<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 DECEMBER 31, 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 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
report(s), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
As of January 31, 2000, the Company had 12,164,134 shares of Common Stock
outstanding.
<PAGE>
COLORADO MEDTECH, INC.
FORM 10-Q
<TABLE>
<CAPTION>
PART I Financial Information PAGE
--------------------- ----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Combined Balance Sheets (Unaudited) -
December 31, 1999 and June 30, 1999 3
Condensed Consolidated Combined Statements of Operations (Unaudited) -
Three and six-months ended
December 31, 1999 and 1998 5
Condensed Consolidated Combined Statements of Cash Flows (Unaudited) -
Six-months ended
December 31, 1999 and 1998 6
Notes to Condensed Consolidated Combined Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition
and Results of Operations 13
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 18
PART II Other Information
-----------------
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
-2-
<PAGE>
PART I Financial Information
Item 1. Financial Statements
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED COMBINED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,969,882 $ 8,499,714
Short-term investments 11,940,852 14,394,870
Accounts receivable, net 14,274,333 11,932,749
Inventories, net 9,306,409 5,512,155
Deferred income taxes and other
current assets 2,865,072 2,353,432
----------------- ---------------
Total current assets 40,356,548 42,692,920
----------------- ---------------
PROPERTY AND EQUIPMENT, net 4,925,675 4,341,931
----------------- ---------------
GOODWILL, net 2,058,023 1,582,039
----------------- ---------------
LAND, DEFERRED INCOME TAXES
AND OTHER ASSETS 1,264,173 1,354,124
----------------- ---------------
TOTAL ASSETS $ 48,604,419 $ 49,971,014
================= ===============
</TABLE>
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>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 6,060,570 $ 5,842,194
Accrued salaries and wages 2,098,852 4,519,996
Accrued product service costs 369,358 313,409
Customer deposits 3,120,001 3,482,841
Other accrued expenses 2,225,875 3,043,878
Income taxes payable - 564,274
Current debt 49,798 590,616
----------------- -------------
Total current liabilities 13,924,454 18,357,208
----------------- -------------
LONG-TERM DEBT, net 95,968 1,163,711
----------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 12,524,444 11,158,446
Retained earnings 22,049,889 19,263,269
Unrealized gain on available-for-sale investment 9,664 28,380
----------------- -------------
Total shareholders' equity 34,583,997 30,450,095
----------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 48,604,419 $ 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 Six Months Ended
December 31, December 31,
------------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES AND SERVICE:
Outsourcing Services $ 10,716,979 $ 11,373,008 $ 22,486,280 $ 20,908,506
Medical Products 7,282,237 6,955,344 16,171,500 13,482,308
------------- ------------- ------------- -------------
Total Sales and service 17,999,216 18,328,352 38,657,780 34,390,814
------------- ------------- ------------- -------------
COST OF SALES AND SERVICE:
Outsourcing Services 7,295,166 6,966,803 14,744,713 13,077,330
Medical Products 4,453,745 4,026,073 9,254,488 7,541,045
------------- ------------- ------------- -------------
Total Cost of Sales 11,748,911 10,992,876 23,999,201 20,618,375
------------- ------------- ------------- -------------
GROSS PROFIT 6,250,305 7,335,476 14,658,579 13,772,439
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Marketing and selling 1,028,937 971,841 2,240,995 1,871,427
Operating, general and administrative 2,909,855 2,593,112 6,111,790 4,896,821
Research and development 937,104 745,498 1,737,714 1,454,144
