FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of May 2005
Commission File No. 000-19865
CEDARA SOFTWARE CORP.
(Registrant's name)
6509 Airport Road
Mississauga, Ontario, Canada L4V 1S7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40F.
Form 20-F Form 40-F X
---------------- ----------------
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1):________
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7):________
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82-________
Documents Included as Part of this Report:
No. Document
1. Cedara Software Corp. Management's Discussion and Analysis and Financial
Statements - Third Quarter Fiscal Year 2005.
Document No. 1
[GRAPHIC OMITTED]
C E D A R A (TM)
Software with Vision
Management Discussion and Analysis
&
Financial Statements
Third Quarter Fiscal Year 2005
www.cedara.com
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MANAGEMENT DISCUSSION AND ANALYSIS
This Management Discussion and Analysis ("MD&A") was prepared as of April 27th,
2005 and should be read in conjunction with Cedara Software Corp.'s ("Cedara"
or the "Company") unaudited Consolidated Interim Financial Statements and the
notes thereto for the three and nine months ended March 31, 2005 and the MD&A
and the Consolidated Financial Statements and the notes thereto for the year
ended June 30, 2004. 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").
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 and Markets
Many of Cedara's innovative medical technologies are sold through major
healthcare device manufacturers and information technology providers, including
GE, Siemens, Philips, Toshiba, Hitachi, Analogic and Cerner. Cedara also has
one of the largest radiology group, mid-size hospital and imaging centre
customer bases in the United States, as a result of the acquisition of eMed
Technologies Corporation ("eMed") completed on October 8, 2004.
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 four ways:
o by developing and licensing its software technology and products;
o by providing custom engineering services to healthcare equipment
manufacturers;
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o through developing, selling and installing image management solutions to
customers; 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. In addition, the
quarterly revenue and earnings of the Company can fluctuate materially between
quarters, principally due to the timing of license contract renewals.
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, Original Equipment Manufacturers ("OEM") sales contracts, and
long sales cycles. To help mitigate the Company's reliance on large, OEM sales
contracts, the Company has taken steps to add a new sales channel directly to
hospitals, imaging centres and radiology groups. Additionally, on October 8,
2004, the Company completed the acquisition of eMed, a privately-held provider
of PACS and web-based medical imaging radiology solutions. Now a wholly-owned
subsidiary of Cedara, eMed is a complementary addition to the Company. eMed's
sizable installed base of hospitals and imaging centres across the United
States provides an opportunity for the eMed sales force to promote Cedara's
clinical applications and image management technologies. At the same time,
Cedara would use its extensive global channel to promote eMed solutions
worldwide. The Company considers that the acquisition has provided 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.
On January 17, 2005, the Company entered into a definitive agreement to merge
in an all-stock transaction with Merge Technologies Incorporated ("Merge
eFilm"), a leading global healthcare software and services company. Pursuant to
the merger agreement, Merge eFilm will issue either 0.587 Merge eFilm common
shares, or 0.587 shares of a newly created class of Canadian exchangeable
shares for each Cedara common share. The transaction is subject to approval by
shareholders of each company, regulatory approvals and other customary closing
conditions. A special meeting of the Company's shareholders to consider the
transaction with Merge eFilm is scheduled for May 24, 2005. Upon completion of
the transaction, the combined company will bring one of the most comprehensive
image and information management solution sets to manage clinical and business
workflow to the diagnostic OEM and end user markets. Management believes that
the combined company will have an extensive healthcare imaging product suite to
meet the current and emerging needs of OEMs and end user customers and
radiology and clinical specialties.
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 its
costs and continue to generate positive quarterly operating cash flows. The
operating results of the Company for the nine month period ended March 31, 2005
include the impact of the eMed acquisition and its operating results from
October 8, 2004 to March 31, 2005.
Principal Products and Services
The Company believes it has one of the most diverse product and service
offerings 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 and is
deployed in hospitals and clinics worldwide - approximately 28,000 medical
imaging systems and approximately 6,400 PACS workstations have been licensed to
date. Additionally, upon acquisition of eMed, the Company significantly
increased its end user customer base of radiology groups, mid-size hospitals
and imaging centres primarily across the United States.
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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.
THIRD QUARTER FISCAL 2005 BUSINESS HIGHLIGHTS
Significant events and actions taken in the third quarter of fiscal 2005
include:
Corporate Highlights
o On January 17, 2005, the Company entered into a definitive agreement to
merge in an all-stock transaction with Merge eFilm, a leading global
healthcare software and services company. Upon completion of the
transaction, the combined company will bring one of the most comprehensive
image and information management solution sets to manage clinical and
business workflow to the diagnostic OEM and end user markets. Merge eFilm
will issue either 0.587 Merge eFilm common shares, or 0.587 shares of a
newly created class of Canadian exchangeable shares for each Cedara common
share. The transaction is subject to approval by shareholders of each
company, regulatory approvals and other customary closing conditions. A
special meeting of the Company's shareholders to consider the transaction
with Merge eFilm is scheduled for May 24, 2005.
o The Company announced $100,000 donation to Save the Children Canada in
support of Asian Tsunami Relief.
Operations
o On February 17, 2005, the Company announced the introduction of
time-saving ImageSnap technology at the Annual Meeting of the American
Academy of Orthopaedic Surgeons (AAOS). The technology introduces
cutting-edge image processing techniques to streamline orthopaedic
planning through automatic detection and measurement of anatomical
structures.
o The Company showcased a comprehensive set of new clinical workflow
solutions at the 2005 European Congress of Radiology (ECR), held March 4
to 8 in Vienna, Austria. The Company demonstrated solutions included a
wide range of PACS-ready clinical packages that allow radiologists and
other specialists to launch orthopaedic planning, digital mammography
screening, 3D, multi-detector CT, PET/CT and other applications, from a
single PACS workstation - eliminating the costly use of multiple
workstations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in the unaudited Consolidated Interim Financial
Statements and notes thereto, 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
healthcare imaging software market and market share, relating to the Company's
expectations concerning its licensed software products, relating to the
Company's expectations as to revenues, costs and cash flows, relating to the
sufficiency of capital to meet working capital and capital expenditure
requirements, relating to the acquisition of eMed and related to the merger
with Merge eFilm 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:
o Dependence on major customers,
o Reliance on individual contracts,
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o Fluctuations in quarterly financial results,
o Dependence on key personnel,
o Intense competition,
o Rapid technological change,
o Exchange rate fluctuations,
o Risks related to international operations,
o Dependence on intellectual property rights,
o Regulatory clearances and approvals for new products,
o Risks relating to product defects and product liability,
o Adverse consequences of financial leverage,
o Ability to service debt,
o Continued acceptance of Cedara's products,
o Risks related to the acquisition of eMed, and
o Risks related to the proposed merger with Merge eFilm including risks
associated with obtaining regulatory and shareholder approvals without
unexpected delays or conditions, timely implementation and execution of
merger integration plans, retention of customers and initial employees,
successfully leveraging Merge eFilm's and the Company's comprehensive
product offering to the combined customer base and sustaining continued
growth at rates approximating recent levels,
and other risks set out in the joint proxy statement and Management Information
Circular for the Merge eFilm transaction or detailed from time to time in other
continuous disclosure filings of the Company. There is also 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. 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 unaudited Consolidated Interim
Financial Statements and notes thereto 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.
