0000950134-01-506870.txt : 20011009 0000950134-01-506870.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950134-01-506870 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLORADO MEDTECH INC CENTRAL INDEX KEY: 0000720013 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 840731006 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12471 FILM NUMBER: 1747930 BUSINESS ADDRESS: STREET 1: 6175 LONGBOW DR CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3035302660 MAIL ADDRESS: STREET 1: 6175 LONGBOW DRIVE CITY: BOULDER STATE: CO ZIP: 80301 FORMER COMPANY: FORMER CONFORMED NAME: CYBERMEDIC INC DATE OF NAME CHANGE: 19920703 10-K 1 d90859e10-k.txt FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: June 30, 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: 000-12471 COLORADO MEDTECH, INC. (Exact name of registrant as specified in its charter) COLORADO 84-0731006 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6175 LONGBOW DRIVE, BOULDER, COLORADO 80301 (Address of principal executive offices, including zip code) (303) 530-2660 (Registrant's Telephone Number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK (NO PAR VALUE) (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and nonvoting common stock held by nonaffiliates computed by reference to the average bid and asked prices of such stock as of August 31, 2001 was $37,495,761. The number of shares outstanding of the issuer's Common Stock as of August 31, 2001 was 12,972,219. DOCUMENTS INCORPORATED BY REFERENCE: The following documents (or portions thereof) are incorporated by reference into the Parts of this Form 10-K noted: Part III incorporates by reference from Registrant's definitive Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after the end of the fiscal year covered by this Form. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. Colorado MEDtech, Inc. is a Colorado corporation incorporated in 1977 and is a leading full-service provider of advanced medical products and comprehensive outsourcing services. Colorado MEDtech's operating units and their principal activities are: o RELA DIVISION ("RELA") provides custom product development and manufacturing outsourcing services, specializing in the design and development of diagnostic, biotechnology and therapeutic medical devices, medical software systems and medical device connectivity. RELA also provides manufacturing services for electronic and electromechanical medical devices and instrumentation systems assembly for major original equipment manufacturers ("OEM"); o IMAGING AND POWER SYSTEMS DIVISION ("IPS") designs, develops and manufactures a broad range of imaging system hardware and software, including advanced magnetic resonance imaging ("MRI") systems and application software, high-performance radio frequency ("RF") amplifiers for MRI systems and high-voltage x-ray generator subsystems for computed tomography ("CT") scanners; and o CIVCO MEDICAL INSTRUMENTS CO., INC. ("CIVCO") SUBSIDIARY OF COLORADO MEDTECH designs, develops, manufactures and distributes specialized medical accessories and supplies for imaging equipment and for minimally invasive surgical equipment. During fiscal 2001, we re-structured to focus on our core markets of Medical Technology and Software Services and Medical Imaging Products and Services. As a part of this effort, we phased out two business units, CMED Automation division ("CMED Automation") and BioMed Y2K, Inc. ("BioMed"). In addition, we integrated the CMED Manufacturing division into RELA and sold the CMED Catheter and Disposables Technology, Inc. ("CDT") subsidiary in April 2001. The activities of these business units were as follows: o CDT designed, developed and manufactured unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology and infertility treatment; o CMED AUTOMATION designed, developed and manufactured automation systems for medical device and associated businesses; and o BIOMED provided software tools and services to support healthcare institutions' efforts to establish Year 2000 compliance for their biomedical devices. On December 29, 2000, we acquired certain operating assets of the ultrasound accessories and supplies business of ATL Ultrasound ("ATL") for $4,384,000. As of June 30, 2001, we had paid -2- 3 approximately $3,884,000 in cash and had accrued approximately $500,000 for future payments for the acquisition. The products acquired include ultrasound supplies, print media and biopsy brackets and guides which are sold principally to end users such as hospitals, clinics and doctors. In connection with this acquisition, we entered into a business development agreement under which ATL will work with us to develop additional customer accessories and participate in co-marketing efforts for products, and will refrain from competing with us in the area of ultrasound supplies. PRODUCTS AND SERVICES Colorado MEDtech is a leading full-service One Source OutSource(TM) provider of advanced medical technology outsourcing services, including device and disposables development, software, medical device connectivity, manufacturing, system components for medical imaging and ultrasound accessories. Outsourcing Services Our outsourcing services consist of design, development and manufacture of medical products and software development, including medical device connectivity, for major medical device and biotechnology companies. Our principal outsourcing markets and services include: o Medical therapeutic and diagnostic devices - we design and develop complex electronic and electromechanical instruments for the detection and treatment of disease. Our therapeutic projects are performed for companies who sell patient therapy products. These products are used in surgery, for the treatment of medical conditions, and for monitoring patients. They include devices such as infusion pumps, surgical devices, blood oxygen monitors and devices for cardiovascular treatment. Our diagnostic projects are performed for companies involved in selling in-vitro diagnostic products, biotechnology systems and laboratory equipment. Typically, these instruments detect, measure or monitor the concentration of a target chemical or biological component in a fluid sample. Products in the diagnostic market can be placed in two categories: Clinical diagnostic instruments - devices which are located in a laboratory and used for analyzing patient samples; Biotechnology - these devices include cellular and molecular biology systems, automated DNA sample preparation, genetic probe systems and DNA systems for isolation and identification. o Medical imaging systems - we design and develop advanced application software and major subsystem hardware. Our work in this area includes the development of leading-edge MRI software, cardiac and vascular diagnostic application software and high-density RF amplifier systems. Contracts in this business area are undertaken with major OEMs in the imaging system market. -3- 4 o Medical software and medical device connectivity - we develop software for electronic and electromechanical medical products and provide medical software verification and validation services. Our software and medical device connectivity projects are performed for customers who produce therapeutic, pharmaceutical or diagnostic instruments. The projects are generally the development of software for use in a device, and/or verification and validation services to ensure the quality and reliability of software to be used in medical devices. Colorado MEDtech's medical device connectivity technology platform permits our clients to develop devices that can access clinical data from remote sites, remotely maintain and troubleshoot devices, and to enable remote upgrade to device software. o Manufacturing - we manufacture complex electronic and electromechanical medical devices and medical imaging products such as high-power systems and systems support modules for MRI systems and x-ray generators for CT scanners. We are registered device manufacturers with the U.S. Food and Drug Administration ("FDA") and are required to meet the agency's Quality System Regulation ("QSR"). Our manufacturing projects include pre-production engineering and commercialization services, turnkey manufacturing of FDA Class II and Class III devices and system test services. Our design and development projects generally include product concept definition, development of specifications for product features and functions, product engineering specifications, instrument design, development, prototype production and testing, and development of test specifications and procedures. Our outsourcing services are performed by engineers, scientists, technicians, manufacturing specialists and assembly workers. We believe our experience in applying our proven methodologies and advanced technologies to the development of innovative new products gives our clients an advantage in their marketplace by providing them with state-of-the-art, quality products in a timely and cost-effective manner. Rapidly advancing technologies, heightened worldwide competition and the demands of an increasingly sophisticated marketplace have created pressures on companies, both domestic and international, to develop high quality, cost-effective, world-class products in time to meet the narrowing windows of opportunity in the marketplace. These conditions have produced opportunities for companies that can react to those market needs. Such companies need to have the technology, experience and ability to develop high quality, state-of-the-art products. We believe we are uniquely positioned to provide our clients, within a single integrated structure, the valuable product development and manufacturing resources they need to satisfy the requirements of a worldwide marketplace. Medical Products Our current products are accessories and supplies for ultrasound imaging equipment and high performance power amplifier systems for use in medical imaging systems, such as MRI machines and CT scanners. Our ultrasound imaging equipment accessories and supplies feature specialized medical products used to complement ultrasound imaging equipment and minimally invasive surgical equipment: -4- 5 o Image-guided biopsy systems, composed of a mechanical bracket attached to an ultrasound imaging transducer and a guide for directing a biopsy needle or other invasive instrument. o Equipment covers, composed of latex or polyurethane sheaths that provide a viral barrier between the ultrasound equipment and the patient and operator. Our ultrasound imaging equipment accessories and supplies are sold to large, multi-national medical ultrasound imaging companies, to international distributors of imaging products, and to end users such as hospitals, clinics and doctors. Our medical imaging power system products line features: o High-performance power delivery subsystems for medical applications. By combining direct current ("DC"), RF, digital and system control technologies, we produce advanced power products. Our solid state amplifier product line represents state-of-the-art RF technology MRI applications. o High-voltage x-ray generators for CT scanners. Our imaging power generation and amplification products are sold to large, multi-national medical imaging companies who integrate the power subsystems into their imaging systems. Financial information about our business segments is contained in the Consolidated Financial Statements and notes thereto contained in this report. MARKETING We market our services through a direct sales force and independent representatives. We market our imaging power generation and amplification products through a direct sales force. We market our imaging equipment accessories and supplies directly to ultrasound imaging equipment manufacturers, through joint marketing programs with such manufacturers, through an international distribution partner network and through telephone and web-based sales to end users. We promote our services and products through advertising, direct mail and exhibition at industry trade shows. SIGNIFICANT CUSTOMERS AND BACKLOG For the year ended June 30, 2001, two customers each accounted for more than 10% of our total revenues: GE Medical Systems (GEMS) - 19%, and Hitachi Medical Corporation - 16%. For the year ended June 30, 2000, GEMS accounted for 19% of our total revenues, Gen-Probe Incorporated accounted for 11% and Hitachi accounted for 13%. Due to the nature of our business, we typically receive about 35% to 45% of our total revenues from two to three customers in any given year. It is also typical that revenues from these customers account for a very high percentage of our total revenues for a one to three year period, then be replaced by other large customers. Foreign sales accounted for 25% and 22% of our total sales in fiscal 2001 and 2000, respectively. The loss of a significant customer could have a material, adverse impact on our operations and financial condition. We account for our business in two business segments - outsourcing services and medical products. For the year ended June 30, 2001, two customers each accounted for more than 10% of Colorado MEDtech's outsourcing revenues: Hitachi - 16% and Gen-Probe - 12%. In the Outsourcing Services segment, we do not expect Hitachi or Gen-Probe to exceed 10% of sales in fiscal year 2002, due to the cancellation of these contracts. See also "Item 3 -- Legal Proceedings." For the year ended June 30, 2000, Gen-Probe accounted for 19% of our outsourcing revenues, Hitachi - 14% and 10% from a -5- 6 customer we are prohibited by contract from identifying. During the last two quarters of fiscal 2001, our outsourcing revenues were less concentrated, spread over a larger number of customers. For the year ended June 30, 2001, two customers each accounted for more than 10% of Colorado MEDtech's medical products segment revenue: GEMS - 35% and Hitachi - 16%. Because our manufacturing activities for Hitachi are winding down, we do not expect Hitachi to exceed 10% of medical products sales in fiscal year 2002. For the year ended June 30, 2000, two customers each accounted for more than 10% of Colorado MEDtech's medical products revenue: GEMS - 45% and Hitachi - 11%. Orders booked during fiscal year 2001 were approximately $91 million (net $85 million after cancellations of approximately $6 million), compared to orders booked of approximately $74 million (net $65 million after contract cancellations of approximately $9 million) in fiscal year 2000. At June 30, 2001, our backlog of orders for services or shipment of product in fiscal 2002 was approximately $37 million compared to approximately $29 million at June 30, 2000. RESEARCH AND PRODUCT DEVELOPMENT We intend to continue to develop new products and services for a broad range of customers. In addition to internal development efforts, we may license or acquire related technologies and/or products from external resources. While we employ approximately 172 engineers, scientists and technicians in research and development activities, these employees' efforts are primarily devoted to contract work for customers and in such cases their expenses are included in the cost of sales and services. During fiscal year 2001, research and development expenses were attributable to RF solid state amplifier systems, medical device connectivity, ultrasound guidance systems and covers, and high voltage x-ray generators for CT scanners. For fiscal years 2001, 2000 and 1999, we incurred approximately $5,077,000, $4,026,000 and $2,878,000, respectively, for research and development activities. Consistent with our operating plans, we are continuously pursuing alliances and the acquisition and development of new or improved technologies or products. Should we identify any opportunities that would be commercially viable and are in line with management's strategies, the amount of future research and development expenditures may increase. We currently anticipate research and development expenditures for fiscal year 2002 to be generally consistent with those of fiscal year 2001. COMPETITION The market for medical outsourcing and products is highly competitive. The principal competitive factors are reputation, quality, price and schedule. Our present and future competition comes from a variety of sources. These sources include consulting, commercial product development and manufacturing companies. There are a number of firms that provide services similar to ours. These vary from small consulting operations offering a small subset of our services to a few integrated service companies. Competitors for our outsourcing services include Plexus Corporation, Relsys International, Inc., Analogic Corporation, ACT Manufacturing, Inc., KMC Systems, Inc., Nova Biomedical, UMM Electronics, Inc., and Sparton Corporation. The principal competitor for our ultrasound imaging power generation products is Analogic Corporation. The principal competitors for our imaging accessories products are the internal development departments of the imaging manufacturers to whom CIVCO sells. On a lesser scale, we also compete with commercial and university research laboratories. There are both for-profit and not-for-profit organizations nationwide that perform services similar to the product -6- 7 development aspect of our business. These include Battelle, Inc., Stanford Research Institute, Arthur D. Little Center for Product Development, Southwest Research Institute and the research capabilities within the nation's leading universities. As we develop and manufacture other proprietary products and as we expand our services in medical device connectivity, we can expect to encounter additional competitors, many of which may be larger and in a stronger financial position than we. As cost containment efforts continue in the healthcare marketplace, competition will continue to be intense. In January 2001 we received a warning letter from the FDA regarding the quality system at our Longmont, Colorado medical manufacturing operation. Because of this, we believe our ability to compete for medical manufacturing and medical device development has been weakened. As of the date of this report, the warning letter has not been resolved. We anticipate that the negative effects of the warning letter will continue until it is resolved and for an undetermined period thereafter. MANUFACTURING We manufacture our proprietary products and customer products at facilities in Boulder and Longmont, Colorado, and Kalona, Iowa. Most products are built in response to specific customer purchase orders, while others are fabricated as standard products. The manufacturing process consists primarily of assembly, test, sterilization and packaging of both custom and commercially available components from outside sources. In addition, we machine certain parts in our Boulder, Colorado facility and machine and mold certain parts in our Kalona, Iowa facility. Most of the materials and components used in our products are available from a number of different suppliers. We generally maintain multiple sources for most items, but some components are single source. We are dependent upon our suppliers for timely delivery of quality components. To date, we have not experienced significant delays in the delivery of such components. PRODUCT WARRANTIES AND SERVICE Warranty periods for our products range from 90 days to 12 months, but in limited cases for up to 18 months, against defects in materials and workmanship. We have established a provision for estimated expenses of providing service under these warranties. Non-warranty service is billed to the customer as performed. GOVERNMENT REGULATION We are a registered device manufacturer with the FDA. The Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act (the "Act") and regulations issued or proposed thereunder, including the Safe Medical Devices Act of 1990, provide for regulation by the FDA of the marketing, design, manufacturing, labeling, packaging and distribution of medical devices. These regulations apply to our products and many of our customers' products. The Act and the regulations include requirements that manufacturers of medical devices register with and furnish lists of devices manufactured by them to the FDA. Prior to marketing a medical device, FDA clearance must be obtained. Tests to be performed for approval range from bench-test data and engineering analysis to potentially expensive and time-consuming clinical trials. The types of tasks for a particular product submission are indicated by the classification of the device and previous approvals for similar devices. There are also certain requirements of other federal laws and of state, local and foreign governments, which may apply to the manufacture and marketing of our products. -7- 8 The FDA's Quality System Regulation ("QSR") for medical devices sets forth standards for the design and manufacturing processes that require the maintenance of certain records and provide for unscheduled inspections of our facilities. Our procedures and records were reviewed by the FDA during routine general inspections in 1995 and each year from 1997 to 2000. On January 25, 2001, we received a warning letter from the FDA regarding certain areas in which our Longmont, Colorado contract medical device manufacturing facility was not in conformance with the QSR. The letter requires us to perform various actions to the FDA's satisfaction to ensure that requirements under the QSR are met prior to the Company resuming manufacture of certain classes of medical devices. If we fail to address the areas of non-conformance, the FDA could seize our facilities, seek injunctive relief against us and/or seek to impose civil penalties. This could have an adverse material effect on our operations and prospects. We have taken actions to strengthen our quality systems and address the areas of non-conformance presented by the FDA. We revised our quality system, hired experienced and qualified personnel to strengthen our quality organization and we specifically addressed each of the FDA's observations. The FDA warning letter has had a significant adverse effect on the medical device development and manufacturing portions of our business. It has adversely affected our ability to ship certain medical devices we manufacture and our ability to book new sales for medical device development and manufacturing projects. During the year ended June 30, 2001, we spent approximately $1.5 million in addressing the issues raised in the warning letter and to improve our quality system generally. The ISO 9000 series of quality management and quality assurance standards has been adopted by over 90 countries. ISO standards require that a quality system be used to guide work to assure quality and to produce quality products and services. ISO 9001, the most comprehensive of the standards, covers 20 elements. These elements include management responsibility, design control, training, process control and servicing. ISO 9001 is the quality systems standard used by companies providing design, development, manufacturing, installation and servicing. Our quality systems are ISO 9001 and EN 46001 certified. There are no material costs or expenses associated with our compliance with federal, state and local environmental laws. INTELLECTUAL PROPERTY We hold six United States patents of varying duration which cover the design and manufacture of a portion of our imaging accessories and power system products. From time to time we file patent applications and continuations to cover new and improved methods, apparatus, processes, designs and products. At present, there are five United States patent applications and office actions pending relating to information technology systems, needle guides and sensor positioning devices. We plan to make additional patent applications as appropriate. We have one registered mark with the United States Patent and Trademark Office and have three U.S. trademarks or servicemarks pending. We plan to make additional trademark, service mark, and certification mark applications as appropriate. In addition to the patents, we try to protect our proprietary technology and know-how through established security practices and confidentiality agreements with each of our employees, consultants, suppliers and technical advisors. There can be no assurance, however, that these -8- 9 agreements or procedures will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information. While the CIVCO business has maintained the practice, where possible, of obtaining patent protection on its products, we believe that the conduct of our medical products business is not dependent upon our ability to obtain or defend patents. We believe that any legal protection afforded by patent, copyright, and trade secret laws are of secondary importance as a factor in our ability to compete in the imaging accessories and power systems markets; our future prospects in those markets are more a function of the continuing level of excellence and creativity of engineers in developing products which satisfy customer needs, and the innovative skills, competence and marketing and managerial skills of our personnel in selling those products. The patents we hold provide barriers to competition in applicable portions of the imaging accessories and power systems portion of our medical product business. The loss of some or all of the protection of the patents could make it easier for other companies to enter our market and compete against us by eroding our ability to differentiate ourselves on the basis of technical superiority. While we believe the protection afforded by the patents is strong, there can be no assurance that other companies will not be able to design and build competing products in a manner that does not infringe the patents. EMPLOYEES As of June 30, 2001, we had 535 employees, of which 524 were full-time. 77% of our employees were employed at our Colorado facilities and 23% of employees were employed in Kalona, Iowa. No employees are represented by labor organizations and there are no collective bargaining agreements. We believe our employee relations are good. -9- 10 ITEM 2. DESCRIPTION OF PROPERTY. With the exception of the CIVCO facility, our operations are located in leased facilities. The following table contains a summary of the significant terms of the leases:
LEASE AVERAGE FACILITY OPERATIONS SQUARE FEET EXPIRES MONTHLY RENT -------- ---------- ----------- ------- ------------ 6175 Longbow Drive, Corporate headquarters, RELA 52,000 6/30/02 $37,200 Boulder, Colorado 410 South Sunset Street, RELA 18,000 6/30/02 $14,200 Longmont, Colorado RELA 11,000 8/31/03 $ 5,400 345 S. Francis Longmont, Colorado 1811/1821 IPS 30,000 7/31/02 $13,900 Lefthand Circle Longmont, Colorado 1510 Nelson Road, IPS 18,079 6/30/02 $ 7,300 Longmont, Colorado
In addition to the rent set forth in the table above, we are responsible for certain expenses associated with the properties, including property taxes, insurance and maintenance. We also lease miscellaneous space on a month to month basis in Boulder and Longmont of approximately 10,000 square feet. We are currently in the process of identifying lease properties in which to centralize all of our Colorado operations into one facility. If a move to a single facility occurs, we expect it to take place in late fiscal year 2002 or early fiscal year 2003. We own the land and building which houses the development and manufacturing facilities of CIVCO, located at 102 First Street South, Kalona, Iowa. The building consists of 25,000 square feet of office and light manufacturing space. Because of increased demand for CIVCO products, we expect to purchase a one-acre plot of land adjacent to the CIVCO property for $114,000 and we plan to build an approximately 18,000 square foot addition to the CIVCO building on such property. We own a 10.91-acre parcel of industrial-zoned vacant land in Louisville, Colorado (the "Louisville Parcel"). It is the opinion of management that, as the Louisville Parcel is vacant land, it is not necessary to provide insurance coverage for the property. At June 30, 2001, we are holding the land as available-for-sale. Notwithstanding our ownership of the Louisville Parcel, it is not our policy to invest in real estate or interests in real estate, real estate mortgages, or securities of or interests in persons primarily engaged in real estate activities. -10- 11 ITEM 3. 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 connection with 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 defendants moved to stay this suit so that the claims could be arbitrated in accordance with an agreement between Mr. Wedel and the Company to submit all disputes to binding arbitration. While the court granted the requested stay, it also 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. In September 2001, we entered into a commitment letter with the lender to remove CIVCO from the credit facility, thus permitting Colorado MEDtech to utilize it. On March 3, 2001, the Wedels submitted a statement of claim to an arbitrator group. The statement of claim alleges that the Company made misrepresentations to and concealed material information from the plaintiffs in connection with the CIVCO acquisition. 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 our filings 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 plaintiffs amended their statement of claim to include an additional damage theory pursuant to which they increased the damages sought to $15,462,804. We and the other defendant have denied all substantive allegations of wrongdoing and both parties are defending themselves. The arbitration hearing is scheduled for October 2001. In May 2001, a former customer, Gen-Probe, Incorporated, threatened litigation against us in connection with a development and manufacturing project. In response to their threat and in anticipation that they were prepared to file suit against us, on May 23, 2001, we filed a suit for declaratory judgment against Gen-Probe in United States District Court for the District of Colorado. The suit seeks a declaration that we did not breach the agreements pursuant to which the development and manufacturing services were performed. The parties have signed a tolling agreement pursuant to which defenses of the parties based on the passage of time are tolled until October 31, 2001, Gen-Probe has agreed not to file suit against Colorado MEDtech until after October 31, 2001, and Colorado MEDtech agreed to stipulate that Gen-Probe's answer in the pending litigation is not due prior to October 31, 2001. While the tolling agreement is in place, the parties are attempting to resolve the dispute. Gen-Probe has stated that its damages in connection with the dispute are in excess of $15 million. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of shareholders during the last quarter of the fiscal year ended June 30, 2001. -11- 12 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Colorado MEDtech common stock is traded on the Nasdaq Stock Market National Market system. The following table sets forth the range of high and low closing prices of our common stock as reported by Nasdaq during fiscal years 2001 and 2000:
Fiscal Year Ended June 30, ----------------------------------------- 2001 2000 ------------------- ------------------- High Low High Low -------- -------- -------- -------- First Fiscal Quarter $ 10.00 $ 5.25 $ 23.50 $ 14.00 Second Fiscal Quarter $ 9.06 $ 3.13 $ 15.75 $ 8.00 Third Fiscal Quarter $ 4.94 $ 3.03 $ 13.00 $ 7.75 Fourth Fiscal Quarter $ 4.95 $ 3.38 $ 7.63 $ 3.81
The foregoing quotations represent quotations between dealers without adjustment for retail markups, markdowns or commissions and may not represent actual transactions. At June 30, 2001, we had approximately 1,150 shareholders of record. We have never paid a dividend to our shareholders, and do not anticipate the payment of dividends in the foreseeable future. Prior to the acquisition by Colorado MEDtech, CIVCO distributed dividends of approximately $373,000 and $902,000 in fiscal 2000 and 1999, respectively. On January 26, 2001, the United States District Court for the Central District of California, in the Wedel litigation described in "Item 3 -- Legal Proceedings" above, entered an order that, among other things, prevents CIVCO from paying any dividends to the Company during the pendency of the dispute. We did not sell any unregistered securities in the three-month period ended June 30, 2001. -12- 13 ITEM 6. SELECTED FINANCIAL DATA. The selected, consolidated financial information presented below for each of the five years in the period ended June 30, 2001 is derived from our consolidated financial statements. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Conditions and Results of Operations contained in this report. Certain reclassifications have been made to prior year financial statements to conform with the current presentation. The acquisition of CIVCO on November 15, 1999 was accounted for as a pooling of interests. Accordingly, we have restated all periods presented to account for the acquisition as if the transaction took place on July 1, 1996. (In thousands, except per share amounts)
YEARS ENDED JUNE 30(a), -------------------------------------------------------- 2001(b) 2000(c) 1999(d) 1998(e) 1997(f) -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales and service $ 77,175 $ 74,003 $ 75,723 $ 56,410 $ 36,097 Gross profit $ 20,802 $ 26,826 $ 30,508 $ 21,827 $ 13,871 Net (loss) income $ (2,707) $ 2,991 $ 9,097 $ 5,477 $ 3,884 (Loss) earnings per share Basic (g) $ (.21) $ .25 $ .79 $ .49 $ .49 Diluted (g) $ (.21) $ .22 $ .69 $ .42 $ .39 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) Operating activities $ (3,299) $ (2,354) $ 13,149 $ 9,389 $ 4,594 Investing activities $ 663 $ 3,151 $ (3,489) $ (9,531) $ (7,361) Financing activities $ 2,204 $ (737) $ (3,627) $ 823 $ 4,017 BALANCE SHEET DATA: Cash and cash equivalents $ 8,127 $ 8,560 $ 8,500 $ 2,467 $ 1,786 Short-term investments $ 1,677 $ 8,191 $ 14,395 $ 12,144 $ 10,293 Current assets $ 40,033 $ 42,066 $ 42,693 $ 31,006 $ 22,338 Total assets $ 51,400 $ 48,292 $ 49,971 $ 37,933 $ 27,282 Current liabilities $ 16,045 $ 12,869 $ 18,357 $ 13,610 10,099 Total long-term debt $ 34 $ 75 $ 1,164 $ 1,182 $ 1,225 Total shareholders' equity $ 35,322 $ 35,347 $ 30,450 $ 23,141 $ 15,958 Cash dividends per share $ -- $ .03 $ .08 $ .10 $ .14
(a) In November 1999, Colorado MEDtech acquired CIVCO Medical Instruments Co., Inc. in a pooling of interests transaction. Due to the nature of a pooling of interests transaction, the selected financial data are restated to reflect combined activities of Colorado MEDtech and CIVCO prior to the acquisition, including dividends paid by CIVCO prior to the acquisition. (b) In December 2000, Colorado MEDtech acquired the operating assets of the ultrasound supplies group of ATL Ultrasound. In April 2001, the Company sold the outstanding stock of CDT. (c) In August 1999, Colorado MEDtech acquired the assets of Creos Technologies, LLC, and in November 1999, Colorado MEDtech acquired CIVCO Medical Instruments Co., Inc. (d) In February 1999, Colorado MEDtech acquired the operating assets of Eclipse Automation Corporation. (e) In October 1997, Colorado MEDtech acquired the operating assets of Erbtec Engineering, Inc. (f) In February 1997, Colorado MEDtech acquired Novel Biomedical, Inc. (g) As restated under Statement of Financial Accounting Standards No. 128, "Earnings per Share", in 1997. -13- 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As an aid to understanding our operating results, the following table indicates the percentage relationships of income and expense items to total revenue for the line items included in the Consolidated Statements of Operations for the three years ended June 30, 2001, 2000 and 1999, and the percentage change in those items for the years ended June 30, 2001 and 2000, from the prior year.
