-----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, KxI4B+UuN88MgpQtnae0pqT/m90kmNHv6dPhv2NFu7Gk/APVWV8pWDDnv5HWeTxT eHMguW0V8fVwIHqlJRxacA== 0001047469-99-037032.txt : 19991227 0001047469-99-037032.hdr.sgml : 19991227 ACCESSION NUMBER: 0001047469-99-037032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718456 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 FORM 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, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 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 ____ 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, 1999 was $ 174,357,653. The number of shares outstanding of the issuer's Common Stock as of August 31, 1999 was 11,129,255. 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. 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. [ ] PART I ITEM 1. DESCRIPTION OF BUSINESS. Colorado MEDtech, Inc. ("CMED" or the "Company")) is a leading full-service provider of advanced medical products and comprehensive outsourcing services. Colorado MEDtech has reorganized its operating units, renaming some, in order to emphasize the focus of the Company and better present its services and products to its customers. The new names will be used throughout this report. Colorado MEDtech's operating units and their principal activities are: - - CMED/RELADIVISION ("RELA") (formerly the RELA Division) provides custom product development services, specializing in the design and development of diagnostic and therapeutic medical devices and medical software; - - IMAGING AND POWER SYSTEMS DIVISION ("IPS") (formerly the Erbtec Engineering Division) designs and develops a broad range of imaging system hardware and software, including advanced magnetic resonance imaging (MRI) systems and application software, high-performance radio frequency ("RF") amplifiers for MRI systems and high-voltage x-ray generator subsystems for computed tomography (CT) scanners; - - CMED MANUFACTURING DIVISION ("CMED MFG") (formerly a part of the RELA Division) manufactures electronic and electromechanical medical devices for major medical original equipment manufacturers ("OEMs") and for CMED operating units; - - CMED CATHETER AND DISPOSABLES TECHNOLOGY, INC. ("CDT") (formerly Novel Biomedical, Inc.) designs, develops and manufactures unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology and infertility treatment; - - CMED AUTOMATION DIVISION ("CMED AUTOMATION") designs, develops and manufactures automation systems for medical device and closely associated businesses; and - - BIOMED Y2K, INC. ("BIOMED") provides software tools and services to support healthcare institutions' efforts to establish Year 2000 compliance for their biomedical devices. In the future, BioMed plans to provide service and support in the biomedical and compliance areas, and to distribute products to hospitals and nursing homes. The CMED Automation division was established in February 1999 following Colorado MEDtech's purchase of the assets of Eclipse Automation Corporation. The purchase price for the assets was approximately $500,000. CMED assumed no liabilities or obligations in connection with the purchase. The division is located in Longmont, Colorado. In August 1999, the company purchased the assets of Creos Technologies, LLC, which developed and manufactured high-voltage x-ray generator systems for CT scanners. The purchase price for the assets was 2 approximately $2 million. The assets of this operation have been integrated into the Imaging and Power Systems division and the CMED Manufacturing division. The Respiratory Products division that existed until June 30, 1999 has been dissolved and its operations have been incorporated into the BioMed Y2K organization as of July 1, 1999. PRODUCTS AND SERVICES Colorado MEDtech is a leading full-service provider of advanced medical products and comprehensive outsourcing services designed to increase the efficacy and lower the cost of healthcare. We sell our services and products to major medical OEMs and pharmaceutical companies, as well as to hospitals and nursing homes. OUTSOURCING SERVICES Our outsourcing services consist of design, development and manufacture of medical products and software for major medical device and pharmaceutical companies. Our principal outsourcing markets and services are: - - Medical diagnostic and therapeutic devices - we design and develop complex electronic and electromechanical instruments for the detection and treatment of disease. Our diagnostic projects in this market are performed for companies involved in selling in-vitro diagnostic products and/or laboratory equipment. Typically, these instruments detect, measure or monitor the concentration of a target chemical or biological component in a fluid sample. Products in the diagnostic market can be placed in three major categories: Clinical diagnostic instruments - devices which are located in a laboratory and used for analyzing patient samples; Pharmaceutical research instruments - systems that are used by pharmaceutical companies to assist the company in defining the performance of a new drug. These instruments analyze many types of fluid samples; and Life sciences instruments - these systems are used to analyze a fluid sample in an industrial setting. They may also include the analysis or target development of a DNA molecule. Our therapeutic projects are performed for companies who sell patient therapy products. These products are used in surgery, for the treatment of medical conditions, and for monitoring patients. They include devices such as infusion pumps, surgical devices, blood oxygen monitors and devices for cardiovascular treatment. - - Medical imaging systems - we design and develop complete MRI systems, including advanced application software and major subsystem hardware. Our work in this area includes the development of leading-edge cardiac and vascular diagnostic application software and high-density RF amplifier systems. Contracts in this business area are undertaken with major OEMs in the imaging system market. - - Medical software - we develop software for electronic and electromechanical medical products and provide medical software verification and validation services. Our software projects are performed for customers who produce therapeutic, pharmaceutical or diagnostic instruments. The projects are 3 generally the development of software for use in a device, and/or verification and validation services necessary to make software of sufficient quality and reliability to be used in sensitive medical devices. - - Manufacturing - we manufacture complex electronic and electromechanical medical devices and medical imaging products such as high-power systems and systems support modules for MRI systems and x-ray generators for CT scanners. We are registered device manufacturers with the U.S. Food and Drug Administration and meet the agency's Quality System Regulation ("QSR") requirements. Our manufacturing projects include pre-production engineering and commercialization services, turnkey manufacturing of FDA Class II and Class III devices and system test services. - - Medical disposable devices - we design, develop and manufacture medical disposable devices, primarily catheters, used in a variety of surgical procedures. Our projects in this market are performed primarily for companies who sell surgical instruments, supplies and accessories. Our medical disposable devices include sensing catheters, balloon catheters, drug delivery catheters, disposable endoscopes, in-vitro diagnostic disposables and surgical disposables. The devices are used primarily in angioplasty, minimally invasive surgery, electrophysiology and infertility treatment. - - Automation systems - we design, develop and build machines and systems for automating the manufacture and packaging of medium to high volumes of medical devices. Our projects in this market are performed generally for large companies who sell medical and pharmaceutical products. Projects generally involve the automation, often using robotics, of specialized and isolated tasks in the manufacture, packaging or labeling of products. Our automation projects integrate Colorado MEDtech-machined parts and production equipment from other manufacturers to produce a production line. Our design and development projects generally include product concept definition, development of specifications for product features and functions, product engineering specifications, instrument design, development, prototype production and testing, and development of test specifications and procedures. Our outsourcing services are performed by engineers, scientists, technicians, manufacturing specialists and assembly workers. We believe our experience in applying our proven methodologies and advanced technologies to the development of innovative new products gives our clients an advantage in their marketplace by providing them with state-of-the-art, quality products in a timely and cost-effective manner. Rapidly advancing technologies, heightened worldwide competition and the demands of an increasingly sophisticated marketplace have created pressures on companies, both domestic and international, to develop high quality, cost-effective, world-class products in time to meet the narrowing windows of opportunity in the marketplace. These conditions have produced opportunities for companies that can react to those market needs. Such companies need to have the technology, experience and ability to develop high quality, state-of-the-art products. We believe we are uniquely positioned to provide our clients, within a single integrated structure, the valuable product development and manufacturing resources they need to satisfy the requirements of a worldwide marketplace. MEDICAL PRODUCTS Our current products are high performance power amplifier systems for use in medical imaging systems, such as MRI machines and CT scanners, software tools for Year 2000 compliance management and reporting, and an oxygen generation system. Our medical imaging products line features: 4 - - Advanced high-performance RF amplifiers and integrated power delivery subsystems that power MRI machines. By combining DC, RF, digital and system control technologies, we produce advanced, highly-embedded power products. Our solid state RF amplifier product line features the highest packaging density available for MRI applications. - - High-voltage x-ray generator subsystems for advanced CT scanners. Our imaging products are sold to large, multi-national medical imaging companies who integrate the power subsystems into their imaging systems. Colorado MEDtech, through its BioMed Y2K, Inc. subsidiary, provides software tools for Year 2000 compliance management and reporting. The Company has developed an extensive medical device compliance database tailored to the needs of the healthcare industry. The software, called BioMed Y2KOne(TM), offers a combination of tools and services to support healthcare institutions in their efforts to establish Year 2000 compliance. Services offered in conjunction with the software 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. In the future, BioMed plans to provide service and support in the biomedical and compliance areas, and to distribute products to hospitals and nursing homes. Colorado MEDtech is beginning to market its FreshAir(TM) system, a self-contained oxygen generation system. The Company recently received marketing clearance for the system from the FDA. It is intended for use in long-term healthcare facilities and is expected to reduce the cost of oxygen to patients of these facilities. The FreshAir system will allow facilities to generate their own oxygen rather than purchase it from third parties. MARKETING The Company markets its services through a direct sales program and nationwide network of independent manufacturers' representatives. The Company promotes its services through advertising, direct mail and exhibition at industry trade shows. SIGNIFICANT CUSTOMERS AND BACKLOG For the year ended June 30, 1999, three customers each accounted for more than 10% of the Company's total revenues: GE Medical Systems (GEMS) - 23%, Gen-Probe Incorporated - 18%, and 12% from a customer the Company is prohibited by contract from identifying. For the year ended June 30, 1998, GEMS accounted for 23% of the total revenues of the Company and Gen-Probe accounted for 22%. 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 other large customers. Foreign sales accounted for 15% and 8% of the Company's total sales in 1999 and 1998, respectively. 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, 1999, the Company's backlog of orders for services or shipment of product in fiscal 2000 was approximately $37 million compared to approximately $40 million at June 30, 1998. Orders booked during fiscal year 1999 increased to approximately $62 million, compared to bookings of approximately $60 million in fiscal year 1998. 5 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 237 engineers, scientists and technicians in research and development activities, these employees' efforts are primarily devoted to contract work for customers and in such cases their expenses are included in the cost of sales and services. Research and development expenses have historically been attributable to the FreshAir system. During fiscal year 1999, research and development expenses were attributable to RF solid state amplifier systems, Year 2000 software tools and database and the FreshAir system. For fiscal years 1999, 1998 and 1997, the Company incurred approximately $1,835,000, $1,681,000 and $304,000, 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. COMPETITION The market for medical outsourcing and products is highly competitive. The principal competitive factors 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. Competitors include Plexus Corporation, Relsys International, Inc., Analogic Corporation, ACT Medical, Inc./Danforth, B. Braun, KMC Systems, Inc., Nova Biomedical, UMM Electronics, Inc., Sparton Corporation and Wright Industries. 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 FreshAir system, 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. MANUFACTURING The Company manufactures its products and customer products at four facilities in the Boulder and 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. In addition, the Company machines certain parts in its Longmont, Colorado facility. 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 6 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 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" 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, 1998 and 1999 by the FDA during routine general inspections. The inspections resulted in some procedural changes that are intended to assure continued compliance with the 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. The Company is a registered device manufacturer with the FDA and meets the agency's QSR requirements. In addition, the Company is EN ISO 9001 and EN 46001 registered. 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. 7 EMPLOYEES As of June 30, 1999, the Company had 501 employees, of which 398 are full-time. 93% of the Company's employees are employed at its Colorado facilities and 7% 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. The Company's operations are located in leased facilities. The following table contains a summary of the significant terms of the leases:
