Securities and Exchange Commission
Washington, DC 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1998
--------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-19865
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I.S.G. Technologies Inc.
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(Exact name of Registrant as specified in its charter)
Ontario, Canada
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(Jurisdiction of incorporation or organization)
6509 Airport Road, Mississauga, Ontario, Canada L4V 1S7
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
- ------------------------------------------------------
(Title of Class)
- ------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Common Shares
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
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12,605,437 Common Shares, without par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1. DESCRIPTION OF THE BUSINESS .......................................................................... 4
1.1 The Company .......................................................................................... 4
1.2 Overview of the Business of the Company............................................................... 5
1.3 Principal Products and Services....................................................................... 6
1.3.1 Diagnostic Imaging Products and Services....................................................... 6
1.3.2. Picture Archiving and Communication Systems (PACS) Products.................................... 6
1.3.3. Image-Guided Therapy Products.................................................................. 7
1.3.4. Custom Engineering .......................................................................... 7
1.3.5. Services....................................................................................... 7
1.4 Revenue Distribution.................................................................................. 8
1.5 Research and Development.............................................................................. 8
1.6 Risk Factors.......................................................................................... 9
1.6.1. Technological Change........................................................................... 9
1.6.2. Intellectual Property..........................................................................10
1.6.3. Competitors....................................................................................10
1.6.4. International Operations.......................................................................11
1.6.5. Dependence on Key Personnel....................................................................11
1.6.6. Fluctuations in Quarterly Financial Results....................................................11
ITEM 2. DESCRIPTION OF PROPERTY .............................................................................11
ITEM 3. LEGAL PROCEEDINGS ...................................................................................11
ITEM 4. CONTROL OF REGISTRANT ...............................................................................11
ITEM 5. NATURE OF TRADING MARKET ............................................................................11
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS ....................................................................................12
6.1 The Investment Act...................................................................................13
ITEM 7. TAXATION ............................................................................................13
ITEM 8. SELECTED FINANCIAL DATA .............................................................................14
8.1 Selected Financial Information.......................................................................14
8.2 Currency Exchange Rates..............................................................................15
8.3 Dividends............................................................................................16
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............16
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........................................16
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT................................................................16
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS..............................................................18
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES......................................18
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS......................................................19
ITEM 14. NOT APPLICABLE .....................................................................................20
ITEM 15. NOT APPLICABLE .....................................................................................20
ITEM 16. NOT APPLICABLE .....................................................................................20
ITEM 17. FINANCIAL STATEMENTS ...............................................................................20
ITEM 18. NOT APPLICABLE .....................................................................................20
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS...................................................................20
SIGNATURES..........................................................................................21
</TABLE>
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I.S.G. TECHNOLOGIES INC.
The Registant's accounts are maintained in Canadian dollars. All dollar amounts
appearing herein are Canadian dollars unless otherwise indicated.
ITEM 1. DESCRIPTION OF THE BUSINESS
1.1 The Company
I.S.G. Technologies Inc. ("ISG" or the "Company") was originally incorporated as
502378 Ontario Limited under the Ontario Business Corporations Act by Articles
of Incorporation dated January 19, 1982. It changed its name to I.S.G.
Technologies Inc. on August 18, 1982.
In 1986, ISG completed a public offering of its securities and listed its common
shares on The Toronto Stock Exchange (TSE). It subsequently issued a secondary
offering on both the TSE and NASDAQ in March of 1992.
ISG has four subsidiaries, the first two of which are wholly-owned; ISG Medical
Systems Inc., a Massachusetts corporation that is currently inactive; and ISG
Technologies (USA), Inc., a Delaware corporation. The Surgical Navigation
Specialists Inc. ("SNS") is an Ontario Corporation in which 80% of the voting
securities are held by ISG, and the balance by Carl Zeiss Inc., a New York
Corporation and Carl Zeiss Oberkochen, a German Trust Foundation. ISG owns 65%
of the voting securities of Nippon ISG Corporation ("Nippon ISG"), a Japanese
incorporated venture with Mitsui and Company Limited and Mitsui and Company
(Canada) Limited.
ISG's head and principal office is located in Mississauga, Ontario. The Company
also maintains an advanced technology facility in California. At June 30, 1998,
ISG had 294 employees worldwide.
Until 1987, the Company was primarily engaged in contract research and
development. In 1987, it began development of a 3-Dimensional medical imaging
workstation, which was the predecessor to ISG's Allegro product. The Company's
first commercial sale of a medical imaging workstation occurred in 1989. Since
then, the Company has focused its efforts on the development of visual data
processing technologies for medical applications.
In 1987, the Company entered into an agreement with Philips Medical Systems
Nederland B.V. to develop the Gyroview Workstation and various application
software packages for Philips Magnetic Resonance Imaging products. Shipments of
Gyroview commenced in 1990 and continued until 1995, when Gyroview was replaced
by Imaging Applications Platform (IAP) technology.
ISG developed the software platform known as IAP in 1991 to facilitate faster
time-to-market and less expensive development of medical imaging software
applications. GE Medical Systems, a division of General Electric Company,
licensed IAP for use in GE's scanner products that same year. Philips Medical
Systems and NORAN Scientific Instruments Inc. became licensees in 1992.
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In March 1992, the Company issued 2,150,000 shares of its securities on NASDAQ
and The Toronto Stock Exchange for net proceeds of approximately $32 million.
In 1993, the Company signed an agreement for Elekta Instruments Inc. to
distribute ISG's new Viewing Wand product - a localization and navigation device
used in surgery by neurosurgeons, Ear, Nose and Throat surgeons, and Orthopaedic
surgeons.
In 1994, the Company developed a line of Radiology Application Software products
used in hospitals and physicians' offices to review and analyze medical images
for both diagnosis and treatment plan purposes. Radiology Application Software
supplanted the Allegro workstation product, which ceased production in 1996.
From 1994 to 1996, the Company entered into agreements to provide custom
developed application products (e.g. scanner consoles, viewing stations) and/or
platform products such as IAP to Analogic Corp., DuPont Diagnostic Imaging,
Hitachi Medical Corporation, Siemens AG, Konica Medical and Shimadzu
Corporation.
In 1997, the Company established contractual relationships with Hospital
Information System providers such as Corsoft AB, and E-Systems Medical
Electronics Inc., including a 7-year contract with Inmet Systems Inc. valued at
a minimum of US$7.8 million. Also in 1997, ISG signed a new custom engineering
relationship with Toshiba Corporation of Japan.
In June 1997, the Company launched the Surgical Navigation Network (SNN) -- a
consortium of leading medical equipment companies who have chosen to standardize
their image-guided surgery applications on the SNN SCOUT, a Windows based image
guided surgery platform developed by Surgical Navigation Specialists Inc. The
SNN is the first industry initiative to facilitate medical equipment integration
across vendors.
In 1998, ISG attracted several new members to the SNN, and Carl Zeiss Inc.
became a 20% joint venture partner with ISG in SNS, which manages and supports
the SNN. ISG also signed a 10 year umbrella agreement with Philips Medical
Systems for a variety of software services.
1.2 Overview of the Business of the Company
ISG develops and markets imaging software, software platforms, software systems
and related services to major medical equipment manufacturers and hospital
systems integrators around the globe. The Company's products are used by
radiologists and surgeons to display, manipulate and analyze 2-dimensional and
3-dimensional images of a patient's internal anatomy. Related services offered
by the Company include custom engineering, technical and applications support,
training, and after-sales service.
The Company believes the enhanced medical imaging capabilities of its products
improve the quality of patient care through more accurate and efficient medical
diagnosis and treatment; and by providing a non-invasive diagnostic alternative
to exploratory surgery.
ISG generates revenue in three ways: through developing and then licensing its
software products to medical equipment manufacturers and system integrators;
through the funded development of custom software products for medical equipment
manufacturers; and through service and support provided to corporate customers.
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The Company is unique in being an independent medical imaging software company
that offers products and services for three inter-related phases of the clinical
workflow process:
- - creating patient images for diagnosis (diagnostic imaging);
- - distributing, reading, and storing images (picture archiving and
communication systems (PACS)); and
- - employing images in treatment technologies (image-guided therapy).
1.3 Principal Products and Services
1.3.1. Diagnostic Imaging Products and Services
- -------------------------------------------------
The Company believes that to accurately assess a patient's condition, it is
necessary to create a view into the human body. This was initially achieved with
the familiar X-ray machine. Over the past 30 years, more refined views were made
possible due to more advanced medical equipment such as computed tomography (CT)
scanners, magnetic resonance imagers (MRI), ultrasound imagers, and nuclear
medicine imagers. ISG's diagnostic imaging software is embedded in this
equipment to allow radiologists to capture, process and analyze images on a
computer screen.
Silhouette Application
ISG's Silhouette application serves both the image production and the image
management and diagnosis markets. It enables sophisticated image viewing and
manipulation capabilities, such as 3-D imaging and image rotation and "cutting"
to remove blocks of obstructing anatomy for dramatically enhanced internal
views.
Silhouette's image processing functionality is combined with filming and
archiving capabilities, and packaged by scanner manufacturers as companion
workstations to the scanner operator console. These companion workstations
enhance the scanning and enable faster patient throughput. Some scanner
manufacturers build operator consoles using Silhouette as the foundation, thus
accelerating development efforts by adding a scanning module to the existing
Silhouette application.
Software Platforms
Software development can be accelerated by building applications on a software
platform consisting of libraries and tools. ISG's principal software platform
product is the Imaging Applications Platform (IAP), which is both sold to
manufacturers of medical imaging devices for use in applications development and
embedded into every application ISG sells. The IAP product serves as the
platform for all of ISG's developments related to computed tomography (CT)
scanners, magnetic resonance imagers (MRI), ultrasound imagers, nuclear medicine
imagers, PACS (Picture Archiving and Communication Systems) workstations, and
image-guided surgery applications.
