<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 April 30, 2000, the Company had 12,263,423 shares of Common Stock
outstanding.
<PAGE>
COLORADO MEDTECH, INC.
FORM 10-Q
PART I Financial Information PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Combined Balance Sheets (Unaudited) -
March 31, 2000 and June 30, 1999 3
Condensed Consolidated Combined Statements of Operations
(Unaudited) - Three and nine months ended
March 31, 2000 and 1999 5
Condensed Consolidated Combined Statements of Cash Flows
(Unaudited) - Nine months ended
March 31, 2000 and 1999 6
Notes to Condensed Consolidated Combined Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition
and Results of Operations 14
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 18
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 19
2
<PAGE>
PART I Financial Information
Item 1. Financial Statements
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED COMBINED BALANCE SHEETS
ASSETS
------
(UNAUDITED)
March 31, 2000 June 30, 1999
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,295,945 $ 8,499,714
Short-term investments 9,174,158 14,394,870
Accounts receivable, net 12,771,318 11,932,749
Inventories, net 8,247,459 5,512,155
Deferred income taxes and other
current assets 3,687,267 2,353,432
----------- -----------
Total current assets 40,176,147 42,692,920
----------- -----------
PROPERTY AND EQUIPMENT, net 4,772,297 4,341,931
----------- -----------
GOODWILL, net 1,960,742 1,582,039
----------- -----------
LAND, DEFERRED INCOME TAXES
AND OTHER ASSETS 1,270,173 1,354,124
----------- -----------
TOTAL ASSETS $48,179,359 $49,971,014
=========== ===========
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED COMBINED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,386,732 $ 5,842,194
Accrued salaries and wages 2,546,696 4,519,996
Accrued product service costs 336,431 313,409
Customer deposits 2,362,317 3,482,841
Other accrued expenses 2,150,264 3,043,878
Income taxes payable - 564,274
Current debt 48,525 590,616
----------- -----------
Total current liabilities 11,830,965 18,357,208
----------- -----------
LONG-TERM DEBT, net 85,143 1,163,711
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 13,407,551 11,158,446
Retained earnings 22,840,281 19,263,269
Unrealized gain on available-for-sale investment 15,419 28,380
----------- -----------
Total shareholders' equity 36,263,251 30,450,095
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $48,179,359 $49,971,014
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES AND SERVICE:
Outsourcing Services $10,810,305 $12,530,535 $33,296,586 $33,439,041
Medical Products 7,539,291 7,125,476 23,710,791 20,607,784
----------- ----------- ----------- -----------
Total Sales and Service 18,349,596 19,656,011 57,007,377 54,046,825
----------- ----------- ----------- -----------
COST OF SALES AND SERVICE:
Outsourcing Services 7,211,235 7,805,654 21,955,947 20,882,984
Medical Products 4,764,874 3,841,137 14,019,362 11,382,182
----------- ----------- ----------- -----------
Total Cost of Sales and Service 11,976,109 11,646,791 35,975,309 32,265,166
----------- ----------- ----------- -----------
GROSS PROFIT 6,373,487 8,009,220 21,032,068 21,781,659
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Marketing and selling 934,731 914,288 3,175,727 2,785,715
Operating, general and administrative 3,182,070 2,804,999 9,293,859 7,701,822
Research and development 1,183,100 707,950 2,920,814 2,162,096
----------- ----------- ----------- -----------
Total operating expenses 5,299,901 4,427,237 15,390,400 12,649,633
----------- ----------- ----------- -----------
EARNINGS FROM OPERATIONS 1,073,586 3,581,983 5,641,668 9,132,026
OTHER (EXPENSE) INCOME, net 130,806 239,451 519,878 302,824
----------- ----------- ----------- -----------
EARNINGS BEFORE
INCOME TAXES 1,204,392 3,821,434 6,161,546 9,434,850
Provision for income taxes 414,000 1,349,000 2,212,000 3,188,000
----------- ----------- ----------- -----------
NET INCOME $ 790,392 $ 2,472,434 $ 3,949,546 $ 6,246,850
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ .06 $ .21 $ .33 $ .55
=========== =========== =========== ===========
Diluted $ .06 $ .19 $ .29 $ .48
=========== =========== =========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 12,178,694 11,511,757 12,012,482 11,408,478
=========== =========== =========== ===========
Diluted 13,185,968 13,274,526 13,469,542 13,126,788
