-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QAJoglldOsQAvyDviFMMtNLJs5Y98blJ0AfifxeL5F3g69auL+CRpuCSSlQ7V3Gy sctZFPavPUO0FuNOYJBY0Q== 0001047469-98-035720.txt : 19980929 0001047469-98-035720.hdr.sgml : 19980929 ACCESSION NUMBER: 0001047469-98-035720 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD 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: SEC FILE NUMBER: 000-12471 FILM NUMBER: 98716430 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 10-K 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, 1998 [ ] 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, 1998 was $33,461,806. The number of shares outstanding of the issuer's Common Stock as of August 31, 1998 was 10,740,846. DOCUMENTS INCORPORATED BY REFERENCE Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is incorporated by reference in Part III of this report. PART I ITEM 1. DESCRIPTION OF BUSINESS. Colorado MEDtech, Inc. ("CMED"), through its wholly-owned subsidiaries, RELA, Inc. ("RELA"), Novel Biomedical, Inc. ("Novel"), and BioMed Y2K, Inc. ("BioMed"), and its operating divisions, Respiratory Products and Erbtec Engineering ("Erbtec") (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 to develop, manufacture, market and service computerized diagnostic and testing instrumentation. RELA a Colorado corporation, was incorporated in 1977. RELA is an integrated custom product development and manufacturing services company specializing in the design, development and manufacture of electronic and electro-mechanical medical products and software systems. The Company merged RELA into CMED in July 1998, and is now operating RELA as a division of CMED. This merger will have no material effect on the day to day operations of RELA. Novel, a Minnesota corporation acquired by CMED in February 1997, was incorporated in 1986. Novel specializes in the custom design, development and manufacture of unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology, and infertility treatment. BioMed, a Colorado corporation, was incorporated in April 1998. BioMed offers a combination of tools and services to support health care institutions' efforts to establish year 2000 compliance for their biomedical devices. In October 1997, CMED completed the acquisition of the operating assets of Erbtec Engineering, Inc. Erbtec's main products are high power Radio Frequency amplifiers, power supplies and systems for Magnetic Resonance Imaging equipment. The Respiratory Products division designs and develops instrumentation for respiratory care. PRODUCTS AND SERVICES OUTSOURCING SERVICES RELA and Novel design, develop and manufacture healthcare products for a broad range of customers that includes major pharmaceutical and medical device companies. RELA develops electronic and electromechanical medical devices and software, primarily for the diagnostic, therapeutic, respiratory care and medical software markets. RELA also manufactures products for some of its customers which range from surgical disposables to automated instruments. Novel designs, develops and manufactures unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology and infertility treatment. RELA and Novel employ engineers, scientists, and technicians, manufacturing specialists and assembly workers. The Company believes its experience in applying its proven methodologies and advanced technologies to the development of innovative new products gives its clients an advantage in their marketplace by providing them with state-of-the-art, quality products in a timely and cost-effective manner. In addition to development, RELA provides product definition services, conducts focus groups and performs software verification and validation activities necessary for Food and Drug Administration ("FDA") approval. -2- Additional services include: - - Feasibility studies - Disposables engineering - - User interface design and usability testing - Prototype development - - Electronic design and development - Design for manufacturability and reliability - - Electronic packaging and printed-circuit design engineering - - Software development, verification and validation - Pilot, short- and long-run production - - Mechanical design and engineering - Quality assurance and testing - - Machining and modeling services - Product service and sustaining engineering
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. The Company believes it is uniquely positioned to provide its 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 CMED's Respiratory Products develops, manufactures, markets and services computerized diagnostic and testing instrumentation. Its current program, FreshAir-TM-, is a self-contained oxygen generation system. Respiratory Products has applied for FDA approval of an oxygen regeneration system that is intended for use in long-term healthcare facilities. This system is expected to reduce the cost of oxygen to patients of these facilities. The facilities would be able to generate their own oxygen rather than purchasing it from third parties. The Company expects this product to be in commercial production during fiscal 1999. Erbtec specializes in designing, developing and manufacturing high-performance RF amplifiers and integrated power delivery subsystems. By combining RF, digital and embedded software technologies, Erbtec is able to produce advanced, computer-controlled RF and DC power products. Erbtec focuses on the MRI and general medical imaging industries for the sale of its products. BioMed provides software tools for Year 2000 compliance management and reporting. BioMed has developed an extensive medical device compliance database tailored to the needs of the healthcare industry. The modified software, called BioMed Y2KOne-TM-, offers a combination of tools and services to support healthcare institutions in there efforts to establish Year 2000 compliance for their biomedical devices. Specific services offered by BioMed include: Year 2000 compliance database for medical devices; inventory consolidation, consulting and support; specialized Year 2000 training; device remediation, consulting and conversion planning; device testing; custom software reviews and analysis; and, contingency planning and cost impact analysis. -3- MARKETING The Company markets its services through a direct sales program and nationwide network of independent manufacturers' representatives. The Company employs 10 persons in the functions of sales and marketing. The Company promotes its services through advertising, direct mail and exhibition at industry trade shows. SIGNIFICANT CUSTOMERS AND BACKLOG For the period ended June 30, 1998, two customers accounted for approximately 23% (GE Medical Systems, General Electric Company) and 22% (Gen-Probe Incorporated) of the total revenues of the Company. For the period ended June 30, 1997, the same two customers accounted for 0% and 19% of the total revenues of the Company. Due to the nature of the outsourcing services business, it is typical for the Company to have about 40% to 50% of its total revenues from two to three customers in any given year. It is also typical that the Company's revenues from these customers account for a very high percentage of its total revenues for a one to three year period, then to see the customers' revenue percentage drop, to be replaced by another large customer. Foreign sales were 8% of the Company's total sales. The loss of a significant customer could have a material, detrimental impact on the Company's operations. Most sales are on net thirty-day credit terms. At June 30, 1998, the Company's backlog of orders for services or shipment of product in fiscal 1999 was approximately $40 million compared to approximately $22 million at June 30, 1997. This increase is attributable to the increase in orders booked during fiscal year 1998, which were in excess of $60 million, compared to bookings of approximately $33 million in fiscal year 1997. RESEARCH AND PRODUCT DEVELOPMENT The Company intends to continue to develop new products and services for a broad range of customers. In addition to internal development efforts, the Company may license or acquire related technology and/or products from external resources. While the Company employs approximately 200 engineers, scientists and technicians in research and development activities, these employees' efforts are primarily devoted to contract work for customers and their expenses are included in the cost of sales and services. Research and development expenses historically have been attributable to Respiratory Products. During fiscal year 1998, most of the research and development expenses are attributable to Respiratory's oxygen regeneration system, Erbtec's RF solid state amplifier systems and BioMed's software tools and database. No research and development expenditures are currently attributable to RELA or Novel. For fiscal years 1998, 1997 and 1996, the Company incurred approximately $1,681,000, $304,000 and $97,000, respectively, for research and development activities. Consistent with the Company's operating plans, the Company is continuously pursuing the acquisition and development of new or improved technology or products. Should the Company identify any opportunities that would be commercially viable, the amount of future research and development expenditures may increase. -4- COMPETITION The principal competitive factors in the outsourcing and medical products markets are reputation, quality, price and schedule. The Company's 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 the Company's. These vary from small consulting operations offering a small subset of the Company's services to a few integrated service companies. RELA competitors include SeaMed Corporation and Kollsman Manufacturing Company. Novel competitors include ACT Medical, Incorporated, Danforth Biomedical, and NuMED, Incorporated. Erbtec competitors include Analogic Corporation and ETO, Inc., a Division of Astex, Inc. BioMed competitors may include Clark Information Services, Superior IS and System Resource Corp. On a lesser scale, the Company also competes with commercial and university research laboratories. There are both for-profit and not-for-profit organizations nationwide that perform services similar to the product development aspect of the Company's 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 the Company develops and manufactures other proprietary products, such as the oxygen regeneration system and the BioMed Y2KOne-TM- software, it can expect to encounter additional competitors, many of which may be larger and in a stronger financial position than the Company. As cost containment efforts continue in the healthcare marketplace, competition will continue to be intense in the future. MANUFACTURING The Company manufactures its products and customer products at four facilities in Boulder, Colorado, Longmont, Colorado and Plymouth, Minnesota. 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 and packaging of both custom and commercially available components from outside sources. Most of the materials and components used in the Company's products are available from a number of different suppliers. The Company generally maintains multiple sources for most items, but some components are single source. The Company is dependent upon its suppliers for timely delivery of quality components. To date, the Company has not experienced significant delays in the delivery of such components. PRODUCT WARRANTIES AND SERVICE The Company generally warrants its products for 90 days, but in limited cases for up to 18 months, against defects in materials and workmanship. The Company has established a provision for estimated expenses of providing service under these warranties. Nonwarranty service is billed to the customer as performed. GOVERNMENT REGULATION 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 -5- apply to the Company's products and many of the Company's 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. Tasks 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 the Company's products. To date, the Company has not experienced significant difficulty in complying with the requirements imposed on it by the FDA or other governmental agencies. The FDA's "Quality System Regulation for Medical Devices" ("QSR") sets forth standards for the Company's design and manufacturing processes that require the maintenance of certain records and provide for unscheduled inspections of the Company's facilities. The Company does not expect to make significant expenditures as a result of these requirements. The Company's procedures and records were reviewed in 1995, 1997 and 1998 by the FDA during routine general inspections. The inspections resulted in some procedural changes that are intended to assure continued compliance with current QSR. 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. EN ISO 9001, the most comprehensive of the standards, covers 20 elements. These elements include management responsibility, design control, training, process control and servicing. EN ISO 9001 is the quality systems standard used by companies providing design, development, manufacturing, installation and servicing. RELA, Novel and Erbtec are registered device manufacturers with the FDA and meet the agency's QSR requirements. In addition, the Company is EN ISO 9001 and EN 46001 registered by a Notified Body. There are no material costs or expenses associated with the Company's compliance with federal, state and local environmental laws. PATENTS The Company has no significant patents. The Company believes that the conduct of its business is not dependent upon its ability to obtain or defend patents. EMPLOYEES As of June 30, 1998, the Company had 410 employees, of which 332 are full-time. 88% of the Company's employees are employed at its operations in Boulder and Longmont, Colorado and 12% of employees are employed in Plymouth, Minnesota. No employees are represented by labor organizations and there are no collective bargaining agreements. Employee relations are believed to be good. ITEM 2. DESCRIPTION OF PROPERTY. CMED, RELA and BioMed operate out of leased facilities located at 6175 Longbow Drive, Boulder, Colorado and 410 South Sunset Street, Longmont, Colorado. The Boulder facility has a five-year lease, which expires on June 30, 2002. The lease calls for average monthly payments over the term of the lease of $36,139. In addition, the Company is responsible for certain expenses, including property taxes, insurance and maintenance. CMED, RELA -6- and BioMed conduct administrative operations, custom product development services and consulting services at this facility. RELA's manufacturing is conducted at its Longmont facility. This facility has a five-year lease that expires on July 1, 2002. The lease calls for average monthly payments over the term of the lease of $13,657. In addition to the base lease payment, the Company is responsible for certain expenses, including property taxes, insurance and maintenance. Novel operates out of a leased facility located at 13845 Industrial Park Boulevard, Plymouth, Minnesota. Novel has a four-year lease that expires on January 31, 2001. This lease calls for average monthly payments over the term of the lease of $8,941. In addition, Novel is responsible for certain expenses, including property taxes, insurance and maintenance. Novel's custom manufacturing and product development services are conducted out of this facility. Erbtec operates out of a leased facility located at 2760 29th Street, Boulder, Colorado. Erbtec has a one-year lease that expires November 30, 1998. This lease calls for average monthly payments over the term of the lease of $12,920. In addition, Erbtec is responsible for certain expenses, including property taxes, insurance and maintenance. All of Erbtec's operations are conducted out of this facility. The Company has leased a facility located at 1510 Nelson Road, Longmont, Colorado. The lease period begins October 1, 1998 and expires on June 30, 2002. The lease calls for average monthly payments over the term of the lease of $7,119. In addition to the base lease payment, the Company is responsible for certain expenses, including property taxes, insurance and maintenance. The Company is planning to use this facility for manufacturing operations. The Company owns a 10.91-acre parcel of industrial-zoned vacant land in Louisville, Colorado (the "Louisville Parcel"). The Company's title in the Louisville Parcel is in fee simple. 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, 1998, the Company is holding the land as available-for-sale. Notwithstanding the Company's ownership of the Louisville Parcel, it is not the policy of the Company 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. ITEM 3. LEGAL PROCEEDINGS. The Company is not involved in any material pending legal proceedings. 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, 1998. -7- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company has been traded on the Nasdaq (National Association of Securities Dealers Automated Quotations) stock market since the Company's initial public offering in July 1983. The Company's common stock has been listed on the Nasdaq National Market since October 1997. The following table sets forth the range of high and low closing prices of the Company's common stock as reported by Nasdaq during fiscal years 1998 and 1997:
Fiscal Year Ended June 30, ------------------------------------------- 1998 1997 ------------------------------------------- High Low High Low ------------------------------------------- First Fiscal Quarter $ 7.12 $5.12 $3.50 $2.62 Second Fiscal Quarter $ 7.00 $5.87 $3.31 $2.88 Third Fiscal Quarter $10.25 $5.81 $3.19 $2.81 Fourth Fiscal Quarter $10.12 $6.94 $6.31 $2.88
The foregoing quotations represent quotations between dealers without adjustment for retail markups, markdowns or commissions and may not represent actual transactions. At June 30, 1998 the Company had approximately 1,100 shareholders of record. The Company has never paid a dividend, and does not anticipate the payment of dividends in the foreseeable future. The Company did not sell any unregistered securities in the three-month period ended June 30, 1998. -8- ITEM 6. SELECTED FINANCIAL DATA. The selected, consolidated financial information presented below for the five years ended June 30, 1998, is derived from the consolidated financial statements of the Company. 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. Certain reclassifications have been made to prior year financial statements to conform with current presentation. (In thousands, except per share amounts)
YEARS ENDED JUNE 30, -------------------- 1998(a) 1997(b) 1996 1995 1994 ------- ------- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales and service $ 47,300 $ 28,243 $ 19,130 $ 19,821 $ 20,615 Gross profit $ 16,943 $ 9,786 $ 6,790 $ 6,838 $ 7,250 Net income $ 4,492 $ 2,480 $ 1,597 $ 1,037 $ 806 Earnings per share Basic (c) $ .47 $ .35 $ .23 $ .15 $ .15 Diluted (c) $ .37 $ .27 $ .21 $ .15 $ .15 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) Operating activities $ 8,268 $ 2,899 $ 1,268 $ 2,342 $ 2,450 Investing activities $ (8,922) $ (6,655) $ (2,798) $ (200) $ (121) Financing activities $ 1,482 $ 4,811 $ - $ (897) $ 1,129 BALANCE SHEET DATA: Cash and cash equivalents $ 2,499 $ 1,671 $ 615 $ 2,144 $ 3,727 Short-term investments $ 12,144 $ 10,293 $ 5,408 $ 2,593 $ - Current assets $ 29,249 $ 20,585 $ 12,099 $ 9,746 $ 8,611 Total assets $ 34,007 $ 23,853 $ 13,217 $ 10,958 $ 9,883 Current liabilities $ 12,285 $ 9,461 $ 6,666 $ 6,005 $ 5,966 Total long-term debt $ - $ - $ - $ - $ - Total shareholders' equity $ 21,723 $ 14,392 $ 6,550 $ 4,953 $ 3,917 Cash dividends per share $ - $ - $ - $ - $ -