1.3.2. Picture Archiving and Communication Systems (PACS) Products
- --------------------------------------------------------------------
Once images have been electronically acquired, PACS networks allow them to be
retrieved for review and analysis on a computer terminal by healthcare
specialists at various remote locations. With centrally archived images,
electronic viewing eliminates the problem of lost films and the significant
storage cost of maintaining hard-copy archives.
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ISG's Viewing and Reading (VR) product line is comprised of two innovative
suites of applications: VR SoftView applications and VR SoftStore applications.
The VR SoftView applications are used to review and analyze medical images in
hospital radiology departments, intensive care units, emergency rooms,
physicians' offices, and various remote locations. The VR SoftStore suite of
applications allows PACS integrators to build robust, flexible and scalable
image storage and management solutions. The Company believes that the product
line's high performance architecture and its ability to integrate with many
off-the-shelf Windows applications increase the efficiency of healthcare
specialists and leads to a higher quality of patient care.
1.3.3. Image-Guided Therapy Products
- --------------------------------------
Advances in efficient image production, manipulation, and management are now
integrating with surgical procedures to raise the quality of patient treatment
to unprecedented levels. ISG's image-guided surgery software allows surgeons to
use medical images to aid in navigating a patient's anatomy before and during
surgery, resulting in more precise, less invasive, and safer surgery.
ISG was the first company to obtain clearance from the U.S. Food and Drug
Administration for an image-guided surgery product, called the Viewing Wand,
which was obtained in 1994. The Viewing Wand system links views of a patient's
images dynamically to hand-held pointing devices in the operating room,
enhancing surgeons' abilities to visualize and localize anatomy and pathology.
Through its joint venture subsidiary, Surgical Navigation Specialists Inc., ISG
offers a new generation of image guided surgery system, called the SNN Scout.
1.3.4. Custom Engineering
- ---------------------------
Some of the world's largest companies have entrusted ISG with the custom
development of medical imaging software embedded in the core products they
produce. Software developed under contract by ISG includes operator console
software for CT scanners, MRIs, nuclear medicine imagers, and others.
1.3.5. Services
- -----------------
ISG provides training, technical, and maintenance services to its customers.
Service contracts are built into the overall agreement with the customer,
thereby providing a revenue stream for ISG after the sale of its products to
customers.
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1.4 Revenue Distribution
ISG's segmented revenue for the three most recent fiscal years as a percentage
of total revenue are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Diagnostic Imaging 24% 19% 30%
PACS 21% 26% 9%
Image Guided Therapy 8% 7% 17%
Custom Engineering 43% 40% 38%
Services 4% 8% 6%
</TABLE>
Unlike many competitors who sell software both to medical equipment makers and
end-users in the competitive hospital market, ISG currently centres its
marketing efforts exclusively on medical equipment makers and systems
integrators who embed imaging software in their products. Its customers include
leading OEMs such as Philips Medical Systems, GE Medical Systems, Hitachi
Medical Corporation, Imnet Systems Inc. and Sterling Diagnostic Imaging Inc.
The Company has one customer who individually represents 10% or more of its
sales and contract revenues. On an aggregate basis, this one customer represents
38% of consolidated revenue. Further details of sales to this customers are
disclosed in note 14(b) of the notes to Consolidated Financial Statements
contained in Exhibit 1(b), which is incorporated herein by this reference.
ISG's revenue by geographic region for the three most recent fiscal years as a
percentage of total sales are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
North America 26% 45% 36%
Europe 30% 20% 20%
Asia 44% 35% 44%
</TABLE>
ISG's geographic revenue distribution reflects the home country of the ISG
customer, not the ultimate market for the customers' products.
1.5 Research and Development
The Company is committed to enhancing its technological leadership by continuing
to channel efforts and resources to the development of leading-edge products.
Its long-term target is to invest 16% of total revenue in R&D, not including the
significant R&D activity ISG conducts on behalf of contract engineering
customers. In fiscal 1998, ISG invested $7.4 million (1997: $7.1 million; 1996:
$6.2 million) in R&D. This amount was applied to:
o the development of the SNN Scout, which was released in September of 1998;
o a Windows-based version of ISG's image viewing software that was released
in March of 1998;
o a new Windows-based version of IAP, featuring a powerful 3-D image
renderer;
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o the introduction of Saratoga "componentware" - a software development
approach that builds upon reusable "blocks" of plug-and-play software and
facilitates integration across vendors; and
o the refinement of overall product development processes.
Products under development in fiscal 1999 include ongoing enhancements to IAP
and application products and transformation of application functionality to
"Componentware".
1.6 Risk Factors
From time to time, information provided by the Company, statements made by its
employees, or information included in its filings with various regulatory
authorities may contain statements that are not historical facts (so-called
"forward-looking statements"), which involve risks and uncertainties. In
particular, statements relating to the Company's expectations concerning its
licensed software products and relating to the sufficiency of capital to meet
working capital and capital expenditure requirements may be forward-looking
statements. The Company's actual future results may differ significantly from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with various regulatory authorities.
1.6.1. Technological Change
- -----------------------------
The market for ISG's products is characterized by rapid and significant
technological change. The development of new technologies, commercialization of
those technologies into products, and market acceptance and customer demand for
those products is critical to the Company's success. Successful product
development and introduction depends upon a number of factors, including new
product selection, timely and efficient completion of product design, product
performance at customer locations, and development of products by competitors.
There can be no assurance that ISG's products will remain competitive or not
become obsolete.
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1.6.2. Intellectual Property
- ------------------------------
The Company has been issued patents, has patents pending and is the exclusive
licensee of one patent. All of these patents relate to strategic features
embodied in the Company's principal products. In addition, the Company has
further patent applications under evaluation with respect to certain software
technology currently under development.
The Company's success is heavily dependent upon proprietary technology. The
Company relies principally upon patent, copyright, trademark, and trade secret
laws to protect its proprietary technology. Where appropriate, the Company also
enters into nondisclosure agreements with persons to whom it reveals its
proprietary information, such as OEMs that the Company works with concerning
future products. There can be no assurance, however, that these laws or
nondisclosure agreements will be adequate to prevent misappropriation or
independent third party development of the same or similar technology.
Any claims or litigation initiated by the Company to protect its proprietary
technology could result in significant expense to the Company and divert its
technical and management resources, whether or not the claims or litigation are
determined in favour of the Company.
There is also a risk that the Company's current or future products may infringe
upon third party proprietary technology. The Company may find it necessary or
desirable to procure licenses from third parties relating to current or future
products or technologies. Such licenses may require payment by the Company of
licence fees and/or royalties, which may be significant. There can be no
assurance that the Company will be able to obtain such licenses or other rights
on commercially acceptable terms.
The Company has been notified that it may be infringing certain patents of one
company and has been invited to discuss a royalty arrangement. The Company
believes the claims are without merit and a royalty arrangement would not be
material. However, the medical imaging and image guided therapy industries are
characterised by frequent claims and related litigation regarding patent and
other intellectual property rights. In the event a third party was to sustain a
valid claim against the Company and any required license was not available on
commercially reasonable terms, the Company's operating results could be
materially and adversely affected. The Company could be required to pay
infringement damages, modify its products so they are non-infringing,
discontinue offering products that are found to be infringing, and/or indemnify
its customers. Furthermore, defending the Company against such claims could
divert a significant portion of the Company's technical and management
resources, whether or not the claims are determined in favour of the Company.
1.6.3. Competitors
- --------------------
The Company faces substantial competition throughout the world, from many
sources, including software companies located in the United States and Europe.
Some of the Company's competitors have substantially greater financial and other
resources with which to pursue research and development, manufacturing,
marketing, and distribution of their products. The Company expects its
competitors to continue to improve the performance of their current products and
to introduce new products or new technologies that provide improved cost of
ownership and performance characteristics. New product introductions by the
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Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products.
1.6.4. International Operations
- ---------------------------------
The Company derives substantially all of its revenues from sales to foreign
markets, including the United States. International sales are subject to
significant risks, including unexpected changes in legal and regulatory
requirements and policy changes affecting the Company's markets; changes in
tariffs, currency exchange rates and other barriers; political and economic
instability; difficulties in accounts receivable collection; difficulties in
managing distributors and representatives; difficulties in protecting the
Company's intellectual property; and potentially adverse tax consequences.
1.6.5. Dependence on Key Personnel
- ------------------------------------
The highly competitive market for qualified personnel could adversely affect the
Company's ability to attract and retain competent, qualified technical
(especially software engineers and developers), managerial, sales, and marketing
personnel.
1.6.6. Fluctuations in Quarterly Financial Results
- ----------------------------------------------------
The Company does not have a seasonal business. However, the Company typically
realizes a larger percentage of its annual revenue and earnings in he fourth
quarter of each fiscal year, and lower revenue and earnings in the first quarter
of the next fiscal year. This is due to the European summer holiday season in
the June to September period.
Item 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 6509 Airport Road, Mississauga,
Ontario, Canada. These premises comprise 60,000 square feet and are leased by
ISG. ISG also leases 6,500 square feet at 6520 Viscount Road, Mississauga,
Ontario, Canada, where certain assembly operations are carried out, and an
office at 14127 Capri Drive, Los Gatos, California, USA.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their properties are subject.
Item 4. CONTROL OF REGISTRANT
To the knowledge of the Company, it is not directly or indirectly owned or
controlled by another corporation or any government, nor does any shareholder
own more than 10% of the Company's outstanding Common Shares.
