Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-16121

VIASYS HEALTHCARE INC.
(Exact Name of Registrant as Specified in Its Charter)

Registrant's telephone number, including area code: (610) 862-0800

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the filing requirements for at least the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

        The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 27, 2003, was approximately $626,000,000 based upon the New York Stock Exchange Composite Tape of $20.95 per common share.

        As of March 5, 2004, the registrant had 30,657,712 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 5, 2004, are incorporated by reference into Part III of this report. Copies of these documents can be obtained at no cost by calling the company's Investor Relations Department at (610) 862-0799 or by accessing the investor relations section of the company's website at www.viasyshealthcare.com.

Forward-looking Information

        The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission, reports to our shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. The forward-looking statements contained in this report include statements regarding our ability to find alternative suppliers for certain components, the effect of the expiration of our patents on our business, the expected time for shipments of our products to customers, the sufficiency of our facilities, our retention of all of our future earnings for use in our business, the effect of changes in foreign exchange rates on our business and the effect on our business of legal proceedings in which we are involved. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

        A wide range of factors could materially affect our future performance and financial and competitive position, including the following:

•

our projected growth of the neurocare market and the demand for respiratory technologies and critical care equipment and disposables;



•

our ability to capitalize on our existing installed equipment base in the respiratory technologies, critical care, neurocare and medical and surgical product markets and our research, development and marketing expertise to expand our business;



•

our ability to obtain and maintain regulatory approvals for our products in development, including 510(k) clearance under the Federal Food, Drug and Cosmetic Act;



•

our ability to obtain a sufficient supply of raw materials from current suppliers, or, if necessary, in developing alternative sources of supply, including internal capability to produce raw materials or components, at prices competitive with our current sources;



•

spending policies of our customers;



•

government funding policies;



•

reimbursement of patients' medical expenses by government healthcare programs and private health insurers;



•

our ability to maintain a competitive position in our industry;



•

our ability to increase our revenues and profits;



•

our ability to realize the value of the goodwill recorded on our financial statements;



•

our ability to adapt and respond to uncertain and difficult global market conditions, including fluctuations in currency exchanges rates and unforeseen changes in foreign governmental rules and regulations;



•

our ability to develop brand recognition of our products and services;



•

our ability to protect our intellectual property rights;



•

our ability to maintain our rights to products and technology licensed from external sources;

2

•

our ability to integrate acquisitions;



•

our ability to introduce new products as planned; and



•

market acceptance of our new products.

        This above list of factors is not exhaustive but merely illustrative of the many factors that may affect our future performance, financial and competitive position and the accuracy of our forward-looking statements. Accordingly, all forward-looking statements must be evaluated with the understanding of their inherent uncertainty.

Item 1. Business

Overview

        We are a healthcare technology company engaged in developing, manufacturing, marketing and servicing a variety of medical devices, instruments and medical and surgical products for use in the respiratory, critical care, neurocare and medical and surgical product markets. We were incorporated in Delaware in August 1995 as a wholly-owned subsidiary of Thermo Electron Corporation ("Thermo Electron" or "former parent company"). Our business was formed from the combination of a number of enterprises separately acquired or originated by Thermo Electron, including Bird Medical Systems, Bear Medical Technologies, SensorMedics and Nicolet Biomedical. On November 15, 2001 ("Spin-off Date"), as part of its reorganization plan, Thermo Electron spun off its equity interest in our company by distribution of a dividend to its stockholders of record as of November 7, 2001. References to our Company for periods before the Spin-off Date are to the combined businesses of our former parent company from which we were formed.

        Our businesses are combined into four segments through which we operate:

Our Respiratory Technologies group, which develops, manufactures, markets and services products for the diagnosis and treatment of pulmonary and sleep-related disorders, as well as providing services to support pharmaceutical companies and clinical research organizations.

Our Critical Care group, which develops, manufactures, markets and services life support products to treat respiratory insufficiency caused by illness, injury or premature birth.

Our NeuroCare group, which develops, manufactures, markets and services a comprehensive line of neurodiagnostic, vascular diagnostic and audiology testing systems.

Our Medical and Surgical Products group, which develops, manufactures and markets disposable medical products and specialty metal components for orthopedic products, medical-imaging equipment and cardio-vascular implants.

        We currently market our products in over 100 countries and our customers include hospitals, alternate care sites, clinical laboratories, private physicians and original equipment manufacturers. Our global revenues from continuing operations in 2003 totaled $394.9 million. Revenue, operating income from continuing operations and total assets by segment are set forth in the Notes to the Consolidated Financial Statements, which are included herein.

Our Strategy

        We focus our development and marketing activities on growth segments of the healthcare industry. We seek to capitalize on our research, development and marketing expertise, as well as our relationships with physicians and other medical caregivers in these markets to expand our business into high-value opportunities, including disposables, therapy and service-based products. We have augmented our internal research by in-licensing technologies. In addition to new in-licensing opportunities, we are working to enhance and extend our existing product lines into next-generation products and to develop new products to broaden our existing respiratory technologies, critical care,

3

neurocare and medical and surgical product offerings. Products that we have recently introduced include:

•

AVEA™ Mechanical Ventilator, a high-end mechanical ventilator for adult, pediatric and neonatal use which incorporates a unique Heliox blending system;



•

VELA® Mechanical Ventilator, a conventional volume/pressure adult and pediatric ventilator;



•

HiOx 80™, a disposable device that administers high levels of oxygen while minimizing oxygen consumption and providing improved patient mobility;



•

Oxycon Mobile, a sports and occupation stress testing unit designed to be worn as the patient is engaged in physical activities;



•

ORION®, PEGASUS®, Dorado and Delphinus CPAP's, systems for managing obstructive sleep apnea;



•

TECOTEX®, an engineered three-dimensional surface texture for orthopedic implants; and



•

AUDERA™, an integrated system for evaluating the hearing of patients of all ages.

4

Principal Businesses and Products

Respiratory Technologies

        Our Respiratory Technologies group develops, manufactures, markets and services products for the diagnosis and treatment of respiratory, pulmonary and sleep-related disorders. These products are used in a variety of settings, from intensive care to homecare, but generally share a common diagnostic focus on breathing and the availability of oxygen throughout the body. We market our respiratory technology products throughout the world to a variety of customers including hospitals, clinics, private physicians and research centers under the brand names Erich Jaeger and SensorMedics. Our Respiratory Technologies business is comprised of the following product lines:

•

Lung function testing, equipment used to diagnose pulmonary disorders;



•

Sleep diagnostic and therapeutic, systems for the diagnosis and treatment of sleep-related disorders; and



•

VIASYS Clinical Services, products and services to support pharmaceutical companies and clinical research organizations.

