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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
Commission File number 0-21727
SeaMED Corporation
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(Exact Name of Registrant as specified in its charter)
Washington 91-1002092
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(State of Incorporation) (Federal I.R.S. No.)
21620 30th Avenue S.E., Bothell, WA 98021
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number 425-867-1818
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
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As of May 11, 1999, the Registrant had 5,582,620 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SeaMED CORPORATION
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEX
Balance Sheets as of March 31, 1999 and June 30, 1998.........................................................3
Statements of Income for the Quarters and the Nine Months
Ended March 31, 1999 and 1998............................................................................4
Statements of Cash Flows for the Nine Months Ended March 31, 1999 and 1998
Notes to Financial Statements.................................................................................6
</TABLE>
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SEAMED CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 10,709,472 $ 6,428,718
Accounts receivable, net ............................ 12,745,808 13,189,092
Inventories ......................................... 10,354,389 15,185,517
Deferred income taxes ............................... 1,733,348 1,733,348
Prepaid expenses .................................... 530,519 223,370
------------ ------------
Total current assets .................................... 36,073,536 36,760,045
Property and equipment, net ............................. 5,648,963 5,162,172
Deposits and other assets ............................... 249,652 934,337
------------ ------------
Total assets ............................................ $ 41,972,151 $ 42,856,554
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 1,755,102 $ 4,323,740
Accrued expenses and reserves ....................... 3,277,417 5,029,410
Customer deposits on inventory ...................... 2,398,306 2,576,916
Current portion of long-term debt ................... 994,483 558,144
------------ ------------
Total current liabilities ............................... 8,425,308 12,488,210
Long-term debt, less current portion .................... 3,025,288 2,435,021
Shareholders' equity:
Common stock ........................................ 21,288,595 20,723,960
Note receivable from officer ........................ (75,000) (75,000)
Retained earnings ................................... 9,307,960 7,284,363
------------ ------------
Total shareholders' equity .............................. 30,521,555 27,933,323
------------ ------------
Total liabilities and shareholders' equity .............. $ 41,972,151 $ 42,856,554
============ ============
</TABLE>
See accompanying notes to financial statements.
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SEAMED CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Manufacturing ................ $ 10,423,115 $ 11,527,258 $ 35,870,539 $ 31,541,468
Engineering .................. 5,407,828 6,737,356 18,222,344 19,012,365
------------ ------------ ------------ ------------
15,830,943 18,264,614 54,092,883 50,553,833
Costs of revenues:
Manufacturing ................ 9,372,356 9,421,206 30,744,882 25,596,463
Engineering .................. 5,291,517 5,786,790 16,721,631 16,398,678
------------ ------------ ------------ ------------
14,663,873 15,207,996 47,466,513 41,995,141
------------ ------------ ------------ ------------
Gross margin .................... 1,167,070 3,056,618 6,626,370 8,558,692
Marketing, general and
administrative expenses ...... 1,202,211 1,454,708 3,612,805 4,205,030
------------ ------------ ------------ ------------
Operating income ................ (35,141) 1,601,910 3,013,565 4,353,662
Other income (expense):
Interest expense ............. (64,435) (16,945) (211,291) (64,342)
Interest and other income, net 106,642 44,824 263,783 148,794
------------ ------------ ------------ ------------
42,207 27,879 52,491 84,452
------------ ------------ ------------ ------------
Income before income taxes ...... 7,066 1,629,789 3,066,056 4,438,114
Income tax provision ............ 2,402 554,128 1,042,459 1,508,959
------------ ------------ ------------ ------------
Net income ...................... $ 4,664 $ 1,075,661 $ 2,023,597 $ 2,929,155
============ ============ ============ ============
Net income per share data:
Basic ........................ $ 0.00 $ 0.20 $ 0.37 $ 0.55
============ ============ ============ ============
Diluted ...................... $ 0.00 $ 0.19 $ 0.36 $ 0.52
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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SEAMED CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 2,023,597 $ 2,929,156
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ................................................... 1,744,979 1,281,395
Provision for bad debts ........................................ 28,542 111,430
Deferred tax benefit ........................................... -- (513,480)
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable ................... 414,742 (3,701,532)
Decrease (Increase) in inventories ........................... 4,831,128 (3,842,291)
Increase (Decrease) in accounts payable, accrued
expenses, and deferred revenue ............................. (4,502,742) 2,763,264
Decrease (Increase) in other assets and prepaid expenses...... 381,036 (279,705)
------------ ------------
