two of these customers accounted for
approximately 50% of the Company's total revenues in 1995. Sales of its design
and manufacturing services to foreign customers accounted for approximately 7%
of revenues during 1997, 1996 and 1995. The Company's customers for its design
and manufacturing services are medical technology companies, who sell ZEVEX's
systems and devices under private labels or incorporate the Company's devices
into their products. Generally, ZEVEX seeks to obtain design and manufacturing
arrangements from its customers for a specified period of time. Typically, the
Company secures manufacturing rights for three to five years initially, followed
by annual renewal. The Company rarely undertakes design work if it does not also
obtain a contract for the accompanying manufacturing work.
BACKLOG
At December 31, 1997, the Company had a backlog of approximately $6,265,007, on
orders for medical devices to be manufactured by ZEVEX for other medical
technology companies, as compared to backlogs at December 31, 1996 and 1995, of
$3,091,000 and $2,359,000, respectively. As of March 24, 1998, the Company had a
backlog of $7,418,088. For purposes of the above figures, backlog includes all
orders received by the Company pursuant to purchase orders that have not been
completed and shipped by the Company. This does not include any backlog for the
Company's proprietary products, because the Company manufactures these devices
and holds appropriate levels in inventory for sale to customers. Some of the
orders included in the backlog may be canceled or modified by customers without
significant penalty. In addition, since customers may place orders for delivery
at various times throughout the year, and because of the possibility of customer
changes in delivery schedules or cancellation of orders, the Company's backlog
as of any particular date may not necessarily be a reliable indicator of future
sales.
<PAGE>
COMPETITION
Competition for ZEVEX's Design and Manufacturing Services.
The Company's primary competitors in design and manufacturing services include
other contract manufacturers and potential customers 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 non-recurring engineering design, 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 US market for ambulatory enteral feeding pumps.
Ross Laboratories, a division of Abbott Laboratories, offers the Companion(R)
pump, which was originally introduced to the market in the late 1980's. The
Company estimates that Ross holds a market share of 45% for ambulatory and
non-ambulatory enteral feeding applications. Also, Sherwood Medical offers the
kangaroo(R) 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.
RESEARCH AND DEVELOPMENT FOR ZEVEX'S PROPRIETARY PRODUCTS
As of December 31, 1997, ZEVEX had three full-time engineers in research and
development, and had several other designers and engineers contributing to
additional research and development projects. ZEVEX's research and development
projects are primarily focused on new proprietary products. During the last
three fiscal years, the Company continued independent research and development
activities with respect to the design and development of new and improved
devices, spending $702,563 in 1997, $527,562 in 1996 and $502,255 in 1995. In
1997, 1996 and 1995 research and development costs represented approximately 8%,
10%, and 10% of the Company's revenues respectively. The most notable product
from the Company's research and development efforts during the past three years
is the EnteraLite(R) Ambulatory Enteral Feeding Pump.
PATENTS, TRADEMARKS, AND OTHER PROPRIETARY RIGHTS
Patents.
The Company currently holds seven United States patents. The Company's first
patent relates to a non-invasive ultrasonic liquid level indicator. The Company
also holds five patents that relate to its EnteraLite(R) Ambulatory Enteral
Feeding Pump. Two patents relate to the use of pressure monitoring to improve
the accuracy of fluid delivery by the pump. This monitoring is key to accuracy
of delivery and the ability of the EnteraLite(R) Pump to operate in any
orientation. Another is related to a novel mechanism for monitoring pump rotor
movement. Two additional patents relate to the pinch clip occluder for infusion
sets, a crucial safety device that protects the patient from over-infusion of
solutions. In addition, the Company has recently received notice of allowance
from the United States Patent and Trademark Office (PTO) on a patent for an
electromagnetic fluid-level sensor device, currently under development.
Trademarks.
The Company has registered the trademarks EnteraLite(R) and BottleWatch(R) with
PTO and has pending registrations for ZEVEX(TM). Additionally, the Company has
procured registrations for EnteraLite(R) and 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.
GOVERNMENTAL REGULATION
ZEVEX's manufacturing facilities, its customers' medical devices, 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, record-keeping requirements and
the reporting of certain information regarding their safety. In addition, the
Company's facilities are subject to periodic inspections by the FDA (and certain
state agencies) for compliance with the FDA's Good Manufacturing Process (GMP)
requirements. 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.
Besides the FDA regulations described above, the Company is also subject to
various state and federal regulations with respect to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control, and the disposal of hazardous or potentially hazardous
materials.
Beginning in 1998, all medical device manufacturers selling their product on the
European Common Market will be required to obtain the "CE Mark" on their
products sold. 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 can be freely traded in
all European Economic Area countries. In 1996, the Company received and has
maintained ISO 9001 certification, and in 1997 the Company also received EN
46001 certification. These certifications will allow the Company to CE Mark and
distribute its proprietary products internationally, greatly reducing the time
necessary to acquire a CE Mark from an outside body. ZEVEX's ISO 9001/EN 46001
certification subjects it to periodic inspection and audit by the NSAI (National
Standards Association of Ireland), the European notified body through which the
Company is certified.
EMPLOYEES
As of March 24, 1998, the Company employed a total of 109 people in the
following areas: in Design and Engineering, 26; in Manufacturing and Test, 42;
in Quality Assurance, 11; and in Marketing and Administration, 30. 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
are covered by a collective bargaining agreement. Currently, the local economy
is growing and the unemployment rate is low in the Salt Lake City metropolitan
area, which means that the Company faces competition to attract and retain
qualified personnel. At the same time, however, the Salt Lake City metropolitan
area has a well-educated work force and is considered an attractive place to
live. Accordingly, the Company does not anticipate having difficulty in
attracting and retaining qualified personnel to meet its projected growth.
