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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 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1002092
(STATE OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
14500 NORTHEAST 87TH STREET 98052-3431
REDMOND, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(425) 867-1818
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
</TABLE>
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of 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 (4,127,440 shares) of the Registrant at
September 25, 1998 was approximately $57,288,867. As of September 25, 1998,
there were 5,468,978 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.
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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 month-end.
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 1998,
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 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.
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
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promotion. Moreover, as of June 1997, the FDA requires the design of medical
devices to satisfy a specific engineering design control process. Under European
quality standards made 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 ("cGMP") 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 1998 SeaMED manufactured 19 different advanced medical instruments
that incorporate diverse technologies. As of the end of fiscal year
1998, SeaMED had in its engineering project pipeline an additional 22
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 cGMP-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 cGMP-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 cGMP requirements. Due to the critical nature of
regulatory compliance, SeaMED devotes significant management time and
financial resources to cGMP 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
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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.
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 1998 SeaMED derived significant manufacturing revenues from 19 medical
instruments. As of the end of fiscal year 1998, SeaMED had in its engineering
project pipeline 28 instruments or systems that it believes have a good chance
of some day producing significant manufacturing revenues. Of these 28 projects,
22 are for new instruments or systems and six are for enhancements of existing
instruments or systems that SeaMED and the customer believe will extend the
life-cycle of the instrument. The 28 projects are performed for 21 different
customers. Although management believes that the 28 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."
The only nonmedical commercial product that generated significant
manufacturing revenues during fiscal years 1998 and 1997 was the Coinstar
coin-counting machine. As of the end of fiscal year 1998, SeaMED did not have
any nonmedical commercial products in its engineering project pipeline.
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.
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 three-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. 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.
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.
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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, 1998, SeaMED's engineering staff consisted of 122 engineers
employed by SeaMED and 24 consulting or contract engineers. The engineering
staff includes a variety of disciplines, as follows:
<TABLE>
<CAPTION>
ENGINEERING CATEGORY NUMBER
-------------------- ------
<S> <C>
Component................................................... 1
Electrical Design........................................... 23
Electrical Test............................................. 13
Manufacturing............................................... 34
Mechanical Design........................................... 26
Reliability and Quality..................................... 31
Software Design............................................. 18
---
Total.................................................. 146
===
</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 cGMP and ISO 9001
quality standards. Often, the manufacture of a particular instrument begins with
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's customers generally submit purchase orders for delivery of
instruments in future periods. As of June 30, 1998 and June 30, 1997, customers
had placed purchase orders with SeaMED for future deliveries
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totaling $33 million and $33 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 approved 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 inspection and/or 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.
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
1998 with the result of no adverse findings.
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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, 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 cGMP) 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.
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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 cGMP 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 cGMP regulations would result in FDA 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. Effective in 1998, in order to allow their instruments to move freely
within the European Community, medical device manufacturers are required to
obtain certifications necessary to enable the "CE mark" to be affixed to their
products. Because SeaMED is
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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, 1998, SeaMED employed a total of 419 people and retained 89
consulting or contract personnel in the following areas:
<TABLE>
<CAPTION>
CATEGORY NUMBER
-------- ------
<S> <C>
Design and Engineering...................................... 192
Preproduction and Manufacturing............................. 214
Quality Assurance........................................... 65
Sales and Marketing, Financing and Administration........... 37
---
Total.................................................. 508
===
</TABLE>
SeaMED considers its labor relations to be good and none of its employees
are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
As of July, 1998, SeaMED is leasing two buildings in Redmond, Washington
and three buildings in Bothell, Washington, aggregating approximately 193,000
square feet. Of the approximately 193,000 square feet currently occupied by
SeaMED, approximately 121,000 square feet are used for manufacturing,
approximately 65,000 square feet are used for engineering and approximately 7000
square feet are used for administrative purposes.
The Company will take 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 year 1999. The 82,000 total square feet acquired
from July of 1998 through June of 1999 are located in a single new building.
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, 1998.
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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 seven 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, 1998........................................... 18 1/4 15 3/8
March 31, 1998.......................................... 20 1/2 16 1/2
December 31, 1997....................................... 18 3/4 15 1/2
September 30, 1997...................................... 20 5/8 15 5/8
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 115 shareholders of record as of June 30, 1998. 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of June 30, 1998 and 1997, and for
each of the periods ended June 30, 1998, 1997 and 1996, 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, 1996, 1995 and 1994, and for
each of the periods ended June 30, 1995 and 1994, 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,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues..................................... $69,981 $52,134 $26,130 $17,661 $14,720
Cost of sales................................ 58,285 43,132 21,093 14,590 11,965
------- ------- ------- ------- -------
11,696 9,002 5,037 3,071 2,755
Marketing, general and administrative
expense.................................... 5,525 4,849 2,937 1,931 1,818
------- ------- ------- ------- -------
Operating income............................. 6,171 4,153 2,100 1,140 937
Other income (expense), net.................. 100 41 (192) (185) (138)
------- ------- ------- ------- -------
Income before income taxes................... 6,271 4,194 1,908 955 799
Income tax benefit (provision)(1)............ (2,132) (1,468) (668) (180) 208
------- ------- ------- ------- -------
Net income................................... $ 4,139 $ 2,726 $ 1,240 $ 775 $ 1,007
======= ======= ======= ======= =======
Net income per share data(2):
Basic...................................... $ 0.78 $ 0.76 $ 1.61 $ 1.08 $ 1.90
Diluted.................................... $ 0.73 $ 0.55 $ 0.33 $ 0.21 $ 0.30
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $24,272 $18,258 $ 4,997 $ 4,497 $ 3,307
Total assets....................... 42,857 32,132 16,064 9,900 7,571
Notes payable to bank........................ -- 1,068 1,817 555 990
Long-term debt, including current portion.... 2,993 -- 1,748 1,517 1,653
Convertible redeemable preferred stock....... -- -- 5,280 5,280 3,815
Total shareholders' equity
(deficit)........................ 27,933 22,793 1,231 (38) (672)
</TABLE>
- ---------------
(1) For the fiscal year ended June 30, 1994, 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 9 of Notes to Financial Statements for an explanation of the number
of shares used in computing net income per share.
10
<PAGE> 12
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. The data should be read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Form 10-K. 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 Form 10-K 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 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.
11
<PAGE> 13
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.
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,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 83.3 82.7 80.7
----- ----- -----
Gross margin................................................ 16.7 17.3 19.3
Marketing, general and administrative expenses.............. 7.9 9.3 11.3
----- ----- -----
Operating income............................................ 8.8 8.0 8.0
Other income (expenses), net................................ 0.2 -- (0.7)
----- ----- -----
Income before income taxes.................................. 9.0 8.0 7.3
Income tax provision........................................ 3.1 2.8 2.6
----- ----- -----
Net income.................................................. 5.9% 5.2% 4.7%
===== ===== =====
</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 years
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
% OF % OF % OF
TOTAL % TOTAL % TOTAL
REVENUES REVENUES INCREASE REVENUES REVENUES INCREASE REVENUES REVENUES
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing............. $44,389 63.4% 34.6% $32,983 63.3% 86.1% $17,725 67.8%
Engineering............... 25,592 36.6 33.6% 19,150 36.7 127.8% 8,405 32.2
------- ----- ---- ------- ----- ----- ------- -----
Total
revenues...... $69,981 100.0% 34.2% $52,133 100.0% 99.5% $26,130 100.0%
======= ===== ==== ======= ===== ===== ======= =====
</TABLE>
Manufacturing revenues increased by approximately $11.4 million in fiscal
year 1998 from fiscal year 1997, due primarily to three medical instruments
adding approximately $8.3 million and one nonmedical
12
<PAGE> 14
product manufactured for Coinstar under a nonexclusive contract adding
approximately $2.8 million in revenues. Increases in manufacturing revenues were
offset by decreased volume of certain instruments and the phaseout of other
instruments. 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 and new and existing instruments adding approximately
$9.1 million in revenues. Increases in manufacturing revenues in fiscal year
1997 were offset by decreased volume of certain instruments and the phaseout of
other instruments.
Sales to Coinstar in fiscal year 1998 represented approximately 23% of
total revenue and approximately 32% of manufacturing revenue, compared to 25% of
total revenue and 35% of manufacturing revenue in fiscal year 1997. SeaMED
management expects that sales to Coinstar as a percentage of total sales will
continue to decline in future years.
Significant manufacturing revenues were generated by 19 medical instruments
in fiscal year 1998 compared to 14 medical instruments in fiscal year 1997. The
only nonmedical commercial product that generated significant manufacturing
revenues during fiscal years 1998 and 1997 was the Coinstar coin-counting
machine.
Engineering revenues increased by approximately $6.4 million in fiscal year
1998 from fiscal year 1997, due primarily to new projects and increased time
and, to a lesser extent, increased hourly rates being billed on existing
projects adding approximately $12.2 million in revenues. Engineering revenues
increased by approximately $10.7 million in fiscal year 1997 from fiscal year
1996, due primarily to new projects and increased time and hourly rates 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 canceled.
Approximately $5.1 million of the revenue in fiscal year 1998 came from
United States Surgical Corporation, compared to $6.7 million in fiscal year
1997. Engineering revenue for United States Surgical in fiscal year 1998
represented approximately 20% of total engineering revenue and approximately 17%
of total revenue. Sales to United States Surgical in fiscal year 1997
represented approximately 35% of total engineering revenue and approximately 14%
of total revenue. SeaMED management expects sales to United States Surgical as a
percentage of total sales to decline in future years.
As of the respective ends of fiscal years 1998 and 1997, SeaMED had in its
engineering project pipeline 22 and 18 new medical instruments or systems, and
six and eight projects that enhance or are intended to extend the life cycle of
existing medical instruments or systems. The 28 medical projects in the pipeline
as of fiscal year 1998 were being performed for 21 different customers (26
medical projects for 21 different customers as of the end of fiscal year 1997).
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 June 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.
13
<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 fiscal years indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
GROSS GROSS GROSS GROSS GROSS GROSS
MARGIN($) MARGIN(%) MARGIN($) MARGIN(%) MARGIN($) MARGIN(%)
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Manufacturing........... $ 8,231 18.5% $6,615 20.1% $4,184 23.6%
Engineering............. 3,465 13.5% 2,387 12.5% 854 10.2%
------- ------ ------
Total gross
margin........... $11,696 16.7% $9,002 17.3% $5,038 19.3%
======= ====== ======
</TABLE>
Manufacturing gross margin decreased to 18.5% of manufacturing revenues in
fiscal year 1998 from 20.1% in fiscal year 1997, due primarily to changes in the
product mix to lower gross margin products, including margin derived from the
Company's nonmedical customer. Fiscal year 1997 was also the last year SeaMED
derived revenues and high margin from its proprietary instrument. SeaMED's
revenue from its proprietary instrument was $1.4 million in both fiscal year
1997 and fiscal year 1996. Engineering gross margin as a percentage of
engineering revenues increased to 13.5% in fiscal year 1998 from 12.5% in fiscal
year 1997. This trend was due primarily to (i) spreading certain fixed
engineering costs over a higher revenue base, (ii) better utilization of
engineers, and (iii) increased hourly rates for engineering services.
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 margin derived from it's
nonmedical customer. Pre-production revenue in fiscal year 1997, which
historically produces lower gross margins, doubled as a percentage of sales 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) better utilization of engineers, and (iii)
increased hourly rates for engineering services.
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 increased to $5.5 million in
fiscal year 1998 from $4.8 million in fiscal year 1997 and $2.9 million in
fiscal year 1996, but as a percentage of revenue decreased from 11.3% in fiscal
year 1996 to 9.3% in fiscal year 1997 to 7.9% in fiscal 1998. 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. The decrease in marketing,
general and administrative expenses as a percentage of revenue is primarily due
to the 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 48.6% to $6.2 million (8.8% of revenues) in
fiscal year 1998 from $4.2 million (8.0% of revenues) in fiscal year 1997. The
$4.2 million in operating income in fiscal year 1997 represented a 97.7%
increase from fiscal year 1996. Increases in operating income are due primarily
to an increase in sales volume, improved engineering margins and a decrease in
marketing, general and administrative expenses as a percent of sales. These
improvements were offset by the decrease in manufacturing margins in 1998 and
1997 and by the increase in Company-wide bonus in fiscal year 1997.
14
<PAGE> 16
Income Taxes
During 1998, 1997 and 1996, the Company's effective tax rate has remained
stable at a rate that approximates the federal statutory rate of 34%, and the
Company expects that its effective tax rate will continue to approximate the
federal statutory rate in the future.
LIQUIDITY AND CAPITAL RESOURCES
SeaMED has historically financed its operations through earnings, debt and
sales of securities. In fiscal year 1998 SeaMED's operating activities provided
$98,000 to the Company. This total amount of net cash in fiscal year 1998 was
relatively small despite increased earnings, due primarily to SeaMED's growth
requiring substantial working capital primarily to support increased 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 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. 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.
During fiscal year 1998, the Company borrowed $2.5 million against an
existing equipment credit facility. In addition, the Company has committed to
borrow the remaining $1.5 million by September 30, 1998. Borrowings under this
agreement bear interest at LIBOR plus 1.4% (7.02% at June 30, 1998).
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.
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 June 30, 1998.
The Company is subject to interest rate risk resulting from amounts
outstanding under one of its borrowings. At June 30, 1998, the Company had an
interest rate contract with a notional principal amount of $2.5 million that
effectively converts the $2.5 million variable rate note to a fixed rate of
7.5%.
SeaMED believes that the remaining net proceeds from its initial public
offering together with 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 capital expenditures.
In July of 1998, SeaMED took occupancy of 41,000 new square feet to support
its growth. SeaMED now has approximately 193,000 total square feet of space. The
Company will take 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
15
<PAGE> 17
the end of fiscal 1999. The 82,000 total square feet acquired from July of 1998
through June of 1999 are located in a single new building. Due in large part to
preparing the new facilities for occupancy, SeaMED anticipates spending $4.4
million on capital expenditures in fiscal year 1999, compared to $2.6 million in
fiscal year 1998 and $2.8 million in fiscal year 1997. Capital expenditures were
$1.5 million in fiscal year 1996.
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 premarket approval application ("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 sales in foreign countries may be 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.
16
<PAGE> 18
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 Customer. SeaMED's nonmedical customer is subject to general
business risks, such as competition, market acceptance of its product, capital
requirements and credit risks. SeaMED's nonmedical customer operates in a highly
competitive industry in which its product competes on price, quality and product
enhancements and is subject to risks of technological obsolescence. As a result,
sales to its nonmedical customer 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.
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 coin-counting machine that exchanges loose coins for
currency, represented approximately 23% of SeaMED's revenues for fiscal year
1998. SeaMED currently manufactures these machines under a nonexclusive
three-year 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 17% of SeaMED's revenues for fiscal year
1998. If one or more of SeaMED's customers experiences 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 health care 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.
17
<PAGE> 19
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.
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.
18
<PAGE> 20
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 do not address Year 2000 issues on a
timely basis. The Food and Drug Administration ("FDA") has issued regulations
requiring all medical 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.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 21
Financial Statements:
Balance Sheets as of June 30, 1998 and 1997............... 22
Statements of Income for the Years Ended June 30, 1998,
1997, and 1996......................................... 23
Statements of Shareholders' Equity for the Years Ended
June 30, 1998, 1997, and 1996.......................... 24
Statement of Cash Flows for the Years Ended June 30, 1998,
1997, and 1996......................................... 25
Notes to Financial Statements............................. 26
Schedule II -- Valuation and Qualifying Accounts for the
Years Ended June 30, 1998, 1997, and 1996.............. 36
</TABLE>
20
<PAGE> 22
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, 1998 and 1997, and the related statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1998. 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
misstatement. 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, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998, 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 14, 1998
21
<PAGE> 23
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 6,428,718 $ 9,092
Investments............................................... -- 6,231,369
Accounts receivable, net of allowance of $505,865
($377,890 in 1997)..................................... 13,189,092 8,794,968
Inventories............................................... 15,185,517 11,198,563
Deferred tax benefit...................................... 1,733,348 1,193,311
Prepaid expenses.......................................... 223,370 169,553
----------- -----------
Total current assets........................................ 36,760,045 27,596,856
Property and equipment...................................... 5,162,172 4,331,814
Deposits and other assets................................... 934,337 202,845
----------- -----------
Total assets...................................... $42,856,554 $32,131,515
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable.......................................... $ 4,323,740 $ 2,482,551
Accrued expenses and reserves............................. 5,029,410 5,041,086
Customer deposits......................................... 2,576,916 746,629
Borrowings under bank line of credit...................... -- 1,068,240
Current portion of long-term debt......................... 558,144 --
----------- -----------
Total current liabilities................................... 12,488,210 9,338,506
Long-term debt, less current portion........................ 2,435,021 --
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 5,000,000 undesignated............ -- --
Common stock, no par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 5,463,298 (5,263,827
in 1997).............................................. 20,723,960 19,722,865
Note receivable from officer................................ (75,000) (75,000)
Retained earnings......................................... 7,284,363 3,145,144
----------- -----------
Total shareholders' equity............................. 27,933,323 22,793,009
----------- -----------
Total liabilities and shareholders' equity........ $42,856,554 $32,131,515
=========== ===========
</TABLE>
See accompanying notes.