Item 5. NATURE OF TRADING MARKET
The Common Shares of the Company are listed in Canada on the Toronto Stock
Exchange ("TSE") under the symbol ISO and in the United States on the Nasdaq
stock market ("NASDAQ") under the symbol ISGTF.
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The following table sets forth the high and low reported sale prices, in
Canadian dollars, of the Common Shares on The Toronto Stock Exchange for the
periods indicated:
<TABLE>
<CAPTION>
Price Range
-----------
Fiscal 1997 High Low
---- ---
<S> <C> <C>
First quarter ended September 30, 1996 $5.70 $2.10
Second quarter ended December 31, 1996 $3.65 $2.25
Third quarter ended March 31, 1997 $4.50 $2.99
Fourth quarter ended June 30, 1997 $4.35 $3.30
Price Range
-----------
Fiscal 1998 High Low
---- ---
First quarter ended September 30, 1997 $4.35 $3.30
Second quarter ended December 31, 1997 $4.35 $3.30
Third quarter ended March 31, 1998 $4.25 $3.60
Fourth quarter ended June 30, 1998 $4.10 $3.21
The following table sets forth the high and low reported sales prices, in US
dollars, of the Common Shares on the Nasdaq stock market for the periods
indicated:
Price Range
-----------
Fiscal 1997 High Low
---- ---
First quarter ended September 30, 1996 $4.375 $1.375
Second quarter ended December 31, 1996 $2.50 $1.828
Third quarter ended March 31,1997 $3.063 $2.188
Fourth quarter ended June 30, 1997 $3.125 $2.375
Price Range
-----------
Fiscal 1998 High Low
---- ---
First quarter ended September 30, 1997 $2.906 $2.406
Second quarter ended December 31, 1997 $3.125 $2.50
Third quarter ended March 31,1998 $3.00 $2.25
Fourth quarter ended June 30, 1998 $2.875 $2.313
</TABLE>
The following table indicates, as of December 21, 1998, the approximate number
of record holders with United States addresses, and the number and percentage of
Common Shares held by them:
Number of U.S. record holders: 47
Number of Common Shares held in the United States: 4,594,548
Percentage of Outstanding Common Shares held in the United States: 36%
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There is no law or government decree or regulation in Canada that restricts the
export or import of capital, or affects the remittance of dividends, interest or
other payments to non-resident holders of common shares, other than withholding
tax requirements.
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There is no limitation imposed by Canadian law or by the charter or other
constituent documents of the Company on the right of a non-resident to hold or
vote common shares of the Company, other than as provided in the Investment
Canada Act (Canada) (the "Investment Act"), as amended by the Canada-United
States Free Trade Agreement Implementation Act (Canada) (the "FTA Implementation
Act").
6.1 The Investment Act
The Investment Act generally prohibits implementation of a reviewable investment
by an individual, government or agency thereof, corporation, partnership, trust
or joint venture that is not a "Canadian" as defined in the Investment Act (a
"non-Canadian"), unless after review, the minister responsible for the
Investment Act is satisfied that the investment is likely to be a net benefit to
Canada. An investment in common shares of the Company by a non-Canadian (other
than an "American" as defined in the Investment Act) would be reviewable under
the Investment Act if it was an investment to acquire direct control of the
Company and the value of the assets of the Company was $5,000,000 or more.
With regard to American investment, an investment in common shares of the
Company by an American would be reviewable under the Investment Act if it was an
investment to acquire direct control of the Company and the value of the assets
of the Company equals or exceeds a specified amount (the "Review Threshold"),
which increases in stages. The Review Threshold is currently $150 million and
remains at $150 million in constant 1992 dollars (calculated as prescribed in
the Investment Act) at any time after 1992.
A non-Canadian, whether American or otherwise, would acquire control of the
Company for the purposes of the Investment Act if he acquired a majority of the
common shares of the Company. The acquisition of less than a majority but
one-third or more of the common shares of the Company would be presumed to be an
acquisition of control of the Company unless it could be established the Company
was not controlled in fact by the acquirer through the ownership of common
shares.
Certain transactions in relation to the common shares of the Company would be
exempt from the Investment Act, including:
(a) an acquisition of common shares of the Company by a person in the ordinary
course of that person's business as a trader or dealer in securities;
(b) an acquisition of control of the Company in connection with the realization
of a security interest granted for a loan or other financial assistance and not
for any purpose related to the provision of the Investment Act; and
(c) an acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact of the Company, through the ownership of
voting interests, remains unchanged.
Item 7. TAXATION
The following discussion summarizes certain tax considerations relevant to
individuals and corporations who, for income tax purposes, are resident in the
United States and not in Canada,
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hold common shares as capital property, do not use or hold the common shares in
carrying on business through a permanent establishment or in connection with a
fixed base in Canada, and in the case of individual investors, are also United
States citizens (collectively, "Unconnected US Shareholders").
The tax consequences of an investment in the common shares by investors who are
not Unconnected US Shareholders may be expected to differ substantially from the
tax consequences discussed herein. The discussion is based upon the provisions
of the Income Tax Act (Canada) (the "Tax Act"), the Convention between Canada
and the United States of America with respect to Taxes on Income and on Capital
(the "Convention") and the published administrative practices of Revenue Canada,
Taxation and the Internal Revenue Service and judicial decision, all of which
are subject to change. The discussion does not take into account the tax laws of
the various provinces or territories of Canada or the tax laws of the various
state and local jurisdictions in the United States.
Dividends paid or credited on the common shares to Unconnected US Shareholders
will be subject to Canadian withholding tax. Under the Convention and related
protocols, the rate of withholding tax generally applicable to Unconnected US
Shareholders who beneficially own common shares is 15%. In the case of
Unconnected US Shareholders that are United States corporations that
beneficially own 10% or more of the voting shares of the Company, the applicable
withholding tax rate is 5%.
In general, a shareholder that is not a Canadian residents is not subject to
Canadian income tax on capital gains arising from the disposition of stock,
unless at any time in the five year period immediately preceding the
disposition, such shareholder, persons with whom such shareholder did not deal
at arm's length, or the shareholder and persons with whom the holder did not
deal at arm's length, owned 25% or more of the issued shares of any class of the
Company. Even if the disposition is taxable, under the Convention, gains
recognized by Unconnected US Shareholders on the disposition of common shares
generally will not be subject to tax under the Tax Act provided that the value
of the shares of the Company is not derived principally from real property
situated in Canada. The Company believes the value of its shares does not
principally derive from real property situated in Canada and it does not expect
this to change in the foreseeable future.
A disposition of common shares to the Company (unless the Company acquires the
shares in the open market in the manner in which shares would normally be
purchased by any member of the public in the open market) will result in a
deemed dividend to the Unconnected US Shareholder equal to the amount by which
the consideration paid by the Company exceeds the paid up capital thereof for
purposes of the Tax Act. The amount of such deemed dividend will be subject to
the withholding tax described above. Canada does not currently impose any estate
taxes or succession duties.
Item 8. SELECTED FINANCIAL DATA
8.1 Selected Financial Information
Set forth below is a summary of selected consolidated financial information for
ISG for the fiscal years ended June 30, 1998, 1997, 1996, 1995, and 1994 which
are derived from the Consolidated Financial Statements of the Company and are
prepared in accordance with accounting principles generally accepted in Canada
("Canadian GAAP"). These principles as applied to the Company, do
Page 14
<PAGE>
not differ materially from those accounting principles and requirements of the
Securities and Exchange Commission in the United States ("US GAAP") except as
disclosed in Note 19 to the Company's Consolidated Financial Statements. All
figures are in Canadian funds. This information should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto and the
Management Discussion and Analysis for Fiscal Years 1998, 1997, 1996, 1995 and
1994, all of which are attached hereto as Exhibit I(a) and (c).
(in thousands of dollars, except per share data, for the Fiscal Year ending
June 30)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total revenue 36,055 30 793 28,763 20,600 18,605
Net earnings (Loss) 498 (3,176) (901) (2,735) (2,085)
Earnings (Loss) per share
Basic earnings (loss) 0.04 (0.25) (0.07) (0.22) (0.17)
Fully diluted earnings 0.04 See Note See Note See Note See Note
Total assets 46,307 43,878 42,147 42,518 44,293
Long-term debt 0 0 0 0 0
Dividends declared 0 0 0 0 0
</TABLE>
Note: Fully diluted earnings per share are the same as net earnings per equity
share as the inclusion of common stock equivalents in the earnings per share
calculation would have an antidilutive effect
8.2 Currency Exchange Rates
The following table sets forth, for the periods indicated, the high and low noon
buying rates in New York City for cable transfers in foreign currencies, the
average of such exchange rates on the last day of each month during the periods
and the period-end exchange rates for United States dollars per Canadian dollar,
as reported by the Federal Reserve Bank of New York:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High US$0.730 US$0.7513 US$0.7527 US$0.7457 $US 0.7834
Low 0.663 0.7145 0.7235 0.7023 0.7166
Average 0.703 0.7316 0.7375 0.7239 0.7460
Period End 0.663 0.7241 0.7322 0.7279 0.7233
</TABLE>
As of June 30, 1998, the noon buying rate in New York City for the Canadian
dollar, as reported by the Federal Reserve Bank of New York, was US $0.663 =
Cdn. $1.00 (equivalent to US $1.00 = Cdn. $1.508).
Page 15
<PAGE>
8.3 Dividends
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. There is no
restriction which prevents ISG from paying dividends.
