Exhibit 10.1
[LOGO]
Management Discussion and Analysis
2002 Annual Report
www.cedara.com
Management Discussion and Analysis
The following information should be read in conjunction with the Company's
audited Consolidated Financial Statements and the notes thereto. All financial
information is presented in Canadian dollars unless otherwise noted. All
references to a year refer to the fiscal year that ended June 30th of that year.
Overview of the Company
Cedara Software Corp. is an independent software company that provides
visualization technology currently to major healthcare Original Equipment
Manufacturers ("OEMs") and Value Added Resellers ("VARs"). The sophisticated
imaging capabilities of Cedara's software products are focused on improving the
quality of patient care through more accurate and productive diagnosis and
treatment.
Cedara develops and markets software for the three phases of clinical workflow:
diagnostic imaging, image management, and image guided therapy. Cedara's
software is embedded in healthcare medical devices offered by world leaders in
the healthcare industry.
Cedara generates revenue in three ways: by developing and licensing its software
products to major healthcare OEMs and VARs; through funded development of custom
software products for healthcare equipment manufacturers; and through service
and support provided to its customers.
At a time when healthcare providers are actively seeking more integrated
solutions, Cedara believes that it has many solutions to offer including the
most complete portfolio of capabilities and products of any independent
developer of medical visualization software.
Fiscal 2002 Business Highlights
Disposal of SNS
o Historically, Cedara has operated in two business segments - the
Imaging & Information Solutions business ("IIS" formerly, now
"continuing operations") and the Surgical Navigation Specialists
business ("SNS"). IIS develops and markets imaging software and related
services to OEMs and VARs. SNS developed and sold healthcare imaging
software, integrated with surgical hardware, to end-user hospitals in
the surgery market. On June 29, 2001, the Company adopted a formal plan
to dispose of its SNS business segment, and consequently the results of
SNS are reported as a discontinued operation in the Company's
consolidated financial statements.
o Effective August 14, 2001 the Company's subsidiary Surgical Navigation
Specialists Inc. ("SNS") obtained an order for protection under the
Companies' Creditors Arrangement Act ("CCAA"). In addition, SNS and its
subsidiaries reduced its workforce by 82 employees.
o In March 2002, the Company announced the sale of certain of SNS'
intellectual property to a third party for a total purchase price of
$2.7 million.
Board and Executive Appointments
o The Company announced the appointment of Fraser Sinclair as Chief
Financial Officer and Corporate Secretary on July 6, 2001.
o On October 25, 2001, the Company announced the appointment of Bernard
Gordon and Thomas Miller, of Analogic Corporation ("Analogic"), and
Arun Menawat of Cedara, to Cedara's Board of Directors. The Company
also announced the appointment of Arun Menawat as President and Chief
Operating Officer. Stepping down, after approximately five years of
service on Cedara's Board, were William Blundell, Walter Stapleton and
Eric Duff Scott. The appointment of Bernard Gordon and Thomas Miller
followed Analogic's September 2001 investment of $11.8 million in
exchange for a 19% interest in Cedara (on an after investment basis).
Analogic of Peabody, Massachusetts is a leading designer and
manufacturer of advanced health and security systems and subsystems
sold to OEMs comprising a healthcare customer base that largely
overlaps Cedara's.
o In April 2002, the Company announced that Ram Ramkumar, the President
and Chief Executive Officer of Inscape Corporation, and John Millerick,
the Senior Vice President, Chief Financial Officer and Treasurer of
Analogic Corporation, had been appointed to Cedara's Board of Directors
following the resignations of Paul Echenberg and Thomas Miller.
Operations
o The Company took major action to reduce its cost base. The payroll cost
at June 30, 2002 compared to June 30, 2001, including the impact of
discontinued operations, was lower by 44%.
o The Company re-negotiated a large-scale development contract,
contributing to an overall improvement of gross margin percentage to
75% in fiscal 2002 from 59% the year before. Software license revenue
in fiscal 2002 comprised 61% of total revenue compared to 47% in the
previous year and also contributed to the improvement of gross margin.
