<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
---------- ----------
Commission file number 0-12471
-------
COLORADO MEDTECH, INC.
--------------------------------------------------
(Exact name of issuer as specified in its charter)
COLORADO 84-0731006
---------------------------------------- ------------------------
(State or other jurisdiction of Employer (IRS Identification No.)
incorporation or organization)
6175 Longbow Drive, Boulder, Colorado 80301
-------------------------------------------
(Address of principal executive offices)
(303) 530-2660
---------------------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
As of October 31, 2000, the Company had 12,629,688 shares of Common Stock
outstanding.
<PAGE> 2
COLORADO MEDTECH, INC.
FORM 10-Q
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three months ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three months ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements (Unaudited) - 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,843,292 $ 8,560,065
Short-term investments 9,276,654 8,190,621
Accounts receivable, net 11,753,407 13,662,053
Inventories, net 10,176,811 8,512,540
Deferred income taxes and other
current assets 3,440,167 3,141,121
----------- -----------
Total current assets 44,490,331 42,066,400
----------- -----------
PROPERTY AND EQUIPMENT, net 4,263,282 4,568,811
----------- -----------
GOODWILL, net 259,796 316,337
----------- -----------
LAND, DEFERRED INCOME TAXES
AND OTHER ASSETS 1,323,905 1,340,315
----------- -----------
TOTAL ASSETS $50,337,314 $48,291,863
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,102,051 $ 5,440,413
Accrued salaries and wages 2,746,567 2,390,201
Accrued product service costs 393,089 394,361
Customer deposits 2,797,605 2,647,132
Other accrued expenses 1,878,816 1,951,128
Income taxes payable -- --
Current debt 43,677 46,120
------------ ------------
Total current liabilities 12,961,805 12,869,355
------------ ------------
LONG-TERM DEBT, net 65,095 75,218
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 15,120,886 13,468,486
Retained earnings 22,215,195 21,881,289
Unrealized gain on available-for-sale investment (25,667) (2,485)
------------ ------------
Total shareholders' equity 37,310,414 35,347,290
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 50,337,314 $ 48,291,863
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
SALES AND SERVICE:
Outsourcing Services $ 9,697,646 $11,769,300
Medical Products 7,373,500 8,889,263
----------- -----------
Total Sales and Service 17,071,146 20,658,563
----------- -----------
COST OF SALES AND SERVICE:
Outsourcing Services 6,271,607 7,449,544
Medical Products 5,039,785 4,800,743
----------- -----------
Total Cost of Sales and Service 11,311,392 12,250,287
----------- -----------
GROSS PROFIT 5,759,754 8,408,276
----------- -----------
COSTS AND EXPENSES:
Marketing and selling 921,383 1,212,058
Operating, general and administrative 3,584,127 3,201,936
Research and development 1,013,558 800,610
----------- -----------
Total operating expenses 5,519,068 5,214,604
----------- -----------
EARNINGS FROM OPERATIONS 240,686 3,193,672
OTHER INCOME, net 292,220 198,287
----------- -----------
EARNINGS BEFORE
INCOME TAXES 532,906 3,391,959
Provision for income taxes 199,000 1,151,000
----------- -----------
NET INCOME $ 333,906 $ 2,240,959
=========== ===========
NET INCOME PER SHARE
Basic $ .03 $ .19
=========== ===========
Diluted $ .03 $ .16
=========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 12,422,867 11,873,080
=========== ===========
Diluted 13,155,868 13,685,034
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 333,906 $ 2,240,959
Adjustment to reconcile net income to net
cash flows from operating activities-
Depreciation and amortization 507,057 488,431
Provision for deferred taxes 49,189 18,476
Change in assets and liabilities-
Accounts receivable, net 1,908,646 (3,454,534)
Inventories, net (1,664,271) (1,076,780)
Other assets (350,450) (77,498)
Accounts payable and accrued expenses 248,088 (2,252,812)
Customer deposits 150,473 (627,976)
----------- -----------
Net cash flows from operating activities 1,182,638 (4,741,734)
----------- -----------
INVESTING ACTIVITIES:
Cash paid for purchase of Creos assets, net -- (1,151,993)
Purchase of short-term investments (1,314,590) (3,873,038)
Sale of short-term investments 210,000 3,697,803
Capital expenditures (144,987) (410,531)
----------- -----------
Net cash flows from investing activities (1,249,577) (1,737,759)
----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock 1,362,732 228,128
Dividends issued to shareholder -- (275,408)
Payment of debt (12,566) (132,350)
----------- -----------
Net cash flows from financing activities 1,350,166 (179,630)
----------- -----------
Net change in cash and cash equivalents 1,283,227 (6,659,123)
Cash and cash equivalents, beginning 8,560,065 8,499,714
----------- -----------
Cash and cash equivalents, ending $ 9,843,292 $ 1,840,591
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
COLORADO MEDTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The financial information is unaudited and should be read in conjunction with
the consolidated financial statements filed with Form 10-K on September 28,
2000. The accounting policies utilized in the preparation of the financial