(a) In October 1997, the Company acquired the operating assets of Erbtec Engineering, Inc. (b) In February 1997, the Company acquired Novel Biomedical, Inc. (c) As restated under Statement of Financial Accounting Standards No. 128, "Earnings per Share". -9- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have consisted of cash flow from operations, cash deposits received from customers related to research and development and manufacturing contracts and cash proceeds from the issuance of common stock. Historically, the Company has also utilized proceeds from debt borrowings. The Company expects capital expenditures to be consistent with the previous year during fiscal year 1999. The Company anticipates that it will fund its expenditures, as well as research and development costs, through cash generated from operations. On October 30, 1997, the Company was approved for a three year revolving line of credit for $5 million the first year, $7 million the second year and $9 million the third year The credit facility is at the bank's prime lending rate (8.5% at June 30, 1998) through the term of the agreement and is secured by all accounts receivable, general intangibles, inventory and equipment. The agreement contains various restrictive covenants, which include, among others, maintenance of certain financial ratios, maintenance of a minimum tangible net worth and limitations on annual investments, dividends and capital expenditures. As of June 30, 1998, no amounts were outstanding under the credit facility. In June 1994, the Company completed the private placement of 1,500,000 units, each unit consisting of one share of no par common stock and two warrants. The units were offered at the greater of $1.00 or 75% of the average of the closing bid and ask price of the common stock for the five days prior to subscription. 1,500,000 of the warrants were priced at 125% of the average of the closing bid and ask price of the common stock on the date of purchase of the units, and an additional 1,500,000 warrants were issued with an exercise price equal to 175% of the average of the closing bid and ask price of the common stock on the date of purchase of the units. The exercise prices of the warrants ranged from $1.41 to $2.68. The proceeds from this offering were approximately $1.5 million. During June 1997, the Company called all of the above warrants that had not previously been exercised. During fiscal year 1997, 2,070,000 of these warrants were exercised for $4,630,800. The remaining 930,000 warrants were exercised during July and August 1997, resulting in cash proceeds to the Company of $1,120,800 and cancellation of 142,505 shares of previously issued common stock that were used in lieu of cash to exercise the warrants. In December 1993, the Company completed the private placement of 500,000 shares of no par value common stock at an offering price of $1.00 per share. The net proceeds from this offering were approximately $493,000. Of the 5,000,000 shares issued in the above transactions, 3,500,000 were sold to a wholly-owned subsidiary of Vencor, Inc. ("Vencor"), a Louisville, Kentucky-based operator of intensive care hospitals and nursing homes that specialize in treating patients with catastrophic illnesses. The Company entered into a standstill agreement with Vencor in June 1994 whereby Vencor will not acquire more than 40% of the Company's common stock for five years from the agreement date. At August 31, 1998, Vencor owned 33% of the Company's outstanding stock. -10- The Company's working capital increased to $16,965,000 at June 30, 1998 from $11,124,000 at June 30, 1997. The increase in working capital occurred primarily because of the Company's cash flow from operations and the proceeds from the issuance of common stock through the exercise of options and warrants. The average number of days outstanding of the Company's accounts receivable was approximately 50 days at June 30, 1998 compared to 57 days at June 30, 1997. The Company has granted extended terms to certain customers which increased the average number of days outstanding of the Company's accounts receivable by 3 days for the year ended June 30, 1998. During the year ended June 30, 1998, the Company acquired approximately $1,479,000 of property and equipment consisting principally of computer equipment. The Company has no present material commitments for capital expenditures. The ratio of current assets to current liabilities was 2.4 to 1 at June 30, 1998, compared to 2.2 to 1 at June 30, 1997. The liabilities to equity ratio was .6 to 1 at June 30, 1998, compared to .7 to 1 at June 30, 1997. The improvement in both of these ratios is due to the Company's profitable growth during the year ended June 30, 1998. Cash provided by operations during the year ended June 30, 1998 was $8.3 million and increased approximately $5.4 million, compared to fiscal year 1997, as a result of the profitable growth of the Company, the increase in accounts payable and accrued expenses, improved inventory turns and the reduction in days outstanding of accounts receivable. -11- RESULTS OF OPERATIONS As an aid to understanding the Company's operating results, the following table indicates the percentage relationships of income and expense items to total revenue for the line items included in the Consolidated Statements of Operations for the three years ended June 30, 1998, 1997 and 1996, and the percentage change in those items for the years ended June 30, 1998 and 1997, 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, 1998 1997 1996 LINE ITEMS 1998 1997 ---- ---- ---- ---------- ---- ---- % % % % % 100.0 100.0 100.0 Sales and Service 67.5 47.6 64.2 65.3 64.5 Cost of Sales and Services 64.5 49.6 ----- ----- ----- ----- ----- 35.8 34.7 35.5 Gross Profit 73.1 44.1 ----- ----- ----- ----- ----- 3.7 4.6 5.2 Marketing and Selling 36.5 29.8 16.1 16.4 20.2 Operating, Gen'l and Admin 65.1 19.4 3.6 1.1 .5 Research and Development 452.5 213.4 ----- ----- ----- ----- ----- 23.4 22.0 25.9 Total Operating Expenses 78.1 25.2 ----- ----- ----- ----- ----- 12.4 12.7 9.6 Earnings from Operations 64.4 95.3 .9 1.0 2.4 Other Income, Net 42.9 (35.7) ----- ----- ----- ----- ----- 13.3 13.7 11.9 Earnings Before Income Taxes 62.8 69.5 3.8 4.9 3.6 Provision for Income Taxes 30.0 102.5 ----- ----- ----- ----- ----- 9.5 8.8 8.3 Net Income 81.2 55.3 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 Revenues were $47.3 million for the year ended June 30, 1998, compared to $28.2 million for the prior year, an increase of 67%. Of total revenues, outsourcing contributed approximately 75% and 95% in the fiscal years 1998 and 1997, respectively, while products contributed approximately 25% and 5% in the fiscal years 1998 and 1997, respectively. The increase in revenues is attributable in part to the acquisition of Novel, effective January 1997, and of Erbtec in October 1997, which contributed approximately $14.8 million of revenue during the year ended June 30, 1998. The Company's revenue growth also was the result of core business growth, which had an increase in revenue of 27% compared to 1997. -12- Gross margins increased to 36% from 35% for the year ended June 30, 1998, compared to the year ended June 30, 1997. The increase in the Company's margins is a result of the shifting composition of the Company's revenues between products and services and the increase in sales of proprietary products. Marketing and selling expenses increased by 36% for the year ended June 30, 1998, as compared to the prior year. The increase is attributable to the growth in sales and the acquisitions of Erbtec and Novel. Marketing and selling expenses as a percentage of total revenue decreased to 4% from 5% for the year ended June 30, 1998, compared to 1997 as a result of the increase in revenues. Operating, general and administrative expenses increased by 65% for the year ended June 30, 1998, compared to the prior year. The increase is attributable to the acquisition of Erbtec and Novel, expenses incurred in August 1997 in moving the RELA manufacturing facility from Boulder, Colorado to Longmont, Colorado, the addition of executive personnel at RELA, increased recruiting and hiring costs of new employees and the overall growth of the Company. As a percentage of revenues, operating, general and administrative expenses were approximately 16% for each of the years ended June 30, 1998 and 1997. Research and development expenses for the year ended June 30, 1998, compared to the prior year increased by approximately $1.4 million, or 453%. Research and development expenses are attributable to new products for Respiratory Products, Erbtec and BioMed. Consistent with the Company's operating plans, the Company continues to pursue the acquisition or development of new or improved technology or products. Should the Company identify any such opportunities, the amount of future research and development expenditures may increase. Net other income and expenses increased approximately $124,000 to $413,000 for the year ended June 30, 1998, compared to $289,000 for the year ended June 30, 1997. The increase is attributable to a higher short-term investment balance during fiscal year 1998, compared to fiscal year 1997. The fiscal year 1998 and 1997 consolidated statements of operations contain a net tax provision of $1.8 million and $1.4 million, respectively. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, which requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards. SFAS No. 109 requires recognition of deferred tax assets 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. During fiscal year 1998, the Company determined the valuation allowance was no longer required because the increased taxable income from the acquisition of Erbtec could be offset by tax credits and net operating loss ("NOL") carryforwards. In fiscal years 1998 and 1997, the Company reduced its valuation allowance by $590,000 and $80,000, respectively, for the utilization of prior years' NOL in the current year and certain deferred tax assets that the Company now believes will be fully utilized. The effective tax rate during fiscal year 1998 was 29%, compared to a 36% effective tax rate during fiscal year 1997. The Company recorded net income of approximately $4.5 million for the fiscal year ended June 30, 1998, compared to $2.5 million for the fiscal year ended June 30, 1997. Earnings per share for the year ended June 30, 1998 were $.37, calculated on 12,256,461 diluted weighted average shares outstanding, compared to $.27 for the same period in the prior year calculated on 9,114,292 diluted weighted average shares outstanding. The diluted -13- weighted average shares outstanding increased by approximately 3,142,000 shares for the year ended June 30, 1998, compared to the same period in 1997, due to the exercise of 3,000,000 private placement warrants and the exercise of options and Board of Director ("Board") and consultant warrants. This increase in net income is attributed to the 67% growth in the Company's revenues, an increase in gross margins by 1% for the fiscal year 1998, compared to 1997, having the combination of operating, general and administrative expenses and marketing and selling expenses increase at a slower rate than revenues and the decrease in the effective tax rate. The Company evaluated its overall business in fiscal year 1996 and, as a result, sharpened its market focus. The Company has continued to refine its market focus during 1997 and 1998. The current targeted markets are: Diagnostic and Laboratory Instruments; Imaging Accessories; Therapeutic Instruments; and, Software. Each area represents a U.S. market of $2 billion or more per year, with annual growth of approximately 8% to 15%. Generally, the marketplace for outsourcing services is expected to remain strong and competitive, with significant opportunity for companies that can develop low-cost, high quality products in a timely manner. Management is dedicated to improving operating results through consistent performance, improved sales levels and cost reductions. There are no assurances that management will be successful in achieving improved operating results. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 Revenues were $28.2 million for the year ended June 30, 1997, compared to $19.1 million for the prior year, an increase of 48%. Of the total revenues, outsourcing contributed approximately 95% for both fiscal year 1997 and 1996, while products contributed approximately 5% for both fiscal year 1997 and 1996. The increase in revenues was attributable to the growth of the core business, which reported an increase in revenues of 41% in fiscal year 1997 compared to fiscal year 1996. The Company's revenue growth was also improved by the acquisition of Novel in January 1997, which contributed $1.6 million of revenue during the last six months of fiscal year 1997. The Company's gross margins as a percentage of total revenues, which were approximately 35%, did not change for the years ended June 30, 1997 and 1996. Marketing and selling expenses increased by 30% for the year ended June 30, 1997, as compared to the prior year. The increase was attributable to the growth in sales and the acquisition of Novel. Marketing and selling expenses as a percentage of total revenue were approximately 5% for the years ended June 30, 1997 and 1996. Operating, general and administrative expenses increased by approximately $749,000, or 19% for the year ended June 30, 1997, compared to the prior year. The increase was attributable to the overall growth of the Company and the acquisition of Novel. As a percentage of revenues, operating, general and administrative expenses decreased to 16% from 20%, in fiscal year 1997, compared to fiscal year 1996, respectively. Research and development expenses for the year ended June 30, 1997, compared to the prior year, increased by approximately $207,000, or 213%. The increase was a result of the Company's greater emphasis on developing proprietary products. Net other income and expenses decreased approximately $161,000 to $289,000 for the year ended June 30, 1997, compared to $450,000 for the year ended June 30, 1996. The decrease was attributable to a $122,000 gain from the sale of the cardiopulmonary product lines and an approximately $50,000 gain on two dispute settlements that occurred during fiscal year 1996. During fiscal year 1997, the Company's interest income increased by $47,000, compared to fiscal year 1996. -14- The fiscal year 1997 and 1996 statements of operations contained a net tax provision of $1,385,000 and $684,000, respectively. In fiscal years 1997 and 1996, the Company reduced its valuation allowance by $80,000 and $178,000, respectively, for the utilization of prior years' NOL in the then current year and certain deferred tax assets that the Company believed would be fully utilized. The effective tax rate during fiscal year 1997 was 36%, compared to a 30% effective tax rate during fiscal year 1996. The Company recorded net income of approximately $2.5 million for the fiscal year ended June 30, 1997, compared to approximately $1.6 million for the fiscal year ended June 30, 1996. Earnings per share for the year ended June 30, 1997 were $.27, calculated on 9,114,292 diluted weighted average shares outstanding, compared to $.21 for the same period in the prior year, calculated on 7,766,805 diluted weighted average shares outstanding. The diluted weighted average shares outstanding increased by approximately 1,347,000 shares for the year ended June 30, 1997 compared to the same period in 1996 due to the increase in the dilutive common equivalent shares for stock options and warrants because of the increase in the Company's stock price during fiscal 1997 compared to fiscal 1996. This increase in net income was attributed to the 48% growth in the Company's revenues, while maintaining the gross margins at 35% for the fiscal years 1997 and 1996, and having the operating, general and administrative expenses and marketing and selling expenses increase at a slower rate than revenues. INFORMATION SYSTEMS AND THE YEAR 2000 ISSUE As is the case for most other companies using computers in their operations, the Company and its subsidiaries are in the process of addressing the Year 2000 problem. The Company is currently engaged in a comprehensive project to upgrade its information technology and manufacturing computer software to programs that will consistently and properly recognize the Year 2000. Many of the Company's systems include new hardware and packaged software recently purchased from vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company will utilize both internal and external resources to test and reprogram or replace all of its software for Year 2000 compliance. The Company does not believe that its proprietary products or any of its outsourcing services involve any material Year 2000 risks. In addition to reviewing its internal systems, the Company has begun formal communications with its significant vendors concerning Year 2000 compliance. There can be no assurance that the systems of other companies that interact with the Company will be sufficiently Year 2000 compliant so as to avoid an adverse impact on the Company's operations, financial condition and results of operations. The Company does not presently anticipate that the costs to address the Year 2000 issue will have a material adverse effect on the Company's financial condition, results of operations or liquidity. Present estimated cost for remediation is less than $100,000. The Company presently anticipates that it will complete its Year 2000 assessment and remediation by the end of fiscal year 1999. However, there can be no assurance that the Company will be successful in implementing its Year 2000 remediation plan according to the anticipated schedule. In addition, the Company may be adversely affected -15- by the inability of other companies whose systems interact with the Company to become Year 2000 compliant and by potential interruptions of utility, communications or transportation systems as a result of Year 2000 issues. Although the Company expects its internal systems will be Year 2000 compliant as described above, the Company intends to prepare a contingency plan that will specify what it plans to do if it or important external companies are not Year 2000 compliant in a timely manner. The Company expects to prepare its contingency plan during fiscal year 1999. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS 130"). SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Comprehensive income would have been approximately $4,527,147, $2,479,617 and $1,596,602 for the years ended June 30, 1998, 1997 and 1996, respectively. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that public companies report information about their operating segments based on the financial information used by the chief operating decision maker in their annual financial statements and requires those companies to report selected information on their interim statements. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management has not determined the segments, if any, that will be reported in connection with the adoption of SFAS 131. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for fiscal quarters and fiscal years beginning after June 15, 1999. Management believes that the adoption of SFAS 133 will not have significant impact on the Company's financial condition and results of operations. In April 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5 provides guidance on financial reporting of start-up costs and organization costs and requires such costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company believes that application of SOP 98-5 will not have a material impact on its financial statements. FORWARD-LOOKING STATEMENTS The statements contained in this report which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. Such risks include, but are not limited to, the risk that a downturn in general economic conditions may tend to adversely affect research and development budgets of potential customers upon which the Company is dependent, the risk that the Company's project-oriented revenues could be delayed or -16- adversely affected if new contracts are not in place when existing contracts are completed, and the risk that the nature of bidding and performing research and development-type contracts and manufacturing contracts may result in short-term fluctuations in revenue or expense that could adversely affect quarterly results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company, as part of its cash management strategy, had short-term investments at June 30, 1998 consisting of approximately $9,137,000 in U.S. Treasury and government agency securities, $2,300,000 in commercial paper and $707,000 in corporate notes. The Company has the intent and ability to hold these short-term investments to maturity and thus has classified these investments, which are stated at amortized cost that approximates market, as "held-to-maturity". All of the short-term investments mature in less than one year. The Company has completed a market risk sensitivity analysis of these short-term investments based upon an assumed 1% increase in interest rates at July 1, 1998. If market interest rates had increased by 1% on July 1, 1998, the Company would have had an approximate $36,000 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. -17- 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-6 Notes to Consolidated Financial Statements F-8
