-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UQJDjTvb5PFLvAZAeITwzrc6ogbb4Kx45N8uhzrPhW1Zv4tkpAHyFYofTyBKYydO DnESCFg/octm0WEu0aL5pA== 0000891020-98-000851.txt : 19980519 0000891020-98-000851.hdr.sgml : 19980519 ACCESSION NUMBER: 0000891020-98-000851 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980402 FILED AS OF DATE: 19980518 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAMED CORP CENTRAL INDEX KEY: 0000937289 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 911002092 STATE OF INCORPORATION: WA FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21727 FILM NUMBER: 98627469 BUSINESS ADDRESS: STREET 1: 14500 N E 87TH STREET CITY: REDMOND STATE: WA ZIP: 98052-3431 BUSINESS PHONE: 2068761818 MAIL ADDRESS: STREET 1: 145 00 N E 87TH STREET CITY: REDMOND STATE: WA ZIP: 98052-3431 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED APRIL 2, 1998 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended April 2, 1998 Commission File number 0-21727 SeaMED Corporation - -------------------------------------------------------------------------------- (Exact Name of Registrant as specified in its charter) Washington 91-1002092 - -------------------------------------------------------------------------------- (State of Incorporation) (Federal I.R.S. No.) 14500 Northeast 87th Street, Redmond, Washington 98052-3431 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number 425-867-1818 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) - -------------------------------------------------------------------------------- As of May 15, 1998, the Registrant had 5,438,318 shares of Common Stock outstanding. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE: None 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SeaMED CORPORATION FINANCIAL STATEMENTS INDEX Balance Sheets as of March 31, 1998 and June 30, 1997........................3 Statements of Income for the Quarters and the Nine Months Ended March 31, 1998 and 1997........................................4 Statements of Cash Flows for the Nine Months Ended March 31, 1998 and 1997.............................................................5 Notes to Financial Statements................................................6
-2- 3 SEAMED CORPORATION BALANCE SHEETS (Unaudited) ASSETS
March 31, June 30, 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents ............. $ 9,354 $ 9,092 Investments ........................... 2,501,632 6,231,369 Accounts receivable, net .............. 12,385,071 8,794,968 Inventories ........................... 15,040,854 11,198,563 Deferred income taxes ................. 1,706,791 1,193,311 Prepaid expenses ...................... 371,827 169,553 ------------ ------------ Total current assets ..................... 32,015,529 27,596,856 Fixed assets, net ........................ 5,316,045 4,331,814 Deposits and other assets ................ 243,913 202,845 ------------ ------------ Total assets ............................. $ 37,575,487 $ 32,131,515 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ...................... $ 3,690,460 $ 2,482,551 Accrued expenses and reserves ......... 4,522,625 5,041,086 Customer deposits on inventory ...... 2,642,483 746,629 Borrowings under bank line of credit .. -- 1,068,240 Current portion of long-term debt ..... 177,962 -- ------------ ------------ Total current liabilities ................ 11,033,530 9,338,506 Long-term debt, less current portion ..... 359,923 -- Shareholders' equity: Common stock .......................... 20,182,734 19,722,865 Note receivable from officer .......... (75,000) (75,000) Retained earnings ..................... 6,074,300 3,145,144 ------------ ------------ Total shareholders' equity ............... 26,182,034 22,793,009 ------------ ------------ Total liabilities and shareholders' equity $ 37,575,487 $ 32,131,515 ============ ============
See accompanying notes to financial statements. -3- 4 SEAMED CORPORATION STATEMENTS OF INCOME (Unaudited)
Quarter Ended Nine Months Ended --------------------------------- --------------------------------- March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997 -------------- -------------- -------------- -------------- Revenues: Manufacturing ............................... $ 11,527,258 $ 8,840,330 $ 31,541,468 $ 22,853,466 Engineering ................................. 6,737,356 5,454,717 19,012,365 13,528,160 ------------ ------------ ------------ ------------ 18,264,614 14,295,047 50,553,833 36,381,626 Costs of revenues: Manufacturing ............................... 9,421,206 7,062,020 25,596,463 18,306,476 Engineering ................................. 5,786,790 4,784,081 16,398,678 11,914,390 ------------ ------------ ------------ ------------ 15,207,996 11,846,101 41,995,141 30,220,866 ------------ ------------ ------------ ------------ Gross margin .................................. 3,056,618 2,448,946 8,558,692 6,160,760 Marketing, general and administrative expenses ..................... 1,454,708 1,338,509 4,205,030 3,260,599 ------------ ------------ ------------ ------------ Operating income .............................. 1,601,910 1,110,437 4,353,662 2,900,161 Other income (expense), net: Interest .................................... 