LEASE AVERAGE FACILITY OPERATIONS SQUARE FEET EXPIRES MONTHLY RENT -------- ---------- ----------- ------- ------------ 6175 Longbow Drive, Corporate headquarters, 52,000 6/30/02 $35,000 Boulder, Colorado CMED/RELA, BioMed 410 South Sunset Street, CMED MFG 18,000 7/1/02 $ 6,780 Longmont, Colorado 2760 29th Street, Boulder, IPS 20,672 12/31/99 $13,800 Colorado 13845 Industrial Park CDT 16,500 1/31/01 $11,735 Boulevard, Plymouth, Minnesota 1811 Lefthand Circle CMED Automation 25,000 7/31/01 $13,368 Longmont, Colorado 1510 Nelson Road, CMED MFG 18,079 6/30/02 $13,640 Longmont, Colorado 7388 S. Revere Parkway, IPS (x-ray generator operations 13,173 11/30/99 $ 9,784 Ste. 1003, Englewood, only) Colorado
In addition to the rent set forth in the table above, the Company is responsible for certain expenses associated with the properties, including property taxes, insurance and maintenance. 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, 8 1999, 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, 1999. 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 1999 and 1998:
Fiscal Year Ended June 30, ---------------------------------------------------------------------- 1999 1998 ------------------------------------ -------------------------------- High Low High Low ---------------------------------------------------------------------- First Fiscal Quarter $8.75 $5.81 $7.12 $5.12 Second Fiscal Quarter $13.63 $6.25 $7.00 $5.87 Third Fiscal Quarter $14.38 $10.75 $10.25 $5.81 Fourth Fiscal Quarter $22.25 $9.06 $10.12 $6.94
The foregoing quotations represent quotations between dealers without adjustment for retail markups, markdowns or commissions and may not represent actual transactions. At June 30, 1999, 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, 1999. 9 ITEM 6. SELECTED FINANCIAL DATA. The selected, consolidated financial information presented below for the five years ended June 30, 1999, 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 contained in this report. 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, -------------------- 1999(a) 1998(b) 1997(c) 1996 1995 ------- ------- ------- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales and service $ 65,349 $ 47,300 $ 28,243 $ 19,130 $ 19,821 Gross profit $ 25,030 $ 16,943 $ 9,786 $ 6,790 $ 6,838 Net income $ 7,850 $ 4,492 $ 2,480 $ 1,597 $ 1,037 Earnings per share Basic (d) $ .73 $ .47 $ .35 $ .23 $ .15 Diluted (d) $ .63 $ .37 $ .27 $ .21 $ .15 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) Operating activities $ 11,672 $ 8,268 $ 2,899 $ 1,268 $ 2,342 Investing activities $ (3,210) $ (8,922) $ (6,655) $ (2,798) $ (200) Financing activities $ (2,503) $ 1,482 $ 4,811 $ - $ (897) BALANCE SHEET DATA: Cash and cash equivalents $ 8,458 $ 2,499 $ 1,671 $ 615 $ 2,144 Short-term investments $ 14,395 $ 12,144 $ 10,293 $ 5,408 $ 2,593 Current assets $ 40,460 $ 29,249 $ 20,585 $ 12,099 $ 9,746 Total assets $ 45,688 $ 34,007 $ 23,853 $ 13,217 $ 10,958 Current liabilities $ 17,001 $ 12,285 $ 9,461 $ 6,666 $ 6,005 Total long-term debt $ - $ - $ - $ - $ - Total shareholders' equity $ 28,687 $ 21,723 $ 14,392 $ 6,550 $ 4,953 Cash dividends per share $ - $ - $ - $ - $ -
(a) In February 1998, the Company acquired the operating assets of Eclipse Automation Corporation. (b) In October 1997, the Company acquired the operating assets of Erbtec Engineering, Inc. (c) In February 1997, the Company acquired Novel Biomedical, Inc. (d) As restated under Statement of Financial Accounting Standards No. 128, "Earnings per Share", in 1997, 1996 and 1995. 10 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 2000. 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 (7.75% at June 30, 1999) 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, 1999, 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. On November 3, 1998, Vencor Operating, Inc., a subsidiary of Vencor, Inc. ("Vencor"), sold 3,560,000 shares of Colorado MEDtech, Inc. common stock held by Vencor. Prior to the transaction, the 3,560,000 shares held by Vencor represented approximately 33% of the outstanding common stock of the Company. As a part of that transaction, the Company purchased and retired 655,000 shares of its own stock for $6.38 per share. The Company used $4,175,625 of its short-term investments to complete this transaction. A number of institutional investors purchased the remaining 2,905,000 shares. The Company's working capital increased to $23,460,000 at June 30, 1999 from $16,965,000 at June 30, 1998. 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 49 days at June 30, 1999 compared to 50 days at June 30, 1998. During the year ended June 30, 1999, the Company acquired approximately $1,174,000 of property and equipment consisting principally of computer equipment. The Company had no material commitments for capital 11 expenditures as of June 30, 1999. The Company purchased the assets of Eclipse Automation Corporation for approximately $500,000 in February 1999. The Company purchased the operating assets of Creos Technologies, LLC, for approximately $2 million in August 1999. The ratio of current assets to current liabilities was 2.4 to 1 at June 30, 1999 and 1998. The liabilities to equity ratio was .6 to 1 at June 30, 1999 and 1998. Cash provided by operations during the year ended June 30, 1999 was $11.7 million, an increase of approximately $3.4, million from $8.3 million in fiscal year 1998, as a result of the profitable growth of the Company, the increase in accounts payable and accrued expenses, and the reduction in days outstanding of accounts receivable. 12 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, 1999, 1998 and 1997, and the percentage change in those items for the years ended June 30, 1999 and 1998, 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, 1999 1998 1997 LINE ITEMS 1999 1998 ---- ---- ---- ---------- ---- ---- % % % % % 100.0 100.0 100.0 Sales and Service 38.2 67.5 61.7 64.2 65.3 Cost of Sales and Services 32.8 64.5 ----- ----- ----- ----- ----- 38.3 35.8 34.7 Gross Profit 47.7 73.1 ----- ----- ----- ----- ----- 3.6 3.7 4.6 Marketing and Selling 33.3 36.5 13.4 16.1 16.4 Operating, Gen'l and Admin 15.1 65.1 2.8 3.6 1.1 Research and Development 9.2 452.5 ----- ----- ----- ----- ----- 19.8 23.4 22.0 Total Operating Expenses 17.1 78.1 ----- ----- ----- ----- ----- 18.5 12.4 12.7 Earnings from Operations 105.4 64.4 .7 .9 1.0 Other Income, Net 15.9 42.9 ----- ----- ----- ----- ----- 19.2 13.3 13.7 Earnings Before Income Taxes 99.5 62.8 7.2 3.8 4.9 Provision for Income Taxes 161.3 30.0 ----- ----- ----- ----- ----- 12.0 9.5 8.8 Net Income 74.8 81.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 Revenues were $65.3 million for the year ended June 30, 1999, compared to $47.3 million for the prior year, an increase of 38%. Of total revenues, outsourcing services contributed approximately 73% and 75% in the fiscal years 1999 and 1998, respectively, while medical products contributed approximately 27% and 25% in the fiscal years 1999 and 1998, respectively. The increase in total revenues is attributable to the growth of outsourcing services, which had an increase in revenues of 32% in fiscal 1999 compared to fiscal 1998. The Company's revenue growth was also attributable to the emphasis on proprietary products represented by the acquisition of IPS in 13 October 1997 and the start-up of BioMed in April 1998. Collectively, IPS and BioMed contributed approximately $19.1 million of revenue during the year ended June 30, 1999 compared to $11.2 million in fiscal 1998. Gross margins increased to 38% for the year ended June 30, 1999, compared to 36% for the year ended June 30, 1998. The increase in the Company's margins is a result of the shifting composition of the Company's revenues between outsourcing services and medical products. Marketing and selling expenses increased by 33% for the year ended June 30, 1999, as compared to the prior year. The increase is attributable to the growth in sales and the acquisition of IPS, the CMED Automation division and the start-up of BioMed. Marketing and selling expenses as a percentage of total revenue were 4% for both fiscal years ended June 30, 1999 and 1998. Operating, general and administrative expenses increased by 15% for the year ended June 30, 1999, compared to the prior year. The increase is attributable to the acquisition of IPS, the CMED Automation division, the start-up of BioMed and the overall growth of the Company. As a percentage of revenues, operating, general and administrative expenses decreased to 13% from 16% in the prior year. Research and development expenses for the year ended June 30, 1999 increased by 9% compared to the prior year. During fiscal year 1999, research and development expenses were attributable to RF solid state amplifier systems, Year 2000 software tools and database and the FreshAir system. 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 to $478,000 for the year ended June 30, 1999, compared to $413,000 for the year ended June 30, 1998. The increase is attributable to a higher short-term investment balance during fiscal year 1999, compared to fiscal year 1998. Included in the June 30, 1999 balance is a $200,000 write down in an investment in an early stage, drug delivery company that was behind schedule in developing its proprietary technologies. The fiscal year 1999 and 1998 consolidated statements of operations contain a net tax provision of $4.7 million and $1.8 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. In fiscal year 1998, the Company reduced its valuation allowance by $590,000 for the utilization of prior years' NOL in the current year and certain deferred tax assets that the Company believed would be fully utilized. The effective tax rate during fiscal year 1999 was 37%, compared to 29% during fiscal year 1998. The Company recorded net income of approximately $7.9 million for the fiscal year ended June 30, 1999, compared to approximately $4.5 million for the fiscal year ended June 30, 1998. Earnings per share for the year ended June 30, 1999 were $.63, calculated on 12,503,471 diluted weighted average shares outstanding, compared to $.37 in the prior year calculated on 12,256,461 diluted weighted average shares outstanding. This increase in net income is attributed to the 38% growth in the Company's revenues, an increase in gross margins by 3% for the 14 fiscal year 1999 compared to 1998, and having the combination of operating, general and administrative expenses and marketing and selling expenses increase at a slower rate than revenues. The Company evaluated its overall business in fiscal year 1996 and, as a result, increased its market focus. The Company has continued to refine its market focus during 1999 and 1998. Management is dedicated to improving operating results through consistent performance, improved sales levels and cost reductions. Generally, the marketplace for outsourcing services and medical products is expected to remain strong and competitive, with significant opportunities for companies that can develop low-cost, high quality products in a timely manner. The current targeted markets are: diagnostic and laboratory instruments; imaging and power systems; therapeutic instruments; software; and hospital services. The Company believes the targeted markets represent a U.S. market of $3 billion or more per year, with forecasted annual growth rates of approximately 20% to 30%. There are no assurances that management will be successful in achieving improved operating results. 