-----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, Fbep+CmIs/d3ps6UOAf2xe/cqfcOkm0LSOyygR/EPV/qsat/9nNGbJee52WAz3jZ Uew6/zv0fe9DBK1eBUE4dA== 0000891020-98-001428.txt : 19981001 0000891020-98-001428.hdr.sgml : 19981001 ACCESSION NUMBER: 0000891020-98-001428 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980702 FILED AS OF DATE: 19980930 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-K405 SEC ACT: SEC FILE NUMBER: 000-21727 FILM NUMBER: 98718532 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-K405 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) 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)
(425) 867-1818 (REGISTRANT'S TELEPHONE NUMBER) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, NO PAR VALUE THE NASDAQ STOCK MARKET
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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 1 3 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 2 4 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. 3 5 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:
ENGINEERING CATEGORY NUMBER -------------------- ------ Component................................................... 1 Electrical Design........................................... 23 Electrical Test............................................. 13 Manufacturing............................................... 34 Mechanical Design........................................... 26 Reliability and Quality..................................... 31 Software Design............................................. 18 --- Total.................................................. 146 ===
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 4 6 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. 5 7 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. 6 8 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 7 9 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:
CATEGORY NUMBER -------- ------ Design and Engineering...................................... 192 Preproduction and Manufacturing............................. 214 Quality Assurance........................................... 65 Sales and Marketing, Financing and Administration........... 37 --- Total.................................................. 508 ===
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. 8 10 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:
QUARTER ENDED HIGH LOW ------------- ---- --- 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
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. 9 11 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)
YEAR ENDED JUNE 30, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- 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
JUNE 30, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- 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)
- --------------- (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 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 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.
YEAR ENDED JUNE 30, ----------------------- 1998 1997 1996 ----- ----- ----- 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% ===== ===== =====
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.
YEAR ENDED JUNE 30, ------------------------------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- % OF % OF % OF TOTAL % TOTAL % TOTAL REVENUES REVENUES INCREASE REVENUES REVENUES INCREASE REVENUES REVENUES -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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% ======= ===== ==== ======= ===== ===== ======= =====
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 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 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.
YEAR ENDED JUNE 30, -------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ---------------------- GROSS GROSS GROSS GROSS GROSS GROSS MARGIN($) MARGIN(%) MARGIN($) MARGIN(%) MARGIN($) MARGIN(%) --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) 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% ======= ====== ======
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 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 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 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 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 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 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- 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
20 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 23 BALANCE SHEETS
JUNE 30, -------------------------- 1998 1997 ----------- ----------- 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 =========== ===========
See accompanying notes. 22 24 STATEMENTS OF INCOME
YEAR ENDED JUNE 30, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- 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 =========== =========== ===========
See accompanying notes. 23 25 SHAREHOLDERS' EQUITY
COMMON STOCK NOTE RETAINED TOTAL ----------------------- RECEIVABLE EARNINGS SHAREHOLDERS' SHARES AMOUNT FROM OFFICER (DEFICIT) EQUITY --------- ----------- ------------ ---------- ------------- 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 ========= =========== ======== ========== ===========
See accompanying notes. 24 26 STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- 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
See accompanying notes. 25 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 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 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:
JUNE 30, -------------------------- 1998 1997 ----------- ----------- 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 =========== ===========
28 30 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JUNE 30, -------------------------- 1998 1997 ----------- ---------- 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 =========== ==========
NOTE 5. ACCRUED EXPENSES AND RESERVES Accrued expenses and reserves consist of the following:
JUNE 30 -------------------------- 1998 1997 ----------- ---------- 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 =========== ==========
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 31 NOTES TO FINANCIAL STATEMENTS (CONTINUED) LONG-TERM DEBT Long-term debt at June 30, 1998 consists of the following: 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 ==========
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 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
NUMBER OF AGGREGATE PRICE PER WEIGHTED AVERAGE SHARES PRICE SHARE EXERCISE PRICE --------- ---------- --------------- ---------------- 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 ======== ========== =============== ======
The following table summarizes information about options outstanding and exercisable at June 30, 1998:
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 - --------------- ----------- ---------------- -------- ----------- -------- $ 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 ======= ========== ====== ======= ======
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:
YEAR ENDED JUNE 30, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- 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
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 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:
SHARES ------- 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 ======= =======
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.