------------- ------------- ------------- -------------
Total operating expenses 4,875,896 4,310,451 10,090,499 8,222,392
------------- ------------- ------------- -------------
EARNINGS FROM OPERATIONS 1,374,409 3,025,025 4,568,080 5,550,047
OTHER (EXPENSE) INCOME, net 190,785 (85,765) 389,072 63,372
------------- ------------- ------------- -------------
EARNINGS BEFORE
INCOME TAXES 1,565,194 2,939,260 4,957,152 5,613,419
Provision for income taxes 647,000 1,025,000 1,798,000 1,839,000
------------- ------------- ------------- -------------
NET INCOME $ 918,194 $ 1,914,260 $ 3,159,152 $ 3,774,419
============= ============= ============= =============
NET INCOME PER SHARE
Basic $ .08 $ .17 $ .26 $ .33
============= ============= ============= =============
Diluted $ .07 $ .15 $ .23 $ .29
============= ============= ============= =============
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 11,987,480 11,239,069 11,930,280 11,357,961
============= ============= ============= =============
Diluted 13,378,266 12,940,457 13,556,338 13,011,852
============= ============= ============= =============
</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 SIX-MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,159,152 $ 3,774,419
Adjustment to reconcile net income to net
cash flows from operating activities-
Write-down of investment - 200,000
Depreciation and amortization 996,126 858,966
Change in assets and liabilities-
Accounts receivable, net (2,180,498) (6,157,971)
Inventories, net (3,275,396) (81,875)
Deferred income taxes and other assets 101,666 646,073
Accounts payable and accrued expenses (4,026,650) (163,904)
Customer deposits (362,840) 1,304,936
------------ ------------
Net cash flows from operating activities (5,588,440) 380,644
------------ ------------
INVESTING ACTIVITIES:
Cash paid for purchase of Creos, net (1,336,562) -
Purchase of short-term investments (3,098,999) (5,137,331)
Sale of short-term investments 5,529,181 10,620,284
Capital expenditures (782,001) (638,539)
------------ ------------
Net cash flows from investing activities 311,619 4,844,414
------------ ------------
FINANCING ACTIVITIES:
Issuance of common stock 728,082 1,046,619
Purchase of common stock - (4,175,625)
Dividends issued to shareholder (372,532) (435,817)
Proceeds from note payable - 366,417
Payment of debt (1,608,561) (457,474)
------------ ------------
Net cash flows from financing activities (1,253,011) (3,655,880)
------------ ------------
Net change in cash and cash equivalents (6,529,832) 1,569,178
Cash and cash equivalents, beginning 8,499,714 2,466,725
------------ ------------
Cash and cash equivalents, ending $ 1,969,882 $ 4,035,903
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
COLORADO MEDTECH, INC.
NOTES TO CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS
THREE AND SIX-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998
(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 consolidated financial
statements contain all adjustments necessary to present fairly the Company's
financial position as of December 31, 1999 and the results of its operations and
its cash flows for the six-month periods ended December 31, 1999 and 1998. All
of the adjustments were of a normal and recurring nature.
The following sets forth the supplemental disclosures of cash flow information
for the six-month periods ended December 31, 1999 and 1998, respectively:
1999 1998
------- -------
(In Thousands)
Cash paid for interest $ 91 $ 88
Cash paid for income taxes $ 1,335 $ 1,615
NOTE 2 - SHORT-TERM INVESTMENTS
During the three months ended December 31, 1998, the Company sold 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. Due to the sale of these
securities, 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 loses.
-7-
<PAGE>
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
December 31, 1999.
