<PAGE> 1
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 April 2, 1998
Commission File number 0-21727
SeaMED Corporation
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Washington 91-1002092
- --------------------------------------------------------------------------------
(State of Incorporation) (Federal I.R.S. No.)
14500 Northeast 87th Street, Redmond, Washington 98052-3431
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number 425-867-1818
- --------------------------------------------------------------------------------
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 ( )
- --------------------------------------------------------------------------------
As of May 15, 1998, the Registrant had 5,438,318 shares of Common Stock
outstanding.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SeaMED CORPORATION
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Balance Sheets as of March 31, 1998 and June 30, 1997........................3
Statements of Income for the Quarters and the Nine Months
Ended March 31, 1998 and 1997........................................4
Statements of Cash Flows for the Nine Months Ended March 31, 1998
and 1997.............................................................5
Notes to Financial Statements................................................6
</TABLE>
-2-
<PAGE> 3
SEAMED CORPORATION
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............. $ 9,354 $ 9,092
Investments ........................... 2,501,632 6,231,369
Accounts receivable, net .............. 12,385,071 8,794,968
Inventories ........................... 15,040,854 11,198,563
Deferred income taxes ................. 1,706,791 1,193,311
Prepaid expenses ...................... 371,827 169,553
------------ ------------
Total current assets ..................... 32,015,529 27,596,856
Fixed assets, net ........................ 5,316,045 4,331,814
Deposits and other assets ................ 243,913 202,845
------------ ------------
Total assets ............................. $ 37,575,487 $ 32,131,515
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................... $ 3,690,460 $ 2,482,551
Accrued expenses and reserves ......... 4,522,625 5,041,086
Customer deposits on inventory ...... 2,642,483 746,629
Borrowings under bank line of credit .. -- 1,068,240
Current portion of long-term debt ..... 177,962 --
------------ ------------
Total current liabilities ................ 11,033,530 9,338,506
Long-term debt, less current portion ..... 359,923 --
Shareholders' equity:
Common stock .......................... 20,182,734 19,722,865
Note receivable from officer .......... (75,000) (75,000)
Retained earnings ..................... 6,074,300 3,145,144
------------ ------------
Total shareholders' equity ............... 26,182,034 22,793,009
------------ ------------
Total liabilities and shareholders' equity $ 37,575,487 $ 32,131,515
============ ============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 4
SEAMED CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------------- ---------------------------------
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Manufacturing ............................... $ 11,527,258 $ 8,840,330 $ 31,541,468 $ 22,853,466
Engineering ................................. 6,737,356 5,454,717 19,012,365 13,528,160
------------ ------------ ------------ ------------
18,264,614 14,295,047 50,553,833 36,381,626
Costs of revenues:
Manufacturing ............................... 9,421,206 7,062,020 25,596,463 18,306,476
Engineering ................................. 5,786,790 4,784,081 16,398,678 11,914,390
------------ ------------ ------------ ------------
15,207,996 11,846,101 41,995,141 30,220,866
------------ ------------ ------------ ------------
Gross margin .................................. 3,056,618 2,448,946 8,558,692 6,160,760
Marketing, general and
administrative expenses ..................... 1,454,708 1,338,509 4,205,030 3,260,599
------------ ------------ ------------ ------------
Operating income .............................. 1,601,910 1,110,437 4,353,662 2,900,161
Other income (expense), net:
Interest .................................... 28,554 97,657 109,391 (3,466)
Other ....................................... (675) (10,479) (24,939) (26,977)
------------ ------------ ------------ ------------
27,879 87,178 84,452 (30,443)
------------ ------------ ------------ ------------
Income before income taxes .................... 1,629,789 1,197,615 4,438,114 2,869,718
Income tax provision .......................... 554,128 419,165 1,508,959 1,004,401
------------ ------------ ------------ ------------
Net income .................................... $ 1,075,661 $ 778,450 $ 2,929,155 $ 1,865,317
============ ============ ============ ============
Net income per share data:
Basic ....................................... $ 0.20 $ 0.15 $ 0.55 $ 0.65
============ ============ ============ ============
Diluted ..................................... $ 0.19 $ 0.14 $ 0.52 $ 0.39
============ ============ ============ ============
Weighted average common shares and equivalents:
Basic ....................................... 5,330,939 5,177,110 5,294,509 2,857,824
============ ============ ============ ============
Diluted ..................................... 5,661,335 5,565,064 5,637,883 4,731,913
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 5
SEAMED CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ....................................... $ 2,929,156 $ 1,086,867