28,554 97,657 109,391 (3,466) Other ....................................... (675) (10,479) (24,939) (26,977) ------------ ------------ ------------ ------------ 27,879 87,178 84,452 (30,443) ------------ ------------ ------------ ------------ Income before income taxes .................... 1,629,789 1,197,615 4,438,114 2,869,718 Income tax provision .......................... 554,128 419,165 1,508,959 1,004,401 ------------ ------------ ------------ ------------ Net income .................................... $ 1,075,661 $ 778,450 $ 2,929,155 $ 1,865,317 ============ ============ ============ ============ Net income per share data: Basic ....................................... $ 0.20 $ 0.15 $ 0.55 $ 0.65 ============ ============ ============ ============ Diluted ..................................... $ 0.19 $ 0.14 $ 0.52 $ 0.39 ============ ============ ============ ============ Weighted average common shares and equivalents: Basic ....................................... 5,330,939 5,177,110 5,294,509 2,857,824 ============ ============ ============ ============ Diluted ..................................... 5,661,335 5,565,064 5,637,883 4,731,913 ============ ============ ============ ============
See accompanying notes to financial statements. -4- 5 SEAMED CORPORATION STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended March 31, 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net income ....................................... $ 2,929,156 $ 1,086,867 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ................................... 1,281,395 488,029 Provision for bad debts ........................ 111,430 54,739 Deferred tax benefit ........................... (513,480) -- Changes in operating assets and liabilities: Increase in accounts receivable .............. (3,701,532) (1,027,170) Increase in inventories ...................... (3,842,291) (1,874,964) Increase in accounts payable, accrued expenses, and deferred revenue ............. 2,763,264 394,780 Increase in other assets and prepaid expenses (279,705) (187,962) ------------ ------------ Net cash used in operating activities ............ (1,251,763) (1,065,681) INVESTING ACTIVITIES Purchases of equipment and leasehold improvements (2,265,627) (634,664) Maturity of short-term investments ............... 3,766,100 -- Purchase of investments .......................... -- (7,960,269) ------------ ------------ Net cash provided by (used in) investing activities ..................................... 1,500,473 (8,594,933) FINANCING ACTIVITIES Proceeds from sale of common stock (net of cost) . -- 14,799,036 Preferred stock dividend ......................... -- (1,765,100) Proceeds from stock options exercised ............ 85,643 7,156 Proceeds from sale of common stock under employee stock purchase plan ............................ 374,226 -- Net payments of credit line ...................... (1,068,240) (1,817,000) Proceeds from notes payable ...................... 625,000 -- Principal payments on notes payable .............. (265,077) (1,029,314) ------------ ------------ Net cash provided by financing activities ........ (248,448) 10,194,778 ------------ ------------ Net increase in cash ............................. 262 534,164 Cash and cash equivalents at beginning of period . 9,092 2,912 ------------ ------------ Cash and cash equivalents at end of period ....... $ 9,354 $ 537,076 ============ ============
See accompanying notes to financial statements. -5- 6 ITEM 1. NOTES TO FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Description of Business SeaMED Corporation (the "Company") manufactures advanced durable electronic medical instruments for medical technology companies, often as part of systems that also include single-use components. To assist its customers in developing and commercializing their instruments for manufacture by the Company, the Company provides a wide range of engineering services and regulatory expertise. Accounting Period The Company presents financial information for a 52/53 week fiscal year that ends on the Thursday nearest to June 30. Each of the Company's fiscal quarters ends, respectively, on the Thursday nearest to September 30, December 31 and March 31. For convenience of presentation, all fiscal periods in these financial statements are shown as ending on a calendar month-end. Unaudited Interim Financial Information The financial information as of March 31, 1998 and for the periods ended March 31, 1998 and 1997 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at such dates and the operations and cash flows for the periods then ended. The financial information is presented according to the rules and regulations of the Securities and Exchange Commission and, accordingly, does not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. Operating results for the periods ended March 31, 1998 are not necessarily indicative of results that may be expected for the entire year. This financial information should be read in conjunction with the Company's audited financial statements for the year ended June 30, 1997, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Net Income Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Basic earnings per share is computed using the -6- 7 weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation if their effect is antidilutive. The Securities and Exchange Commission previously had requirements for common and common stock equivalent shares issued during the 12-month period prior to the filing of an initial public offering to be included in the calculation of earnings per share as if they were outstanding for all periods presented using the treasury stock method assuming the initial public offering price. In 1998, the Securities and Exchange Commission issued new requirements for dilutive common stock equivalent shares to be included in the calculation of diluted earnings per share at the fair market value of common stock outstanding during the period. Net income per share amounts for all periods, where necessary, have been restated to conform to SFAS No. 128 and the new Securities and Exchange Commission requirements. New Accounting Pronouncements As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income. Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, adoption of Statement No. 130 had no impact on the Company's net income or shareholders' equity. Statement No. 130 had no impact on the classification of the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company will adopt SFAS No. 131 in 1998. The Company does not expect the impact of SFAS No. 131 to be material. 2. INITIAL PUBLIC OFFERING In November 1996, the Company completed an initial public offering of securities, selling 1,529,720 shares of common stock at $11 per share, resulting in net proceeds to the Company of $14,822,755, net of offering costs and underwriters discount of $2,004,165. Of the net proceeds, the Company used $1,765,100 to pay a cumulative preferred dividend on its convertible redeemable preferred stock, $1,831,000 to pay down its line of credit with a bank to zero and $1,296,000 to pay off in full three notes payable to the bank. In conjunction with the offering, all of the Company's convertible redeemable preferred stock outstanding immediately prior to the offering was converted into 2,934,029 shares of common stock. -7- 8 3. INVENTORIES Inventories consist of the following:
March 31, June 30, 1998 1997 ------------ ------------ Work-in-process $ 4,036,688 $ 3,274,857 Purchased and manufactured parts 11,004,166 7,923,706 ------------ ------------ Net Inventory $ 15,040,854 $ 11,198,563 ============ ============
4. INVESTMENTS Investments are classified as held to maturity. Investments are reported at cost net of unamortized premium or discount. All investments mature within one year. 5. LONG-TERM DEBT The Company has a term note payable to Keybank National Association (the "Bank"), entered into on July 31, 1997 and disbursed by the Bank on September 4, 1997. Borrowings under this note bear interest at LIBOR plus 1.4%, 7.1% at April 30, 1998, and will adjust as the LIBOR rate changes. The note is due in monthly payments of $18,055 through December 2000. At April 30, the balance outstanding on this note was approximately $523,000. -8- 9 6. INCOME PER SHARE The following table sets forth the computation of basic and diluted income per share: COMPUTATION OF NET INCOME PER SHARE
Quarter Ended Nine Months Ended March 31, March 31, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- NUMERATOR: Numerator for basic and diluted income per share ............. $1,075,661 $ 778,450 $2,929,155 $1,865,317 ---------- ---------- ---------- ---------- DENOMINATOR: Denominator for basic income per share -- weighted average common shares ................ 5,330,939 5,177,110 5,294,509 2,857,824 Effect of dilutive securities: Weighted average of all convertible redeemable preferred stock outstanding .. 0 0 0 1,506,933 Net effect of dilutive stock options based on the treasury stock method using avg. market price ........................ 301,507 360,992 314,748 348,479 Net effect of dilutive stock warrants based on the treasury stock method using avg. market price ........................ 28,889 26,962 28,626 18,677 ---------- ---------- ---------- ---------- Dilutive potential common shares ....................... 330,396 387,944 343,374 1,874,089 ---------- ---------- ---------- ---------- Denominator for diluted income per share .................... 5,661,335 5,565,064 5,637,883 4,731,913 Basic income per share ......... $ 0.20 $ 0.15 $ 0.55 $ 0.65 ========== ========== ========== ========== Fully diluted net income per share .................... $ 0.19 $ 0.15 $ 0.52 $ 0.39 ========== ========== ========== ==========
-9- 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. OVERVIEW SeaMED is a manufacturer of advanced medical instruments for medical technology companies. SeaMED was incorporated in 1976, and since 1988 has focused its business primarily on manufacturing medical instruments for medical technology companies. To assist its customers in developing and commercializing their products for manufacture by SeaMED, the Company provides a wide range of engineering services and regulatory expertise. SeaMED's manufacturing contracts with its customers are usually exclusive contracts for a fixed period of time, generally ranging from three to five years. SeaMED negotiates each manufacturing contract independently, and each varies as to profitability. SeaMED negotiates the price of each manufactured instrument on a cost and margin formula. SeaMED's contracts with its customers generally permit annual manufacturing cost audits and price renegotiations. During the contract term, customers have broad discretion to control the volume and timing of instrument