PROPERTIES AND FACILITIES
The Company's executive offices and manufacturing facilities are located in its
new 51,000 square foot headquarters in Salt Lake City, Utah, which was financed
by 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 facilities are
adequate for its current needs and does not anticipate any difficulty locating
additional facilities, if necessary.
The Company has exercised its first right of refusal to purchase a parcel of
land, approximately 3.47 acres, to the north of its facility. The transaction
was completed on March 4, 1998, for a purchase price of $580,000 based upon MAI
appraisal.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 23, 1997, holders of a majority of the shares of the Company's
outstanding common stock approved by written consent, in lieu of a stockholders'
meeting, the Merger of ZEVEX International, Inc., a Nevada corporation, with and
into ZEVEX International, Inc., a Delaware corporation (the "Merger"). The
purpose of the Merger was to change the Company's state of incorporation from
Nevada to Delaware. A total of 1,141,565 shares out of 2,063,826 shares issued
and outstanding were voted in favor of the Merger, which became effective on
November 20, 1997. The Company filed an information statement with the
Securities and Exchange Commission in connection with the Merger on October 31,
1997, pursuant to section 14(c) of the Securities Exchange Act of 1934.
<PAGE>
SELECTED FINANCIAL DATA -- FIVE-YEAR REVIEW
The following selected statement of operations data for the years ended December
31, 1997, 1996 and 1995, and the balance sheet data as of December 31, 1997 and
1996 are derived from the audited consolidated financial statements included in
this report and should be read in conjunction with those consolidated financial
statements and notes thereto. The selected statement of operations data for the
years ended December 31, 1995 and 1994 and the balance sheet data as of December
31, 1995, 1994 and 1993 are derived from the audited consolidated financial
statements of the Company, which are not included herein and are qualified by
reference to such financial statements and the notes thereto.
<PAGE>
Fiscal Year Ended December 31
<TABLE>
1997 1996 1995 1994 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues $8,968,425 $5,663,733 $5,295,762 $3,332,437 $3,115,878
Gross profit 4,211,368 2,727,678 2,230,209 1,315,767 1,515,806
Selling, general and administrative expenses 2,481,090 1,892,317 1,324,928 1,023,988 775,760
Research and development expenses 702,563 527,562 502,255 419,278 198,804
Other (income)/expenses (47,136) (243,947) (40,829) (36,127) (37,096)
Provisions (benefit) for taxes 356,609 206,169 127,055 (66,709) 196,940
Net income (loss) 718,242 345,577 316,800 (24,662) 381,398
Net income (loss) per share basic .34 .25 .24 (.02) .36
Weighted average shares outstanding 2,097,831 1,388,511 1,305,812 1,130,609 1,060,430
Net Income (loss) per share diluted .29 .24 24 (.02) 35
Weighted average shares outstanding - assuming
dilution 2,443,482 1,411,687 1,333,768 1,151.991 1,086,480
</TABLE>
<TABLE>
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $22,582,543 $6,368,670 $3,247,375 $2,824,029 $2,912,071
Total current liabilities 1,290,466 588,009 346,504 273,708 337,087
Long-term debt 2,026,380 2,000,000 -- -- --
Stockholders' equity 19,265,697 3,701,449 2,900,871 2,550,321 2,574,984
</TABLE>
<PAGE>
19
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
ZEVEX designs and manufactures advanced medical devices, including surgical
systems, device components, and sensors for medial technology companies. The
Company also designs, manufactures, and markets its own medical devices using
its proprietary technologies.
ZEVEX's sales results for 1997 were the strongest in the Company's history.
Revenues were $8,968,425, a 58% increase over revenues of $5,663,733 in 1996,
and a 69% increase over revenues of $5,295,762 in 1995. Revenues for 1997
increased due to demand for the Company's products, and the award of significant
engineering and manufacturing service contracts. The Company is well positioned
to accommodate rapid growth in revenues over the next several years.
Results of Operations
In each of the three preceding years, a small number of customers accounted for
a significant percentage of total revenues. Fluctuations in the timing and size
of orders from such major customers resulted in changes in the Company's
revenues and product mix, which in turn affected gross margins. As a result, the
Company 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.
Manufacturing revenue growth depends upon growth in demand for systems, devices
and instruments manufactured by ZEVEX, and ZEVEX's ability to acquire additional
manufacturing service contracts from medical technology companies. ZEVEX's
contract manufacturing customers have complete control over the marketing and
sales of products that we manufacture for them. ZEVEX has no ability to increase
demand for instruments that it manufactures for its contract-manufacturing
customers.
ZEVEX markets its manufacturing capabilities and rarely undertakes design work
without securing exclusive manufacturing rights (See "Manufacturing
Capabilities"). The volume and timing of future manufacturing revenues related
to any specific engineering project are highly variable. Certain engineering
projects may not lead to future manufacturing revenues. The manufacturing gross
margin percentage from year to year depends primarily on the product mix, as
gross margins vary by instrument, and as a result of negotiated volume
discounts. Management may negotiate volume discounts if the larger volume
results in smaller per unit overhead, improving operating margin. The gross
margin percentage for manufacturing revenues from instruments not yet approved
for commercial use is generally lower because a smaller number of units limits
opportunities to achieve economies of scale, and the instrument and its
manufacturing process are being refined.