22
<PAGE> 24
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Manufacturing..................................... $44,388,608 $32,983,491 $17,724,883
Engineering....................................... 25,592,644 19,150,019 8,405,352
----------- ----------- -----------
69,981,252 52,133,510 26,130,235
Cost of revenues:
Manufacturing..................................... 36,157,294 26,368,242 13,541,280
Engineering....................................... 22,127,908 16,763,316 7,551,399
----------- ----------- -----------
58,285,202 43,131,558 21,092,679
----------- ----------- -----------
Total gross margin.................................. 11,696,050 9,001,952 5,037,556
Marketing, general, and administrative expenses..... 5,524,535 4,849,413 2,937,556
----------- ----------- -----------
Operating income.................................... 6,171,515 4,152,539 2,100,000
Other income (expense):
Interest expense.................................. (73,788) (190,989) (198,274)
Interest and other income, net.................... 173,817 232,522 6,665
----------- ----------- -----------
100,029 41,533 (191,609)
----------- ----------- -----------
Income before income taxes.......................... 6,271,544 4,194,072 1,908,391
Income tax provision................................ (2,132,325) (1,467,925) (667,937)
----------- ----------- -----------
Net income.......................................... $ 4,139,219 $ 2,726,147 $ 1,240,454
=========== =========== ===========
Net income per share data:
Basic............................................. $ 0.78 $ 0.76 $ 1.61
=========== =========== ===========
Diluted........................................... $ 0.73 $ 0.55 $ 0.33
=========== =========== ===========
</TABLE>
See accompanying notes.
23
<PAGE> 25
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, July 1, 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
Common stock sold under
employee stock purchase
plan....................... 44,602 671,372 -- -- 671,372
Stock options exercised....... 126,974 114,522 -- -- 114,522
Tax benefit from stock options
and stock purchase plan.... -- 215,201 -- -- 215,201
Common stock warrants
exercised.................. 27,895 -- -- -- --
Net income.................... -- -- -- 4,139,219 4,139,219
--------- ----------- -------- ---------- -----------
Balance, June 30, 1998.......... 5,463,298 $20,723,960 $(75,000) $7,284,363 $27,933,323
========= =========== ======== ========== ===========
</TABLE>
See accompanying notes.
24
<PAGE> 26
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME.......................................... $ 4,139,219 $ 2,726,147 $ 1,240,454
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation...................................... 1,790,378 1,073,885 693,752
Provision for bad debt............................ 127,975 125,664 47,743
Deferred tax benefit.............................. (540,037) (568,090) (95,539)
Changes in operating assets and liabilities:
Increase in accounts receivable................ (4,522,098) (3,044,699) (2,569,134)
Increase in inventories........................ (3,986,954) (4,501,315) (2,977,592)
Increase in other assets and prepaid
expenses..................................... (785,309) (164,642) (38,644)
Increase in accounts payable, accrued expenses,
and deferred revenue......................... 3,875,000 2,340,097 3,402,643
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ 98,174 (2,012,953) (296,317)
INVESTING ACTIVITIES
Purchases of equipment.............................. (2,620,736) (2,750,434) (1,492,021)
Maturity of short-term investments.................. 6,231,369 1,756,074 200,000
Purchase of investments............................. -- (7,987,443) --
----------- ----------- -----------
Net cash provided by (used in) investing
activities........................................ 3,610,633 (8,981,803) (1,292,021)
FINANCING ACTIVITIES
Net proceeds from sale of common stock.............. -- 14,822,755 --
Proceeds from sale of common stock under employee
stock option plan................................. 671,372 389,141 --
Preferred stock dividend............................ -- (1,765,100) --
Proceeds from stock options exercised............... 114,522 50,672 28,268
Net (payments of) borrowings under credit line...... (1,068,240) (748,760) 1,261,999
Proceeds from notes payable......................... 3,125,000 -- 600,000
Principal payments on notes payable................. (131,835) (1,747,772) (369,400)
----------- ----------- -----------
Net cash provided by financing activities........... 2,710,819 11,000,936 1,520,867
----------- ----------- -----------
Net increase (decrease) in cash..................... 6,419,626 6,180 (67,471)
Cash and cash equivalents at beginning of year...... 9,092 2,912 70,383
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 6,428,718 $ 9,092 $ 2,912
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Taxes paid.......................................... $ 2,403,000 $ 2,390,000 $ 330,000
Interest paid....................................... $ 73,788 $ 190,989 $ 198,274
</TABLE>
See accompanying notes.
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
NOTE 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's fiscal year consists of 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.
CASH EQUIVALENTS
The Company considers all highly-liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
CREDIT POLICIES
The Company extends credit to various customers, which are primarily in the
medical device industry and 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 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.
26
<PAGE> 28
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 (SFAS) 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.
CONCENTRATIONS OF CREDIT RISK
The Company is subject to concentrations of credit risk from its holdings
of cash, cash equivalents, and securities. The Company's credit risk is managed
by investing its cash in high-quality money market instruments, securities of
the U.S. Government and its agencies, and high-quality corporate issues.
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 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. Net income is adjusted for the accretion of cumulative
preferred stock dividends for Class A and D convertible redeemable preferred
stock in the calculation of basic earnings per share amounts in 1997 and 1996.
Net income per share amounts for all periods, where necessary, have been
restated to conform to SFAS No. 128 requirements.
In 1998, the SEC issued Staff Accounting Bulletin (SAB) No. 98 which
superceded SAB No. 83 requirements to reflect 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 earnings per share if they were outstanding
for all periods presented using the treasury stock method assuming the initial
public offering price. Net income per share amounts for all periods, where
necessary, have been restated to conform to these SEC requirements.
The Company's previously reported primary and fully diluted net income per
share were $0.60 and $0.55 and $0.42 and $0.32 for the years ended June 30, 1997
and 1996, respectively.
INTEREST RATE CONTRACT
Net amounts paid or received under its interest rate contract are reflected
as adjustments to interest expense. The Company accounts for its contract at
cost. The fair market value of the contract was not material at June 30, 1998.
It is the Company's intent to hold the contract to maturity.
27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATION
Certain prior year items have been reclassed to conform to the current year
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
The Company will adopt SFAS No. 130 in the first quarter of 1999. Comprehensive
and net income have been the same in the past and the Company does not expect
the impact of SFAS No. 130 to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company will adopt SFAS No. 131 for
fiscal year end June 30, 1999. The Company has not yet determined the impact of
SFAS No. 131.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Due to its minimal use of derivatives, the
Company does not expect the impact of SFAS No. 133 to be material.
NOTE 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.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Work in process............................................. $ 3,685,594 $ 3,294,857
Purchased and manufactured parts............................ 12,366,257 8,608,455
----------- -----------
16,051,851 11,903,312
Less inventory reserve...................................... 866,334 704,749
----------- -----------
$15,185,517 $11,198,563
=========== ===========
</TABLE>
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 1,122,538 $ 959,033
Equipment................................................... 7,744,716 5,815,854
Manufacturing molds......................................... 527,172 524,110
Leasehold improvements...................................... 1,227,856 702,549
----------- ----------
10,622,282 8,001,546
Less accumulated depreciation and amortization.............. 5,460,110 3,669,732
----------- ----------
$ 5,162,172 $4,331,814
=========== ==========
</TABLE>
NOTE 5. ACCRUED EXPENSES AND RESERVES
Accrued expenses and reserves consist of the following:
<TABLE>
<CAPTION>
JUNE 30
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
Taxes payable............................................... $ 246,157 $ 216,996
Accrued compensation........................................ 2,622,059 2,501,732
Deferred revenue............................................ 789,414 423,128
Other accrued expenses...................................... 787,670 1,522,794
Warranty reserve............................................ 584,110 376,436
----------- ----------
$ 5,029,410 $5,041,086
=========== ==========
</TABLE>
NOTE 6. NOTES PAYABLE
VARIABLE RATE NOTE PAYABLE
During fiscal year 1998, the Company borrowed $2.5 million against an
existing equipment credit facility. In addition, the Company has committed to
borrow the remaining $1.5 million by September 30, 1998. Borrowings under this
agreement bear interest at LIBOR plus 1.4% (7.02% at June 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 June 30, 1998.
29
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT
Long-term debt at June 30, 1998 consists of the following:
<TABLE>
<S> <C>
Unsecured subordinated note payable, with monthly payments
of $18,055, including interest, through December 2000..... $ 493,165
Variable rate note payable, secured by equipment, with
monthly payments beginning November 1, 1998, including
interest, through September 30, 2003...................... 2,500,000
2,993,165
Less current portion........................................ 558,144
----------
$2,435,021
==========
</TABLE>
INTEREST RATE CONTRACT
At June 30, 1998, the Company had an interest rate contract with a notional
principal amount of $2.5 million that effectively converts the $2.5 million
variable rate note to a fixed rate of 7.5%.
NOTE 7. CONVERTIBLE REDEEMABLE PREFERRED STOCK
On January 3, 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 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 was exercised in March 1998 in a
cashless transaction based upon 27,895 shares.
NOTE 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
30
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
termination upon certain events. Stock options exercised, granted, and canceled
during fiscal years 1998, 1997, and 1996 are as follows:
OUTSTANDING OPTIONS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRICE PER WEIGHTED AVERAGE
SHARES PRICE SHARE EXERCISE PRICE
--------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance, July 1, 1995.............. 450,381 $ 713,931 $0.16 - $10.00 $ --
Options granted.................. 132,824 454,060 2.50 - 5.00 3.42
Options canceled................. (8,031) (12,300) 0.50 - 2.50 1.54
Options exercised................ (89,735) (28,268) 0.16 - 1.25 0.31
-------- ---------- --------------- ------
Balance June 30, 1996.............. 485,439 1,127,423 0.16 - 10.00 2.32
Options granted.................. 105,241 1,622,428 5.00 - 17.25 15.42
Options canceled................. (4,205) (11,392) 0.80 - 16.25 2.71
Options exercised................ (89,856) (50,672) 0.16 - 2.50 0.56
-------- ---------- --------------- ------
Balance June 30, 1997.............. 496,619 2,687,787 0.16 - 17.25 5.41
Options granted.................. 105,734 1,850,686 16.13 - 18.75 17.50
Options canceled................. (11,635) (135,928) 1.80 - 18.00 11.68
Options exercised................ (126,974) (114,521) 0.16 - 3.75 0.90
-------- ---------- --------------- ------
Balance June 30, 1998.............. 463,744 $4,288,024 $0.16 - $18.75 $ 9.25
======== ========== =============== ======
</TABLE>
The following table summarizes information about options outstanding and
exercisable at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------
----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.16 - $ 0.80 26,688 3.61 years $ 0.61 26,688 $ 0.61
1.00 - 2.20 38,654 5.38 years 1.44 38,654 1.44
2.50 - 2.50 92,580 7.13 years 2.50 41,464 2.50
3.75 - 7.50 94,650 7.41 years 5.33 38,730 5.36
10.00 - 10.00 17,500 6.57 years 10.00 7,500 10.00
16.13 - 18.75 193,672 9.07 years 17.06 -- --
------- ---------- ------ ------- ------
0.16 - 18.75 463,744 7.63 years $ 9.25 153,036 $ 2.99
======= ========== ====== ======= ======
</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 1998, 1997, and 1996 the pro forma amounts
of the Company's net income and net income per share for the years ended June
30, 1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income per share -- as reported.................... $4,139,219 $2,726,147 $1,240,454
Net income per share -- pro forma...................... $3,742,622 $2,581,412 $1,219,006
Diluted net income per share -- as reported............ $ 0.73 $ 0.55 $ 0.33
Diluted net income per share -- pro forma.............. $ 0.66 $ 0.52 $ 0.32
</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 5.51% to 5.92%; expected option life of four to six years;
volatility of 0.3865; and no expected dividends. The weighted average fair value
of options granted during the years 1998 and 1997 was $7.96 and $15.42,
respectively, for options granted at fair market value.
31
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SHARES RESERVED FOR FUTURE ISSUANCE
The following shares of common stock have been reserved for future issuance
as of June 30, 1998, 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>
Stock purchase plan......................................... 83,881
Incentive Stock Option Plan:
Options outstanding....................................... 463,744 --
Options available for grant............................... 234,283 698,027
------- -------
Total common shares reserved for future issuance
at June 30, 1998................................. 781,908
======= =======
</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 shareholders authorized the
sale of up to 170,000 shares of common stock over five years pursuant to the
plan.
NOTE 9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for diluted net income per share
Net income as reported............................ $4,139,219 $2,726,147 $1,240,454
Accretion of cumulative preferred stock dividend..... -- (101,077) (263,050)
---------- ---------- ----------
Numerator for computing basic net income per share... $4,139,219 $2,625,070 $ 977,404
========== ========== ==========
Denominator:
Denominator for basic net income per
share -- weighted average common shares........... 5,330,188 3,445,748 606,353
---------- ---------- ----------
Effect of dilutive securities:
Weighted average of all convertible redeemable
preferred stock outstanding....................... -- 1,130,200 2,934,029
Net effect of dilutive stock options based on the
treasury stock method using average market
price............................................. 288,289 347,119 253,996
Net effect of dilutive stock warrants based on the
treasury stock method using average market
price............................................. 23,713 21,088 586
---------- ---------- ----------
Dilutive potential common shares..................... 312,002 1,498,407 3,188,611
---------- ---------- ----------
Denominator for diluted net income per share......... 5,642,190 4,944,155 3,794,964
========== ========== ==========
Basic net income per share............................. $ 0.78 $ 0.76 $ 1.61
========== ========== ==========
Diluted net income per share........................... $ 0.73 $ 0.55 $ 0.33
========== ========== ==========
</TABLE>
32
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1998 1997 1996
---- ---------- --------
<S> <C> <C> <C>
Current income tax provision............................ $2,672,362 $2,036,015 $763,476
Deferred income tax benefit............................. (540,037) (568,090) (95,539)
---------- ---------- --------
Income tax provision.................................... $2,132,325 $1,467,925 $667,937
========== ========== ========
</TABLE>
Significant components of the Company's deferred tax benefits are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets (liabilities):
Fixed assets.............................................. $ 56,701 $ (43,886)
Inventories............................................... 825,643 703,213
Accrued expenses.......................................... 578,680 266,952
Bad debt reserves......................................... 171,994 128,483
Other..................................................... 100,330 138,549
---------- ----------
Net deferred tax benefit.................................... $1,733,348 $1,193,311
========== ==========
</TABLE>
A reconciliation from the U.S. statutory rate to the effective tax rate is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. 34.0% 34.0% 34.0%
Other....................................................... -- 1.0 1.0
---- ---- ----
34.0% 35.0% 35.0%
==== ==== ====
</TABLE>
NOTE 11. REVENUE AND OPERATIONS
During fiscal 1998, 1997, and 1996, 58%, 54%, and 41%, respectively, of
total net sales were to five customers. Receivables from these five customers
represent 60% and 36% of total accounts receivable at June 30, 1998 and 1997,
respectively.
Revenues from customers that represent more than 10% of total revenues are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
customer
A.................................................. $ -- $ -- $2,665,000
B.................................................. -- -- 3,129,000
C.................................................. 15,897,400 12,836,000 --
D.................................................. 11,546,258 5,686,000 --
</TABLE>
NOTE 12. 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, 1998, 1997, and 1996 amounted to
$1,940,798, $1,322,204, and $655,079, respectively.
33
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease commitments under noncancelable leases and service
agreements as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 2,349,842
2000........................................................ 2,779,483
2001........................................................ 2,841,393
2002........................................................ 2,717,589
2003........................................................ 2,720,869
Thereafter.................................................. 12,077,707
-----------
$25,486,883
===========
</TABLE>
NOTE 13. 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 $304,000, $159,000, and
$72,000 in fiscal 1998, 1997, and 1996, respectively. The Company does not
provide other post-retirement benefits.
NOTE 14. 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.
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 $489,000, $92,000, and
$335,000 in fiscal years 1998, 1997, and 1996, respectively.
A director of the Company was also a partner in the Company's law firm.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR 1998
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue............................................. $16,030 $16,259 $18,265 $19,427
Gross Margin........................................ 2,732 2,771 3,057 3,136
Operating Income.................................... 1,355 1,397 1,602 1,818
Net Income.......................................... 907 947 1,076 1,209
Basic EPS........................................... $ 0.17 $ 0.18 $ 0.20 $ 0.22
Diluted EPS......................................... $ 0.16 $ 0.17 $ 0.19 $ 0.21
</TABLE>
34
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR 1997
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue............................................. $10,076 $12,010 $14,295 $15,753
Gross Margin........................................ 1,685 2,027 2,449 2,841
Operating Income.................................... 838 952 1,110 1,253
Net Income.......................................... 487 600 778 861
Basic EPS........................................... $ 0.63 $ 0.21 $ 0.15 $ 0.17
Diluted EPS......................................... $ 0.12 $ 0.13 $ 0.14 $ 0.15
</TABLE>
- ---------------
(1) All outstanding preferred stock was converted to common stock in connection
with the Company's initial public offering. In accordance with FAS 128,
Basic EPS for periods prior to the IPO exclude effects of preferred stock
dividends.
