10-Q 1 d87280e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 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 MARCH 31, 2001 [ ] 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of April 30, 2001, the Company had 12,953,905 shares of Common Stock outstanding. 2 COLORADO MEDTECH, INC. FORM 10-Q
PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) - March 31, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Operations (Unaudited) - Three months and nine months ended March 31, 2001 and 2000 5 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine months ended March 31, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19
2 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COLORADO MEDTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (UNAUDITED)
March 31, 2001 June 30, 2000 -------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 8,570,795 $ 8,560,065 Short-term investments 2,719,256 8,190,621 Accounts receivable, net 13,655,772 13,662,053 Inventories, net 15,451,261 8,512,540 Deferred income taxes and other current assets 4,540,433 3,141,121 ----------- ----------- Total current assets 44,937,517 42,066,400 PROPERTY AND EQUIPMENT, net 4,481,636 4,568,811 GOODWILL AND INTANGIBLES, net 3,864,750 316,337 NOTES RECEIVABLE -- RELATED PARTIES 999,796 -- LAND, DEFERRED INCOME TAXES AND OTHER ASSETS 1,244,468 1,340,315 ----------- ----------- TOTAL ASSETS $55,528,167 $48,291,863 =========== ===========
The accompanying notes are an integral part of these balance sheets. 3 4 COLORADO MEDTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
March 31, 2001 June 30, 2000 -------------- ------------- CURRENT LIABILITIES: Accounts payable $ 8,208,740 $ 5,440,413 Accrued salaries and wages 2,796,299 2,390,201 Accrued product service costs 400,024 394,361 Customer deposits 4,250,776 2,647,132 Other accrued expenses 2,815,963 1,951,128 Current debt 40,901 46,120 ------------ ------------ Total current liabilities 18,512,703 12,869,355 ------------ ------------ LONG-TERM DEBT, net 44,242 75,218 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock 16,113,103 13,468,486 Retained earnings 20,903,678 21,881,289 Unrealized loss on available-for-sale investments (45,559) (2,485) ------------ ------------ Total shareholders' equity 36,971,222 35,347,290 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,528,167 $ 48,291,863 ============ ============
The accompanying notes are an integral part of these balance sheets. 4 5 COLORADO MEDTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
Three Months Ended Nine Months Ended March 31, March 31, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ SALES AND SERVICE: Outsourcing Services $ 9,217,606 $ 10,810,305 $ 29,603,576 $ 33,296,586 Medical Products 11,740,055 7,539,291 27,112,593 23,710,791 ------------ ------------ ------------ ------------ Total Sales and Service 20,957,661 18,349,596 56,716,169 57,007,377 ------------ ------------ ------------ ------------ COST OF SALES AND SERVICE: Outsourcing Services 6,499,414 7,211,235 20,485,558 21,955,947 Medical Products 7,941,635 4,764,874 18,372,441 14,019,362 ------------ ------------ ------------ ------------ Total Cost of Sales and Service 14,441,049 11,976,109 38,857,999 35,975,309 ------------ ------------ ------------ ------------ GROSS PROFIT 6,516,612 6,373,487 17,858,170 21,032,068 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Marketing and selling 1,066,151 934,731 2,986,424 3,175,727 Operating, general and administrative 5,123,238 3,182,070 13,419,023 9,293,859 Research and development 1,557,837 1,183,100 3,770,940 2,920,814 ------------ ------------ ------------ ------------ Total operating expenses 7,747,226 5,299,901 20,176,387 15,390,400 ------------ ------------ ------------ ------------ (LOSS) EARNINGS FROM OPERATIONS (1,230,614) 1,073,586 (2,318,217) 5,641,668 OTHER INCOME, net 215,138 130,806 745,606 519,878 ------------ ------------ ------------ ------------ (LOSS) EARNINGS BEFORE INCOME TAXES (1,015,476) 1,204,392 (1,572,611) 6,161,546 (Benefit from) Provision for income taxes (380,000) 414,000 (595,000) 2,212,000 ------------ ------------ ------------ ------------ NET (LOSS) INCOME $ (635,476) $ 790,392 $ (977,611) $ 3,949,546 ============ ============ ============ ============ NET (LOSS) INCOME PER SHARE Basic $ (.05) $ .06 $ (.08) $ .33 ============ ============ ============ ============ Diluted $ (.05) $ .06 $ (.08) $ .29 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING Basic 12,871,898 12,178,694 12,591,727 12,012,482 ============ ============ ============ ============ Diluted 12,871,898 13,185,968 12,591,727 13,469,542 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 5 6 COLORADO MEDTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