A reader 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.
RESULTS OF OPERATIONS
For the third quarter of fiscal 2005 ended March 31, 2005 ("Q3 fiscal 2005"),
the Company recorded net income of $6.2 million or $0.20 per share ($0.18 per
share on a diluted basis). This compares to a net income of $5.1 million or
$0.20 per share ($0.18 per share on a diluted basis) for the quarter ended
March 31, 2004 ("Q3 fiscal 2004").
For the nine months ended March 31, 2005, the Company recorded net income of
$14.3 million or $0.45 per share ($0.43 per share on a diluted basis) compared
to a net income of $10.7 million or $0.43 per share ($0.38 per share on a
diluted basis) in the nine month period ended March 31, 2004.
The increase in net income was primarily a result of increased profits from
organic growth and the impact of the Company's acquisition of eMed.
RESULTS OF CONTINUING OPERATIONS
During Q3 fiscal 2005, revenue increased by 81% to $24.4 million from $13.5
million recorded in Q3 fiscal 2004. Net income for Q3 fiscal 2005 increased by
21% to $6.2 million compared to $5.1 million in Q3 fiscal 2004. Included in the
net income for the quarter are $1.2 million of costs incurred towards the
proposed merger with Merge eFilm and $0.9 million of adjustments relating to
purchase accounting for amortization of acquired intangible assets and deferred
revenue. Excluding the impact of the merger expenses and purchase accounting
adjustments, net income for Q3 fiscal 2005 increased by 62% compared to Q3
fiscal 2004.
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Revenue year-to-date was up 67% at $59.7 million from $35.7 million a year ago.
Net income for the nine months ended March 31, 2005 increased 34% to $14.3
million or $0.45 per share ($0.43 per share on a diluted basis) from $10.7
million or $0.43 per share ($0.38 per share on a diluted basis) recorded in the
first nine months of the prior year. Net income year-to-date includes $1.2
million of merger expenses and eMed results including the impact of $1.9
million of purchase accounting adjustments, neither of which were included in
the comparative period. The prior year-to-date net income includes a $1.2
million recovery of employee loans.
Revenue by Product Category (in millions of dollars, except percentages)
=====================================================================================================================
Three Months Nine Months Variance
Ended March 31 Ended March 31 Increase/(Decrease)
-------------- -------------- -------------------
Three Nine
2005 2004 2005 2004 Months Months
- ---------------------------------------------------------------------------------------------------------------------
Software licenses $ 13.2 $ 9.7 $ 32.3 $ 23.0 36% 41%
Engineering services 2.1 2.9 8.6 8.9 (29%) (3%)
Solutions and workstations 5.3 - 11.3 - 100% 100%
Support services and other 3.8 0.9 7.5 3.8 348% 95%
- ---------------------------------------------------------------------------------------------------------------------
Total $ 24.4 $ 13.5 $ 59.7 $ 35.7 81% 67%
=====================================================================================================================
The revenue increase in Q3 fiscal 2005 was driven primarily by a $3.5 million
increase in software license revenue and the inclusion of $8.1 million of
solution and workstations sales and related support services revenue as a
result of selling directly to hospitals, imaging centres and medical clinics.
Three customers accounted for 40% of the overall revenue during Q3 fiscal 2005,
compared to two customers accounting for 60% of overall revenue in Q3 of 2004.
The diversification of the Company's customer base provided by the acquisition
of eMed and the increase in the number of new software license arrangements
entered into during the fiscal 2005 to-date have contributed to lowering the
risk of customer concentration.
The increases of $3.5 million and $9.3 million in software license revenue for
the three and nine month periods ended March 31, 2005 are primarily a result of
organic growth resulting from new software license arrangements with existing
and new customers. The Company continues to generate new software license
revenue from existing technologies and from new technology offerings introduced
during fiscal 2005.
Engineering services revenue was $0.8 million or 29% lower in Q3 fiscal 2005
than in Q3 fiscal 2004. Revenue derived from engineering services varies by the
number of active contracts and the individual characteristics of each contract,
including contract life cycles. In Q3 fiscal 2005, 10 active engineering
services contracts generated revenue of $2.1 million, two of which were new
contracts that were not active in the same period last year. In Q3 of fiscal
2004, 12 active contracts produced revenue of $2.9 million.
On a year-to-date basis, engineering services revenue decreased marginally by
3% or $0.3 million compared to the same period last year. The number of active
contracts over the first nine months of fiscal 2005 was 13 compared to 15
active contracts for the same period in the prior year. Engineering services
contracts continue to migrate towards smaller and shorter-term contracts. The
Company continues to invest resources in partnering with various organizations
and offering competitive engineering services to attract new business under
this revenue category, which often results in the development of new
technologies.
Solutions and workstations revenue includes bundled software and hardware PACS
solutions and bundled software and hardware specialty workstations. The $5.3
million increase in solutions and workstation revenue in Q3 of 2005 and the
$11.3 million increase year-to-date in fiscal 2005, reflects predominantly
revenue growth from the acquisition of eMed. Prior to the acquisition of eMed
in October 2004, the Company generally did not offer bundled software and
hardware workstations or bundled PACS solutions and generally licensed
technology on a software-only basis.
Support services and other revenue comprises support and service contracts
associated with solutions and workstations sales and software license sales.
Support services and other revenue was higher by $2.9
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million in Q3 and $3.7 million in year-to-date fiscal 2005 as compared to the
same periods last year. Organic support service revenue was maintained at the
same level compared to the prior year, but was accompanied by the significant
positive impact of the inclusion of support services revenue from the
acquisition of eMed.
Revenue by Geographic Region (in millions of dollars, except percentages)
==============================================================================================================
Three Months Nine Months Variance
Ended March 31 Ended March 31 Increase/(Decrease)
-------------- -------------- -------------------
2005 2004 2005 2004 Three Months Nine Months
- --------------------------------------------------------------------------------------------------------------
United States $ 15.5 $ 2.1 $ 37.4 $ 12.0 640% 212%
Asia 8.5 4.2 19.8 10.8 103% 84%
Europe 0.4 7.2 2.5 12.9 (94%) (81%)
- --------------------------------------------------------------------------------------------------------------
Total $ 24.4 $ 13.5 $ 59.7 $ 35.7 81% 67%
==============================================================================================================
Increased revenue from United States customers for the three and nine months
ended March 31, 2005 was due primarily to the acquisition of eMed and an
increase in software license revenue. Virtually all of eMed's revenue is
derived from customers in the United States. The increase in revenue from Asia
represents primarily increased software licenses revenue for both the current
quarter and the year-to-date. Revenue from Europe decreased $6.8 million for
the quarter and $10.4 million year-to-date compared to the same periods in the
prior year primarily due to the impact of $6.7 million technology agreement
entered into with Siemens during Q3 fiscal 2004, the completion of a large
custom engineering project at the beginning of Q3 fiscal 2004 and a large
European software licensing arrangement recognized in the first quarter of
fiscal 2004.