35
<PAGE> 37
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SEAMED CORPORATION
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO OTHER
BEGINNING OF COST AND ACCOUNTS -- DEDUCTIONS -- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
----------- ------------ ---------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ==========
Year Ended June 30, 1998:
Deducted from asset accounts:
Allowance for uncollectible
accounts................. $377,890 $215,354 $ 87,379(1) $ 505,865
Warranty reserve................ $376,436 $549,227 $341,553(2) $ 584,110
-------- -------- -------- ----------
$754,326 $764,581 $428,932 $1,089,975
======== ======== ======== ==========
</TABLE>
- ---------------
(1) Write-off of uncollectible accounts, net of recoveries
(2) Actual warranty costs incurred
36
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 November 5, 1998.
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 November 5, 1998.
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 November 5, 1998.
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 November 5, 1998.
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 20 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 20 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, 1998.
37
<PAGE> 39
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 29th day of September, 1998.
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 29th day of September, 1998.
<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 Financial
Edgar F. Rampy 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>
38
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
3.1# Amended and Restated Articles of Incorporation of the
Registrant..................................................
3.2+ Bylaws of the Registrant....................................
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.................................
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 First Amendment dated September 15, 1997 to Industrial Real
Estate Lease (Building 2) dated September 10, 1996, between
Washington Capital Management, Inc. and SeaMED
Corporation.................................................
10.4+ Option Agreement dated September 10, 1996, by and between
Washington Capital Management, Inc. and SeaMED
Corporation.................................................
10.5++ 1997 SeaMED Corporation Employee Nonqualified Stock Option
Plan........................................................
10.6* Design, Manufacturing and Supply Agreement dated April 7,
1997, made by United States Surgical Corporation and SeaMED
Corporation.................................................
10.7*** 1995 SeaMED Corporation Stock Option and Incentive Plan, as
amended and approved by the Company's shareholders on
October 30, 1997............................................
10.8# Business Loan Agreement dated July 31, 1997 between SeaMED
Corporation and Keybank N.A. ...............................
10.9# Revolving Note, Principal Amount $20,000,000, dated July 31,
1997 made by SeaMED Corporation in favor of Keybank N.A. ...
10.10# Term Note, Principal Amount $625,000, dated July 31, 1997
made by SeaMED Corporation in favor of Keybank N.A. ........
10.11 Extension Agreement dated June 30, 1998 between SeaMED
Corporation and Keybank N.A. extending term of Loan
Agreement and Note..........................................
10.12 Manufacturing Agreement dated as of May 14, 1998, made and
entered into by SeaMED Corporation and Coinstar, Inc. ......
10.13 Promissory Note dated June 30, 1998 made by SeaMED
Corporation payable to Keybank N.A. in the amount of
$4,000,000..................................................
10.14 Real Estate Lease Agreement dated May 1, 1998 between SeaMED
Corporation and Children's Health Care System...............
10.15 Description of Non-Employee Director Stock Option Policy....
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 Registration Statement on Form S-8 for
its 1997 SeaMED Corporation Employee Nonqualified stock Option Plan filed
with the Securities and Exchange Commission.
* Filed previously with the Company's report of Form 10-K for the fiscal year
ended July 3, 1997 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.
<PAGE> 41
*** Filed previously with the Company's quarterly report on Form 10-Q for the
quarter ended January 1, 1998, filed with the Securities and Exchange
Commission.
# 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.
<PAGE> 1
EXHIBIT 10.3
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is made this 15th day of September, 1997 by
and between Washington Capital Management, Inc., as Investment Manager for
Locals 302 and 612, International Union of Operating Engineers-Employers
Construction Industry Retirement Fund, (the "Landlord") and SeaMED Corporation,
a Delaware corporation, (the "Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated
September 10, 1996 (the "Lease"), for approximately 30,000 square feet located
in Building "B", Tract 41, Highlands Campus, (the "Premises"), as more fully
described in the Lease; and
WHEREAS, the Tenant and Landlord desire to modify the Base Rent, Premises,
Tenant Improvement Allowance, and Core and Shell definition and, modify the
Lease accordingly;
NOW, THEREFORE, consideration of the covenants and agreements contained
herein, the parties hereby mutually agree as follows:
1. Premises. Pursuant to Section 1.03 (Premises) of the Lease, the
"Premises" shall be expanded to 40,500 square feet in Building B as outlined on
Exhibit A-2, attached hereto and by reference made a part hereof, which shall
replace and supersede Exhibit A-1 of the Lease. The Premises shall expand in
accordance with the schedule provided in paragraph 2 below unless otherwise
accelerated by Tenant as allowed under paragraph 4 below.
2. Premises Expansion/Rent Schedule. Effective upon the Commencement Date,
the Base Rent as set forth for in Section 1.10 of the Lease shall be modified as
set forth below:
<TABLE>
<CAPTION>
MONTH PREMISES SF BASE RENT
------- ----------- -----------
<S> <C> <C>
1-6 40,500 $ 43,335.00
7-12 60,750 $ 65,002.00
13-36 81,000 $ 86,670.00
37-72 81,000 $ 94,080.00
73-108 81,000 $102,156.00
109-120 81,000 $110,960.00
</TABLE>
3. Common Expenses. Tenant's share of Common Expenses, as described in
Section 4.02 of the Lease, shall be based upon the Premises square footage as
described in the schedule outlined in Paragraph 2 above, or as accelerated by
Tenant under paragraph 4 below. Notwithstanding the foregoing Tenant shall pay
100% utility charges (including, without limitation, electricity, gas, water,
sewer and garbage) for the entire building from the initial date of occupancy.
<PAGE> 2
4. Early Expansion. At Tenant's sole option, Tenant may expand the
Premises prior to the dates described in Paragraph 2 above. If Tenant wishes to
expand ahead of the above schedule, Tenant shall give 10 days written notice to
Landlord of the area that Tenant wishes to be added to the Premises and the date
of the addition; provided that in no event shall the added space be less than
5,000 square feet. On the date of the expansion, the area included in the
Premises, the Base Rent and Tenant's share of Common Expenses shall each be
adjusted accordingly. In addition, Landlord's property manager, with prior
notice, shall review the Premises on a regular basis and, if in the Landlord's
property manager's sole discretion, it is determined that Tenant is using any
area outside the then Premises for any purpose other than Temporary Dead Storage
(as defined below), then Landlord's property manager shall notify Tenant and
adjust the Premises, Base Rent and Tenant's share of Common Expenses
accordingly, as of the first day of the current month. For example, if Tenant
expands the Premises by using additional areas without notifying the Landlord,
and if the property manager first notices it on May 15, the Premises shall be
expanded in relation to that space (but not less than 5,000 square feet) as of
May 1. The retroactive increase in Base Rent and other charges shall be paid by
Tenant within 10 days after Tenant receives the invoices. Notwithstanding, the
foregoing from time to time and on a temporary basis only, Tenant may use
portions of the Building outside the Premises for the sole purposes of dead
storage of boxes, unused equipment and unused furniture ("Temporary Dead
Storage"). Any other use of space beyond the scheduled Premises which involves
more than Temporary Dead Storage shall be construed as use which causes the
Premises to be automatically expanded. The Premises shall be expanded in
increments of not less than 5,000 square feet regardless of whether Tenant is
using all of that area. Tenant reserves the right to vacate the early expanded
premises in the event that Landlord and Tenant are in disagreement with respect
to the size of the early expanded premises.
5. Deleted Provisions. The following paragraphs of the Lease are hereby
terminated and of no further force and effect:
1) Section 1.06
2) Article Seventeen: Right to Lease Entire Building
3) Article Eighteen: Right of First Opportunity
6. Security Deposit. On or before the date that the Premises are expanded
to 60,750 square feet, Tenant shall increase the Security Deposit to $65,000. On
or before the date that the Premises are expanded to 81,000 square feet, Tenant
shall increase the Security Deposit to $86,000.
7. Modified Provisions. Paragraph F (Tenant Improvement Allowance),
Paragraph G (Reduction in Base Rent for Tenant Improvement Savings), Paragraph H
(Increase in Base Rent for Additional Allowance), Paragraph I (Funding for
Tenant Improvements in Excess of $840,000) of Exhibit B (Landlord's Work) of the
Lease shall be replaced with the following:
F. Tenant Improvement Allowance. Landlord shall provide a tenant
improvement allowance of $2,340,000 (inclusive of construction costs, sales tax,
permit fees and architectural fees) for improvements to the Premises above the
Core and Shell (the "Tenant
<PAGE> 3
Improvements"). At Tenant's option, Landlord shall provide an additional
allowance of up to $160,000 (the "Additional Allowance"). The Additional
Allowance shall be amortized over the Lease Term as set forth in Paragraph H
below. Unless otherwise agreed by Landlord and Tenant, all tenant improvements
shall be competitively bid by at least two (2) union subcontractors mutually
agreed upon by Landlord and Tenant.
G. Reduction in Base Rent for Tenant Improvement Savings. If the
cost of the Tenant Improvements is less than $2,340,000, then the Base Rent
shall be reduced using the formula set forth below:
ABR = BR- [CS X 10%)/12]
ABR = Adjusted Base Rent
BR = Base Rent set forth in Paragraph 2 of this Amendment
CS = Cost Savings ($2,340,000 minus actual cost of the Tenant
Improvements)
H. Increase in Base Rent for Additional Allowance. If Tenant
utilizes part or all of the Additional Allowance, the monthly Base Rent shall be
increased by an amount equal to what the monthly payment would be on a 10 year
loan at 11 percent with a principal balance of the cost of additional Tenant
Improvements funded by Landlord.
I. Funding of Tenant Improvements in Excess of $2,500,000. If Tenant
requests Tenant Improvements in excess of $2,500,000, Landlord agrees to
construct the additional Tenant Improvements provided that Tenant shall be
solely responsible for the cost of such work and Tenant will fund those costs
prorata as the payments are due to the contractor. Landlord's share of each
payment to the contractor for Tenant Improvements shall be the fraction of the
numerator which is $2,500,000, and the denominator is the estimate by the
contractor of the actual cost of the Tenant Improvements and Tenant shall pay
the remainder. For example, if the contractor estimates that a particular
additional improvement shall cost $300,000, Landlord shall pay 89.3% of each
invoice, and Tenant shall pay the remainder. When the Tenant Improvements have
been completed and final numbers are available, appropriate adjustments shall be
made to the amounts previously paid by Landlord and Tenant so that Landlord has
paid $2,500,000 and Tenant has paid the balance.
8. Core and Shell. Schedule 2, attached hereto and by reference made a
part hereof, shall replace and supersede Schedule 1 of the Lease.
Notwithstanding anything to the contrary in the Lease or Amendment, Schedule 2
shall define the Core and Shell ("Core and Shell") and the limits of Landlord's
Work.
9. Authorization. Tenant warrants that all necessary corporate actions
have been duly taken to permit Tenant to enter into this First Amendment to
Lease and that each undersigned officer has been duly authorized and instructed
to execute this First Amendment To Lease.
<PAGE> 4
10. No Other Modifications. Except as expressly modified above, all terms
and conditions of the Lease remain in full force and effect and are hereby
ratified and confirmed.
LANDLORD TENANT
Washington Capital Management, SeaMED Corporation, a Delaware
Inc., as Investment Manager of corporation
Locals 302 and 612, International
Union of Operating Engineers
Employers construction Industry By: /s/ DON RICH
Retirement Fund. --------------------------------
Its: Sr. VP, Operations
--------------------------------
By: [signature] Date: 9-19-97
-------------------------------- --------------------------------
Its:
--------------------------------
Date: 9-23-97
--------------------------------
<PAGE> 5
STATE OF WASHINGTON )
) ss.
County of KING )
On this 19 day of September, 1997, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Don Rich, to me known to be the person who signed as VP of
SeaMed, voluntary act and deed of such party for the uses and purposes therein
mentioned; and on oath stated that he was authorized to execute the said
instrument on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day
and year first above written.
[SIGNATURE]
--------------------------------------
NOTARY PUBLIC,
residing at Bellevue
My appointment Expires 1/18/2001
STATE OF WASHINGTON )
) ss.
County of KING )
On this 23d day of September, 1997, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael S. Barnes, to me known to be the person who signed
as VP of Washington Capital Management, voluntary act and deed of such party for
the uses and purposes therein mentioned; and on oath stated that he was
authorized to execute the said instrument on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day
and year first above written.
[SIGNATURE]
--------------------------------------
NOTARY PUBLIC,
residing at Seattle
My appointment Expires 4/23/00
<PAGE> 1
EXHIBIT 10.11
[LOGO]
MODIFICATION AND/OR EXTENSION AGREEMENT
Date: July 30, 1998
Borrower(s): SEAMED CORPORATION
Lender: KEYBANK NATIONAL ASSOCIATION
Note: Dated July 31, 1997, in the principal amount of $20,000,000.00.
Loan #: 31-314107-2009901
FOR VALUE RECEIVED, Borrower and Lender hereby agree to modify the
above-referenced Loan and Promissory Note and/or Loan Agreement as follows:
1. MODIFICATION AND/OR EXTENSION PROVISIONS.
o The maturity date of the Loan is hereby extended to October 1,
2001.
2. CONDITIONS. The modifications and/or extension described above are subject
to and conditioned upon Borrower's full satisfaction of all of the following on
or before the date first stated above, time being of the essence.
A. There shall be no uncured event of default under the Loan, nor
any event or condition which with notice or the passage of time
would be an event of default thereunder.
B. Borrower shall deliver to Lender a fully executed original of
this Modification and/or Extension Agreement.
C. All expenses incurred by Lender in connection with this Agreement
(including without limitation, attorney fees, recording charges,
charges for title policy update(s), escrow charges, costs of
obtaining updated or additional appraisal(s) or collateral
valuations, if required by Lender) shall be paid by Borrower.
D. Borrower shall comply with the following additional conditions:
o No additional conditions apply.
3. GENERAL PROVISIONS. Except as modified above, all other provisions of the
Promissory Note and any other documents securing or relating to the Loan (the
"Loan Documents") remain in full force and effect. All security given for the
Loan and all guarantees of the Loan (as applicable) shall continue in full
force. Borrower warrants and represents to Lender that it has full right, power
and authority to enter into this agreement and to perform all its obligations
hereunder, and that all information and materials submitted to Lender in
connection with this modification are accurate and complete. Borrower warrants
that no default exists under the Loan Documents. Borrower reaffirms its
obligation to pay the Loan in full and reaffirms the validity and enforceability
of the Loan Documents, without set-off, counterclaim or defense.
-1-
<PAGE> 2
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
LENDER: BORROWER:
KEYBANK NATIONAL ASSOCIATION
By: [SIG] SEAMED CORPORATION
---------------------------------
Sarah Bullock Vice President
By: /s/ Edgar F. Rampy
-------------------------------------
EDGAR F. RAMPY VICE PRESIDENT
2
<PAGE> 1
EXHIBIT 10.12
SUPPLY AGREEMENT
This Supply Agreement and all attachments ( collectively, the "Agreement") is
made by Coinstar, Inc. ("Buyer") its principal place of business at 1800-114th
Avenue S.E., Bellevue, Washington 98004, and SeaMED Corporation ("Seller") its
principal place of business at 14500 N.E. 87th Street, Redmond, Washington
98052. This Agreement sets forth the terms and conditions pursuant to which
Buyer and Seller will conduct business for the life of this Agreement.
Seller and Buyer agree as follows:
SECTION 1. DEFINITIONS
Whenever used in this Agreement, the following terms shall have the following
specified meanings:
1.1 "Buyer's Plant" means Buyer's plant located in Bellevue, Washington or such
other location in the United States as Buyer may specify for delivery of any
Product.
1.2 "Customer" means any customer of Buyer, any subsequent owner, operator or
user of any Product and any other Person that has or acquires an interest in any
Product.
1.3 "Order" means Buyer's purchase order for Products.
1.4 "Documentation" means Specifications and/or Inspection Procedures.
1.5 "Inspection Procedures" means detailed inspection procedures for Product
quality assurance and to assure compliance with Specifications in the form
delivered to Seller.
1.6 "Lot" means the number of Products to be delivered for acceptance testing at
the end of each week pursuant to firm delivery dates under an Order.
1.7 "Person" means any individual, corporation, partnership, trust, association
or other entity.
1.8 "Purchased Product" means Product purchased by Buyer in accordance with the
acceptance procedures under Section 4.1.
1.9 "Product" means the Coinstar, Inc. Jefferson-1000 Self Service Coin Machine
and Ansel System Coin Counting Mechanism (and any spare parts or components of
the same), with the exception of the Ansel Retrofit Kits, manufactured or to be
manufactured by Seller, as more particularly described in the Specifications.
Buyer and Seller may mutually agree to amend Exhibit A to include other
electronic assemblies as specified in the future.
<PAGE> 2
1.10 "Specifications" means the specifications for each Product in the form
delivered to Seller, as may be changed from time to time pursuant to paragraph
2.1.
1.11 "Term" means the period commencing with the date of this Agreement and
ending on the third anniversary date of this Agreement. Thereafter, the
Agreement shall continue automatically for subsequent one (1) year terms. Either
party can terminate this Agreement by giving written notice to the other more
than thirty (30) days prior to the end of any one (1) year term upon completion
of the initial three (3) year term.