2001 2000 ------------ ------------ OPERATING ACTIVITIES: Net (loss) income $ (977,611) $ 3,949,546 Adjustments to reconcile net income to net cash flows from operating activities- Depreciation and amortization 1,796,565 1,547,954 Provision for deferred taxes 49,189 18,476 Change in assets and liabilities- Accounts receivable, net 6,281 (677,483) Inventories, net (6,432,398) (2,216,446) Other assets (1,403,905) (342,132) Accounts payable and accrued expenses 3,995,933 (5,045,825) Customer deposits 1,603,644 (1,120,524) ------------ ------------ Net cash flows from operating activities (1,362,302) (3,886,434) ------------ ------------ INVESTING ACTIVITIES: Cash paid for purchase of Creos assets, net -- (1,651,295) Cash paid for purchase of ATL assets, net (3,886,041) -- Purchase of short-term investments (4,852,011) (8,361,720) Sale of short-term investments 10,306,079 13,564,349 Funding of related party notes receivable (999,796) -- Capital expenditures (1,364,803) (1,083,171) ------------ ------------ Net cash flows from investing activities (796,572) 2,468,163 ------------ ------------ FINANCING ACTIVITIES: Issuance of common stock 2,314,549 1,207,693 Purchase of common stock (108,750) -- Dividends issued to shareholder -- (372,532) Payment of debt (36,195) (1,620,659) ------------ ------------ Net cash flows from financing activities 2,169,604 (785,498) ------------ ------------ Net change in cash and cash equivalents 10,730 (2,203,769) Cash and cash equivalents, beginning 8,560,065 8,499,714 ------------ ------------ Cash and cash equivalents, ending $ 8,570,795 $ 6,295,945 ============ ============
The accompanying notes are an integral part of these statements. 6 7 COLORADO MEDTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES The financial information is unaudited and should be read in conjunction with the consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended June 30, 2000 (the "Form 10-K"). 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. 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 March 31, 2001 and the results of its operations and its cash flows for the three and nine-month periods ended March 31, 2001 and 2000. 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, 2001 and 2000, respectively:
2001 2000 ------ ------ (In Thousands) Cash paid for interest $ 8 $ 97 Cash paid for income taxes $ 315 $1,748
During the nine-month periods ended March 31, 2001 and 2000, the Company received non-cash tax benefits of approximately $439,000 and $1,041,000, respectively, for the exercise of stock options and warrants in disqualifying stock transactions. NOTE 2 -- DEBT The Company and its subsidiaries entered into a bank financing agreement on December 21, 2000 that provides for a three-year revolving line of credit for draws of a specified percentage of certain assets up to a maximum of $15 million. The credit facility accrues interest on outstanding balances at the higher of either the bank's prime lending rate or the Federal Funds Rate plus one half of one percent, or the London Inter Bank Offering Rate (LIBOR) plus up to 200 margin basis points, based on the Company's preference. As of March 31, 2001, the applicable rate was 5.83%. All accounts receivable and inventory secure outstanding balances, but no amounts had been advanced under the facility as of April 30, 2001. The agreement contains various restrictive covenants customary in asset-based loans. In connection with litigation filed against the Company by Victor Wedel over the Company's purchase of CIVCO Medical Instruments Co., Inc. ("CIVCO") from Mr. Wedel, the court entered an order on January 26, 2001 that imposes certain restrictions on CIVCO and the Company during the pendency of the dispute. The order includes a provision that the Company will not draw on its credit facility while CIVCO is a party to the credit facility during the pendency of the dispute. The Company has no current plans to draw on the facility, but if it later desires to draw on the facility prior to resolution of the dispute, the Company expects to remove CIVCO from the credit facility at such time. The Company has a capital lease agreement that has an interest rate of 7.9% and terminates in April 2003. A capital lease with an interest rate of 6.5% expired in January 2001. 7 8 The following sets forth the outstanding debt instruments as of March 31, 2001 and June 30, 2000:
