U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________________ to ________________
Commission file number: 000-12471
COLORADO MEDTECH, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0731006
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6175 LONGBOW DRIVE, BOULDER, COLORADO 80301
(Address of principal executive offices, including zip code)
(303) 530-2660
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK (NO PAR VALUE)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _______
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and nonvoting common stock held
by nonaffiliates computed by reference to the average bid and asked prices of
such stock as of August 31, 1998 was $33,461,806.
The number of shares outstanding of the issuer's Common Stock as of August
31, 1998 was 10,740,846.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934 is incorporated by
reference in Part III of this report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Colorado MEDtech, Inc. ("CMED"), through its wholly-owned subsidiaries,
RELA, Inc. ("RELA"), Novel Biomedical, Inc. ("Novel"), and BioMed Y2K, Inc.
("BioMed"), and its operating divisions, Respiratory Products and Erbtec
Engineering ("Erbtec") (collectively, the "Company"), is a leading
full-service provider of advanced medical products and comprehensive
outsourcing services. CMED was incorporated in 1977 as a Colorado corporation
to develop, manufacture, market and service computerized diagnostic and
testing instrumentation. RELA a Colorado corporation, was incorporated in
1977. RELA is an integrated custom product development and manufacturing
services company specializing in the design, development and manufacture of
electronic and electro-mechanical medical products and software systems. The
Company merged RELA into CMED in July 1998, and is now operating RELA as a
division of CMED. This merger will have no material effect on the day to day
operations of RELA. Novel, a Minnesota corporation acquired by CMED in
February 1997, was incorporated in 1986. Novel specializes in the custom
design, development and manufacture of unique disposable medical devices,
primarily catheters, used in angioplasty, minimally invasive surgery,
electrophysiology, and infertility treatment. BioMed, a Colorado corporation,
was incorporated in April 1998. BioMed offers a combination of tools and
services to support health care institutions' efforts to establish year 2000
compliance for their biomedical devices. In October 1997, CMED completed the
acquisition of the operating assets of Erbtec Engineering, Inc. Erbtec's main
products are high power Radio Frequency amplifiers, power supplies and
systems for Magnetic Resonance Imaging equipment. The Respiratory Products
division designs and develops instrumentation for respiratory care.
PRODUCTS AND SERVICES
OUTSOURCING SERVICES
RELA and Novel design, develop and manufacture healthcare products for a
broad range of customers that includes major pharmaceutical and medical
device companies. RELA develops electronic and electromechanical medical
devices and software, primarily for the diagnostic, therapeutic, respiratory
care and medical software markets. RELA also manufactures products for some
of its customers which range from surgical disposables to automated
instruments. Novel designs, develops and manufactures unique disposable
medical devices, primarily catheters, used in angioplasty, minimally invasive
surgery, electrophysiology and infertility treatment. RELA and Novel employ
engineers, scientists, and technicians, manufacturing specialists and
assembly workers. The Company believes its experience in applying its proven
methodologies and advanced technologies to the development of innovative new
products gives its clients an advantage in their marketplace by providing
them with state-of-the-art, quality products in a timely and cost-effective
manner.
In addition to development, RELA provides product definition services,
conducts focus groups and performs software verification and validation
activities necessary for Food and Drug Administration ("FDA") approval.
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Additional services include:
- - Feasibility studies - Disposables engineering
- - User interface design and usability testing - Prototype development
- - Electronic design and development - Design for manufacturability and reliability
- - Electronic packaging and printed-circuit design engineering
- - Software development, verification and validation - Pilot, short- and long-run production
- - Mechanical design and engineering - Quality assurance and testing
- - Machining and modeling services - Product service and sustaining engineering
Rapidly advancing technologies, heightened worldwide competition and the
demands of an increasingly sophisticated marketplace have created pressures
on companies, both domestic and international, to develop high quality,
cost-effective, world-class products in time to meet the narrowing windows of
opportunity in the marketplace. These conditions have produced opportunities
for companies that can react to those market needs. Such companies need to
have the technology, experience and ability to develop high quality,
state-of-the-art products. The Company believes it is uniquely positioned to
provide its clients, within a single integrated structure, the valuable
product development and manufacturing resources they need to satisfy the
requirements of a worldwide marketplace.
MEDICAL PRODUCTS
CMED's Respiratory Products develops, manufactures, markets and services
computerized diagnostic and testing instrumentation. Its current program,
FreshAir-TM-, is a self-contained oxygen generation system. Respiratory
Products has applied for FDA approval of an oxygen regeneration system that
is intended for use in long-term healthcare facilities. This system is
expected to reduce the cost of oxygen to patients of these facilities. The
facilities would be able to generate their own oxygen rather than purchasing
it from third parties. The Company expects this product to be in commercial
production during fiscal 1999.
Erbtec specializes in designing, developing and manufacturing
high-performance RF amplifiers and integrated power delivery subsystems. By
combining RF, digital and embedded software technologies, Erbtec is able to
produce advanced, computer-controlled RF and DC power products. Erbtec
focuses on the MRI and general medical imaging industries for the sale of its
products.
BioMed provides software tools for Year 2000 compliance management and
reporting. BioMed has developed an extensive medical device compliance
database tailored to the needs of the healthcare industry. The modified
software, called BioMed Y2KOne-TM-, offers a combination of tools and
services to support healthcare institutions in there efforts to establish
Year 2000 compliance for their biomedical devices. Specific services offered
by BioMed include: Year 2000 compliance database for medical devices;
inventory consolidation, consulting and support; specialized Year 2000
training; device remediation, consulting and conversion planning; device
testing; custom software reviews and analysis; and, contingency planning and
cost impact analysis.
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MARKETING
The Company markets its services through a direct sales program and
nationwide network of independent manufacturers' representatives. The
Company employs 10 persons in the functions of sales and marketing. The
Company promotes its services through advertising, direct mail and exhibition
at industry trade shows.
SIGNIFICANT CUSTOMERS AND BACKLOG
For the period ended June 30, 1998, two customers accounted for
approximately 23% (GE Medical Systems, General Electric Company) and 22%
(Gen-Probe Incorporated) of the total revenues of the Company. For the
period ended June 30, 1997, the same two customers accounted for 0% and 19%
of the total revenues of the Company. Due to the nature of the outsourcing
services business, it is typical for the Company to have about 40% to 50% of
its total revenues from two to three customers in any given year. It is also
typical that the Company's revenues from these customers account for a very
high percentage of its total revenues for a one to three year period, then to
see the customers' revenue percentage drop, to be replaced by another large
customer. Foreign sales were 8% of the Company's total sales. The loss of a
significant customer could have a material, detrimental impact on the
Company's operations. Most sales are on net thirty-day credit terms.
At June 30, 1998, the Company's backlog of orders for services or
shipment of product in fiscal 1999 was approximately $40 million compared to
approximately $22 million at June 30, 1997. This increase is attributable to
the increase in orders booked during fiscal year 1998, which were in excess
of $60 million, compared to bookings of approximately $33 million in fiscal
year 1997.
RESEARCH AND PRODUCT DEVELOPMENT
The Company intends to continue to develop new products and services for
a broad range of customers. In addition to internal development efforts, the
Company may license or acquire related technology and/or products from
external resources.
While the Company employs approximately 200 engineers, scientists and
technicians in research and development activities, these employees' efforts
are primarily devoted to contract work for customers and their expenses are
included in the cost of sales and services. Research and development expenses
historically have been attributable to Respiratory Products. During fiscal
year 1998, most of the research and development expenses are attributable to
Respiratory's oxygen regeneration system, Erbtec's RF solid state amplifier
systems and BioMed's software tools and database. No research and
development expenditures are currently attributable to RELA or Novel. For
fiscal years 1998, 1997 and 1996, the Company incurred approximately
$1,681,000, $304,000 and $97,000, respectively, for research and development
activities.
Consistent with the Company's operating plans, the Company is
continuously pursuing the acquisition and development of new or improved
technology or products. Should the Company identify any opportunities that
would be commercially viable, the amount of future research and development
expenditures may increase.
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COMPETITION
The principal competitive factors in the outsourcing and medical
products markets are reputation, quality, price and schedule. The Company's
present and future competition comes from a variety of sources. These
sources include consulting, commercial product development and manufacturing
companies. There are a number of firms that provide services similar to the
Company's. These vary from small consulting operations offering a small
subset of the Company's services to a few integrated service companies. RELA
competitors include SeaMed Corporation and Kollsman Manufacturing Company.
Novel competitors include ACT Medical, Incorporated, Danforth Biomedical, and
NuMED, Incorporated. Erbtec competitors include Analogic Corporation and
ETO, Inc., a Division of Astex, Inc. BioMed competitors may include Clark
Information Services, Superior IS and System Resource Corp.
On a lesser scale, the Company also competes with commercial and
university research laboratories. There are both for-profit and
not-for-profit organizations nationwide that perform services similar to the
product development aspect of the Company's business. These include
Battelle, Inc., Stanford Research Institute, Arthur D. Little Center for
Product Development, Southwest Research Institute and the research
capabilities within the nation's leading universities.
As the Company develops and manufactures other proprietary products,
such as the oxygen regeneration system and the BioMed Y2KOne-TM- software, it
can expect to encounter additional competitors, many of which may be larger
and in a stronger financial position than the Company. As cost containment
efforts continue in the healthcare marketplace, competition will continue to
be intense in the future.
MANUFACTURING
The Company manufactures its products and customer products at four
facilities in Boulder, Colorado, Longmont, Colorado and Plymouth, Minnesota.
Most products are built in response to specific customer purchase orders,
while others are fabricated as standard products. The manufacturing process
consists primarily of assembly, test and packaging of both custom and
commercially available components from outside sources.
Most of the materials and components used in the Company's products are
available from a number of different suppliers. The Company generally
maintains multiple sources for most items, but some components are single
source. The Company is dependent upon its suppliers for timely delivery of
quality components. To date, the Company has not experienced significant
delays in the delivery of such components.
PRODUCT WARRANTIES AND SERVICE
The Company generally warrants its products for 90 days, but in limited
cases for up to 18 months, against defects in materials and workmanship. The
Company has established a provision for estimated expenses of providing
service under these warranties. Nonwarranty service is billed to the
customer as performed.