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 the total revenues, outsourcing services contributed approximately 75% for fiscal year 1998 and approximately 95% for fiscal year 1997, while products contributed approximately 25% for fiscal year 1998 and 5% for fiscal year 1997. The increase in revenues was attributable in part to the acquisition of CDT in January 1997 and of IPS in October 1997, which contributed approximately $14.8 million of revenue during the year ended June 30, 1998. The Company's gross margins as a percentage of total revenues were approximately 36% for fiscal year 1998 and approximately 35% for fiscal year 1997. Marketing and selling expenses increased by 36% for the year ended June 30, 1998, as compared to the prior year. The increase was attributable to the growth in sales and the acquisitions of IPS and CDT. Marketing and selling expenses as a percentage of total revenue were approximately 4% and 5% for the years ended June 30, 1998 and 1997. Operating, general and administrative expenses increased by approximately 65% for the year ended June 30, 1998, compared to the prior year. The increase is attributable to the acquisition of IPS and CDT, expenses incurred in August 1997 in moving the manufacturing facility from Boulder, Colorado to Longmont, Colorado, the addition of executive personnel, 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%. The increase was a result of the Company's greater emphasis on developing proprietary products. 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 was attributable to a higher short-term investment balance during fiscal year 1998, compared to fiscal year 1997. The fiscal year 1998 and 1997 statements of operations contained a net tax provision of $1.8 million and $1.4 million, respectively. 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 then current year and certain deferred tax assets 15 that the Company believed would 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 approximately $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 in the prior year, calculated on 9,114,292 diluted weighted average shares outstanding. The diluted 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 was 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. 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 received confirmation from most of its significant vendors concerning Year 2000 compliance and it is in the process of obtaining assurances from the remainder. 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. As of June 30, 1999, the Company had spent approximately $75,000 on the Year 2000 issue. The Company presently anticipates that it will complete its Year 2000 assessment and remediation by September 30, 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 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 complete its contingency plan by September 30, 1999. 16 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The Statement establishes accounting and reporting standards for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 1347 delays the effective date of SFAS No. 133 to financial quarters and financial years beginning after June 15, 2000. The Company does not typically enter into arrangements that would fall under the scope of Statement No. 133 and thus, management believes that Statement No. 133 will not significantly affect its financial condition and results of operations. FORWARD-LOOKING STATEMENTS AND RISK FACTORS 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. In addition, the Company may, in discussions of its future plans, objectives and expected performance in periodic reports filed by the Company with the Securities and Exchange Commission (or documents incorporated by reference therein) and in written and oral presentations made by the Company, include projections or other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, as amended. Such projections and forward-looking statements are based on assumptions which the Company believes are reasonable, but are by their nature inherently uncertain. In all cases, there can be no assurance that such assumptions will prove correct or that projected events will occur, and actual results could differ materially from those projected. Some of the important factors that could cause actual results to differ from any such projections or other forward-looking statements follow. VARIABILITY OF OPERATING RESULTS The Company's annual and quarterly operating results are affected by a number of factors, including the volume and timing of revenue from customer orders. The volume and timing of revenue from customer orders varies due to: - - discounts extended to customers due to growth in project size and cost caused by unfunded changes in the scope of a project or for reasons related to project performance; - - variation in demand for the customer's products as a result of, among other things, product life cycles, competitive conditions and general economic conditions; - - suspension or cancellation of a customer's development project for reasons which may or may not be related to project performance; - - suspension or cancellation of a customer's R&D budget for reasons often unrelated to the project; - - a change in a customer's R&D strategy as a result of sale or merger of the customer to another company; and - - delays in projects associated with the approval process for changes to a project. 17 Because the Company's outsourcing services business organization and its related cost structure anticipate supporting a certain minimum level of revenues, the Company's limited ability to adjust its short-term cost structure may compound the adverse effect of any significant revenue reduction. Any one of these factors or a combination thereof could result in a material adverse effect on the Company's business, results of operations and financial condition. Due to the foregoing factors, it is possible that the Company's operating results may from time to time be below the expectations of public market analysts and investors. In such event, the price of the Company's securities would likely be adversely affected. CUSTOMER RISK FACTORS The Company's success depends on the success of its customers and their products that are developed or manufactured by the Company. Any unfavorable developments or adverse effects on the sales of those products or its customers' businesses could have a corresponding adverse effect on the Company. The Company believes that its customers and their products (and, accordingly, the Company) are generally subject to the following risks: COMPETITIVE ENVIRONMENT The medical products industry is highly competitive, subject to significant technological change, and requires ongoing investment to keep pace with technological developments and quality and regulatory requirements. The medical products industry consists of numerous companies, ranging from start-up to well-established companies. The competitors of the Company's customers may succeed in developing or marketing technologies and products that will be better accepted in the marketplace than the products manufactured by the Company for its customers or that would render its customers' technology and products obsolete or noncompetitive. Some of the Company's customers are emerging medical technology companies that have competitors and potential competitors with substantially greater capital resources, research and development staffs and facilities and substantially greater experience in developing and commercializing new products. The Company's customers may not be successful in marketing or distributing their products, or may not respond to pricing, marketing or other competitive pressures or the rapid technological innovation demanded by the marketplace and, as a result, may experience a dramatic drop in product sales, which would have an adverse effect on the Company's business, results of operations and financial condition. UNCERTAIN MARKET ACCEPTANCE OF NEW PRODUCTS; PRODUCT OBSOLESCENCE There can be no assurance that the Company's customers' will be able to gain any significant market acceptance for the products developed or manufactured for them by the Company. Market acceptance may depend on a variety of factors, including educating the target market regarding the use of a new procedure and convincing healthcare payers that the benefits of the product and its related treatment regimen outweigh its costs. Market acceptance and market share are also affected by the timing of market introduction of competitive products. Some of the Company's customers, especially emerging medical technology companies, have limited or no experience in marketing their products and may be unable to establish effective sales and marketing and distribution channels to successfully commercialize their products. CUSTOMER REGULATORY COMPLIANCE The FDA regulates many of the products developed and manufactured by the Company for its customers, and requires certain clearances or approvals before new medical devices can be marketed. As a 18 prerequisite to any introduction of a new device into the medical marketplace, the Company or its customers must obtain necessary product clearances or approvals from the FDA or other regulatory agencies. There can be no assurance that such clearances or approvals will be obtained on a timely basis, if at all. Certain medical devices manufactured by the Company may be subject to the need to obtain premarket approval from the FDA, which requires substantial preclinical and clinical testing and may cause delays and prevent introduction of such instruments. Other instruments can be marketed only by establishing "substantial equivalence" to a predicate device in a 510(k) premarket notification. In addition, products intended for use in foreign countries must comply with similar requirements and be certified for sale in those countries. A customer's failure to comply with the FDA's requirements can result in the delay or denial of approval to proceed with the device. Delays in obtaining regulatory approval are frequent and, in turn, can result in delaying or canceling customer orders from the Company. There can be no assurance that the Company's customers will obtain or be able to maintain all required clearances or approvals for domestic or exported products on a timely basis, if at all. The delays and potential product cancellations inherent in the regulatory approval and ongoing regulatory compliance of products developed or manufactured by the Company may have a material adverse effect on the Company's business, reputation, results of operations and financial condition. CUSTOMERS' FUTURE CAPITAL REQUIREMENTS Some of the Company's customers, especially emerging medical technology companies, are not profitable and may have little or no revenues, but they have significant working capital requirements for which the customer may be required to raise additional funds through public or private financings. Adequate funds for their operations may not be available when needed, if at all. Insufficient funds may require a customer to suspend its research and development spending, delay development of a product, clinical trials (if required) or the commercial introduction of a product. Depending on the significance of a customer's product to the Company's revenues or profitability, any adverse effect on a customer resulting from insufficient funds could result in an adverse effect on the Company's business, results of operations and financial condition. UNCERTAINTY REGARDING THIRD-PARTY REIMBURSEMENT Governmental and insurance industry efforts to reform the healthcare industry and reduce healthcare spending have affected, and will continue to affect, the market for medical devices. Adverse governmental regulation relating to the Company's or its customers' products which might arise from future legislative, administrative or insurance industry policy cannot be predicted and the ultimate effect on private insurer and governmental healthcare reimbursement is unknown. Government and commercial insurance companies are increasingly vigorous in their attempts to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products even if approved for marketing by the FDA. If adequate coverage and reimbursement levels are not provided by government and commercial payers for uses of the Company's new and existing products, the market acceptance of these products and the Company's profitability would be adversely affected. RELIANCE ON MAJOR CUSTOMERS In the fiscal year ended June 30, 1999, three customers accounted for approximately 53% of the Company's consolidated revenues. In the fiscal year ended June 30, 1998, two customers accounted for 19 approximately 45% of the Company's consolidated revenues. In the fiscal year ended June 30, 1997, three customers accounted for approximately 45% of the Company's consolidated revenues. As a contract developer and manufacturer, the Company has historically obtained a significant share of its revenue from a small number of customers, but the identity of those major customers tends to change from year to year. A significant reduction or delay in orders or payments from any of these customers could have a material adverse effect on the Company's business and results of operations. COMPETITION The Company faces competition from a variety of sources, including consulting, commercial product development and manufacturing companies. Competition also comes from commercial and university research laboratories and from current and prospective customers who evaluate the Company's capabilities against the merits of designing, engineering and manufacturing products internally. Many of the Company's competitors have substantially greater financial, research and development manufacturing resources than the Company. Competition from any of the foregoing sources could place pressure on the Company to accept lower margins on its contracts or lose existing or potential business, which could result in a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent on the continued service of certain of its key managerial, technical and engineering personnel, particularly its President and Chief Executive Officer, John V. Atanasoff II, and