March 31, 2001 June 30, 2000 -------------- ------------- (In Thousands) Capitalized lease obligation $ 85 $ 121 Less -- Current maturities (41) (46) ----- ----- Long-term debt $ 44 $ 75 ===== =====
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:
Three Months Ended Nine Months Ended March 31, March 31, -------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- (In Thousands) Net (Loss) Income $ (635) $ 790 $ (978) $ 3,950 Changes in unrealized (loss) gain on available-for-sale investments (1) 6 (43) (13) ------- ------- ------- ------- Comprehensive income $ (636) $ 796 $(1,021) $ 3,937 ======= ======= ======= =======
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. During the three and nine months ended March 31, 2001, the Company operated at a loss. Therefore, all outstanding warrants and options were anti-dilutive in nature and were not used in the calculation of fully diluted weighted average shares outstanding. 8 9 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)
Three Months Ended Nine Months Ended March 31, March 31, -------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Net (loss) income $ (635) $ 790 $ (978) $ 3,950 ======= ======= ======= ======= Weighted average number of common shares outstanding (shares used in basic earnings per share computation) 12,872 12,179 12,592 12,012 Effect of stock options and warrants (treasury stock method) -- 1,007 -- 1,458 ------- ------- ------- ------- Shares used in diluted earnings per share computation 12,872 13,186 12,592 13,470 ======= ======= ======= ======= Basic earnings per share $ (.05) $ .06 $ (.08) $ .33 ======= ======= ======= ======= Diluted earnings per share $ (.05) $ .06 $ (.08) $ .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 2,843 746 2,843 290 ======= ======= ======== ======
NOTE 5 -- STOCK AND STOCK OPTIONS During the nine months ended March 31, 2001, the Company granted options to purchase 1,090,200 shares of the Company's common stock to certain employees of the Company, including ten officers. The options to purchase the Company's common stock were issued at exercise prices ranging from $4.19 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 nine months ended March 31, 2001, stock options were exercised by certain employees at prices per share ranging from $1.72 to $8.94, resulting in cash proceeds to the Company of approximately $1,838,000. Included in the transactions was the cancellation of 23,412 shares delivered in lieu of cash to exercise options. During the nine months ended March 31, 2001, the Company issued warrants to outside directors of the Company to purchase 211,250 shares of common stock. The warrants to purchase the Company's common stock were issued at exercise prices ranging from $4.19 to $7.94 per share, which were the fair market values of the Company's common stock on the dates of the grants. A warrant for 10,000 shares was fully vested upon issuance. A warrant for 21,250 shares allows for 6,250 shares to vest after June 30, 2001 and the remaining 15,000 shares to vest after June 30, 2002. The remaining warrants vest one-half after June 30, 2001 and one-half after June 30, 2002. The warrants terminate five years from the dates of grant. Warrants for 30,000 shares of common stock previously issued to outside directors were exercised during the nine months ended March 31, 2001 at prices ranging from $6.41 to $7.00 per share, resulting in cash proceeds to the Company of approximately $201,000. Warrants to exercise 30,000 shares of common stock expired during the nine months ended March 31, 2001. 