Liquidity and Capital Resources
o The Company repaid its debt outstanding to the vendors of Dicomit Dicom
Information Technologies Corp. ("Dicomit") of $8.3 million.
o On September 28, 2001, the Company completed a private placement of
4,000,000 common shares to Analogic Corporation at $2.96 per share for
proceeds of $11.8 million. Analogic held approximately 19% of the
issued and outstanding common shares of the Company after giving effect
to this transaction.
o On December 17, 2001 the Company announced that it had settled with
certain holders of promissory notes, which were exchangeable into
convertible subordinated debentures, with a corresponding principal
amount due five years from the date of issuance, bearing interest at 5%
and convertible into common shares of the Company at a conversion price
of $2.50 per share (the "Convertible Debentures"). Of the $7.1 million
promissory notes outstanding at the time, $3.5 million of promissory
notes were exchanged for 1,400,000 common shares of the Company in
December 2001.
o Also in December 2001, the Company announced that it had entered into a
settlement agreement with Carl Zeiss and its affiliates ("Zeiss") to
settle certain financial and other contractual obligations, and to
assure support for the SNS installed base. This settlement, together
with the $3.5 million settlement with promissory note holders, had the
effect of reducing the Company's net cash liabilities by approximately
$8.6 million.
o In January and February 2002, an additional $1.5 million of promissory
notes were settled via conversion to 600,000 common shares at a
conversion price of $2.50. Also, during the third quarter, an
additional $350,000 of promissory notes were settled by exchanging the
notes for Convertible Debentures as described above. Of the original
$7.1 million of promissory notes, these conversions brought the total
converted to common shares and convertible debentures to $5.35 million
as at March 31, 2002.
o The Company entered into new banking arrangements with National Bank of
Canada, which allows for a $9.0 million operating line, bearing
interest at prime plus 1/2% per annum. The revised banking arrangements
do not contain financial covenants. As part of the revised banking
arrangements, Analogic Corporation has guaranteed the Company's bank
operating facility by way of a letter of credit issued to the bank.
o On May 3, 2002, the Company completed a private placement of 580,461
common shares to Analogic Corporation at $2.35 per share for net
proceeds of $1.4 million. This brought Analogic's interest in Cedara
back to 19% on an after-investment basis. As part of Analogic's
original investment, Cedara agreed to grant Analogic pre-emptive rights
whereby Analogic has the right to maintain its 19% equity interest in
the event of certain issuances by Cedara of its securities.
o On May 14, 2002, the Company announced a private placement of
convertible debentures for approximately $1.1 million to Toyo
Corporation of Japan. The transaction included the purchase by Toyo of
an existing promissory note of $0.5 million, the exchange of that
promissory note for a $0.5 million Convertible Debenture and a new
debenture issue from treasury of approximately $1.1 million for a total
investment of approximately $1.6 million. Under the terms of the
financing, the Convertible Debentures bear interest of 5% per annum and
mature in five years. The Convertible Debentures can be converted into
common shares of the Company at a conversion price of $2.50 per share.
o On June 28, 2002, the Company announced that all of the remaining $1.25
million of promissory notes had been exchanged for Convertible
Debentures with a corresponding principal amount due five years from
the date of issuance bearing interest at 5% and convertible into common
shares at a conversion price of $2.50 per share.
Product Development
o The Company announced that its 3D Volume Rendering Software has been
optimized to take advantage of the power of the new Pentium(R) 4
processor to deliver advanced medical imaging visualization.
o In November 2001 at the Radiological Society of North America
Conference in Chicago, the Company launched Cedara(TM) OpenEyes(TM), an
advanced software platform that enables OEMs to bring their own imaging
applications to market with greater speed and flexibility.
Nasdaq Listing
o In January 2002, the Company had received a Nasdaq Staff Determination
indicating that the Company failed to comply with either the US$4.0
million net tangible assets or the US$10.0 million minimum
stockholders' equity requirements for continued listing on Nasdaq.
Following a February 2002 hearing in Washington before a Nasdaq
Listings Qualifications Panel at which Cedara executives made a
presentation, in March 2002, the Panel decided to continue Cedara's
Nasdaq listing but to transfer such listing from the Nasdaq National
Market to the Nasdaq Small Cap Market effective April 1, 2002.
