U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 0-12471
COLORADO MEDTECH, INC.
(Exact name of issuer as specified in its charter)
COLORADO 84-0731006
-------- ----------
(State or other jurisdiction of Registrant (IRS Identification No.)
incorporation or organization)
4801 North 63rd Street, Boulder, Colorado 80301
-----------------------------------------------
(Address of principal executive offices, including zip code)
(303) 530-2660
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- -------
As of April 30, 2002, the Company had 13,168,583 shares of Common Stock
outstanding.
COLORADO MEDTECH, INC.
FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2002 (Unaudited) and June 30, 2001 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three months and nine months ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Forward-Looking Statements and Risk Factors 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
March 31, 2002 June 30, 2001
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,046,472 $ 8,127,076
Short-term investments 589,210 1,677,290
Accounts receivable, net 9,568,202 13,505,201
Inventories 7,718,446 11,720,505
Deferred income taxes 3,234,201 3,234,201
Prepaid expenses and other 1,106,662 791,848
Income taxes receivable 2,947,370 976,507
----------- -----------
Total current assets 29,210,563 40,032,628
PROPERTY AND EQUIPMENT, net 5,174,436 4,637,282
GOODWILL AND OTHER INTANGIBLES, net 5,961,116 3,585,772
NOTES RECEIVABLE - RELATED PARTIES 715,489 999,796
INVESTMENT IN LAND 500,000 500,000
DEFERRED INCOME TAXES AND OTHER 1,671,751 1,644,455
----------- -----------
TOTAL ASSETS $43,233,355 $51,399,933
=========== ===========
The accompanying notes are an integral part of these balance sheets.
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COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
March 31, 2002 June 30, 2001
-------------- -------------
CURRENT LIABILITIES:
Accounts payable $ 4,418,064 $ 7,168,168
Accrued product service costs 518,614 424,163
Accrued salaries and wages 2,122,803 3,054,307
Other accrued expenses 1,169,172 1,905,229
Customer deposits 2,292,256 3,451,332
Current portion of capital lease obligation 44,242 41,715
------------ ------------
Total current liabilities 10,565,151 16,044,914
Capital lease obligation, net of current portion -- 33,503
------------ ------------
Total Liabilities 10,565,151 16,078,417
SHAREHOLDERS' EQUITY:
Common Stock, no par value, 25,000,000 shares authorized;
13,168,583 and 12,967,319 issued and outstanding at
March 31, 2002 and June 30, 2001, respectively 16,700,307 16,161,004
Retained earnings 15,970,614 19,174,464
Unrealized loss on available-for-sale investments (2,717) (13,952)
------------ ------------
Total shareholders' equity 32,668,204 35,321,516
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 43,233,355 $ 51,399,933
============ ============
The accompanying notes are an integral part of these balance sheets.
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COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
SALES AND SERVICE:
Outsourcing Services $ 6,958,751 $ 9,217,606 $ 20,240,585 $ 29,603,576
Medical Products 10,703,223 11,740,055 32,129,050 27,112,593
------------ ------------ ------------ ------------
Total Sales and Service 17,661,974 20,957,661 52,369,635 56,716,169
------------ ------------ ------------ ------------
COST OF SALES AND SERVICE:
Outsourcing Services 6,736,328 6,499,414 19,022,564 20,485,558
Medical Products 6,306,957 7,941,635 19,005,446 18,372,441`
------------ ------------ ------------ ------------
Total Cost of Sales and Service 13,043,285 14,441,049 38,028,010 38,857,999
------------ ------------ ------------ ------------
GROSS PROFIT 4,618,689 6,516,612 14,341,625 17,858,170
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 879,414 1,557,837 2,747,020 3,770,940
Marketing and selling 940,181 1,066,151 2,894,220 2,986,424
Operating, general and administrative 3,409,733 4,659,380 11,550,549 12,358,047
Other operating expenses 1,286,127 463,858 2,353,637 1,060,976
------------ ------------ ------------ ------------
Total operating expenses 6,515,455 7,747,226 19,545,426 20,176,387
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,896,766) (1,230,614) (5,203,801) (2,318,217)
OTHER INCOME, net 45,083 215,138 180,951 745,606
------------ ------------ ------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (1,851,683) (1,015,476) (5,022,850) (1,572,611)
BENEFIT FOR INCOME TAXES (612,000) (380,000) (1,819,000) (595,000)
------------ ------------ ------------ ------------
NET LOSS $ (1,239,683) $ (635,476) $ (3,203,850) $ (977,611)
============ ============ ============ ============
NET LOSS PER SHARE
Basic and diluted $ (.09) $ (.05) $ (.25) $ (.08)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 13,114,961 12,871,898 13,015,833 12,591,727
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
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COLORADO MEDTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net loss $(3,203,850) $ (977,611)
Adjustments to reconcile net income to net
cash flows used in operating activities-
Depreciation and amortization 1,952,198 1,796,565
Stock-based compensation 54,603 --
Provision for deferred taxes -- 49,189
Accretion of short-term investments 1,338 99,246
Changes in operating assets and liabilities-
Accounts receivable, net 3,936,999 6,281
Inventories 4,327,840 (6,432,398)
Prepaid expenses and other assets (2,380,631) (1,403,905)
Accounts payable and accrued expenses (4,109,471) 3,995,933
Customer deposits (1,159,076) 1,603,644
----------- -----------
Net cash flows used in operating activities (580,050) (1,263,056)
----------- -----------
INVESTING ACTIVITIES:
Cash paid for purchase of Barzell assets, net (2,056,293) --
Cash paid for purchase of ATL assets, net (500,000) (3,886,041)
Capital expenditures (2,280,282) (1,364,803)
Purchases of short-term investments (594,793) (4,074,915)
Sales of short-term investments 1,690,020 9,429,737
Proceeds from sale of CDT 65,877 --
Funding of related party notes receivable -- (999,796)
Repayment of related party notes receivable 134,309 --
----------- -----------
Net cash flows used in investing activities (3,541,162) (895,818)
----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock 301,124 2,314,549
Purchase of common stock -- (108,750)
Repayment of borrowings (260,516) (36,195)
----------- -----------
Net cash flows provided by financing activities 40,608 2,169,604
----------- -----------
Net (decrease) increase in cash and cash equivalents (4,080,604) 10,730
Cash and cash equivalents, at beginning of period 8,127,076 8,560,065
----------- -----------
Cash and cash equivalents, at end of period $ 4,046,472 $ 8,570,795
=========== ===========
The accompanying notes are an integral part of these statements.
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COLORADO MEDTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The financial information is unaudited and should be read in conjunction with
the consolidated financial statements and notes thereto filed with the Company's
annual report on Form 10-K for the year ended June 30, 2001 (the "Form 10-K").
The accounting policies utilized in the preparation of the financial information
herein presented are the same as set forth in the Company's annual consolidated
financial statements filed with the Form 10-K, except as modified for interim
accounting policies which are within the guidelines set forth in Accounting
Principles Board Opinion No. 28.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of March 31, 2002 and June 30, 2001, the results
of its operations for the three and nine-month periods ended March 31, 2002 and
2001, and its cash flows for the nine-month periods ended March 31, 2002 and
2001. All of the adjustments were of a normal and recurring nature.
Reclassifications
Certain amounts have been reclassified in the prior year financial statements to
be consistent with the current year presentation.
Other Operating Expenses
Other operating expenses are comprised of legal fees, costs associated with the
Company defending itself in the Wedel arbitration, severance costs, costs
related to an unsolicited acquisition proposal, costs related to the settlement
of an outstanding dispute with a customer and costs related to resolution of
the FDA warning letter received by the Company (see Note 11).
Cash Flow Information
The following sets forth the supplemental disclosures of cash flow information
for the nine-month periods ended March 31, 2002 and 2001, respectively:
2002 2001
---- ----
(In thousands)
Cash paid for interest $ 17 $ 8
Cash paid for income taxes $376 $315
During the nine-month periods ended March 31, 2002 and 2001, the Company
received non-cash tax benefits of $1,000 and $439,000, respectively, for the
exercise of stock options and warrants in disqualifying stock transactions.
NOTE 2 - BORROWINGS
Credit Facility
The Company entered into a credit facility (the "Credit Facility") on December
21, 2000 that provided for a three-year revolving line of credit of $15 million.
On November 13, 2001, the Company and the lender amended the Credit Facility to:
(i) remove CIVCO Medical Instruments Co., Inc. ("CIVCO") as a
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party; (ii) remove CIVCO assets as collateral; (iii) ease financial covenants;
(iv) reduce the line of credit from $15 million to $5 million and change the
maturity date from December 21, 2003 to July 1, 2002; and (v) set the interest
rate at 2% over the higher of (a) the bank's prime rate (4.75% at March 31,
2002) or (b) the federal funds effective rate (1.74% at March 31, 2002) plus
0.5%. At March 31, 2002 the applicable interest rate on borrowings was 6.75%.