9 10 During the nine months ended March 31, 2001, the Company issued 100,000 shares of common stock purchased through the Company's Employee Stock Purchase Plan for the plan year ended December 31, 2000 at a price of $2.75 per share, resulting in cash proceeds to the Company of approximately $275,000. During the nine months ended March 31, 2001, the Company purchased and retired 21,700 shares of its outstanding common stock at prices ranging from $5.00 to $5.13 per share for an aggregate of $109,000, as part of a previously announced stock repurchase program. NOTE 6 -- SEGMENT INFORMATION The Company operates in two industry segments, Outsourcing Services and Medical Products. Through March 31, 2001 the Outsourcing Services segment was 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 include major pharmaceutical and medical device companies. As part of Colorado MEDtech's reorganization, CMED Manufacturing and CMED Automation are being integrated with the CMED/RELA operations. As of April 30, 2001, CMED CDT had been sold to a third party. The Medical Products segment is made up of CIVCO, the products portion of IPS and BioMed Y2K, Inc. ("BioMed"). This segment designs, develops and manufactures proprietary medical components and ultrasound accessories and supplies, 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 its proprietary products. As of December 31, 2000, operations of BioMed had ceased. The Company did not incur any additional cost due to the cessation of operations. The following is a breakout of the Company's operating revenue and gross profit by segment for the three-month and nine-month periods ended March 31, 2001 and 2000:
Outsourcing Medical Reconciling Consolidated Services Products Items Totals ----------- -------- ----------- ------------ (In Thousands) Three months ended March 31, 2001: Operating revenue $14,791 $11,740 $ (5,573) $20,958 Gross profit 2,718 3,799 -- 6,517 Three months ended March 31, 2000: Operating revenue $13,686 $ 7,539 $ (2,875) $18,350 Gross profit 3,599 2,774 -- 6,373 Nine months ended March 31, 2001: Operating revenue $43,647 $27,112 $(14,043) $56,716 Gross profit 9,118 8,740 -- 17,858 Nine months ended March 31, 2000: Operating revenue $37,988 $23,710 $ (4,691) $57,007 Gross profit 11,341 9,691 -- 21,032
Included in the operating revenues disclosed above are intersegment operating revenues of the Outsourcing Services segment of $5,573,000 and $2,875,000 for the quarters ended March 31, 2001 and 10 11 March 31, 2000, respectively. For the nine-month periods ended March 31, 2001 and 2000, intersegment revenues were $14,043,000 and $4,691,000, respectively. The Medical Products segment had no intersegment revenues for the quarters ended March 31, 2001 and 2000. 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, 2001 compared to June 30, 2000:
Outsourcing Medical Reconciling Consolidated Services Products Items Totals ----------- -------- ----------- ------------ (In Thousands) Assets at March 31, 2001 $31,639 $24,447 $ (558) $55,528 Assets at June 30, 2000 26,841 21,645 (194) 48,292
The asset reconciling items at March 31, 2001 and June 30, 2000 consist of the elimination of the investment in IPS and the elimination of interdivisional accounts receivable. NOTE 7 -- ACQUISITION OF CERTAIN OPERATING ASSETS OF ATL ULTRASOUND On December 29, 2000, the Company acquired certain operating assets of the ultrasound accessories and supplies business of ATL Ultrasound ("ATL") for $4,399,000. This acquisition was accounted for as a purchase. As of March 31, 2001, the Company had paid approximately $3,886,000 in cash and had accrued approximately $513,000 for future obligations related to the acquisition, which are included in other accrued expenses on the balance sheet. The purchase price was allocated as follows: Inventory $ 506,000 Fixed Assets 102,000 Business Development Agreement 1,000,000 Goodwill 2,791,000 ---------- Total Purchase Price $4,399,000 ==========
In connection with this acquisition, the Company and ATL entered into a Business Development Agreement under which ATL will both work with the Company to develop additional customer accessories and participate in co-marketing efforts for products and refrain from competing with the Company in the area of ultrasound supplies. The Business Development Agreement is included in Goodwill and Intangibles on the balance sheet and will be amortized over a five-year period. The remaining goodwill associated with the purchase will be amortized over fifteen years. Prior to the sale, the acquired assets generated annualized revenues of approximately $8,000,000. 