GOVERNMENT REGULATION
The Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act
(the "Act") and regulations issued or proposed thereunder, including the Safe
Medical Devices Act of 1990, provide for regulation by the FDA of the
marketing, design, manufacturing, labeling, packaging and distribution of
medical devices. These regulations
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apply to the Company's products and many of the Company's customers'
products. The Act and the regulations include requirements that
manufacturers of medical devices register with and furnish lists of devices
manufactured by them to the FDA. Prior to marketing a medical device, FDA
clearance must be obtained. Tasks to be performed for approval range from
bench-test data and engineering analysis to potentially expensive and
time-consuming clinical trials. The types of tasks for a particular product
submission are indicated by the classification of the device and previous
approvals for similar devices. There are also certain requirements of other
federal laws and of state, local and foreign governments, which may apply to
the manufacture and marketing of the Company's products. To date, the
Company has not experienced significant difficulty in complying with the
requirements imposed on it by the FDA or other governmental agencies.
The FDA's "Quality System Regulation for Medical Devices" ("QSR") sets
forth standards for the Company's design and manufacturing processes that
require the maintenance of certain records and provide for unscheduled
inspections of the Company's facilities. The Company does not expect to make
significant expenditures as a result of these requirements. The Company's
procedures and records were reviewed in 1995, 1997 and 1998 by the FDA during
routine general inspections. The inspections resulted in some procedural
changes that are intended to assure continued compliance with current QSR.
The ISO 9000 series of quality management and quality assurance
standards has been adopted by over 90 countries. ISO standards require that
a quality system be used to guide work to assure quality and to produce
quality products and services. EN ISO 9001, the most comprehensive of the
standards, covers 20 elements. These elements include management
responsibility, design control, training, process control and servicing. EN
ISO 9001 is the quality systems standard used by companies providing design,
development, manufacturing, installation and servicing.
RELA, Novel and Erbtec are registered device manufacturers with the
FDA and meet the agency's QSR requirements. In addition, the Company is
EN ISO 9001 and EN 46001 registered by a Notified Body. There are no material
costs or expenses associated with the Company's compliance with federal,
state and local environmental laws.
PATENTS
The Company has no significant patents. The Company believes that the
conduct of its business is not dependent upon its ability to obtain or defend
patents.
EMPLOYEES
As of June 30, 1998, the Company had 410 employees, of which 332 are
full-time. 88% of the Company's employees are employed at its operations in
Boulder and Longmont, Colorado and 12% of employees are employed in Plymouth,
Minnesota. No employees are represented by labor organizations and there are
no collective bargaining agreements. Employee relations are believed to be
good.
ITEM 2. DESCRIPTION OF PROPERTY.
CMED, RELA and BioMed operate out of leased facilities located at 6175
Longbow Drive, Boulder, Colorado and 410 South Sunset Street, Longmont,
Colorado. The Boulder facility has a five-year lease, which expires on June
30, 2002. The lease calls for average monthly payments over the term of the
lease of $36,139. In addition, the Company is responsible for certain
expenses, including property taxes, insurance and maintenance. CMED, RELA
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and BioMed conduct administrative operations, custom product development
services and consulting services at this facility.
RELA's manufacturing is conducted at its Longmont facility. This
facility has a five-year lease that expires on July 1, 2002. The lease calls
for average monthly payments over the term of the lease of $13,657. In
addition to the base lease payment, the Company is responsible for certain
expenses, including property taxes, insurance and maintenance.
Novel operates out of a leased facility located at 13845 Industrial Park
Boulevard, Plymouth, Minnesota. Novel has a four-year lease that expires on
January 31, 2001. This lease calls for average monthly payments over the
term of the lease of $8,941. In addition, Novel is responsible for certain
expenses, including property taxes, insurance and maintenance. Novel's
custom manufacturing and product development services are conducted out of
this facility.
Erbtec operates out of a leased facility located at 2760 29th Street,
Boulder, Colorado. Erbtec has a one-year lease that expires November 30,
1998. This lease calls for average monthly payments over the term of the
lease of $12,920. In addition, Erbtec is responsible for certain expenses,
including property taxes, insurance and maintenance. All of Erbtec's
operations are conducted out of this facility.
The Company has leased a facility located at 1510 Nelson Road, Longmont,
Colorado. The lease period begins October 1, 1998 and expires on June 30,
2002. The lease calls for average monthly payments over the term of the lease
of $7,119. In addition to the base lease payment, the Company is responsible
for certain expenses, including property taxes, insurance and maintenance.
The Company is planning to use this facility for manufacturing operations.
The Company owns a 10.91-acre parcel of industrial-zoned vacant land in
Louisville, Colorado (the "Louisville Parcel"). The Company's title in the
Louisville Parcel is in fee simple. It is the opinion of management that, as
the Louisville Parcel is vacant land, it is not necessary to provide
insurance coverage for the property. At June 30, 1998, the Company is
holding the land as available-for-sale. Notwithstanding the Company's
ownership of the Louisville Parcel, it is not the policy of the Company to
invest in real estate or interests in real estate, real estate mortgages, or
securities of or interests in persons primarily engaged in real estate
activities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of shareholders during the
last quarter of the fiscal year ended June 30, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company has been traded on the Nasdaq (National
Association of Securities Dealers Automated Quotations) stock market since
the Company's initial public offering in July 1983. The Company's common
stock has been listed on the Nasdaq National Market since October 1997. The
following table sets forth the range of high and low closing prices of the
Company's common stock as reported by Nasdaq during fiscal years 1998 and
1997:
Fiscal Year Ended June 30,
-------------------------------------------
1998 1997
-------------------------------------------
High Low High Low
-------------------------------------------
First Fiscal Quarter $ 7.12 $5.12 $3.50 $2.62
Second Fiscal Quarter $ 7.00 $5.87 $3.31 $2.88
Third Fiscal Quarter $10.25 $5.81 $3.19 $2.81
Fourth Fiscal Quarter $10.12 $6.94 $6.31 $2.88
The foregoing quotations represent quotations between dealers without
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
At June 30, 1998 the Company had approximately 1,100 shareholders of
record. The Company has never paid a dividend, and does not anticipate the
payment of dividends in the foreseeable future.
The Company did not sell any unregistered securities in the three-month
period ended June 30, 1998.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected, consolidated financial information presented below for the
five years ended June 30, 1998, is derived from the consolidated financial
statements of the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
Certain reclassifications have been made to prior year financial statements
to conform with current presentation.
(In thousands, except per share amounts)
YEARS ENDED JUNE 30,
--------------------
1998(a) 1997(b) 1996 1995 1994
------- ------- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales and service $ 47,300 $ 28,243 $ 19,130 $ 19,821 $ 20,615
Gross profit $ 16,943 $ 9,786 $ 6,790 $ 6,838 $ 7,250
Net income $ 4,492 $ 2,480 $ 1,597 $ 1,037 $ 806
Earnings per share
Basic (c) $ .47 $ .35 $ .23 $ .15 $ .15
Diluted (c) $ .37 $ .27 $ .21 $ .15 $ .15
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in)
Operating activities $ 8,268 $ 2,899 $ 1,268 $ 2,342 $ 2,450
Investing activities $ (8,922) $ (6,655) $ (2,798) $ (200) $ (121)
Financing activities $ 1,482 $ 4,811 $ - $ (897) $ 1,129
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,499 $ 1,671 $ 615 $ 2,144 $ 3,727
Short-term investments $ 12,144 $ 10,293 $ 5,408 $ 2,593 $ -
Current assets $ 29,249 $ 20,585 $ 12,099 $ 9,746 $ 8,611
Total assets $ 34,007 $ 23,853 $ 13,217 $ 10,958 $ 9,883
Current liabilities $ 12,285 $ 9,461 $ 6,666 $ 6,005 $ 5,966
Total long-term debt $ - $ - $ - $ - $ -
Total shareholders' equity $ 21,723 $ 14,392 $ 6,550 $ 4,953 $ 3,917
Cash dividends per share $ - $ - $ - $ - $ -
(a) In October 1997, the Company acquired the operating assets of Erbtec
Engineering, Inc.
(b) In February 1997, the Company acquired Novel Biomedical, Inc.
(c) As restated under Statement of Financial Accounting Standards No. 128,
"Earnings per Share".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have consisted of cash flow
from operations, cash deposits received from customers related to research
and development and manufacturing contracts and cash proceeds from the
issuance of common stock. Historically, the Company has also utilized
proceeds from debt borrowings. The Company expects capital expenditures to
be consistent with the previous year during fiscal year 1999. The Company
anticipates that it will fund its expenditures, as well as research and
development costs, through cash generated from operations.
On October 30, 1997, the Company was approved for a three year revolving
line of credit for $5 million the first year, $7 million the second year and
$9 million the third year The credit facility is at the bank's prime lending
rate (8.5% at June 30, 1998) through the term of the agreement and is secured
by all accounts receivable, general intangibles, inventory and equipment. The
agreement contains various restrictive covenants, which include, among
others, maintenance of certain financial ratios, maintenance of a minimum
tangible net worth and limitations on annual investments, dividends and
capital expenditures. As of June 30, 1998, no amounts were outstanding under
the credit facility.
In June 1994, the Company completed the private placement of 1,500,000
units, each unit consisting of one share of no par common stock and two
warrants. The units were offered at the greater of $1.00 or 75% of the
average of the closing bid and ask price of the common stock for the five
days prior to subscription. 1,500,000 of the warrants were priced at 125% of
the average of the closing bid and ask price of the common stock on the date
of purchase of the units, and an additional 1,500,000 warrants were issued
with an exercise price equal to 175% of the average of the closing bid and
ask price of the common stock on the date of purchase of the units. The
exercise prices of the warrants ranged from $1.41 to $2.68. The proceeds
from this offering were approximately $1.5 million.
During June 1997, the Company called all of the above warrants that had
not previously been exercised. During fiscal year 1997, 2,070,000 of these
warrants were exercised for $4,630,800. The remaining 930,000 warrants were
exercised during July and August 1997, resulting in cash proceeds to the
Company of $1,120,800 and cancellation of 142,505 shares of previously issued
common stock that were used in lieu of cash to exercise the warrants.
In December 1993, the Company completed the private placement of 500,000
shares of no par value common stock at an offering price of $1.00 per share.
The net proceeds from this offering were approximately $493,000.