YEAR ENDED JUNE 30, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- 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 ========== ========== ==========
32 34 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10. INCOME TAXES The income tax provision consists of the following:
YEAR ENDED JUNE 30, ------------------------------------ 1998 1997 1996 ---- ---------- -------- 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 ========== ========== ========
Significant components of the Company's deferred tax benefits are as follows:
JUNE 30, ------------------------ 1998 1997 ---------- ---------- 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 ========== ==========
A reconciliation from the U.S. statutory rate to the effective tax rate is as follows:
YEAR ENDED JUNE 30, -------------------- 1998 1997 1996 ---- ---- ---- Tax at U.S. statutory rate.................................. 34.0% 34.0% 34.0% Other....................................................... -- 1.0 1.0 ---- ---- ---- 34.0% 35.0% 35.0% ==== ==== ====
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:
YEAR ENDED JUNE 30, ---------------------------------------- 1998 1997 1996 ----------- ----------- ---------- customer A.................................................. $ -- $ -- $2,665,000 B.................................................. -- -- 3,129,000 C.................................................. 15,897,400 12,836,000 -- D.................................................. 11,546,258 5,686,000 --
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 35 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Future minimum lease commitments under noncancelable leases and service agreements as of June 30, 1998 are as follows: 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 ===========
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)
FISCAL YEAR 1998 ------------------------------------------------ FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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
34 36 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEAR 1997 ------------------------------------------------ FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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
- --------------- (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 37 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS SEAMED CORPORATION
ADDITIONS ----------------------------- BALANCE AT CHARGED TO CHARGED TO OTHER BEGINNING OF COST AND ACCOUNTS -- DEDUCTIONS -- BALANCE AT DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD ----------- ------------ ---------- ---------------- ------------- ------------- 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 ======== ======== ======== ==========
- --------------- (1) Write-off of uncollectible accounts, net of recoveries (2) Actual warranty costs incurred 36 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 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.
SIGNATURES TITLE ---------- ----- /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
38 40 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 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.....................................
- --------------- + 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. 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. EX-10.3 2 FIRST AMENDMENT TO INDUSTRIAL REAL ESTATE LEASE 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:
MONTH PREMISES SF BASE RENT ------- ----------- ----------- 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
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. 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 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. 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 -------------------------------- 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 EX-10.11 3 EXTENSION AGREEMENT OF LOAN AGREEMENT AND NOTE 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- 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 EX-10.12 4 MANUFACTURING AGREEMENT DATED AS OF MAY 14, 1998 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. 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. 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 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. 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 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. 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 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) 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 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 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 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 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. 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) EX-10.13 5 PROMISSARY NOTE DATED JUNE 30, 1998 1 EXHIBIT 10.13 PROMISSORY NOTE
- --------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS - --------------------------------------------------------------------------------------------------------------------- $4,000,00 06-03-1998 10-01-2003 3000009001 305 E314107 SAB10 - ---------------------------------------------------------------------------------------------------------------------
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 ================================================================================
Principal Amount: Initial Rate: Date of Note: $4,000,000.00 8.500% June 30, 1998
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 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. 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. 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 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. 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). EX-10.14 6 REAL ESTATE LEASE AGREEMENT DATED MAY 1, 1998 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 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:
Monthly Annual Rent Per Square Foot Lease Year Installments Annual Rent Per Year ---------- ------------ ----------- --------------- 1-3 $5,500.00 $66,000.00 $6.855 4-5 $6,160.00 $73,920.00 $7.678
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 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 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; 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 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. 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. 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 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 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: 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, 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. 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 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 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 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. 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 ----------------------------------- 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 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 EX-10.15 7 DESCRIPTION OF NON-EMPLOYEE DIRECTOR STOCK OPTION 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. EX-23.1 8 CONSENT OF ERNST & YOUNG LLP 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 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 6,428,718 0 13,189,092 505,865 15,185,517 36,760,045 10,622,282 5,460,110 42,856,554 12,488,210 0 0 0 20,723,960 0 42,856,554 69,981,252 69,981,252 58,285,202 58,285,202 5,350,718 0 73,788 6,271,544 2,132,325 4,139,219 0 0 0 4,139,219 0.78 0.73
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