Gross Margin
Gross margin continued to be strong at $18.3 million or 75% of revenue in Q3
fiscal 2005, an increase of $7.6 million or 71% compared to $10.7 million or
80% of revenue in Q3 fiscal 2004. Gross margin on a year-to-date basis for
fiscal 2005 was $44.6 million or 75% of revenue compared to $28.0 million or
78% of revenue in the same period in fiscal 2004. The gross margin of the
Company is heavily influenced by the relative mix of software license revenue
compared to other revenue sources, as software license gross margins are
considerably higher. Solutions and workstation sales include an element of
hardware, which carries a lower gross margin compared to software-only sales.
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 decline in gross margin percentage for both the current quarter and the
nine month period ended March 31, 2005 was attributable in part to the increase
in solutions and workstation sales, which comprised 22% of revenue in Q3 of
2005 and 19% of revenue for year-to-date fiscal 2005. The Company earns lower
margins on solutions and workstation sales, due to the sale of computer
hardware as part of solution revenue. The Company also incurred $0.6 million of
withholding tax expense during the current quarter on software license sales to
customers in Japan, compared to less than $0.1 million in Q3 of fiscal 2004.
Gross margin was also adversely impacted by the inclusion of amortization of
purchased technology of $0.2 million and $0.3 million for the three and nine
month period ended March 31, 2005 respectively.
Operating Expenses
Operating expenses in Q3 of fiscal 2005 include the impact of eMed operations,
which are not included in the comparative periods.
Total operating expenses for Q3 fiscal 2005 were $12.0 million, an increase of
$6.6 million or 121% from the $5.4 million incurred in the same period of the
prior year. Excluding $1.2 million of merger related expenses and the impact of
the acquisition of eMed, organic expenses increased approximately 26% in Q3
fiscal 2005 compared to Q3 of the prior year. Operating expenses for the nine
months ended March 31, 2005 were $30.2 million, an increase of 83% from $16.5
million incurred in the same period last year. Excluding the $1.2 million gain
on settlement of shareholder loans in Q2 of the prior year, merger expenses and
the impact of the
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acquisition of eMed, year to date fiscal 2005 organic expenses increased
approximately 22% compared to the prior year to-date period. The increase
reflects the Company's increased spending on sales and marketing efforts and
certain non-recurring general and administrative costs.
Research and development costs were $3.0 million for Q3 fiscal 2005 compared to
$2.0 million for the same period last year, up 54% or $1.0 million. On a
year-to-date basis, research and development costs increased $1.5 million or
23% compared to the same period last year. The increase is attributable
primarily to higher employee related costs as a result of the acquisition of
eMed and the expensing of costs relating to stock based compensation. Research
and development costs for Q3 fiscal 2005 represent 13% of revenue in the
quarter, as compared to 15% of revenue in the same period in the prior year.
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.
Sales and marketing expenses mainly consist of salaries, other employee related
costs, travel expenses and trade show expenses associated with promoting,
managing, selling and marketing of the Company's products and services. Sales
and marketing costs for Q3 fiscal 2005 were up $2.3 million and were up $5.2
million year-to-date compared to the same periods in previous year. The
increases were due primarily to additional sales and marketing resources added
as a result of the acquisition of eMed, adding direct-to-end user sales staff
in the fourth quarter of fiscal 2004, the new business operation in Shanghai,
China, participation in trade shows during Q3 fiscal 2005 and stock based
compensation costs. The Company continues to increase its spending on sales and
marketing efforts in the area of new sales personnel and increased
participation in trade shows, with a view to expand its sales and new business
opportunities.
General and administrative expenses consist primarily of salaries and other
employee related costs of administrative personnel, professional fees, investor
related costs, insurance costs and facilities related expenditures. General and
administrative costs increased 67% or $1.2 million in Q3 fiscal 2005 and $2.9
million or 56% on a year-to-date basis, compared with the same periods of the
previous year. The increases in Q3 fiscal 2005 as compared to same period in
the prior year are primarily due to inclusion of eMed expenses as a result of
the acquisition, increased stock exchange listing fees due to increased market
capitalization, stock-based compensation expense and a marginal increase in
employee related expenses. In addition, increases in year-to-date expenses were
attributable to increased commercial legal expenses, and costs related to
entering into the new banking relationship.
Other charges increased $1.3 million in Q3 of fiscal 2005 and $2.6 million
year-to-date compared to the same period in the prior year. Included in other
charges for the quarter were $1.2 million of costs incurred by the Company as a
result of the proposed merger with Merge eFilm. Excluding the impact of the
merger expenses, other charges increased by $0.1 in Q3 fiscal 2005, on a
comparative basis. The fiscal 2004 year to date charges of $0.2 million
included a recovery of $1.2 million against provisions for share purchase loans
to the former CEO and other former employees. Excluding the impact of the loan
recovery from the prior year, year to date fiscal 2005 expenses increased $1.4
million which is primarily attributable to foreign exchange losses. The Company
incurred foreign exchange losses of $0.2 million in Q3 fiscal 2005 compared to
no loss or gain in Q3 of the prior year. Foreign exchange losses for the nine
months ended March 31, 2005 were $1.4 million compared to $0.5 million in the
prior period. The foreign exchange loss is attributable to the decline in
United States Dollar with respect to the Canadian dollar. Generally, the
foreign exchange gains or losses include unrealized translation changes on the
Company's accounts receivable balances, bank indebtedness and cash equivalents
denominated in United States dollars due to the changes in the United States
dollar compared to the Canadian dollar. Substantially all of the Company's
revenue is billed and received in United States dollars.
Intangible asset amortization increased $0.6 million in Q3 fiscal 2005 and $1.1
million year to date fiscal 2005 as compared to the same period in the prior
year due to $0.6 million and $1.2 million of amortization charges resulting
from the eMed acquisition in the current quarter and year to date,
respectively. Included in direct costs for the three and nine months ended
March 31, 2005 are $0.2 million and $0.3 million respectively of charges
relating to amortization of purchased technology. Depreciation and amortization
charges decreased in fiscal 2005 compared to the same period in the prior year
primarily due to deferred development costs becoming fully amortized in fiscal
2004. 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.
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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.
===================================================================================================================================
Summary Table of Unaudited Quarterly Operating Results
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars March 31, Dec. 31 Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
except share amounts) 2005 2004 2004 2004 2004 2003 2003 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue $ 24.4 $ 23.0 $ 12.3 $ 14.7 $ 13.4 $ 12.1 $ 10.1 $ 6.6
Net income (loss) from
continuing operations $ 6.2 $ 4.9 $ 3.2 $ 4.9 $ 5.1 $ 4.0 $ 1.6 $ (3.7)
Income (loss) from
discontinued operations $ - $ - $ - $ - $ - $ (0.1) $ 0.1 $ -
Net income (loss) $ 6.2 $ 4.9 $ 3.2 $ 4.9 $ 5.1 $ 3.9 $ 1.7 $ (3.7)
Earnings (loss) per share
from continuing operations:
Basic $ 0.20 $ 0.16 $ 0.10 $ 0.16 $ 0.20 $ 0.16 $ 0.07 $ (0.15)
Diluted $ 0.18 $ 0.15 $ 0.10 $ 0.15 $ 0.18 $ 0.14 $ 0.06 $ (0.15)
Earnings (loss) per share:
Basic $ 0.20 $ 0.16 $ 0.10 $ 0.16 $ 0.20 $ 0.16 $ 0.07 $ (0.15)
Diluted $ 0.18 $ 0.15 $ 0.10 $ 0.15 $ 0.18 $ 0.14 $ 0.06 $ (0.15)
Weighted average shares
outstanding:
Basic 31,680,694 31,503,201 31,378,091 31,043,959 26,007,932 24,168,495 24,157,621 24,157,621
Diluted 33,801,761 33,370,845 33,485,858 33,341,097 28,749,093 27,762,206 26,427,255 24,157,621
===================================================================================================================================
The operating results of the Company as at March 31, 2005 and December 31, 2004
include the impact of the eMed acquisition and its operating results from
January 1, 2005 and October 8, 2004 respectively. Historically, the Company's
operating results have fluctuated on a quarterly basis and the Company expects
that quarterly financial results will continue to fluctuate in the future.
