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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-12471
COLORADO MEDTECH, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0731006
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes __X__ No ____
The aggregate market value of the voting and nonvoting common stock
held by nonaffiliates computed by reference to the average bid and asked
prices of such stock as of August 31, 1999 was $ 174,357,653.
The number of shares outstanding of the issuer's Common Stock as of
August 31, 1999 was 11,129,255.
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.
Indicate by check mark if disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained herein, and will not
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-K or any amendment to this Form 10-K. [ ]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Colorado MEDtech, Inc. ("CMED" or the "Company")) is a leading full-service
provider of advanced medical products and comprehensive outsourcing services.
Colorado MEDtech has reorganized its operating units, renaming some, in order to
emphasize the focus of the Company and better present its services and products
to its customers. The new names will be used throughout this report. Colorado
MEDtech's operating units and their principal activities are:
- - CMED/RELADIVISION ("RELA") (formerly the RELA Division)
provides custom product development services, specializing in the
design and development of diagnostic and therapeutic medical
devices and medical software;
- - IMAGING AND POWER SYSTEMS DIVISION ("IPS") (formerly the Erbtec
Engineering Division)
designs and develops a broad range of imaging system hardware and
software, including advanced magnetic resonance imaging (MRI) systems and
application software, high-performance radio frequency ("RF") amplifiers
for MRI systems and high-voltage x-ray generator subsystems for computed
tomography (CT) scanners;
- - CMED MANUFACTURING DIVISION ("CMED MFG") (formerly a part of the RELA
Division)
manufactures electronic and electromechanical medical devices for major
medical original equipment manufacturers ("OEMs") and for CMED operating
units;
- - CMED CATHETER AND DISPOSABLES TECHNOLOGY, INC. ("CDT") (formerly Novel
Biomedical, Inc.)
designs, develops and manufactures unique disposable medical devices,
primarily catheters, used in angioplasty, minimally invasive surgery,
electrophysiology and infertility treatment;
- - CMED AUTOMATION DIVISION ("CMED AUTOMATION")
designs, develops and manufactures automation systems for medical device
and closely associated businesses; and
- - BIOMED Y2K, INC. ("BIOMED")
provides software tools and services to support healthcare institutions'
efforts to establish Year 2000 compliance for their biomedical devices.
In the future, BioMed plans to provide service and support in the
biomedical and compliance areas, and to distribute products to hospitals
and nursing homes.
The CMED Automation division was established in February 1999 following
Colorado MEDtech's purchase of the assets of Eclipse Automation Corporation. The
purchase price for the assets was approximately $500,000. CMED assumed no
liabilities or obligations in connection with the purchase. The division is
located in Longmont, Colorado.
In August 1999, the company purchased the assets of Creos Technologies,
LLC, which developed and manufactured high-voltage x-ray generator systems for
CT scanners. The purchase price for the assets was
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approximately $2 million. The assets of this operation have been integrated
into the Imaging and Power Systems division and the CMED Manufacturing
division.
The Respiratory Products division that existed until June 30, 1999 has
been dissolved and its operations have been incorporated into the BioMed Y2K
organization as of July 1, 1999. PRODUCTS AND SERVICES
Colorado MEDtech is a leading full-service provider of advanced medical
products and comprehensive outsourcing services designed to increase the
efficacy and lower the cost of healthcare. We sell our services and products
to major medical OEMs and pharmaceutical companies, as well as to hospitals
and nursing homes.
OUTSOURCING SERVICES
Our outsourcing services consist of design, development and manufacture of
medical products and software for major medical device and pharmaceutical
companies.
Our principal outsourcing markets and services are:
- - Medical diagnostic and therapeutic devices - we design and develop
complex electronic and electromechanical instruments for the detection
and treatment of disease.
Our diagnostic projects in this market are performed for companies
involved in selling in-vitro diagnostic products and/or laboratory
equipment. Typically, these instruments detect, measure or monitor
the concentration of a target chemical or biological component in
a fluid sample. Products in the diagnostic market can be placed in
three major categories:
Clinical diagnostic instruments - devices which are located in
a laboratory and used for analyzing patient samples;
Pharmaceutical research instruments - systems that are used by
pharmaceutical companies to assist the company in defining the
performance of a new drug. These instruments analyze many
types of fluid samples; and
Life sciences instruments - these systems are used to analyze
a fluid sample in an industrial setting. They may also include
the analysis or target development of a DNA molecule.
Our therapeutic projects are performed for companies who sell
patient therapy products. These products are used in surgery, for
the treatment of medical conditions, and for monitoring patients.
They include devices such as infusion pumps, surgical devices,
blood oxygen monitors and devices for cardiovascular treatment.
- - Medical imaging systems - we design and develop complete MRI systems,
including advanced application software and major subsystem hardware.
Our work in this area includes the development of leading-edge cardiac
and vascular diagnostic application software and high-density RF
amplifier systems. Contracts in this business area are undertaken with
major OEMs in the imaging system market.
- - Medical software - we develop software for electronic and
electromechanical medical products and provide medical software
verification and validation services. Our software projects are
performed for customers who produce therapeutic, pharmaceutical or
diagnostic instruments. The projects are
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generally the development of software for use in a device, and/or
verification and validation services necessary to make software of
sufficient quality and reliability to be used in sensitive medical
devices.
- - Manufacturing - we manufacture complex electronic and electromechanical
medical devices and medical imaging products such as high-power systems
and systems support modules for MRI systems and x-ray generators for CT
scanners. We are registered device manufacturers with the U.S. Food and
Drug Administration and meet the agency's Quality System Regulation
("QSR") requirements. Our manufacturing projects include pre-production
engineering and commercialization services, turnkey manufacturing of
FDA Class II and Class III devices and system test services.
- - Medical disposable devices - we design, develop and manufacture medical
disposable devices, primarily catheters, used in a variety of surgical
procedures. Our projects in this market are performed primarily for
companies who sell surgical instruments, supplies and accessories. Our
medical disposable devices include sensing catheters, balloon
catheters, drug delivery catheters, disposable endoscopes, in-vitro
diagnostic disposables and surgical disposables. The devices are used
primarily in angioplasty, minimally invasive surgery, electrophysiology
and infertility treatment.
- - Automation systems - we design, develop and build machines and systems
for automating the manufacture and packaging of medium to high volumes
of medical devices. Our projects in this market are performed generally
for large companies who sell medical and pharmaceutical products.
Projects generally involve the automation, often using robotics, of
specialized and isolated tasks in the manufacture, packaging or
labeling of products. Our automation projects integrate Colorado
MEDtech-machined parts and production equipment from other
manufacturers to produce a production line.
Our design and development projects generally include product concept
definition, development of specifications for product features and functions,
product engineering specifications, instrument design, development, prototype
production and testing, and development of test specifications and procedures.
Our outsourcing services are performed by engineers, scientists,
technicians, manufacturing specialists and assembly workers. We believe our
experience in applying our proven methodologies and advanced technologies to the
development of innovative new products gives our clients an advantage in their
marketplace by providing them with state-of-the-art, quality products in a
timely and cost-effective manner.
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,
cost-effective, 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. We believe we are uniquely positioned to provide our clients, within a
single integrated structure, the valuable product development and manufacturing
resources they need to satisfy the requirements of a worldwide marketplace.
MEDICAL PRODUCTS
Our current products are high performance power amplifier systems for use
in medical imaging systems, such as MRI machines and CT scanners, software tools
for Year 2000 compliance management and reporting, and an oxygen generation
system.
Our medical imaging products line features:
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- - Advanced high-performance RF amplifiers and integrated power delivery
subsystems that power MRI machines. By combining DC, RF, digital and
system control technologies, we produce advanced, highly-embedded power
products. Our solid state RF amplifier product line features the
highest packaging density available for MRI applications.
- - High-voltage x-ray generator subsystems for advanced CT scanners.
Our imaging products are sold to large, multi-national medical imaging
companies who integrate the power subsystems into their imaging systems.
Colorado MEDtech, through its BioMed Y2K, Inc. subsidiary, provides
software tools for Year 2000 compliance management and reporting. The Company
has developed an extensive medical device compliance database tailored to the
needs of the healthcare industry. The software, called BioMed Y2KOne(TM), offers
a combination of tools and services to support healthcare institutions in their
efforts to establish Year 2000 compliance. Services offered in conjunction with
the software include: Year 2000 compliance database for medical devices;
inventory consolidation, consulting and support; specialized Year 2000 training;
device remediation, consulting and conversion planning; device testing; custom
software reviews and analysis; and contingency planning and cost impact
analysis. In the future, BioMed plans to provide service and support in the
biomedical and compliance areas, and to distribute products to hospitals and
nursing homes.
Colorado MEDtech is beginning to market its FreshAir(TM) system, a
self-contained oxygen generation system. The Company recently received marketing
clearance for the system from the FDA. It is intended for use in long-term
healthcare facilities and is expected to reduce the cost of oxygen to patients
of these facilities. The FreshAir system will allow facilities to generate their
own oxygen rather than purchase it from third parties.
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 exhibition at
industry trade shows.
SIGNIFICANT CUSTOMERS AND BACKLOG
For the year ended June 30, 1999, three customers each accounted for more
than 10% of the Company's total revenues: GE Medical Systems (GEMS) - 23%,
Gen-Probe Incorporated - 18%, and 12% from a customer the Company is prohibited
by contract from identifying. For the year ended June 30, 1998, GEMS accounted
for 23% of the total revenues of the Company and Gen-Probe accounted for 22%.
Due to the nature of the outsourcing services business, it is typical for the
Company to have about 40% to 50% of its total revenues from two to three
customers in any given year. It is also typical that the Company's revenues from
these customers account for a very high percentage of its total revenues for a
one to three year period, then to see the customers' revenue percentage drop, to
be replaced by other large customers. Foreign sales accounted for 15% and 8% of
the Company's total sales in 1999 and 1998, respectively. 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, 1999, the Company's backlog of orders for services or
shipment of product in fiscal 2000 was approximately $37 million compared to
approximately $40 million at June 30, 1998. Orders booked during fiscal year
1999 increased to approximately $62 million, compared to bookings of
approximately $60 million in fiscal year 1998.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company intends to continue to develop new products and services for
a broad range of customers. In addition to internal development efforts, the
Company may license or acquire related technology and/or products from
external resources.
While the Company employs approximately 237 engineers, scientists and
technicians in research and development activities, these employees' efforts
are primarily devoted to contract work for customers and in such cases their
expenses are included in the cost of sales and services. Research and
development expenses have historically been attributable to the FreshAir
system. During fiscal year 1999, research and development expenses were
attributable to RF solid state amplifier systems, Year 2000 software tools
and database and the FreshAir system. For fiscal years 1999, 1998 and 1997,
the Company incurred approximately $1,835,000, $1,681,000 and $304,000,
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 market for medical outsourcing and products is highly competitive.
The principal competitive factors are reputation, quality, price and
schedule. The Company's present and future competition comes from a variety
of sources. These sources include consulting, 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. Competitors include Plexus Corporation, Relsys
International, Inc., Analogic Corporation, ACT Medical, Inc./Danforth, B.
Braun, KMC Systems, Inc., Nova Biomedical, UMM Electronics, Inc., Sparton
Corporation and Wright Industries.
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.
As the Company develops and manufactures other proprietary products,
such as the FreshAir 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.
MANUFACTURING
The Company manufactures its products and customer products at four
facilities in the Boulder and Longmont, Colorado and Plymouth, Minnesota.
Most products are built in response to specific customer purchase orders,
while others are fabricated as standard products. The manufacturing process
consists primarily of assembly, test and packaging of both custom and
commercially available components from outside sources. In addition, the
Company machines certain parts in its Longmont, Colorado facility.
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
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source. The Company is dependent upon its suppliers for timely delivery of
quality components. To date, the Company has not experienced significant
delays in the delivery of such components.
PRODUCT WARRANTIES AND SERVICE
The Company generally warrants its products for 90 days, but in limited
cases for up to 18 months, 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 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 clearance 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" 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 1995, 1997, 1998 and 1999 by the FDA during routine
general inspections. The inspections resulted in some procedural changes that
are intended to assure continued compliance with the current QSR.
The ISO 9000 series of quality management and quality assurance
standards has been adopted by over 90 countries. ISO standards require that a
quality system be used to guide work to assure quality and to produce quality
products and services. EN ISO 9001, the most comprehensive of the standards,
covers 20 elements. These elements include management responsibility, design
control, training, process control and servicing. EN ISO 9001 is the quality
systems standard used by companies providing design, development,
manufacturing, installation and servicing.
The Company is a registered device manufacturer with the FDA and meets
the agency's QSR requirements. In addition, the Company is EN ISO 9001 and EN
46001 registered. There are no material costs or expenses associated with the
Company's compliance with federal, state and local environmental laws.
