Colorado Medtech, Inc. Business Information, Profile, and History

Company Perspectives:

Colorado MEDtech, Inc. is a medical device outsourcing and critical components company, providing advanced engineering, scientific and medical expertise for the research and development, design and manufacturing needs of its clients. This encompasses designing new medical devices and instruments, applying advanced technologies to improve existing products and providing contract manufacturing services. Clients include major medical device, biotechnology, and pharmaceutical companies. The Company also manufactures and markets proprietary critical components, including high-performance frequency amplifiers for MRI systems, high-voltage x-ray generator sub-systems for computed tomography (CT) scanners, specialized medical imaging accessories and minimally invasive surgical equipment.

History of Colorado Me Dtech, Inc.

Colorado MEDtech, Inc. (CMED) is a leading full-service provider of advanced medical products and comprehensive outsourcing services. CMED operates three core operating units, including the RELA division, the Imaging and Power Systems division (IPS), and CIVCO Medical Instruments Co., Inc, a wholly owned subsidiary of Colorado MEDtech. The RELA division provides custom product development and outsourcing services, specializing in the design and development of diagnostic, biotechnology, and therapeutic medical devices, medical software systems, and medical device connectivity. RELA also provides manufacturing services for electronic and electromechanical medical devices and instrumentation systems assembly for major manufacturers. The IPS division designs, develops, and produces imaging system hardware and software, including advanced magnetic resonance imaging (MRI) systems and application software, high-performance radio frequency amplifiers for MRI systems and high-voltage x-ray generator subsystems for computed tomography scanners. The CIVCO subsidiary designs, develops, manufactures, and distributes specialized medical accessories and supplies for imaging equipment and for minimally invasive surgical equipment.

Founding of Company

Colorado MEDtech was founded on October 19, 1992 when Cybermedic Inc., a publicly traded company, and RELA Inc., a privately held company, signed a definitive agreement to merge. Under the agreement, Cybermedic, the parent company in the merger, adopted the trade name "Colorado MEDtech." The agreement called for approximately three million shares of Cybermedic common stock to be issued to RELA's shareholders, resulting in five million Cybermedic shares outstanding after the merger. The company's stock would continue to be traded on the NASDAQ system under Cybermedic's symbol CMED. The agreement also stipulated that Cybermedic and RELA would operate as separate divisions of CMED. Cybermedic developed, manufactured, and marketed non-invasive cardiopulmonary diagnostic instruments, and RELA specialized in the design and development of medical products and software systems. Management anticipated the merger to improve the financial strength of the two companies and to produce operating efficiencies that would make CMED a leader in the health care equipment industry.

Following the merger, the annualized sales of both companies totaled $15 million with combined assets of more than $7 million and $2 million in shareholders' equity. Dean Leffingwell, founder of RELA and newly appointed chairman of the board, announced the appointment of John Greenbaum, formerly of Eli Lily Corp. as CMED's president and chief executive officer. Greenbaum also was to continue in his position as president of RELA. Lockett Wood, founder of Cybermedic, became president of CMED's Cybermedic's division.

Facing a New Health Care Climate in the Early 1990s

With the merger and the changing climate of the health care industry under President Clinton's proposed health-reform plan, CMED confronted new opportunities along with the challenge of maintaining its markets. Clinton's health-care reform plan prompted enormous national and Congressional debate on the future of the country's health care industry. The President's proposal had also ignited the introduction of numerous other proposals that offered alternative insurance reforms, financial schemes, and payment options. In this uncertain environment, CMED's combined capabilities appeared to position it well as a medical technology management company with a proven product line, centralized manufacturing, and improved research and development resources. The challenge not only was to ensure that the merger proceeded smoothly, but also to steer the company toward profitability in a changing marketplace that appeared to be headed toward more managed patient care.

In June 1993, John V. Atanasoff II was appointed as the company's president, CEO and chairman. Atanasoff's experience had been in various segments of the high technology industry, including as president and CEO of Cybernetics, which developed and manufactured specialized equipment for the electronics and computer graphics markets. Under Atanasoff's direction, CMED down-sized operations to eliminate redundancies and effect administrative changes. Atanasoff's vision included designing a leaner company that focused on core business operations in diagnostics and device and pharmaceutical manufacturing. By doing so, the company could better pursue opportunities in the medical instruments industry, which then represented approximately $68 billion and was growing at a rate of about 8 percent per year. In 1993, the U.S. market alone totaled $31 billion.

CMED was also committed to developing new product technologies for the health care industry, including non-invasive cardiac output monitoring. In 1993, current technology required the use of an invasive catheter that could result in life-threatening complications. As a result, the company began developing and manufacturing non-invasive technologies through its RELA division. The company also looked to capitalize on new market opportunities in managed care given the rapidly changing nature of the health care industry from traditional care providers, such as hospitals and physicians, to managed care. CMED's greatest challenge was to establish plans and profits that would see it through the dramatic changes underway in the health care industry and help it grow from a small high technology company to a medium-sized product-oriented growth company.