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. -18- 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, August 24, 1998. F-1 Page 1 of 2 COLORADO MEDTECH, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997
ASSETS 1998 1997 ------ ------ ------ CURRENT ASSETS: Cash and cash equivalents $ 2,499,072 $ 1,670,821 Short-term investments 12,144,005 10,293,101 Accounts receivable- Trade - less allowance for uncollectible accounts of $580,000 and $162,000, respectively 7,631,436 4,549,543 Unbilled 182,537 690,564 Inventories, net 4,225,680 2,390,267 Deferred income taxes 1,676,227 795,459 Prepaid expenses and other 890,260 195,483 ------------ ------------ Total current assets 29,249,217 20,585,238 ------------ ------------ PROPERTY AND EQUIPMENT: Computer equipment 3,224,215 2,307,210 Office furniture and fixtures 1,262,193 963,145 Leasehold improvements 485,748 365,860 Manufacturing equipment 1,063,920 548,054 ------------ ------------ Total property and equipment 6,036,076 4,184,269 Less - Accumulated depreciation and amortization (4,301,804) (3,505,865) ------------ ------------ Property and equipment, net 1,734,272 678,404 ------------ ------------ INVESTMENT IN LAND 500,000 500,000 ------------ ------------ GOODWILL, net 1,724,796 1,628,326 ------------ ------------ DEFERRED INCOME TAXES AND OTHER 798,997 461,465 ------------ ------------ $ 34,007,282 $ 23,853,433 ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-2 Page 2 of 2 COLORADO MEDTECH, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 ------------------------------------ ------ ------ CURRENT LIABILITIES: Accounts payable $ 4,426,172 $ 3,075,225 Accrued product service costs 291,566 373,629 Accrued salaries and wages 3,126,671 1,805,770 Other accrued expenses 1,169,004 992,354 Customer deposits 2,804,450 3,175,530 Income taxes payable 466,788 38,691 ------------ ------------ Total current liabilities 12,284,651 9,461,199 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 7) SHAREHOLDERS' EQUITY: Preferred stock, no par value; 5,000,000 shares authorized; none issued - - Common stock, no par value; 25,000,000 shares authorized; 10,740,013 and 9,341,108 issued and outstanding at June 30, 1998 and 1997, respectively 11,879,456 9,076,206 Retained earnings 9,808,175 5,316,028 Unrealized gain on available-for-sale investment 35,000 - ------------ ------------ Total shareholders' equity 21,722,631 14,392,234 ------------ ------------ $ 34,007,282 $ 23,853,433 ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- NET SALES AND SERVICE $47,300,200 $28,243,185 $19,130,979 COST OF SALES AND SERVICE 30,357,492 18,456,764 12,341,217 ----------- ----------- ----------- GROSS PROFIT 16,942,708 9,786,421 6,789,762 ----------- ----------- ----------- COSTS AND EXPENSES: Marketing and selling 1,756,661 1,287,091 991,508 Operating, general and administrative 7,626,103 4,619,447 3,870,181 Research and development 1,680,625 304,180 97,059 ----------- ----------- ----------- Total operating expenses 11,063,389 6,210,718 4,958,748 ----------- ----------- ----------- INCOME FROM OPERATIONS 5,879,319 3,575,703 1,831,014 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (14,127) (22,460) (59,945) Interest income and other 426,955 311,374 509,533 ----------- ----------- ----------- Total other income 412,828 288,914 449,588 ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 6,292,147 3,864,617 2,280,602 PROVISION FOR INCOME TAXES 1,800,000 1,385,000 684,000 ----------- ----------- ----------- NET INCOME $ 4,492,147 $ 2,479,617 $ 1,596,602 ----------- ----------- ----------- ----------- ----------- ----------- EARNINGS PER SHARE (Note 2): Basic $.43 $.35 $.23 ----------- ----------- ----------- ----------- ----------- ----------- Diluted $.37 $.27 $.21 ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 10,446,868 7,165,499 6,901,762 ----------- ----------- ----------- ----------- ----------- ----------- Diluted 12,256,461 9,114,292 7,766,805 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-4 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Unrealized Gain On Common Stock Available- ------------------------- For-Sale Retained Shares Amount Investment Earnings ---------- ----------- ---------- ---------- BALANCES, June 30, 1995 6,901,762 $ 3,713,652 $ - $1,239,809 Net income - - - 1,596,602 ---------- ----------- ---------- ---------- BALANCES, June 30, 1996 6,901,762 3,713,652 - 2,836,411 Issuance of Common Stock 2,449,346 5,053,574 - - Purchase of Common Stock (80,000) (242,144) - - Common stock issued in conjunction with the Novel acquisition 70,000 207,816 - - Options issued in conjunction with the Novel acquisition - 338,672 - - Options issued for services from consultants - 4,636 - - Net income - - - 2,479,617 ---------- ----------- ---------- ---------- BALANCES, June 30, 1997 9,341,108 9,076,206 - 5,316,028 Issuance of Common Stock 1,376,597 1,989,646 - - Purchase of Common Stock (66,400) (507,390) - - Common stock issued in conjunction with the Erbtec acquisition 88,708 620,956 - - Change in unrealized gain on available-for-sale investment - - 35,000 - Tax benefit from sale of option shares - 593,442 - - Options issued for services from consultants - 106,596 - - Net income - - - 4,492,147 ---------- ----------- ---------- ---------- BALANCES, June 30, 1998 10,740,013 $11,879,456 $ 35,000 $9,808,175 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-5 Page 1 of 2 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,492,147 $ 2,479,617 $ 1,596,602 Adjustments to reconcile net income to net cash flows from operating activities- Deferred tax benefit (966,000) (80,000) (91,000) Depreciation and amortization 1,047,007 433,747 391,405 Allowance for uncollectible accounts 392,783 (12,921) (25,000) Reserve for inventory 134,578 (202,000) (295,000) Gain on sale of product line - - (121,986) Non-cash consulting services 106,596 4,636 - Changes in operating assets and liabilities- Accounts receivable (779,833) (1,758,217) (460,881) Inventories 240,123 (377,038) (485,899) Prepaid expenses and other assets 50,680 (165,430) 56,954 Accounts payable and accrued expenses 3,921,199 2,051,653 43,242 Customer deposits (371,080) 525,223 659,397 ----------- ----------- ----------- Net cash flows from operating activities 8,268,200 2,899,270 1,267,834 ----------- ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Cash paid for purchase of Novel, net - (1,126,363) - Cash paid for purchase of Erbtec, net (5,392,731) - - Purchase of investments (200,000) (25,000) - Capital expenditures (1,478,570) (643,326) (231,982) Increase in short-term investments, net (1,850,904) (4,859,839) (2,815,587) Proceeds from sale of product line - - 250,000 ----------- ----------- ----------- Net cash flows used in investing activities (8,922,205) (6,654,528) (2,797,569) ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-6 Page 2 of 2 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 ---------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Stock $1,989,646 $5,053,574 $ - Purchase of Common Stock (507,390) (242,144) - ---------- ---------- ----------- Net cash flows from financing activities 1,482,256 4,811,430 - ---------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 828,251 1,056,172 (1,529,735) CASH AND CASH EQUIVALENTS, at beginning of period 1,670,821 614,649 2,144,384 ---------- ---------- ----------- CASH AND CASH EQUIVALENTS, at end of period $2,499,072 $1,670,821 $ 614,649 ---------- ---------- ----------- ---------- ---------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 14,849 $ 31,593 $ 59,767 ---------- ---------- ----------- ---------- ---------- ----------- Cash paid for income taxes $1,535,003 $1,675,000 $ 885,000 ---------- ---------- ----------- ---------- ---------- ----------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of Common Stock for acquisition of Novel $ - $ 207,816 $ - ---------- ---------- ----------- ---------- ---------- ----------- Issuance of stock options for acquisition of Novel $ - $ 338,672 $ - ---------- ---------- ----------- ---------- ---------- ----------- Issuance of Common Stock for acquisition of Erbtec $ 620,956 $ - $ - ---------- ---------- ----------- ---------- ---------- -----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-7 COLORADO MEDTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 (1) ORGANIZATION AND OPERATIONS Colorado MEDtech, Inc. ("CMED") was incorporated in 1977 as a Colorado corporation to develop, manufacture, market and service computerized diagnostic and testing instrumentation. RELA, Inc. ("RELA"), a Colorado corporation and wholly owned subsidiary of CMED, was incorporated in 1977. RELA is an integrated custom product development and manufacturing services company specializing in the design, development and manufacture of electronic and electro-mechanical medical products and software systems. The Company merged RELA into CMED in July 1998, and is now operating RELA as a division of CMED. This merger will have no material effect on the day to day operations of RELA. Novel Biomedical, Inc. ("Novel"), a Minnesota corporation and wholly owned subsidiary acquired by CMED in February 1997, was incorporated in 1986. Novel specializes in the custom design, development and manufacture of unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology, and infertility treatment. In October 1997, CMED completed the acquisition of the operating assets of Erbtec Engineering, Inc. ("Erbtec"). Erbtec is operated as a division of CMED. Erbtec's main products are high power Radio Frequency amplifiers, power supplies and systems for Magnetic Resonance Imaging equipment. BioMed Y2K, Inc. ("BioMed"), a Colorado corporation and wholly owned subsidiary of CMED, was incorporated in April 1998. BioMed offers a combination of tools and services to support health care institutions' efforts to establish year 2000 compliance for their biomedical devices. (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying financial statements reflect the consolidated results of CMED, RELA, Novel and BioMed (collectively, the "Company"). 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. F-8 INVESTMENTS The Company accounts for its investments in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Short-term investments are primarily U.S. Treasury and government agency securities, which the Company has the intent and the ability to hold to maturity and thus has classified these investments, which are stated at amortized cost which approximates market, as "held-to-maturity". All of the Company's held-to-maturity investments mature in less than one year. The unrealized gains and losses on these held-to-maturity investments were immaterial at June 30, 1998 and 1997. The following is a summary of held-to-maturity investments as of June 30, 1998 and 1997:
Security Type 1998 1997 ------------- ---- ---- U.S. Treasury and government agency securities $ 9,137,095 $ 5,298,635 Commercial paper 2,299,905 3,968,369 Corporate notes 707,005 1,026,097 ----------- ----------- $12,144,005 $10,293,101 ----------- ----------- ----------- -----------
The Company also has approximately $120,000 of equity available-for-sale investments which are marked to market in the accompanying consolidated balance sheets. These equity available-for-sale investments have no specific maturity. The realized and unrealized gains and losses on the equity available-for-sale investments were immaterial as of and for the years ended June 30, 1998 and 1997. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. The cost of inventories includes material, labor and manufacturing overhead. As of June 30, 1998 and 1997, inventories, net of allowances, consisted of:
1998 1997 ----------- ----------- Raw materials $ 2,957,886 $ 1,791,104 Work-in-process 1,267,794 594,697 Finished goods - 4,466 ----------- ----------- $ 4,225,680 $ 2,390,267 ----------- ----------- ----------- -----------
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 range from 2 to 7 years. Depreciation expense for the years ended June 30, 1998, 1997 and 1996 was approximately $796,000, $401,000 and $391,000, respectively. GOODWILL Goodwill resulting from the Erbtec and Novel acquisitions is stated at cost, net of accumulated amortization of approximately $284,000 and $33,000, as of June 30, 1998 and 1997, respectively. Amounts of goodwill for Erbtec F-9 and Novel are being amortized using the straight-line method over estimated useful lives of 2 and 25 years, respectively. ACCRUED PRODUCT SERVICE COSTS The Company warrants its products against defects in materials and workmanship, generally for 90 days, but in limited cases for up to 18 months. Estimated costs of product service are accrued at the time of sale. CUSTOMER DEPOSITS Customer deposits result from cash received in advance for future contract work. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128"), which was effective for periods ended after December 15, 1997. This statement establishes standards for computing and presenting 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. As a result of adopting SFAS 128, reported earnings per share for the years ended June 30, 1997 and 1996 were restated. The effect of this accounting change on previously reported earnings per share was as follows:
1998 1997 1996 ---- ---- ---- Primary earnings per share (as reported under the prior method) $.37 $.24 $.21 Effect of SFAS 128 on basic earnings per share .06 .11 .02 ---- ---- ---- Basic earnings per share $.43 $.35 $.23 ---- ---- ---- ---- ---- ---- Fully diluted earnings per share (as reported under the prior method) $.36 $.23 $.17 Effect of SFAS 128 on diluted earnings per share .01 .04 .04 ---- ---- ---- Diluted earnings per share $.37 $.27 $.21 ---- ---- ---- ---- ---- ----
A reconciliation between the number of shares used to calculate basic and diluted earnings per share is as follows (in thousands):
1998 1997 1996 ---- ---- ---- Net income (income available to common shareholders) $ 4,492 $ 2,480 $ 1,597 ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding (shares used in basic earnings per share computation) 10,447 7,165 6,902 Effect of stock options and warrants (treasury stock method) 1,809 1,949 865 ------- ------- ------- Shares used in diluted earnings per share computation 12,256 9,114 7,767 ------- ------- ------- ------- ------- -------
Options and warrants that were of an antidilutive nature for the years ended June 30, 1998, 1997 and 1996 that were outstanding but not included in the shares used in diluted earnings per share computation totaled approximately 1,571,000, 3,972,000 and 4,630,000, respectively. F-10 NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS 130"). SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Comprehensive income would have been approximately $4,527,147, $2,479,617 and $1,596,602 for the years ended June 30, 1998, 1997 and 1996, respectively. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that public companies report information about their operating segments based on the financial information used by the chief operating decision maker in their annual financial statements and requires those companies to report selected information on their interim statements. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management has not determined the segments, if any, that will be reported in connection with the adoption of SFAS 131. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for fiscal quarters and fiscal years beginning after June 15, 1999. Management believes that the adoption of SFAS 133 will not have significant impact on the Company's financial condition and results of operations. In April 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP 98-5"), "Reporting on the Costs of Start-up Activities." SOP 98-5 provides guidance on financial reporting of start-up costs and organization costs and requires such costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company believes that application of SOP 98-5 will not have a material impact on its financial statements. REVENUE RECOGNITION POLICY The Company 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. 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. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards. SFAS 109 requires recognition of deferred tax assets 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 (see Note 6). F-11 STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB 25"). Effective in 1995, the Company adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not choose to account for stock-based compensation as prescribed by the statement shall disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma financial statement effect of SFAS 123 (see Note 5). 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. FINANCIAL INSTRUMENTS The fair market values of accounts receivable, accounts payable and other financial instruments approximate their carrying values in the accompanying consolidated balance sheets. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. (3) ACQUISITIONS In October 1997, the Company completed the acquisition of the operating assets of Erbtec. The purchase was completed for $5.39 million in cash and issuance of 88,708 shares of common stock, resulting in a total purchase value of approximately $6.0 million, including acquisition costs. At the date of the purchase, $1 million of the cash portion of the purchase price was placed in escrow pending the performance of certain criteria outlined in the purchase and sale agreement. During the quarter ended June 30, 1998, the Company was informed that certain of the purchase and sale agreement criteria would not be met and the seller would be refunding $750,000 of the escrowed purchase price. This receivable is included in other current assets in the accompanying consolidated balance sheets. The net purchase price, less the net tangible assets acquired, resulted in goodwill of $480,773 that will be amortized over a 2-year period. The accompanying consolidated financial statements include the operating results of Erbtec since October 1, 1997, the effective date of the acquisition. The total purchase price and net cash used for the acquisition of Erbtec are as follows: F-12 Assets acquired: Cash $ 8,882 Accounts receivable 2,186,816 Inventories 2,210,114 Equipment and furniture 373,227 Other assets 12,757 Goodwill 480,773 ----------- Total purchase price 5,272,569 Less: Stock issued (620,956) Cash acquired (8,882) Plus: Receivable of escrowed funds 750,000 ----------- Net cash paid for purchase of Erbtec $ 5,392,731 ----------- -----------
In February 1997, the Company completed the acquisition of Novel. The Company acquired Novel for $1,899,196, which included cash, the issuance of 70,000 shares of common stock, and the grant of 294,211 non-qualified stock options. The stock was valued at fair market value on the date the Agreement and Plan of Reorganization was entered into between CMED and Novel. The non-qualified stock options were valued using the Black-Scholes option pricing model. In fiscal 1998, the Company recognized certain tax benefits related to assets obtained in the Novel acquisition, which resulted in an adjustment to goodwill. The purchase price, less the net assets acquired, resulted in goodwill of $1,528,332 that is being amortized over a 25-year period. The accompanying consolidated financial statements include the operating results of Novel since January 3, 1997, the effective date of the acquisition. The following unaudited pro forma results of operations of the Company for the fiscal years ended June 30, 1998, 1997 and 1996 assume that the acquisition of Erbtec had occurred on July 1, 1996 and the acquisition of Novel had occurred on July 1, 1995. These 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. Should the Company obtain additional information about the fair market value of the assets acquired, the purchase price may be adjusted in future periods.