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.
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EMPLOYEES
As of June 30, 1999, the Company had 501 employees, of which 398 are
full-time. 93% of the Company's employees are employed at its Colorado
facilities and 7% of employees are employed 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.
The Company's operations are located in leased facilities. The following
table contains a summary of the significant terms of the leases:
<TABLE>
<CAPTION>
LEASE AVERAGE
FACILITY OPERATIONS SQUARE FEET EXPIRES MONTHLY RENT
-------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C>
6175 Longbow Drive, Corporate headquarters, 52,000 6/30/02 $35,000
Boulder, Colorado CMED/RELA, BioMed
410 South Sunset Street, CMED MFG 18,000 7/1/02 $ 6,780
Longmont, Colorado
2760 29th Street, Boulder, IPS 20,672 12/31/99 $13,800
Colorado
13845 Industrial Park CDT 16,500 1/31/01 $11,735
Boulevard, Plymouth,
Minnesota
1811 Lefthand Circle CMED Automation 25,000 7/31/01 $13,368
Longmont, Colorado
1510 Nelson Road, CMED MFG 18,079 6/30/02 $13,640
Longmont, Colorado
7388 S. Revere Parkway, IPS (x-ray generator operations 13,173 11/30/99 $ 9,784
Ste. 1003, Englewood, only)
Colorado
</TABLE>
In addition to the rent set forth in the table above, the Company is
responsible for certain expenses associated with the properties, including
property taxes, insurance and maintenance.
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. 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. At June 30,
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1999, the Company is holding the land as available-for-sale. 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.
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, 1999.
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) stock market since
the Company's initial public offering in July 1983. The Company's common
stock has been listed on the Nasdaq National Market since October 1997. The
following table sets forth the range of high and low closing prices of the
Company's common stock as reported by Nasdaq during fiscal years 1999 and
1998:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------------------------------------
1999 1998
------------------------------------ --------------------------------
High Low High Low
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<S> <C> <C> <C> <C>
First Fiscal Quarter $8.75 $5.81 $7.12 $5.12
Second Fiscal Quarter $13.63 $6.25 $7.00 $5.87
Third Fiscal Quarter $14.38 $10.75 $10.25 $5.81
Fourth Fiscal Quarter $22.25 $9.06 $10.12 $6.94
</TABLE>
The foregoing quotations represent quotations between dealers without
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
At June 30, 1999, 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 did not sell any unregistered securities in the three-month
period ended June 30, 1999.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected, consolidated financial information presented below for the
five years ended June 30, 1999, is derived from the consolidated financial
statements of the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Conditions and Results of Operations
contained in this report. Certain reclassifications have been made to prior
year financial statements to conform with current presentation.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
YEARS ENDED JUNE 30,
--------------------
1999(a) 1998(b) 1997(c) 1996 1995
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales and service $ 65,349 $ 47,300 $ 28,243 $ 19,130 $ 19,821
Gross profit $ 25,030 $ 16,943 $ 9,786 $ 6,790 $ 6,838
Net income $ 7,850 $ 4,492 $ 2,480 $ 1,597 $ 1,037
Earnings per share
Basic (d) $ .73 $ .47 $ .35 $ .23 $ .15
Diluted (d) $ .63 $ .37 $ .27 $ .21 $ .15
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in)
Operating activities $ 11,672 $ 8,268 $ 2,899 $ 1,268 $ 2,342
Investing activities $ (3,210) $ (8,922) $ (6,655) $ (2,798) $ (200)
Financing activities $ (2,503) $ 1,482 $ 4,811 $ - $ (897)
BALANCE SHEET DATA:
Cash and cash equivalents $ 8,458 $ 2,499 $ 1,671 $ 615 $ 2,144
Short-term investments $ 14,395 $ 12,144 $ 10,293 $ 5,408 $ 2,593
Current assets $ 40,460 $ 29,249 $ 20,585 $ 12,099 $ 9,746
Total assets $ 45,688 $ 34,007 $ 23,853 $ 13,217 $ 10,958
Current liabilities $ 17,001 $ 12,285 $ 9,461 $ 6,666 $ 6,005
Total long-term debt $ - $ - $ - $ - $ -
Total shareholders' equity $ 28,687 $ 21,723 $ 14,392 $ 6,550 $ 4,953
Cash dividends per share $ - $ - $ - $ - $ -
</TABLE>
(a) In February 1998, the Company acquired the operating assets of Eclipse
Automation Corporation.
(b) In October 1997, the Company acquired the operating assets of Erbtec
Engineering, Inc.
(c) In February 1997, the Company acquired Novel Biomedical, Inc.
(d) As restated under Statement of Financial Accounting Standards No. 128,
"Earnings per Share", in 1997, 1996 and 1995.
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ITEM 7. 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 expects capital expenditures to be
consistent with the previous year during fiscal Year 2000. The Company
anticipates that it will fund its expenditures, as well as research and
development costs, through cash generated from operations.
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 (7.75% at June 30, 1999) through the term of the agreement and is
secured by all accounts receivable, 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, 1999, 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. 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 ranged 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 year 1997, 2,070,000 of these
warrants were exercised for $4,630,800. The remaining 930,000 warrants were
exercised during July and August 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.
On November 3, 1998, Vencor Operating, Inc., a subsidiary of Vencor,
Inc. ("Vencor"), sold 3,560,000 shares of Colorado MEDtech, Inc. common stock
held by Vencor. Prior to the transaction, the 3,560,000 shares held by Vencor
represented approximately 33% of the outstanding common stock of the Company.
As a part of that transaction, the Company purchased and retired 655,000
shares of its own stock for $6.38 per share. The Company used $4,175,625 of
its short-term investments to complete this transaction. A number of
institutional investors purchased the remaining 2,905,000 shares.
The Company's working capital increased to $23,460,000 at June 30, 1999
from $16,965,000 at June 30, 1998. The increase in working capital occurred
primarily because of the Company's cash flow from operations and the proceeds
from the issuance of common stock through the exercise of options and
warrants. The average number of days outstanding of the Company's accounts
receivable was approximately 49 days at June 30, 1999 compared to 50 days at
June 30, 1998.
During the year ended June 30, 1999, the Company acquired approximately
$1,174,000 of property and equipment consisting principally of computer
equipment. The Company had no material commitments for capital
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expenditures as of June 30, 1999. The Company purchased the assets of Eclipse
Automation Corporation for approximately $500,000 in February 1999. The
Company purchased the operating assets of Creos Technologies, LLC, for
approximately $2 million in August 1999.
The ratio of current assets to current liabilities was 2.4 to 1 at June
30, 1999 and 1998. The liabilities to equity ratio was .6 to 1 at June 30,
1999 and 1998.
Cash provided by operations during the year ended June 30, 1999 was
$11.7 million, an increase of approximately $3.4, million from $8.3 million
in fiscal year 1998, as a result of the profitable growth of the Company, the
increase in accounts payable and accrued expenses, and the reduction in days
outstanding of accounts receivable.
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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 years ended June 30, 1999, 1998 and
1997, and the percentage change in those items for the years ended June 30,
1999 and 1998, from the prior year.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES PERCENTAGE CHANGE FROM PRIOR YEAR
--------------------------------- ---------------------------------
For the Years Ended June 30, For the Years Ended June 30,
1999 1998 1997 LINE ITEMS 1999 1998
---- ---- ---- ---------- ---- ----
% % % % %
<S> <C> <C> <C> <C> <C>
100.0 100.0 100.0 Sales and Service 38.2 67.5
61.7 64.2 65.3 Cost of Sales and Services 32.8 64.5
----- ----- ----- ----- -----
38.3 35.8 34.7 Gross Profit 47.7 73.1
----- ----- ----- ----- -----
3.6 3.7 4.6 Marketing and Selling 33.3 36.5
13.4 16.1 16.4 Operating, Gen'l and Admin 15.1 65.1
2.8 3.6 1.1 Research and Development 9.2 452.5
----- ----- ----- ----- -----
19.8 23.4 22.0 Total Operating Expenses 17.1 78.1
----- ----- ----- ----- -----
18.5 12.4 12.7 Earnings from Operations 105.4 64.4
.7 .9 1.0 Other Income, Net 15.9 42.9
----- ----- ----- ----- -----
19.2 13.3 13.7 Earnings Before Income Taxes 99.5 62.8
7.2 3.8 4.9 Provision for Income Taxes 161.3 30.0
----- ----- ----- ----- -----
12.0 9.5 8.8 Net Income 74.8 81.2
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Revenues were $65.3 million for the year ended June 30, 1999, compared
to $47.3 million for the prior year, an increase of 38%. Of total revenues,
outsourcing services contributed approximately 73% and 75% in the fiscal
years 1999 and 1998, respectively, while medical products contributed
approximately 27% and 25% in the fiscal years 1999 and 1998, respectively.
The increase in total revenues is attributable to the growth of outsourcing
services, which had an increase in revenues of 32% in fiscal 1999 compared to
fiscal 1998. The Company's revenue growth was also attributable to the
emphasis on proprietary products represented by the acquisition of IPS in
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October 1997 and the start-up of BioMed in April 1998. Collectively, IPS and
BioMed contributed approximately $19.1 million of revenue during the year
ended June 30, 1999 compared to $11.2 million in fiscal 1998.
Gross margins increased to 38% for the year ended June 30, 1999,
compared to 36% for the year ended June 30, 1998. The increase in the
Company's margins is a result of the shifting composition of the Company's
revenues between outsourcing services and medical products.
Marketing and selling expenses increased by 33% for the year ended June
30, 1999, as compared to the prior year. The increase is attributable to the
growth in sales and the acquisition of IPS, the CMED Automation division and
the start-up of BioMed. Marketing and selling expenses as a percentage of
total revenue were 4% for both fiscal years ended June 30, 1999 and 1998.
Operating, general and administrative expenses increased by 15% for the
year ended June 30, 1999, compared to the prior year. The increase is
attributable to the acquisition of IPS, the CMED Automation division, the
start-up of BioMed and the overall growth of the Company. As a percentage of
revenues, operating, general and administrative expenses decreased to 13%
from 16% in the prior year.
Research and development expenses for the year ended June 30, 1999
increased by 9% compared to the prior year. During fiscal year 1999, research
and development expenses were attributable to RF solid state amplifier
systems, Year 2000 software tools and database and the FreshAir system.
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 increased to $478,000 for the year ended
June 30, 1999, compared to $413,000 for the year ended June 30, 1998. The
increase is attributable to a higher short-term investment balance during
fiscal year 1999, compared to fiscal year 1998. Included in the June 30, 1999
balance is a $200,000 write down in an investment in an early stage, drug
delivery company that was behind schedule in developing its proprietary
technologies.
The fiscal year 1999 and 1998 consolidated statements of operations
contain a net tax provision of $4.7 million and $1.8 million, 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.
During fiscal year 1998, the Company determined the valuation allowance was
no longer required. In fiscal year 1998, the Company reduced its valuation
allowance by $590,000 for the utilization of prior years' NOL in the current
year and certain deferred tax assets that the Company believed would be fully
utilized. The effective tax rate during fiscal year 1999 was 37%, compared to
29% during fiscal year 1998.
The Company recorded net income of approximately $7.9 million for the
fiscal year ended June 30, 1999, compared to approximately $4.5 million for
the fiscal year ended June 30, 1998. Earnings per share for the year ended
June 30, 1999 were $.63, calculated on 12,503,471 diluted weighted average
shares outstanding, compared to $.37 in the prior year calculated on
12,256,461 diluted weighted average shares outstanding. This increase in net
income is attributed to the 38% growth in the Company's revenues, an increase
in gross margins by 3% for the
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<PAGE>
fiscal year 1999 compared to 1998, and having the combination of operating,
general and administrative expenses and marketing and selling expenses
increase at a slower rate than revenues.
The Company evaluated its overall business in fiscal year 1996 and, as a
result, increased its market focus. The Company has continued to refine its
market focus during 1999 and 1998. Management is dedicated to improving
operating results through consistent performance, improved sales levels and
cost reductions. Generally, the marketplace for outsourcing services and
medical products is expected to remain strong and competitive, with
significant opportunities for companies that can develop low-cost, high
quality products in a timely manner. The current targeted markets are:
diagnostic and laboratory instruments; imaging and power systems; therapeutic
instruments; software; and hospital services. The Company believes the
targeted markets represent a U.S. market of $3 billion or more per year, with
forecasted annual growth rates of approximately 20% to 30%. There are no
assurances that management will be successful in achieving improved operating
results.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues were $47.3 million for the year ended June 30, 1998, compared
to $28.2 million for the prior year, an increase of 67%. Of the total
revenues, outsourcing services contributed approximately 75% for fiscal year
1998 and approximately 95% for fiscal year 1997, while products contributed
approximately 25% for fiscal year 1998 and 5% for fiscal year 1997. The
increase in revenues was attributable in part to the acquisition of CDT in
January 1997 and of IPS in October 1997, which contributed approximately
$14.8 million of revenue during the year ended June 30, 1998.