Of the 5,000,000 shares issued in the above transactions, 3,500,000 were
sold to a wholly-owned subsidiary of Vencor, Inc. ("Vencor"), a Louisville,
Kentucky-based operator of intensive care hospitals and nursing homes that
specialize in treating patients with catastrophic illnesses. The Company
entered into a standstill agreement with Vencor in June 1994 whereby Vencor
will not acquire more than 40% of the Company's common stock for five years
from the agreement date. At August 31, 1998, Vencor owned 33% of the
Company's outstanding stock.
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The Company's working capital increased to $16,965,000 at June 30, 1998
from $11,124,000 at June 30, 1997. The increase in working capital occurred
primarily because of the Company's cash flow from operations and the proceeds
from the issuance of common stock through the exercise of options and
warrants. The average number of days outstanding of the Company's accounts
receivable was approximately 50 days at June 30, 1998 compared to 57 days at
June 30, 1997. The Company has granted extended terms to certain customers
which increased the average number of days outstanding of the Company's
accounts receivable by 3 days for the year ended June 30, 1998.
During the year ended June 30, 1998, the Company acquired approximately
$1,479,000 of property and equipment consisting principally of computer
equipment. The Company has no present material commitments for capital
expenditures.
The ratio of current assets to current liabilities was 2.4 to 1 at June
30, 1998, compared to 2.2 to 1 at June 30, 1997. The liabilities to equity
ratio was .6 to 1 at June 30, 1998, compared to .7 to 1 at June 30, 1997.
The improvement in both of these ratios is due to the Company's profitable
growth during the year ended June 30, 1998.
Cash provided by operations during the year ended June 30, 1998 was $8.3
million and increased approximately $5.4 million, compared to fiscal year
1997, as a result of the profitable growth of the Company, the increase in
accounts payable and accrued expenses, improved inventory turns and the
reduction in days outstanding of accounts receivable.
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RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the
following table indicates the percentage relationships of income and expense
items to total revenue for the line items included in the Consolidated
Statements of Operations for the three years ended June 30, 1998, 1997 and
1996, and the percentage change in those items for the years ended June 30,
1998 and 1997, from the prior year.
As a Percentage of Total Revenues Percentage Change from Prior Year
- --------------------------------- ---------------------------------
For the Years Ended June 30, For the Years Ended June 30,
1998 1997 1996 LINE ITEMS 1998 1997
---- ---- ---- ---------- ---- ----
% % % % %
100.0 100.0 100.0 Sales and Service 67.5 47.6
64.2 65.3 64.5 Cost of Sales and Services 64.5 49.6
----- ----- ----- ----- -----
35.8 34.7 35.5 Gross Profit 73.1 44.1
----- ----- ----- ----- -----
3.7 4.6 5.2 Marketing and Selling 36.5 29.8
16.1 16.4 20.2 Operating, Gen'l and Admin 65.1 19.4
3.6 1.1 .5 Research and Development 452.5 213.4
----- ----- ----- ----- -----
23.4 22.0 25.9 Total Operating Expenses 78.1 25.2
----- ----- ----- ----- -----
12.4 12.7 9.6 Earnings from Operations 64.4 95.3
.9 1.0 2.4 Other Income, Net 42.9 (35.7)
----- ----- ----- ----- -----
13.3 13.7 11.9 Earnings Before Income Taxes 62.8 69.5
3.8 4.9 3.6 Provision for Income Taxes 30.0 102.5
----- ----- ----- ----- -----
9.5 8.8 8.3 Net Income 81.2 55.3
----- ----- ----- ----- -----
----- ----- ----- ----- -----
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues were $47.3 million for the year ended June 30, 1998, compared
to $28.2 million for the prior year, an increase of 67%. Of total revenues,
outsourcing contributed approximately 75% and 95% in the fiscal years 1998
and 1997, respectively, while products contributed approximately 25% and 5%
in the fiscal years 1998 and 1997, respectively. The increase in revenues is
attributable in part to the acquisition of Novel, effective January 1997, and
of Erbtec in October 1997, which contributed approximately $14.8 million of
revenue during the year ended June 30, 1998. The Company's revenue growth
also was the result of core business growth, which had an increase in revenue
of 27% compared to 1997.
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Gross margins increased to 36% from 35% for the year ended June 30,
1998, compared to the year ended June 30, 1997. The increase in the
Company's margins is a result of the shifting composition of the Company's
revenues between products and services and the increase in sales of
proprietary products.
Marketing and selling expenses increased by 36% for the year ended June
30, 1998, as compared to the prior year. The increase is attributable to the
growth in sales and the acquisitions of Erbtec and Novel. Marketing and
selling expenses as a percentage of total revenue decreased to 4% from 5% for
the year ended June 30, 1998, compared to 1997 as a result of the increase in
revenues.
Operating, general and administrative expenses increased by 65% for the
year ended June 30, 1998, compared to the prior year. The increase is
attributable to the acquisition of Erbtec and Novel, expenses incurred in
August 1997 in moving the RELA manufacturing facility from Boulder, Colorado
to Longmont, Colorado, the addition of executive personnel at RELA, increased
recruiting and hiring costs of new employees and the overall growth of the
Company. As a percentage of revenues, operating, general and administrative
expenses were approximately 16% for each of the years ended June 30, 1998 and
1997.
Research and development expenses for the year ended June 30, 1998,
compared to the prior year increased by approximately $1.4 million, or 453%.
Research and development expenses are attributable to new products for
Respiratory Products, Erbtec and BioMed. Consistent with the Company's
operating plans, the Company continues to pursue the acquisition or
development of new or improved technology or products. Should the Company
identify any such opportunities, the amount of future research and
development expenditures may increase.
Net other income and expenses increased approximately $124,000 to
$413,000 for the year ended June 30, 1998, compared to $289,000 for the year
ended June 30, 1997. The increase is attributable to a higher short-term
investment balance during fiscal year 1998, compared to fiscal year 1997.
The fiscal year 1998 and 1997 consolidated statements of operations
contain a net tax provision of $1.8 million and $1.4 million, respectively.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, which requires recognition
of deferred income tax assets and liabilities for the expected future income
tax consequences, based on enacted tax laws, of temporary differences between
the financial reporting and tax bases of assets, liabilities and
carryforwards. SFAS No. 109 requires recognition of deferred tax assets for
the expected future effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for any tax benefits
which, based on current circumstances, are not expected to be realized.
During fiscal year 1998, the Company determined the valuation allowance was
no longer required because the increased taxable income from the acquisition
of Erbtec could be offset by tax credits and net operating loss ("NOL")
carryforwards. In fiscal years 1998 and 1997, the Company reduced its
valuation allowance by $590,000 and $80,000, respectively, for the
utilization of prior years' NOL in the current year and certain deferred tax
assets that the Company now believes will be fully utilized. The effective
tax rate during fiscal year 1998 was 29%, compared to a 36% effective tax
rate during fiscal year 1997.
The Company recorded net income of approximately $4.5 million for the
fiscal year ended June 30, 1998, compared to $2.5 million for the fiscal year
ended June 30, 1997. Earnings per share for the year ended June 30, 1998
were $.37, calculated on 12,256,461 diluted weighted average shares
outstanding, compared to $.27 for the same period in the prior year
calculated on 9,114,292 diluted weighted average shares outstanding. The
diluted
-13-
weighted average shares outstanding increased by approximately 3,142,000
shares for the year ended June 30, 1998, compared to the same period in 1997,
due to the exercise of 3,000,000 private placement warrants and the exercise
of options and Board of Director ("Board") and consultant warrants. This
increase in net income is attributed to the 67% growth in the Company's
revenues, an increase in gross margins by 1% for the fiscal year 1998,
compared to 1997, having the combination of operating, general and
administrative expenses and marketing and selling expenses increase at a
slower rate than revenues and the decrease in the effective tax rate.
The Company evaluated its overall business in fiscal year 1996 and, as a
result, sharpened its market focus. The Company has continued to refine its
market focus during 1997 and 1998. The current targeted markets are:
Diagnostic and Laboratory Instruments; Imaging Accessories; Therapeutic
Instruments; and, Software. Each area represents a U.S. market of $2 billion
or more per year, with annual growth of approximately 8% to 15%. Generally,
the marketplace for outsourcing services is expected to remain strong and
competitive, with significant opportunity for companies that can develop
low-cost, high quality products in a timely manner. Management is dedicated
to improving operating results through consistent performance, improved sales
levels and cost reductions. There are no assurances that management will be
successful in achieving improved operating results.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenues were $28.2 million for the year ended June 30, 1997, compared
to $19.1 million for the prior year, an increase of 48%. Of the total
revenues, outsourcing contributed approximately 95% for both fiscal year 1997
and 1996, while products contributed approximately 5% for both fiscal year
1997 and 1996. The increase in revenues was attributable to the growth of the
core business, which reported an increase in revenues of 41% in fiscal year
1997 compared to fiscal year 1996. The Company's revenue growth was also
improved by the acquisition of Novel in January 1997, which contributed $1.6
million of revenue during the last six months of fiscal year 1997.
The Company's gross margins as a percentage of total revenues, which
were approximately 35%, did not change for the years ended June 30, 1997 and
1996.
Marketing and selling expenses increased by 30% for the year ended June
30, 1997, as compared to the prior year. The increase was attributable to
the growth in sales and the acquisition of Novel. Marketing and selling
expenses as a percentage of total revenue were approximately 5% for the years
ended June 30, 1997 and 1996.
Operating, general and administrative expenses increased by
approximately $749,000, or 19% for the year ended June 30, 1997, compared to
the prior year. The increase was attributable to the overall growth of the
Company and the acquisition of Novel. As a percentage of revenues,
operating, general and administrative expenses decreased to 16% from 20%, in
fiscal year 1997, compared to fiscal year 1996, respectively.
Research and development expenses for the year ended June 30, 1997,
compared to the prior year, increased by approximately $207,000, or 213%.
The increase was a result of the Company's greater emphasis on developing
proprietary products.
Net other income and expenses decreased approximately $161,000 to
$289,000 for the year ended June 30, 1997, compared to $450,000 for the year
ended June 30, 1996. The decrease was attributable to a $122,000 gain from
the sale of the cardiopulmonary product lines and an approximately $50,000
gain on two dispute settlements that occurred during fiscal year 1996.
During fiscal year 1997, the Company's interest income increased by $47,000,
compared to fiscal year 1996.