Significant Events and Actions Subsequent to Year-end
o In August 2002, the Company announced the release of Cedara(TM)
I-Route(TM) teleradiology DICOM gateway that compresses and distributes
clinical studies to physicians at remote locations across
point-to-point connections, allowing these remote physicians to better
manage high volumes of medical images.
o Also in August 2002, the Company launched Cedara(TM) I-Acquire(TM), a
universal software application in which multiple digital detectors, CR
(computed radiography) scanners and X-ray generators can be integrated
into a powerful acquisition console, which improves ease of use and
productivity for busy technologists, as well as giving OEMs and system
integrators the freedom to choose and quickly package detectors,
scanners, and generators from different vendors into an assortment of
tailored solutions, thereby addressing a broader range of clinical
applications with less effort and faster time to market.
o On August 8, 2002, the Company announced that Abe Schwartz, the
President of Schwartz Technologies Inc., had been appointed to the
Company's Board of Directors following the resignation of William
Breukelman.
o In September 2002, the Board of Directors announced the appointment of
Abe Schwartz as Chief Executive Officer and Peter Cooper as Chairman of
the Board, following the resignation of Dr. Michael Greenberg.
o Subsequent to June 30, 2002, Analogic agreed to increase the letter of
credit that fully guarantees the Company's bank line by $3.0 million,
which, subject to bank approval, would increase the Company's available
borrowing capacity under the current operating line to $12 million.
Analogic also agreed to extend the expiry date of the letter of credit
to December 20, 2003. Along with the $3.0 million increase, Analogic
has agreed to make available an additional $2.0 million of financing if
required by the Company.
Forward-Looking Statements
Certain statements contained in the Annual Report, Consolidated Financial
Statements and Notes, and this Management Discussion and Analysis, constitute
forward-looking statements. These include statements about management's
expectations, beliefs, intentions or strategies for the future, which are
indicated by words such as "anticipate, intend, believe, estimate, forecast and
expect" and similar words. All forward-looking statements reflect management's
current views with respect to future events and are subject to certain risks and
uncertainties and assumptions that have been made. Important factors that could
cause actual results, performance or achievements to be materially different
from those expressed or implied by these forward-looking statements include:
o Adverse consequences of financial leverage,
o Ability to service debt,
o Continued acceptance of Cedara's products,
o Intense competition,
o Rapid technological change,
o Dependence on key personnel,
o Dependence on intellectual property rights,
o Risks relating to product defects and product liability,
o Risks related to international operations,
and other risks detailed from time to time in other continuous disclosure
filings of the Company. If one or more of these risks or uncertainties
materialize, or if assumptions underlying the forward-looking statements prove
incorrect, actual results could vary materially from those that are expressed or
implied by these forward-looking statements.
RESULTS OF OPERATIONS
For the year ended June 30, 2002 ("FY2002"), the Company recorded net income of
$1.5 million or $0.07 per share compared to a net loss of $67.8 million or $4.10
per share in fiscal 2001 ("FY2001") an improvement of $69.3 million.
The improvement reflects improved results from continuing operations which
recorded a loss of $3.6 million for FY2002 compared to a loss of $26.4 million
last year and income of $5.0 million from discontinued operations in FY2002
compared to a loss of $41.4 million FY2001. The Company's bi-weekly payroll
costs at June 2002 compared to June 2001, including the impact of discontinued
operations, were lower by 44%.
Results of Continuing Operations
For the year ended June 30, 2002, revenue was $45.5 million compared to $46.7
million in FY2001, a decrease of $1.2 million or 3%. The net loss from
continuing operations for FY2002 was $3.6 million or $0.17 per share compared to
a net loss of $26.4 million or $1.60 per share in the previous year.
Revenue
Revenue by Product Category
- -------------------------------- ------------ ----------- ------------ ----------- ------------------------------
Variance
Increase/(Decrease)
2002 % of Total 2001 % of Total $ %
- -------------------------------- ------------ ----------- ------------ ----------- ------------- ----------------
Software licenses 27.9 61% 22.1 47% 5.8 26%
Engineering services 15.3 34% 17.7 38% (2.4) (14%)
Services and other(1) 2.3 5% 6.9 15% (4.6) (67%)
- -------------------------------- ------------ ----------- ------------ ----------- ------------ -----------------
Total $45.5 100% $46.7 100% $(1.2) (3%)
- -------------------------------- ------------ ----------- ------------ ----------- ------------ -----------------
(1) Primarily Dicomit hardware systems revenue. Dicomit software revenue is included in software licenses.
For FY2002, software license revenue increased by $5.8 million or 26% to $27.9
million, offset by a decline in services and other revenue of $4.6 million or
67% and a decline in engineering services revenue of $2.4 million or 14%. The
increase in software license revenue is due to a combination of higher platform
software license revenue of $2.5 million, higher applications software license
revenue of $1.1 million, improved image management (Picture Archive and
Communication Systems or "PACS") revenue of $1.8 million and increased Dicomit
software license revenue of $0.4 million. The decline in engineering services
revenue resulted from the completion of a long-term engineering services
contract in Q3 of FY2002. The decline in services and other revenue is due to
our customers' shift from customized services and hardware solutions to higher
margin software products.