Fluctuations in results relate to several external factors including the timing
of sales and contract renewals with large OEM customers which may place large
single orders in any one quarter and due to fluctuations in exchange rates.
Off-Balance Sheet Arrangements
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 the first two quarters of fiscal 2005, the Company provided services and
licenses to Carl Zeiss Inc. ("Zeiss") in final settlement of non-cash
liabilities under the terms of a settlement agreement between Zeiss and the
Company. Discontinued operations of the Company are now finalized. Further
details on discontinued operations can be found in note 6 to the Unaudited
Consolidated Financial Statements.
CRITICAL ACCOUNTING ESTIMATES
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
- 9 -
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 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 and
intangible 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.
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, the Company identifies the reporting unit associated with the goodwill
and assesses the value of the goodwill in the context of that reporting unit.
Income Taxes
The Company believes that it has adequately provided for income taxes based on
all of the information that is currently available. Tax filings are subject to
audits, which could materially change the amount of current and future income
tax assets and liabilities. As outlined in note 17 to the Company's audited
consolidated annual financial statements for the year ended June 30, 2004, a
full valuation allowance has been taken against all future tax assets of the
Company, resulting in no future tax asset being recorded in the financial
statements.
- 10 -
ADOPTION OF ACCOUNTING POLICIES
Effective July 1, 2004, the Company adopted CICA Section 1100, "Generally
Accepted Accounting Principles" and 1400 "General Standards of Financial
Statement Presentation", which establish standards for financial reporting and
financial statement presentation in accordance with GAAP. The standards define
primary sources of GAAP and require that an entity apply every relevant primary
source. The adoption of these standards did not have a material impact on the
Company's financial statements.
Effective July 1, 2004, the Company adopted the CICA Accounting Guideline (AcG)
13, "Hedging Relationships". This guideline addresses the identification,
designation, documentation and effectiveness of hedging relationships for the
purpose of applying hedge accounting. The guideline establishes certain
criteria for the application of hedge accounting and the discontinuance of
hedge accounting. EIC 128, "Accounting for Trading, Speculative or Non-Hedging
Derivative Financial Instruments", requires that any derivative financial
instrument not designated as an AcG 13 compliant hedge relationship be measured
at fair value with changes in fair value recorded in current income. The
Company did not enter into any hedging contracts during the three and nine
month periods ended March 31, 2005.
Beginning Q2 fiscal 2005, as a result of the acquisition of eMed, the Company
included in its accounting policies, a revenue recognition policy related to
sales of electronic medical imaging system solutions and workstations.
Under this policy, the Company recognizes revenue from the sale of hardware
transactions, solutions and workstations where software is incidental in
accordance with Emerging Issues Committee ("EIC") abstract 141 - Revenue
Recognition and EIC 142 - Revenue Arrangements with Multiple Deliverables
which, in the Company's circumstances, is not materially different from the
amounts that would be determined under the provisions of Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition, as amended by SAB No. 104, which
incorporates the provision regarding revenue arrangements with multiple
deliverables as prescribed by Emerging Issues Task Force (EITF) Issue No.
00-21, Revenue Arrangements with Multiple Deliverables. Revenue from solution
and workstation sales is recognized upon shipment to the customer provided that
evidence of an arrangement exists, fees are fixed or determinable, title and
risk of loss has passed to the customer, collection of the related receivable
is probable, and there are no customer acceptance provisions. The majority of
these arrangements also contain installation services.
For arrangements in which a portion of the solution and workstation sales price
is not due until customer acceptance, the Company recognizes such portion only
upon obtaining customer acceptance. In the event uncertainty exists about
customer acceptance of product sales such as acceptance criteria or greater
than 50% of the sales price is not due until customer acceptance, the entire
sales price is deferred until acceptance occurs. Customer payments received in
advance of product shipments are recorded as deferred revenue. The Company's
results for the current quarter include revenues recognized from sales of
solutions and workstations.
Effective January 1, 2005, the Company adopted CICA Accounting Guideline (AcG)
15, "Consolidation of Variable Interest Entities" which provides guidance for
determining when an enterprise includes the assets, liabilities, and results of
activities of entities that are subject to control on a basis other than
ownership of voting interest (a "variable interest entity"). The adoption of
this guideline had no material impact on the Company's financial position,
results of operations, or cash flows.
- 11 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated balance sheets as at March 31, 2005 and June 30,
2004 are summarized as follows:
Consolidated Balance Sheets
============================================================================================================================
March 31, 2005 June 30, 2004
(In millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------------
Current assets of continuing operations $ 57.7 $ 60.0
Less: Current liabilities of continuing operations (26.9) (5.1)
- ----------------------------------------------------------------------------------------------------------------------------
Working capital of continuing operations 30.8 54.9
Current liabilities of discontinued operations - (1.0)
- ----------------------------------------------------------------------------------------------------------------------------
Working capital 30.8 53.9
Capital assets 2.2 2.2
Long-term investments 2.8 0.5
Goodwill 33.7 9.1
Intangible assets 11.6 0.4
- ----------------------------------------------------------------------------------------------------------------------------
$ 81.1 $ 66.1
- ----------------------------------------------------------------------------------------------------------------------------
Represented by:
Long-term liability $ 0.1 $ -
Shareholders' equity 81.0 66.1
- ----------------------------------------------------------------------------------------------------------------------------
$ 81.1 $ 66.1
============================================================================================================================
At March 31, 2005, the Company had working capital of $30.8 million, a
reduction of $23.1 million over the working capital position at June 30, 2004.
The reduction was primarily due to the acquisition of eMed in Q2 fiscal 2005
for net cash of $36.8 million (including transaction costs) which resulted in
net current assets, goodwill and intangible assets included in the Company's
balance sheet. The Company expects that working capital will improve and
strengthen as a result of consistent positive operating cash flows and
sustained profitability. Compared to Q2 fiscal 2005, the working capital
position of the Company has improved by $6.1 million during the quarter.
Liquidity of the Company is expected to be sustained principally through cash
provided by operations, with short-term investments and highly liquid
cash-equivalent instruments available to provide additional sources of cash.
