<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
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COLORADO MEDTECH, INC.
--------------------------------------------------
(Exact name of issuer as specified in its charter)
COLORADO 84-0731006
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6175 LONGBOW DRIVE, BOULDER, COLORADO 80301
-------------------------------------------
(Address of principal executive offices)
(303) 530-2660
---------------------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of October 31, 1997, the Company had 10,450,724 shares of Common Stock
outstanding.
<PAGE>
COLORADO MEDTECH, INC.
FORM 10-Q
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997 3
Consolidated Statements of Operations (Unaudited)-
Three-months ended
September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows (Unaudited) -
Three-months ended
September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,339,365 $ 1,670,821
Short-term investments 3,413,594 10,293,101
Accounts receivable, net 7,558,875 5,240,107
Inventories, net 3,754,954 2,390,267
Deferred income taxes and other
current assets 925,447 990,942
------------ ------------
Total current assets 21,992,235 20,585,238
------------ ------------
EQUIPMENT AND FURNITURE, net 911,348 678,404
------------ ------------
GOODWILL, net 1,611,711 1,628,326
------------ ------------
LAND, DEFERRED INCOME TAXES
AND OTHER ASSETS 965,560 961,465
------------ ------------
TOTAL ASSETS $ 25,480,854 $ 23,853,433
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
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<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,708,687 $ 3,075,225
Accrued salaries and wages 1,240,921 1,805,770
Accrued product service costs 389,436 373,629
Customer deposits 3,449,183 3,175,530
Other accrued expenses 1,140,418 1,031,045
------------ ------------
Total current liabilities 8,928,645 9,461,199
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 10,572,472 9,076,206
Retained earnings 5,979,737 5,316,028
------------ ------------
Total shareholders' equity 16,552,209 14,392,234
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 25,480,854 $ 23,853,433
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
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<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
SALES AND SERVICE $ 7,260,230 $ 5,288,302
COST OF SALES AND SERVICE 4,621,058 3,533,717
----------- -----------
GROSS PROFIT 2,639,172 1,754,585
----------- -----------
COSTS AND EXPENSES:
Marketing and selling 332,358 246,834
Operating, general and administrative 1,380,337 918,139
Research and development 45,624 63,432
----------- -----------
Total operating expenses 1,758,319 1,228,405
----------- -----------
EARNINGS FROM OPERATIONS 880,853 526,180
OTHER INCOME, NET 193,856 52,153
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,074,709 578,333
Provision for income taxes 411,000 125,000
----------- -----------
NET INCOME $ 663,709 $ 453,333
----------- -----------
----------- -----------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE
(Primary and Fully Diluted) $ . 06 $ .05
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING
- Primary 11,821,519 11,011,962
----------- -----------
----------- -----------
- Fully Diluted 11,995,048 11,011,962
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 663,709 $ 453,333
Adjustment to reconcile net income
to net cash flows from
operating activities-
Deferred tax benefit - (80,000)
Depreciation and amortization 157,352 93,663
Non-cash consulting services 26,649 -
Change in assets and liabilities-
Accounts receivable, net (2,318,768) (432,118)
Inventories, net (1,364,687) (542,850)
Deferred income taxes and other assets 61,401 (46,826)
Accounts payable and accrued expenses (806,207) 287,769
Customer deposits 273,653 (531,944)
----------- -----------
Net cash flows from operating activities (3,306,898) (798,973)
----------- -----------
INVESTING ACTIVITIES:
Decrease in short-term investments, net 6,879,507 942,184
Capital expenditures (373,682) (170,630)
----------- -----------
Net cash flows from investing activities 6,505,825 771,554
----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock 1,469,617 -
----------- -----------
Net cash flows from financing activities 1,469,617 -
----------- -----------
Net change in cash and cash equivalents 4,668,544 (27,419)
Cash and cash equivalents, beginning 1,670,821 614,649
----------- -----------
Cash and cash equivalents, ending $ 6,339,365 $ 587,230
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
COLORADO MEDTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The financial information is unaudited and should be read in conjunction with
the consolidated financial statements filed with Form 10-KSB on September 26,
1997. The accounting policies utilized in the preparation of the financial
information herein presented are the same as set forth in the Company's annual
consolidated financial statements filed with the Form 10-KSB, except as modified
for interim accounting policies which are within the guidelines set forth in
Accounting Principles Board Opinion No. 28. Certain amounts have been
reclassified in the prior year financial statements to be consistent with the
current year presentation.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the Company's