-14-
The fiscal year 1997 and 1996 statements of operations contained a net
tax provision of $1,385,000 and $684,000, respectively. In fiscal years 1997
and 1996, the Company reduced its valuation allowance by $80,000 and
$178,000, respectively, for the utilization of prior years' NOL in the then
current year and certain deferred tax assets that the Company believed would
be fully utilized. The effective tax rate during fiscal year 1997 was 36%,
compared to a 30% effective tax rate during fiscal year 1996.
The Company recorded net income of approximately $2.5 million for the
fiscal year ended June 30, 1997, compared to approximately $1.6 million for
the fiscal year ended June 30, 1996. Earnings per share for the year ended
June 30, 1997 were $.27, calculated on 9,114,292 diluted weighted average
shares outstanding, compared to $.21 for the same period in the prior year,
calculated on 7,766,805 diluted weighted average shares outstanding. The
diluted weighted average shares outstanding increased by approximately
1,347,000 shares for the year ended June 30, 1997 compared to the same period
in 1996 due to the increase in the dilutive common equivalent shares for
stock options and warrants because of the increase in the Company's stock
price during fiscal 1997 compared to fiscal 1996. This increase in net
income was attributed to the 48% growth in the Company's revenues, while
maintaining the gross margins at 35% for the fiscal years 1997 and 1996, and
having the operating, general and administrative expenses and marketing and
selling expenses increase at a slower rate than revenues.
INFORMATION SYSTEMS AND THE YEAR 2000 ISSUE
As is the case for most other companies using computers in their
operations, the Company and its subsidiaries are in the process of addressing
the Year 2000 problem. The Company is currently engaged in a comprehensive
project to upgrade its information technology and manufacturing computer
software to programs that will consistently and properly recognize the Year
2000. Many of the Company's systems include new hardware and packaged
software recently purchased from vendors who have represented that these
systems are already Year 2000 compliant. The Company is in the process of
obtaining assurances from vendors that timely updates will be made available
to make all remaining purchased software Year 2000 compliant. The Company
will utilize both internal and external resources to test and reprogram or
replace all of its software for Year 2000 compliance.
The Company does not believe that its proprietary products or any of its
outsourcing services involve any material Year 2000 risks. In addition to
reviewing its internal systems, the Company has begun formal communications
with its significant vendors concerning Year 2000 compliance. There can be no
assurance that the systems of other companies that interact with the Company
will be sufficiently Year 2000 compliant so as to avoid an adverse impact on
the Company's operations, financial condition and results of operations.
The Company does not presently anticipate that the costs to address the
Year 2000 issue will have a material adverse effect on the Company's
financial condition, results of operations or liquidity. Present estimated
cost for remediation is less than $100,000.
The Company presently anticipates that it will complete its Year 2000
assessment and remediation by the end of fiscal year 1999. However, there
can be no assurance that the Company will be successful in implementing its
Year 2000 remediation plan according to the anticipated schedule. In
addition, the Company may be adversely affected
-15-
by the inability of other companies whose systems interact with the Company
to become Year 2000 compliant and by potential interruptions of utility,
communications or transportation systems as a result of Year 2000 issues.
Although the Company expects its internal systems will be Year 2000
compliant as described above, the Company intends to prepare a contingency
plan that will specify what it plans to do if it or important external
companies are not Year 2000 compliant in a timely manner. The Company
expects to prepare its contingency plan during fiscal year 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130"). SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Comprehensive income would have been approximately $4,527,147, $2,479,617 and
$1,596,602 for the years ended June 30, 1998, 1997 and 1996, respectively.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires that public companies report
information about their operating segments based on the financial information
used by the chief operating decision maker in their annual financial
statements and requires those companies to report selected information on
their interim statements. SFAS 131 is effective for fiscal years beginning
after December 15, 1997. Management has not determined the segments, if any,
that will be reported in connection with the adoption of SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for fiscal quarters and
fiscal years beginning after June 15, 1999. Management believes that the
adoption of SFAS 133 will not have significant impact on the Company's
financial condition and results of operations.
In April 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 provides guidance on financial reporting of
start-up costs and organization costs and requires such costs to be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company believes that application of
SOP 98-5 will not have a material impact on its financial statements.
FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical facts
are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in
or implied by forward-looking statements. Such risks include, but are not
limited to, the risk that a downturn in general economic conditions may tend
to adversely affect research and development budgets of potential customers
upon which the Company is dependent, the risk that the Company's
project-oriented revenues could be delayed or
-16-
adversely affected if new contracts are not in place when existing contracts
are completed, and the risk that the nature of bidding and performing
research and development-type contracts and manufacturing contracts may
result in short-term fluctuations in revenue or expense that could adversely
affect quarterly results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, as part of its cash management strategy, had short-term
investments at June 30, 1998 consisting of approximately $9,137,000 in U.S.
Treasury and government agency securities, $2,300,000 in commercial paper and
$707,000 in corporate notes. The Company has the intent and ability to hold
these short-term investments to maturity and thus has classified these
investments, which are stated at amortized cost that approximates market, as
"held-to-maturity". All of the short-term investments mature in less than
one year. The Company has completed a market risk sensitivity analysis of
these short-term investments based upon an assumed 1% increase in interest
rates at July 1, 1998. If market interest rates had increased by 1% on
July 1, 1998, the Company would have had an approximate $36,000 loss on these
short-term investments. Because this is only an estimate, any actual loss
due to an increase in interest rates could differ from this estimate.
-17-
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements and Schedules:
Page
Number
------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
-18-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado MEDtech, Inc.:
We have audited the accompanying consolidated balance sheets of COLORADO
MEDTECH, INC. (a Colorado corporation) and subsidiaries as of June 30, 1998
and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Colorado MEDtech, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 24, 1998.
F-1
Page 1 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
ASSETS 1998 1997
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,499,072 $ 1,670,821
Short-term investments 12,144,005 10,293,101
Accounts receivable-
Trade - less allowance for uncollectible accounts
of $580,000 and $162,000, respectively 7,631,436 4,549,543
Unbilled 182,537 690,564
Inventories, net 4,225,680 2,390,267
Deferred income taxes 1,676,227 795,459
Prepaid expenses and other 890,260 195,483
------------ ------------
Total current assets 29,249,217 20,585,238
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 3,224,215 2,307,210
Office furniture and fixtures 1,262,193 963,145
Leasehold improvements 485,748 365,860
Manufacturing equipment 1,063,920 548,054
------------ ------------
Total property and equipment 6,036,076 4,184,269
Less - Accumulated depreciation and amortization (4,301,804) (3,505,865)
------------ ------------
Property and equipment, net 1,734,272 678,404
------------ ------------
INVESTMENT IN LAND 500,000 500,000
------------ ------------
GOODWILL, net 1,724,796 1,628,326
------------ ------------
DEFERRED INCOME TAXES AND OTHER 798,997 461,465
------------ ------------
$ 34,007,282 $ 23,853,433
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-2
Page 2 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------------------------ ------ ------
CURRENT LIABILITIES:
Accounts payable $ 4,426,172 $ 3,075,225
Accrued product service costs 291,566 373,629
Accrued salaries and wages 3,126,671 1,805,770
Other accrued expenses 1,169,004 992,354
Customer deposits 2,804,450 3,175,530
Income taxes payable 466,788 38,691
------------ ------------
Total current liabilities 12,284,651 9,461,199
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares authorized;
none issued - -
Common stock, no par value; 25,000,000 shares authorized;
10,740,013 and 9,341,108 issued and outstanding
at June 30, 1998 and 1997, respectively 11,879,456 9,076,206
Retained earnings 9,808,175 5,316,028
Unrealized gain on available-for-sale investment 35,000 -
------------ ------------
Total shareholders' equity 21,722,631 14,392,234
------------ ------------
$ 34,007,282 $ 23,853,433
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
NET SALES AND SERVICE $47,300,200 $28,243,185 $19,130,979
COST OF SALES AND SERVICE 30,357,492 18,456,764 12,341,217
----------- ----------- -----------
GROSS PROFIT 16,942,708 9,786,421 6,789,762
----------- ----------- -----------
COSTS AND EXPENSES:
Marketing and selling 1,756,661 1,287,091 991,508
Operating, general and administrative 7,626,103 4,619,447 3,870,181
Research and development 1,680,625 304,180 97,059
----------- ----------- -----------
Total operating expenses 11,063,389 6,210,718 4,958,748
----------- ----------- -----------
INCOME FROM OPERATIONS 5,879,319 3,575,703 1,831,014
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (14,127) (22,460) (59,945)
Interest income and other 426,955 311,374 509,533
----------- ----------- -----------
Total other income 412,828 288,914 449,588
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,292,147 3,864,617 2,280,602
PROVISION FOR INCOME TAXES 1,800,000 1,385,000 684,000
----------- ----------- -----------
NET INCOME $ 4,492,147 $ 2,479,617 $ 1,596,602
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER SHARE (Note 2):
Basic $.43 $.35 $.23
----------- ----------- -----------
----------- ----------- -----------
Diluted $.37 $.27 $.21
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 10,446,868 7,165,499 6,901,762
----------- ----------- -----------
----------- ----------- -----------
Diluted 12,256,461 9,114,292 7,766,805
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-4
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Unrealized
Gain On
Common Stock Available-
------------------------- For-Sale Retained
Shares Amount Investment Earnings
---------- ----------- ---------- ----------
BALANCES, June 30, 1995 6,901,762 $ 3,713,652 $ - $1,239,809
Net income - - - 1,596,602
---------- ----------- ---------- ----------
BALANCES, June 30, 1996 6,901,762 3,713,652 - 2,836,411
Issuance of Common Stock 2,449,346 5,053,574 - -
Purchase of Common Stock (80,000) (242,144) - -
Common stock issued in conjunction
with the Novel acquisition 70,000 207,816 - -
Options issued in conjunction
with the Novel acquisition - 338,672 - -
Options issued for services
from consultants - 4,636 - -
Net income - - - 2,479,617
---------- ----------- ---------- ----------
BALANCES, June 30, 1997 9,341,108 9,076,206 - 5,316,028
Issuance of Common Stock 1,376,597 1,989,646 - -
Purchase of Common Stock (66,400) (507,390) - -
Common stock issued in conjunction
with the Erbtec acquisition 88,708 620,956 - -
Change in unrealized gain on
available-for-sale investment - - 35,000 -
Tax benefit from sale of option shares - 593,442 - -
Options issued for services
from consultants - 106,596 - -
Net income - - - 4,492,147
---------- ----------- ---------- ----------
BALANCES, June 30, 1998 10,740,013 $11,879,456 $ 35,000 $9,808,175
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-5
Page 1 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,492,147 $ 2,479,617 $ 1,596,602
Adjustments to reconcile net income to net cash flows
from operating activities-
Deferred tax benefit (966,000) (80,000) (91,000)
Depreciation and amortization 1,047,007 433,747 391,405
Allowance for uncollectible accounts 392,783 (12,921) (25,000)
Reserve for inventory 134,578 (202,000) (295,000)
Gain on sale of product line - - (121,986)
Non-cash consulting services 106,596 4,636 -
Changes in operating assets and liabilities-
Accounts receivable (779,833) (1,758,217) (460,881)
Inventories 240,123 (377,038) (485,899)
Prepaid expenses and other assets 50,680 (165,430) 56,954
Accounts payable and accrued expenses 3,921,199 2,051,653 43,242
Customer deposits (371,080) 525,223 659,397
----------- ----------- -----------
Net cash flows from operating activities 8,268,200 2,899,270 1,267,834
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Cash paid for purchase of Novel, net - (1,126,363) -
Cash paid for purchase of Erbtec, net (5,392,731) - -
Purchase of investments (200,000) (25,000) -
Capital expenditures (1,478,570) (643,326) (231,982)
Increase in short-term investments, net (1,850,904) (4,859,839) (2,815,587)
Proceeds from sale of product line - - 250,000
----------- ----------- -----------
Net cash flows used in investing activities (8,922,205) (6,654,528) (2,797,569)
----------- ----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-6
Page 2 of 2
COLORADO MEDTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock $1,989,646 $5,053,574 $ -
Purchase of Common Stock (507,390) (242,144) -
---------- ---------- -----------
Net cash flows from financing activities 1,482,256 4,811,430 -
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 828,251 1,056,172 (1,529,735)
CASH AND CASH EQUIVALENTS, at beginning of period 1,670,821 614,649 2,144,384
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, at end of period $2,499,072 $1,670,821 $ 614,649
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 14,849 $ 31,593 $ 59,767
---------- ---------- -----------
---------- ---------- -----------
Cash paid for income taxes $1,535,003 $1,675,000 $ 885,000
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Common Stock for acquisition of Novel $ - $ 207,816 $ -
---------- ---------- -----------
---------- ---------- -----------
Issuance of stock options for acquisition of Novel $ - $ 338,672 $ -
---------- ---------- -----------
---------- ---------- -----------
Issuance of Common Stock for acquisition of Erbtec $ 620,956 $ - $ -
---------- ---------- -----------
---------- ---------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-7
COLORADO MEDTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
(1) ORGANIZATION AND OPERATIONS
Colorado MEDtech, Inc. ("CMED") was incorporated in 1977 as a Colorado
corporation to develop, manufacture, market and service computerized
diagnostic and testing instrumentation.