As a Percentage of Total Revenues Percentage Change From Prior Year -------------------------------------------- --------------------------------- For the Years Ended June 30, For the Years Ended June 30, 2001 2000 1999 LINE ITEMS 2001 2000 ------------ ------------ ------------ ---------- ------------ ------------ % % % % % 47.7 57.4 62.6 Sales, Outsourcing Services (13.3) (10.4) 52.3 42.6 37.4 Sales, Medical Products 28.0 11.4 ------------ ------------ ------------ ------------ ------------ 100.0 100.0 100.0 Total Sales and Service 4.3 (2.3) ------------ ------------ ------------ ------------ ------------ 34.1 38.6 38.5 Cost of Sales, Outsourcing Services (7.8) (2.1) 39.0 25.2 21.2 Cost of Sales, Medical Products 61.2 16.1 ------------ ------------ ------------ ------------ ------------ 73.1 63.8 59.7 Total Cost of Sales and Services 19.5 4.3 ------------ ------------ ------------ ------------ ------------ 26.9 36.2 40.3 Gross Profit (22.5) (12.1) ------------ ------------ ------------ ------------ ------------ 5.1 5.5 5.0 Marketing and Selling (2.6) 8.5 21.7 18.7 13.6 Operating, Gen'l and Admin 20.6 34.1 6.6 5.4 3.8 Research and Development 26.1 39.9 2.4 0.3 0.3 Other Operating Expenses 882.1 (0.2) ------------ ------------ ------------ ------------ ------------ 35.8 29.9 22.7 Total Operating Expenses 24.8 28.8 ------------ ------------ ------------ ------------ ------------ (8.9) 6.3 17.6 Earnings from Operations (246.1) (64.8) 1.1 1.0 0.6 Other Income, Net 14.9 49.0 1.2 0.0 0.0 Gain on Sale of Subsidiary 100.0 0.0 ------------ ------------ ------------ ------------ ------------ (6.6) 7.3 18.2 Earnings Before Income Taxes (193.8) (60.8) (3.1) 3.3 6.2 Provision for Income Taxes (197.8) (48.5) ------------ ------------ ------------ ------------ ------------ (3.5) 4.0 12.0 NET INCOME (190.5) (67.1) ============ ============ ============ ============ ============
-14- 15 RESULTS OF OPERATIONS Fiscal Year 2001 Compared to Fiscal Year 2000 Revenues were $77.2 million for the year ended June 30, 2001, compared to $74.0 million for the prior year, an increase of 4%. Outsourcing services were approximately 48% of total revenues in fiscal year 2001 and 57% of total revenues in fiscal year 2000. Medical products were approximately 52% of total revenues in fiscal year 2001 and 43% of total revenues in fiscal year 2000. Outsourcing services contributed approximately $36.8 million of revenue during the year ended June 30, 2001 compared to $42.5 million in fiscal 2000. Until the deficiencies cited by the FDA in the warning letter are resolved, we are not permitted to manufacture or ship certain types of medical devices. This will have an ongoing negative impact on both product development and manufacturing outsourcing service revenue. Medical products and components contributed approximately $40.4 million of revenue during the year ended June 30, 2001, compared to $31.5 million in fiscal 2000. The increase in medical products revenues was due to the acquisition of the operating assets of the ultrasound supplies group of ATL Ultrasound in December 2000 and an increase in medical product and component shipments from our IPS division. Gross margins decreased to 31% (27%, after a specific write down of inventory of approximately $3,100,000 related to the discontinuation of our Hitachi manufacturing contract) for the year ended June 30, 2001, compared to 36% for the year ended June 30, 2000. Gross margins in our Outsourcing Services segment decreased to 29% in fiscal 2001 from 33% in fiscal 2000. This decrease was due to the increase in direct costs of quality system improvements on our projects, discounts extended on outsource engineering projects, higher than normal write downs of inventory and our inability to sustain a consistent manufacturing process. Gross margins in the Medical Products segment decreased to 33% (prior to specific charges from the write down of inventory) in fiscal 2001 from 41% in fiscal 2000. This decrease was due to an increase in sales of some of our lower margin products. Marketing and selling expenses decreased by 3% for the year ended June 30, 2001, compared to the prior year. The decrease was attributable to the reduced effort in marketing and selling expenses related to the discontinued operations of our CMED Automation, BioMed, and CDT divisions. Marketing and selling expenses as a percentage of total revenue were 5% and 6% for the fiscal years ended June 30, 2001 and 2000, respectively. Operating, general and administrative expenses increased by 21% for the year ended June 30, 2001, compared to the prior year. The increase was attributable to the recruiting and hiring of experienced personnel, an increase in the number of personnel and the actions we have taken to improve our quality systems, tools and processes. As a percentage of revenues, operating, general and administrative expenses increased to 22% from 19% in the prior year. We have taken expense reduction actions to bring down operating, general and administrative costs, but we expect to continue our investment in our quality systems. Other operating expenses relate to the Company's legal fees, severance charges, costs related to the unsolicited acquisition proposal and costs associated with the general improvement of the Company's quality systems. Other operating expenses for the year ended June 30, 2001 increased 882% compared to the prior year due to the Company's response to the unsolicited acquisition proposal by HEI, Inc. (including one time charges of $560,000), increased legal fees due to the Wedel litigation, and expenses associated with our response to the FDA warning letter. -15- 16 Research and development expenses for the year ended June 30, 2001 increased by 26% compared to the prior year. During fiscal year 2001, research and development expenses were attributable to RF solid state amplifier systems, medical device connectivity, ultrasound guidance systems and covers, and high voltage x-ray generators for CT scanners. Consistent with our operating plans, we continue to pursue the development or acquisition of new or improved technology or products. Should we identify any such opportunities, the amount of future research and development expenditures may increase. Net other income and expenses increased to $800,000 (prior to the one time gain on the sale of the CDT subsidiary of $921,000) for the year ended June 30, 2001, compared to $700,000 for the year ended June 30, 2000. The increase was attributable to lower interest expense during fiscal year 2001 compared to fiscal year 2000. In fiscal year 2001 the consolidated statements of operations contain a net tax benefit of $2.4 million compared to a net tax provision of $2.4 million in fiscal 2000. The effective tax rate during fiscal year 2001 was 47%, compared to 44% during fiscal year 2000. The increase was the result of the non-taxable book gain on the sale of our CDT subsidiary of $345,000 and for credits related to our research and development activities. During the year ended June 30, 2001 compared to the year ended June 30, 2000, 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:
Year Ended June 30, ------------------------------- 2001 2000 ---------- ----------- Net (Loss) Income $(2.7) million $3.0 million Diluted Earnings per Share $(.21) $.22 Diluted Weighted Average Common Equivalent Shares Outstanding 12.7 million 13.4 million
The decrease in net income and earnings per share was attributable to the specific write down of approximately $3,100,000 in inventory due to the sudden and unplanned cancellation of the Hitachi contract, additional write downs of materials due to obsolete and excess inventories of approximately $800,000, a slowdown in outsource manufacturing caused by the FDA warning letter and the resulting production delays and stoppages, the specific charges of approximately $560,000 for the Company's response to the unsolicited acquisition proposal by HEI, and the increase in costs related to improving our quality systems and infrastructure. The Company had a one-time gain on the sale of our CDT subsidiary of $921,000 during fiscal 2001. If the Company had not incurred the specific and one-time charges discussed above, the net income and earnings per share figures for the year ended June 30, 2001, would have been as follows:
Year Ended June 30, ------------------------------ 2001 2000 ---------- ---------- Pro forma Net (Loss) Income $ (1.4) million $ 5.0 million Pro forma (Loss) Earnings per Share $ (.11) $ .37
-16- 17 Fiscal Year 2000 Compared to Fiscal Year 1999 Revenues were $74.0 million for the year ended June 30, 2000, compared to $75.7 million for the prior year, a decrease of 2%. Outsourcing services were approximately 57% of total revenues in fiscal year 2000 and 63% of total revenues in fiscal year 1999. Medical products were approximately 43% of total revenues in fiscal year 2000 and 37% of total revenues in fiscal year 1999. The decrease in total revenues was attributable to the cancellation and slowdown of some development and manufacturing programs. Outsourcing services contributed approximately $42.5 million of revenue during the year ended June 30, 2000, compared to $47.4 million in fiscal 1999. Medical products contributed approximately $31.5 million of revenue during the year ended June 30, 2000, compared to $28.3 million in fiscal 1999. Gross margins decreased to 36% for the year ended June 30, 2000, compared to 40% for the year ended June 30, 1999. In our outsourcing services segment, gross margins decreased to 33% in fiscal 2000 compared to 39% in fiscal 1999. This decrease was due to discounts given on large time and material projects and overruns on fixed price contracts. Due to integration difficulties with our CT products, gross margins in our medical products segment decreased to 41% in fiscal year 2000, compared to 43% in the prior year. Marketing and selling expenses increased by 8% for the year ended June 30, 2000, compared to the prior year. The increase was attributable to the fact that fiscal year 2000 included sales and marketing efforts associated with the CT product line and CMED Automation for a full year while fiscal year 1999 had such expenses only for part of the year. Marketing and selling expenses as a percentage of total revenue were 6% and 5% for the fiscal years ended June 30, 2000 and 1999, respectively. Operating, general and administrative and other operating expenses increased by 34% for the year ended June 30, 2000, compared to the prior year. The increase was attributable to the one-time expenses related to the acquisition of CIVCO which was completed in November 1999. This acquisition was accounted for as a pooling of interests; therefore, all acquisition costs were expensed in the year in which they were incurred. These one-time expenses were approximately $.8 million for the year ended June 30, 2000. We also had a specific write-off of goodwill for CDT of $1.3 million during fiscal year 2000. The increase in operating, general and administrative expenses was also attributable to the addition of CMED Automation and Creos. As a percentage of revenues, operating, general and administrative and other expenses increased to 19% from 14% in the prior year. Research and development expenses for the year ended June 30, 2000 increased by 40% compared to the prior year. During fiscal year 2000, research and development expenses were attributable to RF solid state amplifier systems, Year 2000 software tools and database, ultrasound guidance systems and covers, and high voltage x-ray generators for CT scanners. Consistent with our operating plans, we continue to pursue the development or acquisition of new or improved technology or products. Net other income and expenses increased to $.7 million for the year ended June 30, 2000, compared to $.5 million for the year ended June 30, 1999. The increase was attributable to lower interest expense during fiscal year 2000 compared to fiscal year 1999. Included in the June 30, 1999 amount was a $.2 million write down in an investment in an early stage, drug delivery company that was behind schedule in developing its proprietary technologies. -17- 18 The fiscal year 2000 and 1999 consolidated statements of operations contain a net tax provision of $2.4 million and $4.7 million, respectively. The effective tax rate during fiscal year 2000 was 44% compared to 34% during fiscal year 1999. The increase in the effective tax rate was the result of having a specific write-off of goodwill of $1.3 million, which was not deductible for tax purposes, and, since CIVCO was an S-corporation during fiscal year 1999, we had no tax provision related to CIVCO's 1999 revenue. During the year ended June 30, 2000 compared to the year ended June 30, 1999, 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:
Year Ended June 30, ----------------------------- 2000 1999 ---------- ---------- Net Income $ 3.0 million $ 9.1 million Diluted Earnings per Share $ .22 $ .69 Diluted Weighted Average Common Equivalent Shares Outstanding 13.4 million 13.3 million
The decrease in net income and earnings per share was attributable to the slowdown in outsource manufacturing caused by production delays, discounts given to large outsourcing customers, overruns on a fixed-price contracts in CMED Automation, the one-time charges for the CIVCO acquisition and the write-off of goodwill associated with CDT. If the Company had not incurred the one-time charges discussed above, the net income and earnings per share figures for the year ended June 30, 2000, would have been as follows:
Year Ended June 30, ----------------------------- 2000 1999 ---------- ---------- Pro forma Net Income $5.0 million $9.1 million Pro forma Earnings per Share $.37 $.69
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity have consisted of cash flows from operations, cash deposits received from customers related to research and development and manufacturing contracts, and issuance of stock. We have a capital lease agreement with an interest rate of 7.9% that terminates in April 2003. A capital lease with an interest rate of 6.5% expired in January 2001. As of June 30, 2001 and 2000, amounts outstanding under these obligations were $75,000 and $121,000, respectively. We 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 based on our preference of either 1) the London Inter Bank Offering Rate (LIBOR) plus up to 200 -18- 19 margin basis points, or 2) the higher of either the bank's prime lending rate or the federal funds rate plus 0.5%. As of June 30, 2001, the applicable rate was 6.02%. All accounts receivable and inventory secure outstanding balances, but no amounts had been advanced under the facility as of August 31, 2001. The agreement contains various restrictive covenants customary in asset-based loans. In connection with the Wedel litigation (See "Item 3 -- Legal Proceedings"), the court entered an order on January 26, 2001 that restricts our ability to draw on our credit facility while CIVCO is a party to the credit facility. In addition, CIVCO cannot pay any dividends to the Company during the pendency of the dispute. We recently entered into a commitment letter with the lender pursuant to which the facility will be amended to: (i) remove CIVCO as a party; (ii) remove CIVCO assets as collateral; (iii) ease financial covenants; (iv) reduce the line of credit from $15 million to $5 million and change the maturity date from December 21, 2003 to July 1, 2002; and (v) set the interest rate at 2% over the higher of (a) the bank's prime rate or (b) the federal funds effective rate plus 0.5%. Fiscal 2001 cash flows used in operating activities were $3.3 million compared to cash used of $2.4 million in fiscal 2000. In fiscal 2001, cash used in operating activities was primarily associated with the Company's pre-tax loss and the increase in inventory levels. The loss for the year resulted primarily from the write down of approximately $4.0 million in inventory ($3.1 million due to the sudden and unplanned cancellation of the Hitachi contract); a slowdown in outsource manufacturing caused by the FDA warning letter and the resulting production delays and stoppages; the one-time charges for the Company's response to the unsolicited acquisition proposal by HEI; and the increase in costs related to improving our quality systems and infrastructure. We increased our expenditures to improve our quality systems in response to the January 2001 FDA warning letter. Until the warning letter is resolved, we are not permitted to manufacture or ship certain types of medical devices. Inventory increased by $6.7 million during the year, related primarily to our inability to ship certain classes of medical devices pending resolution of the FDA warning letter and our decision to hold inventory for anticipated future sales in the Medical Products segment of our business. The cash used in operating activities was offset by an increase in accounts payable and accrued expenses of $2.6 million, customer deposits received to cover inventory purchases of $1.0 million, and depreciation and amortization charges for the period of $2.5 million. Cash flows provided by investing activities were $663,000 due to the sale of short-term investments of $11.4 million and the proceeds from the sale of our CDT subsidiary of $1.2 million. These inflows were offset by cash outflows of $3.9 million for the purchase of the ATL Ultrasound accessories business, purchases of short-term investments of $4.9 million and property and equipment purchases of $2.1 million. We expect capital expenditures in fiscal 2002 to be near or above the level of fiscal 2001. In fiscal 2001, we loaned approximately $1.0 million to officers to purchase Company stock from persons other than the Company. Cash flows provided by financing activities were $2.2 million, primarily related to receipts from employee purchases of common stock under the Stock Option Plan and the 1996 Employee Stock Purchase Plan. Working capital decreased to $24.0 million at June 30, 2001 from $29.2 million at June 30, 2000. The ratio of current assets to current liabilities decreased to 2.5 to 1 at June 30, 2001 from 3.3 to 1 at June 30, 2000. This decrease was due to cash paid for ATL of $3.9 million and the cash used to fund the operating loss incurred during fiscal 2001. This was offset by the $2.4 million of cash received -19- 20 from employee purchases of common stock mentioned above. The average number of days outstanding of our accounts receivable was approximately 61 days at June 30, 2001, compared to 73 days at June 30, 2000. The decrease in days outstanding is due to the Company's increased emphasis on collections. Our cash, investments, credit facilities and cash projected from operations will be sufficient to meet our working capital needs through the end of fiscal 2002 and the foreseeable future. However, our projected cash needs may change as a result of acquisitions, unforeseen operational difficulties or other factors. On January 25, 2001, we received a warning letter from the FDA regarding certain areas in which our Longmont, Colorado contract medical device manufacturing facility was not in conformance with the FDA's Quality System Regulation (QSR). Our efforts to address the issues raised in the warning letter and improve our quality systems have used some of our capital resources. The temporary restriction placed on our manufacturing facility by the warning letter has impaired our ability to generate cash flows at the same rate as in previous years. Until the letter is resolved and our quality systems restructuring is complete, this may continue. As part of the Wedel litigation (see "Item 3 - Legal Proceedings"), the plaintiffs have asserted a damage theory that would involve rescission of the CIVCO transaction. Should we lose this suit, and the rescission damage theory is accepted and imposed in lieu of money damages, the arbitrator may rescind the transaction and return CIVCO to the plaintiffs. The court also imposed certain restrictions on CIVCO and the Company during the pendency of the dispute. The restrictions include a provision that the Company will not draw on its credit facility while CIVCO is a party to the credit facility and that CIVCO can not pay any dividends to the Company during the pendency of the dispute. As part of our sale of CDT, the Company recognized a tax effected loss of approximately $225,000, which has been recorded as a deferred tax asset. For the Company to recognize the tax benefit of this loss, we will need to realize capital gains, which has not historically occurred in our business. Therefore, the Company has recorded a valuation allowance of $225,000 against this deferred tax asset. In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities. In the event of any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional indebtedness. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 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, unless specific hedge accounting criteria are met. We do not typically enter into arrangements that would fall under the scope of SFAS No. 133 and thus, its adoption did not significantly affect our financial condition or results of operations for the year ended June 30, 2001. -20- 21 In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("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. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44"). The interpretation clarifies the application of Accounting Principles Board Opinion No. 25 for certain issues related to equity-based instruments issued to employees. FIN No. 44 was effective on July 1, 2000, except for certain transactions, and will be applied on a prospective basis. FIN No. 44 did not have a significant impact on our financial position or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". These standards revise the rules related to the accounting of business combinations, goodwill and other intangible assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase accounting method. SFAS No. 142 states that goodwill is no longer subject to amortization over its useful life. Rather, goodwill will be subject to an annual assessment for impairment and be written down to its fair value only if the carrying amount is greater than the fair value. In addition, intangible assets will be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. The amount and timing of non-cash charges related to intangibles acquired in business combinations will change significantly from prior practice. We have not yet determined the effect of adopting SFAS Nos. 141 and 142 on the Company's financial condition and results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. It requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate can be made. The Company does not believe that this statement will materially impact its results of operations. Forward-Looking Statements and Risk Factors The statements in this report that are not historical facts are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes," "intends," "may," "will," "should," "anticipated," "expected" or comparable terminology or by discussions of strategy. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. Such statements involve risks and uncertainties including, but not limited to, the risk that our existing level of orders may not be indicative of the level or trend of future orders, the risk that we 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, the risk that acquired companies cannot be successfully integrated with existing operations and the risk -21- 22 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 we are 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 below and in our documents filed from time to time with the Securities and Exchange Commission. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise. OUR FINANCIAL RESULTS CAN FLUCTUATE FROM QUARTER TO QUARTER AND YEAR TO YEAR, WHICH CAN AFFECT OUR STOCK PRICE. Our quarterly and annual operating results are affected by a number of factors, primarily the volume and timing of revenue from customer orders. The volume and timing of our revenue from customer orders varies due to: o variation in demand for the customer's products as a result of, among other things, product life cycles, competitive conditions and general economic conditions; o suspension or cancellation of a customer's development project for reasons which may or may not be related to project performance; o suspension or cancellation of a customer's R&D budget for reasons often unrelated to the project; o a change in a customer's R&D strategy as a result of sale or merger of the customer to another company; o delays in projects associated with the approval process for changes to a project; and, o discounts extended to customers for reasons related to project performance or which we may be required to give at the concluding phase of a project if the project is late or over budget. Our outsourcing services business organization and its related cost structure is designed to support a certain minimum level of revenues. As such, if we experience a temporary decrease in project revenues, our ability to adjust our short-term cost structure is limited. This limitation may compound the adverse effect of any significant revenue reduction we may experience. Any one of the factors listed above or a combination thereof could result in a material adverse effect on our business, results of operations and financial condition. Due to the foregoing factors, it is possible that our operating results may from time to time be below the expectations of public market analysts and investors. In such event, the price of our stock would likely be adversely affected. IF WE DO NOT COMPLY WITH REGULATORY REQUIREMENTS, OUR PROJECTS AND REVENUE CAN BE ADVERSELY AFFECTED. We are subject to a variety of regulatory agency requirements in the United States and foreign countries relating to many of the products that we develop and manufacture. The process of obtaining and maintaining required regulatory approvals and otherwise remaining in regulatory compliance can be lengthy, expensive and uncertain. The FDA inspects manufacturers of certain types of devices before providing a clearance to manufacture and sell such device, and the failure to pass such an inspection could result in delay in -22- 23 moving ahead with a product or project. We are required to comply with the FDA's QSR for the development and manufacture of medical products. In addition, in order for devices we design or manufacture to be exported and for us and our customers to be qualified to use the "CE" mark in the European Union, we maintain ISO 9001/EN 46001 certification which, like the QSR, subjects our operations to periodic surveillance audits. To ensure compliance with various regulatory and quality requirements, we expend significant time, resources and effort in the areas of training, production and quality assurance. If we fail to comply with regulatory or quality regulations or other FDA or applicable legal requirements, the governing agencies can issue warning letters, impose government sanctions and levy serious penalties. On January 25, 2001, we received a warning letter from the FDA regarding certain areas in which our Longmont, Colorado contract medical device manufacturing facility was not in conformance with the FDA's Quality System Regulation (QSR). Until the warning letter is resolved, we are not permitted to manufacture or ship certain types of medical devices. This action has required that we divert resources otherwise available for our operations and has distracted our management and employees from carrying out the day-to-day operations of the business. While we are working to correct all problems related to the warning letter, we cannot predict how soon this matter will be resolved. Our actions to address the deficiencies raised in the warning letter have had a negative effect on our reported earnings and will continue to have such an effect until we have received clearance from the FDA to resume manufacturing products for our customers. This issue has created uncertainties about our future in the minds of our employees and vendors. In addition, such action has had an adverse effect on the willingness of customers and prospective customers to do business with us. Such noncompliance, as well as any increased cost of compliance has had and could continue to have a material adverse effect on our business, results of operations and financial condition. Our inability to ship certain products has had a negative impact on our customers. In August 2001, our customer Urologix, Inc. announced that its operating results were negatively impacted due to our inability to provide them with the product we were to manufacture for them. While we have not been threatened with legal action in connection with this matter and our contract (with Urologix and generally with other customers) limits our liability for certain types of damages, including lost profits, there can be no assurance that our inability to fill customer needs will not result in liability to the affected customer. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES, DELAY PRODUCTION OR TERMINATE THEIR CONTRACTS. Medical device development and manufacturing service providers must provide increasingly rapid product output for their customers. We generally do not obtain long-term commitments from our customers and we continue to experience reduced lead times in customer orders. Customers may cancel their orders, change production quantities, delay production, or terminate their contracts for a number of reasons. In certain situations, cancellations, reductions in quantities, delays or terminations by a significant customer could adversely affect our operating results. In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, parts procurement commitments, and personnel needs based on our estimates of customer requirements. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand or a termination of a contract by a customer can harm our gross margins and operating results. -23- 24 Hitachi Medical Corporation recently cancelled orders for x-ray generator subsystems for computed tomography (CT) scanners. As a result, in fiscal year 2001 we wrote down $3.1 million of related inventory, our fiscal year 2002 revenues will be less than originally planned, and we laid off employees working on the project. POTENTIAL OR PENDING LITIGATION MAY AFFECT OUR BUSINESS. We are currently involved in two material pieces of litigation, described above in this report under "Item 3 -- Legal Proceedings". We may incur significant costs and liabilities related to potential or pending litigation. These costs and liabilities may include legal and expert fees, settlement payments or judgments against us. As a result, the defense or resolution of the pending litigation or any future litigation could have a negative impact on our financial position and results of operations. RISKS WHICH AFFECT OUR CUSTOMERS CAN DIRECTLY IMPACT OUR BUSINESS. Our success is dependent on the success of our customers and the products that we develop or manufacture for them. Any unfavorable developments or adverse effects on the sales of those products or on our customers' businesses could have a corresponding adverse effect on our business. We believe that our customers and their products are generally subject to the risks listed below. To the extent the factors set forth below affect our customers, there may be a corresponding impact on our business. OUR CUSTOMERS OPERATE IN A COMPETITIVE ENVIRONMENT The medical products industry is highly competitive and is subject to significant and rapid technological change. It requires ongoing investment to keep pace with technological developments and quality and regulatory requirements. The medical products industry consists of numerous companies, ranging from start-up to well-established companies. Our customers' competitors may succeed in developing or marketing technologies and products that will be better accepted in the marketplace than the products we design and manufacture for our customers or that would render our customers' technology and products obsolete or noncompetitive. Some of our customers are emerging medical technology companies that have competitors and potential competitors with substantially greater capital resources, research and development staffs and facilities, and substantially greater experience in developing and commercializing new products. Our customers may not be successful in marketing or distributing their products, or may not respond to pricing, marketing or other competitive pressures or the rapid technological innovation demanded by the marketplace. As a result, they may experience a drop in product sales, which would have an adverse effect on our business, results of operations and financial condition. OUR CUSTOMERS' BUSINESS SUCCESS DEPENDS ON MARKET ACCEPTANCE OF NEW PRODUCTS. We design and manufacture medical devices for other companies. We also sell proprietary products to other companies and end-user customers. For products we manufacture (manufactured for others, or those we sell directly), our success is dependent on the acceptance of those products in their markets. Market acceptance may depend on a variety of factors, including educating the target market regarding the use of a new procedure and convincing healthcare payers that the benefits of the product and its related treatment regimen outweigh its costs. Market acceptance and market share are also affected by the timing of market introduction of competitive products. Some of our customers, especially emerging medical technology companies, have limited or no experience in -24- 25 marketing their products and may be unable to establish effective sales and marketing and distribution channels to rapidly and successfully commercialize their products. If our customers are unable to gain any significant market acceptance for the products we develop or manufacture for them, our business will be affected. IF OUR CUSTOMERS DON'T PROMPTLY OBTAIN REGULATORY APPROVAL FOR THE PRODUCTS WE DESIGN AND MANUFACTURE FOR THEM, OUR PROJECTS AND REVENUE CAN BE AFFECTED. The FDA regulates many of the products we develop and manufacture, and requires certain clearances or approvals before new medical devices can be marketed. As a prerequisite to any introduction of a new device into the medical marketplace, our customers or we must obtain necessary product clearances or approvals from the FDA or other regulatory agencies. This can be a slow and uncertain process and there can be no assurance that such clearances or approvals will be obtained on a timely basis, if at all. Certain medical devices we manufacture may be subject to the need to obtain premarket approval from the FDA, which requires substantial preclinical and clinical testing, and may cause delays and prevent introduction of such instruments. Other instruments can be marketed only by establishing "substantial equivalence" to a pre-existing device in a 510(k) premarket notification. In addition, products intended for use in foreign countries must comply with similar requirements and be certified for sale in those countries. A customer's failure to comply with the FDA's requirements can result in the delay or denial of approval to proceed with the device. Delays in obtaining regulatory approval are frequent and, in turn, can result in delaying or canceling customer orders. There can be no assurance that we or our customers will obtain or be able to maintain all required clearances or approvals for domestic or exported products on a timely basis, if at all. The delays and potential product cancellations inherent in the regulatory approval and ongoing regulatory compliance of products we develop or manufacture may have a material adverse effect on our business, reputation, results of operations and financial condition. OUR CUSTOMERS' FINANCIAL CONDITION MAY ADVERSELY AFFECT THEIR ABILITY TO CONTINUE OR PAY FOR A PROJECT. Some of our customers, especially the smaller and newer emerging medical technology companies, are not profitable, may have little or no revenues or may have limited working capital available to fund a development project. Adequate funds for their operations or for a development project may not be available when needed. A customer's financial difficulties may require a customer to suspend its research and development spending, delay development of a product, clinical trials (if required) or the commercial introduction of a product. Depending on the significance of a customer's product to our revenues or profitability, any adverse effect on a customer resulting from insufficient funds could result in an adverse effect on our business, results of operations and financial condition. GOVERNMENT OR INSURANCE COMPANY REIMBURSEMENT FOR OUR CUSTOMERS' PRODUCTS OR SERVICES MAY CHANGE AND CAUSE A REDUCED DEMAND FOR THE PRODUCT WE PROVIDE TO THE CUSTOMER. Governmental and insurance industry efforts to reform the healthcare industry and reduce healthcare spending have affected, and will continue to affect, the market for medical devices. There have been several instances of changes in governmental or -25- 26 commercial insurance reimbursement policies which have significantly impacted the markets for certain types of products or services or which have impacted entire industries, such as recent policies affecting payment for nursing home and home care services. Adverse governmental regulation relating to our products or our customers' products which might arise from future legislative, administrative or insurance industry policy cannot be predicted and the ultimate effect on private insurer and governmental healthcare reimbursement is unknown. Government and commercial insurance companies are increasingly vigorous in their attempts to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products even if approved for marketing by the FDA. If government and commercial payers do not provide adequate coverage and reimbursement levels for uses of our products and our customers' products, the market acceptance of these products and our revenues and profitability would be adversely affected. A SIGNIFICANT PORTION OF OUR REVENUE COMES FROM A SMALL NUMBER OF MAJOR CUSTOMERS. In the fiscal year ended June 30, 2001, two customers accounted for approximately 35% of our consolidated revenues. In the fiscal year ended June 30, 2000, three customers accounted for approximately 43% of our consolidated revenues. In the fiscal year ended June 30, 1999, three customers accounted for approximately 49% of our consolidated revenues. The primary portion of our business is contract development and manufacturing of medical devices for other companies. As such, we have historically obtained a significant share of our revenue from a small number of customers, but the identity of those major customers tends to change from year to year. The concentration of business in such a small number of customers means that a significant reduction or delay in orders or payments from any of these customers could have a material adverse effect on our business and results of operations. One of our significant customers in fiscal year 2001, Hitachi Medical Corporation, recently cancelled orders for x-ray generator subsystems for computed tomography (CT) scanners. As a result, in fiscal year 2001 we wrote down $3.1 million of related inventory, our fiscal year 2002 revenues will be less than originally planned, and we laid off employees working on the project. In addition, another large customer, Gen-Probe Incorporated, terminated its project and as a result our 2001 revenues were less than planned and we laid off employees. We are in litigation with Gen-Probe, described above in this report under "Item 3 -- Legal Proceedings." AN UNSOLICITED ACQUISITION PROPOSAL MAY ADVERSELY AFFECT OUR PERFORMANCE. We have been the subject of hostile acquisition action in the past. This was expensive and disruptive to our business. The possibility exists that we may be the subject of such action in the future. If so, we may incur significant expenses in responding to any such action and any such increased expenses would divert resources otherwise available for our operations and could have a negative effect on our reported earnings. Such activities could also distract our management and employees from carrying out the day-to-day operations of the business, and may create uncertainties about our future in the minds of our employees, vendors and customers. Any of these could have a negative impact on our operations, financial results or stock price. THE MOVING OF OUR OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS. We currently operate our business out of five separate locations in Colorado and one in Iowa. During fiscal year 2002 we may move our Colorado operations from their current locations to a central location. Any such move involves numerous business risks, including the risk associated -26- 27 with integrating the operations at our separate locations into one facility; the risk that we will not be able to find suitable facilities on a timely basis or on terms satisfactory to us; the risk of delays in the implementation of the move to a new facility; diversion of management's attention from other business areas during the planning and implementation of the move; strain placed on our operational, financial, management, technical and information systems and resources; disruption in manufacturing operations; and incurrence of significant costs and expenses associated with moving the facilities. CONSOLIDATION OF CUSTOMERS CAN ELIMINATE CUSTOMERS OR NEED FOR PRODUCT. Due to the nature of the medical device business, especially in the imaging field, the possibility exists that any of our customers may merge with, or be acquired by, other companies, which companies may also be our customers or customers of our competitors. Such consolidation of our customers' operations could eliminate the customer or, alternatively, the customer's need for our products. We cannot predict how many (if any) of our customers we may lose, or how many of our customers may no longer require certain of our products, due to such mergers and acquisitions. Such elimination of customers or their need for our products may negatively impact our business. COMPETITIVE ISSUES BETWEEN OUR CUSTOMERS MAY LIMIT OUR ABILITY TO PURSUE NEW BUSINESS IN ATTRACTIVE AREAS. There is a great deal of competition in the medical technology industry, especially with respect to new product introductions. Our outsourcing services customers invest heavily in the development of new products and it is important to them to protect their new technology and to hold a technology edge over their competitors as long as possible. Although we generally do not enter into non-competition agreements, on occasion our development contracts prohibit us from working for certain competitors of our customers. When and if we do this, our growth may be adversely affected because such contracts would prevent us from developing or manufacturing instruments for our customers' competitors. Any conflicts among our customers could prevent or deter us from obtaining contracts to develop or manufacture instruments, which could result in a material adverse effect on our business, results of operations and financial condition. OUR SALES CYCLES ARE LONG. The sales cycle for our products and services is lengthy and unpredictable. As a result, the time it takes our business to recover from a slow sales period may be lengthy. While our sales cycle varies from customer to customer, it often ranges from six to nine months or more for outsourcing services projects. While the sales cycle for our medical products can be shorter, to the extent it involves a relationship with a large original equipment manufacturer, the sales cycle can also be quite lengthy. Our pursuit of sales leads typically involves an analysis of our prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. Our sales cycle may also be affected by a prospective customer's budgetary constraints and internal acceptance reviews, over which we have little or no control. A SHIFT IN MARKET DEMAND MAY RESULT IN DECREASED DEMAND FOR OUR SERVICES. The markets for our services are characterized by rapidly changing technology and evolving changes in the needs of the medical device market. The continued success of our business depends on our ability to recognize and quickly react to changes in the medical device market and our ability to hire, retain, and expand our qualified engineering and technical personnel, and maintain and enhance our technological capabilities in a timely and cost-effective manner. Although we -27- 28 believe that our operations currently utilize the technology, processes and equipment required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology, industry standards or customer requirements may render our capabilities and services obsolete or noncompetitive. We may have to acquire new technologies and personnel in order to remain competitive. This acquisition and implementation of these new technologies and personnel may require significant capital investment, which could reduce our operating margins and operating results. Our failure to anticipate our customers' changing needs could have an adverse effect on our business. OUR BUSINESS SUCCESS DEPENDS ON HIRING AND RETAINING KEY PERSONNEL. Our success depends to a significant extent on the continued service of certain of our key managerial, technical and engineering personnel, particularly our President and Chief Executive Officer, Stephen K. Onody. Our future success will be dependent on our continuing ability to attract, train, assimilate and retain highly qualified engineering, technical and managerial personnel experienced in commercializing medical products. The labor market is tight and competition for such personnel is intense, the available pool of qualified candidates is limited and there can be no assurance that we can retain our key engineering, technical and managerial personnel or that we can attract, train, assimilate or retain other highly qualified engineering, technical and managerial personnel in the future. The loss of Mr. Onody or any of our other key personnel or our inability to hire, train, assimilate or retain qualified personnel could have a material adverse effect on our business, results of operations and financial condition. THE PRODUCTS WE DESIGN AND MANUFACTURE MAY BE SUBJECT TO PRODUCT RECALLS AND MAY SUBJECT US TO PRODUCT LIABILITY CLAIMS. Most of the products we design or manufacture are medical devices, many of which may be used in life-sustaining or life-supporting roles. The tolerance for error in the design, manufacture or use of these products may be small or nonexistent. If a product we designed or manufactured is found to be defective, whether due to design or manufacturing defects, to improper use of the product or to other reasons, the product may need to be recalled, possibly at our expense. Furthermore, the adverse effect of a product recall on our business might not be limited to the cost of the recall. Recalls, especially if accompanied by unfavorable publicity or termination of customer contracts, could result in substantial costs, loss of revenues and damage to our reputation, each of which would have a material adverse effect on our business, results of operations and financial condition. The manufacture and sale of the medical devices we develop and manufacture involves the risk of product liability claims. Although we generally obtain indemnification from our customers for products we manufacture to the customers' specifications and we maintain product liability insurance, there can be no assurance that the indemnities will be honored or the coverage of our insurance policies will be adequate. In addition, we are not indemnified with respect to our products which are sold directly to end-users. Further, we generally provide a design defect warranty and indemnify our customers for failure of a product to conform to design specifications and against defects in materials and workmanship. Product liability insurance is expensive and in the future may not be available on acceptable terms, in sufficient amounts, or at all. A successful product liability claim in excess of our insurance coverage or any material claim for which insurance coverage was denied or limited and for which indemnification was not available could have a material adverse effect on our business, results of operations and financial condition. -28- 29 OUR MARKETS ARE COMPETITIVE. Our competition with respect to outsourcing services comes from a variety of sources, including consulting, commercial product development and manufacturing companies. Competition also comes from commercial and university research laboratories and from current and prospective customers who evaluate our capabilities and costs against the merits of designing, engineering or manufacturing products internally. Many of our competitors are larger and have substantially greater financial, research and development and manufacturing resources. Competition from any of the foregoing sources could place pressure on us to accept lower margins on our contracts or lose existing or potential business, which could result in a material adverse effect on our business, results of operations and financial condition. We sell our medical products principally in the markets of the United States, Japan and Europe. Our competition with respect to medical products comes from two principal sources: original equipment manufacturers who may have in-house capabilities similar to ours, and other medical outsourcing and products companies who sell to original equipment manufacturers or directly to customers. Many of our competitors are larger and have substantially greater financial, research and development and manufacturing resources. Price and quality are the primary competitive factors in the markets in which we compete. As competition in the market for medical products continues to increase, we may experience pricing pressure, which could result in a material adverse effect on our business, results of operation and financial condition. SALES OF SHARES ISSUABLE UPON EXERCISE OF STOCK OPTIONS MAY ADVERSELY AFFECT STOCK PRICE. As of June 30, 2001 there were a total of approximately 13 million shares of our common stock outstanding. In addition, there were outstanding warrants and stock options to purchase approximately 2.6 million shares of common stock, approximately 1.0 million of which are currently exercisable or become exercisable by August 31, 2001. Shares issued upon the exercise of warrants and options to purchase our stock generally are available for sale in the open market. Investors should understand that even if our financial performance is good, future sales of the shares of common stock referred to above could adversely affect the market price of the common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As part of our cash management strategy, we had short-term investments at June 30, 2001 consisting of approximately $1.7 million in U.S. Treasury and government agency securities. We classify these investments as available-for-sale. All of the short-term investments mature in less than one year. We have completed a market risk sensitivity analysis of these short-term investments based upon an assumed 1% increase in interest rates at July 1, 2001. If market interest rates had increased by 1% on July 1, 2001, we would have had an approximate $5,000 loss on these short-term investments. Because this is only an estimate, any actual loss due to an increase in interest rates could differ from this estimate. The Company has a line of credit that bears interest on outstanding balances at the higher of the lender's prime rate or the federal funds effective rate plus 0.5%. As we have yet to draw upon our line of credit, an increase in interest rates would not have had an effect on our financial condition or results of operations. We also had two capital lease obligations totaling approximately $75,000 at June 30, 2001 at fixed interest rates. -29- 30 ITEM 8. FINANCIAL STATEMENTS Index to Financial Statements and Schedules:
Page Number ------ Report of Independent Public Accountants F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-10
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. -30- 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Colorado MEDtech, Inc.: We have audited the accompanying consolidated balance sheets of COLORADO MEDtech, Inc. (a Colorado corporation) and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Colorado MEDtech, Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Denver, Colorado, September 6, 2001 F-1 32 COLORADO MEDTECH, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND 2000
2001 2000 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,127,076 $ 8,560,065 Short-term investments 1,677,290 8,190,621 Accounts receivable- Trade - less allowance for uncollectible accounts of approximately $481,000 and $478,000, respectively 12,964,383 12,518,499 Unbilled 540,818 1,143,554 Inventories 11,720,505 8,512,540 Deferred income taxes 3,234,201 1,815,298 Prepaid expenses and other 1,768,355 1,325,823 ------------ ------------ Total current assets 40,032,628 42,066,400 ------------ ------------ PROPERTY AND EQUIPMENT: Computer equipment 6,821,776 6,532,423 Office furniture and fixtures 1,544,405 1,404,735 Building and leasehold improvements 2,462,598 1,902,817 Manufacturing equipment 3,709,400 2,884,486 ------------ ------------ Total property and equipment 14,538,179 12,724,461 Less - Accumulated depreciation and amortization (9,900,897) (8,155,650) ------------ ------------ Property and equipment, net 4,637,282 4,568,811 ------------ ------------ GOODWILL AND INTANGIBLES 3,585,772 316,337 NOTES RECEIVABLE - RELATED PARTIES 999,796 -- INVESTMENT IN LAND 500,000 500,000 DEFERRED INCOME TAXES AND OTHER 1,644,455 840,315 ------------ ------------ TOTAL ASSETS $ 51,399,933 $ 48,291,863 ============ ============
The accompanying notes to financial statements are an integral part of these balance sheets. F-2 33 COLORADO MEDTECH, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND 2000
2001 2000 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,168,168 $ 5,440,413 Accrued product service costs 424,163 394,361 Accrued salaries and wages 3,054,307 2,390,201 Other accrued expenses 1,905,229 1,951,128 Customer deposits 3,451,332 2,647,132 Current portion of capital lease obligation 41,715 46,120 ------------ ------------ Total current liabilities 16,044,914 12,869,355 Capital lease obligation, net of current portion 33,503 75,218 ------------ ------------ Total liabilities 16,078,417 12,944,573 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY: Preferred stock, no par value; 5,000,000 shares authorized; none issued -- -- Common stock, no par value; 25,000,000 shares authorized; 12,967,319 and 12,307,535 issued and outstanding at June 30, 2001 and 2000, respectively 16,161,004 13,468,486 Retained earnings 19,174,464 21,881,289 Unrealized loss on available-for-sale investment (13,952) (2,485) ------------ ------------ Total shareholders' equity 35,321,516 35,347,290 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,399,933 $ 48,291,863 ============ ============
The accompanying notes to financial statements are an integral part of these balance sheets. F-3 34 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999 ------------ ------------ ------------ SALES AND SERVICE: Outsourcing Services $ 36,815,289 $ 42,467,159 $ 47,408,235 Medical Products 40,359,964 31,535,944 28,314,372 ------------ ------------ ------------ Total Sales and Service 77,175,253 74,003,103 75,722,607 ------------ ------------ ------------ COST OF SALES AND SERVICE: Outsourcing Services 26,302,639 28,527,446 29,153,336 Medical Products 30,070,134 18,649,757 16,060,924 ------------ ------------ ------------ Total Cost of Sales and Service 56,372,773 47,177,203 45,214,260 ------------ ------------ ------------ GROSS PROFIT 20,802,480 26,825,900 30,508,347 ------------ ------------ ------------ COSTS AND EXPENSES: Marketing and selling 3,958,235 4,065,466 3,748,617 Operating, general and administrative 16,724,778 13,862,686 10,339,564 Research and development 5,076,781 4,025,567 2,878,396 Other operating expenses 1,882,038 191,635 233,188 ------------ ------------ ------------ Total operating expenses 27,641,832 22,145,354 17,199,765 ------------ ------------ ------------ (LOSS) EARNINGS FROM OPERATIONS (6,839,352) 4,680,546 13,308,582 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (33,025) (98,391) (166,936) Interest income and other 874,894 831,399 659,002 Gain on sale of subsidiary 920,658 -- -- ------------ ------------ ------------ Total other income 1,762,527 733,008 492,066 ------------ ------------ ------------ (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (5,076,825) 5,413,554 13,800,648 (BENEFIT) PROVISION FOR INCOME TAXES (2,370,000) 2,423,000 4,704,000 ------------ ------------ ------------ NET (LOSS) INCOME $ (2,706,825) $ 2,990,554 $ 9,096,648 ============ ============ ============ NET (LOSS) INCOME PER SHARE: Basic $ (.21) $ .25 $ .79 ============ ============ ============ Diluted $ (.21) $ .22 $ .69 ============ ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 12,717,529 12,076,421 11,471,362 ============ ============ ============ Diluted 12,717,529 13,354,808 13,239,795 ============ ============ ============
The accompanying notes to financial statements are an integral part of these financial statements. F-4 35 Page 1 of 3 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Common Stock Other Accumulated Other ---------------------------- Comprehensive Comprehensive Retained Shares Amount Income (Loss) Income (Loss) Earnings ------------ ------------ ------------- ----------------- ------------ BALANCES, June 30, 1998 11,476,337 $ 12,037,456 $ 35,000 $ 11,068,826 Exercise of stock options and warrants 956,747 1,370,641 -- -- Issuance of stock under ESPP 53,365 301,718 -- -- Purchase of common stock (655,000) (4,175,625) -- -- Dividends -- -- -- (902,205) Change in unrealized gain on available-for-sale investment, net of applicable taxes of $4,057 -- -- $ (6,620) (6,620) -- Tax benefit from sale of option shares -- 1,624,256 -- -- -- Net income -- -- 9,096,648 -- 9,096,648 ------------ Comprehensive income -- -- $ 9,090,028 -- -- ============ ------------ ------------ ------------ ------------ BALANCES, June 30, 1999 11,831,449 $ 11,158,446 $ 28,380 $ 19,263,269 ============ ============ ============ ============
F-5 36 Page 2 of 3 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Common Stock Other Accumulated Other --------------------------- Comprehensive Comprehensive Retained Shares Amount Income (Loss) Income (Loss) Earnings ------------ ------------ --------------- ----------------- ------------ BALANCES, June 30, 1999 11,831,449 $ 11,158,446 $ 28,380 $ 19,263,269 Exercise of stock options and warrants 424,595 921,064 -- -- Issuance of stock under ESPP 51,491 347,564 -- -- Dividends -- -- -- (372,534) Change in unrealized gain on available-for-sale investment, net of applicable taxes of $19,817 -- -- $ (30,865) (30,865) -- Tax benefit from sale of option shares -- 1,041,412 -- -- -- Net income -- -- 2,990,554 -- 2,990,554 --------------- Comprehensive income -- -- $ 2,959,689 -- -- =============== ------------ ------------ --------------- ------------ BALANCES, June 30, 2000 12,307,535 $ 13,468,486 $ (2,485) $ 21,881,289 ============ ============ =============== ============
The accompanying notes to financial statements are an integral part of these financial statements. F-6 37 Page 3 of 3 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Common Stock Other Accumulated Other ------------------------------- Comprehensive Comprehensive Retained Shares Amount Income (Loss) Income (Loss) Earnings --------------- ------------ --------------- ----------------- ------------ BALANCES, June 30, 2000 12,307,535 $ 13,468,486 $ (2,485) $ 21,881,289 Exercise of stock options and warrants 581,453 2,083,629 -- -- Issuance of stock under ESPP 100,031 274,907 -- -- Purchase of common stock (21,700) (108,750) -- -- Change in unrealized gain on available-for-sale investment, net of applicable taxes of $7,645 -- -- $ (11,467) (11,467) -- Tax benefit from sale of option shares -- 442,732 -- -- -- Net loss -- -- (2,706,825) -- (2,706,825) --------------- Comprehensive loss -- -- $ (2,718,292) -- -- =============== --------------- ------------ --------------- ------------ BALANCES, June 30, 2001 12,967,319 $ 16,161,004 $ (13,952) $ 19,174,464 =============== ============ =============== ============
The accompanying notes to financial statements are an integral part of these financial statements. F-7 38 Page 1 of 2 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (2,706,825) $ 2,990,554 $ 9,096,648 Adjustments to reconcile net income to net cash flows (used in) provided by operating activities- Gain on sale of subsidiary (920,658) -- -- Deferred tax benefit (2,275,666) (31,000) (380,000) Depreciation and amortization 2,460,642 2,123,394 1,547,529 Write down of goodwill 138,161 1,321,657 -- Allowance for uncollectible accounts 2,576 131,492 27,201 Write down of inventory 3,970,697 187,785 260,624 Write down of investment -- -- 200,000 Changes in operating assets and liabilities- Accounts receivable (535,333) (1,761,459) (3,175,557) Inventories (6,740,254) (2,669,312) (787,169) Prepaid expenses and other assets (292,570) 175,848 (215,600) Accounts payable and accrued expenses 2,570,417 (3,987,344) 5,897,380 Customer deposits 1,029,385 (835,709) 678,391 ------------ ------------ ------------ Net cash flows (used in) provided by operating activities (3,299,428) (2,354,094) 13,149,447 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for purchase of ATL assets (3,884,123) -- -- Cash released from Erbtec escrow -- -- 750,000 Cash paid for purchase of Eclipse -- -- (505,759) Cash paid for purchase of Creos assets -- (1,651,295) -- Purchase of equity investments -- -- (30,000) Capital expenditures (2,146,224) (1,373,129) (1,452,489) Funding of related party notes receivable (999,796) -- -- Proceeds from sale of CDT 1,170,000 -- -- Purchases of short-term investments (4,852,011) (11,756,473) (12,432,936) Sales of short-term investments 11,374,927 17,932,235 10,182,071 ------------ ------------ ------------ Net cash flows provided by (used in) investing activities 662,773 3,151,338 (3,489,113) ------------ ------------ ------------
The accompanying notes to financial statements are an integral part of these financial statements. F-8 39 Page 2 of 2 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock $ 2,358,536 $ 1,268,628 $ 1,672,359 Purchase of common stock (108,750) -- (4,175,625) Dividends paid to shareholder -- (372,534) (902,205) Proceeds from note payable -- -- 559,038 Repayment of borrowings (46,120) (1,632,987) (780,912) ------------ ------------ ------------ Net cash flows provided by (used in) financing activities 2,203,666 (736,893) (3,627,345) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (432,989) 60,351 6,032,989 CASH AND CASH EQUIVALENTS, at beginning of period 8,560,065 8,499,714 2,466,725 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, at end of period $ 8,127,076 $ 8,560,065 $ 8,499,714 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 18,025 $ 108,013 $ 164,345 ============ ============ ============ Cash paid for income taxes $ 612,831 $ 1,823,377 $ 3,365,000 ============ ============ ============
