ISG Technologies braces for shareholder vote after dissident group launches proxy battle

Quorum begins fight for control in middle of RSNA week

One of the medical imaging industry's most riveting corporatedramas in recent years is scheduled to come to a head next week,when shareholders of medical imaging software developer ISG Technologiesvote on whether to allow a dissident shareholder group to takeover the firm. If successful, the insurgent group plans to reinstallThomas Cafarella, ISG's former president and CEO, who was oustedin August.

The proxy fight was launched by Quorum Growth, a Toronto-basedinvestment group that since 1987 has held stock in ISG, of Mississauga,Ontario. Quorum launched its proxy bid on Dec. 3, in the middleof the Radiological Society of North America meeting. Quorum ownsabout 7.4% of ISG stock, which has been mired at around $2 a sharefor several months.

Quorum characterized its move as the culmination of years offrustration with the poor performance of ISG's financial resultsand stock price, as well as a philosophical clash with ISG overthe company's direction. Quorum and Cafarella believe that ISGhas been too slow in getting products to market, and should jettisonits slow-developing Viewing Wand image-guided surgery businessto focus on the PACS and hospital information systems markets.

"The financial performance of ISG over the last severalyears has been extremely poor, both in terms of profitabilityand a related factor, the decline in the stock price. That hascome despite what we see to be repeated claims by management thatsuccess is just around the corner," said Vernon Lobo, seniorvice president of Quorum. "What we've proposed to do…involvestaking what we believe to be the highly competitive elements ofISG's product set and focusing the company's resources on leveragingthose into high-growth market opportunities."

The proxy fight is not the first time Quorum has expressedits dissatisfaction with ISG's performance. In fact, Cafarella'shiring in November 1995 was at the urging of the investment group,which felt that ISG needed additional management expertise.

Cafarella had a stormy nine-month tenure with the company,during which he presided over a restructuring that saw some ISGworkers let go (SCAN 3/13/96). Cafarella and former ISG vice presidentof sales and marketing Denis O'Connor filed a wrongful terminationsuit against ISG after they were removed as ISG executives.

In an effort to settle the litigation, Quorum and Cafarellaoffered to buy ISG's Viewing and Reading Stations PACS businessfor $2.8 million, with the intention of starting a separate businessto provide PACS solutions for HIS companies. ISG found the offerinadequate, according to ISG chairman and CEO Michael Greenberg,and Quorum launched its proxy fight not long thereafter.

If Quorum does take control of ISG, it will install its ownboard and reinstate Cafarella as CEO, with O'Connor returningto the company as well. The new ISG would divest the image-guidedsurgery business, while working with HIS companies to integrateISG's VRS PACS line into their information systems.

Greenberg challenges Quorum's version of ISG's past and itsvision for the company's future. While he admits that ISG onlybegan to turn profitable in 1996, the company has spent yearsbuilding an asset base of technology and customer relationshipsthat it can leverage into future growth. In addition, ISG's participationin several different market segments is not illustrative of alack of focus, but rather is part of the company's strategy todefine its business more broadly than just one industry segment.

"We are not a PACS business, we are not a surgery business.This distinction is false," Greenberg said. "We area software company that sells into medical imaging, just as youcan have a software company that sells into the office (market)."

The rhetoric between the sides has grown increasingly hostileas the firms gear up for the Dec. 23 vote. Quorum issued an investorpacket that included charts showing ISG's stock underperformingthe Technology Software Index, and comparing the firm's performancewith statements by Greenberg in several years' worth of ISG annualreports claiming that profitability was just around the corner.

ISG countered by producing a letter from ISG employees supportingGreenberg and claiming that many employees left during Cafarella'stenure at the company, due to his management style. ISG also saidthat a number of its medical imaging customers had written letterssupporting the current management.

How close is Quorum to rounding up a majority of ISG proxies?In a Dec. 12 conference call with analysts, the group said italready had proxies representing one-third of ISG shares. At aboutthe same time, ISG also claimed to have one-third of the company'sshares in its corner. Regardless of who wins, however, the victorwill be faced with the daunting task of restoring confidence andstability in a company that saw more than its share of turmoilin 1996.