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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Commission File number 0-21727
SeaMED Corporation
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(Exact Name of Registrant as specified in its charter)
Washington 91-1002092
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(State of Incorporation) (Federal I.R.S. No.)
14500 Northeast 87th Street, Redmond, Washington 98052-3431
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number 425-867-1818
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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 past 90 days. Yes [X] No [ ]
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As of November 13, 1998, the Registrant had 5,481,248 shares of Common
Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SeaMED CORPORATION
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX
<S> <C>
Balance Sheets as of September 30, 1998 and June 30, 1998..................................... 3
Statements of Income for the Quarters Ended September 30, 1998 and 1997....................... 4
Statements of Cash Flows for the Quarters Ended September 30, 1998 and 1997................... 5
Notes to Financial Statements................................................................. 6
</TABLE>
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SeaMED CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,455,666 $ 6,428,718
Accounts receivable, net of allowance 12,362,414 13,189,092
Inventories 14,481,392 15,185,517
Deferred tax benefit 1,733,348 1,733,348
Prepaid expenses 420,274 223,370
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Total current assets 37,453,094 36,760,045
Property and equipment 6,438,920 5,162,172
Deposits and other assets 250,704 934,337
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Total assets $ 44,142,718 $ 42,856,554
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,410,530 $ 4,323,740
Accrued expenses and reserves 4,391,467 5,029,410
Customer deposits 2,814,777 2,576,916
Current portion of long-term debt 987,151 558,144
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Total current liabilities 11,603,925 12,488,210
Long-term debt, less current portion 3,460,465 2,435,021
Shareholders' equity:
Common Stock 20,739,585 20,723,960
Note receivable from officer (75,000) (75,000)
Retained earnings 8,413,743 7,284,363
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Total shareholders' equity 29,078,328 27,933,323
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Total liabilities and shareholders' equity $ 44,142,718 $ 42,856,554
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
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SeaMED CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended September 30, 1998 1997
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<S> <C> <C>
Revenues:
Manufacturing $ 12,490,210 $ 10,362,638
Engineering 6,886,210 5,667,153
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19,376,420 16,029,791
Cost of revenues:
Manufacturing 10,224,401 8,378,072
Engineering 6,114,191 4,920,164
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16,338,592 13,298,236
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Total gross margin 3,037,828 2,731,555
Marketing, general, and
administrative expenses 1,332,403 1,376,982
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Operating income 1,705,425 1,354,573
Other income (expense):
Interest expense (63,564) (37,274)
Interest and other income, net 69,321 56,711
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5,757 19,437
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Income before income taxes 1,711,182 1,374,010
Income tax provision (581,802) (467,164)
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Net income $ 1,129,380 $ 906,846
==============================================================================
Net income per share data:
==============================================================================
Basic $ 0.21 $ 0.17
==============================================================================
Diluted $ 0.20 $ 0.16
==============================================================================
</TABLE>
See accompanying notes to financial statements.
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SeaMED CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended September 30, 1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,129,380 $ 906,846
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 576,793 401,549
Provision for bad debt (17,686) 40,168
Deferred tax benefit -- (241,480)
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 844,365 (643,792)
Decrease (Increase) in inventories 704,125 (1,288,694)
Decrease (Increase) in other assets and prepaid expenses 486,729 (360,895)
Increase (Decrease) in accounts payable, accrued
expenses, and deferred revenue (1,313,293) 466,699
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Net cash provided by (used in) operating activities 2,410,413 (719,599)
INVESTING ACTIVITIES
Purchases of equipment (1,853,541) (529,456)
Maturity of short-term investments -- 1,678,496
Purchase of investments -- --
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Net cash provided by (used in) investing activities (1,853,541) 1,149,040
FINANCING ACTIVITIES
Proceeds from stock options exercised 15,625 2,470
Net (payments of) borrowings under credit line -- 428,755
Proceeds from notes payable 1,500,000 500,000
Principal payments on notes payable (45,549) (129,104)
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Net cash provided by financing activities 1,470,076 802,121
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Net increase (decrease) in cash 2,026,949 600
Cash and cash equivalents at beginning of period 6,428,718 2,912
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Cash and cash equivalents at end of period $ 8,455,666 $ 3,512
========================================================================================================
</TABLE>
See accompanying notes to financial statements.
