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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number: 0-12471
COLORADO MEDTECH, INC.
(Name of small business issuer in its charter)
COLORADO 84-0731006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6175 LONGBOW DRIVE, BOULDER, COLORADO 80301
(Address of principal executive offices, including zip code)
(303) 530-2660
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK (NO PAR VALUE)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $28,243,185
The aggregate market value of the voting stock held by nonaffiliates
computed by reference to the average bid and asked prices of such stock as of
August 31, 1997 was $28,511,668
The number of shares outstanding of the issuer's Common Stock as of August 31,
1997 was 10,303,192.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 is incorporated by reference in
Part III of this report.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Colorado MEDtech, Inc. ("CMED") and its wholly-owned subsidiaries, RELA,
Inc. ("RELA") and Novel Biomedical, Inc. ("Novel") (collectively, the
"Company") are leading full-service providers of advanced medical products,
technologies and services which increase the efficacy and lower the cost of
health care. CMED was incorporated in 1977 as a Colorado corporation to
develop, manufacture, market and service computerized diagnostic and testing
instrumentation. RELA, a Colorado corporation, was incorporated in 1977. RELA
is an integrated custom product development and manufacturing services
company specializing in the design, development and manufacture of electronic
and electro-mechanical medical products and software systems. Novel, a
Minnesota corporation, was incorporated in 1986 and was acquired by CMED in
February, 1997. Novel specializes in the custom design, development and
manufacture of unique disposable medical devises, primarily catheters, used
in angioplasty, minimally invasive surgery, electrophysiology and infertility
treatment. In July 1997, CMED entered into an agreement to acquire the
operating assets of Erbtec Engineering, Inc. ("Erbtec"). Erbtec, located in
Boulder, Colorado, produces high power radio frequency ("RF") amplifiers and
systems for Magnetic Resonance Imaging ("MRI") equipment and other medical
imaging applications.
PRODUCTS AND SERVICES
The Company employs engineers, scientists, technicians, manufacturing
specialists, and assembly workers. The Company believes its experience in
applying its proven methodologies and advanced technologies to the
development of innovative new products gives its clients an advantage in
their marketplace by providing them with state-of-the-art, quality products
in a timely and cost-effective manner. The Company designs, develops and
manufactures healthcare products for a broad range of customers that include
major pharmaceutical and medical instrumentation companies. In addition to
development, the Company performs product definition services, conducts focus
groups and performs software verification and validation ("V&V") activities
necessary for Food and Drug Administration ("FDA") approval. CMED and RELA
received ISO 9001 and EN 46001 certification during 1996. Novel is currently
preparing to undergo an ISO 9001 and EN 46001 certification audit during
fiscal year 1998. The Company is a Registered Device Manufacturer with the
FDA and meets the agency's Quality Systems Regulation requirements.
Additional services include:
- - Feasibility studies - Mechanical design and engineering
- - Market research - Machining and modeling services
- - Product modeling, graphic design - Disposables engineering
and trade show support - Prototype development
- - Industrial design and human - Design for manufacturability
factors engineering and reliability engineering
- - User interface design and - Pilot, short- and long-run
usability testing production
- - Electronic design and development - Quality assurance and testing
- - Software development, verification - Product service and sustaining
and validation engineering
- - Electronic packaging and printed-
circuit design
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Rapidly advancing technologies, heightened worldwide competition and the
demands of an increasingly sophisticated marketplace have created pressures
on companies, both domestic and international, to develop high quality,
world-class products in time to meet the narrowing windows of opportunity in
the marketplace. These conditions have produced opportunities for companies
that can react to those market needs. Such companies need to have the
technology, experience and ability to develop high quality, state-of-the-art
products. The Company believes it is uniquely positioned to provide its
clients, within a single integrated structure, the valuable product
development and manufacturing resources they need to satisfy the requirements
of a worldwide marketplace.
CMED was organized to develop, manufacture, market and service
computerized diagnostic and testing instrumentation. The Company's
respiratory product lines include respiratory filters, metabolic assessment
instruments and computers and computer software for the measurement of
metabolic parameters.
CMED is currently in the test phase of an oxygen regeneration system
that is intended for use in long-term health care facilities. This system is
expected to reduce the cost of oxygen to patients of these facilities due to
the fact that they would be generating their own oxygen at their own
facilities instead of purchasing it from third parties. The Company expects
this product to be in commercial production during fiscal 1998.
The Company's MetaScope-TM- allows physicians to perform metabolic
analysis in a noninvasive manner by means of the science of indirect
calorimetry. The MetaScope-TM- provides physicians with precise nutritional
information that assists in monitoring patient recovery. Cardiac output
measurements based on oxygen consumption can also be computed with this
instrument.
MARKETING
The Company markets its services through a direct sales program and
nationwide network of independent manufacturers' representatives. The
Company promotes its services through advertising, direct mail and attendance
at industry trade shows.
The Company's respiratory products are sold primarily to Vencor, Inc.
("Vencor"), a related party that is a large hospital and nursing home
organization and to other hospitals, clinics, and private physicians
throughout the continental United States, and on a limited basis in Canada,
Japan, Mexico and several other foreign countries. The Company distributes
these products through its own support organization.
For the period ended June 30, 1997, three customers accounted for
approximately 19%, 14% and 12%, respectively, of total revenues of the
Company and foreign sales were less than 5% of the Company's total sales.
The loss of a significant customer could have a material, detrimental impact
on the Company's operations. Most sales are on net thirty-day credit terms.
At June 30, 1997, the Company's backlog of orders for services or shipment of
product in fiscal 1998 was approximately $21.7 million compared to
approximately $16.0 million at June 30, 1996.
RESEARCH AND PRODUCT DEVELOPMENT
The Company intends to continue to improve current products and to
develop new products and services. In addition to internal development
efforts, the Company may acquire related technology and/or products from
others.
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In June of 1994, the Company signed a product development agreement with
Vencor to develop mutually agreed upon products that Vencor would purchase
exclusively from the Company, while the Company is unrestricted in its rights
to sell the products. The Company has agreed to expend at least $800,000
toward development of products during the term of the agreement.
While the Company employs approximately 100 engineers, scientists and
technicians in research and development activities, these employees' efforts
are primarily devoted to contract work for customers. Research and
development expenses historically were attributable to the metabolic and
filter product lines. During fiscal year 1997 most of the research and
development expenses are attributable to the oxygen regeneration system. No
research and development expenditures are currently attributable to RELA or
Novel. For fiscal years 1997 and 1996, the Company incurred approximately
$304,000 and $97,000, respectively, for research and development activities.
Consistent with the Company's operating plans, the Company is
continuously pursuing the acquisition and development of new or improved
technology or products. Should the Company identify any opportunities that
would be commercially viable, the amount of future research and development
expenditures may increase.
COMPETITION
The Company's present and future competition comes from a variety of
sources. These sources include commercial product development and
manufacturing companies. There are a number of firms that provide services
similar to the Company's. These vary from small consulting operations
offering a small subset of the Company's services to a few integrated service
companies. Frequent RELA competitors include SeaMed Corporation and Kollsman
Manufacturing Company. Frequent Novel competitors include ACT Medical,
Incorporated and NuMED, Incorporated.
On a lesser scale, the Company also competes with commercial and
university research laboratories. There are both for-profit and
not-for-profit organizations nationwide that perform services similar to the
product development aspect of the Company's business. These include
Battelle, Inc., Stanford Research Institute, Arthur D. Little Center for
Product Development, Southwest Research Institute and the research
capabilities within the nation's leading universities.
CMED's MetaScope-TM- has three major competitors. Mallinckrodt Group,
Incorporated has a unit dedicated for use with their line of hospital
ventilators. Sensormedics Corporation and Medical Graphics Corporation both
produce instruments that compete directly with the Company's product. Jaeger
also produces a product that has not been released for sale in the United
States.
As the Company develops and manufactures other proprietary products,
such as the oxygen regeneration system, it can expect to encounter
additional competitors, many of which may be larger and in a stronger
financial position than the Company. As cost containment efforts continue in
the healthcare marketplace, competition will continue to be intense in the
future.
MANUFACTURING
The Company manufactures its products and customer products at three
facilities in Boulder, Colorado, Longmont, Colorado and in Plymouth,
Minnesota. Most products are fabricated as standard products, while others
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are built in response to specific customer purchase orders. The
manufacturing process consists primarily of assembly, test and packaging of
both custom and commercially available components from outside sources.
Most of the materials and components used in the Company's products are
available from a number of different suppliers. The Company generally
maintains multiple sources for most items, but some components are single
source. The Company is dependent upon its suppliers for timely delivery of
quality components.
PRODUCT WARRANTIES AND SERVICE
The Company generally warrants its products for 90 days, but in limited
cases for up to one year against defects in materials and workmanship. The
Company has established a provision for estimated expenses of providing
service under these warranties. Nonwarranty service is billed to the
customer as performed.
GOVERNMENT REGULATION
The Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act
(the "Act") and regulations issued or proposed thereunder, including the Safe
Medical Devices Act of 1990, provide for regulation by the U.S. Food and Drug
Administration ("FDA") of the marketing, design, manufacturing, labeling,
packaging and distribution of medical devices. These regulations apply to
the Company's products and many of the Company's customers' products. The
Act and the regulations include requirements that manufacturers of medical
devices register with and furnish lists of devices manufactured by them to
the FDA. Prior to marketing a medical device, FDA approval must be obtained.
Tasks to be performed for approval range from bench-test data and
engineering analysis to potentially expensive and time-consuming clinical
trials. The types of tasks for a particular product submission are indicated
by the classification of the device and previous approvals for similar
devices. There are also certain requirements of other federal laws and of
state, local, and foreign governments, which may apply to the manufacture and
marketing of the Company's products. To date, the Company has not
experienced significant difficulty in complying with the requirements imposed
on it by the FDA or other governmental agencies.
The FDA's "Quality System Regulation for Medical Devices" ("QSR") sets
forth standards for the Company's design and manufacturing processes that
require the maintenance of certain records and provide for unscheduled
inspections of the Company's facilities. The Company does not expect to make
significant expenditures as a result of these requirements. The Company's
procedures and records were reviewed in 1987, 1990, 1995, and 1997 by the FDA
during routine general inspections. The inspections resulted in some
procedural changes that are intended to assure continued compliance with
current QSR.