Revenue by Geographic Region
- -------------------------------- ------------ ----------- ------------ ----------- ------------------------------
Variance
Increase/
(Decrease)
2002 % of Total 2001 % of Total $ %
- -------------------------------- ------------ ----------- ------------ ----------- ------------- ----------------
United States 12.4 27% 17.7 38% (5.3) (30%)
Europe 10.1 22% 9.5 20% 0.6 6%
Asia 23.0 51% 19.5 42% 3.5 18%
- -------------------------------- ------------ ----------- ------------ ----------- ------------ -----------------
Total $45.5 100% $46.7 100% $(1.2) (3%)
- -------------------------------- ------------ ----------- ------------ ----------- ------------ -----------------
For FY2002, a decline in United States revenue of $5.3 million or 30% was
partially offset by increased revenues in Asia of $3.5 million or 18% and Europe
of $0.6 million or 6%. The decline in United States revenue is due primarily to
lower hardware systems sales to a major OEM partially offset by increased
software sales. Higher revenue in Europe was due primarily to the signing of
software license contracts with major OEM partners. Increased sales in Asia
reflect higher software license revenues associated with the completion and
delivery of software under a major long-term engineering services contract.
Gross Margin
Gross margin increased to $34.2 million or 75% of revenue in FY2002 compared to
$27.8 million or 59% of revenue in FY2001. The margin improvement in FY2002 is
due to an increased proportion of high-margin software license revenues and a
return to normal engineering services margins as a result of the renegotiation
of a large-scale development contract. Software license revenue comprised 61% of
FY2002 revenue compared to 47% of FY2001 revenue.
Operating Expenses
Total operating expenses for FY2002 were $36.1 million, a decrease of $13.8
million or 28% compared with the $49.9 million incurred in FY2001. The decline
in overall operating expenses reflects a combination of the Company's ongoing
cost reduction initiatives and a decrease in non-recurring charges, which were
incurred in FY2001. The components of the decrease in operating expenses are
outlined below.
Research and Development 2002 Change 2001 Change 2000
(In millions of dollars)
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Research and Development 12.1 -% 12.1 29% 9.4
As a percentage of total revenue 27% 26% 21%
Research and development costs for FY2002 of $12.1 million were equal to those
of last year. As a percentage of revenue, research and development represented
27% of revenue for FY2002 compared to 26% in FY2001. The Company continued to
invest in new software applications products such as I-RouteTM for
teleradiology, I-AcquireTM for digital radiography, the Company's new components
based OpenEyesTM platform, and in significantly enhancing the Company's existing
line of PACS products.
Sales and Marketing
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Sales and Marketing 5.1 (26%) 6.8 3% 6.6
As a percentage of total revenue 11% 15% 15%
Sales and marketing costs for FY2002 decreased by $1.7 million or 26% to $5.1
million compared to $6.8 million in FY2001. As a percentage of revenue, sales
and marketing represented 11% of revenue for FY2002 compared to 15% in FY2001.
The $1.7 million decrease in FY2002 is due primarily to the Company's ongoing
cost reduction initiatives including the reduction of marketing expenses.
General and Administration
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
General and Administration 10.3 (20%) 12.9 95% 6.6
As a percentage of total revenue 23% 28% 15%
General and administration expenses in FY2002 were $10.3 million, a decrease of
$2.6 million or 20% compared to the $12.9 million incurred in FY2001. The
general and administration expenses for FY2001 of $12.9 million have been
reduced by the allocation of costs to the discontinued SNS business of $1.6
million. Excluding the impact of the $1.6 million allocation to the SNS
business, general and administration expenses in FY2001 were $14.5 million. In
terms of actual cash outlay, the $10.3 million of general and administration
expenses incurred in FY2002 represents a reduction of $4.2 million or 29% over
the actual cash outlay of $14.5 million in FY2001.
Severance Costs
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Severance Costs 0.9 (1.1) 2.0 1.2 0.8
Between July 2001 and June 2002, including the impact of discontinued
operations, the Company has reduced its overall payroll costs by 44%. The $0.9
million of severance costs in FY2002 reflects the costs associated with ongoing
reorganization of the business.