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ITEM 1. NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared by
SeaMED Corporation (the Company) in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation have been
included. The balance sheet at June 30, 1998 has been derived from audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the three-month period ended
September 30, 1998, are not necessarily indicative of results to be expected for
the entire year ending June 30, 1999 or for any other fiscal period. For further
information, refer to the financial statements and footnotes included in the
Company's Form 10-K for the year ended June 30, 1998.
2. REVENUE RECOGNITION
The Company recognizes revenues from contracts to perform engineering
design and product development as the related engineering service is performed.
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.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." The
adoption of SFAS No. 130 had no impact on the Company's operating results or
shareholders' equity. For the three months ended September 30, 1998, net income
and comprehensive income were the same.
In 1997, the Financial Standards Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is required to be adopted for periods beginning after
December 15, 1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." Companies will be required to report each
operating segment and related information, as defined in SFAS No. 131, in the
notes to financial statements. The Company plans to adopt SFAS No. 131 in 1999.
SFAS No. 131 is not required to be applied to interim financial statements in
the initial year of adoption.
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In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted for periods
beginning after June 15, 1999. Due to the minimal use of derivative instruments
and hedging activities, the Company does not expect the impact of SFAS No. 133
to be material.
4. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: September 30, June 30,
1998 1998
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<S> <C> <C>
Work in process $ 4,018,160 $ 3,685,594
Purchased and manufactured parts 11,448,709 12,366,257
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15,466,869 16,051,851
Less inventory reserve 985,477 866,334
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$14,481,392 $15,185,517
=======================================================================================
</TABLE>
5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
<TABLE>
<CAPTION>
Quarters Ended September 30, 1998 1997
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<S> <C> <C>
Numerator:
Numerator for basic and diluted net income per share
Net income as reported $ 1,129,380 $ 906,846
=================================================================================================
Denominator:
Denominator for basic net income per share -
weighted average common shares 5,465,268 5,268,899
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Effect of dilutive securities:
Net effect of dilutive stock options based
on the treasury stock method using average
market price 198,822 329,205
Net effect of dilutive stock warrants based
on the treasury stock method using average
market price -- 28,711
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Dilutive potential common shares 198,822 357,916
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Denominator for diluted net income per share 5,664,090 5,626,815
=================================================================================================
Basic net income per share $ 0.21 $ 0.17
=================================================================================================
Diluted net income per share $ 0.20 $ 0.16
=================================================================================================
</TABLE>
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6. NOTES PAYABLE
Variable Rate Note
The Company borrowed $2.5 million during fiscal year 1998 and an
additional $1.5 million in September 1998 against an existing equipment credit
facility. Borrowings under this agreement bear interest at LIBOR plus 1.4%
(7.04% at September 30, 1998).
Equipment Line of Credit Agreement
In July of 1998, the Company's Board of Directors approved an equipment
line of credit up to $5.0 million. Borrowings under this facility bear interest
at LIBOR plus 1.4%. This agreement expires October 1, 2001.
Working-Capital Line of Credit Agreement
In July of 1998, the Company's Board of Directors approved an increase
to its existing working capital line of credit. Under this agreement the Company
can borrow up to 85% of eligible accounts receivable and 50% of eligible
inventory up to a maximum of $20.0 million. Borrowings under this agreement and
the equipment line of credit 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, minimum ratio of earnings before income taxes and interest of
2.0-to-1 and dividend restrictions. Borrowings under this agreement bear
interest at the bank's prime rate minus .25% or LIBOR plus 1.2%. This agreement
expires October 1, 2001. There were no borrowings outstanding under this line of
credit at September 30, 1998.