CMED and RELA received ISO 9001 and EN 46001 certification in June of
1996. The ISO 9001 series of quality management and quality assurance
standards has been adopted by 90 countries. ISO standards require that a
quality system be used to guide work to assure quality and to produce quality
products. ISO 9001, the most comprehensive of the standards, covers 20
elements. These elements include management responsibility, design control,
training, process control and servicing. ISO 9001 is the quality systems
standard used by companies providing design, development, manufacturing,
installation, and servicing. Novel is currently preparing to apply for ISO
9001 and EN 46001 certification during fiscal year 1998.
There are no material costs or expenses associated with the Company's
compliance with federal, state and local environmental laws.
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PATENTS
The Company has no significant patents. The Company believes that the
conduct of its business is not dependent upon its ability to obtain or defend
patents.
EMPLOYEES
As of June 30, 1997, the Company had 245 employees, of which 189 are
full-time. 85% of the Company's employees are employed at its operations in
Boulder and Longmont, Colorado. The remaining 15% of employees are employed
at Novel in Plymouth, Minnesota. No employees are represented by labor
organizations and there are no collective bargaining agreements. Employee
relations are believed to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
CMED and RELA operate out of leased facilities located at 6175 Longbow
Drive, Boulder, Colorado and 410 South Sunset Street. Longmont, Colorado.
The Boulder facility has a five-year lease, which expires on June 30, 2002.
The lease calls for average monthly payments over the term of the lease of
$36,139. In addition, the Company is responsible for certain expenses,
including property taxes, insurance and maintenance. CMED's and RELA's
custom product development services and administrative operations are
conducted at this facility.
RELA's manufacturing is conducted at its Longmont facility. This
facility has a five-year lease that expires on July 1, 2002. The lease calls
for average monthly payments over the term of the lease of $13,657. In
addition to the base lease payment, the Company is responsible for certain
expenses, including property taxes, insurance, and maintenance.
Novel operates out of a leased facility located at 13845 Industrial Park
Boulevard, Plymouth, Minnesota. Novel has a four-year lease that expires on
January 31, 2001. This lease calls for average monthly payments over the
term of the lease of $7,356. In addition, Novel is responsible for certain
expenses, including property taxes, insurance, and maintenance. Novel's
custom manufacturing and product development services are conducted out of
this facility.
The Company owns a 10.91-acre parcel of industrial-zoned vacant land in
Louisville, Colorado (the "Louisville Parcel"). The Company's title in the
Louisville Parcel is in fee simple. In connection with a prior financing
arrangement with a partnership whose general partner is also a shareholder of
the Company, the Company granted an option to purchase the Louisville parcel
at a purchase price of $640,968. The option is exercisable at any time
during the five years ending March 18, 1998. It is the opinion of management
that, as the Louisville Parcel is vacant land, it is not necessary to provide
insurance coverage for the property. The Company had intended to construct a
facility on this parcel, however, the Company has since decided not to
construct a facility at the present time. The land is currently held for
investment or future development. Notwithstanding the Company's ownership of
the Louisville Parcel, it is not the policy of the Company to invest in real
estate or interests in real estate, real estate mortgages, or securities of
or interests in persons primarily engaged in real estate activities.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of shareholders during the
last quarter of the fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company has been traded on the Nasdaq (National
Association of Securities Dealers Automated Quotations) Small-Cap Market
since the Company's initial public offering in July 1983. The following
table sets forth the range of high and low closing bid prices of the
Company's common stock as reported by Nasdaq during fiscal years 1997 and
1996:
Fiscal Year Ended June 30,
------------------------------------
1997 1996
----------------- -----------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
First Fiscal Quarter $3.25 $2.50 $1.56 $1.31
Second Fiscal Quarter $3.13 $2.88 $2.50 $1.38
Third Fiscal Quarter $3.06 $2.69 $2.75 $1.81
Fourth Fiscal Quarter $6.13 $2.88 $3.63 $2.25
The foregoing quotations represent quotations between dealers without
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
At June 30, 1997 the Company had approximately 1,100 shareholders of
record. The Company has never paid a dividend, and does not anticipate the
payment of dividends in the foreseeable future.
The Company sold the following unregistered securities in the three
month period ended June 30, 1997:
(1) On May 21, 1997, the Company issued 100,000 shares of common stock
to Louisville Land Company, LLC. upon exercise of warrants to
purchase common stock, for an aggregate purchase price of $125,000.
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(2) On May 27, 1997, the Company issued 2,000,000 shares of common
stock to Vencor, Inc. ("Vencor") upon exercise of warrants to
purchase common stock, for an aggregate purchase price of
$4,500,000.
(3) Following the exercise of the warrants by Vencor described in (2)
above, the Company called all other warrants issued in the 1994
private placement in which Vencor acquired its warrants. On dates
between June 2 and June 25, 1997, the Company issued 70,000 shares
of common stock to two persons upon exercise of warrants to
purchase common stock, for an aggregate purchase price of $130,800.
The Company believes each of these sales was private in nature and was
exempt from the registration requirements of Section 5 of the Securities Act
by virtue of the exemption provided by Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have consisted of cash flow
from operations, cash deposits received from customers related to research
and development and manufacturing contracts and cash proceeds from the
issuance of common stock. Historically, the Company has also utilized
proceeds from debt borrowings.
The Company renewed its bank financing arrangement during October of
1996 that provides for a $4 million revolving line of credit at the bank's
prime lending rate, which matures October 30, 1997. This credit facility is
secured by all accounts, general intangibles, inventory and equipment. The
agreement contains various restrictive covenants, which include, among
others, maintenance of certain financial ratios, maintenance of a minimum
tangible net worth and limitations on annual investments, dividends and
capital expenditures. As of June 30, 1997, no amounts were outstanding under
the credit facility.
In June 1994, the Company completed the private placement of 1,500,000
units, each unit consisting of one share of no par common stock and two
warrants. The units were offered at the greater of $1.00 or 75% of the
average of the closing bid and ask price of the common stock for the five
days prior to subscription. The warrants issued are callable by the Company,
and expire after five years. In accordance with the private placement
memorandum, 1,500,000 of the warrants were priced at 125% of the average of
the closing bid and ask price of the common stock on the date of purchase of
the units, and an additional 1,500,000 warrants were issued with an exercise
price equal to 175% of the average of the closing bid and ask price of the
common stock on the date of purchase of the units. The exercise prices of
the warrants range from $1.41 to $2.68. The proceeds from this offering were
approximately $1.5 million.
During June 1997, the Company called all of the above warrants that had
not previously been exercised. During fiscal 1997, 2,070,000 of these
warrants were exercised for $4,630,800. The remaining 930,000 warrants were
exercised during July and August of 1997 resulting in cash proceeds to the
Company of $1,120,800 and cancellation of 142,505 shares of previously issued
common stock that were used in lieu of cash to exercise the warrants.
In December 1993, the Company completed the private placement of 500,000
shares of no par common stock at an offering price of $1.00 per share. The
net proceeds from this offering were approximately $493,000.
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Of the 2,000,000 shares sold in the above transactions, 1,500,000 were
sold to a wholly owned subsidiary of Vencor, a Louisville, Kentucky-based
operator of intensive care hospitals and nursing homes that specialize in
treating patients with catastrophic illnesses. The Company entered into a
standstill agreement with Vencor in June of 1994 whereby Vencor will not
acquire more than 40% of the Company's common stock for five years from the
agreement date. In May, 1997, Vencor exercised 2,000,000 warrants received
as part of the private placement discussed above. As of August 31, 1997,
Vencor owns 34% of the Company's outstanding stock.
The Company's working capital increased to $11,124,000 at June 30, 1997
from $5,433,000 at June 30, 1996. The increase in working capital occurred
primarily because of the exercise of 2,000,000 warrants by Vencor and the
Company's cash flow from operations. The average number of days outstanding
of the Company's accounts receivable was approximately 57 days at June 30,
1997 compared to 63 days at June 30, 1996. The Company has granted extended
terms to certain customers which increased the average number of days
outstanding of the Company's accounts receivable by 9 days for the year ended
June 30, 1997.
During the year ended June 30, 1997, the Company acquired approximately
$643,000 of property and equipment consisting principally of computer
equipment. The Company has no present material commitments for capital
expenditures.
The Company announced in July 1997, that it had entered into an
agreement to acquire the operating assets of Erbtec. Erbtec is a privately
held company with annual revenue of $10 - $12 million. The transaction is
expected to close on October 1, 1997. Consideration will be primarily cash
that will come from available cash and investment sources that the Company
has at June 30, 1997, with some stock.
The ratio of current assets to current liabilities was 2.2 to 1 at
June 30, 1997, compared to 1.8 to 1 at June 30, 1996. The liabilities to
equity ratio were .7 to 1 at June 30, 1997, compared to 1.0 to 1 at June 30,
1996. The improvement in both of these ratios is due to the exercise of the
2,000,000 warrants by Vencor and the Company's profitable growth during the
year ended June 30, 1997.
Cash provided by operations during the year ended June 30, 1997 was
$2,899,000 and increased approximately $1,631,000 compared to fiscal 1996, as
a result of the profitable growth of the Company and the increase in the
accounts payable, accrued expenses, and customer deposits.
RESULTS OF OPERATIONS
Revenues were $28.2 million for the year ended June 30, 1997, compared
to $19.1 million for the prior year, an increase of 48%. The increase in
revenues is attributable to the growth of the core business at CMED and RELA
that reported an increase in revenues of 39% in fiscal 1997 compared to
fiscal 1996. The Company's revenue growth was improved by the acquisition of
Novel in January 1997 that contributed $1.6 million of revenue during the
last six months of fiscal 1997. The increase in the Company's revenues is
attributable to starting fiscal year 1997 with a backlog of orders of
approximately $16.0 million and order bookings of approximately $33.2 million
during 1997. At June 30, 1997, the Company has a backlog of approximately
$21.7 million.
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Marketing and selling expenses increased by 30% for the year ended
June 30, 1997, as compared to the prior year. The increase is attributable
to the growth in sales and the acquisition of Novel. Marketing and selling
expenses as a percentage of total revenue were approximately 5% for the year
ended June 30, 1997 and 1996.