1.12 "Tooling" means Buyer purchased tooling set forth in Exhibit B, as the same
may be amended from time to time.
1.13 "Warranty Period" means, with respect to each Purchased Product listed in
Exhibit A, the period ending upon the expiration of eighteen (18) months after
the date of shipment and invoice of such Product from Seller's Plant.
1.14 "Spare Parts Warranty Period" means the period ending upon the expiration
of ninety (90) days after the date of installation of such Spare Part (but not
to exceed six (6) months from the date of delivery of such spare part to Buyer).
However, with respect to the Spare Parts listed in Exhibit C, Seller shall pass
on the benefits of any extended warranty to Buyer. Upon Buyer's request and
under normal circumstances, Seller will use best efforts to ship a reasonable
quantity of the Spare Parts listed in Exhibit C to Buyer within 30 days.
SECTION 2. PRODUCT CHANGES; TOOLING
2.1 Changes to Documentation. Seller shall revise the Documentation only in
accordance with the Document Change Control Agreement set forth in Exhibit D.
Buyer shall be the owner of all Documentation and all associated patent,
copyright, trade secret and other proprietary rights with the exception of
Seller's proprietary manufacturing processes and Seller's proprietary STEMS
software.
2.2 Tooling. Seller shall hold the Tooling for use in the manufacture, assembly
and testing of Products. Buyer shall bear the cost of manufacturing,
preventative maintenance and normal wear repairing of all Tooling. Buyer shall
be the owner of all Tooling (and Seller shall place a permanent marking on all
Tooling showing Buyer's ownership and shall execute and deliver any and all
documents as Buyer may reasonable request to vest, evidence or give public
notice of Buyer's ownership). Seller shall deliver any and all Tooling to Buyer
promptly on written request and in any event at the end of the Term in good
operating condition and state of repair, ordinary wear and tear excepted,
together with any and all related specifications, drawings, manuals,
documentation and records (e.g., pertaining to the operation, maintenance and
repair of the Tooling).
2.3 Buyer Supplied Components. Any parts inventory of Buyer supplied components
shall remain the sole and exclusive property of Buyer.
<PAGE> 3
SECTION 3. PURCHASE AND SALE OF PRODUCTS
3.1 Purchase Agreement. This Agreement is a supply agreement whereby the Buyer
agrees to purchase Product for the term shown from the Seller. At a minimum,
Buyer agrees to purchase all of its requirements for Product in the United
States up to and including 1800 units per year during the initial three (3) year
term of this Agreement. Buyer may choose to build Product itself or through a
third party so long as the yearly commitment to Seller of 1800 units is not
affected. Should the annual volume of units ordered by Buyer be greater than or
less than 1800 units per year, Seller will re-calculate the unit price
accordingly based on the pricing methodology in Exhibit A-1 and Exhibit F. Any
volume price adjustments will be implemented as go forward pricing not
retroactively. Buyer will provide Seller with an opportunity to bid on any
Products for sale outside of the United States provided no exclusion of U.S.
suppliers exists. Notwithstanding Seller's right to bid on any Products for sale
outside of the United States, Buyer shall have the right to select any seller at
its sole discretion.
3.2 Exclusion of Ansel Retrofit Kits. Buyer and Seller agree to exclude the
Product known as "Ansel Retrofit Kits" from this Agreement. Buyer and Seller
agree to review Ansel System Retrofit Kit pricing within two (2) months of
executing this Agreement. Buyer and Seller will work together to reduce the cost
of the retrofit kits and upon mutual acceptance of terms will amend this
Agreement to add the Ansel Retrofit Kits to the Product definition.
3.3 Production Products. Seller shall manufacture, sell and deliver to Buyer
such Products as Buyer may order from Seller during the Term.
3.4 Right to Bid on New Product. Seller shall have the right to bid on the
manufacture of any new Product that Buyer may decide to introduce during the
term of this Agreement. For the purposes of this Agreement, new Product is
defined as a Product which differs from the specifications in Exhibit A by more
than 50% of component content, provided that such component content changes are
not resultant from on-going cost reduction efforts or added product features to
the Products listed in Exhibit A. Notwithstanding Seller's right to bid on new
Product, Buyer shall have the right to select any seller at its sole discretion.
3.5 Segregation of Engineers and Early Notification of Competing Products.
During the term of this agreement, Seller agrees that the employee's of Seller
that are engaged or have been engaged in the design and development of Buyer's
product will not be used to develop, or manufacture competing products. Seller
further agrees to use its best efforts to inform Buyer of the manufacture of
competing products prior to any public announcement. If such disclosure is made,
Buyer agrees to treat such information in confidence.
3.6 Orders; Delivery Schedule. Each of Buyer's Orders for Products shall be
submitted to Seller substantially in the form of a purchase order or such other
form as may be utilized by Buyer for ordering Products under this Agreement.
Each Order shall contain a description of the Products ordered, specify the
shipping destination (if any at that time), specify the quantity of Products
ordered and specify the dates on which each ordered Product is to be made
available to
<PAGE> 4
Buyer for acceptance testing with respect to the first three month period
covered by the Order schedule, along with a forecast of when additional Product
will be acceptance tested for the remaining quarters covered by the Order. No
less than ninety (90) days prior to such forecasted quarter, Buyer will supply
Seller with a definitive schedule for Product acceptance testing timing and
quantities for such quarter. The definitive quantity may vary from the
forecasted quantity by plus or minus thirty Percent (30%). Time is of the
essence in this Agreement. If one or more Lots is not made available for
delivery and acceptance testing in accordance with the definitive schedule
provided by Buyer ("Short Lot(s)"), and the reason(s) for such delay are within
the reasonable control of Seller, and Seller fails to ensure that, within eight
(8) weeks from the date of the first Short Lot, the cumulative number of
Products in Lots actually made available for acceptance testing and delivery is
again equal to the number required through that date under the definitive
schedule, Seller shall be in material breach of this Agreement and Buyer may
terminate this Agreement and all or part of any outstanding Orders at any time
thereafter. Upon such termination, Buyer shall pay Seller an amount equal to
Seller's Burdened Costs (as defined in Section 3.9.2 below) for raw materials
which are purchased by Seller (or which Seller has then placed non-cancelable
purchase orders) specifically for the manufacture of such Products and which are
returned to Seller's suppliers where possible, sold or otherwise disposed of as
directed by Buyer.
3.7 Purchased Price. As full compensation for the Products and the performance
of Seller's obligations under this Agreement, Buyer shall pay Seller the price
for each Product as established in each order. Buyer requested changes to (a)
the Documentation or (b) to ordering components for subassemblies resulting in a
quantity less than the total purchase quantity for such Products under such
Order, may cause an increase or decrease in underlying material costs, and
therefore in the price of Products. All increases or decreases in material cost
due to such changes will be passed on to Buyer as direct material cost increases
or savings (as the case may be). Seller will provide Buyer detailed baseline
cost and actual costs for any such changes to support any price adjustments made
hereunder. The parties will work together to ensure that the mechanics and
documentation of implementing price changes occur in an efficient manner for
both Buyer and Seller. Burden rates as stated in Exhibit E will be fixed for the
initial three (3) year term of this Agreement. Buyer and Seller agree to met
every three (3) months during the term of the Agreement to discuss the
methodology (i.e. tooling, NRE, economic order buys, etc.) towards price
reduction and reduction of actual costs to manufacture Products. Seller and
Buyer agree to work together to continue to reduce the manufacturing cost of the
Products where possible.
3.8 Payment. Seller shall issue its invoice for the price of a Product upon
Buyer's approval of the Product pursuant to paragraph 4.1. Buyer shall pay
Seller the amount due under each of Seller's invoices within thirty (30) days
after Buyer's receipt of the invoice. Seller shall promptly furnish Buyer with
such documentation and information as Buyer may reasonably request to verify the
amount due under any of Seller's invoices. Payments otherwise due or payable
under this Agreement may be withheld by Buyer on account of any Product that
does not comply with the warranty set forth in paragraph 7.1 or the failure of
Seller to comply with any of its other obligations under this Agreement.
Applicable taxes will appear as additional amounts owing on invoices.
<PAGE> 5
3.9 Cancellation of Orders.
3.9.1 Buyer may not cancel any Order as it applies to Products scheduled
for delivery within ninety (90) days after Buyer gives Seller such notice of the
cancellation.
3.9.2 Buyer may cancel any Order as it applies to Products scheduled for
delivery more than ninety (90) days after Buyer gives Seller such notice of the
cancellation; provided that, with respect to canceled Products scheduled for
delivery more than ninety (90) days but less than three hundred sixty five (365)
days after Buyer gives Seller notice of the cancellation, Buyer shall agree to
pay Seller an amount equal to Seller's Burdened Costs (as defined below) for raw
materials which are purchased by Seller (or for which Seller has then placed
non-cancelable purchase orders) specifically for the manufacture of such
Products and which are returned to Seller's suppliers where possible, sold or
otherwise disposed of as directed by Buyer. Seller's "Burdened Costs" shall
equal the difference between the amount paid by Seller for such materials plus a
handling charge of ten percent (10%) plus any bill back by Seller's suppliers
for taking less than amounts ordered with respect to Product Orders and the
amount of any refund, credit, allowance or compensation received by or on behalf
of Seller for such return, sale or other disposition. Seller shall furnish Buyer
such receipts, documents and other information as Buyer may reasonably request
to verify Seller's net Burdened Costs under this Agreement.
3.9.3 No cancellation shall relieve Buyer or Seller of any of their
respective obligations under this Agreement as to any Products not canceled. If
Buyer purports to cancel all or any part of any Order for Seller's breach or
default and it is determined that Seller was not in breach or default that would
permit such cancellation, then such cancellation shall be deemed to have been a
cancellation pursuant to this paragraph and the rights and obligations of the
parties shall be determined accordingly.
3.10 Spare Parts. Seller will produce and sell and provide Buyer with spare
parts for the Products, which are configured and tested to the current Product
Specifications pursuant to Orders for such spare parts. During the first term
year of this Agreement, Buyer shall provide Seller with a 1 year forecast of
spare parts requirements and shall provide firm orders for spare parts
quarterly. Seller shall invoice Buyer for Seller's actual spare part direct
material and assembly labor cost plus 10 percent (10%) For the subsequent term
years of the Agreement, Seller shall invoice Buyer for Seller's actual spare
part direct material and assembly labor cost plus 10 percent (10%) when spare
parts are ordered with annual Product Orders. For spare parts orders not made in
connection with annual Product Orders, Seller shall invoice Buyer for Seller's
actual spare part direct material and assembly labor cost plus seventeen percent
(17%). On Orders for spares that provide for future delivery to Buyer, Seller
will reasonably accommodate Buyer's requests, as necessary, to delay delivery or
utilize some portion of such spare parts in future Product manufacturing.
SECTION 4. ACCEPTANCE, DELIVERY AND SHIPMENT
<PAGE> 6
4.1 Acceptance. Delivery of Products to Buyer shall be deemed to have occurred
upon acceptance of each lot of Products under any Order in accordance with the
following acceptance procedure. Seller shall notify Buyer when a particular
Product Lot is ready for acceptance testing. Buyer will promptly inspect all or
a portion of such Product Lot at Seller's Plant. Buyer many conduct a
statistical sampling of each such Lots of Products. If five percent (5%) or more
of the lot fails to comply with the warranties set forth in paragraph 7.1, then
Seller shall repair the non-conforming Products at Seller's plant using Seller's
labor, tools, and materials, all at Seller's expense. However, if Seller will
not be able to make, or does not make, such required repairs within a reasonable
time, Buyer may, at its option, repair the non-complying Products and charge
Seller the reasonable cost of the repair. Even if a Product Lot is accepted,
Seller shall remain responsible to correct non-conformities in any Product in
such Lot under paragraph 7.2.
4.2 Storage of Completed Products. Accepted Product lots shall be stored in a
clean and safe condition by Seller at Seller's Plant or any other mutually
acceptable location until Buyer requests shipment of individual Products to
Buyer's Plant. Seller shall retain all risk of loss with respect to such stored
Products until shipment. Once accepted pursuant to Section 4.1, Buyer shall
retain all right, title and interest in and to such Products. Seller shall
execute any and all documents reasonably required in order to protect Buyer's
ownership interest in all accepted and delivered Products. Seller shall maintain
general liability and any other insurance reasonably required to insure against
loss or damage of any nature to the Products and Tooling in amounts equal to the
full insurable value thereof. At Buyer's request, Seller shall provide a
certificate evidencing the above required insurance coverage.
4.3 Shipment. Upon Buyer's request, Seller shall properly mark and otherwise
identify each accepted Product for shipment to Buyer's Plant. Buyer shall
arrange and pay for all transportation, handling, transit insurance, duties,
governmental inspections and other requirements for delivery of the Products in
accordance with this Agreement. Shipments shall be F.O.B. Seller's Plant.
4.4 Packaging. Seller shall properly package the Purchased Product according to
Buyer's instructions for protection against damage or deterioration that may
result from shipment, handling, storage or other cause.
4.5 Schedule. Seller shall make the Products available for Buyer's acceptance
testing in accordance with the schedule set forth in the applicable Order, as
revised and updated as described in Section 3.6. However, Seller shall not be
liable for delays in delivery due to causes which are not reasonably
foreseeable, which are beyond Seller's control and which cannot be overcome by
the exercise of reasonable diligence; provided that Seller gives Buyer prompt
written notice of the circumstances giving rise to the delay, the anticipated
duration of the delay and the action being taken by Seller to overcome or
mitigate the delay. The specified delivery date shall be extended by the period
of any such delay and the shipment schedule shall be recovered in accordance
with section 3.6. unless otherwise agreed to by the parties. Shipment delays
requested by the Buyer or due to Buyer supplied materials, design changes,
software or other factors under the primary control of the Buyer may result in
an inventory deposit from the Buyer to the Seller.
<PAGE> 7
4.6 Excess and Obsolete Material. During the performance of this Agreement,
Seller will purchase materials to support the requirements of the Buyers
program. Certain materials which Seller will acquire will be subject to
minimum-buy requirements and quantity price breaks which may result in excess
material accumulation which will be the responsibility of the Buyer.
Additionally, design changes may cause materials to become obsolete. Obsolete
materials due to a design change will be returned to suppliers when possible.
Non-returnable inventory will be charged to the buyer. During the performance of
this Supply Agreement, Seller will provide the Buyer with periodic updates of
the status and amount of excess or obsolete material. Seller will use its best
efforts to minimize the impact of excess material and/or obsolete materials on
Buyer's program. Seller will return materials to suppliers for credit, less
restocking fees, when appropriate. However, final costs associated with the
accumulation of excess and obsolete materials are chargeable and payable by the
Buyer. Any excess or obsolete inventories will be charged to the Buyer at
Seller's cost plus material burden, but without profit. Disposition of excess or
obsolete materials will be coordinated with the Buyer to minimize the impact of
cost to the Buyer where possible.
SECTION 5. INSPECTION
5.1 Seller's Plant. Seller's Plant and all Tooling shall be subject to
inspection by Buyer at any time during normal business hours upon twenty-four
(24) hours prior notice. Seller shall provide Buyer with safe and sufficient
access for such inspection.
5.2 By Seller. Seller shall perform such detailed inspections and tests of each
Purchased Product as are necessary to ensure that such Product complies with the
requirements of this Agreement. Without limiting the generality of the
foregoing, Seller shall:
(a) comply with the Inspection Procedures applicable to each Purchased
Product;
(b) inspect and test all materials and components to be incorporated in
any Purchased Product on receipt in order to assure material and
component quality; and
(c) keep and maintain complete and adequate records of all inspections
and test performed on Purchased Products, and make such records
available to Buyer for examination, copying and audit.
5.3 By Buyer. All Products shall at all times be subject to inspection and
testing by Buyer upon 24 hours prior notice to Seller. Seller shall provide
Buyer with safe and sufficient access, equipment and facilities for any such
inspection or test prior to delivery. No acceptance of any Products shall be
construed to result from any inspection, test or delay or failure to inspect or
test by Buyer prior to final inspection and test of such Products by Buyer.
Buyer shall be afforded a reasonable opportunity to inspect each Product for
damage at its specified destination. No inspection, test, delay or failure to
inspect or test, or failure to discover any defect or noncompliance by Buyer
shall relieve Seller of any of its obligations under this Agreement or
<PAGE> 8
impair Buyer's right to reject defective or non-complying Products or any other
right or remedy afforded to Buyer.
SECTION 6. COMPLIANCE WITH LAWS AND STANDARDS
6.1 General. Seller shall comply (and shall ensure that all Products and
Seller's subcontractors and suppliers of every tier comply) with all applicable
laws, ordinances, rules, regulations, orders, licenses, permits and other
requirements, now or hereafter in effect, of any governmental authority. Seller
shall furnish such documents as may be required to effect or evidence such
compliance. All laws, ordinances, rules, regulations and order required to be
incorporated in agreements of this character are incorporated in this Agreement
by reference.
6.2 Industry Standards. Seller shall produce all Products in accordance with,
and shall ensure that each Product complies with, the following requirements as
now or hereafter in effect:
(a) Federal Communications Commission ("FCC") Class "A" Standard agency
approvals and;
(b) Underwriters Laboratory ("UL") Standard 751 agency approvals.