Net cash provided by (used in) operating activities ............... 4,921,282 (1,251,763)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements ................. (2,231,769) (2,265,627)
Maturity of short-term investments ................................ -- 3,766,100
------------ ------------
Net cash provided by (used in) investing activities ............... (2,231,769) 1,500,473
FINANCING ACTIVITIES
Proceeds from stock options exercised ............................. 166,735 85,643
Proceeds from sale of common stock under employee stock
purchase plan .................................................. 397,900 374,226
Net (payments of) borrowings under credit line ................... -- (1,068,240)
Proceeds from notes payable ....................................... 1,500,000 625,000
Principal payments on notes payable ............................... (473,394) (265,077)
------------ ------------
Net cash provided by financing activities ......................... 1,591,241 (248,448)
------------ ------------
Net increase in cash .............................................. 4,280,754 262
Cash and cash equivalents at beginning of period .................. 6,428,718 9,092
------------ ------------
Cash and cash equivalents at end of period ........................ $ 10,709,472 $ 9,354
============ ============
</TABLE>
See accompanying notes to financial statements.
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ITEM 1. NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared by
SeaMED Corporation (the Company) in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation have been
included. The balance sheet at June 30, 1998 has been derived from audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the nine-month period ended
March 31, 1999, are not necessarily indicative of results to be expected for the
entire year ending June 30, 1999 or for any other fiscal period. For further
information, refer to the financial statements and footnotes included in the
Company's Form 10-K for the year ended June 30, 1998.
2. REVENUE RECOGNITION
The Company recognizes revenues from contracts to perform engineering
design and product development as the related engineering service is performed.
When estimates indicate a probable loss on a contract, the full amount of such
loss is accrued at that time. The Company generally recognizes revenue from
manufacturing services when the related products are shipped.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." The
adoption of SFAS No. 130 had no impact on the Company's operating results or
shareholders' equity. For the nine months ended March 31, 1999, net income and
comprehensive income were the same.
In 1997, the Financial Standards Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is required to be adopted for periods beginning after
December 15, 1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." Companies will be required to report each
operating segment and related information, as defined in SFAS No. 131, in the
notes to financial statements. The Company plans to adopt SFAS No. 131 in 1999.
SFAS No. 131 is not required to be applied to interim financial statements in
the initial year of adoption.
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In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted for periods
beginning after June 15, 1999. Due to the minimal use of derivative instruments
and hedging activities, the Company does not expect the impact of SFAS No. 133
to be material.
4. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: March 31, June 30,
1999 1998
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<S> <C> <C>
Work in process $ 2,451,218 $ 3,685,594
Purchased and manufactured parts 9,153,659 12,366,257
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11,604,877 16,051,851
Less inventory reserve 1,250,488 866,334
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$10,354,389 $15,185,517
==========================================================================
</TABLE>
5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per share
Net income as reported 4,664 1,075,661 2,023,597 2,929,155
========================================================================================================================
Denominator:
Denominator for basic net income per share -
weighted average common shares 5,545,184 5,330,939 5,501,013 5,294,509
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Effect of dilutive securities:
Net effect of dilutive stock options based
on the treasury stock method using average
market price 112,157 301,507 159,202 314,748
Net effect of dilutive stock warrants based
on the treasury stock method using average
market price 0 28,889 0 28,626
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Dilutive potential common shares 166,628 330,396 159,202 343,374
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Denominator for diluted net income per share 5,657,342 5,661,335 5,660,215 5,637,883
========================================================================================================================
Basic net income per share $ .00 $ .20 $ .37 $ .55
========================================================================================================================
Diluted net income per share $ .00 $ .19 $ .36 $ .52
========================================================================================================================
</TABLE>
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6. NOTES PAYABLE
Variable Rate Note
The Company borrowed $2.5 million during fiscal year 1998 and an
additional $1.5 million in September 1998 against an existing equipment credit
facility. Borrowings under this agreement bear interest at LIBOR plus 1.4%
(6.65% at March 31, 1999).