The accompanying notes to financial statements are an integral part of these financial statements. F-9 40 COLORADO MEDTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND OPERATIONS Colorado MEDtech, Inc. ("CMED"), through its operating divisions and its wholly-owned subsidiary (collectively the "Company"), is a leading full-service provider of advanced medical products and comprehensive outsourcing services. CMED was incorporated in 1977 as a Colorado corporation. CMED's operating units and their principal activities are: o RELA DIVISION ("RELA") provides custom product development and manufacturing outsourcing services, specializing in the design and development of diagnostic, biotechnology and therapeutic medical devices, medical software systems and medical device connectivity. RELA also provides manufacturing services for electronic and electromechanical medical devices and instrumentation systems assembly for major original equipment manufacturers ("OEM"); o IMAGING AND POWER SYSTEMS DIVISION ("IPS") designs, develops and manufactures a broad range of imaging system hardware and software, including advanced magnetic resonance imaging ("MRI") systems and application software, high-performance radio frequency ("RF") amplifiers for MRI systems and high-voltage x-ray generator subsystems for computed tomography ("CT") scanners; and o CIVCO MEDICAL INSTRUMENTS CO., INC. ("CIVCO") SUBSIDIARY OF COLORADO MEDTECH designs, develops, manufactures and distributes specialized medical accessories and supplies for imaging equipment and for minimally invasive surgical equipment. During fiscal 2001, the Company re-structured to focus on its core markets of Medical Technology and Software Services and Medical Imaging Products and Services. As a part of this effort, the Company phased out two business units, CMED Automation division ("CMED Automation") and BioMed Y2K, Inc. ("BioMed"). In addition, the Company integrated the CMED Manufacturing division into RELA and sold the CMED Catheter and Disposables Technology, Inc. ("CDT") subsidiary in April 2001. The activities of these business units were as follows: o CDT designed, developed and manufactured unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology and infertility treatment; o CMED AUTOMATION designed, developed and manufactured automation systems for medical device and associated businesses; and o BIOMED provided software tools and services to support healthcare institutions' efforts to establish Year 2000 compliance for their biomedical devices. (2) SIGNIFICANT ACCOUNTING POLICIES F-10 41 Principles of Consolidation The accompanying financial statements reflect the consolidated results of RELA, IPS, CIVCO, CDT (through the date of sale), CMED Automation and BioMed. All significant intercompany transactions and accounts have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments The Company accounts for investments in accordance with the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company's short-term investments are generally classified and accounted for as available-for-sale and accordingly are carried at fair market value with unrealized gains and losses reflected in other comprehensive income. The Company had realized gains of $411,000, $639,000, and $207,000 for the years ended June 30, 2001, 2000 and 1999, respectively. There were no realized losses for these periods. During the years ended June 30, 2001, 2000 and 1999, the Company realized previously unrealized gains of $34,000, $33,000 and $25,000, respectively. Short-term investments consist of approximately $1,677,000 and $8,191,000 of U.S. Treasury and government agency securities as of June 30, 2001 and 2000, respectively. The Company also held approximately $130,000 and $160,000 of marketable equity securities as of June 30, 2001 and 2000, respectively, which are included in deferred income taxes and other. These securities are marked to market through other comprehensive income in the accompanying consolidated balance sheets. The realized and unrealized gains and losses on these marketable equity securities were not significant as of and for the years ended June 30, 2001 and 2000. Inventories Inventories are stated at the lower of cost (weighted average method) or market. The cost of inventories includes material, labor and manufacturing overhead. As of June 30, 2001 and 2000, inventories consisted of: (In thousands)
2001 2000 ---------- ---------- Raw materials $ 7,133 $ 6,490 Work-in-process 4,144 1,899 Finished goods 444 124 ---------- ---------- $ 11,721 $ 8,513 ========== ==========
During the fourth quarter of fiscal 2001, one of the Company's customers cancelled its contract to manufacture x-ray generators. This resulted in an inventory write down of $3,100,000. This charge together with $900,000 of other inventory write downs is included in cost of sales and service. F-11 42 Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the difference between the carrying value and the fair value of the long-lived asset. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets which are: computer equipment -- three years; office furniture and fixtures -- five years; building -- 30 years; leasehold improvements -- over the remaining term of the leased property, which is one to two years; and manufacturing equipment -- seven years. Depreciation expense for the years ended June 30, 2001, 2000 and 1999 was approximately $2,092,000, $1,729,000 and $1,207,000, respectively. Goodwill and Intangibles Goodwill and intangibles consist of the following:
(In thousands) Year Ended June 30, ---------------------------- Lives 2001 2000 ----- ------------ ------------ Goodwill 2 - 15 years $ 3,904 $ 2,656 Development agreement 5 years 1,000 -- ------------ ------------ Total intangibles 4,904 2,656 Accumulated amortization (1,318) (2,340) ------------ ------------ Net intangibles $ 3,586 $ 316 ============ ============
During fiscal 2001, the Company wrote off the remaining goodwill relating to the purchase of Creos of $138,000 due to the reduction of orders expected in the Company's CT business. This impairment was determined by comparing the fair value of the goodwill based upon expected future cash flows from the product line to the carrying amount of the goodwill. The impairment expense is included in operating, general and administrative expenses in the accompanying statement of operations and relates to the Medical Products segment. During fiscal year 2000, the Company wrote off the remaining goodwill in CDT of $1,322,000 due to continual operating losses incurred at CDT and the departure of certain key members of CDT management. The $1,322,000 impairment was determined by comparing the fair value of the goodwill based upon expected future cash flows from CDT to the carrying amount of the goodwill. The impairment expense is included in operating, general and administrative expenses in the accompanying statement of operations and relates to the Outsourcing Services segment. Accrued Product Service Costs The Company warrants its products against defects in materials and workmanship, generally for three to 12 months, but in limited cases for up to 18 months. Estimated costs of product service are accrued at the time of sale. F-12 43 Customer Deposits Customer deposits result from cash received in advance of services performed. Earnings Per Share Basic earnings per share are computed on the basis of the weighted average shares outstanding during each period. Diluted earnings per share are computed on the basis of the weighted average shares outstanding during each period, including dilutive common equivalent shares for stock options and warrants. During the year ended June 30, 2001, the Company reported a net loss. Therefore, all outstanding warrants and options were anti-dilutive in nature and were not used in the calculation of fully diluted shares outstanding as of June 30, 2001. A reconciliation between the number of shares used to calculate basic and diluted earnings per share is as follows:
(In thousands) 2001 2000 1999 ---------- ---------- ---------- Net (loss) income (income available to common shareholders) $ (2,707) $ 2,991 $ 9,097 ========== ========== ========== Weighted average number of common shares outstanding (shares used in basic earnings per share computation) 12,718 12,076 11,471 Effect of dilutive stock options and warrants (treasury stock method) -- 1,279 1,769 ---------- ---------- ---------- Shares used in diluted earnings per share computation 12,718 13,355 13,240 ========== ========== ==========
Options and warrants excluded from diluted earnings per share because they were antidilutive for the years ended June 30, 2001, 2000 and 1999 totaled approximately 2,637,000, 746,000 and 75,000, respectively. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 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, unless specific hedge accounting criteria are met. The Company does not typically enter into arrangements that would fall under the scope of SFAS No. 133 and thus, its adoption did not significantly affect the Company's financial condition or results of operations for the year ended June 30, 2001. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("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, effective July 1, 2000, with no material effect on its financial condition or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". These standards revised the rules related to the accounting for business combinations, goodwill and other intangible assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase accounting method. SFAS No. 142 states that goodwill is no longer subject to amortization over its F-13 44 useful life. Rather, goodwill will be subject to an annual assessment for impairment and be written down to its fair value only if the carrying amount is greater than the fair value. In addition, intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. The amount and timing of non-cash charges related to intangibles acquired in business combinations will change significantly from prior practice. The Company has not yet quantified the potential effect of adoption of SFAS Nos. 141 and 142. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. It requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate can be made. The Company is required to adopt this statement in its fiscal year 2003. The Company does not believe that this statement will materially impact its results of operations. Revenue Recognition Policy The Company generally recognizes revenue for manufacturing services upon shipment of the related products and recognizes revenues for engineering contract services as work is performed and contract requirements are met. Some of the Company's software contracts are to develop custom software code. These contracts are on a time and material basis, therefore revenue is recognized as hours and expenses are incurred. Unbilled receivables result from revenue recognized for contract services in excess of billings. Unanticipated losses on engineering contracts are provided for, in full, when determinable. Certain of the Company's contracts are billed to customers based on progress payments, and are accounted for under the percentage of completion method of recognizing revenue. Income Taxes The Company accounts for income taxes under the liability method. Deferred income tax liabilities are recognized for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are recognized for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans using the intrinsic value method under which no compensation is generally recognized for equity grants in the Company's common stock at or above the current market price of the underlying stock on the measurement date. F-14 45 Management's Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, short-term investments and accounts receivable. The Company maintains its cash and short-term investment balances in the form of bank demand deposits, money market accounts, government securities and commercial paper with financial institutions that management believes are creditworthy. Accounts receivable are typically unsecured and are comprised of amounts due from numerous other entities participating in the medical industry. Financial Instruments The fair market values of cash equivalents, accounts receivable and payable approximate their carrying values due to the short-term nature of these instruments. The fair market values of the Company's borrowings outstanding approximate their carrying values based upon current market rates of interest. Short-term investments are reported at fair value. Advertising The Company expenses all advertising costs as they are incurred. Advertising expense for the years ended June 30, 2001, 2000 and 1999 was $107,000, $115,000 and $108,000, respectively. Reclassifications Certain amounts reported in the prior year have been reclassified to conform to the current year presentation. Other Operating Expenses Other operating expenses are comprised of legal fees, severance charges, costs related to the unsolicited acquisition proposal and costs associated with the FDA warning letter. 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. F-15 46 (3) ACQUISITIONS On December 29, 2000, the Company acquired certain operating assets of the ultrasound accessories and supplies business of ATL Ultrasound ("ATL") for $4,384,000. This acquisition was accounted for as a purchase and accordingly, the results of ATL have been included subsequent to the date of acquisition. As of June 30, 2001, the Company had paid approximately $3,884,000 in cash and had accrued approximately $500,000 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:
(In thousands) Inventory $ 506 Fixed Assets 102 Business Development Agreement 1,000 Goodwill 2,776 ---------- Total Purchase Price $ 4,384 ==========
In connection with this acquisition, the Company and management of ATL entered into a five-year Business Development Agreement under which ATL will both work with the Company to develop additional ultrasound accessory devices and participate in co-marketing efforts for products, and will 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 15 years. 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 were integrated into IPS and CMED Manufacturing. The acquisition resulted in goodwill of approximately $448,000 that was being amortized over a three-year period. During the year ended June 30, 2001, the contract to continue the manufacture of the product associated with this purchase was canceled and the unamortized goodwill of $138,000 was written off. The Company acquired certain operating assets of Eclipse Automation Corporation in February 1999. CMED operated the acquired assets as the CMED Automation division. CMED Automation was an automation services company located in Longmont, Colorado. As part of the Company's restructuring activities during fiscal year 2001, remaining CMED Automation projects were undertaken by the RELA division. The following unaudited pro forma results of operations of the Company for the fiscal years ended June 30, 2001, 2000 and 1999 assume that the acquisition of the operating assets of Creos, Eclipse and ATL occurred on July 1, 1998. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have been achieved nor are they necessarily indicative of future results of operations. (In thousands, except per share data)
Year Ended June 30, ------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (Unaudited) Revenues $ 81,015 $ 81,676 $ 91,130 Net (Loss) Income $ (2,560) $ 3,254 $ 8,580 Net (Loss) Income Per Share (Diluted) $ (.20) $ .24 $ .65
F-16 47 (4) SALE OF STOCK OF SUBSIDIARY On April 30, 2001, the Company sold all of the outstanding stock of CDT to an unrelated party for $1,300,000 in cash. Pursuant to indemnification provisions of the sale agreement, 10% of the sale price is held in escrow, with 5% to be released in six months and the remaining 5% to be released in twelve months from the date of sale. The Company recorded a gain of approximately $921,000 from the sale. Revenues and net income for CDT were as follows:
(In thousands) Year Ended June 30, ------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (Unaudited) Revenues $ 2,023 $ 2,281 $ 4,115 Net (Loss) Income $ 86 $ (489) $ 98
(5) BORROWINGS Credit Facility The Company entered into a credit facility (the "Credit Facility") on December 21, 2000 that provided for a three-year revolving line of credit of $15 million. The Credit Facility accrued interest on outstanding balances based on the Company's preference at either 1) the London Inter Bank Offering Rate (LIBOR) plus up to 200 margin basis points or 2) the higher of either the bank's prime lending rate or the federal funds rate plus 0.5%. As of June 30, 2001, the applicable rate was 6.02%. All accounts receivable and inventory secure outstanding balances. The agreement contains various restrictive covenants customary in asset-based loans. In connection with the Wedel litigation (See "Note 10. Legal Proceedings"), the court entered an order on January 26, 2001 that restricts the Company's ability to draw on the Credit Facility while CIVCO is a party to the Credit Facility. In addition, CIVCO cannot pay any dividends to the Company during the pendency of the dispute. On September 6, 2001, the Company entered into a commitment letter with the lender pursuant to which the Credit Facility will be amended to: (i) remove CIVCO as a party; (ii) remove CIVCO assets as collateral; (iii) ease financial covenants; (iv) reduce the line of credit from $15 million to $5 million and change the maturity date from December 21, 2003 to July 1, 2002; and (v) set the interest rate at 2% over the higher of (a) the bank's prime rate or (b) the federal funds effective rate plus 0.5%. Capital Leases The Company is obligated under capital lease agreements as follows:
(In thousands) Minimum lease payments: Fiscal 2002 $ 46 Fiscal 2003 35 ------ Total lease payments 81 Amount representing interest (7.9%) (6) ------ $ 75 ======
F-17 48 (6) SHAREHOLDERS' EQUITY Preferred Stock The Company's shareholders have authorized 5,000,000 shares of no par value preferred stock, to be issuable from time to time in such series and to have such rights and preferences as the Company's Board of Directors (the "Board") may designate. As of June 30, 2001, no shares of preferred stock had been issued. Common Stock The Company's shareholders have authorized 25,000,000 shares of no par value common stock, of which 12,967,319 and 12,307,535 shares were issued and outstanding as of June 30, 2001 and 2000, respectively. During the year ended June 30, 2001, the Company purchased and retired 21,700 shares of its own common stock for approximately $109,000, as part of a stock repurchase program. The stock was purchased at prices ranging from $5.00 to $5.13 per share. On November 3, 1998, Vencor Operating, Inc., a subsidiary of Vencor, Inc. ("Vencor"), sold 3,560,000 shares of Colorado MEDtech, Inc. common stock held by Vencor. The Company used approximately $4,176,000 of its short-term investments to purchase from Vencor and retire 655,000 shares of its own stock for $6.38 per share. A number of institutional investors purchased the remaining 2,905,000 shares. Prior to the transaction, the 3,560,000 shares held by Vencor represented approximately 33% of the outstanding common stock of the Company. CIVCO Pooling On November 15, 1999, the Company acquired CIVCO by exchanging 736,324 of its common shares for all of the outstanding stock of CIVCO and related real estate assets held by its owners. Prior to the merger, CIVCO paid dividends on its common shares of approximately $373,000 and $902,000 in the years ended June 30, 2000 and 1999, respectively. Restricted Assets In connection with the Wedel litigation, the Company is enjoined from distributing dividends from its CIVCO subsidiary. The following summarizes the financial position and results of operations of CIVCO:
(In thousands) June 30, ------------------------ 2001 2000 ---------- ---------- Cash and cash equivalents $ 3,265 $ 929 Other current assets 3,865 1,501 Noncurrent assets 1,792 1,829 Current liabilities (3,304) (1,416) ---------- ---------- Restricted net assets $ 5,618 $ 2,843 ========== ==========
F-18 49
Year Ended June 30, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- Sales and services $ 17,521 $ 11,513 $ 10,373 Gross profit $ 9,282 $ 6,274 $ 5,478 Earnings from operations $ 4,469 $ 2,158 $ 1,233 Other $ 74 $ (35) $ (13) Income before provision for income taxes $ 4,543 $ 2,124 $ 1,246 Net Income $ 2,816 $ 2,124 $ 1,246
Stock Option Plan On June 25, 1992, the Board approved a Stock Option Plan (the "Plan"). The Plan provides for the grant of both incentive and nonstatutory stock options as defined by the Internal Revenue Code of 1986, stock appreciation rights and supplemental bonuses at the discretion of the Board. Under the terms of the Plan, the purchase price of the shares subject to an incentive option will be the fair market value of the Company's common stock on the date the option is granted. If the grantee owns more than 10% of the total combined voting power of all classes of stock on the date of grant, the purchase price shall be at least 110% of the fair market value at the date of grant and the exercise term shall be up to five years from the date of grant. All other options granted under the Plan are exercisable up to 10 years from the date of grant. Under the Plan, 4,500,000 shares of common stock are reserved for options. At June 30, 2001, 538,035 shares were available for grant. Vesting periods for options issued are determined by the Board at the date of grant and currently vest over two to four years. A summary of the status of the Plan for the years ended June 30 follows:
2001 2000 1999 ---------- ---------- ---------- Beginning of fiscal year 2,323,449 2,035,318 2,035,151 Granted during period 1,110,200 994,775 485,600 Forfeited during period (696,678) (424,566) (60,801) Exercised during period (545,935) (282,078) (424,632) ---------- ---------- ---------- Options outstanding at June 30, 2,191,036 2,323,449 2,035,318 ========== ========== ========== Options exercisable at June 30, 473,124 657,616 582,457 ========== ========== ==========
2001 2000 1999 ---------- ---------- ---------- Weighted average exercise price: At beginning of period $ 7.45 $ 5.54 $ 3.98 At end of period $ 7.95 $ 7.45 $ 5.54 Exercisable at end of period $ 8.44 $ 4.26 $ 2.91 Options granted $ 6.00 $ 11.06 $ 9.77 Options exercised $ 3.44 $ 3.88 $ 2.76 Options forfeited $ 6.69 $ 9.12 $ 6.60 Weighted average fair value of options granted during period $ 3.70 $ 5.67 $ 5.70
F-19 50
June 30, 2001 ------------------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------------- ----------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price --------------- ------------- --------- ------------ ------ ------------- $ 3.03 - $ 4.19 536,236 $ 3.88 4.8 174,536 $ 3.62 $ 4.20 - $ 6.41 515,300 $ 5.44 7.0 80,150 $ 6.41 $ 6.42 - $ 7.94 480,000 $ 7.73 5.2 -- $ -- $ 7.95 - $ 13.19 444,500 $ 11.48 3.1 142,607 $ 10.92 $ 13.20 - $ 18.75 215,000 $ 17.33 3.4 75,831 $ 17.00 ------------- ------- 2,191,036 473,124 ============= =======
Non-Qualified Stock Options The Company has issued non-qualified stock options outside the Plan to purchase up to 728,651 shares of the Company's common stock in exchange for employment recruiting services, the acquisition of CDT, and to employees. The value of options issued to non-employees has been determined using the Black-Scholes option pricing model and recorded in the accompanying consolidated financial statements. All non-qualified stock options issued to employees were granted with an exercise price that was equal to the fair market value of the Company's stock on the date of grant. A summary of the status of the Company's non-qualified stock options outside the Plan follows for the years ended June 30:
2001 2000 1999 ---------- ---------- ---------- Beginning of fiscal year 83,683 198,070 614,253 Granted during period -- -- -- Forfeited during period -- -- (1,541) Exercised during period (28,930) (114,387) (414,642) ---------- ---------- ---------- Options outstanding at June 30, 54,753 83,683 198,070 ========== ========== ========== Options exercisable at June 30, 54,753 83,683 143,669 ========== ========== ==========
2001 2000 1999 ---------- ---------- ---------- Weighted average exercise price: At beginning of period $ 2.97 $ 2.97 $ 2.05 At end of period $ 2.97 $ 2.97 $ 2.97 Exercisable at end of period $ 2.97 $ 2.97 $ 2.97 Options granted $ -- $ -- $ -- Options exercised $ 2.97 $ 2.97 $ 1.61 Options forfeited $ -- $ -- $ 2.97
F-20 51
June 30, 2001 -------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------- ------------------- Weighted Weighted Average Remaining Average Exercise Contractual Exercise Exercise Price Shares Price Life (Years) Shares Price -------------- ------ -------- ------------ ------ -------- $ 2.97 54,753 $ 2.97 1.6 54,753 $ 2.97
Director, Consultant and Other Warrants The Company grants warrants to its outside directors for serving on the Board. The warrants have a five-year term, and have exercise prices equal to the fair market value of the Company's stock on the date of grant. A summary of the Company's warrants is as follows for the years ended June 30:
2001 2000 1999 -------- -------- -------- Beginning of fiscal year 255,000 330,000 410,000 Granted during period 181,250 15,000 180,000 Forfeited during period (15,000) -- (45,000) Exercised during period (30,000) (90,000) (215,000) -------- -------- -------- Warrants outstanding at June 30, 391,250 255,000 330,000 ======== ======== ======== Warrants exercisable at June 30, 301,250 255,000 255,000 ======== ======== ========
2001 2000 1999 -------- -------- -------- Weighted average exercise price: At beginning of period $ 6.96 $ 5.21 $ 4.16 At end of period $ 6.15 $ 6.96 $ 5.21 Exercisable at end of period $ 6.50 $ 6.96 $ 4.68 Warrants granted $ 5.17 $ 13.19 $ 7.00 Warrants exercised $ 6.71 $ 1.59 $ 4.37 Warrants forfeited $ 7.00 $ -- $ 6.80 Weighted average fair value of warrants granted during period $ 3.14 $ 3.61 $ 2.74
F-21 52
June 30, 2001 ----------------------------------------------------------- Warrants Outstanding Warrants Exercisable ----------------------------------- -------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price --------------- ------ -------- ------------ ------ -------- $3.03 - $4.19 36,250 $ 3.71 2.9 21,250 $ 3.37 $4.20 - $6.40 150,000 $ 5.13 4.4 75,000 $ 5.13 $6.41 - $6.99 60,000 $ 6.41 1.4 60,000 $ 6.41 $7.00 - $13.19 145,000 $ 7.71 2.2 145,000 $ 7.71 ------- ------- 391,250 301,250 ======= =======
Employee Stock Purchase Plan In September 1996, the Board of Directors adopted an Employee Stock Purchase Plan (the "ESPP"), effective for the plan year beginning January 1, 1997. Under the ESPP, as amended, the Company is authorized to issue up to 540,000 shares of common stock to its full time employees, nearly all of whom are eligible to participate. Under terms of the ESPP, employees can have up to 10% of their salary withheld to purchase the Company's common stock. An employee can enter the plan on the first day of each calendar quarter. The purchase price of the stock is 85% of the lower of its beginning-of-the-period or end-of-the-period market price. The maximum number of shares available during the annual payment period beginning January 1, 2001 and ending December 31, 2001 (the "Plan Year") is limited to 150,000, and the maximum number of shares available during the 2002 Plan Year is limited to 259,587 minus the number of shares issued during the 2001 Plan Year. Pro Forma Fair Value Disclosures If the Company had accounted for its stock-based compensation plans using the fair value method, the Company's net (loss) income and pro forma diluted earnings (loss) per common share would have been reported as follows:
(In thousands, except per share data) Year Ended June 30, ------------------------------------- 2001 2000 1999 ---------- ---------- ---------- Net (Loss) Income: As reported $ (2,707) $ 2,991 $ 9,097 Pro forma $ (4,342) $ 1,776 $ 8,032 Diluted Earnings (Loss) Per Common Share: As reported $ (.21) $ .22 $ .69 Pro forma $ (.34) $ .14 $ .64
F-22 53 The Company has computed the fair value of shares issued under the ESPP, all options and warrants issued during fiscal years 2001, 2000 and 1999, for purposes of the pro forma disclosure, using the Black-Scholes pricing model, and the following weighted average assumptions:
2001 2000 1999 --------- --------- --------- Risk-free interest rate 5.60% 6.23% 4.99% Expected lives 3.5 years 3.2 years 4.2 years Expected volatility 84.4% 66.0% 64.5% Expected dividend yield 0% 0% 0%
(7) INCOME TAXES The provision (benefit) for income taxes includes the following:
(In thousands) Year Ended June 30, -------------------------------------- 2001 2000 1999 ---------- ---------- ---------- Current - Federal $ (318) $ 2,237 $ 4,667 State 224 217 417 ---------- ---------- ---------- Total Current (94) 2,454 5,084 Deferred - Federal (2,258) (28) (349) State (243) (3) (31) Valuation allowance 225 -- -- ---------- ---------- ---------- Total Deferred (2,276) (31) (380) ---------- ---------- ---------- Total $ (2,370) $ 2,423 $ 4,704 ========== ========== ==========
The Company established a valuation allowance due to the uncertainty that the full amount of its capital loss carryforward would be applied against future capital gains. The Company's effective income tax rate was different than the statutory federal income tax rate as follows:
(In thousands) Year Ended June 30, -------------------------------------- 2001 2000 1999 ---------- ---------- ---------- Federal income tax (benefit) provision at statutory rates $ (1,777) $ 1,895 $ 4,830 State income tax provision, net of federal tax effect (12) 189 382 Permanent differences and other (47) 396 54 Tax effect of CIVCO Subchapter S income -- (57) (562) Research and development credit (189) -- -- Non-taxable gain on sale of subsidiary (345) -- -- Capital loss for tax purposes on sale of subsidiary (225) -- -- Valuation allowance 225 -- -- ---------- ---------- ---------- Effective tax $ (2,370) $ 2,423 $ 4,704 ========== ========== ==========
F-23 54 Deferred taxes are determined based on estimated future tax effects of differences between the amounts reflected in the financial statements and the tax basis of assets and liabilities given the provisions of the enacted tax laws. Deferred tax assets include the tax effect of NOL and tax credit carryforwards. The net deferred tax assets and liabilities as of June 30, 2001 and 2000 are comprised of the following:
(In thousands) 2001 2000 ---------- ---------- Current Tax effect of NOL carryforwards $ 280 $ 305 Allowance for doubtful accounts 157 179 Inventory reserves 1,759 268 Accrued vacation 443 330 Other accruals 455 593 Tax credits 140 140 ---------- ---------- Net current deferred tax asset $ 3,234 $ 1,815 ========== ========== Noncurrent Depreciation for book in excess of tax $ 716 $ 309 Goodwill amortization for book in excess of tax 421 330 Tax credits 378 -- Capital loss carryforwards 225 -- Valuation allowance (225) -- ---------- ---------- Net noncurrent deferred tax asset $ 1,515 $ 639 ========== ==========
In accordance with certain provisions of the Internal Revenue Code, a change in ownership of greater than 50% of a company within a three-year period results in an annual limitation on the Company's ability to utilize its net operating loss ("NOL") carryforwards from tax periods prior to the ownership change. Such a change in ownership occurred with respect to the Company on October 19, 1992. Accordingly, the NOL carryforwards at October 19, 1992 were restricted to annual cumulative amounts of approximately $105,000 subject to the expiration of these carryforwards, or approximately $1,575,000. As of June 30, 2001, the Company had NOL carryforwards available of approximately $738,000 related to this transaction. If these NOL's are not applied against taxable income, they will expire. These NOL's were to begin expiring in 1999 and continue to expire through 2007. The Company also has research and development and investment tax credit carryforwards totaling approximately $518,000 that began expiring in 1999 and continue to expire through 2021. The Company believes that it will be able to utilize all of its NOL carryforwards and tax credits prior to expiration. (8) SEGMENT INFORMATION The Company reports its results in two segments: Outsourcing Services and Medical Products. The Outsourcing Services segment was made up of RELA, CMED Manufacturing, CDT, CMED Automation and the service portion of IPS. This segment designs, develops and manufactures medical products for a broad range of customers that include major pharmaceutical and medical device companies. F-24 55 The Medical Products segment was made up of the products portion of IPS, CIVCO and BioMed. This segment designs, develops and manufactures proprietary medical products which include: high-performance RF amplifiers and integrated power delivery subsystems for the medical imaging industry; high voltage x-ray generator subsystems for CT scanners; a combination of tools and services to support healthcare institutions in their efforts to establish Year 2000 compliance for their biomedical devices; and specialized medical accessories for imaging equipment and for minimally invasive surgical equipment. Following is a breakout of the Company's segments for the years ended June 30:
(In thousands) Outsourcing Medical Reconciling Consolidated Services Products Items Totals ----------- -------- ----------- ------------ Fiscal 2001: Operating revenue $ 57,449 $ 40,360 $ (20,634) $ 77,175 Gross profit 10,512 10,290 -- 20,802 Assets 27,567 23,833 -- 51,400 Expenditures for long-lived assets 1,525 723 -- 2,248 Fiscal 2000: Operating revenue $ 49,734 $ 32,054 $ (7,785) $ 74,003 Gross profit 13,921 12,905 -- 26,826 Assets 26,841 21,645 (194) 48,292 Expenditures for long-lived assets 491 2,533 -- 3,024 Fiscal 1999: Operating revenue $ 48,038 $ 28,314 $ (629) $ 75,723 Gross profit 18,362 12,253 (107) 30,508 Assets 34,096 18,280 (2,405) 49,971 Expenditures for long-lived assets 1,634 (426) -- 1,208
Included in the operating revenues disclosed above are intersegment operating revenues of the Outsourcing Services segment of $20,634,000, $7,785,000 and $591,000 for the years ended June 30, 2001, 2000 and 1999, respectively. The Medical Products segment had no intersegment revenues for the years ended June 30, 2001 and 2000, and $38,000 of intersegment revenues for the year ended June 30, 1999. The intersegment revenues account for the operating revenue and margin reconciling items. The assets reconciling item is the elimination of the investment in CDT and CMED Automation for the years ended June 30, 2000 and 1999. The Company manages its operating segments through the gross margin component of each segment. It is impractical to break out other operating expenses, including depreciation, on a segment basis. F-25 56 The following customers accounted for more than 10% of the total outsourcing services revenue for the years ended June 30, 2001, 2000 and 1999:
Customer 2001 2000 1999 -------- ---- ---- ---- A 16% 14% 3% B 12% 19% 25% C 0% 10% 17%
The following customers accounted for more than 10% of the total medical products revenue for the years ended June 30, 2001, 2000 and 1999:
Customer 2001 2000 1999 -------- ---- ---- ---- A 35% 45% 60% B 16% 11% 0%
The loss of any of these significant customers would have an adverse effect on the Company. As of June 30, 2001, the Company had receivables outstanding from the above significant customers of approximately $6,100,000. As a percentage of total revenues, foreign revenues accounted for the following as of June 30,:
2001 2000 1999 ---- ---- ---- Japan 17% 13% 2% France 1% 5% 11% Other foreign revenue 7% 4% 2% ---- ---- ---- Total foreign revenue 25% 22% 15% ==== ==== ====
(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 to purchase common stock of the Company from persons other than the Company. The loans are full recourse to the Borrower and bear interest at the prime rate plus 0.5%. 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 June 30, 2001, accrued interest on the loans was approximately $40,000 and is included in other current assets on the balance sheet. Interest income of approximately $40,000 from the loans is included in interest income and other for the year ended June 30, 2001. (10) COMMITMENTS AND CONTINGENCIES Leases The Company leases its operating facilities and certain computer and test equipment pursuant to noncancellable operating lease arrangements. The Company incurred rent expense of $1,190,000, $1,303,000 and $1,068,000 for the years ended June 30, 2001, 2000 and 1999, respectively, under such agreements. At June 30, 2001, future minimum lease payments under leases having an initial or remaining noncancellable term of one year or more are approximately $958,000 in 2002, $84,000 in 2003, $12,000 in 2004, and none thereafter. F-26 57 Employment and Compensation Agreements The Company has entered into employment agreements with certain key employees. The employment agreements establish compensation and generally provide for severance benefits to the employees upon termination of employment or upon a change in control. Legal Proceedings On November 21, 2000, Victor J. Wedel and Sherrill Wedel filed a legal proceeding against the Company and one of its directors, John V. Atanasoff, in United States District Court for the Central District of California in connection with the November 15, 1999 transaction in which the Company acquired the outstanding stock of CIVCO Medical Instruments Co., Inc. and related real estate from the Wedels in exchange for Company stock. The defendants moved to stay this suit so that the claims could be arbitrated in accordance with an agreement between Mr. Wedel and the Company to submit all disputes to binding arbitration. While the court granted the requested stay, it also 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. In September 2001 we entered into a commitment letter with the lender pursuant to which the facility will be amended to remove CIVCO as a party, thus permitting the Company to utilize it. On March 3, 2001, the Wedels submitted a statement of claim to an arbitrator group. The statement of claim alleges that the Company made misrepresentations to and concealed material information from the plaintiffs in connection with the CIVCO acquisition. 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 our filings 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 plaintiffs amended their statement of claim to include an additional damage theory pursuant to which they increased the damages sought to $15,462,804. The Company and the other defendant have denied all substantive allegations of wrongdoing and both parties are defending themselves. The arbitration hearing is scheduled for October 2001. The Company cannot predict the eventual outcome of this matter. In May 2001, a former customer, Gen-Probe, Incorporated, threatened litigation against the Company in connection with a development and manufacturing project. In response to their threat and in anticipation that they were prepared to file suit against us, on May 23, 2001, we filed a suit for declaratory judgment against Gen-Probe in United States District Court for the District of Colorado. The suit seeks a declaration that we did not breach the agreements pursuant to which the development and manufacturing services were performed. The parties have signed a tolling agreement pursuant to which defenses of the parties based on the passage of time are tolled until October 31, 2001. Further, Gen-Probe has agreed not to file suit against the Company until after October 31, 2001, and the Company agreed to stipulate that Gen-Probe's answer in the pending litigation is not due prior to October 31, 2001. While the tolling agreement is in place, the parties are attempting to resolve the dispute. Gen-Probe has stated that its damages in connection with the dispute are in excess of $15 million. The Company cannot predict the eventual outcome of this matter. Other than mentioned above, the Company is involved in legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company's consolidated financial position or results of operations. F-27 58 Regulatory Actions 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 seizure, injunction, and/or civil penalties. This had an adverse material effect on the operations of the Company during the year ended June 30, 2001. The Company has taken actions to strengthen its quality systems and address the areas of non-conformance presented by the FDA. An independent audit was completed and the Company is now waiting for the FDA to complete its review. Delays in receiving clearance from the FDA may cause the Company to incur additional costs and delay shipments of certain products expected to be manufactured in the Longmont facility. Such delays would continue to have a material adverse effect on the operations of the Company. (11) 401(k) RETIREMENT PLAN The Company has established the Colorado MEDtech, Inc. 401(k) Retirement Plan, which is governed by Section 401(k) of the Internal Revenue Code. Employees are eligible to enroll in the plan on January 1 and July 1, any time after they become full time employees of the Company. The Company makes discretionary contributions that vest over a three-year period. Company contributions were approximately $407,000, $366,000 and $264,000 for the years ended June 30, 2001, 2000 and 1999, respectively. F-28 59 (12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The Company's quarterly results of operations are summarized as follows: (In thousands except earnings per share data)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Fiscal Year Ended June 30, 2001 Net sales and service $ 17,071 $ 18,687 $ 20,958 $ 20,459 Gross profit $ 5,760 $ 5,582 $ 6,517 $ 2,943 Net income $ 334 $ (676) $ (635) $ (1,730) Earnings per share: Basic $ .03 $ (.05) $ (.05) $ (.13) Diluted $ .03 $ (.05) $ (.05) $ (.13) Fiscal Year Ended June 30, 2000 Net sales and service $ 20,659 $ 17,999 $ 18,349 $ 16,996 Gross profit $ 8,408 $ 6,250 $ 6,373 $ 5,794 Net income $ 2,241 $ 918 $ 790 $ (959) Earnings per share: Basic $ .19 $ .08 $ .06 $ (.08) Diluted $ .16 $ .07 $ .06 $ (.08) Fiscal Year Ended June 30, 1999 Net sales and service $ 16,062 $ 18,328 $ 19,656 $ 21,676 Gross profit $ 6,437 $ 7,335 $ 8,009 $ 8,727 Net income $ 1,860 $ 1,914 $ 2,472 $ 2,850 Earnings per share: Basic $ .16 $ .17 $ .21 $ .24 Diluted $ .14 $ .15 $ .19 $ .21
During the quarter ended June 30, 2001, the Company wrote down approximately $3,100,000 of inventory due to the sudden and unplanned cancellation of a manufacturing contract. F-29 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated herein by reference to Colorado MEDtech's definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on November 16, 2001, to be filed with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to Colorado MEDtech's definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on November 16, 2001, to be filed with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated herein by reference to Colorado MEDtech's definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on November 16, 2001, to be filed with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to Colorado MEDtech's definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on November 16, 2001, to be filed with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934. -31- 61 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) and (2) The following financial statements and financial statement schedules are filed as part of this report: Report of Independent Public Accountants Consolidated Balance Sheets as of June 30, 2001 and 2000 Consolidated Statements of Operations for the Years Ended June 30, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000 and 1999 Notes to Consolidated Financial Statements All other schedules have been omitted because they were not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits. See Exhibit Index included as the last page of this report, which index is incorporated by reference. (b) Reports on Form 8-K. We filed the following reports on Form 8-K for the three-month period ended June 30, 2001: 1. A current report on Form 8-K dated April 23, 2001 regarding a press release discussing expense reductions through a reduction in its contract manufacturing workforce. 2. A current report on Form 8-K dated June 4, 2001 regarding investor and analyst presentation materials of the President and Chief Executive Officer and Chief Financial Officer used on June 4, 2001 and to be used from time to time thereafter. -32- 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 28, 2001. COLORADO MEDTECH, INC. By: /s/ Stephen K. Onody ------------------------ Stephen K. Onody Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Stephen K. Onody Chief Executive Officer, September 28, 2001 -------------------------------- President and Director Stephen K. Onody (Principal Executive Officer) /s/ Gregory A. Gould Chief Financial Officer September 28, 2001 -------------------------------- (Principal Financial and Gregory A. Gould Accounting Officer) /s/ John V. Atanasoff Director September 28, 2001 -------------------------------- John V. Atanasoff /s/ Anthony J. Dimun Director September 28, 2001 -------------------------------- Anthony J. Dimun /s/ John P. Jenkins Director September 28, 2001 -------------------------------- John P. Jenkins /s/ Ira M. Langenthal Director September 28, 2001 -------------------------------- Ira M. Langenthal /s/ Clifford W. Mezey Director September 28, 2001 -------------------------------- Clifford W. Mezey /s/ Robert L. Sullivan Director September 28, 2001 -------------------------------- Robert L. Sullivan /s/ John E. Wolfe Director September 28, 2001 -------------------------------- John E. Wolfe
-33- 63 INDEX TO EXHIBITS
Exhibit Sequential Number Description Page No. ------ ----------- ---------- 3.1 Articles of Incorporation; Complete Copy, as Amended. (A) 3.2 Bylaws, as Amended. 4.2 Specimen of Common Stock Certificate. (B) 4.3 Rights Agreement between Colorado MEDtech, Inc. and American Securities Transfer & Trust, Inc. dated January 14, 1999, as amended. (C) 10.31 Colorado MEDtech, Inc. Stock Option Plan. (D) 10.32 Employment Agreement between Colorado MEDtech, Inc. and John V. Atanasoff, II. (E) 10.38 Extension of Employment Agreement between Colorado MEDtech, Inc. and John V. Atanasoff, II (F) 10.42 Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan 10.44 Loan Agreement, Commercial Security Agreement, and Promissory Note dated October 30, 1997 between Colorado MEDtech, Inc. and Bank One, Colorado N.A. (G) 10.45 Executive Employment Agreement between Colorado MEDtech, Inc. and Stephen K. Onody. (D) 10.46 Letter agreement between Colorado MEDtech, Inc. and Gregory A. Gould. (D) 10.47 Credit Agreement, Security Agreement and Promissory Note dated December 21, 2000 between Colorado MEDtech, Inc. and KeyBank, National Association. (H) 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. (I) 10.49 Form of Officer Loan Agreement, Master Promissory Note, Master Escrow Agreement, and Security Agreement for 2001 Officer Loans, and Schedule. 21.1 Subsidiaries of Colorado MEDtech, Inc. 23.1 Consent of Independent Public Accountants
---------- (A) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1999. (B) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on May 17, 1983. (C) Filed with Registration Statement on Form 8-A/A dated June 27, 2000. (D) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 2000. (E) Filed as an exhibit to the Company's Current Report on Form 8-K, dated June 21, 1993 (F) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (G) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. (H) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2000. (I) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. -34- EX-3.2 3 d90859ex3-2.txt AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF COLORADO MEDTECH, INC. ARTICLE I SHAREHOLDERS 1. ANNUAL SHAREHOLDERS' MEETING. The annual shareholders' meeting of Colorado MEDtech, Inc. (the "Corporation") shall be held for the purpose of electing directors and transacting such other corporate business as may come before the meeting. The date, time and place of the annual meeting shall be determined by resolution of the board of directors. 2. SPECIAL SHAREHOLDERS' MEETING. Special meetings of the shareholders of the Corporation (a) may be called at any time by the chairman of the board of directors, by the chief executive officer, by the president, or by resolution of the board of directors and (b) shall be called by the Secretary of the Corporation as provided below after the Corporation receives from shareholders authorized to make such demands under the Colorado Business Corporation Act (the "Act") the last of any shareholder demands necessary to require the calling of a special meeting. Any demand by a shareholder to call a special meeting shall include the information required by Section 5(d) of this Article I. Promptly after a special meeting is called or demanded to be called pursuant to the first sentence of this Section 2, the board of directors shall establish the record date, and the date and time for the special meeting. Notice of any special meeting shall be given by the Secretary of the Corporation in compliance with Section 6 of this Article I promptly after the date and time of the special meeting are established by the board of directors. The place of any special meeting shall be the principal office of the Corporation or such other place as the board of directors may determine. 3. RECORD DATE FOR DETERMINATION OF SHAREHOLDERS. (a) In order to make a determination of shareholders (1) entitled to notice of or to vote at any shareholders' meeting or at any adjournment of a shareholders' meeting, (2) entitled to demand a special shareholders' meeting, (3) entitled to take any other action, (4) entitled to receive payment of a share dividend or a distribution, or (5) for any other purpose, the board of directors may fix a future date as the record date for such determination of shareholders. The record date may be fixed not more than seventy (70) days before the date of the proposed action. (b) Unless otherwise specified when the record date is fixed, the time of day for determination of shareholders shall be 5:00 p.m. local time at the principal office of the Corporation on the record date. (c) A determination of shareholders entitled to be given notice of or to vote at a shareholders' meeting is effective for any adjournment of the meeting unless the board of directors fixes a new record date, which the board shall do if the meeting is adjourned to 2 a date more than one hundred twenty (120) days after the date fixed for the original meeting. (d) If no record date is otherwise fixed, the record date for determining shareholders entitled to be given notice of and to vote at an annual or special shareholders' meeting is the day before the first notice is given to shareholders. (e) The record date for determining shareholders entitled to take action without a meeting is the date a writing upon which the action is taken is first received by the Corporation. 4. VOTING LIST. (a) After a record date is fixed for a shareholders' meeting, the secretary shall prepare a list of the names of all its shareholders who are entitled to be given notice of the meeting. The list shall be arranged by voting groups and within each voting group by class or series of shares, shall be alphabetical within each class or series, and shall show the address of, and the number of shares of each such class and series that are held by, each shareholder. (b) The shareholders' list shall be available for inspection by any shareholder for any purpose germane to the meeting, beginning the earlier of ten (10) days before the meeting for which the list was prepared or two business days after notice of the meeting is given and continuing through the meeting, and any adjournment thereof, at the Corporation's principal office or at a place identified in the notice of the meeting in the city where the meeting will be held. (c) A shareholder, his agent or attorney shall be entitled upon written demand to inspect and copy the list during regular business hours, during the period it is available for inspection, provided, (i) the shareholder has been a shareholder for at least three (3) months immediately preceding the demand or holds at least five percent (5%) of all outstanding shares of any class of shares as the date of the demand, (ii) the demand is made in good faith and for a purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the cost of production and reproduction. 5. NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS. (a) Nominations of Directors and Business at Shareholder Meetings. Subject to compliance with this Section 5, nominations of persons for election to the board of directors may be made and business to be considered by the shareholders may be proposed at any annual meeting of shareholders (i) by or at the direction of the board of directors, or (ii) by any shareholder of the Corporation. Subject to compliance with this Section 5, nominations of persons for election to the board of directors may be made and 2 3 business to be considered by the shareholders may be proposed at any special meeting of shareholders (i) by any person or persons calling the special meeting as provided in Section 2(a) of this Article I or demanding that the special meeting be called as provided in Section 2(b) of this Article I, or (ii) by any shareholder of the Corporation. For nominations or other business to be properly brought before a meeting by a shareholder pursuant to this Section 5, the shareholder must comply with all requirements of this Section 5, be a shareholder of record at the time of giving the notice described in Section 5(d), be entitled to vote at the meeting, and give timely notice of such nominations or business in writing to the Secretary of the Corporation, containing the information set forth in Section 5(d) of this Article I within the time limits set forth in Section 5(b) or 5(c) of this Article I. (b) Annual Meetings of Shareholders. (1) To be timely for an annual meeting, the shareholder's notice required by this Section 5 must be received by the Secretary of the Corporation not later than the close of business on the 105th calendar day, and not earlier than the close of business on the 120th calendar day, before the one year anniversary of the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of shareholders; provided, however, that if the date of the annual meeting is more than thirty (30) calendar days before or more than sixty (60) calendar days after the anniversary date of the prior year's annual meeting, then notice by the shareholder to be timely must be received by the Secretary of the Corporation not earlier than the close of business on the 120th calendar day prior to such annual meeting, and not later than the close of business on the later of the 90th calendar day prior to such annual meeting or the 10th calendar day following the calendar day on which public announcement of the date of such meeting is first made by the Corporation. Public announcement of an adjournment of an annual meeting of shareholders shall not commence a new time period for the giving of a shareholder's notice as described in this Section 5. (2) Notwithstanding anything in Section 5(b)(1) of this Article I to the contrary, if the number of directors to be elected to the board of directors of the Corporation at an annual meeting is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased board of directors at least one hundred (100) calendar days prior to the anniversary of the prior year's annual meeting of shareholders, then a shareholder's notice required by this Section 5 shall be considered timely, but only with respect to nominees for any new positions created by such increase, if it is received by the Secretary of the Corporation not later than the close of business on the 10th calendar day following the day on which such public announcement is first made by the Corporation. (c) Special Meetings of Shareholders. To be timely for a special meeting, the shareholder's notice required by this Section 5 must be received by the Secretary of the Corporation not earlier than the close of business on the 105th calendar day prior to such 3 4 special meeting, and not later than the close of business on the later of the 90th calendar day prior to such special meeting or the 10th calendar day following the day on which public announcement is first made by the Corporation of the date of such special meeting. The public announcement of an adjournment of a special meeting of shareholders shall not commence a new time period for the giving of a shareholder's notice as described this Section 5. (d) Shareholder's Notice of Nominations and Business. A shareholder's notice to the Corporation given pursuant to either Section 2 or Section 5 of this Article I shall set forth (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") including such nominee's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (B) as to any other business that the shareholder proposes to bring before the meeting, (i) a description of the business desired to be brought before the meeting, (ii) the text of any resolution proposed to be adopted at the meeting, (iii) the reasons for conducting such business at the meeting, and (iv) any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) the name and address of such shareholder, as they appear on the Corporation's books, and of any such beneficial owner, and the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and any such beneficial owner. (e) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible for election to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Articles of Incorporation or these bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in these bylaws and, if any proposed nomination or business is not in compliance with these bylaws, to declare that such defective proposal or nomination shall be disregarded. The chairman of the meeting of shareholders shall, if the facts warrant, determine and declare to the meeting that any nomination or business was not properly brought before the meeting and in accordance with the provisions of these bylaws, and if he or she should so determine, the chairman shall so declare to the meeting, and any such nomination or business not properly brought before the meeting shall not be transacted. 4 5 (2) Whenever used in these bylaws, "public announcement" shall mean disclosure (A) in a press release released by the Corporation, provided such press release is released by the Corporation following its customary procedures, is reported by the Dow Jones News Service, Associated Press or comparable national news service, or is generally available on internet news sites, or (B) in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of these bylaws, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in these bylaws. Nothing in these bylaws shall be deemed to affect any rights (A) of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (B) of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances. 6. NOTICE TO SHAREHOLDERS. (a) The secretary shall give notice to shareholders of the date, time, and place of each annual and special shareholders' meeting no fewer than ten nor more than sixty (60) days before the date of the meeting; except that, if the articles of incorporation are to be amended to increase the number of authorized shares, at least thirty (30) days' notice shall be given. Except as otherwise required by the Act, the secretary shall be required to give such notice only to shareholders entitled to vote at the meeting. (b) Notice of an annual shareholders' meeting need not include a description of the purpose or purposes for which the meeting is called unless a purpose of the meeting is to consider an amendment to the articles of incorporation, a restatement of the articles of incorporation, a plan of merger or share exchange, disposition of substantially all of the property of the Corporation, consent by the Corporation to the disposition of property by another entity, or dissolution of the Corporation. (c) Notice of a special shareholders' meeting shall include a description of the purpose or purposes for which the meeting is called, and no other business shall be conducted at such meeting. (d) Notice of a shareholders' meeting shall be in writing and shall be given: (1) by deposit in the United States mail, properly addressed to the shareholder's address shown in the Corporation's current record of shareholders, first class postage prepaid, and, if so given, shall be effective when mailed; or 5 6 (2) by telegraph, teletype, electronically transmitted facsimile, electronic mail, mail, or private carrier or by personal delivery to the shareholder, and, if so given, shall be effective when actually received by the shareholder. (e) If an annual or special shareholders' meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time or place if the new date, time, or place is announced at the meeting before adjournment; provided, however, that, if a new record date for the adjourned meeting is fixed pursuant to Section I.3.(c), notice of the adjourned meeting shall be given to persons who are shareholders as of the new record date. (f) If three (3) successive notices are given by the Corporation, whether with respect to a shareholders' meeting or otherwise, to a shareholder and are returned as undeliverable, no further notices to such shareholder shall be necessary until another address for the shareholder is made known to the Corporation. 7. QUORUM. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. A majority of the votes entitled to be cast on the matter by the voting group shall constitute a quorum of that voting group for action on the matter. If a quorum does not exist with respect to any voting group, the president, the board of directors, chief executive officer, chairman of the board, or the holders of a majority of outstanding shares, whether present in person or by proxy, whether or not a member of that voting group, may adjourn the meeting to a different date, time, or place, and (subject to the next sentence) notice need not be given of the new date, time, or place if the new date, time, or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is or must be fixed pursuant to Section I.3.(c), notice of the adjourned meeting shall be given pursuant to Section I.6. to persons who are shareholders as of the new record date. At any adjourned meeting at which a quorum exists, any matter may be acted upon that could have been acted upon at the meeting originally called; provided, however, that, if new notice is given of the adjourned meeting, then such notice shall state the purpose or purposes of the adjourned meeting sufficiently to permit action on such matters. Once a share is represented for any purpose at a meeting, including the purpose of determining that a quorum exists, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or shall be set for that adjourned meeting. 8. VOTING ENTITLEMENT OF SHARES. Except as stated in the articles of incorporation, each outstanding share, regardless of class, is entitled to one vote, and each fractional share is entitled to a corresponding fractional vote, on each matter voted on at a shareholders' meeting. 9. PROXIES; ACCEPTANCE OF VOTES AND CONSENTS. (a) A shareholder may vote either in person or by proxy. 6 7 (b) An appointment of a proxy is not effective against the Corporation until the appointment is received by the Corporation. An appointment is valid for eleven months unless a different period is expressly provided in the appointment form. (c) The Corporation may accept or reject any appointment of a proxy, revocation of appointment of a proxy, vote, consent, waiver, or other writing purportedly signed by or for a shareholder, if such acceptance or rejection is in accordance with the provisions of Sections 7-107-203 and 7-107-205 of the Act. (d) The board of directors may appoint, or may authorize the Chairman of the Board to appoint, one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of shareholders and make a written report thereof. If no inspector has been appointed to act or is able to act at a meeting of shareholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging such person's duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The inspectors shall, by majority vote, resolve all questions regarding voting of shares, including the shares represented at the meeting, the qualification of voters, the validity of proxies, the existence of a quorum as to any voting group, and the acceptance, rejection and tabulation of votes. 