Operating, general and administrative expenses increased by
approximately $749,000, or 19% for the year ended June 30, 1997, compared to
the prior year. The increase is attributable to the overall growth of the
Company and the acquisition of Novel. As a percentage of revenues,
operating, general and administrative expenses decreased from 20% to 16%,
respectively.
Research and development expenses for the year ended June 30, 1997
compared to the prior year increased by approximately $207,000, or 213%. The
increase is a result of the Company's greater emphasis on developing
proprietary products. Consistent with the Company's operating plans, the
Company continues to pursue the acquisition or development of new or improved
technology or products. Should the Company identify any such opportunities,
the amount of future research and development expenditures may increase.
Net other income and expenses decreased approximately $161,000 to
$289,000 for the year ended June 30, 1997 compared to $450,000 for the year
ended June 30, 1996. The decrease is attributable to a $122,000 gain from
the sale of the cardiopulmonary product lines and an approximately $50,000
gain on two dispute settlements that occurred during fiscal 1996. During
fiscal 1997 the Company's interest income increased by $47,000 compared to
fiscal 1996.
The fiscal 1996 and 1997 statements of operations contains a net tax
provision of $684,000 and $1,385,000, respectively. The Company accounts for
income taxes under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, which requires recognition of deferred income tax
assets and liabilities for the expected future income tax consequences, based
on enacted tax laws, of temporary differences between the financial reporting
and tax bases of assets, liabilities and carryforwards. SFAS No. 109
requires recognition of deferred tax assets for the expected future effects
of all deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized. In fiscal year 1996 and
1997, the Company reduced its valuation allowance by $178,000 and $80,000,
respectively, for the utilization of prior years net operating losses in the
current year and certain deferred tax assets that the Company now believes
will be fully utilized.
The Company recorded net income of approximately $2,480,000 for the
fiscal year ended June 30, 1997 compared to approximately $1,597,000 for the
fiscal year ended June 30, 1996. This increase in net income is attributed
the 48% growth in the Company's revenues, while maintaining the gross margins
at 35% for the fiscal year 1997 and 1996 and having the operating, general,
and administrative and marketing and selling expenses increase at a 26%
slower rate than revenues.
The Company evaluated its overall business in fiscal 1996 and, as a
result, sharpened its market focus. Targeted markets are: Diagnostic and
Laboratory Instruments; Respiratory Care Products; Therapeutic Instruments
and Software. Each area represents a U.S. market of $2 billion or more per
year, with annual growth of approximately 8% to 15%. The Company has
experience in these markets which it plans to utilize. Generally, the
marketplace for outsourcing services is expected to remain strong and
competitive, with significant opportunity for companies that can develop
low-cost, quality products in a timely manner. Management is dedicated to
improving operating results
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through consistent performance, improved sales levels and cost reductions.
There are no assurances that management will be successful in achieving
improved operating results.
(3) FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements including, but not limited to, the risk
that a downturn in general economic conditions may tend to adversely affect
research and development budgets of potential customers upon which the
Company is dependent, the risk that the Company's project-oriented revenues
could be delayed or adversely affected if new contracts are not in place when
existing contracts are completed, and the risk that the nature of bidding and
performing research and development-type contracts may result in short-term
fluctuations in revenue or expense that could adversely affect quarterly
results.
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ITEM 7. FINANCIAL STATEMENTS.
Index to Financial Statements and Schedules:
PAGE
NUMBER
------
Report of Independent Public Accountants F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Colorado Medtech, Inc.:
We have audited the accompanying consolidated balance sheet of COLORADO
MEDTECH, INC. (a colorado corporation) and subsidiaries as of June 30, 1997,
and the related consolidated statements of operations, shareholders' equity
and cash flows for the years ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 Colorado Medtech, Inc. and
subsidiaries as of June 30, 1997, and the results of their operations and
their cash flows for the years ended June 30, 1997 and 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 22, 1997.
F-1
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,670,821
Short-term investments 10,293,101
Accounts receivable-
Trade - less allowance of $162,000 for uncollectible accounts 4,549,543
Unbilled 690,564
Inventories, net 2,390,267
Deferred income taxes 795,459
Prepaid expenses 195,483
-----------
Total current assets 20,585,238
-----------
PROPERTY AND EQUIPMENT:
Computer equipment 2,307,210
Office furniture and fixtures 963,145
Leasehold improvements 365,860
Manufacturing equipment 548,054
-----------
Total property and equipment 4,184,269
Less - accumulated depreciation and amortization (3,505,865)
-----------
Property and equipment, net 678,404
-----------
INVESTMENT IN LAND 500,000
-----------
GOODWILL, net 1,628,326
-----------
DEFERRED INCOME TAXES AND OTHER 461,465
-----------
$23,853,433
-----------
-----------
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-2
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,075,225
Accrued product service costs 373,629
Accrued salaries and wages 1,805,770
Other accrued expenses 992,354
Customer deposits 3,175,530
Income taxes payable 38,691
-----------
Total current liabilities 9,461,199
-----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares authorized;
none issued -
Common stock, no par value; 25,000,000 shares authorized;
9,341,108 issued and outstanding 9,076,206
Retained earnings 5,316,028
-----------
Total shareholders' equity 14,392,234
-----------
$23,853,433
-----------
-----------
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-3
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- -----------
NET SALES AND SERVICE $28,243,185 $19,130,979
COST OF SALES AND SERVICE 18,456,764 12,341,217
----------- -----------
GROSS PROFIT 9,786,421 6,789,762
----------- -----------
COSTS AND EXPENSES:
Marketing and selling 1,287,091 991,508
Operating, general and administrative 4,619,447 3,870,181
Research and development 304,180 97,059
----------- -----------
Total operating expenses 6,210,718 4,958,748
----------- -----------
INCOME FROM OPERATIONS 3,575,703 1,831,014
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (22,460) (59,945)
Interest income and other 311,374 509,533
----------- -----------
Total other income (expense) 288,914 449,588
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,864,617 2,280,602
PROVISION FOR INCOME TAXES 1,385,000 684,000
----------- -----------
NET INCOME $ 2,479,617 $ 1,596,602
----------- -----------
----------- -----------
EARNINGS PER SHARE (Note 2):
Primary $.24 $.21
---- ---
---- ---
Fully diluted $.23 $.17
---- ---
---- ---
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 11,232,009 7,766,805
----------- -----------
----------- -----------
Fully diluted 11,232,009 10,692,702
----------- -----------
----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-4
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS
--------- ---------- ----------
BALANCES, June 30, 1995 6,901,762 $3,713,652 $1,239,809
Net income - - 1,596,602
--------- ---------- ----------
BALANCES, June 30, 1996 6,901,762 3,713,652 2,836,411
Issuance of Common Stock 2,449,346 5,053,574 -
Purchase of Common Stock (80,000) (242,144) -
Common stock issued in conjunction
with the Novel acquisition 70,000 207,816 -
Options issued in conjunction
with the Novel acquisition - 338,672 -
Options issued for services
from consultants - 4,636 -
Net income - - 2,479,617
--------- ---------- ----------
BALANCES, June 30, 1997 9,341,108 $9,076,206 $5,316,028
--------- ---------- ----------
--------- ---------- ----------
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-5
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,479,617 $ 1,596,602
Adjustments to reconcile net income to net cash
flows from operating activities-
Deferred tax benefit (80,000) (91,000)
Depreciation and amortization 433,747 391,405
Gain on sale of product line - (121,986)
Non-cash consulting services 4,636 -
Changes in assets and liabilities-
Accounts receivable (1,771,138) (485,881)
Inventories (579,038) (780,899)
Prepaid expenses and other assets (165,430) 56,954
Accounts payable and accrued expenses 2,051,653 43,242
Customer deposits 525,223 659,397
----------- -----------
Net cash flows from operating activities 2,899,270 1,267,834
----------- -----------
CASH FLOWS USED-IN INVESTING ACTIVITIES:
Cash paid for purchase of Novel, net (1,126,363) -
Capital expenditures (643,326) (231,982)
Increase in short-term investments, net (4,884,839) (2,815,587)
Proceeds from sale of product line - 250,000
----------- -----------
Net cash flows used-in investing activities (6,654,528) (2,797,569)
----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-6
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock $5,053,574 $ -
Purchase of Common Stock (242,144) -
---------- -----------
Net cash flows from financing activities 4,811,430 -
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,056,172 (1,529,735)
CASH AND CASH EQUIVALENTS, at beginning of period 614,649 2,144,384
---------- -----------
CASH AND CASH EQUIVALENTS, at end of period $1,670,821 $ 614,649
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 31,593 $ 59,767
---------- -----------
---------- -----------
Cash paid for income taxes $1,675,000 $ 885,000
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Issuance of common stock for acquisition
of Novel $ 207,816 $ -
---------- -----------
---------- -----------
Issuance of stock options for acquisition
of Novel $ 338,672 $ -
---------- -----------
---------- -----------
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-7
<PAGE>
COLORADO MEDTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) ORGANIZATION AND OPERATIONS
Colorado MEDtech, Inc. ("CMED" or the "Company") was incorporated in 1977 as
a Colorado corporation to develop, manufacture, market and service
computerized diagnostic and testing instrumentation.
RELA, Inc. ("RELA"), a Colorado corporation and wholly owned subsidiary of
CMED, was incorporated in 1977. RELA is an integrated custom product
development and manufacturing services company specializing in the design,
development and manufacture of electronic and electro-mechanical medical
products and software systems.
Novel Biomedical, Inc. ("Novel"), a Minnesota corporation and wholly owned
subsidiary of CMED, was incorporated in 1986. Novel specializes in the
custom design, development and manufacture of unique disposable medical
devices, primarily catheters, used in angioplasty, minimally invasive
surgery, electrophysiology, and infertility treatment.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect the consolidated results of
CMED, RELA and Novel (collectively, the "Company"). All significant
intercompany transactions and accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVESTMENTS
The Company accounts for its investments, which are primarily U.S.
Treasuries, in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company has the intent and the ability to hold its
investments to maturity and thus has classified its investments, which are
stated at amortized cost that closely represents market, as
"held-to-maturity".