All accounts receivable and inventory secure outstanding balances, but no
amounts had been advanced under the facility as of April 30, 2002.
Capital Leases
The Company is obligated under a capital lease agreement that terminates in
April 2003 as follows:
March 31, 2002
--------------
(In thousands)
Minimum lease payments
Current $ 46
Long-term --
----
Total lease payments 46
Amount representing interest (7.9%) (2)
----
$ 44
====
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive loss includes net loss and all changes in equity during a period
that arise from non-owner sources, such as foreign currency items and unrealized
gains and losses on certain investments in debt and equity securities. Total
comprehensive loss and the components of comprehensive loss follow:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
(In thousands)
Net loss $(1,240) $ (635) $(3,204) $ (978)
Changes in unrealized gain on
available-for-sale investments,
net of taxes 20 (1) 11 (43)
------- ------- ------- -------
Comprehensive loss $(1,220) $ (636) $(3,193) $(1,021)
======= ======= ======= =======
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
common shares outstanding during each period. Diluted earnings per share are
computed on the basis of the weighted average shares outstanding during each
period, including dilutive common equivalent shares for stock options and
warrants. The Company's diluted net loss per share was the same as its basic net
loss per share because all stock options and warrants were antidilutive and were
therefore excluded from the calculation of diluted net loss per share. As of
March 31, 2002 and 2001, there were 2,337,000 and 2,843,000 options and warrants
outstanding that were excluded from the diluted earnings per share calculation
because their effect was antidilutive.
- 8 -
NOTE 5 - STOCK AND STOCK OPTIONS
During the nine months ended March 31, 2002, the Company granted 232,500 stock
options to certain employees. The options to purchase the Company's common stock
were issued at exercise prices ranging from $2.22 to $4.70 per share, which were
the fair market values of the Company's common stock on the dates of the grants.
The options vest over four-year periods and expire ten years from the dates of
grant.
During the nine months ended March 31, 2002, 10,500 stock options were exercised
by certain employees and one officer at prices per share ranging from $3.03 to
$3.82, resulting in cash proceeds to the Company of approximately $19,000.
Included in the transactions was the cancellation of 4,872 shares used in lieu
of cash to exercise options.
On August 24, 2001, the Company issued a warrant to an outside director of the
Company to purchase 26,250 shares of the Company's common stock at $2.85 per
share. The warrant vested over the period from August 24, 2001 to February 24,
2002. The warrant expires on August 24, 2006. The warrant was issued as
consideration for consulting services provided by the director to the Company
and was recorded as compensation expense over the vesting period based on the
fair market value of the warrant issued. The Company has computed the fair value
of the warrant issued under this agreement using the Black Scholes pricing
model, assuming a risk free interest rate of 4.53%, expected life of four years,
expected volatility of 87.2%, and 0% dividend rate. When issued, the warrant had
a fair value of approximately $50,000. The Company recorded compensation expense
related to the warrant for the nine months ended March 31, 2002 of approximately
$50,000.
On February 22, 2002, the Company issued a warrant to an outside director of the
Company to purchase 15,000 shares of the Company's common stock at $2.79 per
share. The warrant vests at the rate of 2,500 shares on each of the six (6)
monthly anniversaries of February 22, 2002, beginning March 22, 2002 and ending
August 22, 2002. The warrant expires five years from date of grant. The warrant
was issued as consideration for consulting services provided by the director to
the Company and is being recorded as compensation expense over the vesting
period based on the fair market value of the warrant issued. The warrant is
revalued each vesting period with a final valuation to be performed when the
warrant is fully vested. The Company has computed the fair value of the warrant
issued under this agreement using the Black Scholes pricing model, assuming a
risk free interest rate of 1.85%, expected life of four years, expected
volatility of 85.25%, and 0% dividend rate. When issued, the warrant had a fair
value of approximately $26,000. The Company recorded compensation expense
related to vesting of the warrant for the nine months ended March 31, 2002 of
approximately $4,000.
During the nine months ended March 31, 2002, the Company issued a warrant to an
outside director of the Company to purchase 6,250 shares of common stock at an
exercise price of $2.65 per share, the fair market value of the stock on the
date of issuance. The warrant vests on July 1, 2002. The shares were issued for
director services and no compensation was required to be recorded.
During the nine months ended March 31, 2002, 15,000 Director warrants were
exercised at a price per share of $3.03, resulting in cash proceeds to the
Company of approximately $45,000.
During the nine months ended March 31, 2002, the Company issued 95,302 shares of
stock purchased through the Company's Employee Stock Purchase Plan during the
plan year ended December 31, 2001. The shares were purchased at prices ranging
from $1.79 to $2.49 per share, resulting in cash proceeds to the Company of
approximately $237,000.
- 9 -
During the nine months ended March 31, 2002, the Company accepted 41,666 shares
of its own common stock for the repayment of the loan of a former officer of
approximately $150,000 (see Note 10). The stock was tendered at a price of $3.60
per share, the fair market value of the shares at the time of the transaction.
NOTE 6 - SEGMENT INFORMATION
The Company operates in two industry segments, Outsourcing Services and Medical
Products. The Outsourcing Services segment is made up of the RELA Division
("RELA") and the service portion of the Imaging and Power Systems Division
("IPS"). This segment designs, develops and manufactures medical products for a
broad range of customers that includes major medical device and biotechnology
companies.
The Medical Products segment is made up of CIVCO and the products portion of
IPS. 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; specialized medical
accessories for ultrasound imaging equipment and for minimally invasive surgical
equipment; and high voltage x-ray tube generator subsystems for CT scanners.
The accounting policies used in the preparation of the segment information are
consistent with those used in the preparation of the Consolidated Financial
Statements of the Company. The following is a breakout of the Company's
operating revenue and gross profit by segment for the three and nine-month
periods ended March 31, 2002 and 2001:
Outsourcing Medical Reconciling Consolidated
Services Products Items Totals
----------- ------- ----------- ------------
(In thousands)
Three months ended March 31, 2002:
Operating revenue $ 7,399 $ 10,757 $ (494) $ 17,662
Gross profit $ 223 $ 4,396 -- $ 4,619
Three months ended March 31, 2001:
Operating revenue $ 14,791 $ 11,740 $ (5,573) $ 20,958
Gross profit $ 2,718 $ 3,799 -- $ 6,517
Nine months ended March 31, 2002:
Operating revenue $ 22,451 $ 32,402 $ (2,483) $ 52,370
Gross profit $ 1,219 $ 13,123 -- $ 14,342
Nine months ended March 31, 2001:
Operating revenue $ 43,647 $ 27,112 $(14,043) $ 56,716
Gross profit $ 9,118 $ 8,740 -- $ 17,858
Included in the operating revenues disclosed above are intersegment operating
revenues of the Outsourcing Services segment of $440,000 and $5,573,000 for the
three-month periods ended March 31, 2002 and 2001, respectively. For the
nine-month periods ended March 31, 2002 and 2001, intersegment revenues were
$2,210,000 and $14,043,000, respectively. The Medical Products segment had
intersegment revenues of $54,000 and $0 for the three-month periods ended March
31, 2002 and 2001, respectively. For the nine-month periods ended March 31, 2002
and 2001, intersegment revenues were $273,000 and $0, respectively.
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.
- 10 -
The following is a breakout of the Company's assets by segment at March 31, 2002
compared to June 30, 2001:
Outsourcing Medical Consolidated
Services Products Totals
----------- -------- ------------
(In thousands)
Assets at March 31, 2002 $25,156 $18,077 $43,233
Assets at June 30, 2001 $27,567 $23,833 $51,400
NOTE 7 - ACQUISITION OF BARZELL
On February 8, 2002, the Company's CIVCO subsidiary acquired 100% of the common
stock of Barzell Whitmore Maroon Bells, Inc. ("Barzell") in a transaction
accounted for under the purchase method of accounting. Barzell designs and
manufactures positioning and stabilizing devices used in minimally invasive
men's health surgical procedures. The acquisition of Barzell expands and
complements CIVCO's product lines. The Company anticipates that the acquisition
of Barzell will help it create new products in the future. As part of the
acquisition, the Company paid $2.0 million in cash, issued 127,000 shares of the
Company's common stock to the selling shareholders of Barzell (valued at
approximately $337,000) and assumed approximately $230,000 of debt. The Company
also incurred transaction costs of approximately $190,000. Under the terms of
the agreement, the former shareholders of Barzell could receive additional cash
payments, totaling up to an additional $2.2 million over five-and-one-half
years, based upon achievement of certain predetermined cumulative gross profit
targets. In addition, the former shareholders of Barzell entered into employment
agreements with CIVCO pursuant to which they could receive additional incentive
payments if other predetermined gross profit targets are exceeded.