financial position as of September 30, 1997 and the results of its operations
and its cash flows for the three-month periods ended September 30, 1997 and
1996. All of the adjustments were of a normal and recurring nature.
The following sets forth the supplemental disclosures of cash flow information
for the three-month periods ended September 30, 1997 and 1996, respectively:
1997 1996
-------- --------
Cash paid for interest $ 2,349 $ 9,024
Cash paid for income taxes $ 28,000 $ 55,000
NOTE 2 - DEBT
On October 30, 1997, the Company was approved for a three year revolving line of
credit for $5 million the first year, $7 million the second year and $9 million
the third year. The credit facility is at the bank's prime lending rate through
the term of the agreement and 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. No amounts had been advanced
under a prior credit facility as of September 30, 1997.
NOTE 3 - 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
three-month periods ended September 30, 1997 and 1996 are computed under the
treasury stock method.
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<PAGE>
For the three-months ended September 30, 1996, net income is increased by
approximately $54,000 (primary) and $53,000 (fully diluted) 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. No such adjustment is required for the three-months ended
September 30, 1997.
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:
September 30, September 30,
1997 1996
------------- -------------
Basic earnings per share $ .07 $ .07
Diluted earnings per share $ .06 $ .05
NOTE 4 - STOCK AND STOCK OPTIONS
During the quarter ended September 30, 1997, the Company issued 250,000
incentive stock options to an officer of RELA, Inc. ("RELA"), a subsidiary of
the Company. The options to purchase the Company's common stock were issued at
an exercise price of $5.47 per share, which was the fair market value of the
Company's common stock on the date of the grant. The options are exercisable
for five years from the date of grant.
The Company had 73,305 stock options exercised by certain employees and
consultants, including an officer of RELA, during the quarter ended September
30, 1997. The stock options were exercised at a price per share ranging from
$1.04 to $1.72. The exercise of the stock options for common stock increased
the equity of the Company by approximately $105,000 for the three months ended
September 30, 1997.
During the quarter ended September 30, 1997, 144,695 Director and consultant
warrants were exercised for common stock. The warrants were exercised at a
price per share ranging from $1.25 to $3.00. The exercise of the warrants
increased the equity of the Company by approximately $244,000.
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 June 1997, the Company called all of the private placement warrants that
had not previously been exercised. During fiscal 1997, 2,070,000 of these
warrants were exercised for approximately $4,631,000. The remaining 930,000
warrants were exercised during July and August of 1997 at a price per share
ranging from $1.41 to $2.68, resulting in cash proceeds to the Company of
approximately $1,121,000 and cancellation of 142,505 shares of previously issued
common stock that were used in lieu of cash to exercise the warrants.
-8-
<PAGE>
NOTE 5 - ACQUISITION OF NOVEL BIOMEDICAL, INC. ("NOVEL")
In February 1997, the Company completed the acquisition of Novel, located in
Minnesota, which specializes in the custom design, development, and manufacture
of unique disposable medical devices, primarily catheters, used in angioplasty,
minimally invasive surgery, electrophysiology, and infertility.
The following unaudited pro forma results of operations of the Company for the
three-months ended September 30, 1996 assumes that the acquisition of Novel had
occurred on July 1, 1996. 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.
THREE-MONTHS ENDED
SEPTEMBER 30,1996
------------------
Revenues $ 5,618,000
Net Income $ 638,000
Net Income Per Share (Fully Diluted) $ .06
NOTE 6 - ACQUISITION OF OPERATING ASSETS OF ERBTEC ENGINEERING, INC. ("ERBTEC")
In October 1997, the Company completed the acquisition of the operating assets
of Erbtec Engineering, Inc. The purchase was completed for $5.35 million cash
and issuance of 88,708 shares of common stock, resulting in a total purchase
value of approximately $6.1 million, including acquisition costs.