RELA, Inc. ("RELA"), a Colorado corporation and wholly owned subsidiary
of CMED, was incorporated in 1977. RELA is an integrated custom product
development and manufacturing services company specializing in the design,
development and manufacture of electronic and electro-mechanical medical
products and software systems. The Company merged RELA into CMED in July 1998,
and is now operating RELA as a division of CMED. This merger will have no
material effect on the day to day operations of RELA.
Novel Biomedical, Inc. ("Novel"), a Minnesota corporation and wholly
owned subsidiary acquired by CMED in February 1997, was incorporated in 1986.
Novel specializes in the custom design, development and manufacture of
unique disposable medical devices, primarily catheters, used in angioplasty,
minimally invasive surgery, electrophysiology, and infertility treatment.
In October 1997, CMED completed the acquisition of the operating assets
of Erbtec Engineering, Inc. ("Erbtec"). Erbtec is operated as a division of
CMED. Erbtec's main products are high power Radio Frequency amplifiers, power
supplies and systems for Magnetic Resonance Imaging equipment.
BioMed Y2K, Inc. ("BioMed"), a Colorado corporation and wholly owned
subsidiary of CMED, was incorporated in April 1998. BioMed offers a
combination of tools and services to support health care institutions'
efforts to establish year 2000 compliance for their biomedical devices.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect the consolidated results
of CMED, RELA, Novel and BioMed (collectively, the "Company"). All
significant intercompany transactions and accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-8
INVESTMENTS
The Company accounts for its investments in accordance with the
provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Short-term investments are primarily U.S. Treasury and government agency
securities, which the Company has the intent and the ability to hold to
maturity and thus has classified these investments, which are stated at
amortized cost which approximates market, as "held-to-maturity". All of the
Company's held-to-maturity investments mature in less than one year. The
unrealized gains and losses on these held-to-maturity investments were
immaterial at June 30, 1998 and 1997. The following is a summary of
held-to-maturity investments as of June 30, 1998 and 1997:
Security Type 1998 1997
------------- ---- ----
U.S. Treasury and
government agency
securities $ 9,137,095 $ 5,298,635
Commercial paper 2,299,905 3,968,369
Corporate notes 707,005 1,026,097
----------- -----------
$12,144,005 $10,293,101
----------- -----------
----------- -----------
The Company also has approximately $120,000 of equity available-for-sale
investments which are marked to market in the accompanying consolidated balance
sheets. These equity available-for-sale investments have no specific maturity.
The realized and unrealized gains and losses on the equity available-for-sale
investments were immaterial as of and for the years ended June 30, 1998 and
1997.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The cost of inventories includes material, labor and manufacturing
overhead. As of June 30, 1998 and 1997, inventories, net of allowances,
consisted of:
1998 1997
----------- -----------
Raw materials $ 2,957,886 $ 1,791,104
Work-in-process 1,267,794 594,697
Finished goods - 4,466
----------- -----------
$ 4,225,680 $ 2,390,267
----------- -----------
----------- -----------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are provided principally on the straight-line method over the
estimated useful lives of the assets, which range from 2 to 7 years.
Depreciation expense for the years ended June 30, 1998, 1997 and 1996 was
approximately $796,000, $401,000 and $391,000, respectively.
GOODWILL
Goodwill resulting from the Erbtec and Novel acquisitions is stated at
cost, net of accumulated amortization of approximately $284,000 and $33,000,
as of June 30, 1998 and 1997, respectively. Amounts of goodwill for Erbtec
F-9
and Novel are being amortized using the straight-line method over estimated
useful lives of 2 and 25 years, respectively.
ACCRUED PRODUCT SERVICE COSTS
The Company warrants its products against defects in materials and
workmanship, generally for 90 days, but in limited cases for up to 18 months.
Estimated costs of product service are accrued at the time of sale.
CUSTOMER DEPOSITS
Customer deposits result from cash received in advance for future
contract work.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", ("SFAS 128"), which was effective for periods ended after December
15, 1997. This statement establishes standards for computing and presenting
earnings per share. Basic earnings per share are computed on the basis of the
weighted average shares outstanding during each period. Diluted earnings per
share are computed on the basis of the weighted average shares outstanding
during each period, including dilutive common equivalent shares for stock
options and warrants. As a result of adopting SFAS 128, reported earnings
per share for the years ended June 30, 1997 and 1996 were restated. The
effect of this accounting change on previously reported earnings per share
was as follows:
1998 1997 1996
---- ---- ----
Primary earnings per share
(as reported under the prior method) $.37 $.24 $.21
Effect of SFAS 128
on basic earnings per share .06 .11 .02
---- ---- ----
Basic earnings per share $.43 $.35 $.23
---- ---- ----
---- ---- ----
Fully diluted earnings per share
(as reported under the prior method) $.36 $.23 $.17
Effect of SFAS 128
on diluted earnings per share .01 .04 .04
---- ---- ----
Diluted earnings per share $.37 $.27 $.21
---- ---- ----
---- ---- ----
A reconciliation between the number of shares used to calculate basic
and diluted earnings per share is as follows (in thousands):
1998 1997 1996
---- ---- ----
Net income (income available to
common shareholders) $ 4,492 $ 2,480 $ 1,597
------- ------- -------
------- ------- -------
Weighted average number of common shares
outstanding (shares used in basic earnings
per share computation) 10,447 7,165 6,902
Effect of stock options and warrants
(treasury stock method) 1,809 1,949 865
------- ------- -------
Shares used in diluted earnings per share
computation 12,256 9,114 7,767
------- ------- -------
------- ------- -------
Options and warrants that were of an antidilutive nature for the years
ended June 30, 1998, 1997 and 1996 that were outstanding but not included in
the shares used in diluted earnings per share computation totaled
approximately 1,571,000, 3,972,000 and 4,630,000, respectively.
F-10
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Comprehensive income would have
been approximately $4,527,147, $2,479,617 and $1,596,602 for the years ended
June 30, 1998, 1997 and 1996, respectively.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires that public companies report
information about their operating segments based on the financial information
used by the chief operating decision maker in their annual financial
statements and requires those companies to report selected information on
their interim statements. SFAS 131 is effective for fiscal years beginning
after December 15, 1997. Management has not determined the segments, if any,
that will be reported in connection with the adoption of SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for fiscal quarters and
fiscal years beginning after June 15, 1999. Management believes that the
adoption of SFAS 133 will not have significant impact on the Company's
financial condition and results of operations.
In April 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP 98-5"), "Reporting on the Costs of
Start-up Activities." SOP 98-5 provides guidance on financial reporting of
start-up costs and organization costs and requires such costs to be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company believes that application of
SOP 98-5 will not have a material impact on its financial statements.
REVENUE RECOGNITION POLICY
The Company recognizes revenue for manufacturing services upon shipment
of the related products and recognizes revenues for engineering contract
services as work is performed and contract requirements are met. Unbilled
receivables result from revenue recognized for contract services in excess of
billings. Unanticipated losses on engineering contracts are provided for, in
full, when determinable.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes"
("SFAS 109"), which requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax
bases of assets, liabilities and carryforwards. SFAS 109 requires
recognition of deferred tax assets for the expected future effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized (see Note 6).