Mid-1990s: A Time of Growth

Atanasoff's plans for profitability began to pay off as the company announced results for its year ended June 30, 1994. Sales increased to $20.6 million compared to $17.5 million in 1993. In addition, the company reported net income of $800,000, or 15 cents per share, compared to a net loss of $1.1 million, or 25 cents per share in the pervious year. Atanasoff had achieved his initial goal of making CMED's core businesses profitable, but to keep the momentum going the company had to begin focusing on investments in product development and business expansion through acquisitions and licensing of synergistic products and services.

By December 1994, the company was continuing to make important progress in expanding its base businesses and pursuing new market opportunities. The company had increased its revenue by 18 percent, retired its bank debt, and secured a significant line of credit for future product development. In addition, CMED established an alliance with Eric Jaeger Co., a German company, to distribute that company's respiratory care products in the United States. This alliance also provided a European distribution channel for CMED's future products. The company developed a new product for the respiratory care market, the Heat-Moisture-Exchange Filter, otherwise known as VenShield or the "artificial nose," which received Food and Drug Administration (FDA) approval for production. CMED developed the filter jointly with Vencor Inc., a Louisville, Kentucky Fortune 500 operator of acute-care hospitals and nursing homes, which not only provided investment funds, but also insight into the needs of the managed care and home care markets. Vencor had taken an initial interest in CMED on December 6, 1993 when it purchased 500,000 shares or about 9 percent of the company's common stock. In 1994, Vencor purchased another 13 percent, increasing its interest in CMED to 22 percent, making it the company's largest shareholder. The price of the shares, which were purchased directly from the company, was not disclosed. The deal with Vencor, a rapidly growing $300 million company, provided CMED with enough capital to produce high-usage disposable respiratory filtration products at a lower cost than was currently available on the market.

Based on these successes, the company planned to take advantage of its research and manufacturing capabilities and to continue to develop and produce mass numbers of low-end, disposable diagnostic and therapeutic products such as the VenShield. CMED also entered another market niche including the production of diagnostic equipment for food inspection utilizing DNA sampling. As a result, two years later in April 1996, the company signed a $1.3 million contract to supply its new "RiboPrinter" product--a testing instrument for food-borne bacteria--to Wilmington, Delaware-based Qualicon LLC, a venture of DuPont and TBK of Japan. The RiboPrinter was designed to detect E. Coli bacteria using DNA analysis. The product had the advantage of employing a much faster detection system than other current laboratory processes, which was important to food manufacturers. With the production of this microbial or bacteria detector, the company began a significant shift from being a design/development company to becoming a products-oriented firm. Although a relatively small firm with only 160 employees, by 1994 the company seemed to have found its competitive niche. It devoted fully half of its 52,000 square-foot facility to research, development, and administration and the other half to manufacturing.

In March 1995, CMED announced that it had won a $3 million contract from New Jersey-based Ohmeda Inc, a large medical company with about $800 million a year in revenue and a subsidiary of the $5.2 billion industrial conglomerate BOC Group based in the United Kingdom. The agreement called for CMED to produce heart monitors and to help Ohmeda develop a system for managing infusions.

On August 16, 1995, the company sold its money-losing cardiopulmonary product lines to Warren E. Collins, Inc. The sale included all inventories, intangible property rights, customer lists, and tooling associated with the cardiopulmonary product lines as well as the trade name Cybermedic. In addition, despite its repeated successes, in September 1995 the company announced that it was recalling its bacterial filter product VenShield and halting production until tests and improvements could be made. In June, the company had shipped initial orders of the filter to several hospitals, which first identified the undisclosed problems. Nevertheless, because the filter was in the early stages of production, it represented less than 3 percent of the company's revenues.

In 1997, the company experienced several important developments. The producer of diagnostic and therapeutic medical devices and software saw its sales jump dramatically. Revenues rose 74 percent and an increase in earnings per share of 38 percent pushed CMED to the number one position among publicly held health care, biotechnology, and pharmaceutical companies in the Denver Post/Bloomberg 100. Overall the company ranked 15th. The company attributed its growth to a significant expanding market in diagnostic systems, minimally invasive catheters and software.