Item 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the Management Discussion and Analysis for Fiscal Year 1998
attached hereto as Exhibit 1(a) and incorporated herein by this reference, for a
comparison of fiscal years 1998 and 1997. For a discussion of fiscal 1997
compared to 1996 results, refer to the Management Discussion and Analysis for
1997 attached hereto as Exhibit 1(c).
Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses financial instruments, primarily forward foreign exchange
contracts, to hedge its exposure to the US/Canadian dollar exchange rate as a
result of receiving the majority of its revenue in US dollars. At June 30, 1998,
the Company had outstanding foreign currency exchange contracts that represented
a commitment to sell US dollars of approximately US$4.9 million (1997: US$5.0
million) over a period of six months at a weighted average exchange rate of
Cdn.$1.383 (1997: $1.385). At June 30, 1998, the estimated fair liability of
these contracts was Cdn. $400 (1997: nil).
The Company does not utilize market-risk sensitive instruments for speculative
purposes.
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information with respect to the executive
officers and directors of the
Company:
<TABLE>
<CAPTION>
Name Position Director/Officer
- ---- -------- ----------------
Since
-----
<S> <C> <C>
Michael M. Greenberg, MD Chairman and CEO 1988
Richmond Hill, Ontario
Max Rutherford President and 1997
Toronto, Ontario Chief Operating Officer
Reinhard Schmidt President and General Manager 1998
Surgical Navigation Specialists Inc.
Robert Dietrich Vice President, Finance and 1997
Toronto, Ontario Chief Financial Officer
Shlomit Dekel Vice President, 1998
Toronto, Ontario Business Development
</TABLE>
Page 16
<PAGE>
<TABLE>
<CAPTION>
Name Position Director/Officer
- ---- -------- ----------------
Since
-----
<S> <C> <C>
Bryan Robb, Vice President 1997
Toronto, Ontario Corporate Affairs and
General Counsel
Wido Menhardt Vice President, Advanced Technology 1998
Vice President and General Manager
ISG Technologies (USA), Inc.
Doron Dekel Vice President, 1989
North York, Ontario Workflow Automation
David Laing Vice President, 1987
Business Operations
Loris Sartor Vice President, 1997
Contract Engineering
Charlie Hall Vice President, 1997
Silhouette and Clinical Development
William Blundell Director 1996
Toronto, Ontario
William Breukelman Director 1995
Mississauga, Ontario
Paul S. Echenberg Director 1991
Montreal, Quebec
Richard L. Lockie Director 1990
Toronto, Ontario
Duff Scott Director 1996
Toronto, Ontario
Walter Stapleton Director 1996
Calgary, Alberta
</TABLE>
All directors hold office until the next annual meeting of the shareholders and
until their successors have been elected and qualified. The officers of the
Company are elected annually and serve at the discretion of the Board of
Directors of the Company. There are no family relationships among any of the
directors and executive officers of the Company.
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation paid and or accrued by ISG to its executive officers
listed in the above table during the fiscal year ended June 30, 1998 was
$1,952,784. During the fiscal year ended
Page 17
<PAGE>
June 30, 1998, the Directors who were not officers or employees of ISG received
an aggregate compensation of $131,000 for their services.
The following table provides a summary of compensation earned during each of the
Company's last three fiscal years by the Chief Executive Officer and the
Company's four most highly paid executive officers (hereinafter collectively
referred to as the "Named Executive Officers").
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Name and Principal Year Salary Bonus Other Annual Common Shares Restricted Shares
Position Compensation Under Option Awarded
($) (5) ($) ($) (#) ($)
- ---------------------------------------------------------------------------------------------------------------------
Michael Greenberg, 1998 305,039 225,000 (1) 36,087 -- --
M.D. 1997 262,000 -- (1) 40,174 75,000 --
Chairman and CEO 1996 230,077 -- (1) 45,431 -- --
- ---------------------------------------------------------------------------------------------------------------------
Thomas Cafarella 1998 -- -- -- --
President and CEO 1997 (4) -- -- -- --
1996 -- -- -- (4) 250,000 --
71,307
161,426
- ---------------------------------------------------------------------------------------------------------------------
Maxwell Rutherford 1998 190,385 -- 2,628 130,000 --
Chief Operating Officer 1997 19,462 -- 219 -- --
1996 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Wido Menhardt 1998 207,944 -- (2) 32,257 50,000 --
Vice President and 1997 96,308 -- (2) 5,179 -- --
General Manager, 1996 120,384 -- (2) 7,059 -- --
ISG West
- ---------------------------------------------------------------------------------------------------------------------
Loris Sartor 1998 152,156 8,800 2,020 -- --
Vice President Contract 1997 114,614 -- 1,718 -- --
Engineering Group 1996 103,669 2,246 -- --
- ---------------------------------------------------------------------------------------------------------------------
Doron Dekel 1998 136,000 -- (3) 18,455 -- --
Vice President Advanced 1997 162,590 15,000 (3) 14,127 -- --
Development R&D 1996 126,000 -- (3) 22,531 -- --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Other annual compensation includes normal executive level benefits plus
imputed interest of $33,298 (1998), $37,735 (1997) and $42,623 (1996),
related to indebtedness to the Corporation in connection with the purchase
of securities of the Corporation and a non-interest bearing loan secured by
a mortgage in connection with a house purchase.
(2) Other annual compensation includes normal executive level benefits arising
from employment in the U.S.A. of $28,792 plus imputed interest of $3,465
(1998), $3,623 (1997) and $4,725 (1996) related to indebtedness to the
Corporation in connection with the purchase of securities of the
Corporation.
(3) Other annual compensation includes normal executive level benefits plus
imputed interest of $15,316 (1998), $11,836 (1997) and $20,191.00 (1996)
related to indebtedness to the Corporation in connection with the purchase
of securities of the Corporation.
(4) Mr. Cafarella was employed with the Corporation from November 1, 1995, to
August 8, 1996. Options granted to Mr. Cafarella in 1996 terminated upon
his ceasing to be an employee of the Corporation.
(5) Annual compensation figures do not reflect the compensation paid to
Executive Officers who joined the Corporation during the fiscal year and
thus did not receive a full year of compensation.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company maintains a Stock Option Incentive Plan (the "Plan") which provides
for the granting of options to purchase shares to the directors, officers and
full-time employees of the Company. The purpose of the Plan is to develop the
interest of certain key employees and the directors of the
Page 18
<PAGE>
Company in the growth and development of the Company by providing them with the
opportunity to acquire a proprietary interest in the Company.
The aggregate number of common shares which may be issued pursuant to the Plan
may not exceed, in the aggregate, 1,900,000 shares or such greater number as may
be approved from time to time by the shareholders of the Company. The aggregate
number of shares reserved for issuance pursuant to all options granted to any
one optionee shall not exceed 5% of the number of shares outstanding on a
non-diluted basis at the time of the grant. The exercise price of an option
granted under the Plan cannot be less than the market price in Canadian Dollars
of the shares on the TSE one trading day prior to the effective date on which
the option is granted. The term of the option shall not be less than one year
and not more than ten years from the date the option is granted. If an optionee
resigns as a director, officer or employee of the Company, or his or her
employment is terminated for cause, his or her options are thereupon
surrendered. If prior to the expiry of an option the optionee's employment is
terminated by the Company other than for cause, the option is exercisable as to
all common shares in respect of which it had not then been exercised to the
extent that such optionee was entitled to do so until the earlier of six months
following the date of such termination of employment and the close of business
on the date of expiry of the option. If, prior to the expiry of an option, the
optionee dies, the option is exercisable as to all common shares in respect of
which it had not been exercised to the extent that such optionee was entitled to
do so until the earlier of the first anniversary of the date of such optionee's
death or the close of business on the date of expiry of the option.
At December 23, 1998, there were outstanding options to purchase an aggregate of
1,493,650 Common Shares of which options to purchase an aggregate of 400,040
Common Shares were held by officers of the Company. Options to purchase an
aggregate of 291,500 Common Shares were held by directors and others of the
Company as of such date. The table below shows the exercise price and expiration
date of all options outstanding at December 23, 1998:
<TABLE>
<CAPTION>
Number of Common
Shares Subject Exercise Date Expiration
to Option Price of Grant Date
- --------- ----- -------- ----
<S> <C> <C> <C>
14,800 $9.00 November 2, 1994 November 1, 2001
68,550 $5.25 June 26, 1995 June 25, 2002
431,720 $7.00 October 5, 1995 October 4, 2002
75,000 $6.00 November 22, 1995 November 21, 2002
37,500 $6.75 December 11, 1995 December 10, 2002
30,000 $6.75 January 18, 1996 January 17, 2003
53,300 $6.00 May 3, 1996 October 2002 to April 2003
22,250 $5.70 June 27, 1996 April 2003 to June 2003
191,433 $3.30 February 12, 1997 February 11, 2004
170,000 $3.90 July 25, 1997 July 24, 2004
160,000 $3.75 September 8, 1997 September 7, 2004
147,930 $3.70 February 11, 1998 February 10, 2005
80,000 $3.95 June 1, 1998 May 31, 2005
</TABLE>
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
During fiscal 1994, the Company renewed a $50,000 loan to Dr. Michael Greenberg,
the CEO and Chairman, in connection with a house purchase. The loan is secured
by a mortgage, is non-interest bearing and remains outstanding. Dr. Greenberg
also has outstanding an interest free loan of $250,075 to enable him to exercise
stock options and purchase shares of the Company.
Page 19
<PAGE>
In connection with the sale by certain investors to employees of the Company in
1992 of warrants to purchase common shares of the Company, the Company, in 1992,
loaned a total of $1,965,848 to its executive officers. These loans are
unsecured and were due October 1996. The Board of Directors approved the
extension of the maturity of these loans until October 1999. At December 23,
1998, $866,385 remained outstanding under these loans.