information herein presented are the same as set forth in the Company's annual
consolidated financial statements filed with the Form 10-K, except as modified
for interim accounting policies which are within the guidelines set forth in
Accounting Principles Board Opinion No. 28. Certain amounts have been
reclassified in the prior year financial statements to be consistent with the
current year presentation. In November 1999, the Company acquired CIVCO Medical
Instruments Co., Inc. ("CIVCO"). This acquisition was accounted for as a pooling
of interests, therefore all prior period financial statements have been changed
to reflect the combined financial condition and results of operations of
Colorado MEDtech, Inc. ("CMED" or "the Company") and CIVCO.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of September 30, 2000 and the results of its
operations and its cash flows for the three-month periods ended September 30,
2000 and 1999. All of the adjustments were of a normal and recurring nature.
The following sets forth the supplemental disclosures of cash flow information
for the three-month periods ended September 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Cash paid for interest $ 3 $ 43
Cash paid for income taxes $ 45 $600
</TABLE>
During the periods ended September 30, 2000 and 1999, the Company received
non-cash tax benefits of $290,000 and $327,000, respectively, for the exercise
of stock options and warrants in disqualifying stock transactions.
NOTE 2 - DEBT
The Company entered into a bank financing agreement 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. This agreement
expired on October 30, 2000. The credit facility is at the bank's prime lending
rate through the term of the agreement and is secured by all accounts, general
intangibles, inventory and equipment. The agreement contains various restrictive
covenants which include, among others, maintenance of certain financial ratios,
maintenance of a minimum tangible net worth and limitations on annual
investments, dividends and capital expenditures. No amounts had been advanced
under the credit facility as of September 30, 2000.
The Company entered into a bank financing commitment on October 19, 2000 that
provides for a three-year revolving line of credit of $15 million. The credit
facility accrues interest on outstanding balances
7
<PAGE> 8
at either the bank's prime lending rate or the London Inter Bank Offering Rate
(LIBOR) plus up to 200 margin basis points, based on the Company's preference.
Outstanding balances are secured by all accounts receivable and inventory. The
agreement contains various restrictive covenants, which include, among others,
maintenance of certain financial ratios and maintenance of a minimum tangible
net worth. The Company plans to finalize this agreement in November 2000.
The Company has two capital lease agreements that have interest rates of 6.5%
and 7.9% and terminate in December 2000 and April 2003.
The following sets forth the outstanding debt instruments as of September 30,
2000 and June 30, 2000:
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------ -------------
(In Thousands)
<S> <C> <C>
Capitalized lease obligation $ 109 $ 121
Less - Current maturities (44) (46)
------- -------
Long-term debt $ 65 $ 75
======= =======
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income includes net income and all changes in equity during a
period that arise from non-owner sources, such as foreign currency items and
unrealized gains and losses on certain investments in debt and equity
securities. Total comprehensive income and the components of comprehensive
income follow:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------
2000 1999
---------- ----------
(In Thousands)
<S> <C> <C>
Net Income $ 334 $ 2,241
Changes in unrealized gain on
available-for-sale investments (23) -
------- -------
Comprehensive income $ 311 $ 2,241
======= =======
</TABLE>
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
common 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:
8
<PAGE> 9
<TABLE>
<CAPTION>
(In Thousands, except earnings per share amounts)
Three Months Ended
September 30,
----------------------
2000 1999
------- -------
<S> <C> <C>
Net income $ 334 $ 2,241
======= =======
Weighted average number of common shares
outstanding (shares used in basic earnings
per share computation) 12,423 11,873
Effect of stock options and warrants
(treasury stock method) 733 1,812
------- -------
Shares used in diluted earnings per share
computation 13,156 13,685
======= =======
Basic earnings per share $ .03 $ .19
======= =======
Diluted earnings per share $ .03 $ .16
======= =======
Options and warrants that were of an antidilutive
nature that were outstanding but not included in
the shares used in diluted earnings per share 1,419 --
======= =======
</TABLE>
NOTE 5 - STOCK AND STOCK OPTIONS
During the three months ended September 30, 2000, the Company granted 482,000
stock options to certain employees, including six officers of the Company. The
options to purchase the Company's common stock were issued at exercise prices
ranging from $7.56 to $8.88 per share, which were the fair market values of the
Company's common stock on the dates of the grants. The options vest over three
or four year periods and are exercisable for a period of five or ten years from
the date of grant.