Year Ended June 30, ------------------- 1998 1997 1996 ---- ---- ---- Revenues $50,752,000 $42,480,000 $20,503,000 Net Income $ 4,293,000 $ 4,117,000 $ 1,560,000 Net Income Per Share (Diluted) $ .35 $ .44 $ .20
F-13 (4) CREDIT FACILITY The Company entered into a bank financing arrangement on October 30, 1997 that provides for a three-year revolving line of credit for $5 million the first year, $7 million the second year and $9 million the third year. The credit facility is at the bank's prime lending rate (8.5% at June 30, 1998) through the term of the agreement and is secured by all accounts receivable, general intangibles, inventory and equipment. The agreement contains various restrictive covenants which include, among others, maintenance of certain financial ratios, maintenance of a minimum tangible net worth and limitations on annual investments, dividends and capital expenditures. No amounts were advanced under this credit facility during fiscal 1998 and 1997. (5) 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, 1998 and1997, no shares of preferred stock have been issued. COMMON STOCK The Company's shareholders have authorized 25,000,000 shares of no par value common stock, of which 10,740,013 and 9,341,108 shares were issued and outstanding as of June 30, 1998 and 1997, respectively. During the years ended June 30, 1998 and 1997, the Company purchased 66,400 and 80,000 shares of common stock, respectively, which decreased the Company's equity by approximately $507,000 and $242,000, respectively. These shares were purchased so that the stock issued under the Employee Stock Purchase Plan would be less dilutive. 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, 3,500,000 shares of common stock are reserved for options. Vesting periods for options issued are determined by the Board at date of grant and currently vest over three to eight years. A summary of the status of the Plan follows: F-14
FY 1998 FY 1997 FY 1996 ------- ------- ------- Balance outstanding at beginning of fiscal year 1,470,571 1,385,949 754,817 Granted during period 873,400 374,200 788,000 Forfeited during period (62,101) (56,636) (156,868) Exercised during period (246,719) (232,942) - --------- --------- --------- Outstanding at June 30, 2,035,151 1,470,571 1,385,949 --------- --------- --------- --------- --------- --------- Exercisable at June 30, 597,775 369,670 447,053 --------- --------- --------- --------- --------- --------- Weighted average exercise price: At beginning of period $ 2.28 $ 1.91 $ 1.41 At end of period $ 3.98 $ 2.28 $ 1.91 Exercisable at end of period $ 2.07 $ 1.44 $ 1.29 Options granted $ 6.30 $ 3.04 $ 2.33 Options exercised $ 1.81 $ 1.33 $ - Options forfeited $ 4.82 $ 2.30 $ 1.61 Weighted average fair value of options granted during period $ 3.49 $ 1.64 $ 1.45
June 30, 1998 ---------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------- ------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price - --------------- ------ ----- ------------ ------ ----- $1.25 - $1.66 242,667 $1.42 2.2 242,667 $1.42 $1.67 - $2.38 397,505 $1.85 4.4 235,835 $1.82 $2.39 - $4.25 556,679 $3.14 5.3 77,607 $3.04 $4.26 - $5.47 250,000 $5.47 4.1 41,666 $5.47 $5.48 - $8.00 588,300 $6.65 4.6 - $ - --------- ------- 2,035,151 597,775 --------- ------- --------- -------
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 Novel and to employees. The value of options issued to non-employees has been determined using the Black-Scholes model and recorded in the accompanying consolidated financial statements. All non-qualified stock options 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. F-15
FY 1998 FY 1997 FY 1996 ------- ------- ------- Balance outstanding at beginning of fiscal year 709,351 434,440 434,440 Granted during period - 294,211 - Forfeited during period (10,958) (1,000) - Exercised during period (84,140) (18,300) - ------- ------- ------- Outstanding at June 30, 614,253 709,351 434,440 ------- ------- ------- ------- ------- ------- Exercisable at June 30, 503,039 531,578 434,440 ------- ------- ------- ------- ------- ------- Weighted average exercise price: At beginning of period $ 1.97 $ 1.28 $ 1.28 At end of period $ 2.05 $ 1.97 $ 1.28 Exercisable at end of period $ 1.85 $ 1.64 $ 1.28 Options granted $ - $ 2.97 $ - Options exercised $ 1.28 $ 1.44 $ - Options forfeited $ 2.97 $ 2.97 $ - Weighted average fair value of $ - $ 1.75 $ - options granted during period
June 30, 1998 ---------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------- ------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price - --------------- ------ ----- ------------ ------ ----- $1.25 - $ 1.44 332,000 $1.27 .5 332,000 $1.27 $1.45 - $ 2.97 282,253 $2.97 3.7 171,039 $2.97 ------- ------- 614,253 503,039 ------- ------- ------- -------
DIRECTOR, CONSULTANT AND OTHER WARRANTS The Board grants warrants to the outside directors for serving on the Board. Warrants were issued in February 1993 to purchase 120,000 shares of the Company's common stock at $1.63 per share; in November 1993 to purchase 90,000 shares of the Company's common stock at $1.50 per share; in June 1995 to purchase 180,000 shares of the Company's common stock at $1.59 per share; in November 1996, to purchase 15,000 shares of the Company's common stock at $3.03 per share; in November 1997, to purchase 90,000 shares of the Company's common stock at $6.41 per share; and in August 1998, to purchase 180,000 shares of the Company's common stock at $7.00 per share. During fiscal years 1998 and 1997, 110,000 and 70,000 director warrants were exercised, F-16 respectively. In fiscal 1997, 15,000 warrants expired, unvested. As of June 30, 1998, 195,000 warrants were vested. 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. In connection with a prior borrowing in March 1993, the Company issued 100,000 warrants to purchase the Company's common stock at an exercise price of $1.50 per share. In May 1994, the Company changed the warrant price to $1.25 per share. All of these warrants were exercised during fiscal year 1997. The warrants had a five-year term. In March 1993, the Company issued 100,000 warrants with a five-year term in connection with a purchase option on the Company's land (see Note 9). These warrants were exercisable at $2.00 per share from March 1996 through March 1997 and at $2.25 per share thereafter. These warrants would have vested only if the land purchase option was exercised. The warrants expired unexercised in March 1998. In November 1993, the Company issued warrants to its attorneys to purchase 100,000 shares of the Company's common stock. These warrants vested 25% per year beginning November 1993, and were exercisable at the average of the bid and ask prices of the Company's common stock as of the vesting date. The warrants vested in 1993, 1994, 1995 and 1996, and were exercisable at $1.50, $1.25, $1.81 and $3.00 per share, respectively. All of these warrants were exercised during fiscal 1998. In May 1997, the Company granted 125,000 warrants to a consulting group in exchange for investor relation services. The exercise prices range from $4.00 to $10.00 per share and the warrants have a three-year term from the date of grant. The Company has recognized approximately $107,000 and $5,000 of expense in fiscal years 1998 and 1997, respectively, related to these warrants based on the value of the services received. A summary of all of the above-described warrants is as follows:
FY 1998 FY 1997 FY 1996 ------- ------- ------- Balance outstanding at beginning of fiscal year 630,000 675,000 675,000 Granted during period 90,000 140,000 - Forfeited during period (100,000) (15,000) - Exercised during period (210,000) (170,000) - -------- -------- ------- Outstanding at June 30, 410,000 630,000 675,000 -------- -------- ------- -------- -------- ------- Exercisable at June 30, 295,000 430,000 460,000 -------- -------- ------- -------- -------- ------- Weighted average exercise price: At beginning of period $2.72 $1.64 $1.64 At end of period $4.16 $2.72 $1.64 Exercisable at end of period $1.96 $1.84 $1.50 Warrants granted $6.41 $6.04 $ - Warrants exercised $1.72 $1.40 $ - Warrants forfeited $2.25 $1.59 $ - Weighted average fair value of warrants granted during period $1.82 $ .96 $ -
F-17
June 30, 1998 ---------------------------------------------------------- Warrants Outstanding Warrants Exercisable ----------------------------------- ------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price - --------------- ------ ----- ------------ ------ ----- $1.25 - $ 1.81 180,000 $1.58 1.7 180,000 $1.58 $1.82 - $ 3.03 15,000 $3.03 3.4 15,000 $3.03 $3.04 - $ 6.00 75,000 $5.00 1.9 75,000 $5.00 $6.01 - $10.00 140,000 $7.16 3.9 25,000 $7.00 ------- ------- 410,000 295,000 ------- ------- ------- -------
PRIVATE PLACEMENT WARRANTS In June 1994, the Company completed the private placement of 1,500,000 units, each unit consisting of one share of no par value common stock and two warrants. During fiscal 1997, 2,070,000 of these warrants were exercised for approximately $4,631,000. The remaining 930,000 warrants were exercised during July and August 1997 at a price per share ranging from $1.41 to $2.68, resulting in cash proceeds to the Company of approximately $1,121,000 and cancellation of 142,505 shares of previously issued common stock that were used in lieu of cash to exercise the warrants. A summary of all of the above-described warrants is as follows:
FY 1998 FY 1997 FY 1996 ------- ------- ------- Balance outstanding at beginning of fiscal year 930,000 3,000,000 3,000,000 Exercised during period (930,000) (2,070,000) - -------- ---------- --------- Outstanding at June 30, - 930,000 3,000,000 -------- ---------- --------- -------- ---------- --------- Exercisable at June 30, - 930,000 3,000,000 -------- ---------- --------- -------- ---------- --------- Weighted average exercise price: At beginning of period $ 2.07 $ 2.18 $ 2.18 At end of period $ - $ 2.07 $ 2.18 Exercisable at end of period $ - $ 2.07 $ 2.18 Warrants exercised $ 2.07 $ 2.24 $ -
F-18 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, the Company is authorized to issue up to 240,000 shares of common stock over a three-year period, with a maximum of 80,000 shares per year, 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. The purchase price of the stock is 85% of the lower of its beginning-of-the-year or end-of-the-year market price. In January 1998, the Company issued 75,526 shares of common stock under the ESPP at $2.50 per share. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 SFAS 123 defines a fair-value based method of accounting for employee stock options or similar equity instruments. However, SFAS 123 allows the continued measurement of compensation cost for such plans using the intrinsic value-based method prescribed by APB 25, provided that pro forma disclosures are made of net income or loss and net income or loss per share, assuming the fair-value based method of SFAS 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB 25; accordingly, for purposes of the pro forma disclosure presented below, the Company has computed the fair values of shares issued under the ESPP, all options and warrants issued during fiscal years 1998, 1997 and 1996 using the Black-Scholes pricing model and the following weighted average assumptions:
1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.84% 5.70% 6.18% Expected lives 3.8 years 3.5 years 4.2 years Expected volatility 67.4% 69.8% 74.6% Expected dividend yield 0% 0% 0%
To estimate expected lives of options for this valuation, it was assumed options would be exercised upon becoming fully vested. Cumulative compensation cost recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. The Company's common stock market volatility was based on the closing market price at the end of each month since the merger of CMED and RELA in October 1992. Fair value compensation is highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. The total fair value of options and warrants granted, that are included in the pro forma calculation, was computed to be approximately $2,536,000, $628,000 and $1,141,000 for the years ended June 30, 1998, 1997 and 1996, respectively. These amounts are amortized ratably over the vesting periods of the options. Pro forma stock-based compensation, net of the effect of forfeitures and taxes, was approximately $639,000, $216,000 and $62,000 for 1998, 1997 and 1996, respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net income and pro forma diluted earnings per common share would have been reported as follows: F-19
Year Ended June 30, ------------------- 1998 1997 1996 ---- ---- ---- Net Income As reported $4,492,147 $2,479,617 $1,596,602 Pro forma $3,852,790 $2,263,185 $1,534,299 Diluted Earnings Per Common Share As reported $.37 $.27 $.21 Pro forma $.33 $.21 $.21
(6) INCOME TAXES The provision for income taxes includes the following:
Year Ended June 30, ------------------- 1998 1997 1996 ----------- ----------- ---------- Current - Federal $ 2,581,784 $ 1,347,733 $ 717,733 State 184,216 96,267 51,267 ----------- ----------- ---------- 2,766,000 1,444,000 769,000 Deferred - Federal (901,664) (55,067) (79,333) State (64,336) (3,933) (5,667) ----------- ----------- ---------- Total $ 1,800,000 $ 1,385,000 $ 684,000 ----------- ----------- ---------- ----------- ----------- ----------
The Company's effective income tax rate was different than the statutory federal income tax rate as follows:
Year Ended June 30, ------------------- 1998 1997 1996 ----------- ----------- ---------- Federal income tax provision at statutory rates $ 2,138,000 $ 1,314,000 $ 775,000 State income tax provision, net of federal tax effect 206,000 133,000 75,000 Nondeductible expenses 46,000 18,000 12,000 SFAS 109 valuation allowance reduction (590,000) (80,000) (178,000) ----------- ----------- ---------- Effective tax $ 1,800,000 $ 1,385,000 $ 684,000 ----------- ----------- ---------- ----------- ----------- ----------
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, 1998, the Company had NOL carryforwards available of approximately $1,219,000. The Company's NOLs expire beginning in 1999 through 2007. The Company also has research and development and investment tax credit carryforwards totaling approximately $140,000 expiring from 1999 through 2007. F-20 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, 1998 and 1997 are comprised of the following:
1998 1997 ---------- ---------- Current Tax effect of NOL carryforwards $ 457,000 $ 538,000 Allowance for doubtful accounts 217,000 57,000 Accrued vacation 177,000 99,000 Deferred service revenue - 15,000 Reserves 685,000 522,000 Tax credits 140,000 - Valuation allowance - (436,000) ---------- ---------- Net current deferred tax asset $1,676,000 $ 795,000 ---------- ---------- ---------- ---------- Noncurrent Tax credits $ - $ 140,000 Depreciation for book in excess of tax 367,000 296,000 Valuation allowance - (154,000) ---------- ---------- Net noncurrent deferred tax asset $ 367,000 $ 282,000 ---------- ---------- ---------- ----------
The Company had established a valuation allowance due to the uncertainty that the full amount of credits and NOL carryforwards would be applied against future taxable income. During fiscal 1998, the Company determined the valuation allowance was no longer required because the increased taxable income from the acquisition of Erbtec could be offset by tax credits and NOL carryforwards. During 1998, 1997 and 1996, the Company reduced the valuation allowance by $590,000, $80,000 and $178,000 for the utilization of NOLs in the respective years and certain deferred tax assets that the Company now believes will be fully utilized. (7) 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 $846,000, $467,000 and $511,000 for the years ended June 30, 1998, 1997 and 1996, respectively, under such agreements. At June 30, 1998, future minimum lease payments under leases having an initial or remaining noncancellable term of one year or more were approximately $825,000 in 1999, $792,000 in 2000, $769,000 in 2001, $728,000 in 2002, and none in 2003 or thereafter. EMPLOYMENT AND COMPENSATION AGREEMENTS In June 1993, the Company entered into an employment agreement with the Company's Chairman, Chief Executive Officer and President, which had a three-year term. The agreement fixed the employee's compensation. In connection with and as a condition of the employment agreement, the employee executed a noncompetition agreement in which he agreed not to engage in competitive activities for a period of two years after his F-21 employment with the Company is terminated, whether voluntarily or involuntarily. The Company also agreed to grant an incentive stock option to purchase up to 300,000 shares of the Company's common stock at a purchase price of $1.25 per share. The options vested at 100,000 shares per year over three years. Each portion of the vested option is exercisable for five years after the date each portion has vested. During fiscal 1998 and 1997, 80,000 of these options were exercised each year. The Company and the employee extended the employment agreement in November 1995 and in May 1996 through June 2002. The Company agreed to grant an incentive stock option to purchase up to 300,000 shares of the Company's common stock at a purchase price of $1.84 per share and another 260,000 shares at a purchase price of $3.25 per share, in consideration of the extended employment agreement. The first group of options vests at 100,000 shares per year over three years. The remaining 260,000 shares vest in year seven, however, earlier vesting can occur if the Company achieves certain targeted stock prices by September 2000. If the Company terminates his employment at any time prior to June 2002, no vesting of the options shall occur after the date of termination, but the employee will be entitled to receive a severance payment amounting to compensation for a period equal to the lesser of 24 months or the unexpired term of the agreement. If the employee terminates his employment prior to June 1999, no further vesting of the stock options shall occur, and the unexercised portion of the options, whether or not vested, shall terminate. Subject to these restrictions, each portion of the vested options shall be exercisable for five years after the date such portion has vested. Two of the Company's other officers have also entered into employment agreements with the Company. These agreements provide for a severance payment equal to one year's salary if the officer's employment is terminated as a result of loss of officer status, relocation of the Company or for reasons other than cause and two years' salary if the officer's employment is terminated as a result of a significant ownership change in the Company. These agreements have no fixed term, and may be terminated by either party at any time. OTHER In connection with an equity offering in June 1994, the Company entered into a standstill agreement with a corporation that owns 3,500,000 shares of the Company's common stock. The standstill agreement limits the corporation to not more than a 40% ownership of the Company. The standstill agreement expires in June 1999. The Company had sales to this corporation of approximately $67,000, $1,473,000 and $381,000 in 1998, 1997 and 1996, respectively. As of June 30, 1998 and 1997, the Company had accounts receivable balances of $0 and $423,000, respectively, related to these sales. (8) 401(k) RETIREMENT PLAN In fiscal year 1988, the Company 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 $175,000, $100,000 and $75,000 for the years ended June 30, 1998, 1997 and 1996, respectively. (9) INVESTMENT IN LAND In 1987, the Company acquired a parcel of land from a shareholder, officer and former director of the Company. The parcel comprises 10.91 acres of industrial zoned land located within the city boundaries of Louisville, Colorado. The Company purchased the parcel for $631,750, the price established by an independent appraisal. During 1992, the Company obtained an independent appraisal for the parcel that indicated a decline in F-22 the valuation of the property. The property is valued at the appraisal value in the accompanying consolidated balance sheets. In connection with a previous borrowing arrangement, the Company granted an option to purchase the land at a purchase price of $640,968. This option expired, unexercised, in March 1998. At June 30, 1998 the Company is holding the land as available-for-sale. (10) MAJOR CUSTOMERS Four customers accounted for more than 10% of total sales and service revenues for the years ended June 30, 1998, 1997 and 1996, as follows:
1998 1997 1996 ---- ---- ---- Customer -------- A 23% 0% 0% B 22% 19% 2% C 2% 14% 13% D 0% 12% 27%
At June 30, 1998 and 1997, these four customers had accounts receivable due to the Company as follows:
1998 1997 ---- ---- A $ 1,662,000 $ - B $ 1,996,000 $ 318,000 C $ 122,000 $ 996,000 D $ - $ 148,000
The loss of a significant customer could have a material, detrimental impact on the Company's operations. (11) SALE OF PRODUCT LINES In June 1995, the Company entered into an agreement to sell the Company's cardiopulmonary product lines to a competitor (the "Purchaser"). The transaction closed on August 16, 1995. The sale transaction included all inventories, intangible property rights, customer lists and tooling associated with cardiopulmonary product lines as well as the trade name Cybermedic. In addition, the Purchaser assumed the warranty and service obligations related to these products. The Purchaser placed noncancellable orders with the Company for additional manufactured units. All of the units related to this contract were shipped to the Purchaser during fiscal year 1996. F-23 (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, 1997 Net sales and service $ 5,288 $ 5,777 $ 8,483 $ 8,695 Gross profit $ 1,755 $ 2,043 $ 2,847 $ 3,142 Net income $ 453 $ 492 $ 672 $ 863 Earnings per share (as restated): Basic $ .07 $ .07 $ .10 $ .11 Diluted $ .05 $ .06 $ .08 $ .09 Fiscal Year Ended June 30, 1998 Net sales and service $ 7,260 $12,183 $13,450 $14,407 Gross profit $ 2,639 $ 4,008 $ 4,796 $ 5,500 Net income $ 664 $ 943 $ 1,329 $ 1,556 Earnings per share: Basic $ .07 $ .09 $ .12 $ .14 Diluted $ .06 $ .08 $ .11 $ .12