Item 14. NOT APPLICABLE
Item 15. NOT APPLICABLE
Item 16. NOT APPLICABLE
Item 17. FINANCIAL STATEMENTS
See attached financial statements which are listed in Item 19 hereof, attached
as Exhibits, and incorporated herein by this reference.
Item 18. NOT APPLICABLE
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
The following Financial Statements and Exhibits are filed as part of this annual
Report.
(a) Management Discussion and Analysis for Fiscal Year 1998.
(b) Financial Statements and Reports:
i. Consolidated Balance Sheet as at June 30, 1998.
ii. Consolidated Statements of Operations and Deficit for the fiscal
year ended June 30, 1998.
iii. Consolidated Statements of Changes in Financial Position for the
fiscal year ended June 30, 1998.
iv. Notes to Consolidated Financial Statements.
v. Auditor's certificate and consent to use same.
(c) Management Discussion and Analysis for the Fiscal Years 1997, 1996,
1995, 1994 incorporated by this reference from the corresponding 20-F
for the years ended June 30, 1997, 1996, 1995 and 1994.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
I.S.G. Technologies Inc.
(Registrant)
By: /s/ Robert Dietrich
--------------------------------
Robert Dietrich
Vice President
Finance and Chief Financial Officer
Dated: January 13, 1999
<PAGE>
Management's Discussion and Analysis for Fiscal Year 1998
The following discussion should be read in conjunction with the Company's 1998
Consolidated Financial Statements and Notes, which are prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP"). These
principles as applied by the Company do not differ materially from those
accounting principles and requirements of the Securities and Exchange Commission
in the United States ("US GAAP"), except as disclosed in Note 19 to the
Company's Financial Statements. All figures are in Canadian Funds.
Overview
ISG Technologies generated net income of $0.5 million or $0.04 per share in the
year ended June 30, 1998, versus a loss of $3.1 million or $0.25 per share in
1997. The earnings turnaround was driven by an improvement in gross margin to
72% from 61% in fiscal 1997, and a 17% increase in revenue to a record $36.1
million. Higher revenue was attributable to growth in contract engineering
services and increased software licensing fees as key customers released new
products with embedded ISG software. Margins strengthened due to increased
internal efficiencies as ISG moves beyond the developmental stage, and a
favourable shift in product mix toward software. The company's profitability
boosted operating cash flow 35% to $7.3 million, of which net $3.3 million was
invested to increase cash and short- term deposits to $20.3 million at the year
end, providing ISG with a solid financial base going forward.
Revenue
Revenue by category in fiscal years 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(Cdn. $000s) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Licensed Software 18,362 14,833 12,843
Contract Engineering 15,478 12,239 11,674
Service 1,340 2,542 1,795
Hardware/ Other 875 1,179 2,451
- --------------------------------------------------------------------------------------------------
Total 36,055 30,793 28,763
- --------------------------------------------------------------------------------------------------
</TABLE>
Software license fees of $18.3 million were up 24% year-over-year, representing
51% of total revenue versus 48% in 1997. The increase reflects new licensing
contracts procured in fiscal 1997 and 1998 for radiology and image-guided
surgery applications, in addition to software platform sales.
Revenue from radiology applications increased 6% in 1998 due to the signing of
software licensing agreements with three new customers. These new contracts more
than offset the negative impact of delays in the development and launch of the
Windows NT version of ISG's Viewing and Reading station software which was
released at the end of the third quarter. Customer reaction to this sof tware
has been enthusiastic and, combined with new archive software also launched in
the third quarter, and an important Silhouette
Page 1
<PAGE>
product delivery to a major European customer at fiscal year end, should improve
revenue in future years. Revenues from image- guided therapy applications
increased 37% over 1997, with sales generated exclusively from the existing
generation Viewing Wand product. This increase was achieved despite the
concentration of the company's efforts on the development of the next-
generation Scout application, porting its image guided therapy platform to
Windows NT, and integrating the Scout with Aesculap surgical tools and Carl
Zeiss surgical microscopes. Also during 1998, ISG focussed on the development of
the SNN, a consortium of leading surgical system and equipment suppliers who
have chosen to adopt a common Windows NT based software platform for their
respective image guided applications.
Software platform sales increased 74% in 1998 over 1997 levels as ISG contract
engineering customers released new scanning models incorporating IAP platform
software into the marketplace. Management expects licensing fees from this
source will further rise in fiscal 1999 as ISG customers increase shipments of
scanners.
Reflecting the company's recent expansion of its software development team to
fulfill product development contracts for diagnostic imaging equipment for
magnetic resonance imaging, computed tomography, and ultrasound applications,
contract engineering revenue climbed 26% to $15.5 million in fiscal 1998. Three
major customers comprised the bulk of new activity, and all three have signed
agreements for additional contract engineering services in fiscal 1999 and
beyond. Toward the end of fiscal 1998, ISG also signed contracts with another
two new customers for similar scanning applications, which should lead to
further revenue growth in fiscal 1999. Contract engineering represents 43% of
total revenue, up from 40% last year. Service revenue was almost halved to $1.3
million in fiscal 1998, as support revenues under new software maintenance
agreements failed to make up for declines in direct service arrangements for
older hardware products. Hardware and other revenue, which includes ISG's 65%-
owned joint venture in Japan, Nippon ISG, declined $0.3 million to $0.9 million
in fiscal 1998. While revenue from Nippon ISG increased 77% to $0.7 million,
this was more than offset by the impact of the fiscal 1997 discontinuation of
the integrated hardware and software product called Allegro.
Direct costs
Direct costs for licensed software include the cost of hardware integrated with
certain software products. Direct costs for contract engineering are labour
costs. Direct costs declined 15% to $10.2 million, equating to 28% of revenue
versus 39% in fiscal 1997 due to higher productivity in contract engineering and
the increase in licensed software in the overall product mix. Accordingly, gross
margin jumped to 72% from 61%. Historically, lower or higher direct costs have
been primarily due to shifts in product mix rather than to competitive pricing
or cost pressures.
Page 2
<PAGE>
Operating expenses
Research and Development expenses increased 3% to $7.4 million in 1998,
reflecting expenditures for improving all ISG platforms and applications and on-
going maintenance of existing products in the field. In addition, ISG
capitalized $2.4 million of development expenses, up from $1.1 million in 1997.
Projects capitalized included the porting of application software from UNIX to
Windows NT and the development of a new components-based framework to simplify
and expedite future product development. Including these capitalized costs,
total R& D spending in 1998 increased 18% over 1997 to $9.8 million,
representing 27% of revenue. In keeping with the company's commitment to
maintaining its technological leadership in medical imaging software, management
expects R& D expenditure levels will continue to grow in future years, but
should decline as a percentage of revenue as sales continue to rise.
Sales and marketing expenses increased 62% to $10.2 million in 1998 due to
increased staffing in sales, marketing, and product management functions;
increased sales commissions and selling costs; and increased promotional
activity, particularly with respect to the SNN. Sales and marketing expenses
comprised 28% of sales, compared to 21% in fiscal 1997. General and
administrative (G& A) expenses increased 33% to $6.3 million in fiscal 1998,
reflecting the continued development of ISG's information services
infrastructure, the addition of key senior management, and occupancy costs
associated with a greater number of employees. G& A comprised 17% of revenue, up
from 15% in fiscal 1997, but is expected to decline as a percentage of revenue
as ISG's revenue increases in future years. Depreciation expenses increased 18%
to $2.3 million in 1998, owing to the upgrading of business support systems, the
purchase of new software development tools, and the acquisition of additional
computer workstations for a growing complement of software developers.
Write-down of product line
During 1997, the company took a $0.9 million write-down of its remaining
inventory of accelerator boards to its net realizable value due to the
discontinuation of this product line.
Interest income
Interest income increased 33% to $0.8 in fiscal 1998 due to greater earnings on
higher average cash balances throughout the year.
Page 3
<PAGE>
Income taxes
Due to losses incurred in prior years, the company did not incur any income tax
expense in any of the past three fiscal years. The company currently has
accumulated $31.1 million of Scientific Research & Experimental Development
expenditures which can be carried forward indefinitely, and $10.8 million in
investment tax credits on scientific research and experimental development
expenditures, which are available to shelter future income tax liabilities
through fiscal 2008.
Net income
ISG became profitable with net income of $0.5 million in fiscal 1998. The
improvement was primarily attributable to an increase in gross margin to 72%
from 61% in fiscal 1997, reflecting increased internal efficiencies and a
favourable shift in product mix towards software, and a 17% increase in revenue
to a record $36.1 million. The loss in fiscal 1997 was primarily caused by the
one time write- down of the company's hardware product line, the costs of a
proxy challenge for control of the company, the disruption in the company's
operations created by the proxy battle, and related events. Earnings per share
were $0.04 per share, compared to a per share loss of $0.25 per share in 1997.
Liquidity and capital resources
ISG had cash and marketable securities of $20.3 million at fiscal year end, up
from $16.9 million a year earlier. As a result of a change in credit policy,
accounts receivable decreased 9% to $11.5 million despite the growth in revenue.
Accordingly, days sales outstanding improved to 122 days from 149 days at last
fiscal year end. Inventory declined 34% to $1.8 million, reflecting the
increasing proportion of software in ISG's product mix. Working capital
increased to $32 million from $30.5 million a year ago. Funds generated from
operations together with current working capital are considered sufficient to
meet anticipated cash needs in the short term. Additionally, during the third
quarter of 1998, ISG initiated an operating lease program to finance the capital
requirements associated with continuously upgrading and replacing desktop
computers and workstations. There are no material pending capital commitments.