10. CONDUCT OF MEETINGS. The board of directors may to the extent not prohibited by law adopt such rules and regulations for the conduct of the meeting of shareholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the board of directors, the chairman of any meeting of shareholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the board of directors or prescribed by the chairman of the meeting, may to the extent not prohibited by law include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. Unless, and to the extent, determined by the board of directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure. 7 8 11. WAIVER OF NOTICE. (a) A shareholder may waive any notice required by the Act, by the articles of incorporation or these bylaws, whether before or after the date or time stated in the notice as the date or time when any action will occur or has occurred. The waiver shall be in writing, be signed by the shareholder entitled to the notice, and be delivered to the Corporation for inclusion in the minutes or filing with the corporate records, but such delivery and filing shall not be conditions of the effectiveness of the waiver. (b) A shareholder's attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice, and waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 12. ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if all of the shareholders entitled to vote thereon consent to such action in writing. Action taken pursuant to this section shall be effective when the Corporation has received writings that describe and consent to the action, signed by all of the shareholders entitled to vote thereon. Action taken pursuant to this section shall be effective as of the date the last writing, necessary to effect the action, is received by the Corporation, unless all of the writings necessary to effect the action specify another date, which may be before or after the date the writings are received by the Corporation. Such action shall have the same effect as action taken at a meeting of shareholders and may be described as such in any document. Any shareholder who has signed a writing describing and consenting to action taken pursuant to this section may revoke such consent by a writing signed by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, if such writing is received by the secretary of the Corporation before the effectiveness of the action. 13. MEETINGS BY TELECOMMUNICATIONS. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. 14. POSTPONEMENT OF MEETINGS. Whenever in the judgment of the board of directors the interest of the Corporation and it shareholders would be served thereby it may postpone for a period of up to thirty (30) days the convening of a previously noticed annual or special meeting of shareholders by making a prompt public announcement of the postponement. If a new record date for the postponed meeting is or must be fixed pursuant to Section I.3.(c), notice of the postponed meeting shall be given pursuant to Section I.6. to persons who are shareholders as of the new record date. 8 9 ARTICLE II DIRECTORS 1. AUTHORITY OF THE BOARD OF DIRECTORS; PERFORMANCE OF DUTIES. The corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, a board of directors. A director shall perform his duties as a director, including his duties as a member of any committee of the Board of Directors upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. 2. NUMBER. The number of directors shall be at least one (1) and not more than eight (8). Within that range, the number of directors shall be as stated by resolution adopted by the board of directors from time to time, but no decrease in the number of directors shall have the effect of shortening the term of any incumbent director 3. QUALIFICATION. Directors shall be natural persons at least eighteen years old but need not be residents of the State of Colorado or shareholders of the Corporation. 4. ELECTION. The board of directors shall be elected at the annual meeting of the shareholders or at a special meeting called for that purpose. 5. TERM. Each director shall be elected to hold office until the next annual meeting of shareholders and until the director's successor is elected and qualified. The term of a director elected to fill a vacancy by the board of directors, even if less than a quorum, expires at the next annual meeting of shareholders at which directors are elected. Unless prohibited by the articles of incorporation, shareholders may fill a vacancy that occurs on the board of directors. If shareholders are permitted to fill a vacancy on the board of directors, the term of a director so elected shall be the unexpired term of his or her last predecessor in office elected by the shareholders. 6. RESIGNATION. A director may resign at any time by giving written notice of his or her resignation to any other director or (if the director is not also the secretary) to the secretary. The resignation shall be effective when it is received by the other director or secretary, as the case may be, unless the notice of resignation specifies a later effective date. Acceptance of such resignation shall not be necessary to make it effective unless the notice so provides. 7. REMOVAL. Any director may be removed by the shareholders, of the voting group that elected the director with or without cause at a meeting called for that purpose. The notice of the meeting shall state that the purpose, or one of the purposes, of the meeting is removal of the director. A director may be removed only if the number of votes cast in favor of removal exceeds the number of votes cast against removal. 9 10 8. VACANCIES. (a) If a vacancy occurs on the board of directors, including a vacancy resulting from an increase in the number of directors: (1) The shareholders may fill the vacancy at the next annual meeting or at a special meeting called for that purpose; or (2) The board of directors may fill the vacancy; or (3) If the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. (b) Notwithstanding Section II.8.(a), if the vacant office was held by a director elected by a voting group of shareholders, then, if one or more of the remaining directors were elected by the same voting group, only such directors are entitled to vote to fill the vacancy if it is filled by directors, and they may do so by the affirmative vote of a majority of such directors remaining in office; and only the holders of shares of that voting group are entitled to vote to fill the vacancy if it is filled by the shareholders. (c) A vacancy that will occur at a specific later date, by reason of a resignation that will become effective at a later date under Section II.6. or otherwise, may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. 9. MEETINGS. The board of directors may hold regular or special meetings in or out of the State of Colorado. The board of directors may, by resolution, establish dates, times and places for regular meetings, which may thereafter be held without further notice. Special meetings may be called by the president, chairman, chief executive officer or by any two directors and shall be held at the principal office of the Corporation unless another place is consented to by every director. At any time when the board consists of a single director, that director may act at any time, date, or place without notice. 10. NOTICE OF SPECIAL MEETING. Notice of a special meeting shall be given to every director at least forty-eight (48) hours before the time of the meeting, stating the date, time, and place of the meeting. The notice need not describe the purpose of the meeting. Notice may be given orally to the director, personally or by telephone or other wire or wireless communication. Notice may also be given in writing by telegraph, teletype, electronically transmitted facsimile, electronic mail, mail, or private carrier. Notice shall be effective at the earliest of the time it is received; five days after it is deposited in the United States mail, properly addressed to the last address for the director shown on the records of the Corporation, first class postage prepaid; or the date shown on the return receipt if mailed by registered or certified mail, return receipt requested, postage prepaid, in the United States mail and if the return receipt is signed by the director to which the notice is addressed. 10 11 11. QUORUM. Except as provided in Section II.8., a majority of the number of directors fixed in accordance with these bylaws shall constitute a quorum for the transaction of business at all meetings of the board of directors. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors, except as otherwise specifically required by law. 12. WAIVER OF NOTICE. (a) A director may waive any notice of a meeting before or after the time and date of the meeting stated in the notice. Except as provided by Section II.12.(b), the waiver shall be in writing and shall be signed by the director. Such waiver shall be delivered to the secretary for filing with the corporate records, but such delivery and filing shall not be conditions of the effectiveness of the waiver. (b) A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless, at the beginning of the meeting or promptly upon his or her later arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. 13. ATTENDANCE BY TELEPHONE. One or more directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. 14. DEEMED ASSENT TO ACTION. A director who is present at a meeting of the board of directors when corporate action is taken shall be deemed to have assented to all action taken at the meeting unless: (a) The director objects at the beginning of the meeting, or promptly upon his or her arrival, to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action taken at the meeting; (b) The director contemporaneously requests that his or her dissent or abstention as to any specific action taken be entered in the minutes of the meeting; or (c) The director causes written notice of his or her dissent or abstention as to any specific action to be received by the presiding officer of the meeting before adjournment of the meeting or by the secretary (or, if the director is the secretary, by another director) promptly after adjournment of the meeting. The right of dissent or abstention pursuant to this Section II.14. as to a specific action is not available to a director who votes in favor of the action taken. 11 12 15. ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or permitted by law to be taken at a board of directors' meeting may be taken without a meeting if all members of the board consent to such action in writing. Action shall be deemed to have been so taken by the board at the time the last director signs a writing describing the action taken, unless, before such time, any director has revoked his or her consent by a writing signed by the director and received by the secretary or any other person authorized by the bylaws or the board of directors to receive such a revocation. Such action shall be effective at the time and date it is so taken unless the directors establish a different effective time or date. Such action has the same effect as action taken at a meeting of directors and may be described as such in any document. 16. COMPENSATION. By resolution of the Board of Directors, any director may be paid any one or more of the following: his expenses, if any, of attendance at meetings; a fixed sum for attendance at each meeting; a stated salary as director; or such other compensation as the Corporation and the director may reasonably agree upon. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE III COMMITTEES OF THE BOARD OF DIRECTORS 1. CREATION AND AUTHORITY. Subject to the provisions of Section 7-108-206 of the Act, the board of directors may create one or more committees and appoint one or more members of the board of directors to serve on them. The Corporation shall have an audit committee, a compensation committee, a nominating committee, and such other committees as the board of directors shall designate by resolution. The creation of a committee and appointment of members to it shall require the approval of a majority of all the directors in office when the action is taken. The provisions of these bylaws governing meetings, action without meeting, notice, waiver of notice, and quorum and voting requirements of the board of directors apply to committees and their members as well. To the extent specified by resolution adopted from time to time by a majority of all the directors in office when the resolution is adopted, each committee shall exercise the authority of the board of directors with respect to the corporate powers and the management of the business and affairs of the Corporation, except that a committee shall not: (a) Authorize distributions; (b) Approve or propose to shareholders action that the Act requires to be approved by shareholders; (c) Fill vacancies on the board of directors or on any of its committees; 12 13 (d) Amend the articles of incorporation pursuant to Section 7-110-102 of the Act, as amended or superseded; (e) Adopt, amend, or repeal bylaws; (f) Approve a plan of merger not requiring shareholder approval; (g) Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors; or (h) Authorize or approve the issuance or sale of shares, or a contract for the sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares; except that the board of directors may authorize a committee or an officer to do so within limits specifically prescribed by the board of directors. The creation of, delegation of authority to, or action by, a committee does not alone constitute compliance by a director with applicable standards of conduct. 2. AUDIT COMMITTEE. There shall be an audit committee composed of not less than three members of the board of directors, a majority of whom shall be directors who are not active officers of the Corporation or any of its subsidiaries. It shall be the duty of the committee to recommend to the board of directors the accounting firm to be selected by the board or to be recommended by it for shareholder approval, as independent auditor of the Corporation and its subsidiaries, and to act on behalf of the board in meeting and reviewing with the independent auditors and the appropriate corporate officers on matters relating to corporate financial reporting and accounting procedures and policies, adequacy of financial, accounting, and operating controls and the scope of the respective audits of the independent auditors and the internal auditor. The committee shall review the results of such audits with the accounting firm and shall promptly report on the audits to the board of directors. The committee shall submit to the board of directors any recommendations it may have from time to time with respect to financial reporting and accounting practices and policies and financial, accounting, and operation controls and safeguards. 3. COMPENSATION COMMITTEE. There shall be a compensation committee composed of not less than two members of the board of directors, a majority of whom shall be directors who are not active officers of the Corporation or any of its subsidiaries. It shall be the duty of the committee to recommend to the board of directors the compensation of officers of the Corporation and its subsidiaries, including the grant of stock options and other incentive compensation to such officers and other key employees of the Corporation and its subsidiaries. 4. NOMINATING COMMITTEE. There shall be a nominating committee composed of not less than two members of the board of directors, a majority of whom shall be directors who are not active officers of the Corporation or any of its subsidiaries. It shall be the duty of the committee to review potential candidates for director, and to recommend to the board of directors the persons to be nominated to the board of directors at any meeting of shareholders or meeting of directors at which directors are to be elected. 13 14 ARTICLE IV OFFICERS 1. GENERAL. The Corporation shall have as officers a president, a secretary, and a treasurer, who shall be appointed by the board of directors. The board of directors may appoint such other officers, including a chief executive officer, and chairman of the board, as they may consider necessary. The board of directors and such other officers as the board of directors may authorize from time to time, acting singly, may appoint as additional officers one or more vice presidents, assistant secretaries, assistant treasurers, and such other subordinate officers as the board of directors or such other appointing officers deem necessary or appropriate. The chief executive officer or, if there is no chief executive officer, the president, shall have the right to reject the appointment of any vice president, the secretary, the treasurer, or any other subordinate officers; if there is a chief executive officer, the chief executive officer shall have the right to reject the appointment of the president. The officers of the Corporation shall hold their offices for such terms and shall exercise such authority and perform such duties as shall be determined from time to time by these bylaws, the board of directors, or (with respect to officers whom are appointed by the appointing officers) the persons appointing them; provided, however, that the board of directors may change the term of offices and the authority of any officer appointed by the appointing officers. Any two or more offices may be held by the same person. The officers of the Corporation shall be natural persons at least eighteen years old. 2. TERM. Each officer shall hold office from the time of appointment until the time of removal or resignation pursuant to Section IV.3. or until the officer's death. 3. REMOVAL AND RESIGNATION. Any officer appointed by the board of directors may be removed at any time by the board of directors. Any officer appointed by an appointing officer may be removed at any time by the board of directors or by the person appointing the officer. Any officer may resign at any time by giving written notice of resignation to any director (or to any director other than the resigning officer if the officer is also a director), to the chief executive officer, to the president, to the secretary, or to the officer who appointed the officer. Notwithstanding this Section IV.3, a resignation may constitute a breach of contract. Acceptance of such resignation shall not be necessary to make it effective, unless the notice so provides. 4. CHIEF EXECUTIVE OFFICER. The chief executive officer shall preside at all meetings of shareholders, and shall also set the agenda of and preside at all meetings of the board of directors unless the board of directors has appointed a chairman, vice chairman, or other officer of the board and has authorized such person to preside at meetings of the board of directors instead of the chief executive officer. Subject to the direction and control of the board of directors, the chief executive officer shall have general and active management of the business of the Corporation. The chief executive officer shall review the performance of all other officers, and shall make recommendations with respect to their compensation to the Compensation Committee of the board of directors. The chief executive officer may negotiate, 14 15 enter into, and execute contracts, deeds, and other instruments on behalf of the Corporation as are necessary and appropriate to the conduct of the business and affairs of the Corporation or as are approved by the board of directors. The chief executive officer shall have such additional authority and duties as are appropriate and customary for the office of chief executive officer, except as the same may be expanded or limited by the board of directors from time to time. 5. PRESIDENT. The president shall be responsible for the day-to-day operations of the Corporation, and shall report to the chief executive officer, if one exists, or to the board of directors if there is no chief executive officer. The president may negotiate, enter into, and execute contracts, deeds, and other instruments on behalf of the Corporation as are necessary and appropriate to the conduct of the business and affairs of the Corporation or as are approved by the board of directors. The president shall have such additional authority and duties as are appropriate and customary for the office of president, except as the same may be expanded or limited by the board of directors from time to time. In the event there is no chief executive officer or in the chief executive officer's absence, the president shall have the authority and duties of the chief executive officer. 6. VICE PRESIDENT. The vice president, if any, or, if there are more than one, the vice presidents in the order determined by the board of directors or the president (or, if no such determination is made, in the order of their appointment), shall be the officer or officers next in seniority after the president. Each vice president shall have such authority and duties as are prescribed by the board of directors or president. Upon the death, absence, or disability of the president, the vice president, if any, or, if there are more than one, the vice presidents in the order determined by the board of directors or the president, shall have the authority and duties of the president. 7. SECRETARY. The secretary shall be responsible for the preparation and maintenance of minutes of the meetings of the board of directors and of the shareholders and of the other records and information required to be kept by the Corporation under section 7-116-101 of the Act and for authenticating records of the Corporation. The secretary, president or other authorized officer shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the board of directors. The secretary will keep the minutes of such meetings, have charge of the corporate seal and have authority to affix the corporate seal to any instrument requiring it (and, when so affixed, it may be attested by the secretary's signature), be responsible for the maintenance of all other corporate records and files and for the preparation and filing of reports to governmental agencies (other than tax returns), and have such other authority and duties as are appropriate and customary for the office of secretary, except as the same may be expanded or limited by the board of directors from time to time. 8. ASSISTANT SECRETARY. The assistant secretary, if any, or, if there are more than one, the assistant secretaries in the order determined by the board of directors or the secretary (or, if no such determination is made, in the order of their appointment) shall, under the supervision of the secretary, perform such duties and have such authority as may be prescribed from time to time by the board of directors or the secretary, and shall have such other authority and duties as are appropriate and customary for the office of assistant secretary, except as the same may be expanded or limited by the board of directors from time to time. Upon the death, 15 16 absence, or disability of the secretary, the assistant secretary, if any, or, if there are more than one, the assistant secretaries in the order designated by the board of directors or the secretary (or, if no such determination is made, in the order of their appointment), shall have the authority and duties of the secretary. 9. TREASURER. The treasurer shall have control of the funds and the care and custody of all stocks, bonds, and other securities owned by the Corporation, and shall be responsible for the preparation and filing of tax returns. The treasurer shall receive all moneys paid to the Corporation and, subject to any limits imposed by the board of directors, shall have authority to give receipts and vouchers, to sign and endorse checks and warrants in the Corporation's name and on the Corporation's behalf, and give full discharge for the same. The treasurer shall also have charge of disbursement of funds of the Corporation, shall keep full and accurate records of the receipts and disbursements, and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as shall be designated by the board of directors. The treasurer shall have such additional authority and duties as are appropriate and customary for the office of treasurer, except as the same may be expanded or limited by the board of directors from time to time. 10. ASSISTANT TREASURER. The assistant treasurer, if any, or, if there are more than one, the assistant treasurers in the order determined by the board of directors or the treasurer (or, if no such determination is made, in the order of their appointment) shall, under the supervision of the treasurer, have such authority and duties as may be prescribed from time to time by the board of directors or the treasurer. The assistant treasurer shall have such additional authority and duties as are appropriate and customary for the office of assistant treasurer, except as the same may be expanded or limited by the board of directors from time to time. Upon the death, absence, or disability of the treasurer, the assistant treasurer, if any, or if there are more than one, the assistant treasurers in the order determined by the board of directors or the treasurer (or, if no such determination is made, in the order of their appointment), shall have the authority and duties of the treasurer. 11. COMPENSATION. Officers shall receive such compensation for their services as may be authorized or ratified by the board of directors. Election or appointment of an officer shall not of itself create a contractual right to compensation for services performed as such officer. ARTICLE V INDEMNIFICATION 1. DIRECTORS AND OFFICERS. The corporation shall indemnify directors and officers of the corporation in their capacities as directors and officers pursuant to the procedures set forth in, and to the fullest extent authorized by, Colorado law as the same exists or may hereafter be amended. The right to indemnification provided herein shall be a contract right and shall include the right to be paid by the corporation in accordance with Colorado law for expenses incurred in advance of any proceeding's final disposition. 16 17 2. EMPLOYEES, FIDUCIARIES AND AGENTS. The corporation may indemnify employees, fiduciaries and agents of the corporation to the same extent as is permitted for directors under Colorado law (and to a greater extent if consistent with law). No such indemnification shall be made without the prior approval of the board of directors and the determination by the board of directors that such indemnification is permissible. 3. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, fiduciary and agent of the corporation or another corporation, partnership, joint venture, trust, or other enterprise against any expense, liability or loss whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under Colorado law. 4. NOT EXCLUSIVE. The foregoing rights of indemnification shall not be exclusive of other rights to which any director, officer, employee or agent may be entitled as a matter of law. ARTICLE VI SHARES 1. CERTIFICATES. Certificates representing shares of the capital stock of the Corporation shall be in such form as is approved by the board of directors and shall be signed by the chairman or vice chairman of the board of directors (if any), or the president or any vice president, and by the secretary or an assistant secretary or the treasurer or an assistant treasurer. All certificates shall be consecutively numbered, and the names of the owners, the number of shares, and the date of issue shall be entered on the books of the Corporation. Each certificate representing shares shall state upon its face: (a) That the Corporation is organized under the laws of the State of Colorado; (b) The name of the person to whom issued; (c) The number and class of the shares and the designation of the series, if any, that the certificate represents; (d) The par value, if any, of each share represented by the certificate; (e) If the Corporation is authorized to issue different classes or series of shares, a conspicuous statement, on the front or back of each certificate, that the Corporation will furnish to the shareholder, on request in writing and without charge, information concerning the designations, preferences, limitations, and relative rights applicable to each class, the variations in preferences, limitations, and rights determined for each series, and the authority of the board of directors to determine variations for future classes or series; and 17 18 (f) Any restrictions imposed by the Corporation upon the transfer of the shares represented by the certificate. 2. FACSIMILE SIGNATURES. Where a certificate is signed: (a) By a transfer agent other than the Corporation or its employee, or (b) By a registrar other than the Corporation or its employee, any or all of the officers' signatures on the certificate required by Section VI.1. may be facsimile. If any officer, transfer agent or registrar who has signed, or whose facsimile signature or signatures have been placed upon, any certificate, shall cease to be such officer, transfer agent, or registrar, whether because of death, resignation, or otherwise, before the certificate is issued by the Corporation, it may nevertheless be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. 3. TRANSFERS OF SHARES. Transfers of shares shall be made on the books of the Corporation only upon presentation of the certificate or certificates representing such shares properly endorsed by the person or persons appearing upon the face of such certificate to be the owner, or accompanied by a proper transfer or assignment separate from the certificate, except as may otherwise be expressly provided by the statutes of the State of Colorado or by order of a court of competent jurisdiction. The officers or transfer agents of the Corporation may, in their discretion, require a signature guaranty before making any transfer. The Corporation shall be entitled to treat the person in whose name any shares are registered on its books as the owner of those shares for all purposes and shall not be bound to recognize any equitable or other claim or interest in the shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interest. 4. SHARES HELD FOR ACCOUNT OF ANOTHER. The board of directors may adopt by resolution a procedure whereby a shareholder of the Corporation may certify in writing to the Corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. The resolution shall set forth: (a) The classification of shareholders who may certify; (b) The purpose or purposes for which the certification may be made; (c) The form of certification and information to be contained herein; (d) If the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or the closing of the stock transfer books within which the certification must be received by the Corporation; and (e) Such other provisions with respect to the procedure as are deemed necessary or desirable. Upon receipt by the Corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set 18 19 forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. 5. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of a certificate alleged to have been destroyed or lost if the owner makes an affidavit or affirmation of that fact and produces such evidence of loss or destruction as the Board of Directors may require. The Board, in its discretion, may as a condition precedent to the issuance of a new certificate require the owner to give the Corporation a bond in such form and amount and with such surety as it may determine as indemnity against any claim that may be made against the Corporation relating to the certificate allegedly destroyed or lost. ARTICLE VII MISCELLANEOUS 1. CORPORATE SEAL. The board of directors may adopt a seal, circular in form and bearing the name of the Corporation and the words "SEAL" and "COLORADO," which, when adopted, shall constitute the seal of the Corporation. The seal may be used by causing it or a facsimile of it to be impressed, affixed, manually reproduced, or rubber stamped with indelible ink. 2. FISCAL YEAR. The fiscal year of the Corporation shall begin on July 1 and end on June 30 of each year. The board of directors may, by resolution, change the fiscal year of the Corporation. 3. RECEIPT OF NOTICES BY THE CORPORATION. Notices, shareholder writings consenting to action, and other documents or writings shall be deemed to have been received by the Corporation when they are received at (a) the registered office of the Corporation in the State of Colorado or (b) the principal office of the Corporation (as that office is designated in the most recent document filed by the Corporation with the Secretary of State for the State of Colorado designating a principal office) addressed to the attention of the secretary of the Corporation. 4. AMENDMENT OF BYLAWS. These bylaws may at any time and from time to time be amended, supplemented, or repealed by the board of directors. 19 20 CERTIFICATE I hereby certify that the foregoing bylaws, consisting of twenty (20) pages, including this page, constitute the bylaws of Colorado MEDtech, Inc., adopted by the board of directors of the Corporation as of September 22, 2000. /s/ Peter J. Jensen --------------------------------- Peter J. Jensen, Secretary 20 EX-10.42 4 d90859ex10-42.txt 1996 EMPLOYEE STOCK PLAN 1 EXHIBIT 10.42 COLORADO MEDTECH, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN AS AMENDED AND RESTATED ON MAY 24, 2001 1) Purpose This Employee Qualified Stock Purchase Plan (the "Plan") is intended to serve as an incentive and to encourage stock ownership by all eligible employees of Colorado MEDtech, Inc. (the "Company") and participating subsidiaries (as defined in Section 17 hereof) so that they may share in the fortunes of the Company by acquiring or increasing their proprietary interest in the Company. The Plan is designed to encourage eligible employees to remain in the employ of the Company. It is intended that options issued pursuant to the Plan shall constitute options issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). 2) Eligible Employees All employees of the Company or any of its participating subsidiaries ("Employees") prior to the beginning of any Payment Period (as defined below) shall be eligible to receive options under the Plan to purchase the Company's Common Stock, no par value (the "Stock"). In no event may an Employee be granted an option if such Employee, immediately after the option is granted, owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of its parent corporation or subsidiary corporation, as the terms "parent corporation" and "subsidiary corporation" are defined in Section 424(d) of the Code shall apply and all stock which the Employee may purchase under outstanding options (notwithstanding that such options may not be presently exercisable) shall be treated as stock owned by the Employee. For purposes of this Article 2, the term "Employee" shall not include an employee whose customary employment by the Company or participating subsidiary is twenty (20) hours or less per week or is for not more than five (5) months in any calendar year. 3) Stock Subject to the Plan The stock subject to the options issued under the Plan shall be shares of the Company's authorized but unissued shares of Stock or shares of Stock reacquired by the Company. The aggregate number of shares which may be issued pursuant to the Plan is 540,000 subject to increase or decrease as provided herein by reason of stock split-ups, reclassifications, stock dividends, changes in par value and the like. The maximum number of shares available during each Annual Payment Period ending prior to January 1, 2000 shall not exceed 80,000 shares and the maximum 1 2 number of shares available during each subsequent Annual Payment Period shall be as follows: (1) the maximum number of shares available during the Annual Payment Period beginning January 1, 2000 and ending December 31, 2000 shall not exceed 100,031, (2) the maximum number of shares available during the Annual Payment Period beginning January 1, 2001 and ending December 31, 2001 (the "2001 Plan Year") shall not exceed 150,000 and (3) the maximum number of shares available during the Annual Payment Period beginning January 1, 2002 and ending December 31, 2002 shall not exceed 259,587 minus the number of shares issued during the 2001 Plan Year. If the total number of shares to be purchased by all Participants on any exercise date exceeds the number of shares then available for issuance under the Plan, a pro rata allocation of the shares available shall be made in a uniform and equitable manner. 4) Payment Periods and Stock Options The annual period, January 1 to December 31 is a payment period during which payroll deductions will be accumulated under the Plan ("Annual Payment Periods"). The Plan will be implemented in three (3) Annual Payment Periods beginning January 1, 1997. Thereafter, it will be continued for three (3) additional Annual Payment Periods beginning January 1, 2000. Each Annual Payment Period consists of four (4) separate payment periods (each, a "Quarterly Payment Period"), beginning on January 1, April 1, July 1 and October 1, as applicable, and each ending on December 31. Each Payment Period includes only regular pay days falling within it. On the first business day of each Payment Period, the Company will grant to each Employee who has elected to participate in the Plan (a "Participant") an option to purchase on the last day of such Payment Period, at the Option Price (defined below), such number of shares of Stock as his/her accumulated payroll deductions during such Payment Period will pay for at the Option Price, provided that such employee remains eligible to participate in the Plan throughout such Payment Period. If the Payment Period terminates on a Saturday, Sunday or legal holiday, then the last day of the Payment Period shall be the last business day prior to December 31. The "Option Price" for each Payment Period shall be the lesser of (i) 85% of the fair market value (as defined below) of the Stock on the first business day of the applicable Payment Period in which the Participant entered the Plan (or, with respect to increased contributions, the Payment Period when such increase takes place);or (ii) 85% of the fair market value of the Stock on the last day of the Annual Payment Period, in either case rounded up to the nearest whole cent. In the event of an increase or decrease in the number of outstanding shares of Stock through stock split-ups, reclassifications, stock dividends, changes in par value and the like, an appropriate adjustment shall be made in the number of shares and Option Price per share provided for under the Plan, either by a proportionate increase in the number of shares and a proportionate decrease in the Option Price per share, or by a proportionate decrease in the number of shares and proportionate increase in the Option Price per share, as may be required to enable a Participant in the Plan as to whom an option is exercised on the last day of any then current Payment Period to acquire such number of full shares as his/her accumulated payroll deduction on such date will pay for at the adjusted Option Price. The 2 3 determination of what constitutes an "appropriate adjustment" shall be made by the Board of Directors, whose determination thereof shall be final. For purposes of this Plan the term "fair market value" means, if the Stock is listed on a national securities exchange, the average of the high and low prices of the Stock on such exchange or if the Stock is traded in the over-the-counter securities market, the mean between the closing bid and asked prices of the Stock. No employee shall be granted an option which permits his/her rights to purchase Stock under the Plan and any other employee stock purchase plans of the Company or any parent or subsidiary corporations to accrue at a rate which exceeds $25,000 in fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. A right to purchase Stock under the Plan "accrues" on the last day of the Payment Period. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code. 5) Exercise of Option Each Participant who fails to withdraw from participation in the Plan on or prior to the last business day of an Annual Payment Period shall be deemed to have exercised his/her option on such date and shall be deemed to have purchased from the Company such number of full shares of Stock reserved for the purpose of the Plan as his/her accumulated payroll deductions on such date will pay for at such Option Price. If a Participant is not an employee on the last day of a Payment Period, he/she shall not be entitled to exercise his/her option. 6) Unused Payroll Deductions Only full shares of Stock may be purchased. Any balance remaining in a Participant's account after a purchase will be reported to the employee and, at the Participant's option, will be returned to the Participant or will be carried in the Participant's account towards the purchase of additional shares in the next Payment Period. 7) Authorization for Entering Plan An Eligible Employee may elect to participate in the Plan by completing, signing and delivering to the Company's Human Resources department an authorization: (a) stating the amount to be deducted regularly from his/her pay; (b) authorizing the purchase of Stock for him/her in each Payment Period in accordance with the terms of the Plan; and 3 4 (c) specifying the exact name in which stock purchased for him/her is to be issued as provided under Article 11 hereof. Such Authorization must be received by the Human Resources department at least ten (10) days before the beginning date of a Payment Period to be effective for that Payment Period. Unless a Participant files a new Authorization or withdraws from the Plan, his/her deductions and purchases under the Authorization he/she has on file under the Plan will continue as long as the Plan remains in effect. The Company will accumulate and hold for the Participant's account the amounts deducted from his/her pay. Interest earned, if any, will be credited to the Participant's account for the purchase of additional shares. 8) Maximum Amount of Payroll Deductions An employee may authorize payroll deductions spread evenly over a Payment Period in any even dollar amount up to, but not more than, ten percent (10%) of his/her regular base pay in any payroll period, over that Payment Period, or may make lump sum contributions (but not later than the first day of a Payment Period); provided, however, that the aggregate of lump sum contributions and payroll deductions may not be greater than ten percent (10%) of a Participant's base pay over the applicable Annual Payment Period. The minimum deduction in respect of any payroll period shall be Five Dollars ($5.00) (or such lesser amount as the Board shall establish). 9) Increase or Decrease in Payroll Deductions. (a) Increases. Once an employee is a Participant in the Plan during an Annual Payment Period (by making payroll deductions or a lump sum contribution), a Participant may increase deductions or make a lump sum contribution only once during the remainder of the applicable Annual Payment Period. An authorization to increase deductions or make a lump sum contribution in a Payment Period must be received by the Human Resources department at least ten (10) days before the beginning of such Payment Period. (b) Price for Increases and Lump Sum Contributions. If a Participant makes a lump sum contribution or increases his or her deductions to the Plan, only such lump sum contribution or increased deductions will have an Option Price calculated pursuant to Section 4 using as measurement dates: (i) the first business day of the Payment Period in which the increase in deductions or lump sum payment was made, and (ii) the last business day of the applicable Annual Payment Period. (c) Decreases in Deductions. Deductions may be decreased only once in an Annual Payment Period. An authorization to decrease deductions will be required and must be received by 4 5 the Human Resources department at least ten (10) days before the end of the payroll period for which it is to become effective. 10) Withdrawal from the Plan A Participant may withdraw from the Plan in whole but not in part, at any time prior to the fifteenth (15th) calendar date prior to the end of each Annual Payment Period or, if such day is not a business day, then the next succeeding business day, by delivering a Withdrawal Notice to the Human Resources department, in which event the Company will promptly refund the entire balance of the Participant's deductions not theretofore used to purchase Stock under the Plan. A Participant who has withdrawn from the Plan shall be treated as an employee who has never elected to participate in the Plan. To re-enter the Plan a new Authorization must be filed at least ten (10) days before the beginning date of the next Annual Payment Period, which Authorization will not become effective before the beginning of the next Annual Payment Period. 11) Issuance of Stock Certificates for Stock issued to Participants will be delivered as soon as practicable after each Payment Period. Stock purchased under the Plan will be issued only in the name of the Participant, or if his/her Authorization so specified, in the name of the Participant and another person of legal age as joint tenants with rights of survivorship. 12) No Transfer or Assignment of Employee's Rights An employee's rights under the Plan may not be transferred to, assigned to, or availed of by, any other person. Any option granted to an employee under this Plan may be exercised only by him/her during his/her lifetime. 13) Termination of Employee's Rights An employee's rights to participate in, and a Participant's rights under, the plan will terminate when he/she ceases to be an employee because of retirement, resignation, layoff, discharge, death, change of status, or for any other reason. A Withdrawal Notice will be considered as having been received from a Participant on the day his/her employment ceases, and all payroll deductions not used to purchase Stock will be refunded to him/her. If a Participant's payroll deductions are interrupted by any legal process, a Withdrawal Notice will be considered as having been received from him/her on the day the interruption occurs. 5 6 14) Termination and Amendments to Plan The Plan may be terminated at any time by the Company's Board of Directors. It will terminate in any case when all or substantially all the unissued shares of Stock reserved for the purposes of the Plan have been purchased. If at any time shares of Stock reserved for the purposes of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to their options and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase Stock will be refunded. The Board of Directors also reserves the right to amend the Plan from time to time, in any respect; provided, however, that no amendment shall be effective without prior approval of the shareholders entitled to vote thereon, which would (a) except as provided in Articles 3 and 4, increase the number of shares of Stock to be offered under the Plan or (b) change the class of employees eligible to participate in the Plan. Further, no amendment shall be made without prior approval of the shareholders of the Company if such amendment would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934 or with Section 423 of the Internal Revenue Code. 15) Limitations on Sale of Stock Purchased Under the Plan; Tax Matters Each Participant who is subject to Section 16(a) promulgated under the Securities Exchange Act of 1934 (i.e., officers of the Company), will agree upon entering the Plan to hold the Stock for a period of six (6) months after its acquisition. Because of certain federal tax law requirements, each Participant will agree upon entering the Plan, promptly to give the Chief Financial Officer of the Company notice of any Stock disposed of within two (2) years after the date of the first day of the Payment Period during which the Stock was purchased under the Plan showing the number of such shares disposed of. The employee assumes the risk of any fluctuations in the price of such Stock. Satisfaction of Withholding Obligations. The Company or participating subsidiary may take such steps as it may deem necessary or appropriate for the withholding of any taxes or funds which the Company or the participating subsidiary is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Company stock received hereunder (collectively, "Withholding Obligations"). Such steps may include, by way of example only and not limitation, (i) requiring a Participant to remit to the Company in cash an amount sufficient to satisfy such Withholding Obligations; (ii) allowing the Participant to tender to the Company shares of Company stock, the fair market value of which at the tender date the Committee determines to be sufficient to satisfy such Withholding Obligations; (iii) withholding shares of Company stock otherwise issuable upon the exercise of a stock option and which have a fair market value at the exercise date sufficient to satisfy such Withholding Obligations; or (iv) any combination of the foregoing. 6 7 Notification of Inquiries and Agreements. Each Participant shall notify the Company in writing within 10 days after the date such Participant (i) first obtains knowledge of any Internal Revenue Service inquiry, audit, assertion, determination, investigation, or question relating in any manner to the value of Company stock or options purchased or granted hereunder; (ii) includes or agrees (including, without limitation, in any settlement, closing or other similar agreement) to include in gross income with respect to any Company stock or option received under this Plan (A) any amount in excess of the amount reported on Form 1099 or Form W-2 to such Participant by the Company, or (B) if no such Form was received, any amount; (iii) exercises, sells, disposes of, or otherwise transfers an option acquired pursuant to this Plan; or (iv) sells, disposes of, or otherwise transfers stock acquired pursuant to the Plan within the Disqualified Period. Upon request, a Participant shall provide to the Company any information or document relating to any event described in the preceding sentence which the Company (in its sole discretion) requires in order to calculate and substantiate any change in the Company's Tax liability or withholding obligations as a result of such event. 16) Company's Payment of Expenses Related to Plan The Company will bear all costs of administering and carrying out the Plan. 17) Participating Subsidiaries The term "participating subsidiaries" shall mean any subsidiary of the Company which is designated by the Board of Directors to participate in the Plan. The Board of Directors shall have the power to make such designation before or after the plan is approved by the stockholders. 18) Administration of the Plan The Plan shall be administered by the Board of Directors of the Company or by a committee composed solely of two or more directors (the "Committee") each of whom is a Non-Employee Director. A "Non-Employee Director" is a person who satisfies the definition of a "non-employee director" set forth in Rule 16b-3, as in effect from time to time, under the Securities Exchange Act of 1934, as amended. The Board of Directors may from time to time, remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board of Directors. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. The interpretation and construction of any provision of the Plan and adoption of rules and regulations for administering the Plan will be made by the Committee, subject, however, at all times to the final jurisdiction which shall rest in the Board. Determinations made by the Committee and approved by the Board with respect to any matter or provision contained in the Plan will be final, conclusive and binding upon the Company and upon all Participants, their heirs or legal 7 8 representatives. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. No member of the Committee shall be eligible to participate in the Plan while serving as a member of the Committee. 19) Optionees Not Stockholders Neither the granting of an option to an employee nor the deductions from his/her pay shall constitute such employee a stockholder of the shares covered by an option until such shares have been purchased by a certificate representing such shares has been issued to him/her. 20) Governmental Regulation The Company's obligation to sell and deliver shares of the Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such stock. 21) Effectiveness of the Plan The Plan became effective September 27, 1996, the date of its adoption by the Board of Directors, and was approved within twelve (12) months thereafter by the holders of a majority of the securities of the Company entitled to vote. 8 EX-10.49 5 d90859ex10-49.txt LOAN AGREEMENT 1 EXHIBIT 10.49 ** NOTE: PURSUANT TO INSTRUCTION 2 TO ITEM 601 OF REGULATION S-K, A SCHEDULE OF MATERIAL DETAILS OF VARIOUS LOAN AGREEMENTS AND RELATED DOCUMENTS FOLLOWS THE FORMS.** LOAN AGREEMENT THIS LOAN AGREEMENT is made and entered into this ___ day of _______, 2001, by and between _____________________________ ("EMPLOYEE") and Colorado MEDtech, Inc., a Colorado corporation (the "COMPANY"). WHEREAS, the Company has agreed to loan up to $____________ (the "COMMITMENT AMOUNT") to Employee to enable Employee to purchase shares of Common Stock of the Company; and WHEREAS, the Company is willing to offer to such loan (the "LOAN") to Employee and Employee desires to accept the loan on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the above recitals, the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties hereto agree as follows: 1. Loan Commitment. The Company agrees to loan up to the Commitment Amount to Employee during the period beginning with the date hereof and ending June 30, 2001 under the terms of the Promissory Note of even date herewith, provided, that Employee is employed by the Company at the time of advances thereunder. 2. Repayment. Upon payment in full of the loan, the Company shall deliver to Employee the Promissory Note marked "paid in full," together with a termination of the Financing Statement filed on Form UCC-1, as hereinafter identified and written authorization and instructions for release of escrowed share certificates. 3. Use of Proceeds. Employee represents, warrants, and covenants to and with the Company that the proceeds of the Loan shall be used by Employee solely for purchase of common stock of the Company (the "SHARES") from persons other than the Company and that loan proceeds not so used within thirty (30) days of their advancement by the Company shall be immediately returned to the Company. The Shares, together with duly executed Stock Powers, will be delivered to and held by the Company's legal counsel, Chrisman, Bynum & Johnson, P.C. ("ESCROW AGENT"), pursuant to a Master Escrow Agreement of even date herewith. 4. Form and Application of Payments. All payments (including prepayments by Employee) on account of principal, interest, and other charges shall be made to the Company without setoff or counterclaim, at the principal office of the Company, in lawful money of the United States of America. 1 2 5. Security Instruments. Contemporaneously with execution of this Loan Agreement, Employee shall execute and acknowledge, as appropriate, and deliver to the Company, the Promissory Note, a Security Agreement, a financing statement on Form UCC-1 and a counterpart signature page to the Master Escrow Agreement, which shall secure the repayment of the Loan. The security interest granted in the Security Agreement shall be subordinate to no other liens or encumbrances whatsoever, and Employee will deliver certificates for all Shares purchased with proceeds of the Loan to the Escrow Agent as soon as possible after a purchase transaction. This Agreement, the Promissory Note, the Security Agreement, the Form UCC-1, and the Master Escrow Agreement are hereinafter collectively referred to as the "LOAN DOCUMENTS"). 6. Representations and Warranties. Employee represents and warrants that the Loan Documents, when executed and delivered, will constitute valid and legally binding obligations of Employee, enforceable against Employee in accordance with their respective terms, and will not result in any violation of, or conflict with, or constitute a default under, any mortgage, deed of trust, pledge, loan or credit agreement or other agreement by which Employee is bound or affected. All action required for the execution and performance of the Loan Documents by Employee has been taken and all required consents and authorizations have been obtained. 7. Covenants. As long as any portion of the Loan shall remain unpaid, Employee covenants and agrees to perform and strictly comply with each of the provisions of the Loan Documents. 8. Events of Default. The occurrence of any one or more of the following events shall constitute an event of default ("EVENT OF DEFAULT") hereunder: (a) failure to deliver the Shares to Escrow Agent within forty-five (45) days of the date on which the Company makes an Advance under the Promissory Note to Employee, (b) failure to pay any installment of principal or interest on the Promissory Note or any portion thereof when due, or (c) breach of or failure to perform any of the terms and conditions of any of the Loan Documents, if such breach is not cured within ten (10) days of delivery of written notice by the Company to Employee. 9. Rights and Remedies of the Company. On the occurrence of an Event of Default or at any time thereafter, then the entire principal sum of the Promissory Note and the accrued interest shall, at the option of the Company, become at once due and payable without further notice, and the Company may, at its option, enforce each and every right, power, and remedy provided for in the Loan Documents and may pursue any other right, power, or remedy available to it, whether at law, in equity, by statute, or otherwise, to enforce a collection of all amounts and the performance of all other obligations due and owing to it under or pursuant to the Loan Documents. Employee agrees to indemnify and hold harmless the Company from and against any and all costs, expenses, claims, losses, liabilities and damages (including reasonable fees and disbursements of counsel) arising out of, based upon or relating to a violation by Employee of any law or regulation, including without limitation a violation of Section 16 of the Securities Exchange Act of 1934 resulting from remedies pursued by the Company relating to an Event of Default. 2 3 10. Severability of Provisions. If any provisions of any of the Loan Documents shall be held, declared, or pronounced void, voidable, invalid, unenforceable or inoperative for any reason by a court of competent jurisdiction, government authority, or otherwise, such holding, declaration, or pronouncement shall not adversely affect any other provision of such document, which shall otherwise remain in full force and effect and be enforceable in accordance with the terms of this Agreement. 11. Survival. All agreements, representations, warranties, terms and conditions contained in the Loan Documents made by Employee and in connection with the loan shall survive the closing and the execution and delivery of the Loan Documents. 12. Time is of the Essence. Time is of the essence hereof and under all of the Loan Documents. 13. Binding Effect. This Agreement shall be binding on the heirs, successors and assigns of the parties hereto. 14. Colorado Law to Govern. This Agreement shall be construed in accordance with the laws of the state of Colorado notwithstanding any Colorado or other conflict of law provision to the contrary. 15. Notices. All notices, requests, demands, and other communications pertaining to this Agreement shall be in writing and shall be deemed duly given when delivered personally (which shall include delivery by facsimile and by Federal Express or other nationally recognized, reputable overnight courier service that issues a receipt or other confirmation of delivery) to the party for whom such communication is intended, or three (3) business days after the date mailed by certified or registered U.S. mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Company: Colorado MEDtech, Inc. 6175 Longbow Drive Boulder, Colorado 80301 Attn: Peter J. Jensen, Vice President with a copy (which shall not constitute notice) to: Chrisman, Bynum & Johnson, P.C. Attn: Christopher Hazlitt 1900 Fifteenth Street Boulder, Colorado 80302 (b) If to Employee: 3 4 to the Employee's address set forth on the counterpart signature page attached to this Agreement or to such other address as such party shall specify by written notice to the other parties hereto. IN WITNESS WHEREOF, this Loan Agreement is executed as of the day and year first above written. THE COMPANY: COLORADO MEDTECH, INC. By: --------------------------------- Peter J. Jensen Vice President EMPLOYEE: -------------------------------------------- Printed Name: ------------------------------- 4 5 MASTER PROMISSORY NOTE Up to a maximum of $__________ ___________, 2001 Boulder, Colorado FOR VALUE RECEIVED, the undersigned, ________________________ ("MAKER"), promises to pay to the order of Colorado MEDtech, Inc., a Colorado corporation ("HOLDER") at such place as shall be designated by Holder, the unpaid principal amount of all Advances (as defined herein) made by Holder hereunder, together with interest at the prime rate of interest as stated in the Money Rates section of The Wall Street Journal (or, if such information is not available, then the prevailing prime rate of interest in the United States, as stated in a comparable authoritative financial publication) plus one-half of one percent (1/2%) per annum. The foregoing prime rate of interest shall be updated and adjusted according to such rate as applicable on January 2 (or, if such date falls on a weekend or holiday, the first business day thereafter) of each calendar year. Holder shall make advances to Maker in amounts up to a maximum of $____________ (the "COMMITMENT AMOUNT"), as requested by Holder from time to time pursuant to the terms of the second paragraph hereof and provided that no Advances will be made after the earlier to occur of (a) the entire Commitment Amount being advanced by Holder to Maker, (b) the termination of Maker's employment with Holder for any reason or (c) June 30, 2001. Maker understands that this is not a "revolving" note and that once principal payments are made on this Promissory Note, Holder will not re-advance them after payments toward principal have been made. Maker will pay accrued interest on the outstanding balance of this Promissory Note on each anniversary of the date hereof and all principal and accrued interest hereunder will be due and payable in full on the date which is (5) years from the date of this Promissory Note. If any payment due hereunder falls on a weekend or holiday, payment will be due on the first business day thereafter. Maker may request Advances in increments of at least $10,000 ("ADVANCES"), in an aggregate amount not to exceed the Commitment Amount. Each advance shall be listed on an attachment to this Promissory Note. This Promissory Note is to be secured by shares of Common Stock of Colorado MEDtech, Inc., pursuant to the terms of a Loan Agreement and a Security Agreement, both of even date herewith. The security interest in the Shares created by the Security Agreement shall in no way limit or restrict the Holder's collection rights as against Maker, as this is a full recourse obligation of Maker. Such shares ("SHARES"), together with duly executed Stock Powers, will be delivered to and held by Holder's legal counsel, Chrisman, Bynum & Johnson, P.C., pursuant to a Master Escrow Agreement, of even date herewith. Maker may prepay the Advance, in whole or in part, at any time, without penalty. 