Exclusive of future contingent consideration, the recorded purchase price of the
net assets acquired in the transaction was approximately $2.5 million. The
purchase price was allocated to the net assets acquired as follows:
Inventory $ 326,000
Property and equipment $ 58,000
Goodwill and other intangibles $2,528,000
Accounts payable and accrued expenses $ (154,000)
Notes payable $ (230,000)
The other intangibles consist of patents, a non-compete agreement and customer
relationships. The Company will amortize these intangibles using the
straight-line method of amortization over the useful lives of these assets. The
allocation of the purchase price to assets acquired and liabilities assumed is
based on preliminary estimates and certain assumptions that the Company believes
are reasonable under the circumstances.
The Company's consolidated financial statements include Barzell's results of
operations for the period from February 8, 2002 to March 31, 2002. During this
period, the operations of Barzell contributed approximately $364,000 of revenue
and $85,000 of net income.
-11-
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company for the nine months ended March 31, 2002,
as if the transaction had occurred July 1, 2001:
Revenue $53,486,000
Net income $(3,199,000)
Net loss per share
Basic and diluted $ (.25)
Because Barzell was operated as a separate business during the above periods,
the actual results of operations may have been different than the pro forma
amounts disclosed above. Further, the pro forma results may not be indicative of
future results.
NOTE 8 - GOODWILL AND INTANGIBLES
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
effective as of July 1, 2001. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
accounting method. SFAS No. 142 states that goodwill is no longer subject to
amortization over its useful life. Rather, goodwill will be subject to an annual
assessment for impairment and be written down to its fair value only if the
carrying amount is greater than the fair value. In addition, intangible assets
will be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented or exchanged, regardless of the acquirer's
intent to do so. The amount and timing of non-cash charges related to
intangibles acquired in business combinations will change significantly from
prior practice.
The Company had recorded on its balance sheet approximately $5,211,000 of
goodwill as of March 31, 2002. As a result of adopting SFAS No. 142, the Company
is no longer amortizing its goodwill related to the December 2000 acquisition of
the operating assets of the ultrasound supplies group of ATL Ultrasound (the
"ATL Goodwill"), nor is it amortizing the goodwill associated with the February
2002 acquisition of Barzell. Prior to adoption, the Company was recording
approximately $47,000 of amortization expense on a quarterly basis associated
with this goodwill. No goodwill amortization was reported for the three or nine
months ended March 31, 2002. Goodwill amortization of approximately $47,000 and
$96,000 was reported for the three and nine months ended March 31, 2001,
respectively. The Company has completed its annual impairment test and concluded
that the ATL Goodwill is not currently impaired. Had SFAS No. 142 been
implemented in the three and nine months ended March 31, 2001, pro forma net
income and earnings per share would have been as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2001
------------------ -----------------
(In thousands)
Reported net loss $(635) $(978)
Goodwill amortization 46 96
----- -----
Adjusted net loss $(589) $(882)
===== =====
Adjusted loss per share $(.05) $(.07)
===== =====
As of March 31, 2002, the Company had approximately $750,000 (net of accumulated
amortization of approximately $250,000) on its balance sheet relating to an
acquired intangible asset. The acquired
-12-
intangible asset is a business support, product development and non-competition
agreement acquired in connection with the December 29, 2000 acquisition of the
operating assets of the ultrasound supplies group of ATL Ultrasound. The Company
recorded approximately $50,000 and $150,000 of amortization expense related to
this asset during the three and nine months ended March 31, 2002, respectively.
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which established accounting
standards for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. It requires an entity to
recognize the fair value of a liability for an asset retirement obligation in
the period in which it is incurred if a reasonable estimate can be made. The
Company is required to adopt this statement in its fiscal year 2003. The Company
does not believe that this statement will materially impact its results of
operations.
During August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard addresses financial accounting
and reporting for the impairment and disposition of long-lived assets. This
statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. This
standard is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. Company
management is reviewing the provisions of this statement and does not expect
them to have a material effect on the Company's financial statements.
NOTE 10 - NOTES RECEIVABLE - RELATED PARTIES
During January 2001, the Board of Directors approved a program to loan officers
of the Company up to an aggregate of $1,000,000 to purchase common stock of the
Company from persons other than the Company. The loans are full recourse to the
Borrower and bear interest at the prime rate plus 0.5%. Interest is payable
annually on the anniversary date of each note. All principal and remaining
accrued interest is due five years from the date of the respective note. On
November 26, 2001, following the resignation of an officer of the Company, the
Company cancelled the former officer's promissory note of approximately $150,000
in exchange for his transfer to the Company of 41,666 shares of the Company's
common stock tendered at $3.60 per share, the fair market value of the shares at
the time of the transaction, and forgave accrued interest on the loan. In March
2002, an officer of the Company repaid approximately $134,000 of the outstanding
balance due on his loan. As of the date of this report, all officers with such
loans outstanding are current in their interest payments. As of March 31, 2002,
accrued interest on the outstanding loans was approximately $15,000 and was
included in other current assets on the balance sheet. Interest income on the
notes receivable in the three months ended March 31, 2002 was approximately
$11,000.
NOTE 11 - RESOLUTION OF DISPUTES
Wedel Arbitration
On November 21, 2000, Victor J. Wedel and Sherrill Wedel filed a legal
proceeding against Colorado MEDtech and a former member of its management in
United States District Court for the Central District of California in
connection with the November 15, 1999 transaction in which Colorado MEDtech
acquired the outstanding stock of CIVCO Medical Instruments Co., Inc. and
related real estate
-13-
from the Wedels in exchange for Colorado MEDtech stock. The defendants moved to
stay this suit so that the claims could be arbitrated in accordance with an
agreement between Mr. Wedel and the Company to submit all disputes to binding
arbitration. While the court granted the requested stay, it also entered an
order that imposed certain restrictions on CIVCO and the Company during the
pendency of the dispute. The order included a provision that CIVCO not pay any
dividends to the Company during the pendency of the dispute.
On March 3, 2001, the Wedels submitted a statement of claim to an arbitrator
group. After binding arbitration, on December 5, 2001 the arbiter found in favor
of the Colorado MEDtech parties and against the claimant on all of the counts in
the matter and ruled that the Colorado MEDtech parties had no liability in the
matter. Following the arbiter's resolution of the dispute, in February 2002 the
court vacated its earlier order and lifted the injunction.
Gen-Probe Litigation
In May 2001, a former customer, Gen-Probe, Incorporated, threatened litigation
against Colorado MEDtech in connection with a development and manufacturing
project. During the remainder of 2001, the Company and Gen-Probe attempted to
reach an amicable settlement. Gen-Probe stated that its damages in connection
with the dispute were $14 million. On February 27, 2002, the Company filed
against Gen-Probe a complaint for declaratory judgment in the United States
District Court for the District of Colorado, seeking a declaration that Colorado
MEDtech did not breach the agreements pursuant to which Colorado MEDtech
provided development and manufacturing services to Gen-Probe. On March 5, 2002,
the Company settled the dispute with Gen-Probe. The settlement included the
withdrawal of the litigation between the parties and with no admission of
liability by either party. Colorado MEDtech's expenses associated with the
dispute in the quarter ending March 31, 2002, including its contribution to the
settlement and its legal fees and costs, were approximately $1.1 million.
Resolution of FDA Warning Letter
On January 26, 2001, the Company received a warning letter from the United
States Food and Drug Administration ("FDA") regarding certain areas in which the
Company's Longmont, Colorado contract medical device manufacturing facility was
not in conformance with the FDA's Quality System Regulation ("QSR"). On October
11, 2001, the Company received a letter from the FDA resolving the issues
identified in the warning letter, and allowing the Company to resume production
of devices affected by the warning letter.
NOTE 12 - CONTINGENCIES AND SUBSEQUENT EVENTS
IRS Audit
The Company is currently under audit by the Internal Revenue Service for its
1998 and 1999 tax returns. Should an unfavorable conclusion come out of the
audit, it could have an adverse effect on financial condition and liquidity. It
is not possible at this time to predict the outcome of the audit.