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
----------- ------------
OPERATING ACTIVITIES:
Net income $ 3,949,546 $ 6,246,850
Adjustment to reconcile net income to net
cash flows from operating activities-
Write-down of investment - 200,000
Depreciation and amortization 1,547,954 1,186,226
Change in assets and liabilities-
Accounts receivable, net (677,483) (4,288,867)
Inventories, net (2,216,446) (169,975)
Deferred income taxes and other assets (323,656) 719,406
Accounts payable and accrued expenses (5,045,825) 2,134,272
Customer deposits (1,120,524) 1,072,238
----------- ------------
Net cash flows from operating activities (3,886,434) 7,100,150
----------- ------------
INVESTING ACTIVITIES:
Cash paid for purchase of Eclipse assets, net - (505,759)
Cash paid for purchase of Creos assets, net (1,651,295) -
Purchase of short-term investments (8,361,720) (13,981,246)
Sale of short-term investments 13,564,349 12,872,284
Capital expenditures (1,083,171) (954,222)
Other long-term investments - (30,000)
----------- ------------
Net cash flows from investing activities 2,468,163 (2,598,943)
----------- ------------
FINANCING ACTIVITIES:
Issuance of common stock 1,207,693 1,441,996
Purchase of common stock - (4,175,625)
Dividends issued to shareholder (372,532) (613,077)
Proceeds from note payable - 559,038
Payment of debt (1,620,659) (942,007)
----------- ------------
Net cash flows from financing activities (785,498) (3,729,675)
----------- ------------
Net change in cash and cash equivalents (2,203,769) 771,532
Cash and cash equivalents, beginning 8,499,714 2,466,725
----------- ------------
Cash and cash equivalents, ending $ 6,295,945 $ 3,238,257
=========== ============
The accompanying notes are an integral part of these statements.
6
<PAGE>
COLORADO MEDTECH, INC.
NOTES TO CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS
THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 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,
1999. 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") and CIVCO.
In the opinion of management, the accompanying unaudited condensed consolidated
combined financial statements contain all adjustments necessary to present
fairly the Company's financial position as of March 31, 2000 and the results of
its operations and its cash flows for the nine-month periods ended March 31,
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 nine-month periods ended March 31, 2000 and 1999, respectively:
2000 1999
------ ------
(In Thousands)
Cash paid for interest $ 97 $ 103
Cash paid for income taxes $1,748 $2,275
NOTE 2 - SHORT-TERM INVESTMENTS
- ---------------------------------
During the three months ended March 31, 2000, the Company sold, prior to
maturity, approximately $1,964,000 of debt securities and recognized a gain on
the sale of these securities of approximately $32,000. These debt securities
were sold to help fund operating activities during the period. The debt
securities sold prior to maturity during the three months ended March 31, 2000
were the only debt securities sold prior to maturity during the nine-month
period ended March 31, 2000.
During the nine months ended March 31, 1999, the Company sold, prior to
maturity, approximately $1,957,000 of debt securities and recognized a gain on
the sale of these securities of approximately $9,000. The securities were sold
in order to raise capital to purchase 655,000 shares of Colorado MEDtech, Inc.
common stock from Vencor Operating, Inc. ("Vencor"). Vencor sold many of its
nonessential assets, which included 3,560,000 shares of Colorado MEDtech, Inc.
common stock, to help fund its operations. Of these shares, 2,905,000 were sold
to institutional investors and 655,000 shares were sold to the Company.
7
<PAGE>
Due to the sale of these securities prior to their maturity, the Company has
recharacterized its short-term investments originally characterized as held-to-
maturity investments to available-for-sale as the Company no longer has the
intent to hold the securities to maturity. Investments are now stated at their
quoted market prices and any unrealized gains or losses are accounted for in the
shareholders' equity section, net of the income tax impact of such gains or
losses.
NOTE 3 - 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. 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
March 31, 2000.