During the three months ended September 30, 2000, the Company had 277,644 stock
options exercised by certain employees. The stock options were exercised at
prices per share ranging from $1.72 to $8.94, resulting in cash proceeds to the
Company of $1,363,000.
During the three months ended September 30, 2000, the Company issued 10,000
warrants to a director of the Company. The warrants to purchase the Company's
common stock were issued at an exercise price of $7.94 per share, which was the
fair market value of the Company's common stock on the date of the grant. The
warrants vested immediately and are exercisable until August 25, 2005.
NOTE 6 - SEGMENT INFORMATION
The Company operates in two industry segments, Outsourcing Services and Medical
Products. The Outsourcing Services segment is made up of the CMED/RELA Division
("RELA"), CMED Manufacturing Division ("CMED MFG"), CMED Catheter and
Disposables Technology, Inc. ("CMED CDT"), CMED Automation Division ("CMED
Automation") and the service portion of the Imaging and
9
<PAGE> 10
Power Systems Division ("IPS"). This segment designs, develops and manufactures
medical products for a broad range of customers that includes major
pharmaceutical and medical device companies.
The Medical Products segment is made up of CIVCO, BioMed Y2K, Inc. ("BioMed")
and the products portion of IPS. This segment designs, develops and manufactures
proprietary medical components and ultrasound accessories, which include: x-ray
generators, high-performance RF amplifiers and integrated power delivery
subsystems for the medical imaging industry; specialized medical products for
ultrasound imaging equipment and minimally invasive surgical equipment and a
combination of tools and services to support healthcare institutions in their
efforts to establish Year 2000 compliance for their biomedical devices. The
Company owns all the patents and technical knowledge for these proprietary
products.
The following is a breakout of the Company's operating revenue and gross profit
by segment for the three-month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- -------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Three months ended September 30, 2000:
Operating revenue $13,296 $7,373 $(3,598) $17,071
Gross profit 3,426 2,334 -- 5,760
Three months ended September 30, 1999:
Operating revenue $12,077 $8,889 $ (307) $20,659
Gross profit 4,320 4,088 -- 8,408
</TABLE>
Included in the operating revenues disclosed above are intersegment operating
revenues of the Outsourcing Services segment of $3,598,000 for the quarter ended
September 30, 2000 and $307,000 for the quarter ended September 30, 1999. The
Medical Products segment had no intersegment revenues for the quarters ended
September 30, 2000 and 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.
The following is a breakout of the Company's assets by segment at September 30,
2000 compared to June 30, 2000:
<TABLE>
<CAPTION>
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- -------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets at September 30, 2000 $27,806 $24,557 $(2,026) $50,337
Assets at June 30, 2000 26,841 21,645 (194) 48,292
</TABLE>
The asset reconciling items at September 30, 2000 and June 30, 2000 consist of
the elimination of the investment in IPS and the elimination of interdivisional
accounts receivable.
10
<PAGE> 11
NOTE 7 - ACQUISITION OF CIVCO MEDICAL INSTRUMENTS CO., INC.
On November 15, 1999, the Company acquired CIVCO by exchanging 736,324 of the
Company's shares for all the outstanding shares of CIVCO and related real
estate. This acquisition was accounted for as a pooling of interests. CIVCO,
located in Kalona, Iowa, is a developer and manufacturer of specialized medical
accessories for ultrasound imaging equipment and for minimally invasive surgical
equipment. CIVCO's annualized revenues prior to the acquisition were
approximately $10 million and it employed approximately 90 people. For the
period July 1, 1999 through September 30, 1999, CIVCO had revenue of
approximately $2,893,000 and net income of approximately $324,000. In the same
period, CMED had revenue of approximately $17,766,000 and net income of
approximately $1,917,000.