Lease
On January 27, 2002 the Company signed a lease for a 10-year term, commencing
April 1, 2002, with rental payments to begin July 1, 2002, for office and
building space in which to consolidate its Colorado operations. The Company
recognizes total rent expense to be paid on a straight-line basis over the term
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of the lease in accordance with SFAS 13, "Accounting for Leases". Future minimum
lease payments under this agreement for the fiscal years ending June 30 are as
follows:
Year Amount
---- ------
2003 $ 768,000
2004 792,000
2005 815,000
2006 840,000
2007 865,000
2008 - 2012 4,730,000
----------
Total minimum
lease payments $8,810,000
==========
The Company expects its costs to exit currently leased facilities and
consolidate its Colorado operations will be approximately $250,000, in addition
to approximately $600,000 in capital expenditures. These costs will be incurred
in the fourth quarter of fiscal 2002 and the first quarter of fiscal 2003.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Colorado MEDtech manages its business based on its outsourcing services and
medical product segments. The Outsourcing Services segment is made up of the
RELA Division ("RELA") and the service portion of the Imaging and Power Systems
Division ("IPS"). The Medical Products segment is made up of CIVCO Medical
Instruments Co., Inc. ("CIVCO") and the products portion of IPS.
Outsourcing Services
Our outsourcing services consist of design, development and manufacture of
medical products and software development, including medical device
connectivity, for major medical device and biotechnology companies.
Our principal outsourcing services include:
o Medical therapeutic and diagnostic device design and development - we
design and develop complex electronic and electromechanical instruments for
the detection and treatment of disease.
o Medical software and medical device connectivity - we develop software for
electronic and electromechanical medical products and provide medical
software verification and validation services. Our software and medical
device connectivity projects are performed for customers who produce
therapeutic, pharmaceutical, diagnostic or biotechnology instruments.
o Manufacturing - we manufacture complex electronic and electromechanical
medical devices. We are registered device manufacturers with the U.S. Food
and Drug Administration ("FDA") and are required to meet the agency's
Quality System Regulation ("QSR").
Medical Products
This segment designs, develops and manufactures proprietary medical products
that are sold to large, multi-national medical ultrasound imaging companies, to
international distributors of imaging products, and to end users such as
hospitals, clinics and doctors. Our products include:
o High-performance RF amplifiers and integrated power delivery subsystems for
the medical imaging industry;
o Specialized medical accessories and supplies for ultrasound imaging
equipment and for minimally invasive surgical equipment; and
o Specialized positioning and stabilizing devices used in image-guided
minimally invasive surgery.
-16-
As an aid to understanding the Company's operating results, the following table
indicates the percentage relationships of income and expense items to total
revenue for the line items included in the Condensed Consolidated Statements of
Operations for the three and nine-month periods ended March 31, 2002 and 2001,
and the percentage change in those items for the three and nine-month periods
ended March 31, 2002, from the comparable periods in 2001.
Percentage Change From
As a Percentage of Total Revenues Prior Year's Comparable Period
----------------------------------------- -------------------------------------------
Three Month Period Nine Month Period Three Month Period Nine Month Period
Ended March 31, Ended March 31, Ended March 31, Ended March 31,
------------------ ----------------- ------------------ -----------------
2002 2001 2002 2001 LINE ITEMS 2002 2002
---- ---- ---- ---- ---------- ---- ----
% % % % % %
39.4 44.0 38.6 52.2 Sales, Outsourcing Services (24.5) (31.6)
60.6 56.0 61.4 47.8 Sales, Medical Products (8.8) 18.5
----- ----- ----- ----- ------ ------
100.0 100.0 100.0 100.0 Total Sales and Service (15.7) (7.7)
----- ----- ----- ----- ------ ------
38.1 31.0 36.3 36.1 Cost of Sales, Outsourcing Services 3.6 (7.1)
35.7 37.9 36.3 32.4 Cost of Sales, Medical Products (20.6) 3.4
----- ----- ----- ----- ------ ------
73.8 68.9 72.6 68.5 Total Cost of Sales and Service (9.7) (2.1)
----- ----- ----- ----- ------ ------
26.2 31.1 27.4 31.5 Gross Profit (29.1) (19.7)
----- ----- ----- ----- ------ ------
5.0 7.4 5.2 6.6 Research and Development (43.5) (27.2)
5.3 5.1 5.5 5.3 Marketing and Selling (11.8) (3.1)
19.3 22.2 22.1 21.8 Operating, Gen'l and Admin (26.8) (6.5)
7.3 2.2 4.5 1.9 Other Operating Expenses 177.3 121.8
----- ----- ----- ----- ------ ------
36.9 36.9 37.3 35.6 Total Operating Expenses (15.9) (3.1)
----- ----- ----- ----- ------ ------
(10.7) (5.8) (9.9) (4.1) Loss from Operations (54.1) (124.5)
.3 1.0 .3 1.3 Other Income, Net (79.0) (75.7)
----- ----- ----- ----- ------ ------
(10.4) (4.8) (9.6) (2.8) Loss Before Income Taxes (82.3) (219.4)
(3.5) (1.8) (3.5) (1.0) Benefit for Income Taxes 61.1 205.7
----- ----- ----- ----- ------ ------
(6.9) (3.0) (6.1) (1.8) Net Loss (95.1) (227.7)
===== ===== ===== ===== ====== ======
-17-
RESULTS OF OPERATIONS
Revenues for the three and nine-month periods ended March 31, 2002, as compared
to the same periods in the prior year, and the percentage of total revenue
contributed by each of our segments, were as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ----------------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Revenues $17.7 million $21.0 million $52.4 million $56.7 million
Outsourcing Services 39% 44% 39% 52%
Medical Products 61% 56% 61% 48%
The overall decrease in revenues for the three and nine months ended March 31,
2002, compared to the same periods in the prior year, was due to a decrease in
revenue from the Outsourcing Services segment. Revenues from the Outsourcing
Services segment declined 25% and 32% in the three and nine months ended March
31, 2002. The decline was due in part to the effect of the FDA warning letter
(see the Notes to Condensed Consolidated Financial Statements, Note 11 -
"Resolution of Disputes") which impaired the Company's ability to obtain new
business for outsource design and development. The decline was also due in part
to the sale of the CDT subsidiary in April 2001, and the phase out of the
Automation division in February 2001, each of which was undertaken as part of
the Company's restructuring strategy. CDT and Automation each contributed
revenues to the Outsourcing Services segment in the quarter ended March 31,
2001. These declines outweighed an increase in revenue from outsource
manufacturing. The increase in outsource manufacturing revenue was due to the
Company having a more consistent manufacturing environment and the ability to
ship products previously delayed by the FDA warning letter. Based upon current
contracts and customer forecasts, the Company expects revenues from outsource
manufacturing to remain relatively steady during the quarter ending June 30,
2002, and then to decline during the quarter ending September 30, 2002.
Medical Products segment revenues decreased 9% in the three months ended March
31, 2002, compared to 2001, primarily due to reduced shipments of products
related to the Hitachi contract, which was cancelled in September 2001. This
decrease offset an increase in revenue from new business resulting from the
acquisition of the ATL Ultrasound operating assets in December 2000. For the
nine months ended March 31, 2002, medical products revenue increased 19%,
compared to the same period in the prior year. The increase in revenue for
medical products was primarily a result of new business from the purchase of the
operating assets of the ultrasound supplies group of ATL Ultrasound. In February
2002, the Company purchased Barzell Whitmore Maroon Bells, Inc. ("Barzell")
which contributed approximately $364,000 to revenue during the quarter ended
March 31, 2002.
-18-
Gross margin percentages for the three and nine-month periods ended March 31,
2002, compared to the same periods in the prior year, and gross margin
percentages for each of the Company's segments, were as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- ----------------------------
2002 2001 2002 2001
---------- ----------- --------- ---------
Aggregate Gross Margin 26.2% 31.1% 27.4% 31.5%
Outsourcing Services 3.2% 29.5% 6.02% 30.8%
Medical Products 41.1% 32.4% 40.9% 32.2%
The decrease in aggregate gross margin for the three and nine-month periods
ended March 31, 2002, compared to the prior year periods, was primarily due to
the decline in gross margins in the Outsourcing Services segment. The decline in
gross margin for the Outsourcing Services segment for the three and nine months
ended March 31, 2002, compared to the prior year periods, resulted from delays
and difficulties on fixed price projects, increased direct costs for quality
system improvements and a change in the mix of revenues from higher margin
development services to lower margin manufacturing services. The Company expects
the fixed price projects to be largely completed during Summer 2002.
The increase in Medical Products segment gross margins in the three and
nine-month periods ended March 31, 2002, compared to the prior year periods, was
due primarily to new business in higher margin product lines from the
acquisition of the operating assets of the ultrasound supplies group of ATL
Ultrasound and the decrease in sales of lower margin x-ray tube generators.
Research and development expenses relate to the development of the RF solid
state amplifier systems and other imaging products, ultrasound guidance systems
and covers and medical device connectivity technologies. Research and
development expenses decreased by 44% and 27% for the three and nine-month
periods ended March 31, 2002, respectively, compared to the same periods in
2001. The decrease was due to the cancellation of further development of x-ray
tube generator systems and the continuing transition of the solid state
amplifier system to manufacturing. Consistent with the Company's operating
plans, it continues to pursue the acquisition or development of new or improved
technology or products. Should the Company identify such opportunities, the
amount of future research and development expenditures may increase.