Strong sales, however, did not account for all of the growth. In February 1997, the company completed a $1.9 million acquisition of Novel Biomedical Inc. of Plymouth, Minnesota. The acquisition was completed with cash, stock, and stock options. Novel Biomedical specialized in developing, designing, and producing disposable medical devices, primarily catheters used in angioplasty and other procedures. In October, CMED also acquired the operating assets of Erbtec Engineering Inc. for $5,350,000 cash and issuance of 88,708 of common stock, resulting in a total purchase value of about $6,100,000. Erbtec produced advanced radio frequency subsystems used in MRI systems. By the end of 1997, CMED's impressive growth led it to be moved from Nasdaq's Small Cap exchange to its National Market System. With these two acquisitions, CMED had increased its workforce to 400 in four facilities.

The company's rapid growth and success was recognized in October 1998 when Forbes magazine selected CMED as one of America's best 200 companies. The company's RELA subsidiary also signed a five-year manufacturing agreement to develop an HIV and Hepatitis C blood detection system for Gen-Probe Inc. of San Diego, California. The system, called TIGRIS, was intended for use in American blood banks. Gen-Probe initially approached CMED in 1996 with the idea of developing a DNA probe to detect HIV in blood. The company's engineers under the RELA division then designed a prototype and built several systems that underwent rigorous testing before determining its efficacy. As a result of this success, Gen-Probe entered into a five-year contract valued at $20 million to have CMED produce the TIGRIS system under the Gen-Probe brand name. At the same time, the company was producing a new proprietary product called FreshAir, designed to convert air from the atmosphere into high-grade oxygen in order to assist seriously ill patients dependent on oxygen.

In addition, in April 1998 CMED signed a licensing agreement with TAVA Technologies for TAVA's Plant Y2KOne products for year 2000 compliance. Under the licensing agreement, CMED would modify TAVA's product software to tailor it specifically to the needs of the health care market. The modified system provided a combination of tools and services to support health care institutions' efforts to conform with year 2000 compliance for their biomedical devices. To provide these services and software system, CMED formed a new subsidiary operation under BioMed Y2, Inc. By the end of 1998, BioMed had already received orders totaling more than $1.5 million from health care providers to assist them in evaluating medical devices for Year 2000 compliance.

On November 6, 1998, Vencor announced that it had sold its entire stake in CMED for $22 million to repay debt. The sale included 3 million shares at $6.38 each to 25 institutional accounts, including CMED, which repurchased 655,000 of its own shares. Three days later on November 9, the company announced that net income for the first quarter rose to $1,3185,905, an increase of 99 percent compared to $663,709 in the same quarter in the previous year. Sales totaled $13,408,421, an increase of 85 percent, compared to $7,260,230 in the same period in 1997. In addition, in December the company's board of directors announced that it had adopted a Shareholder Rights Plan. The rights plan was aimed at providing protection against coercive or hostile takeover tactics, and to ensure that anyone seeking to take over the company would first need to negotiate with the company's board of directors.

In 1999, the company achieved several strategic developments. In February, it acquired selected operating assets of Eclipse Automation Corporation, which became CMED's Automation division. In August, CMED acquired certain operating assets of Creos Technologies LLC, a developer and producer of high voltage x-ray generator systems for computed tomography scanners. CMED also announced that it was expanding its injection molding capability through the acquisition of CIVCO Medical Instruments Co. Inc. of Kalona, Iowa, a producer of ultrasound imaging equipment and minimally invasive surgical products. CMED completed the acquisition on November 15, 1999 by exchanging 736,324 of its own shares for all the outstanding shares of CIVCO and related estate. The company operated CIVCO as a subsidiary of CMED.

Late 1990s and Beyond: Corporate Troubles and Restructuring

By the end of 1999, however, the company began experiencing difficulties. Shares in the company plummeted when the company announced that earnings for the second quarter ending December 31 would not meet expectations. Despite winning accolades in business magazines and local newspapers, its shares dropped 40% to $8. CEO John Atanasoff said the company was having difficulty meeting development deadlines for several clients. To maintain good relations and compensate clients for production delays, Atanasoff offered discounts totaling just under $1 million. Another problem stemmed from higher than expected costs of consolidating three manufacturing plants into one in Longmont, Colorado. This downturn came after the company had recorded 26 straight profitable quarters, 50 percent annual sales growth over the previous three years, and had increased its workforce to 600. A major product development problem involved software code that had to be rewritten. Nevertheless, on December 23, 1999, Ken Trbovich, an analyst with Bigelow & Co., a Denver investment bank, said in the Denver Post that the company's units that made "x-ray machines and power systems for x-ray machines were in fine shape." He stated that the problems were in the RELA subsidiary, which produced equipment under contract to other companies. "The difficulties there," he stated, "are swamping the positive developments that are taking place in other parts of the business." Trbovich nevertheless criticized the company for not addressing the problems quickly and noted that it was adversely affecting the company from a fundamental earnings perspective.