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ................................... 1,281,395 488,029
Provision for bad debts ........................ 111,430 54,739
Deferred tax benefit ........................... (513,480) --
Changes in operating assets and liabilities:
Increase in accounts receivable .............. (3,701,532) (1,027,170)
Increase in inventories ...................... (3,842,291) (1,874,964)
Increase in accounts payable, accrued
expenses, and deferred revenue ............. 2,763,264 394,780
Increase in other assets and prepaid expenses (279,705) (187,962)
------------ ------------
Net cash used in operating activities ............ (1,251,763) (1,065,681)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (2,265,627) (634,664)
Maturity of short-term investments ............... 3,766,100 --
Purchase of investments .......................... -- (7,960,269)
------------ ------------
Net cash provided by (used in) investing
activities ..................................... 1,500,473 (8,594,933)
FINANCING ACTIVITIES
Proceeds from sale of common stock (net of cost) . -- 14,799,036
Preferred stock dividend ......................... -- (1,765,100)
Proceeds from stock options exercised ............ 85,643 7,156
Proceeds from sale of common stock under employee
stock purchase plan ............................ 374,226 --
Net payments of credit line ...................... (1,068,240) (1,817,000)
Proceeds from notes payable ...................... 625,000 --
Principal payments on notes payable .............. (265,077) (1,029,314)
------------ ------------
Net cash provided by financing activities ........ (248,448) 10,194,778
------------ ------------
Net increase in cash ............................. 262 534,164
Cash and cash equivalents at beginning of period . 9,092 2,912
------------ ------------
Cash and cash equivalents at end of period ....... $ 9,354 $ 537,076
============ ============
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 6
ITEM 1. NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
SeaMED Corporation (the "Company") 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.
Accounting Period
The Company presents financial information for a 52/53 week fiscal year
that ends on the Thursday nearest to June 30. Each of the Company's fiscal
quarters ends, respectively, on the Thursday nearest to September 30, December
31 and March 31. For convenience of presentation, all fiscal periods in these
financial statements are shown as ending on a calendar month-end.
Unaudited Interim Financial Information
The financial information as of March 31, 1998 and for the periods ended
March 31, 1998 and 1997 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position at such dates and
the operations and cash flows for the periods then ended. The financial
information is presented according to the rules and regulations of the
Securities and Exchange Commission and, accordingly, does not include all of the
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. Operating
results for the periods ended March 31, 1998 are not necessarily indicative of
results that may be expected for the entire year. This financial information
should be read in conjunction with the Company's audited financial statements
for the year ended June 30, 1997, included in its Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS
No. 128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Basic
earnings per share is computed using the
-6-
<PAGE> 7
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common and
common stock equivalent shares outstanding during the period. Common equivalent
shares are excluded from the computation if their effect is antidilutive.
The Securities and Exchange Commission previously had requirements for
common and common stock equivalent shares issued during the 12-month period
prior to the filing of an initial public offering to be included in the
calculation of earnings per share as if they were outstanding for all periods
presented using the treasury stock method assuming the initial public offering
price. In 1998, the Securities and Exchange Commission issued new requirements
for dilutive common stock equivalent shares to be included in the calculation of
diluted earnings per share at the fair market value of common stock outstanding
during the period.
Net income per share amounts for all periods, where necessary, have been
restated to conform to SFAS No. 128 and the new Securities and Exchange
Commission requirements.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income. Statement No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, adoption of Statement No. 130 had no impact on the
Company's net income or shareholders' equity. Statement No. 130 had no impact on
the classification of the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." The
Company will adopt SFAS No. 131 in 1998. The Company does not expect the impact
of SFAS No. 131 to be material.
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 net 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.
-7-
<PAGE> 8
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Work-in-process $ 4,036,688 $ 3,274,857
Purchased and manufactured parts 11,004,166 7,923,706
------------ ------------
Net Inventory $ 15,040,854 $ 11,198,563
============ ============
</TABLE>
4. INVESTMENTS
Investments are classified as held to maturity. Investments are reported
at cost net of unamortized premium or discount. All investments mature within
one year.