The Company's gross margins as a percentage of total revenues were
approximately 36% for fiscal year 1998 and approximately 35% for fiscal year
1997.
Marketing and selling expenses increased by 36% for the year ended June
30, 1998, as compared to the prior year. The increase was attributable to the
growth in sales and the acquisitions of IPS and CDT. Marketing and selling
expenses as a percentage of total revenue were approximately 4% and 5% for
the years ended June 30, 1998 and 1997.
Operating, general and administrative expenses increased by
approximately 65% for the year ended June 30, 1998, compared to the prior
year. The increase is attributable to the acquisition of IPS and CDT,
expenses incurred in August 1997 in moving the manufacturing facility from
Boulder, Colorado to Longmont, Colorado, the addition of executive personnel,
increased recruiting and hiring costs of new employees and the overall growth
of the Company. As a percentage of revenues, operating, general and
administrative expenses were approximately 16% for each of the years ended
June 30, 1998 and 1997.
Research and development expenses for the year ended June 30, 1998,
compared to the prior year, increased by approximately $1.4 million, or 453%.
The increase was a result of the Company's greater emphasis on developing
proprietary products.
Net other income and expenses increased approximately $124,000 to
$413,000 for the year ended June 30, 1998, compared to $289,000 for the year
ended June 30, 1997. The increase was attributable to a higher short-term
investment balance during fiscal year 1998, compared to fiscal year 1997.
The fiscal year 1998 and 1997 statements of operations contained a net
tax provision of $1.8 million and $1.4 million, respectively. In fiscal years
1998 and 1997, the Company reduced its valuation allowance by $590,000 and
$80,000, respectively, for the utilization of prior years' NOL in the then
current year and certain deferred tax assets
15
<PAGE>
that the Company believed would be fully utilized. The effective tax rate
during fiscal year 1998 was 29%, compared to a 36% effective tax rate during
fiscal year 1997.
The Company recorded net income of approximately $4.5 million for the
fiscal year ended June 30, 1998, compared to approximately $2.5 million for
the fiscal year ended June 30, 1997. Earnings per share for the year ended
June 30, 1998 were $.37, calculated on 12,256,461 diluted weighted average
shares outstanding, compared to $.27 in the prior year, calculated on
9,114,292 diluted weighted average shares outstanding. The diluted weighted
average shares outstanding increased by approximately 3,142,000 shares for
the year ended June 30, 1998, compared to the same period in 1997, due to the
exercise of 3,000,000 private placement warrants and the exercise of options
and Board of Director ("Board") and consultant warrants. This increase in net
income was attributed to the 67% growth in the Company's revenues, an
increase in gross margins by 1% for the fiscal year 1998, compared to 1997,
having the combination of operating, general and administrative expenses and
marketing and selling expenses increase at a slower rate than revenues and
the decrease in the effective tax rate.
INFORMATION SYSTEMS AND THE YEAR 2000 ISSUE
As is the case for most other companies using computers in their
operations, the Company and its subsidiaries are in the process of addressing
the Year 2000 problem. The Company is currently engaged in a comprehensive
project to upgrade its information technology and manufacturing computer
software to programs that will consistently and properly recognize the Year
2000. Many of the Company's systems include new hardware and packaged
software recently purchased from vendors who have represented that these
systems are already Year 2000 compliant. The Company is in the process of
obtaining assurances from vendors that timely updates will be made available
to make all remaining purchased software Year 2000 compliant. The Company
will utilize both internal and external resources to test and reprogram or
replace all of its software for Year 2000 compliance.
The Company does not believe that its proprietary products or any of its
outsourcing services involve any material Year 2000 risks. In addition to
reviewing its internal systems, the Company has received confirmation from
most of its significant vendors concerning Year 2000 compliance and it is in
the process of obtaining assurances from the remainder. There can be no
assurance that the systems of other companies that interact with the Company
will be sufficiently Year 2000 compliant so as to avoid an adverse impact on
the Company's operations, financial condition and results of operations.
The Company does not presently anticipate that the costs to address the
Year 2000 issue will have a material adverse effect on the Company's
financial condition, results of operations or liquidity. Present estimated
cost for remediation is less than $100,000. As of June 30, 1999, the Company
had spent approximately $75,000 on the Year 2000 issue.
The Company presently anticipates that it will complete its Year 2000
assessment and remediation by September 30, 1999. However, there can be no
assurance that the Company will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule. In addition, the
Company may be adversely affected by the inability of other companies whose
systems interact with the Company to become Year 2000 compliant and by
potential interruptions of utility, communications or transportation systems
as a result of Year 2000 issues.
Although the Company expects its internal systems will be Year 2000
compliant as described above, the Company intends to prepare a contingency
plan that will specify what it plans to do if it or important external
companies are not Year 2000 compliant in a timely manner. The Company expects
to complete its contingency plan by September 30, 1999.
16
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The
Statement establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 - An Amendment of FASB Statement No. 133"
("SFAS No. 137"). SFAS No. 1347 delays the effective date of SFAS No. 133 to
financial quarters and financial years beginning after June 15, 2000. The
Company does not typically enter into arrangements that would fall under the
scope of Statement No. 133 and thus, management believes that Statement No.
133 will not significantly affect its financial condition and results of
operations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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. In addition, the Company may, in
discussions of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written
and oral presentations made by the Company, include projections or other
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934,
as amended. Such projections and forward-looking statements are based on
assumptions which the Company believes are reasonable, but are by their
nature inherently uncertain. In all cases, there can be no assurance that
such assumptions will prove correct or that projected events will occur, and
actual results could differ materially from those projected. Some of the
important factors that could cause actual results to differ from any such
projections or other forward-looking statements follow.
VARIABILITY OF OPERATING RESULTS
The Company's annual and quarterly operating results are affected by a
number of factors, including the volume and timing of revenue from customer
orders. The volume and timing of revenue from customer orders varies due
to:
- - discounts extended to customers due to growth in project
size and cost caused by unfunded changes in the scope of a project
or for reasons related to project performance;
- - variation in demand for the customer's products as a result of,
among other things, product life cycles, competitive conditions
and general economic conditions;
- - suspension or cancellation of a customer's development project
for reasons which may or may not be related to project
performance;
- - suspension or cancellation of a customer's R&D budget for reasons
often unrelated to the project;
- - a change in a customer's R&D strategy as a result of sale or
merger of the customer to another company; and
- - delays in projects associated with the approval process for
changes to a project.
17
<PAGE>
Because the Company's outsourcing services business organization and its
related cost structure anticipate supporting a certain minimum level of
revenues, the Company's limited ability to adjust its short-term cost
structure may compound the adverse effect of any significant revenue
reduction. Any one of these factors or a combination thereof could result in
a material adverse effect on the Company's business, results of operations
and financial condition. Due to the foregoing factors, it is possible that
the Company's operating results may from time to time be below the
expectations of public market analysts and investors. In such event, the
price of the Company's securities would likely be adversely affected.
CUSTOMER RISK FACTORS
The Company's success depends on the success of its customers and their
products that are developed or manufactured by the Company. Any unfavorable
developments or adverse effects on the sales of those products or its
customers' businesses could have a corresponding adverse effect on the
Company. The Company believes that its customers and their products (and,
accordingly, the Company) are generally subject to the following risks:
COMPETITIVE ENVIRONMENT
The medical products industry is highly competitive, subject to
significant technological change, and requires ongoing investment to
keep pace with technological developments and quality and regulatory
requirements. The medical products industry consists of numerous
companies, ranging from start-up to well-established companies. The
competitors of the Company's customers may succeed in developing or
marketing technologies and products that will be better accepted in the
marketplace than the products manufactured by the Company for its
customers or that would render its customers' technology and products
obsolete or noncompetitive. Some of the Company's customers are
emerging medical technology companies that have competitors and
potential competitors with substantially greater capital resources,
research and development staffs and facilities and substantially
greater experience in developing and commercializing new products. The
Company's customers may not be successful in marketing or distributing
their products, or may not respond to pricing, marketing or other
competitive pressures or the rapid technological innovation demanded by
the marketplace and, as a result, may experience a dramatic drop in
product sales, which would have an adverse effect on the Company's
business, results of operations and financial condition.
UNCERTAIN MARKET ACCEPTANCE OF NEW PRODUCTS; PRODUCT OBSOLESCENCE
There can be no assurance that the Company's customers' will be
able to gain any significant market acceptance for the products
developed or manufactured for them by the Company. Market acceptance
may depend on a variety of factors, including educating the target
market regarding the use of a new procedure and convincing healthcare
payers that the benefits of the product and its related treatment
regimen outweigh its costs. Market acceptance and market share are also
affected by the timing of market introduction of competitive products.
Some of the Company's customers, especially emerging medical technology
companies, have limited or no experience in marketing their products
and may be unable to establish effective sales and marketing and
distribution channels to successfully commercialize their products.
CUSTOMER REGULATORY COMPLIANCE
The FDA regulates many of the products developed and manufactured
by the Company for its customers, and requires certain clearances or
approvals before new medical devices can be marketed. As a
18
<PAGE>
prerequisite to any introduction of a new device into the medical
marketplace, the Company or its customers must obtain necessary product
clearances or approvals from the FDA or other regulatory agencies.
There can be no assurance that such clearances or approvals will be
obtained on a timely basis, if at all.
Certain medical devices manufactured by the Company may be subject
to the need to obtain premarket approval from the FDA, which requires
substantial preclinical and clinical testing and may cause delays and
prevent introduction of such instruments. Other instruments can be
marketed only by establishing "substantial equivalence" to a predicate
device in a 510(k) premarket notification. In addition, products
intended for use in foreign countries must comply with similar
requirements and be certified for sale in those countries. A customer's
failure to comply with the FDA's requirements can result in the delay
or denial of approval to proceed with the device. Delays in obtaining
regulatory approval are frequent and, in turn, can result in delaying
or canceling customer orders from the Company. There can be no
assurance that the Company's customers will obtain or be able to
maintain all required clearances or approvals for domestic or exported
products on a timely basis, if at all. The delays and potential product
cancellations inherent in the regulatory approval and ongoing
regulatory compliance of products developed or manufactured by the
Company may have a material adverse effect on the Company's business,
reputation, results of operations and financial condition.
CUSTOMERS' FUTURE CAPITAL REQUIREMENTS
Some of the Company's customers, especially emerging medical
technology companies, are not profitable and may have little or no
revenues, but they have significant working capital requirements for
which the customer may be required to raise additional funds through
public or private financings. Adequate funds for their operations may
not be available when needed, if at all. Insufficient funds may require
a customer to suspend its research and development spending, delay
development of a product, clinical trials (if required) or the
commercial introduction of a product. Depending on the significance of
a customer's product to the Company's revenues or profitability, any
adverse effect on a customer resulting from insufficient funds could
result in an adverse effect on the Company's business, results of
operations and financial condition.
UNCERTAINTY REGARDING THIRD-PARTY REIMBURSEMENT
Governmental and insurance industry efforts to reform the
healthcare industry and reduce healthcare spending have affected, and
will continue to affect, the market for medical devices. Adverse
governmental regulation relating to the Company's or its customers'
products which might arise from future legislative, administrative or
insurance industry policy cannot be predicted and the ultimate effect
on private insurer and governmental healthcare reimbursement is
unknown. Government and commercial insurance companies are increasingly
vigorous in their attempts to contain healthcare costs by limiting both
coverage and the level of reimbursement for new therapeutic products
even if approved for marketing by the FDA. If adequate coverage and
reimbursement levels are not provided by government and commercial
payers for uses of the Company's new and existing products, the market
acceptance of these products and the Company's profitability would be
adversely affected.
RELIANCE ON MAJOR CUSTOMERS
In the fiscal year ended June 30, 1999, three customers accounted for
approximately 53% of the Company's consolidated revenues. In the fiscal
year ended June 30, 1998, two customers accounted for
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<PAGE>
approximately 45% of the Company's consolidated revenues. In the fiscal
year ended June 30, 1997, three customers accounted for approximately 45%
of the Company's consolidated revenues. As a contract developer and
manufacturer, the Company has historically obtained a significant share of
its revenue from a small number of customers, but the identity of those
major customers tends to change from year to year. A significant reduction
or delay in orders or payments from any of these customers could have a
material adverse effect on the Company's business and results of
operations.
