<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED JULY 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------------- TO ---------------
COMMISSION FILE NUMBER 0-21727
SEAMED CORPORATION
(EXACT NAME OF REGISTRATION AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1002092
(STATE OF INCORPORATION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
14500 NORTHEAST 87TH STREET, REDMOND,
WASHINGTON 98052-3431
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(425) 867-1818
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
NONE NONE
</TABLE>
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK, NO PAR VALUE THE NASDAQ STOCK MARKET
</TABLE>
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 such
filing requirements for the last ninety days. Yes [X] No [ ]
Indicated 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 Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value (based on the NASDAQ quoted closing price) of the
common stock held by non-affiliates (4,059,476 shares) of the Registrant at
September 18, 1997 was approximately $73,070,568. As of September 18, 1997,
there were 5,274,773 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K, Directors and Executive
Officers of the Registrant, Executive Compensation, Security Ownership of
Certain Beneficial Owners and Management, and Certain Relationships and Related
Transactions, is included in the Company's proxy statement filed with the
Securities and Exchange Commission.
================================================================================
<PAGE> 2
SEAMED CORPORATION
FORM 10-K
SeaMED Corporation's ("SeaMED" or the "Company") fiscal year consists of
the 52/53-week period that ends on the Thursday nearest to June 30, and SeaMED's
fiscal quarters end on the Thursdays nearest to September 30, December 31 and
March 31. For convenience of presentation, all fiscal periods in this Form 10-K
are shown as ending on a calendar monthend.
PART I
ITEM 1. BUSINESS
INTRODUCTION
SeaMED manufactures advanced durable electronic medical instruments for
medical technology companies, often as part of systems that also include
single-use components. To assist its customers in developing and commercializing
their instruments for manufacture by SeaMED, the Company provides a wide range
of engineering services and regulatory expertise. During fiscal year 1997,
SeaMED manufactured or engineered medical instruments for both established and
emerging medical technology companies. SeaMED from time to time selectively
designs and manufactures nonmedical commercial products that benefit from
SeaMED's engineering and manufacturing capabilities. Currently, SeaMED
manufactures one such product, a coin-counting machine that exchanges loose
coins for currency, for Coinstar, Inc. ("Coinstar").
Since 1988, SeaMED has focused its business primarily on manufacturing
medical instruments for medical technology companies and believes it is the
largest independent manufacturer of advanced medical instruments for medical
technology companies. As part of its growth strategy, SeaMED continues to expand
its engineering expertise, regulatory knowledge and manufacturing capabilities,
thereby allowing it to design and manufacture a broader range of medical
instruments. SeaMED also utilizes its existing resources and expertise by
accepting high value-added engineering and manufacturing contracts for select
nonmedical products. During fiscal year 1997 SeaMED changed its state of
incorporation to Washington from Delaware.
INDUSTRY OVERVIEW
Demand for health care has grown rapidly in recent years, and is expected
to continue to increase as the population ages. Advancements in science,
medicine, and computers have dramatically expanded the number and variety of
effective medical procedures. The most advanced medical procedures and
techniques, many of which use advanced medical instruments, now are common
treatments under many health insurance plans. As insurance companies and federal
and state governments have expanded the medical procedures for which health care
providers would be reimbursed, demand has grown for the medical instruments and
systems needed for these procedures. More recently, in response to increasing
pressure to control rising health care costs, medical technology companies have
developed advanced medical instruments and systems that improve patient outcomes
and lessen the overall cost of health care by reducing palliative care and acute
hospital stays.
As medical products have incorporated the latest developments in computers,
electronics, materials and other technologies, the cost of product development
and the length of the development cycle have increased substantially. The risks
in developing and launching new medical products also have increased
significantly as competition in the highly fragmented medical technology
industry has increased. As a result, medical technology companies face increased
pressure to bring new products to market in the shortest possible time, reduce
costs, maintain or increase market share and accelerate realization of revenue.
At the same time, the Food and Drug Administration (the "FDA") and the
European Community have adopted increasingly stringent and evolving regulatory
requirements for the design and manufacture of medical products. In the United
States, certain medical products are subject to the FDA's premarket approval
application ("PMA") requirements and many medical products require premarket
clearance. In addition, products are subject to regulation with respect to
manufacture, labeling, distribution, postmarket reporting and
1
<PAGE> 3
promotion. And as of June 1997, the FDA requires the design of medical devices
to satisfy a specific engineering design control process. Under European quality
standards to be effective in 1998, the design of medical products must satisfy
specific engineering design process standards. To market and sell their
products, medical technology companies must invest significant financial
resources to establish and maintain manufacturing facilities that comply with
the FDA's good manufacturing practices ("GMP") requirements and the European
Community's quality system standards, particularly if the facilities produce
life-supporting, life-sustaining, or implantable products. After the often
lengthy and time-consuming process of obtaining FDA marketing authorization and
ISO certification, medical technology companies must devote substantial
managerial oversight to ensure continued compliance with FDA and European
Community requirements.
SeaMED believes that the trend toward outsourcing medical product
engineering and manufacturing is in its early stages and outsourcing revenues
represent a very small percentage of the more than $30 billion medical
technology industry. SeaMED also believes that medical technology companies will
expand their outsourcing of engineering and manufacturing and that SeaMED is
well positioned for such expansion. With intensified competition, higher initial
product development costs, and longer product development and regulatory cycles,
many of SeaMED's customers have chosen to concentrate product development and
manufacturing resources on higher-volume single-use components and to outsource
the development and manufacturing of durable medical instruments.
THE SEAMED ADVANTAGES
SeaMED provides integrated solutions to the engineering, regulatory and
manufacturing challenges of advanced medical instruments. SeaMED offers its
customers the following advantages:
- Broad Experience With Numerous Advanced Medical Instruments. In fiscal
year 1997 SeaMED manufactured 14 different advanced medical instruments
that incorporate diverse technologies. As of the end of fiscal year 1997,
SeaMED had in its engineering project pipeline an additional 18
instruments or systems that it believes have a good chance of some day
producing significant manufacturing revenues. As a result, SeaMED has
considerable expertise in addressing its customers' product development,
engineering, manufacturing and regulatory issues.
- Focus on Core Functions. By relying on SeaMED's engineering and
manufacturing capabilities, customers can focus management efforts on
product research, clinical development and sales and marketing, as well as
manufacturing their higher-volume, single-use components. In addition,
SeaMED's customers can shift to variable costs the high fixed costs
associated with staffing and maintaining GMP-compliant facilities for
durable medical instruments.
- Production Flexibility. SeaMED's broad customer base permits it to offer
its customers production flexibility, which enables customers to adjust
production volumes in response to fluctuations in market demand or
regulatory issues.
- Rapid Product Development. SeaMED believes that, with its engineering and
manufacturing capabilities, it can more rapidly develop and manufacture
new products at a lower overall cost than its customers, which otherwise
expend significant time and financial resources to develop internal
engineering expertise, establish GMP-compliant manufacturing facilities
and obtain ISO certification.
- Regulatory Compliant Manufacturing. SeaMED's medical manufacturing
facilities are ISO 9001/EN 46001 certified and SeaMED believes that they
comply with GMP requirements. Due to the critical nature of regulatory
compliance, SeaMED devotes significant management time and financial
resources to GMP compliance and ISO certification.
- Integrated Engineering and Manufacturing. SeaMED provides a wide range of
engineering services, and has the capabilities to provide complete
instrument or system design (including engineering, testing, component
analysis and regulatory compliance), which enhances its manufacturing
business. By integrating engineering design work with manufacturing
processes, materials acquisitions and quality and regulatory
considerations, SeaMED believes that it can increase the quality and lower
the overall cost of the instruments that it manufactures for its
customers.
2
<PAGE> 4
CUSTOMERS AND PRODUCTS
SeaMED's customers include some of the world's largest medical technology
companies as well as many emerging medical technology companies. During fiscal
year 1997 SeaMED derived significant manufacturing revenues from 14 medical
instruments manufactured for 15 different customers. As of the end of fiscal
year 1997, SeaMED had in its engineering project pipeline 18 instruments or
systems that it believes have a good chance of some day producing significant
manufacturing revenues. In addition, SeaMED has seven projects in its pipeline
that are enhancements of existing instruments or systems that SeaMED and the
customer believe will extend the life-cycle of the instrument. The 25 projects
are performed for 23 different customers. Although management believes that the
25 projects in the pipeline have a good chance of some day resulting in
manufacturing contracts from which SeaMED will derive substantial manufacturing
revenues, the volume and timing of future manufacturing revenues that relate to
any specific engineering project are highly variable, and certain engineering
projects in the pipeline may not lead to future manufacturing revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook: Issues and Uncertainties."
SeaMED derived significant manufacturing revenues from 12 medical
instruments for 13 different customers during fiscal year 1996. As of the end of
fiscal year 1996, SeaMED had in its engineering project pipeline eight
instruments, all of which were new instruments, for eight different customers.
The only nonmedical commercial product that generated significant
manufacturing revenues during fiscal years 1997 and 1996 was the Coinstar
coin-counting machine. As of the end of each of fiscal years 1997 and 1996,
SeaMED had in its engineering project pipeline one nonmedical commercial
product.
SeaMED's sales to Coinstar represented approximately 25% of SeaMED's
revenues for fiscal year 1997. SeaMED's sales to United States Surgical
Corporation were approximately 11% of SeaMED's revenues for fiscal year 1997. In
fiscal year 1996, Boston Scientific Corporation (through two subsidiaries) and
C.R. Bard, Inc. each accounted for more than 10% of the Company's revenues.
SeaMED has ongoing contracts with Coinstar, United States Surgical Corporation
and one subsidiary of Boston Scientific Corporation, but manufactures on a
purchase order basis for C. R. Bard, Inc. and another subsidiary of Boston
Scientific Corporation.
SeaMED negotiates separate contracts with its customers for engineering
design services and product manufacturing. Most projects begin with an
engineering design contract. As a business strategy, SeaMED generally prices
engineering contracts to cover direct project expenses (i.e., nonrecurring
engineering expenses) plus a share of operating expenses. SeaMED's objective is
to obtain the exclusive manufacturing rights to medical instruments for a
specific time period, generally three to five years. SeaMED believes that no
customer has replaced SeaMED as its manufacturer.
The only nonmedical commercial product currently manufactured by SeaMED is
the Coinstar coin-counting machine. SeaMED may from time to time selectively
design and manufacture other nonmedical commercial products that can benefit
from SeaMED's engineering and manufacturing capabilities. SeaMED currently
manufactures Coinstar's machines under a one-year nonexclusive manufacturing
agreement with Coinstar that allows Coinstar to cancel or modify orders with
SeaMED on 90 days' notice, except for product orders scheduled for delivery
within 90 days. The agreement automatically renews for additional one-year terms
if neither party gives notice of termination, and it has been renewed through
August 31, 1998. Under the terms of the agreement, in the event that Coinstar
cancels product orders, Coinstar has agreed to reimburse SeaMED for certain raw
material and related costs. SeaMED believes its experience in manufacturing the
large and complex Coinstar machine has expanded its manufacturing expertise.
SeaMED intends to maintain as its primary focus the design and manufacturing of
advanced medical instruments for medical technology companies.
3
<PAGE> 5
ENGINEERING
SeaMED will provide its customers with engineering services at any stage of
an instrument's development. Customers in many cases rely on SeaMED for complete
instrument design (including engineering, testing, component analysis and
regulatory compliance). In other cases, customers deliver final drawings for
instruments they believe are ready for manufacturing. SeaMED then reviews and
tests the existing design prior to manufacturing the instrument and, in many
cases, SeaMED's engineers are able to identify and offer alternatives to the
customer's design that improve performance or produce manufacturing
efficiencies.
SeaMED approaches each engineering project using a team structure, each
team being a multi-disciplinary collection of engineers and technicians who
understand the technical requirements of the particular project. Each team
includes representatives from other engineering disciplines, including one or
more manufacturing, test and quality engineers, who help design an instrument
that can be manufactured in a manner that meets or exceeds customer
specifications and applicable regulatory requirements.
SeaMED integrates its engineering staff throughout its operations,
including sales and marketing, customer relations, materials management, quality
assurance, regulatory compliance and manufacturing. SeaMED's engineers play a
critical role in sales and marketing by assisting SeaMED's Vice President, Sales
and Marketing, in evaluating requests for proposals and developing
project-specific, solution-oriented responses, bids, cost estimates and project
plans. Similarly, SeaMED project engineers act as customer contacts throughout
the engineering design phase and have responsibility for all aspects of a
customer's project, including coordinating the component parts necessary for the
instrument, quality assurance procedures, regulatory compliance and the
manufacturing process. SeaMED provides its customers with design information and
other support during the 510(k) approval or PMA process, but does not assist in
the testing, studies and human clinical trials associated with these processes.
SeaMED provides testing services in the area of safety regulation, such as those
necessary to obtain a listing by Underwriters Laboratories, Inc. SeaMED has made
significant investments in state-of-the-art equipment to support its engineering
design effort, including engineering design and testing stations and
computer-aided design software.
Each instrument, product design, patent and other proprietary right
developed by SeaMED becomes the property of the customer, with SeaMED typically
retaining the manufacturing rights to such instrument for a period generally
ranging from three to five years. Generally, SeaMED provides nonrecurring
engineering services under a project plan that identifies the engineering tasks,
deliverables and schedule. Typically, such services are billed on a time and
materials basis and are cancelable at any time. The project plan usually states
that SeaMED is intended to be the manufacturer of the instrument, but does not
specify the manufacturing terms. SeaMED typically provides a design defect
warranty for 15 months to replace or repair instruments relating to the specific
elements for which SeaMED had primary design responsibility.
At June 30, 1997, SeaMED's engineering staff consisted of 90 engineers
employed by SeaMED and 23 consulting or contract engineers. The engineering
staff includes a variety of disciplines, as follows:
<TABLE>
<CAPTION>
ENGINEERING CATEGORY NUMBER
------------------------------------ ------
<S> <C>
Component........................... 2
Electrical Design................... 17
Electrical Test..................... 12
Manufacturing....................... 21
Mechanical Design................... 29
Reliability and Quality............. 22
Software Design..................... 10
---
Total..................... 113
===
</TABLE>
MANUFACTURING OPERATIONS
As the engineering project nears completion, the members of the project
team with direct responsibility for manufacturing, quality assurance,
manufacturing/test engineering and materials assume a greater role. The team
implements a materials management system and develops an assembly process and
product testing and quality assurance procedures to produce high-quality
instruments that satisfy customer specifications as well as GMP and ISO 9001
quality standards. Often, the manufacture of a particular instrument begins with
4
<PAGE> 6
production of a relatively small number of units of the instrument before it is
approved for commercial use (known as "preproduction" units), which are used by
the customer for clinical trials. SeaMED and the customer frequently make
engineering and manufacturing refinements during the preproduction phase.
Each instrument is manufactured in a dedicated manufacturing cell in the
Company's manufacturing space. These cells are flexible and, within the same
manufacturing location, can be expanded or modified as needed, enabling SeaMED
to adjust production volumes quickly in response to customer orders. A
significant limitation on this flexibility is that regulatory approvals may be
required if a manufacturing cell must be moved from one facility to another.
SeaMED is currently in the process of consolidating the manufacturing of, and
support services for, all of its commercialized instruments into a new 60,000
square foot facility. Because certain instruments that will soon be manufactured
at the new facility were initially approved for manufacture at another facility,
some FDA approvals are required before the instruments can be manufactured in
the new facility.