Prior to the acquisition, CIVCO was an S-corporation and did not have a
provision for income taxes. If CIVCO had been required to pay income taxes prior
to the acquisition, the pro forma consolidated combined net income for the three
months ended September 30, 1999 would have been $2,118,000 and diluted earnings
per share would have been $.15 for the Company.
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101 provides
the SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. The Company implemented SAB 101 on July 1,
2000. The implementation did not have a significant affect on its financial
condition and results of operations.
11
<PAGE> 12
NOTE 9 - CONTINGENCIES AND SUBSEQUENT EVENTS
On August 31, 2000, in a filing with the SEC, Anthony Fant, Chief Executive
Officer of HEI, Inc. ("HEI"), disclosed that he had been acquiring CMED shares
since early May and had accumulated 1,214,300 shares, or about 9.9% of the total
shares outstanding. In his filing, he stated his objective was to obtain control
of the Company.
On September 11, 2000, Mr. Fant sent a letter to the Board of Directors
proposing a transaction in which HEI would acquire the Company for HEI common
stock having a value of $12 per CMED share. HEI's proposal limited the number of
HEI shares that would be issued to 8.5 million. On the same day it delivered its
proposal to the Company, HEI filed suit against the Company and its directors in
a Colorado federal court. HEI's suit alleged that certain provisions of the
Company's bylaws and its shareholders' rights plan wrongfully limited the rights
of shareholders to hold a special meeting to elect directors. HEI said it
intended to demand a special meeting of shareholders to replace the Company's
directors.
In October 2000, HEI announced it would no longer pursue its proposed
acquisition offer and dismissed the lawsuit.
On September 27, 2000, counsel to the former shareholder of CIVCO orally advised
the Company that he intends to assert claims against the Company and possibly
others arising out of the CIVCO acquisition. Counsel for such shareholder stated
that the former shareholder intends to claim damages for various alleged wrongs
done to him and possibly others. No complaint has been filed with respect to
this matter.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As an aid to understanding the Company's operating results, the following table
indicates the percentage relationships of income and expense items to total
revenue for the line items included in the Condensed Consolidated Statements of
Operations for the three-month periods ended September 30, 2000 and 1999, and
the percentage change in those items for the three-month period ended September
30, 2000, from the comparable periods in 1999.
<TABLE>
<CAPTION>
Percentage Change From
As a Percentage of Total Revenues Prior Year's Comparable Period
--------------------------------- ------------------------------
Three-Month Period Three-Month Period
Ended September 30, Ended September 30,
---------------------- -------------------
2000 1999 LINE ITEMS 2000
---- ---- ---------- ----
% % %
<S> <C> <C> <C>
56.8 57.0 Sales, Outsourcing Services (17.6)
43.2 43.0 Sales, Medical Products (17.1)
----- ----- -----
100.0 100.0 Total Sales and Service (17.4)
----- ----- -----
36.7 36.1 Cost of Sales, Outsourcing Services (15.8)
29.5 23.2 Cost of Sales, Medical Products 5.0
----- ----- -----
66.2 59.3 Total Cost of Sales and Services (7.7)
----- ----- -----
33.8 40.7 Gross Profit (31.5)
----- ----- -----
5.4 5.9 Marketing and Selling (24.0)
21.0 15.5 Operating, Gen'l and Admin 11.9
6.0 3.9 Research and Development 26.6
----- ----- -----
32.4 25.3 Total Operating Expenses 5.8
----- ----- -----
1.4 15.4 Earnings from Operations (92.5)
1.7 1.0 Other Income, Net 47.4
----- ----- -----
3.1 16.4 Earnings Before Income Taxes (84.3)
1.2 5.6 Provision for Income Taxes (82.7)
----- ----- -----
1.9 10.8 NET INCOME (85.1)
===== ===== =====
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
Revenues for the three-month period ended September 30, 2000, as compared to the
same period in the prior year, and the percentage of total revenue contributed
by each of the Company's segments, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenues $17.1 million $20.7 million
Outsourcing Services 56.8% 57.0%
Medical Products 43.2% 43.0%
</TABLE>
The decrease in revenues during the three month period is attributable to
discounts the Company gave to two large customers in the outsourcing division,
the slowdown in outsource manufacturing caused by production delays, the
cessation of operations of BioMed and the normal fluctuations due to certain
project life cycles in the contract manufacturing and engineering business.