Continuing operating activities provided cash of $7.2 million in Q3 fiscal
2005, consistent with the cash generated in Q3 fiscal 2004. The cash provided
from operating activities in Q3 fiscal 2005 resulted mainly from $7.8 million
of cash generated from operations before working capital changes, an increase
of $2.3 million compared to the same period in the prior year, partially offset
by a decrease in working capital changes of $0.5 million. Continuing operating
activities provided cash of $8.7 million year-to-date, compared to $7.8 million
of cash generated in the prior period. The cash generated was a result of $18.3
million of cash generated from operations before working capital changes and
offset partially by an increase in accounts receivable balances.
Investing activities consumed cash of $0.4 million in Q3 fiscal 2005 and $26.3
million year to date compared to cash used of $0.2 million and $0.7 million in
the same periods of the prior fiscal year, respectively. The cash usage during
the nine month period ended March 31, 2005 reflects primarily the net cash
purchase price of eMed of $36.8 million which was partly financed by the
liquidation of short-term investments of $11.0 million and the $17.8 million
draw on the Company's acquisition credit facility as discussed below.
Financing activities for the current quarter consumed cash of $4.5 million.
This compares to cash generated of $39.0 million in Q3 fiscal 2004. The cash
used in financing activities in the current quarter reflects primarily the
repayment of $5.1 million towards the bank credit facility which was used to
partly finance the acquisition of eMed and offset by $0.7 million from the
issue of shares on exercise of employee stock options. Cash generated in the
same period of the prior year reflects primarily the cash inflow from the
issuance of shares
- 12 -
under an equity financing. Cash generated of $15.3 million from financing
activities during the nine months ended March 31, 2005, reflects primarily the
net cash inflow from the bank credit facility and cash received on exercise of
employee stock options.
On October 8, 2004 the Company entered into a $29.8 million credit facility
with RBC. Under the credit facility, RBC provided an acquisition term facility
of up to $22.5 million to allow Cedara to finance part of the acquisition of
all of the issued and outstanding shares of eMed on October 8, 2004. The
Company accessed $17.8 million of the available $22.5 million to consummate the
acquisition of eMed. The remaining unused portion of the acquisition term
facility was then cancelled. The new 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, 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. Under the terms of the
credit facility, the Company is required to obtain RBC's written consent prior
to completing the proposed merger with Merge eFilm. The Company expects that it
would either obtain RBC's consent or repay all bank indebtedness prior to the
formal completion of the merger.
As of March 31, 2005, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $36.6 million, accounts receivable of $16.9
million, the bank credit facility as described above, and ongoing future
operating cash flows. The Company's cash requirements in the short-term relate
to the ongoing funding of its operations and growth initiatives and management
believes the results of the above will provide sufficient operating cash flows
to meet the Company's cash requirements for at least the next twelve months.
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.
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.
- 13 -
CEDARA SOFTWARE CORP.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
________________________________________________________________________________
===========================================================================================================================
March 31, 2005 June 30, 2004
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 36,640 $ 40,510
Short-term investments - 10,902
Accounts receivable 16,907 7,449
Inventory 1,792 268
Prepaid expenses and other assets 2,377 881
--------------------------------------------------------------------------------------------------------------------
57,716 60,010
Capital assets 2,189 2,201
Long-term investments (note 3) 2,839 510
Intangible assets 11,623 373
Goodwill (note 4) 33,682 9,053
- ---------------------------------------------------------------------------------------------------------------------------
$ 108,049 $ 72,147
===========================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness (note 5) $ 12,700 $ -
Accounts payable and accrued liabilities 8,820 4,207
Deferred revenue 5,360 861
Current liabilities of discontinued operations (note 6) - 986
--------------------------------------------------------------------------------------------------------------------
26,880 6,054
Long-term liability 201 -
Non-current portion of provision for loss on sublease 8 44
Shareholders' equity
Capital stock 163,587 161,536
Contributed surplus 962 388
Deficit (81,545) (95,875)
Cumulative translation adjustment (2,044) -
--------------------------------------------------------------------------------------------------------------------
80,960 66,049
- ---------------------------------------------------------------------------------------------------------------------------
$ 108,049 $ 72,147
===========================================================================================================================
See accompanying notes to unaudited consolidated financial statements
- 14 -
CEDARA SOFTWARE CORP.
Unaudited Consolidated Statements of Operations
(In thousands of Canadian dollars, except per share amounts)
________________________________________________________________________________
===========================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
---------------------------------------------------------
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $ 24,395 $ 13,450 $ 59,709 $ 35,701
Direct costs 6,062 2,737 15,148 7,708
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 18,333 10,713 44,561 27,993
Expenses:
Research and development 3,044 1,971 7,869 6,385
Sales and marketing 3,400 1,068 8,675 3,480
General and administration 3,093 1,848 7,992 5,133
Severance costs (recovery) 171 64 586 (120)
Other charges (note 9) 1,320 22 2,882 240
Amortization of intangible assets 647 47 1,248 149
Depreciation and amortization 330 409 987 1,262
--------------------------------------------------------------------------------------------------------------------
12,005 5,429 30,239 16,529
- ---------------------------------------------------------------------------------------------------------------------------
Income before interest expense 6,328 5,284 14,322 11,464
Interest expense, net 115 156 27 758
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 6,213 5,128 14,295 10,706
Income from discontinued operations (note 6) - - 35 -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 6,213 $ 5,128 $ 14,330 $ 10,706
===========================================================================================================================
Earnings per share from continuing operations (note 10)
Basic $ 0.20 $ 0.20 $ 0.45 $ 0.43
Diluted $ 0.18 $ 0.18 $ 0.43 $ 0.38
Earnings per share (note 10)
Basic $ 0.20 $ 0.20 $ 0.45 $ 0.43
Diluted $ 0.18 $ 0.18 $ 0.43 $ 0.38
===========================================================================================================================
See accompanying notes to unaudited consolidated financial statements
- 15 -
CEDARA SOFTWARE CORP.
Unaudited Consolidated Statements of Shareholders' Equity
(In thousands of Canadian dollars)
________________________________________________________________________________
===================================================================================================================================
Total
Cumulative Shareholders'
Contributed Translation Equity
Common Shares Warrants Surplus Deficit Adjustment (Deficiency)
----------------------------------------------------------------------------------------------------
Number Amount Number Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 24,157,621 $106,328 605,636 $ 3,260 $ - $ (111,441) $ - $ (1,853)
Issue of shares on exercise of
stock options 501,992 1,624 - - - - - 1,624
Reclass of expired warrants - - (200,000) (155) 155 - - -
Issue of shares on exercise of
warrants 42,000 105 (42,000) (105) 105 - - 105
Issue of shares on conversion
of convertible subordinated
debentures 1,267,120 2,887 - - - - - 2,887
Issue of shares on equity
financing 5,000,000 50,000 - - - - - 50,000
Share issue costs - (2,900) - - - - - (2,900)
Net income for the period - - - - - 10,706 - 10,706
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 30,968,733 $ 158,044 363,636 $ 3,000 $ 260 $ (100,735) $ - $ 60,569
===================================================================================================================================
Balance, June 30, 2004 31,540,267 $161,536 - $ - $ 388 $ (95,875) $ - $ 66,049
Issue of shares on exercise of
stock options 332,355 2,051 - - - - - 2,051
Stock-based compensation
expense (note 8) - - - - 574 - - 574
Net income for the period - - - - - 14,330 - 14,330
Current period translation
adjustment - - - - - - (2,044) (2,044)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 31,872,622 $163,587 - $ - $ 962 $ (81,545) $ (2,044) $ 80,960
===================================================================================================================================
See accompanying notes to unaudited consolidated financial statements
- 16 -
CEDARA SOFTWARE CORP.
