BRIDGES OF INNOVATION
1998
ANNUAL
REPORT
ZEVEX
INTERNATIONAL
<PAGE>
1998 ZEVEX HIGHLIGHTS
(photo of small boy demonstrating ZEVEX pump)
ZEVEX International, Inc. (NASDAQ:ZVXI) is a designer, manufacturer and marketer
of medical devices including surgical, diagnostic and therapeutic systems,
sensors and surgical handpieces. For over 12 years, ZEVEX has been designing and
manufacturing products for many of the world's leading healthcare companies
which market them under their own labels. From internal research and development
and an aggressive acquisitions strategy, the Company also produces and
distributes its own proprietary products.
ZEVEX manufactures and distributes a line of enteral nutrition delivery
pumps, disposable sets and feeding tubes which it acquired from Nutrition
Medical, Inc., as well as its own patented Enteralite(R) Ambulatory Enteral
Feeding Pump which delivers enteral nutrition with unprecedented accuracy and
mobility for home healthcare patients.
Through the recent acquisition of JTech Medical Industries, Inc., ZEVEX
has grown its proprietary product portfolio to include a line of stand-alone and
computerized musculoskeletal evaluation products that measure isolated muscle
strength, joint ranges of motion, and sensation to document the effectiveness of
treatment or extent of injury.
Continuing its commitment to technology and its contract manufacturing
business, ZEVEX also recently acquired Aborn Electronics, Inc., a San Jose
designer and manufacturer of custom optoelectronic components.
ZEVEX
INTERNATIONAL
TOTAL ZEVEX REVENUES 1998 AND 1997
24% increase to $11,084,413.
1998 PRODUCT MIX AND CONTRIBUTION TO SALES
1999 PROJECTED PRODUCT MIX AND CONTRIBUTION TO SALES
<PAGE>
TO OUR SHAREHOLDERS,
CUSTOMERS AND EMPLOYEES
The theme of this year's annual report is "Bridges of Innovation," a phrase that
aptly describes the work ZEVEX(TM) International has done, and will continue to
do, as your Company grows and thrives. Our innovative engineering led to several
exciting contracts and our acquisition of Nutrition Medical's enteral feeding
product line, JTech Medical Industries, and Aborn Electronics have helped to
bridge proprietary technology with acquired technology, as ZEVEX brings patients
better medical care. 1998 was an exciting year filled with challenges and
opportunities--new business, new products, and new technologies.
For the year, total revenues increased 24% to $11,084,413. Net income
was $362,193 compared with $718,242 in 1997, and earnings per fully diluted
share were $0.10 versus $0.29. Contract design and manufacturing revenues were
approximately $7.8 million, and sales from proprietary enteral feeding products
exceeded $3.3 million, a gain of over 200% from the previous year. Operating
income, however, showed a slight loss for the year due mainly to greater than
anticipated engineering expenses on two cutting-edge technology projects,
compounded by the third quarter postponement of scheduled deliveries by some key
customers. Although the Engineering investment was costly in the short term, we
expect contributions to revenue and margins when these products perform in the
marketplace. We also reviewed our development proposal practice and will no
longer quote engineering projects at fixed prices. All contracts will be quoted
on a cost-plus basis.
The Company has taken major steps to grow and diversify its operations.
Using a portion of the $13 million in net proceeds from the Company's secondary
public offering in November 1997, the Company completed three major acquisitions
in December 1998. These acquisitions are in keeping with management's criterion
that acquisitions immediately contribute to earnings.
First, The Company completed the acquisition of a line of enteral
feeding products from Nutrition Medical, Inc., a Minnesota corporation. Second,
the Company acquired JTech Medical Industries, a Utah company that has been
successfully manufacturing and selling its own proprietary musculoskeletal and
functional evaluation products to healthcare service providers. Third, the
Company acquired Aborn Electronics, Inc., a Silicon Valley-based business that
designs and manufactures a variety of sophisticated optical sensors, custom
computer chips, and semiconductor components for medical technology companies.
