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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
Imax Corporation
(Exact name of registrant as specified in its charter)
Canada 98-0140269
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
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(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
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N/A
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(Former name or former address, if changed since last report)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of October 31, 1999
- -------------------------- ----------------------------------
Common stock, no par value 29,644,688
Page 1 0f 18
IMAX CORPORATION
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitive and Qualitative Factors about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Listing of Exhibits and Reports on Form 8-K 17
Signatures 18
FORWARD LOOKING INFORMATION
Certain statements included herein may constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform Act
of 1995. These forward-looking statements may include, but are not limited to,
references to future capital expenditures (including the amount and nature
thereof), business strategies and measures to implement strategies, competitive
strengths, goals, expansion and growth of its business and operations, plans and
references to the future success of the Company and the known Year 2000 issues
confronting the Company. These forward-looking statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the expectations and predictions of the Company is subject to a number of
risks and uncertainties, including, but not limited to, general economic, market
or business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other companies;
conditions in the out-of-home entertainment industry; changes in laws or
regulations; risks associated with investments and operations in foreign
jurisdictions and any future international expansion, including those related to
economic, political and regulatory policies of local governments and laws and
policies of the United States and Canada; the potential impact of increased
competition in the markets the Company operates within; the availability of
personnel with required remediation skills, the ability of the Company to
identify and correct all relevant computer code and the success of third parties
with whom the Company does business in addressing their Year 2000 issues and
other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made herein are qualified by
these cautionary statements, and there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to, or
effects on, the Company.
Page 2
IMAX CORPORATION
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The following condensed consolidated financial statements
are filed as part of this Report:
Condensed Consolidated Balance Sheets as at
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations for the
three and nine
month periods ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flow
for the nine month periods ended September 30, 1999 and
1998 6
Notes to Condensed Consolidated Financial Statements 7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(unaudited)
September 30, December 31,
1999 1998
-------------- -------------
Assets
Current assets
Cash and cash equivalents $ 52,673 $143,566
Short-term marketable securities 56,859 39,305
Accounts receivable 46,837 45,217
Current portion of net investment in leases 10,962 9,303
Inventories and systems under construction (note 3) 33,162 18,747
Prepaid expenses 5,743 3,766
-------------- --------
Total current assets 206,236 259,904
Long-term marketable securities 37,459 20,070
Net investment in leases 84,809 79,124
Film assets 38,244 34,885
Capital assets 65,111 46,563
Goodwill (note 2) 54,483 38,129
Other assets 27,365 11,416
-------------- --------
Total assets $ 513,707 $490,091
============== ========
Liabilities
Current liabilities
Accounts payable $ 12,621 $ 9,882
Accrued liabilities 36,770 30,153
Current portion of deferred revenue 24,206 22,062
Income taxes payable 356 435
-------------- --------
Total current liabilities 73,953 62,532
Deferred revenue 18,976 15,005
Senior notes 200,000 200,000
Convertible subordinated notes 100,000 100,000
Deferred income taxes 20,682 23,263
-------------- --------
Total liabilities 413,611 400,800
-------------- --------
Minority interest 6,053 4,845
-------------- --------
Commitments and contingencies (notes 4 and 5)
Subsequent event (note 8)
Shareholders' equity
Capital stock 56,771 55,236
Retained earnings 36,888 29,436
Other comprehensive items 384 (226)
-------------- --------
Total shareholders' equity 94,043 84,446
-------------- --------
Total liabilities and shareholders' equity $ 513,707 $490,091
============== ========
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 10.)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(unaudited)
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Revenue
Systems $25,458 $35,793 $ 66,767 $ 93,047
Films 11,042 5,313 30,108 19,350
Other 5,953 3,293 16,579 11,692
------- ------- -------- --------
42,453 44,399 113,454 124,089
Costs and expenses 23,043 17,940 61,800 51,887
------- ------- -------- --------
Gross margin 19,410 26,459 51,654 72,202
Loss from equity accounted investees 288 471 450 1,149
Selling, general and administrative expenses 8,602 7,790 24,860 25,686
Research and development 1,027 865 2,314 2,224
Amortization of intangibles 581 631 1,526 1,890
------- ------- -------- --------
Earnings from operations 8,912 16,702 22,504 41,253
Interest income 2,281 1,044 7,550 3,448