deliveries. Consequently, SeaMED's revenues with respect to each instrument may vary substantially from period to period, and an instrument that generates revenues in one quarter may not necessarily generate revenues in each quarter of a fiscal year. In addition, for a variety of reasons such as a customer's inventory levels, sales mix and timing of product launches, SeaMED's revenues for an instrument do not necessarily correspond to the customer's sales. Manufacturing revenue growth depends primarily on two factors: increased demand for instruments manufactured by SeaMED and SeaMED's ability to attract additional manufacturing contracts from emerging and established medical technology companies. SeaMED has no ability to increase demand for the instruments it manufactures because SeaMED's customers control all product marketing and sales. SeaMED markets its manufacturing capabilities and usually procures additional manufacturing contracts as a result of its engineering projects, but the volume and timing of future manufacturing revenues that relate to any specific engineering project are highly variable, and certain engineering projects may not lead to future manufacturing revenues. The manufacturing gross margin percentage from year to year depends primarily on the product mix, as gross margins vary by instrument and as a result of negotiated volume discounts. Management may negotiate volume discounts if the larger volume results in smaller per unit overhead allocation, thereby improving operating margin. For manufacturing revenues from -10- 11 instruments not yet approved for commercial use (known as "preproduction revenues"), the gross margin percentage is generally lower because a smaller number of units limits opportunities to achieve economies of scale, and the instrument and its manufacturing process are being refined. The Company's manufacturing revenues could be adversely affected if one or more of its customers are unable to comply with Food and Drug Administration ("FDA") regulations regarding Year 2000 issues. FDA regulations require all medical device companies to be Year 2000 compliant. The Company has been monitoring FDA filings of its manufacturing customers concerning these issues. If one or more of the Company's customers do not ultimately comply with FDA regulations regarding Year 2000 issues in a timely manner, the Company's related manufacturing revenues could cease, with a potential adverse effect on the Company's operating results or financial condition. SeaMED provides its customers with engineering services at any stage of an instrument's development, as part of its strategy to obtain exclusive manufacturing rights for an instrument. SeaMED generally provides engineering services under a project plan that identifies the engineering tasks, deliverables and schedule. SeaMED negotiates each engineering project plan independently, and, as a business strategy, generally prices engineering contracts to cover direct project expenses (i.e., nonrecurring engineering expenses) plus a share of marketing, general and administrative expenses. SeaMED's objective in providing engineering services is to obtain, for a specific time period (usually three to five years), exclusive manufacturing rights to the instrument resulting from the engineering project. The customer can typically cancel the engineering project at any time upon short notice. Engineering revenues are derived primarily from professional services provided by SeaMED's engineers. The balance of engineering revenues is sales of materials to customers at cost. Engineering revenue growth depends primarily on three factors: (i) the number and scope of existing engineering projects, (ii) whether existing projects are in time-intensive phases, and (iii) whether new engineering projects of sufficient scope replace engineering projects that are completed or otherwise terminated. Engineering gross margins are low due to SeaMED's strategy of pricing engineering services as part of an exclusive manufacturing contract for the resulting instrument. Since demand for engineering services is based on the number and scope of engineering projects, if customers cancel one or more projects on short notice, SeaMED may experience from time to time excess engineering capacity. Engineering margins may fluctuate depending on the rates that customers pay under engineering project plans and the utilization rates of engineers. SeaMED from time to time selectively designs and manufactures nonmedical commercial products that benefit from SeaMED's engineering and manufacturing capabilities. SeaMED intends to maintain as its primary focus the design and manufacturing of advanced medical instruments for medical technology companies. -11- 12 Marketing, general and administrative expenses include the costs of SeaMED's marketing, finance, and management information systems departments and other administrative costs. In addition, marketing, general and administrative expenses include the cost of a Company-wide bonus tied to operating performance and return on operating assets based on an operating plan approved by the Board of Directors. Future payments will vary based on the Company's performance relative to plan objectives. -12- 13 RESULTS OF OPERATIONS The following table sets forth statement of income data as a percentage of revenues for the periods indicated.