the Company's continuing ability to attract, train, assimilate and retain highly qualified engineering, technical and managerial personnel experienced in commercializing medical products. Competition for such personnel is intense, the available pool of qualified candidates is limited and there can be no assurance that the Company can retain its key engineering, technical and managerial personnel or that it can attract, train, assimilate or retain other highly qualified engineering, technical and managerial personnel in the future. The loss of Mr. Atanasoff or any of the Company's other key personnel or the inability of the Company to hire, train, assimilate or retain qualified personnel could have a material adverse effect on the Company's business, results of operations and financial condition. COMPLIANCE WITH REGULATORY REQUIREMENTS The Company is subject to a variety of regulatory agency requirements in the United States and foreign countries relating to many of the products that it develops and manufactures for its customers. The process of obtaining and maintaining required regulatory approvals and otherwise remaining in regulatory compliance can be lengthy, expensive and uncertain. The FDA inspects manufacturers of certain types of devices before providing a clearance to manufacture and sell such device, and the failure to pass such an inspection could result in delay in moving ahead with a project. The Company is required to comply with the FDA's QSR requirements for the manufacture of medical products. In addition, in order for the Company's instruments to be exported and for the Company and its customers to be qualified to use the "CE" mark in the European Union, the Company maintains ISO 9001/EN 46001 certification which, like the QSR, subjects the Company's operations to periodic surveillance audits. To ensure compliance with QSR requirements, the Company expends significant time, resources and effort in the areas of training, production and quality assurance. Failure to comply with QSR regulations or other FDA or applicable legal requirements can lead to warning letters, government sanctions and serious penalties. In addition, the continued sale of any products manufactured by the Company may be halted or 20 otherwise restricted. Any such actions could have an adverse effect on the willingness of customers and prospective customers to do business with the Company. In addition, any such noncompliance or increased cost of compliance could have a material adverse effect on the Company's business, results of operations and financial condition. PRODUCT RECALLS, PRODUCT LIABILITY AND INSURANCE Most of the products the Company designs or manufactures are medical devices, many of which may be used in life-sustaining or life-supporting roles. The tolerance for error in the design, manufacture or use of these products may be small or nonexistent. If a product designed or manufactured by the Company is found to be defective, whether due to design or manufacturing defects, to improper use of the product or to other reasons, the product may need to be recalled, possibly at the Company's expense. Furthermore, the adverse effect of a product recall on the Company might not be limited to the cost of the recall. Recalls, especially if accompanied by unfavorable publicity or termination of customer contracts, could result in substantial costs, loss of revenues and a diminution of the Company's reputation, each of which would have a material adverse effect on the Company's business, results of operations and financial condition. The manufacture and sale of the medical devices developed and manufactured by the Company involves the risk of product liability claims. Although the Company generally obtains indemnification from its customers for products it manufactures to the customers' specifications and in addition maintains product liability insurance, there can be no assurance that the indemnities will be honored or the coverage of the Company's insurance policies will be adequate. In addition, the Company generally provides a design defect warranty and indemnifies its customers for failure of a product to conform to design specifications and against defects in materials and workmanship. Product liability insurance is expensive and in the future may not be available on acceptable terms, in sufficient amounts, or at all. A successful claim brought against the Company in excess of its insurance coverage or any material claim for which insurance coverage was denied or limited and for which indemnification was not available could have a material adverse effect on the Company's business, results of operations and financial condition. YEAR 2000 ISSUE Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date code field, and were not designed to account for the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process data related to the Year 2000. The Company relies on its systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and accounts receivable modules), inventory and receivables systems, customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company also relies, directly and indirectly, on systems of external business enterprises such as distributors, suppliers, creditors, financial organizations, and of governmental entities for accurate exchange of data. The Company does not believe that its proprietary products or any of its outsourcing services projects involve any material Year 2000 risks, and 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. Even if the internal systems of the Company and the systems and software in its proprietary products and its outsourcing products are not materially affected by the Year 2000 issue, the Company could be affected through disruptions in the operation of the enterprises with which the Company interacts. If the Year 2000 issue affects the ability of the Company's component suppliers to meet delivery schedules for the components needed to 21 manufacture the Company's products, the Company may not be able to timely meet its obligations to its customers. This would likely have an adverse impact on the Company's business, financial condition and operating results which could be material. There can be no assurance that Year 2000 issues will not have a material adverse effect on the Company's business, financial condition or results of operations. CUSTOMER CONFLICTS The medical technology industry reflects vigorous competition among its participants. Although the Company generally does not enter into non-competition agreements, on occasion the Company's agreements prohibit it from working for certain competitors of its customers. When and if the company does this, its growth may be adversely affected because such agreements would prevent the Company from manufacturing instruments for its customers' competitors. Any conflicts among its customers could prevent or deter the Company from obtaining contracts to manufacture successful instruments, which could result in a material adverse effect on its business, results of operations and financial condition. SHARES ELIGIBLE FOR FUTURE SALE On the date of this report there were a total of approximately 11.2 million shares of common stock outstanding, of which approximately 9.2 million are freely tradeable. The remaining 2.0 million shares are held by officers and directors of the Company and their affiliates. Such shares are eligible for sale in the public markets in accordance with the volume restrictions of Rule 144 under the Securities Act of 1933, which are not a practical impediment to the sale of large numbers of such shares. In addition, there are outstanding warrants and stock options to purchase 2.1 million shares of common stock, 1.5 million of which are currently exercisable or become exercisable in 60 days from the date of this report. Except as limited by Rule 144 volume limitations applicable to affiliates, shares issued upon the exercise of the Company's warrants and options generally are available for sale in the open market. Even if the Company's financial performance is good, future sales of the shares of common stock referred to above could adversely affect the market price of the common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company, as part of its cash management strategy, had short-term investments at June 30, 1999 consisting of approximately $13.4 million in U.S. Treasury and government agency securities and $1.0 million in commercial paper. 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, 1999. If market interest rates had increased by 1% on July 1, 1999, the Company would have had an approximate $44,000 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. 22 ITEM 8. FINANCIAL STATEMENTS Index to Financial Statements and Schedules:
Page Number ------ Report of Independent Public Accountants F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-10
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 23 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, August 12, 1999. F-1 Page 1 of 2 COLORADO MEDTECH, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998
ASSETS 1999 1998 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents$ 8,457,552 $ 2,499,072 Short-term investments 14,394,870 12,144,005 Accounts receivable- Trade - less allowance for uncollectible accounts of $334,000 and $580,000, respectively 10,508,810 7,631,436 Unbilled 217,077 182,537 Inventories, net 4,598,686 4,225,680 Deferred income taxes 1,907,227 1,676,227 Prepaid expenses and other 375,950 890,260 ----------- ----------- Total current assets 40,460,172 29,249,217 ----------- ----------- PROPERTY AND EQUIPMENT: Computer equipment 4,034,989 3,224,215 Office furniture and fixtures 1,465,889 1,262,193 Leasehold improvements 697,973 485,748 Manufacturing equipment 1,319,745 1,063,920 ----------- ----------- Total property and equipment 7,518,596 6,036,076 Less - Accumulated depreciation and amortization (5,140,302) (4,301,804) ----------- ----------- Property and equipment, net 2,378,294 1,734,272 ----------- ----------- INVESTMENT IN LAND 500,000 500,000 ----------- ----------- GOODWILL, net 1,582,039 1,724,796 ----------- ----------- DEFERRED INCOME TAXES AND OTHER 767,377 798,997 ----------- ----------- $45,687,882 $34,007,282 ----------- ----------- ----------- -----------
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, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 5,664,484 $ 4,426,172 Accrued product service costs 313,409 291,566 Accrued salaries and wages 4,519,996 3,126,671 Other accrued expenses 2,455,555 1,169,004 Customer deposits 3,482,841 2,804,450 Income taxes payable 564,274 466,788 ------------ ------------ Total current liabilities 17,000,559 12,284,651 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Preferred stock, no par value; 5,000,000 shares authorized; none issued - - Common stock, no par value; 25,000,000 shares authorized; 11,095,125 and 10,740,013 issued and outstanding at June 30 1999 and 1998, respectively 11,000,446 11,879,456 Retained earnings 17,658,497 9,808,175 Unrealized gain on available-for-sale investment 28,380 35,000 ------------ ------------ Total shareholders' equity 28,687,323 21,722,631 ------------ ------------ $ 45,687,882 $ 34,007,282 ------------ ------------ ------------ ------------
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, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- NET SALES AND SERVICE $65,349,436 $47,300,200 $28,243,185 COST OF SALES AND SERVICE 40,319,214 30,357,492 18,456,764 ----------- ----------- ----------- GROSS PROFIT 25,030,222 16,942,708 9,786,421 ----------- ----------- ----------- COSTS AND EXPENSES: Marketing and selling 2,341,837 1,756,661 1,287,091 Operating, general and administrative 8,777,752 7,626,103 4,619,447 Research and development 1,834,729 1,680,625 304,180 ----------- ----------- ----------- Total operating expenses 12,954,318 11,063,389 6,210,718 ----------- ----------- ----------- INCOME FROM OPERATIONS 12,075,904 5,879,319 3,575,703 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (17,347) (14,127) (22,460) ----------- ----------- ----------- Interest income and other 495,765 426,955 311,374 ----------- ----------- ----------- Total other income 478,418 412,828 288,914 ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 12,554,322 6,292,147 3,864,617 PROVISION FOR INCOME TAXES 4,704,000 1,800,000 1,385,000 ----------- ----------- ----------- NET INCOME $ 7,850,322 $ 4,492,147 $ 2,479,617 ----------- ----------- ----------- ----------- ----------- ----------- EARNINGS PER SHARE (Note 2): Basic $ .73 $ .43 $ .35 ----------- ----------- ----------- ----------- ----------- ----------- Diluted $ .63 $ .37 $ .27 ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 10,735,038 10,446,868 7,165,499 ----------- ----------- ----------- ----------- ----------- ----------- Diluted 12,503,471 12,256,461 9,114,292 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-4 Page 1 of 3 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Common Stock Other Accumulated Other ------------------------------ Comprehensive Comprehensive Retained Shares Amount Income Income (Loss) Earnings --------- ----------- ------------- ----------------- ----------- 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 CDT acquisition 70,000 207,816 - - - Options issued in conjunction with the CDT acquisition - 338,672 - - - Options issued for services from consultants - 4,636 - - - Net income - - 2,479,617 - 2,479,617 ------------- Comprehensive Income - - 2,479,617 - - --------- ----------- ------------- ----------------- ----------- BALANCES, June 30, 1997 9,341,108 $ 9,076,206 $ - $ - $ 5,316,028 --------- ----------- ------------- ----------------- -----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-5 