F-8
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The cost of inventories includes material, labor and manufacturing
overhead. As of June 30, 1997, inventories, net of allowances, consisted of:
Raw materials $1,791,104
Work-in-process 594,697
Finished goods 4,466
---------
$2,390,267
---------
---------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided principally on the straight-line method over the estimated useful
life of the asset, which range from 3 to 7 years.
GOODWILL
Goodwill resulting from the Novel acquisition is stated at cost, net of
accumulated amortization of approximately $33,000, and is being amortized
using the straight-line method over an estimated useful life of 25 years.
ACCRUED PRODUCT SERVICE COSTS
The Company warrants its products against defects in materials and
workmanship, generally for 90 days, but in limited cases for up to one year.
Estimated costs of product service are accrued at the time of sale.
CUSTOMER DEPOSITS
Customer deposits result from cash received in advance for future contract
work.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average shares
outstanding during each period and dilutive common equivalent shares for
stock options and warrants. Primary and fully diluted earnings per share for
the year ended June 30, 1997 are computed under the treasury stock method
whereby net income is increased by approximately $219,000 and $92,000,
respectively, of interest income, net of income taxes, from the investment of
proceeds from assumed exercise of options/warrants in excess of proceeds used
to repurchase outstanding shares. Under this same method, net income is
increased by approximately $180,000 for the fully diluted earnings per share
calculation for the year ended June 30, 1996.
F-9
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share", which is to
be effective December 15, 1997. This statement establishes standards for
computing and presenting earnings per share. Had this statement been adopted
as of June 30, 1997, earnings per share would have been as follows:
June 30, June 30,
1997 1996
-------- --------
Basic earnings per share $ .35 $ .23
Diluted earnings per share $ .27 $ .21
REVENUE RECOGNITION POLICY
The Company recognizes revenue for manufacturing services upon shipment of
the related products and recognizes revenues for engineering contract
services as work is performed and contract requirements are met. Unbilled
receivables result from revenue recognized for contract services in excess of
billings. Unanticipated losses on engineering contracts are provided for, in
full, when determinable.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"), which requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax
bases of assets, liabilities and carryforwards. SFAS 109 requires
recognition of deferred tax assets for the expected future effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized (see Note 6).
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees"
("APB No. 25"). Effective in 1995, the Company adopted the disclosure option
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies
which do not choose to account for stock-based compensation as prescribed by
the statement shall disclose the pro forma effects on earnings and earnings
per share as if SFAS 123 had been adopted. Additionally, certain other
disclosures are required with respect to stock compensation and the
assumptions used to determine the pro forma financial statement effect of
SFAS 123 (see Note 5).
MANAGEMENT'S 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 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.
F-10
<PAGE>
FINANCIAL INSTRUMENTS
The fair market value of accounts receivable, accounts payable and other
financial instruments approximates their carrying value in the accompanying
balance sheet.
(3) ACQUISITION OF NOVEL
In February 1997, the Company completed the acquisition of Novel. The
Company acquired Novel for $1,899,196, which included cash, the issuance of
70,000 shares of common stock, and the grant of 294,211 non-qualified stock
options. The stock was valued at the fair market value on the date the
Agreement and Plan of Reorganization was entered into between CMED and Novel.
The non-qualified stock options were valued using the Black-Scholes option
pricing model. The purchase price, less the net assets acquired, resulted in
goodwill of $1,661,557 that is being amortized over a 25-year period. The
accompanying consolidated financial statements include the operating results
of Novel since January 3, 1997, the effective date of the acquisition. The
total purchase price and net cash used for the acquisition of Novel are as
follows:
Assets acquired:
Cash $ 226,345
Accounts receivable 461,273
Inventories 108,592
Equipment and furniture 59,890
Other assets 162,172
Goodwill 1,661,557
Liabilities assumed (780,633)
----------
Total purchase price 1,899,196
Less:
Stock issued (207,816)
Options issued (338,672)
Cash acquired (226,345)
----------
Cash paid for purchase of Novel, net $ 1,126,363
----------
----------
The following unaudited pro forma results of operations of the Company for
the fiscal years ended June 30, 1997 and 1996 assumes that the acquisition of
Novel had occurred on July 1, 1995. These pro forma results are not
necessarily indicative of the actual results of operations that would have
been achieved nor are they necessarily indicative of future results of
operations. The Company is obtaining additional information about the fair
market value of the assets acquired and thus the purchase price may be
adjusted in future periods.
Year Ended June 30,
-------------------
1997 1996
---- ----
Revenues $29,658,188 $20,503,055
Net Income $ 2,741,873 $ 1,666,880
Net Income Per Share (Fully Diluted) $ .24 $ .16
F-11
<PAGE>
(4) CREDIT FACILITY
The Company has a financing commitment from a bank that provides for a $4
million revolving line of credit at the bank's prime lending rate (8.5% at
June 30, 1997) which matures October 30, 1997. This credit facility is
secured by all accounts, general intangibles, inventory and equipment. The
agreement contains various restrictive covenants that include, among others,
maintenance of certain financial ratios, maintenance of a minimum tangible
net worth and limitations on annual investments, dividends and capital
expenditures. The Company did not utilize this credit facility during fiscal
1997.
(5) SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company's shareholders have authorized 5,000,000 shares of no par value
preferred stock, to be issuable from time to time in such series and to have
such rights and preferences as the Company's board of directors may
designate. As of June 30, 1997, no shares of preferred stock have been
issued.
COMMON STOCK
The Company's shareholders have authorized 25,000,000 shares of no par common
stock, of which 9,341,108 are issued and outstanding as of June 30, 1997.
During the year ended June 30, 1997, the Company purchased 80,000 shares of
common stock which decreased the Company's equity by approximately $242,000.
These shares were purchased so that the stock issued under the Employee Stock
Purchase Plan would not be dilutive.
STOCK OPTION PLAN
On June 25, 1992, the Board of Directors approved a Stock Option Plan (the
"Plan"). The Plan provides for the grant of both incentive and nonstatutory
stock options as defined by the Internal Revenue Code of 1986, stock
appreciation rights and supplemental bonuses at the discretion of the Board.
Under the terms of the Plan, the purchase price of the shares subject to an
incentive option will be the fair market value of the Company's common stock
on the date the option is granted. If the grantee owns more than 10% of the
total combined voting power of all classes of stock on the date of grant, the
purchase price shall be at least 110% of the fair market value at the date of
grant and the exercise term shall be up to five years from the date of grant.
All other options granted under the Plan are exercisable up to 10 years from
the date of grant. Under the Plan, 2,000,000 shares of common stock are
reserved for options. Vesting periods for options issued are determined by
the Board at date of grant and currently vest over three to seven years. A
summary of the status of the Company's Stock Option Plan follows:
F-12
<PAGE>
FY 1997 FY 1996
------- -------
Balance outstanding at beginning
of fiscal year 1,385,949 754,817
Granted during period 374,200 788,000
Forfeited during period (56,636) (156,868)
Exercised during period (232,942) -
--------- ---------
Outstanding at June 30, 1,470,571 1,385,949
--------- ---------
--------- ---------
Exercisable (vested) at June 30, 369,670 447,053
--------- ---------
--------- ---------
Weighted average exercise price:
At beginning of period $1.91 $1.41
At end of period $2.28 $1.91
Exercisable at end of period $1.44 $1.29
Options granted $3.04 $2.33
Options exercised $1.33 $ -
Options forfeited $2.30 $1.61
Weighted average fair value of options
granted during period $1.64 $1.45
June 30, 1997
---------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Shares Price Life (Years) Shares Price
-------- ------ ----- ------------ ------ ------
$1.25 - $1.66 392,001 $1.43 3.2 329,334 $1.39
$1.67 - $2.38 469,670 $1.88 4.9 40,336 $1.89
$2.39 - $4.25 608,900 $3.13 6.1 - $ -
NON-QUALIFIED STOCK OPTIONS
The Company has issued non-qualified stock options outside the Stock Option
Plan to purchase up to 728,651 shares of the Company's common stock in
exchange for employment recruiting services; the acquisition of Novel; and to
employees. All non-qualified stock options were granted with an exercise
price that was equal to the fair market value of the Company's stock on the
date of grant. A summary of the status of the Company's non-qualified stock
options outside the Stock Option Plan follows.
F-13
<PAGE>
FY 1997 FY 1996
------- -------
Balance outstanding at beginning
of fiscal year 434,440 434,440
Granted during period 294,211 -
Forfeited during period (1,000) -
Exercised during period (18,300) -
--------- --------
Outstanding at June 30, 709,351 434,440
--------- --------
--------- --------
Exercisable (vested) at June 30, 531,578 434,440
--------- --------
--------- --------
Weighted average exercise price:
At beginning of period $1.28 $1.28
At end of period $1.97 $1.28
Exercisable at end of period $1.64 $1.28
Options granted $2.97 $ -
Options exercised $1.44 $ -
Options forfeited $2.97 $ -
Weighted average fair value of options $1.75 $ -
granted during period
June 30, 1997
---------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Shares Price Life (Years) Shares Price
-------- ------ ----- ------------ ------ ------
$1.04 - $1.04 10,000 $1.04 .6 10,000 $1.04
$1.05 - $1.44 406,140 $1.28 1.6 406,140 $1.28
$1.45 - $2.97 293,211 $2.97 4.6 115,438 $2.97
DIRECTOR, CONSULTANTS AND OTHER WARRANTS
The Board of Directors grants warrants to the outside directors for serving
on the Board. Warrants were issued in February of 1993 to purchase a total of
120,000 shares of the Company's common stock at $1.63 per share and
additional warrants were issued in November of 1993 to purchase 90,000 shares
of the Company's common stock at $1.50 per share. Also, in June of 1995,
warrants were issued to purchase 180,000 shares of the Company's common stock
at $1.59 per share. In November, 1996, 15,000 warrants were issued to a
director at a price of $3.03 per share. During fiscal 1997, 70,000 director
warrants were exercised and 15,000 warrants expired. As of June 30, 1997,
290,000 warrants were vested. The warrants have a five-year term.
F-14
<PAGE>
In connection with a prior borrowing in March of 1993, the Company issued
100,000 warrants to purchase the Company's common stock at an exercise price
of $1.50 per share. All 100,000 of these warrants are vested. The warrants
have a five-year term. In May of 1994, the Company changed the warrant price
to $1.25 per share. All of these warrants were exercised during fiscal year
1997.