5

Lung Function Testing Equipment

        Lung or pulmonary function testing equipment measures and analyzes breathing in order to evaluate the condition of the heart, lungs and metabolism. These instruments assist in the diagnosis of heart and lung disease and in the evaluation of a patient's fitness and metabolic condition. In pulmonary function testing, a patient typically breathes into a mouthpiece connected to a diagnostic instrument. This instrument measures the gas concentration, air flow and air volume and collects data on the level of exchange of oxygen and carbon dioxide in the patient's lungs.

        We market our lung function diagnostic equipment internationally under the SensorMedics and Erich Jaeger brand names. We offer a broad line of pulmonary function testing equipment, from basic spirometry products, which measure the rate and volume of breathing, to complete pulmonary function and metabolic systems, which measure a wide range of heart, lung and metabolic functions. Our principal pulmonary function testing products are:

•

SensorMedics VMAX ® Spectra ("VMAX"), a portable pulmonary function and metabolic diagnostic system designed for use by healthcare providers. VMAX is a modular system that allows end-users to configure a system to their specific needs and to add diagnostic functions as those needs change. VMAX may be configured in a variety of ways, ranging from a simple spirometry system to a full-featured pulmonary function and metabolic diagnostic lab; and



•

Erich Jaeger MasterScreen, a full-function, pulmonary function and metabolic diagnostic system for use primarily by healthcare providers. Our MasterScreen series of products are similar to the VMAX system, but are constructed in a single configuration with fully integrated features.

        We believe that through our combined SensorMedics and Erich Jaeger businesses we represent one of the largest global manufacturers of lung function testing instruments.

Sleep Diagnostic and Therapeutic Equipment

        Sleep diagnostic and therapeutic equipment measures a variety of respiratory and neurological functions to assist in the diagnosis, monitoring and treatment of sleep disorders, such as snoring and obstructive sleep apnea, a condition that causes a person to stop breathing intermittently during sleep.

        We market our sleep diagnostic and therapeutic testing systems under the SensorMedics and Erich Jaeger brand names. Our sleep diagnostic products range from basic sleep diagnostic systems that monitor one patient to a networked, modular, expandable sleep lab that can monitor multiple patients simultaneously. Our sleep therapy product line for homecare use includes continuous positive airway pressure, or CPAP, systems that assist breathing to allow for uninterrupted sleep. Our principal sleep diagnostic and therapeutic devices are:

•

SOMNOTRACTPRO™, SOMNOSTARPRO™ and SLEEPSCREEN™, sleep diagnostic systems that monitor respiratory and neurological functions to assist in the diagnosis of sleep disorders; and



•

ORION, PEGASUS, Dorado and Delphinus CPAPs, sleep therapy products which use a gentle stream of air to encourage a patient's airway to remain open while sleeping with various monitoring capabilities.

        We believe we hold a market leadership position in sleep diagnostics.

VIASYS Clinical Services ("VCS")

        Our clinical services business provides technology and services including VIAPAD, our proprietary electronic data capture device, to several major pharmaceutical and biotechnology companies and clinical research organizations. We assist these companies and organizations in the monitoring of subjects in clinical studies which investigate treatments for respiratory illnesses. VCS provides customers with high quality data during the clinical study, resulting in the need for fewer patients for their clinical studies and accelerated data capture. VCS' competence is true paperless data collection in

6

clinical trials worldwide and reliable data capture with centralized data management and reporting for diagnostic and home monitoring equipment (including electronic diaries).

        We believe the clinical services market offers significant opportunity for growth within our respiratory technology group, as well as in other areas of our company, such as in our NeuroCare group.

Critical Care

        Our Critical Care group develops, manufactures, markets and services life support products to treat respiratory insufficiency caused by illness, injury or premature birth. These products are used in a variety of settings, from intensive care to homecare. We market our critical care products throughout the world to a variety of customers including hospitals, clinics, private physicians, research centers and original equipment manufacturers. Our Critical Care business is comprised of the following product lines:

•

Mechanical ventilators, products for patients who need assistance with breathing; and



•

Other Products, such as specialized ventilators, treatment devices, blenders and monitoring devices.

Mechanical Ventilators

        Mechanical ventilators are used by patients who are unable to breathe adequately without assistance due to disease or injury. These devices pump heated, humidified, oxygen-enriched air into the lungs at regulated pressures, volumes and times in order to approximate normal breathing or to modify breathing to treat disorders. They are typically configured either for adult, pediatric or neonatal use and are marketed globally under the BIRD®, BEAR®, EME®, SENSORMEDICS™ and VIASYS® Critical Care brand names. We believe our Critical Care business is a market leader in the pediatric and neonatal conventional ventilation markets, as well as the high frequency ventilator markets.

        Our principal mechanical ventilators are:

Other Products

        In addition, we offer high frequency oscillatory ventilators ("HFOV"), which are specialized ventilators designed to provide superior gas exchange within the lung, while protecting the patient's lung from damage that may be caused by the cyclic expansion and contraction characteristic of conventional ventilators and other types of high frequency ventilators. Our primary HFOV products which are marketed under the SensorMedics brand name are:

        3100A HFOV, for use in children and premature infants who suffer acute respiratory failure; and

        3100B HFOV, for use in adults for the treatment of acute respiratory distress syndrome ("ARDS").

7

        We also offer a variety of related products, including:

•

INFANT FLOW®, a proprietary form of nasal CPAP (Continuous Positive Airway Pressure) and was added as a result of our acquisition of EME in October 2002;



•

air/oxygen blenders, which regulate, in specific concentrations, the oxygen delivered by a mechanical ventilator or oxygen delivery device;



•

ventilator accessories, such as air compressors, heated humidifiers and mounting stands; and



•

monitoring devices that measure the volume of gas entering and exiting a patient's lungs during mechanical ventilation.

NeuroCare

        Our NeuroCare group develops, manufactures, markets and services a comprehensive line of neuro, vascular and audiology diagnostic systems that are used by physicians and medical technologists to assist in the diagnosis and monitoring of neurological, vascular, brain and auditory disorders. We market our portfolio of products globally to a variety of customers under brand names such as Grason-Stadler, Nicolet Biomedical and Nicolet Vascular. Our NeuroCare business is comprised of the following product lines:

•

Electromyography and Evoked Potential, equipment that measures electrical activity in nerves and muscles;



•

Electroencephalography, equipment that monitors and visually displays the electrical activity generated by nerve cells in the brain;



•

Epilepsy Monitoring, equipment that enables a physician to assess the frequency and severity of epileptic and non-epileptic seizures over long time periods;



•

Audiology, equipment that assesses hearing and balance disorders using a variety of testing techniques and assists in the placement of digital hearing aids and cochlear implants;



•

Intra-Operative Monitoring, products that assist surgeons in preserving the functional integrity of a patient's circulatory and nervous systems during and after complex surgical procedures;



•

Physiologic peripheral vascular diagnostics, products that assist healthcare professionals to detect, grade and track treatment of peripheral vascular disease; and



•

Patient Management Software Solutions, systems that capture, communicate, archive and summarize patient results for remote viewing, billing and improved productivity.