Other charges
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Operating leases 1.2 (0.1) 1.3 0.1 1.2
Bad debt expense 0.2 (2.6) 2.8 2.4 0.4
Amortization of deferred financing costs - (1.0) 1.0 1.0 -
Provision for employee share purchase
and other loans receivable 0.9 (0.1) 1.0 1.0 -
Other (0.2) (1.5) 1.3 1.3 -
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
2.1 (5.3) 7.4 5.8 1.6
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Operating leases represents the costs associated with leasing computer
equipment. The bad debt expense in FY2001 includes $2.4 million related to three
customers. Financing costs represents expenses associated with the issuance of
$7.1 million of promissory notes in FY2001. The provision for employee share
purchase and other loans receivable reflects the write down of outstanding
employee loans in FY2002 and FY2001. The amount of $0.9 million was provided for
in FY2002, being the amount of loans outstanding to the former Chief Executive
Officer. Settlement of these loans is currently being negotiated by the Board
and the former CEO and the Board deemed it prudent to make this provision. Other
expenses of $0.2 million in FY2002 is comprised mainly of realized and
unrealized foreign exchange gains associated with US dollar items. In FY2001,
other expenses of $1.3 million included a foreign exchange loss of $0.9 million
resulting from the settlement of US dollar foreign exchange contracts.
Amortization of deferred compensation
(In millions of dollars) 2002 Change 2001 Change 2000
- -------------------------------------------------- -------- ------------ ------------ ------------ --------------
Amortization of deferred compensation - (4.1) 4.1 3.7 0.4
In May 2000, the Company purchased 91.5% of the outstanding common shares of
Dicomit it did not already own. Of the total purchase consideration, $4.5
million was contingent upon the continued employment of two of the former
shareholders of Dicomit to June 30, 2001. This portion of the consideration has
been recorded as deferred compensation and has been amortized on a straight-line
basis over the period to June 30, 2001.
Depreciation and amortization
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------- ---------- ------------ ---------------
Amortization of intangibles 1.7 (0.1) 1.8 1.6 0.2
Depreciation and amortization 3.8 1.0 2.8 0.7 2.1
- ----------------------------------------------- ----------- ------------- ---------- ------------ ---------------
5.5 0.9 4.6 2.3 2.3
- ----------------------------------------------- ----------- ------------- ---------- ------------ ---------------
Depreciation and amortization increased by $0.9 million to $5.5 million in
FY2002 compared to $4.6 million recorded in FY2001. The increase is due
primarily to the increase in the Company's capital assets base as a result of
FY2001 capital expenditures, offset by the reclassification of certain
intangibles to goodwill as discussed in note 14 to the Consolidated Financial
Statements.
Other Income and Expenses
Interest income (expense), net
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------- ---------- ------------ ---------------
Interest income (expense), net (1.7) (0.7) (1.0) (1.4) 0.4
Interest charges for FY2002 were $1.7 million, an increase of $0.7 million
compared to FY2001. The increase in interest expense during FY2002 reflects
costs associated with the financing of accounts receivable, the issuance of
promissory notes and the reduction of the interest income producing marketable
securities.
Loss on dissolution of joint venture
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Loss on dissolution of joint venture - (1.0) 1.0 1.0 -
The loss on dissolution of joint venture in FY2001 represents the realization of
historical foreign exchange rate adjustments due to the dissolution of the
Company's Japanese joint venture together with operating losses of the joint
venture for the year ended June 30, 2001.
Amortization of goodwill
(In millions of dollars) 2002 Change 2001 Change 2000
- ----------------------------------------------- ----------- ------------ ------------ ------------ --------------
Amortization of goodwill - (2.3) 2.3 2.0 0.3
The amortization of goodwill in FY2001 reflects the acquisition on May 26, 2000,
of 91.5% of the outstanding shares of Dicomit, bringing the Company's interest
to 100%. As at June 30, 2002, goodwill associated with the Company's investment
in Dicomit amounts to $9.1 million. As of July 1, 2001, the Company adopted the
new goodwill accounting pronouncement which requires that goodwill is no longer
amortized unless an impairment exists. This adjustment is not applied
retroactively (see note 14 to the audited Consolidated Financial Statements).
Discontinued Operations
On June 29, 2001, the Company adopted a formal plan to dispose of its Surgical
Navigation Specialists business segment.