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 11 12 into arrangements that would fall under the scope of SFAS No. 133. The Company implemented SFAS No. 133 on July 1, 2000 with no material effect on its financial condition or 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 with no material effect on its financial condition or results of operations. NOTE 9 -- NOTES RECEIVABLE -- RELATED PARTIES During January 2001, the Board of Directors approved a program to loan to officers of the Company up to $1,000,000, in the aggregate, to purchase common stock of the Company from persons other than the Company. The loans are full recourse, bear interest at the prime rate of interest plus one-half of one percent, adjusted on January 2 each year and are secured by the stock purchased with the loan proceeds. Interest is payable annually on the anniversary date of each note. All principal and remaining accrued interest is due five years from the date of the respective note. As of March 31, 2001, notes receivable from officers totaled $999,796. Accrued interest on the loans as of March 31, 2001 was approximately $14,500 and is included in other current assets on the balance sheet. NOTE 10 -- CONTINGENCIES AND SUBSEQUENT EVENTS On August 31, 2000, Anthony Fant, Chief Executive Officer of HEI, Inc. ("HEI"), publicly announced his ownership of about 9.9% of the Company's outstanding common shares and plans to take 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. No such offer was ever made, and in October 2000, HEI announced it would no longer pursue its proposed acquisition offer and dismissed a related lawsuit against the Company. On November 21, 2000, Victor J. Wedel and Sherrill Wedel filed a legal proceeding against Colorado MEDtech and one of its directors, John V. Atanasoff, in United States District Court for the Central District of California. In accordance with an agreement between Victor Wedel and the Company to submit all disputes to binding arbitration, on March 3, 2001 the plaintiff submitted a statement of claim to an arbitrator group. The statement of claim relates to the November 15, 1999 transaction in which Colorado MEDtech acquired the outstanding stock of CIVCO Medical Instruments Co., Inc. and related real estate from the Wedels in exchange for Colorado MEDtech stock. The statement of claim alleges that in connection with the CIVCO acquisition the Company made misrepresentations to and concealed material information from the plaintiffs. The statement of claim further alleges that there was a breach of the warranty contained in the CIVCO acquisition agreement regarding the completeness and correctness of filings by the Company with the Securities and Exchange Commission. The amount of damages sought was $5,457,701 or, alternatively, rescission of the CIVCO acquisition. On March 30, 2001, the plaintiff amended his statement of claim to include an additional damage theory pursuant to which he increased the damages sought to $15,462,804. The Company is defending itself against this action. On January 26, 2001, the Company received a warning letter from the United States Food and Drug Administration (FDA) regarding certain areas in which the Company's Longmont, Colorado contract medical device manufacturing facility was not in conformance with the FDA's Quality System Regulation (QSR). The letter requires actions to be performed by the Company to ensure that requirements under the QSR are met prior to the Company resuming manufacture of certain classes of medical devices. Failure by the Company to address the areas of non-conformance could result in 12 13 seizure, injunction, and/or civil penalties. This could have an adverse material effect on the operations of the Company going forward. The Company has taken actions to strengthen its quality systems and address the areas of non-conformance presented by the FDA. On April 30, 2001, the Company sold all of the outstanding stock of its CMED CDT subsidiary to an unrelated party for $1,300,000 in cash. Pursuant to indemnification provisions of the sale agreement, ten percent of the purchase price is held in escrow, with five percent to be released in six months and the remaining five percent to be released in twelve months. The Company will record a gain of approximately $925,000 from the sale. CMED CDT had annualized revenues of approximately $2,500,000. 13 14 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 nine-month periods ended March 31, 2001 and 2000, and the percentage change in those items for the three and nine-month periods ended March 31, 2001, from the comparable periods in 2000.