Electromyography and Evoked Potential

        Electromyography, or EMG, is the measurement of electrical activity in the nerves and muscles. Evoked potential, or EP, is the monitoring of patient response to stimuli in order to evaluate the condition of specific nerve pathways. Physicians and technicians in the fields of neurology, physical medicine and rehabilitation use EMG and EP data to confirm the diagnosis of various diseases and disorders, including carpal tunnel syndrome, Lou Gehrig's (ALS) disease, multiple sclerosis and spinal cord injury. Our principal EMG and EP diagnostic products are the Nicolet Viking and Toennies Neuroscreen, which offer high quality signals to distinguish electrical impulses within the body from background noise.

Electroencephalography

        An electroencephalograph, or EEG, is a visual display of electrical activity generated by nerve cells in the brain. Placing electrodes on the scalp allows the brain's activity to be amplified and displayed in rising and falling potentials called brain waves. Physicians use EEGs primarily for the diagnosis of epilepsy and the monitoring of surgical and pharmaceutical treatments. Our principal EEG diagnostic product is the Nicolet AllianceWorks digital EEG system, which allows screening of brain wave abnormalities.

8

Epilepsy Monitoring

        Our BMSI 6000 epilepsy monitoring system combines EEG data with digital video of a patient to enable a physician to assess the frequency and severity of epileptic and non-epileptic seizures over a multiple day period, typically three or four days. Our system helps the physician to locate the site of epileptic seizures in the brain for surgical intervention, to determine the proper dosage of drug therapies, or to determine other courses of treatment for a particular patient.

Audiology

        Audiology is the assessment of hearing, auditory performance and balance disorders using a variety of testing techniques, including the evaluation of the function of the ear and the measurement of neural responses to sound. We offer a broad range of audiology diagnostic instruments for middle ear testing in adults and children that we market under the Grason-Stadler and Nicolet Biomedical brand name. AUDIOSCREENER® is an infant hearing screener for early detection of hearing disorders that could affect the development of speech and language abilities in children. In 2003, we introduced an enhanced version of AUDERA, a device which assists physicians in fitting cochlear implants and hearing aids especially in children.

Intra-Operative Monitoring and Transcranial Doppler

        Our intra-operative monitoring products assist surgeons in preserving the functional integrity of a patient's circulatory and nervous systems during and after complex surgical procedures, such as vascular reconstruction and tumor removal. NeuroCare's primary products in this area are the Endeavor, a sophisticated 16-channel intra-operative monitoring system that provides simultaneous EEG, EP and EMG monitoring for use in the operating room and intensive care units, and our Pioneer and Companion transcranial Doppler systems, which monitor blood flow to the brain in a non-invasive manner.

Physiologic Peripheral Vascular Diagnostics

        Our physiologic testing systems include the VasoGuard and MicroLite, non-invasive products that use a variety of technologies to detect, grade and follow various peripheral vascular diseases. Noninvasive testing is cost-effective and speeds identification and location of disease thus reducing time spent on other more expensive and invasive tests. In addition, these technologies assist in optimizing therapies, such as medication, surgery or vascular stent placement.

        We also offer a variety of products related to our neurodiagnostic instruments, including:

•

Medical pocket Dopplers, instruments that detect fetal heartbeats and blood flow in the peripheral vasculature; and



•

Transcranial Doppler sonographs, instruments that measure blood flow in the brain.

Patient Management Software Solutions

        Our patient management software solutions are designed to improve the productivity of clinicians by providing data management and connectivity to hospital information systems. Customers are able to collect, archive, share and view patient information in local databases and networks. In addition, they may use the solutions to reduce errors and improve productivity by seamlessly sharing patient results across the hospital's clinical network.

        In contrast to many other neurodiagnostic instrument providers, VIASYS NeuroCare is a leader in providing in-field system repair service, and excels in training and applications support by staffing credentialed employees in all application areas. We believe that we are market leaders in the neurodiagnostic, peripheral vascular diagnostic and audiologist focused audio diagnostic market.

9

Medical and Surgical Products

        Our Medical and Surgical group develops, manufactures and markets disposable products and specialty medical products. In 2003, we divested our patient monitoring and our polyurethane businesses. The Medical and Surgical group is now focused on medical disposable products, orthopedic and spinal implants as well as a number of components for various medical devices. We market our disposable products, such as our feeding tube systems, disposable airway management devices and surgical barrier control systems to hospitals, homecare, long-term care and industrial customers globally. We market our specialty products and materials, such as our surgical implant components, to original equipment manufacturers for inclusion in their products. Our Medical and Surgical Products business is comprised of the following businesses:

•

MedSystems Disposables, medical disposable products for enteral feeding and respiratory therapy.



•

Orthopedics, Specialty Products and Materials, a variety of high-tech metal components and materials for inclusion by original equipment manufacturers in their products. These components include titanium knee and steel hip implants as well as surface textures for orthopedic implants.

MedSystems Disposables

        In 2002, we created a strategic business unit called MedSystems through the combination of our Corpak and Stackhouse businesses. This strategic business unit develops, manufactures and markets a variety of disposable products, including:

•

Specialty feeding tubes that supply nutrition to critically ill or compromised patients. The tubes run from the nose into either the stomach or small bowel and allow easily-digested nutrients to be delivered into a patient's digestive tract rather than into the blood stream. Our specially designed tubes can be placed into the small bowel at the patient's bedside resulting in reduced patient transport costs and quicker caloric goal achievement. We market this group of products under the Corflo brand name and we believe that we are the market leader in specialty long-term naso-gastric feeding tubes.



•

Neonatal/Pediatric devices, such as:



•

Closed suctioning systems that assist infants requiring mechanical ventilation by maintaining an open airway and ensuring that the lungs remain inflated. We market this product under the NeoLink® brand name.



•

Farrell Gastric Relief Systems that eliminate gas and fluid buildup that is common in infants suffering from digestive complications, thereby allowing the delivery of nutrients into the stomach. We market this product under the Corflo brand name.



•

Disposable respiratory accessories that assist a patient's breathing during surgery or trauma, which we market under the Pulmanex®brand name.