Gross margins decreased to 34% for the three-month period ended September 30,
2000, compared to 41% for the same period in the prior year. The decrease in the
Company's gross margins is a result of discounts given to two large customers in
the outsourcing division, the slowdown in outsource manufacturing caused by
production delays and the increase of sales of lower margin products in the
medical products segment.
Marketing and selling expenses decreased 24% for the three-month period ended
September 30, 2000, compared to the same period in the prior year. The decrease
is due to the centralization of the sales and marketing group and the decrease
in commissions due to the decrease in sales. Marketing and selling expenses as a
percentage of total revenues were 5% for the three-month period ended September
30, 2000, compared to 6 % for the same period in the prior year. In future
periods, the Company expects marketing and selling expenses to return to
historical levels.
Operating, general and administrative expenses increased 12% for the three-month
period ended September 30, 2000, compared to the same period in the prior year.
The increase is primarily attributable to the one-time expenses related to
CMED's response to HEI's unsolicited acquisition proposal and related
litigation. As a percentage of revenues, operating, general and administrative
expenses (excluding one-time charges of $250,000) increased to 19% for the
three-month period ended September 30, 2000, compared to 16% for the same period
in the prior year. The increase is primarily due to the decrease in sales during
the quarter ended September 30, 2000. The Company expects expenses related to
its response to the unsolicited proposal during the quarter ending December 31,
2000 to increase from the level in the quarter ended September 30, 2000.
Research and development expenses increased by 27% for the three-month period
ended September 30, 2000, compared to the same period in 1999. Research and
development expenses are attributable to the IPS and CIVCO product lines. The
increase in research and development expenses is due to continued efforts on the
RF solid state amplifier systems, ultrasound guidance systems and covers, and
high voltage x-ray generators for CT scanners. The Company believes research and
development expenses will remain near the level experienced in the quarter ended
September 30, 2000. Consistent with the Company's operating plans, the Company
continues to pursue the acquisition or development of new or
14
<PAGE> 15
improved technology or products. Should the Company identify such opportunities,
the amount of future research and development expenditures may increase.
Other income increased by $94,000 for the three-month period ended September 30,
2000. The increase is due to the increase in the average cash balances in the
period, compared to the same period last year, and the increase in interest
rates.
During the three month period ended September 30, 2000, compared to the same
period in the prior year, the Company's net income, earnings per share and
diluted weighted average common equivalent shares outstanding used to calculate
earnings per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Income $0.3 million $2.2 million
Diluted Earnings per Share $.03 $.16
Diluted Weighted Average Common
Equivalent Shares Outstanding 13.2 million 13.7 million
</TABLE>
The decrease in net income and earnings per share is attributable to the
slowdown of revenues, the decrease in gross margins, as discussed above, and the
one-time charges related to the unsolicited acquisition proposal from HEI.
If the Company had not incurred the one-time charges related to the HEI
acquisition proposal, the net income and earnings per share figures would have
been as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Pro forma Net Income $.5 million $2.2 million
Pro forma Earnings per Share $.04 $.16
</TABLE>
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have consisted of cash flow from
operations, cash proceeds from short-term investments, cash deposits received
from customers related to contracts, and cash proceeds from the issuance of
common stock. The Company assumed capital leases as a part of the CIVCO
acquisition. These capital lease agreements have interest rates of 6.5% and 7.9%
and terminate in December 2000 and April 2003.
The Company entered into a bank financing agreement 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. This agreement
expired on October 30, 2000. The credit facility is at the bank's prime lending
rate through the term of the agreement and is secured by all accounts, general
intangibles, inventory and equipment. The agreement contains various restrictive
covenants which include, among others, maintenance of certain financial ratios,
maintenance of a minimum tangible net worth and limitations on annual
investments, dividends and capital
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expenditures. No amounts had been advanced under the credit facility.
The Company entered into a bank financing commitment on October 19, 2000 that
provides for a three-year revolving line of credit for $15 million. The credit
facility accrues interest on outstanding balances at either the bank's prime
lending rate or the London Inter Bank Offering Rate (LIBOR) plus up to 200
margin basis points, based on the Company's preference. Outstanding balances are
secured by all accounts receivable and inventory. The agreement contains various
restrictive covenants, which include, among others, maintenance of certain
financial ratios and maintenance of a minimum tangible net worth. The Company
plans to finalize this agreement in November 2000.