Seller shall provide Buyer with such specifications, testimony and other
assistance as Buyer may reasonably request in connection with the listing,
approval, registration or satisfaction of similar requirements of any trade
association or other organization, as the same may apply to the Product.
SECTION 7. WARRANTY
7.1. Warranty. Seller warrants to Buyer that:
(a) each Product shall be free from defects in material and workmanship;
(b) each Product shall be free from all defects in design, except to the
extent manufactured to a detailed design furnished by Buyer;
(c) all materials, parts components and other items incorporated in any
Product shall be new and suitable for its intended purposes;
(d) all Products shall strictly comply with the Documentation; and
(e) each Product shall comply with the requirements of this Agreement
and the Order pursuant to which it is purchased by Buyer.
7.2 Correction of Noncompliance. If at any time during the Warranty Period Buyer
notifies Seller of any failure to comply with the warranty set forth in
paragraph 7.1, Seller shall promptly correct such noncompliance (e.g., repair or
replacement of the noncomplying Product)
<PAGE> 9
and remedy any damage to the Product resulting from such failure. Buyer will pay
the costs of transportation to Seller's Plant for warranty service. Seller will
pay all other transportation and other costs incidental to such correction and
remedying. If Buyer rejects any Products that do not comply with the warranty
set forth in paragraph 7.1, Seller shall have a reasonable time to correct the
noncompliance. If Seller fails to correct the noncompliance within a reasonable
time, Buyer may cancel the Order as it applies to the noncomplying Products only
without any cost, obligation or liability to Buyer with respect to such
noncomplying Products and without prejudice to any other rights or remedies of
Buyer with respect to such noncompliance (e.g., as to damages or cover).
7.3 Seller's Failure to Correct Noncompliance. If during the Warranty Period
Buyer requests Seller to correct any Product that does not comply with the
warranty set forth in paragraph 7.1 and Seller thereafter fails to correct the
noncompliance or otherwise comply with the requirements of paragraph 7.2, or
indicates its inability or unwillingness to comply, then Buyer may perform (or
cause performance of) the correction or otherwise achieve compliance by the most
expeditious means available to it (by contract or otherwise) and charge to or
otherwise recover (for example, by offset against the compensation otherwise
payable to Seller under this Agreement) from Seller all reasonable costs thereof
that are associated with the direct repair of the Product. Buyer's right to
perform corrections, achieve compliance and recover the costs thereof from
Seller shall not be interpreted or construed as obligating Buyer to make any
correction or otherwise achieve compliance. Further, Seller's obligations
(including warranty) shall not be limited or reduced in any way because of any
corrections performed or caused to be performed by Buyer or Buyer's rights to
perform the same. However, Seller will have no obligation for damage to a
Product where such damage is caused by the efforts of Buyer or Buyer's
representative in correcting the noncompliance.
7.4 Response Time. Seller shall use its best efforts to perform such warranty
service by a qualified service technician within (10) business days from the
time that Seller receives the defective Product part, assuming material
availability. If the claim is not within Seller's warranty obligations under
this paragraph 7, Seller shall immediately notify Buyer and, at Buyer's option,
shall either return such Product part to Buyer or shall perform the required
service under paragraph 7.5 as directed by Buyer.
7.5 Service Not Covered by Warranty. In the event that any Product requires
repair or other service that is not covered by Seller's warranty obligations
under this paragraph 7 (e.g., after expiration of the Warranty Period), Seller
shall provide such service at a rate as may be agreed upon by the parties.
Seller shall use its best efforts to complete such repairs within four (4)
business days in the case of a priority repair and within ten (10) business days
in the case of a normal repair.
7.6 Spare Parts. Seller warrants that spare parts shall be free from defects in
material and workmanship. If at any time during the Spare Parts Warranty Period
any spare part provided pursuant to this Section does not conform with the
above, the Buyer or, at the Buyer's option, the Buyer's designee shall return
such spare part to the Seller. The Seller shall, within seven (7) days following
receipt of the part, promptly repair or replace such spare part (dependent on
<PAGE> 10
material availability) 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 shall not exceed the then current surface
rate, freight charge charged by United Parcel Service ("UPS") or, if such UPS
freight charge is not readily available, the rate charged by a shipping company
similar to UPS.
7.7 Spare Parts Warranty. The Buyer and Seller will jointly create and
periodically review a list of spare components (not to exceed 15 parts) which
require extended (one (1) year) warranty per 1.14. Should the Seller's suppliers
provide an extended warranty to the Seller at no cost that same warranty will be
passed on to the Buyer at no cost. Should the Seller's supplier not provide such
warranty, the Buyer and Seller will negotiate in good faith on the additional
cost associated with supplying an extended warranty.
7.8 Ongoing Engineering Service. Seller shall provide such technical support
services to Buyer as the parties may agree upon during the Term and thereafter
until the expiration of the Warranty Period for all Products delivered under
this Agreement. Such services may include, without limitation, engineering
consulting services to modify, correct or enhance any Product to perform
according to its specifications or to its intended function. Seller's
engineering hourly rates for the Term are set forth on Exhibit E.
SECTION 8. ADDITIONAL OBLIGATIONS OF SELLER
8.1 Proprietary Nature of Products. The Documentation, Tooling and Products
involve valuable patent, copyright, trade secret and other proprietary rights of
Buyer. Accordingly, Seller shall not, without Buyer's prior written consent;
(a) sell any Product to any person other than the Buyer;
(b) manufacture any Product except for sale to Buyer under this
Agreement;
(c) deliver or disclose any Documentation, Tooling, or any confidential
or proprietary information of or relating to Buyer (e.g., whether of
a technical, financial, business, trade secret or other nature) to
any Person other than Buyer; or
(d) use any Documentation or Tooling for any purpose other than the
manufacture of Products for sale to Buyer under this Agreement.
Seller and Buyer shall each maintain as confidential any specifications,
drawings, blueprints, data, business information, trade secrets, manufacturing
processes, or other confidential information which Seller or Buyer learns or
acquires by virtue of this Agreement.
8.2 Component Specifications. Seller shall provide upon request from Buyer a
complete list of all parts and components used in the Product and the
manufacturers of such parts and components, specifically noting which parts or
components are available only from the manufacturer listed. Seller shall ensure
that all Products and pertinent parts and components of
<PAGE> 11
all Products are serialized and otherwise identified in accordance with any
reasonable requirements by Buyer.
8.3 Product Defect Notification. Seller shall immediately notify Buyer by fax or
telephone of any material or recurring defect, deficiency or nonconformity
discovered with respect to the Product.
8.4 Modification. Seller shall not modify or authorize any modification
affecting form, fit or function of any Product, or which would be significant
with respect to requirements or any governmental authority, without the prior
written consent of Buyer. Seller shall promptly disclose in writing to Buyer all
potential modifications (including, but not necessarily limited to, alterations,
improvements and enhancements), methods, applications, inventions, ideas and
know-how relating to the Product made by Seller during the Term.
8.5 Improvements. Seller hereby acknowledges that improvements to the Product
funded by the Buyer, which are unique to Buyer's program, shall be the sole
property of Buyer, and Seller shall provide Buyer, at Buyer's request and at a
reasonable charge, reasonable assistance in securing patents for such
improvements. Seller agrees to promptly disclose improvements to Buyer and to
execute documents reasonably requested by Buyer to evidence Buyer's ownership of
such improvements. Manufacturing process improvements developed by the Seller
shall be the property of the Seller.
SECTION 9 NOTICES
9.1 Notices. Any notice, request, authorization, direction or other
communication under this Agreement shall be given in writing and be delivered in
person or by first-class U.S. mail, properly addressed and stamped with the
required postage, to the intended recipient as follows:
If to Seller. If to Buyer.
Steven F. Bahr Scott Dean
Contracts Manager Director of Manufacturing and Quality
SeaMED Corporation Coinstar, Inc.
14500 NE 87th Street 1800-114th Avenue SE
Redmond, WA 98052 Bellevue, WA 98004
with copies to: with copies to:
Vice President, Operations Vice President, Program Management
and Development
Either party may change its address specified above by giving the other party
notice of such change in accordance with this paragraph.
9.2 Independent Contractor. Seller is an independent contractor, not an agent or
representative of Buyer. Seller shall not have any right, power or authority to
enter into any
<PAGE> 12
agreement for or on behalf of, or incur any obligation or liability of or to
otherwise bind Buyer. This Agreement shall not be interpreted or construed to
create an association, joint venture or partnership between the parties or to
impose any partnership obligation or liability upon either party.
9.3 Nonwaiver. The failure of either party to insist upon or enforce strict
performance by the other party of, any provision of this Agreement or to
exercise any right under this Agreement shall not be construed as a waiver or
relinquishment to any extent of such party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same shall be
and remain in full force and effect.
9.4 Survival. Paragraphs 6, 7, and 8.1 (and all provisions of this Agreement
which may reasonably be interpreted or construed as surviving the completion,
expiration, termination or cancellation of this Agreement) shall survive the
completion, expiration, termination or cancellation of this Agreement.
9.5 Entire Agreement. This Agreement and all outstanding purchase orders from
Buyer to Seller for Product set forth the entire agreement, and supersede any
and all prior agreements, of the parties with respect to the Products. No
additional or different provisions proposed by Buyer or Seller shall apply and
are hereby rejected, unless provisions are specifically agreed to in writing by
both parties. If any term of this Agreement conflicts with any term of an issued
Purchase Order, this Agreement shall take precedence. Any terms or conditions in
the Purchase Order not covered under this Agreement must be specified on the
front of purchase orders and must be mutually and explicitly agreed to by both
the Buyer and Seller.
9.6 Amendment. No change, amendment or modification of any provision of this
Agreement shall be valid unless set forth in a written instrument signed by the
party to be bound thereby.
9.7 Successors and Assigns. Neither party shall assign (voluntarily, by
operation of law or otherwise) this Agreement or any right, interest or benefit
under this Agreement without the prior written consent of the other party;
provided, however, that either party may assign this Agreement or any of its
rights, interests or benefits in this Agreement without such consent to any
entity which is wholly owned or controlled by, which owns or controls or which
is under common control with the assigning party. No assignment with or without
such consent shall relieve or release either party of any of its obligations
under this Agreement. Subject to the foregoing restriction on assignments, this
Agreement shall be fully binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors, assigns and legal
representatives.
9.8 Applicable Law. This Agreement shall be interpreted, construed and enforced
in accordance with the laws of the State of Washington, except to the extent
such laws may be preempted by the laws of the United States of America. Seller
shall not commence or prosecute any suit, proceeding or claim to enforce the
provisions of this Agreement, to recover damages for breach of or default under
this Agreement, or otherwise arising under or by reason of this Agreement other
than in the courts of the State of Washington or the District Court of the
United
<PAGE> 13
States, Western Division, State of Washington. Seller irrevocably consents to
the jurisdiction of the courts of the State of Washington with venue laid in
King County and of the District Court of the United States, Western Division,
State Of Washington.
9.9 Force Majeure. Neither party shall be liable for any failure to perform or
delay in performing any of its obligations hereunder when such failure or delay
is due to one or more of the following circumstances: any natural catastrophe,
fire, war, riot or civil unrest, or any act, regulation, restriction, order or
intervention of any governmental authority. Upon the occurrence of such
circumstance(s), the affected party shall immediately notify the other party,
keep the other party informed of any further developments and use all
commercially reasonable efforts to overcome the force majeure event. Immediately
after such condition is removed, the affected party shall perform such
obligation with all due speed.
<PAGE> 14
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
SELLER BUYER
By /s/ DONALD RICH By /s/ DANIEL A. GERRITY
---------------------------------- ------------------------------------
(Signature) (Signature)
Donald Rich Daniel A. Gerrity
---------------------------------- ------------------------------------
(Printed Name) (Printed Name)
Sr. VP, Operations President and Chief Operating Officer
---------------------------------- ------------------------------------
(Title) (Title)
May 14, 1998 May 15, 1998
---------------------------------- ------------------------------------
(Date) (Date)
<PAGE> 1
EXHIBIT 10.13
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
$4,000,00 06-03-1998 10-01-2003 3000009001 305 E314107 SAB10
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE
APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR LOAN OR ITEM.
Borrower: SEAMED CORPORATION Lender: KEYBANK NATIONAL ASSOCIATION
14500 N.E. 87th Street SEATTLE METROPOLITAN COMMERCIAL
Redmond, WA 98052 BUILDING CENTER
700 Fifth Avenue, 48th Floor
P.O. Box 90 WA-31-10-4871
Seattle, WA 98111-0490
================================================================================
<TABLE>
<CAPTION>
Principal Amount: Initial Rate: Date of Note:
<S> <C> <C>
$4,000,000.00 8.500% June 30, 1998
</TABLE>
PROMISE TO PAY. SEAMED CORPORATION ("Borrower") promises to pay to KEYBANK
NATIONAL ASSOCIATION ("Lender"), or order, in lawful money of the United States
of America, the principal amount of Four Million & 00/100 Dollars
($4,000,000.00), together with Interest on the unpaid principal balance from
June 30,1998, until paid In full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan on demand, or if no demand Is made, in 59 principal
payments of $66,666.66 each and one final principal payment of $66,667.06.
Borrower's first principal payment is due November 1,1998, and all subsequent
principal payments are due on the same day of each month after that. In
addition, Borrower will pay regular monthly payments of all accrued unpaid
Interest due as of each payment date. Borrower's first Interest payment Is due
November 1, 1998, and all subsequent Interest payments are due on the same day
of each month after that. Borrower's final payment due October 1, 2003, will be
for all principal and accrued Interest not yet paid. Interest on this Note is
computed on a 365/360 simple interest basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, times the outstanding
principal balance, times the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lenders address shown above or at such
other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Prime Rate announced by
Lender (the "Index"). The interest rate will change automatically and
correspondingly on the date of each announced change of the Index by Lender. The
Index is not necessarily the lowest rate charged by Lender on its loans and is
set by Lender in its sole discretion. If the Index becomes
<PAGE> 2
unavailable during the term of this loan, the Lender may designate a substitute
index after notifying Borrower. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often than
each day that the Index changes. The Index currently is 8.500% per annum. The
Interest rate to be applied to the unpaid principal balance of this Note will be
at a rate equal to the Index, resulting in an Initial rate of 8.600% per annum.
NOTICE: Under no circumstances will the interest rate on this Note be more than
the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
under the payment schedule. Rather, they will reduce the principal balance due
and may result in Borrower making fewer payments.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
6.000% of the regularly scheduled payment or $50.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower falls to make any payment when due, (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fads to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender, (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents, (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished, (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws, (f) Any creditor tries
to take any of Borrower's properly on or in which Lender has a lien or security
Interest. This includes a garnishment of any of Borrower's accounts with Lender,
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note, (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lenders sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
<PAGE> 3
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid Interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.000
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. This Note has been delivered to
Lender and accepted by Lender in the State of Washington. If there is a lawsuit,
Borrower agrees upon Lenders request to submit to the Jurisdiction of the courts
of King or Pierce County, the State of Washington. Lender and Borrower hereby
waive the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. This Note shall be
governed by and construed In accordance with the laws of the State of
Washington.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
ADDENDUM. THE TERMS IN THE 30 DAY LIBOR ADDENDUM ATTACHED TO THIS NOTE ARE
INCORPORATED HEREIN.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fall to realize upon or perfect Lenders security Interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
<PAGE> 4
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
BORROWER:
SEAMED CORPORATION
By /s/ EDGAR F. RAMPY
-----------------------------------
Edgar F. Rampy, Vice President
Treasurer, and Chief Financial
Officer
<PAGE> 5
LIBOR ADDENDUM TO PROMISSORY NOTE
(LINE OF CREDIT 30-DAY RATE)
This Addendum is attached to and made part of the Promissory Note dated
June 30, 1998 between KeyBank National Association ("Lender") and SEAMED
CORPORATION ("Borrower").
1. DEFINITIONS: For the purposes of this Addendum, the following
definitions will apply:
"Business Day" means a day on which dealings are carried on in the London
interbank eurodollar market.
"LIBOR Interest Period" means the period commencing on the date an advance
bearing interest at the LIBOR Rate is made, continued, or converted and ending
thirty (30) days thereafter.
"LIBOR Rate" means the rate per annum calculated by the Lender in good
faith, which Lender determines with reference to the rate per annum (rounded
upwards to the next higher whole multiple of 1/16% if such rate is not such a
multiple) at which deposits in United States dollars are offered by prime banks
in the London interbank eurodollar market two Business Days prior to the day on
which such rate is calculated by Bank in an amount comparable to the amount of
such advance and with a maturity equal to the LIBOR Interest Period.
"LIBOR Reserve Requirements" means, for any advance bearing interest at
the LIBOR Rate, the maximum reserves (whether basic, supplemental, marginal,
emergency, or otherwise) prescribed by the Board of Governors of the Federal
Reserve System (or any successor) with respect to liabilities or assets
consisting of or including "Eurocurrency liabilities" (as defined in Regulation
D of the Board of Governors of the Federal Reserve System) having a term equal
to the term of such advance.
"Margin" means ONE AND FORTY HUNDREDTHS percent (1.40 %).