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 March 31, 1999.
Interest Rate Contract
At March 31, 1999, the Company had an interest rate contract with a
notional principal amount of $4.0 million that effectively converts the $4.0
million variable rate note to a fixed rate of 7.5%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and Notes thereto included elsewhere in
this report. This report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause such a difference include,
but are not limited to, risks that customers may terminate engineering or
manufacturing contracts, customers are not successful in marketing and selling
their products, and engineering projects do not become products that are
manufactured by SeaMED in any significant volume. These and
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other factors are more fully described in the Company's Form 10-K filed for the
year ended June 30, 1998. The Company's fiscal year consists of the 52/53-week
period that ends on the Thursday nearest to June 30. For convenience of
presentation, all fiscal periods in this report are shown as ending on a
calendar month-end.
OVERVIEW
SeaMED is a manufacturer of advanced medical instruments for medical
technology companies. SeaMED was incorporated in 1976, and since 1988 has
focused its business primarily on manufacturing medical instruments for medical
technology companies. To assist its customers in developing and commercializing
their products for manufacture by SeaMED, the Company provides a wide range of
engineering services and regulatory expertise.
The Company entered into a definitive merger agreement with Plexus
Corp., a Wisconsin corporation (Nasdaq: PLXS), on March 16, 1999. If the merger
is approved by SeaMED shareholders, each SeaMED shareholder will receive between
$12 and $15 worth of Plexus common stock for each share of SeaMED common stock,
depending upon the average price of Plexus common stock during a defined period
ending before the merger. The exact number of shares of Plexus common stock that
SeaMED shareholders will receive will be calculated immediately prior to the
effective date of the merger. SeaMED shareholders may receive less than $12
worth of Plexus common stock for each SeaMED share if the Plexus average price
prior to the merger is below $27, but under those circumstances either Plexus or
SeaMED will have the option to elect not to proceed with the merger. The merger
is subject to several conditions, including the approval of SeaMED's
shareholders and the expiration of the waiting period under the federal
Hart-Scott-Rodino Antitrust Improvements Act.
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
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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.
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.
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YEAR 2000 TECHNOLOGY ISSUES
SeaMED continues to evaluate the capability of its computer software,
hardware and other electronic equipment to accurately function and accurately
recognize and process data in the year 2000 and beyond. SeaMED has completed its
evaluation of its various information technology systems and services, including
servers, desktop stations, software applications and WAN equipment, as well as
external services, such as internet access and telephone. SeaMED is in the final
stages of the implementation of all corrective measures for such systems and
equipment and anticipates completion of such implementation by July 1, 1999.
Year 2000 issues were identified primarily in SeaMED's financial information
software programs. The Company has also implemented corrective measures in its
critical date-sensitive technology systems by upgrading its software and
hardware systems, including incorporating new Year 2000 fixes as released by
manufacturers. Internal testing of the corrective measures has been completed,
and SeaMED believes that such measures have adequately addressed all identified
Year 2000 issues in the Company's information technology systems.
SeaMED has evaluated most reasonably likely worst-case scenarios
involving the failure of its various information systems. In those scenarios,
SeaMED would be unable to access data and applications utilized in manufacturing
processes, and experience a slow-down of production. Accordingly, SeaMED has
formulated contingency plans to secure backup systems and services in order to
maintain at least partial operations under such circumstances.