We believe that these strategic acquisitions will help us to accelerate revenue
and margin growth by offering a complementary but more diverse line of products
and services.
During the year, ZEVEX received five patents: four on its EnteraLite(R)
Ambulatory Enteral Feeding Pump and one on its disposable electromagnetic fluid
level sensor. We expect that these patents will protect the Company's
competitive position in the marketplace. In addition, ZEVEX received the
prestigious EN46001 Certification from the National Standards Association of
Ireland. This certification will expedite the Company's ability to "CE-mark"
products, which is required for the sale and distribution of medical devices in
the European Union. EN46001 certification is a prerequisite to winning contract
manufacturing business from multinational medical device marketers.
We are proud to have received the Alliance of Children's Hospitals'
Seal of Acceptance for the EnteraLite(R) Ambulatory Enteral Feeding Pump. Our
pump is the first enteral feeding pump to receive this prestigious endorsement.
The Alliance of Children's Hospitals is affiliated with Child Health Corporation
of America, a member of the Premier Buying Group, which represents over 1,800
hospitals nationwide. The Seal is awarded to products and companies
demonstrating excellence in safety, efficacy for pediatric use, cost
effectiveness, customer support, management strengths, and a commitment to
improving pediatric care in partnership with the Alliance.
PROPRIETARY PRODUCTS-SOURCE OF GREATER CONTROL
Your Company's goal of increasing proprietary product sales is rooted in the
desire for better margins and more control over its sales. ZEVEX employs both
its own sales staff and independent manufacturer's representatives to market
these products.
Enteral Feeding Menu Broadened
Proprietary product sales increased $213% in 1998, to $3,314,000, which
accounted for 30% of total sales and consisted of products related to enteral
feeding, or the delivery of nutrition directly to the stomach or intestines.
During the year, ZEVEX broadened its offerings in this area by acquiring
Nutrition Medical's stationary EP85 and EP80 feeding pumps, which are primarily
employed for patients in hospitals and long term care facilities. These pumps,
along with the disposable delivery sets, complement ZEVEX's EnteraLite feeding
pump, which allows home care patients to be mobile. The annual U.S. market for
enteral pumps and delivery sets used in hospitals, long term care facilities
Photo of Liquid Level Detectors
Photo of Air Bubble Detectors
Photo of Aborn Optoelectronic Integrated Circuit
Photo of Enteralite(R) Abulatory Feeding Pump
Photo of Enteralite(R) Fanny pack and Enteralite(R) Sportpack
<PAGE>
and home care is estimated to exceed $200 million. We also acquired Nutrition
Medical's PANDA(R) line of nasoenteric feeding tubes and needle catheter
jejunostomy kits. PANDA products are recognized for their innovative design
features, unique construction materials and superior performance. This product
line addresses the $250 million annual market for enteral feeding tubes and
gastrointestinal access devices.
ZEVEX is now able to offer most of the components of enteral nutrition
delivery to its customers. We can capitalize on our "razor/razor blade"
strategy, by supplying all the disposable sets needed for feeding pumps, once
they are sold, rented, or leased. In keeping with our strategy to capitalize on
our technological capabilities, we have made modifications to the former
Nutrition Medical line that we expect will allow us to realize a premium price
on the sale of these products in the future.
Acquisition of JTech Medical Adds Muscle to Proprietary Products Offerings
We are thrilled to add the exciting products of JTech Medical Industries to our
product line. JTech Medical Industries is an internationally recognized leader
in providing both stand-alone and computerized products for musculoskeletal and
functional testing. JTech products are used to evaluate strength, motion,
functional capacity, hand and upper extremities, and pain levels resulting from
injury or disease. Primary U.S. markets consists of approximately 70,000
physical therapists, 40,000 chiropractors, and 100,000 physical medicine
practitioners.