SeaMED's customers generally submit purchase orders for delivery of
instruments in future periods. As of June 30, 1997 and June 30, 1996, customers
had placed purchase orders with SeaMED for future deliveries totaling $33
million and $12 million, respectively, with all such deliveries scheduled to
occur before the end of the next fiscal year. The Company does not regard
backlog data as a meaningful indicator of revenues for future periods because of
its policy of generally allowing its customers to cancel orders at any time
without notice.
SeaMED uses a fully integrated materials requirements system. This system,
which includes sales order entry, purchasing, inventory control, production
control, and cost accounting, helps SeaMED manage material acquisitions and
inventory for the various projects in full production at any one time and
facilitates the planning and control essential to building products within
critical time schedules.
Manufacturing contracts are generally executed near completion of the
engineering project, at which time SeaMED and the customer negotiate the term,
pricing, warranty, indemnity and other provisions. Pricing typically is based on
SeaMED's expected cost and an agreed-upon margin, both of which are subject to
customer audit. Although manufacturing contracts rarely include minimum
production requirements, they typically grant SeaMED exclusive manufacturing
rights for periods generally ranging from three to five years. Contracts
typically are terminable only for cause, which generally is defined as the
failure to deliver instruments on a timely basis or the failure to comply with
design specifications. In each case, SeaMED usually has an opportunity to cure
the breach. SeaMED generally warrants conformity to design specifications and
against defects in materials and workmanship and indemnifies its customers
against losses arising out of a breach of such warranty. In addition, SeaMED in
many cases enters into repair and service agreements with its customers that set
forth the pricing and terms under which SeaMED provides repair and replacement
parts, and needed services and upgrades not covered under warranty. Although
most of SeaMED's manufacturing is performed under long-term manufacturing
contracts, some instruments are manufactured only under purchase orders.
QUALITY ASSURANCE AND REGULATORY COMPLIANCE
SeaMED emphasizes quality throughout its operations and integrates its
quality assurance and quality engineering programs throughout each instrument's
engineering and manufacturing phases, a process that involves SeaMED's senior
management and executive officers. Quality assurance procedures are integrated
into every aspect of an instrument's manufacturing cycle. SeaMED establishes a
quality assurance program for each instrument, which includes a "zero defects"
objective. Substantially all component parts and outside-contracted product
subassemblies receive a control number and are inspected and, if necessary,
tested. SeaMED requires all vendors that supply components to satisfy certain
quality standards. On the manufacturing floor, quality assurance personnel
implement quality procedures at interim points during the assembly process and
conduct a final-level test when the instrument is fully assembled and ready for
shipping. In addition, prior to shipping, a quality inspector reviews each
instrument for proper labeling and paperwork.
SeaMED is registered with the FDA as a medical device manufacturer. As a
manufacturer of instruments reviewed under the PMA process, SeaMED is subject to
inspections by the FDA prior to PMA approval. SeaMED is also subject to other
regularly scheduled and unscheduled FDA audits.
5
<PAGE> 7
SeaMED has ISO 9001/EN 46001 certification. ISO 9000 is the first quality
system standard to gain worldwide recognition, including in the European
Community, Japan and the United States. As many medical technology companies
expand sales of products in international markets, compliance with international
quality standards has increased in importance. SeaMED's ISO 9001 designation is
the highest level of ISO 9000 certification and indicates that SeaMED has met
design, manufacture and test standards for its products. SeaMED's EN 46001
designation indicates that it has met additional standards specific to medical
instruments.
SeaMED's ISO 9001/EN 46001 certification serves as a marketing tool that
enhances SeaMED's competitive position in the industry, especially with respect
to medical technology companies with internal manufacturing facilities that have
not gone through the costly and time-consuming ISO certification process. SeaMED
underwent a number of ISO quality and FDA regulatory audits during fiscal year
1997 with the result of no adverse findings.
SALES AND MARKETING
SeaMED generates new business opportunities by promoting its engineering
design and manufacturing capabilities at industry trade shows, by advertising in
leading industry publications, and by obtaining referrals from customers, former
employees of customers and other parties familiar with SeaMED's services. While
SeaMED's sales and marketing department consists solely of the Vice President,
Sales and Marketing, other executive officers and project engineers participate
extensively in sales and marketing activities. SeaMED believes it can
effectively market and sell its engineering and manufacturing capabilities while
maintaining a small sales and marketing staff.
COMPETITION
For established medical technology companies, SeaMED's primary competitor
is the internal design and manufacturing facilities of its prospective customer.
For emerging companies, SeaMED competes both with the customer's internal design
and manufacturing facilities (planned or operational), other manufacturers that
operate in the medical technology industry and, to a lesser extent, with
specialty design firms, most of which do not have manufacturing capabilities.
The primary competitive factors in medical instrument design and manufacturing
include quality, regulatory compliance, technical engineering competence, cost
of the nonrecurring engineering design component, price of the manufactured
product, experience, customer service, and ability to meet a design and
production schedule.
Competition is primarily limited to those companies that meet the minimum
applicable regulatory requirements of the FDA and international manufacturing
and design standards. In the future, SeaMED is likely to compete against new
entrants into the industry as outsourcing expands in medical technology
products. For example, medical technology companies with design and
manufacturing capabilities (especially those with excess capacity) and large
electronic contract manufacturers and defense department contractors with
extensive nonmedical engineering expertise may undertake design and/or
manufacture of medical instruments. Although SeaMED is not aware of substantial
competition from these sources to date, there can be no assurance that these, or
other formidable, competitors will not aggressively expand into SeaMED's
targeted market segment in the future.
GOVERNMENTAL REGULATION
SeaMED's business and operations are subject to substantial governmental
regulation, primarily from the FDA in the United States and the regulatory
bodies in other countries, as described below. While these regulations directly
affect SeaMED's design and manufacturing operations, to a greater extent they
affect SeaMED's customers and their products. To the extent that production of a
customer's instrument is delayed or cancelled due to regulatory noncompliance,
the timing and levels of revenues received by SeaMED may be affected adversely.
United States
Because SeaMED provides design and manufacturing services to producers of
medical devices, SeaMED's manufacturing facilities are subject to extensive
regulation by the FDA under the Federal Food,
6
<PAGE> 8
Drug, and Cosmetic Act, as amended (the "FDC Act"). Manufacturers of medical
devices must comply with applicable provisions of the FDC Act and associated
regulations governing the design, development, testing, manufacturing, labeling,
marketing and distribution of medical devices and the reporting of certain
information regarding their safety. The FDC Act requires PMA approval before
certain medical devices can be marketed.
The FDA classifies medical devices into three classes (Class I, II or III)
on the basis of the controls deemed necessary by the FDA to reasonably ensure
product safety and efficacy. Class I devices are subject to general controls
(e.g., labeling, premarket notification and adherence to GMP) and Class II
devices are subject to general and special controls (e.g., performance standards
and guidelines). Generally, Class III devices are higher-risk devices and cannot
be marketed until after receiving FDA PMA approval.
A premarket approval application must be supported by valid scientific
evidence, which typically includes extensive data, including preclinical and
clinical trial data to demonstrate safety and efficacy of the device. The
application also must contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the instrument and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling. Although SeaMED's services do not extend to assistance with
testing, studies and human clinical trials, SeaMED does provide its customers
with required design information and other support during the PMA process.
Typically, the FDA will inspect the manufacturer prior to granting PMA approval.
If the FDA identifies deficiencies in the manufacturing process, it could delay
PMA approval. Delays in the PMA process can affect the timing of manufacturing
services provided by SeaMED. Currently, an FDA review of a PMA application
generally takes one to two years from the date the application is submitted, but
often is significantly extended by an FDA request for more information or
clarification of information previously submitted. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which PMA approval
has been sought have never been approved for marketing. Until a device subject
to the PMA requirement receives PMA approval, it cannot be sold commercially in
the United States. After PMA approval is obtained, subsequent modifications to
the device, its labeling or manufacturing may require additional FDA approvals.
For Class I and Class II devices, and certain Class III devices, FDA
clearance may be obtained through a 510(k) notification, pursuant to which the
FDA determines that a medical device is "substantially equivalent" to an
existing, legally marketed predicate device or a predicate device marketed
before May 28, 1976. Clinical testing of certain devices may be required as part
of the 510(k) process. There can be no assurance that the FDA will find a device
substantially equivalent and allow marketing of such device. Even if the device
is found substantially equivalent, the clearance process may be delayed.
Any instrument manufactured by SeaMED or distributed by its customers
pursuant to FDA clearances or approvals is subject to pervasive and continuing
regulation by the FDA, including record-keeping requirements and reporting of
adverse experiences associated with the use of the instrument. Device
manufacturers are required to register their establishments and list their
devices with the FDA and certain state agencies, and are subject to periodic
inspections by the FDA and certain state agencies. The FDC Act requires devices
to be manufactured in accordance with GMP regulations, which impose certain
procedural and documentation requirements upon SeaMED with respect to
manufacturing, quality assurance activities and maintenance of service records.
Noncompliance with FDA regulations can result in, among other things, SeaMED and
its customers being subject to fines, injunctions, civil penalties, criminal
prosecution, recall or seizure of devices, total or partial suspension of
production, failure of the government to grant premarket clearance or PMA
approval for products, withdrawal of marketing approvals, or a recommendation by
the FDA that a customer not be permitted to enter into government contracts. The
FDA also has the authority to require repair, replacement or refund of the cost
of any device manufactured or distributed by a customer of SeaMED. In addition,
the failure to be found in compliance with the FDA regulations could have an
adverse effect on the Company's reputation. The FDA periodically inspects device
manufacturers for compliance with FDA regulations. In addition, the FDA
generally inspects a manufacturer prior to approving a PMA. There can be no
assurance that the Company will be found in compliance with all applicable
regulations during such an inspection. The failure to be found in compliance
with the GMP regulations would result in FDA
7
<PAGE> 9
enforcement action against the Company, which could result in a diminution of
the Company's reputation and an adverse effect on the Company's business,
results of operations and financial condition.
International
Sales of medical devices outside the United States are subject to
regulatory requirements that vary from country to country. The time required to
obtain approval for sale in foreign countries may be longer or shorter than that
required for FDA approval, and the requirements may differ. The export of
devices is subject to FDA regulation. In some instances, prior FDA approval is
needed. Commencing in 1998, in order to allow their instruments to move freely
within the European Community, medical device manufacturers will be required to
obtain certifications necessary to enable the "CE mark" to be affixed to their
products. Because SeaMED is ISO 9001/EN 46001 certified, if a SeaMED customer is
also ISO 9001 certified, the customer may be permitted to affix the CE mark to
an instrument manufactured by SeaMED without the customer being subject to
additional requirements. In addition, all medical device manufacturers must
comply with other laws generally applicable to foreign trade, including
technology export restrictions, tariffs and other regulatory barriers.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 1997, SeaMED employed a total of 317 people and retained 83
consulting or contract personnel in the following areas:
<TABLE>
<CAPTION>
CATEGORY NUMBER
-------------------------------------------------------------------- ------
<S> <C>
Design and Engineering.............................................. 189
Preproduction and Manufacturing..................................... 147
Quality Assurance................................................... 35
Sales and Marketing, Finance and Administration..................... 29
---
Total..................................................... 400
===
</TABLE>
SeaMED considers its labor relations to be good and none of its employees
are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
SeaMED leases three buildings in Redmond, Washington and one building in
Bothell, Washington aggregating approximately 148,000 square feet, of which
60,000 square feet were occupied in fiscal year 1997. Three long-term leases
cover approximately 140,000 square feet of space. Of the approximately 148,000
square feet currently occupied by SeaMED, approximately 110,000 square feet are
used for manufacturing, approximately 31,000 square feet are used for
engineering and approximately 7,000 square feet are used for administrative
purposes.
The 60,000 square feet of production space added in fiscal year 1997 is in
one new building. The lease term is 10 years with two five-year renewal options.
Based on anticipated growth in the number and size of manufacturing cells,
SeaMED is in the process of moving substantially all of the manufacturing of
commercialized instruments to the space in the new building. The 81,000 square
feet in the two other buildings occupied under long-term leases are expected to
serve SeaMED's administrative and engineering needs, as well as provide
manufacturing space for commercial products and instruments in the early stages
of preproduction. SeaMED anticipates entering into a commitment in the near
future to lease an additional 80,000 square feet of space in stages beginning in
January 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
employee-related issues and disputes with customers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended June 30, 1997.
8
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock commenced trading on the Nasdaq National Market
on November 19, 1996. Prior to this point, the Company's common stock was not
traded publicly. The high and low bids for the three quarters during which the
Company's stock has been publicly traded were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
----------------------------------------------------- ---- ---
<S> <C> <C>
June 30, 1997........................................ 21 14 1/2
March 31, 1997....................................... 18 1/4 11
December 31, 1996.................................... 11 3/4 9 7/8
</TABLE>
The Company had 177 shareholders of record as of June 30, 1997. No cash
dividends have been declared on the Company's common stock to date and the
Company does not intend a pay a cash dividend on common stock in the foreseeable
future. Future earnings will be used as a source to finance the growth and
development of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of June 30, 1997 and 1996, and for
each of the periods ended June 30, 1997, 1996 and 1995, are derived from audited
financial statements of the Company, which are included elsewhere in this Form
10-K. The selected financial data as of June 30, 1995, 1994 and 1993, and for
each of the periods ended June 30, 1994 and 1993, are derived from audited
financial statements not included herein.
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................. $52,134 $26,130 $17,661 $14,720 $ 9,582
Cost of sales............................ 43,132 21,093 14,590 11,965 7,444
------- ------- ------- ------- -------
9,002 5,037 3,071 2,755 2,138
Marketing, general and administrative
expense................................ 4,849 2,937 1,931 1,818 1,239
------- ------- ------- ------- -------
Operating income......................... 4,153 2,100 1,140 937 899
Other income (expense), net.............. 41 (192) (185) (138) (114)
------- ------- ------- ------- -------
Income before income taxes............... 4,194 1,908 955 799 785
Income tax benefit (provision)(1)........ (1,468) (668) (180) 208 245
------- ------- ------- ------- -------
Net income............................... $ 2,726 $ 1,240 $ 775 $ 1,007 $ 1,030
======= ======= ======= ======= =======
Net income per share data (2):
Primary................................ $ 0.60 $ 0.42 $ 0.25 $ 0.39 $ 0.42
Fully diluted.......................... $ 0.55 $ 0.32 $ 0.21 $ 0.30 $ 0.31
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $18,258 $ 4,997 $ 4,497 $ 3,307 $ 2,686
Total assets............................. 32,132 16,064 9,900 7,571 4,903
Notes payable to bank.................... -- 1,817 555 990 --
Long-term debt, including current
portion................................ -- 1,748 1,517 1,653 1,370
Convertible redeemable preferred stock... -- 5,280 5,280 3,815 3,815
Total shareholders' equity (deficit)..... 22,793 1,231 (38) (672) (1,713)
</TABLE>
9
<PAGE> 11
- ---------------
(1) For the fiscal years ended June 30, 1994 and 1993, reflects the benefit of
utilization of net operating loss carryforwards, tax credit carryforwards
and related changes in the deferred tax asset valuation allowance.
(2) See Note 1 of Notes to Financial Statements for an explanation of the number
of shares used in computing net income per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and Notes thereto included elsewhere in this
Form 10-K. This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed in the
Company's Registration Statement on Form S-1 (No. 333-13455) filed with the
Securities and Exchange Commission. The data should be read in conjunction with
the Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Form 10-K.