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 December 31,
1999 and June 30, 1999:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
(In Thousands)
Borrowing under CIVCO revolving line of credit $ - $ 249
Capitalized lease obligation 146 169
Bank notes payable - 1,337
----------------- -------------
146 1,755
Less - Current maturities (50) (591)
----------------- -------------
Long-term debt $ 96 $ 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 nonowner 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 Six Months Ended
December 31, December 31,
------------------------ ---------------------
1999 1998 1999 1998
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
(In Thousands)
Net Income $ 918 $ 1,914 $ 3,159 $ 3,774
Changes in unrealized gain on
available-for-sale investments (19) - (19) -
---------- ----------- ---------- ---------
Comprehensive income $ 899 $ 1,914 $ 3,140 $ 3,744
========== =========== ========== =========
</TABLE>
-8-
<PAGE>
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 Six Months Ended
December 31, December 31,
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net income $ 918 $ 1,914 $ 3,159 $ 3,774
========== ========== =========== =========
Weighted average number of common shares
outstanding (shares used in basic earnings
per share computation) 11,987 11,239 11,930 11,358
Effect of stock options and warrants
(treasury stock method) 1,391 1,701 1,626 1,654
---------- ---------- ----------- ---------
Shares used in diluted earnings per share
Computation 13,378 12,940 13,556 13,012
========== ========== =========== =========
Basic earnings per share $ .08 $ .17 $ .26 $ .33
========== ========== =========== =========
Diluted earnings per share $ .07 $ .15 $ .23 $ .29
========== ========== =========== =========
Options and warrants that were of an antidilutive
nature that were outstanding but not included in
the shares used in diluted earnings per share 742 435 215 435
========== ========== =========== =========
</TABLE>
NOTE 6 - STOCK AND STOCK OPTIONS
During the six-months ended December 31, 1999, the Company issued 651,275
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 $13.19 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.
-9-
<PAGE>
The Company had 199,484 stock options exercised by certain employees and
consultants, including three officers of the Company, during the six-months
ended December 31, 1999. The stock options were exercised at prices per share
ranging from $1.66 to $8.94, resulting in cash proceeds to the Company of
$332,818 and cancellation of 39,457 shares of previously issued common stock
that were used in lieu of cash to exercise the options.
During the six-months ended December 31, 1999, 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 30,000 Director warrants exercised for common stock during the
six-months ended December 31, 1999. The warrants were exercised at a price per
share of $1.59, resulting in cash proceeds to the Company of $47,700.
During the six-months ended December 31, 1999, 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 a 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 a 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 six-month periods ended December 31, 1999 and 1998:
-10-
<PAGE>
<TABLE>
<CAPTION>
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- --------- ------------ -------------
<S> <C> <C> <C> <C>
(In Thousands)
Three-months Ended December 31, 1999:
Operating revenue $ 12,223 $ 7,282 $ (1,506) $ 17,999
Gross Profit 3,422 2,828 - 6,250
Three-months Ended December 31, 1998:
Operating revenue $ 11,373 $ 6,955 $ - $ 18,328
Gross Profit 4,406 2,929 - 7,335
Six-months Ended December 31, 1999:
Operating revenue $ 24,302 $ 16,171 $ (1,815) $ 38,658
Gross Profit 7,742 6,917 - 14,659
Six-months Ended December 31, 1998:
Operating revenue $ 20,909 $ 13,482 $ - $ 34,391
Gross Profit 7,831 5,941 - 13,772
</TABLE>
Included in the operating revenues disclosed above are intersegment operating
revenues of the Outsourcing Services segment of $1,506,000 and $1,815,000 for
the quarter and the six-month period ended December 31, 1999. The Medical
Products segment had no intersegment revenues for the quarters or the six-month
periods ended December 31, 1999 and 1998.
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 December 31,
1999 compared to June 30, 1999:
<TABLE>
<CAPTION>
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- --------- ------------ -------------
<S> <C> <C> <C> <C>
(In Thousands)
Assets at December 31, 1999 $ 40,726 $ 15,954 $ (8,076) $ 48,604
Assets at June 30, 1999 34,096 18,280 (2,405) 49,971
</TABLE>
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 December 31, 1999 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.
-11-
<PAGE>
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 the assets was
approximately $1,954,000. As of December 31, 1999, the Company has paid
approximately $1,337,000 in cash and had accrued approximately $617,000 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 designer 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
October 1, 1999 through November 15, 1999 CIVCO had revenue of approximately
$1,260,000 and net income of approximately $(161,000). In the same period, CMED
had revenues of approximately $7,669,000 and net income of approximately
$(174,000). 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.