Erbtec, located in Boulder, Colorado, had annualized revenues of approximately
$12.0 million and income before taxes of approximately $2.0 million. Erbtec's
main products are high power radio frequency (RF) amplifiers, power supplies and
systems for Magnetic Resonance Imaging (MRI) equipment.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As an aid to understanding the Company's operating results, the following table
indicates the percentage relationships of income and expense items to total
revenue for the line items included in the Consolidated Statements of Operations
for the three-month periods ended September 30, 1997 and 1996, and the
percentage changes in those items for the three-month period ended September 30,
1997, from the comparable period in 1996.
PERCENTAGE CHANGE FROM
AS A PERCENTAGE OF TOTAL REVENUES PRIOR YEAR'S COMPARABLE PERIOD
- --------------------------------- ------------------------------
THREE-MONTH PERIOD THREE-MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997
% % LINE ITEMS %
----- ----- ---------- ------
100.0 100.0 Sales and Service 37.3
63.6 66.8 Cost of Sales and Service 30.8
----- ----- -----
36.4 33.2 Gross Profit 50.4
----- ----- -----
4.6 4.7 Marketing and Selling 34.6
19.0 17.4 Operating, General and Administrative 50.3
.6 1.2 Research and Development (28.1)
----- ----- -----
24.2 23.3 Total Operating Expenses 43.1
12.1 9.9 Earnings from Operations 67.4
2.7 1.0 Other Income, Net 271.7
----- ----- -----
14.8 10.9 Earnings Before Income Taxes 85.8
5.7 2.3 Provision for Income Taxes 228.8
----- ----- -----
9.1 8.6 NET INCOME 46.4
----- ----- -----
----- ----- -----
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<PAGE>
RESULTS OF OPERATIONS
Revenues for the three-month period ended September 30, 1997 were $7,260,230, up
37% as compared to the same period in the prior year. The increase in revenues
is attributable to the core business growth of RELA, Inc. which had an increase
in revenues of 30% for the quarter ended September 30, 1997 compared to the same
period in 1996. The Company's revenue growth was improved by the acquisition of
Novel in January 1997, which contributed approximately $879,000 of revenue
during the three months ended September 30, 1997. The increase in revenue is a
reflection of the increase in the backlog of orders for services and shipment of
products at June 30, 1997 compared to June 30, 1996.
Gross margins increased to 36% from 33% for the three-month period ended
September 30, 1997 compared to the same period in the prior year. The increase
in the Company's margin is a result of the shifting composition of the Company's
revenues between services and products and decreased project expenses associated
with design and development services.
Marketing and selling expenses increased 35% for the three-month period ended
September 30, 1997, as compared to the same period in the prior year. Marketing
and selling expenses as a percentage of total revenues were approximately 5% for
each of the three-month periods ended September 30, 1997 and 1996. The increase
is attributable to the growth in sales and acquisition of Novel.
Operating, general and administrative expenses increased 50% for the three-month
period ended September 30, 1997, as compared to the same period in the prior
year. As a percentage of revenues, operating, general and administrative
expenses increased to 19% from 17% compared to the same three-month period in
the prior year. The increase is attributable to the acquisition of Novel,
expenses incurred in moving the RELA manufacturing facility, the addition of a
new executive at RELA and the overall growth of the Company.
Research and development expenses decreased by $18,000 for the three-month
period ended September 30, 1997 compared to the same three-month period in 1996.
Research and development expenses are attributable to the respiratory product
lines. 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 such opportunities, the amount of future research
and development expenditures may increase.
Other income increased to $194,000 for the three-month period ended September
30, 1997. The increase is due to the Company having on average approximately $5
million more of investment capital during the quarter ended September 30, 1997
compared to the same period in 1996.
The provision for income taxes increased to 38% of earnings before income taxes
for the three-month period ended September 30, 1997 compared to 22% for the same
three-months in the prior year. The Company's provision for income taxes as a
percentage of earnings before income taxes has been less than the ordinary
combined Federal and state tax rate of approximately 38% due to the fact that
the Company reduced the valuation allowance on the deferred tax assets for the
utilization of net operating losses in the three-month period ended September
30, 1996.
The Company reported net income of $663,709 for the three-months ended September
30, 1997, compared to $453,333 for the same period in the prior year. Earnings
per share for the three-months ended September 30,
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<PAGE>
1997 were $.06 calculated on 11,995,048 fully diluted weighted average common
share equivalents outstanding compared to $.05 for the same period in the
prior year calculated on 11,011,962 fully diluted weighted average common
equivalent shares. This increase in net income is attributed to the 37% growth
in the Company's revenues, while increasing the gross margins to 36% from 33%
for the three-month period ended September 30, 1997 compared to the same
period in 1996.
