UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 40-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004 Commission File Number 000-19865
________________________
CEDARA SOFTWARE CORP.
(Exact name of Registrant as specified in its charter)
ONTARIO 7372 NOT APPLICABLE
(Province or other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification No..)
of Incorporation Classification
or Organization) Code Number)
6509 AIRPORT ROAD
MISSISSAUGA, ONTARIO
CANADA, L4V 1S7
(905) 672-2100
(Address and telephone number of Registrants' principal executive offices)
CT CORPORATION SYSTEM
111 EIGHTH AVE.
NEW YORK, NY 10011
(212) 894-8940
(Name, address (including zip code) and telephone
number (including area code) of agent for service in
the United States)
__________________________________
Securities registered or to be registered pursuant to Section
12(b) of the Act.
NONE
Securities registered or to be registered pursuant to Section
12(g) of the Act.
COMMON SHARES, NO PAR VALUE
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
NONE
For annual reports, indicate by check mark the information
filed with this Form:
[X] Annual information form [X] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
this annual report.
THE REGISTRANT HAD 31,540,267 COMMON SHARES OUTSTANDING AS
AT JUNE 30, 2004.
Indicate by check mark whether the Registrant by filing the
information contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the filing number
assigned to the registrant in connection with such Rule.
Yes _____ 82- _____ No ___X___
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ____
DOCUMENTS FILED UNDER COVER OF THIS FORM
----------------------------------------
Document No. 1: Annual Information Form for the year ended June 30, 2004,
dated October 31, 2004.
Document No. 2: Audited Consolidated Financial Statements for the fiscal
year ended June 30, 2004, prepared in accordance with
Canadian generally accepted accounting principles,
including a reconciliation to United States generally
accepted accounting principles, prepared in accordance with
Item 17 of Form 20-F.
Document No. 3: Management's Discussion and Analysis of Financial Condition
and Results of Operations for the fiscal year ended June
30, 2004.
DOCUMENT NO. 1
CEDARA
Software with Vision
CEDARA SOFTWARE CORP.
2004 ANNUAL INFORMATION FORM
October 31st, 2004
TABLE OF CONTENTS
1. CORPORATE STRUCTURE.........................................................1
1.1 The Company......................................................1
1.2 Subsidiaries.....................................................1
2. GENERAL DEVELOPMENT OF THE BUSINESS.........................................2
2.1 Company Profile..................................................2
2.2 History of the Company and Major Developments of the
Last Three Years.................................................2
3. DESCRIPTION OF THE BUSINESS.................................................8
3.1 Overview of the Business of the Company..........................8
3.2 Principal Products and Services..................................8
3.3 Product Distribution and Markets................................14
3.4 Revenue Distribution............................................15
3.5 Patents and Other Intellectual Property.........................15
3.6 Seasonality.....................................................16
3.7 Significant Contractual Relationships...........................16
3.8 Facilities......................................................17
3.9 Competition.....................................................17
3.10 Research and Development........................................18
3.11 Employees.......................................................19
3.12 International Operations........................................19
4. SELECTED CONSOLIDATED FINANCIAL INFORMATION................................19
4.1 Annual Financial Information - Last Three Years.................19
4.2 Quarterly Financial Information - Last Eight Quarters...........20
4.3 Dividend Policy.................................................21
5. MANAGEMENT'S DISCUSSION AND ANALYSIS.......................................21
6. MARKET FOR SECURITIES......................................................21
7. DIRECTORS AND OFFICERS.....................................................21
8. RISK FACTORS...............................................................21
9. ADDITIONAL INFORMATION.....................................................25
1. CORPORATE STRUCTURE
1.1 The Company
Cedara Software Corp. ("Cedara" or the "Company") was originally incorporated
as 502378 Ontario Limited under the Business Corporations Act (Ontario)
("OBCA") by Articles of Incorporation dated January 19, 1982.
On August 18, 1982, the Company changed its name to "I.S.G. Technologies Inc."
("ISG").
On February 19, 1986, the Company filed articles of amendment to change the
authorized number of directors; to delete the objects for which it was
incorporated; to change its authorized capital to an unlimited number of common
shares; to eliminate all restrictions on the allotment, issue, or transfer of
shares; and to delete a provision in the articles providing that the Company
may purchase any of its issued common shares.
Following the approval of shareholders obtained at the December 17, 1999 Annual
and Special Meeting of Shareholders, the Company changed its name to "Cedara
Software Corp." effective December 21, 1999.
Effective July 1, 2002, Cedara amalgamated under the OBCA with DICOMIT Dicom
Information Technologies Corp., the then wholly owned subsidiary of Cedara. The
amalgamated company adopted the name of the Company as well as the Company's
articles and bylaws.
Effective July 1, 2004, Cedara amalgamated under the OBCA with Surgical
Navigation Specialists, Inc., the then wholly owned subsidiary of Cedara. The
amalgamated company adopted the name of the Company as well as the Company's
articles and bylaws.
The head office and principal office of Cedara is located at 6509 Airport Road,
Mississauga, Ontario, Canada, L4V 1S7. The Company's fiscal year end is June 30.
1.2 Subsidiaries
The following table sets forth the information on the subsidiaries of Cedara as
of June 30, 2004:
- --------------------------------------- --------------- -----------------------
Name Jurisdiction of Percentage of Voting
Incorporation Securities Beneficially
or Governance Owned or Over Which
Control or Direction is
Exercised by Cedara
- ---------------------------------------- --------------- -----------------------
Surgical Navigation Specialists, Inc.(1) Ontario, Canada 100%
- ---------------------------------------- --------------- -----------------------
Cedara Software Limited (2) Ontario, Canada 100%
- ---------------------------------------- --------------- -----------------------
Cedara Software (USA) Ltd. Delaware, USA 100%
- ---------------------------------------- --------------- -----------------------
Cedara Software (Shanghai) Co. Ltd. Shanghai, China 100%
- ---------------------------------------- --------------- -----------------------
(1) Effective July 1, 2004, the Company amalgamated with Surgical Navigation
Specialists, Inc., a wholly owned subsidiary.
(2) Currently inactive.
2. GENERAL DEVELOPMENT OF THE BUSINESS
2.1 Company Profile
Established in 1982, Cedara Software Corp., is a leading independent provider
of medical technologies used worldwide by key medical device manufacturers,
healthcare information technology companies, hospitals, imaging centres, and
medical clinics.
Cedara's Technologies
Many of Cedara's innovative medical technologies are sold through major
healthcare device manufacturers and information technology providers, including
GE, Siemens, Philips, Toshiba, Hitachi and Cerner.
Through the years Cedara's software has been deployed in thousands of hospitals
and clinics worldwide, including prestigious facilities such as Johns Hopkins
University School of Medicine; Shands Hospital, University of Florida;
University of California, Los Angeles; Lund University in Sweden; and
University Hospital of Geneva, Switzerland.
Cedara is unique in that its advanced medical imaging technologies are used in
all aspects of clinical workflow including:
o The operator consoles of many medical imaging devices
o Picture Archiving and Communications Systems (PACS)
o Sophisticated clinical applications that further analyze and manipulate
images
o The use of imaging in computer-assisted therapy
Cedara is also unique in another way: it has expertise and technologies that
span all the major digital imaging modalities and related subspecialties,
including magnetic resonance imaging (MRI), computed tomography (CT), positron
emission tomography (PET), nuclear medicine, digital X-ray, ultrasound,
mammography, cardiology, angiography, and fluoroscopy.
The Company generates revenue in three ways:
o by developing and licensing its software technology and products;
o through development of custom software for healthcare equipment
manufacturers; and
o through service and support provided to its customers.
2.2 History of the Company and Major Developments of the Last Three Years
Board and Management Changes
During the first half of fiscal 2003, the Company underwent a change of
management, resulting in the appointment of Mr. Abe Schwartz as Chief Executive
Officer and Mr. Peter Cooper as Chairman of the Board of Directors, following
the resignation of Dr. Michael Greenberg as Chief Executive Officer in
September 2002.
During November 2002, the Company announced that Mr. Arun Menawat, then
President and Chief Operating Officer, would not be standing for re-election as
a director at the Company's Annual General Meeting held on November 26, 2002
and that he was relinquishing his position as an officer of the Company.
-2-
During the second quarter ended December 31, 2002, the Company eliminated a
layer of management - three vice presidents and two senior directors - as part
of the plan to streamline operations and increase efficiencies.
In November 2003, Dr. Michael Greenberg paid to the Company $0.9 million in
full and final settlement of his loan outstanding.
On April 28, 2004, the Company announced the appointment of Brian Pedlar as
Chief Financial Officer and Corporate Secretary of the Company following the
resignation of Fraser Sinclair as Chief Financial Officer and Corporate
Secretary.
On October 20, 2004, the Company announced the election of Dr. Myrna Francis as
a new member to its Board of Directors at the Company's Annual and Special
Meeting held in Toronto on October 18, 2004.
Financing and Banking
In September 2001, the Company completed a private placement of 4,000,000
common shares to Analogic Corporation ("Analogic") at $2.96 per share for
proceeds of $11.8 million. Analogic also provided a guarantee to support the
Company's bank facility with National Bank of Canada (the "Bank") by way of a
letter of credit.
On November 20, 2001, the Company completed a private placement of 200,000
common shares of the Company to Cerner Corporation at $1.19 per common share.
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.
On January 7, 2002, the Company entered into new banking arrangements with the
Bank, which allowed for a $9.0 million operating line bearing interest at prime
plus 1/2% per annum. As part of the revised banking arrangements, Analogic
guaranteed the Company's operating line facility by way of a letter of credit
and the Company entered into an indemnity and security agreement with Analogic.
The operating line was secured by a general security agreement made by the
Company in favour of the Bank, which security would be assigned to Analogic if
the Bank drew on the letter of credit.
On February 28, 2002, the Company completed a private placement of 266,666
common shares to a Canadian investment dealer. The common shares were issued in
lieu of cash fees payable for services rendered to the Company.
On May 3, 2002, the Company completed a private placement of 580,461 common
shares to Analogic at $2.35 per share, for net proceeds of approximately $1.4
million.
On May 14, 2002, the Company announced a private placement of convertible
debentures for approximately $1.1 million to Toyo Corporation of Japan.
In May 2002, the Company completed a private placement of 25,000 common shares
to Standard Securities Capital Corporation. The common shares were issued in
lieu of cash fees payable for services rendered to the Company.
On June 28, 2002, the Company announced that all of the remaining $2.1 million
of Notes had been exchanged by noteholders for $2.1 million in principal amount
of convertible debentures due five years from the date of issuance bearing
interest at 5% per annum and convertible into common shares of the Company at a
conversion price of $2.50 per common share.
On August 27, 2002, Analogic agreed to provide an additional guarantee in
support of the Company's operating line of credit, by increasing its supporting
letter of credit by up to $3.0 million, on an as required basis, in increments
of $1.0 million. Analogic also agreed to extend the expiry date of the
-3-
letter of credit to December 20, 2003. Along with the $3.0 million increase,
Analogic also agreed to make available up to $2.0 million of additional
financial support to the Company.
On October 18, 2002, Company issued to Analogic a promissory note in the
principal amount of US$0.65 million bearing interest at the prime rate of
interest (based on the rate set by the Sovereign Bank of Boston). On the same
day, the parties amended their existing indemnity and security agreement, dated
December 14, 2001, to extend its application to the newly issued promissory
note. The note was repaid on January 16, 2003.
On December 22, 2003, the Company announced that $1.0 million of outstanding 5%
unsecured subordinated convertible debentures were converted into common shares
of the Company at $2.50 per share. This resulted in the issuance of 400,000
common shares of the Company.
Effective January 15, 2004, the Company exercised its right to convert all of
the remaining $2.2 million of convertible debentures outstanding into common
shares of the Company. This resulted in the issuance of 867,120 common shares
of the Company.
On March 25, 2004, the Company successfully completed its offering of 5,000,000
common shares at a price of $10.00 per share representing an aggregate amount
of issue of $50 million (net proceeds of $47.2 million). The offering was made
through a syndicate of underwriters.
In April 2004, the letter of credit issued by Analogic in support of the
Company's $14.0 million bank line was cancelled. The security agreement between
Analogic and the Bank, which allowed the transfer of the Bank's security
position to Analogic, should the letter of credit be drawn upon, was also
cancelled. The Company and the Bank are currently renegotiating the structure
of the Company's borrowing facility, which may result in an increase or
reduction in the availability of funds under that facility.
On October 8, 2004 the Company entered into a $29.8 million credit facility
with Royal Bank of Canada ("RBC"). Under the credit facility, RBC provided a
term facility of up to $22.5 million to allow the Company to finance part of
the acquisition of eMed Technologies Corporation ("eMed"). The credit facility
also includes a revolving credit facility, a corporate VISA facility and a
foreign exchange credit facility in an aggregate amount of up to $7.3 million
for purposes of financing Cedara's general operating requirements, office and
travel expenses, and facilitating foreign exchange transactions.
At the same time, the Company's operating line of credit of $14.0 million with
the National Bank of Canada was cancelled.
NASDAQ Update
On January 9, 2002, the Company received a NASDAQ Staff Determination for
failure to comply with the minimum shareholders' equity requirements for
continued listing on NASDAQ. Effective April 1, 2002, the NASDAQ Panel
transferred the Company's listing from the NASDAQ National Market to the NASDAQ
SmallCap Market.
In March 2003, the Company received a NASDAQ Staff Determination for failure to
comply with either the US$1.00 minimum bid price requirement or the US$2.5
million minimum shareholders' equity requirement for continued listing on the
NASDAQ SmallCap Market. On July 3, 2003, the Company's common shares were
de-listed from NASDAQ and became eligible for trading on the OTC Bulletin Board
under the symbol "CDSWF". The Company's listing on the Toronto Stock Exchange
was unaffected by NASDAQ's decision.
In September 2004, NASDAQ approved the Company's application to list its
securities on the NASDAQ National Market. As a result, trading of the Company's
common shares commenced on the NASDAQ National Market on September 14, 2004
under the symbol "CDSW".
-4-
Surgical Navigation Specialists Inc.
On August 2001, Surgical Navigation Specialists, Inc. ("SNS") obtained an Order
for protection from its creditors under the Companies' Creditors Arrangement
Act (CCAA) from the Ontario Superior Court of Justice. The Order had the effect
of staying the current obligations of SNS to its creditors until a Plan of
Arrangement was approved by the court. The Plan of Arrangement was approved,
and SNS settled all outstanding obligations with creditors. On October 19,
2001, the Grenoble (France) commercial court opened a procedure of compulsory
liquidation against SNS Surgical Navigation Specialists (France) SAS ("SNS
France"), a subsidiary of SNS. By virtue of this judgment, a liquidator was
appointed who was in charge of collecting the assets of the company and paying
its debts. On November 2, 2001, SNS Surgical Navigation Specialists
International GmbH ("SNS International"), another subsidiary of SNS, submitted
a petition for insolvency to the Amstgericht Aalen (Germany). The Amstgericht
Aalen appointed an insolvency administrator on November 6, 2001. SNN, Surgical
Navigation Network Europe GmbH was wound down through orderly liquidation. By
May 2003, all SNS subsidiaries had been liquidated.
On December 10, 2001, the Company entered into minutes of settlement with Carl
Zeiss, Inc. to offset all amounts owing between Zeiss entities, SNS and other
Cedara entities and to defer and reduce the balance owing to Zeiss entities.
The revised obligation of the Cedara entities was to pay cash of US $1.5
million over 18 months commencing April 2002 and ending in September 2003, and
for Cedara to provide US$1.5 million in software licences and/or services to
Zeiss for the period from December 10, 2001 until December 2004.
In March 2002, SNS completed the sale of certain of its intellectual property
assets to a third party for a total purchase price of $2.7 million. Proceeds of
the sale were distributed to creditors of SNS pursuant to the Plan of
Arrangement.
By June 2004, the Zeiss entities exercised all the warrants which were issued
to them by the Company in connection with the acquisition by the Company of all
the issued and outstanding common shares of SNS in November 2000, and received
in aggregate 363,636 common shares of the Company.
Effective July 1, 2004, Cedara amalgamated with SNS under the OBCA. The
amalgamated company adopted Cedara's name, articles and bylaws.
Operations
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.
On July 19, 2002, the Company formally dissolved Cedara Software USA Corp., a
Delaware subsidiary. Prior to being dissolved this subsidiary was inactive.
In August 2002, the Company announced the release of Cedara(TM) I-Route(TM), a
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.
Also in August 2002, the Company launched Cedara(TM) I-Acquire(TM) , a
universal software application in which multiple digital detectors,
computed radiography ("CR") 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 original equipment
manufacturers and system integrators the freedom to choose and quickly
package detectors, scanners, and generators from different vendors
-5-
into an assortment of tailored solutions, thereby addressing a broader range of
clinical applications with less effort and faster time to market.
In January 2003, Cedara announced Cedara 3D Baby Explorer software which is an
application that adds 3D fetal imaging to any existing Ultrasound system,
allowing expectant parents, during scheduled ultrasound examinations, to view
and record 3D images months before a baby's arrival.
In March 2003, the Company launched Cedara Vivace, a suite of 3D visualization
software plug-in components for examining images acquired from computed
tomography and magnetic resonance imaging scanners, allowing advanced 3D
visualization and use of diagnostic tools that are easily plugged into imaging
workstations already installed in the field, or into new medical imaging
devices.
In July 2003, the Company announced Cedara OrthoWorks, a desktop application
and web server solution for orthopedic surgeons that allows the surgeon to
prepare for surgery whether working in the hospital, at home or elsewhere with
instant access to digital patient images, surgical planning aids, measurement
tools and a library of digital prosthetic templates.
In September 2003, the Company launched Cedara I-Reach(TM) 3.0, a new PACS
web-based viewer, that significantly advances the current capabilities of PACS
viewers by providing fast access to images through the use of the latest
compression techniques, while maintaining high image quality and provides
complete seamless integration with hospital PACS and hospital information
systems ("HIS") and radiology information systems ("RIS").
In September 2003, the Company announced that it had signed an agreement valued
at $4.2 million with Philips Medical Systems to supply certain of its medical
imaging technologies and related support services for application by Philips in
its MR (Magnetic Resonance) systems.
In November 2003, the Company signed an agreement with Cerner worth $7.1
million to supply certain of its medical imaging technologies and related
support services.
The Company presented its latest healthcare imaging product enhancements and
features at the 2003 Radiological Society of North America ("RSNA") Conference
in Chicago. Cedara showcased its extensive product portfolio of new
technologies which encompasses all aspects of clinical workflow from image
acquisition to sophisticated image processing and surgery.
In December 2003, the Company launched a new Technology Partnership Program
pursuant to which the Company provides support and assistance to technology
partners, such as hospitals, research institutions, medical universities,
startup companies, doctors and inventors, by providing them access to the
Company's research laboratory, marketing department and global sales channel.
On February 24, 2004, the Company announced that two of its key products,
Cedara I-Softview(TM) and Cedara I-Acquire Video(TM) excelled in the annual IHE
(Integrating the Healthcare Environment) Connectathon event sponsored by
Healthcare Information and Management Systems Society ("HIMSS") and RSNA.
In March 2004, the Company signed an agreement with Siemens Medical Solutions
worth $6.7 million to supply certain of its medical imaging technologies.
In March 2004, the Company announced that it signed a major agreement with
Aloka Co. Ltd. of Tokyo Japan, to supply certain of its medical imaging
technologies and services to Aloka. The agreement was valued at a minimum of
$3.1 million.
In April 2004, the Company signed an agreement with Hitachi Medical Corporation
to supply certain of its medical imaging technologies and services to Hitachi.
The agreement was valued at a minimum of $6.1 million.
-6-
The Company presented its latest healthcare imaging products and technologies
at the 2004 European Congress of Radiology ("ECR").
In May 2004, Cedara presented its latest web imaging solutions at the 2004
Society for Computer Applications in Radiology (SCAR) 21st annual meeting in
Vancouver.
In May 2004, the Company announced that it has received U.S. Food and Drug
Administration (FDA) 510(k) clearance for Cedara I-ReadMammo(TM) a new
mammography reading workstation for diagnosis and screening.
In May 2004, the Company entered into a cooperative sales, marketing and
support agreement with Fischer Imaging Corporation ("Fischer") to integrate a
customized version of Cedara's new I-ReadMammo(TM) workstation software with
Fischer's SenoScan(R) digital mammography scanning system.
In June 2004, Cedara announced a strategic partnership with Medipattern
Corporation. Under the terms of the partnership agreement, Cedara will be the
exclusive global channel for Medipattern's breast ultrasound computer aided
diagnosis (CAD) and detection technology.
China Initiative
In November 2002, the Company announced several initiatives associated with its
entrance into the medical imaging market in China, including funding from the
Canadian International Development Agency, the signing of a cooperation
agreement with the Hong Kong Polytechnic University to deploy PACS, and the
signing of a partnership agreement with the largest HIS company in China.
Since November 2002, the Company entered into arrangements with a number of
companies in China, including Beijing WanDong Medical Equipment Co., Landwind
Industrial Co. Ltd. and Shan Dong XinHua Medical, to distribute the Company's
digital X-Ray, PACS and 3D imaging applications to the Chinese market.
In October 2003, the Company signed a distribution agreement with Shanghai
Medical Equipment Works (SMEW), one of the largest medical equipment companies
in China. This agreement allowed Cedara to broaden distribution of X-ray
acquisition console software and PACS.
On May 31, 2004, the Company announced that it has opened an office in Shanghai
to better serve its existing customers and to pursue new business opportunities
in China.
Acquisition of eMed Technologies Corporation
On September 14, 2004, the Company announced that it had entered into a
definitive agreement pursuant to which it would acquire all of the issued and
outstanding shares of eMed of Burlington, Massachusetts, a privately-held
provider of PACS and web-based medical imaging radiology solutions. The
transaction closed on October 8, 2004 with the Company acquiring all of eMed's
shares for cash consideration of US$48.0 million (approximately C$62.0
million). On closing, eMed's balance sheet included cash of approximately
US$19.0 million and no debt. The Company financed the net cash disbursement of
approximately US$29.0 million to complete the transaction with approximately
US$14.5 million from its own cash reserves and approximately US$14.5 million
from its new credit facility with RBC. The results of eMed's operations will be
consolidated in the Company's financial statements starting with the quarter
ending December 31, 2004.
-7-
3. DESCRIPTION OF THE BUSINESS
3.1 Overview of the Business of the Company
Established in 1982, Cedara Software Corp. is a leading independent provider of
medical technologies used worldwide by key medical device manufacturers,
healthcare information technology companies, hospitals, imaging centres, and
medical clinics.
Cedara's Technologies
Many of Cedara's innovative medical technologies are sold through major
healthcare device manufacturers and information technology providers, including
GE, Siemens, Philips, Toshiba, Hitachi and Cerner.
Through the years the Company's software has been deployed in thousands of
hospitals and clinics worldwide, including prestigious facilities such as Johns
Hopkins University School of Medicine; Shands Hospital, University of Florida;
University of California, Los Angeles; Lund University in Sweden; and
University Hospital of Geneva, Switzerland.
The Company is unique in that its advanced medical imaging technologies are
used in all aspects of clinical workflow including:
o The operator consoles of many medical imaging devices
o Picture Archiving and Communications Systems (PACS)
o Sophisticated clinical applications that further analyze and
manipulate images
o The use of imaging in computer-assisted therapy
The Company is also unique in another way: it has expertise and technologies
that span all the major digital imaging modalities and related subspecialties,
including magnetic resonance imaging (MRI), computed tomography (CT), positron
emission tomography (PET), nuclear medicine, digital X-ray, ultrasound,
mammography, cardiology, angiography, and fluoroscopy.
The Company generates revenue in three ways:
o by developing and licensing its software technology and products;
o through development of custom software for healthcare equipment
manufacturers; and
o through service and support provided to its customers.
As with many software companies, the Company is reliant on individual
transactions that can be material in any given quarter. If the Company fails to
enter into contracts of this nature in any quarter, the financial results of
the Company could be materially adversely impacted. Even if such transactions
are entered into, there is no guarantee or assurance that these transactions
will be re-occurring. In addition, the quarterly revenue and earnings of the
Company can fluctuate materially between quarters, principally due to the
timing of annual license contract renewals. There is no guarantee or assurance
that such renewals will occur.
The Company anticipates that the healthcare imaging software market will
continue to grow over the next several years. 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. To help
mitigate the Company's reliance on large, long-term sales contracts, the Company
has taken steps to add a new sales channel directly to hospitals, imaging
centres and radiology groups to complement its OEM channel. Additionally, on
October 8, 2004, the Company completed the acquisition of eMed, a
-8-
privately-held provider of PACS and web-based medical imaging radiology
solutions. Now a wholly-owned subsidiary of Cedara Software Corp., eMed will
immediately be a complementary addition to the Company. eMed's sizable
installed base of hospitals and imaging centres across the United States will
provide an opportunity for the eMed sales force to promote Cedara's clinical
applications and image management technologies. At the same time, Cedara will
use its extensive global channel to promote eMed solutions worldwide. The
Company expects that the acquisition will provide an opportunity to capture
greater market share and develop better product capabilities by leveraging the
strengths of two leading solution providers in the medical information
management market. The Company intends to continue to maximize existing revenue
opportunities, and to build a future of sustainable, more predictable revenue
through identifying new projects and opportunities. The Company intends to
continue to monitor and control its cost structure in an effort to maintain
cash positive operations.