"Note Rate" means the interest rate provided for in the Note based on the
Lender's Prime Rate (as defined in the Note).
2. INTEREST RATE. Notwithstanding anything contained in the Note to the
contrary, advances under the Note shall bear interest at a fixed rate of
interest equal to the LIBOR Rate plus the Margin for the duration of a LIBOR
Interest Period; provided that no such advance shall be in an amount of less
than $100,000.00, and provided further that no LIBOR Interest Period may extend
beyond the maturity date of the Note. Upon the expiration of the initial LIBOR
Interest Period, Borrower may elect a new LIBOR Rate or the Note Rate. If
Borrower fails to make an election, the advances will bear interest at the LIBOR
Rate plus the Margin for consecutive LIBOR Interest Periods until an election is
made. During any LIBOR Interest Period, Borrower shall continue to make interest
payments as required by the Note.
<PAGE> 6
3. INCREASED COSTS. If, because of the introduction of or any change in,
or because of any judicial, administrative, or other governmental interpretation
of, any law or regulation, there shall be any increase in the cost to Lender of
making, funding, maintaining, or allocating capital to any advance bearing
interest at the LIBOR Rate, including a change in LIBOR Reserve Requirements,
then Borrower shall, from time to time upon demand by Lender, pay to Lender
additional amounts sufficient to compensate Lender for such increased cost.
4. ILLEGALITY. If, because of the introduction of or any change in, or
because of any judicial, administrative, or other governmental interpretation
of, any law or regulation, it becomes unlawful for Lender to make, fund, or
maintain any advance at the LIBOR Rate, then Lender's obligation to make, fund,
or maintain any such advance shall terminate and each affected outstanding
advance shall be convened to the Note Rate on the earlier of the termination
date for each LIBOR Interest Period or the date the making, funding, or
maintaining of each such advance becomes unlawful.
5. REIMBURSEMENT OF COSTS. If Borrower repays any advance bearing interest
at the LIBOR Rate prior to the end of the applicable LIBOR Interest Period,
including without limitation a prepayment under paragraphs 3 or 4 above,
Borrower shall reimburse Lender on demand for any resulting loss or expense
incurred by Lender. including without limitation any loss or expense incurred in
obtaining, liquidating or reemploying deposits from third parties. A statement
as to the amount of such loss or expense, prepared in good faith and in
reasonable detail by Lender and submitted by Lender to the Borrower, shall be
conclusive and binding for all purposes absent manifest error in computation.
Calculation of all amounts payable to Lender under this paragraph shall be made
as though Lender shall have actually funded the relevant advance through
deposits or other funds acquired from third parties for such purpose: provided,
however, that Lender may fund any advance bearing interest at the LIBOR Rate in
any manner it sees fit and the foregoing assumption shall be utilized only for
purposes of calculation of amounts payable under this paragraph. Lender will be
entitled to receive the reimbursement provided for herein regardless of whether
the prepayment is voluntary or involuntary (including demand or acceleration of
the Note upon Borrower's default).
<PAGE> 1
EXHIBIT 10.14
LEASE AGREEMENT
1. PARTIES. This Lease Agreement (this "Lease"), dated for reference
purposes only, ____________, 1998, is made by and between CHILDREN'S HEALTHCARE
SYSTEM, a Washington non-profit corporation, hereinafter referred to as
"Landlord," and SEAMED, INC., a Delaware corporation, hereinafter referred to as
"Tenant."
2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord, for the term, at the rental, and upon all the conditions set
forth herein, that certain space (herein called "Premises") containing nine
thousand six hundred twenty-eight (9,628) square feet of floor area, in the
building located at 2525 - 220th Street S.E., Bothell, Washington 98201 (the
"Building"), situated on the real estate described in Exhibit A (the
"Property"). The Building and the location of the Premises within the Building
are indicated on the floor plan(s) depicted on Exhibit B attached hereto and
incorporated herein by reference.
3. TERM.
3.1 INITIAL TERM. The Lease term shall commence on the later of
either the date on which Landlord completes Landlord's work as described in
Section 5.1 or this Lease, or May 1, 1998, (the "Commencement Date") and shall
continue for five (5) years unless sooner terminated pursuant to any provision
hereof (the "Initial Term").
In the event Landlord is unable to deliver possession of the Premises
within one hundred eighty (180) days from the date of the execution of this
Lease, Landlord shall not be liable for any damage caused thereby, but in such
event either Tenant or Landlord may cancel this Lease by giving the other Party
written notice within ten (10) days thereafter.
For the purpose of this Lease, the term "Lease Year" shall mean and refer
to that period of twelve (12) full consecutive calendar months beginning with
the first full calendar month of the Term and each subsequent period of twelve
(12) consecutive calendar months during the Term, provided that if the Term
commences on other than the first day of a calendar month, then the initial
fractional month of the Term plus the next succeeding twelve (12) full calendar
months shall constitute the first Lease Year of the Term.
3.2 EXTENSION OPTION. Provided Tenant is not in default under this
Lease, Tenant shall have the option to extend the term of this Lease for one (1)
five (5) year period (the "Extension Term"), upon the same terms and conditions
as contained in this Lease, except for Base Rent which shall be adjusted as set
forth below. To exercise the extension option, Tenant shall give Landlord
written notice at least one hundred eighty (180) days prior to the expiration
date of the Initial Term. At any time after Tenant has exercised its option to
extend this Lease, Tenant and Landlord shall sign and acknowledge a written
memorandum evidencing Tenant's exercise of the option and stating the date to
which the Extension Term will extend and the rental
<PAGE> 2
rates that will be applicable during such Extension Term. Base Rent for any
Extension Term shall be adjusted to the fair market rental rate for similar
space in similar buildings in the general vicinity of the Premises as reasonably
determined by Landlord. In no event shall Base Rent for the Extension Term be
less than Base Rent during the last Lease Year of the Initial Term.
Notwithstanding anything herein to the contrary, Tenant's option to extend
this Lease for the Extension Term is expressly subject and subordinate to the
rights of HealthTeam Northwest to expand into all or some portion of the
Premises.
4. RENT.
4.1 COMMENCEMENT OF RENT. All rental payments due under this Lease
shall commence on the Commencement Date.
4.2 BASE RENT. Tenant shall pay to Landlord base rent as follows
("Base Rent") during the Initial Term:
<TABLE>
<CAPTION>
Monthly Annual Rent Per Square Foot
Lease Year Installments Annual Rent Per Year
---------- ------------ ----------- ---------------
<S> <C> <C> <C>
1-3 $5,500.00 $66,000.00 $6.855
4-5 $6,160.00 $73,920.00 $7.678
</TABLE>
Tenant shall pay Base Rent in monthly installments on or before the first
day of every month. Base Rent for any period less than one calendar month shall
be prorated on a daily basis based on a three hundred sixty (360) day year.
4.3 ADDITIONAL RENT. In addition to the Base Rent, Tenant shall pay
to Landlord, as additional rent ("Additional Rent"), all Operating Charges, as
defined in Section 6, and all other amounts to be paid by Tenant hereunder. All
Additional Rent for any period which is for less than one (1) month shall be a
pro rata portion of the monthly rent.
4.4 DEPOSITS. Upon the execution of this Lease, Tenant shall pay to
Landlord the sum of Five Thousand Five Hundred Dollars ($5,500) to be applied
against Base Rent for the first month of the Initial Term. In addition, upon
execution of this Lease, Tenant shall pay to Landlord the sum of Six Thousand
One Hundred Sixty Dollars ($6,160) as a deposit securing Tenant's full
performance of Tenant's obligations under this Lease ("Security Deposit"). In
the event that Tenant fails to pay Base Rent, Additional Rent, or any other
charges due hereunder, Landlord may elect to apply the Security Deposit toward
the payment of such default. Should Landlord elect to apply any portion of the
Security Deposit as provided hereunder, Tenant shall, upon ten (10) days written
notice, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to the full amount stated under this Section 4.4. In no event
shall Tenant be entitled to any interest paid or accrued on the Security
Deposit. If Tenant performs all of Tenant's obligations under this Lease, the
Security Deposit (or so much as has not been applied by Landlord).shall be
returned to Tenant (or, at Landlord's option to the last assignee, if any, of
<PAGE> 3
Tenant's interest under the Lease) within a reasonable time. Landlord may
transfer the Security Deposit to a purchaser of its interest hereunder. In the
event of such a transfer Tenant shall look solely to such purchaser for return
of the Security Deposit.
4.5 LATE CHARGE. If any payment of rent, Operating Charges or other
amount to be paid by Tenant is not paid by the due date, then there shall be due
as additional rent a late charge in an amount equal to five percent (5%) of the
delinquent payment for each month or partial month that the delinquent payment
remains due and unpaid.
4.6 PAYMENT OF RENT. All rent shall be payable without notice or
demand and without deduction, offset or abatement. All rent payments shall be
sent to Landlord at the address identified in Section 25 of this Lease, or to
such other address as Landlord may from time to time designate.
5. TENANT IMPROVEMENTS.
5.1 LANDLORD'S WORK. Landlord shall complete all items described on
Exhibit C attached hereto and by this reference incorporated herein to this
Lease ("Landlord's Work") at its sole cost and expense in a good workmanlike
manner before delivering the Premises to Tenant. Landlord shall notify Tenant in
writing when the Premises are ready for Tenant's occupancy.
5.2 SUBSEQUENT TENANT IMPROVEMENTS. After Landlord has performed all
Landlord's work as required under Section 5.1, Tenant shall, at its sole cost
and expense, be responsible for the design, construction, and installation of
Tenant's own future leasehold improvements and trade fixtures ("Tenant's
Improvements"), including lights, branch wiring beyond the panel, floor
coverings, interior partitioning, decor, shelves, racks, and counters; provided,
that the design and decor shall be subject to the reasonable approval of
Landlord, and Tenant shall provide Landlord with appropriate design drawings for
approval prior to the construction and installation of Tenant's Improvements.
Landlord agrees to examine Tenant's design drawings on receipt and to notify
Tenant in writing when the same have been approved, and Tenant agrees to
commence Tenant's Improvements promptly, proceed diligently, and complete them
as soon as possible.
All necessary future modifications to plumbing, electrical, and fire and
life safety protection systems within the Premises shall be performed by Tenant
at Tenant's expense by a licensed and insured contractor or other worker
approved by Landlord in writing. In order to maintain all existing roof
warranties, any and all roof penetrations required by Tenant shall be by
Landlord's roofing contractor at Tenant's expense. Tenant agrees, at Tenant's
expense, to obtain and maintain public liability insurance and workers'
compensation insurance adequate to fully protect Landlord as well as Tenant from
and against any and all liability for death of or injury to persons or damage to
property caused in or about, or by reason of, the construction of Tenant's
Improvements. In construction of Tenant's Improvements, Tenant shall conform to
and comply with all federal, state and local laws, ordinances, permits, rules
and regulations applicable thereto. During construction, fixturing and
installation, Tenant at Tenant's expense shall remove
<PAGE> 4
on a daily basis all trash from the Premises. On completion of construction of
Tenant's Improvements, Tenant shall submit a contractor's affidavit of
completion and waiver of lien to Landlord.
5.3 REMOVAL. All leasehold improvements which cannot be removed
without material damage to the Premises shall, at Landlord's option, become the
property of Landlord upon termination of the Lease. At expiration of the Lease
term or earlier termination as herein provided, Tenant shall promptly remove all
Tenant's leasehold improvements (other than those which Landlord elects to
retain) and shall repair all damage occasioned by such removal and remove all
dirt, trash and debris from the Premises.
6. OPERATING CHARGES. As used herein, "Tenant's Share" shall be equal to
seventeen and 1/4 percent (17.25%) which is the ratio of the total area of the
Premises including any mezzanines (nine thousand six hundred twenty-eight
(9,628) square feet), to the total rentable area of the Building (fifty-five
thousand eight hundred seven (55,807) square feet). In addition to the Base Rent
provided for hereunder, and commencing at the same time as Base Rent commences
under this Lease, Tenant shall pay as additional rent to Landlord Tenant's Share
of the following items, herein called "Operating Charges":
6.1 TAXES AND INSURANCE. All real estate taxes and insurance
premiums related to the Property, including land, building, and improvements
thereon. Real estate taxes shall include all real estate taxes and assessments
that are levied upon and/or assessed against the Property, including any taxes
which may be levied on rents. Insurance shall include all insurance premiums for
fire or other hazard with all-risk extended coverage, including special perils,
liability, loss of income due to business interruption or loss of rentals, and
any other insurance that Landlord deems necessary on the Property.
6.2 COMMON AREA MAINTENANCE. The total cost of the following items:
6.2.1 Maintenance, repair and replacement of parking lots,
sidewalks, driveways, landscaping, lobbies, restrooms and other areas used in
common by the tenants of the Building, and of exterior walls (including periodic
painting thereof), roofs and foundations.
6.2.2 Maintenance, illumination, operation and repair of
common signs for the Property;
6.2.3 Repair and maintenance of utility services, including
without limitation water, gas and electrical mains, and sanitary and storm
sewers, surface water management and drainage systems, telephone and
telecommunications lines; and
6.2.4 A management fee to Landlord (or a third party property
manager) for management and supervision of the Property, an amount equal to four
percent (4%) of the total gross revenues derived from the Property;
<PAGE> 5
6.3 UTILITIES. All water, gas, heat, light, power, sewer, garbage
collection, telephone and telecommunications service and all other services and
utilities supplied to the Premises together with any taxes thereon; provided,
however, that if any utility services are separately metered and/or billed to
Tenant, Tenant shall pay for such services as and when billed and will indemnify
Landlord against and hold Landlord harmless from any and all loss, cost, damage
or expense, including reasonable attorneys' fees suffered or incurred by
Landlord in connection therewith.
Upon commencement of the Lease term, Landlord shall advise Tenant of
Tenant's pro rata share through the end of the period for which the taxes or
insurance premiums have been prepaid and Tenant shall pay the amount thereof
concurrently with payment of the first month's rent; and Landlord also shall
submit to Tenant a statement of all other anticipated monthly Operating Charges
for the period between such commencement and the following January, and Tenant
shall pay these Operating Charges on a monthly basis concurrently with the
payment of the rent, beginning with the first payment of rent. By March 1 of
each year, Landlord shall provide Tenant a statement showing the total Operating
Charges for the Property for the prior calendar year and Tenant's allocable
share thereof, pro rated from the commencement of the Lease term, if
appropriate. In the event the total of the monthly payments which Tenant has
made for the prior calendar year is less than Tenant's actual share of such
Operating Charges, then Tenant shall pay the difference in a lump sum within ten
(10) days after receipt of such statement from Landlord. In the event that the
total monthly payments exceed Tenant's actual share, Tenant shall receive credit
against the next payment of Additional Rent due.
Also, by March 1 of each year (the "current year"), Landlord shall submit
to Tenant a statement of the budgeted Operating Charges for the current year, as
reasonably established by Landlord. Tenant shall then pay Landlord the
difference between the prior established Operating Charges and the budgeted
current Operating Charges for the months which have passed since the first of
the current year and shall continue to pay the budgeted current Operating
Charges for the remainder of the current year, subject to adjustment by March 1
of the following year in the manner provided above. Even though the term has
expired and Tenant has vacated the Premises, when the final determination is
made of Tenant's share of said Operating Charges for the year in which this
Lease terminates, Tenant shall immediately pay any increase due over the
estimated Operating Charges previously paid, and, conversely, any overpayment
made shall be promptly rebated by Landlord to Tenant. Failure of Landlord to
submit statements as called for herein shall not be deemed to be a waiver of
Tenant's requirement to pay sums as herein provided.
Landlord estimates that Tenant's Share of Operating Charges shall be Two
and 40/100 Dollars ($2.40) per square foot of rentable area in the Premises per
year. Notwithstanding anything herein to the contrary, Landlord agrees that
Tenant's Share of Additional Rent attributable to Operating Charges for the
first full Lease Year shall not exceed Two and 76/100 Dollars ($2.76) per square
foot of rentable area in the Premises per year.
7. USE. The Premises shall be used and occupied only for storing and
warehousing medical devices and equipment that Tenant makes available for lease
or sale in the ordinary course of Tenant's business. Tenant shall not use the
Premises for any other purpose without the
<PAGE> 6
prior written consent of Landlord. No act shall be done in or about the Premises
that is unlawful or that will increase the rate of insurance on the Building.
Tenant shall not commit or allow to be committed any waste upon the Premises or
any public or private nuisance or other act or thing which disturbs the quiet
enjoyment of any other tenants in the Business Park. Tenant shall comply with
all laws relating to its use of the Premises (including, without limitation, the
Americans with Disabilities Act and regulations promulgated thereunder) and
shall observe such reasonable rules and regulations as may be adopted and
published by Landlord for the safety, care, and cleanliness of the Premises
and/or the Building for the preservation of good order therein.