In March of 1993, the Company issued an additional 100,000 warrants with a
five-year term in connection with a purchase option on the Company's land
(see Note 9). These warrants are exercisable at $2.00 per share from March
1996 through March 1997 and at $2.25 per share thereafter. These warrants
vest only if the land purchase option is exercised.
In November of 1993, the Company issued warrants to its attorneys to purchase
up to 100,000 shares of the Company's common stock. These warrants vest 25%
per year beginning November of 1993, and are exercisable at the average of
the bid and ask prices of the Company's common stock as of the vesting date.
The warrants vested in 1993, 1994, 1995 and 1996 are exercisable at $1.50,
$1.25, $1.81 and $3.00 per share, respectively.
The Company has granted 125,000 warrants to a consulting group in exchange
for investor relation services. The Company issued these warrants in May
1997. Their exercise prices range from $4.00 to $10.00 per share and the
warrants have a three year term from the date of grant. The Company has
recognized approximately $4,600 of expense related to these warrants based on
the value of the services received.
A summary of all of the above-described warrants is as follows:
FY 1997 FY 1996
------- -------
Balance outstanding at beginning
of fiscal year 675,000 675,000
Granted during period 140,000 -
Forfeited during period (15,000) -
Exercised during period (170,000) -
-------- -------
Outstanding at June 30, 630,000 675,000
-------- -------
-------- -------
Exercisable (vested) at June 30, 430,000 460,000
-------- -------
-------- -------
Weighted average exercise price:
At beginning of period $1.64 $1.64
At end of period $2.72 $1.64
Exercisable at end of period $1.84 $1.50
Warrants granted $6.04 $ -
Warrants exercised $1.40 $ -
Warrants forfeited $1.59 $ -
Weighted average fair value of warrants $ .96 $ -
granted during period
F-15
<PAGE>
June 30, 1997
---------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Shares Price Life (Years) Shares Price
-------- ------ ----- ------------ ------ ------
$1.25 - $1.81 365,000 $1.56 1.9 365,000 $1.56
$1.82 - $3.03 140,000 $2.47 1.2 40,000 $3.01
$3.04 - $10.00 125,000 $6.40 2.9 25,000 $4.00
PRIVATE PLACEMENT WARRANTS
In June, 1994, the Company completed the private placement of 1,500,000
units, each unit consisting of one share of no par common stock and two
warrants. During fiscal 1997, 2,070,000 of these warrants were exercised for
$4,630,800. The remaining 930,000 warrants were called in June 1997, with
the final exercise date in August, 1997.
A summary of all of the above-described warrants is as follows:
FY 1997 FY 1996
------- -------
Balance outstanding at beginning
of fiscal year 3,000,000 3,000,000
Exercised during period (2,070,000) -
--------- ---------
Outstanding at June 30, 930,000 3,000,000
--------- ---------
--------- ---------
Exercisable (vested) at June 30, 930,000 3,000,000
--------- ---------
--------- ---------
Weighted average exercise price:
At beginning of period $2.18 $2.18
At end of period $2.07 $2.18
Exercisable at end of period $2.07 $2.18
Warrants exercised $2.24 $ -
June 30, 1997
---------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Shares Price Life (Years) Shares Price
-------- ------ ----- ------------ ------ ------
$1.41 - $1.91 465,000 $1.72 .2 465,000 $1.72
$1.92 - $2.68 465,000 $2.41 .2 465,000 $2.41
F-16
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Board of Directors adopted an Employee Stock Purchase
Plan, effective for the plan year beginning January 1, 1997. Under the plan,
the Company is authorized to issue up to 240,000 shares of common stock over
a three year period, with a maximum of 80,000 shares per year, to its full
time employees, nearly all of whom are eligible to participate. Under terms
of the plan, employees can have up to 10% of their salary withheld to
purchase the Company's common stock. The purchase price of the stock is 85%
of the lower of its beginning-of-the-year or end-of-the-year market price.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of
compensation cost for such plans using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), provided that pro forma disclosures are made of net income or
loss and net income or loss per share, assuming the fair value based method
of SFAS 123 had been applied. The Company has elected to account for its
stock-based compensation plans under APB 25; accordingly, for purposes of the
pro forma disclosure presented below, the Company has computed the fair
values of all options and warrants issued during fiscal 1997 and 1996 using
the Black-Scholes pricing model and the following weighted average
assumptions:
1997 1996
---- ----
Risk-free interest rate 5.70% 6.18%
Expected lives 3.5 years 4.2 years
Expected volatility 69.8% 74.6%
Expected dividend yield 0% 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon becoming fully vested. Cumulative
compensation cost recognized in pro forma net income or loss with respect to
options that are forfeited prior to vesting is adjusted as a reduction of pro
forma compensation expenses in the period of forfeiture. The Company's
common stock market volatility was based on the closing market price at the
end of each month since the merger of CMED and RELA in October 1992. Fair
value compensations are highly sensitive to the volatility factor assumed;
the greater the volatility, the higher the computed fair value of options
granted.
The total fair value of options and warrants granted, that are included in
the pro forma calculation, was computed to be approximately $628,000 and
$1,141,000 for the years ended June 30, 1997 and 1996. These amounts are
amortized ratably over the vesting periods of the options. Pro forma
stock-based compensation, net of the effect of forfeitures and taxes, was
approximately $349,000 and $100,000 for 1997 and 1996.
F-17
<PAGE>
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and pro forma net income
per common share would have been reported as follows:
Year Ended June 30,
1997 1996
---------- ----------
Net Income
As reported $2,479,617 $1,596,602
Pro forma $2,263,185 $1,534,299
Net Income Per Common Share - Fully Diluted
As reported $.23 $.17
Pro forma $.22 $.16
(6) INCOME TAXES
The provision for income taxes includes the following:
June 30, June 30,
1997 1996
---------- --------
Current -
Federal $1,347,733 $717,733
State 96,267 51,267
---------- --------
1,444,000 769,000
Deferred -
Federal (55,067) (79,333)
State (3,933) (5,667)
---------- --------
Total $1,385,000 $684,000
---------- --------
---------- --------
The Company's effective income tax rate was different than the statutory
federal income tax rate as follows:
June 30, June 30,
1997 1996
---------- --------
Federal income tax provision at
statutory rates $1,314,000 $ 775,000
State income tax provision, net
of federal tax effect 133,000 75,000
Nondeductible expenses 18,000 12,000
SFAS 109 valuation allowance
reduction (80,000) (178,000)
---------- ---------
Effective tax $1,385,000 $ 684,000
---------- ---------
---------- ---------
In accordance with certain provisions of the Internal Revenue Code, a change
in ownership of greater than 50% of a company within a three-year period
results in an annual limitation on the Company's ability to utilize its net
operating loss ("NOL") carryforwards from tax periods prior to the ownership
change. Such a change in ownership occurred with respect to the Company on
October 19, 1992. Accordingly, the NOL carryforwards at October 19, 1992 are
restricted to annual cumulative amounts of approximately $105,000 subject to
the expiration of these carryforwards, or approximately $1,575,000. As of
June 30, 1997, the Company had NOL carryforwards available of approximately
$1,433,000. The Company's NOL's expire beginning in 1999 through 2007. The
Company also has research and development and investment tax credit
carryforwards totaling approximately $140,000 expiring from 1999 through 2007.
F-18
<PAGE>
Deferred taxes are determined based on estimated future tax effects of
differences between the amounts reflected in the financial statements and the
tax basis of assets and liabilities given the provisions of the enacted tax
laws. Deferred tax assets include the tax effect of net operating loss and
tax credit carryforwards. The net deferred tax assets and liabilities as of
June 30, 1997 are comprised of the following:
Current
Tax effect of net operating loss carryforwards $ 538,000
Allowance for doubtful accounts 57,000
Accrued vacation and severance 99,000
Deferred service revenue 15,000
Reserves 522,000
Valuation allowance (436,000)
---------
Net current deferred tax asset $ 795,000
---------
---------
Noncurrent
Tax credits $ 140,000
Depreciation for book in excess of tax 296,000
Valuation allowance (154,000)
---------
Net noncurrent deferred tax asset $ 282,000
---------
---------
The Company has established a valuation allowance due to the uncertainty that
the full amount of credits and operating loss carryforwards will be applied
against future taxable income. Although management expects continuing growth
in taxable income, it emphasized past performance rather than growth
projections when determining the valuation allowance. During 1997 and1996,
the Company reduced the valuation allowance by $80,000 and $178,000 for the
utilization of NOL's in the respective years and certain deferred tax assets
that the Company now believes will be fully utilized. Future adjustments to
the valuation allowance deemed appropriate will be recognized as a separate
component of the provision for income tax.
(7) COMMITMENTS AND CONTINGENCIES
PROPOSED ACQUISITION
The Company announced in July 1997, that it had entered into an agreement to
acquire the operating assets of Erbtec Engineering, Inc. ("Erbtec"). Erbtec
is a privately held company located in Boulder, Colorado, with annual revenue
of approximately $10 - $12 million. The transaction is expected to close on
October 1, 1997. Consideration will be primarily cash that will come from
available cash and investment sources that the Company has at June 30, 1997
and some stock.
Erbtec's main products are high power radio frequency ("RF") amplifiers and
systems for Magnetic Resonance Imaging ("MRI") equipment. Erbtec also has
product offerings in radio frequency amplifiers and power systems for other
medical imaging applications.
F-19
<PAGE>
LEASES
The Company leases its operating facilities, certain computer and test
equipment pursuant to operating lease arrangements. The Company incurred
rent expense of $467,000 and $511,000 for the years ended June 30, 1997 and
1996, respectively.
At June 30, 1997, future minimum lease payments under leases having an
initial or remaining noncancelable term of one year or more were
approximately $689,000 in 1998, $705,000 in 1999, $724,000 in 2000, $706,000
in 2001, and $673,000 in 2002.
EMPLOYMENT AND COMPENSATION AGREEMENTS
In June 1993, the Company entered into an employment agreement with the
Company's Chairman, Chief Executive Officer and President, which had a
three-year term. The agreement fixed the employee's compensation. In
connection with and as a condition of the employment agreement, the employee
executed a noncompetition agreement in which he agreed not to engage in
competitive activities for a period of two years after his employment with
the Company is terminated, whether voluntarily or involuntarily. The Company
also agreed to grant an incentive stock option to purchase up to 300,000
shares of the Company's common stock at a purchase price of $1.25 per share.