Marketing and selling expenses decreased 12% and 3% for the three and nine-month
periods ended March 31, 2002, respectively, compared to the same periods in the
prior year. The decrease for the three-month period was due to continued efforts
to reduce expenses. As a percentage of revenue, selling and marketing
expenditures were 5% for the three-month periods ended March 31, 2002 and 2001,
and 6% and 5% for the nine month periods ended March 31, 2002 and 2001,
respectively.
Operating, general and administrative expenses decreased 27% and 7% for the
three and nine-month periods ended March 31, 2002, respectively, compared to the
same periods in the prior year. The decrease was due to the Company's focus on
cost cutting measures to scale certain portions of the business with the current
year revenue, which included personnel reductions. As a percentage of revenues,
operating, general and administrative expenses were 19% and 22%, for the
three-month periods ended March 31, 2002 and 2001, respectively. For the
nine-month periods ended March 31, 2002 and 2001, operating, general and
administrative expenses were 22% of revenues.
-19-
Other operating expenses are comprised of legal fees, severance costs, costs
related to an unsolicited acquisition proposal, costs related to the settlement
of litigation with a customer and costs associated with consultants working on
issues related to resolution of the FDA warning letter received by the Company.
Other operating expenses increased 177% and 122% for the three and nine-month
periods ended March 31, 2002, respectively, compared to the same periods in the
prior year. As a percentage of revenue, other operating expenses were 7% and 5%
for the three and nine-month periods ended March 31, 2002, compared to 2% for
the same periods in fiscal 2001. The increase was due to expenses of
approximately $1.1 million recorded related to the settlement of the Gen-Probe
litigation (see the Notes to Condensed Consolidated Financial Statements, Note
11 - "Resolution of Disputes.")
Other income decreased 79% and 76% for the three and nine-month periods ended
March 31, 2002, compared to the same periods in the prior year. The decrease was
due to a lower average cash and investments balance coupled with lower interest
rates on invested balances.
During the three and nine-month periods ended March 31, 2002, compared to the
same periods in the prior year, the Company's net income, earnings per share and
diluted weighted average common equivalent shares outstanding used to calculate
earnings per share were as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- ----------------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
Net loss $(1,240,000) $ (635,000) $(3,204,000) $ (978,000)
Earnings per share $ (.09) $ (.05) $ (.25) $ (.08)
Diluted weighted average common
equivalent shares outstanding 13.1 million 12.9 million 13.0 million 12.6 million
The decrease in net income and earnings per share for the quarter ended March
31, 2002, compared to the same quarter in the previous period, was attributable
to the settlement of the Gen-Probe dispute (net income effect of $682,000).
Prior to expenses related to the settlement with Gen-Probe, the Company had a
loss of $558,000, or 4 cents per share for the quarter ended March 31, 2002. The
reduction of the loss prior to the Gen-Probe settlement was due to the
aforementioned cost-cutting measures related to research and development and
general and administrative costs. The increase in the loss for the nine months
ended March 31, 2002, compared to the same period in the prior year, was
primarily due to lower gross margins in the outsourcing services segment as
discussed above.
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 issuance of stock.
The Company has a capital lease agreement with an interest rate of 7.9% that
terminates in April 2003. As of March 31, 2002 and June 30, 2001, amounts
outstanding under this obligation were $44,000 and $75,000, respectively.
The Company entered into a credit facility (the "Credit Facility") on December
21, 2000 that provided for a three-year revolving line of credit of $15 million.
On November 13, 2001, the Company amended the facility to: (i) remove CIVCO as a
party; (ii) remove CIVCO assets as collateral; (iii) ease financial covenants;
(iv) reduce the line of credit from $15 million to $5 million and change the
maturity date from December 21, 2003 to July 1, 2002; and (v) set the interest
rate at 2% over the higher of (a) the
-20-
bank's prime rate (4.75% at March 31, 2002) or (b) the federal funds effective
rate (1.74% at March 31, 2002) plus 0.5%. All accounts receivable and inventory
secure outstanding balances, but no amounts had been advanced under the facility
as of April 30, 2002. At March 31, 2002, the applicable interest rate on
borrowings was 6.75%. The Company is currently in negotiations to extend the
Credit Facility maturity date.
Cash flows used in operating activities were $580,000 for the nine months ended
March 31, 2002, compared to cash used of $1,263,000 for the same period in the
prior year. The primary difference from the prior year was the benefit of using
$4,328,000 of inventory, compared to providing $6,432,000 of inventory in the
previous year. This was attributable to the investment made to improve materials
management and quality systems, the cancellation of the Hitachi generator
contract in 2001, and lower manufacturing business volume. During the nine
months ended March 31, 2002, collections of accounts receivable provided cash of
$3,937,000, bringing down the average number of days outstanding of the
Company's accounts receivable to 49 days, compared to 61 days at June 30, 2001.
The decrease in days outstanding was due to increased efforts in the collection
process and a favorable change in payment terms with the Company's largest
customer. Depreciation and amortization for the nine months ended March 31, 2002
and 2001 was $1,952,000 and $1,797,000, respectively.
Offsetting the cash provided by collection of receivables, the reduction of
inventory and depreciation and amortization charges were decreases in accounts
payable and accrued expenses of $4,109,000, a net loss of $3,204,000, increases
in prepaid expenses of $2,381,000, and the use of customer deposits of
$1,159,000. The decrease in accounts payable was primarily due to the slowdown
in inventory purchases and improvements in the procurement function. The
reduction in accrued salaries and wages resulted from payment of the Company's
401(k) match for the first half of fiscal 2002 eligible contributions, use of
vacation time by employees, and personnel reductions. The decrease in customer
deposits was primarily attributable to the use of a significant balance by a
former customer. The increase in prepaid expenses was mainly a result of the
annual payment of insurance premiums that come due in our third fiscal quarter.
Cash flows used in investing activities during the nine months ended March 31,
2002 were $3,541,000, compared to use of $896,000 for the same period in the
prior year. The cash used primarily related to the purchase of Barzell of
$2,056,000 and purchases of capital assets of $2,280,000, including land and
expansion of facilities for our CIVCO subsidiary, along with software and
associated licenses. During the nine months ended March 31, 2002, the final
payment of $500,000 was made for the operating assets of the ultrasound supplies
group of ATL Ultrasound. Net sales and purchases of short-term investments
during the nine months ended March 31, 2002 were a cash inflow of $1,095,000.
The repayment by an officer of a portion of his outstanding loan resulted in
cash inflow of $134,000, and $66,000 was received as part of the sale price for
our former CDT subsidiary.
Cash flows provided by financing activities were $41,000 for the nine months
ended March 31, 2002, and were primarily attributable to issuance of stock under
the Employee Stock Purchase Plan ("ESPP") and the exercise of employee options
and Director warrants totaling $301,000, offset by payment of debt of $230,000
acquired by the Company as part of the Barzell acquisition, and capital lease
payments of $30,000. In the same period of the prior year, cash flows provided
by financing activities were $2,170,000 and were primarily attributable to
issuance of stock under the ESPP and the exercise of employee options and
Director warrants totaling $2,315,000, offset by the purchase of common stock of
$109,000 and capital lease payments of $36,000.
Working capital decreased to $18,645,000 at March 31, 2002, from $23,988,000 at
June 30, 2001. The ratio of current assets to current liabilities increased to
2.8 to 1 at March 31, 2002, compared to 2.5 to 1
-21-
at June 30, 2001. The reduction in working capital was primarily related to the
decrease in cash from our net loss, the purchase of Barzell and the settlement
of the Gen-Probe dispute.
On February 8, 2002, the Company acquired all the outstanding shares of Barzell
for $2,056,000 in cash and transactions costs plus 127,000 shares of Colorado
MEDtech common stock valued at approximately $337,000. In connection with the
purchase of Barzell, the Company acquired approximately $230,000 of debt, which
was paid on the date of the transaction. The purchase agreement provides for
additional consideration of up to $2,200,000 in cash to be paid over a period of
up to five-and-one-half years if certain gross profit performance standards are
met.
The Company believes cash, investments, credit facilities and cash projected
from operations will be sufficient to meet working capital needs through the end
of fiscal 2002 and the foreseeable future. However, projected cash needs may
change as a result of acquisitions, unforeseen operational difficulties or other
factors.
The Company is currently under audit by the Internal Revenue Service for the
1998 and 1999 tax years. Should an unfavorable conclusion come out of the audit,
additional cash payments for taxes may be required by the Company, which could
have an adverse affect on our financial condition and liquidity. It is not
possible at this time to predict the outcome of the audit.