<PAGE>
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the income statement bear to revenues.
Year Ended December 31, Income Statement Data -- Percentage of Gross Sales
<TABLE>
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 100% 100%
Gross profit 47% 48% 42% 40% 49%
Selling, general and 27% 33% 25% 31% 25%
administrative expenses
Research and development expenses 8% 10% 9% 12% 6%
Operating income/(loss) 12% 5% 8% (3)% 18%
Other income -- 4% 1% 1% 1%
Income (loss) before taxes 12% 9% 9% (2)% 19%
Provisions (benefit) for taxes 4% 3% 3% (1)% 7%
Net income (loss) 8% 6% 6% (1)% 12%
</TABLE>
During 1997, 65% of total revenues resulted from sales to four customers, three
of whom were major customers in 1996. 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.
The Company's gross profit as a percentage of sales was 47% in 1997, as compared
to 48% in 1996 and 42% in 1995. Management attributes the decrease in 1997 to
the change in product mix delivered during the year, and the increase from 1995
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 for 1995.
Selling, general and administrative expenses increased during 1997 to
$2,481,090, 27% of gross sales, as opposed to $1,892,317, 33% of gross sales in
1996, or $1,324,749, 25% of gross sales in 1995. Increased expenses resulted
from the Company's continuing expansion. The Company also had an increase in
legal costs associated with patent and trademark implementation. Marketing
expenses increased following the introduction of the Company's proprietary
product. Expenses in insurance, taxes and pension benefits also increased. The
Company believes that general and administrative expenses in 1998 as related to
sales will continue at approximately the same percentage rate as last year.
The Company invested $702,563 in 1997, $527,562 in 1996, and $502,255 in 1995
for new research and continued development of new applications for the Company's
ultrasound technology, and proprietary products. Management expects research and
development expenses to continue at the same percentage rate in 1998.
Operating income increased to $1,027,715, 12% of gross sales in 1997 from
$307,799, 5% of gross sales in 1996, or $403,026, 8% of gross sales in 1995.
Similarly, the Company had a net income of $718,242, 8% of gross sales in 1997,
compared to $345,577, 6% of gross sales in 1996, or $316,800, 6% of gross sales
in 1995. These changes during 1997 as compared to 1996 and 1995 are principally
due to the costs addressed previously as well as changes in the Company's
product mix delivered during the year.
<PAGE>
Liquidity and Capital Resources
The Company's increased working capital requirements during 1997 and 1996
stemmed from 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, a $1.25 million private placement of the Company's
securities in February, 1997, and a secondary public offering of the Company's
Common Stock in November, 1997, from which the Company received approximately
$13 million in net proceeds.
During 1997, the Company produced $718,242 in net income. Cash increased by
$175,371 for 1997, as the Company's expenses related to gross revenues
decreased. During 1996, the Company had net income of $345,577, and cash
decreased from operating activities by $175,141, as the Company funded an
increase in accounts receivable and inventories. During 1995, the Company had a
net income of $316,800, and cash increased by $248,111 from operating
activities, while the Company funded an increase in accounts receivable.
In 1997, the Company completed construction of its new 51,000 square foot
headquarters and manufacturing facility. The cost of this undertaking was
approximately $2,591,177. In 1996, the company negotiated a $2.0 million
Industrial Development Bond to finance this construction. On October 29, 1996,
the Company 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, as
the site for this facility. The Company's purchases of land and facilities, and
new research, production, testing equipment and tooling increased to $3,004,926
in 1997, as compared to $619,188 in 1996, and $242,110 in 1995. The increase
during 1997 is attributed to the Company's completion of its new headquarters
and manufacturing facility in June, as well as to continued upgrading of the
Company's production fixturing, tooling and research and engineering
capabilities. The increase in equipment purchases between 1995 and 1996 is
primarily due to upgrading the Company's production fixturing, tooling and
research and engineering capabilities in 1995.
The Company's working capital at December 31, 1997, was $17,235,516, compared to
$4,520,781 at December 31, 1996, and $2,528,418 at December 31, 1995. The
portion of working capital represented by cash and short-term investments at
such dates was $12,663,535, $2,228,164 and 870,333 respectively. The increase in
working capital during 1997 is primarily attributed to (i) completion of a
secondary offering of the Company's common stock in November, 1997, which netted
approximately $13 million to the Company, (ii) increased income from operations
during the year, and (iii) a private placement that was completed in February,
1997. In 1996, the Company used net cash flow of $175,141in operating
activities, as the Company funded an increase in accounts receivable and
inventories. 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.
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.
The Company has agreed to register on demand 350,000 shares of the outstanding
warrants issued in connection with the private placement of February 12, 1997.
The demand registration rights have been granted for a period of two years from
February 1, 1998.
On December 11, 1996, the Company entered into a $500,000 open line of credit
arrangement with a financial institution. The line of credit was increased to
$1,000,000 on September 10, 1997, and increased again to $5,000,000 on December
31, 1997. The line is due May 31, 1998. The line of credit is collateralized by
accounts receivable and inventories, and bears interest at prime rate. The
Company owed zero on the line of credit at December 31, 1997, $60,108 at
December 31, 1996, and zero at December 31, 1995.
Inflation and Changing Prices
The Company has not been, and in the near term is not expected to be, materially
affected by inflation or changing prices.