Interest expense (5,401) (3,310) (16,415) (9,927)
Foreign exchange gain (loss) 403 (120) 616 (349)
------- ------- -------- --------
Earnings before income taxes and minority interest 6,195 14,316 14,255 34,425
Provision for income taxes (2,451) (6,322) (5,595) (15,469)
------- ------- -------- --------
Earnings before minority interest 3,744 7,994 8,660 18,956
Minority interest (501) (874) (1,207) (1,476)
------- ------- -------- --------
Net earnings $ 3,243 $ 7,120 $ 7,453 $ 17,480
======= ======= ======== ========
Earnings per share (note 6)
Basic $0.11 $0.24 $0.25 $0.59
Diluted $0.11 $0.23 $0.24 $0.57
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 10.)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Amounts in accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(unaudited)
Nine months ended September 30,
1999 1998
-------------------- --------------------
Cash provided by (used in):
Operating Activities
Net earnings $ 7,453 $ 17,480
Items not involving cash:
Depreciation and amortization 17,330 11,430
Deferred income taxes 316 11,673
Loss from equity accounted investees 450 1,149
Minority interest 1,208 1,476
Other (461) 205
Change in net investment in leases (7,233) (24,842)
Change in deferred revenue on film production 4,537 4,725
Changes in non-cash operating assets and liabilities (8,941) (11,925)
--------- --------
Net cash provided by operating activities 14,659 11,371
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Investing Activities
Purchase of Digital Projection International, net of cash acquired (25,724) -
Increase in marketable securities (35,007) (4,882)
Increase in film assets (11,692) (14,401)
Purchase of capital assets (19,707) (9,467)
Increase in other assets (14,997) (3,038)
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Net cash used in investing activities (107,127) (31,788)
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Financing Activities
Class C preferred shares dividends paid (365) (386)
Common shares issued 1,535 1,472
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Net cash provided by financing activities 1,170 1,086
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Effect of exchange rate changes on cash 405 86
--------- --------
Decrease in cash and cash equivalents during the period (90,893) (19,245)
Cash and cash equivalents, beginning of period 143,566 64,069
--------- --------
Cash and cash equivalents, end of period $ 52,673 $ 44,824
========= ========
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 10.)
Page 6
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Nine Month Periods Ended September 30, 1999 and 1998
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Imax
Corporation and its wholly-owned and majority owned subsidiaries. The
nature of the Company's business is such that the results of operations for
the interim periods presented are not necessarily indicative of results to
be expected for the fiscal year. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of such
operations. All such adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the Company's
most recent annual report on Form 10-K for the year ended December 31, 1998
which should be consulted for a summary of the significant accounting
policies utilized by the Company.
2. Acquisition of Digital Projection International
On September 3, 1999, the Company acquired all of the common and preferred
shares of Digital Projection International, ("DPI") a designer and
manufacturer of digital image delivery systems with operations in
Manchester, England and Atlanta, Georgia. The transaction has been
accounted for as a purchase and the assets acquired and the liabilities
assumed were recorded at their fair market values on September 3, 1999. The
purchase price of approximately $27.2 million was paid with approximately
$25.5 million of cash, $1.5 million in contingent escrow funds subject to a
net asset adjustment, and restricted shares of the Corporation, valued at
approximately $1.7 million, to be issued to former shareholders of DPI over
the next five years.
The excess of the purchase price over the book value of the assets acquired
has been allocated to assets and liabilities to record them at their
estimated fair values at September 3, 1999 as follows:
Cash $ 1,526
Accounts receivable 3,875
Inventory 6,771
Capital assets 3,056
Other assets 4,000
Accounts payable and accrued liabilities (11,104)
Deferred income tax 1,714
Goodwill 17,412
--------
$ 27,250
========
3. Inventories and Systems Under Construction
September 30, December 31,
1999 1998
---------------- ---------------
Raw materials $15,342 $ 7,555
Work-in-process 12,164 10,686
Finished goods 5,656 506
------- -------
$33,162 $18,747
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Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Nine Month Periods Ended September 30, 1999 and 1998
(unaudited)
4. Financial Instruments
From time to time the Company engages in hedging activities to reduce the
impact of fluctuations in foreign currencies on its profitability and cash
flow. The credit risk exposure associated with these activities would be
limited to all unrealized gains on contracts based on current market
prices. The Company believes that this credit risk has been minimized by
dealing with highly rated financial institutions.
To fund Canadian dollar costs in 1999 and 2000, the Company had entered
into forward exchange contracts as at September 30, 1999 to hedge the
conversion of $26 million of its cash flow into Canadian dollars at an
average exchange rate of Canadian $1.46 per U.S. dollar. The company
recognizes exchange gains or losses on the forward contracts when the
contracts mature.