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.
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.
-12-
<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 Statements of
Operations for the three and six-month periods ended December 31, 1999 and 1998,
and the percentage change in those items for the three and six-month periods
ended December 31, 1999, from the comparable periods in 1998.
<TABLE>
<CAPTION>
Percentage Change From
As a Percentage of Total Revenues Prior Year's Comparable Period
- --------------------------------------------- ---------------------------------------------------
Three Month Period Six Month Period Three Month Period Six Month Period
Ended December 31, Ended December 31, Ended December 31, Ended December 31,
- ----------------------- -------------------- -------------------------- ----------------------
1999 1998 1999 1998 LINE ITEMS 1999 1999
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
<C> <C> <C> <C> <S> <C> <C>
% % % % % %
100.0 100.0 100.0 100.0 Sales and Service (1.8) 12.4
65.3 60.0 62.1 60.0 Cost of Sales and Services 6.9 16.4
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
34.7 40.0 37.9 40.0 Gross Profit (14.8) 6.4
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
5.7 5.3 5.8 5.4 Marketing and Selling 5.9 19.7
16.2 14.1 15.8 14.2 Operating, Gen'l and Admin 12.2 24.8
5.2 4.1 4.5 4.2 Research and Development 25.7 19.5
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
27.1 23.5 26.1 23.9 Total Operating Expenses 13.1 22.7
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
7.6 16.5 11.8 16.1 Earnings from Operations (54.6) (17.7)
1.1 (0.5) 1.0 0.2 Other Income, Net 322.5 513.9
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
8.7 16.0 12.8 16.3 Earnings Before Income Taxes (46.7) (11.7)
3.6 5.6 4.7 5.3 Provision for Income Taxes (36.9) (2.2)
- --------- ---------- --------- --------- -------------------------------- -------------------------- ----------------------
5.1 10.4 8.2 11.0 NET INCOME (52.0) (16.3)
========= ========== ========= ========= ================================ ========================== ======================
</TABLE>
-13-
<PAGE>
RESULTS OF OPERATIONS
Revenues for the three and six-month periods ended December 31, 1999, as
compared to the same periods in the prior year, and the percentage of total
contributed by each of the Company's segments are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1999 1998 1999 1998
Revenues $18.0 million $18.3 million $38.7 million $34.4 million
Outsourcing Services 60% 62% 58% 61%
Medical Products 40% 38% 42% 39%
The decrease in revenues during the three month period is attributable to a
slowdown in outsource manufacturing resulting from the centralization of the
Company's manufacturing operations and discounts given to three large
outsourcing services customers. The increase in revenues for the six 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 $3.2 million in the six-month period ended December
31, 1999.
Gross margins decreased to 35% and 38% for the three and six-month periods ended
December 31, 1999, compared to 40% 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 the centralization of the Company's
manufacturing operations and discounts the Company gave to three large
outsourcing services customers. The Company had one-time expenses of
approximately $.3 million during the quarter ended December 31, 1999 in
connection with the centralization of its manufacturing operations.
Marketing and selling expenses increased 6% and 20% for the three and six-month
periods ended December 31, 1999, 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 six months ended
December 31, 1999, compared to the same period in the prior year. Marketing and
selling expenses as a percentage of total revenues increased to 6% for each of
the three and six-month periods ended December 31, 1999, compared to 5% for the
same periods in the prior year.
Operating, general and administrative expenses increased 12% and 25% for the
three and six-month periods ended December 31, 1999, compared to the same
periods in the prior year. The increase is attributable to 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
-14-
<PAGE>
of interests; therefore, all acquisition costs were expensed in the quarter in
which they were incurred. These one-time expenses were approximately $.4 million
for the quarter and $.8 million for the six-month period ended December 31,
1999. 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 16% for
the three and six-month periods ended December 31, 1999, compared to 14% for the
same periods in the prior year.