The Company signed a lease for a new building in which to consolidate its
Colorado operations. To ensure a smooth transition for employees, development
projects and manufacturing capabilities, there will be some overlap in the use
of new and current facilities. Over the next six months, the Company expects to
incur additional rent and moving expenses of approximately $250,000 and purchase
approximately $600,000 of furniture, improvements and a phone system.
In the normal course of business, the Company investigates, evaluates and
discusses acquisition, joint venture, minority investment, strategic
relationship and other business combination opportunities. In the event of any
future investment, acquisition or joint venture opportunities, the Company may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations is based upon the consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the U.S.
("GAAP"). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts
of revenue and expenses during the periods. Estimates have been made by
management in several areas, including, but not limited to, the percentage of
completion on certain projects and the net realizable value of inventory. These
estimates are based on historical experience and various other assumptions that
are believed to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions.
Critical accounting policies include:
Revenue Recognition
The Company generally recognizes revenue when persuasive evidence of an
arrangement exists, products are delivered or services rendered, the sales price
is fixed and determinable and collectibility is assured. For all sales, either a
binding purchase order or a signed agreement is used as evidence of an
arrangement. Revenue from product sales is recognized when title and risk of
loss transfer to the customer, usually at the time of shipment. Revenue and
profit relating to product design and development contracts are generally
recognized at the time services are rendered. The Company has
-22-
entered into a limited number of fixed price development projects, which are
accounted for using the percentage of completion method. Significant judgments
are required in calculating the estimated costs and percentage of completion for
these long-term development contracts. Inherent uncertainties in determining the
costs associated with the contracts may cause unexpected changes to revenue.
Fixed price development contracts account for less than 5% of the Company's
total revenues.
Inventories
The Company values inventories primarily at the lower of cost or market using
the weighted average method. Management assesses the recoverability of inventory
based on types and levels of inventory held, forecasted demand and changes in
technology. These assessments require management judgments and estimates, and
valuation adjustments for excess and obsolete inventory may be recorded based on
these assessments. Estimates of future product demand or judgments related to
changes in technology may prove to be inaccurate, in which case the carrying
value of inventory could be overstated or understated. In the event of any such
inaccuracies, an adjustment would be recognized in cost of goods sold at the
time of such determination.
FORWARD - LOOKING STATEMENTS AND RISK FACTORS
The statements in this report that are not historical facts are forward-looking
statements that represent management's beliefs and assumptions based on
currently available information. Forward-looking statements can be identified by
the use of words such as "believes", "intends", "estimates", "may", "will",
"should", "anticipated", "expected" or comparable terminology or by discussions
of strategy. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we cannot assure you that these
expectations will prove to be correct. Such statements involve risks and
uncertainties including, but not limited to, the risk that our existing level of
orders may not be indicative of the level or trend of future orders, the risk
that we may not successfully complete the work encompassed by current or future
orders, the risk that unforeseen technical or production difficulties may
adversely impact project timing and financial performance, the risk of potential
litigation and the risk that acquired companies cannot be successfully
integrated with our existing operations. Should one or more of these risks
materialize (or the consequences of such a development worsen), or should the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected. These factors are more fully described below
and in our documents filed from time to time with the Securities and Exchange
Commission. We disclaim any intention or obligation to update publicly or revise
such statements whether as a result of new information, future events or
otherwise.
OUR FINANCIAL RESULTS CAN FLUCTUATE FROM QUARTER TO QUARTER AND YEAR TO YEAR,
WHICH CAN AFFECT OUR STOCK PRICE.
Our quarterly and annual operating results are affected by a number of factors,
primarily the volume and timing of revenue from customer orders. The volume and
timing of our revenue from customer orders varies due to:
o variation in demand for the customer's products as a result of,
among other things, product life cycles, competitive conditions
and general economic conditions;
o suspension or cancellation of a customer's development project for
reasons which may or may not be related to project performance;
o suspension or cancellation of a customer's R&D budget for reasons
which may or may not be related to the project;
-23-
o a change in a customer's R&D strategy as a result of sale or
merger of the customer to another company;
o delays in projects associated with the approval process for
changes to a project; and,
o discounts extended to customers for reasons related to project
size, performance or schedule.
Our outsourcing services business organization and its related cost structure is
designed to support a certain minimum level of revenues. As such, if we
experience a temporary decrease in project revenues, our ability to adjust our
short-term cost structure is limited. This limitation may compound the adverse
effect of any significant revenue reduction we may experience. Any one of the
factors listed above or a combination thereof could result in a material adverse
effect on our business, results of operations and financial condition. Due to
the foregoing factors, it is possible that our operating results may from time
to time be below the expectations of public market analysts and investors. In
such event, the price of our stock would likely be adversely affected.
OUR SALES CYCLES ARE LONG.
The sales cycle for our products and services is lengthy and unpredictable. As a
result, the time it takes our business to recover from a slow sales period may
be lengthy. Our sales cycle varies from customer to customer, but it often
ranges from six to nine months or more for outsourcing services projects. And
while the sales cycle for our medical products can be shorter, to the extent it
involves a relationship with a large original equipment manufacturer, the sales
cycle can also be quite lengthy. Our pursuit of sales leads typically involves
an analysis of our prospective customer's needs, preparation of a written
proposal, one or more presentations, and contract negotiations. Our sales cycle
may also be affected by a prospective customer's budgetary constraints and
internal acceptance reviews, over which we have little or no control. During
fiscal year 2002 we have experienced decreased bookings of medical device
development services, and if such decreased bookings continue it could have a
material adverse effect on our outsourcing services segment.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES, DELAY
PRODUCTION OR TERMINATE THEIR CONTRACTS; WE MAY HAVE INVENTORY RISK.
Medical device development and manufacturing service providers must provide
product output that matches the needs of their customers, which can change from
time to time. We generally do not obtain long-term commitments from our
customers and we continue to experience reduced lead times in customer orders.
Customers may cancel their orders, change production quantities, delay
production, or terminate their contracts for a number of reasons. In certain
situations, cancellations, reductions in quantities, delays or terminations by a
significant customer could adversely affect our operating results. Such
cancellations, reductions or delays have occurred and may continue to occur in
response to slowdowns in our customers' businesses or for other reasons. In
addition, we make significant decisions, including determining the levels of
business that we will seek and accept, production schedules, parts procurement
commitments, and personnel needs based on our estimates of customer
requirements. Because many of our costs and operating expenses are relatively
fixed, a reduction in customer demand or a termination of a contract by a
customer could adversely affect our gross margins and operating results.
Most of our contract manufacturing services are provided on a turnkey basis,
where we purchase some or all of the materials required for product assembling
and manufacturing. We bear varying amounts of inventory risk in providing
services in this manner. In manufacturing operations, we need to order parts and
supplies based on customer forecasts, which may be for a larger quantity of
product than is included in the firm orders ultimately received from those
customers. While many of our customer agreements
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include provisions which require customers to reimburse us for excess inventory
which we specifically order to meet their forecasts, we may not actually be
reimbursed or be able to collect on these obligations. In that case, we could
have excess inventory and/or cancellation or return charges from our suppliers.
Our imaging and medical device manufacturing customers continue to experience
fluctuating demand for their products, and in response they may ask us to reduce
or delay production. If we delay production, our financial performance may be
adversely affected. In 2001, a customer cancelled orders for x-ray generator
subsystems for computed tomography (CT) scanners, and as a result in fiscal year
2001 we wrote down $3.1 million of related inventory. In addition, our fiscal
year 2002 revenues are less than originally planned, and we laid off employees
working on the project.
AN UNSOLICITED ACQUISITION PROPOSAL MAY ADVERSELY AFFECT OUR PERFORMANCE.
We have been the subject of an unsolicited acquisition proposal in the past.
This was expensive and disruptive to our business. The possibility exists that
we may be the subject of such an action in the future. If so, we may incur
significant expenses in responding to any such action and any such increased
expenses would divert resources otherwise available for our operations and could
have a negative effect on our reported earnings. Such activities could also
distract our management and employees from carrying out the day-to-day
operations of the business, and may create uncertainties about our future in the
minds of our customers, employees and vendors. Any of these could have a
negative impact on our operations, financial results or stock price.
A SIGNIFICANT PORTION OF OUR REVENUE COMES FROM A SMALL NUMBER OF MAJOR
CUSTOMERS.
We have historically obtained a significant share of our revenue from a small
number of customers, but the identity of those major customers tends to change
from year to year. In the quarter ended March 31, 2002, 2 customers accounted
for approximately 34% of our consolidated revenues. The concentration of
business in such a small number of customers means that such a customer may be
in a position to exert significant leverage over the Company and force the
Company to grant to such customer commercial terms that the Company would not
otherwise do but for the special leverage the customer is able to exert. The
concentration of business in such a small number of customers also means that
the loss of any one of these customers or a significant reduction or delay in
orders or payments from any of these customers could have a material adverse
effect on our business and results of operations.