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 contracts, and cash
proceeds from the issuance of common stock. Historically, the Company has also
utilized proceeds from debt borrowings.
The Company has a bank financing arrangement that provides for a three year
revolving line of credit for $5 million the first year, $7 million the second
year and $9 million the third year. The credit facility is at the bank's prime
lending rate through the term of the agreement and 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. No amounts had been
advanced under a prior credit facility as of September 30, 1997.
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 June 1997, the Company called all of the private placement warrants that
had not been previously exercised. During fiscal 1997, 2,070,000 of these
warrants were exercised for approximately $4,631,000. The remaining 930,000
warrants were exercised during July and August of 1997 at a price per share
ranging from $1.41 to $2.68, resulting in cash proceeds to the Company of
approximately $1,121,000 and cancellation of 142,505 shares of previously issued
common stock that were used in lieu of cash to exercise the warrants.
The ratio of current assets to current liabilities was 2.5 to 1 at September 30,
1997, compared to 2.2 to 1 at June 30, 1997. The Company's working capital
increased approximately $1,940,000 since June 30, 1997. Working capital
increased primarily as a result of continued profitability of the business and
the proceeds from the issuance of common stock. The average number of days
outstanding of the Company's accounts receivable at September 30, 1997 was
approximately 81 days, compared to 57 days at June 30, 1997. The increase in
the number of days outstanding is a result of extended payment terms granted to
customers, which increased the average number of days outstanding of the
Company's accounts receivable by16 days as of September 30, 1997. Management
believes that most of these accounts will be brought back into terms during the
next quarter.
The Company used approximately $3.3 million of cash for operations during the
three-month period ended September 30, 1997 primarily for the purchase of
inventory to support new orders and due to the increased payment terms granted
to customers.
During the three-months ended September 30, 1997, the Company made capital
expenditures of approximately $374,000 of property and equipment consisting
principally of computer and manufacturing equipment.
In October 1997, the Company completed the acquisition of the operating assets
of Erbtec Engineering, Inc. The purchase was completed for $5.35 million cash
and issuance of 88,708 shares of common stock, resulting in
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<PAGE>
a total purchase price of approximately $6.1 million, including acquisition
costs. The Company has no other material commitments for capital expenditures
at September 30, 1997.
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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<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) The Company sold the following unregistered securities in the three-month
period ended June 30, 1997:
(1) In May 1997, the Company issued to an investor relations consultant a
warrant to purchase 125,000 shares of common stock at exercise prices that
range between $4.00 and $10.00 per share depending on attaining certain
performance levels.
The Company believes this sale 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.
The Company sold the following unregistered securities in the three-month
period ended September 30, 1997:
(1) On dates between July 8 and August 26, 1997, the Company issued
930,000 shares of common stock to twenty persons upon exercise of
warrants to purchase common stock for aggregate consideration of
approximately $1,121,000 in cash and cancellation of 142,505 shares of
previously issued common stock that were used in lieu of cash to
exercise the warrants.
The Company believes this sale 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. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K during the first quarter of the Company's fiscal year
ended June 30, 1998 - None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLORADO MEDTECH, INC.
----------------------
(Registrant)
DATE: November 12, 1997
/s/ John V. Atanasoff II
--------------------------
John V. Atanasoff II
Chief Executive Officer
DATE: November 12, 1997
/s/ Bruce L. Arfmann
--------------------------
Bruce L. Arfmann
Chief Financial Officer
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<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 (K)
10.41 Employment Agreement between Colorado MEDtech, Inc. and Lee Erb
11.1 Computation of Primary and Fully Diluted Earnings Per Share
for the Three-Months Ended September 30, 1997
21.1 Subsidiaries of Small Business Issuer (K)
27.1 Financial Data Schedule for the three-months ended September 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.
(K) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1997.
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<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement"), is
made and entered as of the 1st day of October 1997, by and between LEE ERB
(hereinafter referred to as "Employee"), and COLORADO MEDTECH, INC., a Colorado
corporation and its assigns (hereinafter referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company desires to engage Employee as an employee for the
Company on the terms hereinafter set forth, and Employee desires to be employed
on such basis; and
WHEREAS, the parties desire to establish the compensation and other
benefits to be paid to Employee while he shall in the employ of the Company.