The Company assumed certain debt as part of the CIVCO acquisition. During the
quarter ended December 31, 1999, the Company paid all the outstanding debt
instruments it assumed except for two capital lease agreements that have
prepayment penalties. These capital lease agreements 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 March 31, 2000
and June 30, 1999:
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
--------------- --------------
(In Thousands)
<S> <C> <C>
Borrowing under CIVCO revolving line of credit $ - $ 249
Capitalized lease obligation 134 169
Bank notes payable - 1,337
---- ------
134 1,755
Less - Current maturities (49) (591)
---- ------
Long-term debt $ 85 $1,164
==== ======
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires, among other things, that the components and
total amount of comprehensive income be displayed in the financial statements
for interim and annual periods. 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:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
(In Thousands)
Net Income $ 790 $ 2,472 $ 3,950 $ 6,247
Changes in unrealized gain on
available-for-sale investments 6 - (13) -
------- ------- ------- -------
Comprehensive income $ 796 $ 2,472 $ 3,937 $ 6,247
======= ======= ======= =======
</TABLE>
NOTE 5 - 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:
(In Thousands, except earnings per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 790 $ 2,472 $ 3,950 $ 6,247
======= ======= ======= =======
Weighted average number of common shares
outstanding (shares used in basic earnings
per share computation) 12,179 11,512 12,012 11,408
Effect of stock options and warrants
(treasury stock method) 1,007 1,763 1,458 1,719
------- ------- ------- -------
Shares used in diluted earnings per share
computation 13,186 13,275 13,470 13,127
======= ======= ======= =======
Basic earnings per share $ .06 $ .21 $ .33 $ .55
======= ======= ======= =======
Diluted earnings per share $ .06 $ .19 $ .29 $ .48
======= ======= ======= =======
Options and warrants that were of an antidilutive
nature that were outstanding but not included in
the shares used in diluted earnings per share 746 1,207 290 1,355
======= ======= ======= =======
</TABLE>
9
<PAGE>
NOTE 6 - STOCK AND STOCK OPTIONS
- --------------------------------
During the nine months ended March 31, 2000, the Company issued 655,275
incentive stock options to certain employees, including three officers of the
Company. The options to purchase the Company's common stock were issued at
exercise prices ranging from $10.50 to $18.75 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 years from the date of grant.
During the nine months ended March 31, 2000, the Company had 311,622 stock
options exercised by certain employees and consultants, including three officers
of the Company. The stock options were exercised at prices per share ranging
from $1.66 to $8.94, resulting in cash proceeds to the Company of $717,029 and
cancellation of 39,649 shares of previously issued common stock that were used
in lieu of cash to exercise the options.
During the nine months ended March 31, 2000, the Company issued 15,000 warrants
to a Director. The warrants to purchase the Company's common stock were issued
at an exercise price of $13.19 per share, which was the fair market value of the
Company's common stock on the date of the grant. The warrants vest on July 1,
2000 and are exercisable until June 1, 2004.
The Company had 90,000 Director warrants exercised for common stock during the
nine months ended March 31, 2000. The warrants were exercised at a price per
share of $1.59, resulting in cash proceeds to the Company of $143,100.
During the nine months ended March 31, 2000, the Company issued 51,491 shares of
stock purchased through the Company's Employee Stock Purchase Plan during the
plan year ended December 31, 1999. The shares were purchased at a price of
$6.75 per share, resulting in cash proceeds to the Company of $347,564.
NOTE 7 - 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 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 products 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; 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.
The following is a breakout of the Company's operating revenue and gross profit
by segment for the three and nine-month periods ended March 31, 2000 and 1999:
10
<PAGE>
<TABLE>
<CAPTION>
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- -------- ------------ ------------
<S> <C> <C> <C> <C>
(In Thousands)
Three-months ended March 31, 2000:
Operating revenue $13,686 $ 7,539 $(2,875) $18,350
Gross profit 3,599 2,774 - 6,373
Three-months ended March 31, 1999:
Operating revenue $12,973 $ 7,125 $ (442) $19,656
Gross profit 4,825 3,284 (100) 8,009
Nine months ended March 31, 2000:
Operating revenue $37,988 $23,710 $(4,691) $57,007
Gross profit 11,341 9,691 - 21,032
Nine months ended March 31, 1999:
Operating revenue $33,882 $20,607 $ (442) $54,047
Gross profit 12,657 9,225 (100) 21,782
</TABLE>
Included in the operating revenues disclosed above are intersegment operating
revenues of the Outsourcing Services segment of $2,875,000 and $4,691,000 for
the quarter and the nine-month period ended March 31, 2000, and $442,000 for the
quarter and nine-month period ended March 31, 1999. The Medical Products
segment had no intersegment revenues for the quarters or the nine-month periods
ended March 31, 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 March 31, 2000
compared to June 30, 1999:
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- -------- ------------ ------------
(In Thousands)
Assets at March 31, 2000 $36,985 $20,010 $(8,816) $48,179
Assets at June 30, 1999 34,096 18,280 (2,405) 49,971
On July 1, 1999 the Company dissolved the Respiratory Products Division
("Respiratory Products") and moved all of its assets into BioMed. All of the
investments in each of the acquired divisions and subsidiaries were transferred
from Respiratory Products to RELA. Since these investments were transferred,
the asset reconciling item at March 31, 2000 is the elimination of the
investment in BioMed and IPS and includes the investment in the assets of Creos
Technologies, LLC ("Creos") purchased in August 1999. The asset reconciling
item at June 30, 1999 consists of the elimination of the investments in CDT and
CMED Automation.