Year 2000 Compliance
The Company has developed a plan to modify its information technology to be
ready for the year 2000, and has begun converting critical data processing
systems. Although no funds were expensed in this regard during 1997, the Company
currently expects the project to be substantially complete by early 1999, and to
cost between $50,000 and $60,000. This estimate includes internal costs, and may
include costs to upgrade and replace systems in the normal course of business,
as ZEVEX anticipates that it will implement year 2000 compliance almost
exclusively through system upgrades. The Company does not expect this project to
have a significant effect on operations. The Company will continue to implement
systems with strategic value though some projects may be delayed due to resource
constraints.
Other Matters
Summary of Quarterly Data
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/97 9/97 6/97 3/97 12/96 9/96 6/96 3/96
Revenue 2,656,935 2,437,734 1,603,260 2,221,105 1,785,478 1,333,030 1,277,618 1,267,607
Gross profit 1,375,032 962,760 835,146 1,038,430 971,163 600,945 601,269 554,301
Net income 307,479 128,238 56,987 225,538 202,867 53,163 6,221 83,326
EPS basic .13 .06 .02 .13 .15 .04 .00 .06
EPS diluted .11 .04 .02 .13 .14 .04 .00 .06
</TABLE>
<PAGE>
ZEVEX International, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,260,426 $ 2,085,055
Cash restricted for sinking fund payment on industrial
development bond 76,164 -
Accounts receivable, net of allowance for doubtful
accounts of $33,000 in 1997 and none in 1996 2,095,455 1,429,521
Inventories 3,540,591 1,344,297
Marketable securities 10,403,109 203,109
Deferred income taxes 82,930 -
Prepaid expenses 67,307 46,808
------------------------------------
------------------------------------
Total current assets 18,525,982 5,108,790
Property and equipment, net 3,933,804 1,207,034
Patents and trademarks, net of amortization of $7,718 and
$1,700 122,002 49,357
Other assets 755 3,489
====================================
$ 22,582,543 $ 6,368,670
====================================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 640,579 $ 339,023
Accrued liabilities 264,484 188,878
Income taxes payable 285,403 -
Bank line of credit - 60,108
Current portion of industrial development bond 100,000 -
------------------------------------
Total current liabilities 1,290,466 588,009
Deferred income taxes 126,380 79,212
Industrial development bond 1,900,000 2,000,000
Stockholders' equity:
Common stock, $.001 par value: 10,000,000 shares
authorized; 3,264,326 and 1,495,716 shares issued
and outstanding in 1997 and 1996 3,265 1,496
Additional paid in capital 16,697,203 1,852,966
Retained earnings 2,565,229 1,846,987
------------------------------------
Total stockholders' equity 19,265,697 3,701,449
====================================
$ 22,582,543 $ 6,368,670
====================================
See accompanying notes.
</TABLE>
<PAGE>
ZEVEX International, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
----------------------------------------------------
Revenues:
Product sales $ 8,176,155 $ 4,891,272 $ 4,968,108
Engineering services 792,270 772,461 327,654
----------------------------------------------------
8,968,425 5,663,733 5,295,762
Cost of sales 4,757,057 2,936,055 3,065,553
----------------------------------------------------
Gross profit 4,211,368 2,727,678 2,230,209
Operating expenses
General and administrative 1,738,375 1,363,900 1,060,275
Selling and marketing 742,715 528,417 264,653
Research and development 702,563 527,562 502,255
----------------------------------------------------
3,183,653 2,419,879 1,827,183
----------------------------------------------------
Operating income 1,027,715 307,799 403,026
Other income (expense):
Interest income 125,315 53,819 40,829
Interest expense (78,179) (12,981) -
Unrealized gain on marketable securities - 203,109 -
----------------------------------------------------
Income before provision for income taxes 1,074,851 551,746 443,855
Provision for income taxes (356,609) (206,169) (127,055)
----------------------------------------------------
Net income 718,242 $ 345,577 $ 316,800
====================================================
Basic net income per common share $ .34 $ .25 $ .24
====================================================
Diluted net income per common share $ .29 $ .25 $ .24
====================================================
See accompanying notes.
</TABLE>
<PAGE>
ZEVEX International, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Stock Amount Paid-in Retained Treasury
Shares Capital Earnings Stock Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 1,138,109 $45,525 $ 1,344,833 $1,193,714 $ (33,750) $ 2,550,322
Restatement of par value
from $.04 to $.001 in
conjunction with
reincorporation in
Delaware - (44,387) 44,387 - - -
Contribution of treasury
stock to employee stock
ownership plan - - - - 33,750 33,750
Common stock dividend 227,607 228 8,876 (9,104) - -
Net income - - - 316,800 - 316,800
-------------------------------------------------------------------------------
Balances at December 31, 1995 1,365,716 1,366 1,398,096 1,501,410 - 2,900,872
Issuance of common stock
for acquisition of land 130,000 130 454,870 - - 455,000
Net income - - - 345,577 - 345,577
-------------------------------------------------------------------------------
Balances at December 31, 1996 1,495,716 1,496 1,852,966 1,846,987 - 3,701,449
Issuance of common stock
for cash 1,700,000 1,700 14,592,681 - - 14,594,381
Exercise of stock options
for cash 44,610 45 70,580 - - 70,625
Exercise of warrants for 24,000 24 179,976 - - 180,000
cash
Issuance of warrants to
purchase 100,000 shares
of common stock for cash - - 1,000 - - 1,000
Net income - - - 718,242 - 718,242
===============================================================================
Balances at December 31, 1997 3,264,326 $ 3,265 $16,697,203 $2,565,229 $ - $19,265,697
===============================================================================
See accompanying notes.