3.2 Principal Products and Services
The Company believes it has the most diverse product and service offering of
any independent provider of medical imaging software. The Company's medical
imaging solutions are used in all aspects of clinical workflow including the
capture of patient digital images, the sharing and archiving of images,
sophisticated tools to analyze and manipulate images, and the use of imaging in
surgery. The Company is unique in that it has expertise and technologies that
span all the major digital imaging modalities including angiography, CT,
echo-cardiology, digital X-ray, fluoroscopy, mammography, MRI, nuclear
medicine, PET, and ultrasound. The Company's software is deployed in hospitals
and clinics worldwide - approximately 28,000 medical imaging systems and
approximately 6,400 Picture Archiving and Communications System ("PACS")
workstations have been licensed to date.
In a clinical environment, medical images are created, viewed, used to diagnose
illnesses, stored, communicated and used in the treatment of diseases. Each
modality uses differing technology to acquire images and has unique needs in
viewing images, diagnosing illnesses with images, as well as in treating these
diseases with the aid of images. The Company has developed a number of advanced
technologies, products and services that are utilized in all of these areas.
Imaging Platform
- ----------------
Software development can be accelerated by building applications on a software
platform consisting of libraries and tools. In 1991, the Company developed a
software imaging platform, called Imaging Application Platform(R) ("IAP"),
which, over the past 12 years, has been used by the Company to develop imaging
technologies and products for sale to Original Equipment Manufacturers ("OEMs")
and Value Added Resellers ("VARs"), as well as licensed to these customers as a
development platform for their development of custom applications.
Imaging Application Platform (IAP)
IAP, the middleware or `glue' between applications, provides a complete
software development environment with technology and capabilities for creating
advanced high-performance medical imaging applications. IAP is one of the most
widely used medical imaging toolkits available, with a proven track record in
all the major imaging modalities and clinical applications.
All of the Company's major OEM partners and virtually all of its engineering
service clients directly or indirectly use IAP in business critical
applications. In fact, the platform is embedded in nearly one-third of MRI
systems sold annually, and more than 80% of all PET-CT systems installed in the
United States.
-9-
Cedara OpenEyes(TM)
The Company's most advanced imaging software platform, called OpenEyes, is a
powerful and flexible best practices development platform that enables the
rapid creation of medical applications. Its programming model represents a
paradigm shift from previous technologies, completely insulating clients from
the complexities of deep code development by providing a single uniform set of
controls and development interfaces.
OpenEyes packages connectivity, visualization and printing services in a
flexible and transparent architecture that can be deployed across a wide
spectrum of application environments - from small "one-off" projects to complex
web solution services.
Picture Archiving and Communications Systems (PACS)
- ---------------------------------------------------
PACS is a digital system that facilitates the diagnostic review of patient data
and images, including the reporting, consultation, and archiving of information
to short- or long-term storage devices. PACS allows communication of patient
information using local or wide area networks or public communications
services.
As an electronic substitute for film, PACS is a crucial component in moving
toward a paperless healthcare environment. PACS gives rise to better sharing of
patient information, faster report retrieval, reduced X-ray retakes, and
better, more efficient image storage. PACS also makes it possible to compare
and analyze digital images and realize substantial cost savings.
The Company offers a full spectrum PACS solution that can easily be tailored to
the needs of different size hospitals.
Enterprise PACS
For large hospital networks with multiple campuses or caseloads exceeding
30,000 per year, Cedara's enterprise PACS exchanges images from any modality
across an entire hospital network, to anywhere critical diagnostic information
is needed, while easily scaling to work with smaller hospital departments.
Modality PACS
Cedara's modality PACS, also referred to as Mini-PACS, facilitates
cost-effective entry into a filmless environment if a hospital's case volume is
less than 30,000 per year. Hospitals can start with one modality, adding a
small archive server, display stations and other modalities as required by
their caseload and demands from other departments.
Entry Level PACS
Cedara's entry-level PACS is ideal for hospitals and clinics with smaller
caseloads that still want the ability to scale to a modality or enterprise PACS
should their volumes increase over time. The entry-level system provides
softcopy reporting in a low maintenance environment.
The Company licenses these products to OEMs and VARs as full solutions and
individually as products to complement the existing portfolio of customers'
PACS offerings. The Company also offers PACS solutions for specific modalities,
such as OrthoWorks(TM), a family of products that can be used individually with
an existing PACS or together as a complete orthopedic, web-enabled package.
Image Acquisition Consoles
Cedara develops image acquisition console software for hardware companies who
need a workstation to drive the capture of images from imaging devices, such as
X-ray or CT scanners.
-10-
Cedara's I-Acquire(TM) line of products for system integrators, X-ray and OEMs
offer universal image capture software for X-ray-related modalities and tools
for rapidly developing CT and MRI console applications. This universal software
application allows multiple digital detectors, computed radiography (CR)
scanners and X-ray generators to be accessed by a common acquisition console
that enables X-ray equipment manufacturers and system integrators to select and
quickly package detectors, scanners and generators from a variety of different
vendors.
The Cedara I-Acquire(TM) family consists of these specialized packages:
Cedara I-Acquire/DR(TM)
A digital radiography (DR) acquisition console application that integrates with
medical systems to simplify technologists' workflow and improve their
productivity with high-quality imaging, tools for image manipulation, and
quality control (QC).
Cedara I-Acquire/CR(TM)
A CR acquisition console that enables CR equipment manufacturers and system
integrators to create competitive CR acquisition systems with powerful workflow
and image processing capabilities.
Cedara I-Acquire/FD(TM)
A film scanning console application that converts vast film libraries to
digital to allow hospitals and smaller medical clinics to eliminate the cost of
maintaining film. This application may also be used in combination with
existing X-ray film-based environments to integrate traditional X-ray rooms
into digital PACS environments.
Cedara I-Acquire MG(TM)
A mammography scanning console application that optimizes hospital workflow and
enables OEMs and system integrators to create competitive digital mammography
systems with powerful workflow and image processing capabilities.
Cedara I-Acquire for MR and CT(TM)
An application that equips MRI and CT manufacturers with more than 80% of the
features needed to build an operator console - the computer that controls the
scanning and monitoring of patients during diagnostic imaging. Features such as
2D image review, multiplanar reformat, printing, DICOM, archiving,
communications, and storage of patient data on DVD are built in.
Clinical Applications
- ---------------------
Clinical software can have a major impact on the delivery of patient care. In
the past several decades, a rapid expansion of clinical software systems has
been noted within institutions that deliver healthcare. Today, more physicians
rely on clinical applications to help them make even routine diagnostic and
therapeutic decisions.
Cedara's broad range of clinical applications is used in general radiology and
other specialty areas. Many of Cedara's clinical applications and workflow
solutions can be added as plug-ins to existing PACS workstations or used as
dedicated, standalone workstations.
General Radiology
Cedara's Baby Explorer(TM)
A software only solution that adds 3D fetal imaging to any existing ultrasound
system, allowing expectant parents to view and record 3D images during
scheduled ultrasound visits - months before a baby's arrival. Baby Explorer
runs on standard PC hardware and acquires images from any ultrasound scanner.
-11-
Cedara 3D Volume Explorer(TM)
A software solution for Ultrasound applications that provides sophisticated 3D
imaging, real-time 3D and 4D, various rendering techniques, a multi-planar
virtual endoscope, and integrated reports that are easily incorporated into any
onboard or off-board application. Baby Explorer is available as an option to
this general-purpose ultrasound application.
Cedara Vivace(TM)
Vivace is a set of 3D visualization software plug-in components for examining
images acquired from CT and MRI scanners. It allows advanced 3D visualization
and the use of diagnostic tools that are easily plugged into imaging
workstations already installed in the field, or new medical imaging devices.
Cedara I-Conference(TM)
An application that consolidates all the information needed to conduct complex,
multi-modality case reviews, reducing preparation time so that doctors can
focus on case presentations.
Cedara I-Report(TM)
A multislice CT navigation and reporting workstation for the largest of
multislice data sets. I-Report-CT allows radiologists to review images in stack
mode using MPR (Multiplanar Reformat), MIP (Minimum-Intensity Projection), and
volume rendering mode - greatly improving the ability to navigate large data
volumes. I-Report-CT includes measurement tools, orthopedic templates, and
future solutions for PET/CT and lung Computer Assisted Diagnosis (CAD). This
workstation also supports all other major medical imaging modalities.
Orthopedics
Cedara OrthoWorks(TM)
A complete orthopedic treatment and digital planning solution that provides
orthopedists with the digital tools needed to accurately plan treatment and
surgery and reduce the support costs of adding new implant templates.
OrthoWorks integrates with Cedara I-Acquire to support image acquisition from
all orthopedic modalities, including CT, MRI, CR, DR and film digitizers. This
solution also uses web server software to enable internet-based orthopedic
planning.
Mammography
Cedara I-ReadMammo(TM)
I-ReadMammo is a high-performance multi-modality digital mammography
workstation with state-of-the art mammography tools for improving mammography
workflow that also automates the presentation procedure and review process for
current and prior mammography images.
Molecular Imaging
Cedara Nuclear Medicine
For more than a decade Cedara has delivered solutions for major OEMs in the
nuclear medicine arena. Cedara's workstation technology is deployed in the
majority of nuclear medicine devices installed worldwide. Cedara has developed
solutions for tomographic reconstruction, nuclear cardiology, fusion,
endocrinology, neurology, pulmonary and gastrointestinal areas.
Cedara's PET/CT fusion plug-in
A plug-in application for the rapid review of large volumes of PET and CT data,
this module will be available as on option on the Cedara I-SoftView(TM) family
of PACS workstations.
-12-
Cardiology
Radiology Components
In the cardiology arena, the advent of multislice MR and CT scanners, new
contrast agents, faster processing speeds and other driving technologies has
left many companies wondering what to do with the vast amount of data that is
now available to produce images of the heart at much higher resolutions.
Cedara has successfully applied its experience in image processing, display,
and analysis to complement the cardiology PACS domain and thus solve many of
these problems.
Cedara's Advanced Tissue Segmentations
Cedara has successfully developed an analysis system for MR data that
automatically segments the heart's left ventricle.
Using this technology, cardiologists are able to segment the ventricle in only
15 minutes compared with the usual 8-9 hours. We also are adapting tools such
as `Point and Click Classification', which facilitates automatic tissue
segmentation for other CT cardiology applications.
Cedara's segmentation technologies for the fully and semi-automated
identification of tissue structures and organs (2D and 3D modality data), in
ultrasound, MRI and CT, are prime examples. The software can be used to build a
variety of clinical applications that require fast, reliable automated analysis
of anatomical structures.
Connectivity Solutions
- ----------------------
Healthcare facilities depend upon standards-based connectivity and workflow
management solutions for efficient, cost-effective communication and data
sharing. By strictly adhering to standards such as Integrating the Healthcare
Enterprise (IHE), the Health Insurance Portability and Accountability Act of
1996 (HIPAA), and Personal Information Protection and Electronic Documents Act
(PIPEDA), Cedara products successfully integrate with diverse healthcare
systems.
DICOM, which stands for "Digital Imaging and Communications in Medicine" is the
industry standard for digital medical images and associated patient data, as
defined by the National Electrical Manufacturers Association and American
College of Radiology.
Cedara's video-to-DICOM conversion products and scalable multi-modality
storage, viewing, and reporting systems communicate efficiently over the
healthcare network to handle and convert video signals from a variety of legacy
systems into digital data. These solutions enable clients to add upgraded,
modern functionality to any legacy modality scanner to extend the life of the
legacy device, allowing full integration with any vendor modality equipment and
better connectivity within the healthcare enterprise.
Cedara I-Acquire Video(TM)
An application that extends the useful life of CT, MR, fluoroscopy, ultrasound,
nuclear medicine, angiography, and endoscopic device scanners that do not
support digital DICOM interfaces. I-Acquire easily upgrades any vendor's image
acquisition device to a Microsoft(R) Windows(R) user interface, utilizing
standard off-the-shelf PC hardware.
Dicomit Information Manager
A hardware and software solution that upgrades any ultrasound machine to comply
with DICOM connectivity standards.
-13-
Dicomit Information Manager - HLR
A hardware and software solution that upgrades any High Line Rate (HLR)
modality, such as C-arm, nuclear medicine, CT, MRI, digital angiography and
high-frequency ultrasound to comply with DICOM standards.
Cardiology Information Manager
A hardware and software solution that upgrades any cardiac ultrasound machine
to digital echocardiology for DICOM compliance.
Engineering Services
- --------------------
Many clients prefer to outsource some or all of their software engineering
activities in order to attain new clinical software expertise or time-to-market
advantage. Engineering services is the aspect of Cedara's business that
undertakes software development under contract. The Company's engineering lab
helps clients who desire one-of-a-kind solutions meet tough deadlines and
rapidly release products to market.
Over its 20-year history, Cedara has built custom software solutions for some
of the industry's largest organizations. The Company's clients range from
leading medical device and healthcare IT vendors to technology start-up
companies.
The engineering work encompasses a variety of technologies and many different
types of projects, including operator console software for CT scanners, MRI
systems, nuclear medicine cameras and other devices, and surgical navigation
and other clinical applications.
Cedara also provides partial teams for clients who need design and methodology
consulting, project management, product verification and validation, test
planning, installed base modernization, system maintenance, and other related
services.
Cedara is certified to several international quality standards, including ISO
9001, CE Mark, CMM, and GMP. These standards ensure that Cedara's work is high
quality. ISO 9001 certification is a key way in which Cedara continually
improves its ability to effectively, efficiently, and systematically meet
customer's needs.
Support Services
- ----------------
Cedara offers many levels of support to help clients with their medical imaging
needs, from professional services to technology partnerships to a 24/7 customer
help desk. Service contracts are often built into the overall agreement with
the customer, thereby providing an ongoing revenue stream.
3.3 Product Distribution and Markets
OEM Channel
Historically, the Company's business model was to sell exclusively through
major healthcare OEMs and VARs. As an independent supplier of imaging
software to medical equipment manufacturers, the Company has established a
global presence, and has fostered long-term relationships with major
companies in the healthcare industry by applying its broad range of skills
and continually enhancing its intellectual property. The Company believes
that its integrated solutions are well positioned to address the needs of a
growing number of hospitals converting to digital image management.
The Company's software powers all major modalities in medical imaging
including MRI, CT-scanners, positron emission tomography, nuclear medicine,
ultrasound, digital x-ray, and mammography. The Company is one of the few
independent developers with this broad range of
-14-
capabilities. The Company's proprietary imaging platform has an installed
base of over 20,000 licenses, a key revenue metric in the software industry.
The Company's products are sold throughout the world by VARs, systems
integrators and OEMs including Philips Medical Systems, GE Medical Systems,
Hitachi Medical Corporation, Cerner Corporation, EMed Technologies, and Toshiba
Medical Systems.
Direct Channel
To help complement the Company's well-established OEM channel, over the past
year the Company began developing a sales channel directly to hospitals,
imaging clinics and radiology groups. Additionally, the Company completed the
acquisition of eMed which will be an immediate complimentary addition to the
Company's direct sales channel. This channel leverages the Company's deep
portfolio of technical capability and its broad product offering, to help in
building a revenue stream directly from "end-users". While this channel has not
had a material impact on the Company's operating results to date, the Company
expects to grow the revenues derived from this channel.
Cedara China
Over the past year Cedara has announced several new initiatives associated with
its entrance into medical imaging in China, where the Company has been active.
These include cooperation agreements with Hong Kong Polytechnic University and
IBM China.
The Company also previously entered into arrangements with various Chinese
companies to distribute Cedara's digital X-ray, PACS and 3D imaging
applications to the Chinese market, including B-Soft, Beijing WanDong Medical
Equipment Co., Landwind Industrial Co. Ltd. and Shan Dong Shanghai Medical.
To better serve local needs while offering engineering services to clients,
Cedara also recently opened an office in China.
3.4 Revenue Distribution
As of June 30, 2004, the Company serves one industry segment, medical imaging
and related information solutions.
The Company has four customers each of which represents 10% or more of its
sales and contract revenues. On an aggregate basis, these four customers
represented approximately 62% of consolidated revenue for the year ended June
30, 2004. Further details of sales to these customers are disclosed in note 20
on pages 45 to 46 of the Company's 2004 Consolidated Annual Financial
Statements which note is expressly incorporated herein by reference.
The Company's consolidated revenue, by geographic region, for the two most
recent fiscal years, as a percentage of total sales are as follows:
=================================================================
2004 2003
=================================================================
Asia 44% 44%
United States 28% 29%
Europe 28% 27%
-----------------------------------------------------------------
100% 100%
=================================================================
-15-
3.5 Patents and Other Intellectual Property
The Company is heavily dependent upon proprietary technology. The Company has
been issued 11 patents and has 32 patents pending, all with respect to
strategic features embodied in its principal products. In addition, the Company
has further patent applications under evaluation with respect to certain
software technology currently under development by the Company.
The Company relies principally upon patent, copyright, trademark, and trade
secret laws to protect its proprietary technology. Where appropriate, the
Company also enters into nondisclosure agreements with persons to whom it
reveals its proprietary information, such as original equipment manufacturers
that the Company works with concerning future products. There can be no
assurance, however, that these laws or nondisclosure agreements will be
adequate to prevent misappropriation or independent third-party development of
the same or similar technology.
It is possible that the Company's intellectual property rights could be
successfully challenged by one or more third parties, which could result in its
inability to exploit, or its loss of the right to prevent others from
exploiting, certain intellectual property. In addition, reverse engineering,
unauthorized copying or other misappropriation of the Company's technology
could enable third parties to benefit from its technology without paying the
Company for it, which could significantly harm its business.
Any claims or litigation initiated by the Company to protect its proprietary
technology could result in significant expense to the Company and divert its
technical and management resources, whether or not the claims or litigation are
determined in favour of the Company.
There is also a risk that the Company's current or future products may infringe
upon third party proprietary technology. The medical imaging industry is
characterized by frequent claims and related litigation regarding patent and
other intellectual property rights. If a third party was to sustain a valid
claim against the Company and any required license was not available on
commercially reasonable terms, the Company's financial condition and operating
results could be materially and adversely affected. The Company could be
required to pay infringement damages, modify its products so they are
non-infringing, discontinue offering products that are found to be infringing,
or indemnify its customers. Furthermore, defending the Company against such
claims could divert a significant portion of the Company's technical and
management resources, whether or not the claims are determined in favour of the
Company.
3.6 Seasonality
The Company does not have a seasonal business. However, the Company typically
realizes a larger percentage of its annual revenue and earnings in the third
and fourth quarters of each fiscal year, and lower revenue and earnings in the
first quarter of the next fiscal year, principally due to the timing of annual
software license renewals from major customers. As a result of this trend, the
Company is required to manage its working capital to ensure it has sufficient
liquidity to meet its operating needs throughout the year.
3.7 Significant Contractual Relationships
The Company has significant contractual agreements with Philips Medical
Systems, Toshiba Corporation, eMed, Elgems Ltd., GE Medical Systems, Siemens
Medical Systems, Hitachi Medical Systems, and Cerner.
The Company is reliant on individual transactions that can be material in any
given quarter. If the Company fails to enter into contracts of this nature in
any quarter, the financial results of the Company could be materially adversely
impacted. Even if such transactions are entered into, there is no guarantee or
assurance that these transactions will be re-occurring.
-16-
The Company is currently dependent on eight suppliers who supply hardware and
software components that are incorporated in or sold with certain of the
Company's products. All but one of these components are supplied under
licensing agreements with the suppliers. The component that is not currently
supplied under contract is obtained on a purchase order basis. Should the
supply of any of these components be unavailable, the Company may experience a
temporary negative impact on sales while replacement technologies are secured.
3.8 Facilities
The following table sets for the principal properties of the Company and its
subsidiaries:
- -----------------------------------------------------------------------------------------------------------------
Location of Principal Property Capacity General Nature Business Owned/Leased and
Division Major
Utilizing Encumbrances
=================================================================================================================
Cedara Software Corp. 59,375 sq. ft. Executive All Leased
6509 Airport Road, Mississauga, offices,
Ontario, Canada Administration,
Research &
Development
Cedara Software (USA) Limited 220 sq. ft. Sales Office All Leased
19800 MacArthur Blvd. Suite 300
Irvine, CA 92612
Cedara Software (Shanghai) Co. Ltd., 175.12 sq. Research & All Leased
Suite 1411, No. 498, Pudong meters Development,
Software ParkGuo Shou Jin Road, Sales
Shanghai, China, 201203
=================================================================================================================
The premises at 3030 Orlando Drive, Mississauga, Ontario, are leased by the
Company and have been sublet to a commercial tenant. The Company does not rely
on any material tangible fixed assets, and is not materially affected by any
environmental laws or regulations in connection with the operation of its
existing assets. The Company does not have any plans to construct new
facilities or expand or improve its existing facilities in any material way.
3.9 Competition
The Company operates in a single industry segment, and services the diagnostic
imaging, image management, and therapy phases of the clinical workflow process.
The primary competitors for the Company's diagnostic imaging products are the
internal development groups of large diagnostic imaging companies. The primary
competitors for the Company's image management products are various PACS
software vendors that offer solutions that are similar to those offered by the
Company.
Some of the Company's current or future competitors may have longer operating
histories and significantly greater financial, technical, marketing and other
resources than the Company. These competitors may be able to undertake more
extensive research and development, manufacturing and marketing efforts and
may be able to adopt more aggressive pricing policies. In addition, some of
the Company's competitors have more extensive customer bases and broader
customer relationships that could be leveraged, including relationships with
the Company's current and potential customers. Some of the Company's
competitors also have significantly more established customer support and
-17-
professional services organizations and more extensive direct and indirect
sales channels than the Company. In addition, these competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements than the Company. As a result, the Company may not be able to
maintain its competitive position and market share against current or future
competitors, which could seriously harm its business and results of
operations.
3.10 Research and Development
The market for the Company's products is characterized by rapid and significant
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. The development of new
technologies, commercialization of those technologies into products, and market
acceptance and customer demand for those products is critical to the Company's
success. Successful product development and introduction depends upon a number
of factors, including new product selection, timely and efficient completion of
product design, product performance at customer locations and development of
products by competitors. If the Company does not properly identify the feature
preferences of its existing and potential customers, or if it fails to deliver
features that meet the requirements of these customers on a timely basis, the
Company's ability to market its products successfully and to increase its
revenues will be impaired.
To date, the Company has devoted significant resources to its product
development efforts and it intends to continue to do so in the foreseeable
future.
Research and development expense incurred in the fiscal year ended June 30,
2004 of $8.6 million was 9% lower than that incurred during the fiscal year
ended June 30, 2003. Research and development expense represented 17% of
revenue in 2004 and 31% of revenue in 2003, compared to $12.1million or 27% of
revenue for the fiscal year ended June 30, 2002.
No research and development expenses were capitalized in fiscal 2004, 2003 or
2002. A total of $0.3 million of amortization of deferred development costs was
included in depreciation and amortization expense in 2004, compared with $0.6
million in 2003 and $0.6 million in 2002. R&D activities included:
o maintenance of the Company's unique IAP (part of OpenEyes(TM)), which
supports 14 different operating system variants including Windows and
LINUX;
o continued development of OpenEyes(TM), the Company's next-generation
architecture;
o porting OpenEyes(TM) to Java;
o development of enhanced capabilities in IAP software for image
management and connectivity;
o development of the next generation of Cedara(R) I-SoftView(TM) PACS
product line including development of components;
o development and launch of the Company's I-ReadMammo(TM) specialty
workstation;
o continued development of image management components including
multi-modality rendering to meet the needs of the imaging technology
market in future years; and
o continued development and expansion of the I-Acquire(TM) product line.
-18-
3.11 Employees
As at October 31, 2004, the Company had 247 full time employees. The majority
of the Company's employees are located at its corporate head office in
Mississauga, Ontario, Canada. The remaining employees are located in the United
States, the United Kingdom and China.
3.12 International Operations
The Company derives primarily all of its revenue from sales outside of Canada.
International sales are subject to certain risks, including unexpected changes
in legal and regulatory requirements and policy changes affecting the Company's
markets; changes in tariffs, currency exchange rates and other barriers;
political and economic instability; difficulties in accounts receivable
collection; difficulties in managing distributors and representatives;
difficulties in protecting the Company's intellectual property; and potentially
adverse tax consequences.