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. The Company hereby engages Employee, and Employee
hereby accepts such employment by the Company for a term commencing on the date
hereof (hereinafter referred to as the "Term of Employment"), and ending on
September 30, 1999, with extension thereafter by mutual agreement. Employee's
title shall be Vice President of Technology, reporting directly to the Company's
President and CEO.
2. DUTIES OF EMPLOYMENT. Employee shall have such responsibilities and
duties as shall be determined by the Board of Directors and the Chief Executive
Officer of the Company, consistent with this Agreement. Such duties shall
include: product conceptualization, sales and marketing support, negotiations
with customers, problem solving with respect to MRI equipment, technical
conceptualization and implementation, design review, and knowledge and know-how
transfer. Duties shall not include acting as a project manager, including any
supervision or management of personnel. During the Term of Employment, the
Company shall not make any substantial change in the duties and responsibilities
of the position held by Employee and shall not require Employee to perform
duties which are not commensurate with his engagement without Employee's prior
consent. Employee shall render the services described herein diligently, using
his best efforts, and he shall neither hold other employment which would
interfere with Employee's duties under this Agreement nor provide consulting
services to any competitor of the Company during the Term of Employment, as
provided in the Non-Competition Agreement attached hereto.
<PAGE>
3. COMPENSATION.
(a) During the Term of Employment, Employee shall receive
compensation ("Compensation") at a rate of not less than $100,000.00 per annum,
payable in equal installments twice monthly in accordance with the Company's
normal payroll practices, and he shall provide at least 1,000 hours of service
per year at least 75% of which will be performed on site or as otherwise
acceptable to the Company. These hours shall be roughly allocated throughout
each twelve months ending on the first and second anniversaries of this
Agreement on schedules to be established by the Company from time to time,
subject to Employee's reasonable availability. They need not conform to any
rigid schedule so long as the minimum is performed each year ending on such
anniversaries. Additionally, options (the "Options") to purchase 100,000 shares
of the Company'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
Options shall vest according to the following schedule: 50,000 shares upon the
first (1st) anniversary of the date hereof; the remaining 50,000 shares upon the
second (2nd) anniversary of the date hereof. The Options shall be exercisable
through September 30, 2001.
(b) Employee shall be eligible for medical benefits, for
participation in the Company's long-term disability plan or other plan providing
equivalent long-term disability benefits, under similar conditions, and for
participation in the Company's stock purchase plan, subject to any benefit plan
eligibility requirements. In addition, the Company shall reimburse the Employee
any reasonably incurred employment related expenses, per the Company's policy.
(c) The Company shall not provide Employee any paid vacation days,
holidays, sick days, or personal days. Employee shall also not be eligible to
participate in any bonus programs.
4. RESTRICTIONS ON USE AND DISCLOSURE; NON-COMPETITION AGREEMENT.
(a) Except as required by Employee's duties to the Company as an
employee, Employee 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 the Company. For
purposes of this Agreement, "Confidential Information" shall mean all written
and oral confidential or proprietary information of the Company and its
affiliates, whether or not discovered or developed by the Company, and of third
parties (such as suppliers, customers and consultants) who may have imparted
information in confidence to the Company or its affiliates, known by Employee as
a result of his Employment with the Company 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 the Company is conducting business without the fault
of Employee.
(b) Upon termination of employment with the Company for any reason,
Employee shall forthwith deliver to the Company all Company property, including
without limitation, all copies of all procedural manuals, guides, customer
lists, records and other documents and materials containing Confidential
Information then in Employee's possession or control, whether
2
<PAGE>
prepared by Employee or others.
(c) Upon the execution of this Agreement, Employee shall execute a
Non-Competition Agreement in the form of that attached hereto as Schedule A;
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 the Company, provided that Employee has given the Company
notice in writing of such breach and the Company has failed to cure such breach
within sixty (60) days of such written notice.
TERMINATION
5. TERMINATION ON DEATH OR DISABILITY.
(a) The Company shall have the right to terminate this Agreement on
the death or Disability of Employee. For purposes of this Agreement,
"Disability" shall mean the failure of Employee, due to illness, accident, or
any other physical or mental incapacity, to perform his duties substantially as
required hereunder for a period of any forty-five (45) consecutive days as
evidenced by a certificate from a physician acceptable to Employee.