OVERVIEW
SeaMED is a manufacturer of advanced medical instruments for medical
technology companies. SeaMED was incorporated in 1976, and since 1988 has
focused its business primarily on manufacturing medical instruments for medical
technology companies. Although some of the instruments it manufactures may be
exported by SeaMED's customers, all of SeaMED's sales occur in the United
States. To assist its customers in developing and commercializing their products
for manufacture by SeaMED, the Company provides a wide range of engineering
services and regulatory expertise.
SeaMED's manufacturing contracts with its customers are usually exclusive
contracts for a fixed period of time, generally ranging from three to five
years. SeaMED negotiates each manufacturing contract independently, and each
varies as to profitability. SeaMED negotiates the price of each manufactured
instrument on a cost and margin formula. SeaMED's contracts with its customers
generally permit annual manufacturing cost audits and price renegotiations.
During the contract term, customers have broad discretion to control the volume
and timing of instrument deliveries. Consequently, SeaMED's revenues with
respect to each instrument may vary substantially from period to period, and an
instrument that generates revenues in one quarter may not necessarily generate
revenues in each quarter of a fiscal year. In addition, for a variety of reasons
such as a customer's inventory levels, sales mix and timing of product launches,
SeaMED's revenues for an instrument do not necessarily correspond to the
customer's sales.
Manufacturing revenue growth depends primarily on two factors: increased
demand for instruments manufactured by SeaMED and SeaMED's ability to attract
additional manufacturing contracts from emerging and established medical
technology companies. SeaMED has no ability to increase demand for the
instruments it manufactures because SeaMED's customers control all product
marketing and sales. SeaMED markets its manufacturing capabilities and usually
procures additional manufacturing contracts as a result of its engineering
projects, but the volume and timing of future manufacturing revenues that relate
to any specific engineering project are highly variable, and certain engineering
projects may not lead to future manufacturing revenues. The manufacturing gross
margin percentage from year to year depends primarily on the product mix, as
gross margins vary by instrument and as a result of negotiated volume discounts.
Management may negotiate volume discounts if the larger volume results in
smaller per unit overhead allocation, thereby improving operating margin. For
manufacturing revenues from instruments not yet approved for commercial use
(known as "preproduction revenues"), the gross margin percentage is generally
lower because a smaller number of units limits opportunities to achieve
economies of scale, and the instrument and its manufacturing process are being
refined.
SeaMED provides its customers with engineering services at any stage of an
instrument's development, as part of its strategy to obtain exclusive
manufacturing rights for an instrument. SeaMED generally provides
10
<PAGE> 12
engineering services under a project plan that identifies the engineering tasks,
deliverables and schedule. SeaMED negotiates each engineering project plan
independently, and, as a business strategy, generally prices engineering
contracts to cover direct project expenses (i.e., nonrecurring engineering
expenses) plus a share of marketing, general and administrative expenses.
SeaMED's objective in providing engineering services is to obtain, for a
specific time period (usually three to five years), exclusive manufacturing
rights to the instrument resulting from the engineering project. The customer
can typically cancel the engineering project at any time upon short notice.
Engineering revenues are derived primarily from professional services
provided by SeaMED's engineers. The balance of engineering revenues is sales of
materials to customers at cost. Engineering revenue growth depends primarily on
three factors: (i) the number and scope of existing engineering projects, (ii)
whether existing projects are in time-intensive phases, and (iii) whether new
engineering projects of sufficient scope replace engineering projects that are
completed or otherwise terminated. Engineering gross margins are low due to
SeaMED's strategy of pricing engineering services as part of an exclusive
manufacturing contract for the resulting instrument. Since demand for
engineering services is based on the number and scope of engineering projects,
if customers cancel one or more projects on short notice, SeaMED may experience
from time to time excess engineering capacity. Engineering margins may fluctuate
depending on the rates that customers pay under engineering project plans and
the utilization rates of engineers.
SeaMED from time to time selectively designs and manufactures nonmedical
commercial products that benefit from SeaMED's engineering and manufacturing
capabilities. SeaMED intends to maintain as its primary focus the design and
manufacturing of advanced medical instruments for medical technology companies.
SeaMED has historically designed, developed and manufactured certain
proprietary instruments. SeaMED expects that it will not derive material
revenues from proprietary instruments after fiscal year 1997. SeaMED expects to
derive its future revenues exclusively by manufacturing instruments and
providing engineering services for its customers. SeaMED's revenues from its
proprietary instruments were $1.4 million, $1.4 million and $923,000 in fiscal
years 1997, 1996 and 1995.
Marketing, general and administrative expenses include the costs of
SeaMED's marketing, finance, and management information systems departments and
other administrative costs. In addition, marketing, general and administrative
expenses include the cost of a Company-wide bonus tied to operating profit and
return on operating assets based on an operating plan approved by the Board of
Directors. Future payments will vary based on the Company's performance relative
to plan objectives.
RESULTS OF OPERATIONS
The following table sets forth statement of income data as a percentage of
revenues for the fiscal years indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues................................................ 100.0% 100.0% 100.0%
Cost of sales........................................... 82.7 80.7 82.6
------ ------ ------
Gross margin............................................ 17.3 19.3 17.4
Marketing, general and administrative expenses.......... 9.3 11.3 10.9
------ ------ ------
Operating income........................................ 8.0 8.0 6.5
Other expenses, net..................................... -- 0.7 1.1
------ ------ ------
Income before income taxes.............................. 8.0 7.3 5.4
Income tax provision.................................... 2.8 2.6 1.0
------ ------ ------
Net income.............................................. 5.2% 4.7% 4.4%
====== ====== ======
</TABLE>
11
<PAGE> 13
Revenues
The following table sets forth revenues with the corresponding percentage
of total revenues and the year-to-year percentage increase for the fiscal years
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
% OF % OF % OF
TOTAL % TOTAL % TOTAL
REVENUES REVENUES INCREASE REVENUES REVENUES INCREASE REVENUES REVENUES
------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing......... $32,984 63.3% 86.1% $17,725 67.8% 48.4% $11,941 67.6%
Engineering........... 19,150 36.7 127.8% 8,405 32.2 46.9% 5,720 32.4
------- ------ ------- ------ ------- ------
Total revenues........ $52,134 100.0% 99.5% $26,130 100.0% 48.0% $17,661 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
Manufacturing revenues increased by approximately $15.3 million in fiscal
year 1997 from fiscal year 1996, due primarily to a nonmedical product
manufactured for Coinstar under a nonexclusive contract adding approximately
$10.0 million in revenues, new instruments adding approximately $1.5 million in
revenues and increased volumes from existing instruments adding approximately
$7.6 million. Increases in manufacturing were offset by decreased volume of
certain instruments and the phase-out of other instruments. SeaMED began
manufacturing for Coinstar in the fourth quarter of 1996 and sales to Coinstar
in fiscal year 1997 represented approximately 25% of total revenue and
approximately 35% of manufacturing revenue. SeaMED management expects Coinstar
sales as a percentage of total sales to decline in future fiscal years. 26
instruments and one nonmedical product contributed to manufacturing revenue in
fiscal year 1997; however significant manufacturing revenues were generated by
14 medical instruments and one nonmedical product in fiscal year 1997.
Engineering revenues increased by approximately $10.7 million in fiscal year
1997 from fiscal year 1996, due primarily to new projects adding approximately
$2.1 million in revenues, and increased time and hourly rates on existing
projects adding approximately $9.9 million. Approximately $5.3 million of the
revenue increase from existing projects came from projects for United States
Surgical Corporation. Sales to United States Surgical in fiscal year 1997
represented approximately 28% of engineering revenue and approximately 11% of
total revenue. Increases in engineering revenues were offset by the transition
of certain projects from engineering to manufacturing.
Manufacturing revenues increased by approximately $5.8 million in fiscal
year 1996 from fiscal year 1995, due primarily to new instruments adding
approximately $653,000 in revenues, nonmedical products adding approximately
$1.7 million in revenues and increased revenues from existing instruments adding
approximately $5.2 million. Increases in manufacturing revenues were offset by
decreased volume of certain existing instruments and the phase-out of other
instruments. Although 18 and 23 instruments contributed to manufacturing
revenues in fiscal years 1996 and 1995, respectively, significant manufacturing
revenues were generated by 12 instruments in fiscal year 1996 and 13 instruments
and one nonmedical product in fiscal year 1995. Engineering revenues increased
by approximately $2.7 million in fiscal year 1996 from fiscal year 1995, due
primarily to new projects adding approximately $2.0 million in revenues, and
increased time and hourly rates being billed on existing projects adding
approximately $3.0 million in revenues. Increases in engineering revenues were
offset by the transition of certain projects from engineering to manufacturing
and other projects being delayed or cancelled.
Price adjustments under existing manufacturing contracts have not been
significant. Increases in revenues have not been significantly influenced by
inflation.
12
<PAGE> 14
Gross Margin
The following table sets forth gross margin, both in dollar amounts and as
a percentage of the corresponding revenue figure for the fiscal years indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
GROSS GROSS GROSS GROSS GROSS GROSS
MARGIN($) MARGIN(%) MARGIN($) MARGIN(%) MARGIN($) MARGIN(%)
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Manufacturing...................... $ 6,615 20.1% $ 4,184 23.6% $ 2,611 21.9%
Engineering........................ 2,387 12.5% 854 10.2% 460 8.0%
------ ------ ------
Total gross margin....... $ 9,002 17.3% $ 5,038 19.3% $ 3,071 17.4%
====== ====== ======
</TABLE>
Manufacturing gross margin decreased to 20.1% of manufacturing revenues in
fiscal year 1997 from 23.6% in fiscal year 1996, due primarily to changes in the
product mix to lower gross margin products, including the lower gross margin
derived from Coinstar. Preproduction revenue, which produces lower gross
margins, doubled as a percentage of sales in fiscal year 1997 from fiscal year
1996. Engineering gross margin as a percentage of engineering revenues increased
to 12.5% in fiscal year 1997 from 10.2% in fiscal year 1996. This trend was due
primarily to (i) spreading certain fixed engineering costs over a higher revenue
base, (ii) high utilization of engineers, and (iii) increased hourly rates for
engineering services. Management expects engineering gross margin as a
percentage of revenues to be approximately 11% in the near term.
Manufacturing gross margin increased to 23.6% in fiscal year 1996 from
21.9% in fiscal year 1995, due primarily to changes in the product mix to
higher-margin products, including a decrease in the percentage of manufacturing
revenues derived from products in preproduction. Engineering gross margin as a
percentage of engineering revenues increased to 10.2% in fiscal year 1996 from
8.0% in fiscal year 1995 for the same reasons that engineering gross margin
increased in fiscal year 1997.
Marketing, General and Administrative Expenses
The following table sets forth marketing, general and administrative
expenses with the corresponding percentage of revenues for the fiscal years
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- -------------------------------------------------------------------------
1997 1996 1995
- --------------------- --------------------- ---------------------
MG&A % OF MG&A % OF MG&A % OF
EXPENSES REVENUES EXPENSES REVENUES EXPENSES REVENUES
- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
$4,849 9.3% $2,938 11.3% $1,931 10.9%
</TABLE>
Marketing, general and administrative expenses increased by approximately
$1.9 million in fiscal year 1997 from fiscal year 1996, due primarily to
increased Company-wide bonuses tied to operating performance, increases in
headcount associated with the Company's growth and increased management
information systems costs. Marketing, general and administrative expenses before
bonuses represented 6.6% and 8.5% of revenues in fiscal years 1997 and 1996,
respectively, as fixed costs were spread over a higher revenue base. If
anticipated revenue growth occurs, SeaMED expects marketing, general and
administrative expenses as a percentage of revenues to decline in the near term.
Marketing, general and administrative expenses increased by approximately
$1.0 million in fiscal year 1996 from fiscal year 1995 due primarily to
increased Company-wide bonuses tied to operating performance and increased
management information systems costs. Marketing, general and administrative
expenses before bonuses represented 10.0% of revenues in fiscal year 1995.
13
<PAGE> 15
Operating Income
The following table sets forth operating income with the corresponding
operating margin as a percentage of revenues and the year-to-year percentage
increase for the fiscal years indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------ ------------------------------------ -----------------------
OPERATING OPERATING % OPERATING OPERATING % OPERATING OPERATING
INCOME MARGIN INCREASE INCOME MARGIN INCREASE INCOME MARGIN
- --------- --------- -------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 4,153 8.0% 97.7% $ 2,100 8.0% 84.2% $ 1,140 6.5%
</TABLE>
The $2.1 million increase in operating income in fiscal year 1997 from
fiscal year 1996 is due primarily to an increase in sales volume and a decrease
in marketing, general and administrative expenses as a percent of sales. In
addition, engineering volume and gross margins improved. These improvements were
offset by the decrease in manufacturing margins.
The $960,000 increase in operating income in fiscal year 1996 from fiscal
year 1995 is due primarily to an increase in both manufacturing volume and the
manufacturing gross margin percentage. In addition, engineering volume and gross
margins improved. These improvements were offset by the increase in marketing,
general and administrative expenses, the most significant of which was the
Company-wide bonus tied to operating performance.
Income Taxes
The Company's effective tax rate was 35% in fiscal years 1997 and 1996 and
18.9% in fiscal year 1995. Differences from the federal statutory income tax
rate of 34% for fiscal year 1995 resulted primarily from the use of net
operating loss carryforwards and tax credits and the reversal of valuation
allowances due to changes in the estimate of realizable deferred tax assets. The
Company expects the future effective tax rate to remain stable at a rate that
approximates the federal statutory rate of 34%.
LIQUIDITY AND CAPITAL RESOURCES
SeaMED has historically financed its operations through earnings, debt and
sales of securities. In fiscal years 1997 and 1996 SeaMED's operating activities
resulted in net uses of cash of $2.0 million and $296,000. These net uses of
cash in fiscal years 1997 and 1996 have occurred despite increased earnings,
because SeaMED's growth has required substantial infusions of working capital
primarily to support increased accounts receivable and inventories. If
anticipated growth occurs, management expects that operating activities will
result in additional net uses of cash.
As part of its strategy to finance its growth, on November 19, 1996, SeaMED
completed its initial public offering of securities, selling 1,529,720 shares of
common stock at $11 per share, resulting in net proceeds to the Company of
approximately $14.8 million. Of the net proceeds, the Company used approximately
$1.8 million to pay a cumulative preferred dividend on its convertible
redeemable preferred stock, approximately $1.8 million to pay down its line of
credit with Pacific Northwest Bank (the "Bank") to zero and approximately $1.3
million to pay off in full three notes payable to the Bank.
SeaMED has used a portion of the remaining net proceeds to continue funding
working capital needs resulting from its growth and for general corporate
purposes, including leasehold improvements and purchases of equipment, and
expects these uses of the remaining net proceeds to continue. If the opportunity
arises the Company may use a portion of the net proceeds to acquire other
manufacturing or engineering businesses or assets that complement the Company's
existing business. The Company currently is not engaged in any discussions
regarding such acquisitions and has no plans, arrangements, understandings or
agreements regarding any specific acquisition.
SeaMED has a fixed-balance cash management arrangement with a bank under
which the Company could borrow up to 80% of eligible accounts receivable (less
than 60 days outstanding) up to a maximum of $4.0 million subject to various
covenants. Borrowings under this agreement bear interest at the bank's prime
14
<PAGE> 16
rate plus .25% (8.5% at August 31, 1997) and are secured by receivables and
inventories. Borrowings outstanding under the line of credit at August 31, 1997
were $1.8 million.