Unaudited Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
________________________________________________________________________________
======================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
-----------------------------------------------------
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income from continuing operations $ 6,213 $ 5,128 $ 14,295 $ 10,706
Items not involving cash:
Depreciation and amortization 1,131 456 2,528 1,411
Stock based compensation expense 330 - 574 -
Accretion of interest on convertible subordinated
debentures - - - 36
Other 85 (99) 910 241
- ----------------------------------------------------------------------------------------------------------------------
7,759 5,485 18,307 12,394
- ----------------------------------------------------------------------------------------------------------------------
Change in non-cash operating working capital:
Accounts receivable 684 496 (10,135) (3,372)
Inventory (172) 20 (254) 108
Prepaid expenses and other assets (413) 154 (673) (206)
Accounts payable and accrued liabilities (459) (42) 156 (2,380)
Deferred revenue (170) 1,116 1,294 1,253
- ----------------------------------------------------------------------------------------------------------------------
(530) 1,744 (9,612) (4,597)
- ----------------------------------------------------------------------------------------------------------------------
7,229 7,229 8,695 7,797
Investing activities:
Decrease in short-term investments - - 10,902 -
Acquisition of eMed, net of cash acquired (249) - (36,751) -
Proceeds from sale of investments in shares - - 273 -
Additions to intangible assets (41) (12) (61) (66)
Additions to capital assets (142) (225) (646) (656)
----------------------------------------------------------------------------------------------------------------
(432) (237) (26,283) (722)
Financing activities:
Increase (decrease) in bank indebtedness (5,124) (8,944) 13,297 (9,493)
Decrease in long-term liability (36) - (40) -
Issue of shares on exercise of options 675 775 2,051 1,624
Issue of shares on equity financing - 47,100 - 47,100
Issue of shares on exercise of warrants - 105 - 105
----------------------------------------------------------------------------------------------------------------
(4,485) 39,036 15,308 39,336
Effect on exchange rate changes on cash and cash equivalents
115 - (1,555) -
- ----------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents from continuing
operations 2,427 46,028 (3,835) 46,411
Change in cash and cash equivalents from discontinued
operations (note 6) - 9 (35) (374)
Cash and cash equivalents, beginning of period 34,213 - 40,510 -
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 36,640 $ 46,037 $ 36,640 $ 46,037
======================================================================================================================
- 17 -
CEDARA SOFTWARE CORP.
Unaudited Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
===========================================================================================================================
Three Months Ended Nine Months Ended
Supplemental cash flow information March 31 March 31
---------------------------------------------------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 253 $ 165 $ 542 $ 883
Taxes 240 13 271 13
Cash received for interest $ 138 $ 9 $ 515 $ 22
Non-cash financing activities:
Receipt of shares on payment of accounts receivable $ 1,813 $ 1,975 $ 2,602 $ 2,887
==========================================================================================================================
See accompanying notes to unaudited consolidated financial statements
- 18 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
1. Significant accounting policies:
The disclosures contained in these unaudited interim consolidated financial
statements do not include all disclosures required under generally accepted
accounting principles (GAAP) for annual financial statements. The unaudited
interim consolidated financial statements should be read in conjunction
with the audited annual consolidated financial statements for the year
ended June 30, 2004.
Management believes these unaudited interim consolidated financial
statements include all adjustments, including normal recurring adjustments,
necessary to present fairly the financial position of the Company as at
March 31, 2005 and the results of its operations and its cash flows for the
three and nine months ended March 31, 2005 and 2004. Results for the three
and nine months ended March 31, 2005 are not necessarily indicative of the
results to be expected for the entire year or for any other interim period.
The unaudited interim consolidated financial statements are based upon
accounting policies consistent with those used and described in the annual
consolidated financial statements, except as herein noted:
(a) Principles of consolidation:
On October 8, 2004, Cedara acquired all of the issued and
outstanding shares of eMed Technologies Corporation ("eMed").
This acquisition was accounted for using the purchase method
(note 2). The Company's interim consolidated financial
statements include operating results of eMed from the date of
acquisition. The functional currency of eMed is the United
States dollar and is accounted for as a self-sustaining foreign
operation. As such, assets and liabilities are translated into
the Company's Canadian dollar reporting currency at the rate of
exchange in effect at the balance sheet date while revenue and
expense items are translated into Canadian dollars at the rate
of exchange in effect on the dates on which such items are
recognized in income during the period. All significant
inter-company balances and transactions have been eliminated on
consolidation.
(b) Revenue recognition:
As a result of the acquisition of eMed, the Company's revenues
now also include revenue derived from sales of electronic
medical imaging system solutions and workstations.
The Company recognizes revenue from the sale of hardware
transactions, solutions and workstations where software is
incidental in accordance with Emerging Issues Committee ("EIC")
abstract 141 - Revenue Recognition and EIC 142 - Revenue
Arrangements with Multiple Deliverables which, in the Company's
circumstances, is not materially different from the amounts
that would be determined under the provisions of Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, as
amended by SAB No. 104, which incorporates the provision
regarding revenue arrangements with multiple deliverables as
prescribed by Emerging Issues Task Force (EITF) Issue No.
00-21, Revenue Arrangements with Multiple Deliverables. Revenue
from solutions and workstations sales is recognized upon
shipment to the customer provided that evidence of an
arrangement exists, fees are fixed or determinable, title and
risk of loss has passed to the customer, collection of the
related receivable is probable, and there are no customer
acceptance provisions. The majority of these arrangements also
contain installation services. The Company has determined that
the elements of its arrangements can be accounted for as
separate units of accounting based on the following factors:
- 19 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
o Delivered element or product does have stand-alone value
to the customer, as the Company does sell its products
separately without installation services;
o The Company has an established price list for installation
of its products that are charged consistently; and
o o The Company's arrangements do not contain a general
right of return, and furthermore, the Company has
demonstrated through past experience its ability to
complete the installation services, which are within the
Company's control, without exception.
For arrangements in which a portion of the solutions and
workstations' sales price is not due until customer acceptance,
the Company recognizes such portion upon obtaining customer
acceptance. In the event uncertainty exists about customer
acceptance of product sales such as acceptance criteria or
greater than 50% of the sales price is not due until customer
acceptance, the entire sales price is deferred until acceptance
occurs. Customer payments received in advance of product
shipments are recorded as deferred revenue. The Company
typically provides a one-year warranty on all system solutions
products sold. The Company accrues the estimated costs to be
incurred in connection with product warranty upon product
shipment.
Service revenue consists of customer fees from installation,
set-up and training; network based comprehensive support, and
post-warranty product maintenance. Up-front set-up fees from
web-based services are recognized on a straight line basis over
the expected period of performance. Revenue from installation
and training is recognized as the work is performed and upon
customer acceptance. Revenue from support agreements and
post-warranty product maintenance contracts is deferred and
recognized ratably over the applicable period.
Shipping and handling fees related to sales transactions for
which the Company is reimbursed are classified as revenue and
the related charges as cost of revenues.