JTech's product lines encompass the Dualer(TM), Commander(TM), and the
computerized Tracker(TM). The associated products include hardware and
Windows(R)-based software with the Tracker line. JTech products feature a
modular design that encourages upgrades and additional product purchases as the
customer's practice grows.
The Dualer is a patented non-computerized inclinometer that measures
spine and extremity range of motion. The Dualer Plus model interfaces with
Tracker Software to create the Tracker Range of Motion (ROM) System. This
computerized system increases efficiency by enabling the practitioner to select
tests and print reports with the click of a computer mouse. In addition to
measuring spine range of motion, the Tracker ROM System automatically calculates
impairment in accordance with American Medical Association's (AMA) Guides to the
Evaluation of Permanent Impairment. The entire Tracker line includes 10
instrumented systems and 12 software-only modules.
The Commander line brings advanced levels of sophistication and
versatility to portable electronic diagnostic and outcome
assessment instruments. Each device has its own Commander Console that
automatically collects data, stores results, computes statistics and prompts for
tests. For instance, the PowerTrack II Commander is used to quickly and
accurately test muscle strength and identify motor deficits or weakness. The
Commander Algometer measures and records the pressure exerted to elicit a
patient's response in pain tolerance and trigger point tenderness tests.
GripTrack Commander is the easiest to use, most versatile, portable electronic
grip strength dynamometer available today. PinchTrack Commander is readily
incorporated into any evaluation that requires finger strength information,
including repetitive trauma disorder. Most Commander devices can be easily
upgraded without modification to fully computerized Tracker systems.
The OnSite Gauge provides a cost-effective tool for quantifying loads
seen in industrial applications and for clinical lift strength evaluations. At
the work site, OnSite Gauge measures job related forces and weights as part of a
job analysis. In a clinical setting, OnSite adapts to effectively measure a
patient's static lift strength, according to National Institute of Occupational
Safety and Health (NIOSH) lift protocols. An optional lifting platform is
available for clinical lift testing. OnSite also upgrades to a fully
computerized Tracker OnSite Force System.
CONTRACT DESIGN AND MANUFACTURING-BEING IN THE RIGHT PLACE AT THE RIGHT TIME
ZEVEX designs and manufactures over 100 different medical devices for more than
50 established and emerging medical technology companies, such as Alaris(R)
Medical Systems, Inc. (formerly IVAC); Allergan(R), Inc.; Paradigm Medical
Industries, Inc.; various divisions of Baxter(R) Healthcare Corporation;
Mentor(R) Corporation; Sims Deltec(R), Inc.; and 3M(R) Healthcare Company. ZEVEX
is well positioned to take advantage of the trend toward outsourcing medical
product manufacturing, particularly as medical devices require more technical
expertise.
ZEVEX designs and manufactures a variety of ultrasonic
phacoemulsification handpieces and systems. Phacoemulsification is a method of
cataract extraction that uses ultrasound waves to break the cataract-obstructed
lens of the eye into small fragments that can be removed through a hollow
needle. This technique requires only a three to four millimeter incision,
compared with 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. Based on a recent market study, the world
market for phacoemulsification system exceeds $100 million per year.
ZEVEX `s two major customers for phacoemulsification handpieces and
systems for opthalmic surgery are Allergan and Paradigm Medical Industries. Year
after year, Allergan performs as a market leader in ophthalmic surgical
products. This year, we expanded our business alliance with Allergan to provide
additional phacoemulsification handpieces for cataract surgery following that
company's decision to outsource all of its handpiece design and manufacturing.
ZEVEX currently manufactures two complete phacoemulsification systems for
Paradigm Medical Industries, Inc., an emerging competitor in ophthalmology.
These two systems include a basic ultrasonic system and a high-end system that
embodies both laser and ultrasonic energy sources.