NOTE 8 - ACQUISITION OF OPERATING ASSETS OF CREOS TECHNOLOGIES, LLC
- -------------------------------------------------------------------
The Company acquired certain operating assets of Creos on August 19, 1999. Creos
developed and manufactured high-voltage x-ray generator systems for computed
tomography ("CT") scanners. The assets of this operation have been integrated
into IPS and CMED Manufacturing. The purchase price for
11
<PAGE>
the assets was approximately $1,954,000. As of March 31, 2000, the Company had
paid approximately $1,651,000 in cash and had accrued approximately $303,000 for
future obligations related to the acquisition. The fair value of the purchased
assets was approximately $1,265,000. The acquisition created goodwill of
approximately $689,000 that will be amortized over a three-year period. Prior to
the sale, Creos had annualized revenues of approximately $4.0 million.
NOTE 9 - 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
products for ultrasound imaging equipment and for minimally invasive surgical
equipment. CIVCO's annualized revenues prior to the acquisition were
approximately $10 million and it employs approximately 90 people. For the
period July 1, 1999 through November 15, 1999, CIVCO had revenue of
approximately $4,152,000 and net income of approximately $163,000. In the same
period, CMED had revenue of approximately $25,435,000 and net income of
approximately $1,743,000.
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 and
diluted earnings per share for the Company would have been as follows:
(In Thousands, except earnings per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pro forma Net Income $790 $2,371 $3,888 $5,855
Pro forma Earnings per Share $.06 $ .18 $ .29 $ .45
</TABLE>
NOTE 10 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
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. 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.
12
<PAGE>
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 guidance in SAB 101 must
be implemented by the Company's first fiscal quarter of fiscal 2001. The
Company is currently reviewing the guidance provided by the SEC staff and has
not concluded as to the effects on the Company's results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44"). The
Interpretation clarifies the application of APB No. 25 for certain issues
related to equity-based instruments issued to employees. FIN No. 44 is
effective on July 1, 2000, except for certain transactions, and will be applied
on a prospective basis. Management believes that FIN No. 44 will not have a
significant impact on its financial statements.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As an aid to understanding the Company's operating results, the following table
indicates the percentage relationships of income and expense items to total
revenue for the line items included in the Condensed Consolidated Combined
Statements of Operations for the three and nine-month periods ended March 31,
2000 and 1999, and the percentage change in those items for the three and nine-
month periods ended March 31, 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 Nine-Month Period Three-Month Period Nine-Month Period
Ended March 31, Ended March 31, Ended March 31, Ended March 31,
- ---------------------- ------------------- ------------------- ------------------
2000 1999 2000 1999 LINE ITEMS 1999 1999
- --------- ----- ----- ----- ---------- ----- -----
<C> <C> <C> <C> <S> <C> <C>
% % % % % %
58.9 63.7 58.4 61.9 Sales, Outsourcing Services (13.7) (0.4)
41.1 36.3 41.6 38.1 Sales, Medical Products 5.8 15.1
- --------- ----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 Total Sales and Service (6.6) 5.5
- --------- ----- ----- ----- ----- -----
39.3 39.7 38.5 38.6 Cost of Sales, Outsourcing Services (7.6) 5.1
26.0 19.5 24.6 21.1 Cost of Sales, Medical Products 24.0 23.2
- --------- ----- ----- ----- ----- -----
65.3 59.3 63.1 59.7 Total Cost of Sales and Services 2.8 11.5
- --------- ----- ----- ----- ----- -----
34.7 40.7 36.9 40.3 Gross Profit (20.4) (3.4)
- --------- ----- ----- ----- ----- -----
5.1 4.7 5.6 5.2 Marketing and Selling 2.2 14.0
17.3 14.3 16.3 14.3 Operating, Gen'l and Admin 13.4 20.7
6.4 3.6 5.1 4.0 Research and Development 67.1 35.1
- --------- ----- ----- ----- ----- -----
28.9 22.5 27.0 23.4 Total Operating Expenses 19.7 21.7
- --------- ----- ----- ----- ----- -----
5.9 18.2 9.9 16.9 Earnings from Operations (70.0) (38.2)
0.7 1.2 0.9 0.6 Other Income, Net (45.4) 71.7
- --------- ----- ----- ----- ----- -----
6.6 19.4 10.8 17.5 Earnings Before Income Taxes (68.5) (34.7)
2.3 6.9 3.9 5.9 Provision for Income Taxes (69.3) (30.6)
- --------- ----- ----- ----- ----- -----
4.3 12.6 6.9 11.6 NET INCOME (68.0) (36.8)