The options become vested at 100,000 shares per year over three years. Each
portion of the vested option is exercisable for five years after the date
each portion has vested. During fiscal 1997, 80,000 of these options were
exercised.
The Company and the employee extended the employment agreement in November
1995 and May 1996 through June 2002. The Company agreed to grant an
incentive stock option to purchase up to 300,000 shares of the Company's
common stock at a purchase price of $1.84 per share and another 260,000
shares at a purchase price of $3.25 per share, in consideration of the
extended employment agreement. The first group of options vests at 100,000
shares per year over three years. The remaining 260,000 shares vest in year
seven, however, earlier vesting can occur if the Company achieves certain
targeted stock prices by September 2000. If the Company terminates his
employment at any time prior to June 2002, no vesting of the options shall
occur after the date of termination, but the employee will be entitled to
receive a severance payment amounting to compensation for a period equal to
the lesser of 24 months or the unexpired term of the agreement. If the
employee terminates his employment prior to June 1999, no further vesting of
the stock options shall occur, and the unexercised portion of the options,
whether or not vested, shall terminate. Subject to these restrictions, each
portion of the vested options shall be exercisable for five years after the
date such portion has vested.
The Company's other two officers have also entered into employment agreements
with the Company. These agreements provide for a severance payment equal to
one year's salary if the officer's employment is terminated as a result of
loss of officer status, relocation of the Company or for reasons other than
cause and two years salary if the officer's employment is terminated as a
result of a significant ownership change in the Company. These agreements
have no fixed term, and may be terminated by either party at any time.
OTHER
In connection with an equity offering in June of 1994, the Company entered
into a standstill agreement with a corporation that owns 3,500,000 shares of
the Company's common stock. The standstill agreement limits the corporation
to not more than a 40% ownership of the Company. The standstill agreement
expires in June of 1999.
F-20
<PAGE>
The Company has also entered into a product development agreement with the
same corporation discussed above. This agreement provides for the Company to
expend $800,000 over the term of the agreement to develop mutually agreed
upon products that the corporation would purchase exclusively from the
Company, while the Company is unrestricted in its rights to sell the
products. The Company had sales to this corporation of approximately
$1,473,000 and $381,000 in 1997 and 1996, respectively. As of June 30, 1997,
the Company had an accounts receivable balance of $423,000 related to these
sales.
(8) 401(K) RETIREMENT PLAN
In fiscal 1988, the Company established the Colorado MEDtech, Inc. 401(k)
Retirement Plan, which is governed by Section 401(k) of the Internal Revenue
Code. Employees are eligible for the plan on January 1 and July 1, any time
after they become full time employees of the Company. The Company makes
discretionary contributions that vest over a three-year period. Company
contributions were $75,000 and $100,000 for the years ended June 30, 1996 and
1997.
(9) INVESTMENT IN LAND
The Company acquired a parcel of land from a director, shareholder and
officer of the Company in 1987. The parcel comprises 10.91 acres of
industrial zoned land located within the city boundaries of Louisville,
Colorado. The Company purchased the parcel for $631,750, the price
established by an independent appraisal. During 1992, the Company obtained
an independent appraisal for the parcel that indicated a decline in the
valuation of the property. The property is valued at the appraisal value in
the accompanying balance sheet. In connection with a previous borrowing
arrangement, the Company granted an option to purchase the land at a purchase
price of $640,968. This option is exercisable at any time before March of
1998.
(10) MAJOR CUSTOMERS
Three customers accounted for more than 10% of total sales and service
revenues for the years ended June 30, 1997 and 1996, as follows:
1997 1996
----- -----
CUSTOMER
A 18.7% 2.3%
B 14.4% 12.8%
C 11.6% 27.3%
At June 30, 1997 these three customers had accounts receivable due to the
Company, as follows:
A $318,000
B $996,000
C $148,000
(11) SALE OF PRODUCT LINES
In June of 1995, the Company entered into an agreement to sell the Company's
cardiopulmonary product lines to a competitor (the "Purchaser"). The
transaction closed on August 16, 1995. The sale transaction included all
inventories, intangible property rights, customer lists, and tooling
associated with cardiopulmonary product lines as well as the trade name
Cybermedic. In addition, the Purchaser assumed the warranty and service
obligations related to these products. The Purchaser placed noncancellable
orders with the Company for additional manufactured units. All of the units
related to this contract were shipped to the Purchaser during fiscal year
1996.
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company's definitive Proxy Statement to be filed pursuant to
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein
by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The Company's definitive Proxy Statement to be filed pursuant to
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company's definitive Proxy Statement to be filed pursuant to
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's definitive Proxy Statement to be filed pursuant to
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein
by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K during the last quarter of the Company's fiscal year
ended June 30, 1996 - None
-13-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: September 26, 1997. COLORADO MEDTECH, INC.
By: /s/ John V. Atanasoff, II
---------------------------
John V. Atanasoff, II
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John V. Atanasoff, II Chief Executive Officer, September 26, 1997
---------------------- President and Director
John V. Atanasoff, II (Principal Executive Officer)
/s/ Dean A. Leffingwell Director September 26, 1997
----------------------
Dean A. Leffingwell
/s/ Ira M. Langenthal Director September 26, 1997
----------------------
Ira M. Langenthal
/s/ Robert L. Sullivan Director September 26, 1997
----------------------
Robert L. Sullivan
/s/ Clifford W. Mezey Director September 26, 1997
----------------------
Clifford W. Mezey
/s/ Michael R. Barr Director September 26, 1997
----------------------
Michael R. Barr
/s/ John E. Wolfe Director September 26, 1997
----------------------
John E. Wolfe
/s/ Bruce L. Arfmann Chief Financial Officer September 26, 1997
---------------------- (Principal Accounting Officer)
Bruce L. Arfmann
-14-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- ----------
3.1 Articles of Incorporation; Complete Copy, as Amended. (A)
3.2 Bylaws, as Amended. (B)
4.2 Specimen of Common Stock Certificate. (C)
10.22 Promissory Notes payable to Lockett E. Wood and Deeds of
Trust with respect to Louisville, Colorado property
acquisition. (D)
10.31 Colorado MEDtech, Inc. Stock Option Plan. (E)
10.32 Employment Agreement between Colorado MEDtech, Inc. and
John V. Atanasoff, II. (F)
10.33 Standstill Agreement dated June 30, 1994 between
Vencor, Inc. and Colorado MEDtech, Inc. (G)
10.34 Product Development Agreement dated June 30, 1994 between
Vencor, Inc. and Colorado MEDtech, Inc. (G)
10.35 Employment Agreement between Colorado MEDtech, Inc. and
Bruce L. Arfmann (H)
10.37 Employment Agreement between Colorado MEDtech, Inc. and
Lockett E. Wood (H)
10.38 Extension of Employment Agreement between Colorado
MEDtech, Inc. and John V. Atanasoff, II (I)
10.39 Agreement and Plan of Reorganization among Colorado
MEDtech, Inc., Novel Biomedical, Inc. and Jonathan
Kagan (J)
10.40 Employment Agreement between Novel Biomedical, Inc. and
Jonathan Kagan
11.1 Computation of Primary and Fully Diluted Earnings Per
Share for the Years Ended June 30, 1997 and 1996
21.1 Subsidiaries of Small Business Issuer
27.1 Financial Data Schedule for the year ended June 30, 1997
(A) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
May 14, 1993.
(B) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on
May 17, 1983, with amendment filed as exhibit to the Company's Annual
Report on Form 10-K for the year ended October 31, 1984.
(C) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on
May 17, 1983.
(D) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1987.
(E) Filed as an exhibit to the Company's Proxy Statement for for the
November 22, 1996 Annual Meeting of Shareholders.
(F) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
June 21, 1993.
(G) Filed as an exhibit to Schedule 13D Amendment No. 2 dated July 18, 1994
filed by Vencor, Inc.
(H) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1994.
(I) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1996.
(J) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
February 28, 1997.
-15-
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement"),
is made and entered as of the day of 1997, by
and among JONATHAN KAGAN (hereinafter referred to as "Executive"), and
COLORADO MEDTECH, INC., a Colorado corporation (hereinafter referred to as
"Employer").
W I T N E S S E T H :
WHEREAS, Employer desires to employ the Executive in an executive
capacity with the Corporation on the terms hereinafter set forth, and the
Executive desires to be so employed on such basis; and
WHEREAS, the parties desire to establish the compensation and other
benefits to be paid to the EXECUTIVE while he shall be in the employ of the
Employer.
NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which hereby is acknowledged, it is agreed as follows:
EMPLOYMENT
1. TERM OF EMPLOYMENT. Employer hereby agrees to employ Executive, and
Executive hereby accepts such employment by Employer, as President of Novel
Biomedical, Inc., a subsidiary of Employer, for a term commencing on the date
hereof (hereinafter referred to as the "Term of Employment"), and ending on
December 31, 2001. The Term of Employment may be reduced by mutual agreement
of the parties, in writing.
2. DUTIES OF EMPLOYMENT.
<PAGE>
a. Executive shall have such responsibilities and duties as shall be
determined by the Board of Directors and the Chief Executive Officer of the
Employer, consistent with this Agreement and with the position of President
of the Novel Biomedical subsidiary or division. The duties to be performed
by Executive shall be performed in Minnesota, subject to reasonable travel
requirements on behalf of Employer and subject to a maximum of 25% of each
month averaged over a twelve month period. During the Term of Employment,
Employer shall not make any substantial change in the duties and
responsibilities of the position held by Executive and shall not require
Executive to perform duties which are not commensurate with his position
without Executive's prior consent.
b. Executive shall render the services described herein diligently,
using his best efforts. Executive shall not hold other employment during the
Term of Employment.
3. COMPENSATION.
a. During the Term of Employment, Executive shall receive base
compensation ("Base Compensation") at a rate of not less than $85,000.00 per
annum, payable twice monthly in accordance with Employer's normal payroll
practices. Base Compensation shall be reviewed annually, and may be
increased depending on Executive's performance and Employer's financial
condition. Additionally, incentive stock options (the "ISOs") to purchase
100,000 shares of Employer's Common Stock shall be granted on the date hereof
at an exercise price equal to the fair market value of the Common Stock on
the date hereof. The ISOs shall be subject to vesting at the earlier of
completion of performance criteria provided on Exhibit A, attached hereto, or
at the end of five years from the date hereof.