Interest Rate Contract
At September 30, 1998, the Company had an interest rate contract with a
notional principal amount of $4.0 million that effectively converts the $4.0
million variable rate note to a fixed rate of 7.5%.
ITEM 2. 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
report. This report 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 such a difference include,
but are not limited to, risks that customers may terminate engineering or
manufacturing contracts, customers are not successful in marketing and selling
their products, and engineering projects do not become products that are
manufactured by SeaMED in any significant volume. These and
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other factors are more fully described in the Company's Form 10-K filed for the
year ended June 30, 1998. The Company's fiscal year consists of the 52/53-week
period that ends on the Thursday nearest to June 30. For convenience of
presentation, all fiscal periods in this report are shown as ending on a
calendar month-end.
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. 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 engineering
services under a project plan that identifies the
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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.
From time-to-time SeaMED 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.
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 performance
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.
YEAR 2000 TECHNOLOGY ISSUES
The Company has analyzed its Year 2000 technology issues in its
information technology systems and has begun to implement corrective measures,
currently scheduled for completion by December 31, 1998. The Company identified
Year 2000 issues primarily in the Company's financial information software
programs. The Company has not analyzed Year 2000 issues in its noninformation
technology assets nor has it formulated contingency plans in the event its
technology systems are adversely affected by Year 2000 issues despite corrective
measures.
The Company recognizes that its operations and manufacturing revenues
may be adversely impacted if its customers or suppliers do not address Year 2000
issues on a timely basis. The Food and Drug Administration ("FDA") has issued
regulations requiring all medical
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device companies (which includes almost all SeaMED customers) to be Year 2000
compliant. Accordingly, the Company has been monitoring FDA Year 2000 compliance
filings of its manufacturing customers and has been in contact with several key
customers in order to determine their state of Year 2000 readiness.
The Company has not to date analyzed its suppliers' Year 2000 readiness.
The Company currently plans to focus its attention primarily on its largest
suppliers and begin assessing their readiness in the coming quarters. In
addition, the Company recognizes that its service providers, such as freight
companies, mail and other delivery services, financial services companies and
others, may adversely effect SeaMED if they do not address Year 2000 issues. The
Company has no plans to evaluate the Year 2000 readiness of such providers. The
Company does not expect the costs associated with Year 2000 upgrades to exceed
$100,000.
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RESULTS OF OPERATIONS
The following table sets forth statement of income data as a percentage
of revenues for the fiscal periods indicated.
<TABLE>
<CAPTION>
Quarters ended September 30, 1998 1997
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<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales 84.3 83.0
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Gross margin 15.7 17.0
Marketing, general and administrative expenses 6.9 8.6
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Operating income 8.8 8.4
Other income, net - 0.2
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Income before income taxes 8.8 8.6
Income tax provision 3.0 2.9
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Net income 5.8% 5.7%
============================================================================
</TABLE>
Revenues
The following table sets forth revenues with the corresponding
percentage of total revenues and the year-to-year percentage increase for the
fiscal periods indicated.
<TABLE>
<CAPTION>
Quarters ended September 30, 1998 1997
- ----------------------------------------------------- ------------------------------------
% of % of
Total Total %
Dollars in thousands Revenues Revenues Revenues Revenues Increase
- ----------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Manufacturing $12,490 64.5% $10,363 64.6% 20.5%
Engineering 6,886 35.5% 5,667 35.4% 21.5%
- ----------------------------------------------------- ------------------------------------
Total revenues $19,376 100.0% $16,030 100.0% 20.9%
===================================================== ====================================
</TABLE>
Manufacturing revenues increased by approximately $2.1 million in the
first quarter of fiscal year 1999 from the first quarter of fiscal year 1998,
due primarily to three medical instruments adding approximately $2.1 million and
one nonmedical product manufactured for Coinstar under a nonexclusive contract
adding approximately $1.5 million in revenues. Increases in manufacturing
revenues were offset by decreased volume of certain instruments and the phaseout
of other instruments.