In July of 1997, the Company's Board of Directors approved the replacement
of the existing line of credit with another line of credit agreement offered by
a new bank under which the Company can borrow up to 85% of eligible accounts
receivable and 50% of eligible inventory up to a maximum of $10.0 million. This
agreement will be subject to renewal every three years. Borrowings under this
agreement will bear interest at either the bank's prime rate minus .25% or LIBOR
plus 1.2%. SeaMED expects to finalize this new line of credit arrangement during
the first half of fiscal year 1998, at which point the Company's existing cash
management arrangement will be terminated.
SeaMED believes that the remaining net proceeds, together with existing
capital resources and amounts available under its new line of credit, will
satisfy the Company's anticipated capital needs for the next 18 to 36 months
(depending primarily on SeaMED's growth rate and its results of operations). To
accommodate anticipated future growth, SeaMED will need additional sources of
capital to fund working capital needs for inventory and accounts receivable, to
lease and acquire furniture and equipment for additional plant facilities, to
fund leasehold improvements and to make other capital expenditures.
In May of 1997 SeaMED occupied an additional 60,000 square feet of space to
support growth. SeaMED now has approximately 148,000 square feet of space. Due
in large part to preparing the new space for occupancy, SeaMED's capital
expenditures increased approximately $1.3 million to $2.8 million in fiscal year
1997 from $1.5 million in fiscal year 1996. Management anticipates that the
amount of capital expenditures in fiscal year 1998 will decrease slightly from
fiscal year 1997. SeaMED anticipates entering into a commitment to lease an
additional 80,000 square feet of space in stages beginning in January 1999.
Capital expenditures were $1.2 million in fiscal year 1995.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Company does not provide forecasts of future financial performance.
While SeaMED's management is optimistic about the Company's long-term prospects,
the following issues and uncertainties, among others, should be considered in
evaluating its growth outlook.
Customer Risk Factors
SeaMED's success depends on the success of its customers and their
instruments manufactured by SeaMED. Any unfavorable developments or adverse
effects on the sales of those products or its customers' businesses, results of
operations or financial condition could have a corresponding adverse effect on
SeaMED. SeaMED believes that its customers and their products (and, accordingly,
SeaMED) are generally subject to the following risks:
Competitive Environment: The medical products industry is highly
competitive and subject to significant technological change, and requires
ongoing investment to keep pace with technological developments and quality and
regulatory requirements. Many of SeaMED's customers are emerging medical
technology companies that have competitors and potential competitors with
substantially greater capital resources, research and development staffs and
facilities and substantially greater experience in developing new products,
obtaining regulatory approvals and manufacturing and marketing medical products.
Customer Regulatory Compliance: The Food and Drug Administration (the
"FDA") regulates instruments manufactured by SeaMED under the Federal Food,
Drug, and Cosmetic Act, as amended (the "FDC Act"), which requires certain
clearances or approvals from the FDA before new medical devices can be marketed.
Certain medical instruments manufactured by SeaMED may be subject to the need to
obtain FDA approval of a PMA, which requires substantial preclinical and
clinical testing and may cause delays and prevent introduction of such
instruments. Other instruments can be marketed only by establishing "substantial
equivalence" to a predicate device in a 510(k) premarket notification. Customer
sales of SeaMED-manufactured medical instruments outside the United States are
subject to regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be
15
<PAGE> 17
longer or shorter than that required for FDA approval, and the requirements may
differ. There can be no assurance that required clearances or approvals will be
obtained on a timely basis, if at all.
Medical instruments manufactured by SeaMED and marketed by its customers
pursuant to FDA clearances or approvals are subject to pervasive and continuing
regulation by the FDA and certain state and foreign regulatory agencies. If a
customer engages in prohibited marketing practices, the FDA or another
regulatory agency with applicable jurisdiction could intervene, possibly
resulting in marketing restrictions, including prohibitions on further product
sales, or civil or criminal penalties.
Uncertain Market Acceptance of Products; Product Obsolescence: There can be
no assurance that SeaMED's customers' products will gain any significant market
acceptance and market share among physicians, patients and health care payors,
even if required regulatory approvals are obtained. Market acceptance may depend
on a variety of factors, including educating physicians regarding the use of a
new procedure, overcoming physician objections to certain effects of the product
or its related treatment regimen, and convincing health care payors that the
benefits of the product and its related treatment regimen outweigh its costs. In
addition, the marketplace for medical products is characterized by rapid change
and technological innovation. As a result, SeaMED and its customers are subject
to the risk of product obsolescence, whether from long development or government
approval cycles or the development of improved products or processes by
competitors.
Customers' Future Capital Requirements: Many of SeaMED's customers,
especially emerging medical technology companies, are not profitable and may
have little or no revenues, but they have significant working capital
requirements, for which the customer may be required to raise additional funds
through public or private financings, including equity financings. Adequate
funds for their operations may not be available when needed, if at all.
Uncertainty of Third-Party Reimbursement: Sales of many of the instruments
manufactured by SeaMED will be dependent in part on availability of adequate
reimbursement for those instruments from third-party health care payors, such as
government and private insurance plans, health maintenance organizations and
preferred provider organizations. There can be no assurance that adequate levels
of reimbursement will be available to enable SeaMED's customers to achieve
market acceptance of their products.
Nonmedical Customers: SeaMED's nonmedical customers are subject to general
business risks, such as competition, market acceptance of their products,
capital requirements and credit risks. SeaMED's nonmedical customers operate in
highly competitive industries in which their products compete on price, quality
and product enhancements and are subject to risks of technological obsolescence.
As a result, sales to nonmedical customers may be volatile and subject to risks
of cancellation.
Variability of Operating Results
SeaMED's annual and quarterly operating results are affected by a number of
factors, including the volume and timing of customer orders, which vary due to
(i) variation in demand for the customer's products as a result of, among other
things, product life cycles, competitive conditions and general economic
conditions, (ii) the customer's attempt to balance its inventory, (iii) the
customer's need to adapt to changing regulatory conditions and requirements, and
(iv) changes in the customer's manufacturing strategy. Under the terms of
SeaMED's contracts with its customers, SeaMED's customers have broad discretion
to control the volume and timing of instrument deliveries. As a result,
production may be reduced or discontinued at any time, causing substantial sales
fluctuations from quarter to quarter or from year to year. Because SeaMED's
business organization and its related cost structure anticipate supporting a
certain minimum level of revenues, the Company's limited ability to adjust its
short-term cost structure would compound the adverse effect of any significant
revenue reduction.
16
<PAGE> 18
Dependence on Small Number of Customers
Historically, a substantial percentage of SeaMED's net sales have been to
fewer than 10 customers. SeaMED's sales to Coinstar, a nonmedical customer for
which SeaMED manufactures a coincounting machine that exchanges loose coins for
currency, represented approximately 25% of SeaMED's revenues for fiscal year
1997. SeaMED currently manufactures these machines under a nonexclusive
manufacturing agreement with Coinstar that allows Coinstar to cancel or modify
orders with SeaMED on 90 days' notice. SeaMED's sales to United States Surgical
Corporation were approximately 11% of SeaMED's revenues for fiscal year 1997. In
fiscal year 1996, Boston Scientific Corporation (through two subsidiaries) and
C.R. Bard, Inc. each accounted for more than 10% of the Company's revenues. If
one or more of SeaMED's customers experience exceptional growth relative to
other SeaMED customers, then SeaMED's success could become substantially more
dependent on the continued success of such customer, and any unfavorable
development regarding such customer or its product could result in a material
adverse effect on the Company's business, results of operations and financial
condition.
Competition
SeaMED faces competition from current and prospective customers who
evaluate SeaMED's capabilities against the merits of designing, engineering and
manufacturing instruments internally. SeaMED also faces competition from design
firms and other manufacturers that operate in the medical technology industry.
As a result of the consolidation in the healthcare industry of smaller
manufacturers into larger manufacturers, some existing or prospective customers
may be eliminated. In the future, SeaMED may also compete against new entrants
to the industry.
Uncertainty of Market Acceptance of Outsourcing Manufacture of Medical
Instruments
SeaMED believes that the market for outsourcing the manufacture of advanced
medical instruments for medical technology companies is in its early stages. As
a result, potential customers may decide that the risks of outsourcing
engineering or manufacturing are too great or exceed the anticipated benefits of
outsourcing.
Compliance With Regulatory Agency Requirements
SeaMED is subject to a variety of regulatory agency requirements in the
United States and foreign countries relating to the instruments that it
manufactures for its customers. The process of obtaining and maintaining
required regulatory approvals and otherwise remaining in regulatory compliance
in the United States and certain other countries is lengthy, expensive and
uncertain. SeaMED also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances.
Product Recalls, Product Liability and Insurance
Many of the instruments SeaMED designs or manufactures are life-sustaining,
life-supporting or implantable medical products. The tolerance for error in the
design, manufacture or use of these products may be small or nonexistent. If an
instrument designed or manufactured by the Company is found to be defective,
whether due to design or manufacturing defects, to improper use of the product
or to other reasons, the instrument may need to be recalled, possibly at the
Company's expense. A product recall could cause a general investigation of the
Company by applicable regulatory authorities as well as cause other customers to
review and potentially terminate their relationships with the Company.
The manufacture and sale of the medical instruments manufactured by SeaMED
involve the risk of product liability claims. Although SeaMED maintains product
liability insurance, there can be no assurance that the coverage of the
Company's insurance policies will be adequate. Product liability insurance is
expensive and in the future may not be available on acceptable terms, in
sufficient amounts, or at all.
17
<PAGE> 19
Dependence on Key Personnel
SeaMED's future success depends to a significant extent on the continued
service of certain of its key managerial, technical and engineering personnel,
particularly its President and Chief Executive Officer, W. Robert Berg, and its
continuing ability to attract, train, assimilate and retain highly qualified
engineering, technical and managerial personnel experienced in commercializing
medical products.
Potential Inability to Sustain and Manage Growth
SeaMED's ability to manage its growth effectively will require it to
continue to implement and improve its operational, financial and management
information systems, to develop its managers' and project engineers' management
skills and to train, motivate and manage its employees. SeaMED depends on its
computer system to integrate its manufacturing processes with its quality
assurance procedures (including, for example, maintaining distribution records
and allowing for the tracing of certain product lots) to comply with regulatory
requirements. Any difficulties or delays in maintaining or upgrading the
computer system could adversely affect the manufacture and delivery of customer
instruments, and the Company's management, reporting and internal control
systems.
Limited Suppliers and Shortages of Component Parts
SeaMED relies on third-party suppliers for each of the component parts used
in manufacturing its customers' instruments. Although component parts are
generally available from multiple suppliers, certain component parts may require
long lead times, and SeaMED may have to delay the manufacture of customer
instruments from time to time due to the unavailability of certain component
parts. In addition, even if component parts are available from an alternative
supplier, SeaMED could experience additional delays in obtaining component parts
if the supplier has not met SeaMED's vendor qualifications.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... 19
Financial Statements:
Balance Sheets as of June 30, 1997 and 1996......................................... 20
Statements of Income for the Years Ended June 30, 1997, 1996, and 1995.............. 21
Statements of Shareholders' Equity for the Years Ended June 30, 1997, 1996, and
1995............................................................................. 22
Statements of Cash Flows for the Years Ended June 30, 1997, 1996, and 1995.......... 23
Notes to Financial Statements....................................................... 24
Schedule II -- Valuation and Qualifying Accounts for the Years Ended June 30, 1997,
1996, and 1995................................................................... 32
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE> 20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
SeaMED Corporation
We have audited the accompanying balance sheets of SeaMED Corporation as of
June 30, 1997 and 1996, and the related statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1997. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SeaMED Corporation as of
June 30, 1997 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
August 11, 1997
19
<PAGE> 21
SEAMED CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $9,092 $2,912
Investments..................................................... 6,231,369 --
Accounts receivable, net of allowance of $377,890 ($252,226 in
1996)........................................................ 8,794,968 5,875,933
Inventories (Note 3)............................................ 11,198,563 6,697,248
Deferred income taxes (Note 9).................................. 1,193,311 625,221
Prepaid expenses................................................ 169,553 63,536
----------- -----------
Total current assets.............................................. 27,596,856 13,264,850
Property and equipment (Note 4)................................... 4,331,814 2,655,265
Deposits and other assets......................................... 202,845 144,220
----------- -----------
Total assets...................................................... $32,131,515 $16,064,335
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $2,482,551 $2,688,160
Accrued expenses and reserves (Note 5).......................... 5,787,715 3,301,064
Borrowings under bank line of credit (Note 6)................... 1,068,240 1,817,000
Current portion of long-term debt............................... -- 461,990
----------- -----------
Total current liabilities......................................... 9,338,506 8,268,214
Long-term debt, less current portion (Note 6)..................... -- 1,285,782
Convertible redeemable preferred stock, issued and outstanding
shares of all series -- 8,456,204; liquidation
value -- $6,308,200 (Note 7).................................... -- 5,279,514
Shareholders' equity (Note 8):
Preferred stock, $0.01 par value:
Authorized shares -- 5,000,000 undesignated (14,050,000, of
which 9,050,000 have been designated convertible redeemable
shares, in 1996)
Common stock, no par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 5,263,827 (668,707 in
1996)....................................................... 19,722,865 886,828
Note receivable from officer (Note 13).......................... (75,000) (75,000)
Retained earnings............................................... 3,145,144 418,997
----------- -----------
Total shareholders' equity........................................ 22,793,009 1,230,825
----------- -----------
Total liabilities and shareholders' equity........................ $32,131,515 $16,064,335
=========== ===========
</TABLE>
See accompanying notes.
20
<PAGE> 22
SEAMED CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Manufacturing..................................... $32,983,491 $17,724,883 $11,940,610
Engineering....................................... 19,150,019 8,405,352 5,720,600
----------- ----------- -----------
52,133,510 26,130,235 17,661,210
Cost of revenues:
Manufacturing..................................... 26,368,242 13,541,280 9,330,095
Engineering....................................... 16,763,316 7,551,399 5,260,489
----------- ----------- -----------
43,131,558 21,092,679 14,590,584
----------- ----------- -----------
Total gross margin.................................. 9,001,952 5,037,556 3,070,626
Marketing, general, and administrative expenses..... 4,849,413 2,937,556 1,930,734
----------- ----------- -----------
Operating income.................................... 4,152,539 2,100,000 1,139,892
Other income (expense):
Interest expense.................................. (190,989) (198,274) (193,095)
Interest and other income, net.................... 232,522 6,665 7,966
----------- ----------- -----------
41,533 (191,609) (185,129)
----------- ----------- -----------
Income before income taxes.......................... 4,194,072 1,908,391 954,763
Income tax provision................................ (1,467,925) (667,937) (180,000)
----------- ----------- -----------
Net income.......................................... $ 2,726,147 $ 1,240,454 $ 774,763
=========== =========== ===========
Net income per share data:
Primary........................................... $ 0.60 $ 0.42 $ 0.25
=========== =========== ===========
Fully diluted..................................... $ 0.55 $ 0.32 $ 0.21
=========== =========== ===========
</TABLE>
See accompanying notes.