Quarter Ended Nine Months Ended March 31, March 31, --------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 83.3 82.9 83.1 83.1 ----- ----- ----- ----- Gross margin 16.7 17.1 16.9 16.9 Marketing, general and administrative 7.9 9.3 8.3 8.9 ----- ----- ----- ----- Operating income 8.8 7.8 8.6 8.0 Other income (expense), net 0.2 0.6 0.2 (0.1) ----- ----- ----- ----- Income before income taxes 9.0 8.4 8.8 7.9 Income tax provision 3.1 3.0 3.0 2.8 ----- ----- ----- ----- Net income 5.9% 5.4% 5.8% 5.1% ===== ===== ===== =====
Revenues The following table sets forth revenues with the corresponding percentage of total revenues and the percentage increase for the periods indicated.
Quarter Ended March 31, ---------------------------------------------------------- 1998 1997 ----------------------------------------------- % of % of Total Total % Revenues Revenues Revenues Revenues Increase -------- -------- -------- -------- -------- (dollars in thousands) Manufacturing $11,527 63.1% $ 8,840 61.8% 30.4% Engineering 6,738 36.9 5,455 38.2 23.5% ------- ----- ------- ----- Total Revenues $18,265 100.0% $14,295 100.0% 27.8% ======= ===== ======= =====
Nine Months Ended March 31, ----------------------------------------------------------- 1998 1997 ----------------------------------------------- % of % of Total Total % Revenues Revenues Revenues Revenues Increase -------- -------- -------- -------- -------- (dollars in thousands) Manufacturing $31,542 62.4% $22,853 62.8% 38.0% Engineering 19,012 37.6 13,528 37.2 40.5% ------- ----- ------- ----- Total Revenues $50,554 100.0% $36,382 100.0% 39.0% ======= ===== ======= =====
Manufacturing revenues increased by approximately $2.7 million in the third quarter of fiscal year 1998 from the third quarter of fiscal year 1997 and by approximately $8.7 million in the first nine months of fiscal year 1998 from the first nine months of fiscal year 1997. The increase in manufacturing revenues in the third quarter of fiscal year 1998 was due primarily to new medical instruments and increased revenues from existing medical instruments adding approximately $3.9 million in revenues and increased revenues from the manufacture of the Coinstar coin-counting machine adding approximately $434,000 in nonmedical manufacturing revenues. The increase in manufacturing revenues in the first nine months of fiscal year 1998 was due primarily to new medical instruments and increased revenues from existing medical instruments adding approximately $10.4 million in revenues and increased revenues from the manufacture of the Coinstar coin-counting machine adding approximately $1.5 million in nonmedical manufacturing revenues. Increases in manufacturing revenues were offset by decreased volume of certain existing instruments and the phase-out of others, including the phase-out of the Company's last remaining proprietary instrument during the fourth quarter of fiscal year 1997. -13- 14 Sales to Coinstar in the third quarter of fiscal year 1998 represented approximately 31% of manufacturing revenues and approximately 23% of total revenues (36% and 25%, respectively, in the third quarter of fiscal year 1997) and in the first nine months of fiscal year 1998 represented approximately 29% of manufacturing revenues and approximately 21% of total revenues (33% and 24%, respectively, in the first nine months of fiscal year 1997). Management expects that sales to Coinstar will tend to decrease as a percentage of manufacturing revenues in the future, but the percentage may fluctuate from quarter to quarter. Significant manufacturing revenues were generated by 19 medical instruments in the first nine months of fiscal year 1998 compared to 14 medical instruments in the first nine months of fiscal year 1997. The only nonmedical commercial product that generated significant manufacturing revenues during the first nine months of fiscal years 1998 and 1997 was the Coinstar coin-counting machine. Engineering revenues increased by approximately $1.3 million in the third quarter of fiscal year 1998 from the third quarter of fiscal year 1997 and approximately $5.5 million in the first six months of fiscal year 1998 from the first nine months of fiscal year 1997. The increase in engineering revenues in the third quarter of fiscal year 1998 was due primarily to new projects and to increased time and, to a lesser extent, hourly rates being billed on existing projects adding approximately $3.7 million in revenues. The increase in engineering revenues in the first nine months of fiscal year 1998 was due primarily to new projects and to increased time and hourly rates being billed on existing