SeaMED recognizes that its operations and manufacturing revenues may be
adversely impacted if its customers or suppliers do not address Year 2000 issues
on a timely basis. The FDA has issued regulations requiring all medical device
companies (which includes almost all SeaMED customers) to disclose whether they
will be Year 2000 compliant. SeaMED 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. SeaMED also
conducted an extensive analysis of medical devices currently and previously
manufactured for different customers, and has undertaken to inform customers of
the results of these tests.
SeaMED has also contacted over 60 of its most significant suppliers in
order to assess their Year 2000 readiness, including sole source vendors that
provide materials critical to the production of manufactured devices. Responses
have been received from the majority of suppliers contacted, with 32 indicating
that they are currently Year 2000 compliant. The remainder of responding
suppliers have indicated that they continue to evaluate Year 2000 issues and
expect to attain compliance before the end of the calendar year. Those suppliers
that have not responded will be re-contacted by SeaMED prior to June 30, 1999.
SeaMED believes the most reasonably likely worst-case conditions involving its
vendors would be the failure of certain sole source vendors to provide materials
or components, which could cause SeaMED to shut down manufacturing operations
that are dependent upon the specific materials or components. As a result,
SeaMED is developing contingency plans that
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may include increasing stocking levels for certain key components. SeaMED
anticipates finalizing such contingency plans by June 30, 1999.
In addition, SeaMED recognizes that its service providers, such as
freight companies, mail and other delivery services, financial services
companies and others, may adversely affect SeaMED if they do not address Year
2000 issues. While SeaMED has evaluated the Year 2000 compliance of its
telephone systems and has arranged for back-up providers of telephone and
internet services in the event of loss of primary services, it has not evaluated
the Year 2000 readiness of other basic service providers.
SeaMED does not expect the costs associated with Year 2000 testing,
upgrades and contingency planning to exceed $100,000.
RESULTS OF OPERATIONS
The following table sets forth statement of income data as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
------------------------ -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.6 83.3 87.8 83.1
---------- ---------- ---------- ----------
Gross margin 7.4 16.7 12.2 16.9
Marketing, general and administrative 7.6 7.9 6.6 8.3
---------- ---------- ---------- ----------
Operating income (0.2) 8.8 5.6 8.6
Other income, net 0.2 0.1 0.1 0.2
---------- ---------- ---------- ----------
Income before income taxes 0.0 8.9 5.7 8.8
Income tax provision 0.0 3.0 1.9 3.0
---------- ---------- ---------- ----------
Net income 0.0% 5.9% 3.7% 5.8%
========== ========== ========== ==========
</TABLE>
Revenues
The following table sets forth revenues with the corresponding
percentage of total revenues and the percentage increase for the periods
indicated.
<TABLE>
<CAPTION>
Quarter Ended March 31, Nine Months Ended March 31,
----------------------------------------------------- -----------------------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
% of % of % of % of
Total Total % Total Total %
Revenues Revenues Revenues Revenues Inc/(Dec) Revenues Revenues Revenues Revenues Inc/(Dec)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Manufacturing $ 10,423 65.8% $ 11,528 63.1% (9.6)% $ 35,871 66.3% $ 31,542 62.4% 13.7%
Engineering 5,408 34.2 6,737 36.9 (19.7)% 18,222 33.7 19,012 37.6 (4.2)%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues $ 15,831 100.0% $ 18,265 100.0% (13.3)% $ 54,093 100.0% $ 50,554 100.0% 7.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Manufacturing revenues decreased by approximately $1.1 million in the
third quarter of fiscal year 1999 from the third quarter of fiscal year 1998 due
primarily to the cancellation of four medical instruments from United States
Surgical. Manufacturing revenues for the first nine
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months of fiscal year 1999 increased approximately $4.3 million from the first
nine months of fiscal year 1998. The increase in manufacturing revenue for the
first nine months of fiscal year 1999 was due primarily to new medical
instruments and increased revenues from existing medical instruments adding
approximately $13.9 million and increased revenues from the manufacture of the
Coinstar coin-counting machine adding approximately $2.1 million in nonmedical
manufacturing revenues. Increases in manufacturing revenues were offset by
decreased volume of certain existing instruments and the phase-out of others.