In prior years, the Company used financial instruments, primarily forward
foreign currency exchange contracts, to hedge its exposure to fluctuations in
the United States to Canadian dollar exchange rate as a result of receiving
substantially all of its revenue in United States dollars. The consolidated
financial statements include, to varying degrees, elements of market, credit
and exchange risk in excess of amounts recognized in the balance sheets. The
Company does not require collateral or other security to support financial
instruments with credit risks.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
trade accounts receivable. Cash equivalents are placed with high credit quality
financial institutions. The Company performs periodic credit evaluations of the
financial condition of its customers and typically does not require collateral
from them. Allowances are maintained for potential credit losses consistent
with the credit risk of specific customers, historical trends and other
information. Credit losses have been within management's range of expectations.
4. SELECTED CONSOLIDATED FINANCIAL INFORMATION
4.1 Annual Financial Information - Last Three Years
Set forth below is a summary of certain selected consolidated financial
information with respect to the Company for the fiscal years ended June 30,
2004, 2003 and 2002. This information should be read in conjunction with
Management's Discussion and Analysis contained in the Company's Annual Report
for 2004, which is expressly incorporated herein by reference.
-19-
(in thousands of dollars, except per share data)
- --------------------------------------------------------------------------------
2004 2003 2002
================================================================================
Revenue $50,386 $30,148 $45,497(1)
Net income (loss) $15,566 $(13,312) $1,451
Earnings (loss) per share:
Basic $ 0.59 $ (0.55) $ 0.07
Diluted $ 0.54 $ (0.55) $ 0.07
Total assets $72,147 $ 19,869 $28,475
Long-term debt $44 $ 2,959 $2,788
Dividends declared Nil Nil Nil
================================================================================
(1) For accounting purposes SNS has been disclosed as a discontinued operation
in compliance with Section 3475 of the CICA Handbook. Accordingly, the
above table excludes revenue from SNS.
4.2 Quarterly Financial Information - Last Eight Quarters
(in thousands of dollars, except per share data)
==================================================================================================================
2004 2004 2004 2004 2003 2003 2003 2003
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ------------------------------------------------------------------------------------------------------------------
Revenue (1) $10,103 $ 12,148 $13,450 $14,685 $ 6,333 $ 8,249 $ 8,978 $ 6,588
Net income (loss) (2) $ 1,686 $ 3,892 $ 5,128 $ 4,860 $(4,034) $ (3,928) $ (1,613) $(3,737)
Basic Earnings (loss) $ 0.07 $ 0.16 $ 0.20 $ 0.16 $ (0.17) $ (0.16) $ (0.07) $ (0.15)
per share
Diluted earnings (loss) $ 0.06 $ 0.14 $ 0.18 $ 0.15 $ (0.17) $ (0.16) $ (0.07) $ (0.15)
per share
Total assets $ 22,044 $ 22,811 $67,849 $72,147 $28,680 $ 26,692 $ 24,981 $19,869
Long-term debt $ 2,959 $ 2,039 $ 57 $ 44 $ 2,804 $ 2,819 $ 2,835 $ 2,959
==================================================================================================================
(1) For accounting purposes SNS has been disclosed as a discontinued
operation in compliance with Section 3475 of the CICA Handbook.
Accordingly, revenue for 2004 and 2003 applies solely to the Company's
continuing operations.
(2) Net income (loss) include results from discontinued operations.
-20-
4.3 Dividend Policy
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. There are no
restrictions that prevent the Company from paying dividends.
5. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis of the Company's financial condition and
results of operations is contained in the Company's 2004 Management Discussion
and Analysis and is expressly incorporated herein by reference.
6. MARKET FOR SECURITIES
The Company's common shares are listed and posted for trading on the TSX under
the symbol "CDE" and quoted on the NASDAQ National Market (ticker symbol
"CDSW").
7. DIRECTORS AND OFFICERS
The section entitled "Election of Directors" contained on pages 7 to 8 of the
2004 Management Information Circular dated September 10, 2004, is expressly
incorporated herein by reference.
8. RISK FACTORS
Certain statements contained in this Annual Information Form may constitute
forward-looking statements within the meaning of securities laws. When used in
this document, the words, "may", "will", "should", "plan", "intend",
"anticipate", "believe", "estimate", "predict", "potential", "continue",
"expect" or similar expressions, concerning matters that are not historical
facts, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. In particular, statements relating to the
Company's expectations concerning its licensed software products and relating
to the sufficiency of capital to meet working capital and capital expenditure
requirements are forward-looking statements. Many factors could cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance, or achievements that may be
expressed or implied by such forward-looking statements, including, among
others, those which are discussed under the "Risk Factors" below. Should one or
more of these risks or uncertainties materialize, or should assumptions
underlying the forward-looking statements prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated
or expected. Forward-looking statements contained in this Annual Information
Form are based on the Company's current estimates, expectations and
projections, which the Company believes are reasonable as of the current date.
You should not place undue importance on forward looking statements and should
not rely upon them as of any other date. The Company does not intend, and does
not assume any obligation, to update these forward-looking statements at any
particular time.
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:
Major Customers
The Company's strategy includes providing products and services to multiple
divisions of the largest companies in the medical imaging industry. As a
result, over the past three fiscal years respectively,
-21-
the Company has had four, two and four customers each of which represents 10%
or more of its consolidated revenues. The sales cycle for transactions with
these major customers can extend longer than one year. As a result, the Company
may not have sales to each of its major customers in any given year or at all.
On an aggregate basis, all of the major customers referred to above represented
approximately 62%, 41% and 64% of the Company's consolidated revenue in each of
the last three fiscal years respectively. Any disruption in the Company's
relationships with these major customers or any decrease in revenue from these
major customers could have a material adverse effect on the Company's business,
financial condition, results of operations and prospects. Because it often
takes significant time to replace lost business, it is likely that the
Company's operating results would be adversely affected if one or more of these
major customers were to cancel, delay or reduce significant orders in the
future.
Reliance on Individual Contracts
The Company is reliant on individual transactions that can be material in any
given quarter. If the Company fails to enter into contracts of this nature in
any quarter, the financial results of the Company could be materially adversely
impacted. Even if such transactions are entered into, there is no guarantee or
assurance that these transactions will be re-occurring.
Fluctuations in Quarterly Financial Results
The Company's revenue and earnings can fluctuate materially between quarters,
principally due to the timing of significant license agreements. There is no
guarantee or assurance that the timing will remain consistent. As a result of
this seasonality, the Company is required to manage its working capital to
ensure that it has sufficient liquidity to meet its operating needs throughout
the year. There can be no assurance that the Company will be able to
effectively manage its working capital requirements in the future.
Dependence on Key Personnel
Loss of the Chief Executive Officer, certain members of the executive team or
key technical leaders of the Company could have a disruptive effect on the
implementation of the Company's business strategy and the efficient running of
day-to-day operations. Moreover, the Company may need to hire additional sales
people, technical staff (especially software engineers and developers),
managerial and marketing personnel. Competition for personnel throughout the
health care and information technology industries is intense. The Company may
be unable to retain its key employees or attract, assimilate, retain or train
other necessary qualified employees, which may restrict its growth potential.
Competitors
The Company operates in a single industry segment, and services the diagnostic
imaging, image management, and therapy phases of the clinical workflow process.
The primary competitors for the Company's diagnostic imaging products are the
internal development groups of large diagnostic imaging companies, many of
which are also customers of the Company. The primary competitors for the
Company's image management products are various PACS software vendors that
offer solutions that are similar to those offered by the Company.
Some of the Company's current or future competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than the Company. These competitors may be able to undertake more
extensive research and development, manufacturing and marketing efforts and may
be able to adopt more aggressive pricing policies. In addition, some of the
-22-
Company's competitors have more extensive customer bases and broader customer
relationships, including relationships with the Company's current and potential
customers. Some of the Company's competitors also have significantly more
established customer support and professional services organizations and more
extensive direct and indirect sales channels than the Company. In addition,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than the Company. As a
result, the Company may not be able to maintain its competitive position and
market share against current or future competitors, which could seriously harm
its business and results of operations.
Technological Change
The market for the Company's products is characterized by rapid and significant
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. The development of new
technologies, commercialization of those technologies into products and market
acceptance and customer demand for those products is critical to the Company's
success. Successful product development and introduction depends upon a number
of factors, including new product selection, timely and efficient completion of
product design, product performance at customer locations and development of
products by competitors. If the Company does not properly identify the feature
preferences of its existing and potential customers, or if it fails to deliver
features that meet the requirements of these customers on a timely basis, the
Company's ability to market its products successfully and to increase its
revenues will be impaired.
Exchange Rate Fluctuations
The Company derives all of its revenue from sales outside of Canada.
Accordingly, the prices realized by the Company are affected by changes in the
exchange rate of Canadian dollars for United States dollars or Canadian dollars
for other foreign currencies. The majority of the Company's costs are payable
in Canadian dollars and, therefore, the financial results of the Company are
subject to foreign currency exchange rate fluctuations. Compared to the
previous fiscal year, there has been a significant appreciation in the value of
the Canadian dollar in terms of the United States dollar. This has had an
adverse effect on the Company's results of operations. Further appreciation in
the value of the Canadian dollar in terms of the United States dollar could
have an additional adverse effect on the Company's results of operations.
International Operations
The Company's business operations outside the United States and Canada subject
it to numerous inherent potential risks associated with international
operations, including:
o difficulties in customizing the Company's products for foreign
markets;
o difficulties in establishing relationships with foreign companies;
o import or export licensing requirements;
o longer payment cycles;
o increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries;
o potential adverse tax consequences;
-23-
o limited or unfavourable intellectual property protection;
o seasonal reductions in business activity during the summer months in
Europe and some other parts of the world; and
o recessionary environments in foreign economies.
Intellectual Property
The Company is heavily dependent upon proprietary technology. The Company has
been issued 11 patents and has 32 patents pending, all with respect to
strategic features embodied in its principal products. In addition, the Company
has further patent applications under evaluation with respect to certain
software technology currently under development by the Company.
The Company relies principally upon patent, copyright, trademark, and trade
secret laws to protect its proprietary technology. Where appropriate, the
Company also enters into non-disclosure agreements with persons to whom it
reveals its proprietary information, such as original equipment manufacturers
that the Company works with concerning future products. There can be no
assurance, however, that these laws or nondisclosure agreements will be
adequate to prevent misappropriation or independent third-party development of
the same or similar technology.
It is possible that the Company's intellectual property rights could be
successfully challenged by one or more third parties, which could result in its
inability to exploit, or its loss of the right to prevent others from
exploiting, certain intellectual property. In addition, reverse engineering,
unauthorized copying or other misappropriation of the Company's technology
could enable third parties to benefit from its technology without paying the
Company for it, which could significantly harm its business.
Any claims or litigation initiated by the Company to protect its proprietary
technology could result in significant expense to the Company and divert its
technical and management resources, whether or not the claims or litigation are
determined in favour of the Company.
There is also a risk that the Company's current or future products may infringe
upon third party proprietary technology. The medical imaging industry is
characterized by frequent claims and related litigation regarding patent and
other intellectual property rights. If a third party was to sustain a valid
claim against the Company and any required license was not available on
commercially reasonable terms, the Company's financial condition and operating
results could be materially and adversely affected. The Company could be
required to pay infringement damages, modify its products so they are
non-infringing, discontinue offering products that are found to be infringing,
or indemnify its customers. Furthermore, defending the Company against such
claims could divert a significant portion of the Company's technical and
management resources, whether or not the claims are determined in favour of the
Company.
Liquidity
The Company's current credit facility requires the Company to comply with
certain financial covenants. There can be no assurance on the Company's ability
to continue to comply with these financial covenants or to appropriately
service its debt.
Regulatory Clearances and Approvals for New Products
The Company's products and services are subject to regulation as medical
devices in the United States by the United States Food and Drug
Administration (the "FDA"), in Canada under Health Canada's Medical Devices
Regulations, and in other countries by corresponding regulatory authorities.
The Company's ability to market new products and improvements to existing
products depends upon the timing of appropriate licenses, pre-market
clearance or approval from the FDA, Health Canada, or any other foreign
regulatory authorities. Failure to comply with applicable
-24-
domestic or other foreign regulatory requirements at any time during the
production, marketing or distribution of products regulated by the FDA, Health
Canada or other foreign regulatory authorities could result in, among other
things, seizures of products, total or partial suspension of production,
refusal to grant licenses, clearances or approvals, withdrawal of existing
licenses, clearances or approvals, or criminal prosecution, any one of which
could have a material adverse effect on the Company's business, financial
condition, results of operations and prospects.
Product Liability and Insurance
The Company's business subjects it to the risk that it will incur product
liability claims. No assurance can be given that the insurance coverage limits
of the Company would be adequate to protect it against any product liability
claims that may arise. The Company may require additional product liability
insurance coverage as the Company commercializes new products or improves
existing products. This insurance is expensive and may not be available on
acceptable terms, or at all. Uninsured product liability claims could have a
material adverse effect on the Company's business, financial condition, results
of operations and prospects.
Acquisition
There is no guarantee or assurance that the Company will be able to retain
eMed's key employees or integrate eMed's employees, products or technologies
into operations or that the Company will be able to execute a successful
strategy and realize the revenue goals and control costs relating to the
acquisition. All of these factors could have a material adverse impact on
eMed's client base, its products and/or the consolidated business operations.
9. ADDITIONAL INFORMATION
Additional information, including directors' and officers' remuneration and
indebtedness, principal holders of securities, options to purchase securities
and interests of insiders in material transactions, where applicable, is
contained in the 2004 Management Information Circular dated September 10, 2004.
Additional financial information is provided in the Company's comparative
financial statements and notes contained in its Annual Report for its most
recently completed fiscal year, which comparative financial statements and
notes are attached hereto.
Upon request, the Company will provide to any person:
(a) when the securities of the Company are in the course of a distribution
pursuant to a preliminary short form prospectus or a short form
prospectus,
(i) one copy of the Company's Annual Information Form (the "AIF"),
together with one copy of any document, or the pertinent pages of
any document, incorporated by reference in the AIF,
(ii) one copy of the comparative financial statements of the Company
for its most recently completed financial year for which
financial statements have been filed together with the
accompanying report of the auditor and one copy of the most
recent interim financial statements of the Company that have been
filed, if any, for any period after the end of its most recently
completed financial year,
(iii) one copy of the information circular of the Company in respect of
its most recent annual meeting of shareholders that involved the
election of directors or one copy of any annual filing prepared
instead of that information circular, as appropriate, and
-25-
(iv) one copy of any other documents that are incorporated by
reference into the preliminary short form prospectus or the short
form prospectus and are not required to be provided under items
(i), (ii) and (iii) above; or
(b) at any other time, one copy of any documents referred to in items
(a)(i), (ii) and (iii) above, provided the Company may require the
payment of a reasonable charge if the request is made by a person or
company who is not a security holder of the Company.
A copy of the above mentioned documents may be obtained on the Internet
at http://www.sedar.com or upon written request to:
Brian Pedlar
Chief Financial Officer and Corporate Secretary
Cedara Software Corp.
6509 Airport Road
Mississauga, Ontario L4V 1S7
Phone: (905) 672 2100 Fax: (905) 671 7972
-26-
DOCUMENT NO. 2
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Cedara Software Corp.
and the information contained in this annual report are the responsibility of
management and have been approved by the Board of Directors.
The financial statements have been prepared by management in accordance with
accounting principles generally accepted in Canada and using accounting
policies and methods considered to be the most appropriate in the
circumstances. Significant accounting policies are described in note 1 to the
consolidated financial statements. In the preparation of these financial
statements management has made estimates and judgments, which are believed to
be reasonably determined and appropriate. Management is also responsible to
ensure that the financial information presented throughout the annual report
is consistent with the financial statements.
In order to fulfill its responsibilities, management develops and maintains
systems of internal accounting and administrative controls which are designed
to provide reasonable assurance that the financial information is relevant
and reliable and that the Company's assets are appropriately accounted for
and adequately safeguarded.
The Board of Directors is responsible for overseeing management in the
performance of its financial reporting responsibilities and is ultimately
responsible for reviewing and approving the financial statements and related
financial information in the annual report. The board carries out this
responsibility principally through its appointed Audit Committee. The
Committee meets periodically with management, as well as with the external
auditors, to discuss internal controls over financial reporting, auditing
matters and financial reporting issues and reports to the board prior to the
board's approval of the financial statements and annual report. The Committee
also recommends the engagement and reappointment of the external auditors for
review by the board and approval of the Company's shareholders at its annual
meeting. KPMG LLP has full and free access to the Audit Committee.
KPMG LLP, independent Chartered Accountants have performed an independent
audit of the consolidated financial statements in accordance with Canadian
generally accepted auditing standards, and their report to the shareholders
is included in this annual report.
/s/ Abe Schwartz /s/ Brian Pedlar
Abe Schwartz Brian Pedlar
President and Chief Executive Officer Chief Financial Officer
1
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Cedara Software Corp. as
at June 30, 2004 and 2003 and the consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended June 30, 2004. 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at June 30,
2004 and 2003 and the results of its operations and its cash flows for each
of the years in the three-year period ended June 30, 2004 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
August 13, 2004
COMMENTS BY AUDITOR FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the
comparability of the Company's financial statements, such as the change
described in note 1(n) to the financial statements. Our report to the
shareholders dated August 13, 2004 is expressed in accordance with Canadian
reporting standards which do not require a reference to such a change in
accounting principles in the auditors' report when the change is properly
accounted for and adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
August 13, 2004
2
CEDARA SOFTWARE CORP.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------
June 30
-----------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 40,510 $ -
Short-term investments 10,902 -
Accounts receivable 7,449 5,551
Inventory (note 7) 268 472
Prepaid expenses and other assets 881 876
- -------------------------------------------------------------------------------------------------------------------
60,010 6,899
Capital assets (note 8) 2,201 2,568
Long-term investment (note 2) 510 472
Goodwill (note 12) 9,053 9,053
Intangible assets (notes 11 and 12) 373 542
Deferred development costs (note 10) - 335
- -------------------------------------------------------------------------------------------------------------------
$ 72,147 $ 19,869
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Bank indebtedness (note 4) $ - $ 9,493
Accounts payable and accrued liabilities 4,207 6,278
Deferred revenue 861 532
Current liabilities of discontinued operations (note 6) 986 2,460
- -------------------------------------------------------------------------------------------------------------------
6,054 18,763
Convertible subordinated debentures (note 5) - 2,851
Non-current portion of provision for loss on sublease 44 108
Shareholders' equity (deficiency):
Capital stock (note 13) 161,536 106,328
Contributed surplus 388 -
Warrants (note 14) - 3,260
Deficit (95,875) (111,441)
- -------------------------------------------------------------------------------------------------------------------
66,049 (1,853)
Commitments (note 19)
Subsequent event (note 1(a))
- -------------------------------------------------------------------------------------------------------------------
$ 72,147 $ 19,869
===================================================================================================================
See accompanying notes to consolidated financial statements
On behalf of the Board
/s/ Peter J. Cooper /s/ Abe Schwartz
Peter J. Cooper Abe Schwartz
Director Director
September 9, 2004
3
CEDARA SOFTWARE CORP.
Consolidated Statements of Operations
(In thousands of Canadian dollars, except per share amounts)
=========================================================================================================================
Year ended June 30
---------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Revenue $ 50,386 $ 30,148 $ 45,497
Direct costs 11,356 11,081 11,279
- -------------------------------------------------------------------------------------------------------------------------
Gross margin 39,030 19,067 34,218
Expenses:
Research and development 8,599 9,400 12,097
Sales and marketing 5,075 4,124 5,045
General and administration 7,258 8,169 10,337
Severance costs 206 2,332 911
Other charges (income) (note 15) (43) 2,822 2,136
Lease exit costs (note 16) - 561 -
Amortization of intangible assets 235 1,461 1,753
Depreciation and amortization 1,577 2,376 3,786
- -------------------------------------------------------------------------------------------------------------------------
22,907 31,245 36,065
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest expense 16,123 (12,178) (1,847)
Interest expense, net (557) (1,134) (1,704)
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 15,566 (13,312) (3,551)
Income from discontinued operations (note 6) - - 5,002
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15,566 $ (13,312) $ 1,451
=========================================================================================================================
Earnings (loss) per share from continuing operations (note 13(c)):
Basic $ 0.59 $ (0.55) $ (0.17)
Diluted $ 0.54 $ (0.55) $ (0.17)
Earnings (loss) per share (note 13(c)):
Basic $ 0.59 $ (0.55) $ 0.07
Diluted $ 0.54 $ (0.55) $ 0.07
=========================================================================================================================
See accompanying notes to consolidated financial statements
4
CEDARA SOFTWARE CORP.
Consolidated Statements of Shareholders' Equity (Deficiency)
(In thousands of Canadian dollars)
===================================================================================================================================
Total
Common Shares Warrants shareholders'
--------------------------------------------- Contributed equity
Number Amount Number Amount Surplus Deficit (deficiency)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 16,997,994 $ 87,315 605,636 $ 3,260 $ - $ (99,580) $ (9,005)
Net income for the year - - - - - 1,451 1,451
Issue of shares on Analogic financing
(note 3) 4,000,000 11,843 - - - - 11,843
Issue of shares on exercise of stock options 87,500 186 - - - - 186
Issue of shares under Analogic Pre-emptive
Rights agreement (note 3) 580,461 1,366 - - - - 1,366
Share issue costs (note 3) - (600) - - - - (600)
Shares issued in payment of financing fees
(note 3) 266,666 600 - - - - 600
Issue of shares on Cerner financing 200,000 238 - - - - 238
Compensation shares issued 25,000 - - - - - -
Issue of shares on settlement of
promissory notes) 2,000,000 5,000 - - - - 5,000
Equity portion of convertible subordinated
debentures (note 5) - 380 - - - - 380
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 24,157,621 $106,328 605,636 $ 3,260 - $ (98,129) $ 11,459
Net loss for the year - - - - - (13,312) (13,312)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 24,157,621 $106,328 605,636 $ 3,260 - $(111,441) $ (1,853)
Net income for the year - - - - - 15,566 15,566
Issue of shares on exercise of stock options 709,890 2,056 - - - - 2,056
Stock-based compensation expense - - - - 128 - 128
Reclass of expired warrants (note 14) - - (200,000) (155) 155 - -
Issue of shares on exercise of warrants
(note 14) 405,636 3,105 (405,636) (3,105) 105 - 105
Issue of shares on conversion of convertible
subordinated debentures (note 5) 1,267,120 2,887 - - - - 2,887
Issue of shares on equity financing
(note 13b) 5,000,000 50,000 - - - - 50,000
Share issue costs (note 13b) - (2,840) - - - - (2,840)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2004 31,540,267 $161,536 - - $ 388 $ (95,875) $ 66,049
===================================================================================================================================
See accompanying notes to consolidated financial statements.
5
CEDARA SOFTWARE CORP.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
==========================================================================================================================
Year ended June 30
-----------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) from continuing operations $ 15,566 $ (13,312) $ (3,551)
Items not involving cash:
Depreciation and amortization 1,812 3,837 5,539
Accretion of interest (note 5) 36 63 -
Stock-based compensation charges 128 - -
Lease exit costs - 561 -
Write down of loans receivable - - 888
Other 91 669 42
- --------------------------------------------------------------------------------------------------------------------------
17,633 (8,182) 2,918
Change in non-cash operating working capital:
Accounts receivable (3,054) 4,951 (2,238)
Inventory 204 1 240
Prepaid expenses and other assets (5) 36 184
Accounts payable and accrued liabilities (2,130) 2,162 (4,624)
Deferred revenue 329 (358) 150
- --------------------------------------------------------------------------------------------------------------------------
(4,656) 6,792 (6,288)
- --------------------------------------------------------------------------------------------------------------------------
12,977 (1,390) (3,370)
Investing activities:
Decrease (increase) in restricted cash - 226 (226)
Additions to intangible assets (115) (111) (150)
Additions to capital assets (896) (1,351) (108)
Decrease (increase) in short-term investments (10,902) - 3,000
- --------------------------------------------------------------------------------------------------------------------------
(11,913) (1,236) 2,516
- --------------------------------------------------------------------------------------------------------------------------
Financing activities:
Increase (decrease) in bank indebtedness (9,493) 4,558 (6,157)
Issue of shares on equity financing 47,160 - 13,447
Issue of shares on exercise of stock options 2,056 - 186
Issue of shares on exercise of warrants 105 - -
Decrease in note payable - - (8,300)
Issue of convertible debenture - - 1,068
- --------------------------------------------------------------------------------------------------------------------------
39,828 4,558 244
- --------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents from continuing
operations 40,892 1,932 (610)
Change in cash and cash equivalents from discontinued
operations (note 6) (382) (1,932) 610
Cash and cash equivalents beginning of year - - -
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 40,510 $ - $ -
==========================================================================================================================
See accompanying notes to consolidated financial statements.