F-11
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1995, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies
which do not choose to account for stock-based compensation as prescribed by
the statement shall disclose the pro forma effects on earnings and earnings
per share as if SFAS 123 had been adopted. Additionally, certain other
disclosures are required with respect to stock compensation and the
assumptions used to determine the pro forma financial statement effect of
SFAS 123 (see Note 5).
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
The fair market values of accounts receivable, accounts payable and
other financial instruments approximate their carrying values in the
accompanying consolidated balance sheets.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
(3) ACQUISITIONS
In October 1997, the Company completed the acquisition of the operating
assets of Erbtec. The purchase was completed for $5.39 million in cash and
issuance of 88,708 shares of common stock, resulting in a total purchase
value of approximately $6.0 million, including acquisition costs. At the
date of the purchase, $1 million of the cash portion of the purchase price
was placed in escrow pending the performance of certain criteria outlined in
the purchase and sale agreement. During the quarter ended June 30, 1998, the
Company was informed that certain of the purchase and sale agreement criteria
would not be met and the seller would be refunding $750,000 of the escrowed
purchase price. This receivable is included in other current assets in the
accompanying consolidated balance sheets. The net purchase price, less the
net tangible assets acquired, resulted in goodwill of $480,773 that will be
amortized over a 2-year period. The accompanying consolidated financial
statements include the operating results of Erbtec since October 1, 1997, the
effective date of the acquisition. The total purchase price and net cash
used for the acquisition of Erbtec are as follows:
F-12
Assets acquired:
Cash $ 8,882
Accounts receivable 2,186,816
Inventories 2,210,114
Equipment and furniture 373,227
Other assets 12,757
Goodwill 480,773
-----------
Total purchase price 5,272,569
Less:
Stock issued (620,956)
Cash acquired (8,882)
Plus:
Receivable of escrowed funds 750,000
-----------
Net cash paid for purchase of Erbtec $ 5,392,731
-----------
-----------
In February 1997, the Company completed the acquisition of Novel. The
Company acquired Novel for $1,899,196, which included cash, the issuance of
70,000 shares of common stock, and the grant of 294,211 non-qualified stock
options. The stock was valued at fair market value on the date the Agreement
and Plan of Reorganization was entered into between CMED and Novel. The
non-qualified stock options were valued using the Black-Scholes option
pricing model. In fiscal 1998, the Company recognized certain tax benefits
related to assets obtained in the Novel acquisition, which resulted in an
adjustment to goodwill. The purchase price, less the net assets acquired,
resulted in goodwill of $1,528,332 that is being amortized over a 25-year
period. The accompanying consolidated financial statements include the
operating results of Novel since January 3, 1997, the effective date of the
acquisition.
The following unaudited pro forma results of operations of the Company
for the fiscal years ended June 30, 1998, 1997 and 1996 assume that the
acquisition of Erbtec had occurred on July 1, 1996 and the acquisition of
Novel had occurred on July 1, 1995. These pro forma results are not
necessarily indicative of the actual results of operations that would have
been achieved nor are they necessarily indicative of future results of
operations. Should the Company obtain additional information about the fair
market value of the assets acquired, the purchase price may be adjusted in
future periods.
Year Ended June 30,
-------------------
1998 1997 1996
---- ---- ----
Revenues $50,752,000 $42,480,000 $20,503,000
Net Income $ 4,293,000 $ 4,117,000 $ 1,560,000
Net Income Per Share (Diluted) $ .35 $ .44 $ .20
F-13
(4) CREDIT FACILITY
The Company entered into a bank financing arrangement on October 30,
1997 that provides for a three-year revolving line of credit for $5 million
the first year, $7 million the second year and $9 million the third year. The
credit facility is at the bank's prime lending rate (8.5% at June 30, 1998)
through the term of the agreement and is secured by all accounts receivable,
general intangibles, inventory and equipment. The agreement contains various
restrictive covenants which include, among others, maintenance of certain
financial ratios, maintenance of a minimum tangible net worth and limitations
on annual investments, dividends and capital expenditures. No amounts were
advanced under this credit facility during fiscal 1998 and 1997.
(5) SHAREHOLDERS' EQUITY
Preferred Stock
The Company's shareholders have authorized 5,000,000 shares of no par
value preferred stock, to be issuable from time to time in such series and to
have such rights and preferences as the Company's Board of Directors (the
"Board") may designate. As of June 30, 1998 and1997, no shares of preferred
stock have been issued.
COMMON STOCK
The Company's shareholders have authorized 25,000,000 shares of no par
value common stock, of which 10,740,013 and 9,341,108 shares were issued and
outstanding as of June 30, 1998 and 1997, respectively. During the years
ended June 30, 1998 and 1997, the Company purchased 66,400 and 80,000 shares
of common stock, respectively, which decreased the Company's equity by
approximately $507,000 and $242,000, respectively. These shares were
purchased so that the stock issued under the Employee Stock Purchase Plan
would be less dilutive.
STOCK OPTION PLAN
On June 25, 1992, the Board approved a Stock Option Plan (the "Plan").
The Plan provides for the grant of both incentive and nonstatutory stock
options as defined by the Internal Revenue Code of 1986, stock appreciation
rights and supplemental bonuses at the discretion of the Board. Under the
terms of the Plan, the purchase price of the shares subject to an incentive
option will be the fair market value of the Company's common stock on the
date the option is granted. If the grantee owns more than 10% of the total
combined voting power of all classes of stock on the date of grant, the
purchase price shall be at least 110% of the fair market value at the date of
grant and the exercise term shall be up to five years from the date of grant.
All other options granted under the Plan are exercisable up to 10 years from
the date of grant. Under the Plan, 3,500,000 shares of common stock are
reserved for options. Vesting periods for options issued are determined by
the Board at date of grant and currently vest over three to eight years. A
summary of the status of the Plan follows:
F-14
FY 1998 FY 1997 FY 1996
------- ------- -------
Balance outstanding at beginning
of fiscal year 1,470,571 1,385,949 754,817
Granted during period 873,400 374,200 788,000
Forfeited during period (62,101) (56,636) (156,868)
Exercised during period (246,719) (232,942) -
--------- --------- ---------
Outstanding at June 30, 2,035,151 1,470,571 1,385,949
--------- --------- ---------
--------- --------- ---------
Exercisable at June 30, 597,775 369,670 447,053
--------- --------- ---------
--------- --------- ---------
Weighted average exercise price:
At beginning of period $ 2.28 $ 1.91 $ 1.41
At end of period $ 3.98 $ 2.28 $ 1.91
Exercisable at end of period $ 2.07 $ 1.44 $ 1.29
Options granted $ 6.30 $ 3.04 $ 2.33
Options exercised $ 1.81 $ 1.33 $ -
Options forfeited $ 4.82 $ 2.30 $ 1.61
Weighted average fair value of
options granted during period $ 3.49 $ 1.64 $ 1.45
June 30, 1998
----------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life (Years) Shares Price
- --------------- ------ ----- ------------ ------ -----
$1.25 - $1.66 242,667 $1.42 2.2 242,667 $1.42
$1.67 - $2.38 397,505 $1.85 4.4 235,835 $1.82
$2.39 - $4.25 556,679 $3.14 5.3 77,607 $3.04
$4.26 - $5.47 250,000 $5.47 4.1 41,666 $5.47
$5.48 - $8.00 588,300 $6.65 4.6 - $ -
--------- -------
2,035,151 597,775
--------- -------
--------- -------
NON-QUALIFIED STOCK OPTIONS
The Company has issued non-qualified stock options outside the Plan to
purchase up to 728,651 shares of the Company's common stock in exchange for
employment recruiting services' the acquisition of Novel and to employees.
The value of options issued to non-employees has been determined using the
Black-Scholes model and recorded in the accompanying consolidated financial
statements. All non-qualified stock options were granted with an exercise
price that was equal to the fair market value of the Company's stock on the
date of grant. A summary of the status of the Company's non-qualified stock
options outside the Plan follows.
F-15
FY 1998 FY 1997 FY 1996
------- ------- -------
Balance outstanding at beginning
of fiscal year 709,351 434,440 434,440
Granted during period - 294,211 -
Forfeited during period (10,958) (1,000) -
Exercised during period (84,140) (18,300) -
------- ------- -------
Outstanding at June 30, 614,253 709,351 434,440
------- ------- -------
------- ------- -------
Exercisable at June 30, 503,039 531,578 434,440
------- ------- -------
------- ------- -------
Weighted average exercise price:
At beginning of period $ 1.97 $ 1.28 $ 1.28
At end of period $ 2.05 $ 1.97 $ 1.28
Exercisable at end of period $ 1.85 $ 1.64 $ 1.28
Options granted $ - $ 2.97 $ -
Options exercised $ 1.28 $ 1.44 $ -
Options forfeited $ 2.97 $ 2.97 $ -
Weighted average fair value of $ - $ 1.75 $ -
options granted during period
June 30, 1998
----------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life (Years) Shares Price
- --------------- ------ ----- ------------ ------ -----
$1.25 - $ 1.44 332,000 $1.27 .5 332,000 $1.27
$1.45 - $ 2.97 282,253 $2.97 3.7 171,039 $2.97
------- -------
614,253 503,039
------- -------
------- -------
DIRECTOR, CONSULTANT AND OTHER WARRANTS
The Board grants warrants to the outside directors for serving on the
Board. Warrants were issued in February 1993 to purchase 120,000 shares of
the Company's common stock at $1.63 per share; in November 1993 to purchase
90,000 shares of the Company's common stock at $1.50 per share; in June 1995
to purchase 180,000 shares of the Company's common stock at $1.59 per share;
in November 1996, to purchase 15,000 shares of the Company's common stock at
$3.03 per share; in November 1997, to purchase 90,000 shares of the Company's
common stock at $6.41 per share; and in August 1998, to purchase 180,000
shares of the Company's common stock at $7.00 per share. During fiscal years
1998 and 1997, 110,000 and 70,000 director warrants were exercised,
F-16
respectively. In fiscal 1997, 15,000 warrants expired, unvested. As of June
30, 1998, 195,000 warrants were vested. The warrants have a five-year term,
and have exercise prices equal to the fair market value of the Company's
stock on the date of grant.
In connection with a prior borrowing in March 1993, the Company issued
100,000 warrants to purchase the Company's common stock at an exercise price
of $1.50 per share. In May 1994, the Company changed the warrant price to
$1.25 per share. All of these warrants were exercised during fiscal year
1997. The warrants had a five-year term.
In March 1993, the Company issued 100,000 warrants with a five-year term
in connection with a purchase option on the Company's land (see Note 9).