Page 2 of 3 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Common Stock Other Accumulated Other ------------------------------ Comprehensive Comprehensive Retained Shares Amount Income Income (Loss) Earnings --------- ----------- ------------- ----------------- ----------- 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 IPS acquisition 88,708 620,956 - - - Change in unrealized gain on available-for-sale investment - - 35,000 35,000 - Tax benefit from sale of option shares - 593,442 - - - Options issued for services from consultants - 106,596 - - - Net income - - 4,492,147 - 4,492,147 ------------- Comprehensive Income - - 4,527,147 - - ---------- ----------- ------------- ----------------- ----------- 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-6 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Common Stock Other Accumulated Other ------------------------------ Comprehensive Comprehensive Retained Shares Amount Income Income (Loss) Earnings --------- ----------- ------------- ----------------- ----------- BALANCES, June 30, 1998 10,740,013 $11,879,456 $ - $ 35,000 $ 9,808,175 Issuance of Common Stock 1,010,112 1,672,359 - - - Purchase of Common Stock (655,000) (4,175,625) - - - Change in unrealized gain on available-for-sale investment - - (6,620) (6,620) - Tax benefit from sale of option shares - 1,624,256 - - - Net income - - 7,850,322 - 7,850,322 ------------- Comprehensive Income - - 7,843,702 - - ---------- ----------- ------------- ----------------- ----------- BALANCES, June 30, 1999 11,095,125 $11,000,446 $ - $ 28,380 $17,658,497 ---------- ----------- ------------- ----------------- ----------- ---------- ----------- ------------- ----------------- -----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-7 Page 1 of 2 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 ------------ ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,850,322 $ 4,492,147 $ 2,479,617 Adjustments to reconcile net income to net cash flows from operating activities- Deferred tax benefit (380,000) (966,000) (80,000) Depreciation and amortization 1,178,157 1,047,007 433,747 Allowance for uncollectible accounts 27,201 392,783 (12,921) Reserve for inventory 260,624 134,578 (202,000) Write down of investment 200,000 - - Non-cash consulting services - 106,596 4,636 Changes in operating assets and liabilities- Accounts receivable (2,939,115) (779,833) (1,758,217) Inventories (633,630) 240,123 (377,038) Prepaid expenses and other assets (231,691) 50,680 (165,430) Accounts payable and accrued expenses 5,661,773 3,921,199 2,051,653 Customer deposits 678,391 (371,080) 525,223 ------------ ----------- ------------ Net cash flows from operating activities 11,672,032 8,268,200 2,899,270 ------------ ----------- ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: Cash paid for purchase of CDT, net - - - (1,126,363) Cash paid for purchase of IPS, net 750,000 (5,392,731) - Cash paid for purchase of CMED Automation, net (505,759) - - Purchase of investments (30,000) (200,000) (25,000) Capital expenditures (1,173,662) (1,478,570) (643,326) Increase in short-term investments, net (2,250,865) (1,850,904) (4,859,839) ------------ ----------- ------------ Net cash flows used in investing activities (3,210,286) (8,922,205) (6,654,528) ------------ ----------- ------------
The accompanying notes to consolidated financial statements are an integral part of these financial statements F-8 Page 2 of 2 COLORADO MEDTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Stock $ 1,672,359 $ 1,989,646 $ 5,053,574 Purchase of Common Stock (4,175,625) (507,390) (242,144) ------------ ----------- ------------ Net cash flows (used in) from financing activities (2,503,266) 1,482,256 4,811,430 ------------ ----------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 5,958,480 828,251 1,056,172 CASH AND CASH EQUIVALENTS, at beginning of period 2,499,072 1,670,821 614,649 ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, at end of period $ 8,457,552 $ 2,499,072 $ 1,670,821 ------------ ----------- ------------ ------------ ----------- ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 20,720 $ 14,849 $ 31,593 ------------ ----------- ------------ ------------ ----------- ------------ Cash paid for income taxes $ 3,365,000 $ 1,535,003 $ 1,675,000 ------------ ----------- ------------ ------------ ----------- ------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of Common Stock for acquisition of CDT $ - $ - $ 207,816 ------------ ----------- ------------ ------------ ----------- ------------ Issuance of stock options for acquisition of CDT $ - $ - $ 338,672 ------------ ----------- ------------ ------------ ----------- ------------ Issuance of Common Stock for acquisition of IPS $ - $ 620,956 $ - ------------ ----------- ------------ ------------ ----------- ------------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. F-9 COLORADO MEDTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 (1) ORGANIZATION AND OPERATIONS Colorado MEDtech, Inc. ("CMED"), through its wholly-owned subsidiaries and its operating divisions (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. CMED has reorganized its operating units, renaming some, in order to emphasize the focus of the Company and better present its services and products to its customers. The new names will be used throughout these financial statements. CMED's operating units and their principal activities are: - - CMED/RELA DIVISION ("RELA") (formerly the RELA Division) provides custom product development services, specializing in the design and development of diagnostic and therapeutic medical devices and medical software. RELA, formerly a Colorado corporation, was founded in 1977. The Company merged RELA into CMED in July 1998, and is now operating RELA as a division of CMED. - - IMAGING AND POWER SYSTEMS DIVISION ("IPS") (formerly the Erbtec Engineering Division) designs and develops a broad range of imaging system hardware and software, including advanced magnetic resonance imaging (MRI) application software, high-performance radio frequency ("RF") amplifiers for MRI systems and high-voltage x-ray generator subsystems for computed tomography (CT) scanners. IPS was formed in October 1997, when CMED completed the acquisition of the operating assets of Erbtec Engineering, Inc. - - CMED MANUFACTURING DIVISION ("CMED MFG") (formerly a part of the RELA Division) manufactures electronic and electromechanical medical devices for major medical original equipment manufacturers ("OEMs") and for other CMED operating units. - - CMED CATHETER AND DISPOSABLES TECHNOLOGY, INC. ("CDT") (formerly Novel Biomedical, Inc.) designs, develops and manufactures unique disposable medical devices, primarily catheters, used in angioplasty, minimally invasive surgery, electrophysiology and infertility treatment. CDT, a Minnesota corporation acquired by CMED in February 1997, was incorporated in 1986. - - CMED AUTOMATION DIVISION ("CMED AUTOMATION") designs, develops and manufactures automation systems for medical device and closely associated businesses. CMED Automation was created in February 1999 following CMED's purchase of the assets of Eclipse Automation Corporation. - - BIOMED Y2K, INC. ("BIOMED") provides software tools and services to support health care institutions' efforts to establish Year 2000 compliance for their biomedical devices. BioMed, a Colorado corporation, was incorporated in April 1998. F-10 The Respiratory Products Division that existed until June 30, 1999 has been dissolved and its operations have been incorporated into the BioMed organization as of July 1, 1999. (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying financial statements reflect the consolidated results of CMED, CDT and BioMed. All significant intercompany transactions and accounts have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVESTMENTS The Company accounts for its investments in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 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 not significant at June 30, 1999 and 1998. The following is a summary of held-to-maturity investments as of June 30, 1999 and 1998:
Security Type 1999 1998 ------------- ----------- ------------ U.S. Treasury and government agency securities $13,396,660 $ 9,137,095 Commercial paper 998,210 2,299,905 Corporate notes - 707,005 ----------- ------------ $14,394,870 $ 12,144,005 ----------- ------------ ----------- ------------
The Company also held approximately $114,000 and $120,000 of marketable equity securities classified as available-for-sale, as of June 30, 1999 and 1998, respectively, which are marked to market in the accompanying consolidated balance sheets. The realized and unrealized gains and losses on these marketable equity securities were not significant as of and for the years ended June 30, 1999 and 1998. 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, 1999 and 1998, inventories, net of allowances, consisted of:
1999 1998 ------------ ------------ Raw materials $ 3,214,355 $ 2,957,886 Work-in-process 1,384,331 1,267,794 Finished goods - - ------------ ------------ $ 4,598,686 $ 4,225,680 ------------ ------------ ------------ ------------
F-11 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, 1999, 1998 and 1997 was approximately $838,000, $796,000 and $401,000, respectively. GOODWILL Goodwill resulting from the IPS, CDT and CMED Automation acquisitions is stated at cost, net of accumulated amortization of approximately $624,000 and $284,000, as of June 30, 1999 and 1998, respectively. Amounts of goodwill for IPS, CDT and CMED Automation are being amortized using the straight-line method over estimated useful lives of 2 years, 25 years and 2 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 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. A reconciliation between the number of shares used to calculate basic and diluted earnings per share is as follows (in thousands):
1999 1998 1997 ------- ------- ------- Net income (income available to common shareholders) $ 7,850 $ 4,492 $ 2,480 ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding (shares used in basic earnings per share computation) 10,735 10,447 7,165 Effect of stock options and warrants (treasury stock method) 1,768 1,809 1,949 ------- ------- ------- Shares used in diluted earnings per share computation 12,503 12,256 9,114 ------- ------- ------- ------- ------- -------
Options and warrants that were of an antidilutive nature for the years ended June 30, 1999, 1998 and 1997 that were outstanding but not included in the shares used in diluted earnings per share computation totaled approximately 75,500, 80,000 and 387,500, respectively. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. In June 1999, the FASB issued SFAS No. F-12 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement No. 133". SFAS No. 137 delays the effective date of SFAS No. 133 to financial quarters and financial years beginning after June 15, 2000. The Company does not typically enter into arrangements that would fall under the scope of Statement No. 133 and thus, management believes that Statement No. 133 will not significantly affect its financial condition and results of operations. 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 SFAS No. 109 "Accounting for Income Taxes" 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 and liabilities. 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). 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 SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123 requires that companies which choose not 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-based 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 due to the short-term mature of these investments. ADVERTISING The Company expenses all advertising costs as they are incurred. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. F-13 (3) ACQUISITIONS The Company acquired certain operating assets of Eclipse Automation Corporation, now CMED Automation, in February 1999. CMED Automation is an automation services company located in Longmont, Colorado. The purchase price for the assets was approximately $506,000. The acquisition resulted in goodwill of approximately $197,000 that is being amortized over a two-year period. The Company assumed no liabilities or obligations as part of the purchase. The accompanying consolidated financial statements include the operating results of CMED Automation since February 4, 1999, the effective date of the acquisition. In October 1997, the Company completed the acquisition of the operating assets of Erbtec Engineering, Inc., now IPS. The purchase was completed for $5.39 million in cash and the 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 June 30, 1998 consolidated balance sheet and was paid to the Company during the year ended June 30, 1999. The net purchase price, less the net tangible assets acquired, resulted in goodwill of $480,773 that is being amortized over a two year period. The accompanying consolidated financial statements include the operating results of IPS since October 1, 1997, the effective date of the acquisition. In February 1997, the Company completed the acquisition of Novel Biomedical, Inc., now CDT. The Company acquired CDT 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 CDT. 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 CDT 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 CDT 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, 1999, 1998 and 1997 assume that the acquisition of CMED Automation had occurred on July 1, 1997, the acquisition of IPS had occurred on July 1, 1996 and the acquisition of CDT 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.