21
<PAGE> 23
SEAMED CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTE RETAINED TOTAL
----------------------- RECEIVABLE EARNINGS SHAREHOLDERS'
SHARES AMOUNT FROM OFFICER (DEFICIT) EQUITY
--------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994............. 494,633 $ 769,295 $ -- $(1,596,220) $ (826,925)
Stock options exercised.......... 54,331 14,265 -- -- 14,265
Net income....................... -- -- -- 774,763 774,763
--------- ----------- -------- ----------- -----------
Balance, June 30, 1995............. 548,964 783,560 -- (821,457) (37,897)
Stock options exercised.......... 89,735 28,268 -- -- 28,268
Common stock issued in exchange
for note receivable........... 30,000 75,000 (75,000) -- --
Fractional shares issued due to
reverse stock split........... 8 -- -- -- --
Net income....................... -- -- -- 1,240,454 1,240,454
--------- ----------- -------- ----------- -----------
Balance, June 30, 1996............. 668,707 886,828 (75,000) 418,997 1,230,825
Common stock sold in initial
public offering (net of
offering cost)................ 1,529,720 14,822,755 -- -- 14,822,755
Issuance of common stock for
conversion of redeemable
preferred stock............... 2,934,029 5,279,514 -- -- 5,279,514
Preferred stock dividends........ -- (1,765,100) -- -- (1,765,100)
Common stock sold under employee
stock purchase plan........... 41,515 389,141 -- -- 389,141
Stock options exercised.......... 89,856 50,672 -- -- 50,672
Tax benefit from stock options
and stock purchase plan....... -- 59,055 -- -- 59,055
Net income....................... -- -- 2,726,147 2,726,147
--------- ----------- -------- ----------- -----------
Balance, June 30, 1997............. 5,263,827 $19,722,865 $(75,000) $ 3,145,144 $ 22,793,009
========= =========== ======== =========== ===========
</TABLE>
See accompanying notes.
22
<PAGE> 24
SEAMED CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 2,726,147 $ 1,240,454 $ 774,763
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation.......................................... 1,073,885 693,752 421,084
Provision for bad debt................................ 125,664 47,743 (25,127)
Deferred tax benefit.................................. (568,090) (95,539) (54,682)
Changes in operating assets and liabilities:
Increase in accounts receivable.................... (3,044,699) (2,569,134) (569,079)
Increase in inventories............................ (4,501,315) (2,977,592) (682,803)
Increase in other assets and prepaid expenses...... (164,642) (38,644) (7,615)
Increase in accounts payable, accrued expenses, and
deferred revenue................................. 2,340,097 3,402,643 801,426
----------- ----------- -----------
Net cash provided by (used in) operating activities..... (2,012,953) (296,317) 657,967
INVESTING ACTIVITIES
Purchases of equipment.................................. (2,750,434) (1,492,021) (1,185,267)
Maturity of short-term investments...................... 1,756,074 200,000 200,000
Purchase of investments................................. (7,987,443) -- (200,000)
----------- ----------- -----------
Net cash used in investing activities................... (8,981,803) (1,292,021) (1,385,267)
FINANCING ACTIVITIES
Net proceeds from sale of common stock.................. 14,822,755 -- --
Net proceeds from sale of preferred stock............... -- -- 1,309,391
Proceeds from sale of common stock under employee stock
option plan........................................... 389,141 -- --
Preferred stock dividend................................ (1,765,100) -- --
Proceeds from stock options exercised................... 50,672 28,268 14,265
Net (payments) of borrowings under credit line.......... (748,760) 1,261,999 (437,185)
Proceeds from notes payable............................. -- 600,000 750,000
Principal payments on notes payable..................... (1,747,772) (369,400) (882,072)
Principal payments on capital lease obligations......... -- -- (1,368)
----------- ----------- -----------
Net cash provided by financing activities............... 11,000,936 1,520,867 753,031
----------- ----------- -----------
Net increase (decrease) in cash......................... 6,180 (67,471) 25,731
Cash and cash equivalents at beginning of year.......... 2,912 70,383 44,652
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 9,092 $ 2,912 $ 70,383
=========== =========== ===========
</TABLE>
See accompanying notes.
23
<PAGE> 25
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
SeaMED Corporation (the "Company") primarily manufactures advanced durable
electronic medical instruments for medical technology companies, often as part
of systems that also include single-use components. To assist its customers in
developing and commercializing their instruments for manufacture by the Company,
the Company provides a wide range of engineering services and regulatory
expertise.
Change in Accounting Period
During fiscal year 1995, the Company changed its fiscal year-end from June
30 to a 52/53-week fiscal year that ends on the Thursday nearest to June 30. For
convenience of presentation, all fiscal periods in these financial statements
are shown as ending on a calendar month-end.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Credit Policies
The Company extends credit to various customers which are primarily in the
medical device industry. Receivables generally are due within 30 days and the
Company generally does not require collateral. The Company maintains reserves
for potential credit losses.
Investments
Investments are classified as held-to-maturity. Investments consist of U.S.
treasury bills, which mature within one year, and are reported at cost net of
unamortized premium or discount, which approximates market.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Depreciation
The Company provides for depreciation of furniture, fixtures, equipment,
and manufacturing molds over their estimated useful lives of three to eight
years using the straight-line method.
Revenue Recognition
The Company recognizes revenues from contracts to perform engineering
design and product development as costs are incurred for cost-plus contracts, or
based on the percentage-of-completion method for fixed-price contracts. When
estimates indicate a probable loss on a contract, the full amount of such loss
is accrued at that time. The Company generally recognizes revenue from
manufacturing services when the related products are shipped.
24
<PAGE> 26
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Warranty Costs
Warranty reserves are recorded based on historical experience and estimates
of current warranty activity.
Income Taxes
The Company provides for income taxes based on the liability method which
requires the recognition of deferred tax assets and liabilities based on
differences between financial reporting and tax bases of assets and liabilities
measured using enacted tax rates and laws that are expected to be in effect when
the differences are expected to reverse.
Stock Compensation
The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company's common stock at the date of grant
over the stock option exercise price.
Net Income Per Share
Except as noted below, historical primary net income per share is based on
the weighted average number of common and common equivalent shares outstanding
during each period. Common equivalent shares include outstanding Class B and C
convertible redeemable preferred stock and outstanding stock options and an
outstanding warrant. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be antidilutive, except
that, in accordance with Securities and Exchange Commission requirements, common
and common equivalent shares issued during the 12-month period prior to the
filing of an initial public offering have been included in the calculation as if
they were outstanding for all periods (using the treasury stock method and an
assumed initial public offering price). In addition, net income is adjusted for
the accretion of cumulative preferred stock dividends to determine earnings
applicable to common stock.
Fully diluted net income per share has been computed as described above and
also gives effect to the dilutive effect of the conversion of outstanding Class
A and D convertible redeemable preferred stock net of the effect of the related
cumulative dividends.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted beginning with
the Company's period ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options and preferred stock
will be excluded. The impact is expected to result in an increase in primary
earnings per share for the year ended June 30, 1997, 1996, and 1995 of $.19,
$.07, and $.43 per share, respectively. The impact of Statement No. 128 on the
calculation of fully diluted earnings per share is not expected to be material.
25
<PAGE> 27
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Data used in calculating net income per share information follow:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income, as reported................................ $2,726,147 $1,240,454 $774,763
Accretion of cumulative preferred stock dividends...... (101,077) (263,050) (203,005)
---------- ---------- ----------
Adjusted income for computing primary net income per
share................................................ $2,625,070 $977,404 $571,758
========== ========== ==========
Shares used in computing primary net income per
share................................................ 4,368,975 2,330,739 2,302,359
========== ========== ==========
Shares used in computing fully diluted net income...... 4,987,703 3,893,243 3,660,549
========== ========== ==========
</TABLE>
Reclassification
Certain prior year items have been reclassed to conform to the current year
presentation.
2. INITIAL PUBLIC OFFERING
In November 1996, the Company completed an initial public offering of
securities, selling 1,529,720 shares of common stock at $11 per share, resulting
in proceeds to the Company of $14,822,755, net of offering costs and
underwriters discount of $2,004,165. Of the net proceeds, the Company used
$1,765,100 to pay a cumulative preferred dividend on its convertible redeemable
preferred stock, $1,831,000 to pay down its line of credit with a bank to zero,
and $1,296,000 to pay off in full three notes payable to the bank. In
conjunction with the offering, all of the Company's convertible redeemable
preferred stock outstanding immediately prior to the offering was converted into
2,934,029 shares of common stock.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Work in process............................. $ 3,274,857 $2,490,710
Purchased and manufactured parts............ 7,923,706 4,206,538
----------- ----------
$11,198,563 $6,697,248
=========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Furniture and fixtures....................... $ 959,033 $ 514,950
Equipment.................................... 5,815,854 3,657,224
Manufacturing molds.......................... 524,110 523,999
Leasehold improvements....................... 702,549 554,939
---------- ----------
8,001,546 5,251,112
Less accumulated depreciation and
amortization............................... 3,669,732 2,595,847
---------- ----------
$4,331,814 $2,655,265
========== ==========
</TABLE>
26
<PAGE> 28
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED EXPENSES AND RESERVES
Accrued expenses and reserves consist of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Taxes payable................................ $ 216,996 $ 630,036
Accrued compensation......................... 2,501,732 1,102,565
Deferred revenue and customer deposits....... 1,169,757 1,015,029
Other accrued expenses....................... 1,522,794 338,146
Warranty reserve............................. 376,436 215,288
---------- ----------
$5,787,715 $3,301,064
========== ==========
</TABLE>
6. NOTES PAYABLE
Line of Credit Agreement
The Company has a line of credit agreement with a bank under which the
Company can borrow up to 80% of eligible accounts receivable (less than 60 days
outstanding) up to a maximum of $4,000,000, subject to various covenants.
Borrowings under this agreement bear interest at the bank's prime rate plus .25%
(8.5% at June 30, 1997) and are secured by receivables and inventories.
Borrowings outstanding under the line of credit at June 30, 1997 and 1996 were
$1,068,240 and $1,817,000, respectively. Weighted average interest rates under
this agreement were 8.5% during fiscal years 1997 and 1996.
In July of 1997, the Company's Board of Directors approved the replacement
of the existing line of credit with another line of credit agreement offered by
a new bank under which the Company can borrow up to 85% of eligible accounts
receivable and 50% of eligible inventory up to a maximum of $10,000,000.
Borrowings under this agreement are payable on demand if certain covenants are
not met. These covenants include a maximum debt-to-equity ratio of 1.25-to-1 and
minimum ratio of earnings before income taxes to interest of 2.0-to-1.
Borrowings under this agreement bear interest at the bank's prime rate minus
.25% or LIBOR plus 1.2%. The agreement will be subject to renewal every three
years.
Long-Term Debt
Long-term debt at June 30, 1996 consists of the following:
<TABLE>
<S> <C>
Unsecured subordinated note payable, with monthly payments of $17,000,
including interest, through May 2001. Interest is adjusted annually on
July 1 to 2% over prime, with a maximum of 10% and a minimum of 7%..... $ 782,650
8.5% note payable, secured by equipment, with monthly payments, including
interest, through August 5, 1998....................................... 438,456
8.75% note payable, secured by equipment, with monthly payments,
including interest, through November 5, 1999........................... 526,666
----------
1,747,772
Less current portion..................................................... 461,990
----------
$1,285,782
=========
</TABLE>
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In January 1995, the Company sold 1,465,000 shares of Class D convertible
redeemable preferred stock at $1.00 per share. These shares were converted into
common stock at the ratio of 3.75 shares of preferred stock for each share of
common stock upon completion of the Company's initial public offering. In
connection
27
<PAGE> 29
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
with the Class D preferred stock offering, the Company also issued a warrant to
purchase 39,066 shares of common stock, with an exercise price of $4.70 per
share. The warrant expires December 21, 1999.
8. SHAREHOLDERS' EQUITY
Reverse Stock Split
In July 1996, the Company's shareholders approved a 1-for-5 stock split of
the common stock, which resulted in an adjustment to the preferred stock
conversion ratio. All share and per share data in the accompanying financial
statements have been restated to retroactively reflect the reverse stock split.
Stock Option and Incentive Plans
The Company has two stock option and incentive plans (collectively, the
"Plans"), the SeaMED Corporation 1988 Stock Option Plan and the SeaMED
Corporation 1995 Employee Stock Option and Incentive Plan. Under the terms of
the Plans, with respect to incentive stock options and options awarded to
nonemployee directors, the option price may not be less than fair market value
of the common stock at the date of grant. Generally, options granted under the
Plans become exercisable at the rate of 50% after two years, 75% after three
years, and 100% after four years from the date of grant. Certain options granted
under the 1988 plan, however, become exercisable ratably over seven years from
the date of grant. Unexercised options expire on the date set forth in the
optionee's option agreement (generally 10 years), subject to earlier termination
upon certain events. Stock options exercised, granted, and canceled during
fiscal years 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------------
NUMBER OF AGGREGATE PRICE PER
SHARES PRICE SHARE
--------- ---------- -------------
<S> <C> <C> <C>
Balance, July 1, 1994..................... 428,764 $ 253,544 $ .16 - 2.20
Options granted......................... 89,200 485,500 2.50 - 10.00
Options canceled........................ (13,252) (10,848) .16 - 2.50
Options exercised....................... (54,331) (14,265) .16 - .75
------- ----------
Balance, June 30, 1995.................... 450,381 713,931 .16 - 10.00
Options granted......................... 132,824 454,060 2.50 - 5.00
Options canceled........................ (8,031) (12,300) .50 - 2.50
Options exercised....................... (89,735) (28,268) .16 - 1.25
------- ----------
Balance June 30, 1996..................... 485,439 1,127,423 .16 - 10.00
Options granted......................... 105,241 1,622,428 5.00 - 17.25
Options canceled........................ (4,205) (11,392) .80 - 16.25
Options exercised....................... (89,856) (50,672) .16 - 2.50
------- ----------
Balance June 30, 1997..................... 496,619 $2,687,787 $ .16 - 17.25
======= ==========
</TABLE>
28
<PAGE> 30
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding and
exercisable at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.16 - $ 0.80 108,265 3.51 years $ 0.4151 108,265 $ 0.4151
1.00 - 2.20 68,763 6.39 years 1.4730 49,910 1.4671
2.50 - 2.50 107,540 8.12 years 2.5000 11,210 2.5000
3.75 - 7.60 99,720 8.43 years 5.2983 10,000 6.2500
10.00 - 17.25 112,331 9.34 years 15.5288 5,000 10.0000
------- -------
0.16 - 17.25 496,619 7.21 years 5.4122 184,385 1.4030
</TABLE>
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 1997 and 1996, the pro forma amounts of the
Company's net income and net income per share for the years ended June 30, 1997
and 1996 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income -- as reported........................... $2,726,147 $1,240,454
Net income -- pro forma............................. 2,581,412 1,219,006
Fully diluted income per share -- as reported....... .55 .32
Fully diluted net income per share -- pro forma..... .52 .31
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.37% to 6.70%; expected option life of four to six years;
volatility of .5344; and no expected dividends. The weighted-average fair value
of options granted during the years 1997 and 1996 was $15.42 and $3.42,
respectively, for options granted at fair market value.
Shares Reserved for Future Issuance
The following shares of common stock have been reserved for future issuance as
of June 30, 1997, including the stock purchase plan referred to below, and
pursuant to the various other agreements and plans discussed above:
<TABLE>
<CAPTION>
SHARES
-------
<S> <C> <C>
Common stock purchase warrants........................... 39,066
Stock purchase plan...................................... 28,485
Incentive Stock Option Plan:
Options outstanding.................................... 496,619
Options available for grant............................ 69,592 566,211
------- -------
Total common shares reserved for future issuance at June
30, 1997............................................... 633,762
=======
</TABLE>
Employee Stock Purchase Plan
In July of 1996, the Company's shareholders approved a stock purchase plan which
became effective on November 11, 1997 with the Company's completion of its
initial public offering of its common stock. The shareholder's authorized the
sale of up to 70,000 shares of common stock over five years pursuant to the
plan.