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, ------------------ ----------------- ------------------ ----------------- 2001 2000 2001 2000 LINE ITEMS 2001 2001 ----- ----- ----- ----- ---------- ------ ------ % % % % % % 44.0 58.9 52.2 58.4 Sales, Outsourcing Services (14.7) (11.1) 56.0 41.1 47.8 41.6 Sales, Medical Products 55.7 14.3 ----- ----- ----- ----- ------ ------ 100.0 100.0 100.0 100.0 Total Sales and Services 14.2 (.5) ----- ----- ----- ----- ------ ------ 31.0 39.3 36.1 38.5 Cost of Sales, Outsourcing Services (9.9) (6.7) 37.9 26.0 32.4 24.6 Cost of Sales, Medical Products 66.7 31.1 ----- ----- ----- ----- ------ ------ 68.9 65.3 68.5 63.1 Total Cost of Sales and Services 20.6 8.0 ----- ----- ----- ----- ------ ------ 31.1 34.7 31.5 36.9 Gross Profit 2.2 (15.1) ----- ----- ----- ----- ------ ------ 5.1 5.1 5.3 5.6 Marketing and Selling 14.1 (6) 24.4 17.3 23.7 16.3 Operating, Gen'l and Admin 61.0 44.4 7.4 6.4 6.6 5.1 Research and Development 31.7 29.1 ----- ----- ----- ----- ------ ------ 36.9 28.8 35.6 27.0 Total Operating Expenses 46.2 31.1 ----- ----- ----- ----- ------ ------ (5.8) 5.9 (4.1) 9.9 Earnings (Loss) from Operations (214.6) (141.1) 1.0 0.7 1.3 0.9 Other Income, Net 64.5 43.4 ----- ----- ----- ----- ------ ------ (4.8) 6.6 (2.8) 10.8 Earnings (Loss) Before Income Taxes (184.3) (125.5) (1.8) 2.3 (1.0) 3.9 Provision for Income Taxes (191.8) (126.9) ----- ----- ----- ----- ------ ------ (3.0) 4.3 (1.8) 6.9 Net (Loss) Income (180.4) (124.8) ===== ===== ===== ===== ====== ======
14 15 RESULTS OF OPERATIONS Revenues for the three and nine-month periods ended March 31, 2001, 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:
Three Months Ended Nine Months Ended March 31, March 31, ------------------------------- --------------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Revenues $21.0 million $18.3 million $56.7 million $57.0 million Outsourcing Services 44% 59% 52% 58% Medical Products 56% 41% 48% 42%
The increase in revenues for the three months ended March 31, 2001 compared to the same period in 2000 was primarily attributable to the growth of sales in medical products. The growth in medical product sales was primarily due to product sales derived from the acquisition of the ATL assets in December 2000 and increased sales of x-ray generators. The decrease in revenues for the nine months ended March 31, 2001 compared to the same period in the previous year was primarily attributable to discounts the Company gave to three large customers in the Outsourcing Services segment, the absence of a customer who was a significant outsourcing customer in the prior year, the slowdown in outsource manufacturing due to limitations on shipments as a result of the warning letter, and the cessation of operations of BioMed. Gross profit for the three-month period ended March 31, 2001 increased 2% compared to the same period in 2000. The increase is primarily attributable to the increase in revenues of the Medical Products segment caused by product sales derived from the ATL asset purchase. Gross profit for the nine-month period ended March 31, 2001 decreased 15% compared to the prior year period. The decrease was primarily attributable to lower utilization rates and increased costs at the Longmont, Colorado manufacturing facility to address facilities and quality systems issues raised by the FDA warning letter. In addition, gross profit was reduced by the discounts given to three large outsourcing customers and a shift in revenue in our Outsourcing Services segment to lower gross margin services. Marketing and selling expenses increased 14% for the three-month period ended March 31, 2001 and decreased 6% for the nine-month period ended March 31, 2001, compared to the same periods in the prior year. The increase for the three-month period is due to the Company's increased advertising, travel and customer relations activities in response to the FDA warning letter. The decrease for the nine-month period is due to the centralization of the sales and marketing organization. Operating, general and administrative expenses increased 61% and 44% for the three and nine-month periods ended March 31, 2001 compared to the same periods in the prior year. The increase was primarily caused by increased spending related to quality systems, the addition of experienced personnel to support these systems, consulting services related to quality systems, legal expenses, and one-time charges related to the response to HEI's unsolicited acquisition proposal. The expenses related to the response to HEI's takeover attempts were $560,000 (approximately 1% of sales) for the nine-month period ended March 31, 2001. As a percentage of revenues, operating, general and administrative expenses increased to 24% for the three and nine-month periods ended March 31, 2001, compared to 17% for the three-month period and 16% for the nine-month period in the prior year. The Company does not expect operating, general and administrative expenses to decline during the remainder of fiscal year 2001. Research and development expenses increased by 32% and 29% for the three and nine-month periods ended March 31, 2001, compared to the same periods in 2000. Research and development expenses are 15 16 attributable to the IPS, RELA and CIVCO product lines. The increase in research and development expenses was due to continued development of the RF solid state amplifier systems, ultrasound guidance systems and covers, high voltage x-ray generators for CT scanners, and web-enabled medical device technologies. 