6
CEDARA SOFTWARE CORP.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
==========================================================================================================================
Year ended June 30
-------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information
Cash paid for:
Interest $ 766 $ 1,068 $ 1,714
Taxes $ 15 $ 9 $ 33
Cash received for:
Interest $ 211 $ 9 $ 8
Non-cash financing activities:
Issue of shares on exercise of warrants $ 3,000 $ - $ -
Issue of shares on conversion of convertible
subordinated debentures $ 2,887 $ - $ -
Issue of shares in settlement of promissory notes $ - $ - $ 5,000
Issue of shares as payment for financing fees $ - $ - $ 600
Issue of convertible debentures in settlement of
promissory notes $ - $ - $ 2,100
Non-cash investing activities:
Receipt of shares on payment of accounts receivable $ 38 $ 472 $ -
Transfer of equipment from inventory to capital assets $ - $ 244 $ -
==========================================================================================================================
7
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
Established in 1982, Cedara Software Corp., is a leading independent provider
of medical technologies used worldwide by key medical device manufacturers,
healthcare information technology companies, hospitals, imaging centres, and
medical clinics.
Many of Cedara's innovative medical technologies are sold through major
healthcare device manufacturers and information technology providers,
including GE, Siemens, Philips, Toshiba, Hitachi and Cerner.
Through the years Cedara's software has been deployed in thousands of
hospitals and clinics worldwide, including prestigious facilities such as
Johns Hopkins University School of Medicine; Shands Hospital, University of
Florida; University of California, Los Angeles (UCLA); Lund University in
Sweden; and University Hospital of Geneva, Switzerland.
Cedara is unique in that its advanced medical imaging technologies are used
in all aspects of clinical workflow including:
o The operator consoles of many medical imaging devices
o Picture Archiving and Communications Systems (PACS)
o Sophisticated clinical applications that further analyze and manipulate
images
o The use of imaging in computer-assisted therapy
Cedara is also unique in another way: it has expertise and technologies that
span all the major digital imaging modalities and related subspecialties,
including magnetic resonance imaging (MRI), computed tomography (CT),
positron emission tomography (PET), nuclear medicine, digital X-ray,
ultrasound, mammography, cardiology, angiography, and fluoroscopy.
The Company generates revenue in three ways:
o by developing and licensing its software technology and products;
o through development of custom software for healthcare equipment
manufacturers; and
o through service and support provided to its customers.
1. Significant accounting policies:
The Company's principal accounting policies are in accordance with
generally accepted accounting principles ("GAAP") in Canada and, except as
discussed in note 22 to the consolidated financial statements, are also,
in all material respects, in accordance with accounting practices
generally accepted in the United States.
(a) Principles of consolidation:
The financial statements of entities controlled by the Company are
consolidated and all significant inter-company transactions and
balances have been eliminated. All of the Company's subsidiaries
are wholly-owned and are considered to be fully integrated
operations.
Effective July 1, 2002, the Company amalgamated with Dicomit Dicom
Information Technologies Corp. ("Dicomit"), a wholly-owned
subsidiary. Effective July 1, 2004, the Company amalgamated with
the SNS Surgical Navigation Specialists Inc. ("SNS"), a
wholly-owned subsidiary.
8
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
(b) Cash and cash equivalents:
Cash and cash equivalents consist of balances with banks and
liquid short-term investments with maturities of three months or
less at the date of acquisition and are carried on the balance
sheet at amortized cost plus accrued interest.
(c) Short-term investments:
Short-term investments consist of liquid investments with
maturities of between three months and one year at the date of
acquisition, and are available for sale investments that are
carried on the balance sheet at amortized cost plus accrued interest.
(d) Inventory:
Inventory consists of parts and components, work-in-process and
finished goods. Parts and components are carried at the lower of
average cost and replacement cost. Work-in-process and finished goods
are carried at the lower of average cost and net realizable value.
(e) Capital assets:
Capital assets are recorded at cost. Depreciation is provided on a
straight-line basis over the assets' estimated useful lives using the
following annual rates:
--------------------------------------------------------------------
Furniture and fixtures 20%
Equipment 20% - 50%
Software 33% - 50%
Leasehold improvements Lease term
--------------------------------------------------------------------
(f) Long-term investment:
Investment in the securities of a private company over which the
Company does not exert significant influence is accounted for
using the cost method. The Company monitors this investment for
indicators other than temporary impairment and takes a charge to
the statement of operations when appropriate.
(g) Goodwill:
Goodwill is tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might
be impaired. The impairment test is carried out in two steps. In
the first step, the carrying amount of the reporting unit is
compared with its fair value. When the fair value of a reporting
unit exceeds its carrying amount, goodwill of the reporting unit
is considered not to have been impaired and the second step of the
impairment test becomes unnecessary. The second step is carried
out when the carrying amount of a reporting unit exceeds its fair
value, in which case the implied fair value of the reporting
unit's goodwill is compared with its carrying amount to measure
the amount of the impairment loss, if any. The implied fair value
of goodwill is determined in the same manner as the value of
goodwill is determined in a business combination, using the fair
value of the reporting unit as if it was the purchase price. When
the carrying amount of reporting unit goodwill exceeds the implied
fair value of the goodwill, an impairment loss is recognized in an
amount equal to the excess and is presented as a separate line
item in the statement of operations before discontinued operations.
9
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
The determination of impairment requires that management make
estimates and exercise judgment in evaluating the fair value of
goodwill. In order to do this it is necessary to identify the
reporting unit associated with the goodwill and to assess the
value of the goodwill in the context of that reporting unit. It
has been determined that the Company consists of a single
reporting unit. As a result, goodwill is tested for impairment at
a corporate level. The Company uses the quoted market price of its
shares as a basis for fair value measurement.
(h) Intangible assets:
Intangible assets comprise core technology, patents and other
intellectual property. Core technology and other intellectual
property are amortized over periods ranging from three to five
years. Patents, included in other intangible assets, are amortized
over their estimated useful lives of 10 years. The amortization
methods and estimated useful lives are reviewed annually.
(i) Revenue recognition:
The Company's revenues are derived from software license fees,
engineering services, hardware sales and service revenues, which
include customer support, product upgrades, installation and
training. Fees for services are billed separately from licenses of
the Company's products. The Company recognizes revenue in
accordance with Canadian GAAP which, in the Company's
circumstances, is not materially different from the amounts that
would be determined under the provisions of the American Institute
of Certified Public Accountants Statement of Position No. 97-2,
"Software Revenue Recognition", as amended by Statement of
Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", for all
transactions involving the sale of software products and hardware
transactions where the software is not incidental. For hardware
transactions where software is incidental, and hardware
transactions where no software is involved, the Company considers
the provisions of Staff Accounting Bulletin 101, "Revenue
Recognition", in determining the appropriate accounting treatment.
The Company recognizes revenue from the sale of software licenses
when persuasive evidence of an arrangement exists, the product has
been delivered, collection of the resulting receivable is
reasonably assured and the fee is fixed and determinable. The
Company relies on contracts and purchase orders as evidence of an
arrangement. Generally, delivery is completed when a master copy
of the software is shipped to the customer. Management assesses
collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of
the customer. The Company generally does not request collateral
from customers. If the Company determines that collection of a fee
is not reasonably assured, it defers the fee and recognizes
revenue at the time collection becomes reasonably assured. The
Company assesses whether the fee is fixed and determinable at the
outset of the arrangement based on the payment terms associated
with the transaction.
Certain software arrangements can include multiple elements,
where the Company is required to determine the fair value of
each element in assessing whether the fee is fixed and
determinable. The elements which may be included in the
Company's software arrangements might comprise product licenses,
maintenance and support, as well as training, implementation and
engineering services. The Company limits its assessment of
vendor specific objective evidence of fair value ("VSOE") for
each element to the price charged when the same element is sold
separately. If VSOE of all undelivered elements exists but
evidence does not exist for VSOE of one or more delivered
elements, then revenue is recognized using the residual method.
Under the residual method, the Company establishes VSOE for
undelivered maintenance and support based on contract specified
renewal rates. Accordingly, if all other revenue recognition
criteria are met, revenue from licenses is recognized upon
delivery using the residual method in
10
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- -------------------------------------------------------------------------------
accordance with SOP 98-9 and maintenance and support revenue is
recognized ratably over the term of the maintenance period.
The Company's software products are fully functional upon delivery
and implementation and do not require significant modification or
alteration.
The Company provides services under time-and-material or
fixed-price contracts that historically are longer than one year
in duration. Under time-and-material and fixed-price contracts,
where costs are generally incurred in proportion with contracted
billing schedules, revenue is recognized when the customer may be
billed. This method is expected to result in reasonably consistent
profit margins over the contract term. For certain fixed-price
contracts, the Company follows percentage-of-completion
accounting, when reasonably dependable estimates of revenue and
expenses can be made.
Revenues related to ongoing customer support and product upgrades
are recognized on a straight-line basis over the life of the
contract, which is typically 12 months, or when the services are
performed. Product license fees and support and upgrades revenues
that have been prepaid but do not yet qualify for recognition
under the Company's revenue recognition policy are reflected as
deferred revenue on the Company's consolidated balance sheet.
Application of the revenue recognition rules associated with
software revenue and engineering services involves judgment in
determining whether individual transactions meet the revenue
recognition rules.
(j) Impairment of long-lived assets:
The Company reviews long-lived assets for impairment on a regular
basis or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of capital assets is measured by comparison of
their carrying amount with the undiscounted projected future net
cash flows the long-lived assets are expected to generate. If the
carrying value exceeds the estimated amount recoverable, a write
down equal to the excess of the carrying value over the asset's
fair value is charged to the consolidated statement of operations.
The Company assesses the recoverability of intangible assets with
finite lives by determining whether the carrying amounts can be
recovered through undiscounted projected future net cash flows.
The amount of impairment, if any, is measured based on
undiscounted projected future net cash flows relative to the
carrying amount of the asset.
(k) Research and development costs:
Research costs are expensed as incurred. Development costs
incurred prior to the establishment of the technological and
financial feasibility of a project are expensed as incurred.
Development costs may be capitalized when the technological and
financial feasibility of a project is established. These costs are
subsequently amortized using the straight-line method over the
related product's estimated economic life being typically three
years.
(l) Foreign currency translation:
The Company records foreign currency transactions at the Canadian
dollar equivalent at the date of the transaction, and translates
foreign currency monetary assets and liabilities at exchange rates
in effect at the balance sheet date. Exchange gains and losses are
included in the statement of operations.
11
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- -------------------------------------------------------------------------------
(m) Income taxes:
The liability method of tax allocation is used to account for
income taxes. Future tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Future tax assets and
liabilities are measured using enacted or substantively enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded against any future
income tax asset if it is not more likely than not that the asset
will be realized. Income tax expense or benefit is the sum of the
Company's provision for current income taxes and the difference
between opening and ending balances of future income tax assets
and liabilities.
(n) Stock options:
The Company issues stock options under the terms of its stock
option plan. No compensation expense was recognized up to June 30,
2003. In November 2003, CICA Handbook Section 3870 was amended to
provide three different transitional provisions which allow for
the adoption of fair value based accounting for stock options for
both employees and non-employees. The Company has elected the
prospective method of adoption effective for the year ended June
30, 2004. In accordance with CICA 3870, the Company has recorded
stock-based compensation expense for all options granted on or
after July 1, 2003. In addition, pro forma stock-based
compensation expense is presented for all grants issued during the
year ended June 30, 2003. Options are granted at an exercise price
equal to the quoted market value of the shares at the time of
granting of such options. Any consideration paid by employees on
exercise of stock options is credited to share capital. If stock
options are repurchased from employees, any excess of the
consideration paid over the carrying amount of the stock or stock
option cancelled is charged to retained earnings (deficit).
(o) Share purchase loans:
Effective July 1, 2003, the Company adopted the new recommendations
of CICA Abstract EIC-132 on share purchase loans. The EIC requires
reclassification of share purchase loans as deductions from
shareholders' equity and exclusion of any common shares secured
against these loans, from the outstanding number of shares for the
purposes of calculating basic earnings per share. As a result of
this adoption, there is no material impact on the basic or diluted
earnings per share for the year ended June 30, 2004.
(p) Earnings per share:
Basic earnings per share is calculated using the weighted average
number of shares outstanding during the year.
The treasury stock method is used to calculate diluted earnings per
share. Under the treasury stock method, it is assumed that potential
proceeds from the exercise of dilutive stock options and warrants
would be used to purchase the Company's common shares at the average
market price during the period, and the computed incremental number
of stock options and warrants are included in the denominator of the
diluted earnings per share computation.
(q) Measurement uncertainty:
The preparation of the Company's consolidated financial
statements in accordance with Canadian GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
liabilities as at the dates of the consolidated
12
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant areas requiring
the use of management estimates include the determination of
allowance for doubtful accounts, provisions for excess and obsolete
inventory, fair values of assets acquired and liabilities assumed in
business combinations, amortization expense, implied fair value of
goodwill, realization of future tax assets and the related
components of the valuation allowance, other provisions and the fair
values of financial instruments. Actual results could differ from
these estimates.
2. Long-term investment:
The long-term investment represents a non-controlling minority
position in a private company and is being carried at cost.
3. Transactions with Analogic Corporation:
On September 28, 2001, the Company completed a private placement of
4,000,000 common shares to Analogic Corporation ("Analogic") at $2.96
per share for proceeds of $11,843. As a result of the transaction,
Analogic held approximately 19.0% of the issued and outstanding common
shares of the Company after giving effect to its investment. As part
of the investment, Analogic guaranteed the Company's bank operating
facility by way of a letter of credit issued to National Bank of
Canada ("NBC"). The Company and Analogic also agreed Analogic would
nominate two directors to the Company's then seven-person Board of
Directors. In connection with this investment, Analogic received
pre-emptive rights to allow it to maintain its percentage ownership in
the Company in the event of future issuance of the Company's common
shares, subject to regulatory approval. Analogic is a leading designer
and manufacturer of advanced health and security systems and
subsystems sold to Original Equipment Manufacturers, with a healthcare
customer base that largely overlaps the Company's. In addition, the
Company also issued 266,666 shares valued at $2.25 per share, based on
the market price of the Company's shares at that time. The shares were
issued as compensation in lieu of financing fees to a third party as a
result of the Analogic investment, which was accounted for as share
issue costs.
The use of proceeds from this financing included repayment of $4,700
of notes payable issued in connection with the acquisition of Dicomit
on May 26, 2000 and the repayment of the remaining bank indebtedness
of approximately $3,400, which was outstanding as of September 28,
2001. The remaining proceeds were used to fund general working capital
needs.
On December 14, 2001, the Company issued a US$1,000 short-term
promissory note to Analogic, which was repaid January 23, 2002. The
note was interest-bearing at United States prime rate.
On May 3, 2002, the Company completed a private placement of 580,461
common shares to Analogic at $2.35 per share for net proceeds of
$1,366, pursuant to the exercise of their pre-emptive rights
agreement.
On October 18, 2002, the Company issued a US$0.65 million short-term
promissory note bearing interest at United States prime rate to
Analogic, which was repaid on January 16, 2003.
During fiscal 2004, the Company incurred approximately $1.5 million of
direct costs in anticipation of entering into contractual arrangements
with Analogic.
4. Bank indebtedness:
The Company has an operating line of credit of $14,000 bearing interest
at prime plus 1/2%. The operating line is secured by a general security
agreement granting a first security interest in all of the
13
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
Company's present and after-acquired property to NBC. On closing of the
equity financing described in note 13(b), the Company repaid all the
amounts outstanding under the bank operating line.
Also, subsequent to the equity financing, the letter of credit issued
by Analogic to NBC which guaranteed the Company's operating line, was
cancelled, along with the security agreement between Analogic and NBC.
The current operating line of $14,000 is due for renewal on October
31, 2004. However, the Company and NBC are in discussions to revise
the borrowing facility to reflect the Company's substantially improved
financial position and the removal of the Analogic letter of credit,
which may result in an increase or reduction of the borrowing capacity
under a new operating facility.
5. Convertible subordinated debentures:
During December 2003, debenture holders representing $1,000 of the
total of $3,168 outstanding 5% unsecured subordinated convertible
debentures (the "Convertible Debentures") elected, in accordance with
the terms of the Convertible Debentures, to convert their holdings
into common shares of the Company at $2.50 per share. This resulted in
the issuance of 400,000 common shares of the Company. Effective
January 15, 2004, the Company exercised its right, in accordance with
the terms of the Convertible Debentures, to require the conversion of
the remaining principal sum of $2,168 into common shares of the
Company at $2.50 per share. This resulted in the issuance of 867,120
common shares of the Company. As a result of these conversions, the
carrying value of the Convertible Debentures and the related holder
conversion option was transferred to share capital and no Convertible
Debentures of the Company remain outstanding.
6. Discontinued operations:
On June 29, 2001 the Board of Directors of the Company adopted a
formal plan to dispose of its Surgical Navigation business segment,
which included the disposal of its wholly-owned subsidiary Surgical
Navigation Specialists Inc. ("SNS") and its subsidiaries. As a result,
the Surgical Navigation business segment is presented as discontinued
operations in these consolidated financial statements.
On August 14, 2001, SNS obtained an order for protection under the
Companies' Creditors Arrangement Act ("CCAA"). The effect of the order
was to stay the current obligations of SNS to creditors. On April 17,
2002, the Ontario Superior Court of Justice approved SNS' Plan of
Arrangement. The liabilities of SNS have since been settled and a
final distribution to the creditors of SNS has been made by the court
appointed monitor.
Effective July 1, 2004, Cedara amalgamated with SNS. The amalgamated
Company adopted the name, articles and bylaws of Cedara.
The following summarizes the balance sheet, statement of operations
and statement of cash flows information for the Company's discontinued
operations:
=========================================================================
Balance Sheet June 30, 2004 June 30, 2003
-------------------------------------------------------------------------
Current liabilities $ 986 $ 2,460
-------------------------------------------------------------------------
Net liabilities of discontinued operations $ 986 $ 2,460
=========================================================================
The Company was obligated to pay US$1,500 over 18 months commencing
April 2002 and ending in September 2003, and to provide US$1,500 in
software licenses and/or services to Carl Zeiss Inc. ("Zeiss")
during the period December 10, 2001 to December 1, 2004 in
settlement of discontinued operations liabilities. At September 30,
2003, the Company had fully paid out the liability of US$1,500
14
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
payable in cash. During the year ended June 30, 2004, the Company
provided services of $866 and licenses of $177 in partial settlement
of the remaining non-cash liabilities (services and licenses
provided during year ended June 30, 2003 - Nil).
Included in current liabilities at June 30, 2004, is the Company's
remaining obligation to Zeiss, as noted above, of $957 (June 30, 2003
- $2,460).
==============================================================================================
Year ended June 30
----------------------------------------
Statement of Operations 2004 2003 2002
----------------------------------------------------------------------------------------------
Revenue $ - $ - $ 499
Income from operations - - -
Gain on disposition of discontinued operations - - 5,002
----------------------------------------------------------------------------------------------
Income from discontinued operations $ - $ - $ 5,002
==============================================================================================
Earnings per share from discontinued operations:
Basic $ - $ - $ 0.24
Diluted $ - $ - $ 0.24
==============================================================================================
==============================================================================================
Year ended June 30
----------------------------------------
Statement of Cash Flows 2004 2003 2002
----------------------------------------------------------------------------------------------
Operating activities $ (382) $ (1,932) $ 610
Investing activities - - -
----------------------------------------------------------------------------------------------
Financing activities - - -
----------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations $ (382) $ (1,932) $ 610
==============================================================================================
7. Inventory:
==============================================================================================
June 30, 2004 June 30, 2003
----------------------------------------------------------------------------------------------
Finished goods $ 7 $ 13
Parts and components 217 343
Work-in-process 44 116
----------------------------------------------------------------------------------------------
$ 268 $ 472
==============================================================================================
8. Capital assets:
==============================================================================================
June 30, 2004 June 30, 2003
----------------------------------------------------------------------------------------------
Cost
Furniture and fixtures $ 221 $ 219
Equipment 3,573 3,869
Software 4,533 4,419
Leasehold improvements 5,988 5,985
----------------------------------------------------------------------------------------------
14,315 14,492
----------------------------------------------------------------------------------------------
Accumulated depreciation
----------------------------------------------------------------------------------------------
Furniture and fixtures 207 184
Equipment 2,697 3,122
Software 4,259 3,962
Leasehold improvements 4,951 4,656
----------------------------------------------------------------------------------------------
12,114 11,924
----------------------------------------------------------------------------------------------
Net book value $ 2,201 $ 2,568
==============================================================================================
15
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. Other assets:
=========================================================================
June 30, 2004 June 30, 2003
-------------------------------------------------------------------------
Share purchase loans to employees
and former officers $ 744 $ 1,791
Other loan to former officer - 50
-------------------------------------------------------------------------
744 1,841
Less provision for loan impairment (744) (1,841)
-------------------------------------------------------------------------
$ - $ -
=========================================================================
The share purchase loans are non-interest bearing and unsecured.
During the year ended June 30, 2002, the Company increased the
provision for loan impairment resulting in a charge to operations of
$888. During the year ended June 30, 2004, previously provided against
loans amounting to $1,080 were repaid by former employees and officers
(year ended June 30, 2003 - $103).
10. Deferred development costs:
=========================================================================
June 30, 2004 June 30, 2003
-------------------------------------------------------------------------
Deferred development costs $ 2,102 $ 2,102
Less accumulated amortization 2,102 1,767
-------------------------------------------------------------------------
$ - $ 335
=========================================================================
Deferred development costs relate to the costs of producing product
masters for the porting of the Company's Imaging Applications Platform
("IAP") product from Unix to Microsoft Windows and the componentization
of IAP source code. The Company commenced capitalization of these costs
once technological feasibility had been established which, in the
Company's circumstances, was based on the creation of a working model.
The capitalization of the costs ceased when the product masters for
these products were available for general release to customers. These
costs have been amortized on a straight-line basis over the economic
life of the software, which was determined to be approximately three
years in each case.
11. Intangible assets:
=========================================================================
June 30, 2004 June 30, 2003
-------------------------------------------------------------------------
Cost
Core ultrasound technology $ 3,900 $ 3,900
Other acquired technology 684 684
Other intangible assets 558 611
-------------------------------------------------------------------------
5,142 5,195
-------------------------------------------------------------------------
Accumulated amortization
Core ultrasound technology 3,900 3,900
Other acquired technology 684 589
Other intangible assets 185 164
-------------------------------------------------------------------------
4,769 4,653
-------------------------------------------------------------------------
Net book value $ 373 $ 542
=========================================================================
16
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
12. Goodwill and intangible assets:
In accordance with CICA 3062, the Company ceased amortizing goodwill
on July 1, 2001, and reclassified the unamortized value of the
workforce acquired on the acquisition of Dicomit on May 26, 2000
(previously recorded as an intangible asset) to goodwill with a net
book value of $1,217 (original cost of $1,800 and accumulated
amortization to July 1, 2001 of $583). The Company has fully amortized
these intangible assets as described in notes 1 and 11.
This change in accounting policy resulted in a reduction in
amortization expense related to goodwill of $2,100 and a reduction in
amortization expense related to intangible assets of $600 for the year
ended June 30, 2002.
The Company has determined that there was no impairment of goodwill at
June 30, 2004 (June 30, 2003 - Nil).
13. Capital stock:
(a) The Company has authorized an unlimited number of common shares.
There were 31,540,267 common shares issued and outstanding at
June 30, 2004 (June 30, 2003 - 24,157,621).
(b) On March 25, 2004, the Company completed an equity offering of
5,000,000 common shares at an offering price of $10.00 per share
raising gross proceeds of $50,000. The net proceeds were
$47,160, after giving effect to the underwriters' fee of $2,500
and expenses of the issue estimated at $340.
(c) Earnings per share
The weighted average number of common shares outstanding is as
follows:
======================================================================================================
Year ended June 30
------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding, for basic earnings per share 26,295,237 24,157,621 21,365,303
Shares held as security on share purchase loans
165,834 - -
Incremental shares from assumed conversion of
employee stock options 2,058,246 - -
Incremental shares from assumed conversion of
share purchase warrants 13,234 - -
Dilutive effect of convertible debentures 650,956 - -
------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding, for diluted earnings per share 29,183,507 24,157,621 21,365,308
======================================================================================================
Options totaling 394,425 for 2004 (2003 - 1,856,184; 2002 - 1,641,188)
that are anti-dilutive were excluded from the calculation.
17
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
As a result of a net loss from continuing operations for the years
ended June 30, 2003 and June 30, 2002, the following potentially
dilutive items have not been included in the calculation of diluted
loss per share, because to do so would have been anti-dilutive;
==============================================================================================
Year ended June 30
----------------------------------------
2003 2002
----------------------------------------------------------------------------------------------
Incremental shares from assumed conversion of
employee stock options 431,713 29,665
----------------------------------------------------------------------------------------------
431,713 29,665
==============================================================================================
(d) Stock option plan:
The Company's stock option plan was implemented to encourage
ownership of the Company by directors, officers and employees of
the Company. The maximum number of common shares which may be set
aside for issuance under the plan is currently 4,200,000 shares,
provided that the Board of Directors of the Company has the right,
from time to time, to increase the number of shares available
under the plan subject to the approval of the shareholders of the
Company when required by law or regulatory authority.