RISKS WHICH AFFECT OUR CUSTOMERS CAN DIRECTLY IMPACT OUR BUSINESS.
Our success is dependent on the success of our customers and the products that
we develop or manufacture for them. Any unfavorable developments or adverse
effects on the sales of those products or on our customers' businesses could
have a corresponding adverse effect on our business. We believe that our
customers and their products are generally subject to the risks listed below. To
the extent the factors set forth below affect our customers, there may be a
corresponding impact on our business.
OUR CUSTOMERS OPERATE IN A COMPETITIVE ENVIRONMENT
The medical products industry is highly competitive and is
subject to significant and rapid technological change. It requires
ongoing investment to keep pace with technological developments and
quality and regulatory requirements. The medical products industry
consists of numerous companies, ranging from start-up to
well-established companies. Our customers' competitors may succeed in
developing or marketing technologies and products that will be better
accepted in the marketplace than the products we design and manufacture
for our customers or that would render our customers' technology and
products obsolete or noncompetitive. Some of our customers are emerging
medical technology companies that have competitors and potential
competitors with
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substantially greater capital resources, research and development
staffs and facilities, and substantially greater experience in
developing and commercializing new products. Our customers may not be
successful in marketing or distributing their products, or may not
respond to pricing, marketing or other competitive pressures or the
rapid technological innovation demanded by the marketplace. As a
result, they may experience a drop in product sales, which would have
an adverse effect on our business, results of operations and financial
condition.
OUR CUSTOMERS' BUSINESS SUCCESS DEPENDS ON MARKET ACCEPTANCE OF NEW
PRODUCTS.
We design and manufacture medical devices for other companies.
We also sell proprietary products to other companies and end-user
customers. For products we manufacture (manufactured for others, or
those we sell directly), our success is dependent on the acceptance of
those products in their markets. Market acceptance may depend on a
variety of factors, including educating the target market regarding the
use of a new procedure and convincing healthcare payers that the
benefits of the product and its related treatment regimen outweigh its
costs. Market acceptance and market share are also affected by the
timing of market introduction of competitive products. Some of our
customers, especially emerging medical technology companies, have
limited or no experience in marketing their products and may be unable
to establish effective sales and marketing and distribution channels to
rapidly and successfully commercialize their products. If our customers
are unable to gain any significant market acceptance for the products
we develop or manufacture for them, our business will be affected.
IF OUR CUSTOMERS DON'T PROMPTLY OBTAIN REGULATORY APPROVAL FOR THE
PRODUCTS WE DESIGN AND MANUFACTURE FOR THEM, OUR PROJECTS AND REVENUE
CAN BE AFFECTED.
The FDA regulates many of the products we develop and
manufacture, and requires certain clearances or approvals before new
medical devices can be marketed. As a prerequisite to any introduction
of a new device into the medical marketplace, our customers or we must
obtain necessary product clearances or approvals from the FDA or other
regulatory agencies. This can be a slow and uncertain process and there
can be no assurance that such clearances or approvals will be obtained
on a timely basis, if at all.
Certain medical devices we manufacture may be subject to the
need to obtain premarket approval from the FDA, which requires
substantial preclinical and clinical testing, and may cause delays and
prevent introduction of such instruments. Other instruments can be
marketed only by establishing "substantial equivalence" to a
pre-existing device in a procedure called a 510(k) premarket
notification. In addition, products intended for use in foreign
countries must comply with similar requirements and be certified for
sale in those countries. A customer's failure to comply with the FDA's
requirements can result in the delay or denial of approval to proceed
with the device. Delays in obtaining regulatory approval are frequent
and, in turn, can result in delaying or canceling customer orders.
There can be no assurance that we or our customers will obtain or be
able to maintain all required clearances or approvals for domestic or
exported products on a timely basis, if at all. The delays and
potential product cancellations inherent in the regulatory approval and
ongoing regulatory compliance of products we develop or manufacture may
have a material adverse effect on our business, reputation, results of
operations and financial condition.
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OUR CUSTOMERS' FINANCIAL CONDITION MAY ADVERSELY AFFECT THEIR ABILITY
TO CONTINUE OR PAY FOR A PROJECT.
Some of our customers, especially the smaller and newer
emerging medical technology companies, are not profitable, may have
little or no revenues or may have limited working capital available to
fund a development project. Adequate funds for their operations or for
a development project may not be available when needed. A customer's
financial difficulties may require a customer to suspend its research
and development spending, delay development of a product, clinical
trials (if required) or the commercial introduction of a product.
Depending on the significance of a customer's product to our revenues
or profitability, any adverse effect on a customer resulting from
insufficient funds could result in an adverse effect on our business,
results of operations and financial condition.
GOVERNMENT OR INSURANCE COMPANY REIMBURSEMENT FOR OUR CUSTOMERS'
PRODUCTS OR SERVICES MAY CHANGE AND CAUSE A REDUCED DEMAND FOR THE
PRODUCT WE PROVIDE TO THE CUSTOMER.
Governmental and insurance industry efforts to reform the
healthcare industry and reduce healthcare spending have affected, and
will continue to affect, the market for medical devices. There have
been several instances of changes in governmental or commercial
insurance reimbursement policies which have significantly impacted the
markets for certain types of products or services or which have
impacted entire industries, such as recent policies affecting payment
for nursing home and home care services. Adverse governmental
regulation relating to our products or our customers' products which
might arise from future legislative, administrative or insurance
industry policy cannot be predicted and the ultimate effect on private
insurer and governmental healthcare reimbursement is unknown.
Government and commercial insurance companies are increasingly vigorous
in their attempts to contain healthcare costs by limiting both coverage
and the level of reimbursement for new therapeutic products even if
approved for marketing by the FDA. If government and commercial payers
do not provide adequate coverage and reimbursement levels for uses of
our products and our customers' products, the market acceptance of
these products and our revenues and profitability would be adversely
affected.
WE ARE MOVING OUR OPERATIONS, WHICH MAY NEGATIVELY IMPACT OUR BUSINESS.
We are currently moving our Colorado operations from their six current locations
to one central location. The move involves numerous business risks, including
the risk associated with integrating the operations at our separate locations
into one facility; decreased utilization and efficiency of revenue-generating
personnel during the move period; the risk of delays in the implementation of
the move to the new facility; diversion of management's attention from other
business areas during the planning and implementation of the move; strain placed
on our operational, financial, management, technical and information systems and
resources; disruption in manufacturing operations; and incurrence of significant
costs and expenses associated with moving the facilities. Any of these could
have a negative impact on our operations, financial results or stock price.
WE OPERATE IN A REGULATED INDUSTRY AND OUR PROJECTS AND REVENUE ARE SUBJECT TO
REGULATORY RISK.
We are subject to a variety of regulatory agency requirements in the United
States and foreign countries relating to many of the products that we develop
and manufacture. The process of obtaining and maintaining required regulatory
approvals and otherwise remaining in regulatory compliance can be lengthy,
expensive and uncertain.
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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 product or project. We
are required to comply with the FDA's QSR for the development and manufacture of
medical products. In addition, in order for devices we design or manufacture to
be exported and for us and our customers to be qualified to use the "CE" mark in
the European Union, we maintain ISO 9001/EN 46001 certification which, like the
QSR, subjects our operations to periodic surveillance audits. To ensure
compliance with various regulatory and quality requirements, we expend
significant time, resources and effort in the areas of training, production and
quality assurance. If we fail to comply with regulatory or quality regulations
or other FDA or applicable legal requirements, the governing agencies can issue
warning letters, impose government sanctions and levy serious penalties.
Noncompliance or regulatory action could have a negative impact on our business,
including the increased cost of coming into compliance, and an adverse effect on
the willingness of customers and prospective customers to do business with us.
Such noncompliance, as well as any increased cost of compliance, could have a
material adverse effect on our business, results of operations and financial
condition.
CONSOLIDATION OF CUSTOMERS CAN ELIMINATE CUSTOMERS OR NEED FOR PRODUCT.
Due to the nature of the medical device business, especially in the imaging
field, the possibility exists that any of our customers may merge with, or be
acquired by, other companies, which companies may also be our customers or
customers of our competitors. Such consolidation of our customers' operations
could eliminate the customer or, alternatively, the customer's need for our
products. We cannot predict how many (if any) of our customers may merge, or how
many of our customers may no longer require certain of our products, due to such
mergers and acquisitions. Such elimination of customers or their need for our
products may negatively impact our business.
A SHIFT IN MARKET DEMAND MAY RESULT IN DECREASED DEMAND FOR OUR SERVICES.