The company's troubles continued into 2000 when analysts criticized the medical technology firm's management team for withholding information about a backlog of contracts and slower than expected growth in the company's engineering consulting division. By mid-2000, a new executive team had taken over. John Atanasoff resigned as chief executive officer and was replaced by Stephen Onody. Greg Gould was promoted to chief financial officer, and Bill Wood, product development and technology officer and a key leader in the company's early years, returned to the firm. Upon taking over the new management discovered quality control problems and immediately sought not only to address quality issues, but also to invest heavily in staff, consultants, and other improvements.

More trouble came in October when the company's weakened financial position invited a takeover attempt by Anthony Fant, CEO of Minneapolis-based HEI Inc. and self-described turnaround artist. On August 31, 2000, in a filing with the SEC, Fant disclosed that he had been acquiring CMED stock since early May and had accumulated 1,214,300 shares, or about 9.9 percent of the total shares outstanding. On September 11, Fant sent a letter to CMED's board of directors proposing a transaction in which HEI would acquire the company for HEI common stock having a value of $12 per CMED share. HEI's offer limited the number of HRI shares that would be issued to 8.5 million. On the same day that he made this proposal to the company, Fant filed suit against the company and its board in U.S. District Court alleging that certain provisions of the company's bylaws and its shareholders' rights plan violated the rights of shareholders to hold a special meeting to elect directors. Fant said he intended to demand a special meeting of shareholders to replace the company's board of directors. In a letter to shareholders, however, CEO Stephen Onody stated that the company's new management team had initiated a renewed focus on core business operations, which had already helped the company expand contracts with major corporate clients, including General Electric Medical Systems and Hitachi Medical Group, and land new contracts for development of medical imaging machines during the first quarter ended September 30. Part of this restructuring plan had included selling CMED's Catheter and Disposables Technology, Inc. subsidiary in April and acquiring certain operating assets of the ultrasound accessories and supplies business of ATL Ultrasound for $4,384,000. With the acquisition of ATL's imaging assets, CMED had formed a new Imaging and Power Systems division. Because of these developments, CMED's management successfully resisted Fant's efforts to put his offer to a vote by investors. As a result, in October Fant announced that he would no longer pursue his acquisition offer and dismissed the lawsuit.

On January 25, 2001, the company received more bad news when the Food and Drug Administration (FDA) received a letter warning CMED that certain areas of its Longmont medical device manufacturing plant was not compliant with federal quality standards. According to the company's general counsel, Peter Jensen, the FDA warning dealt primarily with administrative processes and did not stem from product defects. Despite the company's hope for a quick resolution, it was not until nine months later in October when the company received FDA clearance allowing the Longmont facility to resume manufacturing operations. The company announced that it had spent $2 million to correct the problems, which adversely affected revenues at a cost of approximately the same amount.

During 2001, the company also continued to restructure operations to focus on its core markets of medical technology, software services, and medical imaging products and services. As a result of this effort, CMED phased out two business divisions, CMED Automation and BioMed Y2K, Inc. In addition, the company integrated its CMED Manufacturing division into RELA. As a result of these developments, the company organized its core operations around three primary operating divisions, including RELA, Imaging and Power Systems, and CIVCO.

As a result of this restructuring and the resolution of the FDA problem, the company believed that it could return to profitability. Nevertheless, for fiscal year 2001 revenue had increased just 4 percent to $77.2 million from $74 million in fiscal year 2000. The deficiencies sited by the FDA had clearly adversely affected both product development and manufacturing outsource revenue. With resolution of the FDA issue, the company could return to the manufacture and distribution of medical devices. This development appeared to bode well for a company that, even during its difficult times, continued to increase substantially its investment in research and development to improve or produce new products and technology.

Principal Subsidiaries: CIVCO Medical Instruments Co., Inc.

Principal Divisions: RELA; Imaging and Power Systems.

Principal Competitors: Plexus Corporation; Relys International, Inc., Analogic Corporation, ACT Manufacturing, Inc.; KMC Systems, Inc.; UMM Electronics Inc.; Spartorn Corporation.

Chronology

• Key Dates:
• 1977: Precursor company, Cybermedic Inc., Inc. in Colorado.
• 1992: Cybermedic Inc. merges with Rela Inc. to form Colorado MEDtech, Inc.
• 1993: Colorado MEDtech sells 500,000 shares or 9 percent of company stock to Vencor, Inc.
• 1994: Company sells additional 13 percent of company stock to Vencor, Inc., increasing Vencor's ownership interest to 22%.
• 1995: Company sells its cardiopulmonary product lines to Warren E. Collins, Inc.
• 1997: Company acquires Novel Biomedical, Co. and the operating assets of Erbtec Engineering, Inc.
• 1998: Company acquires the operating assets of Eclipse Automation Corporation.
• 1999: Company acquires the assets of Creos Technologies LLC and CIVCO Medical Instruments Co. Inc.
• 2000: Company resists hostile takeover attempt.