•

Surgical barrier control systems that we market to hospitals globally under the Stackhouse brand name. Our principal surgical barrier control systems are:



•

FreedomAir Surgical Helmets and ACS Surgical Face Shields that protect surgeons from contamination introduced into the operating room;



•

VitalVac Surgical Smoke Evacuation Systems, which are air filtration systems that collect the smoke plume created from vaporizing tissue during laser surgery or electrosurgery; and



•

Gowns, masks and caps used in industrial environments.

10

Orthopedic, Specialty Products and Materials

        We develop, manufacture and market a variety of specialty products and materials for inclusion by original equipment manufacturers in their products, including:

•

Surgical implant components, which are used in reconstructive spinal and trauma surgery, which we market to original equipment manufacturers that design and distribute orthopedic implants globally;



•

Key components for a left ventricular assist device which is used to bridge the gap to heart transplant in cardio-vascular surgery; and



•

Medical imaging components that reduce X-ray scatter, which allows for high resolution images in mammography and early detection of tumors.

VIASYS Customer Care

        VIASYS Customer Care provides warranty, technical support and long-term service contract options for our products. In addition, our customer care professionals provide the training, installation, contract administration, parts and product upgrades to support both our direct customers and our worldwide distributor network. We provide these services through an organization of 220 experienced biomedical engineers and technicians to ensure the highest level of quality and support to the care providers and patients who rely on our products.

New Products, Research and Development

        We seek to combine research and development spending with our significant knowledge base and key industry relationships to develop a robust pipeline of new products. We have a very active product development portfolio that we believe will be substantially more productive than past efforts due to the implementation of several disciplined processes. In 2002, we instituted a process that benchmarks each major research and development project against others throughout the company. We measure numerous parameters including relative risks, time to market, competitive landscape, resource constraints and return on invested capital. This benchmarking process helps senior management decide on the level of investment in a project and ensures that worthy projects are adequately funded while those with inadequate returns are reevaluated.

        Our Respiratory Technologies Group has broad initiatives to continue the growth of VCS, our clinical services business, improve our sleep diagnostic and therapy franchise, and develop applications for nitric oxide, a therapeutic gas with broad clinical efficacy. VCS leverages our competencies in respiratory medicine, pulmonary mechanics and telemedicine to assist in the management of pharmaceutical trials. We are adding both software and hardware engineering capabilities to the group in order to improve our value to the pharmaceutical and biotechnology industries and assist them in bringing better documented and better understood products to market faster than in the past. We are continuing to develop new products for the sleep therapy market. We expect to introduce a novel new patient interface in 2004 and are actively pursuing both humidification systems and new products in different modes of CPAP. We are also conducting research into potentially significant areas for utilization of nitric oxide. While we are in the early phases, clinical results on a relatively small number of patients have been promising and we intend to increase our focus in this area.

        Our Critical Care Group is working on a number of initiatives to enhance and expand the capabilities of our flagship mechanical ventilator platforms, AVEA and Vela. We intend to incorporate several new software modalities in the future and will continue to develop these product platforms as long term projects. We are also expanding the use of Heliox medical gas on our AVEA ventilator. AVEA is the only ventilator approved for use with Heliox gas in the United States. Heliox is a mixture of medical grade air and helium and its lighter than air qualities make the work of breathing easier for patients with obstructive breathing disorders such as Asthma or Chronic Obstructive Pulmonary Disease. In 2004, we expect to introduce a new generation of our patented Infant Flow noninvasive ventilation product.

11

        Our NeuroCare Group is expected to launch a number of new products in 2004, including a much lighter and smaller system for Intra-Operative Monitoring ("IOM"). IOM systems are used to monitor the integrity of nerve pathways during an increasing number of surgical procedures. The use of this equipment requires an experienced technician; therefore it is not uncommon to move both the technician and equipment into numerous surgical suites. The new IOM system meets this emerging need with a full-featured, rugged and durable solution that is one-third lighter and smaller than conventional systems. In addition, we expect the group's investments in core EEG, EMG, sleep and information technologies will surface this year in multi-modality solutions that support the new dynamic workflow requirements of diagnostic clinicians. Advanced signal processing, clinical reporting, database and interfacing tools are expected to enhance the quality and access of patient information, reducing costs and improving productivity and quality of care. Advances in audio diagnostics have also been realized with the successful Audera system, which is expected to be enhanced this year with important new diagnostic test features. The vascular technologies group continues to advance with new state-of-the-art operating system platforms and signal processing advances for trans-cranial monitoring.

        Our Medical and Surgical Group is preparing to launch products to support its enteral feeding line. We believe, and independent clinical data supports, that enteral feeding has significant advantages over IV feeding for most patients including decreased infection rates, less expensive treatment, and reduced length of stay in the hospital. MedSystems also expects to introduce several products to revitalize our barrier protection systems, including a new helmet system for protecting physicians and patients in the surgical suite.

Raw Materials

        We believe we have a readily available supply of raw materials for all of our significant products from various sources and do not anticipate any difficulties in obtaining raw materials essential to our business. However, some components and raw materials, such as the beryllium copper strips included in our medical imaging components, are purchased from sole-source suppliers. We believe that we have the ability to locate, over time, alternative sources of supply at prices competitive with our current supplies or to develop the internal capability to produce such components, if necessary. We have not had a significant production delay that was primarily attributable to an outside supplier.

Government Regulation

United States

U.S. Food and Drug Administration ("FDA")

        In the United States, the testing, manufacture and sale of our products is subject to regulation by numerous governmental authorities, principally the FDA and corresponding state agencies. Pursuant to the Federal Food, Drug and Cosmetic Act and related regulations, the FDA regulates preclinical and clinical testing, development, manufacture, labeling, distribution and promotion of medical devices in the United States. If we do not comply with applicable requirements, we can be subject to, among other things:

•

FDA warning letters;



•

injunctions;



•

fines;



•

civil penalties;



•

recall or seizure of products;



•

total or partial suspension of production;



•

operating restrictions/limitations on marketing;



•

refusal of the government to grant premarket clearance or premarket approval for devices;



•

withdrawal of marketing clearances or approvals; and

12

•

criminal prosecution.

        Further, if our suppliers or companies we supply products to do not meet their regulatory requirements, we could also be adversely affected.