COMPETITION
The Company faces competition from a variety of sources, including
consulting, commercial product development and manufacturing companies.
Competition also comes from commercial and university research laboratories
and from current and prospective customers who evaluate the Company's
capabilities against the merits of designing, engineering and manufacturing
products internally. Many of the Company's competitors have substantially
greater financial, research and development manufacturing resources than
the Company. Competition from any of the foregoing sources could place
pressure on the Company to accept lower margins on its contracts or lose
existing or potential business, which could result in a material adverse
effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the continued
service of certain of its key managerial, technical and engineering
personnel, particularly its President and Chief Executive Officer, John V.
Atanasoff II, and the Company's continuing ability to attract, train,
assimilate and retain highly qualified engineering, technical and
managerial personnel experienced in commercializing medical products.
Competition for such personnel is intense, the available pool of qualified
candidates is limited and there can be no assurance that the Company can
retain its key engineering, technical and managerial personnel or that it
can attract, train, assimilate or retain other highly qualified
engineering, technical and managerial personnel in the future. The loss of
Mr. Atanasoff or any of the Company's other key personnel or the inability
of the Company to hire, train, assimilate or retain qualified personnel
could have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPLIANCE WITH REGULATORY REQUIREMENTS
The Company is subject to a variety of regulatory agency requirements
in the United States and foreign countries relating to many of the products
that it develops and manufactures for its customers. The process of
obtaining and maintaining required regulatory approvals and otherwise
remaining in regulatory compliance can be lengthy, expensive and uncertain.
The FDA inspects manufacturers of certain types of devices before
providing a clearance to manufacture and sell such device, and the failure
to pass such an inspection could result in delay in moving ahead with a
project. The Company is required to comply with the FDA's QSR requirements
for the manufacture of medical products. In addition, in order for the
Company's instruments to be exported and for the Company and its customers
to be qualified to use the "CE" mark in the European Union, the Company
maintains ISO 9001/EN 46001 certification which, like the QSR, subjects the
Company's operations to periodic surveillance audits. To ensure compliance
with QSR requirements, the Company expends significant time, resources and
effort in the areas of training, production and quality assurance. Failure
to comply with QSR regulations or other FDA or applicable legal
requirements can lead to warning letters, government sanctions and serious
penalties. In addition, the continued sale of any products manufactured by
the Company may be halted or
20
<PAGE>
otherwise restricted. Any such actions could have an adverse effect on the
willingness of customers and prospective customers to do business with the
Company. In addition, any such noncompliance or increased cost of
compliance could have a material adverse effect on the Company's business,
results of operations and financial condition.
PRODUCT RECALLS, PRODUCT LIABILITY AND INSURANCE
Most of the products the Company designs or manufactures are medical
devices, many of which may be used in life-sustaining or life-supporting
roles. The tolerance for error in the design, manufacture or use of these
products may be small or nonexistent. If a product designed or manufactured
by the Company is found to be defective, whether due to design or
manufacturing defects, to improper use of the product or to other reasons,
the product may need to be recalled, possibly at the Company's expense.
Furthermore, the adverse effect of a product recall on the Company might
not be limited to the cost of the recall. Recalls, especially if
accompanied by unfavorable publicity or termination of customer contracts,
could result in substantial costs, loss of revenues and a diminution of the
Company's reputation, each of which would have a material adverse effect on
the Company's business, results of operations and financial condition.
The manufacture and sale of the medical devices developed and
manufactured by the Company involves the risk of product liability claims.
Although the Company generally obtains indemnification from its customers
for products it manufactures to the customers' specifications and in
addition maintains product liability insurance, there can be no assurance
that the indemnities will be honored or the coverage of the Company's
insurance policies will be adequate. In addition, the Company generally
provides a design defect warranty and indemnifies its customers for failure
of a product to conform to design specifications and against defects in
materials and workmanship. Product liability insurance is expensive and in
the future may not be available on acceptable terms, in sufficient amounts,
or at all. A successful claim brought against the Company in excess of its
insurance coverage or any material claim for which insurance coverage was
denied or limited and for which indemnification was not available could
have a material adverse effect on the Company's business, results of
operations and financial condition.
YEAR 2000 ISSUE
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date code field, and
were not designed to account for the upcoming change in the century. As a
result, such systems and applications could fail or create erroneous
results unless corrected so that they can process data related to the Year
2000. The Company relies on its systems, applications and devices in
operating and monitoring all major aspects of its business, including
financial systems (such as general ledger, accounts payable and accounts
receivable modules), inventory and receivables systems, customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and end products. The Company also relies, directly and
indirectly, on systems of external business enterprises such as
distributors, suppliers, creditors, financial organizations, and of
governmental entities for accurate exchange of data. The Company does not
believe that its proprietary products or any of its outsourcing services
projects involve any material Year 2000 risks, and the Company does not
presently anticipate that the costs to address the Year 2000 issue will
have a material adverse effect on the Company's financial condition,
results of operations or liquidity. Even if the internal systems of the
Company and the systems and software in its proprietary products and its
outsourcing products are not materially affected by the Year 2000 issue,
the Company could be affected through disruptions in the operation of the
enterprises with which the Company interacts. If the Year 2000 issue
affects the ability of the Company's component suppliers to meet delivery
schedules for the components needed to
21
<PAGE>
manufacture the Company's products, the Company may not be able to timely
meet its obligations to its customers. This would likely have an adverse
impact on the Company's business, financial condition and operating
results which could be material. There can be no assurance that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations.
CUSTOMER CONFLICTS
The medical technology industry reflects vigorous competition among its
participants. Although the Company generally does not enter into
non-competition agreements, on occasion the Company's agreements prohibit
it from working for certain competitors of its customers. When and if the
company does this, its growth may be adversely affected because such
agreements would prevent the Company from manufacturing instruments for its
customers' competitors. Any conflicts among its customers could prevent or
deter the Company from obtaining contracts to manufacture successful
instruments, which could result in a material adverse effect on its
business, results of operations and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
On the date of this report there were a total of approximately 11.2
million shares of common stock outstanding, of which approximately 9.2
million are freely tradeable. The remaining 2.0 million shares are held by
officers and directors of the Company and their affiliates. Such shares are
eligible for sale in the public markets in accordance with the volume
restrictions of Rule 144 under the Securities Act of 1933, which are not a
practical impediment to the sale of large numbers of such shares. In
addition, there are outstanding warrants and stock options to purchase 2.1
million shares of common stock, 1.5 million of which are currently
exercisable or become exercisable in 60 days from the date of this report.
Except as limited by Rule 144 volume limitations applicable to affiliates,
shares issued upon the exercise of the Company's warrants and options
generally are available for sale in the open market. Even if the Company's
financial performance is good, future sales of the shares of common stock
referred to above could adversely affect the market price of the common
stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, as part of its cash management strategy, had short-term
investments at June 30, 1999 consisting of approximately $13.4 million in
U.S. Treasury and government agency securities and $1.0 million in commercial
paper. The Company has the intent and ability to hold these short-term
investments to maturity and thus has classified these investments, which are
stated at amortized cost that approximates market, as "held-to-maturity". All
of the short-term investments mature in less than one year. The Company has
completed a market risk sensitivity analysis of these short-term investments
based upon an assumed 1% increase in interest rates at July 1, 1999. If
market interest rates had increased by 1% on July 1, 1999, the Company would
have had an approximate $44,000 loss on these short-term investments. Because
this is only an estimate, any actual loss due to an increase in interest
rates could differ from this estimate.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements and Schedules:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado MEDtech, Inc.:
We have audited the accompanying consolidated balance sheets of COLORADO
MEDtech, Inc. (a Colorado corporation) and subsidiaries as of June 30, 1999
and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 12, 1999.
F-1
<PAGE>
Page 1 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents$ 8,457,552 $ 2,499,072
Short-term investments 14,394,870 12,144,005
Accounts receivable-
Trade - less allowance for uncollectible
accounts of $334,000 and $580,000,
respectively 10,508,810 7,631,436
Unbilled 217,077 182,537
Inventories, net 4,598,686 4,225,680
Deferred income taxes 1,907,227 1,676,227
Prepaid expenses and other 375,950 890,260
----------- -----------
Total current assets 40,460,172 29,249,217
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 4,034,989 3,224,215
Office furniture and fixtures 1,465,889 1,262,193
Leasehold improvements 697,973 485,748
Manufacturing equipment 1,319,745 1,063,920
----------- -----------
Total property and equipment 7,518,596 6,036,076
Less - Accumulated depreciation
and amortization (5,140,302) (4,301,804)
----------- -----------
Property and equipment, net 2,378,294 1,734,272
----------- -----------
INVESTMENT IN LAND 500,000 500,000
----------- -----------
GOODWILL, net 1,582,039 1,724,796
----------- -----------
DEFERRED INCOME TAXES AND OTHER 767,377 798,997
----------- -----------
$45,687,882 $34,007,282
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets
F-2
<PAGE>
Page 2 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,664,484 $ 4,426,172
Accrued product service costs 313,409 291,566
Accrued salaries and wages 4,519,996 3,126,671
Other accrued expenses 2,455,555 1,169,004
Customer deposits 3,482,841 2,804,450
Income taxes payable 564,274 466,788
------------ ------------
Total current liabilities 17,000,559 12,284,651
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000
shares authorized; none issued - -
Common stock, no par value; 25,000,000
shares authorized; 11,095,125 and 10,740,013
issued and outstanding at June 30 1999
and 1998, respectively 11,000,446 11,879,456
Retained earnings 17,658,497 9,808,175
Unrealized gain on available-for-sale investment 28,380 35,000
------------ ------------
Total shareholders' equity 28,687,323 21,722,631
------------ ------------
$ 45,687,882 $ 34,007,282
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES AND SERVICE $65,349,436 $47,300,200 $28,243,185
COST OF SALES AND SERVICE 40,319,214 30,357,492 18,456,764
----------- ----------- -----------
GROSS PROFIT 25,030,222 16,942,708 9,786,421
----------- ----------- -----------
COSTS AND EXPENSES:
Marketing and selling 2,341,837 1,756,661 1,287,091
Operating, general and administrative 8,777,752 7,626,103 4,619,447
Research and development 1,834,729 1,680,625 304,180
----------- ----------- -----------
Total operating expenses 12,954,318 11,063,389 6,210,718
----------- ----------- -----------
INCOME FROM OPERATIONS 12,075,904 5,879,319 3,575,703
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (17,347) (14,127) (22,460)
----------- ----------- -----------
Interest income and other 495,765 426,955 311,374
----------- ----------- -----------
Total other income 478,418 412,828 288,914
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 12,554,322 6,292,147 3,864,617
PROVISION FOR INCOME TAXES 4,704,000 1,800,000 1,385,000
----------- ----------- -----------
NET INCOME $ 7,850,322 $ 4,492,147 $ 2,479,617
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER SHARE (Note 2):
Basic $ .73 $ .43 $ .35
----------- ----------- -----------
----------- ----------- -----------
Diluted $ .63 $ .37 $ .27
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 10,735,038 10,446,868 7,165,499
----------- ----------- -----------
----------- ----------- -----------
Diluted 12,503,471 12,256,461 9,114,292
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-4
<PAGE>
Page 1 of 3
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Other Accumulated Other
------------------------------ Comprehensive Comprehensive Retained
Shares Amount Income Income (Loss) Earnings
--------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
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 CDT
acquisition 70,000 207,816 - - -
Options issued in
conjunction with the CDT
acquisition - 338,672 - - -
Options issued for services
from consultants - 4,636 - - -
Net income - - 2,479,617 - 2,479,617
-------------
Comprehensive Income - - 2,479,617 - -
--------- ----------- ------------- ----------------- -----------
BALANCES, June 30, 1997 9,341,108 $ 9,076,206 $ - $ - $ 5,316,028
--------- ----------- ------------- ----------------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-5
<PAGE>
Page 2 of 3
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Other Accumulated Other
------------------------------ Comprehensive Comprehensive Retained
Shares Amount Income Income (Loss) Earnings
--------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1997 9,341,108 $ 9,076,206 $ - $ - $ 5,316,028