Due to delays in manufacturing of certain products and the phase-out of United
States Surgical instruments during the first half of fiscal year 1999, SeaMED
management anticipates manufacturing revenues in the fourth quarter of fiscal
year 1999 to be approximately the same as the third quarter of fiscal 1999.
Sales to Coinstar in the third quarter of fiscal year 1999 represented
approximately 27% of total revenue and approximately 37% of manufacturing
revenue, compared to 23% of total revenue and 31% of manufacturing revenue in
the third quarter of fiscal year 1998. For the first nine months of fiscal year
1999, Coinstar represented approximately 23% of total revenue and 31% of
manufacturing revenue compared to 21% of total revenue and 29% of manufacturing
revenue in the first nine months of fiscal year 1998.
SeaMED management expects sales to Coinstar will decrease as a
percentage of total sales in future years, but the percentage will increase for
the fourth quarter of fiscal year 1999.
Significant manufacturing revenues were generated by 19 medical
instruments in the first nine months of fiscal year 1999 compared to 20 medical
instruments in the first nine months of fiscal year 1998. The only nonmedical
commercial product that generated significant manufacturing revenues during the
nine months of fiscal year 1999 and fiscal year 1998 was the Coinstar
coin-counting machine.
Engineering revenues decreased by approximately $1.3 million in the
third quarter of fiscal year 1999 from the third quarter of fiscal year 1998,
due primarily to the delay of certain projects and the cancellation of other
projects. These delays and cancellations in the third quarter of fiscal year
1999 were offset by increased time and, to a lessor extent, hourly rates being
billed on existing projects of approximately $3.1 million compared to the third
quarter of fiscal year 1998. For the first nine months of fiscal year 1999
engineering revenues decreased by approximately $790,000 compared to the first
nine months of fiscal year 1998. The decrease in engineering revenues in the
first nine months of fiscal year 1999 was due primarily to delays of certain
projects and the cancellation of other projects. These delays and cancellations
during the first nine months of fiscal year 1999 were offset by increased time
and, to a lesser extent, hourly rates being billed on existing projects adding
approximately $9.1 million in revenues.
While future engineering revenues are difficult to forecast, SeaMED
management expects engineering revenues for the fourth quarter of fiscal year
1999 will be slightly lower than the third quarter of fiscal year 1999.
Approximately $2.7 million (11%) of total manufacturing revenue came
from United States Surgical in the first nine months of fiscal year 1999
compared to approximately $2.2
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million (11%) in the first nine months of fiscal year 1998. SeaMED management
expects no further sales to United States Surgical in 1999 or in future years.
As of the end of fiscal year 1998, SeaMED had in its engineering
project pipeline 22 new medical instruments or systems, and six projects that
enhance or are intended to extend the life cycle of existing medical instruments
or systems. At the end of the third quarter of fiscal year 1999, SeaMED had 10
new medical instruments or systems and 10 projects that enhance or are intended
to extend the life cycle of existing medical instruments or systems. The 20
medical projects in the pipeline at the end of third quarter of fiscal year 1999
were being performed for 17 different customers. Although management believes
that many of the 19 medical projects and one non-medical project in the pipeline
have a good chance of some day resulting in manufacturing contracts from which
SeaMED will derive substantial manufacturing revenues, the volume and timing of
future manufacturing revenues that relate to any specific engineering project
are highly variable, and certain engineering projects in the pipeline may not
lead to future manufacturing revenues.
Price adjustments under existing manufacturing contracts have not been
significant. Increases in revenues have not been significantly influenced by
inflation.