Generally, options issued under the plan vest annually over a two
to five year period. Any option granted which, for any reason, is
cancelled or terminated prior to their exercise, will become
available for grant under the plan. In accordance with the plan,
the exercise price of options is determined by the fair value of
the Company's common shares at the time the option is granted.
Options granted under the plan may be exercised during a period
not exceeding seven years from the date of grant, subject to
earlier termination upon the optionee ceasing to be a director,
officer or employee of the Company or any of its subsidiaries, as
applicable. Options issued under the plan are non-transferable.
(e) Continuity of options issued under the plan as at June 30 is as follows:
====================================================================================================================
2004 2003 2002
---------------------------- ----------------------------- -------------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
- --------------------------------------------------------------------------------------------------------------------
Outstanding,
beginning of year 3,224,990 $2.95 2,057,438 $5.34 2,526,345 $5.81
Granted 414,000 $3.58 2,046,806 $1.32 437,500 $1.93
Exercised (709,890) $2.92 - - (87,500) $2.13
Cancelled (75,950) $8.04 (879,254) $4.74 (818,907) $5.31
- --------------------------------------------------------------------------------------------------------------------
Outstanding,
end of year 2,853,150 $2.92 3,224,990 $2.95 2,057,438 $5.34
- --------------------------------------------------------------------------------------------------------------------
Options exercisable,
end of year 1,218,151 $4.24 1,309,626 $4.57 1,176,647 $6.05
====================================================================================================================
(e) A summary of the balances of options issued under the plan as at
June 30, 2004 is as follows:
18
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
===================================================================================================================
Options outstanding Options exercisable
-------------------------------------------------------- -------------------------------
Weighted average
Range of Options remaining Weighted average Options Weighted average
exercise prices outstanding contractual life exercise price exercisable exercise price
- -------------------------------------------------------------------------------------------------------------------
$ 1.05 to $ 1.50 1,330,189 5.0 years $ 1.06 509,816 $ 1.05
$ 1.70 to $ 2.50 628,786 3.4 years $ 2.07 223,535 $ 2.20
$ 3.30 to $ 3.95 415,750 5.9 years $ 3.35 34,750 $ 3.71
$ 4.50 to $ 5.90 84,000 1.9 years $ 5.25 83,250 $ 5.26
$ 6.00 to $ 6.80 12,000 1.9 years $ 6.20 12,000 $ 6.20
$ 7.00 to $ 9.90 382,425 2.7 years $ 9.70 354,800 $ 9.86
- ------------------------------------------------------------------------------------------------------------------
$ 1.05 to $ 9.90 2,853,150 4.4 years $ 2.92 1,218,151 $ 4.24
- ------------------------------------------------------------------------------------------------------------------
14. Warrants:
Effective October 1, 2000, the Company acquired from Zeiss its 20%
minority interest in SNS through the issuance of $3,000 of warrants
exercisable into 363,636 common shares of the Company and options to
purchase SNS shares. The Company provided price protection on the
value of the warrants up to US$5.50 per share commencing August 1,
2003 to July 31, 2005 to a maximum value of US$2,000 through either
the issuance of shares (subject to regulatory approval) or the payment
of cash at the Company's option. In May 2004, Zeiss exercised all of
the warrants into 363,636 common shares of the Company.
On January 14, 2004, NBC converted warrants valued at $1.05 into
42,000 common shares of the Company at the exercise price of $2.50 per
share. Additionally, a value of $155 relating to 200,000 unexercised
warrants which had previously expired was transferred to contributed
surplus.
15. Other charges (income):
===========================================================================================================
Year ended June 30
-----------------------------------------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------------------------------------------------
Bad debt expense $ 437 $ 962 $ 367
Computer and equipment operating leases 413 1,202 1,133
Stock based compensation charges 128 - -
Provision (recovery) of employee share purchase
and other loans receivable (1,080) (103) 888
Foreign exchange and other 59 761 (252)
-----------------------------------------------------------------------------------------------------------
$ (43) $ 2,822 $ 2,136
===========================================================================================================
19
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- -------------------------------------------------------------------------------
16. Lease exit costs:
======================================================================================================
Year ended June 30
------------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------------
Provision for loss on sublease $ - $ 307 $ -
Write down of leasehold improvements - 254 -
------------------------------------------------------------------------------------------------------
$ - $ 561 $ -
======================================================================================================
In fiscal 2003, as part of ongoing cost reduction initiatives, the
Company consolidated its operations into one leased facility and
entered into a sublease agreement for the vacated premises on April
23, 2003. The Company recorded a liability for net costs that will
continue to be incurred for the remaining term of the existing lease.
The liability was recorded at its fair value of $307 by estimating the
net present value of the future cash outflows, net of expected
sublease rental income.
In addition, the Company determined that the carrying value of the
leasehold improvements in the subleased premises would not be fully
recoverable and recorded a charge of $254 towards the shortfall of the
carrying value of the leasehold improvements over the related
undiscounted future cash flows.
17. Income taxes:
The Company has earned investment tax credits ("ITCs") of $2,600, on
Scientific Research & Experimental Development expenditures which will
expire within the years beginning 2005 through 2006. These credits,
prior to their expiry, may be applied to reduce income taxes otherwise
payable.
Total income tax expense varies from the amounts that would be
computed by applying the effective income tax rate to the income
(loss) from continuing operations before income taxes for the years
ended June 30, as follows:
======================================================================================================
Year ended June 30
------------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------------
Income tax expense (recovery)
computed at statutory rates $ 5,661 $ (4,674) $ (1,433)
Adjustment to income tax recovery resulting from:
Changes in the valuation allowance
for future income tax assets 931 1,165 287
Adjustments to future tax assets and liabilities
for changes in substantively enacted tax rates (5,343) 3,356 277
Non-deductible amortization and other non-deductible items (1,249) 153 869
------------------------------------------------------------------------------------------------------
Actual income tax expense (recovery) $ - $ - $ -
======================================================================================================
The income tax effects of temporary differences that give rise to
significant portions of future income tax assets and liabilities are
as follows:
20
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
======================================================================================================
June 30, 2004 June 30, 2003
------------------------------------------------------------------------------------------------------
Future income tax assets:
Non-capital income tax losses carried forward and income tax credits $ 23,334 $ 23,697
Future income tax deductions relating to accounting accruals
and fixed assets 3,234 2,708
Share issue costs 986 342
------------------------------------------------------------------------------------------------------
27,554 26,747
Less valuation allowance (27,554) (26,623)
------------------------------------------------------------------------------------------------------
- 124
Future income tax liabilities:
Intangible assets, deferred compensation and unpaid remuneration - (124)
------------------------------------------------------------------------------------------------------
Net future income tax assets $ - $ -
======================================================================================================
The valuation allowance at June 30, 2004 primarily represents income
tax benefits of non-capital income tax losses carried forward which
management has assessed as not meeting the criteria to be realized.
Consequently, the benefit of the future income tax assets has not been
recognized in these consolidated financial statements.
The valuation allowance increased by $931 during the year ended June
30, 2004, primarily as a result of not recognizing the benefit of
current net operating losses.
In assessing the realizability of future tax assets, management
considers whether it is more likely than not that some portion or all
of the future tax assets will not be realized. The ultimate
realization of future tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future
taxable income, uncertainties related to the industry in which the
Company operates and tax planning strategies in making this
assessment. In order to fully realize the future tax asset, the
Company will need to generate future taxable income of approximately
$76,000 prior to the expiration of the net operating loss carry
forwards. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the
future tax assets are deductible, management believes that the more
likely than not criteria has not been satisfied in order for the
Company to realize the benefits of these deductible differences.
The Company has significant tax losses carried forward arising from
the discontinued SNS business. The tax losses of the Company and other
deductions amount to $63,000 and expire commencing from 2005 to 2010.
The potential benefit of these losses and other deductions has not
been recognized in the accounts of the Company.
18. Fair values of financial instruments:
The Company has used financial instruments, primarily forward foreign
currency exchange contracts, to mitigate its exposure to fluctuations
in the United States/Canadian dollar exchange rate as a result of
receiving substantially all of its revenue in United States dollars.
These consolidated financial statements include, to varying degrees,
elements of market, credit and exchange risk in excess of amounts
recognized in the consolidated balance sheets. The Company did not
have any foreign exchange contracts outstanding as at June 30, 2004 or
at June 30, 2003.
During the year ended June 30, 2003, the Company financed specific
receivables, with aggregate book values of $1,842 and received net
proceeds of $1,640, through the issuance of bills of exchange. In the
year ended June 30, 2003, bills of exchange amounting to $927 were
settled. At June 30, 2003, a bill of exchange amounting to $915 was
not yet due for settlement. This was settled in May 2004. At June 30,
2004, there were no bills of exchange outstanding for settlement. The
financing of receivables has been treated as a sale of
21
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- -------------------------------------------------------------------------------
receivables for accounting purposes and the loss on financing has been
recorded as interest expense in the consolidated statement of operations.
There were no collectibility or billing problems with customers or
classes of customers, other than as provided in the financial
statements. There were no significant changes in credit terms during
the fiscal year 2004.
The carrying values of the Company's other financial instruments
approximate their fair values due to the short term to maturity of the
various instruments.
The Company is exposed to market, credit and interest rate risk on its
short-term investment portfolio. The Company limits its risk by
investing only in liquid, investment grade securities and by limiting
exposure to any one entity or group of related entities. The fair
value of investments, mostly interest bearing, as well as investment
income derived from the investment portfolio, will fluctuate with
changes in the prevailing interest rates.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company performs periodic credit evaluations of the
financial condition of its customers and typically does not require
collateral from them. Allowances are maintained for potential credit
losses consistent with the credit risk of specific customers,
historical trends and other information. Credit losses have been
within management's range of expectations. At June 30, 2004, three
customers comprised 19%, 13% and 12% of trade accounts receivable
(2003 - three customers at 19%, 15% and 13% respectively).
19. Commitments:
The Company is committed under long-term operating leases for the
rental of premises, computer and office equipment. The minimum annual
lease payments for the four years subsequent to June 30, 2004 are as
follows:
========================================================================
------------------------------------------------------------------------
2005 $1,323
2006 $1,287
2007 $1,260
2008 and thereafter $3,051
========================================================================
The Company has entered into a sublease agreement dated April 23, 2003
whereby it is able to recover a portion of lease commitments over the
remaining term of the lease for the premises. The minimum annual lease
payments above have been disclosed net of sublease rental income.
20. Segmented information and major customers:
The Company develops and markets diagnostic imaging, image management,
and software products for integration with medical solutions offered
by world leaders in the healthcare sector. The Company's products
include 2D and 3D medical imaging software applications, components,
platforms, and custom engineering solutions. The Company serves one
industry segment, medical imaging and related information solutions.
22
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
All of the Company's revenues are exports as follows:
==========================================================================
Year ended June 30
---------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------
Asia $ 22,296 $ 13,378 $ 23,045
United States 14,269 8,722 12,389
Europe 13,821 8,048 10,063
--------------------------------------------------------------------------
Total revenue $ 50,386 $ 30,148 $ 45,497
==========================================================================
The following are product and service revenues of the Company:
==========================================================================
Year ended June 30
---------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------
Software licenses $ 33,732 $ 11,632 $ 27,945
Engineering services 12,034 14,643 15,265
Support services and other 4,620 3,873 2,287
--------------------------------------------------------------------------
$ 50,386 $ 30,148 $ 45,497
==========================================================================
All of the assets of continuing operations are located in North
America. Revenues to customers that individually generate more than
10% of revenue are as follows:
==========================================================================
Year ended June 30
---------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------
Customer A 23% 23% 22%
Customer B 10% 18% 13%
Customer C 6% 8% 15%
Customer D 13% - 3%
Customer E 16% 3% 14%
==========================================================================
21. Stock-based compensation:
In accordance with CICA 3870, the Company has recorded stock-based
compensation expense of $128 for all options granted on or after July
1, 2003. For the options granted during the year ended June 30, 2003
for which no charge has been recorded, the Company is required to
provide pro forma disclosure of the net income (loss) and earnings
(loss) per share, as if the fair value-based method, as opposed to the
settlement based method of accounting for employee stock options, had
been applied for these options. The disclosures in the following table
reflect the Company's net income (loss) and earnings (loss) per share
on a pro forma basis using the fair value method, on a straight-line
basis, as determined by using a Black-Scholes option pricing model:
23
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
==========================================================================
Year ended June 30
-------------------------
2004 2003
--------------------------------------------------------------------------
Net income (loss) - as reported $ 15,566 $(13,312)
Total stock-based compensation expense determined
for options granted prior to July 1, 2003 (379) (352)
--------------------------------------------------------------------------
Net income (loss) - pro forma $ 15,187 $(13,664)
--------------------------------------------------------------------------
Pro forma earnings (loss) per share:
Basic $ 0.58 $ (0.57)
Diluted $ 0.52 $ (0.57)
==========================================================================
The weighted average grant date fair value of options granted was
calculated as follows using a Black-Scholes option pricing model with
the following assumptions:
==========================================================================
Year ended June 30
-------------------------
2004 2003
--------------------------------------------------------------------------
Number of options issued 414,000 2,046,806
Weighted average grant date
fair value of each option $ 2.47 $ 0.85
Assumptions:
Risk free interest rates 4% 4.5%
Expected life in years 5.0 5.0
Expected dividend yield - -
Volatility 85% 75%
==========================================================================
22. GAAP in Canada and the United States:
The consolidated financial statements of the Company have been
prepared in accordance with GAAP as applied in Canada.
The following summarizes financial statement amounts in accordance
with United States GAAP:
==========================================================================
Year ended June 30
-------------------------
Consolidated balance sheets 2004 2003
--------------------------------------------------------------------------
Current assets $ 60,010 $ 6,899
Capital assets 2,201 2,568
Intangible assets 373 447
Goodwill 7,836 7,836
Total assets 70,930 18,557
Current liabilities 6,054 18,871
Convertible debentures - 3,168
Capital stock 160,676 104,157
Contributed surplus 388 -
Deficit (96,232) (110,899)
Total shareholders' equity (deficiency) $ 64,832 $ (3,482)
==========================================================================
24
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
===============================================================================
Year ended June 30
--------------------------------------
Consolidated statements of operations 2004 2003 2002
-------------------------------------------------------------------------------
Revenue $ 50,386 $ 30,148 $45,497
Gross margin 39,030 19,067 34,218
Operating expenses 23,842 29,910 33,562
Income (loss) before interest expense 15,188 (10,843) 656
Income (loss) from continuing operations 14,667 (11,914) (1,048)
Income (loss) from discontinued operations - - 5,002
Net income (loss) and comprehensive income $ 14,667 $(11,914) $ 3,954
===============================================================================
===============================================================================
Year ended June 30
--------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------
Earnings per share from continuing operations:
Basic earnings (loss) per share $ 0.56 $ (0.49) $ (0.05)
Diluted earnings (loss) per share $ 0.50 $ (0.49) $ (0.05)
Earnings per share from discontinued operations:
Basic earnings (loss) per share $ - $ - $ 0.23
Diluted earnings (loss) per share $ - $ - $ 0.23
Earnings per share:
Basic earnings (loss) per share $ 0.56 $ (0.49) $ 0.19
Diluted earnings (loss) per share $ 0.50 $ (0.49) $ 0.19
===============================================================================
===============================================================================
Year ended June 30
--------------------------------------
Consolidated statements of cash flows 2004 2003 2002
-------------------------------------------------------------------------------
Net cash used in operating activities $ 11,939 $ (1,493) $(3,466)
Net cash provided by (used in)
investing activities $ (11,913) $ (1,236) $ 2,516
Net cash provided by financing activities $ 40,908 $ 4,558 $ 244
===============================================================================
The significant differences between Canadian and United States GAAP and
their effect on the consolidated financial statements of the Company
are described below:
25
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
(a) Consolidated statements of operations:
================================================================================
Year ended June 30
--------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Income (loss) from continuing operations,
Canadian GAAP $ 15,566 $ (13,312) $ (3,551)
Foreign exchange gains and losses on
hedged transactions (i) - - (54)
Provision (recovery) for employee share
purchase loans receivable (ii) (1,030) (103) 838
Accretion of interest on debt component of
convertible debentures (iii) 36 63 -
Purchased in-process research and
development expense (iv) 95 1,438 1,719
- --------------------------------------------------------------------------------
Income (loss) from continuing operations,
United States GAAP 14,667 (11,914) (1,048)
Income from discontinued operations - - 5,002
- -------------------------------------------------------------------------------
Net income (loss), United States GAAP $ 14,667 $ (11,914) $ 3,954
===============================================================================
The significant differences between Canadian and United States GAAP and
their effect on the consolidated financial statements of the Company are
described below:
(i) Under Canadian GAAP, unrealized and realized gains and losses on
foreign currency exchange contracts identified as hedges may be
deferred as long as there is reasonable assurance that the hedge
will be effective. Under United States GAAP, deferral is allowed
only on foreign currency exchange contracts that are specifically
designated and documented as hedges of identifiable firm currency
commitments.
(ii) Under Canadian GAAP, employee share purchase loans were included in
loans receivable. Under United States GAAP, the loans would be
classified as a reduction of shareholders' equity. As a result, the
related provision recorded for these loans receivable for Canadian
GAAP purposes is required to be reversed to comply with United
States GAAP. As noted under United States GAAP the plans would be
considered to be fixed plans and a compensation adjustment would
only be required to the extent that the arrangement was modified or
a direct award of the underlying stock ultimately occurred. Due to
this difference, the provision for these loans for purposes of
Canadian GAAP would not be recorded under United States GAAP.
(iii) The Company has recorded a compound instrument under Canadian GAAP
in connection with the unsecured convertible debentures issued
during fiscal 2003 and 2002. United States GAAP does not permit
separate recognition of the financial liability and equity
components. Accordingly, the note payable would be classified
entirely as notes payable for United States GAAP reporting purposes
for the years ended June 30, 2003 and 2002 on the consolidated
balance sheet and the interest accretion related to the fair market
valuation of the interest rate on the debt component would be added
back on the statement of operations for United States GAAP purposes.
26
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
(iv) Under Financial Accounting Standards Board ("FASB") Statement No. 2,
"Accounting for Research and Development Costs," acquired in-process
research and development having no alternative future use must be
written off at the time of acquisition. The Company acquired
in-process research and development as part of the business
combination with Dicomit in May 2000 which represents products in
the development stage not considered to have reached technological
feasibility at the time of acquisition. Such costs are required to
be expensed under United States GAAP. For the years ended June 30,
2004, 2003 and 2002, the adjustment represents the reversal of
amortization of the capitalized in-process research and development
under Canadian GAAP.
(v) United States GAAP requires disclosure of the details of depreciation
and amortization for the years ended June 30, as follows:
===============================================================================
2004 2003 2002
-------------------------------------------------------------------------------
Depreciation of capital assets $ 1,242 $ 1,814 $ 3,230
Amortization of intangible assets 140 23 34
Amortization of deferred development costs 335 562 556
Amortization of goodwill - - -
-------------------------------------------------------------------------------
$ 1,717 $ 2,399 $ 3,820
===============================================================================
(b) Consolidated statements of shareholders' equity (deficiency) under United
States GAAP:
==============================================================================
Year ended June 30
------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------
Deficit, beginning of year $ (110,899) $ (98,985) $ (102,939)
Net income (loss) 14,667 (11,914) 3,954
------------------------------------------------------------------------------
Deficit, end of year $ (96,232) $ (110,899) $ (98,985)
==============================================================================
(c) Consolidated statements of cash flow:
Canadian GAAP permits the disclosure of a subtotal of the amount of
funds provided by operations before changes in non-cash working
capital items in the statements of consolidated cash flows. United
States GAAP does not permit this subtotal to be included.
(d) Other disclosures:
(i) Stock-based compensation:
Beginning in 1996, SFAS 123, Accounting for Stock-based
Compensation, encourages, but does not require, companies to
record compensation costs for employee stock option plans at
fair value. Effective July 1, 2003, for all grants made on or
after July 1, 2003, the Company has chosen to account for
stock options using the fair value method as described in
notes 1(n) and 21. The stock based compensation charge of
$128 for the current year recorded in Other charges could be
distributed into various expense categories as follows: cost
of sales $21, research and development $62, sales and
marketing $35 and, general and administrative $10.
Up to June 30, 2003, the Company had chosen to continue to
account for stock options using the intrinsic value method
prescribed by existing accounting pronouncements in effect in the
27
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
the United States. SFAS 123 does require the disclosure of pro forma
net income (loss) and income (loss) per share information as if the
Company had accounted for its employee stock options under the fair
value method.
The disclosures in the following table reflect the Company's net
income (loss) and earnings (loss) per share on a pro forma basis
using the fair value method, on a straight-line basis, as determined
by using a Black-Scholes option pricing model.
==============================================================================
Year ended June 30
---------------------------------------
2004 2003 2002
------------------------------------------------------------------------------
Net income (loss) - pro forma $(12,672) $ (1,579) $ (24,693)
Pro forma earnings (loss) per share:
Basic $ (0.52) $ (0.07) $ (1.49)
Diluted $ (0.52) $ (0.07) $ (1.49)
===============================================================================
The weighted average grant date fair value of options granted was
calculated as follows using a Black-Scholes option pricing model
with the following assumptions:
==============================================================================
Year ended June 30
---------------------------------------
2004 2003 2002
------------------------------------------------------------------------------
Number of options issued 2,046,806 437,500 712,700
Weighted average grant date fair
value of each option $ 0.85 $ 1.90 $ 2.93
Assumptions:
Risk free interest rates 4.5% 4.5% 4.0%
Expected life in years 5.0 5.0 5.0
Expected dividend yield - - -
Volatility 75% 79% 80%
==============================================================================
The effects on pro forma disclosure of applying SFAS 123 are
not necessarily representative of the effects on pro forma
disclosure in future years.
(ii) As of January 1, 1998, the Company implemented SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement, which is
solely a financial statement presentation standard, requires the
Company to disclose non-owner charges included in equity but not
included in earnings. These charges include the fair value
adjustment to certain available for sale securities, the foreign
currency translation adjustments.
(iii) The allowance for doubtful accounts as at June 30, 2004 was $972
(2003 - $961).
(iv) Rent expense, net of sublease income, for the year ended June 30,
2004 amounted to $798 (2003 - $988; 2002 - $1,007).
(v) United States GAAP requires the disclosure of accrued liabilities.
Accrued liabilities included in accounts payable and accrued
liabilities as at June 30, 2004 were $3,042 (2003 - $3,108). At June
30, 2004, accrued liabilities of $905 for accrued vacation and $820
for accrued bonus exceeded 5% of current liabilities (June 30, 2003
- accrued vacation - $505 and severance payable - $1,426).
28
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
(vi) The Company has disclosed income before goodwill amortization, which
is not a permitted disclosure under United States GAAP. For United
States GAAP purposes goodwill amortization would be included in
expenses and deducted in the determination of income (loss) before
interest income.
(vii) Under United States GAAP, amortization of deferred compensation
would be included in general and administrative expenses.
23. Recent accounting pronouncements:
In December 2003, the Emerging Issues Committee released EIC-141,
"Revenue Recognition" ("EIC-141") and EIC-142, "Revenue Arrangements
with Multiple Deliverables" ("EIC-142"). EIC-141 summarizes the
principles set forth in SAB 104 that, in the Committee's view, are
generally appropriate as interpretive guidance on the application of
CICA Handbook Section 3400 "Revenue." EIC-142 addresses certain
aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. Specifically,
EIC-142 address how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, and
how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The adoption of
EIC-141 and EIC-142 is not expected to have a material impact on the
Company's results of operations or financial position.
In July 2003, the CICA issued new Handbook Sections 1100, "Generally
Accepted Accounting Principles," and 1400, "General Standards of
Financial Statement Presentation". Section 1100 describes what
constitutes Canadian Generally Accepted Accounting Principles ("GAAP")
and its sources and provides guidance on sources to consult when
selecting accounting policies and determining appropriate disclosures
when a matter is not dealt with explicitly in the primary sources of
generally accepted accounting principles, thereby re-codifying the
Canadian GAAP hierarchy. Section 1400 provides general guidance on
financial statement presentation and further clarifies what
constitutes fair presentation in accordance with GAAP. These
recommendations are effective for fiscal years beginning on or after
October 1, 2003. The Company does not expect these recommendations to
have any significant impact on its consolidated financial statements
upon adoption.
In March 2003, the CICA issued Section 3110, "Asset Retirement
Obligations". This standard requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. The associated costs are capitalized as part of the
carrying value of the related asset and depreciated over its remaining
useful life. Section 3110 is applicable to fiscal years beginning on
or after July 1, 2004 and must be applied retroactively with
restatement of prior periods. The application of this standard is not
expected to have a significant impact on the financial position or
results of operations of the Company.