</TABLE>
<PAGE>
ZEVEX International, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 718,242 $ 345,577 $ 316,800
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization expense 284,174 232,625 153,523
Provision (benefit) for deferred income taxes (35,762) 79,212 -
Contribution of treasury stock to ESOP - - 33,750
Unrealized gain on marketable securities - (203,109) -
Changes in operating assets and liabilities:
Increase in restricted cash for sinking fund
payment on industrial development bond (76,164) - -
(Increase) in accounts receivable (665,934) (219,727) (357,915)
Increase in inventories (2,196,294) (552,337) (100,895)
(Increase) decrease in deposits and prepaid (20,499) (43,973) 133,540
expenses
(Increase) decrease in other assets 2,734 5,193 (4,467)
Increase (decrease) in accounts payable 301,556 147,461 (660)
Increase in accrued liabilities 75,606 92,672 14,721
Increase (decrease) in income taxes payable 285,403 (58,735) 58,735
Purchase of marketable securities (10,200,000) - -
-----------------------------------------------
Net cash flows provided by (used in) operating activities (11,526,938) (175,141) 247,132
Cash flows from investing activities
Purchase of property and equipment (3,004,926) (619,188) (241,131)
Addition of patents and trademarks (78,663) (51,057) -
-----------------------------------------------
Net cash flows used in investing activities (3,083,589) (670,245) (241,131)
Cash flows from financing activities
Proceeds from issuance of common stock 14,594,381 - -
Proceeds from exercise of warrants 180,000 - -
Proceeds from exercise of stock options 70,625 - -
Proceeds from sale of 100,000 warrants 1,000 - -
Proceeds from bank line of credit 639,892 60,108 -
Repayments of bank line of credit (700,000) - -
Proceeds from industrial development bonds - 2,000,000 -
-----------------------------------------------
Net cash flows provided by financing activities 14,785,898 2,060,108 -
-----------------------------------------------
Net increase in cash 175,371 1,214,722 6,001
Cash and cash equivalents at beginning of year 2,085,055 870,333 864,332
-----------------------------------------------
Cash and cash equivalents at end of year $ 2,260,426 $2,085,055 $ 870,333
===============================================
See accompanying notes.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
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. In November
1997 the Company reincorporated into Delaware. 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all certificates of deposit and highly liquid debt
instruments 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,
marketable securities and trade accounts receivable. Cash and cash equivalents
are held in federally insured financial institutions or invested in high-grade
short-term commercial paper issued by major United States corporations.
1. Summary of Significant Accounting Policies (continued)
Marketable securities consist principally of high-grade municipal bonds. The
Company sells its products primarily to, and has trade receivables with
independent durable medical equipment manufacturers and dealers in the United
States and abroad. During the period presented, four of the Company's customers
accounted for more than 10% of net product sales. Less than 10% of product sales
are to foreign customers.
As a general policy, collateral is not required for accounts receivable;
however, the Company periodically monitors the need for an allowance for
doubtful accounts based upon expected collections of accounts receivable and
specific identification of uncollectible accounts. Additionally, customers'
financial condition and credit worthiness are regularly evaluated. Historical
losses have not been material.
Inventories
Inventories are stated at the lower of cost or market; cost is determined using
the first-in, first-out method.
Marketable Securities
The Company's short-term investments are comprised of debt and 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,
1997 and 1996. Accordingly, net unrealized holding gains for the periods ending
December 31, 1997 and 1996 of none and $203,109, 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.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of." The standard requires the Company to review long-lived and
intangible assets for impairment whenever events or circumstances indicate that
the carrying value of an asset may not be recoverable. Adoption did not have a
material effect on the results of operations or financial position of the
Company.
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
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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
Standards (SFAS) No. 123, Accounting for Stock-based Compensation. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
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 $82,530, $113,566 and $39,237, respectively for the
years ended December 31, 1997, 1996 and 1995.
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income for the
period by the weighted-average number of the Company's common shares
outstanding.
Diluted net income per common share includes the dilutive effect of options and
warrants in the weighted-average number of the Company's common shares
outstanding as calculated using the treasury stock method.
<PAGE>
Net Income Per Common Share (continued)
Net income as presented on the statement of operations represents the numerator
used in calculating basic and diluted net income per common share. The following
table sets forth the computation of the shares used in determining basic and
diluted net income per common share:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Denominator for basic net income per common share -
weighted average shares 2,098 1,389 1,306
Dilutive securities: warrants and stock options 345 23 28
============ =========== ===========
Denominator for diluted net income per common share -
adjusted weighted average shares 2,443 1,412 1,334
============ =========== ===========
</TABLE>
Options and warrants to purchase 312,000 shares of common stock were outstanding
at December 31, 1997, but were not included in the computation of diluted
earnings per share because they were anti-dilutive.
All shares held in the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding for both basic and diluted earnings per share
calculations. All share and per share data is restated to reflect a 20% stock
dividend declared by the Board of Directors in March 1995.