(b) In the event of termination upon the death or Disability of
Employee, the Company shall pay to Employee, or to his estate or personal
representative, as the case may be, all arrearages of Compensation and mutually
agreed upon expenses to the Date of Termination.
6. TERMINATION FOR CAUSE.
(a) The Company shall have the right to terminate its relationship
with Employee hereunder at any time and with immediate effect for Cause. For
all purposes of this Agreement, Employee's relationship shall be deemed
terminated for "Cause" only if it is terminated by Company for:
(i) misappropriation or misuse of corporate Confidential
Information or funds by Employee or with Employee's knowledge or direct
involvement;
(ii) conviction of, or plea of guilty or NOLO CONTENDERE to, a
felony involving fraud, embezzlement, theft or dishonesty or other criminal
conduct by Employee;
(iii) willful misconduct by Employee, PROVIDED, however, that
no discharge shall be deemed for Cause under this clause (iii) unless Employee
shall have first received written notice from the President and CEO of the
Company advising Employee of the specific acts or omissions alleged to
constitute such willful misconduct, and such misconduct continues uncured by
Employee for a period of sixty (60) days;
(iv) a material breach by Employee of the terms of this Agreement
and a failure by Employee to cure such breach within sixty (60) days after
receiving written notice from
3
<PAGE>
the Board of Directors of the Company advising Employee of the action
allegedly resulting in the material breach; or
(v) breach of any representation or warranty by Employee under
the Asset Purchase Agreement entered into by the parties, dated October 1, 1997
(the "Asset Purchase Agreement") other than an omission or error made by
Employee thereunder which does not have a material adverse effect on the
Company.
(b) If Employee's employment hereunder is terminated for Cause:
Employee shall be entitled to payment of all arrearages of salary and mutually
agreed upon expenses to the Date of Termination.
7. TERMINATION WITHOUT CAUSE. The Company shall have the right to
terminate Employee's employment hereunder for any reason other than Cause,
provided that Employee shall receive the following: (i) any unpaid Compensation
for the balance of this Agreement, and (ii) full and immediate vesting of the
Options.
8. NOTICE OF TERMINATION. Any purported termination of Employee's
relationship hereunder, either by the Company or by Employee, shall be
communicated by a written Notice of Termination to the other party hereto
(except in the case of termination upon the death of Employee 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").
MISCELLANEOUS
9. EMPLOYEE'S UNIQUE VALUE TO COMPANY. Employee and Company acknowledge
the unique ability of Employee to assist in the integration of Erbtec
Engineering, Inc.'s ("Erbtec") business into the Company and to thereby allow
Company to realize the value of Erbtec as an ongoing business unit pursuant to
the Asset Purchase Agreement. Employee and the Company further acknowledge
that, for these reasons, a failure of Employee to remain as an employee during
the full term provided by this Agreement could damage the Company to a
significantly greater extent than is ordinarily associated with an employee
terminating his relationship in breach of an employment agreement.
10. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the Company, its successors and assigns, and any person,
partnership, company or corporation which may acquire substantially all of the
Company's assets or business or with or into which the Company may be
liquidated, consolidated, merged or otherwise combined, and shall inure to the
benefit of and be binding upon Employee, his heirs, executors, administrators,
and personal representatives.
4
<PAGE>
11. INJUNCTIVE RELIEF. Employee acknowledges that any breach of the
noncompete obligations hereof would entail irreparable injury to the Company and
that in addition to the Company's other remedies the Company shall be entitled
to injunctive and other equitable relief to prevent any such breach, actual,
intended or likely.
12. SEVERABILITY. Nothing in this Agreement shall be construed so as to
require the commission of any act contrary to law and wherever there is any
conflict between any provision of this Agreement and any law, statute,
ordinance, order or regulation, the latter shall prevail, but in such event any
provision of this Agreement shall be curtailed and limited only to the extent
necessary to bring it within applicable legal requirements. If any provision of
this Agreement should be held invalid or unenforceable, the remaining provisions
shall be unaffected by such a holding.
13. 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 deemed
delivered on the date and at the time indicated on the duly completed Postal
Service return receipt.