projects adding approximately $9.9 million in revenues. Increases in engineering revenues were offset by the transition of certain projects from engineering to manufacturing and other projects being delayed or cancelled. As of the respective ends of the third quarters of fiscal years 1998 and 1997, SeaMED had in its engineering project pipeline 24 and 21 new medical instruments or systems, and nine and five projects that enhance or are intended to extend the life cycle of existing medical instruments or systems. The 33 medical projects in the pipeline as of the end of the third quarter of fiscal year 1998 were being performed for 27 different customers (25 medical projects for 23 different customers as of the end of the third quarter of fiscal year 1997). Although management believes that the 33 medical projects in the pipeline have a good chance of some day resulting in manufacturing contracts from which SeaMED will derive substantial manufacturing revenues, the volume and timing of future manufacturing revenues that relate to any specific engineering project are highly variable, and certain engineering projects in the pipeline may not lead to future manufacturing revenues. As of the end of the third quarters of each of fiscal years 1998 and 1997, SeaMED had in its engineering project pipeline one nonmedical commercial product. Price adjustments under existing manufacturing contracts have not been significant. Increases in revenues have not been significantly influenced by inflation. -14- 15 Gross Margin The following table sets forth gross margin, both in dollar amounts and as a percentage of the corresponding revenue figure for the periods indicated.
Quarter Ended March 31, Nine Months Ended March 31, ------------------------------------------ ------------------------------------------ 1998 1997 1998 1997 -------------------- ------------------- ------------------- ------------------- Gross Gross Gross Gross Gross Gross Gross Gross Margin Margin Margin Margin Margin Margin Margin Margin ($) (%) ($) (%) ($) (%) ($) (%) ------ ------ ------ ------ ------ ------ ------ ------ (dollars in thousands) Manufacturing $2,106 18.3% $1,778 20.1% $5,945 18.8% $4,547 19.9% Engineering 951 14.1% 671 12.3% 2,614 13.7% 1,614 11.9% ------ ------ ------ ------ Total gross margin $3,057 16.7% $2,449 17.1% $8,558 16.9% $6,160 16.9% ====== ====== ====== ======
Manufacturing gross margin decreased to 18.3% of manufacturing revenues in the third quarter of fiscal year 1998 from 20.1% in the third quarter of fiscal year 1997. Preproduction revenues, which generally produce lower gross margins, increased as a percent of sales and offset gross margin improvements achieved by spreading facilities and certain other manufacturing overhead costs over a higher revenue base. The decrease in the manufacturing gross margin percentage to 18.8% in the first nine months of fiscal year 1998 from 19.9% in the first nine months of fiscal year 1997 was primarily attributable to the same factors. Engineering gross margin increased to 14.1% of engineering revenues in the third quarter of fiscal year 1998 from 12.3% in the third quarter of fiscal year 1997. This increase was attributable primarily to spreading certain fixed engineering costs over a higher revenue base and high utilization of engineers, and, to a lesser extent, to increased hourly rates for engineering services. The increase in the engineering gross margin percentage to 13.7% in the first nine months of fiscal year 1998 from 11.9% in the first nine months of fiscal year 1997 was primarily attributable to the same factors. Management expects engineering gross margin as a percentage of revenues to fluctuate from quarter to quarter, but to average approximately 11% over time. Marketing, General and Administrative Expenses Marketing, general and administrative expenses increased to $1.5 million in the third quarter of fiscal year 1998 from $1.3 million in the third quarter of fiscal year 1997, but as a percentage of revenues decreased to 7.9% from 9.3% for the respective quarters. In the first nine months of fiscal year 1998, marketing, general and administrative expenses increased to $4.2 million from $3.3 million in the first nine months of fiscal year 1997, but as a percentage of revenues decreased to 8.3% from 8.9%. The dollar increases were due primarily to costs associated with disseminating information to shareholders and the public, increased headcount and management information systems costs associated with the Company's growth. Marketing, general and administrative expenses before bonus represented 6.4% of revenues in the third quarter of