Research and development expenses increased by 26% and 20% for the three and
six-month periods ended December 31, 1999, compared to the same periods in 1998.
Research and development expenses are attributable to the Imaging and Power
Systems Division ("IPS") product lines, which include Creos, and 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 December 31, 1999. Consistent
with the Company's operating plans, the Company continues to pursue the
acquisition or development of new or improved technology or products. Should the
Company identify such opportunities, the amount of future research and
development expenditures may increase.
Other income increased to $.2 million and $.4 million for the three and six-
month periods ended December 31, 1999. The increase is primarily due to a $.2
million write-down of an investment in an early stage drug delivery company that
occurred during the quarter ended December 31, 1998. The increase is also
attributable to an increase in the amount of the Company's investment capital
during the three and six-month periods ended December 31, 1999, compared to the
same periods in 1998.
The provision for income taxes increased to 41% of earnings before income taxes
for the quarter ended December 31, 1999 and decreased to 36% of earnings before
income taxes for the six-month period ended December 31, 1999 due to 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 six-month periods ended December 31, 1999, 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 Six Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net Income $0.9 million $1.9 million $3.2 million $3.8 million
Earnings per Share $.07 $.15 $.23 $.29
Diluted Weighted Average Common
Equivalent Shares Outstanding 13.4 million 12.9 million 13.6 million 13.0 million
</TABLE>
-15-
<PAGE>
The decrease in net income and earnings per share is attributable to the
slowdown in outsource manufacturing caused by the centralization of
manufacturing operations into one location, discounts given to three large
outsourcing customers 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, the net income and
earnings per share figures would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Income $1.4 million $1.9 million $3.8 million $3.8 million
Earnings per Share $.10 $.15 $.28 $.29
</TABLE>
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have consisted of cash flow from
operations, cash deposits received from customers related to contracts and cash
proceeds from the issuance of common stock. The Company assumed certain debt,
approximately $1.7 million, as part of the CIVCO acquisition. During the quarter
ended December 31, 1999, the Company paid off all the outstanding debt
instruments it had 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
December 31, 1999.
The ratio of current assets to current liabilities was 2.9 to 1 at December 31,
1999 and 2.3 to 1 at June 30, 1999. The Company's working capital increased $2.1
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 six-month period ended December 31, 1999 was approximately
72 days, compared to 49 days for the year ended June 30, 1999. The increase in
the number of days outstanding was a result of extended payment terms granted to
a customer during a contract negotiation, which increased the average number of
days outstanding of the Company's accounts receivable by 10 days as of December
31, 1999, and slow payments by several large customers. Management believes that
the average days outstanding will return to a more historical level by the end
of the fiscal year.
-16-
<PAGE>
The Company used $5.6 million of cash for operations during the six-month period
ended December 31, 1999, primarily due to the increase in days outstanding of
accounts receivable, increase in inventory and decrease of accrued expenses.
Management believes that the number of inventory turns will improve by the end
of the fiscal year.
During the six-months ended December 31, 1999, the Company made capital
expenditures of $.8 million for property and equipment, consisting principally
of computer and manufacturing equipment.
The Company had no material commitments for capital expenditures at December 31,
1999.
INFORMATION SYSTEMS AND THE YEAR 2000 ISSUE
The Company had no material Year 2000 issues as of January 31, 2000, and has
continued to operate in its normal fashion. The Company believes that it has
fully addressed the Year 2000 issue. The Company engaged in a comprehensive
project to upgrade its information technology and manufacturing computer
software to programs that consistently and properly recognize the year 2000.