In June 2003, the CICA issued Accounting Guideline 15 (AcG-15),
"Consolidation of Variable Interest Entities." This guideline requires
that an enterprise holding other than a voting interest in a variable
interest entity ("VIE") could, subject to certain conditions, be
required to consolidate the VIE if it is considered its primary
beneficiary whereby it would absorb the majority of the VIE's expected
losses and/or receive the majority of its expected residual returns.
AcG-15 applies to annual and interim periods beginning on or after
November 1, 2004. The Company does not expect this guideline to have
an impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Assets and
Liabilities. SFAS 150 addresses the accounting for mandatory
redeemable shares, put options and forward purchase contracts of the
Company's shares, and instruments that are liabilities under this
Statement that can be settled for shares. This standard is effective
for all financial instruments entered into or modified after May 31,
2003, and is otherwise
29
CEDARA SOFTWARE CORP.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
effective for the first interim period beginning after June 15, 2003.
The Company does not expect any impact on the Company's results of
operations and financial position upon the adoption of SFAS 150.
25. Comparative figures:
Certain prior years' figures have been reclassified to conform with
the current year's presentation.
30
DOCUMENT NO. 3
MESSAGE TO OUR SHAREHOLDERS
Fiscal 2004 was an excellent year for Cedara Software Corp., one in which the
Company achieved very significant financial and market milestones. Cedara
ended the year with record earnings, a sound balance sheet and in a strong
position to take advantage of new growth opportunities.
Highlights of the year were:
o Record net income of $15.6 million over four consecutive quarters of
healthy earnings;
o Continued improvement in customer relationships, entering into a
number of major contracts with large global customers and the opening
of a Cedara office in Shanghai, China;
o A successful $50 million equity financing that transformed the
Company's financial position, allowed the cancellation of the
guarantee by Analogic Corporation of Cedara's operating line of
credit with its bank and provided Cedara with the flexibility to
independently develop new financing arrangements;
o Further development of the organization and its core technologies,
and
o Regaining Cedara's listing on The NASDAQ National Market.
These results were achieved with minimal impact on operating costs which had
been significantly reduced in the Company's restructuring that was completed
in fiscal 2003.
With the turnaround accomplished, momentum strong and distribution channel
inventories at somewhat below-optimal levels, management began focusing on new
growth opportunities. As we have stated throughout the past year, the OEM
software business is characterized by large transactions which make revenue
flows unpredictable. While we have every intention of further developing
Cedara's share of this market, we are also committed to augmenting the
Company's revenue stream with complementary sources of business. To that end,
we have and will continue to assess relevant, accretive acquisition
opportunities and are working on numerous joint initiatives that will benefit
from Cedara's depth of intellectual capital in imaging. In whatever
initiatives we pursue we are committed to protecting the Company's newly
established financial health and to ensuring that we have the people to
sustain it.
Cedara has entered fiscal 2005 with a talented, dedicated management team that
has brought it through extremely difficult circumstances, new credibility in
its core markets globally and a developing positive image in financial
markets. We anticipate competition and customer expectations will escalate,
but are optimistic about the Company's ability to meet these challenges.
We would like to extend our thanks and appreciation to our loyal staff for
their continued hard work and perseverance in achieving this strong set of
results. To our customers who have continued to support us, we express our
deep appreciation. And we thank our shareholders, who were patient and
supportive through the difficult turnaround, and who continue to believe in
Cedara's potential. We will do everything possible in 2005 to build on the
momentum.
/s/ Peter J. Cooper /s/ Abe Schwartz
- ------------------------ -------------------------------------
Peter J. Cooper Abe Schwartz
Chairman President and Chief Executive Officer
MANAGEMENT DISCUSSION AND ANALYSIS
This Management Discussion and Analysis ("MD&A) was prepared as of September
7, 2004 and 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. The
Company prepares its financial statements in accordance with generally
accepted accounting principles in Canada ("Canadian GAAP"). To the extent
applicable to the Consolidated Financial Statements, Canadian GAAP conforms in
all material respects with generally accepted accounting principles in the
United States ("U.S. GAAP"), except as described in note 22 to the
Consolidated Financial Statements. All references to a year, which are
included elsewhere in this annual report, refer to the fiscal year that ended
June 30th of that year.
The MD&A has been prepared in reference to the new MD&A disclosure
requirements established under National Instrument 51-102 "Continuous
Disclosure Obligations" ("NI 51-102") of the Canadian Securities
Administrators. While the provisions of NI 51-102 concerning annual MD&A apply
only for financial periods beginning on or after January 1, 2004, it is
believed that utilizing NI 51-102 as a guideline for enhanced disclosure will
provide greater insight into, and understanding of, the Company's financial
condition and results of operations.
Additional information about Cedara, including copies of continuous disclosure
materials such as the Company's annual information form, is available on
Cedara's website at http://www.cedara.com, or the SEDAR website at
http://www.sedar.com.
Overview of the Company
Overview of the Business of the Company
Established in 1982, Cedara Software Corp., is a leading independent provider
of medical technologies used worldwide by key medical device manufacturers,
healthcare information technology companies, hospitals, imaging centres, and
medical clinics.
Cedara's Technologies
Many of Cedara's innovative medical technologies are sold through major
healthcare device manufacturers and information technology providers,
including GE, Siemens, Philips, Toshiba, Hitachi and Cerner.
Through the years Cedara's software has been deployed in thousands of
hospitals and clinics worldwide, including prestigious facilities such as
Johns Hopkins University School of Medicine; Shands Hospital, University of
Florida; University of California, Los Angeles (UCLA); Lund University in
Sweden; and University Hospital of Geneva, Switzerland.
Cedara is unique in that its advanced medical imaging technologies are used in
all aspects of clinical workflow including:
o The operator consoles of many medical imaging devices
o Picture Archiving and Communications Systems (PACS)
o Sophisticated clinical applications that further analyze and manipulate
images
o The use of imaging in computer-assisted therapy
Cedara is also unique in another way: it has expertise and technologies that
span all the major digital imaging modalities and related subspecialties,
including magnetic resonance imaging (MRI), computed tomography (CT), positron
emission tomography (PET), nuclear medicine, digital X-ray, ultrasound,
mammography, cardiology, angiography, and fluoroscopy.
1
The Company generates revenue in three ways:
o by developing and licensing its software technology and products;
o through development of custom software for healthcare equipment
manufacturers; and
o through service and support provided to its customers.
As with many software companies, the Company is reliant on individual
transactions that can be material in any given quarter. If the Company fails
to enter into contracts of this nature in any quarter, the financial results
of the Company could be materially adversely impacted. Even if such
transactions are entered into, there is no guarantee or assurance that these
transactions will be re-occurring. In addition, the quarterly revenue and
earnings of the Company can fluctuate materially between quarters, principally
due to the timing of annual license contract renewals. There is no guarantee
or assurance that such renewals will occur.
The Company anticipates that the healthcare imaging software market will
continue to grow over the next several years. 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. To help
mitigate the Company's reliance on large, long-term sales contracts, the
Company has taken steps to add a new sales channel directly to hospitals,
imaging centres and radiology groups in an effort to complement its OEM
channel. The Company will continue 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 maintain cash positive
operations.
Principal Products and Services
The Company believes it has the most diverse product and service offering of
any independent provider of medical imaging software. The Company's medical
imaging solutions are used in all aspects of clinical workflow including the
capture of patient digital images, the sharing and archiving of images,
sophisticated tools to analyze and manipulate images, and the use of imaging
in surgery. The Company is unique in that it has expertise and technologies
that span all the major digital imaging modalities including angiography, CT,
echo-cardiology, digital X-ray, fluoroscopy, mammography, MRI, nuclear
medicine, PET, and ultrasound. Cedara software is deployed in hospitals and
clinics worldwide - approximately 20,000 medical imaging systems and
approximately 4,600 Picture Archiving and Communications System ("PACS")
workstations have been licensed to date.
In a clinical environment, medical images are created, viewed, used to
diagnose illnesses, stored, communicated and used in the treatment of
diseases. Each modality uses differing technology to acquire images and has
unique needs in viewing images, diagnosing illnesses with images, as well as
in treating these diseases with the aid of images. The Company has developed a
number of advanced technologies, products and services that are utilized in
all of these areas.
Imaging Platform
- ----------------
Software development can be accelerated by building applications on a software
platform consisting of libraries and tools. In 1991, the Company developed a
software imaging platform, called Imaging Application Platform(R) ("IAP"),
which, over the past 12 years, has been used by the Company to develop imaging
technologies and products for sale to Original Equipment Manufacturers
("OEMs") and Value Added Resellers ("VARs"), as well as licensed to these
customers as a development platform for their development of custom
applications.
Imaging Application Platform (IAP)
IAP, the middleware or `glue' between applications, provides a complete
software development environment with technology and capabilities for creating
advanced high-performance medical imaging applications. IAP is one of the most
widely used medical imaging toolkits available, with a proven track record in
all the major imaging modalities and clinical applications.
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All of the Company's major OEM partners and virtually all of its engineering
service clients directly or indirectly use IAP in business critical
applications. In fact, the platform is embedded in nearly one-third of MRI
systems sold annually, and more than 80% of all PET-CT systems installed in
the United States.
Cedara OpenEyes(TM)
The Company's most advanced imaging software platform, called OpenEyes, is a
powerful and flexible best practices development platform that enables the
rapid creation of medical applications. Its programming model represents a
paradigm shift from previous technologies, completely insulating clients from
the complexities of deep code development by providing a single uniform set of
controls and development interfaces.
OpenEyes packages connectivity, visualization and printing services in a
flexible and transparent architecture that can be deployed across a wide
spectrum of application environments - from small "one-off" projects to
complex web solution services.
Picture Archiving and Communications Systems (PACS)
- ---------------------------------------------------
PACS is a digital system that facilitates the diagnostic review of patient
data and images, including the reporting, consultation, and archiving of
information to short- or long-term storage devices. PACS allows communication
of patient information using local or wide area networks or public
communications services.
As an electronic substitute for film, PACS is a crucial component in moving
toward a paperless healthcare environment. PACS gives rise to better sharing
of patient information, faster report retrieval, reduced X-ray retakes, and
better, more efficient image storage. PACS also makes it possible to compare
and analyze digital images and realize substantial cost savings.
Cedara offers a full spectrum PACS solution that can easily be tailored to the
needs of different size hospitals.
Enterprise PACS
For large hospital networks with multiple campuses or caseloads exceeding
30,000 per year, Cedara's enterprise PACS exchanges images from any modality
across an entire hospital network, anywhere critical diagnostic information is
needed, while easily scaling to work with smaller hospital departments.
Modality PACS
Cedara's modality PACS, also referred to as Mini-PACS, facilitates
cost-effective entry into a filmless environment if a hospital's case volume
is less than 30,000 per year. Hospitals can start with one modality, adding a
small archive server, display stations and other modalities as required by
their caseload and demands from other departments.
Entry Level PACS
Cedara's entry-level PACS is ideal for hospitals and clinics with smaller
caseloads that still want the ability to scale to a modality or enterprise
PACS should their volumes increase over time. The entry-level system provides
softcopy reporting in a low maintenance environment.
The Company licenses these products to OEMs and VARs as full solutions and
individually as products to complement the existing portfolio of customers'
PACS offerings. The Company also offers PACS solutions for specific
modalities, such as OrthoWorks(TM), a family of products that can be used
individually with an existing PACS or together as a complete orthopedic,
web-enabled package.
Image Acquisition Consoles
Cedara develops image acquisition console software for hardware companies who
need a workstation to drive the capture of images from imaging devices, such
as X-ray or CT scanners.
3
Cedara's I-Acquire(TM) line of products for system integrators, X-ray and OEMs
offer universal image capture software for X-ray-related modalities and tools
for rapidly developing CT and MRI console applications. This universal
software application allows multiple digital detectors, computed radiography
(CR) scanners and X-ray generators to be accessed by a common acquisition
console that enables X-ray equipment manufacturers and system integrators to
select and quickly package detectors, scanners and generators from a variety
of different vendors.
The Cedara I-Acquire(TM) family consists of these specialized packages:
Cedara I-Acquire/DR(TM)
A digital radiography (DR) acquisition console application that integrates
with medical systems to simplify technologists' workflow and improve their
productivity with high-quality imaging, tools for image manipulation, and
quality control (QC).
Cedara I-Acquire/CR(TM)
A CR acquisition console that enables CR equipment manufacturers and system
integrators to create competitive CR acquisition systems with powerful
workflow and image processing capabilities.
Cedara I-Acquire/FD(TM)
A film scanning console application that converts vast film libraries to
digital to allow hospitals and smaller medical clinics to eliminate the cost
of maintaining film. This application may also be used in combination with
existing X-ray film-based environments to integrate traditional X-ray rooms
into digital PACS environments.
Cedara I-Acquire MG(TM)
A mammography scanning console application that optimizes hospital workflow
and enables OEMs and system integrators to create competitive digital
mammography systems with powerful workflow and image processing capabilities.
Cedara I-Acquire for MR and CT(TM)
An application that equips MRI and CT manufacturers with more than 80% of the
features needed to build an operator console - the computer that controls the
scanning and monitoring of patients during diagnostic imaging. Features such
as 2D image review, multiplanar reformat, printing, DICOM, archiving,
communications, and storage of patient data on DVD are built in.
Clinical Applications
- ---------------------
Clinical software can have a major impact on the delivery of patient care. In
the past several decades, a rapid expansion of clinical software systems has
been noted within institutions that deliver healthcare. Today, more physicians
rely on clinical applications to help them make even routine diagnostic and
therapeutic decisions.
Cedara's broad range of clinical applications is used in general radiology and
other specialty areas. Many of Cedara's clinical applications and workflow
solutions can be added as plug-ins to existing PACS workstations or used as
dedicated, standalone workstations.
General Radiology
Cedara's Baby Explorer(TM)
A software only solution that adds 3D fetal imaging to any existing ultrasound
system, allowing expectant parents to view and record 3D images during
scheduled ultrasound visits - months before a baby's arrival. Baby Explorer
runs on standard PC hardware and acquires images from any ultrasound scanner.
4
Cedara 3D Volume Explorer(TM)
A software solution for Ultrasound applications that provides sophisticated 3D
imaging, real-time 3D and 4D, various rendering techniques, a multi-planar
virtual endoscope, and integrated reports that are easily incorporated into
any onboard or off-board application. Baby Explorer is available as an option
to this general-purpose ultrasound application.
Cedara Vivace(TM)
Vivace is a set of 3D visualization software plug-in components for examining
images acquired from CT and MRI scanners. It allows advanced 3D visualization
and the use of diagnostic tools that are easily plugged into imaging
workstations already installed in the field, or new medical imaging devices.
Cedara I-Conference(TM)
An application that consolidates all the information needed to conduct
complex, multi-modality case reviews, reducing preparation time so that
doctors can focus on case presentations.
Cedara I-Report(TM)
A multislice CT navigation and reporting workstation for the largest of
multislice data sets. I-Report-CT allows radiologists to review images in
stack mode using MPR (Multiplanar Reformat), MIP (Minimum-Intensity
Projection), and volume rendering mode - greatly improving the ability to
navigate large data volumes. I-Report-CT includes measurement tools,
orthopedic templates, and future solutions for PET/CT and lung Computer
Assisted Diagnosis (CAD). This workstation also supports all other major
medical imaging modalities.
Orthopedics
Cedara OrthoWorks(TM)
A complete orthopedic treatment and digital planning solution that provides
orthopedists with the digital tools needed to accurately plan treatment and
surgery and reduce the support costs of adding new implant templates.
OrthoWorks integrates with Cedara I-Acquire to support image acquisition from
all orthopedic modalities, including CT, MRI, CR, DR and film digitizers. This
solution also uses web server software to enable internet-based orthopedic
planning.
Mammography
Cedara I-ReadMammo(TM)
I-ReadMammo is a high-performance multi-modality digital mammography
workstation with state-of-the art mammography tools for improving mammography
workflow that also automates the presentation procedure and review process for
current and prior mammography images.
Molecular Imaging
Cedara Nuclear Medicine
For more than a decade Cedara has delivered solutions for major OEMs in the
nuclear medicine arena. Cedara's workstation technology is deployed in the
majority of nuclear medicine devices installed worldwide. Cedara has developed
solutions for tomographic reconstruction, nuclear cardiology, fusion,
endocrinology, neurology, pulmonary and gastrointestinal areas.
Cedara's PET/CT fusion plug-in
A plug-in application for the rapid review of large volumes of PET and CT
data, this module will be available as on option on the Cedara I-SoftView(TM)
family of PACS workstations.
5
Cardiology
Radiology Components
In the cardiology arena, the advent of multislice MR and CT scanners, new
contrast agents, faster processing speeds and other driving technologies has
left many companies wondering what to do with the vast amount of data that is
now available to produce images of the heart at much higher resolutions.
Cedara has successfully applied its experience in image processing, display,
and analysis to complement the cardiology PACS domain and thus solve many of
these problems.
Cedara's Advanced Tissue Segmentations
Cedara has successfully developed an analysis system for MR data that
automatically segments the heart's left ventricle.
Using this technology, cardiologists are able to segment the ventricle in only
15 minutes compared with the usual 8-9 hours. We also are adapting tools such
as `Point and Click Classification', which facilitates automatic tissue
segmentation for other CT cardiology applications.
Cedara's segmentation technologies for the fully and semi-automated
identification of tissue structures and organs (2D and 3D modality data), in
ultrasound, MRI and CT, are prime examples. The software can be used to build
a variety of clinical applications that require fast, reliable automated
analysis of anatomical structures.
Connectivity Solutions
- ----------------------
Healthcare facilities depend upon standards-based connectivity and workflow
management solutions for efficient, cost-effective communication and data
sharing. By strictly adhering to standards such as Integrating the Healthcare
Enterprise (IHE), the Health Insurance Portability and Accountability Act of
1996 (HIPAA), and Personal Information Protection and Electronic Documents Act
(PIPEDA), Cedara products successfully integrate with diverse healthcare
systems.
DICOM, which stands for "Digital Imaging and Communications in Medicine" is
the industry standard for digital medical images and associated patient data,
as defined by the National Electrical Manufacturers Association and American
College of Radiology.
Cedara's video-to-DICOM conversion products and scalable multi-modality
storage, viewing, and reporting systems communicate efficiently over the
healthcare network to handle and convert video signals from a variety of
legacy systems into digital data. These solutions enable clients to add
upgraded, modern functionality to any legacy modality scanner to extend the
life of the legacy device, allowing full integration with any vendor modality
equipment and better connectivity within the healthcare enterprise.
Cedara I-Acquire Video(TM)
An application that extends the useful life of CT, MR, fluoroscopy,
ultrasound, nuclear medicine, angiography, and endoscopic device scanners that
do not support digital DICOM interfaces. I-Acquire easily upgrades any
vendor's image acquisition device to a Microsoft(R) Windows(R) user interface,
utilizing standard off-the-shelf PC hardware.
Dicomit Information Manager
A hardware and software solution that upgrades any ultrasound machine to
comply with DICOM connectivity standards.
Dicomit Information Manager - HLR
A hardware and software solution that upgrades any High Line Rate (HLR)
modality, such as C-arm, nuclear medicine, CT, MRI, digital angiography and
high-frequency ultrasound to comply with DICOM standards.
6
Cardiology Information Manager
A hardware and software solution that upgrades any cardiac ultrasound machine
to digital echocardiology for DICOM compliance.
Engineering Services
- --------------------
Many clients prefer to outsource some or all of their software engineering
activities in order to attain new clinical software expertise or
time-to-market advantage. Engineering services is the aspect of Cedara's
business that undertakes software development under contract. The Company's
engineering lab helps clients who desire one-of-a-kind solutions meet tough
deadlines and rapidly release products to market.
Over its 20-year history, Cedara has built custom software solutions for some
of the industry's largest organizations. The Company's clients range from
leading medical device and healthcare IT vendors to technology startup
companies.
The engineering work encompasses a variety of technologies and many different
types of projects, including operator console software for CT scanners, MRI
systems, nuclear medicine cameras and other devices, and surgical navigation
and other clinical applications.
Cedara also provides partial teams for clients who need design and methodology
consulting, project management, product verification and validation, test
planning, installed base modernization, system maintenance, and other related
services.
Cedara is certified to several international quality standards, including ISO
9001, CE Mark, CMM, and GMP. These standards ensure that Cedara's work is high
quality. ISO 9001 certification is a key way in which Cedara continually
improves its ability to effectively, efficiently, and systematically meet
customer's needs.
Support Services
- ----------------
Cedara offers many levels of support to help clients with their medical
imaging needs, from professional services to technology partnerships to a 24/7
customer help desk. Service contracts are often built into the overall
agreement with the customer, thereby providing an ongoing revenue stream.
Product Distribution and Markets
OEM Channel
Historically, the Company's business model was to sell exclusively through
major healthcare OEMs and VARs. As an independent supplier of imaging software
to medical equipment manufacturers, the Company has established a global
presence, and has fostered long-term relationships with major companies in the
healthcare industry by applying its broad range of skills and continually
enhancing its intellectual property. The Company believes that its integrated
solutions are well positioned to address the needs of a growing number of
hospitals converting to digital image management.
The Company's software powers all major modalities in medical imaging
including MRI, CT-scanners, positron emission tomography, nuclear medicine,
ultrasound, digital x-ray, and mammography. The Company is one of the few
independent developers with this broad range of capabilities. The Company's
proprietary imaging platform has an installed base of over 20,000 licenses, a
key revenue metric in the software industry.
The Company's products are sold throughout the world by VARs, systems
integrators and OEMs including Philips Medical Systems, GE Medical Systems,
Hitachi Medical Corporation, Cerner Corporation, EMed Technologies, and
Toshiba Medical Systems.
Direct Channel
To help complement the Company's well-established OEM channel, over the past
year the Company began developing a sales channel directly to hospitals,
imaging clinics and radiology groups. This channel
7
leverages the Company's deep portfolio of technical capability and its broad
product offering, to help in building a revenue stream directly from
"end-users". While this channel has not had a material impact on the Company's
operating results to date, the Company expects to grow the revenues derived
from this channel.
Cedara China
Over the past year Cedara has announced several new initiatives associated
with its entrance into medical imaging in China, where the Company has been
active. These include cooperation agreements with Hong Kong Polytechnic
University and IBM China.
The Company also previously entered into arrangements with various Chinese
companies to distribute Cedara's digital X-ray, PACS and 3D imaging
applications to the Chinese market, including B-Soft, Beijing WanDong Medical
Equipment Co., Landwind Industrial Co. Ltd. and Shan Dong Shanghai Medical.
To better serve local needs while offering engineering services to clients,
Cedara also recently opened an office in China.
FISCAL 2004 BUSINESS HIGHLIGHTS
Fiscal 2004 was a milestone in the Company's efforts to become more
financially stable and profitable. On March 25, 2004, the Company completed a
major equity financing initiative that saw the Company issue 5,000,000 common
shares priced at $10.00 per share for net proceeds of approximately $47.2
million. This financing dramatically improved the Company's financial
position, and the Company is no longer dependant on Analogic Corporation's
("Analogic") generous financial support and is no longer dependant on a bank
line of credit to fund working capital. This financing, combined with positive
cash flow from operations and strong profits during the year, has
substantially improved the Company's balance sheet and liquidity position as
at June 30, 2004.
Fiscal 2004 also saw the Company achieve sustainable profits and positive cash
flow from operations after reporting improved revenues from the prior fiscal
year. A number of significant events and actions undertaken in fiscal 2004
contributed to these outcomes, including the following:
Operations
During fiscal 2004, the Company continued its efforts to improve the
fundamentals of the business including refocusing of the business operations
on customer service, quality product innovation, distribution expansion and
realigning operations. The Company successfully completed five significant
customer agreements which contributed to revenue for the current fiscal year:
o On September 22, 2003, the Company announced that it had signed an
agreement with Philips Medical Systems to supply certain of its
medical imaging technologies and related support services for
application by Philips in its Magnetic Resonance ("MR") systems. The
agreement was valued at a minimum of $4.2 million, substantially all
of which was recognized as revenue during fiscal year 2004.
o On November 12, 2003, the Company announced that it had signed a
major agreement with Cerner Corporation to supply certain of its
medical imaging technologies and related support services. The
agreement was valued at a minimum of approximately $7.1 million, a
substantial portion of which was recorded in the current fiscal year.
o On March 2, 2004, the Company announced that it has signed a major
agreement with Siemens Medical Solutions ("Siemens"), to supply
certain of its medical imaging technologies to Siemens. The agreement
was valued at $6.7 million, all of which was recognized as revenue in
the Company's third quarter.
o On March 4, 2004, the Company announced that it signed a major
agreement with Aloka Co. Ltd. of Tokyo Japan, to supply certain of
its medical imaging technologies and services to Aloka. The agreement
was valued at a minimum of $3.1 million, a significant portion of
which was recognized in the current fiscal year.
8
o On April 5, 2004, the Company announced that it had signed a major
agreement with Hitachi Medical Corporation, to supply certain of its
medical imaging technologies and services to Hitachi. The agreement
was valued at a minimum of $6.1 million a significant portion of
which was recognized in the current fiscal year.