fiscal year 1998 and 6.8% in the third quarter of 1997, and 6.6% of revenues in the first nine months of fiscal years 1998 and 1997. -15- 16 Operating Income Operating income increased 44.3% to $1.6 million (8.8% of revenues) in the third quarter of fiscal year 1998 from $1.1 million (7.8% of revenues) in the third quarter of fiscal year 1997 and increased 50.1% to $4.4 million (8.6% of revenues) in the first nine months of fiscal year 1998 from $2.9 million (8.0% of revenues) in the first nine months of fiscal year 1997, due primarily to an increase in sales volume and improved gross margins in engineering. LIQUIDITY AND CAPITAL RESOURCES SeaMED has historically financed its operations through earnings, debt and sales of securities. In the first nine months of fiscal year 1998 SeaMED's operating activities resulted in net uses of cash of $1.3 million, despite earnings of $2.9 million, because SeaMED's growth continues to require substantial infusions of working capital, primarily to support increases in accounts receivable and inventories. As part of its strategy to finance its growth, on November 19, 1996, SeaMED completed its initial public offering of securities, selling 1,529,720 shares of common stock at $11 per share, resulting in net proceeds to the Company of approximately $14.8 million. Of the net proceeds, the Company used approximately $1.8 million to pay a cumulative preferred dividend on its convertible redeemable preferred stock, approximately $1.8 million to pay down a line of credit with a bank to zero and approximately $1.3 million to pay off in full three notes payable to the bank. SeaMED has used a portion of the remaining net proceeds to continue funding working capital needs resulting from its growth and for general corporate purposes, including leasehold improvements and purchases of equipment. If the opportunity arises the Company may use a portion of the net proceeds to acquire other manufacturing or engineering businesses or assets that complement the Company's existing business. The Company currently is not engaged in any discussions regarding such acquisitions and has no plans, arrangements, understandings or agreements regarding any specific acquisition. The Company has a line of credit arrangement (the "working capital facility") with Keybank National Association (the "Bank"), under which the Company can borrow against 85% of eligible accounts receivable and 50% of eligible inventory, up to a maximum of $10.0 million ($20.0 million after July 1998). Borrowings under the working capital facility will bear interest at either the Bank's prime rate minus .25% or LIBOR plus 1.2%. At April 30, there were no borrowings under the working capital facility. In addition the Bank has committed to allow SeaMED, in SeaMED's discretion, to draw on an equipment acquisition line of credit (the "equipment facility") with the Bank, under which the Company can borrow up to $5.0 million. Borrowings under the equipment facility will bear interest at LIBOR plus 1.4% and will be secured by the equipment purchased using the equipment facility. At April 30, there were no borrowings under the equipment facility. -16- 17 SeaMED also has a term note payable to the Bank, entered into on July 31, 1997 and disbursed by the Bank on September 4, 1997. Borrowings under this note bear interest at LIBOR plus 1.4%, 7.1% at April 30, 1998, and will adjust as the LIBOR rate changes. The note is due in monthly payments of $18,055 through December 2000. At April 30, the balance outstanding on this note was approximately $523,000. SeaMED believes that the net proceeds remaining from its initial public offering, together with existing capital resources and amounts available under its new working capital and equipment facilities, will satisfy the Company's anticipated capital needs for the next 18 to 36 months (depending primarily on SeaMED's growth rate and its results of operations). To accommodate anticipated future growth, SeaMED will need additional sources of capital to fund working capital needs for inventory and accounts receivable, to lease and acquire furniture and equipment for additional plant facilities, to fund leasehold improvements and to make other capital expenditures. SeaMED's current facilities contain approximately 148,000 square feet of space. Due in large part to furnishing during the first half of fiscal year 1998 60,000 square feet of space added in May 1997 and reconfiguring space in its headquarters, SeaMED's capital expenditures increased to approximately $2.3 million in the first nine months of fiscal year 1998 from $1.2 million in the first nine months of