(c) Generally Accepted Accounting Principles:
Effective July 1 2004, the Company adopted CICA Section 1100,
Generally Accepted Accounting Principles and CICA Section 1400
General Standards of Financial Statement Presentation, which
establish standards for financial reporting and financial
statement presentation in accordance with GAAP. The standards
define primary sources of GAAP and require that an entity apply
every relevant primary source. The adoption of these standards
did not have a material impact on the Company's financial
statements.
(d) Hedging relationships:
Effective July 1, 2004, the Company adopted the CICA Accounting
Guideline (AcG) 13, Hedging Relationships. This guideline
addresses the identification, designation, documentation and
effectiveness of hedging relationships for the purpose of
applying hedge accounting. The guideline establishes certain
criteria for the application of hedge accounting and the
discontinuance of hedge accounting. EIC 128, Accounting for
Trading, Speculative or Non-Hedging Derivative Financial
Instruments, requires that any derivative financial instrument
not designated as an AcG 13 compliant hedge relationship be
measured at fair value with changes in fair value recorded in
current income. The Company
- 20 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
did not enter into any hedging contracts during the three and
nine months period ended March 31, 2005.
(e) Consolidation of Variable Interest Entities:
Effective January 1, 2005, the Company adopted CICA Accounting
Guideline (AcG) 15, Consolidation of Variable Interest
Entities, which provides guidance for determining when an
enterprise includes the assets, liabilities, and results of
activities of entities that are subject to control on a basis
other than ownership of voting interest (a "variable interest
entity"). The adoption of this guideline had no material impact
on the Company's financial position, results of operations, or
cash flows.
2. Acquisition:
On October 8, 2004, the Company acquired all of the issued and outstanding
shares of eMed Technologies Corporation ("eMed"), a privately-held provider
of Picture Archiving and Communications Systems (PACS) and web-based
medical imaging radiology solutions based in Burlington, Massachusetts (the
"Acquisition").
The purchase consideration paid in cash for the Acquisition, together with
the transaction costs, was $61,599 (US$49,202). The Company financed the
Acquisition partly from its own cash reserves, partly from its new term
credit facility with the Royal Bank of Canada ("RBC") and the remainder of
the consideration was financed from cash on the balance sheet of eMed on
the closing of the Acquisition, as described below:
=======================================================================================================
Cdn$ US$
- -------------------------------------------------------------------------------------------------------
Cash on hand $ 17,970 $ 14,356
Acquired cash of eMed 24,848 19,846
Acquisition borrowing facility 18,781 15,000
- -------------------------------------------------------------------------------------------------------
$ 61,599 $ 49,202
=======================================================================================================
The acquisition is accounted for using the purchase method of accounting in
accordance with the recommendations of Section 1581, Business Combinations
of the CICA Handbook and the resultant goodwill and other intangible assets
are accounted for prospectively in accordance with the recommendations of
Section 3062, Goodwill and Other Intangible Assets of the CICA Handbook.
In the preparation of these consolidated financial statements, the purchase
consideration has been allocated on a preliminary basis to the fair value
of assets acquired, including intangible assets, any future tax impact and
liabilities assumed based on management's best estimates and taking into
account all relevant information available at the time these statements
were prepared. The Company engaged an independent valuator to assist
management in identifying and assessing the fair value of the various
assets and liabilities acquired. The independent valuator has issued a
report which forms the basis for the values assigned set out below.
Management is in the process of finalizing the allocation of purchase
consideration including future tax impact, if any. To the extent the
finalization of these fair value results in changes to amounts set out in
these consolidated financial statements, the amount assigned to goodwill
will be adjusted by an equal and offsetting amount.
- 21 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
During the three months ended March 31, 2005, the Company identified
additional expenses of $249 relating to transactional costs. As a result,
the preliminary purchase consideration increased by $249 and amount
assigned to goodwill increased by $249.
The purchase price allocation of the fair value of net assets acquired is
detailed as follows:
================================================================================================================
Cdn$ US$
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 24,848 $ 19,846
Accounts receivable 4,172 3,332
Inventory 1,315 1,050
Prepaid expenses and other assets 849 678
Capital assets 347 276
Goodwill 25,449 20,330
Intangible assets:
Purchased technology 3,130 2,500
Brand name and trademarks 1,377 1,100
Order backlog 2,634 2,104
Customer contracts and customer base 6,010 4,800
Deferred revenue (3,989) (3,186)
Liabilities (4,543) (3,628)
----------------------------------------------------------------------------------------------------------------
$ 61,599 $ 49,202
================================================================================================================
The purchased technology, brand name and trademarks and customer contracts
and customer base are being amortized on a straight-line basis over their
useful lives which are estimated as follows; purchased technology over 5
years, brand name and trademarks over 5 years and customer contracts and
customer base over 6 years. The order backlog asset will be amortized as
the orders are fulfilled, which is expected to be 2 years. The amortization
of purchased technology is included in direct costs as follows: $154 and
$293 for the three and nine month periods ended March 31, 2005,
respectively.
3. Long-term investments:
Long-term investments represent shares held in private companies which the
Company does not control or have significant influence over and are
accounted for at cost.
4. Goodwill:
=====================================================================================================
-----------------------------------------------------------------------------------------------------
Balance, October 8, 2004 $ 34,253
Adjustment to purchase price allocation for additional transaction
costs incurred 249
Foreign exchange translation impact (820)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 2005 $ 33,682
=====================================================================================================
5. Bank indebtedness:
During October 2004, the operating line of $14,000 and the general security
agreement with the National Bank of Canada were cancelled and the Company
entered into a $29,750 credit facility with the Royal Bank
- 22 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
of Canada ("RBC") bearing interest at prime plus an applicable margin
depending upon certain financial ratios. Under the new credit facility, RBC
provided a term facility of up to $22,500 to allow the Company to finance
part of the acquisition of eMed (note 2). Following the acquisition of
eMed, the remaining unused portion of this acquisition facility was
cancelled. 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 $7,250 for purposes of financing the Company's
general operating requirements, and facilitating foreign exchange
transactions. The credit facility is secured by a general security
agreement granting a first security interest in all of the Company's
present and after acquired property to RBC. The borrowings under the
facility are repayable by quarterly payments based on various financial
milestones and conditions. During the three and nine months ended March 31,
2005, the Company made repayments of $5,125 and $5,485, respectively. The
credit facility requires that the Company satisfy certain financial,
reporting and other covenants, including the maintenance of certain
financial ratios. The Company is in compliance with all such covenants at
March 31, 2005. Under the terms of the credit facility, the Company is
required to obtain RBC's written consent prior to completing the proposed
merger with Merge eFilm (note 11). The Company expects that it would either
obtain RBC's consent or repay all bank indebtedness prior to the formal
completion of the merger.
6. Discontinued operations:
The following summarizes the balance sheet, statement of operations and
statement of cash flows information for the Company's discontinued
operations:
================================================================================================================
Balance Sheet March 31, 2005 June 30, 2004
----------------------------------------------------------------------------------------------------------------
Current liabilities $ - $ 986
----------------------------------------------------------------------------------------------------------------
Net liabilities of discontinued operations $ - $ 986
================================================================================================================
The Company was obligated to pay US$1,500 over 18 months commencing April
2002 and ending in September 2004, 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. The cash liability of US$1,500 was fully paid.