14. DISPUTE RESOLUTION. 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 the Judicial Arbiter
Group ("JAG"), any successor of the JAG, or any similar arbitration provider who
can provide a former judge to conduct such arbitration if JAG is no longer in
existence. The arbiter shall be selected by JAG 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 Boulder, Colorado. 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.
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
5
<PAGE>
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.
15. 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 or in the Asset Purchase Agreement.
16. 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.
IN WITNESS WHEREOF, the parties have executed or caused this Agreement to
be executed as of the day first above written.
COLORADO MEDTECH, INC. EMPLOYEE
By: /s/ John V. Atanasoff II By: /s/ Lee Erb
----------------------------- --------------------------
John V. Atanasoff II, President Lee Erb
6175 Longbow Drive 2760 29th Street
Boulder, CO 80301 Boulder, CO 80301-0301
6
<PAGE>
SCHEDULE A
NON-COMPETITION AGREEMENT
THIS AGREEMENT is made as of this 1st day of October, 1997 between Colorado
MEDtech, Inc., a Colorado corporation (the "Company") and Lee Erb ("Employee").
WHEREAS, Employee has sold his interest in Erbtec Engineering, Inc. to the
Company and has agreed to become an employee of the Company, and will be a
unique, valued employee of the Company, and, as such, will be in a position to
damage the business of the Company by engaging in competing activities; and
WHEREAS, the Company wishes to protect itself from competitive activities
of Employee which would injure its business;
NOW, THEREFORE, in consideration of the relationship 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 operates or will operate 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 relationship 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 relationship with the Company
is terminated for any other reason, including the expiration of his Employment
Agreement with the Company, he will not, without the Company's prior written
consent, 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 medical device field; 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
and on which the Employee actively participated, anywhere in the United States
of America.
(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 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
1
<PAGE>
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 or 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 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. Nothing in this Agreement shall be construed so as to require the
commission of any act contrary to law and wherever there is any conflict between
any provision of this Agreement and any law, statute, ordinance, order or
regulation, the latter shall prevail, but in such event any provision of this
Agreement shall be curtailed and limited only to the extent necessary to bring
it within applicable legal requirements. If any provision of this Agreement
should be held invalid or unenforceable, the remaining provisions shall be
unaffected by such a holding.
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 procedure set forth in the
Employment Agreement of even date herewith.
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. EMPLOYEE
By: /s/ John V. Atanasoff II By: /s/ Lee Erb
----------------------------- ------------------------------
John V. Atanasoff II, President Lee Erb
6175 Longbow Drive 2760 29th Street
Boulder, CO 80301 Boulder, CO 80301-0301
3
<PAGE>
Exhibit 11.1
COLORADO MEDTECH, INC.
Statement Re: Computation of Primary and Fully Diluted Earnings Per Share
for the Three Months Ended September 30, 1996
<TABLE>
<CAPTION>
PRIMARY FULLY
DILUTED DILUTED
----------- -----------
<S> <C> <C>
Net income $ 453,333 $ 453,333
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) 54,368 53,183
---------- ----------
Adjusted net income $ 507,701 $ 506,516
---------- ----------
Weighted average common shares outstanding 6,901,762 6,901,762
Plus - Common stock equivalents 5,490,552 5,490,552
Less - use of proceeds from assumed exercise of
options/warrants to repurchase outstanding
shares at the yearend market price not to
exceed 20% of the outstanding shares (1,380,352) (1,380,352)
---------- ----------
Adjusted weighted common shares outstanding 11,011,962 11,011,962
---------- ----------
Fully diluted net income per share $.05 $.05
---- ----
</TABLE>
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED 9/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,339,365
<SECURITIES> 3,413,594
<RECEIVABLES> 7,558,875
<ALLOWANCES> 0
<INVENTORY> 3,754,954
<CURRENT-ASSETS> 21,992,235
<PP&E> 911,348
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,480,854
<CURRENT-LIABILITIES> 8,928,645
<BONDS> 0
0
0
<COMMON> 10,572,472
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,480,854
<SALES> 7,260,230
<TOTAL-REVENUES> 7,260,230
<CGS> 4,621,058
<TOTAL-COSTS> 1,758,319
<OTHER-EXPENSES> (193,856)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,074,709
<INCOME-TAX> 411,000
<INCOME-CONTINUING> 663,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 663,709
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