5. LONG-TERM DEBT
The Company has a term note payable to Keybank National Association (the
"Bank"), entered into on July 31, 1997 and disbursed by the Bank on September 4,
1997. Borrowings under this note bear interest at LIBOR plus 1.4%, 7.1% at April
30, 1998, and will adjust as the LIBOR rate changes. The note is due in monthly
payments of $18,055 through December 2000. At April 30, the balance outstanding
on this note was approximately $523,000.
-8-
<PAGE> 9
6. INCOME PER SHARE
The following table sets forth the computation of basic and diluted
income per share:
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted
income per share ............. $1,075,661 $ 778,450 $2,929,155 $1,865,317
---------- ---------- ---------- ----------
DENOMINATOR:
Denominator for basic income per
share -- weighted average
common shares ................ 5,330,939 5,177,110 5,294,509 2,857,824
Effect of dilutive securities:
Weighted average of all
convertible redeemable
preferred stock outstanding .. 0 0 0 1,506,933
Net effect of dilutive stock
options based on the treasury
stock method using avg. market
price ........................ 301,507 360,992 314,748 348,479
Net effect of dilutive stock
warrants based on the treasury
stock method using avg. market
price ........................ 28,889 26,962 28,626 18,677
---------- ---------- ---------- ----------
Dilutive potential common
shares ....................... 330,396 387,944 343,374 1,874,089
---------- ---------- ---------- ----------
Denominator for diluted income
per share .................... 5,661,335 5,565,064 5,637,883 4,731,913
Basic income per share ......... $ 0.20 $ 0.15 $ 0.55 $ 0.65
========== ========== ========== ==========
Fully diluted net income
per share .................... $ 0.19 $ 0.15 $ 0.52 $ 0.39
========== ========== ========== ==========
</TABLE>
-9-
<PAGE> 10
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
Form 10-Q. This Form 10-Q 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 annual report on Form 10-K filed with the Securities and Exchange
Commission.
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
-10-
<PAGE> 11
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.
The Company's manufacturing revenues could be adversely affected if one
or more of its customers are unable to comply with Food and Drug Administration
("FDA") regulations regarding Year 2000 issues. FDA regulations require all
medical device companies to be Year 2000 compliant. The Company has been
monitoring FDA filings of its manufacturing customers concerning these issues.
If one or more of the Company's customers do not ultimately comply with FDA
regulations regarding Year 2000 issues in a timely manner, the Company's
related manufacturing revenues could cease, with a potential adverse effect on
the Company's operating results or financial condition.
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 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.
-11-
<PAGE> 12
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.
-12-
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth statement of income data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
--------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.3 82.9 83.1 83.1
----- ----- ----- -----
Gross margin 16.7 17.1 16.9 16.9
Marketing, general and administrative 7.9 9.3 8.3 8.9
----- ----- ----- -----
Operating income 8.8 7.8 8.6 8.0
Other income (expense), net 0.2 0.6 0.2 (0.1)
----- ----- ----- -----
Income before income taxes 9.0 8.4 8.8 7.9
Income tax provision 3.1 3.0 3.0 2.8
----- ----- ----- -----
Net income 5.9% 5.4% 5.8% 5.1%
===== ===== ===== =====
</TABLE>
Revenues
The following table sets forth revenues with the corresponding
percentage of total revenues and the percentage increase for the periods
indicated.
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------------------------------------
1998 1997
-----------------------------------------------
% of % of
Total Total %
Revenues Revenues Revenues Revenues Increase
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Manufacturing $11,527 63.1% $ 8,840 61.8% 30.4%
Engineering 6,738 36.9 5,455 38.2 23.5%
------- ----- ------- -----
Total Revenues $18,265 100.0% $14,295 100.0% 27.8%
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-----------------------------------------------------------
1998 1997
-----------------------------------------------
% of % of
Total Total %
Revenues Revenues Revenues Revenues Increase
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Manufacturing $31,542 62.4% $22,853 62.8% 38.0%
Engineering 19,012 37.6 13,528 37.2 40.5%
------- ----- ------- -----
Total Revenues $50,554 100.0% $36,382 100.0% 39.0%
======= ===== ======= =====
</TABLE>
Manufacturing revenues increased by approximately $2.7 million in the
third quarter of fiscal year 1998 from the third quarter of fiscal year 1997 and
by approximately $8.7 million in the first nine months of fiscal year 1998 from
the first nine months of fiscal year 1997. The increase in manufacturing
revenues in the third quarter of fiscal year 1998 was due primarily to new
medical instruments and increased revenues from existing medical instruments
adding approximately $3.9 million in revenues and increased revenues from the
manufacture of the Coinstar coin-counting machine adding approximately $434,000
in nonmedical manufacturing revenues. The increase in manufacturing revenues in
the first nine months of fiscal year 1998 was due primarily to new medical
instruments and increased revenues from existing medical instruments adding
approximately $10.4 million in revenues and increased revenues from the
manufacture of the Coinstar coin-counting machine adding approximately $1.5
million in nonmedical manufacturing revenues. Increases in manufacturing
revenues were offset by decreased volume of certain existing instruments and the
phase-out of others, including the phase-out of the Company's last remaining
proprietary instrument during the fourth quarter of fiscal year 1997.