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 was $215,000 and $746,000 for the three and nine-month periods ended March 31, 2001 compared to $131,000 and $520,000 for the same periods in the previous year. The increase was due to the higher average cash balances held by the Company in the current fiscal year. During the three and nine-month periods ended March 31, 2001, 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:
Three Months Ended Nine Months Ended March 31, March 31, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------- -------------- -------------- -------------- Net (Loss) Income $ (635,000) $ 790,000 $ (978,000) $ 3,950,000 Earnings per Share $ (.05) $ .06 $ (.08) $ .29 Diluted Weighted Average Common Equivalent Shares Outstanding 12.9 million 13.2 million 12.6 million 13.5 million
The decrease in net income and earnings per share was attributable to the decrease in gross margins discussed above, the spending related to quality systems and hiring experienced personnel, and the one-time charges related to the unsolicited acquisition proposal from HEI. 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 and cash proceeds from the issuance of common stock. The Company has a capital lease agreement that has an interest rate of 7.9% and terminates in April 2003. A capital lease with an interest rate of 6.5% expired in January 2001. The Company entered into a bank financing agreement on December 21, 2000 that provides for a three-year revolving line of credit of $15 million. The credit facility accrues interest on outstanding balances at the higher of either the bank's prime lending rate or the Federal Funds Rate plus one half of one percent, or the London Inter Bank Offering Rate (LIBOR) plus up to 200 margin basis points, based on the Company's preference. As of March 31, 2001, the applicable rate was 5.83%. All accounts receivable and inventory secure outstanding balances, but no amounts had been advanced under the facility as of April 30, 2001. The agreement contains various restrictive covenants customary in asset-based loans. In connection with litigation filed against the Company by Victor Wedel over the Company's purchase of CIVCO Medical Instruments Co., Inc. from Mr. Wedel, the court entered an order on January 26, 2001 that imposes certain restrictions on CIVCO during the pendency of the dispute. The order includes a provision that the Company will not draw on its credit facility while CIVCO is a party to the credit facility and that CIVCO will not pay any dividends to the Company during the pendency of the dispute. The Company has no current plans to draw on the facility, but if it 16 17 later desires to draw on the facility prior to resolution of the dispute, the Company expects to remove CIVCO from the credit facility at such time. The ratio of current assets to current liabilities was 2.4 to 1 at March 31, 2001, compared to 3.3 to 1 at June 30, 2000. The Company's working capital has decreased approximately $2.8 million since June 30, 2000 primarily as a result of the purchase of certain operating assets of ATL Ultrasound, for which the Company paid $3.9 million in cash and accrued $513,000 for future obligations related to the acquisition. The average number of days outstanding of the Company's accounts receivable at March 31, 2001 was approximately 58 days, compared to 73 days at June 30, 2000. The decrease in the number of days outstanding was a result of the Company's continued emphasis on collections during the past nine months. The Company used approximately $1,362,000 of cash from operations during the nine-month period ended March 31, 2001, primarily due to the increase in inventories, offset in part by deposits received from customers, and amounts yet to be paid on the inventory purchases at March 31, 2001. Inventories increased $2.9 million during the third quarter due to the Company's slowdown in shipments from its outsourcing manufacturing operations in response to the FDA's warning letter. The Company expects inventory levels to decrease over the next twelve months. During January 2001, the Board of Directors approved a program to loan to officers of the Company up to $1,000,000, in the aggregate, to purchase common stock of the Company from persons other than the Company. The loans are full recourse, bear interest at the prime rate of interest plus one-half of one percent, adjusted on January 2 each year and are secured by the stock purchased with the loan proceeds. Interest is payable annually on the anniversary date of each note. All principal and remaining accrued interest is due five years from the date of the respective note. As of March 31, 2001, notes receivable from officers totaled $999,796. Accrued interest