These warrants were exercisable at $2.00 per share from March 1996 through
March 1997 and at $2.25 per share thereafter. These warrants would have
vested only if the land purchase option was exercised. The warrants expired
unexercised in March 1998.
In November 1993, the Company issued warrants to its attorneys to
purchase 100,000 shares of the Company's common stock. These warrants vested
25% per year beginning November 1993, and were exercisable at the average of
the bid and ask prices of the Company's common stock as of the vesting date.
The warrants vested in 1993, 1994, 1995 and 1996, and were exercisable at
$1.50, $1.25, $1.81 and $3.00 per share, respectively. All of these warrants
were exercised during fiscal 1998.
In May 1997, the Company granted 125,000 warrants to a consulting group
in exchange for investor relation services. The exercise prices range from
$4.00 to $10.00 per share and the warrants have a three-year term from the
date of grant. The Company has recognized approximately $107,000 and $5,000
of expense in fiscal years 1998 and 1997, respectively, related to these
warrants based on the value of the services received.
A summary of all of the above-described warrants is as follows:
FY 1998 FY 1997 FY 1996
------- ------- -------
Balance outstanding at beginning
of fiscal year 630,000 675,000 675,000
Granted during period 90,000 140,000 -
Forfeited during period (100,000) (15,000) -
Exercised during period (210,000) (170,000) -
-------- -------- -------
Outstanding at June 30, 410,000 630,000 675,000
-------- -------- -------
-------- -------- -------
Exercisable at June 30, 295,000 430,000 460,000
-------- -------- -------
-------- -------- -------
Weighted average exercise price:
At beginning of period $2.72 $1.64 $1.64
At end of period $4.16 $2.72 $1.64
Exercisable at end of period $1.96 $1.84 $1.50
Warrants granted $6.41 $6.04 $ -
Warrants exercised $1.72 $1.40 $ -
Warrants forfeited $2.25 $1.59 $ -
Weighted average fair value of
warrants granted during period $1.82 $ .96 $ -
F-17
June 30, 1998
----------------------------------------------------------
Warrants Outstanding Warrants Exercisable
----------------------------------- -------------------
Weighted Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life (Years) Shares Price
- --------------- ------ ----- ------------ ------ -----
$1.25 - $ 1.81 180,000 $1.58 1.7 180,000 $1.58
$1.82 - $ 3.03 15,000 $3.03 3.4 15,000 $3.03
$3.04 - $ 6.00 75,000 $5.00 1.9 75,000 $5.00
$6.01 - $10.00 140,000 $7.16 3.9 25,000 $7.00
------- -------
410,000 295,000
------- -------
------- -------
PRIVATE PLACEMENT WARRANTS
In June 1994, the Company completed the private placement of 1,500,000
units, each unit consisting of one share of no par value common stock and two
warrants. During fiscal 1997, 2,070,000 of these warrants were exercised for
approximately $4,631,000. The remaining 930,000 warrants were exercised
during July and August 1997 at a price per share ranging from $1.41 to $2.68,
resulting in cash proceeds to the Company of approximately $1,121,000 and
cancellation of 142,505 shares of previously issued common stock that were
used in lieu of cash to exercise the warrants.
A summary of all of the above-described warrants is as follows:
FY 1998 FY 1997 FY 1996
------- ------- -------
Balance outstanding at beginning
of fiscal year 930,000 3,000,000 3,000,000
Exercised during period (930,000) (2,070,000) -
-------- ---------- ---------
Outstanding at June 30, - 930,000 3,000,000
-------- ---------- ---------
-------- ---------- ---------
Exercisable at June 30, - 930,000 3,000,000
-------- ---------- ---------
-------- ---------- ---------
Weighted average exercise price:
At beginning of period $ 2.07 $ 2.18 $ 2.18
At end of period $ - $ 2.07 $ 2.18
Exercisable at end of period $ - $ 2.07 $ 2.18
Warrants exercised $ 2.07 $ 2.24 $ -
F-18
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Board of Directors adopted an Employee Stock
Purchase Plan (the "ESPP"), effective for the plan year beginning January 1,
1997. Under the ESPP, the Company is authorized to issue up to 240,000
shares of common stock over a three-year period, with a maximum of 80,000
shares per year, to its full time employees, nearly all of whom are eligible
to participate. Under terms of the ESPP, employees can have up to 10% of
their salary withheld to purchase the Company's common stock. The purchase
price of the stock is 85% of the lower of its beginning-of-the-year or
end-of-the-year market price. In January 1998, the Company issued 75,526
shares of common stock under the ESPP at $2.50 per share.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
SFAS 123 defines a fair-value based method of accounting for employee
stock options or similar equity instruments. However, SFAS 123 allows the
continued measurement of compensation cost for such plans using the intrinsic
value-based method prescribed by APB 25, provided that pro forma disclosures
are made of net income or loss and net income or loss per share, assuming the
fair-value based method of SFAS 123 had been applied. The Company has
elected to account for its stock-based compensation plans under APB 25;
accordingly, for purposes of the pro forma disclosure presented below, the
Company has computed the fair values of shares issued under the ESPP, all
options and warrants issued during fiscal years 1998, 1997 and 1996 using the
Black-Scholes pricing model and the following weighted average assumptions:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.84% 5.70% 6.18%
Expected lives 3.8 years 3.5 years 4.2 years
Expected volatility 67.4% 69.8% 74.6%
Expected dividend yield 0% 0% 0%
To estimate expected lives of options for this valuation, it was assumed
options would be exercised upon becoming fully vested. Cumulative
compensation cost recognized in pro forma net income or loss with respect to
options that are forfeited prior to vesting is adjusted as a reduction of pro
forma compensation expense in the period of forfeiture. The Company's common
stock market volatility was based on the closing market price at the end of
each month since the merger of CMED and RELA in October 1992. Fair value
compensation is highly sensitive to the volatility factor assumed; the
greater the volatility, the higher the computed fair value of options granted.
The total fair value of options and warrants granted, that are included
in the pro forma calculation, was computed to be approximately $2,536,000,
$628,000 and $1,141,000 for the years ended June 30, 1998, 1997 and 1996,
respectively. These amounts are amortized ratably over the vesting periods of
the options. Pro forma stock-based compensation, net of the effect of
forfeitures and taxes, was approximately $639,000, $216,000 and $62,000 for
1998, 1997 and 1996, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and pro forma diluted
earnings per common share would have been reported as follows:
F-19
Year Ended June 30,
-------------------
1998 1997 1996
---- ---- ----
Net Income
As reported $4,492,147 $2,479,617 $1,596,602
Pro forma $3,852,790 $2,263,185 $1,534,299
Diluted Earnings Per Common Share
As reported $.37 $.27 $.21
Pro forma $.33 $.21 $.21
(6) INCOME TAXES
The provision for income taxes includes the following:
Year Ended June 30,
-------------------
1998 1997 1996
----------- ----------- ----------
Current -
Federal $ 2,581,784 $ 1,347,733 $ 717,733
State 184,216 96,267 51,267
----------- ----------- ----------
2,766,000 1,444,000 769,000
Deferred -
Federal (901,664) (55,067) (79,333)
State (64,336) (3,933) (5,667)
----------- ----------- ----------
Total $ 1,800,000 $ 1,385,000 $ 684,000
----------- ----------- ----------
----------- ----------- ----------
The Company's effective income tax rate was different than the statutory
federal income tax rate as follows:
Year Ended June 30,
-------------------
1998 1997 1996
----------- ----------- ----------
Federal income tax provision at
statutory rates $ 2,138,000 $ 1,314,000 $ 775,000
State income tax provision, net of
federal tax effect 206,000 133,000 75,000
Nondeductible expenses 46,000 18,000 12,000
SFAS 109 valuation allowance reduction (590,000) (80,000) (178,000)
----------- ----------- ----------
Effective tax $ 1,800,000 $ 1,385,000 $ 684,000
----------- ----------- ----------
----------- ----------- ----------
In accordance with certain provisions of the Internal Revenue Code, a
change in ownership of greater than 50% of a company within a three-year
period results in an annual limitation on the Company's ability to utilize
its net operating loss ("NOL") carryforwards from tax periods prior to the
ownership change. Such a change in ownership occurred with respect to the
Company on October 19, 1992. Accordingly, the NOL carryforwards at October
19, 1992 were restricted to annual cumulative amounts of approximately
$105,000 subject to the expiration of these carryforwards, or approximately
$1,575,000. As of June 30, 1998, the Company had NOL carryforwards available
of approximately $1,219,000. The Company's NOLs expire beginning in 1999
through 2007. The Company also has research and development and investment
tax credit carryforwards totaling approximately $140,000 expiring from 1999
through 2007.
F-20
Deferred taxes are determined based on estimated future tax effects of
differences between the amounts reflected in the financial statements and the
tax basis of assets and liabilities given the provisions of the enacted tax
laws. Deferred tax assets include the tax effect of NOL and tax credit
carryforwards. The net deferred tax assets and liabilities as of June 30,
1998 and 1997 are comprised of the following:
1998 1997
---------- ----------
Current
Tax effect of NOL carryforwards $ 457,000 $ 538,000
Allowance for doubtful accounts 217,000 57,000
Accrued vacation 177,000 99,000
Deferred service revenue - 15,000
Reserves 685,000 522,000
Tax credits 140,000 -
Valuation allowance - (436,000)
---------- ----------
Net current deferred tax asset $1,676,000 $ 795,000
---------- ----------
---------- ----------
Noncurrent
Tax credits $ - $ 140,000
Depreciation for book in excess of tax 367,000 296,000
Valuation allowance - (154,000)
---------- ----------
Net noncurrent deferred tax asset $ 367,000 $ 282,000
---------- ----------
---------- ----------
The Company had established a valuation allowance due to the uncertainty
that the full amount of credits and NOL carryforwards would be applied
against future taxable income. During fiscal 1998, the Company determined
the valuation allowance was no longer required because the increased taxable
income from the acquisition of Erbtec could be offset by tax credits and NOL
carryforwards. During 1998, 1997 and 1996, the Company reduced the valuation
allowance by $590,000, $80,000 and $178,000 for the utilization of NOLs in
the respective years and certain deferred tax assets that the Company now
believes will be fully utilized.