Issuance of Common Stock 1,376,597 1,989,646 - - -
Purchase of Common Stock (66,400) (507,390) - - -
Common stock issued in
conjunction with the IPS
acquisition 88,708 620,956 - - -
Change in unrealized gain on
available-for-sale
investment - - 35,000 35,000 -
Tax benefit from sale of
option shares - 593,442 - - -
Options issued for services
from consultants - 106,596 - - -
Net income - - 4,492,147 - 4,492,147
-------------
Comprehensive Income - - 4,527,147 - -
---------- ----------- ------------- ----------------- -----------
BALANCES, June 30, 1998 10,740,013 $11,879,456 $ - $ 35,000 $ 9,808,175
---------- ----------- ------------- ----------------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-6
<PAGE>
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
<CAPTION>
Common Stock Other Accumulated Other
------------------------------ Comprehensive Comprehensive Retained
Shares Amount Income Income (Loss) Earnings
--------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1998 10,740,013 $11,879,456 $ - $ 35,000 $ 9,808,175
Issuance of Common Stock 1,010,112 1,672,359 - - -
Purchase of Common Stock (655,000) (4,175,625) - - -
Change in unrealized gain
on available-for-sale
investment - - (6,620) (6,620) -
Tax benefit from sale
of option shares - 1,624,256 - - -
Net income - - 7,850,322 - 7,850,322
-------------
Comprehensive Income - - 7,843,702 - -
---------- ----------- ------------- ----------------- -----------
BALANCES, June 30, 1999 11,095,125 $11,000,446 $ - $ 28,380 $17,658,497
---------- ----------- ------------- ----------------- -----------
---------- ----------- ------------- ----------------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-7
<PAGE>
Page 1 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,850,322 $ 4,492,147 $ 2,479,617
Adjustments to reconcile net income to net cash flows
from operating activities-
Deferred tax benefit (380,000) (966,000) (80,000)
Depreciation and amortization 1,178,157 1,047,007 433,747
Allowance for uncollectible accounts 27,201 392,783 (12,921)
Reserve for inventory 260,624 134,578 (202,000)
Write down of investment 200,000 - -
Non-cash consulting services - 106,596 4,636
Changes in operating assets and liabilities-
Accounts receivable (2,939,115) (779,833) (1,758,217)
Inventories (633,630) 240,123 (377,038)
Prepaid expenses and other assets (231,691) 50,680 (165,430)
Accounts payable and accrued expenses 5,661,773 3,921,199 2,051,653
Customer deposits 678,391 (371,080) 525,223
------------ ----------- ------------
Net cash flows from operating
activities 11,672,032 8,268,200 2,899,270
------------ ----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Cash paid for purchase of CDT, net - - - (1,126,363)
Cash paid for purchase of IPS, net 750,000 (5,392,731) -
Cash paid for purchase of CMED Automation, net (505,759) - -
Purchase of investments (30,000) (200,000) (25,000)
Capital expenditures (1,173,662) (1,478,570) (643,326)
Increase in short-term investments, net (2,250,865) (1,850,904) (4,859,839)
------------ ----------- ------------
Net cash flows used in investing
activities (3,210,286) (8,922,205) (6,654,528)
------------ ----------- ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements
F-8
<PAGE>
Page 2 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock $ 1,672,359 $ 1,989,646 $ 5,053,574
Purchase of Common Stock (4,175,625) (507,390) (242,144)
------------ ----------- ------------
Net cash flows (used in) from financing activities (2,503,266) 1,482,256 4,811,430
------------ ----------- ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 5,958,480 828,251 1,056,172
CASH AND CASH EQUIVALENTS, at beginning of period 2,499,072 1,670,821 614,649
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, at end of period $ 8,457,552 $ 2,499,072 $ 1,670,821
------------ ----------- ------------
------------ ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 20,720 $ 14,849 $ 31,593
------------ ----------- ------------
------------ ----------- ------------
Cash paid for income taxes $ 3,365,000 $ 1,535,003 $ 1,675,000
------------ ----------- ------------
------------ ----------- ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Common Stock for acquisition of CDT $ - $ - $ 207,816
------------ ----------- ------------
------------ ----------- ------------
Issuance of stock options for acquisition of CDT $ - $ - $ 338,672
------------ ----------- ------------
------------ ----------- ------------
Issuance of Common Stock for acquisition of IPS $ - $ 620,956 $ -
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-9
<PAGE>
COLORADO MEDTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 AND 1997
(1) ORGANIZATION AND OPERATIONS
Colorado MEDtech, Inc. ("CMED"), through its wholly-owned
subsidiaries and its operating divisions (collectively the "Company"),
is a leading full-service provider of advanced medical products and
comprehensive outsourcing services. CMED was incorporated in 1977 as a
Colorado corporation to develop, manufacture, market and service
computerized diagnostic and testing instrumentation. CMED has reorganized
its operating units, renaming some, in order to emphasize the focus of
the Company and better present its services and products to its customers.
The new names will be used throughout these financial statements.
CMED's operating units and their principal activities are:
- - CMED/RELA DIVISION ("RELA") (formerly the RELA Division)
provides custom product development services, specializing in the
design and development of diagnostic and therapeutic medical devices
and medical software. RELA, formerly a Colorado corporation, was
founded in 1977. The Company merged RELA into CMED in July 1998, and
is now operating RELA as a division of CMED.
- - IMAGING AND POWER SYSTEMS DIVISION ("IPS") (formerly the Erbtec
Engineering Division)
designs and develops a broad range of imaging system hardware and
software, including advanced magnetic resonance imaging (MRI)
application software, high-performance radio frequency ("RF")
amplifiers for MRI systems and high-voltage x-ray generator subsystems
for computed tomography (CT) scanners. IPS was formed in October 1997,
when CMED completed the acquisition of the operating assets of Erbtec
Engineering, Inc.
- - CMED MANUFACTURING DIVISION ("CMED MFG") (formerly a part of the
RELA Division)
manufactures electronic and electromechanical medical devices for
major medical original equipment manufacturers ("OEMs") and for other
CMED operating units.
- - CMED CATHETER AND DISPOSABLES TECHNOLOGY, INC. ("CDT") (formerly Novel
Biomedical, Inc.)
designs, develops and manufactures unique disposable medical devices,
primarily catheters, used in angioplasty, minimally invasive surgery,
electrophysiology and infertility treatment. CDT, a Minnesota
corporation acquired by CMED in February 1997, was incorporated in
1986.
- - CMED AUTOMATION DIVISION ("CMED AUTOMATION")
designs, develops and manufactures automation systems for medical
device and closely associated businesses. CMED Automation was created
in February 1999 following CMED's purchase of the assets of Eclipse
Automation Corporation.
- - BIOMED Y2K, INC. ("BIOMED")
provides software tools and services to support health care
institutions' efforts to establish Year 2000 compliance for their
biomedical devices. BioMed, a Colorado corporation, was incorporated
in April 1998.
F-10
<PAGE>
The Respiratory Products Division that existed until June 30, 1999
has been dissolved and its operations have been incorporated into the BioMed
organization as of July 1, 1999.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect the consolidated
results of CMED, CDT and BioMed. 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 in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Short-term investments are primarily U.S. Treasury and
government agency securities, which the Company has the intent and the
ability to hold to maturity and thus has classified these investments,
which are stated at amortized cost which approximates market, as
"held-to-maturity". All of the Company's held-to-maturity investments
mature in less than one year. The unrealized gains and losses on these
held-to-maturity investments were not significant at June 30, 1999 and
1998. The following is a summary of held-to-maturity investments as of June
30, 1999 and 1998:
<TABLE>
<CAPTION>
Security Type 1999 1998
------------- ----------- ------------
<S> <C> <C>
U.S. Treasury and government
agency securities $13,396,660 $ 9,137,095
Commercial paper 998,210 2,299,905
Corporate notes - 707,005
----------- ------------
$14,394,870 $ 12,144,005
----------- ------------
----------- ------------
</TABLE>
The Company also held approximately $114,000 and $120,000 of
marketable equity securities classified as available-for-sale, as of
June 30, 1999 and 1998, respectively, which are marked to market in
the accompanying consolidated balance sheets. The realized and unrealized
gains and losses on these marketable equity securities were not significant
as of and for the years ended June 30, 1999 and 1998.
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, 1999 and 1998, inventories, net of
allowances, consisted of:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 3,214,355 $ 2,957,886
Work-in-process 1,384,331 1,267,794
Finished goods - -
------------ ------------
$ 4,598,686 $ 4,225,680
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
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 lives of the assets, which range from 2 to 7 years.
Depreciation expense for the years ended June 30, 1999, 1998 and 1997 was
approximately $838,000, $796,000 and $401,000, respectively.
GOODWILL
Goodwill resulting from the IPS, CDT and CMED Automation acquisitions
is stated at cost, net of accumulated amortization of approximately $624,000
and $284,000, as of June 30, 1999 and 1998, respectively. Amounts of goodwill
for IPS, CDT and CMED Automation are being amortized using the straight-line
method over estimated useful lives of 2 years, 25 years and 2 years,
respectively.
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 18 months.
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
Basic earnings per share are computed on the basis of the weighted
average shares outstanding during each period. Diluted earnings per share are
computed on the basis of the weighted average shares outstanding during each
period, including dilutive common equivalent shares for stock options and
warrants. A reconciliation between the number of shares used to calculate
basic and diluted earnings per share is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income (income available to
common shareholders) $ 7,850 $ 4,492 $ 2,480
------- ------- -------
------- ------- -------
Weighted average number of common shares
outstanding (shares used in basic earnings
per share computation) 10,735 10,447 7,165
Effect of stock options and warrants
(treasury stock method) 1,768 1,809 1,949
------- ------- -------
Shares used in diluted earnings per share
computation 12,503 12,256 9,114
------- ------- -------
------- ------- -------
</TABLE>
Options and warrants that were of an antidilutive nature for the
years ended June 30, 1999, 1998 and 1997 that were outstanding but not
included in the shares used in diluted earnings per share computation totaled
approximately 75,500, 80,000 and 387,500, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Statement establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. In June 1999, the FASB
issued SFAS No.
F-12
<PAGE>
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 - An Amendment of FASB
Statement No. 133". SFAS No. 137 delays the effective date of SFAS No. 133 to
financial quarters and financial years beginning after June 15, 2000. The
Company does not typically enter into arrangements that would fall under the
scope of Statement No. 133 and thus, management believes that Statement No.
133 will not significantly affect its financial condition and results of
operations.
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 SFAS No.
109 "Accounting for Income Taxes" 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 and liabilities. 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 25"). Effective in 1995, the Company adopted the disclosure
option of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123
requires that companies which choose not 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-based 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.
FINANCIAL INSTRUMENTS
The fair market values of accounts receivable, accounts payable and
other financial instruments approximate their carrying values in the
accompanying consolidated balance sheets due to the short-term mature of
these investments.
ADVERTISING
The Company expenses all advertising costs as they are incurred.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
current year presentation.
F-13
<PAGE>
(3) ACQUISITIONS
The Company acquired certain operating assets of Eclipse Automation
Corporation, now CMED Automation, in February 1999. CMED Automation is an
automation services company located in Longmont, Colorado. The purchase price
for the assets was approximately $506,000. The acquisition resulted in
goodwill of approximately $197,000 that is being amortized over a two-year
period. The Company assumed no liabilities or obligations as part of the
purchase. The accompanying consolidated financial statements include the
operating results of CMED Automation since February 4, 1999, the effective
date of the acquisition.
In October 1997, the Company completed the acquisition of the
operating assets of Erbtec Engineering, Inc., now IPS. The purchase was
completed for $5.39 million in cash and the issuance of 88,708 shares of
common stock, resulting in a total purchase value of approximately $6.0
million, including acquisition costs. At the date of the purchase, $1 million
of the cash portion of the purchase price was placed in escrow pending the
performance of certain criteria outlined in the purchase and sale agreement.
During the quarter ended June 30, 1998, the Company was informed that certain
of the purchase and sale agreement criteria would not be met and the seller
would be refunding $750,000 of the escrowed purchase price. This receivable
is included in other current assets in the accompanying June 30, 1998
consolidated balance sheet and was paid to the Company during the year ended
June 30, 1999. The net purchase price, less the net tangible assets acquired,
resulted in goodwill of $480,773 that is being amortized over a two year
period. The accompanying consolidated financial statements include the
operating results of IPS since October 1, 1997, the effective date of the
acquisition.
In February 1997, the Company completed the acquisition of Novel
Biomedical, Inc., now CDT. The Company acquired CDT 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 fair market
value on the date the Agreement and Plan of Reorganization was entered into
between CMED and CDT. The non-qualified stock options were valued using the
Black-Scholes option pricing model. In fiscal 1998, the Company recognized
certain tax benefits related to assets obtained in the CDT acquisition, which
resulted in an adjustment to goodwill. The purchase price, less the net
assets acquired, resulted in goodwill of $1,528,332 that is being amortized
over a 25-year period. The accompanying consolidated financial statements
include the operating results of CDT since January 3, 1997, the effective
date of the acquisition.