Year Ended June 30, ------------------- 1999 1998 1997 ------------ ----------- ----------- Revenues $ 69,284,000 $55,702,000 $42,480,000 Net Income $ 7,484,000 $ 3,786,000 $ 4,117,000 Net Income Per Share (Diluted) $ .60 $ .31 $ .44
F-14 (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 (7.75% at June 30, 1999) 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 1999 and 1998. (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, 1999, 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 11,095,125 and 10,740,013 shares were issued and outstanding as of June 30, 1999 and 1998, respectively. On November 3, 1998, Vencor Operating, Inc., a subsidiary of Vencor, Inc. ("Vencor"), sold 3,560,000 shares of Colorado MEDtech, Inc. common stock held by Vencor. The Company purchased and retired 655,000 shares of its own stock for $6.38 per share. The Company used approximately $4,176,000 of its short-term investments to complete this transaction. A number of institutional investors purchased the remaining 2,905,000 shares. Prior to the transaction, the 3,560,000 shares held by Vencor represented approximately 33% of the outstanding common stock of the Company. During the year ended June 30, 1998, the Company purchased and retired 66,400 shares of common stock which decreased the Company's equity by approximately $507,000. 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 the date of grant and currently vest over two to eight years. A summary of the status of the Plan follows: F-15
FY 1999 FY 1998 FY 1997 --------- --------- --------- Balance outstanding at beginning of fiscal year 2,035,151 1,470,571 1,385,949 Granted during period 485,600 873,400 374,200 Forfeited during period (60,801) (62,101) (56,636) Exercised during period (424,632) (246,719) (232,942) --------- --------- --------- Outstanding at June 30, 2,035,318 2,035,151 1,470,571 --------- --------- --------- --------- --------- --------- Exercisable at June 30, 582,457 597,775 369,670 --------- --------- --------- --------- --------- --------- FY 1999 FY 1998 FY 1997 ------- ------- ------- Weighted average exercise price: At beginning of period $ 3.98 $ 2.28 $ 1.91 At end of period $ 5.54 $ 3.98 $ 2.28 Exercisable at end of period $ 2.91 $ 2.07 $ 1.44 Options granted $ 9.77 $ 6.30 $ 3.04 Options exercised $ 2.76 $ 1.81 $ 1.33 Options forfeited $ 6.60 $ 4.82 $ 2.30 Weighted average fair value of options granted during period $ 5.70 $ 3.49 $ 1.64
June 30, 1999 ------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ---------------------------------------------------------------- ---------------------------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price --------------- --------- -------- ------------ ------- -------- $ 1.66 - $ 1.71 50,940 $ 1.66 .2 50,940 $ 1.66 $ 1.72 - $ 2.38 315,667 $ 1.83 3.5 315,667 $ 1.83 $ 2.39 - $ 4.25 490,888 $ 3.15 4.5 99,178 $ 3.03 $ 4.26 - $ 8.00 707,323 $ 6.30 3.2 116,672 $ 6.27 $ 8.01 - $14.25 470,500 $ 9.79 4.5 - $ - --------- ------- 2,035,318 582,457 --------- ------- --------- -------
In August 1999, the Company issued 115,000 incentive stock options to two key employees at $18.75 per share that vest over a three-year period and terminate five years from the date of grant. In September 1999 the Company issued another 100,000 incentive stock options to two other key employees at $17.50 per share that vest over a four-year period and terminate five years from the date of grant. NON-QUALIFIED STOCK OPTIONS The Company has issued non-qualified stock options outside the Plan to purchase up to 728,651 shares of the Company's common stock in exchange for employment recruiting services, the acquisition of CDT, and to employees. The value of options issued to non-employees has been determined using the Black- F-16 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:
FY 1999 FY 1998 FY 1997 ----------- ---------- ---------- Balance outstanding at beginning of fiscal year 614,253 709,351 434,440 Granted during period - - 294,211 Forfeited during period (1,541) (10,958) (1,000) Exercised during period (414,642) (84,140) (18,300) ----------- ---------- ---------- Outstanding at June 30, 198,070 614,253 709,351 ----------- ---------- ---------- ----------- ---------- ---------- Exercisable at June 30, 143,669 503,039 531,578 ----------- ---------- ---------- ----------- ---------- ---------- Weighted average exercise price: At beginning of period $ 2.05 $ 1.97 $ 1.28 At end of period $ 2.97 $ 2.05 $ 1.97 Exercisable at end of period $ 2.97 $ 1.85 $ 1.64 Options granted $ - $ - $ 2.97 Options exercised $ 1.61 $ 1.28 $ 1.44 Options forfeited $ 2.97 $ 2.97 $ 2.97 Weighted average fair value of options granted during period $ - $ - $ 1.75
June 30, 1999 ------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ---------------------------------------------------------------- ---------------------------------------- Weighted Weighted Average Remaining Average Exercise Contractual Exercise Exercise Price Shares Price Life (Years) Shares Price -------------- ------- -------- ------------ ------- -------- $ 2.97 198,070 $ 2.97 2.6 143,669 $ 2.97
DIRECTOR, CONSULTANT AND OTHER WARRANTS The Board grants warrants to the outside directors for serving on the Board. Warrants were issued 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 1999 and 1998, 90,000 and 110,000 director warrants were exercised, respectively. In fiscal 1999, 45,000 warrants expired, unvested. As of June 30, 1999, 255,000 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 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 F-17 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 Company's warrants is as follows:
FY 1999 FY 1998 FY 1997 --------- --------- --------- Balance outstanding at beginning of fiscal year 410,000 630,000 675,000 Granted during period 180,000 90,000 140,000 Forfeited during period (45,000) (100,000) (15,000) Exercised during period (215,000) (210,000) (170,000) --------- --------- --------- Outstanding at June 30, 330,000 410,000 630,000 --------- --------- --------- --------- --------- --------- Exercisable at June 30, 255,000 295,000 430,000 --------- --------- --------- --------- --------- --------- Weighted average exercise price: At beginning of period $ 4.16 $ 2.72 $ 1.64 At end of period $ 5.21 $ 4.16 $ 2.72 Exercisable at end of period $ 4.68 $ 1.96 $ 1.84 Warrants granted $ 7.00 $ 6.41 $ 6.04 Warrants exercised $ 4.37 $ 1.72 $ 1.40 Warrants forfeited $ 6.80 $ 2.25 $ 1.59 Weighted average fair value of warrants granted during period $ 2.74 $ 1.82 $ .96
June 30, 1999 ------------------------------------------------------------------------------------------------------------ Warrants Outstanding Warrants Exercisable ---------------------------------------------------------------- ---------------------------------------- Weighted Weighted Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life (Years) Shares Price --------------- ------ -------- ------------ ------- -------- $ 1.59 - $ 3.02 90,000 $ 1.59 .9 90,000 $ 1.59 $ 3.03 - $ 6.40 15,000 $ 3.03 2.4 15,000 $ 3.03 $ 6.41 - $ 6.99 75,000 $ 6.41 3.4 75,000 $ 6.41 $ 7.00 - $ 7.01 150,000 $ 7.00 3.9 75,000 $ 7.00 ------- ------- 330,000 255,000 ------- ------- ------- -------
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. 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. An employee can enter the plan at two times during a year: on January 1st for the twelve month period ending on December 31st; or, on July 1st for the six month period ending December 31st. The purchase price of the stock is 85% of the lower of its beginning-of-the-period or end-of-the-year market price. In January 1999, the Company issued 53,365 shares of common stock under the ESPP at either $5.50 or $7.38 per share, depending on when the employee entered the plan, resulting in cash proceeds to the Company of $302,000. 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 value of shares issued under the ESPP, all options and warrants issued during fiscal years 1999, 1998 and 1997, using the Black-Scholes pricing model, and the following weighted average assumptions:
1999 1998 1997 ---- ---- ---- Risk-free interest rate 4.99% 5.84% 5.70% Expected lives 4.2 years 3.8 years 3.5 years Expected volatility 64.5% 67.4% 69.8% 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 $1,266,000, $2,536,000 and $628,000 for the years ended June 30, 1999, 1998 and 1997, 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 $983,000, $639,000 and $216,000 for 1999, 1998 and 1997, 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, 1999 1998 1997 ---------- ---------- ---------- Net Income As reported $7,850,000 $4,492,000 $2,480,000 Pro forma $6,867,000 $3,853,000 $2,263,000 Diluted Earnings Per Common Share As reported $.63 $.37 $.27 Pro form $.57 $.33 $.21
(6) INCOME TAXES The provision for income taxes includes the following:
Year Ended June 30, ------------------- 1999 1998 1997 ----------- ----------- ----------- Current - Federal $ 4,666,739 $ 2,581,784 $ 1,347,733 State 417,261 184,216 96,267 ----------- ----------- ----------- 5,084,000 2,766,000 1,444,000 Deferred - Federal (348,812) (901,664) (55,067) State (31,188) (64,336) (3,933) ----------- ----------- ----------- Total $ 4,704,000 $ 1,800,000 $ 1,385,000 ----------- ----------- ----------- ----------- ----------- -----------
The Company's effective income tax rate was different than the statutory federal income tax rate as follows:
Year Ended June 30, ------------------- 1999 1998 1997 ----------- ----------- ----------- Federal income tax provision at statutory rates $ 4,268,000 $ 2,138,000 $ 1,314,000 State income tax provision, net of federal tax effect 382,000 206,000 133,000 Nondeductible expenses 54,000 46,000 18,000 SFAS 109 valuation allowance reduction - (590,000) (80,000) ----------- ----------- ----------- Effective tax $ 4,704,000 $ 1,800,000 $ 1,385,000 ----------- ----------- ----------- ----------- ----------- -----------
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, 1999, the Company had NOL carryforwards available of approximately $917,000. The Company's NOLs began to F-20 expire in 1999 and continue to expire through 2007. The Company also has research and development and investment tax credit carryforwards totaling approximately $140,000 that began expiring in 1999 and continue to expire through 2007. 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, 1999 and 1998 are comprised of the following: Current 1999 1998 ----------- ----------- Tax effect of NOL carryforwards $ 344,000 $ 457,000 Allowance for doubtful accounts 39,000 217,000 Accrued vacation 314,000 177,000 Other accruals 1,070,000 685,000 Tax credits 140,000 140,000 ----------- ----------- Net current deferred tax asset $ 1,907,000 $ 1,676,000 ----------- ----------- ----------- ----------- Noncurrent Depreciation for book in excess of tax 366,000 367,000 Goodwill amortization for book in excess of tax 150,000 - ----------- ----------- Net noncurrent deferred tax asset $ 516,000 $ 367,000 ----------- ----------- ----------- -----------
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. During 1998 and 1997 the Company reduced the valuation allowance by $590,000 and $80,000 for the utilization of NOLs in the respective years and certain deferred tax assets that the Company now believes will be fully utilized. (7) SEGMENT INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". 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. Management has determined that the Company has two segments, Outsourcing Services and Medical Products, that will be reported in connection with the adoption of SFAS 131. The Outsourcing Services segment is made up of RELA, CMED MFG, CDT, CMED Automation and a portion of IPS. This segment designs, develops and manufactures medical products for a broad range of customers that include major pharmaceutical and medical device companies. The medical products segment is made up of a portion of IPS and BioMed. This segment designs, develops and manufactures proprietary medical products which include: high-performance RF amplifiers and integrated power delivery subsystems for the medical imaging industry; a combination of tools and services to support healthcare institutions in their efforts to establish Year 2000 compliance for their biomedical devices; and a self-contained oxygen generation system. Following is a breakout of the Company's segments: F-21
Outsourcing Medical Reconciling Consolidated Services Products Items Totals ----------- ----------- ----------- ----------- Fiscal 1999: Operating revenue $48,038,000 $17,941,000 $ (630,000) $65,349,000 Margin 18,362,000 6,775,000 (107,000) 25,030,000 Assets 34,096,000 13,997,000 (2,405,000) 45,688,000 Expenditures for long-lived assets 1,635,000 (705,000) - 1,174,000 Fiscal 1998: Operating revenue $36,366,000 $11,344,000 $ (410,000) $47,300,000 Margin 12,596,000 4,470,000 (123,000) 16,943,000 Assets 22,366,000 13,540,000 (1,899,000) 34,007,000 Expenditures for long-lived assets 1,303,000 5,568,000 - 1,479,000 Fiscal 1997: Operating revenue $27,507,000 $ 1,619,000 $ (883,000) $28,243,000 Margin 9,175,000 611,000 - 9,786,000 Assets 18,304,000 7,448,000 (1,899,000) 23,853,000 Expenditures for long-lived assets 1,770,000 - - 643,000