The markets for our services are characterized by rapidly changing technology
and evolving changes in the needs of the medical device market. The continued
success of our business depends on our ability to recognize and quickly react to
changes in the medical device market and our ability to hire, retain, and expand
our qualified engineering and technical personnel, and maintain and enhance our
technological capabilities in a timely and cost-effective manner. Although we
believe that our operations currently utilize the technology, processes and
equipment required by our customers, we cannot be certain that we will develop
the capabilities required by our customers in the future. The emergence of new
technology, industry standards or customer requirements may render our
capabilities and services obsolete or noncompetitive. We may have to acquire new
technologies and personnel in order to remain competitive. This acquisition and
implementation of these new technologies and personnel may require significant
capital investment, which could reduce our operating margins and operating
results. Our failure to anticipate our customers' changing needs could have an
adverse effect on our business.
OUR BUSINESS SUCCESS DEPENDS ON HIRING AND RETAINING KEY PERSONNEL.
Our success depends to a significant extent on the continued service of certain
of our key managerial, technical and engineering personnel. Our future success
will be dependent on our continuing ability to attract, train, assimilate and
retain highly qualified engineering, technical and managerial personnel
experienced in commercializing medical products. The competition for these
individuals is intense, and the loss of key employees, generally none of whom is
subject to an employment agreement for a specified term or a post-employment
non-competition agreement, could harm our business. The loss of any of our key
personnel or our inability to hire, train, assimilate or retain qualified
personnel could have a material adverse effect on our business, results of
operations and financial condition.
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THE PRODUCTS WE DESIGN AND MANUFACTURE MAY BE SUBJECT TO PRODUCT RECALLS AND MAY
SUBJECT US TO PRODUCT LIABILITY CLAIMS.
Most of the products we design or manufacture are medical devices, many of which
may be used in life-sustaining or life-supporting roles. The tolerance for error
in the design, manufacture or use of these products may be small or nonexistent.
If a product we designed or manufactured is found to be defective, whether due
to design or manufacturing defects, to improper use of the product or to other
reasons, the product may need to be recalled, possibly at our expense.
Furthermore, the adverse effect of a product recall on our business might not be
limited to the cost of the recall. Recalls, especially if accompanied by
unfavorable publicity or termination of customer contracts, could result in
substantial costs, loss of revenues and damage to our reputation, each of which
would have a material adverse effect on our business, results of operations and
financial condition.
The manufacture and sale of the medical devices we develop and manufacture
involves the risk of product liability claims. Although we generally obtain
indemnification from our customers for products we manufacture to the customers'
specifications and we maintain product liability insurance, there can be no
assurance that the indemnities will be honored or the coverage of our insurance
policies will be adequate. In addition, although we carry product liability
insurance, we are not indemnified with respect to our products which are sold
directly to end-users. Further, we generally provide a design defect warranty
and indemnify our customers for failure of a product to conform to design
specifications and against defects in materials and workmanship. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, in sufficient amounts, or at all. A successful product
liability claim in excess of our insurance coverage or any material claim for
which insurance coverage was denied or limited and for which indemnification was
not available could have a material adverse effect on our business, results of
operations and financial condition.
OUR MARKETS ARE COMPETITIVE.
Our competition with respect to outsourcing services comes from a variety of
sources, including consulting, commercial product development and manufacturing
companies. Competition also comes from commercial and university research
laboratories and from current and prospective customers who evaluate our
capabilities and costs against the merits of designing, engineering or
manufacturing products internally. Many of our competitors are larger and have
substantially greater financial, research and development and manufacturing
resources. Competition from any of the foregoing sources could place pressure on
us to accept lower margins on our contracts or lose existing or potential
business, which could result in a material adverse effect on our business,
results of operations and financial condition.
We sell our medical products principally in the markets of the United States,
Japan and Europe. Our competition with respect to medical products comes from
two principal sources: original equipment manufacturers who may have in-house
capabilities similar to ours, and other medical outsourcing and products
companies who sell to original equipment manufacturers or directly to customers.
Many of our competitors are larger and have substantially greater financial,
research and development and manufacturing resources. Price and quality are the
primary competitive factors in the markets in which we compete. As competition
in the market for medical products continues to increase, we may experience
pricing pressure, which could result in a material adverse effect on our
business, results of operation and financial condition.
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SALES OF SHARES ISSUABLE UPON EXERCISE OF STOCK OPTIONS AND WARRANTS MAY
ADVERSELY AFFECT STOCK PRICE.
As of March 31, 2002 there were a total of approximately 13.2 million shares of
our common stock outstanding. In addition, there were outstanding warrants and
stock options to purchase approximately 2.3 million shares of common stock,
approximately 1.3 million of which are currently exercisable or become
exercisable by June 30, 2002. Shares issued upon the exercise of warrants and
options to purchase our stock generally are available for sale in the open
market. Investors should understand that the future issuance or sale of the
shares of common stock referred to above could adversely affect the market price
of the common stock.
COMPETITIVE ISSUES BETWEEN OUR CUSTOMERS MAY LIMIT OUR ABILITY TO PURSUE NEW
BUSINESS IN ATTRACTIVE AREAS.
There is a great deal of competition in the medical technology industry,
especially with respect to new product introductions. Our outsourcing services
customers invest heavily in the development of new products and it is important
to them to protect their new technology and to hold a technology edge over their
competitors as long as possible. Although we generally do not enter into
non-competition agreements, on occasion our development contracts prohibit us
from working for certain competitors of our customers. When and if we do this,
our growth may be adversely affected because such contracts would prevent us
from developing or manufacturing instruments for our customers' competitors. Any
conflicts among our customers could prevent or deter us from obtaining contracts
to develop or manufacture instruments, which could result in a material adverse
effect on our business, results of operations and financial condition.
POTENTIAL OR PENDING LITIGATION MAY AFFECT OUR BUSINESS.
During fiscal year 2002 we were involved in two material pieces of litigation.
We incurred significant costs and liabilities related to the defense and
settlement of the litigation, including legal and expert fees, and settlement
payments. The defense or resolution of any future litigation could have a
negative impact on our financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as part of its cash management strategy, had short-term investments
at March 31, 2002 consisting of approximately $589,000 in investment grade
securities. The Company classifies these investments as available-for-sale
assets, which are stated at "Fair Market Value" on the accompanying balance
sheets. All of the short-term investments mature in less than one year. The
Company has completed a market risk sensitivity analysis of these short-term
investments based upon an assumed 1% increase in interest rates at April 1,
2002. Based on amounts invested in high grade commercial paper, if markets were
to experience an increase in rates of 1% on April 1, 2002, the Company would
have had an approximate $4,000 realized loss on these short-term investments.
Because this is only an estimate, any actual loss due to an increase in interest
rates could differ from this estimate.
The Company has a line of credit that bears interest on outstanding balances at
2% above the higher of the lender's prime rate or the federal funds effective
rate plus 0.5%. As we have yet to draw upon our line of credit, an increase in
interest rates would not have had an effect on our financial condition or
results of operations. The Company also had a capital lease obligation totaling
approximately $44,000 at March 31, 2002 at a fixed interest rate of 7.9%.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See the Notes to Condensed Consolidated Financial Statements, Note 11 -
"Resolution of Disputes" which is incorporated herein by reference.
In addition, the Company is or may be involved in other legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
other legal actions will have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation; Complete Copy, as Amended. (A)
3.2 Bylaws, as Amended. (B)
4.2 Specimen of Common Stock Certificate. (C)
4.3 Rights Agreement between Colorado MEDtech, Inc. and
American Securities Transfer & Trust, Inc.
dated January 14, 1999, as amended. (D)
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(A) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended June 30, 1999.
(B) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended June 30, 2001.
(C) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on
May 17, 1983.
(D) Filed with Registration Statement on Form 8-A/A dated June 27, 2000.
(b) Reports on Form 8-K during the quarter ended March 31, 2001:
The company filed a current report on Form 8-K dated January 28, 2002
regarding investor and analyst presentation materials of the President and Chief
Executive Officer and the Chief Financial Officer used on January 28, 2002 and
to be used from time to time thereafter.
The company filed a current report on Form 8-K dated March 5, 2002
reporting the issuance of a press release regarding settlement of the dispute
and litigation with Gen-Probe Incorporated.
The company filed a current report on Form 8-K dated March 14, 2002
regarding investor and analyst presentation materials of the President and Chief
Executive Officer and the Chief Financial Officer of Colorado MEDtech, Inc. to
be used at meetings with investors and shareholders beginning March 14, 2002 and
to be used from time to time thereafter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Colorado MEDtech, Inc.
---------------------------------
(Registrant)
DATE: May 14, 2002
/s/ Stephen K. Onody
---------------------------------
Stephen K. Onody
Chief Executive Officer
DATE: May 14, 2002
/s/ Gregory A. Gould
---------------------------------
Gregory A. Gould
Chief Financial Officer
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