Sales to Coinstar in the first quarter of fiscal year 1999 represented
approximately 24% of total revenue and approximately 34% of manufacturing
revenue, compared to 20% of total revenue and 27% of manufacturing revenue in
the first quarter of fiscal year 1998.
SeaMED management expects that sales to Coinstar as a percentage of
total sales will decline in future years.
Significant manufacturing revenues were generated by 19 medical
instruments in the first
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quarter of fiscal year 1999 compared to 19 medical instruments in fiscal year
1998. The only nonmedical commercial product that generated significant
manufacturing revenues during the first quarter of fiscal year 1999 and fiscal
year 1998 was the Coinstar coin-counting machine.
Engineering revenues increased by approximately $1.2 million in the
first quarter of fiscal year 1999 from the first quarter of fiscal year 1998,
due primarily to new projects and increased time and, to a lesser extent,
increased hourly rates being billed on existing projects adding approximately
$3.9 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 canceled.
Approximately $2.8 million (15%) of the revenue in the first quarter of
fiscal year 1999 came from United States Surgical Corporation, compared to $2.1
million (15%) in the first quarter of fiscal year 1998. Engineering revenue for
United States Surgical in the first quarter of fiscal year 1999 represented
approximately 11% of total engineering revenue. Manufacturing revenue for United
States Surgical in the first quarter of fiscal year 1999 represented
approximately 17% of total manufacturing revenue. SeaMED management expects
sales to United States Surgical as a percentage of total sales to fluctuate in
future years.
Approximately $2.6 million (15%) of the revenue in the first quarter of
fiscal year 1999 came from Johnson & Johnson, compared to $486,000 (3%) in the
first quarter of fiscal year 1998. Engineering revenue for Johnson & Johnson in
the first quarter of fiscal year 1999 represented approximately 1.6% of total
engineering revenue. Manufacturing revenue for Johnson & Johnson in the first
quarter of fiscal year 1999 represented approximately 20% of total manufacturing
revenue. SeaMED management expects sales to Johnson & Johnson as a percentage of
total sales to fluctuate in future years.
As of the end of fiscal year 1998 SeaMED had in its engineering project
pipeline 22 new medical instruments or systems, and six projects that enhance or
are intended to extend the life cycle of existing medical instruments or
systems. At the end of the first quarter of fiscal year 1999, SeaMED had 17 new
medical instruments or systems and 11 projects that enhance or are intended to
extend the life cycle of existing medical instruments or systems. The 28 medical
projects in the pipeline at the end of fiscal year 1998 and at the end of the
first quarter of fiscal year 1999, were being performed for 21 different
customers. Although management believes that the 28 medical 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.
All projects in SeaMED's engineering pipeline at September 30, 1998 were
for medical instruments.
Price adjustments under existing manufacturing contracts have not been
significant. Increases in revenues have not been significantly influenced by
inflation.
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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>
- ------------------------------------------------------------------------------------------------
Quarters ended September 30, 1998 1997
- ------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Dollars in thousands Margin ($) Margin (%) Margin ($) Margin (%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Manufacturing $2,266 18.1% $1,985 19.1%
Engineering 772 11.2% 747 13.2%
- ------------------------------------------------------------------------------------------------
Total gross margin $3,038 15.7% $2,732 17.0%
================================================================================================
</TABLE>
Manufacturing gross margin decreased to 18.1% of manufacturing revenues
in the first quarter of fiscal year 1999 from 19.1% in the first quarter fiscal
year 1998, due primarily to changes in the product mix to lower gross margin
products, including margin derived from the Company's nonmedical customer.
Engineering gross margin as a percentage of engineering revenues decreased to
11.2% in the first quarter of fiscal year 1999 from 13.2% in the first quarter
of fiscal year 1998. The decrease is attributable to costs associated with the
addition of the Company's new development facility.