Many of the Company's systems include new hardware and packaged software
purchased from vendors who represented that these systems were Year 2000
compliant. During the past two years, the Company replaced or added new
equipment to its inventory of network and systems computers. This hardware
includes the Company's organization-wide network system and servers,
telecommunication systems and personal computer equipment. In addition, the
Company upgraded its organization-wide accounting and management information
computer software. This new software operates the Company's accounting and
operational systems and is functional at each of its facility locations. The
vendor warranted that the software is Year 2000 compliant. The Company
successfully tested the system for Year 2000 compliance. The primary purpose of
acquiring this system was to provide improved functionality in the area of
consolidated financial reporting, financial project control and management
reporting. In addition, the Company upgraded its telecommunication system to
make it Year 2000 compliant. The Company utilized 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 had formal communications with its
significant vendors concerning Year 2000 compliance. 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 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. The Company had spent
approximately $100,000 as of December 31, 1999 on the Year 2000 issue.
-17-
<PAGE>
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 such orders, 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. 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 December 31, 1999 consisting of approximately $11.9 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 January 1, 2000. If market interest rates had
increased by 1% on January 1, 2000, the Company would have had an approximate
$19,000 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 December 31, 1999.
-18-
<PAGE>
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) On November 15, 1999, the Company issued 736,324 shares of common stock to
Victor Wedel and Sherrill Wedel in consideration for the acquisition by the
Company from the Wedels of all of the outstanding shares of CIVCO Medical
Products Co., Inc. and real estate associated with the business of CIVCO. The
shares of common stock were valued at a negotiated price of $15.00 per share.
Due to the private nature of the transaction, the issuance of the common stock
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of shareholders of the Company at
the Annual Meeting of Shareholders held November 20, 1999:
The following members were elected to the Board of Directors to hold office
until the next annual meeting:
Nominee For Withheld
- ------- --------- --------
John V. Atanasoff, II 9,215,282 521,454
John P. Jenkins 9,101,410 635,326
Ira M. Langenthal 9,206,062 530,674
Dean A. Leffingwell 9,184,482 552,254
Clifford W. Mezey 9,213,582 523,154
Robert L. Sullivan 9,142,429 594,307
John E. Wolfe 9,143,524 593,212
The Colorado MEDtech, Inc. Stock Option Plan was amended to increase the number
of shares of the Company's Common Stock reserved for issuance thereunder from
3,500,000 to 4,500,000
For Against Abstain Not Voted
3,969,741 2,983,788 15,040 2,768,167
The Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan was amended to
increase the number of shares of the Company's Common Stock reserved for
issuance thereunder from 240,000 to 540,000.
For Against Abstain Not Voted
6,644,224 307,213 17,532 2,767,767
-19-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the three months ended December 31,
1999.
(b) Reports on Form 8-K during quarter ended December 31, 1999:
The Company filed a current report on Form 8-K dated October 14, 1999
relating to a press release regarding the signing of a letter of intent
to acquire CIVCO Medical Instruments Co., Inc.
The Company filed a current report on Form 8-K dated November 15, 1999
relating to the acquistion of CIVCO Medical Instruments Co., Inc.
The Company filed a current report on Form 8-K dated December 22, 1999
relating to a press release regarding its expected second quarter
results.
-20-
<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: February 11, 2000
/s/ John V. Atanasoff II
------------------------
John V. Atanasoff II
Chief Executive Officer
DATE: February 11, 2000
/s/ Stephen P. Hall
------------------------
Stephen P. Hall
Chief Financial Officer
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,969,882
<SECURITIES> 11,940,852
<RECEIVABLES> 14,274,333
<ALLOWANCES> 0
<INVENTORY> 9,306,409
<CURRENT-ASSETS> 40,356,548
<PP&E> 4,925,675
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,604,419
<CURRENT-LIABILITIES> 13,924,454
<BONDS> 0
0
0
<COMMON> 12,524,444
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,604,419
<SALES> 38,657,780
<TOTAL-REVENUES> 38,657,780
<CGS> 23,999,201
<TOTAL-COSTS> 10,090,499
<OTHER-EXPENSES> (389,072)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,957,152
<INCOME-TAX> 1,798,000
<INCOME-CONTINUING> 3,159,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,159,152
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.23
</TABLE>