8. MAINTENANCE, REPAIRS AND ALTERATIONS.
8.1 LANDLORD'S OBLIGATIONS. Subject to the provisions of. Sections
8.2 and 10 and except for damage caused by the negligence or intentional act or
omission of Tenant or Tenant's agents, employees or invitees, Landlord shall
keep in good order, condition and repair the common areas of the Building and
the Property and the foundations and structural portions of the exterior walls
and exterior roof of the Building, all bathrooms located on the Premises, and
the HVAC system for the Building; and the cost thereof shall be charged to
Tenant on a pro rata basis under the provisions of Section 6.2 hereof. Landlord
shall not, however, be obligated to maintain plate glass or the interior surface
of the ceiling, walls, windows or doors on the Premises; provided, that if
Landlord does perform such maintenance, it shall be at the expense of Tenant,
and the cost thereof shall be charged to Tenant on a pro rata basis under the
provisions of Section 6.2 hereof. Landlord shall have no obligation to make
repairs under this Section 8.1 until a reasonable time after receipt of written
notice of the need for such repairs.
8.2 TENANT'S OBLIGATIONS. Subject to the provisions of Sections 8.1,
8.2 and 10, Tenant, at Tenant's expense, shall keep in good order, condition and
repair the Premises and all Tenant Improvements, including but not limited to
plumbing, mechanical or electrical apparatus, doors, window frames, hardware,
glass, and nonstructural ceilings and walls. Tenant shall provide and maintain,
at Tenant's expense, a security system for the Premises that Landlord deems
acceptable. Tenant shall also provide its own janitorial services and shall
replace all light bulbs and robes for the Premises. Tenant shall, at the
expiration or termination of this Lease, surrender and deliver the Premises to
Landlord in as good condition as when received by Tenant from Landlord or as
thereafter improved, reasonable use and wear excepted. Tenant shall repair any
damage to the Premises or the Building occasioned by its use thereof or by the
removal of Tenant's trade fixtures, furnishings and equipment, which repair
shall include, without limitation, the patching and filling of holes and repair
of structural damage.
8.3 LANDLORD'S RIGHTS. If Tenant fails to perform Tenant's
obligations hereunder relating to the repair, maintenance or upkeep of the
Premises or the Building, Landlord may, at its option (but shall not be required
to), enter upon the Premises after three (3) days prior written notice to Tenant
and put the same in good order, condition, and repair or otherwise cure the
default, and the cost of such action plus fifteen percent (15%) thereof shall
become due and payable as additional rent to Landlord at the time Tenant's next
rental installment is due.
<PAGE> 7
8.4 ALTERATIONS AND ADDITIONS. Tenant shall not make any
alterations, additions or improvements in the Premises without Landlord's prior
written consent, which may be withheld in Landlord's discretion. As a condition
to giving such consent, Landlord may require that Tenant remove any such
alterations, improvements, additions or utility installations at the expiration
of the term and restore the Premises to their prior condition. All work on the
Premises shall be done in compliance with all applicable governmental codes and
regulations. At Landlord's option, all alterations, improvements or additions
which may be made on the Premises shall become the property of Landlord and
remain upon and be surrendered with the Premises at the expiration of the term.
If Landlord elects not to have the improvements become Landlord's property, then
Tenant shall remove such improvements and shall restore Premises to the
condition at the Commencement Date. Tenant's machinery, equipment, and trade
fixtures other than those which are affixed to the Premises so that they cannot
be removed without material damage to the Premises shall remain the property of
Tenant and may be removed by Tenant, subject to the provisions of Section 8.2
and 10.
9. INSURANCE; INDEMNITY
9.1 LIABILITY INSURANCE. Tenant shall maintain in force during the
term of this Lease a policy of comprehensive public liability insurance issued
by a company acceptable to Landlord and insuring Tenant and Landlord against any
liability, including without limitation personal injury to any person and damage
to other portions of the Business Park, arising out of the ownership, use,
occupancy or maintenance of the Premises and all areas appurtenant thereto. Such
insurance shall be in an amount of not less than Two Million Dollars
($2,000,000) combined simple limit for personal injury and property damage, or
in such higher amount as Landlord may reasonably require to reflect the
inflation rate in the area. The limits of said insurance shall not, however,
limit the liability of Tenant hereunder. Such policies shall name Landlord and
Landlord's agents as additional insureds and shall provide that they may not be
cancelled or changed materially without fifteen (15) days prior written notice
to Landlord. Landlord shall be furnished with a certificate evidencing issuance
of such policy of liability insurance, which certificate shall recite that the
policy may not be cancelled or changed materially without such prior written
notice to Landlord. If Tenant shall fail to maintain said insurance, Landlord
may but shall not be required to procure and maintain the same, at the sole
expense of Tenant.
9.2 PROPERTY INSURANCE.
9.2.1 LANDLORD'S OBLIGATION. Landlord shall maintain in force
during the term of this Lease a policy of insurance insuring the Building for an
amount not less than replacement cost against damage or destruction by fire
and/or by perils covered by the standard form of extended coverage endorsements
to fire insurance policies in the State of Washington in effect at the time when
the policies are obtained, with vandalism and malicious mischief endorsements.
Said policies shall also cover loss of income due to business interruption or
loss of rental. Tenant shah pay Tenant's proportionate share of the premiums on
any such policies, as provided in Section 6.1.
<PAGE> 8
9.2.2 TENANT'S OBLIGATION. Tenant shall maintain in force
during the term of this lease a policy of insurance issued by a company
acceptable to Landlord insuring Tenant's fixtures, equipment, leasehold
improvements, and any other personal property of Tenant located on the Premises
in the amount of their full replacement value. If Tenant shall fail to maintain
said insurance, Landlord may but shall not be required to procure and maintain
the same, at Tenant's sole expense.
9.3 WAIVER OF SUBROGATION. Landlord and Tenant hereby mutually waive
their respective rights of recovery against each other for any property loss
insured by fire and extended coverage, or other property insurance policies
existing for the benefit of the respective parties, each such waiver to be
effective only to the extent it does not invalidate the insurance afforded by
the waiving party's insurance policy.
9.4 HOLD HARMLESS. Tenant shall indemnify, defend, and hold Landlord
harmless from any and all claims arising from Tenant's use of the Premises or
from the conduct of its business or from any activity, work, or thing which may
be permitted or suffered by Tenant in or about the Premises and shall further
indemnify, defend, and hold Landlord harmless from and against any and all
claims arising from any breach or default in the performance of any obligation
on Tenant's part to be performed under the provisions of this Lease or arising
from any negligence of Tenant or any of its agents, contractors, employees or
invitees and from any and all costs, attorneys' fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon. Tenant hereby assumes all risk of damage to property or injury to
persons in or about the Premises from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, excepting where said damage arises
solely out of the negligence of Landlord.
9.5 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for injury to Tenant's business or any loss of income therefrom or for
damage to the goods, wares, merchandise or other property of Tenant or Tenant's
employees, invitees, customers, or any other person in or about the Premises;
nor, unless caused solely by its negligence, shall Landlord be liable for
personal injury to Tenant or Tenant's employees, agents, contractors and
invitees, whether said damage or injury results from conditions arising upon the
Premises or upon other portions of the Building or the Property or from other
sources or places, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible to Landlord or Tenant.
Landlord shall not be liable for any damages arising from any act or neglect of
any other Tenant, if any, of the Building.
10. DAMAGE OR DESTRUCTION. In the event the Premises are destroyed or are
damaged such that twenty-five percent (25%) or more of the rentable area in the
Premises is rendered untenantable, then it shall be optional with Landlord to
repair or rebuild the same, but in no event shall Landlord be required to repair
or rebuild any Tenant's Improvements, which shall remain the responsibility of
Tenant; and after the happening of any such event, Tenant shall give landlord or
Landlord's agent immediate written notice thereof. Landlord shall have thirty
(30) days after the date of such notification to notify Tenant in writing of
Landlord's intentions to repair or rebuild the Premises or the part so damaged
as aforesaid, and if Landlord elects to repair
<PAGE> 9
or rebuild the Premises, Landlord shall prosecute the work of such repairing or
rebuilding without unnecessary delay, and during such period the Base Rent shall
be abated in the same ratio that that portion of the Premises rendered for the
time being unfit for occupancy shall bear to the whole of the Premises. If
Landlord shall fail to give the notice aforesaid, Tenant shall have the right to
declare this Lease terminated by written notice served upon Landlord.
If the Building is damaged (even though the Premises hereby leased shall
not be damaged thereby) to such extent that, in the opinion of Landlord, it
shall not be practicable to repair or rebuild, or is destroyed, then it shall be
optional with Landlord to terminate this Lease by written notice served on
Tenant within thirty (30) days after such damage or destruction.
If the Premises are partially damaged or destroyed such that less than
twenty-five percent (25%) of the rentable area of the Premises is rendered
untenantable, then Landlord shall restore the same with reasonable promptness,
excluding any Tenant's Improvements, which shall be the responsibility of
Tenant, and all insurance proceeds received by Landlord pursuant to the
provisions of this Lease, less the cost of recovery of such proceeds, if any,
shall be held in trust and applied to the payment of such restoration as such
restoration progresses; provided, however, that there shall be no abatement,
diminution or reduction of rent in the event of such damage to or destruction of
the Premises while Tenant restores the Premises. Notwithstanding the foregoing
Landlord's obligation to restore the Premises shall be limited to the extent of
the insurance proceeds available to Landlord for such restoration (less any
amounts claimed by the holder of any first mortgage or the beneficiary of any
first deed of trust coveting the Premises), and Landlord shall have no
obligation to restore the Premises if such damage or destruction occurs during
the last two (2) years of the Lease term.
11. ADVERTISING AND WINDOWS. Tenant shall comply with all rules and
specifications that Landlord shall from time to time promulgate and/or modify
with respect to signs on the Premises or Building, and shall not place any sign
on the Premises or Building without the approval and consent of Landlord, which
may be withheld in Landlord's discretion. Any such approval or consent by
Landlord shall be upon the understanding and condition that Tenant will remove
the same at the expiration or sooner termination of this Lease and that Tenant
shall repair any damage to the Premises or the Building caused thereby. Tenant
shall use window coverings that conform to standards set by Landlord.
12. PERSONAL PROPERTY TAXES. Tenant shall pay or cause to be paid before
delinquency any and all taxes levied or assessed and which become payable during
the term hereof upon all Tenant's leasehold improvements, equipment, furniture,
fixtures, and any other personal property located in the Premises. In the event
any or all of Tenant's leasehold improvements, equipment, furniture, fixtures,
and other personal property shall be assessed and taxed with the Property,
Tenant shall pay to Landlord its shares of such taxes within ten (10) days after
delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's property.
13. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with
the rules and regulations that Landlord shall from time to time promulgate
and/or modify. The rules and
<PAGE> 10
regulations shall be binding upon Tenant upon delivery of a copy to Tenant.
Landlord shall not be responsible to Tenant for the nonperformance of any of
said rules and regulations by any other tenants or occupants.
14. LIENS AND INSOLVENCY. Tenant shall keep the Premises, the Building and
the Property free from any liens arising out of any work performed, materials
ordered or obligations incurred by Tenant, and shall indemnify and defend
Landlord against and hold Landlord harmless from any loss, damage or expense,
including attorneys' fees, resulting therefrom. Tenant shall have no authority,
express or implied, to create or place any lien or encumbrance of any kind or
nature whatsoever upon, or in any manner to bind, the interest of Landlord in
the Premises or to charge the rentals payable hereunder for any claim in favor
of any person dealing with Tenant, including those who may furnish materials or
perform labor for any construction or repairs, and each such claim shall affect
and each such lien shall attach to, if at all, only the leasehold interest
granted to Tenant by this instrument. If Tenant becomes insolvent or voluntarily
or involuntarily bankrupt or if a receiver, assignee, or other liquidating
officer is appointed for the business of Tenant and if the receivership,
assignment, or other liquidating action is not terminated within thirty (30)
days of any such appointment, then to the extent permitted under applicable law
Landlord may terminate this Lease and Tenant's right of possession under this
Lease at Landlord's option.
15. DEFAULTS. The occurrence of any one or more of the following events
shall constitute a default of this Lease by Tenant:
15.1 VACATION OF PREMISES. The vacating or abandonment of the
Premises by Tenant.
15.2 FAILURE TO PAY RENT OR ADDITIONAL CHARGES. Notwithstanding the
provision for late charges, the failure by Tenant to make any payment of rent or
any other payment required to be made by Tenant hereunder as and when due, and
such failure shall continue for a period of three (3) days after written notice
thereof by Landlord to Tenant.
15.3 FAILURE TO PERFORM COVENANTS. The failure by Tenant to observe
or perform any of the covenants, conditions, or provisions of this Lease to be
observed or performed by Tenant, other than described in Section 15.2 above,
where such failure shall continue for a period of ten (10) days after written
notice thereof by Landlord to Tenant; provided, however, that if the nature of
Tenant's default is such that more than ten (10) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences such cure within said ten- (10-) day period and thereafter diligently
prosecutes such cure to completion.
16. REMEDIES ON DEFAULT. In the event of any such default by Tenant,
Landlord may, at any time thereafter, in its sole discretion, with or without
notice or demand and without limiting Landlord in the exercise of any other
right or remedy which Landlord may have by reason of such default:
<PAGE> 11
16.1 TERMINATION. Terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall thereafter have no further rights hereunder or in the Premises;
provided, however, that upon such termination Landlord shall be entitled to
recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including but not limited to the cost of recovering possession of the
Premises; expenses of reletting, including necessary renovation and alteration
of the Premises; reasonable attorneys' fees; all accrued and unpaid rent,
Operating Charges and other mounts due from Tenant with interest thereon as
provided herein; the worth at the time of award by the court having jurisdiction
thereof of the amount by which the unpaid rent and other charges and Operating
Charges called for herein for the balance of the term after the time of such
award exceeds the amount of such loss for the same period that Tenant proves
could be reasonably avoided; and that portion of any leasing commission paid by
Landlord and applicable to the unexpired term of this Lease; or
16.2 ENFORCE RIGHTS. Maintain Tenant's right to possession, in which
case this Lease shall continue in effect whether or not Tenant shall have
abandoned the Premises, and Landlord shall be entitled to enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
the rent and any other charges and Operating Charges due or to become due
hereunder with interest as provided herein; or
16.3 OTHER REMEDIES. Pursue any other remedy or remedies now or
hereafter available to Landlord under the laws Or judicial decisions of the
state in which the Premises are located.
17. SUBORDINATION. Tenant agrees that this Lease shall be subordinate to
any first mortgage or first deed of trust now or at any time hereafter
constituting a lien upon the Premises and to any and all advances made or to be
made thereunder, and to the interest thereon, and to all renewals, replacements
and extensions thereof, if the mortgagee or the beneficiary named in such
mortgage or deed of trust agrees therein or in a separate instrument to
recognize this Lease in the event of foreclosure where Tenant is not in default
hereunder and agrees to attorn to the mortgagee or any purchaser at a
foreclosure sale. Upon demand by Landlord, Tenant shall execute and deliver any
documents that may be required by such mortgagees or beneficiaries to further
evidence subordination of this Lease to any such mortgages or deeds of trust,
and shall execute and deliver estoppel certificates as requested by Landlord
from time to time in the standard form of any such mortgagee or beneficiary.
18. CONDEMNATION. If all of the Premises shall be taken by eminent domain
(or by a voluntary conveyance made in lieu of a taking by eminent domain), this
Lease shall automatically terminate as of the date Tenant is required to vacate
or will be deprived of the reasonable use of the Premises, and all rentals and
Operating Charges shall be paid to that date. In the case of a taking of
twenty-five percent (25%) or more of the rentable area of the Premises, Tenant
may, at its election within ten (10) days after receipt of notice of the
proposed taking, terminate this Lease, effective as of entry of a final judgment
or order confirming the taking or delivery of a deed in lieu of a taking by
eminent domain, by giving notice of termination to Landlord; if Tenant does not
terminate this Lease because of a taking of a part of the Premises,
<PAGE> 12
this Lease shall continue in full force and effect, and the minimum rental shall
be equitably reduced based on the proportion by which the floor area of the
Premises is reduced, such rent reduction to be effective as of the date when
possession of such portion is delivered to the condemning authority. In the case
of a taking of fifty percent (50%) or more of the Property, Landlord may, at is
election within sixty (60) days after receipt of notice of the proposed taking,
terminate this Lease, effective as of entry of a final judgment or order
confirming the taking or delivery of a deed in lieu of a taking by eminent
domain, or earlier at Landlord's option, by giving notice of termination to
Tenant. Landlord reserves all rights to damages to the Premises for any taking
by eminent domain, and Tenant hereby assigns to Landlord any right Tenant may
have to such damages or award, and Tenant shall make no claim against Landlord
for damages for termination of the leasehold interest or for interference with
Tenant's business.
19. PARKING AND COMMON AREAS.
19.1 LANDLORD'S OBLIGATIONS AND RIGHTS. Landlord covenants that the
common areas, parking areas, and loading docks are for the nonexclusive use of
Tenant and other tenants; provided, that the condemnation or other taking by any
public authority or sale or transfer in lieu of condemnation of any or all of
such common and parking areas shall not constitute a violation of this covenant.
Notwithstanding anything herein contained to the contrary, Landlord shall
be entitled to alter the Property services or facilities and the location of
driveways, sidewalks or other common areas, and expand the existing Building or
common areas of the Building, or add new common areas to the Property; and upon
any alteration of the common areas or upon commencement of construction of any
addition or additions to the Building and upon any addition of the new common
areas, Landlord and Tenant shall execute such further and other documents as may
be required to reflect such alterations of the common areas to exclude areas
taken for construction of additional space or to include areas added as new
common areas, as the case may be.