========= ===== ===== ===== ===== =====
</TABLE>
14
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Revenues for the three and nine-month periods ended March 31, 2000, as compared
to the same periods 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 Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $18.3 million $19.7 million $57.0 million $54.0 million
Outsourcing Services 59% 64% 58% 62%
Medical Products 41% 36% 42% 38%
</TABLE>
The decrease in revenues during the three month period is attributable to a
slowdown in outsource manufacturing caused by production delays, discounts given
to three large outsourcing services customers, and the cessation of operations
in BioMed Y2K, Inc. The increase in revenues for the nine-month period is
attributable to the acquisition of the CMED Automation Division ("CMED
Automation") in February 1999 and the acquisition of the assets of Creos
Technologies, LLC ("Creos") in August 1999. Together, CMED Automation and Creos
contributed approximately $5.3 million in revenues for the nine-month period
ended March 31, 2000.
Gross margins decreased to 35% and 37% for the three and nine-month periods
ended March 31, 2000, compared to 41% and 40% for the same periods in the prior
year. The decrease in the Company's margins is a result of the slowdown in
outsource manufacturing caused by production delays, discounts the Company gave
to three large outsourcing services customers, and an overrun on a fixed price
contract in the Automation Division.
Marketing and selling expenses increased 2% and 14% for the three and nine-month
periods ended March 31, 2000, compared to the same periods in the prior year.
The increase is attributable to the addition of CMED Automation and the
Company's increased emphasis on marketing and sales during the nine months ended
March 31, 2000, compared to the same period in the prior year. Marketing and
selling expenses as a percentage of total revenues were 5% and 6% for the three
and nine-month periods ended March 31, 2000, compared to 5% for each of the same
periods in the prior year.
Operating, general and administrative expenses increased 13% and 21% for the
three and nine-month periods ended March 31, 2000, compared to the same periods
in the prior year. The increase is primarily attributable to the one-time
expenses related to the acquisition of CIVCO Medical Instruments Co., Inc.
("CIVCO") which was completed in November 1999. This acquisition was accounted
for as a pooling of interests; therefore, all acquisition costs were expensed in
the quarter in which they were incurred. These one-time expenses were
approximately $.8 million for the nine-month period ended March 31, 2000. The
increase in operating, general and administrative expenses is also attributable
to the addition of CMED Automation and Creos. As a percentage of revenues,
operating, general and administrative expenses increased to 17% and 16% for the
three and nine-month periods ended March 31, 2000, compared to 14% for each of
the same periods in the prior year.
Research and development expenses increased by 67% and 35% for the three and
nine-month periods ended March 31, 2000, compared to the same periods in 1999.
Research and development expenses are attributable to the Imaging and Power
Systems Division ("IPS") product lines, which include Creos, and
15
<PAGE>
to CIVCO product lines. Due to the addition of the Creos and CIVCO product
lines, the Company expects research and development expenses to continue at
approximately the same levels as during the three months ended March 31, 2000.
Consistent with the Company's operating plans, the Company continues to pursue
the acquisition or development of new or improved technology or products. Should
the Company identify such opportunities, the amount of future research and
development expenditures may increase.
Other income remained at 1% of sales for the three and nine-month periods ended
March 31, 2000 and 1999. The increase in other income for the nine months
ended March 31, 2000, is primarily due to a $.2 million write-down of an
investment in an early stage drug delivery company that occurred during the
nine-month period ended March 31, 1999.
The provision for income taxes decreased to 34% and 36% of earnings before
income taxes for the three and nine-month periods ended March 31, 2000 due to a
one-time tax benefit related to the exercise of warrants by consultants and the
timing of income recognition by CIVCO. CIVCO was an S-corporation prior to the
November 1999 acquisition. The Company was not responsible for taxes on income
earned by CIVCO nor did it receive a benefit on losses incurred prior to the
acquisition. The Company's ordinary combined Federal and state tax rate is
approximately 38%.