Gross Margin
The following table sets forth gross margin, both in dollar amounts and
as a percentage of the corresponding revenue figure for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended March 31, Nine Months Ended March 31,
--------------------------------------------------- ---------------------------------------------------
1999 1998 1999 1998
------------------------ ------------------------ ------------------------ ------------------------
Gross Gross Gross Gross Gross Gross Gross Gross
Margin ($) Margin (%) Margin ($) Margin (%) Margin ($) Margin (%) Margin ($) Margin (%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Manufacturing $ 1,051 10.1% $ 2,106 18.3% $ 5,126 14.3% $ 5,945 18.8%
Engineering 116 2.1% 951 14.1% 1,500 8.2% 2,614 13.7%
---------- ---------- ---------- ----------
Total gross margin $ 1,167 7.4% $ 3,057 16.7% $ 6,626 12.2% $ 8,559 16.9%
========== ========== ========== ==========
</TABLE>
Manufacturing gross margin decreased to 10.1% of manufacturing revenues
in the third quarter of fiscal year 1999 from 18.3% in the third quarter fiscal
year 1998, due primarily to excess capacity related to the decline in medical
manufacturing revenue during the quarter. Manufacturing gross margin for the
first nine months of fiscal year 1999 decreased to 14.3% from 18.8% for the nine
months of fiscal year 1998. SeaMED reduced headcount approximately 6% during the
third quarter of fiscal year 1999 and expects a further reduction during the
fourth quarter of fiscal year 1999 in an effort to improve gross margins in
future periods. SeaMED management expects manufacturing gross margins as a
percentage of revenue to remain lower than historic levels for the remainder of
fiscal year 1999 but to improve in future years.
Engineering gross margin as a percentage of engineering revenues
decreased to 2.1% in the third quarter of fiscal year 1999 from 14.1% in the
third quarter of fiscal year 1998. The
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decrease is attributable to lower engineering revenue, lower utilization rates
and increased costs associated with the addition of the Company's new
development facility. Management expects that engineering gross margins as a
percentage of sales will fluctuate from quarter to quarter but should
approximate 11%.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses decreased to $1.2
million in the third quarter and $3.6 million for the first nine months of
fiscal year 1999 compared to $1.5 million for the third quarter and $4.2 million
for the first nine months of fiscal year 1998. The dollar decrease was due
primarily to lower expenses associated with the company-wide plan attainment
bonus. These savings were offset by the increase in costs associated with
disseminating information to shareholders and the public, and severance charges
of approximately $237,000 related to the cost reduction program instituted
during the third quarter of fiscal 1999. 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. SeaMED management expects
marketing, general and administrative expenses as a percentage of revenues to
remain approximately the same in the near term.
Operating Income
Operating income decreased to approximately breakeven in the third
quarter of fiscal year 1999 from $1.6 million (8.8% of revenues) in the third
quarter of fiscal year 1998. The decrease in operating income is primarily the
result of lower manufacturing and engineering gross margins during the third
quarter of fiscal year 1999. Operating income decreased to $3.0 million
(5.6% of revenues) for the first nine months of fiscal year 1999 compared to
$4.4 million (8.6% of revenues)for the comparable 1998 period. The decrease in
operating income for the first nine months of fiscal year 1999 is due
primarily to the decrease in gross margin, as described above.
LIQUIDITY AND CAPITAL RESOURCES
SeaMED has historically financed its operations through earnings, debt
and sales of securities. As part of its strategy to finance its growth, on
November 19, 1996, SeaMED completed its initial public offering of securities,
selling 1,529,720 shares of common stock at $11 per share, resulting in net
proceeds to the Company of approximately $14.8 million. Of the net proceeds, the
Company used approximately $1.8 million to pay a cumulative preferred dividend
on its convertible redeemable preferred stock, approximately $1.8 million to pay
down a line of credit to zero and approximately $1.3 million to pay off three
notes payable. SeaMED has used a portion of the remaining net proceeds to
continue funding working capital needs resulting from its growth and for general
corporate purposes, including leasehold improvements and purchases of equipment.