Impact of Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure," SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." These Standards will become effective for
the Company's 1998 fiscal year. SFAS No. 129 requires disclosure about an
entity's capital structure and contains no change in disclosure requirements for
entities that were subject to the previously existing requirements. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 131
changes current practice under SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. Management is currently assessing the impact
of implementation of these Standards on the consolidated financial statements of
the Company and does not believe that the implementation will have a material
impact on the Company's financial statements.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 77,641 $ 6,530 $ 438
Income taxes 71,206 170,839 19,200
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>
2. Inventories
Inventories consist of the following at December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------
<S> <C> <C>
Materials $ 2,306,818 $ 936,938
Work in Progress 1,044,331 292,423
Finished goods, including
completed subassemblies 189,442 114,936
=========================================
$ 3,540,591 $1,344,297
=========================================
</TABLE>
<PAGE>
3. Property and Equipment
At December 31, 1997 and 1996, property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Machinery and equipment $ 497,540 $ 433,171
Furniture and fixtures 592,889 365,797
Vehicles 4,500 4,500
Tooling costs 495,986 406,219
Leasehold improvements - 54,464
Building 2,717,962 129,023
Land 505,000 505,000
----------------- -----------------
4,813,877 1,898,174
Less accumulated depreciation and 880,073 691,140
amortization
----------------- -----------------
$ 3,933,804 $ 1,207,034
================= =================
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
amounted to $278,156, $230,925 and $153,523, respectively.
4. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Accrued payroll and related taxes
and benefits $212,495 $182,427
Professional fees 20,000 -
Warranty reserve 25,000 -
Accrued interest 6,989 6,451
================= =================
$264,484 $188,878
================= =================
</TABLE>
5. Income Taxes
The provision 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.
Significant components of the Company's net deferred income taxes as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Deferred tax assets:
Non-deductible accruals and expenses .......... $ 82,930 $
---------
Deferred tax liabilities:
Accelerated depreciation ................... (49,932) (3,452)
Unrealized gains on trading securities ..... (75,760) (75,760)
--------- ---------
Total deferred tax liabilities ................... (118,692) (79,212)
--------- ---------
$ (35,762) $ (79,212)
========= =========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- ----------------
<S> <C> <C> <C>
Current taxes:
Federal $(333,620) $(137,196) $(153,228)
State (56,792) (17,936) (22,440)
R&D credit 69,565 28,175 48,613
Deferred taxes:
Federal (31,176) (69,057) -
State (4,586) (10,155) -
----------------- ---------------- ----------------
Provision for income taxes $(356,609) $(206,169) $(127,055)
================= ================ ================
The actual tax expense differs from the 34% Federal statutory rate as follows:
1997 1996 1995
----------------- ---------------- ----------------
Expected tax (expense) at federal rate $(365,449) $(187,594) $(153,461)
State income tax expense, net of federal benefit
(35,470) (18,208) (16,064)
Research and development credit 69,565 28,175 48,613
Non-deductible expenses (1,401) (6,164) (5,366)
Other (23,854) (22,378) (777)
----------------- ---------------- ----------------
Total provision for income taxes $(356,609) $(206,169) $(127,055)
================= ================ ================
</TABLE>
6. Bank Line of Credit
On December 31, 1997, the Company renewed its line of credit arrangement with a
financial institution for $5 million. The line matures on May 31, 1998. The line
of credit is collateralized by accounts receivable and inventory and bears
interest at the prime rate (8.5%) at December 31, 1997 and prime plus 1% (9.25%)
at December 31, 1996. The Company's balance on its line of credit was zero at
December 31, 1997 and $60,108 at December 31, 1996. Under the line of credit
agreement, the Company is restricted from declaring cash dividends. The renewal
of the Company's line of credit resulted in the addition of certain financial
covenants. As of December 31, 1997, the Company was in compliance with these
financial covenants.
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 December 31, 1997.
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, 1997, 1996 and 1995
were $60,274, $86,035 and $77,037, respectively. The Company has recorded
payables to the plan of $25,410 and $38,000 at December 31, 1997 and 1996,
respectively, which are included in accrued liabilities.
Employees' Stock Ownership Plan
Effective October 14, 1993, the Company adopted an Employee Stock Ownership Plan
that covers all employees who are over the age of 21, have been employed for at
least 90 days and who provide at least 1,000 hours of service.
Full vesting will occur after seven years of service or upon normal retirement
at 65 years of age. Contributions to the plan are at the discretion of the Board
of Directors with no minimum annual funding requirements. Contributions to the
plan will be primarily made with common stock of the Company.
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 years ended December 31, 1997 and 1996.
<PAGE>
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.
Change in Authorized Shares and Par Value
In connection with the 1997 reincorporation into Delaware, the Company adopted
an Amended and Restated Certificate of Incorporation, which provides that the
Company is authorized to issue 2,000,000 shares of $.001 par value preferred
stock and 10,000,000 shares of $.001 par value common stock.
Issuance of Common Stock
On November 29, 1996, the Company paid cash of $50,000 and issued 130,000 shares
of the Company's common stock for the purchase of 3.7 acres of land in Murray,
Utah for the purpose of constructing a manufacturing facility.
On February 12, 1997, the Company completed a private placement offering for
$1,250,000 of its securities, which consist of 500,000 units at a price of $2.50
per unit. Each unit consists of one share of common stock and a warrant to
purchase one share of common stock at a price of $3.50 per share. The issued
shares and shares underlying the warrants are entitled to registration rights
for a period of five years from completion of the offering.
In November 1997 the Company completed a secondary public offering of 1,200,000
shares of its common stock. Total net proceeds from the offering were
$13,344,381.
Repurchase of Common Stock Units
The Company previously repurchased 13,440 shares of outstanding common stock for
$50,400. The Company subsequently contributed all 13,440 shares to the
Employees' Stock Ownership Plan.
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.
The 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.
In connection with the secondary public offering in November 1997, the Company
issued the underwriters warrants to purchase 100,000 shares of common stock at
$15 per share. The underwriters paid a price of $.01 per warrant. These warrants
expire 5 years from the date of the offering. The underwriters' warrants are
restricted from exercise, sale, transfer, assignment or hypothecation for a
period of one year commencing from the offering date. These warrants are
entitled to certain registration rights.