        A medical device may be marketed in the United States only if: (1) the FDA gives prior authorization; (2) the device is subject to a specific exemption; or (3) the device was marketed prior to May 28, 1976, the effective date of the Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. Depending on the type of medical device, FDA authorization typically takes one of the following two forms:

•

Premarket clearance pursuant to section 510(k) of the Federal Food, Drug and Cosmetic Act. Generally speaking, 510(k) premarket clearance requires that an applicant submit information which establishes that a proposed device is substantially equivalent to a legally marketed device. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness or constitute a major change in the intended use of the device, require new 510(k) clearances. We believe that it now usually takes from approximately three to six months from the date of submission to obtain 510(k) clearance, although it can take substantially longer, depending on the device and its proposed use.



•

Premarket approval ("PMA"). For devices that are not exempt or eligible for 510(k) clearance, the PMA process may be utilized. A PMA application requires an applicant to prove the safety and effectiveness of the device to the FDA through clinical trials. The process of obtaining PMA approval is expensive and uncertain. We believe that FDA approval usually takes from one to three years after filing, but it can take longer, depending on the device.

        The FDA classifies medical devices in the following three categories, according to the level of patient risk associated with a device.

•

Class I devices are non-critical products for which general regulatory controls are sufficient to provide reasonable assurance of safety and effectiveness. Most Class I devices are exempt from the requirement of 510(k) premarket clearance. The FDA must grant 510(k) premarket clearance prior to marketing a non-exempt Class I device in the United States.



•

Class II devices are products for which general regulatory controls are insufficient to provide reasonable assurance of safety and effectiveness and which therefore need special regulatory controls such as compliance with FDA prescribed standards. The FDA must grant 510(k) premarket clearance prior to marketing a Class II device in the United States.



•

Class III devices are products classified by the FDA as posing the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices that are not substantially equivalent to a legally marketed Class I or Class II device. The FDA generally must approve a PMA application prior to marketing a Class III device in the United States. Two of our principal products, the 3100A and 3100B HFOV, are Class III devices. The FDA has approved a PMA for use of the 3100A HFOV product in children in acute respiratory failure with no upper weight limit. The 3100B HFOV has been approved by the FDA for use in adults with ARDS.

        If human clinical trials of a device are required, whether to support a 510(k) or a PMA application, the sponsor of the trial, which is usually the manufacturer or the distributor of the device, must have an investigational device exemption ("IDE"), before beginning human clinical trials. If a device presents a significant risk to the patient, the FDA must approve the sponsor's IDE application before the clinical trial may start. An IDE application for a significant risk device must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRB"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient a sponsor may begin a clinical trial after obtaining approval for the study by the IRB at each clinical site without the need for FDA approval of an IDE application.

13

        The Federal Food, Drug and Cosmetic Act regulates our quality control and manufacturing procedures by requiring us to demonstrate and maintain compliance with the Quality System Regulation ("QSR"). The QSR sets forth the FDA's current good manufacturing practices requirements, which cover the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation and servicing of all finished devices intended for human use. The QSR covers quality management and organization, device design, buildings, equipment, purchase and handling of components, production and process controls, packaging and labeling control, device evaluation, distribution, installation, complaint handling, servicing and records. These requirements include, among other things, that:

•

We use written procedures to control all aspects of our product development, manufacturing processes, labeling, packaging, handling, storage, distribution, installation and servicing of medical devices;



•

We validate, by extensive and detailed testing, every aspect of each process, and our ability to produce devices which meet our manufacturing specifications;



•

We investigate any deficiencies in the manufacturing process or in the products produced; and



•

We maintain detailed recordkeeping relating to all personnel, processes and aspects of the operation.

        The FDA monitors compliance with the QSR and current good manufacturing practice requirements by conducting periodic inspections of manufacturing facilities. Violations of applicable regulations noted by the FDA during inspections of our manufacturing facilities could adversely affect the continued marketing of our products.

        The FDA enforces post-marketing controls that include the requirement to file medical device reports ("MDRs") when we become aware of information suggesting that any of our marketed products may have caused or contributed to a death, serious injury or serious illness. The FDA also requires the filing of an MDR when we become aware that any of our products has malfunctioned and that a recurrence of that malfunction would likely cause or contribute to a death, serious injury or serious illness. The FDA relies on MDRs to identify product problems and utilizes MDRs as one mechanism to determine whether it should exercise its enforcement powers.

        Other post-marketing requirements are applicable to our devices including, but not limited to, tracking for certain devices, as well as complaint handling, reporting of corrections and removals and repair, replacement or refund. Companies can also voluntarily conduct a recall of a problem product.

        Other FDA requirements govern product labeling and promotion and prohibit a manufacturer from marketing an approved device for unapproved indications, among other things. If the FDA believes that a manufacturer is not in compliance with the law, it can institute an enforcement action against the manufacturer, its officers and employees.

Other Regulations

        We are also subject to numerous federal, state and local laws relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances.

International

        We derive 43% of our revenues from sales of products outside the United States. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. These laws and regulations range from simple product registration requirements in some countries to complex clearance and production controls in others. As a result, the processes and time periods required to obtain foreign marketing approval may be longer or shorter than those necessary to obtain FDA approval or marketing clearance. These differences may affect the efficiency and timeliness of international market introduction of new products.

14

        A medical device may only be marketed in the European Union (EU) if it complies with the Medical Devices Directive (MDD) and bears the CE mark as evidence of that compliance. To achieve this the medical devices in question must meet the "essential requirements" defined under the MDD relating to safety and performance and we, as manufacturer of the devices, must undergo a verification of our regulatory compliance by a third party standards certification provider, a so-called "Notified Body". The nature of the assessment depends upon the regulatory class of products concerned, which in turn determines the precise form of testing undertaken by the Notified Body. Similar to the system in the United States, medical devices in the EU are classified according to the risks posed by their use, with class I being low risk devices, class IIa medium risk, class IIb medium/high risk and class III being high risk devices. Our devices fall into the medium and high risk categories and require a higher level of regulatory assessment. As of January 3, 2004, our key respiratory technologies, critical care and neurocare products bore the CE mark.

        The requirements of the MDD must be complied with by the "manufacturer of the device" which is defined as the party responsible for the design, manufacture, packaging and labeling of the device before it is placed in the EU market, regardless of whether these operations are carried out by this entity or on its behalf. Therefore, where our specialty products are incorporated by original equipment manufacturers into their products, compliance with the MDD is their responsibility.

        Geographic information is discussed in the Notes to the Consolidated Financial Statements, which are included herein.