Consequently, the results of operations of SNS have been accounted for as
discontinued operations in the consolidated financial statements. During FY2002,
the discontinued SNS operations recorded a gain of $5.0 million compared to a
loss of $41.4 million in FY2001. The gain from discontinued SNS operations in
FY2002 reflects a gain of $1.2 million resulting from the settlement agreement
with Carl Zeiss, $1.1 million due to the de-consolidation of two SNS European
subsidiaries resulting from court liquidation proceedings for the Company's SNS
France and SNS International subsidiaries, and $2.7 on the sale of substantially
all of SNS' intellectual property. Further details on discontinued operations
can be found in note 7 to the Consolidated Financial Statements.
Liquidity and Capital Resources
The Company's consolidated balance sheets as at June 30, 2002 and 2001 are
summarized as follows:
Consolidated Balance Sheet
- ------------------------------------------------------------------------------------------
(In millions of dollars) 2002 2001
- ------------------------------------------------------------------------------------------
Current assets of continuing operations 13.6 14.5
Less: Current portion of Dicomit notes payable - (8.3)
Promissory notes - (7.1)
Other current liabilities of continuing operations (9.0) (19.6)
- ------------------------------------------------------------------------------------------
Working capital (deficiency) of continuing operations 4.6 (20.5)
Working capital (deficiency) of discontinued operations (4.0) (8.9)
- ------------------------------------------------------------------------------------------
Working capital (deficiency) 0.6 (29.4)
Capital assets 3.0 6.2
Other assets - 0.9
Deferred development costs 0.9 1.4
Intangible assets 1.9 4.7
Goodwill 9.1 7.8
Non-current assets of discontinued operations - 0.1
- ------------------------------------------------------------------------------------------
15.5 (8.3)
- ------------------------------------------------------------------------------------------
Represented by:
Deferred revenue 0.9 0.7
Convertible debentures 2.8 -
Non-current Liabilities of discontinued operations 0.3 -
- ------------------------------------------------------------------------------------------
4.0 0.7
Shareholders' equity (deficiency) 11.5 (9.0)
- ------------------------------------------------------------------------------------------
15.5 (8.3)
- ------------------------------------------------------------------------------------------
As of June 30, 2002, the Company held current assets from continuing operations
of $13.6 million principally in the form of accounts receivable of $11.7
million, restricted cash of $0.2 million, inventory of $0.7 million and prepaid
expenses and other assets of $0.9 million.
Short-term investments of $3.0 million as at June 30, 2001 consisted of cash,
which was required to be held on deposit under the terms of the Company's
operating facility with National Bank of Canada ("NBC"). Subsequent to June 30,
2001, the cash held on deposit was applied against the balance of the bank
operating facility, and following the September 28, 2001 private placement by
Analogic Corporation (referred to below), the outstanding bank balance of $3.4
million was fully paid off.
On September 28, 2001, the Company announced that it had completed a private
placement of 4,000,000 common shares to Analogic Corporation for net proceeds of
approximately $11.0 million, after providing for cash fees of approximately $0.8
million. In February 2002, the Company announced that it had completed a private
placement of 266,666 common shares. These common shares were issued in lieu of
the above-noted cash fees payable to a Canadian investment dealer in connection
with the Analogic private placement. The use of proceeds from this transaction
were as follows:
Private Placement
- -------------------------------------------------------------------------------------------
(In millions of dollars) Use of proceeds
- -------------------------------------------------------------------------------------------
Repayment of Dicomit Notes payable due September 30, 2001 4.7
Repayment of bank operating facility 3.4
General working capital purposes 3.7
- -------------------------------------------------------------------------------------------
Net private placement proceeds 11.8
- -------------------------------------------------------------------------------------------
In addition to the equity investment, Analogic agreed to provide a guarantee to
support the Company's bank facility. On January 7, 2002, the Company entered
into new banking arrangements with NBC, which allows for a $9.0 million
operating line, bearing interest at prime plus 1/2% per annum. The revised
banking arrangements do not contain financial covenants. As part of the revised
banking arrangements, Analogic has guaranteed the Company's bank operating
facility by way of a letter of credit issued to NBC. Subsequent to June 30,
2002, Analogic agreed to increase the Letter of Credit, that fully guarantees
the Company's bank line, by $3.0 million, which, subject to bank approval, would
increase the Company's available borrowing capacity under the current operating
line to $12 million. Analogic also agreed to extend the expiry date of the
Letter of Credit to December 20, 2003. Along with the $3.0 million increase,
Analogic has agreed to make available an additional $2.0 million of financing if
required by the Company.