The following unaudited pro forma results of operations of the Company
for the fiscal years ended June 30, 1999, 1998 and 1997 assume that the
acquisition of CMED Automation had occurred on July 1, 1997, the acquisition
of IPS had occurred on July 1, 1996 and the acquisition of CDT 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.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 69,284,000 $55,702,000 $42,480,000
Net Income $ 7,484,000 $ 3,786,000 $ 4,117,000
Net Income Per Share (Diluted) $ .60 $ .31 $ .44
</TABLE>
F-14
<PAGE>
(4) CREDIT FACILITY
The Company entered into a bank financing arrangement on October 30,
1997 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 (7.75% at June 30, 1999)
through the term of the agreement and is secured by all accounts receivable,
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 were
advanced under this credit facility during fiscal 1999 and 1998.
(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 (the
"Board") may designate. As of June 30, 1999, no shares of preferred stock
have been issued.
COMMON STOCK
The Company's shareholders have authorized 25,000,000 shares of no par
value common stock, of which 11,095,125 and 10,740,013 shares were issued and
outstanding as of June 30, 1999 and 1998, respectively.
On November 3, 1998, Vencor Operating, Inc., a subsidiary of Vencor,
Inc. ("Vencor"), sold 3,560,000 shares of Colorado MEDtech, Inc. common stock
held by Vencor. The Company purchased and retired 655,000 shares of its own
stock for $6.38 per share. The Company used approximately $4,176,000 of its
short-term investments to complete this transaction. A number of
institutional investors purchased the remaining 2,905,000 shares. Prior to
the transaction, the 3,560,000 shares held by Vencor represented
approximately 33% of the outstanding common stock of the Company.
During the year ended June 30, 1998, the Company purchased and retired
66,400 shares of common stock which decreased the Company's equity by
approximately $507,000. These shares were purchased so that the stock issued
under the Employee Stock Purchase Plan would be less dilutive.
STOCK OPTION PLAN
On June 25, 1992, the Board 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, 3,500,000 shares of common stock are
reserved for options. Vesting periods for options issued are determined by
the Board at the date of grant and currently vest over two to eight years. A
summary of the status of the Plan follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
FY 1999 FY 1998 FY 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance outstanding at beginning
of fiscal year 2,035,151 1,470,571 1,385,949
Granted during period 485,600 873,400 374,200
Forfeited during period (60,801) (62,101) (56,636)
Exercised during period (424,632) (246,719) (232,942)
--------- --------- ---------
Outstanding at June 30, 2,035,318 2,035,151 1,470,571
--------- --------- ---------
--------- --------- ---------
Exercisable at June 30, 582,457 597,775 369,670
--------- --------- ---------
--------- --------- ---------
<CAPTION>
FY 1999 FY 1998 FY 1997
------- ------- -------
<S> <C> <C> <C>
Weighted average exercise price:
At beginning of period $ 3.98 $ 2.28 $ 1.91
At end of period $ 5.54 $ 3.98 $ 2.28
Exercisable at end of period $ 2.91 $ 2.07 $ 1.44
Options granted $ 9.77 $ 6.30 $ 3.04
Options exercised $ 2.76 $ 1.81 $ 1.33
Options forfeited $ 6.60 $ 4.82 $ 2.30
Weighted average fair value of options
granted during period $ 5.70 $ 3.49 $ 1.64
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------- ----------------------------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life (Years) Shares Price
--------------- --------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
$ 1.66 - $ 1.71 50,940 $ 1.66 .2 50,940 $ 1.66
$ 1.72 - $ 2.38 315,667 $ 1.83 3.5 315,667 $ 1.83
$ 2.39 - $ 4.25 490,888 $ 3.15 4.5 99,178 $ 3.03
$ 4.26 - $ 8.00 707,323 $ 6.30 3.2 116,672 $ 6.27
$ 8.01 - $14.25 470,500 $ 9.79 4.5 - $ -
--------- -------
2,035,318 582,457
--------- -------
--------- -------
</TABLE>
In August 1999, the Company issued 115,000 incentive stock options to
two key employees at $18.75 per share that vest over a three-year period and
terminate five years from the date of grant. In September 1999 the Company
issued another 100,000 incentive stock options to two other key employees at
$17.50 per share that vest over a four-year period and terminate five years
from the date of grant.
NON-QUALIFIED STOCK OPTIONS
The Company has issued non-qualified stock options outside the Plan to
purchase up to 728,651 shares of the Company's common stock in exchange for
employment recruiting services, the acquisition of CDT, and to employees. The
value of options issued to non-employees has been determined using the
Black-
F-16
<PAGE>
Scholes model and recorded in the accompanying consolidated financial
statements. 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 Plan follows:
<TABLE>
<CAPTION>
FY 1999 FY 1998 FY 1997
----------- ---------- ----------
<S> <C> <C> <C>
Balance outstanding at beginning
of fiscal year 614,253 709,351 434,440
Granted during period - - 294,211
Forfeited during period (1,541) (10,958) (1,000)
Exercised during period (414,642) (84,140) (18,300)
----------- ---------- ----------
Outstanding at June 30, 198,070 614,253 709,351
----------- ---------- ----------
----------- ---------- ----------
Exercisable at June 30, 143,669 503,039 531,578
----------- ---------- ----------
----------- ---------- ----------
Weighted average exercise price:
At beginning of period $ 2.05 $ 1.97 $ 1.28
At end of period $ 2.97 $ 2.05 $ 1.97
Exercisable at end of period $ 2.97 $ 1.85 $ 1.64
Options granted $ - $ - $ 2.97
Options exercised $ 1.61 $ 1.28 $ 1.44
Options forfeited $ 2.97 $ 2.97 $ 2.97
Weighted average fair value of options
granted during period $ - $ - $ 1.75
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------- ----------------------------------------
Weighted Weighted
Average Remaining Average
Exercise Contractual Exercise
Exercise Price Shares Price Life (Years) Shares Price
-------------- ------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
$ 2.97 198,070 $ 2.97 2.6 143,669 $ 2.97
</TABLE>
DIRECTOR, CONSULTANT AND OTHER WARRANTS
The Board grants warrants to the outside directors for serving on the
Board. Warrants were issued in November 1996, to purchase 15,000 shares of
the Company's common stock at $3.03 per share; in November 1997, to purchase
90,000 shares of the Company's common stock at $6.41 per share; and in August
1998, to purchase 180,000 shares of the Company's common stock at $7.00 per
share. During fiscal years 1999 and 1998, 90,000 and 110,000 director
warrants were exercised, respectively. In fiscal 1999, 45,000 warrants
expired, unvested. As of June 30, 1999, 255,000 warrants were vested. The
warrants have a five-year term, and have exercise prices equal to the fair
market value of the Company's stock on the date of grant.
In May 1997, the Company granted 125,000 warrants to a consulting
group in exchange for investor relation services. The 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 $107,000 and
$5,000 of
F-17
<PAGE>
expense in fiscal years 1998 and 1997, respectively, related to these
warrants based on the value of the services received.
A summary of all of the Company's warrants is as follows:
<TABLE>
<CAPTION>
FY 1999 FY 1998 FY 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance outstanding at beginning
of fiscal year 410,000 630,000 675,000
Granted during period 180,000 90,000 140,000
Forfeited during period (45,000) (100,000) (15,000)
Exercised during period (215,000) (210,000) (170,000)
--------- --------- ---------
Outstanding at June 30, 330,000 410,000 630,000
--------- --------- ---------
--------- --------- ---------
Exercisable at June 30, 255,000 295,000 430,000
--------- --------- ---------
--------- --------- ---------
Weighted average exercise price:
At beginning of period $ 4.16 $ 2.72 $ 1.64
At end of period $ 5.21 $ 4.16 $ 2.72
Exercisable at end of period $ 4.68 $ 1.96 $ 1.84
Warrants granted $ 7.00 $ 6.41 $ 6.04
Warrants exercised $ 4.37 $ 1.72 $ 1.40
Warrants forfeited $ 6.80 $ 2.25 $ 1.59
Weighted average fair value of warrants
granted during period $ 2.74 $ 1.82 $ .96
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------------------------------------------------------
Warrants Outstanding Warrants Exercisable
---------------------------------------------------------------- ----------------------------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life (Years) Shares Price
--------------- ------ -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
$ 1.59 - $ 3.02 90,000 $ 1.59 .9 90,000 $ 1.59
$ 3.03 - $ 6.40 15,000 $ 3.03 2.4 15,000 $ 3.03
$ 6.41 - $ 6.99 75,000 $ 6.41 3.4 75,000 $ 6.41
$ 7.00 - $ 7.01 150,000 $ 7.00 3.9 75,000 $ 7.00
------- -------
330,000 255,000
------- -------
------- -------
</TABLE>
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 value common stock and two
warrants. 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 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.
F-18
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Board of Directors adopted an Employee Stock
Purchase Plan (the "ESPP"), effective for the plan year beginning January 1,
1997. Under the ESPP, 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 ESPP, employees can have up to 10% of their
salary withheld to purchase the Company's common stock. An employee can enter
the plan at two times during a year: on January 1st for the twelve month
period ending on December 31st; or, on July 1st for the six month period
ending December 31st. The purchase price of the stock is 85% of the
lower of its beginning-of-the-period or end-of-the-year market price. In
January 1999, the Company issued 53,365 shares of common stock under the ESPP
at either $5.50 or $7.38 per share, depending on when the employee entered
the plan, resulting in cash proceeds to the Company of $302,000. In January
1998, the Company issued 75,526 shares of common stock under the ESPP at
$2.50 per share.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
SFAS 123 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 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 value of shares issued under the ESPP, all options and
warrants issued during fiscal years 1999, 1998 and 1997, using the
Black-Scholes pricing model, and the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 4.99% 5.84% 5.70%
Expected lives 4.2 years 3.8 years 3.5 years
Expected volatility 64.5% 67.4% 69.8%
Expected dividend yield 0% 0% 0%
</TABLE>
To estimate expected lives of options for this valuation, it was
assumed options would 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 expense 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
compensation is 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
$1,266,000, $2,536,000 and $628,000 for the years ended June 30, 1999, 1998
and 1997, respectively. 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 $983,000, $639,000 and $216,000
for 1999, 1998 and 1997, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and pro forma diluted
earnings per common share would have been reported as follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net Income
As reported $7,850,000 $4,492,000 $2,480,000
Pro forma $6,867,000 $3,853,000 $2,263,000
Diluted Earnings Per
Common Share
As reported $.63 $.37 $.27
Pro form $.57 $.33 $.21
</TABLE>
(6) INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current -
Federal $ 4,666,739 $ 2,581,784 $ 1,347,733
State 417,261 184,216 96,267
----------- ----------- -----------
5,084,000 2,766,000 1,444,000
Deferred -
Federal (348,812) (901,664) (55,067)
State (31,188) (64,336) (3,933)
----------- ----------- -----------
Total $ 4,704,000 $ 1,800,000 $ 1,385,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company's effective income tax rate was different than the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax provision at
statutory rates $ 4,268,000 $ 2,138,000 $ 1,314,000
State income tax provision, net of
federal tax effect 382,000 206,000 133,000
Nondeductible expenses 54,000 46,000 18,000
SFAS 109 valuation allowance reduction - (590,000) (80,000)
----------- ----------- -----------
Effective tax $ 4,704,000 $ 1,800,000 $ 1,385,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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 were 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, 1999, the Company had NOL carryforwards available
of approximately $917,000. The Company's NOLs began to
F-20
<PAGE>
expire in 1999 and continue to expire through 2007. The Company also has
research and development and investment tax credit carryforwards totaling
approximately $140,000 that began expiring in 1999 and continue to expire
through 2007.
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 NOL and tax credit
carryforwards. The net deferred tax assets and liabilities as of June 30,
1999 and 1998 are comprised of the following:
<TABLE>
Current 1999 1998
----------- -----------
<S> <C> <C>
Tax effect of NOL carryforwards $ 344,000 $ 457,000
Allowance for doubtful accounts 39,000 217,000
Accrued vacation 314,000 177,000
Other accruals 1,070,000 685,000
Tax credits 140,000 140,000
----------- -----------
Net current deferred tax asset $ 1,907,000 $ 1,676,000
----------- -----------
----------- -----------
Noncurrent
Depreciation for book in excess of tax 366,000 367,000
Goodwill amortization for book in excess of tax 150,000 -
----------- -----------
Net noncurrent deferred tax asset $ 516,000 $ 367,000
----------- -----------
----------- -----------
</TABLE>
The Company had established a valuation allowance due to the
uncertainty that the full amount of credits and NOL carryforwards would be
applied against future taxable income. During fiscal 1998, the Company
determined the valuation allowance was no longer required. During 1998 and
1997 the Company reduced the valuation allowance by $590,000 and $80,000 for
the utilization of NOLs in the respective years and certain deferred tax
assets that the Company now believes will be fully utilized.