Common Stock Reserved for Future Issuance
At December 31, 1997, the Company had reserved 1,155,390 shares of common stock
for future issuance, including 600,000 shares reserved for exercise of warrants
and 555,390 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.
A summary of stock option activity, and related information for the years ended
December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
Shares Outstanding Stock Options Weighted-
------------------------------------
Available Number of Price Average
for Grant shares Per Share Exercise Price
------------------------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 219,300 80,700 $.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 $.79-5.00 $ 2.70
Additional authorization 100,000 - - -
Options granted (12,000) 12,000 $4.50 $ 4.50
Options canceled 3,060 (3,060) $2.50-5.00 $ 3.24
------------------------------------ ----------------- ------------------
Balance at December 31, 1996 313,900 86,100 $.79-5.00 $ 2.93
Additional authorization 200,000 - - -
Options granted (275,050) 275,050 $3.50-17.50 $13.51
Options exercised - (44,610) $.79-$5.00 $ 1.58
Options canceled 2,850 (2,850) $3.50-$5.00 $ 3.97
------------------------------------ ----------------- ------------------
Balance at December 31, 1997 241,700 313,690 $2.50-17.50 $12.39
==================================== ================= ==================
</TABLE>
<PAGE>
The weighted average fair value of options granted in the years ended December
31, 1997 and 1996 were $9.98 and $1.33, respectively.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 1997 and 1996,
respectively: risk-free interest rate of 5.9% and 6.1%, dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
.90 and .40; and a weighted-average expected life of the option of 4 years and 3
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. Because the effect of SFAS No.
123 is prospective, the initial impact on pro forma net income may not be
representative of compensation expense in future years. The effect on the
Company's pro forma results for each of the fiscal years 1996 and 1995 was not
material (less than $.01 per share).
For the year ended December 31, 1997, pro forma net income and pro forma net
income per common share were approximately $554,000 and $.23, respectively.
Additionally, SFAS No. 123 requires that companies with wide ranges between the
high and low exercise prices of its stock options segregate the exercise prices
into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises. Below are the segregated ranges of exercise
prices as of December 31, 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 44,940 3.48 years $ 3.24 44,940 $ 3.24
$3.85-5.00 56,750 2.20 years $ 4.46 56,750 $ 4.46
$16.44-17.50 212,000 4.74 years $16.45 2,000 $17.50
- ----------------- ----------------- ---------------- ----------------- --------------- ---------------
-----------------
$2.50-$17.50 313,690 4.10 years $12.39 103,690 $ 4.18
================= ================= ================ ================= =============== ===============
</TABLE>
<PAGE>
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 $55,695, $109,505 and $74,551 has been charged to operations
for the years ended December 31, 1997, 1996 and 1995, respectively. The lease
expired in April 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 prices.
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>
1997 1996
---------------------------------- -----------------------------------
Carrying Amount Fair Carrying Amount Fair
Value Value
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,260,426 $ 2,260,426 $2,085,055 $2,085,055
Marketable securities 10,200,000 10,403,109 - 203,109
Industrial development bond 2,000,000 2,000,000 2,000,000 2,000,000
</TABLE>
<PAGE>
12. Major Customers
Sales to major customers for the years ended December 31, 1997, 1996 and 1995,
are summarized as follows (percent of product sales):
<TABLE>
Year ended December 31,
----------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Customer A 18% 33% 32%
Customer B 17% *% *%
Customer C 15% 23% 24%
Customer D 15% 10% *%
----------------- ---------------- -----------------
65% 66% 56%
================= ================ =================
- -----------------
* Less than 10% of sales.
</TABLE>
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 paid an initial fee of
$50,000 and must pay $10,000 per month for two years. In addition, these certain
stockholders have the right to appoint one director to the Company's Board of
Directors
In connection with the secondary public offering completed in November 1997,
certain stockholders waived their registration rights on 350,000 warrants. In
exchange, the Company and the stockholders executed a registration rights
agreement, entitling the stockholders to certain demand registration rights for
a period of two years from the agreement's effective date.
<PAGE>
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 year then ended. These consolidated financial statements are the
responsibility of our 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
<PAGE>
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
<PAGE>
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 December 31, 1997 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.
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, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
|s| Ernst & Young LLP
Salt Lake City, Utah
March 10, 1998
<PAGE>
CORPORATE INFORMATION
<PAGE>
Board of Directors
Dean G. Constantine
President and CEO
ZEVEX, Inc.
David J. McNally
Vice President and Marketing Director
ZEVEX, Inc.
Phillip L. McStotts, CPA Secretary/Treasurer and CFO ZEVEX, Inc.
Darla R. Gill
President
Momentum Medical Corp.
Bradly A. Oldroyd
President
Pinnacle Management Group
Officers
Dean G. Constantine
President and CEO
David J. McNally
Vice President and Marketing Director
Phillip L. McStotts, CPA
Secretary/Treasurer and CFO
Investor Information
CORPORATE HEADQUARTERS
4314 ZEVEX Park Lane
Salt Lake City, Utah 84123
Telephone: (801) 264-1001
FAX: (801) 264-1051
TRANSFER AGENTS
Colonial Stock Transfer
455 East 400 South,
Suite 100
Salt Lake City, Utah 84111
Chase Mellon
Shareholder Service
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
INDEPENDENT AUDITORS
Ernst & Young, LLP
Suite 800
60 East South Temple
Salt Lake City, Utah 84111
(801) 350-3300
CORPORATE COUNSEL
Jones, Waldo, Holbrook & McDonough
1500 Wells Fargo Plaza
Salt Lake City, UT 84101
(801) 521-3200
<PAGE>
Annual Report on Form 10-K
A copy of the Company's Annual Report to the Securities and Exchange Commission
on Form 10-K will be provided to any stockholder free of charge, upon request.