Third Party Reimbursement

        In the United States, health care providers that purchase medical devices generally rely on third party payors to reimburse all or a portion of the cost of the devices either directly or bundled as a component of a reimbursement for health care services. Examples of third party payors are Medicare, Medicaid, private health insurance plans and health maintenance organizations. Medicare is a federally funded program managed by the Centers for Medicare and Medicaid Services ("CMS"), through local fiscal intermediaries and carriers that administer coverage and reimbursement for certain health care items and services furnished to the elderly and disabled. Medicaid is an insurance program for the poor that is both federally and state funded and managed by each state. The federal government sets general guidelines for Medicaid and each state creates specific regulations that govern their individual program. Each payer has its own process and standards for determining whether it will cover and reimburse a procedure or particular product. Private payers often rely on the lead of the governmental payers in rendering coverage and reimbursement determinations. Therefore, achieving favorable Medicare coverage and reimbursement is usually a significant gating issue for successful introduction of a new product. The competitive position of some of our products will depend, in part, upon the extent of coverage and adequate reimbursement for such products and for the procedures in which such products are used. Prices at which we or our customers seek reimbursement for our products can be subject to challenge, reduction or denial by the government and other payors.

        The federal government and various state governments are currently considering proposals to reform the Medicare and Medicaid systems. We are unable to evaluate what legislation may be drafted and whether or when any such legislation will be enacted and implemented. Some of these proposals, if adopted, could have an adverse effect on our business, financial condition and results of operations.

        During the past several years, the major third party payors have substantially revised their reimbursement methodologies in an attempt to contain their health care reimbursement costs. Medicare reimbursement for inpatient hospital services is based on a fixed amount per admission based on the patient's specific diagnosis. As a result, any illness to be treated or procedure to be performed will be reimbursed only at a prescribed rate set by the government that is known in advance to the health care provider. If the treatment costs less, the provider keeps the overage; if it costs more, the provider cannot bill the patient for the difference. No separate payment is made in most cases for products such as our medical devices when they are furnished or used in connection with inpatient

15

care. Many private third party payors and some state Medicaid programs have also adopted similar prospective payment systems.

        Third party payors have recently increased their emphasis on managed care, which has led to an increased emphasis on the use of cost-effective medical devices by health care providers. In addition, through their purchasing power, these payors often seek discounts, price reductions or other incentives from medical product suppliers.

        Reimbursement and health care payment systems in international markets vary significantly by country and include both government sponsored healthcare and private insurance. We have received international reimbursement approvals for many of our products and plan to seek international reimbursement approvals for other products. In contrast to the United States, Europe is a highly fragmented market, with a large number of distinct and uniquely structured healthcare delivery and payment systems. European health care systems are beginning to confront the same fiscal pressures and limitations that characterize the United States health care system and are increasingly adopting many of the same cost and utilization control mechanisms. To the extent that any of our products are not entitled to reimbursement in any international market, market acceptance of such products would be adversely affected.

        In addition to the foregoing Medicare coverage and reimbursement limitations, other aspects of the Medicare and Medicaid programs may negatively affect the Company. In 1977, Congress adopted the Medicare and Medicaid Anti-Fraud and Abuse Amendments of 1977, which have been strengthened by subsequent amendments and the creation of the Office of Inspector General ("OIG") to enforce compliance with the statute, as amended (the "Anti-Fraud and Abuse Law"). The Anti-Fraud and Abuse Law prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration in any form as an inducement or reward for either the referral of patients or the arranging for reimbursable services. A violation of the statute is a felony and could result in civil penalties, including exclusion from the Medicare program, even if no criminal prosecution is initiated.

        The U.S. Department of Health and Human Services has issued regulations from time to time setting forth so-called "safe harbors," which would protect certain limited types of arrangements from prosecution under the statute. Failure to comply with each element of a particular safe harbor does not mean that an arrangement is per se in violation of the Anti-Fraud and Abuse Law. As the comments to the safe harbors indicate, the purpose of the safe harbors is not to describe all illegal conduct, but to set forth standards for certain non-violative arrangements. Nevertheless, if an arrangement implicates the Anti-Fraud and Abuse Law and full compliance with a safe harbor cannot be achieved, the Company risks greater scrutiny by the OIG and, potentially, civil and/or criminal sanctions. The Company believes its arrangements are in compliance with the federal Anti-Fraud and Abuse Law; however, no assurance can be given that regulatory authorities will not take a contrary position.

        Also, the federal Civil False Claims Act prohibits knowingly presenting (including "causing" the presentation of) a false, fictitious or fraudulent claim for payment to the United States. Actions under the Civil False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the Civil False Claims Act, and the threat of significant liability, in its investigations of health care providers, suppliers and manufacturers throughout the country for a wide variety of Medicare billing practices, and has obtained multi-million dollar settlements. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources in investigating healthcare providers', suppliers' and manufacturers' compliance with health care billing, coverage and reimbursement rules and fraud and abuse laws.

        In addition, federal law includes other provisions that specifically prohibit certain types of manipulative Medicare billing practices. Federal law also provides for minimum periods of exclusion from federal and state health care programs for certain offenses and frauds. Many states also have false claims and other health care fraud and abuse laws, which also may include civil and criminal penalties.

16

Patents, Licenses and Trademarks

        We pursue patent protection of our technology, products and product improvements both in the United States and in selected foreign countries. We also rely on trade secrets and technological innovations to develop and maintain our competitive position. In an effort to protect our trade secrets, we generally require our employees, consultants and advisors to execute confidentiality and invention assignment agreements upon commencement of employment or consulting relationships with us.

        We have entered into a number of license and other arrangements under which we have obtained rights to manufacture and market some products or potential products. For instance, a number of the therapeutic-based products that we are developing incorporate proprietary technologies that we have licensed from third parties. Under our existing licenses, we are subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach a license agreement, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license, we may be required to license to the licensor any related intellectual property that we develop.

        We do not consider any patent or related group of patents to be of such importance that its expiration or termination would materially affect our business.

Competition

        The respiratory technologies, critical care, neurocare and medical and surgical product markets are highly competitive. We compete with many companies ranging from small start-up enterprises to companies that are larger and more established than us, with access to significant financial resources and greater name recognition, research and development experience and regulatory, manufacturing, and marketing capabilities. We compete in each of our markets primarily on the basis of reputation, product reliability and performance, product features and benefits, price and post-sale service and support.

        Our Respiratory Technologies and Critical Care segments compete with products from firms such as Siemens AG, Tyco Healthcare Group, Dragerwork AG and Respironics, Inc. The principal competitors of our NeuroCare segment include Bio-logic Systems Corporation, Shanghai Kohden Medical Instrument Corporation (formerly Nihen Koden Corporation), Teca-Oxford Instruments PLC, and Excel Tech Ltd. The principal competitors of our Medical and Surgical Products segment include the Ross Products Division of Abbott Laboratories, The Dow Chemical Company and J. P. Stevens Company.