As part of a software license purchase agreement signed August 29, 2001, the
Company completed a private placement of 200,000 common shares on November 23,
2001 to Cerner Corporation at US$0.75 per share for proceeds of $0.2 million.
As of June 30, 2002, the Company's principal sources of liquidity consist of the
bank credit facility of $9.0 million and accounts receivable of $11.7 million.
The accounts receivable of $11.7 million as of June 30, 2002, represent days
sales outstanding ("DSO") of approximately 93 days compared to DSO of
approximately 73 days as of June 30, 2001.
The Company's cash requirements in the short-term relate to the ongoing funding
of its operations and the servicing of its debt.
On June 28, 2001, the Company signed an agreement with the Dicomit vendors to
postpone certain payments of principal and interest. As part of the June 28,
2001 postponement agreement, the Company waived the right to repay any portion
of the principal outstanding by the issuance of common shares. The Company paid
$8.3 million during FY2002 to extinguish the Dicomit notes payable.
On December 22, 2000, the Company issued $6.1 million dollars of promissory
notes due on or before May 22, 2001, bearing interest at 5% due at maturity. On
January 19, 2001, the Company issued a further $1.0 million of promissory notes,
bringing the total outstanding to $7.1 million of promissory notes (the
"Notes").
The Notes were exchangeable at their maturity into convertible debentures (the
"Convertible Debentures") of the Company of a corresponding principal amount due
five years from their date of issuance. The Convertible Debentures, subordinate
to present and future senior indebtedness of the Company, are convertible into
common shares of the Company at the option of the holder at a conversion price
of $2.50 per share.
Under the agreement with the note-holders, the Company was required to file a
prospectus with respect of the issuance of the Convertible Debentures by May 22,
2001, failing which a penalty of $0.2 million became payable. The Company
received a receipt for a preliminary prospectus on April 26, 2001, but was not
able, despite its efforts, to resolve all of the comments of the Ontario
Securities Commission by May 22, 2001. On May 22, 2001, the Company did not
exchange the Notes into convertible debentures and did not pay the prospectus
penalty of $0.2 million, nor interest due on the Notes of $0.3 million. As a
result, in August 2001, the Company received a letter from legal counsel
representing certain Note-holders indicating an event of default and demanding
repayment in full. On December 17, 2001, the Company announced that it had
settled with certain note holders representing $3.5 million of the $7.1 million
of promissory notes outstanding. The $3.5 million of promissory notes were
exchanged for 1,400,000 common shares in December 2001.
In January and February 2002, an additional $1.5 million of promissory notes
were settled via conversion to 600,000 shares at a conversion price of $2.50.
Also, in January 2002, an additional $350,000 of promissory notes were settled
by exchanging the notes for Convertible Debentures with a corresponding
principal amount due five years from the date of issuance, bearing interest at
5% and convertible into common shares at a conversion price of $2.50 per share.
In May 2002, all of the remaining $1.75 million of promissory notes were
exchanged for Convertible Debentures with a corresponding principal amount due
five years from the date of issuance bearing interest at 5% and convertible into
common shares at a conversion price of $2.50 per share. Also in May, the Company
issued a further $1.1 million of unsecured convertible debentures with the same
terms and conditions to Toyo Corporation of Japan.
On December 14, 2001, the Company issued a US$1.0 million (Cdn.$1.6 million)
short-term promissory note bearing interest at prime to Analogic, which was
settled in January 2002.
The current liabilities of discontinued operations as at June 30, 2001 of $15.8
million included amounts due to Carl Zeiss, Inc. ("Zeiss") totaling $9.3 million
in connection with the Company's acquisition of Zeiss' interest in SNS. The
current assets of discontinued operations included $3.6 million of accounts
receivable from Zeiss. On December 28, 2001, the Company announced that it had
reached a settlement agreement with Zeiss. The agreement, which offsets the
receivables owing from Zeiss with amounts owed to Zeiss and reduces the
Company's net liabilities to Zeiss, provides for a cash settlement of US$1.5
million to Zeiss, paid out over the course of 18 months commencing April 30,
2002, and for the Company providing US$1.5 million of software licenses and
engineering services to Zeiss at no charge. As of June 30, 2002 the Company had
paid US$0.3 million of the US$1.5 million cash portion of the liability. The
Company has not been requested to supply any goods or services in settlement of
the non-cash liability to date. As detailed in note 8 to the audited
Consolidated Financial Statements, the Company has also provided price
protection on the value of certain warrants up to US$5.50 per share commencing
August 1, 2003 to July 31, 2005 to a maximum value of US$2.0 million.