(7) SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 requires that
public companies report information about their operating segments based on
the financial information used by the chief operating decision maker in their
annual financial statements and requires those companies to report selected
information on their interim statements. Management has determined that the
Company has two segments, Outsourcing Services and Medical Products, that
will be reported in connection with the adoption of SFAS 131.
The Outsourcing Services segment is made up of RELA, CMED MFG, CDT,
CMED Automation and a portion of IPS. This segment designs, develops and
manufactures medical products for a broad range of customers that include
major pharmaceutical and medical device companies.
The medical products segment is made up of a portion of IPS and
BioMed. This segment designs, develops and manufactures proprietary medical
products which include: high-performance RF amplifiers and integrated power
delivery subsystems for the medical imaging industry; a combination of tools
and services to support healthcare institutions in their efforts to establish
Year 2000 compliance for their biomedical devices; and a self-contained
oxygen generation system.
Following is a breakout of the Company's segments:
F-21
<PAGE>
<TABLE>
<CAPTION>
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal 1999:
Operating revenue $48,038,000 $17,941,000 $ (630,000) $65,349,000
Margin 18,362,000 6,775,000 (107,000) 25,030,000
Assets 34,096,000 13,997,000 (2,405,000) 45,688,000
Expenditures for long-lived assets 1,635,000 (705,000) - 1,174,000
Fiscal 1998:
Operating revenue $36,366,000 $11,344,000 $ (410,000) $47,300,000
Margin 12,596,000 4,470,000 (123,000) 16,943,000
Assets 22,366,000 13,540,000 (1,899,000) 34,007,000
Expenditures for long-lived assets 1,303,000 5,568,000 - 1,479,000
Fiscal 1997:
Operating revenue $27,507,000 $ 1,619,000 $ (883,000) $28,243,000
Margin 9,175,000 611,000 - 9,786,000
Assets 18,304,000 7,448,000 (1,899,000) 23,853,000
Expenditures for long-lived assets 1,770,000 - - 643,000
</TABLE>
Included in the operating revenues disclosed above are intersegment
operating revenues of the Outsourcing Services segment of $591,000, $410,000
and $883,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
The Medical Products segment had intersegment revenues of $39,000 for the
year ended June 30, 1999 and no intersegment revenues for the two preceding
years. The intersegment revenues account for the operating revenue and margin
reconciling items.
The assets reconciling item is the elimination of the investments in
CDT for years ended June 30, 1999, 1998 and 1997, and the elimination of the
investment in CMED Automation for the year ended June 30, 1999.
The Company manages its operating segments through the gross margin
component of each segment. It is impractical to break out other operating
expenses, including depreciation, on a segment basis.
Four customers accounted for more than 10% of the total outsourcing
services revenue for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Customer
--------
<S> <C> <C> <C>
A 25% 29% 19%
B 17% 3% 0%
C 3% 3% 15%
D 0% 0% 12%
</TABLE>
F-22
<PAGE>
Two customers accounted for more than 10% of the total medical
products revenue for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Customer
--------
<S> <C> <C> <C>
A 84% 96% 0%
B 2% 1% 91%
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its operating facilities and certain computer and
test equipment pursuant to noncancellable operating lease arrangements. The
Company incurred rent expense of $1,009,000, $846,000 and $467,000 for the
years ended June 30, 1999, 1998 and 1997, respectively, under such agreements.
At June 30, 1999, future minimum lease payments under leases having an
initial or remaining noncancellable term of one year or more are
approximately $1,024,000 in 2000, $922,000 in 2001, $731,000 in 2002, $4,000
in 2003, and none in 2004 or thereafter.
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 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. These options were exercised 140,000, 80,000 and 80,000
in fiscal 1999, 1998 and 1997, respectively.
The Company and the employee extended the employment agreement in
November 1995 and again in May 1996, for a term through June 2002. The
Company agreed to grant incentive stock options 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 of the extended agreement. However, earlier
vesting can occur if the Company's stock achieves certain targeted 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.
One of the Company's other officers has also entered into an
employment agreement with the Company. This agreement provides 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
F-23
<PAGE>
than cause and two years' salary if the officer's employment is terminated as
a result of a significant ownership change in the Company. This agreement has
no fixed term, and may be terminated by either party at any time.
OTHER
In connection with an equity offering in June 1994, the Company
entered into a standstill agreement with a corporation that owned 3,500,000
shares of the Company's common stock. This corporation sold all of its stock
in the Company on November 3, 1998 (See Note 5). The standstill agreement
limited the corporation to not more than a 40% ownership of the Company.
The Company had sales to this corporation of approximately $303,000,
$67,000, and $1,473,000 in 1999, 1998 and 1997, respectively. As of June 30,
1999 and 1998, the Company had accounts receivable balances of $26,000 and
$0, respectively, related to these sales.
SUBSEQUENT ACQUISITION
In August 1999, the Company purchased the assets of Creos
Technologies, LLC which developed and manufactured high-voltage x-ray
generator systems for CT scanners. The purchase price for the assets was
approximately $2 million. The assets of this operation have been integrated
into the IPS and CMED MFG divisions.
(9) 401(k) RETIREMENT PLAN
The Company has established the Colorado MEDtech, Inc. 401(k)
Retirement Plan, which is governed by Section 401(k) of the Internal Revenue
Code. Employees are eligible to enroll in 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 $264,000, $175,000 and $100,000 for the years ended June
30, 1999, 1998 and 1997, respectively.
(10) INVESTMENT IN LAND
In 1987, the Company acquired a parcel of land from a shareholder,
officer and former director of the Company. 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 consolidated balance sheets. 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 expired, unexercised, in March 1998.
(11) MAJOR CUSTOMERS
Five customers accounted for more than 10% of total sales and service
revenues for the years ended June 30, 1999, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Customer
--------
<S> <C> <C> <C>
A 23% 23% 0%
B 18% 22% 19%
C 12% 3% 0%
D 2% 2% 14%
E 0% 0% 12%
</TABLE>
F-24
<PAGE>
At June 30, 1999 and 1998, these five customers had accounts
receivable due to the Company as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
A $ 2,400,000 $ 1,662,000
B $ 1,002,000 $ 1,996,000
C $ 1,101,000 $ 496,000
D $ 289,000 $ 122,000
E $ - $ -
</TABLE>
The loss of a significant customer could have a material impact on the
Company's operations.
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as
follows (in thousands except earnings per share data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal Year Ended June 30, 1999
Net sales and service $13,408 $15,754 $17,150 $19,037
Gross profit $ 4,974 $ 6,013 $ 6,713 $ 7,330
Net income $ 1,319 $ 1,690 $ 2,205 $ 2,636
Earnings per share (as restated):
Basic $ .12 $ .16 $ .20 $ .24
Diluted $ .11 $ .14 $ .18 $ .21
Fiscal Year Ended June 30, 1998
Net sales and service $ 7,260 $12,183 $13,450 $14,407
Gross profit $ 2,639 $ 4,008 $ 4,796 $ 5,500
Net income $ 664 $ 943 $ 1,329 $ 1,556
Earnings per share:
Basic $ .07 $ .09 $ .12 $ .14
Diluted $ .06 $ .08 $ .11 $ .12
</TABLE>
F-25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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. 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 12. 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 13. 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 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) The following financial statements and financial statement
schedules are filed as part of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Operations for the Years Ended June 30,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended June 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
All other schedules have been omitted because they were not applicable, not
required or the required information is shown in the consolidated
financial statements or notes thereto.
(3) Exhibits. See Exhibit Index included as the last page of this
report, which index is incorporated by reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed for the three-month
period ended June 30, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: September 27, 1999. COLORADO MEDTECH, INC.
By: /S/ JOHN V. ATANASOFF, II
-------------------------------
John V. Atanasoff, II
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ JOHN V. ATANASOFF, II Chief Executive Officer, September 27, 1999
- ------------------------------------ President and Director
John V. Atanasoff, II (Principal Executive Officer)
/S/ STEPHEN P. HALL Chief Financial Officer September 27, 1999
- ------------------------------------ (Principal Financial and
Stephen P. Hall Accounting Officer)
/S/ DEAN A. LEFFINGWELL Director September 27, 1999
- ------------------------------------
Dean A. Leffingwell
/S/ IRA M. LANGENTHAL Director September 27, 1999
- ------------------------------------
Ira M. Langenthal
/S/ ROBERT L. SULLIVAN Director September 27, 1999
- ------------------------------------
Robert L. Sullivan
/S/ CLIFFORD W. MEZEY Director September 27, 1999
- ------------------------------------
Clifford W. Mezey
/S/ JOHN E. WOLFE Director September 27, 1999
- ------------------------------------
John E. Wolfe
</TABLE>
25
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
<S> <C> <C>
3.1 Articles of Incorporation; Complete Copy, as Amended.
3.2 Bylaws, as Amended. (A)
4.2 Specimen of Common Stock Certificate. (B)
4.3 Rights Agreement between Colorado MEDtech, Inc. and American
Securities Transfer & Trust, Inc. dated January 14, 1999. (C)
10.31 Colorado MEDtech, Inc. Stock Option Plan. (D)
10.32 Employment Agreement between Colorado MEDtech, Inc. and
John V. Atanasoff, II. (E)
10.37 Employment Agreement between Colorado MEDtech, Inc. and
Lockett E. Wood (F)
10.38 Extension of Employment Agreement between Colorado MEDtech, Inc.
and John V. Atanasoff, II (G)
10.40 Employment Agreement between Novel Biomedical, Inc. and
Jonathan Kagan (H)
10.41 Employment Agreement between Colorado MEDtech, Inc. and Lee Erb (I)
10.42 Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan as
Amended on November 21, 1997, Effective as of January 1, 1998 (J)
10.44 Loan Agreement, Commercial Security Agreement, and Promissory Note dated
October 30, 1997 between Colorado MEDtech, Inc. and Bank One, Colorado N.A. (D)
21.1 Subsidiaries of Business Issuer
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule for the year ended June 30, 1999
- --------------------------------------
</TABLE>
(A) 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.
(B) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on May 17,
1983.
(C) Filed with Registration Statement on Form 8-A dated January 14, 1999.
(D) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998.
(E) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
June 21, 1993
(F) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1994.
(G) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1996.
(H) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1997.
(I) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
(J) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997.
26
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
COLORADO MEDTECH, INC.
(AS OF SEPTEMBER 28, 1999)
ARTICLE I
The name of the Corporation is: Colorado MEDtech, Inc.
ARTICLE II
A. The nature of the business of the Corporation and the objects
and purposes to be transacted, promoted and carried on by it are:
1. To manufacture, produce, import, export, purchase or otherwise
acquire, hold, own, use, maintain, sell at wholesale or retail,
lease, or otherwise dispose of and generally deal in medical
equipment, systems, supplies and related products of any and all
kinds, for itself or as agent and/or as a manufacturer's
representative of other medical supply houses, including, without
being limited to, the buying, selling, leasing, renting,
maintaining, using, operating, installing, and distributing of
all materials, equipment and personal property appurtenant or
incident to and useful in the medical equipment and systems
business, together with the rights incident thereto of
establishing and maintaining such equipment upon public or
private property; and to purchase, own, hold, convey and
otherwise use and enjoy real and personal property of all kinds
for the operation of the aforesaid business, and in connection
therewith, to acquire, construct, maintain, and operate buildings
and equipment deemed necessary or convenient in connection
therewith.
2. To engage in any commercial, industrial, manufacturing or
agricultural enterprises calculated or designed to be profitable
to this Corporation and in conformity with the laws of the State
of Colorado.
3. To generally engage in any lawful business.
The objects and purposes specified in each of the foregoing
paragraphs shall not be limited or restricted by reference or inference from
the terms of any other paragraph but each shall be regarded as an independent
object and purpose.
<PAGE>
B. In furtherance of the foregoing purposes, the Corporation shall have
and may exercise all of the rights, powers and privileges now and hereafter
conferred upon corporations organized under the laws of the State of
Colorado. In addition, it may do everything necessary, suitable or proper for
the accomplishment of any of its corporate purposes, including the following:
(a) To borrow money for any corporate purposes from its officers,
directors or shareholders, upon fair and equitable terms and conditions.
(b) To acquire shares of its own capital stock, and to hold the same
either as treasury stock, or to cancel the same in the manner provided by
law; any stock so held in the treasury shall not be voted.
ARTICLE III
This Corporation shall have perpetual existence.