Photo of Delivery Sets for Pump Administration
Photo of Enteral EZ(TM) Enteral Feeding Pump
Photo of PANDA(R) Nasoenteric Feeding Tubes
Photo of JTech Tracker(TM) ROM System
Photo of JTech Commander(TM) Products
<PAGE>
Aborn Electronics--A Sense for Market Positioning
As an up-and-coming competitor in the multi-billion dollar market for contract
manufacturing, ZEVEX continues to build core competencies that will allow it to
carve out a market niche. Aborn is a strategic acquisition that builds upon the
Company's competence in advanced sensor technologies.
Aborn possesses unique expertise in the design, development and
production of optoelectronic devices. Aborn products include fiber optic links,
integrated optoisolators, high-speed sensor integrated circuits, custom chips,
application specific integrated circuit (ASIC) chips and solid state relays. A
typical device consists of an emitter and/or detector combined with a custom
integrated circuit. Medical applications include blood analyzers, diagnostic
equipment, and therapeutic systems such as dialysis equipment.
Aborn specializes in research and low to medium volume production
applications that are of lesser interest to their much larger competitors.
In-house capabilities include chip design, wafer fabrication processes, wafer
evaluation, package design, assembly process development, tooling, product
characterization and reliability evaluation. Aborn has low volume production
capabilities in the United States and maintains relationships with manufacturers
overseas for high volume chip production.
Our Acquisition of Aborn Electronics has already expanded the scope of
contract manufacturing relationships with several of our existing customers.
ZEVEX Demonstrates Specialized
Capabilities with Cutting-Edge Products
ZEVEX has been successful in winning new contract manufacturing business,
particularly for the design and manufacture of key components in cutting
- -edge medical devices. We are proud to have been selected by KeraVision(R)
to produce the vacuum pump employed in a procedure to correct near sightedness.
We were also chosen to manufacture Cardiac Science's Powerheart(R)
AECD(R), a non-invasive bedside automatic defibrillator-monitor.
KeraVision chose us to manu-facture the vacuum pump instrument used during
the Intacs(TM) installation procedure, which is a non laser approach to
permanent vision correction for people with low to moderate nearsightedness
(myopia). Intacs have recently been cleared for sale in the U.S. by the FDA. The
KeraVision treatment is the first surgical procedure intended to reshape the
cornea by adding material instead of cutting or removing tissue, which means
the KeraVision approach does not harm the optical zone. Furthermore, Intacs
are replaceable and removable which is a great advantage for patients whose
vision changes with age. The treatment takes about 15 minutes and, based on
clinical studies, usually produces rapid results, fast recovery and---for
more than half of the patients--better than 20/20 vision.
We are currently developing Cardiac Science's fully automatic external
cardioverter defibrillator called the Powerheart AECD. This defibrillator is a
non-invasive hospital bedside defibrillator-monitor that can detect and treat
ventricular tachyarrhythmias for in-hospital patients at risk of sudden cardiac
arrest. The Powerheart delivers defibrillation shocks within seconds and without
human intervention, converting a patient's heartbeat back to a normal rhythm.
Commercial sales are expected to begin in 1999.
THE COMING YEAR AND BEYOND
ZEVEX International has never been in a better position to realize its goals. We
plan to build upon our current core competencies and to develop and market
additional high margin, proprietary products. In addition, we will continue to
seek acquisition and licensing opportunities in order to support proprietary
revenue growth. Our goal is to achieve a mix in which proprietary products
contribute 50% of total revenues. This is expected to increase gross margins to
the 40-50% level while providing the Company greater control over sales.
We also recognize that the design, development and production of
medical devices will grow ever more sophisticated. ZEVEX will be there, to
bridge the distance between idea and reality, to provide our customers with the
best in medical manufacturing practices, and to ensure the innovation needed for
tomorrow.
Photo of Surgical Handpieces
Photon(TM)Phacoemulsification System
Keravision(R)Vacuum Pump
Cardiac Science Powerheart(R) AECD(R)
<PAGE>
Innovation doesn't happen in a vacuum. We would like to thank our
employees for giving us their best work and our shareholders and customers for
their continued support and confidence .