2
<PAGE>
b. During the Term of Employment Executive shall be entitled to
participate in benefits programs, including MBO-based bonuses, adopted by
Employer commensurate with other executives of Employer. Employer shall not
alter the bonus compensation program of Novel Biomedical through June 1997,
and Executive shall not be entitled to participate in such Novel Biomedical
program, provided that the financial performance of Novel Biomedical shall be
adjusted to reflect Executive's employment by Employer prior to the
calculation of any bonus due.
4. BENEFITS AND PERQUISITES. Executive shall during the Term of
Employment be eligible to receive all benefits and perquisites from time to
time available generally to senior management and key executives of Employer,
all of which shall be provided at the expense of Employer. This Agreement is
not intended to and shall not be deemed to be in lieu of any rights, benefits
and privileges to which Executive may be entitled as an employee of Employer
under any retirement, pension, profit sharing, insurance, hospital or other
plans which may now be in effect or which may hereafter be adopted, it being
understood that Executive shall have the same rights and privileges to
participate in such plans and benefits as any other employee during
Executive's period of employment with Employer.
5. RESTRICTIONS ON USE AND DISCLOSURE; NON-COMPETITION AGREEMENT.
a. Except as required by Executive's duties to Employer as an employee,
Executive shall not (during or after any period of employment) directly or
indirectly use, publish, disseminate or otherwise disclose any Confidential
Information without the express prior written consent of Employer. For
purposes of this Agreement, "Confidential Information" shall mean all written
and oral confidential or proprietary information of Employer and its
affiliates, whether or not discovered or developed by Employer, and of third
parties (such as suppliers, customers
3
<PAGE>
and consultants) who may have imparted information in confidence to Employer
or its affiliates, known by Executive as a result of his employment with
Employer at any time (including prior to execution of this Agreement),
provided that Confidential Information shall not include any such information
which is now or hereafter becomes generally known in the industries in which
Employer is conducting business without the fault of Executive.
b. Upon termination of employment with Employer for any reason,
Executive shall forthwith deliver to Employer all Employer property,
including without limitation, all copies of all procedural manuals, guides,
customer lists, records and other documents and materials containing
Confidential Information then in Executive's possession or control, whether
prepared by Executive or others.
c. Upon the execution of this Agreement, Executive shall execute a
Non-Competition Agreement in the form of that attached hereto as Schedule B;
provided, however, that any obligations pursuant to such Non-Competition
Agreement shall automatically terminate upon the occurrence of a material
breach of this Agreement by Employer, provided that Executive has given
Employer notice in writing of such breach and Employer has failed to cure
such breach within sixty (60) days of such written notice.
TERMINATION
6. TERMINATION ON DEATH OR DISABILITY.
a. Employer shall have the right to terminate this Agreement on the
death or Disability of Executive. For purposes of this Agreement,
"Disability" shall mean the failure of Executive, due to illness, accident,
or any other physical or mental incapacity, to perform his duties
substantially as required hereunder for a period of any one hundred and
eighty (180)
4
<PAGE>
consecutive days as evidenced by a certificate from a physician acceptable to
Executive. If following any such termination for Disability, but prior to
the expiration of the Term of Employment, Executive shall offer his services
to Employer on the original terms hereof if such Disability no longer exists
(as evidenced by a physician's certificate), or on terms which reasonably
reflect his still existing Disability, as the case may be, and Employer fails
to employ Executive on such terms, then, as of the time of any such failure,
Employer shall be deemed to have terminated Executive without Cause.
b. In the event of termination upon the death or Disability of
Executive, Employer shall pay to Executive, or to his estate or personal
representative, as the case may be, all arrearages of salary and expenses to
the Date of Termination and a pro rata portion (based on the number of days
in such fiscal year through the Date of Termination) of any incentive bonus
which would have been payable to Executive for such year pursuant to Section
3(b) hereof. In the event of the termination of this Agreement by Employer
for Disability, Employer shall continue to provide (at no cost to Executive
except to the extent, if any, to which Executive is then paying for the same)
for the balance of the Term of Employment, all health, disability and life
insurance benefits that Executive was receiving at the Date of Termination.
7. TERMINATION FOR CAUSE.
a. Employer shall have the right to terminate Executive's employment
hereunder at any time and with immediate effect for Cause. For all purposes
of this Agreement, Executive's employment shall be deemed terminated for
"Cause" only if it is terminated by Employer for:
i. misappropriation of corporate funds by Executive or with
Executive's knowledge or direct involvement;
5
<PAGE>
ii. conviction of, or plea of guilty or NOLO CONTENDERE to, a
felony involving fraud, embezzlement, theft or dishonesty or other criminal
conduct by Executive; or
iii. gross and willful misconduct by Executive, PROVIDED, however,
that no discharge shall be deemed for Cause under this clause (iii) unless
Executive shall have first received written notice from the Board of
Directors of Employer advising Executive of the specific acts or omissions
alleged to constitute such gross and willful misconduct, and such misconduct
continues uncured by Executive for a period of sixty (60) days.
iv. a material breach by Executive of the terms of this Agreement
and a failure by Executive to cure such breach within sixty (60) days after
receiving written notice from the Board of Directors of Employer advising
Executive of the action allegedly resulting in the material breach.
b. Notwithstanding any of the foregoing, "Cause" shall not include the
breach of any representation or warranty by Executive under the Agreement and
Plan of Reorganization between Executive and Employer, dated December 10,
1996, or an innocent ommission or error made by Executive thereunder.
c. If Executive's employment hereunder is terminated for Cause: (i)
Executive shall be entitled to payment of all arrearages of salary and
expenses to the Date of Termination, but (ii) Executive shall not be eligible
to receive, and Employer shall have no further obligation to make, from and
after the Date of Termination, any further payments or benefits pursuant to
this Agreement arising out of or in connection with Executive's employment
hereunder.
8. TERMINATION WITHOUT CAUSE. Employer shall have the right to
terminate Executive's employment hereunder for any reason other than Cause,
provided that Employer shall pay to
6
<PAGE>
Executive: (i) an amount (payable in equal semi-monthly installments) equal
to the monthly amount of Base Compensation received by Executive over one
year, and (ii) the amount of any benefits accrued to the date of termination.
9. NOTICE OF TERMINATION. Any purported termination of Executive's
employment hereunder, either by Employer or by Executive, shall be
communicated by a written Notice of Termination to the other party hereto
(except in the case of termination upon the death of Executive in which event
the Date of Termination shall be the date of death). Such notice shall
indicate the specific termination provision in this Agreement which is relied
upon, recite the facts and circumstances claimed to provide the basis for
such termination and specify the effective date of such termination (the
"Date of Termination"). If within thirty (30) days from the date of the
Notice of Termination the party receiving such notice notifies the other
party that a dispute exists concerning such termination, the Date of
Termination shall be the date on which the dispute is finally resolved. The
Date of Termination shall be extended by a notice of dispute only if such
notice is given in good faith and the party giving such notice pursues the
resolution of such dispute by entering immediately into binding arbitration
under the terms attached hereto as Schedule C. Notwithstanding the pendency
of any such dispute, and provided that Executive stands ready to provide the
services hereunder, Employer will continue to pay the Employee his full Base
Compensation in effect as of the date of the Notice of Termination and
continue the Employee as a participant in all compensation, benefit and
insurance plans in which he was participating at such date, until the dispute
is finally resolved.
MISCELLANEOUS
7
<PAGE>
10. INDEMNITY. Employer shall indemnify Executive and hold him
harmless from and against any liability, cost or expense which he may incur
as an employee or officer of Employer in a manner at least as beneficial to
Executive as is now provided in accordance with the provisions of the
Articles of Incorporation and Bylaws of Employer in effect on the date prior
to the date hereof.
11. BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon Employer, its successors and assigns, and any person,
partnership, company or corporation which may acquire substantially all of
Employer's assets or business or with or into which Employer may be
liquidated, consolidated, merged or otherwise combined, and shall inure to
the benefit of and be binding upon Executive, his heirs, executors,
administrators, and personal representatives.
12. INJUNCTIVE RELIEF. Executive acknowledges that any breach of
Section 5 hereof would entail irreparable injury to Employer and that in
addition to Employer's other remedies Employer shall be entitled to
injunctive and other equitable relief to prevent any such breach, actual,
intended or likely.
13. SEVERABILITY. If any one or more of the terms, provisions
covenants or restrictions of this Agreement shall be determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
14. NOTICES. Any notice, demand or other communication given by the
parties under this Agreement shall be in writing (i) delivered personally,
(ii) delivered by a reputable overnight delivery service, or (iii) sent by
certified mail, return receipt requested to the address of the parties set
forth beneath their signatures to this Agreement. Notices so sent by mail
shall be
8
<PAGE>
deemed delivered on the date and at the time indicated on the duly completed
Postal Service return receipt.
15. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado.
16. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof, and the parties have made no
agreement, representations or warranties relating to the subject matter of
this Agreement which are not set forth herein.
17. AMENDMENT. No waiver or modification of this Agreement or of any
covenant, condition or limitation herein contained shall be valid unless in
writing and duly executed by the party to be charged therewith, and no
evidence of any waiver or modification shall be offered or received in
evidence of any proceeding, arbitration or litigation between the parties
hereto arising out of or affecting this Agreement, or the rights or
obligations of the parties hereunder, unless such waiver or modification is
in writing, duly executed as aforesaid.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be considered an original.
IN WITNESS WHEREOF, the parties have executed or caused this Agreement
to be executed as of the day first above written.
COLORADO MEDTECH, INC.
By:
-----------------------------------
John V. Atanasoff II, President
Address: 6175 Longbow Drive
Boulder, CO 80301
9
<PAGE>
- -----------------------------------
Jonathan Kagan
Address: 200 Homedale Road
Hopkins, MN 55343
10
<PAGE>
SCHEDULE A
ISO PERFORMANCE CRITERIA
JONATHAN KAGAN 100,000 SHARE INCENTIVE STOCK OPTION VESTING SCHEDULE
Options will vest at the earlier of:
A.) 5 years from February 21, 1997, or
B.) The % of annual MBO achievement times the options listed in the
following table:
OPTIONS MBO PERIOD ENDED
------- ----------------
10,000 6/30/97
30,000 6/30/98
30,000 6/30/99
30,000 6/30/2000
* 6/30/2001
* Balance of options not previously vested.