SeaMED management expects manufacturing gross margins as a percentage of
revenue to fluctuate from quarter to quarter as new products are introduced, but
to average approximately 20% over time. Management expects that engineering
gross margins as a percentage of sales will also fluctuate from quarter to
quarter but should approximate 11%.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses decreased slightly to
$1.3 million in the first quarter of fiscal year 1999 compared to $1.4 million
for the first quarter of fiscal year 1998. The dollar decrease was due primarily
to lower expenses associated with the company-wide plan attainment bonus. These
savings were offset by the increase in costs associated with disseminating
information to shareholders and the public, increased headcount and management
information systems costs associated with the Company's growth. The decrease in
marketing, general and administrative expenses as a percentage of revenue is
primarily due to the lower spreading of fixed costs over a higher revenue base.
If anticipated revenue growth occurs, SeaMED management expects marketing,
general and administrative expenses as a percentage of revenues to decline in
the near term.
Operating Income
Operating income increased 25.9% to $1.7 million (8.8 % of revenues) in
the first quarter of fiscal year 1999 from $1.4 million (8.5% of revenues) in
the first quarter of fiscal year 1998. Increases in operating income are due
primarily to an increase in sales volume and a decrease in
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marketing, general and administrative expenses as a percent of sales. These
improvements were offset by the decrease in manufacturing and engineering
margins from the first quarter of fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
SeaMED has historically financed its operations through earnings, debt
and sales of securities. 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 a line of credit to zero and approximately $1.3 million to pay off three
notes payable. 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.
In the first quarter of fiscal year 1999 SeaMED's operating activities
provided $2.4 million to the Company due primarily to decreases in accounts
receivable and inventory. During the first quarter of fiscal year 1999, the
Company borrowed an additional $1.5 million against an existing equipment credit
facility, bringing total borrowings against existing equipment to $4.0 million.
Borrowings under this agreement bear interest at LIBOR plus 1.4% (7.04% at
September 30, 1998). This agreement expires October 1, 2001.
In July of 1998, the Company's Board of Directors approved an increase
to its existing working capital line of credit. Under this agreement the Company
can borrow up to 85% of eligible accounts receivable and 50% of eligible
inventory up to a maximum of $20.0 million. Borrowings under this agreement (and
the equipment loan agreement) require compliance with certain covenants,
including a maximum debt-to-equity ratio of 1.25-to-1, minimum ratio of earnings
before income taxes and interest of 2.0-to-1 and dividend restrictions.
Borrowings under this agreement bear interest at the bank's prime rate minus
.25% or LIBOR plus 1.2%. This agreement expires October 1, 2001. There were no
borrowings outstanding under this line of credit at September 30, 1998.
The Company is subject to interest rate risk resulting from amounts
outstanding under one of its borrowings. At September 30, 1998, the Company had
an interest rate contract with a notional principal amount of $4.0 million that
effectively converts the $4.0 million variable rate note to a fixed rate of
7.5%.
SeaMED believes that its existing capital resources and amounts
available under its existing working capital facility, 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, fund leasehold
improvements and make other
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capital expenditures.
In July of 1998, SeaMED occupied of 41,000 new square feet of office
space to support its growth. SeaMED now leases approximately 193,000 total
square feet of space. The Company will lease an additional 20,500 square feet in
January of 1999 and another 20,500 square feet in June of 1999, bringing total
square footage to 234,000 by the end of fiscal 1999. The 82,000 total square
feet leased from July of 1998 through June of 1999 are located in a single new
building adjacent to an existing leased building. Due in large part to preparing
the new facilities for occupancy, SeaMED spent $1.9 million on capital
expenditures during the first quarter of fiscal year 1999 compared to $529,000
during the first quarter of fiscal year 1998. The Company anticipates spending
$4.4 million on capital expenditures in fiscal year 1999, compared to $2.6
million in fiscal year 1998.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
In a Schedule 13G filed on August 11, 1998, Gilder, Gagnon, Howe & Co.,
a general partnership and broker-dealer operating in New York, NY, reported
beneficial ownership of 21.5% of the outstanding shares of the Company's common
stock. Except for shares owned by or for partners of the firm, the shares are
held in discretionary accounts of approximately 250 customers, over which Gilder
Gagnon has no voting rights. In a separate Schedule 13G filed on October 9, 1998
(and subsequently amended), Neil Gagnon and certain persons related to him
reported beneficial ownership of an aggregate of 6.3% of the outstanding shares
of the Company's common stock.