In the longer term, ISG may require further equity capital to finance
anticipated growth or potential business investments.
Deferred revenue rose $1.7 million to $6.7 million, due to advance payments
received for future software shipments and other services. This revenue will be
recognized over the next several years as the software is shipped or the
services are provided. In addition, the company has committed future revenue of
a minimum $21.7 million arising from contracts in place at fiscal year end.
Page 4
<PAGE>
To retain the confidence of customers who depend on ISG for critical software,
the company's investment policy with respect to cash and marketable securities
is to preserve capital rather than maximize investment income. Excess cash is
invested in investment grade government or corporate bonds and money market
instruments.
The company does not invest in equity securities or derivative products.
The company's policy with respect to foreign currency exposure is to manage the
impact of foreign currency exchange movements on its earnings by entering into
foreign exchange forward contracts to hedge certain non-local currency
receivables. The company has never declared or paid any cash dividends on its
common shares. The company's current policy is to retain earnings to finance
future expansion, develop new software applications, and acquire new software
products.
Event subsequent to fiscal year end
Effective July 1, 1998, ISG transferred its image guided therapy business to an
80% owned subsidiary, SNS Inc. SNS Inc. is a joint venture company owned 20% by
Carl Zeiss Inc., the world's leading surgical microscope company and a founding
member of the SNN. Future results of ISG will reflect the minority interest of
Carl Zeiss in the SNS.
On September 28, 1998, ISG announced that it filed, and the Toronto Stock
Exchange accepted, a Notice of Intention to make a normal course issuer bid. ISG
indicated its intention to acquire, through the facilities of the T. S. E., up
to 500,000 of its common shares for cancellation during the 12- month period
ending September 29, 1999. A shareholder may obtain a copy of the Notice,
without charge, by contacting ISG.
Year 2000 exposure
ISG Technologies Inc. recognizes the importance of Year 2000 preparations for
its investors, customers, employees, and suppliers. ISG's preparations were
initiated in December 1997 with the goal of completing all significant
compliance projects by December 31, 1998. The company's Year 2000 projects cover
products, business infrastructure and contract engineering services.
While product compliance is the major Year 2000 concern, ISG is also focussing
its attention on potential Year 2000 costs and risks related to its business
infrastructure in the key areas of information systems, finance, buildings and
infrastructure, and organizational development.
Page 5
<PAGE>
Products
--------
Risks regarding the compliance of past, present, and future products include,
but are not limited to: warranty or liability claims related to undetected and
uncorrected product defects; support or liability claims for problems that
result from the non-compliance of equipment or software connected to or used
with ISG products; further declarations of non-compliance from manufacturers of
equipment used with ISG products, resulting in the need for additional
compliance work; medical regulatory changes resulting in new compliance,
documentation, or communication requirements; customer claims or litigation
pertaining to ISG's upgrade options and charges to bring installed products into
compliance; customers' compliance projects delaying the purchase of new systems,
resulting in delayed revenue to ISG; and ISG compliance projects not being
completed in a timely or adequate fashion.
Past Products - ISG has an installed software base of approximately 2000 sites,
the majority of which are supported by its distributors and customers. ISG's
analysis and testing has found very few date- related errors in ISG products.
However, ISG products depend on products from other suppliers and business
partners, and an analysis of these external dependencies has led ISG to identify
a number of past products whose correct operation cannot be guaranteed through
the Year 2000. ISG is actively engaged in advising customers of upgrade or
replacement options.
Current Products - ISG intends to release compliant product versions in each
product line by no later than April 1999. A complete inventory of current
products has been completed, and all products except one have been analyzed for
compliance. Required remedial work has already been planned and is being
executed. The most critical products from outside suppliers have been assessed
and decisions taken to change products or suppliers as necessary. Analysis of
the single remaining product has been deferred to the first quarter of calendar
1999. Preliminary analysis indicates that no new release of this final product
will be required.
Future Products - ISG has taken steps in its ISO 9001- registered software
development process to ensure that date calculations in general and Year 2000
date issues in particular do not adversely affect future products. There are no
material costs associated with these process refinements and no adverse impact
on future costs or product time frames is anticipated.
Business Infrastructure
-----------------------
The majority of effort in this area is centered on the information systems that
ISG uses to manage its business and develop products. Business functions are
centralized in a commercial application MFG PRO supplied by QAD Software, and
ISG will complete an upgrade to a compliant version of this software by November
1998. Product development tools are being upgraded as required. Management does
not anticipate the cost of upgrading these tools will be material.
Page 6
<PAGE>
Factors that may affect future results
From time to time, information provided by the company, statements made by its
employees, or information included in its filings with various regulatory
authorities may contain statements that relate to management's expectations
concerning the future performance of the company. The company's actual future
results may differ significantly from those stated in these so-called forward-
looking statements. Factors that may cause such differences include, but are not
limited to, the factors discussed below.
Revenue
-------
License revenue for any given application will vary based on the underlying
competitive environment encountered by ISG's channel partners in the end user
marketplace. Contract engineering projects are for discreet product developments
on behalf of ISG's customers. While the company has been successful in securing
incremental projects from its existing customers, there is no assurance that the
level achieved in 1998 will be repeated in future years.
Technological change
--------------------
The market for the company's products is characterized by rapid and significant
technological change. The development of new technologies, commercialization of
those technologies into products, and market acceptance and customer demand for
those products is critical to the company's success. Successful product
development and introduction depends upon a number of factors, including new
product selection, timely and efficient completion of product design, product
performance at customer locations, and development of products by competitors.
There can be no assurance that the company's products will remain competitive or
not become obsolete.
Intellectual property
---------------------
The company relies on certain intellectual property protections to preserve its
intellectual property rights. Any invalidation of the company's intellectual
property rights or lengthy and expensive defense of those rights could have a
material adverse effect on ISG.
Competitors
-----------
The company faces substantial competition from many sources throughout the
world, including software companies located in the United States and Europe.
Some of ISG's competitors have substantially greater financial and other
resources with which to pursue research and development, manufacturing,
marketing, and distribution of their products. The company expects its
competitors to continue to improve the performance of their current products and
to introduce new products or new technologies that provide improved cost of
ownership and performance characteristics. New product introductions
Page 7
<PAGE>
by the company's competitors could cause a decline in sales or loss of market
acceptance of ISG's existing products.
International operations
------------------------
The company derives all of its revenues from international sales. International
sales are subject to significant risks. These include unexpected changes in
legal and regulatory requirements and policy changes affecting the company's
markets; changes in tariffs, currency exchange rates and other trade barriers;
political and economic instability; difficulties in accounts receivable
collection; difficulties in managing distributors and representatives;
difficulties in protecting the company's intellectual property; and potentially
adverse tax consequences. Effective July 1, 1998 the company entered into an
agreement with the Government of Canada's Export Development Corporation under
which accounts receivable will be insured up to 90% of their value, thereby
protecting the company against credit risks associated with potentially volatile
foreign markets.
Dependence on key personnel
---------------------------
The highly competitive market for qualified personnel could adversely affect the
company's ability to attract and retain competent managerial, sales, marketing,
and technical personnel - especially software engineers and developers.
Outlook
For fiscal 1999, growth is anticipated in all product and service revenue
categories. Software license fees will grow on the strength of recent contracts
for software platforms and radiology and image-guided surgery applications.
ISG's Windows Viewing and Reading Station software and new archive software
released in the third quarter of fiscal 1998 and the fiscal 1999 launch of the
new SNN Scout image- guided surgery software should make especially strong
contributions. Additionally, the SNN will have growing impact on revenue in
fiscal 1999 and beyond, when software standardization among SNN member companies
based on ISG's Windows- based software has occurred.
Management also expects IAP licensing fees will rise in fiscal 1999 as customers
increase their shipments of new scanners that embed this software platform.
ISG's recent expansion of its software development team and rising number of
contracts to develop custom medical scanning applications for its customers
should fuel future contract engineering revenue growth. Additionally, service
revenue is expected to increase in fiscal 1999 due to escalation clauses in
existing contracts and the recent introduction of computer-based training, and
should continue to grow in future years as the company expands its ability to
generate additional annuity- like revenue streams.
The medical imaging software industry is expected to grow at an accelerating
rate over the next several years, and management is committed to maintaining its
leading position in this field. To reinforce ISG's technological and market
leadership, strategic investment in R& D will remain a priority.
Page 8
<PAGE>
Management anticipates company earnings will continue to grow in fiscal 1999 and
beyond due to rising revenue and the resultant decline in average costs as ISG
increasingly shifts from a development to a production and marketing mode.
Page 9
<PAGE>
Consolidated Financial Statements of
I.S.G. TECHNOLOGIES INC.
Years ended June 30, 1998, 1997 and 1996
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of I.S.G. Technologies Inc. as
at June 30, 1998 and 1997 and the consolidated statements of operations, deficit
and changes in financial position for each of the years in the three-year period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 1998 and
1997 and the results of its operations and the changes in its financial position
for each of the years in the three-year period ended June 30, 1998 in accordance
with generally accepted accounting principles in Canada, which, except as
disclosed in note 19 to the consolidated financial statements, also conform in
all material respects in accordance with generally accepted accounting
principles in the United States.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
September 2, 1998
<PAGE>
I.S.G. TECHNOLOGIES INC.