Inquiries should be addressed to Investor Relations, at the corporate address
above.
MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been trading on the American Stock Exchange since
May 19, 1997, under the symbol ZVX. Prior to that time, the stock traded on the
OTC Bulletin Boards under the symbols ZVXI and ZVXIU. In November, 1997, the
Company commenced a secondary public offering of its Common Stock at $12.50 per
share. The Company received $13 million in net proceeds from this offering. As
of March 24, 1998, there were 480 holders of record of the Company's common
stock. Because many of the Company's shares of common stock are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders.
The Company has never declared or paid any cash dividends on its common stock.
Since the Company intends to retain all future earnings to finance future
growth, it does not anticipate paying any cash dividends in the foreseeable
future.
<TABLE>
-------------------------------------- -------------------------------------
1997 1996
High Low High Low
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
1st Quarter $8.00 $3.25 $4.25 $3.75
2nd Quarter $11.25 $7.13 $4.00 $2.75
3rd Quarter $20.75 $13.50 $3.25 $2.50
4th Quarter $16.25 $8.50 $3.31 $2.75
</TABLE>
Inside Back Cover: [PHOTOGRAPH OF AIR BUBBLE DETECTORS]
Caption: AIR BUBBLE DETECTION
"ZEVEX's non-invasive ultrasonic air bubble detectors are utilized worldwide
in a variety of medical applications, including: infusion pumps, dialysis
machines, cardiopulmonary bypass systems and blood analyzers. for any
application where fluid moves through tubing, ZEVEX air bubble detectors
accurately and reliably detect the presence of air without the use of coupling
gels. ZEVEX's electronic interface circuit was evaluated by the TUV Product
Service and awarded the Bauart Gepruft Stamp as a stand alone fail-safe device."
[PHOTOGRAPH OF LIQUID LEVEL SENSORS]
Caption: LIQUID LEVEL MEASUREMENT
"Precise, non-invasive liquid leve measurment devices employ pulse-echo ultra-
sonic transmission technology. ZEVEX's patented design enables the sensor to be
acoustically coupled to the outside of a rigid vessel wall without the use of
coupling gels. Point level detectors, mounted on the side of the vessel, can
determine the presence of liquid or air at specific levels, while volumetric
systems determine liquid column height from the bottom of the container."
[PHOTOGRAPH OF PHACOEMULSIFICATION HANDPIECES]
Caption: SURGICAL HANDPIECES
"ZEVEX surgical handpiece products utilize ultrasonic energy to fragment tissue
in a variety of medical applications such as cataract surgery and ultrasonically
assisted liposuction. These precision surgical instruments are designed to
continue to operate reliably after repeated steam sterilization cycles."
[PHOTOGRAPH OF PHOTON LASER PHACOEMULSIFICATION SYSTEM]
Caption: SPECIALIZED MEDICAL SYSTEMS
"ZEVEX designs and manufactures customer medical systems for original equipment
manufacturers worldwide."
Back Cover:
[PHOTOGRAPH OF PHILLIP L. MCSTOTTS, DEAN G. CONSTANTINE, DAVID J. MCNALLY]
Caption: EXECUTIVE MANAGEMENT TEAM
[PHOTOGRAPH OF ZEVEX LOBBY]
"Over the past decade, ZEVEX has established itself as one of the premier, high-
tech growth companies of the '90's. ZEVEX has demonstrated a unique capability
of combining innovative engineering, production and quality control, managed
under stringent international standards. The company has the capability to
design and produce electronic instruments recognized throughout the world for
precision, value and quality.
The ZEVEX executive management team is professionally trained and has worked
successfully together since founding the company in 1986.
ZEVEX is publicly traded on the American Stock Exchange under the symbol ZVX."
[PHOTOGRAPH OF ZEVEX BUILDING]
"ZEVEX International, 4314 ZEVEX PARK LANE/SALT LAKE CITY, UTAH 84123, USA
TELEPHONE 801-264-1001/FAX 801-264-1051
TOLL-FREE IN USA 1-800-970-2337"
LOGO: National Standards Association of Ireland
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of ZEVEX International, Inc. of our report dated March 10, 1998, included in the
1997 Annual Report to Stockholders of ZEVEX International, Inc.
/s/ Ernst & Young LLP
Salt Lake City, Utah
March 27, 1998
ACCOUNTANTS' CONSENT
We consent to the use of our report dated February 13, 1997,
accompanying the financial statements and Form 10-K of ZEVEX International,
Inc., and Subsidiary as of December 31, 1996, for the purpose of filing with the
Securities and Exchange Commission.
/s/ Daines & Rasmussen P.C.
March 25, 1998
Salt Lake City, Utah
ACCOUNTANTS' CONSENT
We consent to the use of our report dated February 12, 1996
accompanying the financial statements and Form 10-K of ZEVEX International,
Inc., and Subsidiary as of December 31, 1995, for the purpose of filing with the
Securities and Exchange Commission.
/s/ Nielsen, Grimmett & Co.
March 25, 1998
Salt Lake City, Utah