During the three and nine-month periods ended March 31, 2000, compared to the
same periods 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 Nine Months Ended
March 31, March 31,
-------------------------- -------------------------------
2000 1999 2000 1999
----------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Net Income $.8 million $2.5 million $3.9 million $6.2 million
Diluted Earnings per Share $ .06 $ .19 $ .29 $ .48
Diluted Weighted Average Common
Equivalent Shares Outstanding 13.2 million 13.3 million 13.5 million 13.1 million
</TABLE>
The decrease in net income and earnings per share is attributable to the
slowdown in outsource manufacturing caused by production delays, discounts given
to three large outsourcing customers, an overrun on a fixed-price contract in
the Automation Division and the one-time charges for the CIVCO acquisition.
If the Company had not incurred the one-time charges for the CIVCO acquisition
and the centralization of its manufacturing operations, that occurred during the
quarter ended December 31, 1999, the net income and earnings per share figures
for the nine months ended March 31, 2000, would have been as follows:
Nine Months Ended
March 31,
---------------------------------
2000 1999
------------ ------------
Pro forma Net Income $4.6 million $6.2 million
Pro forma Earnings per Share $ .34 $ .48
16
<PAGE>
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 approximately $1.7 million of debt as part of
the CIVCO acquisition. During the quarter ended December 31, 1999, the Company
paid off all the outstanding debt instruments it assumed except for two capital
lease agreements that have prepayment penalties. 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. 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
March 31, 2000.
The ratio of current assets to current liabilities was 3.4 to 1 at March 31,
2000 and 2.3 to 1 at June 30, 1999. The Company's working capital increased
$4.0 million since June 30, 1999. 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 nine-month period ended March 31, 2000 was
approximately 58 days, compared to 49 days for the year ended June 30, 1999.
The increase in the number of days outstanding was a result of slow payments by
two large customers who delayed their payments. Management believes that the
average days outstanding will remain at the current level in the near future.
The Company used $3.9 million of cash for operations during the nine-month
period ended March 31, 2000, primarily due to the increase in inventory and
decrease of accrued expenses and customer deposits. Management believes that
the number of inventory turns will improve by the end of the fiscal year.
During the nine months ended March 31, 2000, the Company made capital
expenditures of $1.1 million for property and equipment, consisting principally
of computer and manufacturing equipment.
The Company had no material commitments for capital expenditures at March 31,
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
- ----------------------------
Statements in this report which are not historical facts are forward-looking
statements subject to risks and uncertainties which could cause actual results
to differ materially from those set forth in or implied by forward-looking
statements. Those risks include, but are 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 affect project timing and financial
performance, 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
17
<PAGE>
upon which the Company is dependent. These factors are more fully described in
the Company's documents filed with the Securities and Exchange Commission,
including its Form 10-K for the year ended June 30, 1999 and its Form S-3 filed
February 7, 2000, copies of which the Company will provide on request.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as part of its cash management strategy, had short-term investments
at March 31, 2000 consisting of approximately $9.2 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 April 1, 2000. If market interest rates had
increased by 1% on April 1, 2000, the Company would have had an approximate
$33,000 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 March 31, 2000.
18
<PAGE>
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended March 31, 2000.
(b) Reports on Form 8-K during the quarter ended March 31, 2000:
The Company amended a current report on Form 8-K dated November 15, 1999
relating to the acquistion of CIVCO Medical Instruments Co., Inc.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Colorado MEDtech, Inc.
----------------------
(Registrant)
DATE: May 11, 2000
/s/ John V. Atanasoff
-----------------------
John V. Atanasoff
Chief Executive Officer
DATE: May 11, 2000
/s/ Stephen P. Hall
-----------------------
Stephen P. Hall
Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN IS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 6,295,945
<SECURITIES> 9,174,158
<RECEIVABLES> 12,771,318
<ALLOWANCES> 0
<INVENTORY> 8,247,459
<CURRENT-ASSETS> 40,176,147
<PP&E> 4,772,297
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,179,359
<CURRENT-LIABILITIES> 11,830,965
<BONDS> 0
13,407,551
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,179,359
<SALES> 57,007,377
<TOTAL-REVENUES> 57,007,377
<CGS> 35,975,309
<TOTAL-COSTS> 15,390,400
<OTHER-EXPENSES> (519,878)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,161,546
<INCOME-TAX> 2,212,000
<INCOME-CONTINUING> 3,949,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,949,546
<EPS-BASIC> .33
<EPS-DILUTED> .29
</TABLE>