5 6 Upon (i) failure to deliver the Shares to Chrisman, Bynum & Johnson, P.C., within forty-five (45) days of the date on which Holder makes any Advance to Maker, or (ii) failure to pay any installment of principal or interest on this Promissory Note or any portion thereof when due, or (iii) to perform any of the terms or conditions of this Note or the breach by Maker of any document or agreement referenced herein, if such deficiency is not cured within ten (10) business days of delivery of written notice by Holder hereof to the Maker, then the entire principal sum and accrued interest shall, at the option of Holder hereof, become at once due and payable without further notice. If any principal or interest payment on this Promissory Note is not paid within ten (10) days after such payment is due, whether maturing by lapse of time or by reason of the failure of the Maker hereof to pay when due or because of a default in the performance of any of the covenants contained in this Promissory Note, such installment of principal and interest shall thereafter bear interest at the rate of one and one-half (1-1/2) times the interest rate provided hereinabove (or the highest rate allowable by law, if less) until fully paid. This Note shall become immediately due and payable (i) ninety (90) days after Holder's employment with Colorado MEDtech, Inc., or any subsidiary corporation, terminates for any reason, (ii) if Maker commences any proceedings in bankruptcy or for dissolution, liquidation, winding-up, composition or other relief under state or federal bankruptcy laws; (iii) if such proceedings are commenced against Maker, or a receiver or trustee is appointed for Maker or a substantial portion of its property, and such proceeding or appointment is not dismissed or discharged within sixty (60) days after its commitment; or (iv) the date which is (5) years from the date of this Promissory Note. All makers and endorsers waive presentment, demand for payment, notice of dishonor, notice of protest, protest and all other notices or demands in connection with the delivery, acceptance, extension, performance, default, endorsement or guarantee hereof. In the event (a) this Promissory Note is placed in the hands of any attorney for collection, or (b) any suit or proceeding is brought for the recovery or protection of the indebtedness, then and in any such events, the Maker hereof agrees to pay on demand all costs and expenses of such suit or proceedings incurred by Holder hereof, including reasonable attorneys' fees. This Note shall be interpreted in accordance with the laws of the State of Colorado notwithstanding any Colorado or other conflict of law provision to the contrary. Any failure of Holder hereof to exercise any right shall not be construed as a waiver of the right to exercise the same or any other right at any time and from time to time thereafter. -------------------------------------------- Printed Name: ------------------------------- 6 7 ADVANCES DATE AMOUNT -------------------------------------------------------------------------------- 7 8 MASTER ESCROW AGREEMENT (WITH POWER OF ATTORNEY AND WAIVER OF CONFLICTS OF INTEREST) This Master Escrow Agreement ("AGREEMENT") is entered into this ____ day of January, 2001, by and among Colorado MEDtech, Inc., a Colorado corporation ("CMED"), Chrisman, Bynum & Johnson, P.C., a Colorado professional corporation ("ESCROW AGENT"), and the parties who become parties to this Agreement by signing a counterpart signature page hereto (each of whom, for purposes of this Agreement, is referred to as an "EMPLOYEE"). The terms of this Agreement shall apply as to any Employee only as to that Employee's Escrow Shares, as defined herein. CMED and Employee have entered into a Loan Agreement ("LOAN AGREEMENT") pursuant to which CMED will loan money to Employee to enable Employee to purchase CMED common stock. CMED and Employee have agreed that the common stock purchased, and other CMED securities thereafter acquired by Employee pursuant to the terms of the Loan Agreement will be delivered to and held by Escrow Agent under the terms of this Agreement. Employee and CMED desire that Escrow Agent hold such securities as provided in this Agreement. It is the responsibility of Employee to deliver such shares to Escrow Agent, together with Stock Powers in the form attached hereto, duly executed in compliance with New York Stock Exchange medallion signature requirements, in blank, to Escrow Agent within the time provided in the Loan Agreement. For purposes of this Agreement, Employee designates and appoints Escrow Agent as Employee's Attorney-in-Fact, with full power of attorney, to sign all documents and instruments whatsoever on behalf of and in the name of Employee including, but not limited to, Stock Powers to effect transfers of Escrow Shares in accordance with this Agreement. Accordingly, in consideration of the mutual covenants contained herein, the parties, intending to be legally bound, hereby agree as follows: 1. Deposit of Escrow Shares. Employee has delivered or shall deliver the CMED share certificates for common stock required to be deposited in escrow (the "ESCROW SHARES") to Escrow Agent, and Escrow Agent shall hold and disburse the Escrow Shares only in accordance with this Agreement. Such share certificates shall be in the name of Employee only, and shall, for so long as they are held in escrow, be deemed beneficially owned by Employee and may be voted by Employee. Escrow Agent will not be asked to hold any property or funds other than Escrow Shares, without a written agreement to do so. 2. Escrow Shares. Escrow Shares shall include any securities delivered as the result of a stock dividend, stock split, stock distribution, or similar event, and any such securities shall become part of the Escrow Shares to be held by Escrow Agent hereunder. 3. Release of Escrow Shares. 8 9 (a) Escrow Agent shall release the Escrow Shares only (i) upon the receipt of written instructions as provided by the Escrow Terms attached hereto on Exhibit A, or (ii) an order of a court, or an arbitrator pursuant to Section 7 of this Agreement. Without the unanimous agreement in writing of CMED, Employee and Escrow Agent, agreeing to a change in the Escrow Terms attached hereto as Exhibit A, such parties agree to be bound by the terms of such Escrow Terms. Upon final release of an Employee's Escrow Shares as provided for herein, this Agreement shall terminate as to that Employee, and the Escrow Agent shall be discharged of any further liability relating to that Employee's Escrow Shares. (b) Notwithstanding the Escrow Terms attached hereto as Exhibit A, either party may notify the Escrow Agent and the other party in writing of its claim that it is entitled to the Escrow Shares. Such claiming party shall, in reasonable detail, cite the Section(s) of the Loan Agreement, and/or this Agreement, and the facts and circumstances supporting its claim. Unless the other party objects by written notice to the Escrow Agent and the other party within thirty (30) days of its receipt of such notice, the Escrow Agent may release the Escrow Shares to the claiming party. If the other party does so object, then the Escrow Agent shall continue to hold the Escrow Shares and shall release them only in accordance with joint written instructions executed by Employee and CMED or with the order of a court, or an arbitrator pursuant to Section 7 of this Agreement. Each party agrees that it will act only in good faith in making any claim or any objection pursuant to this Section 3(b). 4. Duties of the Escrow Agent. (a) Duties in General. (i) The Escrow Agent undertakes to perform only such duties as are expressly set forth herein (and required by applicable law), which the parties agree are ministerial in nature. If in doubt as to its duties and responsibilities hereunder, the Escrow Agent may consult with counsel of its choice and shall be protected in any action taken or omitted in connection with the advice or opinion of such counsel. (ii) If the Escrow Agent becomes involved in litigation with respect to this Escrow Agreement for any reason, it is hereby authorized to deposit the Escrow Shares with the Clerk of such court in which such litigation is pending, or to interplead all interested parties in any court of competent jurisdiction and to deposit with the Clerk of such court the Escrow Shares. Upon the happening of either of the above, the Escrow Agent shall stand fully relieved and discharged of any further duties hereunder. (iii) If the Escrow Agent should at any time be confronted with inconsistent claims or demands by the parties hereto, the Escrow Agent shall have the right to interplead such parties in any state or federal court of competent jurisdiction, to deposit the Escrow Shares with the Clerk of such court, and to request that such court determine the respective rights of the parties with respect to this Escrow Agreement, and upon doing so, the Escrow Agent automatically shall be released from any obligations or liability as a consequence 9 10 of any claims or demands hereunder; provided, however, that any party may initiate arbitration proceedings pursuant to Section 7 hereunder. (b) Exculpation. Except for the Escrow Agent's own willful misconduct, bad faith or gross negligence; (i) the Escrow Agent shall have no liability of any kind whatsoever for its performance of any duties imposed upon the Escrow Agent under this Escrow Agreement or for any of its acts or omissions hereunder; (ii) the Escrow Agent shall not be responsible for any of the acts or omissions of the parties hereto; (iii) the Escrow Agent shall not be liable to anyone for damages, losses or expenses arising out of this Escrow Agreement; and (iv) the Escrow Agent may rely and/or act upon any written instrument, document or request believed by the Escrow Agent in good faith to be genuine and to be executed and delivered by the proper person, and may assume in good faith the authenticity, validity and effectiveness thereof and shall not be obligated to make any investigation or determination as to the truth and accuracy of any information contained therein. (c) No Additional Duties. The Escrow Agent shall have no duties except those that are expressly set forth herein, and it shall not be bound by any notice of a claim or demand hereunder, or any waiver, modification, amendment, termination or rescission of this Escrow Agreement. (d) Miscellaneous. The Escrow Agent may execute any of its powers or responsibilities hereunder and exercise any rights hereunder either directly or by or through its agents or attorneys. The Escrow Agent shall not be responsible for and shall not be under a duty to examine or pass upon the validity, binding effect, execution or sufficiency of the Escrow Agreement or of any agreement amendatory or supplemental hereto. 5. Releases; Indemnification; Fees and Expenses; Distribution. (a) CMED and Employee, jointly and severally, agree to indemnify and hold harmless the Escrow Agent from and against any and all costs, expenses, claims, losses, liabilities and damages (including reasonable fees and disbursements of counsel) (collectively, "DAMAGES") arising out of, based upon or relating to the Escrow Agent's actions as escrow agent hereunder, except to the extent that a court of competent jurisdiction determines by final, nonappealable order that such Damages arose directly from the Escrow Agent's gross negligence or willful misconduct, such Damages to be shares equally, one-half by CMED and one-half by Employee. (b) The Escrow Agent shall be entitled to reimbursement for all administrative fees and expenses incurred by the Escrow Agent (including reasonable fees and expenses of counsel) in connection with its duties hereunder. Such fees and expenses shall be paid by CMED. 6. Resignation of the Escrow Agent. The Escrow Agent, and any successor Escrow Agent, may resign at any time as Escrow Agent hereunder by giving at least fifteen (15) business 10 11 days written notice to the parties. Upon such resignation and the appointment of a successor Escrow Agent, the resigning Escrow Agent shall be absolved from any and all liability in connection with the exercise of its powers and duties as Escrow Agent hereunder. Upon their receipt of notice of resignation from the Escrow Agent, CMED and Employee shall use their reasonable best efforts jointly to designate a successor Escrow Agent. If the parties do not agree upon a successor Escrow Agent within fifteen (15) business days after the receipt by the parties of the Escrow Agent's resignation notice, the Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor Escrow Agent or other appropriate relief and any such resulting appointment shall be binding upon all parties hereto. By mutual agreement, the parties shall have the right at any time upon not less than seven (7) business days written notice to terminate their appointment of the Escrow Agent, or the successor Escrow Agent, as Escrow Agent hereunder. Notwithstanding anything to the contrary in the foregoing, the Escrow Agent or the successor Escrow Agent shall continue to act as Escrow Agent until a successor is appointed and qualified to act as Escrow Agent. 7. Dispute Resolution. Except as provided below, any and all disputes arising under or related to this Agreement which cannot be resolved through negotiations between the parties shall be submitted to binding arbitration. If the parties fail to reach a settlement of their dispute within fifteen (15) days after the earliest date upon which one of the parties notified the other(s) of its desire to attempt to resolve the dispute, then the dispute shall be promptly submitted to arbitration by a single arbitrator through the Judicial Arbiter Group ("JAG"), any successor of the JAG, or any similar arbitration provider who can provide a former judge to conduct such arbitration if JAG is no longer in existence. The arbiter shall be selected by JAG on the basis, if possible, of his or her expertise in the subject matter(s) of the dispute. The decision of the arbitrator shall be final, nonappealable and binding upon the parties, and it may be entered in any court of competent jurisdiction. The arbitration shall take place in Boulder, Colorado. The arbitrator shall be bound by the laws of the State of Colorado applicable to the issues involved in the arbitration and all Colorado rules relating to the admissibility of evidence, including, without limitation, all relevant privileges and the attorney work product doctrine. All discovery shall be completed in accordance with the time limitations prescribed in the Colorado rules of civil procedure, unless otherwise agreed by the parties or ordered by the arbitrator on the basis of strict necessity adequately demonstrated by the party requesting an extension of time. The arbitrator shall have the power to grant equitable relief where applicable under Colorado law. The arbitrator shall issue a written opinion setting forth his or her decision and the reasons therefor within thirty (30) days after the arbitration proceeding is concluded. The obligation of the parties to submit any dispute arising under or related to this Agreement to arbitration as provided in this Section shall survive the expiration or earlier termination of this Agreement. Notwithstanding the foregoing, either party may seek and obtain an injunction or other appropriate relief from a court to preserve or protect trademarks, tradenames, copyrights, patents, trade secrets or other intellectual property or proprietary information or to preserve the status quo with respect to any matter pending conclusion of the arbitration proceeding, but no such application to a court shall in any way be permitted to stay or otherwise impede the progress of the arbitration proceeding. 11 12 In the event of any arbitration or litigation being filed or instituted between the parties concerning this Agreement, the prevailing party will be entitled to receive from the other party or parties its attorneys' fees, witness fees, costs and expenses, court costs and other reasonable expenses, whether or not such controversy, claim or action is prosecuted to judgment or other form of relief. 8. Notices. All notices, requests, demands, and other communications pertaining to this Agreement shall be in writing and shall be deemed duly given when delivered personally (which shall include delivery by facsimile and by Federal Express or other nationally recognized, reputable overnight courier service that issues a receipt or other confirmation of delivery) to the party for whom such communication is intended, or three (3) business days after the date mailed by certified or registered U.S. mail, return receipt requested, postage prepaid, addressed as follows: (a) If to CMED: Colorado MEDtech, Inc. 6175 Longbow Drive Boulder, Colorado 80301 Attn: Peter J. Jensen, Vice President with a copy (which shall not constitute notice) to: Chrisman, Bynum & Johnson, P.C. Attn: Christopher Hazlitt 1900 Fifteenth Street Boulder, Colorado 80302 (b) If to Escrow Agent: Chrisman, Bynum & Johnson, P.C. Attn: Christopher Hazlitt 1900 Fifteenth Street Boulder, Colorado 80302 (c) If to an Employee: to the Employee's address set forth on the counterpart signature page attached to this Agreement or to such other address as such party shall specify by written notice to the other parties hereto. Any notice sent to Escrow Agent shall also be sent to the other party to this Agreement. 12 13 9. Assignment. CMED and Employee may assign their rights under this Agreement to the same extent they are permitted to assign their rights and obligations under the Loan Agreement. 10. Waiver of Conflicts of Interest. Employee acknowledges that Escrow Agent serves as legal counsel to CMED, and waives any conflict of interest arising out of that representation, and specifically consents to Escrow Agent's representation of CMED in all matters in connection with this transaction and any dispute that may arise between CMED and Employee. 11. Miscellaneous. This Agreement, and with respect to Employee and CMED, the Loan Agreement and documents referred to therein, embody the entire agreement and understanding of the parties concerning the Escrow Shares. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. The headings in this Agreement are intended solely for convenience or reference and shall be given no effect in the construction or interpretation of this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado, except the choice of law rules utilized in that jurisdiction. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. This Agreement may be executed in any number of counterparts, which together shall constitute one and the same instrument. [The remainder of this page is intentionally blank.] 13 14 To evidence their agreement, the parties have caused this Master Escrow Agreement to be executed on the date first written above. COLORADO MEDTECH, INC. By: --------------------------------- Peter J. Jensen Vice President ESCROW AGENT: CHRISMAN, BYNUM & JOHNSON, P.C. By: --------------------------------- Christopher M. Hazlitt 14 15 MASTER ESCROW AGREEMENT COUNTERPART SIGNATURE PAGE The undersigned employee of Colorado MEDtech, Inc., agrees to the terms of, and hereby becomes a party to, the foregoing Master Escrow Agreement, as of the date set forth below. EMPLOYEE: ------------------------------- Name: -------------------------- Date: -------------------------- ADDRESS FOR NOTICE PURPOSES: ------------------------------- ------------------------------- ------------------------------- COLORADO MEDTECH, INC. APPROVAL: By: ----------------------------- Date: --------------------------- 15 16 EXHIBIT A ESCROW TERMS 1. Employee shall deposit Escrow Shares with Escrow Agent within forty-five (45) days of a loan from CMED to facilitate the purchase of such shares. 2. Employee may request that CMED authorize the release of some or all of the Escrow Shares, from time to time, to pay the exercise price of CMED stock options, in which case a number of shares underlying such options equal to the number of shares released shall be deposited with Escrow Agent when issued. 3. Escrow Agent shall release Escrow Shares to Employee upon written authorization from CMED signed by an executive officer of CMED (other than Employee). 4. Escrow Agent shall release Escrow Shares and shall complete the Stock Power delivered by Employee and release such Stock Power with the Escrow Shares to CMED or CMED's stock transfer agent, upon written instructions from an executive officer of CMED stating that the loan is in default, provided, that Escrow Agent shall give written notice to Employee at least ten (10) days prior to the release of any shares to CMED. 6. Upon receipt of instructions to release the Escrow Shares signed by an executive officer of CMED (other than Employee) and Employee and in substantially the form attached hereto, Escrow Agent shall release the Escrow Shares and shall complete the Stock Power delivered by Employee and release such Stock Power with the Escrow Shares to CMED's stock transfer agent or the party indicated in such instructions. 16 17 SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated _____________, 2001, is entered into by and between _______________________ ("EMPLOYEE") and Colorado MEDtech, Inc., a Colorado corporation (the "SECURED PARTY"); WITNESSETH: WHEREAS, Employee has borrowed money from Secured Party pursuant to a Loan Agreement (the "LOAN Agreement") and a Promissory Note (the "NOTE"), both of even date herewith, and purchased shares of common stock of Secured Party, to be evidenced by certificates to be delivered within forty-five (45) days of the date hereof (the "SHARES"); and WHEREAS, to induce the Secured Party to enter into the Loan Agreement, Employee has agreed to execute and deliver this Security Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: 1. Pledge. Employee hereby pledges, assigns and transfers to the Secured Party, and hereby grants to the Secured Party a security interest in the Shares and the certificates representing the Shares, and any other shares or securities of the Secured Party subsequently issued, and all cash, securities, and other property at any time and from time to time receivable or otherwise distributed in respect of or in exchange for any of or all of the Shares (all such Shares, certificates, cash, securities and other property being herein collectively called the "PLEDGED COLLATERAL"). The Shares shall be held by Chrisman, Bynum & Johnson, P. C. ("ESCROW AGENT") and shall have attached thereto a stock power, endorsed in blank by Employee, in the form attached to the Master Escrow Agreement among the parties and of even date herewith. Unless and until an Event of Default (as defined in Section 3 hereof) has occurred, the Pledged Collateral shall be held by the Escrow Agent in accordance with the terms of this Security Agreement and the Master Escrow Agreement. 2. Indebtedness Secured. The security interest in the Pledged Collateral granted under Section 1 hereof is granted as security for the payment by Employee of his or her obligations to the Secured Party which arise under the terms of the Note and the Loan Agreement. 3. Events of Default. For purposes of this Security Agreement, an "EVENT OF DEFAULT" shall be deemed to have occurred if (i) Employee shall fail to deliver the Shares to the Escrow Agent within forty-five (45) days of his or her receipt of the funds loaned pursuant to the Note, (ii) Employee shall fail to pay any installment of principal or interest on the Note or any portion thereof when due, or (iii) if there is a breach by Employee of any representation, 19 18 warranty, covenant or other agreement under this Security Agreement or the Loan Agreement, and such event is not cured within ten (10) days of delivery of written notice by the holder of the Note to Employee. 4. Remedies Upon Default. At any time after an Event of Default shall have occurred, Employee shall, upon written notice by the Secured Party, (a) register the Pledged Collateral in the Secured Party's name and the Secured Party shall (to the extent permitted by law) have the right to vote the shares which are part of the Pledged Collateral pending disposition thereof as required by Section 4(c) hereof; (b) apply the cash (if any) then held as Pledged Collateral hereunder to the payments due on the Note; and (c) if there shall be no such cash or the cash so applied shall be insufficient to pay such Note in full, sell the Pledged Collateral, or any part thereof, on an additional ten (10) business days' written notice to Employee, at public or private sale for cash, upon credit, or for future delivery, as the Secured Party shall deem appropriate; provided, however, that if such sale is a private sale, Employee shall receive written notice thereof at least five (5) business days prior to the consummation of such sale, which notice shall describe the material terms and conditions thereof, and Employee may, within such five-day period, tender payment and consummate such purchase on the same terms and conditions. In lieu of the foregoing, the Secured Party may cancel the Pledged Collateral and credit the fair market value of the cancelled shares (at the closing price of the stock on Nasdaq on the date of cancellation) as a payment toward the Note and in an amount not to exceed the Loan balance. Employee acknowledges that the stock value may decline between the date of the Event of Default and the liquidation or cancellation, and hereby waives any and all claims in respect of such decline. 5. Application of Proceeds of Sale. The proceeds of sale of Pledged Collateral sold pursuant to Section 4 hereof shall be applied by the Secured Party as follows: First: To the payment of the reasonable costs and expenses of such sale (including registration costs and expenses, if applicable), including the out-of-pocket expenses of the Secured Party and the reasonable fees and out-of-pocket expenses of counsel employed in connection therewith, and to the payment of all advances made by the Secured Party for the account of the Employee hereunder and the payment of all costs and expenses incurred by the Secured Party in connection with the administration and enforcement of this Security Agreement, to the extent that such advances, costs and expenses shall not have been reimbursed to the Secured Party; Second: To the reduction of all amounts due and payable under the Note; and Third: In the case of any surplus remaining after the application of the proceeds of the sale of Pledged Collateral as aforesaid, to Employee, his or her successors or assigns, or as a court of competent jurisdiction may direct. 20 19 6. Amendment to Agreements, Etc. Employee agrees and consents that his or her obligations and the rights of the Secured Party under this Security Agreement shall not be impaired if, at any time and from time to time: (a) The time of repayment of the Note shall be extended in whole or in part and/or shall be renewed in whole or in part; (b) The maturity of the Note shall be accelerated and any collateral security therefor exchanged, surrendered or otherwise dealt with in accordance with the terms of any present or future agreement relating thereto, including this Security Agreement; (c) The time for the performance by Employee or of compliance with any term, covenant or agreement on his or her part to be performed under the Note and/or any present or future agreement between Employee and the Secured Party shall be extended or such performance or compliance waived; (d) The liability of Employee to pay the Note or to perform his or her obligations under any present or future agreement between Employee and the Secured Party shall be settled or compromised. Any of the foregoing may occur from time to time without affecting this Security Agreement or the obligations of Employee hereunder, which shall continue in full force and effect until the Note secured hereby and all obligations of Employee hereunder shall have been fully paid and performed. 7. No Waiver. No failure on the part of the Secured Party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Secured Party preclude any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. 8. Termination. This Security Agreement shall terminate upon the date on which the Note has been fully paid. At the time this Security Agreement has been terminated, the Secured Party shall reassign and redeliver to Employee, or to such person or persons as Employee may designate, against receipt, such of the Pledged Collateral (if any) as shall not have been sold or otherwise applied by the Secured Party pursuant to the terms hereof and shall still be held by the Escrow Agent hereunder, together with appropriate instruments of reassignment and release. 9. Binding Agreement; Assignment. This Security Agreement and the terms, covenants and conditions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. The purchaser, assignee, transferee, or pledgee of the Note and the Secured Party's security interest hereunder shall forthwith become vested with and entitled to exercise all the powers and rights given by this Security Agreement to the Secured Party. 21 20 10. Governing Law; Amendments. This Agreement shall in all respects be construed in accordance with and governed by the laws of the State of Colorado notwithstanding any Colorado or other conflict of law provision to the contrary. This Agreement may not be amended or modified, nor may any of the Pledged Collateral be released from the security interest created hereby except in a writing signed by Employee and the Secured Party. [The remainder of this page is intentionally blank.] 22 21 IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the date first above written. SECURED PARTY: COLORADO MEDTECH, INC. By: ----------------------------------------- Peter J. Jensen Vice President EMPLOYEE: By: ----------------------------------------- Name 23 22 SCHEDULE OF LOAN AGREEMENTS AND RELATED DOCUMENTS The following schedule of details of various Loan Agreements and related documents is provided in accordance with Instruction 2 to Item 601 of Regulation S-K. One (1) set of Loan Agreement, Master Promissory Note, Master Escrow Agreement and Security Agreement has been made for each person listed in the table below, and each document is substantially identical in all material respects to the form preceding this schedule except with respect to the details provided in the table below.
Name Amount of Loan Date of Loan ---- -------------- ------------ Stephen K. Onody $250,000 1/17/01 Gregory A. Gould $150,000 1/17/01 Charles R. Klasson, Jr. $150,000 1/25/01 Frank Maguire $149,998 1/31/01 Kenneth D. Taylor, Ph.D. $ 49,997 1/31/01 Bill Wood $ 24,998 1/31/01 Richard Schoen $ 24,998 1/31/01 Charles W. Philipp, Jr. $ 74,999 1/31/01 James C. Vetricek $124,806 3/30/01
EX-21.1 6 d90859ex21-1.txt SUBSIDIARIES OF COLORADO MEDTECH INC 1 EXHIBIT 21.1 COLORADO MEDTECH, INC. Subsidiaries of Colorado MEDtech, Inc. 1. BioMed Y2K, Inc., a Colorado corporation.. 2. CIVCO Medical Instruments Co., Inc., an Iowa corporation. EX-23.1 7 d90859ex23-1.txt CONSENT OF INDEPENDCENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated September 6, 2001, included in this Form 10-K, into Colorado MEDtech, Inc.'s previously filed Registration Statements File Nos. 333-17207, 333-93689, 333-70755, 333-64705 and 333-50168. ARTHUR ANDERSEN LLP Denver, Colorado, September 28, 2001.