Gilder Gagnon and Neil Gagnon have each represented to the Company that
neither has any intent to control or influence management. Gilder Gagnon and
Neil Gagnon have also entered into standstill arrangements, which include their
agreements not to do the following:
- Acquire additional shares
- Propose an acquisition or other similar transactions with the Company
- Sell more than 10% of their shares to any single buyer or group
- Engage in any tender or exchange offer for shares
- Solicit proxies
- Pursue control over management or policies of the Company
Neil Gagnon also agreed to establish a voting agreement for his shares,
with the shares voted by W. Robert Berg, the Company's chief executive officer.
The voting agreement is for one year, is not revocable and will be extended if
Gilder Gagnon's ownership continues to exceed 15% (or such other number as the
Plan may then provide).
In addition, Gilder Gagnon and Neil Gagnon have agreed to divest as
promptly as practicable a sufficient number of shares necessary to reduce its
beneficial ownership below 15%
-16-
<PAGE> 17
(or such other number as the Plan may then provide). In divesting as promptly as
practicable, Gilder Gagnon and Neil Gagnon are allowed to take into account
various factors, including then market price, current trends, losses, trading
volume, and impact on the Company's stock price.
On November 5, 1998, the Company's board of directors made a
determination that Gilder Gagnon and Neil Gagnon inadvertently acquired the
shares without awareness of the Company's Rights Agreement or "poison pill." As
a result of these events, the Company will not distribute the preferred share
purchase rights, nor will the preferred share purchase rights become
exercisable, under its Rights Agreement dated as of January 27, 1998.
ITEM 6(a). EXHIBITS.
The exhibits filed in response to Item 601 of Regulation S-K are listed
in the Exhibit Index contained herein.
-17-
<PAGE> 18
SIGNATURES
The unaudited interim financial statements furnished by management
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position and results of operation.
Pursuant to the requirements 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.
By /s/ W. Robert Berg November 13, 1998
----------------------------------------- -----------------
W. Robert Berg Date
Principal Executive Officer
By /s/ Edgar F. Rampy November 13, 1998
----------------------------------------- -----------------
Edgar F. Rampy Date
Principal Financial Officer
-18-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<S> <C> <C>
Exhibit 3.1+ Amended and Restated Articles of Incorporation of the Registrant.........
Exhibit 3.2++ Bylaws of the Registrant.................................................
Exhibit 27.1 Financial Data Schedule..................................................
</TABLE>
- ----------
+ Filed previously with the Company's quarterly report on Form 10-Q for
the quarter ended October 2, 1997, filed with the Securities and
Exchange Commission.
++ Filed previously with the Company's Registration Statement on Form S-1
(No. 333-13455) filed with the Securities and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,455,666
<SECURITIES> 0
<RECEIVABLES> 12,850,592
<ALLOWANCES> 488,179
<INVENTORY> 14,481,392
<CURRENT-ASSETS> 37,453,094
<PP&E> 12,475,823
<DEPRECIATION> 6,036,903
<TOTAL-ASSETS> 44,142,718
<CURRENT-LIABILITIES> 11,603,925
<BONDS> 0
0
0
<COMMON> 20,739,585
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 44,142,718
<SALES> 19,376,420
<TOTAL-REVENUES> 19,376,420
<CGS> 16,338,693
<TOTAL-COSTS> 16,338,693
<OTHER-EXPENSES> 1,263,082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,564
<INCOME-PRETAX> 1,711,182
<INCOME-TAX> 581,802
<INCOME-CONTINUING> 1,129,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,129,380<F1>
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
<FN>
<F1>For purposes of this exhibit, Primary means Basic.
</FN>
</TABLE>