The ratio of current assets to current liabilities was 3.4 to 1 at September 30,
2000 compared to 3.3 to 1 at June 30, 2000. The Company's working capital
increased $2.3 million since June 30, 2000. Working capital increased primarily
as a result of continued profitability of the business and the proceeds from the
issuance of common stock. The average number of days outstanding of the
Company's accounts receivable for the three-month period ended September 30,
2000 was approximately 63 days, compared to 73 days for the year ended June 30,
2000. The decrease in the number of days outstanding was a result of the
Company's emphasis on collections during the quarter.
The Company provided $1.2 million of cash from operations during the three-month
period ended September 30, 2000, primarily due to the continued profitability of
the Company and the reduction in accounts receivable.
The Company had no material commitments for capital expenditures at September
30, 2000.
The Company believes cash provided by operations, together with its current cash
and short-term investments and cash available under its credit facility, will be
sufficient to fund operations for the next twelve months.
FORWARD - LOOKING STATEMENTS
The statements in this report that are not historical facts are forward-looking
statements that represent management's beliefs and assumptions based on
currently available information. Forward-looking statements can be identified by
the use of words such as "believes," "intends," "may," "will," "should,"
"anticipated" or comparable terminology or by discussions of strategy. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot assure that these expectations will prove
to be correct. Such statements involve risks and uncertainties including, but
not limited to, the risk that the Company's existing level of orders may not be
indicative of the level or trend of future orders, the risk that the Company may
not successfully complete the work encompassed by current or future orders, the
risk that unforeseen technical or production difficulties may adversely impact
project timing and financial performance, the risk that the management changes
will not produce the desired results, the risk of potential litigation, the risk
that acquired companies cannot be successfully integrated with the Company's
existing operations and the risk that a downturn in general economic conditions
or customer budgets may adversely affect research and development and capital
expenditure budgets of potential customers upon which the Company is dependent.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. These
factors are more fully described in the Company's documents filed from time to
time with the Securities and Exchange Commission. The Company assumes no duty to
update any forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as part of its cash management strategy, had short-term investments
at September 30, 2000 consisting of approximately $9.3 million in U.S. Treasury
and government agency securities. The Company accounts for these short-term
investments as available-for sale assets, which are stated at "Fair Market
Value" on the accompanying balance sheets. 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 October 1, 2000. If market interest rates had
increased by 1% on October 1, 2000, the Company would have had an approximate
$22,000 realized 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.
The Company does not believe there have been any material changes in the
reported market risks faced by the Company since the end of its most recent
quarter ended September 30, 2000.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except as described below, we are not involved in any material pending legal
proceedings:
On September 11, 2000, HEI, Inc. sued Colorado MEDtech and certain of its
directors in United States District Court in Denver. HEI dismissed the suit on
October 17, 2000. The complaint alleged that one of our bylaws concerning
special shareholder meetings is inconsistent with Colorado law. The complaint
further alleged that our Rights Agreement is inconsistent with Colorado law, to
the extent that it prevents a 10% shareholder in our company from calling for a
special shareholder meeting. The complaint sought declaratory and injunctive
relief barring enforcement of the bylaw and barring application of the Rights
Agreement in the context of a call for a special shareholder meeting.
On October 3, 2000, Roger Blazic and on October 5, 2000, Walter West sued
Colorado MEDtech and certain of its directors in Boulder County, Colorado
District Court. The plaintiffs purported to be shareholders of Colorado MEDtech
and filed class action lawsuits in connection with the unsolicited proposal from
HEI. Each plaintiff dismissed his suit in October 2000. Each lawsuit made
allegations and sought relief substantially identical to that in the suit by
HEI, and in addition claimed unspecified damages.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the three months ended September 30,
2000.
(b) Reports on Form 8-K during the quarter ended September 30, 2000:
The company filed a current report on Form 8-K dated August 22, 2000
reporting the issuance of a press release regarding financial results
for its fourth quarter and fiscal year ended June 30, 2000, management
changes and stock repurchase program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Colorado MEDtech, Inc.
----------------------
(Registrant)
DATE: November 13, 2000
/s/ Stephen K. Onody
--------------------
Stephen K. Onody
Chief Executive Officer
DATE: November 13, 2000
/s/ Gregory A. Gould
--------------------
Gregory A. Gould
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
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27 Financial Data Schedule