-13-
<PAGE> 14
Sales to Coinstar in the third quarter of fiscal year 1998 represented
approximately 31% of manufacturing revenues and approximately 23% of total
revenues (36% and 25%, respectively, in the third quarter of fiscal year 1997)
and in the first nine months of fiscal year 1998 represented approximately 29%
of manufacturing revenues and approximately 21% of total revenues (33% and 24%,
respectively, in the first nine months of fiscal year 1997). Management expects
that sales to Coinstar will tend to decrease as a percentage of manufacturing
revenues in the future, but the percentage may fluctuate from quarter to
quarter.
Significant manufacturing revenues were generated by 19 medical
instruments in the first nine months of fiscal year 1998 compared to 14 medical
instruments in the first nine months of fiscal year 1997. The only nonmedical
commercial product that generated significant manufacturing revenues during the
first nine months of fiscal years 1998 and 1997 was the Coinstar coin-counting
machine.
Engineering revenues increased by approximately $1.3 million in the
third quarter of fiscal year 1998 from the third quarter of fiscal year 1997 and
approximately $5.5 million in the first six months of fiscal year 1998 from the
first nine months of fiscal year 1997. The increase in engineering revenues in
the third quarter of fiscal year 1998 was due primarily to new projects and to
increased time and, to a lesser extent, hourly rates being billed on existing
projects adding approximately $3.7 million in revenues. The increase in
engineering revenues in the first nine months of fiscal year 1998 was due
primarily to new projects and to increased time and hourly rates being billed on
existing projects adding approximately $9.9 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 cancelled.
As of the respective ends of the third quarters of fiscal years 1998 and
1997, SeaMED had in its engineering project pipeline 24 and 21 new medical
instruments or systems, and nine and five projects that enhance or are
intended to extend the life cycle of existing medical instruments or systems.
The 33 medical projects in the pipeline as of the end of the third quarter of
fiscal year 1998 were being performed for 27 different customers (25 medical
projects for 23 different customers as of the end of the third quarter of
fiscal year 1997). Although management believes that the 33 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.
As of the end of the third quarters of each of fiscal years 1998 and
1997, SeaMED had in its engineering project pipeline one nonmedical commercial
product.
Price adjustments under existing manufacturing contracts have not been
significant. Increases in revenues have not been significantly influenced by
inflation.