Photo of ZEVEX Corporate Officers Photo of ZEVEX Building
Dean G. Constantine, President and CEO
David J. McNally, Executive Vice President
Photo of Production Area
Phillip L. McStotts, Vice President, Treasurer and CFO
ZEVEX
INTERNATIONAL
<PAGE>
CORPORATE INFORMATION
BOARD OF DIRECTORS
Dean G. Constantine
President and CEO, ZEVEX International, Inc.
David J. McNally
Executive Vice President, ZEVEX International, Inc.
Phillip L. McStotts, CPA
Vice President, Treasurer and CFO
ZEVEX International, Inc.
Kirk Blosch
General Partner, Blosch & Holmes, LLC
Darla R. Gill
President, DRG Enterprises
Bradly A. Oldroyd
President, Pinacle Management Group
CEO, Team One Food and Fuel Centers, Inc.
OFFICERS
Dean G. Constantine
President and CEO
David J. McNally
Executive Vice President
Phillip L. McStotts, CPA
Vice President, Treasurer and CFO
INVESTOR INFORMATION
Corporate Headquarters
4314 ZEVEX Park Lane
Salt Lake City, Utah 84123
Telephone: (801) 264-1001
FAX: (801) 264-1051
INVESTOR RELATIONS
Lippert/Heilshorn & Associates
800 Third Avenue, Suite 1701
New York, NY 10022
Telephone: (212) 838-3777
FAX: (212) 838-4568
TRANSFER AGENTS
Colonial Stock Transfer
455 East 400 South, Suite 100
Salt Lake City, UT 84111
Chase Mellon Shareholder Service
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
INDEPENDENT AUDITORS
Ernst & Young, LLP
60 East South Temple, Suite 800
Salt Lake City, Utah 84111
(801) 350-3300
CORPORATE COUNSEL
Jones, Waldo, Holbrook & McDonough
1500 Wells Fargo Plaza
Salt Lake City, Utah 84101
(801) 521-3200
MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been trading on the NASDAQ National Market
exchange since November 2, 1998, under the symbol ZVXI. Prior to that time, the
stock traded on the American Stock Exchange since May 19, 1997 under the symbol
ZVX. In November 1997, the Company completed 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 March14, 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 no anticipate paying any cash
dividends in the foreseeable future.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Stock Prices 1998 High 1998 Low 1997 High 1997 Low
1st Quarter $12.63 $ 7.88 $ 8.00 $ 3.25
2ndQuarter $11.25 $ 6.75 $11.25 $ 7.13
3rd Quarter $ 7.63 $ 4.50 $20.75 $13.50
4th Quarter $ 7.88 $ 4.00 $16.25 $ 8.50
</TABLE>
ZEVEX
INTERNATIONAL
<PAGE>
THE ZEVEX INTERNATIONAL GROUP
ZEVEX
INCORPORATED
ZEVEX INCORPORATED
4314 ZEVEX PARK LANE
SALT LAKE CITY, UTAH 84123, USA
TEL 801-264-1001
TOLL-FREE IN USA 1-800-970-2337
FAX 801-264-1051
ABORN ELECTRONICS, INC.
2018-D BERING DRIVE
SAN JOSE, CALIFORNIA 95131
TEL 408-436-5444
FAX 408-436-0969
JTECH MEDICAL INDUSTRIES, INC.
4314 ZEVEX PARK LANE
SALT LAKE CITY, UTAH 84123
TEL 801-264-1001
TOLL-FREE IN USA 1-800-985-8324
FAX 801-264-1051
ZEVEX
INTERNATIONAL
4314 ZEVEX PARK LANE, SALT LAKE CITY, UTAH 84123,
USA/TEL 801-264-1001, TOLL-FREE IN USA 1-800-970-2337, FAX 801-264-1051/
www.zevex.com and www.jtechmed.com