Consolidated Balance Sheets
June 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and short-term deposits $ 7,838 $ 9,430
Marketable securities (quoted market
value $13,687; 1997 - $7,492) 12,449 7,488
Accounts receivable 11,510 12,673
Inventory (note 2) 1,792 2,706
Prepaid expenses and other assets 1,223 893
Current portion of note receivable 271 1,087
Current portion of loans receivable 1,033 --
- ------------------------------------------------------------------------------------------------------
36,116 34,277
Fixed assets (note 3) 3,984 4,311
Note receivable (non-interest bearing, unsecured) -- 473
Loans receivable (note 4) 2,161 3,194
Deferred development costs (note 5) 4,046 1,623
- ------------------------------------------------------------------------------------------------------
$ 46,307 $ 43,878
- ------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 4,110 $ 3,769
Deferred revenue 6,694 5,034
Shareholders' equity:
Capital stock (note 8) 62,853 62,853
Deficit (27,044) (27,542)
Cumulative translation adjustment (306) (236)
- ------------------------------------------------------------------------------------------------------
35,503 35,075
- ------------------------------------------------------------------------------------------------------
$ 46,307 $ 43,878
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
_____________________ Director _____________________ Director
<PAGE>
I.S.G. TECHNOLOGIES INC.
Consolidated Statements of Operations
Years ended June 30, 1998, 1997 and 1996 (In thousands, except per share
amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 36,055 $ 30,793 $ 28,763
Direct costs 10,207 12,067 10,813
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Gross margin 25,848 18,726 17,950
Expenses:
Research and development 7,351 7,160 6,209
Sales and marketing 10,223 6,316 6,546
General and administration
(note 9) 6,264 4,701 4,846
Depreciation 2,272 1,930 1,717
Write-down of product line (note 10) -- 875 --
- ---------------------------------------------------------------------------------------------------
26,110 20,982 19,318
- ---------------------------------------------------------------------------------------------------
(262) (2,256) (1,368)
Interest income 760 573 1,017
- ---------------------------------------------------------------------------------------------------
Income (loss) before the below noted items 498 (1,683) (351)
Restructuring charge (note 11) -- -- 550
Proxy and related costs (note 12) -- 1,493 --
- ---------------------------------------------------------------------------------------------------
Net income (loss) for the year $ 498 $ (3,176) $ (901)
- ---------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic and fully diluted $ 0.04 $ (0.25) $ (0.07)
- ---------------------------------------------------------------------------------------------------
Consolidated Statements of Deficit
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Deficit, beginning of year $ (27,542) $(24,366) $(23,465)
Net income (loss) for the year 498 (3,176) (901)
- ---------------------------------------------------------------------------------------------------
Deficit, end of year $ (27,044) $(27,542) $(24,366)
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Consolidated Statements of Changes in Financial Position
Years ended June 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used for):
Operating activities:
Net income (loss) for the year $ 498 $(3,176) $ (901)
Depreciation expense not
involving cash 2,272 1,930 1,717
- -------------------------------------------------------------------------------------------------
2,770 (1,246) 816
Change in non-cash working capital item 2,904 2,538 (3,743)
Deferred revenue 1,660 4,131 226
- -------------------------------------------------------------------------------------------------
7,334 5,423 (2,701)
Financing activities:
Issue of shares -- -- 79
Decrease in loans receivable -- 27 96
Decrease in note receivable 473 1,814 122
- -------------------------------------------------------------------------------------------------
473 1,841 297
Investing activities:
Decrease (increase) in marketable
securities (4,961) (1,184) 8,522
Additions to fixed assets (1,945) (2,443) (2,184)
Increase in deferred development costs (2,423) (1,092) (531)
- -------------------------------------------------------------------------------------------------
(9,329) (4,719) 5,807
Effect of exchange rate changes on
cash and short-term deposits (70) (24) (212)
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
short-term deposits (1,592) 2,521 3,191
Cash and short-term deposits,
beginning of year 9,430 6,909 3,718
- -------------------------------------------------------------------------------------------------
Cash and short-term deposits,
end of year $ 7,838 $ 9,430 $ 6,909
- -------------------------------------------------------------------------------------------------
Change in non-cash working capital: Cash provided by (used for):
Accounts receivable $ 1,163 $ (395) $(2,846)
Inventory 914 2,344 (1,535)
Prepaid expenses and
other assets (330) (211) 200
Current portion of note receivable 816 -- --
Accounts payable and accrued
liabilities 341 800 438
- -------------------------------------------------------------------------------------------------
Change in non-cash working
capital items $ 2,904 $ 2,538 $(3,743)
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
The Company is incorporated under the laws of Ontario and is engaged in the
development, production and sale of imaging software for the medical imaging and
informatics industry.
1. Significant accounting policies:
The Company's principal accounting policies are in accordance with
generally accepted accounting principles in Canada and, except as discussed
in note 19 to the consolidated financial statements, are also in all
material respects in accordance with accounting policies generally accepted
in the United States.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries, I.S.G. Medical Systems Inc. and
ISG Technologies (USA), Inc.
(b) Joint venture:
The Company's investment in a joint venture is accounted for by the
proportionate consolidation method. The Company has a 65% interest in
a joint venture with Mitsui & Co., Ltd. and Mitsui & Co. (Canada) Ltd.
The accompanying financial statements include the Company's
proportionate share of assets, liabilities, revenues and expenses of
the joint venture.
(c) Marketable securities:
Short-term marketable securities are carried at the lower of cost and
market value.
(d) Inventory:
Inventory consists of parts, components, work-in-progress and
completed workstations. Parts and components are carried at the lower
of average cost and replacement cost. Completed workstations are
carried at the lower of average cost and net realizable value.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 2
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(e) Fixed assets:
Fixed assets are stated at cost. Depreciation is provided on the
straight-line basis over the asset's estimated useful life, using the
following annual rates:
-----------------------------------------------------------------------
Furniture and fixtures 20%
Equipment 30% to 50%
Leasehold improvements Lease term
-----------------------------------------------------------------------
(f) Research and development costs:
Research costs are expensed as incurred. Development costs incurred
prior to the establishment of the technological and financial
feasibility of a project are expensed as incurred.
Development costs are capitalized when the technological and financial
feasibility of a project is established. These costs are subsequently
amortized using the straight-line method over the related product's
estimated economic life.
(g) Foreign currency translation:
The Company records foreign currency at the Canadian dollar equivalent
at the date of the transaction, and translates foreign currency
monetary assets and liabilities at year-end exchange rates. Exchange
gains and losses are included in income.
The Company periodically utilizes forward foreign currency exchange
contracts to hedge the effect of exchange rate changes on identified
foreign currency exposures. Any gains and losses on these contracts
are recorded as part of the related transactions.
The operations of the joint venture are considered to be
self-sustaining. Assets and liabilities are translated at year-end
exchange rates, operating items are translated at average exchange
rates and gains and losses on translation are included as a component
of shareholders' equity.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 3
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(h) Revenue recognition:
The Company's revenues are derived from product revenues, comprising
primarily of license fees, contract research and development, hardware
sales and service revenues, which includes customer support, product
upgrades, installation, and training. Fees for services are billed
separately from licenses of the Company's products. The Company
recognizes revenue in accordance with Canadian GAAP, which in the
Company's circumstances, are not materially different from the amounts
that would be determined under the provision of the American Institute
of Certified Public Accountants Statement of Position No. 91-1
Software Revenue Recognition.
Product revenues are recognized pursuant to a contract, when software
is shipped, provided that no significant obligations on part of the
Company remain outstanding and collection of the related receivable is
deemed probable by management. Service revenues related to ongoing
customer support and product upgrades, which are generally paid in
advance and are non-refundable are recognized over the life of the
contract, which is typically twelve months when the services are
performed. Revenues from hardware sales are recognized when the
product is shipped. Revenues from contract research and development,
installation and training services are recognized when the services
are performed.
Product license fees and service revenues that have been prepaid but
do not yet qualify for recognition under the Company's revenue
recognition policy are reflected as deferred revenue on the Company's
balance sheet.
(i) Measurement uncertainty:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the year. Actual results could differ from those
estimates.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 4
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
2. Inventory:
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
Finished goods $ 281 $ 657
Parts and components 1,511 2,049
-------------------------------------------------------------------------
$ 1,792 $2,706
-------------------------------------------------------------------------
3. Fixed assets:
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
Furniture and fixtures $ 179 $ 159
Equipment 8,329 6,831
Leasehold improvements 2,660 2,233
-------------------------------------------------------------------------
11,168 9,223
Less accumulated depreciation 7,184 4,912
-------------------------------------------------------------------------
$ 3,984 $4,311
-------------------------------------------------------------------------
4. Loans receivable:
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
Share purchase loans $ 2,894 $2,894
Other amounts receivable 300 300
-------------------------------------------------------------------------
3,194 3,194
Less current portion 1,033 --
-------------------------------------------------------------------------
$ 2,161 $3,194
-------------------------------------------------------------------------
The share purchase loans are non-interest bearing and were due October
1998. The Board of Directors approved the extension of the maturity of
certain of these loans until October 1999.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 5
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
5. Deferred development costs:
In 1998 and 1997, the Company capitalized development costs relating to new
products not exceeding amounts recoverable over the life of the product.
These costs will be amortized on a straight-line basis over a period of two
to three years, representing the estimated average sales life of the
products commencing on the date of commercial production. In 1998 and 1997,
no amortization was charged to operations.
6. Bank indebtedness:
Under the terms of a bank revolving credit agreement and conditional on the
Company meeting certain financial covenants, the Company can borrow up to
$2,500 and U.S. $500.