<PAGE>
SCHEDULE B
NON-COMPETITION AGREEMENT
THIS AGREEMENT is made as of this 21st day of February, 1997 between
Colorado MEDtech, Inc., a Colorado corporation (the "Company") and Jonathan
Kagan ("Employee").
WHEREAS, Employee has sold his interest in Novel Biomedical, Inc. to the
Company and has agreed to become an employee of the Company, and will be a
key, valued executive employee of the Company, and, as such, will be in a
position to damage the business of the Company by engaging in competing
activiies; and
WHEREAS, the Company wishes to protect itself from competitive
activities of Employee which would injure its business;
NOW, THEREFORE, in consideration of the employment offered to Employee,
the promises and mutual covenants and agreements herein set forth, and for
other good and valuable consideration, including future compensation, the
parties hereby agree as follows:
1. (a) Employee agrees that he possesses the knowledge, skills and
reputation in the industry in which the Company's subsidiary, Novel
Biomedical, Inc., operates which are of material importance to the Company,
and which are special and unique. Employee acknowledges that his services
cannot readily be replaced and that the loss of his services, or the use of
his services by a competitor, may cause harm to the Company. Therefore,
Employee agrees that during the period commencing with the date hereof and
ending two (2) years after his employment with the Company is terminated for
"Cause", as defined in Section 7 of the Employment Agreement between the
Company and Employee dated of even date herewith (the "Employment
Agreement"), or one (1) year after his employment with the Company is
terminated for any other reason, including the expiration of his Employment
Agreement with the Company, he will not, knowingly, directly or indirectly,
as a principal, officer, director, shareholder (other than as a holder of 5%
or less of a publicly traded corporation's capital stock), partner, employee,
or in any other capacity whatsoever, engage in, be or become associated with,
or advise or assist any business, firm, partnership, individual, corporation,
or any other entity which competes with, or which, on the date of
termination, has a significant active program in place to compete with, any
business engaged in by the Company or any subsidiary of the Company in the
field of contract development or OEM manufacturing of medical devices for
diagostics or therapeutics on which the Employee worked during his
employment; provided, however, that Employee also agrees not to compete with
the Company in relation to any product or device the Company is actively
pursuing at the time of Employee's termination, anywhere in the United States
of America. The parties recognize that, notwithstanding the foregoing
restriction, Employee may have investment, employment or consulting
opportunities with other companies in the medical device field which do not
compete with the business of the Company and which would not necessarily
violate the terms of this Paragraph 1.
(b) Any and all obligations under this Agreement shall automatically
terminate and become of no further force or effect upon the occurrence of a
material breach of the
<PAGE>
Employment Agreement by the Company, as provided in the Employment Agreement.
(c) It is agreed that Employee's services are unique, and that any
breach or threatened breach by Employee of any provisions of this Paragraph 1
may not be remedied solely by damages. Accordingly, in the event of a breach
or threatened breach by Employee of any of the provisions of this paragraph 1,
the Company may be entitled to injunctive relief, restraining Employee and any
business, firm, partnership, individual, corporation, or entity participating
in such breach or attempted breach, from engaging in any activity which would
constitute a breach of this Paragraph 1. Nothing herein, however, shall be
construed as prohibiting the Company from pursuing any other remedies
available at law or in equity for such breach or threatened breach, including
but not limited to, the recovery of damages.
2. Any waiver of any of the terms and conditions of this Agreement
shall not operate as a waiver of any other breach of such terms or
conditions, or any other term or condition, nor shall any failure to enforce
any provision hereof operate as a waiver of such provision or any other
provision hereof.
3. Any and all notices referred to herein shall be sufficient if
furnished in writing, sent by registered or certified mail, return receipt
requested, or via a reputable overnight delivery service, to Employee at his
address as shall be furnished to the Company in writing, and to the Company
at its principal office in Boulder, Colorado.
4. This Agreement shall be governed by and construed in accordance with
the laws of the State of Colorado.
5. No modification or changes in this Agreement shall be valid unless
such modification or changes are in writing and signed by all parties hereto.
6. The invalidity or unenforceability of any provision in this Agreement
shall not affect the other provisions hereof. This Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
7. This Agreement may not be assigned by either party hereto without
the prior written approval of the other party.
8. Any controversy or claim arising out of or relating to this
Agreement shall be settled by arbitration pursuant to the rules established
by Schedule C attached to Employee's Employment Agreement of even date
herewith.
9. As used herein, any reference to the masculine shall include, if
appropriate, the feminine.
-2-
<PAGE>
IN WITNESS WHEREOF the parties hereto have set their hands and seals as
of the date and year first above written.
COLORADO MEDTECH, INC.
By JOHN V. ATANASOFF II
-------------------------------------
John V. Atanasoff II, President
EMPLOYEE:
JONATHAN KAGAN
---------------------------------------
Jonathan Kagan
-3-
<PAGE>
SCHEDULE C
ARBITRATION
Except as provided below, any and all disputes arising under or related to
this Agreement which cannot be resolved through negotiations between the
parties shall be submitted to binding arbitration. If the parties fail to
reach a settlement of their dispute within fifteen (15) days after the
earliest date upon which one of the parties notified the other(s) of its
desire to attempt to resolve the dispute, then the dispute shall be promptly
submitted to arbitration by a single arbitrator through any professional
arbitration provider (the "Service") who can provide a former judge to
conduct such arbitration. The arbitrator shall be selected by the Service on
the basis, if possible, of his or her expertise in the subject matter(s) of
the dispute. The decision of the arbitrator shall be final, nonappealable
and binding upon the parties, and it may be entered in any court of competent
jurisdiction. The arbitration shall take place in Minneapolis, Minnesota.
The arbitrator shall be bound by the laws of the State of Colorado applicable
to the issues involved in the arbitration and all Colorado rules relating to
the admissibility of evidence, including, without limitation, all relevant
privileges and the attorney work product doctrine. All discovery shall be
completed in accordance with the time limitations prescribed in the Colorado
rules of civil procedure, unless otherwise agreed by the parties or ordered
by the arbitrator on the basis of strict necessity adequately demonstrated by
the party requesting an extension of time. The arbitrator shall have the
power to grant equitable relief where applicable under Colorado law, and
shall be entitled to make an award of punitive damages when applicable under
Colorado law. The arbitrator shall issue a written opinion setting forth his
or her decision and the reasons therefor within thirty (30) days after the
arbitration proceeding is concluded. The obligation of the parties to submit
any dispute arising under or related to this Agreement to arbitration as
provided in this Section shall survive the expiration or earlier termination
of this Agreement. Notwithstanding the foregoing, either party may seek and
obtain an injunction or other appropriate relief from a court to preserve or
protect trademarks, tradenames, copyrights, patents, trade secrets or other
intellectual property or proprietary information or to preserve the status
quo with respect to any matter pending conclusion of the arbitration
proceeding, but no such application to a court shall in any way be permitted
to stay or otherwise impede the progress of the arbitration proceeding.
In the event of any arbitration or litigation being filed or instituted
between the parties concerning this Agreement, the prevailing party will be
entitled to receive from the other party or parties its attorneys' fees,
witness fees, costs and expenses, court costs and other reasonable expenses,
whether or not such controversy, claim or action is prosecuted to judgment or
other form of relief.
<PAGE>
Exhibit 11.1
COLORADO MEDTECH, INC.
Statement Re: Computation of Primary and Fully Diluted Earnings Per Share
for the Years Ended June 30, 1997 and 1996
<TABLE>
1997 1996
----------------------- -------------------------
Fully Fully
Primary Diluted Primary Diluted
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 2,479,617 $ 2,479,617 $1,596,602 $ 1,596,602
Interest income from investment of
proceeds from assumed exercise of
options/warrants in excess of
proceeds used to repurchase
outstanding shares (see below), net
of income taxes (investment assumed
to be made in U.S. government
securities) 218,742 92,248 - 180,106
----------- ----------- ---------- -----------
Adjusted net income $ 2,698,359 $ 2,571,865 $1,596,602 $ 1,776,708
----------- ----------- ---------- -----------
Weighted average common shares
outstanding 7,165,499 7,165,499 6,901,762 6,901,762
Plus - common stock equivalents 5,499,610 5,499,610 865,043 5,171,292
Less - use of proceeds from assumed
exercise of options/warrants to
repurchase outstanding shares at
the average (primary) and yearend
(fully diluted) market price not to
exceed 20% of the outstanding
shares (1,433,100) (1,433,100) - (1,380,352)
----------- ----------- ---------- -----------
Adjusted weighted common shares
outstanding 11,232,009 11,232,009 7,766,805 10,692,702
----------- ----------- ---------- -----------
Fully diluted net income per share $.24 $.23 $.21 $.17
---- ----- ---- ----
</TABLE>
<PAGE>
Exhibit 21.1
COLORADO MEDTECH, INC.
Subsidiaries of Colorado MEDtech, Inc.
1. RELA, Inc., a Colorado corporation.
2. Novel Biomedical, Inc., a Minnesota corporation.
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR YEAR ENDED 6/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,670,821
<SECURITIES> 10,293,101
<RECEIVABLES> 5,402,107
<ALLOWANCES> (162,000)
<INVENTORY> 2,390,267
<CURRENT-ASSETS> 20,585,238
<PP&E> 4,184,269
<DEPRECIATION> (3,505,865)
<TOTAL-ASSETS> 23,853,433
<CURRENT-LIABILITIES> 9,461,199
<BONDS> 0
0
0
<COMMON> 9,076,206
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,853,433
<SALES> 28,243,185
<TOTAL-REVENUES> 28,243,185
<CGS> 18,456,764
<TOTAL-COSTS> 6,210,718
<OTHER-EXPENSES> (311,374)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,460
<INCOME-PRETAX> 3,864,617
<INCOME-TAX> 1,385,000
<INCOME-CONTINUING> 2,479,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,479,617
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