29
<PAGE> 31
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Current income tax provision.............. $2,036,015 $763,476 $234,682
Deferred income tax benefit............... (568,090) (95,539) (54,682)
---------- -------- --------
Income tax provision...................... $1,467,925 $667,937 $180,000
========== ======== ========
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30
-----------------------
1997 1996
---------- --------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets........................................ $ (43,886) $(20,337)
Deferred tax assets:
Inventory reserves.................................. 703,213 356,175
Accrued expenses.................................... 266,952 147,712
Bad debt reserves................................... 128,483 85,757
Other............................................... 138,549 55,914
---------- --------
Total deferred assets................................. 1,237,197 645,558
---------- --------
Net deferred asset balance............................ $1,193,311 $625,221
========== ========
</TABLE>
A reconciliation from the U.S. statutory rate to the effective tax rate is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate......................... 34.0% 34.0% 34.0%
Change in valuation allowance...................... -- -- (26.3)
Other.............................................. 1.0 1.0 11.2
---- ---- -----
35.0% 35.0% 18.9%
==== ==== =====
</TABLE>
Taxes of $2,390,000, $330,000, and $28,000, were paid in the years ended
June 30, 1997, 1996, and 1995, respectively.
10. REVENUE AND OPERATIONS
During fiscal 1997, 1996, and 1995, 54%, 41%, and 49%, respectively, of
total net sales were to five customers. Receivables from these five customers
represent 36% and 34% of total accounts receivable at June 30, 1997 and 1996,
respectively.
Revenues from customers that represent more than 10% of total revenues are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------
CUSTOMER 1997 1996 1995
--------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
A...................................... $ -- $2,665,000 $2,278,000
B...................................... -- -- 1,933,000
C...................................... -- 3,129,000 2,725,000
D...................................... 12,836,000 -- --
E...................................... 5,524,000 -- --
</TABLE>
30
<PAGE> 32
SEAMED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. LEASE COMMITMENTS
The Company currently leases office and production space, and equipment
under noncancelable operating leases. Rental expense under operating lease
agreements for the fiscal years ended June 30, 1997, 1996, and 1995 amounted to
$1,322,204, $655,079, and $388,085, respectively.
Future minimum lease commitments under noncancelable leases and service
agreements as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................ $1,874,088
1999............................................ 1,885,070
2000............................................ 1,921,694
2001............................................ 1,950,473
2002............................................ 1,701,560
Thereafter...................................... 8,408,518
-----------
$17,741,403
===========
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute amounts through payroll deductions.
The Company matches annually 50% of the employees' contributions up to 4% of the
employees' salary. The 401(k) savings plan expense was $159,000, $72,000, and
$57,672 in fiscal 1997, 1996, and 1995, respectively. The Company does not
provide other post-retirement benefits.
13. RELATED-PARTY TRANSACTIONS
In October 1995, the Company's Chief Executive Officer and President
received a $75,000 loan from the Company, the proceeds of which he used to
purchase 30,000 shares of common stock. The loan is evidenced by an unsecured
promissory note that bears interest at the floating minimum statutory rate set
by the Internal Revenue Service from time to time. This officer may prepay
principal and interest at any time without penalty; unpaid principal and
interest are due on October 11, 2000. As of June 30, 1997, aggregate principal
and accrued interest on this loan was approximately $80,000.
A director of the Company is also a partner in the law firm Preston Gates &
Ellis, the Company's counsel.
A director of the Company serves as President and Chief Executive Officer
and a director of one of the Company's customers. The Company has provided
engineering and manufacturing services for this customer. The Company recognized
revenues with respect to such services of approximately $92,000, $335,000, and
$1.0 million in fiscal years 1997, 1996, and 1995, respectively.
31
<PAGE> 33
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SEAMED CORPORATION
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- --------------------------------- ------------ ---------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1995:
Deducted from asset accounts:
Allowance for uncollectible
accounts.................. $229,610 $104,320 $ 129,447(1) $ 204,483
Warranty reserve............... 160,271 171,515 145,375(2) 186,411
-------- -------- -------- -------- --------
$389,881 $275,835 $ 274,822 $ 390,894
======== ======== ======== ======== ========
Year Ended June 30, 1996:
Deducted from asset accounts:
Allowance for uncollectible
accounts.................. $204,483 $ 50,709 $ 2,966(1) $ 252,226
Warranty reserve............... 186,411 275,893 247,016(2) 215,288
-------- -------- -------- -------- --------
$390,894 $326,602 $ 249,982 $ 467,514
======== ======== ======== ======== ========
Year Ended June 30, 1997:
Deducted from asset accounts:
Allowance for uncollectible
accounts.................. $252,226 $130,075 $ 4,411(1) $ 377,890
Warranty reserve............... 215,288 428,773 267,625(2) 376,436
-------- -------- -------- -------- --------
$467,514 $558,848 $ 272,036 $ 754,326
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Write-off of uncollectible accounts, net of recoveries.
(2) Actual warranty costs incurred.
32
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
section labeled "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on October 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section labeled "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on October 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section labeled "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on October 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section labeled "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on October 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements included in Item 8, Financial Statements and
Supplementary Data, are set forth in the Index to Financial Statements and
Financial Statement Schedules listed on page 18 of this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules are set forth in the Index to Financial
Statements and Financial Statement Schedules listed on page 18 of this Form
10-K.
3. EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are listed in
the Exhibit Index contained herein.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Redmond,
State of Washington on this 30th day of September, 1997.
SeaMED CORPORATION
By /s/ W. ROBERT BERG
------------------------------------
W. Robert Berg
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on this 30th day of September, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ W. ROBERT BERG President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
W. Robert Berg
/s/ EDGAR F. RAMPY Vice President, Treasurer and Chief
- --------------------------------------------- Financial Officer, and Director (Principal
Edgar F. Rampy Financial Officer)
/s/ RICHARD P. MUNOZ Controller (Principal Accounting Officer)
- ---------------------------------------------
Richard P. Munoz
/s/ R. SCOTT ASEN Chairman of the Board, Director
- ---------------------------------------------
R. Scott Asen
/s/ STEPHEN J. CLEARMAN Director
- ---------------------------------------------
Stephen J. Clearman
/s/ RICHARD E. ENGEBRECHT Director
- ---------------------------------------------
Richard E. Engebrecht
/s/ WILLIAM H. GATES, SR. Director
- ---------------------------------------------
William H. Gates, Sr.
/s/ RICHARD O. MARTIN Director
- ---------------------------------------------
Richard O. Martin
</TABLE>
34
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------------------------------------------------------------------- -----
<S> <C> <C>
3.1+ Articles of Incorporation of the Registrant............................
3.2+ Bylaws of the Registrant...............................................
10.1+ Industrial Real Estate Lease (Building 1) dated September 10, 1996,
between Washington Capital Management, Inc. and SeaMED Corporation.....
10.2+ Industrial Real Estate Lease (Building 2) dated September 10, 1996,
between Washington Capital Management, Inc. and SeaMED Corporation.....
10.3+ Option Agreement dated September 10, 1996, by and between Washington
Capital Management, Inc. and SeaMED Corporation........................
10.4++ Promissory Note dated December 5, 1996 made by SeaMED Corporation
payable to Pacific Northwest Bank, in the amount of $4,000,000.........
10.5++ Commercial Security Agreement dated December 5, 1996 between SeaMED
Corporation and Pacific Northwest Bank.................................
10.6+ SeaMED Corporation 1996 Employee Stock Purchase Plan...................
10.7+++ 1997 SeaMED Corporation Employee Nonqualified Stock Option Plan........
10.8+ Manufacturing Agreement dated as of September 1, 1996, made and entered
into by SeaMED Corporation and Coinstar, Inc...........................
10.9 Design, Manufacturing and Supply Agreement dated April 7, 1997, made by
United States Surgical Corporation and SeaMED Corporation..............
11.1 Statement regarding computation of net income per share................
23.1 Consent of Ernst & Young LLP, independent auditors.....................
27.1 Financial Data Schedule................................................
</TABLE>
- ---------------
+ Filed previously with the Company's Registration Statement on Form S-1 (No.
333-13455) filed with the Securities and Exchange Commission.
++ Filed previously with the Company's Quarterly Report on Form 10-Q for the
quarter ended January 2, 1997 filed with the Securities and Exchange
Commission.
+++ Filed previously with the Company's Registration Statement on Form S-8 for
its 1997 SeaMED Corporation Employee Nonqualified Stock Option Plan filed
with the Securities and Exchange Commission.
35
<PAGE> 1
EXHIBIT 10.9
DESIGN, MANUFACTURING AND SUPPLY AGREEMENT
This Design, Manufacturing and Supply Agreement and all attachments
(called the "Agreement") is made by United States Surgical Corporation
("Buyer"), having its principal place of business at 150 Glover Avenue, Norwalk,
Connecticut 06856, and SeaMED Corporation ("Contractor"), having its principal
place of business at 14500 NE 87th Street, Redmond, Washington 98052. This
Agreement sets forth the mutual understanding by which the Buyer and the
Contractor will conduct business for the life of this Agreement.
Whereas, the Contractor has the facilities and expertise to design,
manufacture, test and supply electronic devices in accordance with GMP and ISO
9000 practices; and
Whereas, Buyer desires to engage the services and the facilities of
Contractor for the design, manufacture and supply of several electronic devices
described in Exhibit B (each hereinafter a "Product" and collectively the
"Products") and other related electronic assemblies as may be specified in the
future;
Therefore, subject to the due execution and delivery of this Agreement
by the parties hereto, in consideration for the below mutual covenants and
agreements, both parties agree as follows:
I. DEFINITIONS
(A) "Qualification Testing" shall be defined as the systematic process
of comparing the actual operation of production units to the functional and
engineering specifications and to the established qualification test procedure.
(B) "Verification Testing" shall be defined as the systematic process
of comparing the actual operation of engineering prototypes of the product to
the functional and engineering specifications.
(C) "Medical Device Reporting" ("MDR") shall be defined as any event
associated with the use of the Product which is required to be reported to the
FDA in accordance with 21 CFR Part 803.
(D) "Device Master Record" shall be defined as the file containing all
pertinent records relative to design, specifications, formulations, complete
manufacturing procedures and quality assurance requirements relative to
production of this medical Product and its subassemblies.
(E) "Device History Record" shall be defined as the compilation of
records containing the complete production / maintenance history of a finished
Product and showing latest revision history, maintenance history and any other
records required by the FDA.
<PAGE> 2
(F) "Certificate of Compliance" shall be defined as Contractor's
notification that the Product (including subassemblies for service) conforms to
all established qualification criteria agreed to between both the Contractor and
Buyer.
(G) "Buyer's Equipment" shall be defined as capital equipment such as
production molds, fixtures or testing equipment purchased for and charged to the
Buyer specifically to manufacture and test the Product.
(H) "Product Complaint" shall be defined as failures which occur in use
which lead to events requiring reporting under the MDR or failures which occur
prior to the minimum life expectancy of the component or assemblies, latent
defects or software anomalies.
(I) "Pre-production Product" shall be defined as the fabrication of
products in the manufacturing area under full GMP control using pre-production
released documentation.
(J) "ISO 9000" shall be defined as the standard established and
identified as ISO 9000 by the International Standards Organization.
II. GENERAL TERMS AND CONDITIONS
A. During the term of this Agreement, Contractor shall use its best
efforts to render all services and provide all deliverables specified in Exhibit
B, within the time parameters and cost estimates established therein. Subject to
the terms and conditions contained in this Agreement, Contractor agrees to sell
to Buyer, and Buyer agrees to purchase from Contractor, during the Purchase Term
(as defined in Section IV below), all of Buyers requirements for the Products;
however, the foregoing does not obligate Buyer to purchase any specific quantity
but only establishes the terms and conditions for such purchases if they occur.
All such quantities shall be specified on Buyers Purchase Orders, issued under
the provisions of this Agreement and incorporated herein by reference.
B. If any term of this Agreement conflicts with any term of an issued
Purchase Order, this Agreement shall take precedence. Any terms or conditions
not covered under this Agreement must be specified on the front of purchase
orders and must be mutually agreed to by both the Buyer and Contractor.
C. Buyer may add products to the list of "Products" available for
purchase hereunder by adding such products to a Purchase Order that is accepted
by Contractor. Such added products shall be deemed 'Products" as defined herein
as though listed in Exhibit B at the time of executing this Agreement. The price
for which such added products shall be available for purchase under this
Agreement shall be as stated on such accepted Purchase Orders(s), subject to the
provisions of this Agreement. The Buyer shall amend Exhibit B to reflect the
added Products and relevant pricing.
D. Payment - Payment for design, testing, engineering and other
preproduction services described in Exhibit A, and for any Products purchased by
Buyer hereunder shall be due
-2-
<PAGE> 3
[*] calendar days subsequent to the date of invoice, which invoice date, in the
case of invoices relating to the purchase of Products, shall be no earlier than
the date of Contractor's shipment of such Products to Buyer. [*]
III. PURCHASE ORDERS
A. The term "Purchase Order" shall mean Buyer's written Purchase Order
form and any documents incorporated therein by reference.
B. Acceptance by Contractor is limited to the provisions of the
Agreement and the Purchase Order. No additional or different provisions proposed
by Buyer shall apply and are hereby rejected. In addition, the parties agree
that this Agreement and issued Purchase Orders constitute a Contract for the
Sale of Goods and satisfy all statutory and legal formalities of a contract.
IV. PURCHASE TERM
A. The "Purchase Term" as to any Product shall begin upon completion of
all preproduction phases for such Product, and acceptance by Buyer of the
Product to revision "A" drawings for that Product, and end [*] after the date of
the first sale of production units of any Product from Contractor to Buyer.
Production units shall be defined as units which are released and manufactured
to Revision A level drawings by the Contractor. This Agreement governs Purchase
Orders issued by Buyer during the Purchase Term and any mutually agreed
extension so long as Buyer has requested delivery of Product within two (2)
months beyond the end of the Purchase Term or any extension.
B. [*]
C. Notwithstanding the foregoing, the Purchase Term shall terminate
immediately upon the termination, pursuant to Article XlV, of the term of this
Agreement.
V. PRICING
A. DESIGN, ENGINEERING AND TESTING PRICING, and pricing for related
services provided during or prior to Phase IV for any Product (excluding only
pricing for purchase of preproduction units) shall be equal to [*] . Cost of
time shall be [*] for Project Directors, [*] for engineers (other than design
engineers), [*] for design engineers, and [*] for technicians, draftsmen and
others. [*]
- -----------
* Information omitted and filed separately with the SEC pursuant to
request for confidential treatment under rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
-3-
<PAGE> 4
B. [*]
C. PRODUCTION PRICING
(i) Initial production pricing shall be established within
[*] of completion of the pre-production units. Labor and
material costs determined from pre-production and the pricing
formula (the "Pricing Formula") in Exhibit A-2 shall be used
to establish the initial selling price, and Contractor agrees
to participate with Buyer in ongoing cost reduction efforts.
The selling price shall be subject to adjustment [*]
Contractor agrees to allow Buyer to examine and copy
Contractor's books and records as and when Buyer requests,
during Contractor's normal business day, for verification of
material and labor costs. All copies of such books and records
shall be treated by Buyer as Contractor's confidential
information, to the same manner that Contractor is required to
treat Buyer's information confidentially pursuant to Section
VIII. Rates will be fixed for one (1) year from completion of
pre-production units.