-14-
<PAGE> 15
Gross Margin
The following table sets forth gross margin, both in dollar amounts and
as a percentage of the corresponding revenue figure for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended March 31, Nine Months Ended March 31,
------------------------------------------ ------------------------------------------
1998 1997 1998 1997
-------------------- ------------------- ------------------- -------------------
Gross Gross Gross Gross Gross Gross Gross Gross
Margin Margin Margin Margin Margin Margin Margin Margin
($) (%) ($) (%) ($) (%) ($) (%)
------ ------ ------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing $2,106 18.3% $1,778 20.1% $5,945 18.8% $4,547 19.9%
Engineering 951 14.1% 671 12.3% 2,614 13.7% 1,614 11.9%
------ ------ ------ ------
Total gross margin $3,057 16.7% $2,449 17.1% $8,558 16.9% $6,160 16.9%
====== ====== ====== ======
</TABLE>
Manufacturing gross margin decreased to 18.3% of manufacturing revenues
in the third quarter of fiscal year 1998 from 20.1% in the third quarter of
fiscal year 1997. Preproduction revenues, which generally produce lower gross
margins, increased as a percent of sales and offset gross margin improvements
achieved by spreading facilities and certain other manufacturing overhead costs
over a higher revenue base. The decrease in the manufacturing gross margin
percentage to 18.8% in the first nine months of fiscal year 1998 from 19.9% in
the first nine months of fiscal year 1997 was primarily attributable to the same
factors. Engineering gross margin increased to 14.1% of engineering revenues in
the third quarter of fiscal year 1998 from 12.3% in the third quarter of fiscal
year 1997. This increase was attributable primarily to spreading certain fixed
engineering costs over a higher revenue base and high utilization of engineers,
and, to a lesser extent, to increased hourly rates for engineering services. The
increase in the engineering gross margin percentage to 13.7% in the first nine
months of fiscal year 1998 from 11.9% in the first nine months of fiscal year
1997 was primarily attributable to the same factors. Management expects
engineering gross margin as a percentage of revenues to fluctuate from quarter
to quarter, but to average approximately 11% over time.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses increased to $1.5 million
in the third quarter of fiscal year 1998 from $1.3 million in the third quarter
of fiscal year 1997, but as a percentage of revenues decreased to 7.9% from 9.3%
for the respective quarters. In the first nine months of fiscal year 1998,
marketing, general and administrative expenses increased to $4.2 million from
$3.3 million in the first nine months of fiscal year 1997, but as a percentage
of revenues decreased to 8.3% from 8.9%. The dollar increases were due primarily
to costs associated with disseminating information to shareholders and the
public, increased headcount and management information systems costs associated
with the Company's growth. Marketing, general and administrative expenses before
bonus represented 6.4% of revenues in the third quarter of fiscal year 1998 and
6.8% in the third quarter of 1997, and 6.6% of revenues in the first nine
months of fiscal years 1998 and 1997.
-15-
<PAGE> 16
Operating Income
Operating income increased 44.3% to $1.6 million (8.8% of revenues) in
the third quarter of fiscal year 1998 from $1.1 million (7.8% of revenues) in
the third quarter of fiscal year 1997 and increased 50.1% to $4.4 million (8.6%
of revenues) in the first nine months of fiscal year 1998 from $2.9 million
(8.0% of revenues) in the first nine months of fiscal year 1997, due primarily
to an increase in sales volume and improved gross margins in engineering.
LIQUIDITY AND CAPITAL RESOURCES
SeaMED has historically financed its operations through earnings, debt
and sales of securities. In the first nine months of fiscal year 1998 SeaMED's
operating activities resulted in net uses of cash of $1.3 million, despite
earnings of $2.9 million, because SeaMED's growth continues to require
substantial infusions of working capital, primarily to support increases in
accounts receivable and inventories.
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 with a 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.
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.
The Company has a line of credit arrangement (the "working capital
facility") with Keybank National Association (the "Bank"), under which the
Company can borrow against 85% of eligible accounts receivable and 50% of
eligible inventory, up to a maximum of $10.0 million ($20.0 million after July
1998). Borrowings under the working capital facility will bear interest at
either the Bank's prime rate minus .25% or LIBOR plus 1.2%. At April 30, there
were no borrowings under the working capital facility. In addition the Bank has
committed to allow SeaMED, in SeaMED's discretion, to draw on an equipment
acquisition line of credit (the "equipment facility") with the Bank, under which
the Company can borrow up to $5.0 million. Borrowings under the equipment
facility will bear interest at LIBOR plus 1.4% and will be secured by the
equipment purchased using the equipment facility. At April 30, there were no
borrowings under the equipment facility.
-16-
<PAGE> 17
SeaMED also has a term note payable to the Bank, entered into on July
31, 1997 and disbursed by the Bank on September 4, 1997. Borrowings under this
note bear interest at LIBOR plus 1.4%, 7.1% at April 30, 1998, and will adjust
as the LIBOR rate changes. The note is due in monthly payments of $18,055
through December 2000. At April 30, the balance outstanding on this note was
approximately $523,000.
SeaMED believes that the net proceeds remaining from its initial public
offering, together with existing capital resources and amounts available under
its new working capital and equipment facilities, 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.