on the loans as of March 31, 2001 was approximately $14,500. As of March 31, 2001, the Company had commitments to purchase an improved customer relationship management system as well as for the remaining purchase price for the certain operating assets of ATL Ultrasound. The Company believes cash provided by operations, together with its current cash and short-term investments, 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," "estimates," "may," "will," "should," "anticipated," "expected" 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 risks associated with regulation by the Federal Food and Drug Administration including compliance with the Quality System Regulation, 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 disclaims any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise. 17 18 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, 2001 consisting of approximately $2,719,000 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, 2001. If market interest rates had increased by 1% on April 1, 2001, the Company would have had an approximate $3,000 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, 2001. 18 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Except as described below, we are not involved in any material pending legal proceedings: On November 21, 2000, Victor J. Wedel and Sherrill Wedel filed a legal proceeding against Colorado MEDtech and one of its directors, John V. Atanasoff, in United States District Court for the Central District of California. In accordance with an agreement between Victor Wedel and the Company to submit all disputes to binding arbitration, on March 3, 2001 the plaintiff submitted a statement of claim to an arbitrator group. The statement of claim relates to the November 15, 1999 transaction in which Colorado MEDtech acquired the outstanding stock of CIVCO Medical Instruments Co., Inc. and related real estate from the Wedels in exchange for Colorado MEDtech stock. The statement of claim alleges that in connection with the CIVCO acquisition the Company made misrepresentations to and concealed material information from the plaintiffs. The statement of claim further alleges that there was a breach of the warranty contained in the CIVCO acquisition agreement regarding the completeness and correctness of filings by the Company with the Securities and Exchange Commission. The amount of damages sought was $5,457,701 or, alternatively, rescission of the CIVCO acquisition. On March 30, 2001, the plaintiff amended his statement of claim to include an additional damage theory pursuant to which he increased the damages sought to $15,462,804. The Company is defending itself against this action. On January 26, 2001, the court entered an order that imposes certain restrictions on CIVCO and the Company during the pendency of the dispute. The order includes a provision that the Company will not draw on its credit facility while CIVCO is a party to the credit facility and that CIVCO will not pay any dividends to the Company during the pendency of the dispute. The Company has no current plans to draw on the facility, but if it later desires to draw on the facility prior to the resolution of the dispute, the Company expects to remove CIVCO from the credit facility at such time. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.48 First Amendment to Security Agreement dated February 28, 2001, and First Amendment to Credit Agreement dated April 30, 2001, between Colorado MEDtech, Inc. and KeyBank National Association. (b) Reports on Form 8-K during the quarter ended March 31, 2001: The company filed a current report on Form 8-K dated January 31, 2001 regarding investor and analyst presentation materials of the President and Chief Executive Officer and the Chief Financial Officer used on January 31, 2001 and to be used from time to time thereafter. The company filed a current report on Form 8-K dated January 31, 2001 reporting the issuance of a press release discussing a letter from the FDA. The company filed a current report on Form 8-K dated February 15, 2001 reporting a change in its Board of Directors. The company filed a current report on Form 8-K dated March 8, 2001 regarding investor and analyst presentation materials of the President and Chief Executive Officer and the Chief Financial Officer used on March 8, 2001 and to be used from time to time thereafter. The company filed a current report on Form 8-K dated March 27, 2001 regarding investor and analyst presentation materials of the President and Chief Executive Officer and the Chief Financial Officer used on March 27, 2001 and to be used from time to time thereafter. 19 20 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, 2001 /s/ Stephen K. Onody -------------------- Stephen K. Onody Chief Executive Officer DATE: May 11, 2001 /s/ Gregory A. Gould -------------------- Gregory A. Gould Chief Financial Officer 20 21 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.48 First Amendment to Security Agreement dated February 28, 2001, and First Amendment to Credit Agreement dated April 30, 2001, between Colorado MEDtech, Inc. and KeyBank National Association.