Employees

        As of January 3, 2004, we had a total of 1,859 full-time employees, consisting of 1,475 employees based in the United States and 384 employees based outside of the United States. We have no collective bargaining agreements with our United States employees. Some of our operating locations outside the United States have work council agreements as mandated by law. The Company believes that it has good employee relations.

Available Information

        We maintain a website at www.viasyshealthcare.com and make available free of charge on this website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

        VIASYS also makes available on its website the charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of its board of directors, and its Code of Conduct. Such information is also available in print to stockholders upon request.

17

Risk Factors

Demand for some of our products depends on the capital spending policies of our customers and on government funding policies. Changes in these policies could negatively affect our business.

        A majority of our customers are hospitals. We also sell to laboratories, universities, healthcare providers and public and private research institutions. Many factors, including public policy spending provisions, available resources and economic cycles have a significant effect on the capital spending policies of these entities. These factors can have a significant effect on the demand for our products. For example, a reduction in funding to major government research supported agencies, such as the National Institutes of Health or the National Science Foundation, could adversely affect sales of our sleep diagnostic testing equipment.

We depend on third party reimbursement to our customers for market acceptance of our products. Our profitability would suffer if third party payors failed to provide appropriate levels of reimbursement for the purchase or use of our products or if any governmental or third party payor were to issue an adverse determination or restrictive coverage policy.

        Sales of medical products largely depend on the reimbursement of patients' medical expenses by government healthcare programs and private health insurers. The cost of some of our products, particularly our SensorMedics VMAX and Erich Jaeger MasterScreen pulmonary function and metabolic diagnostic systems, our epilepsy monitoring systems and our intra-operative monitoring systems is substantial. Without both favorable coverage determinations by, and the financial support of, government and third party insurers, the market for some of our products could be limited.

        Governments and private insurers in many countries closely examine medical products and devices incorporating new technologies to determine whether to cover and reimburse for the purchase or use of such products and devices and, if so, the appropriate level of reimbursement. We cannot be sure that third party payors will cover and reimburse customers for purchases of future products or that any such reimbursement will enable us to sell these products at profitable prices. We also cannot be sure that third party payors will maintain the current level of reimbursement to physicians and medical centers for use of our existing products. Adverse coverage determinations or any reduction in the amount of this reimbursement could harm our business.

        During the past several years, major third party payors have substantially revised their reimbursement methodologies in an attempt to contain their healthcare reimbursement costs. Third party payors have recently increased their emphasis on managed care, which has led to an increased emphasis on the use of cost-effective medical devices by healthcare providers. In addition, through their purchasing power, these payors often seek discounts, price reductions or other incentives from medical products suppliers.

        The federal government and private insurers continue to consider ways to change the manner in which healthcare services are provided and paid for in the United States. In the future, it is possible that the government may institute price controls and further limits on Medicare and Medicaid spending. These controls and limits could affect the payments we receive from sales of our products. Internationally, medical reimbursement systems vary significantly, with some medical centers having fixed budgets, regardless of the level of patient treatment and other countries requiring application for, and approval of, government or third party reimbursement. Even if we succeed in bringing new products to market, uncertainties regarding future healthcare policy, legislation and regulations, as well as private market practices, could affect our ability to sell our products in commercially acceptable quantities at profitable prices.

18

We may need additional capital to sustain and expand our business, including the development of new products.

        We currently have cash and cash equivalents of $97.9 million and a $60.0 million revolving credit facility under which we have no outstanding debt as of January 3, 2004. Both cash and the credit facility are available to expand our business, either through acquisitions or development of new products. Our ability to access the credit facility is dependent on complying with the debt covenants that are part of that agreement. These covenants include a maximum ratio of debt to earnings before interest, taxes and depreciation and amortization ("EBITDA") of 2.5, a minimum ratio of EBITDA to interest expense of 4.0, maximum annual capital expenditures of $20 million and a minimum level of stockholders' equity. While we are in compliance with these restrictions and expect to be able to meet these requirements in the future, failure to satisfy any of the conditions would require us to renegotiate the facility on terms that may not be favorable or could require us to repay any outstanding balance. While we would attempt to find alternative sources to fund our operations from other financial institutions, we cannot assure you that we would be successful, or if we were successful that the new credit would be on terms that would be attractive in financing our business plans.

        In addition, we may need to seek capital beyond that available. Adequate funds for these purposes on terms favorable to us, whether through additional equity financing, debt financing or other sources, may not be available when needed and, if consummated, may result in significant dilution to existing stockholders. If we are unable to secure additional funding when required, we may be required to delay, scale back, and/or abandon some or all of our product development programs.

We face aggressive competition in many areas of our business and our business will be harmed if we fail to compete effectively.

        We encounter aggressive competition from numerous companies in many areas of our business. Although we believe that our products currently compete favorably with respect to these factors, we cannot give assurance that we can maintain our competitive position against our current and potential competitors. Many of our current and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than we have. We may not be able to compete effectively with these competitors. To remain competitive, we must develop new products and periodically enhance our existing products. We anticipate that we may have to adjust the prices of many of our products to stay competitive. In addition, new competitors may emerge and entire product lines may be threatened by new technologies or market trends that reduce the value of these product lines.

A significant percentage of our total assets consist of goodwill from acquired companies and we may be unable to realize the value of this asset.

        VIASYS and its former parent company have paid substantial premiums over the fair value of the net assets of some of the companies that comprise our business. We have acquired significant intangible assets, including approximately $182.4 million of cost in excess of net assets of acquired companies, or goodwill, recorded on our balance sheet as of January 3, 2004. This represents approximately 36% of our total assets as of that date. Our ability to realize the value of this asset will depend on future cash flows of the acquired businesses. Cash flow, in turn, depends on how well we have identified these acquired businesses as desirable acquisition candidates and how well we can integrate these acquired businesses.

The complexity presented by international operations could negatively affect our business.

        International revenues account for a substantial portion of our revenues. International revenues from continuing operations, including export revenues from the United States, accounted for 43% of our total revenues in 2003 and 41% of our total revenues in 2002. While we plan to continue

19

expanding our presence in international markets, our international operations present a number of risks, including the following:

•

Foreign laws in a number of countries may limit our ability to properly maintain our distribution channels. For example, a number of foreign laws restrict our ability to terminate a distributor for taking actions that adversely affect our business, such as manufacturing and selling competing products.



•

The successful marketing of our products in some countries, including many European countries, may require us to establish a local presence. The revenues generated in these countries may not justify the expense of establishing and maintaining such a local presence.



•

Fluctuations in currency exchange rates have, on occasion, forced us to lower our prices, thereby reducing our margins for some of our respiratory and neurodiagnostic products.