SeaMED's current facilities contain approximately 148,000 square feet of
space. Due in large part to furnishing during the first half of fiscal year 1998
60,000 square feet of space added in May 1997 and reconfiguring space in its
headquarters, SeaMED's capital expenditures increased to approximately $2.3
million in the first nine months of fiscal year 1998 from $1.2 million in the
first nine months of fiscal year 1997. Management anticipates that total capital
expenditures in fiscal year 1998 will be about the same as the $2.8 million of
capital expenditures in fiscal year 1997. In July 1997 SeaMED entered into a
commitment to lease an additional 81,000 square feet of space in stages
beginning in January 1999. SeaMED now anticipates occupying the first 40,000
square feet under this commitment during the summer of 1998 and the remaining
space by summer 1999.
-17-
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 2(D). USE OF OFFERING PROCEEDS. From November 18, 1996, the effective date
of the Securities Act registration statement for the Company's initial public
offering of common stock, through April 2, 1998, the Company has used the net
offering proceeds as follows:
<TABLE>
<CAPTION>
Use of Net Offering Proceeds Amount
- ---------------------------- ----------
(dollars in
thousands)
<S> <C>
Construction of plant, building and facilities $ 644
Purchase and installation of machinery and equipment 3,910
Repayment of indebtedness (including a cumulative preferred stock
dividend) 4,892
Working capital 2,875
Temporary investments 2,502
--------
$ 14,823
========
</TABLE>
The uses of net offering proceeds set forth above are management's reasonable
estimates, and they assume the reinvestment of cash from operating activities
into the Company's net working capital. Temporary investments are United States
government obligations with a term of less than one year.
ITEM 6(A). EXHIBITS.
Exhibit 3.1+ Amended and Restated Articles of Incorporation of the Registrant
Exhibit 3.2++ Bylaws of the Registrant
Exhibit 4.1+++ Rights Agreement dated as of January 27, 1998, between the
Company and ChaseMellon Shareholder Services, L.L.C., which
includes the form of Articles of Amendment as Exhibit A
thereto, the form of Right Certificate as Exhibit B thereto and
the form of Summary of Rights to Purchase Preferred Shares as
Exhibit C thereto.
Exhibit 27.1 Financial Data Schedule
- ----------
+ 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.
+++ Filed previously with the Company's current report on Form 8-K filed
February 5, 1998 with the Securities and Exchange Commission.
-18-
<PAGE> 19
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.
/s/ W. Robert Berg 5/15/98
By__________________________________ ___________________________
W. Robert Berg Date
Principal Executive Officer
/s/ Edgar F. Rampy 5/15/98
By__________________________________ ___________________________
Edgar F. Rampy Date
Principal Financial Officer
-19-
<PAGE> 20
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 4.1+++ Rights Agreement dated as of January 27, 1998, between the Company and
ChaseMellon Shareholder Services, L.L.C., which includes the form of
Articles of Amendment as Exhibit A thereto, the form of Right Certificate
as Exhibit B thereto and the form of Summary of Rights to Purchase
Preferred Shares as Exhibit C thereto.
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.
+++ Filed previously with the Company's current report on Form 8-K filed
February 5, 1998 with the Securities and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> DEC-31-1997 JUL-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 9,354 9,354
<SECURITIES> 2,501,632 2,501,632
<RECEIVABLES> 12,874,390 12,874,390
<ALLOWANCES> 489,320 489,320
<INVENTORY> 15,040,854 15,040,854
<CURRENT-ASSETS> 32,015,529 32,015,529
<PP&E> 10,267,173 10,267,173
<DEPRECIATION> 4,951,128 4,951,128
<TOTAL-ASSETS> 37,575,487 37,575,487
<CURRENT-LIABILITIES> 11,033,530 11,033,530
<BONDS> 359,923 359,923
0 0
0 0
<COMMON> 20,182,734 20,182,734
<OTHER-SE> 5,999,300 5,999,300
<TOTAL-LIABILITY-AND-EQUITY> 37,575,487 37,575,487
<SALES> 18,264,614 50,553,833
<TOTAL-REVENUES> 18,264,614 50,553,833
<CGS> 15,207,996 41,995,141
<TOTAL-COSTS> 15,207,996 41,995,141
<OTHER-EXPENSES> 1,454,708 4,205,030
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,629,789 4,438,114
<INCOME-TAX> 554,128 1,508,959
<INCOME-CONTINUING> 1,075,661 2,929,155
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,075,661 2,929,155
<EPS-PRIMARY> .20 .55
<EPS-DILUTED> .19 .52
</TABLE>