In the first nine months of fiscal year 1999 SeaMED's operating
activities provided $4.9
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<PAGE> 16
million to the Company due primarily to decreases in inventory. During the first
quarter of fiscal year 1999, the Company borrowed an additional $1.5 million
against an existing equipment credit facility, bringing total borrowings against
existing equipment to $4.0 million. Borrowings under this agreement bear
interest at LIBOR plus 1.4% (6.25% at March 31, 1999). This agreement expires
October 1, 2001.
In July of 1998, the Company's Board of Directors approved an increase
to its existing working capital line of credit. Under this agreement the Company
can borrow up to 85% of eligible accounts receivable and 50% of eligible
inventory up to a maximum of $20.0 million. Borrowings under this agreement (and
the equipment loan agreement) require compliance with certain covenants,
including a maximum debt-to-equity ratio of 1.25-to-1, minimum ratio of earnings
before income taxes and interest of 2.0-to-1 and dividend restrictions.
Borrowings under this agreement bear interest at the bank's prime rate minus
.25% or LIBOR plus 1.2%. This agreement expires October 1, 2001. There were no
borrowings outstanding under this line of credit at March 31, 1999.
The Company is subject to interest rate risk resulting from amounts
outstanding under one of its borrowings. At March 31, 1998, the Company had an
interest rate contract with a notional principal amount of $4.0 million that
effectively converts the $4.0 million variable rate note to a fixed rate of
7.5%.
SeaMED believes that its existing capital resources and amounts
available under its existing working capital facility, will satisfy the
Company's anticipated capital needs for the next 18 to 36 months (depending
primarily on SeaMED's growth rate and its results of operations). To accommodate
anticipated future growth, SeaMED will need additional sources of capital to
fund working capital needs for inventory and accounts receivable, to lease and
acquire furniture and equipment for additional plant facilities, fund leasehold
improvements and make other capital expenditures.
In June of 1999 SeaMED will move its corporate headquarters and
engineering development from Redmond to its facilities in Bothell. The Company
anticipates sub-leasing the 60,000 square foot building in Redmond. SeaMED now
leases approximately 213,500 total square feet of space, including the Redmond
facility. The Company will lease an additional 20,500 square feet in June of
1999, bringing total square footage to 234,000 by the end of fiscal 1999. The
82,000 total square feet leased from July of 1998 through June of 1999 are
located in a single new building adjacent to an existing leased building. Due in
large part to preparing the new facilities for occupancy, SeaMED spent $2.2
million on capital expenditures during the nine months of fiscal year 1999
compared to $2.3 million during the first nine months of fiscal year 1998. The
Company anticipates spending $3.0 million on capital expenditures in fiscal year
1999, compared to $2.6 million in fiscal year 1998.
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PART II - OTHER INFORMATION
ITEM 6(A). EXHIBITS.
Exhibit 2.1* Agreement and Plan of Merger dated March 16, 1999
Exhibit 3.1+ Amended and Restated Articles of Incorporation of the Registrant
Exhibit 3.2++ Bylaws of the Registrant
Exhibit 27.1 Financial Data Schedule
- ----------
* Filed previously with the Company's report on Form 8-K, filed March 18,
1999 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.
++ Filed previously with the Company's Registration Statement on Form S-1
(No. 333-13455), filed with the Securities and Exchange Commission.
[Remainder of page intentionally left blank.]
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<PAGE> 18
SIGNATURES
The unaudited interim financial statements furnished by management
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position and results of operation.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By /s/ W. Robert Berg June 11, 1999
---------------------------------- --------------------------
W. Robert Berg Date
Principal Executive Officer
By /s/ Edgar F. Rampy June 11, 1999
---------------------------------- --------------------------
Edgar F. Rampy Date
Principal Financial Officer
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