Included in the operating revenues disclosed above are intersegment operating revenues of the Outsourcing Services segment of $591,000, $410,000 and $883,000 for the years ended June 30, 1999, 1998 and 1997, respectively. The Medical Products segment had intersegment revenues of $39,000 for the year ended June 30, 1999 and no intersegment revenues for the two preceding years. The intersegment revenues account for the operating revenue and margin reconciling items. The assets reconciling item is the elimination of the investments in CDT for years ended June 30, 1999, 1998 and 1997, and the elimination of the investment in CMED Automation for the year ended June 30, 1999. The Company manages its operating segments through the gross margin component of each segment. It is impractical to break out other operating expenses, including depreciation, on a segment basis. Four customers accounted for more than 10% of the total outsourcing services revenue for the years ended June 30, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Customer -------- A 25% 29% 19% B 17% 3% 0% C 3% 3% 15% D 0% 0% 12%
F-22 Two customers accounted for more than 10% of the total medical products revenue for the years ended June 30, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Customer -------- A 84% 96% 0% B 2% 1% 91%
(8) COMMITMENTS AND CONTINGENCIES LEASES The Company leases its operating facilities and certain computer and test equipment pursuant to noncancellable operating lease arrangements. The Company incurred rent expense of $1,009,000, $846,000 and $467,000 for the years ended June 30, 1999, 1998 and 1997, respectively, under such agreements. At June 30, 1999, future minimum lease payments under leases having an initial or remaining noncancellable term of one year or more are approximately $1,024,000 in 2000, $922,000 in 2001, $731,000 in 2002, $4,000 in 2003, and none in 2004 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 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. These options were exercised 140,000, 80,000 and 80,000 in fiscal 1999, 1998 and 1997, respectively. The Company and the employee extended the employment agreement in November 1995 and again in May 1996, for a term through June 2002. The Company agreed to grant incentive stock options 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 of the extended agreement. However, earlier vesting can occur if the Company's stock achieves certain targeted 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. One of the Company's other officers has also entered into an employment agreement with the Company. This agreement provides 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 F-23 than cause and two years' salary if the officer's employment is terminated as a result of a significant ownership change in the Company. This agreement has 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 owned 3,500,000 shares of the Company's common stock. This corporation sold all of its stock in the Company on November 3, 1998 (See Note 5). The standstill agreement limited the corporation to not more than a 40% ownership of the Company. The Company had sales to this corporation of approximately $303,000, $67,000, and $1,473,000 in 1999, 1998 and 1997, respectively. As of June 30, 1999 and 1998, the Company had accounts receivable balances of $26,000 and $0, respectively, related to these sales. SUBSEQUENT ACQUISITION In August 1999, the Company purchased the assets of Creos Technologies, LLC which developed and manufactured high-voltage x-ray generator systems for CT scanners. The purchase price for the assets was approximately $2 million. The assets of this operation have been integrated into the IPS and CMED MFG divisions. (9) 401(k) RETIREMENT PLAN The Company has established the Colorado MEDtech, Inc. 401(k) Retirement Plan, which is governed by Section 401(k) of the Internal Revenue Code. Employees are eligible to enroll in the plan on January 1 and July 1, any time after they become full time employees of the Company. The Company makes discretionary contributions that vest over a three-year period. Company contributions were $264,000, $175,000 and $100,000 for the years ended June 30, 1999, 1998 and 1997, respectively. (10) 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 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. (11) MAJOR CUSTOMERS Five customers accounted for more than 10% of total sales and service revenues for the years ended June 30, 1999, 1998 and 1997, as follows:
1999 1998 1997 ---- ---- ---- Customer -------- A 23% 23% 0% B 18% 22% 19% C 12% 3% 0% D 2% 2% 14% E 0% 0% 12%
F-24 At June 30, 1999 and 1998, these five customers had accounts receivable due to the Company as follows:
1999 1998 ----------- ----------- A $ 2,400,000 $ 1,662,000 B $ 1,002,000 $ 1,996,000 C $ 1,101,000 $ 496,000 D $ 289,000 $ 122,000 E $ - $ -
The loss of a significant customer could have a material impact on the Company's operations. (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, 1999 Net sales and service $13,408 $15,754 $17,150 $19,037 Gross profit $ 4,974 $ 6,013 $ 6,713 $ 7,330 Net income $ 1,319 $ 1,690 $ 2,205 $ 2,636 Earnings per share (as restated): Basic $ .12 $ .16 $ .20 $ .24 Diluted $ .11 $ .14 $ .18 $ .21 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-25 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, 1999 and 1998 Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements All other schedules have been omitted because they were not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits. See Exhibit Index included as the last page of this report, which index is incorporated by reference. (b) Reports on Form 8-K. No reports on Form 8-K were filed for the three-month period ended June 30, 1999. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 27, 1999. COLORADO MEDTECH, INC. By: /S/ JOHN V. ATANASOFF, II ------------------------------- John V. Atanasoff, II Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /S/ JOHN V. ATANASOFF, II Chief Executive Officer, September 27, 1999 - ------------------------------------ President and Director John V. Atanasoff, II (Principal Executive Officer) /S/ STEPHEN P. HALL Chief Financial Officer September 27, 1999 - ------------------------------------ (Principal Financial and Stephen P. Hall Accounting Officer) /S/ DEAN A. LEFFINGWELL Director September 27, 1999 - ------------------------------------ Dean A. Leffingwell /S/ IRA M. LANGENTHAL Director September 27, 1999 - ------------------------------------ Ira M. Langenthal /S/ ROBERT L. SULLIVAN Director September 27, 1999 - ------------------------------------ Robert L. Sullivan /S/ CLIFFORD W. MEZEY Director September 27, 1999 - ------------------------------------ Clifford W. Mezey /S/ JOHN E. WOLFE Director September 27, 1999 - ------------------------------------ John E. Wolfe
25 INDEX TO EXHIBITS
Exhibit Sequential Number Description Page No. - ------ ----------- -------- 3.1 Articles of Incorporation; Complete Copy, as Amended. 3.2 Bylaws, as Amended. (A) 4.2 Specimen of Common Stock Certificate. (B) 4.3 Rights Agreement between Colorado MEDtech, Inc. and American Securities Transfer & Trust, Inc. dated January 14, 1999. (C) 10.31 Colorado MEDtech, Inc. Stock Option Plan. (D) 10.32 Employment Agreement between Colorado MEDtech, Inc. and John V. Atanasoff, II. (E) 10.37 Employment Agreement between Colorado MEDtech, Inc. and Lockett E. Wood (F) 10.38 Extension of Employment Agreement between Colorado MEDtech, Inc. and John V. Atanasoff, II (G) 10.40 Employment Agreement between Novel Biomedical, Inc. and Jonathan Kagan (H) 10.41 Employment Agreement between Colorado MEDtech, Inc. and Lee Erb (I) 10.42 Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan as Amended on November 21, 1997, Effective as of January 1, 1998 (J) 10.44 Loan Agreement, Commercial Security Agreement, and Promissory Note dated October 30, 1997 between Colorado MEDtech, Inc. and Bank One, Colorado N.A. (D) 21.1 Subsidiaries of Business Issuer 23.1 Consent of Independent Public Accountants 27.1 Financial Data Schedule for the year ended June 30, 1999 - --------------------------------------
(A) 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. (B) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on May 17, 1983. (C) Filed with Registration Statement on Form 8-A dated January 14, 1999. (D) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. (E) Filed as an exhibit to the Company's Current Report on Form 8-K, dated June 21, 1993 (F) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1994. (G) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (H) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1997. (I) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (J) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997. 26 EX-3.1 2 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF COLORADO MEDTECH, INC. (AS OF SEPTEMBER 28, 1999) ARTICLE I The name of the Corporation is: Colorado MEDtech, Inc. ARTICLE II A. The nature of the business of the Corporation and the objects and purposes to be transacted, promoted and carried on by it are: 1. To manufacture, produce, import, export, purchase or otherwise acquire, hold, own, use, maintain, sell at wholesale or retail, lease, or otherwise dispose of and generally deal in medical equipment, systems, supplies and related products of any and all kinds, for itself or as agent and/or as a manufacturer's representative of other medical supply houses, including, without being limited to, the buying, selling, leasing, renting, maintaining, using, operating, installing, and distributing of all materials, equipment and personal property appurtenant or incident to and useful in the medical equipment and systems business, together with the rights incident thereto of establishing and maintaining such equipment upon public or private property; and to purchase, own, hold, convey and otherwise use and enjoy real and personal property of all kinds for the operation of the aforesaid business, and in connection therewith, to acquire, construct, maintain, and operate buildings and equipment deemed necessary or convenient in connection therewith. 2. To engage in any commercial, industrial, manufacturing or agricultural enterprises calculated or designed to be profitable to this Corporation and in conformity with the laws of the State of Colorado. 3. To generally engage in any lawful business. The objects and purposes specified in each of the foregoing paragraphs shall not be limited or restricted by reference or inference from the terms of any other paragraph but each shall be regarded as an independent object and purpose. B. In furtherance of the foregoing purposes, the Corporation shall have and may exercise all of the rights, powers and privileges now and hereafter conferred upon corporations organized under the laws of the State of Colorado. In addition, it may do everything necessary, suitable or proper for the accomplishment of any of its corporate purposes, including the following: (a) To borrow money for any corporate purposes from its officers, directors or shareholders, upon fair and equitable terms and conditions. (b) To acquire shares of its own capital stock, and to hold the same either as treasury stock, or to cancel the same in the manner provided by law; any stock so held in the treasury shall not be voted. ARTICLE III This Corporation shall have perpetual existence. ARTICLE IV A. The aggregate number of shares of all classes of capital stock which the Corporation shall have authority to issue is Thirty Million (30,000,000), consisting of (i) Twenty-Five Million (25,000,000) shares of Common Stock, no par value per share, and (ii) Five Million (5,000,000) shares of series preferred stock, no par value per share ("Preferred Stock"). The Board of Directors shall have the authority to fix the rights, powers, preferences and privileges, and the qualifications, limitations or restrictions thereof, of any series of Preferred Stock, including, but not limited to, dividend rights, dividend rates, conversion rights, voting rights, and liquidation preferences; and to fix the number of shares constituting any such series and the designation thereof; and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). B. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. Out of the five million (5,000,000) shares of Preferred Stock, no par value per share, authorized under Section IV.A., a series of preferred stock of the Corporation is created, and the designation and amount thereof and the relative rights and preferences of the shares of such series, are as follows: B.1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "PREFERRED SHARES") and the number of shares constituting the Preferred Shares shall be one hundred fifty thousand (150,000). Such number of 2 shares may be increased or decreased by resolution of the Board of Directors and any necessary shareholder approval; PROVIDED, HOWEVER, that no decrease shall reduce the number of shares of Preferred Shares to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Preferred Shares. B.2. DIVIDENDS AND DISTRIBUTIONS. (a) Subject to the rights of the holders of any shares of any series of preferred stock (or any similar stock) ranking prior and superior to the Preferred Shares with respect to dividends, the holders of Preferred Shares, in preference to the holders of Common Stock, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Preferred Shares, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Preferred Shares. In the event the Corporation shall at any time after December 22, 1998, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Preferred Shares were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the number or of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Preferred Shares as provided in paragraph (a) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Preferred Shares shall nevertheless be 3 payable, out of funds legally available for such purpose, on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall being to accrue and be cumulative on outstanding shares of Preferred Shares from their date of issue. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. B.3. VOTING RIGHTS. (a) Subject to the provision for adjustment hereinafter set forth, each Preferred Share shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after December 22, 1998, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of Preferred Shares and the holders of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (c) Except as set forth herein or required by law, holders of Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. B.4. CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends or other dividends or distributions payable on the Preferred Shares as provided in Section B.2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Preferred Shares outstanding shall have been paid in full, the Corporation shall not: 4 (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares, except dividends paid ratably on the Preferred Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares; PROVIDED, HOWEVER, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares; or (iv) redeem or purchase or otherwise acquire for consideration any Preferred Shares, or any stock ranking on a parity with the Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could under paragraph (a) of this Section B.4, purchase or otherwise acquire such shares at such time and in such manner. B.5. REACQUIRED SHARES. Any Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, as amended, or in any other certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law. 5 B.6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares unless, prior thereto, the holders of Preferred Shares shall have received the greater of (i) $100 per share, plus an amount equal to accrued and unpaid dividends an distributions thereon, whether or not declared, to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (b) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares, except distributions made ratably on the Preferred Shares and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after December 22, 1998, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification aor otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Preferred Shares were entitled immediately prior to such event under clause (a)(ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction of the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. B.7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Preferred Shares shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after December 22, 1998, declare or pay any divided on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 6 B.8. NO REDEMPTION. The shares of Preferred Shares shall not be redeemable. B.9. RANK. The Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's preferred stock. B.10. FRACTIONAL SHARES. Preferred Shares may be issued in fractions of a share which are integral multiples of one one-hundredth of a share which shall entitle the holder, in proportion to such holder's fractional shares, to receive dividends, participate in distributions and to have the benefit of all other rights of holders of Preferred Shares. B.11. AMENDMENT. The Articles of Incorporation of the Corporation, as amended, shall not be amended in any manner which would materially alter or change the powers, preferences or rights of the Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Preferred Shares, voting together as a single class. C. Each shareholder of record shall have one vote for each share of stock standing in his name on the books of the Corporation and entitled to vote. In the election of directors, cumulative voting shall not be allowed. D. Shareholders of the capital stock of this Corporation shall not have the pre-emptive or preferential right to subscribe for any shares of the capital stock of this Corporation, whether nor or hereafter authorized, and the right to acquire additional or treasury shares of the Corporation or securities convertible into shares or carrying stock purchase warranty or privileges. E. The Board of Directors may, from time to time, distribute to the shareholders in partial liquidation, out of stated capital or capital surplus of the Corporation, a portion of its assets, in cash or property, subject to the limitations contained in the statutes of the State of Colorado. 7 ARTICLE V The number of persons constituting the Board of Directors of the Corporation shall be fixed by the Bylaws of the Corporation. Directors need not be residents of the State of Colorado, nor shareholders of the Corporation, and shall exercise all the powers conferred on the Corporation by these Articles of Incorporation and by the laws of the State of Colorado. ARTICLE VI No contract or other transaction of the Corporation with any other person, firm, or corporation, or in which this Corporation is interested, shall be affected by reason of any of the directors or officers of this Corporation being interested, in their individual capacities, or as an officer or director of another corporation, individually or jointly with others as a party to such contract or transaction; provided that the fact of such interest is known or disclosed to the Board. Any member of the Board so interested may be counted in determining the existence of a quorum at which the matter is considered and may vote at the meeting at which this matter is taken up, as if he were not so interested. ARTICLE VII [DELETED] ARTICLE VIII The Corporation shall, to the fullest extent permitted by Colorado law as in effect at any time, indemnify any person against all liability and expense (including attorney's fees) incurred by reason of the fact that he is or was a director of officer of the Corporation or, while serving as a director or officer of the Corporation, he is or was serving at the request of the Corporation as a director, officer, partner or trustee of, or in any similar managerial or fiduciary position of, or as an employee or agent of, another corporation, partnership, joint venture, trust, association or other entity. Expenses (including attorney's fees) incurred in defending an action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding to the full extent and under the circumstances permitted by Colorado law. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the Corporation against any liability asserted against and incurred by such person in any such capacity or arising out of such person's position, whether or not the Corporation would have the power to indemnify against such liability under the provisions of this Article VIII. The indemnification provided by this Article VIII shall not be deemed exclusive of any other rights to which those indemnified may be entitled under these articles of incorporation, any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, shall inure to the benefit of their heirs, executors, and administrators. The provisions of this Article VIII shall not be deemed to preclude the Corporation from indemnifying other 8 persons from similar or other expenses and liabilities as the board of directors or the shareholders may determine a specific instance or by a resolution of general application. ARTICLE IX The officers of the Corporation shall be subject to the doctrine of corporate opportunities only insofar as it applies to business opportunities in which this Corporation has expressed an interest as determined from time to time by the Corporation's Board of Directors, as evidenced by resolutions appearing in its minutes. When so delineated, opportunities within such areas of interest shall be disclosed promptly to the Board of Directors. Until such time as this Corporation, through its Board of Directors, has designated an area of interest, the officers shall be free to engage in such areas and to continue a business existing prior to the time that such an area of interest has been designated. ARTICLE X The Corporation shall be entitled to treat the registered holder of any shares of the Corporation as the owner thereof for all purposes, including all rights derived from such shares, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares, on the part of any other persons, including but without limiting the generality thereof, a purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such purchaser, assignee, transferee or other person becomes a registered holder of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such purchaser, assignee, transferee or other person. The purchaser, assignee or transferee of any of the shares of the Corporation shall not be entitled: (1) to receive notice of the meetings of the shareholders; (2) to vote at such meetings; (3) to examine a list of these shareholders; (4) to be paid dividends or other sums payable to shareholders; (5) to own, enjoy and exercise any other property or rights deriving from such shares against the Corporation, until such purchaser, assignee or transferee has become the registered holder of such shares. ARTICLE XI [DELETED] ARTICLE XII By the affirmative vote or concurrence of the holders of a majority of the outstanding shares of the Corporation, or any class or series thereof, the shareholders may take any action that, but for this Article, would require a two-thirds affirmative vote or concurrence of the holders of the outstanding shares, or any class or series thereof, under the Colorado Corporation Code. 9 ARTICLE XIII A director of the Corporation shall not be personally liable to the Corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director except that this provision shall not eliminate or limit the liability of a director to the Corporation or to its shareholders for monetary damages otherwise existing for: (i) any breach of the directors' duty of loyalty to the Corporation or to its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law (iii) acts specified in Section 7-5- 144 of the Colorado Corporation Code, as amended; or (iv) any transaction from which the director derived any improper personal benefit. If the Colorado Corporation Code hereafter is amended to eliminate or limit further the liability of a director, then, in addition to the elimination and limitation of liability provided by the preceding sentence, the liability of each director shall be eliminated or eliminated to the fullest extent permitted by the Colorado Corporation Code as so amended. Any repeal or modification of this Article XIII shall not adversely affect any right or protection of a director of the Corporation under this Article XIII, as in effect immediately prior to such repeal or modification, with respect to any liability that would have accrued, but for this Article XIII, prior to such repeal or modification. 10 EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 COLORADO MEDTECH, INC. Subsidiaries of Colorado MEDtech, Inc. 1. CMED Catheter and Disposables Technology, Inc., a Minnesota corporation. 2. BioMed Y2K, Inc., a Colorado corporation EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated August 12, 1999, included in Registration Statement File No. 333-17207. It should be noted that we have not audited any financial statements of the company subsequent to June 30, 1999, or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Denver, Colorado, September 27, 1999. EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1999 JUN-30-1999 8,457,552 14,394,870 10,508,810 (334,000) 4,598,686 40,460,172 7,518,596 (5,140,302) 45,687,882 17,000,559 0 0 0 11,000,446 0 45,687,882 65,349,436 65,349,436 40,319,214 12,954,318 (495,765) 0 17,347 12,554,322 4,704,000 7,850,322 0 0 0 7,850,322 .73 .63
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