19.2 TENANT'S RIGHTS. Tenant, for the use and benefit of Tenant arid
its agents, employees, customers, licensees, and subtenants approved by
Landlord, shall have the nonexclusive right during the Initial Term and any
Extension Term for ingress, egress and automobile parking, subject to Landlord's
rules and regulations applicable thereto. During the Initial Term and any
Extension Term Landlord shall provide ten (10) unreserved vehicle parking spaces
for use by Tenant and its employees and invitees.
19.3 RULES AND REGULATIONS. Tenant agrees to comply with such
reasonable rules and regulations as Landlord may adopt from time to time for the
orderly and proper operation of common and parking areas. Such rules may include
but shall not be limited to the regulation of the removal, storage and disposal
of Tenant's refuse and other rubbish at the sole cost and expense of Tenant.
20. HAZARDOUS MATERIALS.
20.1 DEFINITIONS.
<PAGE> 13
20.1.1 ENVIRONMENTAL LAW. The term "Environmental Law" means
any federal, state, local law, statute, ordinance, regulation, or order and all
amendments thereto pertaining to health, industrial hygiene, environmental
conditions or Hazardous Materials.
20.1.2 HAZARDOUS MATERIALS. The term "Hazardous Materials"
shall mean any hazardous or toxic substances, materials or wastes, or pollutants
or contaminants as defined, listed or regulated by any Environmental Law or by
common law decision including, without limitation, chlorinated solvents;
petroleum products or by-products; asbestos; and polychlorinated biphenyl.
20.2 TENANT'S COVENANT. Tenant covenants, represents and warrants to
Landlord that no Hazardous Materials shall be generated, stored, deposited,
disposed of, or released in, on or under the Premises, the Building or the
Property, other than materials used in the ordinary course of Tenant's business
and in full compliance with applicable laws, rules and regulations. Tenant
further represents and warrants that Tenant's improvements and equipment on the
Premises shall not incorporate lead, asbestos or PCBs or any other Hazardous
Material. Tenant shall require each of its employees, agents, contractors,
subcontractors, or any other-person or entity over whom Tenant has supervision
or control or fight of the same to comply with all environmental laws including,
without limitation, any federal, state, local law, statute, ordinance,
regulation or order and all amendments thereto pertaining to health, industrial
hygiene, environmental conditions or Hazardous Materials. Tenant agrees to
indemnify and defend Landlord against and hold Landlord harmless from any loss,
damage, liability, cost or expense, including reasonable attorneys' and
consultants' fees, arising out of any breach of the terms of Section 20 of this
Lease, including without limitation (i) those related to any claims of third
parties for personal injury, property damage, or other harm, and (ii) any
response costs and costs of remedial, restoration or cleanup actions suffered or
incurred by Landlord arising out of or related to such introduction, use or
incorporation of Hazardous Materials in, on or under the Premises by Tenant. The
terms, covenants, representations and warranties contained herein shall survive
the termination or expiration of this Lease.
21. ENERGY CONSERVATION LEGISLATION. In the event that any legislative
enactment or decree of governmental authority shah require changes in the
heating, lighting and electrical systems or the fuel or power source utilized by
such systems, Landlord reserves the right, at any time and from time to time, to
make changes in, additions to, subtractions from, Or rearrangements of the
Premises and the common areas of the Property to accommodate the required
changes to such systems or conversion to a different fuel or power source; and
Landlord reserves the right to install a central heating system to serve all
premises in the Property and to erect, use, and maintain wiring, maim, pipes,
conduits, and other means of distributing heat to the Premises and in and
through the Premises for the benefit of other portions of the Building; and
Landlord and all persons authorized by it shall have the fight, from time to
time, to enter upon the Premises for the purpose of access thereto for
installation, maintenance and repair, and such entry shall not be deemed to be
an interference with Tenant's possession under this Lease, nor shall Tenant make
any claim for damages or indemnification against Landlord by reason of such
changes to the Premises or by reason of the installation, maintenance and repair
of new or
<PAGE> 14
alterations to existing systems, nor shall there by any diminution or abatement
of rent by reason thereof. All costs incurred by Landlord pursuant to this
Section shall be charged to Tenant, pro rated in the manner set forth in Section
6 hereof.
22. NONWAIVER. Any waiver of any right or remedy hereunder must be in
writing, signed by the waiving party. Forbearance by Landlord with respect to
any breach of any term, covenant or condition hereof contained shall not be a
waiver of such term, covenant or condition or of any subsequent breach of the
same or any other term, covenant or condition. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
23. HOLDING OVER. This Lease shall terminate without further notice at the
expiration of the Lease Term. Any holding over by Tenant without the express
written consent of Landlord shall not constitute the renewal of extension of
this Lease or give Tenant any rights in or to the Premises. In the event of such
a holding over by Tenant without the express written consent of Landlord, the
monthly rent payments to be paid by Tenant shall be subject to increase at the
sole discretion of Landlord in an mount equal to one hundred twenty-five percent
(125%) of the then applicable rental rate; provided, however, no payment of such
increased rental by Tenant shall be deemed to extend or renew the term of this
Lease, and such rental payments shall be fixed by Landlord only to establish the
amount of liability for payment of rent on the part of Tenant during such period
of holding over. In the event Landlord shall give its express written consent to
Tenant to occupy the Premises beyond the expiration of the term, that occupancy
shall be construed to be a month-to-month tenancy upon all the same tern and
conditions as set forth herein unless modified by Landlord in such' written
consent; provided that rent charged during any period of holding over shall be
as stated above.
24. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease nor
sublet the whole or any part of the Premises to any person or entity without the
prior written consent of Landlord, which shall not be unreasonably withheld, and
any such assignment or subletting without such consent shall be void. Landlord
may withhold its consent to any proposed assignment or sublease if Landlord
determines that the use or parking demand of the proposed assignee or sublessee
will have an adverse impact on the Building or other tenants' use and enjoyment
thereof. As used herein the term "assignment" includes without limitation
transfers to a subsidiary or affiliated entity, transfers of interest by or
between individual partners if Tenant is a partnership, transfers of stock by
stockholders if Tenant is a corporation, transfers of membership interests if
Tenant in a limited liability company, and any assignment in connection with any
corporate merger or consolidation. In the event of any such assignment or
sublease, Tenant shall remain at all times primarily liable under this Lease and
Landlord shall be entitled to fifty percent (50%) of the aggregate of all rent
and other consideration paid to Tenant by any assignee or subtenant in excess of
Base Rent due hereunder, and Tenant shall remit to Landlord its share promptly
after Tenant's receipt thereof. In the event Landlord is requested hereunder to
consent to any assignment or sublease, Tenant agrees to reimburse Landlord for
its reasonable
<PAGE> 15
out-of-pocket expenses (including attorneys' fees) incurred in connection with
Landlord's review of such request.
25. NOTICES. Whenever a provision is made under this Lease for any demand,
notice, or declaration of any kind, or where it is deemed desirable or necessary
by either party to give or serve any such notice, demand, or declaration to the
other party, it shall be in writing and served either personally or sent by
United States mail, certified, postage prepaid, addressed at the addresses set
forth below or at such address as either party may advise the other ,from time
to time.
To Landlord at: Children's Health Care System -
4800 Sand Point Way NE
Seattle, WA 98105
Attn: General Counsel
To Tenant at: SeaMed, Inc.
14560 N.E. 87th Street
Redmond, WA 98052
Attn: Facilities
Notices given hereunder shall be deemed to have been given on the date of
personal delivery (or the first business day thereafter if delivered on a
nonbusiness day) or two (2) days after the date of mailing.
26. COSTS AND ATTORNEYS' FEES. In any suit, action or appeal therefrom to
enforce any provision hereof, or to interpret this Lease, the prevailing party
shall be entitled to recover its costs incurred therein including costs of suit,
reasonable attorneys' fees and disbursements of counsel. In addition, if it
becomes necessary for Landlord to employ an attorney by reason of any default on
the part of Tenant where no suit or action is commenced, Tenant agrees to pay on
demand from Landlord all costs or expenses incurred by Landlord in connection
with such default including attorneys' fees.
27. LANDLORD'S ACCESS. Landlord and its agents shall have the right to
enter the Premises at reasonable times for the purpose of inspecting it, showing
it to prospective purchasers or lenders, and making such repairs as Landlord may
deem necessary or desirable. Landlord may, at any time, place on or about the
Premises any ordinary "For Sale" signs and may, during the last ninety (90) days
of the term, place on or about the Premises any ordinary "For Sale or Lease"
signs, without rebate of rent or liability to Tenant.
28. CAPTIONS AND CONSTRUCTION. The titles to the sections of this Lease
are not a part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
29. REMOVAL OF PROPERTY. If Tenant shall fail to remove any of its
property of any nature whatsoever from the Premises, the Building or the
Property at the term/nation of this Lease or when Landlord has the fight of
reentry, Landlord may, at its option, remove and store
<PAGE> 16
said property without liability for loss thereof or damage thereto, such storage
to be for the account and at the expense of Tenant. If Tenant shall not pay the
cost of storing any such property after it has been stored for a period of
thirty (30) days or more, Landlord may, at its option, sell or permit to be sold
any or all of such property at public or private sale, in such manner and at
such times and places as Landlord in its sole discretion may deem proper,
without notice to Tenant, and shall apply the proceeds of such sale as follows:
First, to the cost and expense of such sale, including reasonable attorneys'
fees actually incurred; second, to the payment of the costs or charges for
removing and storing any such property; third, to the payment of any other sums
of money which may then be or thereafter become due Landlord from Tenant under
any of the terms hereof; and fourth, the balance, if any, to Tenant.
30. SUCCESSORS. This Lease shall apply to and be binding upon Landlord and
its successors and assigns, and Tenant and its heirs, personal representatives,
successors and permitted assigns. This provision shall not limit the prohibition
on assignment and subletting by Tenant.
31. ACCEPTANCE OF PREMISES. Tenant accepts the Premises "As Is" at the
commencement of the term of this Lease, in their then present condition and
subject to all applicable municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises. Tenant
acknowledges that neither landlord nor Landlord's agents have made any
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business.
32. SALE OF PROPERTY BY LANDLORD. At closing of any sale of the Property
by Landlord or of a subsequent sale thereof, the purchaser shall be deemed to
have assumed and agreed to carry out all of the covenants and obligations of
Landlord hereunder; and Tenant agrees that Landlord and any subsequent owner of
the Building or Business Park shall be released and discharged from any
liability hereunder arising out of any act or omission occurring after closing
of such sale.
33. TENANT'S STATEMENT. Tenant shall, at any time and from time to time,
upon not less than three (3) days prior written notice from Landlord, execute,
acknowledge and deliver to Landlord a statement in writing (a) certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease as so modified is
in full force and effect) and the date to which the rental and other charges are
paid in advance, if any; (b) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
what defaults, if any, are claimed; and (c) setting forth the date of
commencement of rents and expiration of the term hereof. Any such statement may
be relied upon by any prospective purchaser or encumbrancer of all or any
portion of the Property.
34. RECORDATION/MEMORANDUM OF LEASE. Tenant shall not record this Lease
without the prior written consent of Landlord. Upon Landlord's request to
Tenant, at any time, the parties will execute and record a memorandum of this
Lease.
<PAGE> 17
35. SEVERABILITY. The invalidity or unenforceability of any provision of
this Lease shall not affect the validity or enforceability of any other
provision.
36. ENTIRE AGREEMENT. This Lease sets forth the entire understanding and
agreement of Landlord and Tenant with respect to the Premises and the lease
thereof, and all prior understandings or agreements are merged herein. This
Lease may be amended or modified only in writing signed by both parties.
37. NAME OF BUILDING. In the event Landlord chooses to change the name of
the Building, Tenant agrees that such change shall not affect in any way its
obligations under the Lease, and that, except for the name change, all terms and
conditions of this Lease shall remain in full force and effect. Tenant agrees
further that such name change shall not require a formal amendment to this
Lease, but shall be effective upon Tenant's receipt of written notification from
Landlord of said change.
38. BROKER'S COMMISSION. Tenant represents and warrants that it has
incurred no liabilities of claims for brokerage commissions or finder's fees in
connection with the negotiation and/or execution of this Lease and that it has
not dealt with or has any knowledge of any real estate broker/agent or
salesperson in connection with this Lease other than John Cox and Bill Nell of
Kidder, Mathews & Segner, Inc., who represented Tenant. Tenant shall indemnify,
defend, and hold Landlord harmless from and against, all of such liabilities and
claims (including, without limitation, attorneys' fees and costs) made by any
other broker/agent or salesperson claiming to represent Tenant in connection
with this Lease. Upon execution of this Lease Landlord agrees to pay a brokerage
commission to Kidder, Mathews & Segner, Inc., for services provided in
connection with this Lease as provided for under a separate agreement between
Landlord and Kidder, Mathews & Segner, Inc.
39. LIMITATION OF LANDLORD'S LIABILITY. Notwithstanding anything to the
contrary in this Lease, Landlord makes no personal covenants, undertakings, or
agreements for the purpose of binding Landlord or Landlord's assets except
Landlord's interest in the Property. Any liability incurred by Landlord arising
from its performance or non-performance under this Lease shall not exceed the
value of Landlord's interest in the Property.
The parties hereto have executed this Lease as of the date set forth
above.
LANDLORD: CHILDREN'S HEALTH CARE SYSTEM, a
Washington nonprofit corporation
By /s/ KELLY A. WALLACE
--------------------------------------
Its VP & CFO
-----------------------------------
<PAGE> 18
TENANT: SEAMED, INC., a Washington corporation
By /s/ DONALD RICH
--------------------------------------
Its Sr. VP, Operations
-----------------------------------
EXHIBITS:
A Legal Description of Property
B Building and Location of Premises
C Landlord's Work
<PAGE> 19
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 7th day of May, 1998, before me, a Notary Public in and for the
State of Washington, personally appeared Kelley A. Wallace, personally known to
me (or proved to me on the basis of satisfactory evidence) to be the person who
executed this instrument, on oath stated that he/she was authorized to execute
the instrument, and acknowledged it as the VP & CFO of CHILDREN'S HEALTH CARE
SYSTEM, a Washington nonprofit corporation, to be the free and voluntary act and
deed of said corporation for the uses and purposes mentioned in the instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day
and year first above written.
[signature]
-------------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Mill Creek
My appointment expires 7-1-99
Print Name Susan E. Zentner
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 27th day of April, 1998, before me, a Notary Public in and for the
State of Washington, personally appeared Donald Rich, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person who
executed this instrument, on oath stated that he/she was authorized to execute
the instrument, and acknowledged it as the Sr. VP, Operations of SEAMED, INC., a
Washington nonprofit corporation, to be the free and voluntary act and deed of
said corporation for the uses and purposes mentioned in the instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day
and year first above written.
[signature]
-------------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at 16641 NC 79th St.
Redmond, WA 98057
My appointment expires October 30, 2001
Print Name Jamie L. Ives
<PAGE> 1
EXHIBIT 10.15
DESCRIPTION OF
SEAMED NON-EMPLOYEE DIRECTOR STOCK OPTION POLICY
During fiscal year 1998 the Board of Directors of SeaMED Corporation (the
"Board") adopted a director compensation policy which allows the Board to grant
non-qualified stock options to non-employee directors upon their election and
qualification to the Board. Pursuant to such policy, the Board may grant an
option to purchase up to 22,500 shares of Common Stock of the Company to each
non-employee director each time such director is elected to serve a three-year
term on the Board. Unless otherwise determined by the Board or the Board's
Compensation Committee, each such option shall be exercisable for a period of
six years from the date of grant and shall vest at the rate of one-third upon
each of the first, second and third anniversaries of the grant date.
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-50617) pertaining to the 1996 Employee Stock Purchase Plan of
SeaMED Corporation, 1997 SeaMED Corporation Employee Nonqualified Stock Option
Plan (Form S-8 No. 333-31881), 1995 SeaMED Corporation Stock Option and
Incentive Plan (Form S-8 No. 333-50613), and SeaMED Corporation 1998 Stock
Option Plan (Form S-8 No. 333-31887) of our report dated August 14, 1998, 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, 1998.
ERNST & YOUNG LLP
Seattle, Washington
September 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 6,428,718
<SECURITIES> 0
<RECEIVABLES> 13,189,092
<ALLOWANCES> 505,865
<INVENTORY> 15,185,517
<CURRENT-ASSETS> 36,760,045
<PP&E> 10,622,282
<DEPRECIATION> 5,460,110
<TOTAL-ASSETS> 42,856,554
<CURRENT-LIABILITIES> 12,488,210
<BONDS> 0
0
0
<COMMON> 20,723,960
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,856,554
<SALES> 69,981,252
<TOTAL-REVENUES> 69,981,252
<CGS> 58,285,202
<TOTAL-COSTS> 58,285,202
<OTHER-EXPENSES> 5,350,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,788
<INCOME-PRETAX> 6,271,544
<INCOME-TAX> 2,132,325
<INCOME-CONTINUING> 4,139,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,139,219
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.73
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