The Company will continue to seek other sources of financing to further
strengthen its working capital position.
Cash Flows
Continuing operations generated cash of $5.5 million in FY2002 compared to $2.1
million in FY2001. Cash generated in the discontinued SNS operations was $0.6
million for FY2002 compared to cash consumed of $12.5 million in FY2001.
Operating activities
Continuing operating activities used cash of $3.4 million in FY2002 compared to
$4.8 million in FY2001. The $3.4 million in cash usage in FY2002 reflects cash
generated from operations before changes in working capital of $2.9 million
offset by a $6.3 million increase in working capital requirements. The increase
in working capital in FY2002 is due primarily to reduced accounts payable of
$4.6 million and increased accounts receivable of $2.2 million.
In FY2001, the cash consumed by operations before working capital changes was
$12.8 million offset partially by lower working capital of $8.1 million. The
reduced working capital requirement of $8.1 million in FY2001 is due primarily
to an increase in accounts payable and other accrued liabilities of $3.3 million
reflecting a lengthening of the Company's payment cycle caused by the strain on
the Company's cash resources. Accounts receivable decreased by $2.3 million in
FY2001. In addition, inventory levels were down by $2.0 million in FY2001 due to
a decrease in work-in-process and prepaid expenses and other assets declined by
$1.9 million. These positive cash flow variances were offset partially by
reduced deferred revenue of $1.4 million.
Financing activities
Financing activities for FY2002 produced cash of $6.4 million compared to $4.2
million in FY2001. Financing activities for FY2002 reflect the September 28,
2001 private placement of 4,000,000 common shares to Analogic Corporation at
$2.96 per share for net proceeds of $11.8 million, (after taking into account
the issuance of 266,666 common shares to a Canadian investment dealer), the
November 23, 2001 private placement to Cerner Corporation of 200,000 common
shares at US$0.75 per share for proceeds of $0.2 million, the May 3, 2002
private placement of 580,461 common shares to Analogic at $2.35 per share for
net proceeds of $1.4 million, the exercise of $0.2 million of stock options and
the issuance of $1.1 million of unsecured convertible debentures to Toyo
Corporation of Japan, offset partially by the repayment of Dicomit notes payable
of $8.3 million.
Financing activities in FY2001 reflect the issuance of $7.1 million of
promissory notes offset partially by a $2.9 million repayment of Dicomit notes
payable.
Investing activities
Investing activities produced cash of $2.5 million in FY2002 compared to
providing cash of $3.1 million in FY2001. The FY2002 investing activities of
$2.5 million reflects primarily the draw down of cash deposits of $3.0 million
which were applied against bank indebtedness offset partially by the increase in
restricted cash of $0.2 million, which represents part of the proceeds from the
sale of the SNS intellectual property, together with additions to capital and
intangible assets of $0.3 million. The source of cash from investing activities
in FY2001 of $3.1 million is due primarily to a reduction in marketable
securities of $8.0 million offset partially by the increase in short-term
investments of $3.0 million held against the Company's outstanding bank
indebtedness and additions to capital assets and intangible assets of $1.6
million.
The Company's bank indebtedness as at June 30, 2002 stood at $4.9 million
compared to bank indebtedness of $11.1 million at the same time last year
representing an improvement of $6.2 million and is due to the above mentioned
items.
Outlook
The Company anticipates that the healthcare imaging software market will
continue to grow over the next several years, and management is committed to
enhancing Cedara's position in this field. At the same time, it is difficult to
forecast the Company's sales with precision due to the nature of the Company's
large, long-term sales contracts, and long sales cycles. In addition, slower
economic conditions have resulted in a cyclical build-up of software inventory
in the customer pipeline, as their sales of end user equipment to hospitals and
clinics around the world have slowed. As a result, Fiscal 2003 revenues are
likely to be negatively impacted. Cedara will seek to maximize existing revenue
opportunities, and build a future of sustainable, more predictable revenue
through identifying new projects and opportunities. The Company will continue to
monitor and control its cost structure in an effort to achieve cash positive
operations.