(7) COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its operating facilities and certain computer and test
equipment pursuant to noncancellable operating lease arrangements. The Company
incurred rent expense of $846,000, $467,000 and $511,000 for the years ended
June 30, 1998, 1997 and 1996, respectively, under such agreements.
At June 30, 1998, future minimum lease payments under leases having an
initial or remaining noncancellable term of one year or more were
approximately $825,000 in 1999, $792,000 in 2000, $769,000 in 2001, $728,000
in 2002, and none in 2003 or thereafter.
EMPLOYMENT AND COMPENSATION AGREEMENTS
In June 1993, the Company entered into an employment agreement with the
Company's Chairman, Chief Executive Officer and President, which had a
three-year term. The agreement fixed the employee's compensation. In
connection with and as a condition of the employment agreement, the employee
executed a noncompetition agreement in which he agreed not to engage in
competitive activities for a period of two years after his
F-21
employment with the Company is terminated, whether voluntarily or
involuntarily. The Company also agreed to grant an incentive stock option to
purchase up to 300,000 shares of the Company's common stock at a purchase
price of $1.25 per share. The options vested at 100,000 shares per year over
three years. Each portion of the vested option is exercisable for five years
after the date each portion has vested. During fiscal 1998 and 1997, 80,000
of these options were exercised each year.
The Company and the employee extended the employment agreement in
November 1995 and in May 1996 through June 2002. The Company agreed to grant
an incentive stock option to purchase up to 300,000 shares of the Company's
common stock at a purchase price of $1.84 per share and another 260,000
shares at a purchase price of $3.25 per share, in consideration of the
extended employment agreement. The first group of options vests at 100,000
shares per year over three years. The remaining 260,000 shares vest in year
seven, however, earlier vesting can occur if the Company achieves certain
targeted stock prices by September 2000. If the Company terminates his
employment at any time prior to June 2002, no vesting of the options shall
occur after the date of termination, but the employee will be entitled to
receive a severance payment amounting to compensation for a period equal to
the lesser of 24 months or the unexpired term of the agreement. If the
employee terminates his employment prior to June 1999, no further vesting of
the stock options shall occur, and the unexercised portion of the options,
whether or not vested, shall terminate. Subject to these restrictions, each
portion of the vested options shall be exercisable for five years after the
date such portion has vested.
Two of the Company's other officers have also entered into employment
agreements with the Company. These agreements provide for a severance
payment equal to one year's salary if the officer's employment is terminated
as a result of loss of officer status, relocation of the Company or for
reasons other than cause and two years' salary if the officer's employment is
terminated as a result of a significant ownership change in the Company.
These agreements have no fixed term, and may be terminated by either party at
any time.
OTHER
In connection with an equity offering in June 1994, the Company entered
into a standstill agreement with a corporation that owns 3,500,000 shares of the
Company's common stock. The standstill agreement limits the corporation to not
more than a 40% ownership of the Company. The standstill agreement expires in
June 1999.
The Company had sales to this corporation of approximately $67,000,
$1,473,000 and $381,000 in 1998, 1997 and 1996, respectively. As of June 30,
1998 and 1997, the Company had accounts receivable balances of $0 and
$423,000, respectively, related to these sales.
(8) 401(k) RETIREMENT PLAN
In fiscal year 1988, the Company established the Colorado MEDtech, Inc.
401(k) Retirement Plan, which is governed by Section 401(k) of the Internal
Revenue Code. Employees are eligible to enroll in the plan on January 1 and
July 1, any time after they become full time employees of the Company. The
Company makes discretionary contributions that vest over a three-year period.
Company contributions were $175,000, $100,000 and $75,000 for the years ended
June 30, 1998, 1997 and 1996, respectively.
(9) INVESTMENT IN LAND
In 1987, the Company acquired a parcel of land from a shareholder, officer
and former director of the Company. The parcel comprises 10.91 acres of
industrial zoned land located within the city boundaries of Louisville,
Colorado. The Company purchased the parcel for $631,750, the price established
by an independent appraisal. During 1992, the Company obtained an independent
appraisal for the parcel that indicated a decline in
F-22
the valuation of the property. The property is valued at the appraisal value
in the accompanying consolidated balance sheets. In connection with a
previous borrowing arrangement, the Company granted an option to purchase the
land at a purchase price of $640,968. This option expired, unexercised, in
March 1998. At June 30, 1998 the Company is holding the land as
available-for-sale.
(10) MAJOR CUSTOMERS
Four customers accounted for more than 10% of total sales and service
revenues for the years ended June 30, 1998, 1997 and 1996, as follows:
1998 1997 1996
---- ---- ----
Customer
--------
A 23% 0% 0%
B 22% 19% 2%
C 2% 14% 13%
D 0% 12% 27%
At June 30, 1998 and 1997, these four customers had accounts receivable due
to the Company as follows:
1998 1997
---- ----
A $ 1,662,000 $ -
B $ 1,996,000 $ 318,000
C $ 122,000 $ 996,000
D $ - $ 148,000
The loss of a significant customer could have a material, detrimental impact on
the Company's operations.
(11) SALE OF PRODUCT LINES
In June 1995, the Company entered into an agreement to sell the Company's
cardiopulmonary product lines to a competitor (the "Purchaser"). The
transaction closed on August 16, 1995. The sale transaction included all
inventories, intangible property rights, customer lists and tooling associated
with cardiopulmonary product lines as well as the trade name Cybermedic. In
addition, the Purchaser assumed the warranty and service obligations related
to these products. The Purchaser placed noncancellable orders with the
Company for additional manufactured units. All of the units related to this
contract were shipped to the Purchaser during fiscal year 1996.
F-23
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (In
thousands, except earnings per share data):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal Year Ended June 30, 1997
Net sales and service $ 5,288 $ 5,777 $ 8,483 $ 8,695
Gross profit $ 1,755 $ 2,043 $ 2,847 $ 3,142
Net income $ 453 $ 492 $ 672 $ 863
Earnings per share (as restated):
Basic $ .07 $ .07 $ .10 $ .11
Diluted $ .05 $ .06 $ .08 $ .09
Fiscal Year Ended June 30, 1998
Net sales and service $ 7,260 $12,183 $13,450 $14,407
Gross profit $ 2,639 $ 4,008 $ 4,796 $ 5,500
Net income $ 664 $ 943 $ 1,329 $ 1,556
Earnings per share:
Basic $ .07 $ .09 $ .12 $ .14
Diluted $ .06 $ .08 $ .11 $ .12
F-24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) The following financial statements and financial statement
schedules are filed as part of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the Years Ended June 30,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
All other schedules have been omitted because they were not applicable, not
required or the required information is shown in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K. No reports on Form 8-K were filed for the
three-month period ended June 30, 1998.
-19-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 24, 1998. COLORADO MEDTECH, INC.
By: /s/ John V. Atanasoff, II
------------------------------
John V. Atanasoff, II
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John V. Atanasoff, II Chief Executive Officer, September 24, 1998
- ---------------------------- President and Director
John V. Atanasoff, II (Principal Executive Officer)
/s/ Dean A. Leffingwell Director September 24, 1998
- ----------------------------
Dean A. Leffingwell
/s/ Ira M. Langenthal Director September 24, 1998
- ----------------------------
Ira M. Langenthal
/s/ Robert L. Sullivan Director September 24, 1998
- ----------------------------
Robert L. Sullivan
/s/ Clifford W. Mezey Director September 24, 1998
- ----------------------------
Clifford W. Mezey
/s/ Michael R. Barr Director September 24, 1998
- ----------------------------
Michael R. Barr
/s/ John E. Wolfe Director September 24, 1998
- ----------------------------
John E. Wolfe
/s/ Bruce L. Arfmann Chief Financial Officer September 24, 1998
- ---------------------------- (Principal Accounting Officer)
Bruce L. Arfmann
-20-
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
3.1 Articles of Incorporation; Complete Copy, as Amended. (A)
3.2 Bylaws, as Amended. (B)
4.2 Specimen of Common Stock Certificate. (C)
10.22 Promissory Notes payable to Lockett E. Wood and Deeds of
Trust with respect to Louisville, Colorado property acquisition. (D)
10.31 Colorado MEDtech, Inc. Stock Option Plan.
10.32 Employment Agreement between Colorado MEDtech, Inc. and
John V. Atanasoff, II. (E)
10.33 Standstill Agreement dated June 30, 1994 between Vencor, Inc.
and Colorado MEDtech, Inc. (F)
10.35 Employment Agreement between Colorado MEDtech, Inc. and
Bruce L. Arfmann (G)
10.37 Employment Agreement between Colorado MEDtech, Inc. and
Lockett E. Wood (G)
10.38 Extension of Employment Agreement between Colorado MEDtech, Inc.
and John V. Atanasoff, II (H)
10.39 Agreement and Plan of Reorganization among Colorado MEDtech, Inc.,
Novel Biomedical, Inc. and Jonathan Kagan (I)
10.40 Employment Agreement between Novel Biomedical, Inc. and
Jonathan Kagan (J)
10.41 Employment Agreement between Colorado MEDtech, Inc. and Lee Erb (K)
10.42 Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan as
Amended on November 21, 1997, Effective as of January 1, 1998 (L)
10.43 Asset Purchase Agreement by and among Colorado MEDtech, Inc.,
Erbtec Engineering, Inc., and Lee Erb, dated October 1, 1997 (M)
10.44 Loan Agreement, Commercial Security Agreement, and Promissory Note
dated October 30, 1997 between Colorado MEDtech, Inc. and Bank One,
Colorado, NA
21.1 Subsidiaries of Business Issuer
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule for the year ended June 30, 1998
(A) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
May 14, 1993.
(B) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on
May 17, 1983, with amendment filed as exhibit to the Company's Annual
Report on Form 10-K for the year ended October 31, 1984.
(C) Filed with Registration Statement (No. 2-83841-D) on Form S-18 on
May 17, 1983.
(D) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 30, 1987.
(E) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
June 21, 1993
(F) Filed as an exhibit to Schedule 13D Amendment No. 2 dated July 18,
1994 filed by Vencor, Inc.
(G) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1994.
(H) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1996.
(I) Filed as an exhibit to the Company's Current Report on Form 8-K,
dated February 28, 1997.
(J) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1997.
(K) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
(L) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997.
(M) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
October 1, 1997.