F-24 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 Company's definitive Proxy Statement to be filed pursuant to Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company's definitive Proxy Statement to be filed pursuant to Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein by reference. 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, 1998 and 1997 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 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. (b) Reports on Form 8-K. No reports on Form 8-K were filed for the three-month period ended June 30, 1998. -19- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 24, 1998. COLORADO MEDTECH, INC. By: /s/ John V. Atanasoff, II ------------------------------ John V. Atanasoff, II Chief Executive Officer In accordance with the Exchange Act, 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/ John V. Atanasoff, II Chief Executive Officer, September 24, 1998 - ---------------------------- President and Director John V. Atanasoff, II (Principal Executive Officer) /s/ Dean A. Leffingwell Director September 24, 1998 - ---------------------------- Dean A. Leffingwell /s/ Ira M. Langenthal Director September 24, 1998 - ---------------------------- Ira M. Langenthal /s/ Robert L. Sullivan Director September 24, 1998 - ---------------------------- Robert L. Sullivan /s/ Clifford W. Mezey Director September 24, 1998 - ---------------------------- Clifford W. Mezey /s/ Michael R. Barr Director September 24, 1998 - ---------------------------- Michael R. Barr /s/ John E. Wolfe Director September 24, 1998 - ---------------------------- John E. Wolfe /s/ Bruce L. Arfmann Chief Financial Officer September 24, 1998 - ---------------------------- (Principal Accounting Officer) Bruce L. Arfmann
-20- INDEX TO EXHIBITS
Exhibit Sequential Number Description Page No. - ------ ----------- -------- 3.1 Articles of Incorporation; Complete Copy, as Amended. (A) 3.2 Bylaws, as Amended. (B) 4.2 Specimen of Common Stock Certificate. (C) 10.22 Promissory Notes payable to Lockett E. Wood and Deeds of Trust with respect to Louisville, Colorado property acquisition. (D) 10.31 Colorado MEDtech, Inc. Stock Option Plan. 10.32 Employment Agreement between Colorado MEDtech, Inc. and John V. Atanasoff, II. (E) 10.33 Standstill Agreement dated June 30, 1994 between Vencor, Inc. and Colorado MEDtech, Inc. (F) 10.35 Employment Agreement between Colorado MEDtech, Inc. and Bruce L. Arfmann (G) 10.37 Employment Agreement between Colorado MEDtech, Inc. and Lockett E. Wood (G) 10.38 Extension of Employment Agreement between Colorado MEDtech, Inc. and John V. Atanasoff, II (H) 10.39 Agreement and Plan of Reorganization among Colorado MEDtech, Inc., Novel Biomedical, Inc. and Jonathan Kagan (I) 10.40 Employment Agreement between Novel Biomedical, Inc. and Jonathan Kagan (J) 10.41 Employment Agreement between Colorado MEDtech, Inc. and Lee Erb (K) 10.42 Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan as Amended on November 21, 1997, Effective as of January 1, 1998 (L) 10.43 Asset Purchase Agreement by and among Colorado MEDtech, Inc., Erbtec Engineering, Inc., and Lee Erb, dated October 1, 1997 (M) 10.44 Loan Agreement, Commercial Security Agreement, and Promissory Note dated October 30, 1997 between Colorado MEDtech, Inc. and Bank One, Colorado, NA 21.1 Subsidiaries of Business Issuer 23.1 Consent of Independent Public Accountants 27.1 Financial Data Schedule for the year ended June 30, 1998
(A) Filed as an exhibit to the Company's Current Report on Form 8-K, dated May 14, 1993. (B) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on May 17, 1983, with amendment filed as exhibit to the Company's Annual Report on Form 10-K for the year ended October 31, 1984. (C) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on May 17, 1983. (D) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1987. (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 Schedule 13D Amendment No. 2 dated July 18, 1994 filed by Vencor, Inc. (G) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1994. (H) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (I) Filed as an exhibit to the Company's Current Report on Form 8-K, dated February 28, 1997. (J) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1997. (K) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (L) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997. (M) Filed as an exhibit to the Company's Current Report on Form 8-K, dated October 1, 1997. EX-10.31 2 EXHIBIT 10.31 COLORADO MEDTECH, INC. EXHIBIT 10.31 STOCK OPTION PLAN (As amended September 26, 1997) I. PURPOSE The COLORADO MEDTECH, INC. Stock Option Plan (the "Plan") provides for the grant of Stock Options, Stock Appreciation Rights and Supplemental Bonuses to Employees and non-employee directors of Colorado MEDtech, Inc. (the "Company"), and such of its subsidiaries (as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code")) as the Board of Directors of the Company (the "Board") shall from time to time designate ("Participating Subsidiaries"), in order to advance the interests of the Company and its Participating Subsidiaries through the motivation, attraction and retention of their respective Employees and non-employee directors. II. INCENTIVE STOCK OPTIONS AND NON-INCENTIVE STOCK OPTIONS The Stock Options granted under the Plan may be either: (a) Incentive Stock Options ("ISOs") which are intended to be "Incentive Stock Options" as that term is defined in Section 422 of the Code; or (b) Nonstatutory Stock Options ("NSOs") which are intended to be options that do not qualify as "Incentive Stock Options" under Section 422 of the Code. All Stock Options shall be ISOs unless the Option Agreement clearly designates the Stock Options granted thereunder, or a specified portion thereof, as NSOs. Subject to the other provisions of the Plan, a Participant may receive ISOs and NSOs at the same time, provided that the ISOs and NSOs are clearly designated as such, and the exercise of one does not affect the exercise of the other. Except as otherwise expressly provided herein, all of the provisions and requirements of the Plan relating to Stock Options shall apply to ISOs and NSOs. III. ADMINISTRATION 3.1 COMMITTEE. The Plan shall be administered by the Board or by a committee composed solely of two or more directors ("Committee") each of whom is a Non-Employee Director. The Committee or the Board, as the case may be, shall have full authority to administer the Plan, including authority to interpret and construe any provision of this Plan and any Stock Option, Stock Appreciation Right or Supplemental Bonus granted hereunder, and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of the Code, or in order that Stock Options that are intended to be ISOs will be classified as incentive stock options under the Code, or in order to conform to any regulation or to any change in any law or regulation applicable thereto. The Committee or the Board may delegate any of its responsibilities under this Plan, other than its responsibility to grant Stock Options, to determine whether the Stock Appreciation Rights or Supplemental Bonuses, if any, payable to a Participant shall be paid in cash, in shares of Common Stock or a combination thereof, or to interpret and construe this Plan. The Board of Directors may reserve to itself any of the authority granted to the Committee as set forth herein, and it may perform and discharge all of the functions and responsibilities of the Committee at any time that a duly constituted Committee is not appointed and serving. All references in this Plan to the "Committee" shall be deemed to refer to the Board of Directors whenever the Board is discharging the powers and responsibilities of the Committee, and to any special committee appointed by the Board to administer particular aspects of this Plan. 3.2 ACTIONS OF THE COMMITTEE. All actions taken and all interpretations and determinations made by the Committee in good faith (including determinations of Fair Market Value) shall be final and binding upon all Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, and all members of the Committee shall, in addition to their rights as directors, be fully protected by the Company with respect to any such action, determination or interpretation. Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") provides that the grant of a stock option to a director or officer of a company will be exempt from the provisions of Section 16(b) of the Exchange Act if the conditions set forth in said Rule are satisfied. Unless otherwise specified by the Committee, grants of Stock Options hereunder to and exercises of Stock Options by individuals who are officers or directors of the Company shall be made in a manner that satisfies the conditions of said Rule. IV. DEFINITIONS 4.1 "STOCK OPTION". A Stock Option is the right granted under the Plan to purchase, at such time or times and at such price or prices ("Option Price") as are determined by the Committee, the number of shares of Common Stock determined by the Committee. 4.2 "STOCK APPRECIATION RIGHT". A Stock Appreciation Right is the right to receive payment, in shares of Common Stock, cash or a combination of shares of Common Stock and cash, of the Redemption Value of a specified number of shares of Common Stock then purchasable under a Stock Option. 4.3 "REDEMPTION VALUE". The Redemption Value of shares of Common Stock purchasable under a Stock Option shall be the amount, if any, by which the Fair Market Value of one share of Common Stock on the date on which the Stock Option is exercised exceeds the Option Price for such share. 4.4 "COMMON STOCK". A share of Common Stock means a share of authorized but unissued or reacquired Common Stock (no par value per share) of the Company. 4.5 "FAIR MARKET VALUE". If the Common Stock is not traded publicly, the Fair Market Value of a share of Common Stock on any date shall be determined, in good faith, by the Committee after such consultation with outside legal, accounting and other experts as the Committee may deem advisable, and the Committee shall maintain a written record of its method of determining such value. If the Common Stock is traded publicly, the Fair Market Value of a share of Common Stock on any date shall be the average of the representative closing bid and asked prices, as quoted by the National Association of Securities Dealers through NASDAQ (its automated system for reporting quotes), for the date in question or, if the Common Stock is listed on the NASDAQ National Market System or is listed on a national stock exchange, the officially quoted closing price on NASDAQ or such exchange, as the case may be, on the date in question. 2 4.6 "EMPLOYEE". An Employee is an employee of the Company or any Participating Subsidiary. 4.7 "PARTICIPANT". A Participant is a person to whom a Stock Option, Stock Appreciation Right or Supplemental Bonus is granted. 4.8 "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 under the Exchange Act or any successor rule or regulation, as it may be amended from time to time. 4.9 "SUPPLEMENTAL BONUS". A Supplemental Bonus is the right to receive payment, in shares of Common Stock, cash or a combination of shares of Common Stock and cash, of an amount determined under Section 7.7. V. ELIGIBILITY AND PARTICIPATION Grants of Stock Options, Stock Appreciation Rights and Supplemental Bonuses may be made to Employees or non-employee directors of the Company or any Participating Subsidiary; PROVIDED, HOWEVER, that only Employees, including directors of the Company who are also Employees, shall be eligible to receive ISOs. The Committee shall from time to time determine the Participants to whom Stock Options shall be granted, the number of shares of Common Stock subject to each Stock Option to be granted, the Option Price of such Stock Options and other terms and provisions of such Stock Options, all as provided in this Plan. The Option Price of any ISO shall be not less than the Fair Market Value of a share of Common Stock on the date on which the Stock Option is granted, but the Option Price of an NSO may be less than the Fair Market Value on the date the NSO is granted if the Committee so determines. If an ISO is granted to an Employee who then owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company, the Option Price of such ISO shall be at least 110% of the Fair Market Value of the Common Stock subject to the ISO at the time such ISO is granted, and such ISO shall not be exercisable after five years after the date on which it was granted. Each Stock Option shall be evidenced by a written agreement ("Option Agreement") containing such terms and provisions as the Committee may determine, subject to the provisions of this Plan. VI. SHARES OF COMMON STOCK SUBJECT TO THE PLAN 6.1 MAXIMUM NUMBER. The maximum aggregate number of shares of Common Stock that may be made subject to Stock Options shall be 3,500,000 authorized but unissued shares. The aggregate Fair Market Value (determined as of the time the ISO is granted) of the Common Stock as to which all ISOs granted to an Employee may first become exercisable in a particular calendar year may not exceed $100,000. If any shares of Common Stock subject to Stock Options are not purchased or otherwise paid for before such Stock Options expire, such shares may again be made subject to Stock Options. 6.2 CAPITAL CHANGES. In the event any changes are made to the shares of Common Stock (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividend in excess of ten percent (10%) at any single time, stock split, combination of shares, exchange of shares, change in corporate structure or otherwise), appropriate adjustments shall be made in: (i) the number of shares of Common Stock theretofore made subject to Stock Options, and in the purchase price of said shares; and 3 (ii) the aggregate number of shares which may be made subject to Stock Options. If any of the foregoing adjustments shall result in a fractional share, the fraction shall be disregarded, and the Company shall have no obligation to make any cash or other payment with respect to such a fractional share. VII. EXERCISE OF STOCK OPTIONS 7.1 TIME OF EXERCISE. Subject to the provisions of the Plan, including without limitation Section 7.5, the Committee, in its discretion, shall determine the time when a Stock Option, or a portion of a Stock Option, shall become exercisable, and the time when a Stock Option, or a portion of a Stock Option, shall expire. Such time or times shall be set forth in the Option Agreement evidencing such Stock Option. A Stock Option shall expire, to the extent not exercised, no later than the tenth anniversary of the date on which it was granted. The Committee may accelerate the vesting of any Participant's Stock Option by giving written notice to the Participant. Upon receipt of such notice, the Participant and the Company shall amend the Option Agreement to reflect the new vesting schedule. The acceleration of the exercise period of a Stock Option shall not affect the expiration date of that Stock Option. 7.2 EXCHANGE OF OUTSTANDING STOCK. The Committee, in its sole discretion, may permit a Participant to surrender to the Company shares of Common Stock previously acquired by the Participant as part or full payment for the exercise of a Stock Option. Such surrendered shares shall be valued at their Fair Market Value on the date of exercise. 7.3 USE OF PROMISSORY NOTE; EXERCISE LOANS. The Committee may, in its sole discretion, impose terms and conditions, including conditions relating to the manner and timing of payments, on the exercise of Stock Options. Such terms and conditions may include, but are not limited to, permitting a Participant to deliver to the Company his promissory note as full or partial payment for the exercise of a Stock Option. The Committee, in its sole discretion, may authorize the Company to make a loan to a Participant in connection with the exercise of Stock Options, or authorize the Company to arrange or guarantee loans to a Participant by a third party. 7.4 STOCK RESTRICTION AGREEMENT. The Committee may provide that shares of Common Stock issuable upon the exercise of a Stock Option shall, under certain conditions, be subject to restrictions whereby the Company has a right of first refusal with respect to such shares or a right or obligation to repurchase all or a portion of such shares, which restrictions may survive a Participant's term of employment with the Company. The acceleration of time or times at which a Stock Option becomes exercisable may be conditioned upon the Participant's agreement to such restrictions. 7.5 TERMINATION OF EMPLOYMENT BEFORE EXERCISE. If a Participant's employment with the Company or a Participating Subsidiary shall terminate for any reason other than the Participant's disability, any Stock Option granted to the Participant, to the extent then exercisable under the applicable Option Agreement(s), shall remain exercisable after the termination of his employment for a period of 30 days (but, in the case of an ISO, in no event beyond ten years from the date of grant of the ISO). If the Participant's employment is terminated because the Participant is disabled within the meaning of Section 22(e)(3) of the Code, any Stock Option granted to the Participant, to the extent then exercisable under the applicable Option Agreement(s), shall remain exercisable after the termination of his employment for a period of three months (but, in the case of an ISO, in no event beyond ten years from the date of grant of the ISO). If the Stock Option is not exercised during the applicable period, it shall be deemed to have 4 been forfeited and of no further force or effect. 7.6 DISPOSITION OF FORFEITED STOCK OPTIONS. Any shares of Common Stock subject to Stock Options forfeited by a Participant shall not thereafter be eligible for purchase by the Participant but may be made subject to Stock Options granted to other Participants. 7.7 GRANT OF SUPPLEMENTAL BONUSES. The Committee, either at the time of grant or at any time prior to exercise of any Stock Option or Stock Appreciation Right, may provide for a Supplemental Bonus from the Company or Participating Subsidiary in connection with a specified number of shares of Common Stock then purchasable, or which may become purchasable, under a Stock Option, or a specified number of Stock Appreciation Rights which may be or become exercisable. Such Supplemental Bonus shall be payable upon the exercise of the Stock Option or Stock Appreciation Right with regard to which such Supplemental Bonus was granted. A Supplemental Bonus shall not exceed the amount necessary to reimburse the Participant for the income tax liability incurred by him upon the exercise of the Stock Option or upon the exercise of such Stock Appreciation Right, calculated using the maximum combined federal and applicable state income tax rates then in effect and taking into account the tax liability arising from the Participant's receipt of the Supplemental Bonus. The Committee may, in its discretion, elect to pay any part or all of the Supplemental Bonus in: (i) cash; (ii) shares of Common Stock; or (iii) any combination of cash and shares of Common Stock. The provisions of Section 8.3 shall apply to the giving of notice, the determination of the number of shares to be delivered, and the time for delivering shares. In applying Section 8.3, the Supplemental Bonus shall be treated as if it were a Stock Appreciation Right that the Participant exercised on the day the Supplemental Bonus became payable. Shares of Common Stock issued pursuant to this Section 7.7 shall not be deemed to have been issued upon the exercise of a Stock Option for purposes of the limitations imposed by Section 6.1 of the Plan. VIII. STOCK APPRECIATION RIGHTS 8.1 GRANT OF STOCK APPRECIATION RIGHTS. The Committee may, from time to time, grant Stock Appreciation Rights to a Participant with respect to not more than the number of shares of Common Stock which are, or may become, purchasable under any Stock Option held by the Participant. The Committee may, in its sole discretion, specify the terms and conditions of such rights, including without limitation the time period or time periods during which such rights may be exercised and the date or dates upon which such rights shall expire and become void and unexercisable; provided, however, that in no event shall such rights expire and become void and unexercisable later than the time when the related Stock Option is exercised, expires or terminates. Each Participant to whom Stock Appreciation Rights are granted shall be given written notice advising him of the grant of such rights and specifying the terms and conditions of the rights, which shall be subject to all the provisions of this Plan. 8.2 EXERCISE OF STOCK APPRECIATION RIGHTS. Subject to Section 8.3, and in lieu of purchasing shares of Common Stock upon the exercise of a Stock Option held by him, a Participant may elect to exercise the Stock Appreciation Rights, if any, he has been granted and receive payment of the Redemption Value of all, or any portion, of the number of shares of Common Stock subject to such Stock Option with respect to which he has been granted Stock Appreciation Rights; provided, however, that the Stock Appreciation Rights may be exercised only when the Fair Market Value of the Common Stock subject to such Stock Option exceeds the exercise price of the Stock Option. A Participant shall exercise his Stock Appreciation Rights by delivering a written notice to the Committee specifying the number of shares with respect to which he exercises Stock Appreciation Rights and agreeing to surrender 5 the rights to purchase an equivalent number of shares of Common Stock subject to his Stock Option. If a Participant exercises Stock Appreciation Rights, payment of his Stock Appreciation Rights shall be made in accordance with Section 8.3 on or before the 90th day after the date of exercise of the Stock Appreciation Rights. 