(ii) [*] Buyer shall have no liability for such taxes if it
has complied with statutory resale tax certificate
requirements. If Buyer is liable to pay these taxes, such
taxes shall be specifically listed in Contractor's invoice.
VI. DELIVERY, LEAD-TIME AND FLEXIBILITY
A. Buyer's Purchase Orders shall state Contractor's committed delivery
date for Product. Time and rate of delivery are of the essence for all purchases
made under this agreement. The minimum agreed period between Buyer's issuance of
a Purchase Order and the scheduled delivery date ("Leadtime") shall be
determined at the time orders are placed with the Contractor.
- -------------
* Information omitted and filed separately with the SEC pursuant to
request for confidential treatment under Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
-4-
<PAGE> 5
B. All shipments shall be F.O.B. [*], with title passing to Buyer at
time of delivery. [*]
C. Buyer may require that shipments of Products under this Agreement be
shipped by Contractor to various destinations. The Purchase Order issued by the
Buyer will clearly specify the "SHIP TO" location for each Product.
D. Buyer may, without cost or liability, increase or decrease the
quantity specified in its Purchase Orders, within the following parameters:
<TABLE>
<S> <C>
[*] Months Firm PO's, May move up to [*] of scheduled
deliveries on PO's out 30 days without penalty,
or in 30 days depending on material
availability.
[*] Months May move up to [*] of scheduled deliveries on
PO's out 60 days without penalty, or in 60 days
depending on material availability.
[*] Months Delivery slides [*] will require an inventory
deposit.
</TABLE>
E. Buyer shall use reasonable efforts to forecast it's intended
purchases on a rolling twelve (12) month basis. Contractor will use the 7-12
month forecast to procure long lead materials which may impact future deliveries
and to determine economic order quantity buys to reduce the recurring pricing to
the Buyer. Contractor will use its best effort to inform Buyer of a need to
authorize procurement of long lead materials beyond firm purchase orders to
protect Buyer's future demand.
F. EXCESS AND OBSOLETE MATERIALS
(i) During the performance of this Agreement, Contractor will purchase
materials to support the purchase requirements of the Buyers program.
Certain materials which Contractor will acquire will be subject to
minimum-buy requirements, scrap and attrition additions, and quantity
price breaks which may result in excess material accumulation.
Additionally, design changes may cause other materials to become
obsolete.
(ii) During the performance of this Agreement, Contractor will provide
Buyer with periodic updates of the status and amount of excess or
obsolete material.
(iii) Contractor will use its best efforts to minimize the quantity and
cost to Buyer of excess and/or obsolete materials relating to the
production of Products, and whenever possible, return the same to
Contractor's supplier or use the same in the manufacture of other
Products for Buyer or other products for Contractor's other customers.
Such effort will be coordinated with Buyer when possible. However,
final costs associated with the
- -----------
* Information omitted and filed separately with the SEC pursuant to request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934, as amended.
-5-
<PAGE> 6
accumulation of excess and obsolete materials, if any, which cannot be
so returned or used, shall be chargeable to and payable by Buyer in an
amount equal to Contractor's cost plus material burden, but without
profit. In no event shall Buyer be liable for any costs resulting from
design changes, unless, prior to implementation of such changes,
Contractor has advised Buyer in writing of the estimated amount of the
costs. At Buyer's option, any excess and/or obsolete materials for
which Buyer pays associated costs shall become the property of Buyer
upon payment, and shall be held by Contractor, without further charge
to Buyer, for disposition pursuant to Buyer's instructions within 90
days.
VII. WARRANTY
A. LIMITED WARRANTY
(i) Contractor warrants for [*] from date of shipment to Buyer's, its
subsidiary's or its distributor's customer from Buyer's, its
subsidiary's or distributor's facility that all Products shall be free
from defects in material and workmanship, and shall conform to
applicable specifications, drawings, samples and descriptions referred
to in this Agreement (provided, however, such [*] shall be reduced to
the extent, if any, that shipment to such customer from Buyer's, its
subsidiary's or distributor's facility occurs more than [*] from date
of invoice to Buyer and further provided that, other than repackaging
of the Products in kit form or otherwise, the relevant Product has only
been subject to customary receiving and inspection at all such
facilities). Contractor warrants it has the right to convey the
Products and that the Products are, and, upon delivery to Buyer, shall
be free of all liens and encumbrances. These warranties shall survive
any inspection, delivery, payment, and termination of this Agreement,
and shall run to Buyer, its and its subsidiary's and distributor's
customers, and Buyer's successors, and assigns.
(ii) Contractor shall correct defects in Products at its facility. At
Buyer's option, Contractor shall complete an assessment of any returned
Product, (typically within five (5), but in any case, within ten (10),
days of receipt), and repair or replace all defective Product
(typically within fifteen (15), but in any case, within thirty (30),
days of receipt), unless otherwise specified. Turn-around times may
vary depending on the complexity of the Product. Inbound freight will
be the responsibility of Buyer. Contractor agrees to pay return freight
to Buyer or, at Buyer's election, to the customer and method of
shipment shall be consistent with the method of inbound freight to the
Contractor.
(iii) Contractor warrants that all Products shall be produced,
manufactured and assembled - in compliance with all applicable federal
and state laws and rules and regulations, including but not limited to
The Food, Drug and Cosmetic Act of 1938 as amended and all regulations
promulgated thereunder, including without limitation, Good
Manufacturing Practices ("GMP's") for medical devices, and with ISO
9000 requirements.
- -----------
* Information omitted and filed separately with the SEC pursuant to request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934, as amended.
-6-
<PAGE> 7
B. NON-WARRANTY
Repair services outside the scope of the warranties described in this
Section VII shall be provided by the Contractor and/or the Buyer pursuant to a
Repair and Service Agreement, if any, negotiated in good faith by the parties
and signed following execution of this Agreement.
C. SUPPLY OF REPLACEMENT PARTS
(i) Contractor agrees to provide Buyer, upon request, Buyer's
requirements of replacement parts or a designee of the Buyer to: (a)
provide non-warranty repair services to Buyer's customers, should
Contractor not provide such repairs, and (b) provide warranty repair
services at authorized third-party service centers world-wide selected
by Buyer with Contractor's consent. Buyer shall pay for such
replacement parts, provided pursuant to (a) above, consistent with
Contractor's current spares pricing methodology, plus freight and
shipping charges actually incurred by the Contractor. The cost of
replacement parts required pursuant to (b) above, including freight and
shipping charges, shall be at the Contractor's expense as part of its
warranty services. Contractor shall not provide warranty service
through third-party repairs without the consent of Buyer.
(ii) Contractor warrants that for a period of time beginning on the
date of delivery to the Buyer or the Buyer's designee of any
replacement parts provided pursuant to this Section VII. C, and
continuing thereafter for [*] following delivery of such replacement
parts to the Buyer's, its subsidiary's or distributor's customer (but
in no event more than [*] from the date of delivery of such replacement
parts to the Buyer or its designee or less than the balance of warranty
coverage applicable pursuant to Section VII. A., to the Product for
which such replacement part is provided), each such part shall be free
from defects in material and workmanship. In the event any replacement
part provided pursuant to this Section VII does not conform with the
above, the Buyer or, at the Buyer's option, the Buyer's designee shall
return such replacement part to the Contractor, and the Contractor
shall, within seven (7) days following receipt, promptly repair or
replace such replacement part without charge and refund to the Buyer or
the Buyer's designee freight paid by the Buyer or the Buyer's designee
for the original and return shipment, such freight cost not to exceed
the then current surface rate, freight charge charged by United Postal
Service ("UPS') or, if such UPS freight charge is not readily
available, the rate charged by a shipping company similar to UPS.
VIII. CONFIDENTIAL INFORMATION AND ADVERTISING
A. Contractor shall maintain as confidential any specifications,
drawings, blueprints, data, business information, trade secrets, or other
confidential information (collectively, "Confidential Information") which
Contractor learns or acquires by virtue of this Agreement, except that
Contractor may disclose Confidential Information pursuant to the order or
requirement of a court, administrative agency or other governmental body,
provided that Contractor has given Buyer at least 10 days prior detailed written
notice of the need for such disclosure and Contractor takes all steps possible
to assure that a protective order, acceptable to
- -----------
* Information omitted and filed separately with the SEC pursuant to request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934, as amended.
-7-
<PAGE> 8
Buyer, exists prior to disclosure. Contractor further agrees to protect the
Confidential Information against disclosure by its employees and subcontractors.
B. Contractor may disclose Confidential Information only to
Contractor's employees and subcontractors who have a need to know and, prior to
such disclosure, have signed and delivered to Contractor and Buyer a
confidentiality agreement satisfactory to Buyer in form and substance. In
accordance with Buyer's written instructions at any time, Contractor agrees to
destroy or otherwise dispose of all Confidential Information.
C. Without Buyer's prior written consent, Contractor shall not in any
manner disclose (except to its banks as required for financing), advertise or
publish the existence of this Agreement nor the terms of transactions under this
Agreement, which shall be considered part of the Confidential Information.
D. The term Confidential Information shall not include information
which is (i) in the public domain at the time of disclosure or afterward, except
where such information becomes public due to a breach by Contractor of its
obligations hereunder, (ii) in Contractor's possession, in dated documentary
form, at the time obtained by Contractor in connection with this Agreement, or
(iii) disclosed to Contractor, without restriction on further disclosure, by a
third party having the right to disclose the same.
IX. OWNERSHIP
A. Inventions and Improvements - Contractor agrees that any and all
inventions, concepts, ideas and the like that are conceived or developed
directly by or for Contractor, whether done by it solely or jointly with Buyer
or any third parties, and that are improvements of, or otherwise relate
specifically to, any Product or the design, engineering, testing, manufacturing
or other services rendered hereunder by Contractor (excluding, however,
manufacturing processes, if the development of such processes was not funded by
Buyer), shall be promptly disclosed by Contractor to Buyer and shall be assigned
to, and be the exclusive property of, Buyer. Contractor warrants that all such
assignments shall be free of any rights of third parties, and agrees to
indemnify and hold Buyer harmless against any loss, damage or expense, including
reasonable attorneys fees, resulting from any breach of this warranty.
Contractor further agrees to assist Buyer, as Buyer may reasonably request and
at Buyer's expense for Contractor's resulting reasonable and necessary
out-of-pocket expenses (excluding attorneys fees insofar as such fees are the
result of legal counsel concerning the scope or nature of Contractor's
obligations hereunder, and provided any other attorneys fees are approved in
advance and in writing by Buyer), in Buyer's prosecution and defending of any
infringement action, and in obtaining patents or other legal instruments to
protect Buyer's proprietary interests. Contractor further agrees to execute and
deliver to Buyer all documents and instruments reasonably requested by Buyer to
evidence Buyer's ownership of inventions, ideas and the like that are or become
Buyer's property pursuant to this paragraph.
B. Specifications and Manuals - Contractor acknowledges that the
specifications and all related writings (including without limitation operating
manuals), drawings, artwork, computer
-8-
<PAGE> 9
assisted designs and similar works (collectively, the "Materials"), whether
created by Contractor solely or jointly with Buyer or any third parties, are
and, as and when hereafter created, shall be assigned to, and be the exclusive
property of, Buyer, and Buyer retains and shall have all right, title and
interest, including copyright, relating to the Material. Contractor warrants
that all such assignments shall be free of any rights of third parties, and
agrees to indemnify and hold Buyer harmless against any loss, damage or expense,
including reasonable attorneys fees, resulting from any breach of this warranty.
Contractor further agrees to assist Buyer, as Buyer may reasonably request, in
Buyer's prosecution and defending of any infringement action, and in obtaining
copyrights or other legal instruments to protect Buyer's proprietary interests.
Upon termination of this Agreement for any mason, Contractor agrees to return to
Buyer all copies of the Materials within fourteen (14) days of such termination
and copies of the same at any time within thirty (30) days of written request
from Buyer; this Material shall be complete in every respect, as to permit an
experienced manufacturer to manufacture, assemble, maintain and service the
Products described in this Agreement. If termination occurs prior to building
any particular Product, Contractor shall provide to Buyer a data package
relating to that Product and containing all information updated as of the date
of termination. The Material shall include a full drawing package in
reproducible form and any revisions or updates, including but not limited to;
GSF Autocad files, fabrication drawings, approved supplier list, test
specifications, tooling specifications and drawings, manufacturing assembly
instructions, routings, quality assurance protocols, test equipment, specs and
drawings and engineering change notice history, device master files, and device
history records. Transfer of information will be Product specific, not including
Contractor's proprietary policies and procedures.
C. Buyer's Equipment - Contractor shall install, maintain and account
for Buyer's Equipment at Contractor's facility or Contractor's subcontractor's
facility in accordance with GMP and ISO 9000. Contractor hereby acknowledges
that the Buyer's Equipment is the sole and exclusive property of Buyer. Buyer
shall provide identification and ownership tags (also called asset tags) for the
Buyer's Equipment, and Contractor shall ensure that such tags are properly
placed and maintained on all Buyer's Equipment. Contractor hereby covenants
that, during the term of this Agreement.
(i) Contractor and any subcontractor of Contractor using
Buyer's Equipment shall maintain it in good working condition
and utilize Buyer's Equipment solely for manufacturing Buyer's
requirements of Products as provided hereunder, and
(ii) Contractor shall not encumber any of the Buyer's
Equipment, nor shall Contractor permit the Buyer's Equipment
to become encumbered as a result of any act or omission of
Contractor or a subcontractor of Contractor.
D. Within Twenty (20)days following termination of this Agreement
(whether as a result of expiration or otherwise), and, if sooner, as to any
Buyer's Equipment needed solely for such Product(s), termination of this
Agreement, pursuant to Section XlV, as to any particular Product(s), Contractor
agrees to properly pack and return to Buyer, or cause to be properly packed and
returned to Buyer, F.O.B. point of shipment, all Buyer Equipment, the same to be
shipped to such facility as Buyer directs at Buyer's expense.
-9-
<PAGE> 10
X. INDEMNITY
A. Contractor agrees to indemnify and hold Buyer, its affiliated
entities, and their respective officers, directors, shareholders, employees and
agents (hereinafter "lndemnitees") harmless from and against all claims, losses,
damages, liability, costs and expenses (including, without limitation,
attorney's fees and legal costs and disbursements) incurred on account of any
injury to persons or property arising out of Contractor's negligence, reckless
conduct or willful misconduct relating to this Agreement, including but not
limited to (i) any failure of the contractor to manufacture the Product in
conformance with the Design Specifications, (ii) any failure by the Contractor
to comply with FDA GMP regulations, or (iii) the negligent manufacture of the
Product by the Contractor provided, that Contractor's liability hereunder shall
be reduced proportionately by the percentage of fault, if any, that may
ultimately be assigned or imposed on Buyer by a court of law or arbitrator as a
result of the Buyer's own negligence, reckless conduct or willful misconduct. In
the event any claim is asserted or any suit is filed against Buyer for which
Contractor is or may be required to indemnify Buyer under this provision, Buyer
shall give Contractor prompt written notice of same. In the event of any such
claim or suit against the Buyer, Buyer may at its option tender defense of the
claim or suit to Contractor, in which case the Buyer shall cooperate with
Contractor, at Contractor's request and expense, in the defense of such claim or
suit, and Contractor shall have the sole right to defend and/or settle such a
claim or suit, including selecting counsel of its choice. Regardless of whether
or not Buyer tenders defense of the claim or .suit to Contractor, and regardless
of whether or not Contractor chooses to accept or reject such tender, the
requirement of this paragraph that Contractor fully indemnify Buyer remains in
.full force and effect.