ARTICLE IV
A. The aggregate number of shares of all classes of capital stock which
the Corporation shall have authority to issue is Thirty Million (30,000,000),
consisting of (i) Twenty-Five Million (25,000,000) shares of Common Stock, no
par value per share, and (ii) Five Million (5,000,000) shares of series
preferred stock, no par value per share ("Preferred Stock"). The Board of
Directors shall have the authority to fix the rights, powers, preferences and
privileges, and the qualifications, limitations or restrictions thereof, of
any series of Preferred Stock, including, but not limited to, dividend
rights, dividend rates, conversion rights, voting rights, and liquidation
preferences; and to fix the number of shares constituting any such series and
the designation thereof; and to increase or decrease the number of shares of
any such series (but not below the number of shares thereof then
outstanding).
B. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK.
Out of the five million (5,000,000) shares of Preferred Stock, no par
value per share, authorized under Section IV.A., a series of preferred stock
of the Corporation is created, and the designation and amount thereof and the
relative rights and preferences of the shares of such series, are as follows:
B.1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Series A
Junior Participating Preferred Stock" (the "PREFERRED SHARES") and the number
of shares constituting the Preferred Shares shall be one hundred fifty
thousand (150,000). Such number of
2
<PAGE>
shares may be increased or decreased by resolution of the Board of Directors
and any necessary shareholder approval; PROVIDED, HOWEVER, that no decrease
shall reduce the number of shares of Preferred Shares to a number less than
the number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Preferred Shares.
B.2. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the rights of the holders of any shares of any
series of preferred stock (or any similar stock) ranking prior and superior
to the Preferred Shares with respect to dividends, the holders of Preferred
Shares, in preference to the holders of Common Stock, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December in
each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Preferred Shares, in
an amount per share (rounded to the nearest cent) equal to the greater of (i)
$1.00 or (ii) subject to the provision for adjustment hereinafter set forth,
100 times the aggregate per share amount of all cash dividends, and 100 times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share
or fraction of a share of Preferred Shares. In the event the Corporation
shall at any time after December 22, 1998, declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which holders of shares of
Preferred Shares were entitled immediately prior to such event under clause
(ii) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the number or of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
(b) The Corporation shall declare a dividend or distribution
on the Preferred Shares as provided in paragraph (a) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock or a subdivision of
the outstanding Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1.00 per share on the Preferred Shares
shall nevertheless be
3
<PAGE>
payable, out of funds legally available for such purpose, on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall being to accrue and be cumulative on
outstanding shares of Preferred Shares from their date of issue. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of
Preferred Shares in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of
Preferred Shares entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior to
the date fixed for the payment thereof.
B.3. VOTING RIGHTS.
(a) Subject to the provision for adjustment hereinafter set
forth, each Preferred Share shall entitle the holder thereof to 100 votes on
all matters submitted to a vote of the shareholders of the Corporation. In
the event the Corporation shall at any time after December 22, 1998, declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Common Stock, then in each such case the number of
votes per share to which holders of shares of Preferred Shares were entitled
immediately prior to such event shall be adjusted by multiplying such number
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
(b) Except as otherwise provided herein or by law, the
holders of Preferred Shares and the holders of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of shareholders of
the Corporation.
(c) Except as set forth herein or required by law, holders of
Preferred Shares shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote with holders
of Common Stock as set forth herein) for taking any corporate action.
B.4. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Preferred Shares as provided in Section B.2 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Preferred Shares
outstanding shall have been paid in full, the Corporation shall not:
4
<PAGE>
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Preferred Shares;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Preferred
Shares, except dividends paid ratably on the Preferred Shares and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Preferred Shares;
PROVIDED, HOWEVER, that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Preferred Shares; or
(iv) redeem or purchase or otherwise acquire for
consideration any Preferred Shares, or any stock ranking on a parity with the
Preferred Shares, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series
or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could under paragraph (a) of
this Section B.4, purchase or otherwise acquire such shares at such time and
in such manner.
B.5. REACQUIRED SHARES.
Any Preferred Shares purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of preferred stock and may be reissued
as part of a new series of preferred stock subject to the conditions and
restrictions on issuance set forth herein, in the Articles of Incorporation,
as amended, or in any other certificate of designation creating a series of
preferred stock or any similar stock or as otherwise required by law.
5
<PAGE>
B.6. LIQUIDATION, DISSOLUTION OR WINDING UP.
Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (a) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Preferred Shares unless, prior thereto, the holders of
Preferred Shares shall have received the greater of (i) $100 per share, plus
an amount equal to accrued and unpaid dividends an distributions thereon,
whether or not declared, to the date of such payment, or (ii) an aggregate
amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 100 times the aggregate amount to be distributed per share to
holders of Common Stock, or (b) to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Preferred Shares, except distributions made ratably on the Preferred
Shares and all such parity stock in proportion to the total amounts to which
the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
after December 22, 1998, declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification
aor otherwise) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares of
Preferred Shares were entitled immediately prior to such event under clause
(a)(ii) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction of the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
B.7. CONSOLIDATION, MERGER, ETC.
In case the Corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common Stock
are exchanged for or changed into other stock or securities, cash and/or any
other property, then in any such case each share of Preferred Shares shall at
the same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time after December 22, 1998, declare or pay any divided on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Preferred Shares
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
6
<PAGE>
B.8. NO REDEMPTION.
The shares of Preferred Shares shall not be redeemable.
B.9. RANK.
The Preferred Shares shall rank, with respect to the payment
of dividends and the distribution of assets, junior to all series of any
other class of the Corporation's preferred stock.
B.10. FRACTIONAL SHARES.
Preferred Shares may be issued in fractions of a share which
are integral multiples of one one-hundredth of a share which shall entitle
the holder, in proportion to such holder's fractional shares, to receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Preferred Shares.
B.11. AMENDMENT.
The Articles of Incorporation of the Corporation, as amended,
shall not be amended in any manner which would materially alter or change the
powers, preferences or rights of the Preferred Shares so as to affect them
adversely without the affirmative vote of the holders of at least two-thirds
of the outstanding shares of Preferred Shares, voting together as a single
class.
C. Each shareholder of record shall have one vote for each share of
stock standing in his name on the books of the Corporation and entitled to
vote. In the election of directors, cumulative voting shall not be allowed.
D. Shareholders of the capital stock of this Corporation shall not have
the pre-emptive or preferential right to subscribe for any shares of the
capital stock of this Corporation, whether nor or hereafter authorized, and
the right to acquire additional or treasury shares of the Corporation or
securities convertible into shares or carrying stock purchase warranty or
privileges.
E. The Board of Directors may, from time to time, distribute to the
shareholders in partial liquidation, out of stated capital or capital surplus
of the Corporation, a portion of its assets, in cash or property, subject to
the limitations contained in the statutes of the State of Colorado.
7
<PAGE>
ARTICLE V
The number of persons constituting the Board of Directors of the
Corporation shall be fixed by the Bylaws of the Corporation. Directors need
not be residents of the State of Colorado, nor shareholders of the
Corporation, and shall exercise all the powers conferred on the Corporation
by these Articles of Incorporation and by the laws of the State of Colorado.
ARTICLE VI
No contract or other transaction of the Corporation with any other
person, firm, or corporation, or in which this Corporation is interested,
shall be affected by reason of any of the directors or officers of this
Corporation being interested, in their individual capacities, or as an
officer or director of another corporation, individually or jointly with
others as a party to such contract or transaction; provided that the fact of
such interest is known or disclosed to the Board. Any member of the Board so
interested may be counted in determining the existence of a quorum at which
the matter is considered and may vote at the meeting at which this matter is
taken up, as if he were not so interested.
ARTICLE VII
[DELETED]
ARTICLE VIII
The Corporation shall, to the fullest extent permitted by Colorado law as
in effect at any time, indemnify any person against all liability and expense
(including attorney's fees) incurred by reason of the fact that he is or was
a director of officer of the Corporation or, while serving as a director or
officer of the Corporation, he is or was serving at the request of the
Corporation as a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of, another
corporation, partnership, joint venture, trust, association or other entity.
Expenses (including attorney's fees) incurred in defending an action, suit or
proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding to the full extent and under the
circumstances permitted by Colorado law. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the Corporation against any liability
asserted against and incurred by such person in any such capacity or arising
out of such person's position, whether or not the Corporation would have the
power to indemnify against such liability under the provisions of this
Article VIII. The indemnification provided by this Article VIII shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under these articles of incorporation, any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise, shall inure to the
benefit of their heirs, executors, and administrators. The provisions of this
Article VIII shall not be deemed to preclude the Corporation from
indemnifying other
8
<PAGE>
persons from similar or other expenses and liabilities as the board of
directors or the shareholders may determine a specific instance or by a
resolution of general application.
ARTICLE IX
The officers of the Corporation shall be subject to the doctrine of
corporate opportunities only insofar as it applies to business opportunities
in which this Corporation has expressed an interest as determined from time
to time by the Corporation's Board of Directors, as evidenced by resolutions
appearing in its minutes. When so delineated, opportunities within such areas
of interest shall be disclosed promptly to the Board of Directors. Until such
time as this Corporation, through its Board of Directors, has designated an
area of interest, the officers shall be free to engage in such areas and to
continue a business existing prior to the time that such an area of interest
has been designated.
ARTICLE X
The Corporation shall be entitled to treat the registered holder of any
shares of the Corporation as the owner thereof for all purposes, including
all rights derived from such shares, and shall not be bound to recognize any
equitable or other claim to, or interest in, such shares or rights deriving
from such shares, on the part of any other persons, including but without
limiting the generality thereof, a purchaser, assignee or transferee of such
shares or rights deriving from such shares, unless and until such purchaser,
assignee, transferee or other person becomes a registered holder of such
shares, whether or not the Corporation shall have either actual or
constructive notice of the interest of such purchaser, assignee, transferee
or other person. The purchaser, assignee or transferee of any of the shares
of the Corporation shall not be entitled: (1) to receive notice of the
meetings of the shareholders; (2) to vote at such meetings; (3) to examine a
list of these shareholders; (4) to be paid dividends or other sums payable to
shareholders; (5) to own, enjoy and exercise any other property or rights
deriving from such shares against the Corporation, until such purchaser,
assignee or transferee has become the registered holder of such shares.
ARTICLE XI
[DELETED]
ARTICLE XII
By the affirmative vote or concurrence of the holders of a majority of
the outstanding shares of the Corporation, or any class or series thereof,
the shareholders may take any action that, but for this Article, would
require a two-thirds affirmative vote or concurrence of the holders of the
outstanding shares, or any class or series thereof, under the Colorado
Corporation Code.
9
<PAGE>
ARTICLE XIII
A director of the Corporation shall not be personally liable to the
Corporation or to its shareholders for monetary damages for breach of
fiduciary duty as a director except that this provision shall not eliminate
or limit the liability of a director to the Corporation or to its
shareholders for monetary damages otherwise existing for: (i) any breach of
the directors' duty of loyalty to the Corporation or to its shareholders;
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law (iii) acts specified in Section 7-5-
144 of the Colorado Corporation Code, as amended; or (iv) any transaction
from which the director derived any improper personal benefit. If the
Colorado Corporation Code hereafter is amended to eliminate or limit further
the liability of a director, then, in addition to the elimination and
limitation of liability provided by the preceding sentence, the liability of
each director shall be eliminated or eliminated to the fullest extent
permitted by the Colorado Corporation Code as so amended. Any repeal or
modification of this Article XIII shall not adversely affect any right or
protection of a director of the Corporation under this Article XIII, as in
effect immediately prior to such repeal or modification, with respect to any
liability that would have accrued, but for this Article XIII, prior to such
repeal or modification.
10
<PAGE>
Exhibit 21.1
COLORADO MEDTECH, INC.
Subsidiaries of Colorado MEDtech, Inc.
1. CMED Catheter and Disposables Technology, Inc., a Minnesota corporation.
2. BioMed Y2K, Inc., a Colorado corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated August 12, 1999, included in
Registration Statement File No. 333-17207. It should be noted that we have
not audited any financial statements of the company subsequent to June 30,
1999, or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 27, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 14,394,870
<RECEIVABLES> 10,508,810
<ALLOWANCES> (334,000)
<INVENTORY> 4,598,686
<CURRENT-ASSETS> 40,460,172
<PP&E> 7,518,596
<DEPRECIATION> (5,140,302)
<TOTAL-ASSETS> 45,687,882
<CURRENT-LIABILITIES> 17,000,559
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0
0
<COMMON> 11,000,446
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<TOTAL-LIABILITY-AND-EQUITY> 45,687,882
<SALES> 65,349,436
<TOTAL-REVENUES> 65,349,436
<CGS> 40,319,214
<TOTAL-COSTS> 12,954,318
<OTHER-EXPENSES> (495,765)
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<INTEREST-EXPENSE> 17,347
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<INCOME-TAX> 4,704,000
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<EPS-BASIC> .73
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