Our competitive position is partially dependent on protecting our intellectual property, which can be difficult and expensive.

        We believe that the success of our business depends, in part, on obtaining patent protection for our products, defending our patents once obtained and preserving our trade secrets. Patent and trade secret protection is important to us because developing and marketing new technologies and products is time consuming and expensive. We own many U.S. and foreign patents and intend to apply for additional patents to cover our products. We may not receive enforceable patents from any pending or future patent applications owned by or licensed to us. The claims allowed under any issued patents may not be broad enough to protect our technology.

        Our competitive position is also dependent upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could result in substantial expense and diversion of attention from our business and may not adequately protect our intellectual property rights.

        In addition, we may be sued by third parties claiming that our products infringe on the intellectual property rights of others. This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, place a significant strain on our financial resources, divert management resources and harm our reputation. Such claims could result in awards of substantial damages, which could have a significant adverse impact on our operating results. In addition, intellectual property litigation or claims could force us to:

•

cease selling, incorporating or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue;



•

obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or



•

redesign our products, which would be costly and time-consuming.

If we breach any of the agreements under which we license commercialization rights to products or technology from others, we could lose license rights that are important to our business.

        We license rights to products and technology that are important to our business and we expect to enter into additional licenses in the future. Although the products and technology that we currently license account for less than 5% of our total annual revenues, we expect that this percentage will increase as we develop and introduce additional licensed products to the market. For instance, a

20

number of the therapy-based products that we are developing incorporate proprietary technologies that we have licensed from third parties. Under these licenses, we are subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach a license agreement, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license, we may be required to license to the licensor any related intellectual property that we develop.

Our ability to market and sell our products depends upon receipt of domestic and foreign regulatory approval of our products and manufacturing operations. Our failure to obtain or maintain regulatory approvals and compliance could negatively affect our business.

        Our products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar regulatory agencies in many other countries in which we do business. The principal risks that we face in obtaining and maintaining the regulatory approvals necessary to market our products include:

•

The approval process for medical devices in the United States and abroad can be lengthy, expensive and require extensive preclinical and clinical trials. As a result, we may expend substantial resources in developing and testing a new product but fail to obtain the necessary approvals or clearances to market or manufacture the product on a timely basis or at all.



•

When we modify a medical device for which we have received marketing approval, we must determine whether the modification requires us to seek new regulatory approvals. If the FDA or other regulatory agency does not agree with our determination, we may be prohibited from marketing the modified device until we receive the requisite regulatory approval or clearance. In addition, the FDA actively enforces regulations prohibiting marketing of devices for indications or uses that have not been cleared or approved by the FDA.



•

The FDA and foreign regulatory agencies require us to comply with an array of manufacturing and design controls and testing, quality control, storage and documentation procedures. Because our business is geographically dispersed in the United States and abroad, compliance with these procedures is difficult and costly.

        If we fail to comply with applicable regulations, we could be subject to a number of enforcement actions, including warning letters, fines, product seizures, recalls, injunctions, total or partial suspension of production, operating restrictions or limitations on marketing, refusal of the government to grant new clearances or approvals, withdrawal of marketing clearances or approvals and civil and criminal penalties. Companies may also voluntarily conduct a recall of a problem product. For a summary of government regulations applicable to our business, see "Business—Government Regulation."

We may be unable to successfully develop and/or commercialize our new and existing products.

        We have undertaken a substantial internal development strategy under which we anticipate developing a number of therapy and service-based products. This strategy represents a departure from our traditional business model and we may not have sufficient expertise and experience necessary to successfully implement this new strategy and develop these new products. Furthermore, the successful development and commercialization of these new products will depend upon our ability to obtain regulatory approvals, as discussed above. If we are unable to obtain these regulatory approvals, we will be unable to market and sell our products, which will negatively affect our business. Even if we are able to obtain regulatory approval for our products we may have difficulty in bringing these products to market. In addition, once our products are brought to market, their shipment may be delayed or the products may have to be discontinued based on design, mechanical, software, regulatory or other issues. These matters may adversely affect our business and reputation.

21

Our dependence on suppliers for materials could impair our ability to manufacture our products.

        Outside vendors, some of which are sole-source suppliers, provide key components and raw materials that we use in the manufacture of our products, such as the beryllium copper strips included in our medical imaging components. Although we believe that alternative sources for these components and raw materials are available, any supply interruption in a limited or sole-source component or raw material could harm our ability to manufacture the affected product until we identify and qualify a new source of supply. In addition, an uncorrected defect or supplier's variation in a component or raw material, either unknown to us or incompatible with our manufacturing process, could harm our ability to manufacture the affected product. We may not be able to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, which could impair our ability to produce and supply our products. If we cannot obtain a necessary component, we may need to find, test and obtain regulatory approval for a replacement component, which would cause significant delays that could seriously harm our business and operating results.

Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay transactions that our stockholders may favor.

        Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. For example, these provisions:

•

authorize the issuance of "blank check" preferred stock without any need for action by stockholders;



•

provide for a classified board of directors with staggered three-year terms;



•

require supermajority stockholder approval to effect various amendments to our charter and by-laws;



•

eliminate the ability of stockholders to call special meetings of stockholders;



•

prohibit stockholder action by written consent; and



•

establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

        In addition, our board of directors has adopted a stockholder rights plan intended to protect stockholders in the event of an unfair or coercive offer to acquire our company and to provide our board of directors with adequate time to evaluate unsolicited offers. This rights plan may have anti-takeover effects. The rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms that our board of directors does not believe are in the best interests of us and our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares.

22

Executive Officers of the Company

        Our executive officers are as follows:

Randy H. Thurman; Chairman of the Board and Chief Executive Officer

        Mr. Thurman has served as Chief Executive Officer since April 2001 and became Chairman of the Board upon the public offering in November 2001. From 1996 to April 2001, Mr. Thurman served as Chairman and Chief Executive Officer of Strategic Reserves LLC, a privately held company providing funding and strategic direction to healthcare technology companies. From 1993 to 1996, Mr. Thurman was Chairman and CEO of Corning Life Sciences Inc., which was a global leader in clinical laboratory testing, pharmaceutical research and esoteric reference testing. Concurrent with the aforementioned positions, Mr. Thurman served as Chairman of the Board of Enzon Pharmaceuticals from 1994 to 2001 (Nasdaq: ENZN). From 1984 to 1993, Mr. Thurman held various positions at Rhone-Poulenc Rorer Pharmaceuticals, Inc., a global pharmaceutical company, ultimately as its President. Mr. Thurman also serves as Lead Director of Valeant P