The Company also introduced a number of products into the market place and
established a number of business relationships, including:
o In July 2003, the Company announced Cedara OrthoWorks, a desktop
application and web server solution for orthopedic surgeons that
allows the surgeon to prepare for surgery whether working in the
hospital, at home or elsewhere with instant access to digital patient
images, surgical planning aids, measurement tools and a library of
digital prosthetic templates.
o In September 2003, the Company unveiled Cedara I-Reach(TM) v3.0, its
new breakthrough medical image viewer for healthcare professionals
who want full PACS functionality over the Internet and enables
hospitals and clinics to acquire, distribute and archive medical
images and diagnostic reports across the Internet. Cedara I-Reach(TM)
v3.0 provided a major step forward for hospitals seeking a fully
web-based PACS implementation.
o On October 22, 2003, the Company announced the unveiling of Cedara
I-Acquire/FD(TM), its new film scanning console application. The new
software allows hospitals and clinics to convert their vast libraries
of film into digital format. By digitizing film, hospitals and
clinics can eliminate the ongoing costs of maintaining these film
libraries.
o The Company presented its latest healthcare imaging product
enhancements and features at the 2003 Radiological Society of North
America ("RSNA") Conference in Chicago. Cedara showcased its
extensive product portfolio of new technologies which encompasses all
aspects of clinical workflow from image acquisition to sophisticated
image processing and surgery.
o In December 2003, the Company launched a new Technology Partnership
Program pursuant to which the Company provides support and assistance
to technology partners, such as hospitals, research institutions,
medical universities, startup companies, doctors and inventors, by
providing them access to the Company's research laboratory, marketing
department and global sales channel.
o On February 24, 2004, the Company announced that two of its key
products, Cedara I-Softview(TM) and Cedara I-Acquire Video(TM)
excelled in the annual IHE (Integrating the Healthcare Environment)
Connectathon event sponsored by Healthcare Information and Management
Systems Society) ("HIMSS") and RSNA.
o The Company presented its latest healthcare imaging products and
technologies at the 2004 European Congress of Radiology ("ECR").
o In May 2004, Cedara presented its latest web imaging solutions at the
2004 Society for Computer Applications in Radiology ("SCAR") 21st
annual meeting in Vancouver.
o The Company received U.S. Food and Drug Administration ("FDA") 510(k)
clearance for I-ReadMammo(TM), a new mammography reading workstation
for diagnosis and screening. FDA clearance allows Cedara to sell
I-ReadMammo(TM) into the US, which currently is the largest market
for mammography, and one of the fastest growing digital mammography
markets in the world.
o Cedara entered into a cooperative sales, marketing and support
agreement with Fischer Imaging Corporation ("Fischer") to integrate a
customized version of Cedara's new I-ReadMammo(TM) workstation
software with Fischer's SenoScan(R) digital mammography scanning
system.
o In June 2004, Cedara announced a strategic partnership with
Medipattern Corporation. Under the terms of the partnership, Cedara
will be the exclusive global channel for Medipattern's breast
ultrasound computer aided diagnosis ("CAD") and detection technology.
9
Liquidity and Capital Resources
o During fiscal 2004 the National Bank of Canada ("NBC") renewed the
Company's current operating line of $14.0 million to October 31,
2004.
o Following the repayment of all borrowings under the operating line,
the letter of credit issued by Analogic in support of the Company's
$14.0 million bank line was cancelled. The security agreement between
Analogic and NBC, which allowed the transfer of NBC's security
position to Analogic, should the letter of credit be drawn upon, was
also cancelled. The Company and NBC are currently renegotiating the
structure of the Company's borrowing facility, which may result in an
increase or reduction in the availability of funds under that
facility.
o The Company issued 400,000 common shares to certain 5% unsecured
subordinated convertible debenture holders ("the Convertible
Debentures"), when these holders elected to convert $1.0 million of
the then $3.2 million outstanding Convertible Debentures to common
shares. On January 15, 2004, the Company exercised its right to
convert all of the remaining $2.2 million of Convertible Debentures
outstanding into common shares of the Company. This resulted in the
issuance of additional 867,120 common shares of the Company.
China Business
On May 31, 2004, the Company announced the formal opening of a new office in
Shanghai, China to better serve its existing customers and to pursue new
business opportunities in the region.
o On October 14, 2003, the Company announced a distribution agreement
with Shanghai Medical Equipment Works ("SMEW"), one of the largest
medical equipment companies in China. This agreement allows Cedara to
broaden distribution of its popular I-Acquire/DR(TM) acquisition
console software, I-SoftView(TM) diagnostic review workstation, and
I-Store(TM) image and distribution archive into SMEW's network of
more than 5,000 hospitals.
o The Company also previously entered into arrangements with other
Chinese companies to distribute Cedara's digital X-Ray, PACS and 3D
imaging applications to the Chinese market, including B-Soft, Beijing
WanDong Medical Equipment Co., and Landwind Industrial Co. Ltd.
o On November 24, 2003, the Company signed a memorandum of
understanding with IBM China. This agreement commits both parties to
work together to explore and identify opportunities in the Chinese
market. Under the agreement, IBM and Cedara will develop a channel
strategy. Both parties will promote Cedara software and IBM hardware
and integrate it with their business partners' solutions.
NASDAQ
o On January 9, 2002, the Company received a NASDAQ Staff Determination
for failure to comply with the minimum stockholders' equity
requirements for continued listing on NASDAQ. Effective April 1,
2002, the NASDAQ Panel transferred the Company's listing from the
NASDAQ National Market to the NASDAQ SmallCap Market.
o In March 2003, the Company received a NASDAQ Staff Determination for
failure to comply with either the US$1.00 minimum bid price
requirement or the US$2.5 million minimum shareholders' equity
requirement for continued listing on the NASDAQ SmallCap Market. On
July 3, 2003, the Company's common shares were de-listed from NASDAQ
and became eligible for trading on the OTC Bulletin Board under the
symbol "CDSWF". The Company's listing on the Toronto Stock Exchange
was unaffected by NASDAQ's decision.
o During September 2004, NASDAQ approved the Company's application to
list its securities on the NASDAQ National Market. As a result,
trading of the Company's common shares is expected to commence on the
NASDAQ National Market on September 14, 2004 under the symbol "CDSW".
10
Board and Management Changes
o In November 2003, the Company received approximately $0.9 million in
full and final settlement of loans outstanding from its former
Chairman and Chief Executive Officer. These loans had been secured
through the pledge of common shares of the Company. A portion of
these shares were sold and the outstanding loans were paid in full.
This repayment resulted in a recovery of approximately $1.1 million
against the provisions for employee share purchase loans and
severance costs.
o On April 28, 2004, the Company announced the appointment of Brian
Pedlar as Chief Financial Officer.
FORWARD-LOOKING STATEMENTS
Certain statements contained in the Annual Report, Consolidated Financial
Statements and Notes, and this Management Discussion and Analysis, may
constitute forward-looking statements within the meaning of securities laws.
When used in these documents, the words, "may", "will", "should", "plan",
"intend", "anticipate", "believe", "estimate", "predict", "potential",
"continue", "expect" or similar expressions, concerning matters that are not
historical facts, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. In particular, statements
relating to the Company's expectations concerning its licensed software
products and relating to the sufficiency of capital to meet working capital
and capital expenditure requirements are forward-looking statements. Many
factors could cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance, or
achievements that may be expressed or implied by such forward-looking
statements, including, among others, those which are discussed under the
heading "Risk Factors" below. Should one or more of these risks or
uncertainties materialize, or should assumptions underlying the
forward-looking statements prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated or expected.
Forward-looking statements contained in the Annual Report, Consolidated
Financial Statements and Notes and this Management Discussion and Analysis are
based on the Company's current estimates, expectations and projections, which
the Company believes are reasonable as of the current date. You should not
place undue importance on forward looking statements and should not rely upon
them as of any other date. The Company does not intend, and does not assume
any obligation, to update these forward-looking statements at any particular
time.
RISK FACTORS
Major Customers
The Company's strategy includes providing products and services to multiple
divisions of the largest companies in the medical imaging industry. As a
result, over the past three fiscal years respectively, the Company has had
four, two and four customers each of which represents 10% or more of its
consolidated revenues. The sales cycle for transactions with these major
customers can extend longer than one year. As a result, the Company may not
have sales to each of its major customers in any given year or at all. On an
aggregate basis, all of the major customers referred to above represented
approximately 62%, 41% and 64% of the Company's consolidated revenue in each
of the last three fiscal years respectively. Any disruption in the Company's
relationships with these major customers or any decrease in revenue from these
major customers could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects. Because it
often takes significant time to replace lost business, it is likely that the
Company's operating results would be adversely affected if one or more of
these major customers were to cancel, delay or reduce significant orders in
the future.
Reliance on Individual Contracts
The Company is reliant on individual transactions that can be material in any
given quarter. If the Company fails to enter into contracts of this nature in
any quarter, the financial results of the Company could be
11
materially adversely impacted. Even if such transactions are entered into,
there is no guarantee or assurance that these transactions will be
re-occurring.
Fluctuations in Quarterly Financial Results
The Company's revenue and earnings can fluctuate materially between quarters,
principally due to the timing of significant license agreements. There is no
guarantee or assurance that the timing will remain consistent. As a result of
this seasonality, the Company is required to manage its working capital to
ensure that it has sufficient liquidity to meet its operating needs throughout
the year. There can be no assurance that the Company will be able to
effectively manage its working capital requirements in the future.
Dependence on Key Personnel
Loss of the Chief Executive Officer, certain members of the executive team or
key technical leaders of the Company could have a disruptive effect on the
implementation of the Company's business strategy and the efficient running of
day-to-day operations. Moreover, the Company may need to hire additional sales
people, technical staff (especially software engineers and developers),
managerial and marketing personnel. Competition for personnel throughout the
health care and information technology industries is intense. The Company may
be unable to retain its key employees or attract, assimilate, retain or train
other necessary qualified employees, which may restrict its growth potential.
Competitors
The Company operates in a single industry segment, and services the diagnostic
imaging, image management, and therapy phases of the clinical workflow
process. The primary competitors for the Company's diagnostic imaging products
are the internal development groups of large diagnostic imaging companies,
many of which are also customers of the Company. The primary competitors for
the Company's image management products are various PACS software vendors that
offer solutions that are similar to those offered by the Company.
Some of the Company's current or future competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than the Company. These competitors may be able to undertake more
extensive research and development, manufacturing and marketing efforts and
may be able to adopt more aggressive pricing policies. In addition, some of
the Company's competitors have more extensive customer bases and broader
customer relationships, including relationships with the Company's current and
potential customers. Some of the Company's competitors also have significantly
more established customer support and professional services organizations and
more extensive direct and indirect sales channels than the Company. In
addition, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than the Company.
As a result, the Company may not be able to maintain its competitive position
and market share against current or future competitors, which could seriously
harm its business and results of operations.
Technological Change
The market for the Company's products is characterized by rapid and
significant technological change, frequent new product introductions, changes
in customer requirements and evolving industry standards. The development of
new technologies, commercialization of those technologies into products and
market acceptance and customer demand for those products is critical to the
Company's success. Successful product development and introduction depends
upon a number of factors, including new product selection, timely and
efficient completion of product design, product performance at customer
locations and development of products by competitors. If the Company does not
properly identify the feature preferences of its existing and potential
customers, or if it fails to deliver features that meet the requirements of
these customers on a timely basis, the Company's ability to market its
products successfully and to increase its revenues will be impaired.
12
Exchange Rate Fluctuations
The Company derives all of its revenue from sales outside of Canada.
Accordingly, the prices realized by the Company are affected by changes in the
exchange rate of Canadian dollars for United States dollars or Canadian
dollars for other foreign currencies. The majority of the Company's costs are
payable in Canadian dollars and, therefore, the financial results of the
Company are subject to foreign currency exchange rate fluctuations. Compared
to the previous fiscal year, there has been a significant appreciation in the
value of the Canadian dollar in terms of the United States dollar. This has
had an adverse effect on the Company's results of operations. Further
appreciation in the value of the Canadian dollar in terms of the United States
dollar could have an additional adverse effect on the Company's results of
operations.
International Operations
The Company's business operations outside the United States and Canada subject
it to numerous inherent potential risks associated with international
operations, including:
o difficulties in customizing the Company's products for
foreign markets;
o difficulties in establishing relationships with foreign
companies;
o import or export licensing requirements;
o longer payment cycles;
o increases in tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers imposed
by foreign countries;
o potential adverse tax consequences;
o limited or unfavourable intellectual property protection;
o seasonal reductions in business activity during the summer
months in Europe and some other parts of the world; and
o recessionary environments in foreign economies.
Intellectual Property
The Company is heavily dependent upon proprietary technology. The Company has
been issued 11 patents and has 32 patents pending, all with respect to
strategic features embodied in its principal products. In addition, the
Company has further patent applications under evaluation with respect to
certain software technology currently under development by the Company.
The Company relies principally upon patent, copyright, trademark, and trade
secret laws to protect its proprietary technology. Where appropriate, the
Company also enters into non-disclosure agreements with persons to whom it
reveals its proprietary information, such as original equipment manufacturers
that the Company works with concerning future products. There can be no
assurance, however, that these laws or nondisclosure agreements will be
adequate to prevent misappropriation or independent third-party development of
the same or similar technology.
It is possible that the Company's intellectual property rights could be
successfully challenged by one or more third parties, which could result in
its inability to exploit, or its loss of the right to prevent others from
exploiting, certain intellectual property. In addition, reverse engineering,
unauthorized copying or other misappropriation of the Company's technology
could enable third parties to benefit from its technology without paying the
Company for it, which could significantly harm its business.
Any claims or litigation initiated by the Company to protect its proprietary
technology could result in significant expense to the Company and divert its
technical and management resources, whether or not the claims or litigation
are determined in favour of the Company.
There is also a risk that the Company's current or future products may
infringe upon third party proprietary technology. The medical imaging industry
is characterized by frequent claims and related litigation regarding patent
and other intellectual property rights. If a third party was to sustain a
valid claim against the Company
13
and any required license was not available on commercially reasonable terms,
the Company's financial condition and operating results could be materially
and adversely affected. The Company could be required to pay infringement
damages, modify its products so they are non-infringing, discontinue offering
products that are found to be infringing, or indemnify its customers.
Furthermore, defending the Company against such claims could divert a
significant portion of the Company's technical and management resources,
whether or not the claims are determined in favour of the Company.
Liquidity
The Company's current $14 million operating facility does not require the
Company to comply with any financial covenants. After renegotiation of the
Company's operating facility with the Bank, there can be no assurance that
debt financing will be available or if available, that it will be on terms
acceptable to the Company. The inability of the Company to access sufficient
capital for its operations on favourable terms could have a material adverse
effect on the Company's financial condition, results of operations or
prospects.
Regulatory Clearances and Approvals for New Products
The Company's products and services are subject to regulation as medical
devices in the United States by the United States Food and Drug Administration
(the "FDA"), in Canada under Health Canada's Medical Devices Regulations, and
in other countries by corresponding regulatory authorities. The Company's
ability to market new products and improvements to existing products depends
upon the timing of appropriate licenses, pre-market clearance or approval from
the FDA, Health Canada, or any other foreign regulatory authorities. Failure
to comply with applicable domestic or other foreign regulatory requirements at
any time during the production, marketing or distribution of products
regulated by the FDA, Health Canada or other foreign regulatory authorities
could result in, among other things, seizures of products, total or partial
suspension of production, refusal to grant licenses, clearances or approvals,
withdrawal of existing licenses, clearances or approvals, or criminal
prosecution, any one of which could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
Product Liability and Insurance
The Company's business subjects it to the risk that it will incur product
liability claims. No assurance can be given that the insurance coverage limits
of the Company would be adequate to protect it against any product liability
claims that may arise. The Company may require additional product liability
insurance coverage as the Company commercializes new products or improves
existing products. This insurance is expensive and may not be available on
acceptable terms, or at all. Uninsured product liability claims could have a
material adverse effect on the Company's business, financial condition,
results of operations and prospects.
RESULTS OF CONTINUING OPERATIONS
For the year ended June 30, 2004 ("fiscal 2004"), revenue was $50.4 million,
up 67% compared to the $30.1 million recorded in the year ended June 30, 2003
("fiscal 2003"). During fiscal 2004, the Company recorded net income of $15.6
million or $0.59 per share ($0.54 per share on diluted basis). This compares
to a net loss of $13.3 million or $0.55 per share ($0.55 on a diluted basis)
in fiscal 2003 and a net loss of $3.6 million or $0.17 per share ($0.17 per
share on a diluted basis) for the year ended June 30, 2002. The improvement in
net income was primarily a result of significant growth in the Company's
revenue by $20.3 million, mainly license revenue, and savings of $8.3 million
in operating expenses in fiscal 2004.
Revenue by Product Category
(in millions of dollars)
- ---------------------------------- -------- --------- --------- ---------- ---------------------- ---------- ------------
Variance
% of % of % of
2004 Total 2003 Total $ % 2002 Total
- ---------------------------------- -------- --------- --------- ---------- ----------- ---------- ---------- ------------
Software licenses 33.8 67% 11.6 39% 22.2 190% 27.9 61%
Engineering services 12.0 24% 14.6 48% (2.6) (18%) 15.3 34%
Support services and other 4.6 9% 3.9 13% 0.7 19% 2.3 5%
- ---------------------------------- -------- --------- --------- ---------- ----------- ---------- ---------- ------------
Total $50.4 100% $30.1 100% $ 20.3 67% $45.5 100%
- ---------------------------------- -------- --------- --------- ---------- ----------- ---------- ---------- ------------
14
For fiscal 2004, the combined increase in software license and support
services and other revenue of $22.9 million was marginally offset by a decline
in engineering services revenue of $2.6 million or 18%.
The increase in fiscal 2004 license revenues of $22.2 million or 190% over
last year was primarily driven by the impact of revenue recognized from five
major software license and services agreements announced during the year.
These agreements include a $4.2 million technology agreement with Philips
Medical Systems, a $7.1 million revenue technology agreement entered into with
Cerner Corporation, a $6.7 million technology agreement entered into with
Siemens, a $3.1 million technology agreement with Aloka Co. Ltd and a $6.1
million technology agreement with Hitachi Medical Corporation. The technology
agreements relate to supply of certain of the Company's medical imaging
technologies and services. In fiscal 2003, license revenues were adversely
affected by a temporary channel inventory overhang of software licenses held
by customers, resulting primarily from bulk sales of licenses by the Company
in fiscal 2002.
The Company is reliant on individual transactions with a number of major
customers that can be material in any given period. Because the sales cycle
for transactions with these customers can extend longer than one year, the
Company may not have sales to the same customers in the same period in any
given year and may not have a major transaction in any given period.
Engineering services revenue was down 18% or $2.6 million in fiscal 2004
compared to fiscal 2003. Revenue from engineering services varies by the
number of active contracts and the individual characteristics of each
contract, including contract life cycles and size. In fiscal 2004, 18 active
engineering services contracts generated revenue of $12.0 million, which
included 8 new contracts generating $3.3 million of revenue that were not
active in the prior year. The Company commenced development on certain
technologies during fiscal 2004 in anticipation of entering into contractual
arrangements with prospective customers, including Analogic As a result,
revenue, if any, will be recognized on these projects when contractual
arrangements are secured with these prospective customers. During fiscal 2004,
the Company incurred approximately $1.5 million of direct costs in
anticipation of entering into contractual arrangements with Analogic. In
fiscal 2003, 17 active contracts produced revenue of $14.6 million. Overall,
the revenue decline was primarily due to the completion of three large fiscal
2003 contracts that were replaced by smaller and shorter-term contracts in
fiscal 2004.
Support services and other revenue include revenue from technical support
services, ultrasound hardware-based sales and other services. Support fees for
fiscal 2004 were up $2.3 million over the previous year. However, the increase
was partially offset by declining ultrasound hardware-based sales, resulting
in a net increase in support services and other revenue of 19% or $0.7 million
for the year. The increased support fees revenue was a result of increased
installed base of software licenses and support associated with the larger
technology agreements noted above.
The decline in value of the United States dollar in fiscal 2004 compared to
fiscal 2003 had a negative impact on revenue for fiscal 2004. Substantially
all of the Company's revenue is billed and received in United States dollars.
Revenue by Geographic Region
(In millions of dollars)
- --------------------------- ---------- ---------- --------- -------- ------------------------- ----------- --------------
Variance
% of % of
2004 Total 2003 Total $ % 2002 % of Total
- --------------------------- ---------- ---------- --------- -------- ------------ ------------ ----------- --------------
Asia 22.3 44% 13.4 44% 8.9 67% 23.0 51%
United States 14.3 28% 8.7 29% 5.6 64% 12.4 27%
Europe 13.8 28% 8.0 27% 5.8 72% 10.1 22%
- --------------------------- ---------- ---------- --------- -------- ------------ ------------ ----------- --------------
Total $50.4 100% $30.1 100% $20.3 67% $45.5 100%
- --------------------------- ---------- ---------- --------- -------- ------------ ------------ ----------- --------------
Increase in revenue from Asia of $8.9 million or 67% in fiscal 2004 over
fiscal 2003 was attributable to the increase in license and support revenue
arising from the technology agreements with Aloka and Hitachi.
15
Revenue from United States customers increased primarily as a result of the
technology agreement signed with Cerner in the second quarter of fiscal 2004.
Increased revenue from European customers in fiscal 2004 was due primarily to
the net impact of revenue from technology agreements entered into with Philips
and Siemens, partially offset by lower engineering service revenue due to the
completion of one major custom engineering contract during Q2 of fiscal 2004.
Gross Margin
Gross margin was $39.0 million or 77% of revenue in fiscal 2004, an increase
of $20.0 million or 105% compared to $19.0 million or 63% of revenue in fiscal
2003. The gross margin of the Company is heavily influenced by the relative
mix of software licenses compared to other revenue sources, as software
license gross margins are considerably higher. Direct costs include personnel
and other costs related to delivering engineering services, third-party
software costs associated with software licenses, hardware costs,
personnel-related support services costs and other direct costs such as
commissions and sales-related taxes. The significant increase in gross margin
was attributable to higher software license revenues on which the Company
earns higher margins. As discussed above, revenue from software license fees
grew by 190% in fiscal 2004. Software license revenue comprised 67% of total
revenue in fiscal 2004, compared to 39% in the prior year.
Operating Expenses
Total operating expenses for fiscal 2004 were $22.9 million, a decrease of
$8.3 million or 27% from the $31.2 million incurred in fiscal 2003.
The decline in overall operating expenses reflects the impact of the Company's
cost reduction measures initiated in fiscal 2003 which continued in 2004.
Additionally, during fiscal 2003, the Company eliminated a layer of senior
management - three vice presidents and two senior director positions. To
implement these management changes, the Company incurred a one-time charge of
$2.2 million for severance costs in fiscal 2003.
The savings in fiscal 2004 were achieved by reducing costs in all areas and
were due primarily to:
o $0.8 million lower research and development costs;
o $0.9 million in general and administrative cost savings;
o $2.1 million in lower severance costs, including a $0.2 million
severance recovery;
o $2.9 million savings in other charges towards lower operating lease,
bad debt, foreign exchange charges and recovery on share purchase
loans; and
o $2.0 million in lower depreciation and amortization
Research and Development 2004 Change 2003 Change 2002
(In millions of dollars)
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
Research and Development $8.6 (9%) $9.4 (22%) $12.1
As a percentage of total revenue 17% 31% 27%
Research and development expenses mainly consist of salaries and other
employee related costs of technical and engineering personnel associated with
the Company's research and software development and maintenance activities.
Research and development costs declined 9% or $0.8 million in fiscal 2004
compared to the same period last year. The decline was attributable primarily
to savings in employee related costs as a result of a marginal 5% reduction in
headcount. The Company continues to invest research and development resources
in new software technologies, partnering with various organizations and in
maintaining and enhancing the Company's existing line of products and
technologies. Certain of the key software products and technologies introduced
during fiscal 2004 include Cedara OrthoWorksTM, a new suite of desktop and web
server software solutions designed for orthopedic surgeons, Cedara I-ReachTM
v3.0, a new breakthrough medical image viewer for healthcare professionals who
want full PACS functionality over the Internet, Cedara I-ReadMammoTM, an
innovative new solution for Mammography's unique workflow and Cedara I-Report
CTTM, one of the most advanced CT-focused reporting workstations on the market
today.
16
Sales and Marketing
(In millions of dollars) 2004 Change 2003 Change 2002
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
Sales and Marketing $5.1 23% $4.1 (18%) $5.1
As a percentage of total revenue 10% 14% 11%
Sales and marketing expenses mainly consist of salaries, other employee
related costs, travel expenses and trade show expenses associated with
promoting, product management, selling and marketing of the Company's products
and services. Sales and marketing costs for fiscal 2004 were up $1.0 million
or 23% compared to the previous year. The increased costs are due primarily to
adding direct-to-end user sales staff in the fourth quarter, setting up the
new business operation in Shanghai, China and additional marketing initiatives
undertaken during the year. Additional marketing initiatives include increased
participation in various trade shows for showcasing the Company's latest
products and technologies. The Company's actions in eliminating a layer of
marketing management in mid fiscal 2003 have continuously allowed more
resources to be utilized directly on core sales and marketing efforts in 2004
and less on sales and marketing management overhead.