During the nine months ended March 31, 2005, the Company provided services
and software licenses of $823 in complete settlement of the remaining
non-cash liabilities (services and licenses provided during nine months
ended March 31, 2004 - $361).
=================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Operations 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------------
Revenue $ - $ - $ - $ -
Income from operations - - - -
Gain on disposition of discontinued operations - - 35 -
Gain from discontinued operations $ - $ - $ 35 $ -
=================================================================================================================
Earnings per share from discontinued operations:
Basic $ - $ - $ - $ -
Diluted $ - $ - $ - $ -
=================================================================================================================
- 23 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Operating activities $ - $ 9 $ (35) $ (374)
Financing activities - - - -
Investing activities - - - -
----------------------------------------------------------------------------------------------------------------
Cash used in discontinued options $ - $ 9 $ (35) $ (374)
----------------------------------------------------------------------------------------------------------------
7. Segmented information and major customers:
The Company 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. The
Company's products include 2D and 3D medical imaging software applications,
components, platforms, imaging system solutions and workstations and custom
engineering services. The Company serves one industry segment, medical
imaging and related information solutions.
All of the Company's revenues are exported as follows:
================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
United States $15,526 $ 2,098 $37,342 $11,965
Asia 8,452 4,155 19,847 10,802
Europe 417 7,197 2,520 12,934
----------------------------------------------------------------------------------------------------------------
$24,395 $13,450 $59,709 $35,701
================================================================================================================
The following are product and service revenues of the Company:
================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Software licenses $13,194 $ 9,675 $32,344 $23,017
Engineering services 2,079 2,927 8,561 8,858
Solutions and workstations 5,322 - 11,343 -
Support services and other 3,800 848 7,461 3,826
----------------------------------------------------------------------------------------------------------------
$24,395 $13,450 $59,709 $35,701
================================================================================================================
All of the capital assets of continuing operations are substantially
located in North America. Revenues to customers that individually generate
more than 10% of revenue are as follows:
- 24 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
====================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Customer A 14% 11% 11% 16%
Customer B - 1% - 13%
Customer C 14% 4% 6% 2%
Customer D 3% 6% 2% 20%
Customer E - 49% - 18%
Customer F 12% - 19% -
====================================================================================================================
At March 31, 2005, three customers accounted for 18%, 17% and 11%,
respectively of trade accounts receivable (June 30, 2004 - three customers
at 19%, 13% and 12%, respectively).
8. Stock-based compensation:
The Company issues stock options under the terms of its Stock Option Plan
(the "Plan"). At the Annual and Special Meeting held in Toronto on October
18, 2004, the shareholders of the Company provided approval to amend the
Plan to increase the maximum number of stock options which may be issued
under the Plan from 4,200,000 options to 5,700,000 options.
During the fourth quarter of fiscal 2004, as permitted under the
transitional provisions of the amended CICA Section 3870, the Company
prospectively adopted the fair value method of accounting for all employee
stock based awards granted on or after July 1, 2003. This resulted in stock
based compensation expense of $330 during the current quarter and $574 for
the nine month period ended March 31, 2005 and recorded in the statement of
operations as follows: Three month period ended March 31, 2005: cost of
sales - $38, research and development - $59, sales and marketing $69, and
general and administrative - $164 Nine month period ended March 31, 2005:
cost of sales - $75, research and development - $129, sales and marketing -
$133 general and administrative - $237.
For the options granted during the year ended June 30, 2004, for which no
charge has been recorded, the Company is required to provide pro-forma
disclosure of the net income and earnings per share, as if the fair
value-based method, as opposed to the intrinsic value based method of
accounting for employee stock options, had been applied. The disclosures in
the following table show the Company's net income and earnings 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.
================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Net income - as reported $ 6,213 $ 5,128 $14,330 $10,706
Estimated stock-based compensation costs (77) (149) (230) (375)
----------------------------------------------------------------------------------------------------------------
Net income - pro-forma $ 6,136 $ 4,979 $14,100 $10,331
================================================================================================================
Pro-forma earnings per share:
Basic $ 0.19 $ 0.19 $ 0.45 $ 0.42
Diluted $ 0.18 $ 0.17 $ 0.42 $ 0.37
- 25 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
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:
================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Number of options issued 39,500 15,000 969,500 405,000
Weighted average grant date value of each option $ 6.77 $ 5.09 $ 4.87 $ 2.55
Assumptions:
Risk free interest rates 4.0% 4.0% 4.0% 4.0%
Expected life in years 5.0 5.0 5.0 5.0
Expected dividend yield - - - -
Volatility 50% 95% 50% 95%
================================================================================================================
9. Other charges:
================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Operating leases $ 27 $ 69 $ 101 $ 360
Bad debt expense 45 45 388 464
Foreign exchange loss (gain) 193 (25) 1,412 463
Recovery of employee loans - (78) - (1,080)
Merger expenses (note 11) 1,144 - 1,144 -
Other expense (income) (89) 11 (163) 33
----------------------------------------------------------------------------------------------------------------
$ 1,320 $ 22 $ 2,882 $ 240
================================================================================================================
10. Earnings per share:
The weighted average number of common shares outstanding is as follows:
================================================================================================================
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------------------------------
Statement of Cash Flows 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding, for basic earnings per share 31,680,694 26,007,932 31,519,494 24,723,842
Shares held as security on share purchase loans 165,834 165,834 165,834 165,834
Incremental shares from assumed conversion of
employee stock options 1,955,233 2,143,760 1,791,982 2,705,952
Incremental shares from assumed conversion of share
purchase warrants - 298,164 - 585,157
Dilutive effect of convertible debentures - 133,403 - 866,363
----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding, for diluted earnings per share 33,801,761 28,749,093 33,477,310 28,047,148
================================================================================================================
- 26 -
CEDARA SOFTWARE CORP.
Unaudited Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share and per option amounts)
Three months and nine months ended March 31, 2005 and March 31, 2004
________________________________________________________________________________
Options to purchase 37,500 and 312,500 common shares were excluded from
the calculation of diluted earnings per share for the three months and
nine months period ended March 31, 2005, respectively (three months and
nine months ended March 31, 2004 - 363,900, and 475,425, respectively)
because the options exercise price was greater than the average market
price of the Company's common shares and, therefore, the effect would be
anti-dilutive.
11. Merger Transaction:
On January 17 2005, the Company entered into a definitive agreement to
merge in an all-stock transaction with Merge Technologies Incorporated
("Merge eFilm), a leading global healthcare software and services company.
In connection with the merger transaction, Merge eFilm will issue either
0.587 Merge eFilm common shares, or 0.587 shares of a newly created class
of Canadian exchangeable shares for each Cedara common share. The
transaction is subject to approval by shareholders of each company,
regulatory approvals and other customary closing conditions. The special
meeting of the shareholders of the Company to consider the transaction
with Merge eFilm is scheduled for May 24, 2005.
Merger related costs incurred by the Company have been expensed as
incurred.
- 27 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 5, 2005
CEDARA SOFTWARE CORP.
By: /s/ BRIAN PEDLAR
-----------------------------
Brian Pedlar
Chief Financial Officer