In midsummer 2002, John Clark, a loan officer of the SaveMe Bank of Ipswich, MA was reviewing a loan request for $100,000 from Bob Roberts, president of AJAX Electronics.
AJAX Electronics had two product lines, industrial sensors and defibrillators. Revenue was split evenly between them.
Bob Roberts, who had an electrical engineering degree, had worked previously as a manufacturing engineer. AJAX had started out as a manufacturing process control consulting firm in 1985. In 1988, it began producing customized sensors for chemical, paper, and brewery companies for use in their manufacturing processes to measure flow volumes, temperatures, pressures, and so forth. Roberts did the selling to client manufacturers himself. He also did the design work and supervised the manufacturing of these sensors. His engineering staff for this end of the business consisted of an electrical engineer and a manufacturing engineer. Over the years, he had achieved a gross margin for these industrial sensors of about 40%. Roberts felt that he could do better.
In 1989, through discussions with his father (who was a retired cardiologist in his late 80's) Roberts became convinced that there was an opportunity to design a low-cost defibrillators for emergency medical applications. Health care was improving around the world. Also, inexpensive off-shore manufacturing was becoming increasingly available to small firms (Roberts was particularly interested in southern China). By late 1989, he had designed a low-cost defibrillator and had received FDA approval to sell it. His father had provided the limited clinical expertise needed for the product. He began manufacturing the product in one side of his existing facility in 1990. AJAX, located in rented space in northeastern Massachusetts, was fully equipped with the latest electrically driven machinery.
Defibrillators are used to apply electrical shock to the heart when its stops beating. The types of buyers of defibrillators are in-hospital users, i.e.. doctors (mainly cardiologist) and emergency room technicians, and out of hospital organizations, such as ambulances. There are also three basic types of defibrillators: "low-end" defibrillators, which produce and deliver the required electrical shock at the hands of a trained operator; mid-range defibrillators, which detect when a shock is required by the heart, and is then delivered at the hands of a trained operator; and "high end" defibrillators, which are programmable "computers" which detect the need for shock, and target the delivery of the shock to a point in the heart rhythm.
AJAX made only low-end defibrillators and had achieved a gross margin in the 25% range. High volume manufacturers of defibrillators were known to achieve gross margins of about 40%. There were many competitors in the low-end market. In the high end market, two firms dominated the in-hospital applications, Hewlett Packard and Zoll, while the out-of-hospital emergency market was dominated by PhysioControl. Interestingly, PhysioControl's government permit to sell defibrillators was recently revoked by the FDA for product quality problems. Given the broad scope of the market for defibrillators, most firms, particularly the smaller ones, employed medical products distributors as the primary sales channel. Industry observers found that US. defibrillator market was about $100 million in 1989. This market is projected to increase to approximately $700 million by 2000, fueled by high levels of growth in markets such as China and South America.
The company was owned 100% by Roberts. Sales volume grew steadily, but always seemed to be higher than could be supported by available capital. In other words, AJAX always seems starved for cash. Capital needs were usually furnished through short-term borrowing. Mr. Roberts, the company’s only officer,...