General and Administration
(In millions of dollars) 2004 Change 2003 Change 2002
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
General and Administration $7.3 (11%) $8.2 (21%) $10.3
As a percentage of total revenue 14% 27% 23%
General and administrative expenses consist primarily of salaries and other
employee related costs of administrative personnel, professional fees,
insurance costs and facilities related expenditures. General and
administrative costs declined by 11% or $0.9 million in fiscal 2004 compared
with the previous year. The cost reductions were achieved through the
elimination of certain management positions in Q2 of fiscal 2003, savings in
certain facilities related costs through the consolidation of operations into
one facility and the sublease of the Company's vacated premises in fiscal
2003. Cost control measures implemented during fiscal 2003 have also resulted
in net cost savings in fiscal 2004 from professional fees and certain outside
suppliers.
Severance Costs
(In millions of dollars) 2004 Change 2003 Change 2002
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
Severance Costs $0.2 (91%) $2.3 156% $0.9
During fiscal 2003, the Company undertook significant cost reduction
initiatives that resulted in $2.3 million of severance charges recorded in the
prior year. Severance charges of $0.4 in fiscal 2004 were offset by severance
cost recovery of $0.2 million in Q2 of fiscal 2004 that resulted from
settlement of loans outstanding from the former Chairman and Chief Executive
Officer of the Company.
Other Charges
(In millions of dollars) 2004 Change 2003 Change 2002
- ------------------------------------------------ ---------- -------------- ------------- --------------- ----------------
Bad debt expense $0.4 (55%) $1.0 162% $0.4
Computer and equipment operating
leases 0.4 (66%) 1.2 6% 1.1
Stock-based compensation charges 0.1 - - - -
Provision (recovery) for employee share
purchase and other loans (1.1) - (0.1) (111%) 0.9
Foreign exchange loss (gain) and other 0.1 (92%) 0.7 333% (0.3)
- ------------------------------------------------ ---------- -------------- ------------- --------------- ----------------
$(0.1) (101%) $2.8 33% $2.1
- ------------------------------------------------ ---------- -------------- ------------- --------------- ----------------
Cost savings in other charges amounted to $2.9 million in the current year as
a result of savings in the following:
o $0.6 million lower bad debt expenses mainly from improved collections
resulting in recoveries of accounts provided for in prior periods;
o $0.8 million savings in computer equipment lease costs;
o $1.0 million recovery of loans from certain current and former
employees including $0.9 million from the Company's former Chairman
and Chief Executive Officer; and
o $0.6 million favorable swing in realized and unrealized foreign
exchange charges
17
The above savings were partially offset by $0.1 million of stock-based
compensation charges recorded in fiscal 2004 as a result of adopting the
prospective method of accounting for options granted during the current year,
in accordance with CICA 3870.
Depreciation and Amortization
(In millions of dollars) 2004 Change 2003 Change 2002
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
Amortization of intangibles $0.2 (84%) $1.5 (12%) $1.7
Depreciation and other amortization 1.6 (34%) 2.4 (37%) 3.8
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
$1.8 (54%) $3.9 (29%) $5.5
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
Intangible assets capitalized as part of the Company's acquisition of Dicomit
were fully amortized by the end of fiscal 2003, resulting in $1.3 million or
87% lower amortization of intangibles in fiscal 2004 as compared to the
previous year. Depreciation and amortization of capital assets was down $0.8
million or 33% in fiscal 2004, compared to the last year. The Company has not
needed to sustain the level of capital asset investment of previous fiscal
years, resulting in certain capital assets becoming fully depreciated.
Interest expense, net
(In millions of dollars) 2004 Change 2003 Change 2002
- ----------------------------------------------- ----------- -------------- ------------- --------------- ----------------
Interest expense, net $0.6 (45%) $1.1 (35%) $1.7
Net interest expense in FY2004 was $0.6 million or 45% lower compared to the
last year. The savings in interest expense were a result of settling the
Company's two major interest bearing liabilities; the operating line of credit
and the Convertible Debentures. The Company also earned interest income of
$0.2 million on its cash reserves that resulted from the equity financing
initiative completed during the third quarter of fiscal 2004.
QUARTERLY OPERATING RESULTS
The following table summarizes selected unaudited quarterly operating results
for each of the eight most recent quarters ended on the dates indicated below.
This information should be read in conjunction with the Company's quarterly
unaudited and annual audited consolidated financial statements (including
notes). The operating results for each quarter are not necessarily indicative
of results for any future period, and should not be relied on to predict the
Company's future performance.
- -------------------------------------------------- --------------------------------------------------------------------------
For the three months ended
-------------- -------------- -------------- --------------
Fiscal 2004 September December 30, March June Fiscal
(In millions of dollars except share amounts) 30, 2003 2003 31, 2004 30, 2004 2004
- -------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Revenue $ 10.1 $ 12.2 $ 13.4 $ 14.7 $ 50.4
Net income (loss) from continuing operations $ 1.6 $ 4.0 $ 5.1 $ 4.9 $ 15.6
Income (loss) from discontinued operations $ 0.1 $ (0.1) $ - $ - $ -
Net income (loss) $ 1.7 $ 3.9 $ 5.1 $ 4.9 $ 15.6
Earnings per share from continuing operations:
Basic $ 0.07 $ 0.16 $ 0.20 $ 0.16 $ 0.59
Diluted $ 0.06 $ 0.14 $ 0.18 $ 0.15 $ 0.54
Earnings per share:
Basic $ 0.07 $ 0.16 $ 0.20 $ 0.16 $ 0.59
Diluted $ 0.06 $ 0.14 $ 0.18 $ 0.15 $ 0.54
Weighted average shares outstanding:
Basic 24,157,621 24,351,597 26,007,932 31,043,959 26,295,237
Diluted 26,427,255 27,762,206 28,749,093 33,341,097 29,183,507
- -------------------------------------------------- -------------- -------------- -------------- -------------- --------------
18
- -------------------------------------------------- ---------------------------------------------------------------------------
For The Three Months Ended
-------------- --------------- -------------- --------------
Fiscal 2003 September December 30, March June Fiscal
(In millions of dollars except share amounts) 30, 2002 2002 31, 2003 30, 2003 2003
- -------------------------------------------------- -------------- --------------- -------------- --------------
Revenue $ 6.3 $ 8.3 $ 9.0 $ 6.6 $ 30.2
Net loss from continuing operations $ (4.1) $ (3.9) $ (1.6) $ (3.7) $ (13.3)
Income (loss) from discontinued operations - - - - -
Net income (loss) $ (4.1) $ (3.9) $ (1.6) $ (3.7) $ (13.3)
Loss per share from continuing operations:
Basic $ (0.17) $ (0.16) $ (0.07) $ (0.15) $ (0.55)
Diluted $ (0.17) $ (0.16) $ (0.07) $ (0.15) $ (0.55)
Loss per share:
Basic $ (0.17) $ (0.16) $ (0.07) $ (0.15) $ (0.55)
Diluted $ (0.17) $ (0.16) $ (0.07) $ (0.15) $ (0.55)
Weighted average shares outstanding:
Basic 24,157,621 24,157,621 24,157,621 24,157,621 24,157,621
Diluted 24,157,621 24,157,621 24,157,621 24,157,621 24,157,621
- -------------------------------------------------- -------------- --------------- -------------- -------------- --------------
Contractual Obligations, Commitments, Contingencies, Guarantees and Off-Balance
Sheet Arrangements
To facilitate a better understanding of the Company's contractual obligations,
the following information is provided (in millions of dollars) in respect of
operating lease obligations:
- -------------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 More than 5
Year years years
- -------------------------------------------------------------------------------------------------------------------------
Operating lease obligations $6.9 $1.3 $2.6 $2.4 $0.6
- -------------------------------------------------------------------------------------------------------------------------
The Company is committed under non-cancelable operating leases for the rental
of premises, computer and office equipment, with terms expiring at various
dates through 2009. The future minimum amounts payable under the lease
agreements in millions of dollars are described in the chart above.
In the normal course of its business, the Company is expected to perform its
obligations under contractual business arrangements with its customers and
suppliers. There are no commitments for capital expenditures or any
off-balance sheet arrangements that have, or are reasonably likely to have, a
current or future effect on the results of operations or financial condition
of the Company.
RESULTS OF DISCONTINUED OPERATIONS
During fiscal 2004, the Company provided services and licenses to Carl Zeiss
Inc. ("Zeiss") in partial settlement of non-cash liabilities under the terms
of a settlement agreement between Zeiss and the Company. Further details on
discontinued operations can be found in note 6 to the Consolidated Financial
Statements.
CRITICAL ACCOUNTING ESTIMATES
Significant accounting policies and estimates used in preparation of the
Consolidated Financial Statements are described in note 1 to the Consolidated
Financial Statements. Management has discussed the application of these
accounting policies and estimates with the Audit Committee of the Company's
Board of Directors and with the full Board of Directors. This review is
conducted annually.
The preparation of the Company's consolidated financial statements in
accordance with Canadian GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities as at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. These estimates and assumptions require management's
most difficult, subjective or complex judgments, about the effect of
19
matters that are inherently uncertain. As a result, the amounts reported for
these items could be different if different assumptions were used, or if
conditions change in the future.
Allowance for doubtful accounts
The Company maintains allowances for losses that it expects will result from
customers who do not make their contractually required payments. The allowance
is estimated based on the likelihood of recovering the accounts receivable.
The estimate is based on past experience, taking into account current and
expected collection trends.
If economic conditions decline and customer losses increase, the allowance for
doubtful accounts will increase by recording an additional expense to the
statement of operations.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment on a regular basis or
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of capital assets is
measured by comparison of their carrying amount with the undiscounted
projected future net cash flows that the long-lived assets are expected to
generate. If the carrying value exceeds the estimated amount recoverable, a
write down equal to the excess of the carrying value over the asset's fair
value is charged to the consolidated statement of operations.
The Company assesses the recoverability of intangible assets with finite lives
by determining whether the carrying amounts can be recovered through
undiscounted projected future net cash flows. The amount of impairment, if
any, is measured based on undiscounted projected future net cash flows
relative to the carrying amount of the asset.
Goodwill is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. The
impairment test is carried out in two steps. In the first step, the carrying
amount of the reporting unit is compared with its fair value. When the fair
value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not to have been impaired and the second step of
the impairment test becomes unnecessary. The second step is carried out when
the carrying amount of a reporting unit exceeds its fair value, in which case
the implied fair value of the reporting unit's goodwill is compared with its
carrying amount to measure the amount of the impairment loss, if any. The
implied fair value of goodwill is determined in the same manner as the value
of goodwill is determined in a business combination, using the fair value of
the reporting unit as if it was the purchase price. When the carrying amount
of reporting unit goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to the excess and is
presented as a separate line item in the statement of operations.
The determination of impairment requires that management make estimates and
exercise judgment in evaluating the fair value of goodwill. In order to do
this it is necessary to identify the reporting unit associated with the
goodwill and to assess the value of the goodwill in the context of that
reporting unit. It has been determined that the Company consists of a single
reporting unit. As a result, goodwill is tested for impairment at a corporate
level. The Company uses the quoted market price of its shares as a basis for
fair value measurement.
ADOPTION OF ACCOUNTING POLICIES
In November 2003, CICA Handbook Section 3870 was amended to provide three
different transitional provisions which allow for the adoption of fair value
based accounting for stock options issued to both employees and non-employees.
The Company has elected the prospective method of adoption effective for the
year ended June 30, 2004. In accordance with CICA 3870, the Company has
recorded stock-based compensation expense for all options granted on or after
July 1, 2003. In addition, pro forma stock-based compensation expense is
presented for all grants issued during the year ended June 30, 2003.
20
FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments approximate their
fair values due to the short-term to maturity of the various instruments.
The Company is exposed to market, credit and interest rate risk on its
investment portfolio. The Company limits its risk by investing only in liquid,
investment grade securities and by limiting exposure to any one entity or
group of related entities. The fair value of investments, mostly interest
bearing, as well as investment income desired from the investment portfolio,
will fluctuate with changes in the prevailing interest rates.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company
performs periodic credit evaluations of the financial condition of its
customers and typically does not require collateral from them. Allowances are
maintained for potential credit losses consistent with the credit risk of
specific customers, historical trends and other information. Credit losses
have been within management's range of expectations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated balance sheets as at June 30, 2004 and 2003 are
summarized as follows:
Consolidated Balance Sheets
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
(In millions of dollars) 2004 2003 2002
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
Current assets of continuing operations $ 60.0 $ 6.9 $ 13.6
Less: Current liabilities of continuing operations (5.1) (16.3) (9.9)
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
Working capital (deficiency) of continuing operations 54.9 (9.4) 3.7
Current liabilities of discontinued operations (1.0) (2.5) (4.0)
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
Working capital (deficiency) 53.9 (11.9) (0.3)
Capital assets 2.2 2.6 3.0
Long-term investment 0.5 0.5 -
Goodwill 9.1 9.1 9.1
Intangible assets 0.4 0.5 1.9
Deferred development costs - 0.3 0.9
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
$ 66.1 $ 1.1 $ 14.6
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
Represented by:
Convertible debentures $ - $ 2.9 $ 2.8
Non-current liabilities of discontinued operations - - 0.3
Non-current portion of provision for loss on sublease - 0.1 -
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
- 3.0 3.1
Shareholders' equity (deficiency) 66.1 (1.9) 11.5
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
$ 66.1 $ 1.1 $ 14.6
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
The Company's liquidity and capital resources position improved dramatically
with the closing of the $47.2 million equity financing in Q3 of fiscal 2004.
Liquidity of the Company is expected to be sustained principally through cash
provided by operations, with short-term deposits and highly liquid
cash-equivalent instruments available to provide additional sources of cash.
The Company is no longer dependant on Analogic Corporation's generous
financial support and no longer dependant on a bank line of credit to fund
working capital.
During the year, the Company eliminated its long-term debt through conversion
of the Convertible Debentures to equity and eliminated bank indebtedness that
stood at $9.5 million on June 30, 2003. The letter of credit issued by
Analogic to NBC that guaranteed the Company's operating line, was cancelled.
The security agreement between Analogic and NBC was also terminated, removing
any and all obligations and rights of Analogic in financial support of the
Company.
As of June 30, 2004, the Company held current assets from continuing
operations of $60.0 million, which was principally comprised of cash and cash
equivalents of $40.5 million, liquid short-term investments of
21
$10.9 million, accounts receivable of $7.5 million, inventory of $0.3 million
and prepaid expenses and other assets of $0.9 million. Through a combination
of the equity financing and profitable, cash-flow positive operations, working
capital has improved by $65.8 million from June 30, 2003 reflecting an
increase in working capital from continuing operations of $64.3 million and a
reduction in current liabilities of discontinued operations of $1.5 million.
The improvement in working capital from continuing operations of $64.3 million
is due primarily to cash and short-term investments of $51.4, increased
accounts receivable of $1.9 million, reduction in bank indebtedness of $9.5
million, reduction in accounts payable and accruals of $2.1 million and
increase in deferred revenue of $0.3 million. The increase in cash and
short-term investments and reduction of bank indebtedness is a result of the
financing during Q3 of fiscal 2004 and continuing positive cash flows from
operations. The increased accounts receivable reflect delay in processing and
receipt of a withholding tax refund of $1.4 million from the German tax
authorities. There are no collectibility or billing problems with customers or
classes of customers, other than as provided in the financial statements.
There were no significant changes in credit terms during the fiscal year 2004.
The decline in current liabilities from discontinued operations of $1.5
million reflects primarily payments of $0.4 million made to Zeiss towards
settlement of the cash liability and provision of services and licenses of
$1.0 million towards settlement of the non-cash liability under the terms of
the settlement agreement as described below.
Continuing operating activities generated cash of $13.0 million in fiscal
2004, an improvement of $14.4 million, compared to $1.4 million of cash used
in fiscal 2003. The improvement in cash generated from operating activities in
fiscal 2004 resulted mainly from $17.6 million of cash generated from
operations before changes in working capital, reduced by increased working
capital requirements of $4.6 million. The $1.4 million in cash usage in fiscal
2003 reflects cash used in operations before changes in working capital of
$8.2 million offset by a $6.8 million decreased working capital requirements.
Investing activities consumed cash of $11.9 million in fiscal 2004 compared to
cash used of $1.2 million in fiscal 2003. The net cash outflow from investing
activities during fiscal 2004 was primarily a result of the purchase of highly
liquid short-term investments of $10.9 million and capital asset purchases and
additions to intangible assets of $1.0 million. Capital asset additions
represent mainly equipment purchases of $0.7 million and $0.1 million of
software purchases.
Financing activities for fiscal 2004 generated cash of $39.8 million compared
to $4.6 million in fiscal 2003. The cash generated from financing activities
in fiscal 2004 reflects the cash inflow of $47.2 million from the equity
financing completed in the current year, $2.1 million from issue of shares on
exercise of employee stock options and $0.1 million from issue of shares on
exercise of warrants.
The Company continues to have a line of credit of $14,000 which is due for
renewal on October 31, 2004. The Company and NBC are currently in discussions
to revise the borrowing facility to reflect the Company's substantially
improved financial position and the removal of the Analogic letter of credit,
which may result in an increase or reduction of the borrowing capacity under a
new operating facility.
As of June 30, 2004, the Company's principal sources of liquidity consisted of
cash and short-term investments of $51.4 million, accounts receivable of $7.5
million, a bank credit facility of $14.0 million, and ongoing future operating
cash flows. The Company's cash requirements in the short-term relates to the
ongoing funding of its operations and management believes the results of the
above will provide sufficient operating cash flows to meet the Company's cash
requirements during fiscal 2005.
The Company intends to use the cash resources available to finance any future
working capital needs that cannot be met through cash provided from operations
and to finance any future strategic acquisitions or partnerships that support
the Company's growth objectives. The timing and amount of actual expenditures
will be based on many factors, including finding the right partners, ongoing
cash flows and the growth of the Company's business. In the interim, the
Company intends to invest the funds in short-term, investment grade, interest
bearing securities, in government securities or in bank accounts.
The current liabilities of discontinued operations as at June 30, 2004 of $1.0
million include amounts due to Zeiss in connection with the Company's
acquisition of Zeiss' interest in SNS. On December 28, 2001, the Company
announced that it had reached a settlement agreement with Zeiss. The
agreement, which offset
22
the receivables owed from Zeiss against amounts owed to Zeiss and reduced the
Company's net liabilities to Zeiss, provided for a cash settlement of US$1.5
million to Zeiss, paid out over 18 months commencing April 30, 2002, and for
the Company to provide US$1.5 million of software licenses and engineering
services to Zeiss at no charge. As of June 30, 2004 the Company had paid all
of the US$1.5 million cash portion of the liability and provided $1.0 of
services and licenses of towards settlement of the US$ 1.5 million non-cash
liability. As detailed in note 14 to the audited Consolidated Financial
Statements, during the current fiscal year, Zeiss also exercised into common
shares, all of the 363,636 warrants on which the Company had provided price
protection.
A. Disclosure Controls and Procedures
Disclosure controls and procedures are defined by the Securities and Exchange
Commission as those controls and other procedures that are designed to ensure
that information required to be disclosed by Cedara Software Corp. (the
"Registrant") in reports filed or submitted by it under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms. The Registrant's Chief Executive Officer and Chief Financial Officer
have evaluated the Registrant's disclosure controls and procedures as of the
end of the period covered by this Annual Report on Form 40-F and have
determined that such disclosure controls and procedures are effective.
B. Changes in Internal Control Over Financial Reporting
Since the most recent evaluation of the Registrant's internal controls, there
has not been any significant change in the Registrant's internal control over
financial reporting that has materially affected or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
C. Notice of Pension Fund Blackout Period
The Registrant was not required by Rule 104 of Regulation BTR to send any
notice to any of its directors or executive officers during the fiscal year
ended June 30, 2004.
D. Audit Committee Financial Expert
The Registrant's board of directors has determined that Ram Ramkumar, an
individual serving on the audit committee of the Registrant's board of
directors, is an audit committee financial expert, as that term is defined in
General Instruction B(8)(a) of Form 40-F. Mr. Ramkumar is independent, as that
term is defined under the rules and regulations of the Nasdaq Stock Market.
E. Code of Ethics
The Registrant has adopted a code of ethics that applies to all directors,
officers and employees, including its chief executive officer, chief financial
officer, controller and principal accounting officer. The Registrant has posted
the text of its code of ethics on its website. The text of the code of ethics
can be viewed by visiting www.cedara.com and selecting the "Corporate
Governance" icon within the section entitled "investors".
F. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed by KPMG LLP (the "Outside Auditors"), the
Registrant's principal accountant, for the fiscal year ended June 30, 2004 for
professional services rendered by the Outside Auditors for the audit of the
Registrant's annual financial statements or services that are normally provided
by the Outside Auditors in connection with statutory and regulatory filings or
engagements were $74,500.
The aggregate fees billed by the Outside Auditors for the fiscal year ended
June 30, 2003 for professional services rendered by the Outside Auditors for
the audit of the Registrant's annual financial statements or services that are
normally provided by the Outside Auditors in connection with statutory and
regulatory filings or engagements for such years were $66,414.
Audit-related Fees
The aggregate fees billed by the Outside Auditors for the fiscal years ended
June 30, 2003 and June 30, 2004, for assurance and related services rendered by
it that are reasonably related to the performance of the audit or review of the
Registrant's financial statements and are not reported above as audit fees were
$60,653 and $57,718, respectively. Professional services provided included
review of the Company's quarterly financial statements and accounting advice on
certain matters.
Tax Fees
The aggregate fees billed by the Outside Auditors for the fiscal years ended
June 30, 2003 and June 30, 2004, for professional services rendered by it for
tax compliance, tax advice, tax planning and other services were $7,239 and
$10,728, respectively. Tax services provided included tax advisory services and
review and filing of the Company's annual income tax returns.
All Other Fees
The aggregate fees billed by the Outside Auditors for the fiscal years ended
June 30, 2003 and June 30, 2004, respectively, for products and services
provided by the Outside Auditors, other than the services reported in the
preceding three paragraphs, were $9,012 and $162,995, respectively. Other
services provided included providing assistance and review of company's filings
with the OSC and SEC, services related to equity financing and services related
to acquisition of eMed Technologies Corporation.
Audit Committee Pre-approval Policies
All audit and non-audit services performed by the Outside Auditors are
pre-approved by the audit committee of the Registrant.
G. Off-Balance Sheet Arrangements
The Registrant is not a party to any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors
H. Tabular Disclosure of Contractual Obligations
Tabular disclosure of the Registrant's contractual obligations can be found in
its Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended June 30, 2004 under the heading "Quarterly
Operating Results - Contractual Obligations, Commitments, Contingencies,
Guarantees and Off-Balance Sheet Arrangements" filed with the Securities and
Exchange Commission as Document 3 herein.
The following table sets out the Registrant's known contractual obligations for
its long-term liabilities and lease commitments as of the fiscal year ended
June 30, 2004.
Payments due by period
--------------------------------------------------------------
Contractual Obligations Less than 1 to 3 4 to 5 More than
(in thousands of U.S. dollars) Total 1 year years years 5 years
- --------------------------------------------------------------------------------------- -----------
Long-term indebtedness $ - $ - $ - $ - $ -
Capital lease obligations - - - - -
Operating leases 5,190 992 1,910 1,815 473
Purchase Obligations - - - - -
Other Long-term liabilities - - - - -
- ---------------------------------------------------------------------------------------------------
Total contractual obligations $ 5,190 $ 992 $ 1,910 $ 1,815 $ 473
- ---------------------------------------------------------------------------------------------------
I. CRITICAL ACCOUNTING POLICIES
A discussion of the Registrant's critical accounting policies can be found in
its Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended June 30, 2004 under the heading "Critical
Accounting Estimates" filed with the Securities and Exchange Commission as
Document 3 herein.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. UNDERTAKING
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities in relation to which the obligation to file an
annual report on Form 40-F arises; or transactions in said securities.
B. CONSENT TO SERVICE OF PROCESS
The Registrant has previously filed with the Commission a Form F-X in
connection with its Common Shares.
SIGNATURE
Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this annual report to be signed on its behalf by the undersigned,
thereto duly authorized.
CEDARA SOFTWARE CORP.
Dated: November 16, 2004 By: /s/ Brian Pedlar
------------------------
By: Brian Pedlar
Title: Chief Financial Officer
EXHIBIT INDEX
Number Document
------ --------
1. Consent of KPMG LLP
31. Certification of CEO and CFO pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32. Certification of CEO and CFO pursuant to Section 906
of the Sarbanes-Oxley Act of 2002