7. Commitments:
The Company is committed under long-term operating leases for the rental of
premises and office equipment. The minimum annual lease principal payments
for the four years subsequent to June 30, 1998 are:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
<S> <C>
1999 985
2000 749
2001 459
2002 459
---------------------------------------------------------------------------
</TABLE>
8. Capital stock:
(a) The Company has authorized an unlimited number of common shares. The
balance of issued and outstanding common shares for 1998, 1997 and
1996 is 12,605 shares.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 6
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
8. Capital stock (continued):
(b) The Company has also granted options to certain employees and officers
to purchase common shares.
Details of all options outstanding are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Number of
shares under
Exercise options Exercisable at
price range June 30, 1998 June 30, 1998 Expiry
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 7.00 21 21 1998
9.00 15 11 2001
5.25 - 7.00 612 547 2002
5.75 - 6.75 95 68 2003
3.30 - 3.90 523 98 2004
3.70 - 3.95 228 0 2005
--------------------------------------------------------------------------------------------
1,494 745
--------------------------------------------------------------------------------------------
</TABLE>
During 1998, the Company issued 578 options at an average price of $3.81,
cancelled 243 options and no options were exercised. Under the stock option
plan, the aggregate number of options cannot exceed 1,900 shares.
(c) Weighted average number of common shares outstanding are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12,605 12,605 12,603
--------------------------------------------------------------------------------------------
</TABLE>
9. General and administration:
Included in general and administration expense for the years ended June 30,
1998, 1997 and 1996 is bad debt expense of $650, $Nil and $1,664,
respectively.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 7
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
10. Write-down of product line:
During 1997, a decision was made to discontinue a product line. All items
in inventory associated with this product line were written down to net
realizable value.
11. Restructuring charge:
During 1996, the Company restructured its sales, support and marketing
departments, incurring severance and related costs associated with the
restructuring.
12. Proxy and related costs:
During 1997, the Company incurred legal and other related costs in
connection with a proxy challenge initiated by a major shareholder for
management control of the Company. Prior to the Annual General Meeting, the
major shareholder withdrew the challenge.
13. Joint venture operations:
During 1995, I.S.G. Technologies Inc., Mitsui & Co., Ltd. and Mitsui & Co.
(Canada) Ltd. entered into an agreement to establish a joint venture. The
joint venture became effective May 18, 1995 with contributions of cash by
the venturers. The accompanying financial statements reflect the Company's
proportionate interest in the joint venture's assets, liabilities,
revenues, expenses and changes in financial position. Details of the
Company's interest is presented in note 19(e).
14. Segmented information and major customers:
(a) The Company's dominant industry segment is the development and sale of
visualization software for the medical imaging market.
All of the Company's revenues are exports as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Total
revenues Asia U.S. Europe
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30:
1998 $36,055 $15,674 $ 9,326 $11,055
1997 30,793 10,900 13,744 6,149
1996 28,763 12,573 10,366 5,824
-----------------------------------------------------------------------------------
</TABLE>
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 8
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
14. Segmented information and major customers:
(b) Sales and contract revenue to customers that individually generate
more than 10% of revenue are as follows (in aggregate):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
<S> <C> <C>
Year ended June 30:
1998 $13,846
1997 9,309
1996 16,935
---------------------------------------------------------------------------
</TABLE>
15. Income taxes:
Under the Income Tax Act, certain expenditures are classified as Scientific
Research & Experimental Development expenditures and are grouped into a
pool for tax purposes which is 100% deductible in the year incurred. This
expenditure pool can also be carried forward indefinitely and deducted in
full in any subsequent year.
The balance of the Scientific Research & Experimental Development
expenditure pool at June 30, 1998 is approximately $31,075 (1997 -
$31,200).
The Company has also earned estimated investment tax credits ("ITCs") on
Scientific Research & Experimental Development expenditures which will
expire as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year Amount
---------------------------------------------------------------------------
<S> <C> <C>
2003 $ 493
2004 1,247
2005 1,666
2006 2,435
2007 3,250
2008 1,667
---------------------------------------------------------------------------
$10,758
---------------------------------------------------------------------------
</TABLE>
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 9
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
16. Fair values of financial instruments:
The Company uses financial instruments, primarily forward foreign currency
exchange contracts, to hedge its exposure to the U.S./Canadian dollar
exchange rate as a result of receiving the majority of its revenue in U.S
dollars. These consolidated financial statements include, to varying
degrees, elements of market, credit and exchange risk in excess of amounts
recognized in the balance sheets. The Company does not require collateral
or other security to support financial instruments with credit risks. At
June 30, 1998, the Company has outstanding foreign currency exchange
contracts that represent a commitment to sell U.S. dollars of approximately
U.S. $4.9 million (1997 - U.S. $5.0 million) over a period of six months at
a weighted average exchange rate of Cdn. $1.383 (1997 - $1.385). At June
30, 1998, the estimated fair value liability of these contracts is $400
(1997 - $Nil).
The carrying values of the Company's other financial instruments, except
marketable securities as disclosed on the balance sheets, approximate their
fair values due to the short term to maturity of the various instruments.
17. Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effect of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant system failure which could affect an entity's
ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
18. Subsequent event:
On July 24, 1998, the Company signed an agreement to purchase an 80% share
of Surgical Navigation Specialists Incorporated, a company formed to market
and sell surgical navigation software. ISG will contribute intellectual
property and other assets with a value of $9.2 million, including cash of
US $350 in exchange for this ownership. This transaction is expected to
close by September 30, 1998.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 10
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
19. Generally accepted accounting principles ("GAAP") in Canada and the United
States:
Differences between Canadian and United States accounting principles, as
they would affect the Company's financial statements, are as follows:
(a) Under United States GAAP, the consolidated statements of changes in
financial position would contain the following additional disclosure
requirements:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash interest paid $ -- $ 7 $47
Cash income taxes paid 152 206 78
---------------------------------------------------------------------------
</TABLE>
(b) Under Canadian GAAP, unrealized and realized gains and losses on
foreign currency translations identified as hedges may be deferred as
long as there is reasonable assurance that the hedge will be
effective. Under U.S. GAAP, deferral is allowed only on foreign
currency transactions intended to hedge identifiable firm currency
commitments.
(c) Under both U.S. and Canadian GAAP, basic earnings per share is
computed by dividing the net income (loss) for the period available to
common shareholders as measured by the respective accounting
principles (numerator), by the weighted average number of common
shares outstanding during that period (denominator). Basic earnings
per share excludes the dilutive effect of potential common shares.
Fully diluted earnings per share under Canadian GAAP and diluted
earnings per share under U.S. GAAP give effect to all potential common
shares outstanding during the period. Under Canadian GAAP, fully
diluted earnings per share is calculated assuming that the proceeds
from the exercise of potential common shares are invested at an
appropriate rate of return, and an imputed interest amount is added to
net income for the period. The number of fully diluted shares
outstanding represents the weighted average maximum number of
potential common shares outstanding. Under U.S. GAAP, the weighted
average number of diluted shares outstanding is calculated assuming
that the proceeds from potential common shares are used to repurchase
common shares at the average share price in the period. No adjustment
is made to net income for imputed interest in calculating diluted
earnings per share under U.S. GAAP. The options outstanding have an
anti-dilutive effect on the calculation of diluted earnings per share
for each of the periods presented and, as a result, there is no
difference between earnings (loss) per share figures under Canadian
and United States GAAP.
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 11
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
19. Generally accepted accounting principles ("GAAP") in Canada and the United
States (continued):
(d) Under United States GAAP, the Financial Accounting Standards Board
adopted Statement 109, "Accounting for Income Taxes", which became
effective for fiscal years beginning after December 15, 1992. The
Company has determined that adoption of the new standard would not
have a material effect on measurement of income taxes in its financial
statements.
(e) Beginning in 1996, United States accounting principles allow, as
specified in SFAS 123, but do not require companies to record
compensation cost for employee stock option plans at fair value. The
Company has chosen to continue to account for stock options using the
intrinsic value method prescribed by APB 25. The Company has
determined that there are no differences between Canadian and United
States accounting principles.
(f) Under United States GAAP, interests in joint ventures are accounted
for using the equity method of accounting as opposed to proportionate
consolidation. The equity method of accounting requires the investment
in the joint venture to be recorded at cost and adjusted to recognize
the investor's share of the earnings or losses of the investee after
the date of acquisition. Under United States GAAP, the consolidated
balance sheets would contain the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Investment in Nippon ISG Corporation $596 $669 $930
---------------------------------------------------------------------------
</TABLE>
The consolidated statements of operations would contain the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in losses of Nippon ISG
Corporation $(73) $(262) $(92)
---------------------------------------------------------------------------
</TABLE>
<PAGE>
I.S.G. TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 12
Years ended June 30, 1998, 1997 and 1996
(In thousands)
- --------------------------------------------------------------------------------
19. Generally accepted accounting principles ("GAAP") in Canada and the United
States (continued):
In addition to the above disclosures, the consolidated balance sheets,
statements of operations, and changes in financial position would be
reduced by their values and changes in values that were proportionately
accounted for in the consolidated financial statements under Canadian GAAP.
A summary of the Company's proportionate share in Nippon ISG Corporation is
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 628 $ 507 $ 851
Long-term assets 176 318 282
Current liabilities 519 398 416
Revenues 1429 920 1,044
Expenses 1504 1,182 1,137
Net loss (74) (262) (92)
Cash flows used in operating activities 12 (239) (122)
Cash flows from financing activities -- -- --
Cash flows used in investing activities 58 (118) (360)
-------------------------------------------------------------------------------------
</TABLE>
20. Comparative figures:
Certain comparative figures have been reclassified to conform with the
current year's presentation.
<PAGE>
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We hereby consent to the use of our report dated September 2, 1998 included in
the Form 20-F for I.S.G. Technologies Inc.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
January 12, 1999