8.3 FORM OF PAYMENT. If a Participant elects to exercise Stock Appreciation Rights as provided in Section 8.2, the Committee may, in its absolute discretion, elect to pay any part or all of the Redemption Value of the shares with respect to which the Participant has exercised Stock Appreciation Rights in: (i) cash; (ii) shares of Common Stock; or (iii) any combination of cash and shares of Common Stock. The Committee's election pursuant to this Section 8.3 shall be made by giving written notice to the Participant within said 90-day period, which notice shall specify the portion which the Committee elects to pay in cash, shares of Common Stock or a combination thereof. In the event any portion is to be paid in shares of Common Stock, the number of shares to be delivered shall be determined by dividing the amount which the Committee elects to pay in shares of Common Stock by the Fair Market Value of one share of Common Stock on the date of exercise of the Stock Appreciation Rights. Any fractional share resulting from any such calculation shall be disregarded. Said shares, together with any cash payable to the Participant, shall be delivered within said 90-day period. IX. NO CONTRACT OF EMPLOYMENT Nothing in this Plan shall confer upon the Participant the right to continue in the employ of the Company, or any Participating Subsidiary, nor shall it interfere in any way with the right of the Company, or any such Participating Subsidiary, to discharge the Participant at any time for any reason whatsoever, with or without cause. Nothing in this Article IX shall affect any rights or obligations of the Company or any Participant under any written contract of employment. X. NO RIGHTS AS A STOCKHOLDER A Participant shall have no rights as a stockholder with respect to any shares of Common Stock subject to a Stock Option. Except as provided in Section 6.2, no adjustment shall be made in the number of shares of Common Stock issued to a Participant, or in any other rights of the Participant upon exercise of a Stock Option by reason of any dividend, distribution or other right granted to shareholders for which the record date is prior to the date of exercise of the Participant's Stock Option. XI. ASSIGNABILITY No Stock Option, Stock Appreciation Right or Supplemental Bonus right granted under this Plan, nor any other rights acquired by a Participant under this Plan, shall be assignable or transferable by a Participant, other than by will or the laws of descent and distribution or, in the case of an NSO, pursuant to a qualified domestic relations order as defined by the Code, Title I of the Employee Retirement Income Security Act, or the rules thereunder. Notwithstanding the preceding sentence, the Committee may, in its sole discretion, permit the assignment or transfer of an NSO, Stock Appreciation Right or Supplemental Bonus right granted under this Plan by a Participant, and the exercise thereof by a person other than such Participant, on such terms and conditions as the Committee in its sole discretion may determine. Any such terms shall be set forth in the Option Agreement. In the event of a Participant's death, the Stock Option or any Stock Appreciation Right or Supplemental Bonus right may be exercised by the Personal Representative of the Participant's estate or, if no Personal Representative has been 6 appointed, by the successor or successors in interest determined under the Participant's will or under the applicable laws of descent and distribution. The terms of any rights under this Plan in the hands of a transferee or assignee shall be determined as if held by the Participant and shall be of no greater extent or term than if the transfer or assignment had not taken place. XII. MERGER OR LIQUIDATION OF THE COMPANY If the Company or its shareholders enter into an agreement to dispose of all, or substantially all, of the assets or outstanding capital stock of the Company by means of a sale or liquidation, or a merger or reorganization in which the Company is not the surviving corporation, all Stock Options outstanding under the Plan as of the day before the consummation of such sale, liquidation, merger or reorganization, to the extent not exercised, shall for all purposes under this Plan become exercisable in full as of such date even though the dates of exercise established pursuant to Section 7.1 have not yet occurred, unless the Board shall have prescribed other terms and conditions to the exercise of the Stock Option, or otherwise modified the Stock Options. XIII. AMENDMENT The Board may from time to time alter, amend, suspend or discontinue the Plan, including, where applicable, any modifications or amendments as it shall deem advisable in order that ISOs will be classified as incentive stock options under the Code, or in order to conform to any regulation or to any change in any law or regulation applicable thereto; provided, however, that no such action shall adversely affect the rights and obligations with respect to Stock Options at any time outstanding under the Plan; and provided further that no such action shall, without the approval of the shareholders of the Company, (i) increase the maximum number of shares of Common Stock that may be made subject to Stock Options (unless necessary to effect the adjustments required by Section 6.2), or (ii) materially modify the requirements as to eligibility for participation in the Plan. XIV. REGISTRATION OF OPTIONED SHARES The Stock Options shall not be exercisable unless the purchase of such optioned shares is pursuant to an applicable effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), or unless, in the opinion of counsel to the Company, the proposed purchase of such optioned shares would be exempt from the registration requirements of the 1933 Act and from the registration or qualification requirements of applicable state securities laws. XV. WITHHOLDING TAXES The Company or Participating Subsidiary may take such steps as it may deem necessary or appropriate for the withholding of any taxes (including the withholding of shares of Common Stock otherwise issuable which appropriate Fair Market Value) which the Company or the Participating Subsidiary is required by any law or regulation or any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option, Stock Appreciation Right or Supplemental Bonus, including, but not limited to, the withholding of all or any portion of any payment or the withholding of issuance of shares of Common Stock to be issued upon the exercise of any Stock Option or Stock Appreciation Right or upon payment of any Supplemental Bonus, until the Participant reimburses the Company or Participating Subsidiary for the amount the Company or Participating 7 Subsidiary is required to withhold with respect to such taxes, or canceling any portion of such payment or issuance in an amount sufficient to reimburse itself for the amount it is required to so withhold. XVI. BROKERAGE ARRANGEMENTS The Committee, in its discretion, may enter into arrangements with one or more banks, brokers or other financial institutions to facilitate the disposition of shares acquired upon exercise of Stock Options, Stock Appreciation Rights or Supplemental Bonuses, including, without limitation, arrangements for the simultaneous exercise of Stock Option, Stock Appreciation Rights or Supplemental Bonuses, and sale of the shares acquired upon such exercise. XVII. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board nor the submission of this Plan to shareholders of the Company for approval shall be construed as creating any limitations on the power or authority of the Board to adopt such other or additional incentive or other compensation arrangements of whatever nature as the Board may deem necessary or desirable or preclude or limit the continuation of any other plan, practice or arrangement for the payment of compensation or fringe benefits to employees generally, or to any class or group of employees, which the Company or any Participating Subsidiary now has lawfully put into effect, including, without limitation, any retirement, pension, savings and stock purchase plan, insurance, death and disability benefits and executive short-term incentive plans. XVIII. EFFECTIVE DATE This Plan was adopted by the Board of Directors and became effective on June 25, 1992 and was approved by the Company's shareholders on May 14, 1993. No Stock Options shall be granted subsequent to ten years after the effective date of the Plan. Stock Options outstanding subsequent to ten years after the effective date of the Plan shall continue to be governed by the provisions of the Plan. 8 EX-10.44 3 EXHIBIT 10.44 EXHIBIT 10.44 BANKONE. LOAN AGREEMENT - ----------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $9,000,000.00 10-30-97 10-30-2000 001113 328 2992911044 00410 - ----------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -----------------------------------------------------------------------------------------------------------
Borrower: COLORADO MEDTECH, INC., A COLORADO CORPORATION; ET. AL. 6175 LONGBOW DRIVE BOULDER, CO 80301 Lender: Bank One, Colorado, NA Boulder 1125 17th Street Denver, CO 80217 THIS LOAN AGREEMENT between COLORADO MEDTECH, INC., A COLORADO CORPORATION RELA, INC., A COLORADO CORPORATION and NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION (referred to in this Agreement individually and collectively as "Borrower") and Bank One, Colorado, NA referred to in this Agreement as "Lender") is made and executed as of October 30, 1997. This Agreement governs all loans, credit facilities and/or other financial accommodations described herein and, unless otherwise agreed to in writing by Lender and Borrower, all other present and future loans, credit facilities and other financial accommodations provided by Lender to Borrower. All such loans, credit facilities and other financial accommodations, together with all renewals, extensions and modifications thereof, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; and (b) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of October 30, 1997, and shall continue thereafter until all Loans and other obligations owing by Borrower to Lender hereunder have been paid in full and Lender has no commitments or obligations to make further Advances under the Loans to Borrower. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Colorado. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as may be amended or modified from lime to time, together with all exhibits and schedules attached hereto from time to time. ACCOUNT. The word "Account" means a trade account receivable of Borrower for goods sold or leased or for services rendered by Borrower in the ordinary course of its business. ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means any advance or other disbursement of Loan proceeds under this Agreement. BORROWER. The word "Borrower" means individually and collectively COLORADO MEDTECH, INC., A COLORADO CORPORATION, RELA, INC., A COLORADO CORPORATION and NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION and all other persons and entities signing Borrowers' Note. BORROWING BASE. The words "Borrowing Base" mean AS DETERMINED BY LENDER FROM TIME TO TIME, THE LESSER OF (A) $5,000,000.00 UNTIL 10/30/98; (B) $7,000,000.00 FROM 10/31/98 UNTIL 10/30/99; (C) $9,000,000.00 FROM 10/3l/99 UNTIL 10/30/2000 OR (D) THE SUM OF (i) 80% EIGHTY PERCENT OF THE AGGREGATE AMOUNT OF ELIGIBLE ACCOUNTS; PLUS (ii) 50% FIFTY PERCENT OF THE AGGREGATE AMOUNT OF ELIGIBLE INVENTORY WHICH FIGURE CANNOT EXCEED 25% TWENTY-FIVE PERCENT OF MARGINED RECEIVABLES. In determining the amount of the Borrowing Base, all Eligible Accounts and Eligible Inventory of all Borrowers shall be included. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral for any Loan, whether real or personal property, whether granted directly or indirectly, whether granted now of in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. COMMITTED SUM. The words "Committed Sum" mean an amount equal to $9,000,000.00. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain terms and conditions acceptable to Lender and in which Lender has a first lien security interest, less the amount of all returns, discounts, credits, and offsets of any nature; provided, however, unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower and to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (b) All Accounts with respect to which Borrower has furnished a payment and/or performance bond and that portion of any Accounts for or representing retainage, if any, until all prerequisites to the immediate payment of such retainage have been satisfied. (c) Accounts with respect to which goods are placed on consignment or subject to a guaranteed sale or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of, or whose principal place of business is located outside of, the United States or its territories, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender in its sole and absolute discretion. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, or setoff. (g) Accounts with respect to which all goods have not been shipped or delivered, or all services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (i) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (j) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States, except to the extent an acknowledgment of assignment to Lender of any such Accounts in compliance with the Federal Assignment of Claims Act and other applicable laws has been received by Lender. (k) Accounts which have not been paid or are not due and payable in full within (60) SIXTY days from the original invoice date. ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, the aggregate value of all of Borrower's Inventory as defined below except: (a) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, end claims of third parties, except Lender's security interest. (b) Inventory which Lender, in its sole and absolute discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. (c) Inventory which has been returned or rejected. (d) Inventory which is held by others on consignment, sale on approval or otherwise riot in Borrower's physical possession, except upon the written consent of Lender. (e) Inventory located outside the United States. (f) WORK IN PROCESS OLDER THAN (60) DAYS. For purposes of this Agreement, Eligible Inventory shall be valued at the lower of cost or market value. ERISA. The word "ERISA" means the Employee Retirement, Income Security Act of 1974, as amended. GRANTOR. The word "Grantor" means and includes each and all of the persons or entities granting a Security Interest in any Collateral for any of the Loans. GUARANTOR. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties for any of the Loans. INDEBTEDNESS. The word "indebtedness" means the indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus any accrued interest thereon, owing by Borrower, at any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Borrower, of any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing; whether such Indebtedness arises by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary. due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. INVENTORY. The word "Inventory" means all raw materials and all tangible personal property, goods, merchandise and other personal property now owned or hereafter acquired by Borrower which is held for sale or lease in the ordinary course of Borrower's business, excluding all spare parts, packaging materials, supplies and any advertising costs capitalized into inventory. LENDER. The word "Lender" means Bank One, Colorado, NA, its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. NOTE. The word "Note" means any and all promissory note or notes which evidence Borrower's Loans in favor of Lender, as well as any amendment, modification, renewal or replacement thereof. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either (1) not yet due, or (ii) being contested in good faith by appropriate proceedings and for which Borrower has established adequate reserves; (c) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure any indebtedness permitted under this Agreement; and (d) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements, and documents, whether now or hereafter existing, executed in connection with the Note. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security interest" mean and include without limitation any type of security interest, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. LINE OF CREDIT. Subject to the other terms and conditions herein, Lender hereby establishes a Line of Credit for Borrower through which Lender agrees to make advances to Borrower from time to time from the effective date of this Agreement until the maturity date of the Note evidencing the Line of Credit, provided the aggregate amount of such advances outstanding at any time does not exceed the lesser of the amount equal to the Borrowing Base or an amount equal to the Committed Sum. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement. BORROWING BASE COMPLIANCE. If at any time the aggregate principal amount outstanding under the Line of Credit shall exceed the applicable Borrowing Base, Borrower shall pay to Lender an amount equal to the difference between the outstanding principal balance under the Line of Credit and the Borrowing Base. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of his Agreement conforms to the requirements of the definition of an Eligible Account; and (b) All Account information listed on reports and schedules delivered to Lender will be true and correct, subject to immaterial variance. REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the Inventory, Borrower represents and warrants to Lender (a) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (b) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (c) The value of the Inventory will be determined on a consistent accounting basis; (d) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; and (e) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each request for an Advance, as of the date of any renewal, extension or modification of any Loan, and at all times any Loans or Lender's commitment to make Loans hereunder is outstanding: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Colorado and is duly qualified and in good standing in all other states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents to which Borrower is a party have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, of constitute a default under (a) any provision of its' articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Borrower has all requisite power and authority to execute and deliver this Agreement and all other Related Documents to which Borrower is a party. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely discloses Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement and all other Related Documents to which Borrower is a party constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. PROPERTIES. Except for Permitted Liens, Borrower is the sole owner of, and has good title to, all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last six (6) years. COMPLIANCE. Except as disclosed in writing to Lender (a) Borrower is conducting Borrower's businesses in material compliance with all applicable federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and Court decisions, including without limitation, those pertaining to health or environmental matters. and (b) Borrower otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage of any toxic or hazardous substance or solid waste. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower, is pending or threatened, and no other event has occurred which may in any one case or in the aggregate materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. All tax returns and reports of Borrower that are or were required to be filed, have beer filed, and all taxes, assessments and other governmental charges have been paid in full, except those that have been disclosed in writing to Lender which are presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to and approved by Lender in writing, Borrower has not entered into any Security Agreements, granted a Security interest or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral, except in favor of Lender. LICENSES, TRADEMARKS AND PATENTS. Borrower possesses and will continue to possess all permits, licenses, trademarks, patents and rights thereto which are needed to conduct Borrower's business and Borrower's business does not conflict with or violate any valid rights of others with respect to the foregoing. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes approved by Lender and such proceeds will not be used for the purchasing or carrying of "margin stock" as defined in Regulation U issued by the Board of Governors of the Federal Reserve System. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA, has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initialed steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other then those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's chief executive office if Borrower has more than one place of business, is located at 6175 LONGBOW DRIVE, BOULDER, CO 80301. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation. is relying upon the above representations and warranties in extending the Loans to Borrower. Borrower further agrees. that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect during the term of this Agreement. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: DEPOSITORY RELATIONSHIP. Establish and maintain its primary operating account(s) with Lender. LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor, and (c) the creation, occurrence of, assumption by Borrower of any actual or contingent liabilities not permitted under this Agreement. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine, audit and make and take away copies or reproductions of Borrower's books and records at all reasonable times. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. FINANCIAL STATEMENTS, Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet, income statement, and statement of changes in financial position for the year ended, audited by a certified public accountant satisfactory to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, ages of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply at all times with the following covenants and ratios: CURRENT RATIO. Maintain, at all times, a ratio of Liquid Assets plus inventory, to current liabilities less customer deposits, in excess of 1.40 to 1.00. QUICK RATIO. Maintain, at all times, a ratio of Liquid Assets to current liabilities in excess of 1.00 to 1.00. DEBT SERVICE COVERAGE. Maintain, as of the end of each fiscal quarter, a ratio of (a) net income before taxes, plus interest, depreciation, amortization and depletion, less any Distributions for the 12 month period ending with such fiscal quarter, to (b) current maturities of long-term debt, plus current maturities of capital leases and interest expense for the following 12 month period, of not less than 2.00 to 1.0 The financial covenants and ratios set forth in this paragraph shall be determined and calculated for all Borrowers on a consolidated basis and reference in this paragraph to "Borrower" shall mean all "Borrowers." For purposes of this Agreement and to the extent the following terms are utilized in this Agreement, the term "Tangible Net Worth" shall mean borrower's total assets excluding all intangible assets (including, without limitation, goodwill, trademarks, patents, copyrights, organization expenses, and similar intangible items) less total liabilities excluding Subordinated Debt. The term 'Subordinated Debt' shall mean all indebtedness owing by Borrower which has been subordinated by written agreement to all indebtedness now or hereafter owing by Borrower to Lender, such agreement to be in form and substance acceptable to Lender. The term "Working Capital" shall mean Borrower's Liquid Assets plus inventory, less current liabilities. The term "Liquid Assets" shall mean borrower's unencumbered cash, marketable securities and accounts receivable net of reserves. The term "Cash Raw" shall mean not income after taxes, and exclusive of extraordinary items, plus depreciation and amortization. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk Insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form. amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to from the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender. In connection with all policies covering assets in which Lender holds or is offered a Security Interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN FEES AND CHARGES. In addition to all other agreed upon fees and charges. pay the following: $12,500.00 YEAR ONE, $17,500.00 YEAR TWO, $22,500.00 YEAR THREE. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income. or profits; provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien. or claim in accordance with generally accepted accounting principles. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act, all applicable environmental statutes, rules, regulations and ordinances and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender WITHIN (45) FORTY FIVE DAYS AFTER EACH CALENDAR QUARTER with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, (a) certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and that, as of the date of the certificate, no Event of Default exists under this Agreement, and (b) demonstrating compliance with all financial covenants set forth in this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all federal, state and local environmental laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; and furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. BORROWING BASE CERTIFICATE. Within 45 days after each FISCAL QUARTER, Borrower shall deliver to Lender a borrowing base certificate, in form and detail satisfactory to Lender, along with such supporting documentation as Lender may request, including without limitation, an accounts receivable aging report and/or a list or schedule of Borrower's accounts receivable, inventory and/or equipment. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: MAINTAIN BASIC BUSINESS. Engage in any business activities substantially different than those in which Borrower is presently engaged. CONTINUITY OF OPERATIONS. Cease operations, liquidate, dissolve or merge or consolidate with or into any other entity. INDEBTEDNESS. Create, incur or assume additional indebtedness for borrowed money, including capital losses, or guarantee any indebtedness owing by others, other then (a) current unsecured trade debt incurred in the ordinary course of business, (b) indebtedness owing to Lender, (c) borrowings outstanding as of the date hereof and disclosed to Lender in writing, and (d) any borrowings otherwise approved by Lender in writing. LIENS. Mortgage, assign, pledge, grant a security interest in or otherwise encumber Borrower's assets, except as allowed as a Permitted Lien. TRANSFER OF ASSETS. Transfer, sell or otherwise dispose of any of Borrower's assets other than in the ordinary course of business. CHANGE IN MANAGEMENT. Permit a change in the senior executive or management personnel of Borrower. TRANSFER OF OWNERSHIP. Permit the sale, pledge or other transfer of any ownership interest in Borrower. INVESTMENTS. Invest in, or purchase, create, form or acquire any interest in, any other enterprise or entity. LOANS. Make any loans to any person or entity. DIVIDENDS. Pay any dividends on Borrower's capital stock or purchase, redeem, retire or otherwise acquire any of Borrower's capital stock or alter or amend Borrower's capital structure. AFFILIATES. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable than would be obtained in a comparable arm's length transaction with a person or entity not an Affiliate of Borrower. As used herein, the term "Affiliate" means any individual or entity directly or indirectly controlling, controlled by or under common control with, another entity or individual. CONDITIONS PRECEDENT TO ADVANCES. Lender's obligation to make any Advances or to provide any other financial accommodations to or for the benefit of Borrower hereunder shall be subject to the conditions precedent that as of the date of such advance or disbursement and after giving effect thereto (a) all representations and warranties made to Lender in this Agreement and the Related Documents shall be true and correct as of and as if made on such date, (b) no material adverse change in the financial condition of Borrower or any Guarantor since the effective date of the most recent financial statements furnished to Lender, or in the value of any Collateral, shall have occurred and be continuing, (c) no event has occurred and is continuing, or would result from the requested advance or disbursement, which with notice or lapse of time, or both, would constitute an Event of Default, (d) no Guarantor has sought claimed or otherwise attempted to limit, modify or revoke such Guarantor's guaranty of any Loan, and (e) Lender has received all Related Documents appropriately executed by Borrower and all other proper parties. ADDITIONAL PROVISIONS. THE BORROWER WILL MAINTAIN A MINIMUM TANGIBLE NET WORTH OF NOT LESS THAN $12,000,000.00 THROUGH 06/30/98; $14,000,000.00 FROM 07/01/98 THROUGH 06/30/99; $17,000,000.00 FROM 07/0l/99 THROUGH 06/30/2000 (PLUS 75%) SEVENTY FIVE PERCENT OF NEW EQUITY CAPITAL IF APPLICABLE. THE BORROWER WILL NOT PURCHASE, CREATE OR ACQUIRE A COMPANY WITH ANNUAL REVENUES GREATER THAT FIFTY (50%) PERCENT OF ITS (COLORADO MEDTECH, INC.) ANNUAL REVENUE, MEASURED AS OF ITS MOST RECENT FISCAL YEAR END, WITHOUT THE LENDER'S WRITTEN CONSENT. BORROWER WILL NOT PURCHASE, CREATE OR ACQUIRE A COMPANY WHOSE VALUE IS GREATER THAN ITS (COLORADO MEDTECH, INC.) TANGIBLE NET WORTH, MEASURED AS OF ITS MOST RECENT QUARTER END, WITHOUT THE LENDER'S PRIOR WRITTEN CONSENT. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on any of the indebtedness. OTHER DEFAULTS. Failure of Borrower, any Guarantor or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement, the Note or in any of the other Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement now existing or hereafter arising between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender under this Agreement or the Related Documents is false or misleading in any material respect. DEFAULT TO THIRD PARTY. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Borrower, Grantor or any Guarantor to any third party under any agreement or undertaking. BANKRUPTCY OR INSOLVENCY. If the Borrower, Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. LIQUIDATION, DEATH AND RELATED EVENTS. If Borrower, Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. CREDITOR OF FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, Lender may, at its option, without further notice or demand, (a) terminate all commitments and obligations of Lender to make Loans to Borrower, if any, (b) declare all Loans and any other Indebtedness immediately due and payable, (c) refuse to advance any additional amounts under the Note or to provide any other financial accommodations under this Agreement, or (d) exercise all the rights and remedies provided in the Note or in any of the Related Documents or available at law, in equity, or otherwise; provided, however, if any Event of Default of the type described in the "Bankruptcy or Insolvency" subsection above shall occur, all Loans and any other Indebtedness shall automatically become due and payable, without any notice, demand or action by Lender, except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative end may be exercised singularly or concurrently. Election by tender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreements of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association. Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, provisional or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. This includes, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment, or imposition of a receivership, or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code, any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right or remedy, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated; provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this arbitration provision shall preclude either party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purpose. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation Interests. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may hire one or more attorneys to help collect the indebtedness if Borrower does not pay, and Borrower will pay Lender's reasonable attorneys' fees. NOTICES. All notices required to he given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a notionally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. It feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute the same document. Signature pages may be detached from the counterparts to a single copy of this Agreement to physically form one document. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right to any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor or Guarantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. EACH BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT. AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS EXECUTED AS OF THE DATE SET FORTH ABOVE. BORROWER: COLORADO MEDTECH, INC., A COLORADO CORPORATION By: /s/ John V. Atanasoff ----------------------------------- JOHN V. ATANASOFF, PRESIDENT & CEO By: /s/ Bruce L. Arfmann ----------------------------------- BRUCE L. ARFMANN, CFO RELA, INC., A COLORADO CORPORATION By: /s/ John V. Atanasoff ----------------------------------- JOHN V. ATANASOFF, CHAIRMAN OF THE BOARD By: /s/ Bruce L. Arfmann ----------------------------------- BRUCE L. ARFMANN, CFO NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION By: /s/ John V. Atanasoff ----------------------------------- JOHN V. ATANASOFF, CHAIRMAN OF THE BOARD By: /s/ Bruce L. Arfmann ----------------------------------- BRUCE L. ARFMANN, CFO LENDER: Bank One, Colorado NA By: /s/ Eric R. Long ----------------------------------- Authorized Officer - ----------------------------------------------------------------- LASER PRO, Reg U.S. Pat. & T.M. Off., Ver 3.23(c) 1997 CFI ProServices, Inc. All rights reserved (CO-C40 CD625633.LNC3.OVL) BANKONE. COMMERCIAL SECURITY AGREEMENT
- ------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $9,000,000.00 10-30-97 10-30-2000 001113 328 2992911044 00410 - ------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------------------------------
Borrower: COLORADO MEDTECH, INC., A COLORADO Lender: Bank One, Colorado, NA CORPORATION; ET. AL. Boulder 6175 LONGBOW DRIVE 1125 17th Street BOULDER, CO 80301 Denver, CO 80217 Grantor: COLORADO MEDTECH, INC., A COLORADO CORPORATION, RELA, INC., A COLORADO CORPORATION and NOVEL BIOMEDICAL. INC., A MINNESOTA CORPORATION THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BY COLORADO MEDTECH, INC., A COLORADO CORPORATION, RELA, INC., A COLORADO CORPORATION AND NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION (REFERRED TO BELOW INDIVIDUALLY AND COLLECTIVELY AS "GRANTOR") FOR THE BENEFIT OF BANKONE, COLORADO, NA REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Colorado ("Code"). All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. BORROWER. The word "Borrower" means each and every person or entity signing the Note, including without limitation COLORADO MEDTECH, INC., A COLORADO CORPORATION, RELA, INC., A COLORADO CORPORATION and NOVEL BIOMEDICAL. INC., A MINNESOTA CORPORATION. COLLATERAL. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES In addition, the word "Collateral" Includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, ports. supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All proceeds (including, without limitation, insurance proceeds) from the sale, lease, destruction, loss, or other disposition of any of the property described in this Collateral section. (d) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph microfilm. microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. EVENT OF DEFAULT. The words "Event of Default" mean and include any of the Events of Default set forth below in the section titled "Events of Default." GRANTOR. The word "Grantor" means COLORADO MEDTECH, INC., A COLORADO CORPORATION, RELA, INC., A COLORADO CORPORATION and NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION. GUARANTOR. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. INDEBTEDNESS. The word "Indebtedness" means the Indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. LENDER. The word "Lender" means Bank One, Colorado, NA, its successors and assigns (which is a secured party under the Code). NOTE. The word "Note" means the promissory note dated October 30, 1997, in the principal amount of $9,000,000.00 from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for such promissory note. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements. environmental agreements, guarantee, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral to Lender; (b) Grantor has established adequate means of obtaining from Borrower on a continuing basis information about Borrower's financial condition; and (c) Lender has made no representation to Grantor about Borrower or Borrower's creditworthiness. GRANTOR'S WAIVERS. Grantor waives notice of the incurring of any Indebtedness and waives all requirements of presentment, protest, demand, and notice of dishonor or nonpayment to Grantor, Borrower, or any other party to the indebtedness or the Collateral. Lender may do any of the following with respect to any obligation of any Borrower, without first notifying or obtaining the consent of Grantor: (a) grant any extension of time for any payment, (b) grant any renewal, (c) permit any modification of payment terms or other terms, (d) release Borrower or any Guarantor from all or any portion of the Indebtedness, or (e) exchange or release all or any portion of the Collateral or other security for all or any portion of the Indebtedness. No such act or failure to act shall affect Lender's rights against Grantor or the Collateral. OBLIGATIONS OF GRANTOR. Grantor represents, warrants and covenants to Lender as follows: PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby irrevocably appoints Lender as its attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement, or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of its security interest in the Collateral. Grantor has disclosed to Lender all tradenames and assumed names currently used by Grantor, all tradenames and assumed names used by Grantor within the previous six (6) years and all of Grantor's current business locations. Grantor will notify Lender in writing at least thirty (30) days prior to the occurrence of any of the following: (i) any changes in Grantor's name, tradename(s) or assumed name(s), or (ii) any change in Grantor's business location(s) or the location of any of the Collateral. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its articles or agreements relating to entity incorporation, organization or existence do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner, of preparation and execution, and all persons, appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; there shall be no setoffs or counterclaims against any such account; and no agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the Collateral consists of Intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of Inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Colorado, without the prior written consent of Lender. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell Inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that it is the owner of the Collateral and holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and insofar as the Collateral consists of accounts and general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require, including without limitation names and addresses of account debtors and agings of accounts and general intangibles. Insofar as the Collateral consists of inventory and equipment, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions. and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of his subsidiaries or related companies. MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and governmental charges or levies upon the Collateral and provide Lender evidence of such payment upon its request. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, data, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor is conducting and will continue to conduct Grantor's businesses in material compliance with all federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions applicable to Grantor's businesses and to the production, disposition or use of the Collateral, including without limitation, those pertaining to health and environmental matters such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (collectively, together with any subsequent amendments, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous Substance Waste Amendments of 1984 (collectively, together with any subsequent amendments, hereinafter called "RCRA"). Grantor represents and warrants that (i) none of the operations of Grantor is the subject of a federal, state or local investigation evaluating whether any material remedial action is needed to respond to a release or disposal of any toxic or hazardous substance or solid waste into the environment; (ii) Grantor has not filed any notice under any federal, state or local law indicating that Grantor is responsible for the release into the environment, the disposal on any promises in which Grantor is conducting its businesses or the improper storage, of any material amount of any toxic or hazardous substance or solid waste or that any such toxic or hazardous substance or solid waste has been released, disposed of or is improperly stored, upon any premises on which Grantor is conducting its businesses; and (iii) Grantor otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage, of any such toxic or hazardous substance or solid waste. The terms "hazardous substance" and "release," as used herein, shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal," as used herein, shall have the meanings specified in RCRA; provided, however, that to the extent that the laws of the State of Colorado establish meanings for such terms which are broader than that specified in either CERCLA or RCRA, such broader meanings shall apply. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnity and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the termination of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risk insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender, and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each Insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest Insurance," which will cover only Lender's interest in the Collateral. APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay THE INDEBTEDNESS. Application of insurance proceeds to the payment of the Indebtedness will not extend, postpone or waive any payments otherwise due, or change the amount of such payments to be made and proceeds may be applied in such order and such amounts as Lender may elect. SOLVENCY OF GRANTOR. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Grantor at the time of the execution of this Agreement, (i) Grantor is and will be solvent, (ii) the fair salable value of Grantor's assets exceeds and will continue to exceed Grantor's liabilities (both fixed and contingent), (iii) Grantor is paying and will continue to be able to pay its debts as they mature, and (iv) if Grantor is not an individual Grantor has and will have sufficient capital to carry on Grantor's businesses and all businesses in which Grantor is about to engage. LIEN NOT RELEASED. The lien, security interest and other security rights of Lender hereunder shall not be impaired by any indulgence, moratorium or release granted by Lender, including but not limited to, the following: (a) any renewal, extension, increase or modification of any of the Indebtedness; (b) any surrender, compromise, release, renewal, extension, exchange or substitution granted in respect of any of the Collateral; (c) any release or indulgence granted to any endorser, guarantor or surety of any of the Indebtedness; (d) any release of any other collateral for any of the Indebtedness; (e) any acquisition of any additional collateral for any of the Indebtedness; and (f) any waiver or failure to exercise any right, power or remedy granted herein, by law or in any of the Related Documents. REQUEST FOR ENVIRONMENTAL INSPECTIONS. Upon Lender's reasonable request from time to time, Grantor will obtain at Grantor's expense an inspection or audit report(s) addressed to Lender of Grantor's operations from an engineering or consulting firm approved by Lender, indicating the presence or absence of toxic and hazardous substances, underground storage tanks and solid waste on any premises in which Grantor is conducting a business; provided, however, Grantor will be obligated to pay for the cost of any such inspection or audit no more than one time in any twelve (12) month period unless Lender has reason to believe that toxic or hazardous substance or solid wastes have been dumped or released on any such premises. If Grantor fails to order or obtain an inspection or audit within ten (10) days after its request, Lender may at its option order such inspection or audit, and Grantor grants to Lender and its agents, employees, contractors and consultants access to the promises in which it is conducting its business and a license (which is coupled with an interest and is irrevocable) to obtain inspections and audits. Grantor agrees to promptly provide Lender with a copy of the results of any such inspection or audit received by Grantor. The cost of such inspections and audits by Lender shall be a part of the Indebtedness, secured by the Collateral and payable by Grantor on demand. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may collect the accounts, notify account debtors to make payments directly to Lender for application to the Indebtedness and to verify the accounts with such account debtors. Lender also has the right, at the expense of Grantor, to enforce collection of such accounts and adjust, settle, compromise, sue for or foreclose on the amount owing under any such account, in the same manner and to the same extent as Grantor. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care, shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims. at any time levied or placed on as Collateral. Lender also may (but shall not be obligated to) pay all costs far insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and be payable on demand by Lender. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall Constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Indebtedness or any other indebtedness or obligation now or hereafter owing to Lender. OTHER DEFAULTS. Failure of Grantor or Borrower to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement, the Note, any of the other Related Documents or failure of Borrower to comply with or to perform any term, obligation, covenant or condition contained in any other agreement now existing or hereafter arising between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender under this Agreement, the Note or any of the other Related Documents is false or misleading in any material respect. DEFAULT TO THIRD PARTY. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Borrower, Grantor or any Guarantor to any third party under any agreement or undertaking. BANKRUPTCY OR INSOLVENCY. If the Borrower, Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed to, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. LIQUIDATION, DEATH AND RELATED EVENTS. If Borrower, Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or Borrower or by any government agency against the Collateral or any other collateral securing the Indebtedness. RIGHTS AND REMEDIES ON DEFAULT. It an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Borrower would be required to pay, immediately due and payable, without notice. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after Lender repossession. SELL THE COLLATERAL. Lender shall have full Power to sell, lease, transfer, or otherwise dispose of the Collateral or the proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral (as a unit or in parcels) at public auction or private rate. Lender may buy the Collateral, or any portion thereof (i) at any public sale, and (ii) at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations. Lender shall not be obligated to make any sale of Collateral regardless of a notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time and place of any public sale thereof or, of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days prior to the date any public sale, or after which a private sale, of any of such Collateral is to be held. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring. preparing for sale and selling the Collateral, shall become a part at the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Any sale of Collateral through the public trustee shall be deemed a commercially reasonable sale. APPOINT RECEIVER. To the extent permitted by applicable law. Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. The receiver may be appointed by a court of competent jurisdiction upon ex parte application and without notice, notice being expressly waived. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Borrower for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Borrower shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Grantor waives any right to require Lender to proceed against any third party, exhaust any other security for the Indebtedness or pursue any other right or remedy available to Lender. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor or Borrower under this Agreement, after Grantor or Borrower's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and supercedes all prior written and oral agreements and understandings, it any, regarding same. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. ATTORNEYS' FEES; EXPENSES. Grantor will upon demand pay to Lender the amount of any and all costs and expenses (including without limitation, reasonable attorneys' fees and expenses) which Lender may incur in connection with (i) the perfection and preservation of the collateral assignment and security interests created under this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, (iii) the exercise or enforcement of any of the rights of Lender under this Agreement, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. TERMINATION. Upon (i) the satisfaction in full of the indebtedness and all obligations hereunder, (ii) the termination or expiration of any commitment of Lender to extend credit that would become Indebtedness hereunder, and (iii) Lender's receipt of a written request from Grantor for the termination hereof, this Agreement and the security interests created hereby shall terminate. Upon termination of this Agreement and Grantor's written request, Lender will, at Granters sole cost and expense, return to Grantor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof and execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. INDEMNITY. Grantor hereby agrees to Indemnify, defend and hold harmless Lender, and its officers, directors, shareholders. employees, agents and representatives (each an "Indemnified Person") from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions. judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the "Claims") which may be imposed on, incurred by or asserted against, any Indemnified Person (whether or not caused by any Indemnified Person's sole, concurrent or contributory negligence) arising in connection with the Related Documents, the indebtedness or the Collateral (including, without limitation, the enforcement of the Related Documents and the defense of any Indemnified Person's action and/or inactions in connection with the Related Documents), except to the limited extent that the Claims against the Indemnified Person are proximately caused by such Indemnified Person's willful misconduct. The Indemnification provided for in this section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the Notices, All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more then one Grantor or Borrower, notice to any Grantor or Borrower will constitute notice to all Grantors and Borrowers. For notice purposes, Grantor and Borrower will keep Lender informed at all times of Grantor and Borrower's current address(es). POWER OF ATTORNEY. Grantor hereby irrevocably appoints Lender all its true and lawful attorney-in-fact, such power of attorney being coupled with an Interest, with full power of substitution to do the following in the place and stead of Grantor and in the name of Grantor: (a) to demand, collect, receive, receipt for, sue and recover all sums of money of other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if an offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns; provided, however, Grantor's rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Lender. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement, unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right to thereafter demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER 30, 1997. GRANTOR: COLORADO MEDTECH, INC., A COLORADO CORPORATION By: /s/ John V. Atanasoff ------------------------------------------- JOHN V. ATANASOFF, PRESIDENT & CEO By: /s/ Bruce L. Arfmann ------------------------------------------- BRUCE L. ARFMANN, CFO RELA, INC., A COLORADO CORPORATION By: /s/ John V. Atanasoff ------------------------------------------- JOHN V. ATANASOFF, CHAIRMAN OF THE BOARD By: /s/ Bruce L. Arfmann ------------------------------------------- BRUCE L. ARFMANN, CFO NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION By: /s/ John V. Atanasoff ------------------------------------------- JOHN V. ATANASOFF, CHAIRMAN OF THE BOARD By: /s/ Bruce L. Arfmann ------------------------------------------- BRUCE L. ARFMANN, CFO - -------------------------------------------------------------------------------- LASER PRO, Reg U.S. Pat. & T.M. Off., Ver 3.23(c) 1997 CFI ProServices, Inc. All rights reserved (CO-E40 CD625633.LNC3.OVL) BANKONE PROMISSORY NOTE
- -------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral Account Initials $9,000,000.00 10-30-1997 10-30-2000 001113 328 2992911104 - -------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item - --------------------------------------------------------------------------------------------------
Borrower: COLORADO MEDTECH, INC., A COLORADO Lender: Bank One Colorado, NA CORPORATION; ET. AL. Boulder 6175 LONGBOW DRIVE 1125 17th Street BOULDER, CO 80301 Denver, CO 80217 Principal Amount: $9,000,000.00 Date of Note: October 30, 1997 PROMISE TO PAY. For value received, COLORADO MEDTECH, INC., A COLORADO CORPORATION, RELA, INC., A COLORADO CORPORATION and NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION referred to in this Note individually and collectively as "Borrower") jointly and severally promise to pay to Bank One, Colorado. NA ("Lender"), or order in lawful money of the United States of America, the principal amount of Nine Million & 00/100 Dollars ($9,000,000.00) ("Total Principal Amount") or so much as may be outstanding, together with Interest on the unpaid outstanding principal balance from the date advanced until paid in full. PAYMENT. This Note shall be payable as follows: Interest shall be due and payable monthly as it accrues, commencing on November 30, 1997 and continuing on the same day of each month thereafter during the term of this Note, and the outstanding principal balance of this Note, together with all accrued but unpaid interest, shall be due and payable on October 30, 2000. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at the address designated by Lender from time to time in writing. If any payment of principal of or interest on this Note shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. As used herein, the term "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. Unless otherwise agreed to, in writing, or otherwise required by applicable law, payments will be applied first to accrued, unpaid interest, then to principal, and any remaining amount to any unpaid collection costs, late charges and other charges, provided, however, upon delinquency or other default, Lender reserves the right to apply payments among principal, interest, late charges, collection costs and other charges at its discretion. The books and records of Lender shall be prima facie evidence of all outstanding principal of and accrued but unpaid interest on the a Note. This Note may be executed in connection with a loan agreement. Any such loan agreement may contain additional rights, obligations and terms. VARIABLE INTEREST RATE. The interest rate on this Note is subject to fluctuation based upon the Prime Rate of interest in effect from time to time (the "Index") (which rate may not be the lowest, best or most favorable rate of interest which Lender may charge on loans to its customers). "Prime Rate" shall mean the rate announced from time to time by Lender as its prime rate. Each change in the rate to be charged on this Note will become effective without notice on the same day as the Index changes. Except as otherwise provided herein, the unpaid principal balance of this Note shall accrue interest at a rate per annum which will from time to time be equal to the sum of the Index, plus 0.000%. NOTICE: Under no circumstances will the Interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without fee all or a portion of the principal amount owed hereunder earlier than it is due. All prepayments shall be applied to the indebtedness owing hereunder In such order and manner as Lender may from time to time determine in its sole discretion. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $25.00, whichever is greater, up to the maximum amount of $250.00 per late charge. DEFAULT. Borrower will be in default it any of the following happens: (a) Borrower fails to make any payment of principal or interest when due under this Note or any other indebtedness owing now or hereafter by Borrower to Lender; (b) Failure of Borrower or any other party to comply with or perform any term, obligation, covenant or condition contained in this Note or in any other promissory note, credit agreement, loan agreement, guaranty, security agreement, mortgage, deed of trust or any other instrument, agreement or document, whether now or hereafter existing, executed in connection with this Note (the Note and all such other instruments, agreements, and documents shall be collectively known herein as the "Related Documents"); (c) Any representation or statement made or furnished to Lender herein, in any of the Related Documents or in connection with any of the foregoing is false or misleading in any material respect; (d) Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety or otherwise, becomes insolvent or bankrupt, has a receiver or trustee appointed for any part of its property, makes an assignment for the benefit of its creditors, or any proceeding is commenced either by any such party or against it under any bankruptcy or insolvency laws; (e) the occurrence of any event of default specified in any of the other Related Documents or in any other agreement now or hereafter arising between Borrower and Lender; (f) the occurrence of any event which permits the acceleration of maturity of any Indebtedness owing now or hereafter by Borrower to any third party; or (g) the liquidation, termination, dissolution, death or legal incapacity of Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantee, surety, or otherwise. LENDER'S RIGHTS. Upon default, Lender may at its option, without further notice or demand (i) declare the entire unpaid principal balance on this Note, all accrued unpaid interest and all other costs and expenses for which Borrower is responsible for under this Note and any other Related Document immediately due, (ii) refuse to advance any additional amounts under this Note, (iii) foreclose all items securing payment hereof, (iv) pursue any other rights, remedies and recourses available to the Lender, including without limitation, any such rights, remedies or recourses under the Related Documents, at law or in equity, or (v) pursue any combination of the foregoing. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both at the following: (a) increase the variable interest rate on this Note to 3.000 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire an attorney to help collect this Note if Borrower does not pay and Borrower will pay Lender's reasonable attorneys' fees and all other costs of collection, unless prohibited by applicable law. This Note has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration, this Note shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. PURPOSE. Borrower agrees that no advances under this Note shall be used for personal, family, or household purposes and that all advances hereunder shall be used solely for business, commercial, agricultural or other similar purposes. JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT. TORT OR OTHERWISE) BETWEEN BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Unless a 1ien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's rights, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender to the extent permitted by applicable law to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Borrower may request advances and make payments hereunder from time to time, provided that it is understood and agreed that the aggregate principal amount outstanding from time to time hereunder shall not at any time exceed the Total Principal Amount. The unpaid principal balance of this Note shall increase and decrease with each new advance or payment hereunder, as the case may be. Subject to the terms hereof, Borrower may borrow, repay and reborrow hereunder. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them. whether individual, joint, or class in nature, arising from this Note, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association. Any arbitration proceeding held pursuant to, this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreements This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, provisional or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. This includes, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgages, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right or remedy, concerning any collateral, including any claim to rescind, reform, or otherwise modify any agreement, relating to the collateral, shall also be arbitrated; provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this arbitration provision shall prejudice either party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an act; or brought by a party shall be Applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action, for these purposes. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Each Borrower understands and agrees that, with or without notice to Borrower, Lender may with respect to any other Borrower or with respect of any other indebtedness owing by such other Borrower (a) make one or more additional, secured or unsecured loans or otherwise extend additional credit; (b) alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time of payment or other terms any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (c) exchange. enforce, waive, subordinate, fail or decide to perfect and release any security, with or without the substitution of now collateral; (d) apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreements, as Lender in its discretion may determine; (e) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; and (f) determine how, when and what application of payments and credits shall be made and any other indebtedness owing by such other borrower. Borrowers and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this Note, or release any party or guarantor or collateral: or unjustifiably impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree the Lender may modify this Note without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS, BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: By: /s/ John V. Atanasoff -------------------------------------------- John V. Atanasoff, II, President & CEO By: /s/ Bruce L. Arfmann -------------------------------------------- Bruce L. Arfmann, CFO RELA, INC., A COLORADO CORPORATION By: /s/ John V. Atanasoff -------------------------------------------- John V. Atanasoff, II, Chairman, BOD By: /s/ Bruce L. Arfmann -------------------------------------------- Bruce L. Arfmann, CFO NOVEL BIOMEDICAL, INC., A MINNESOTA CORPORATION By: /s/ John V. Atanasoff -------------------------------------------- John V. Atanasoff, II, Chairman, BOD By: /s/ Bruce L. Arfmann -------------------------------------------- Bruce L. Arfmann, CFO EX-21.1 4 EXHIBIT 21.1 Exhibit 21.1 COLORADO MEDTECH, INC. Subsidiaries of Colorado MEDtech, Inc. 1. Novel Biomedical, Inc., a Minnesota corporation. 2. BioMed Y2K, Inc., a Colorado corporation EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS September 28, 1998 As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8, dated December 3, 1996. ARTHUR ANDERSEN LLP EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1998 JUN-01-1997 JUN-30-1998 2,499,072 12,144,005 8,211,436 (580,000) 4,225,680 29,249,217 6,036,076 (4,301,804) 34,007,282 12,284,651 0 0 0 11,879,456 9,843,175 34,007,282 47,300,200 47,300,200 30,357,492 30,357,492 11,063,389 0 14,127 6,292,147 1,800,000 4,492,147 0 0 0 4,492,147 .43 .37
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