B. Buyer agrees to indemnify and hold Contractor, its affiliated
entities, and their respective officers, directors, shareholders, employees and
agents harmless from and against all claims, losses, damages, liability, cost
and expenses ( including, without limitation, attorneys' fees and legal costs
and disbursements) incurred on account of any injury to persons or property
arising out of the Buyer's negligence, reckless conduct or willful misconduct
relating to this agreement, including, with out limitation, (i) the negligent
design of any Product or (ii) furnishing incorrect or negligent design
specifications: provided, however, that this indemnity shall extend only to the
amount of claims, losses, damages, liability, costs and expenses not covered by
insurance under Section (c) hereinbelow.
C. Buyer agrees to add and maintain Contractor as an additional insured
on Buyers product liability insurance policy. Contractor shall have the same
liability protection and coverage under the policy as Buyer. The policy shall
specifically waive any right of subrogation that the insurer may have against
the Contractor. Buyer shall provide Contractor with a certificate of insurance
verifying the foregoing provisions of this paragraph C.
XI. FORCE MAJEURE
Neither party shall be considered to be in default in respect of any
obligation hereunder, if failure of performance shall be due to Force Majeure.
If either party is affected by a Force
-10-
<PAGE> 11
Majeure event, such party shall, within ten (10) days of its occurrence, give
notice to the other party stating the nature of the event, its anticipated
duration and any action being taken to avoid or minimize its effect. The
suspension of performance shall be of no greater scope and no longer duration
than is required and the non-performing party shall use reasonable efforts to
remedy its inability to perform. Force Majeure shall mean, without limitation,
explosion, flood, fire, war (whether declared or otherwise), accident, labor
strike, or other labor disturbance, sabotage, acts of God, or acts of regulatory
agencies, including withdrawal or suspension of licenses and consents, which are
unforeseeable or unavoidable and beyond the control and without the fault or
negligence of a party.
XII. REGULATORY MATTERS
A. Complaints - Buyer shall forward to Contractor copies of customer
complaints, user reports and MDR's relating to the any Product and Contractor
shall cooperate fully with the Buyer in investigating such complaints. In the
event that customer complaints or user reports are received by the Contractor
they shall be forwarded to the Buyer. Upon the request of the Buyer, and at a
charge mutually agreed upon between the parties, Contractor shall conduct a
comprehensive analysis and test of any Product subject to a complaint and shall
promptly provide Buyer with a written report on such analysis and testing
period.
B. Registration - Contractor hereby represents to Buyer that it shall,
at its sole cost and expense, timely register with the FDA as a Contract Medical
Device Manufacturer, or cause to be timely registered with the FDA, in
accordance with the Federal Food, Drug and Cosmetic Act 21 CFR Part 807 as
amended, each establishment which Contractor or a subcontractor of Contractor
intends to use to manufacture, and/or make repairs to, any Product.
C. FDA Inspection Reports - Contractor shall provide the Buyer with
copies of any FDA Form 483 observations, follow-up warning letters and/or
close-out reports for those portions of FDA GMP compliance inspection reports
relating specifically to the manufacture of the Product(s) for any
manufacturer's facility where the Product(s)is manufactured.
D. Contacts - Each party shall designate an individual within its
organization to be the primary contact regarding regulatory issues. Such
individual can be changed by giving written notice thereof to the other party.
XIII. NOTICES
A. Any notice given under this Agreement shall be written or sent by
telex or facsimile. Written notice shall be sent by registered mail or by
certified mail, postage prepaid, return receipt requested. Any telex or
facsimile notice must be followed within three (3) days by written notice. All
notices shall be effective when first received at the following addresses:
-11-
<PAGE> 12
<TABLE>
<S> <C>
If to Contractor: If to Buyer:
Contracts Manager Thomas R. Bremer, Senior Vice President
SeaMED Corporation and General Counsel United States Surgical Corporation
14500 NE 87th Street 150 Glover Avenue
Redmond, WA 98052 Norwalk, CT 06856
with copies to: with copies to:
Vice President, Operations Thomas D. Guy, Senior Vice President,
Manager, Customer Support Operations
Vice President, Regulatory Affairs and
Quality Assurance
</TABLE>
XIV. TERMINATION
(A) The term of this Agreement shall commence with the date hereof and
terminate upon expiration of the last-to-expire Purchase Term, but may be sooner
terminated as follows:
(i) by either party, upon at least 45 days prior notice, if the
other party breaches any of its obligations under this Agreement and fails to
cure such breach within the 45 days;
(ii) by either party, upon notice after commencement of any
voluntary or involuntary bankruptcy, liquidation or insolvency proceedings
against the other party or if the other party executes an assignment for the
benefit of creditors; or
(iii) termination by Buyer of this Agreement as to all Products,
pursuant to the immediately succeeding provisions of this Section XIV.A.
Upon notice to Contractor, Buyer may terminate this Agreement as to any
Product or Products for which Contractor fails to meet the estimated dates for
phase completions, or time and material estimated costs, stated in Exhibit B, as
the same may be amended by written agreement of the parties from time to time,
or delivery dates for Products as stated in Buyer's Purchase Orders in
accordance with the provisions of this Agreement, excluding, however, any delays
caused by Buyer or any events of Force Majeure.
(B) In the event that this Agreement is terminated, the parties agree
as follows:
(i) Regardless of which party terminates this Agreement, Buyer
shall buy from Contractor, at cost plus normal mark-up, any and all transferable
parts which are in inventory or are on order and non-cancelable by Contractor,
insofar as such were purchased to fill Buyer's purchase orders or were
purchased, with Buyer's written approval, to meet Buyer's production forecasts.
Buyer shall reimburse Contractor for all finished goods that would, but for such
termination, have been subject to delivery to Buyer within 30 days (or any
longer period in any particular instance, insofar as USSC consents in writing to
such longer period) following
-12-
<PAGE> 13
termination, as well as work in process and raw materials inventory either on
hand or on order and non-cancelable by Contractor, insofar as such were
purchased or produced to fill Buyer's purchase orders or were purchased or
produced, with Buyer's written approval, to meet Buyer's production forecasts.
Contractor shall complete any work in process if so requested by Buyer as if no
termination notice was given.
(ii) If Buyer terminates this agreement as to any or all
Products, and if Buyer so requests, Contractor shall provide to Buyer design
details and tooling and work in process relating to that Product. Buyer shall be
responsible for all costs associated with establishing an alternate source,
including but not limited to copying records and transferring transferable parts
to an alternate source.. Buyer shall also reimburse Contractor for all
outstanding time and material costs incurred and all non-cancelable committed
time and material costs associated with the pre-production phase of this
Agreement. Regardless of which party terminates this Agreement, Contractor shall
provide to Buyer, upon termination, a complete listing of parts including
traceability records.
XV. SURVIVAL
A. The provisions of Sections VII, VIII, IX, X, XlX, XX, and, as it
relates to any Products purchased by Buyer prior to termination of this
Agreement, Section II D, shall survive termination of this Agreement (whether by
expiration or otherwise) as follows: (i) indefinitely, as to Section X, and (ii)
for the post-termination period stated in the other Sections, or, if no such
period is stated, 5 years.
XVI. GENERAL
A. Only the authorized representatives of the parties may amend or
waive provisions of this Agreement, which amendment shall only be effective if
in writing and signed by such representatives. If either party fails to enforce
any term of this Agreement, failure to enforce on that occasion shall not
prevent enforcement on any other occasion.
B. As used in this Agreement, except where otherwise noted, the term
"days" shall mean calendar days.
C. Contractor, including its agents and employees., is an independent
contractor and not an agent or employee of Buyer. Without limiting the
generality of the foregoing, Contractor is not authorized to, and shall not,
represent or make any commitments on behalf of Buyer, and Buyer expressly
disclaims any liability therefor.
D. All rights and remedies conferred by this Agreement, by any other
instrument, or by law are cumulative and may be exercised singularly or
concurrently. If any provision of this Agreement is held invalid by any law or
regulation of any government or by any court, such invalidity shall not affect
the enforceability of any other provisions hereof. This Agreement and any
Purchase Orders issued hereunder shall be governed by and interpreted in
accordance with the laws of the State of Washington.
-13-
<PAGE> 14
XVII. BUSINESS REVIEWS
A. Buyer and Contractor shall, each at their own expense, meet
periodically, at Buyer's .option either by telephone or in person, to review
performance and business transacted, and to identify and resolve those issues
which have arisen since the last business review meeting.
B. Buyer and Contractor shall furnish agenda items not later than one
(1) week prior to scheduled business review meetings. Minutes shall document
action items, open items, and committed dates which may be the result from such
business review meetings, and shall be sent by the drafting party to the other
party within ten (10) days after each meeting.
XVIII. INSURANCE
A. Contractor agrees to carry at all times, and with companies
reasonably acceptable to Buyer, insurance of the kinds and in the amounts listed
below:
(i) Worker's Compensation statutory limits in each state in
which Contractor is required to provide Worker's Compensation coverage.
(ii) Employee's Liability not less than [*] per employee.
(iii) Comprehensive General Liability - including Contractual
Liability, Independent Contractor's Liability, Products and/or Completed
Operations Liability, and Personal Injury / Property Damage Coverage's in a
combined single limit of not less than [*].
(iv) Automobile Liability for owned, non-owned and hired
vehicles in a combined single limit of not less than [*].
(v) Umbrella Liability a combined single limit of not less than
[*].
B. Buyer agrees to carry at all times, and with companies reasonably
acceptable to Contractor, insurance of the kinds and in the amounts listed
below, and, as to its product liability policy as it relates to Products sold by
Buyer, to include Contractor as an additional insured'
(i) Comprehensive General Liability - including Contractual
Liability, Products and/or Completed Operations Liability, and Personal Injury /
Property Damage Coverages in a combined single limit of not less than [*]
(ii) Umbrella Liability a combined single limit of not less than
[*].
Upon request of either party, the other shall provide to such party a
certificate(s) of insurance evidencing the above coverages.
- -----------
* Information omitted and filed separately with the SEC pursuant to request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934, as amended.
-14-
<PAGE> 15
XIX. LIMITATION OF LIABILITY
A. Except as otherwise provided in this Agreement, neither party shall
be liable for special, indirect, incidental, or consequential damages. The
foregoing limitation shall not limit Contractor's liability for any costs,
expenses, and damages arising out of or in connection with: claims brought by
third parties; Contractor's unauthorized disclosure of Buyer's confidential
information; or any indemnification granted by Contractor in connection with
this Agreement.
B. In no event shall Buyer's liability to Contractor exceed the total
amount to be paid by Buyer to Contractor hereunder.
XX. NO IMPLIED LICENSE
The parties understand that, except as may be otherwise expressly
stated herein, neither the Terms or Conditions of this Agreement, nor the acts
of either party arising out of this Agreement or related to Buyer's purchase,
use, sale, or other distribution of Product may be considered in any way as a
grant of any license whatsoever under any of Buyer's present or future patents,
copyrights, trademarks, trade secrets, or other proprietary rights, nor is any
such license granted by implication, estoppel, or otherwise.
IN WITNESS WHEREOF, the authorized representatives of the parties have
executed this Agreement under seal as of the date(s) set forth below.
SEAMED CORPORATION UNITED STATES SURGICAL CORPORATION
By: /s/ DONALD RICH By: /s/ THOMAS D. GUY
---------------------------- ----------------------------
Title: Sr. V.P., Operations Title: Sr. V.P., Operations
------------------------- -------------------------
Date: March 25, 1997 Date: April 7, 1997
-------------------------- --------------------------
-15-
<PAGE> 1
EXHIBIT 11.1
SEAMED CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY:
Weighted average common shares................. 3,445,748 606,353 530,681
Class B and C convertible redeemable
preferred stock classified as common
stock equivalents............................ 530,256 1,376,559 1,376,559
Net effect of dilutive stock options
based on the treasury stock method
using average market price................... 347,119 253,996 288,786
Net effect of dilutive stock warrants
based on the treasury stock method
using average market price................... 21,088 -- --
Net incremental effect of stock options
granted or exercised at less than
offering price during the 12 months
prior to the Company's filing of its
initial public offering, calculated
using the treasury stock method at an
offering price of $11 per share, and
treated as outstanding for all
periods presented............................ 24,764 93,831 106,333
---------- ---------- ----------
Total weighted average shares outstanding...... 4,368,975 2,330,739 2,302,359
========== ========== ==========
Net income..................................... $2,726,147 $1,240,454 $ 774,763
Less accretion of cumulative preferred
stock dividends.............................. $ (101,077) $ (263,050) $ (203,005)
---------- ---------- ----------
Adjusted income for computation of
primary earnings per share................... $2,625,070 $ 977,404 $ 571,758
========== ========== ==========
Primary net income per share................... $0.60 $0.42 $0.25
========== ========== ==========
FULLY DILUTED:
Weighted average common shares
outstanding.................................. 3,445,748 606,353 530,681
Weighted average of all convertible
redeemable preferred stock
outstanding.................................. 1,130,200 2,934,029 2,734,403
Net effect of dilutive stock options
based on the treasury stock method
using the greater of average or
ending market price.......................... 363,785 261,165 289,178
Net effect of dilutive stock warrants based on
the treasury stock method using the greater
of average or ending market price............ 23,622 586 --
Net incremental effect of stock options
granted or exercised at less than
offering price during the 12 months
prior to the Company's filing of its
initial public offering, calculated
using the treasury stock method at
an offering price of $11 per share,
and treated as outstanding for all
periods presented............................ 24,348 91,110 106,287
---------- ---------- ----------
Total weighted average shares outstanding...... 4,987,703 3,893,243 3,660,549
========== ========== ==========
Net income..................................... $2,726,147 $1,240,454 $ 774,763
========== ========== ==========
Fully diluted net income per share............. $0.55 $0.32 $0.21
========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 pertaining to the 1996 Employee Stock Purchase Plan of SeaMED
Corporation, 1997 SeaMED Corporation Employee Nonqualified Stock Option Plan,
1995 SeaMED Corporation Stock Option and Incentive Plan and SeaMED Corporation
1988 Stock Option Plan of our report dated August 11, 1997, with respect to the
financial statements and schedule of SeaMED Corporation included in this Annual
Report (Form 10-K) for the year ended June 30, 1997.
ERNST & YOUNG LLP
Seattle, Washington
September 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 9,092
<SECURITIES> 6,231,369
<RECEIVABLES> 8,794,968
<ALLOWANCES> 377,890
<INVENTORY> 11,198,563
<CURRENT-ASSETS> 27,596,856
<PP&E> 8,001,546
<DEPRECIATION> 3,669,732
<TOTAL-ASSETS> 32,131,515
<CURRENT-LIABILITIES> 9,338,506
<BONDS> 0
0
0
<COMMON> 19,722,865
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,131,515
<SALES> 52,133,510
<TOTAL-REVENUES> 52,133,510
<CGS> 43,131,558
<TOTAL-COSTS> 43,131,558
<OTHER-EXPENSES> 4,616,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,989
<INCOME-PRETAX> 4,194,072
<INCOME-TAX> 1,467,925
<INCOME-CONTINUING> 2,726,147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,726,147
<EPS-PRIMARY> .60
<EPS-DILUTED> .55
</TABLE>