fiscal year 1997. Management anticipates that total capital expenditures in fiscal year 1998 will be about the same as the $2.8 million of capital expenditures in fiscal year 1997. In July 1997 SeaMED entered into a commitment to lease an additional 81,000 square feet of space in stages beginning in January 1999. SeaMED now anticipates occupying the first 40,000 square feet under this commitment during the summer of 1998 and the remaining space by summer 1999. -17- 18 PART II - OTHER INFORMATION ITEM 2(D). USE OF OFFERING PROCEEDS. From November 18, 1996, the effective date of the Securities Act registration statement for the Company's initial public offering of common stock, through April 2, 1998, the Company has used the net offering proceeds as follows:
Use of Net Offering Proceeds Amount - ---------------------------- ---------- (dollars in thousands) Construction of plant, building and facilities $ 644 Purchase and installation of machinery and equipment 3,910 Repayment of indebtedness (including a cumulative preferred stock dividend) 4,892 Working capital 2,875 Temporary investments 2,502 -------- $ 14,823 ========
The uses of net offering proceeds set forth above are management's reasonable estimates, and they assume the reinvestment of cash from operating activities into the Company's net working capital. Temporary investments are United States government obligations with a term of less than one year. ITEM 6(A). EXHIBITS. Exhibit 3.1+ Amended and Restated Articles of Incorporation of the Registrant Exhibit 3.2++ Bylaws of the Registrant Exhibit 4.1+++ Rights Agreement dated as of January 27, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., which includes the form of Articles of Amendment as Exhibit A thereto, the form of Right Certificate as Exhibit B thereto and the form of Summary of Rights to Purchase Preferred Shares as Exhibit C thereto. Exhibit 27.1 Financial Data Schedule - ---------- + Filed previously with the Company's quarterly report on Form 10-Q for the quarter ended October 2, 1997, filed with the Securities and Exchange Commission. ++ Filed previously with the Company's Registration Statement on Form S-1 (No. 333-13455) filed with the Securities and Exchange Commission. +++ Filed previously with the Company's current report on Form 8-K filed February 5, 1998 with the Securities and Exchange Commission. -18- 19 SIGNATURES The unaudited interim financial statements furnished by management reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position and results of operation. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ W. Robert Berg 5/15/98 By__________________________________ ___________________________ W. Robert Berg Date Principal Executive Officer /s/ Edgar F. Rampy 5/15/98 By__________________________________ ___________________________ Edgar F. Rampy Date Principal Financial Officer -19- 20 EXHIBIT INDEX
Exhibit Number Description Page - ------ ----------- ---- Exhibit 3.1+ Amended and Restated Articles of Incorporation of the Registrant......... Exhibit 3.2++ Bylaws of the Registrant................................................. Exhibit 4.1+++ Rights Agreement dated as of January 27, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., which includes the form of Articles of Amendment as Exhibit A thereto, the form of Right Certificate as Exhibit B thereto and the form of Summary of Rights to Purchase Preferred Shares as Exhibit C thereto. Exhibit 27.1 Financial Data Schedule..................................................
- ---------- + Filed previously with the Company's quarterly report on Form 10-Q for the quarter ended October 2, 1997, filed with the Securities and Exchange Commission. ++ Filed previously with the Company's Registration Statement on Form S-1 (No. 333-13455) filed with the Securities and Exchange Commission. +++ Filed previously with the Company's current report on Form 8-K filed February 5, 1998 with the Securities and Exchange Commission. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS JUN-30-1998 JUN-30-1998 DEC-31-1997 JUL-01-1997 MAR-31-1998 MAR-31-1998 9,354 9,354 2,501,632 2,501,632 12,874,390 12,874,390 489,320 489,320 15,040,854 15,040,854 32,015,529 32,015,529 10,267,173 10,267,173 4,951,128 4,951,128 37,575,487 37,575,487 11,033,530 11,033,530 359,923 359,923 0 0 0 0 20,182,734 20,182,734 5,999,300 5,999,300 37,575,487 37,575,487 18,264,614 50,553,833 18,264,614 50,553,833 15,207,996 41,995,141 15,207,996 41,995,141 1,454,708 4,205,030 0 0 0 0 1,629,789 4,438,114 554,128 1,508,959 1,075,661 2,929,155 0 0 0 0 0 0 1,075,661 2,929,155 .20 .55 .19 .52
-----END PRIVACY-ENHANCED MESSAGE-----