The Company has also entered into foreign currency swap transactions to
hedge minimum lease payments receivable under sales-type lease contracts
denominated in Japanese Yen and French Francs. These swap transactions fix
the foreign exchange rates on conversion of 110 million Yen at 98 Yen per
U.S. dollar through September 2004 and on 13.5 million Francs at 5.1 Francs
per U.S. dollar through September 2005.
These hedging contracts are expected to be held to maturity; however, if
they were terminated on September 30, 1999, the Company would have realized
a gain of approximately $0.1 million based on the then prevailing exchange
rates.
The Company entered into an interest rate swap transaction in May 1999 for
a term commencing June 1, 1999 and terminating on December 1, 2002. The
Company has agreed to pay a floating rate of LIBOR plus 1.49% to June 1,
2000 and LIBOR plus 2.09% for the remainder of the term and the
counterparty has agreed to pay a fixed rate of 7.875% on notional principal
of $65 million. The floating rate is revised every 1st of December, March,
June and September. The counterparty may cancel the remaining payments on
the swap transaction prior to May 31, 2000 with no early termination cost
to either party. The Company adjusts interest expense over each 3-month
period for the net amount it is to receive from or pay to the counterparty.
The interest rate swap is expected to be held to maturity; however, if it
were terminated by the Company on September 30, 1999, the Company would
have realized a loss of approximately $0.9 million based on the then
prevailing interest rates.
5. Contingencies
In April 1994, Compagnie France Film Inc. filed a claim against the Company
in the Superior Court in the District of Montreal, in the Province of
Quebec, alleging breach of contract and bad faith in respect of an
agreement which the plaintiff claims it entered into with the Company for
the establishment of an IMAX theater in Quebec City, Quebec, Canada. The
plaintiffs claimed damages of Canadian $4.6 million, together with expenses
and pre-judgment interest. Compagnie France Film had also incorporated a
shell company, 3101-8450 Quebec Inc. ("3101"). 3101 was sued in an
unrelated action to which the Company was not a party and, in February
1996, was found liable to pay damages in the amount of Canadian $2.5
million.
Subsequent to that judgment 3101 intervened in the lawsuit between
Compagnie France Film and the Company in order to claim such amount from
the Company. In a decision rendered in April 1998, the Court dismissed the
plaintiffs' claims with costs. In May 1998, Compagnie France Film Inc. and
3101 both filed appeals to the Court of Appeal. The Company believes that
it will be successful in responding to these appeals and the ultimate loss,
if any, will not have a material impact on the financial position or
results of operations of the Company, although no assurance can be given
with respect to the ultimate outcome of this litigation.
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Nine Month Periods Ended September 30, 1999 and 1998
(unaudited)
5. Contingencies (continued)
In addition to the litigation described above, the Company is currently
involved in other litigation which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect
to the ultimate outcome for any such litigation.
6. Earnings Per Share
Reconciliations of the numerators and denominators of the basic and
diluted per-share computations are as follows:
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------- -------------- ------------- --------------
Net earnings available to common
Shareholders:
Net earnings $ 3,243 $ 7,120 $ 7,453 $17,480
Less:
Accrual of dividends on preferred shares - (43) - (128)
Accretion of discount of preferred shares - (46) - (135)
------- ------- ------- -------
Net earnings used in computing basic earnings 3,243 7,031 7,453 17,217
per share
Interest expense on Convertible Subordinated - 885 - 1,769
Notes, net of tax ------- ------- ------- -------
Net earnings used in computing diluted $ 3,243 $ 7,916 $ 7,453 $18,986
Earnings per share ======= ======= ======= =======
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
Weighted average number of common shares (000's):
Issued and outstanding at beginning of period 29,614 29,280 29,478 29,115
Weighted average shares issued in the period 17 23 120 131
------- ------- ------- -------
Weighted average used in computing basic 29,631 29,303 29,598 29,246
Earnings per share
Assumed exercise of stock options, net of shares 830 1,031 835 1,156
assumed acquired under the Treasury Stock Method
Assumed conversion of Convertible Subordinated Notes - 4,672 - 3,115
------- ------- ------- -------
Weighted average used in computing diluted 30,461 35,006 30,433 33,517
Earnings per share ======= ======= ======= =======
6.
Page 9
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Nine Month Periods Ended September 30, 1999 and 1998
(unaudited)
Earnings Per Share (continued)
Common shares potentially issuable pursuant to the Convertible Subordinated
Notes were excluded from the computations for the three months and nine
months ended September 30, 1999 and the three months ended March 31, 1998
as they would have had an antidilutive effect on earnings per share.
7. Segmented Information
There has been no change in the basis of segmentation or in the basis of
measurement of segment profit or loss from the Company's most recent annual
report on Form 10-K for the year ended December 31, 1998. Intersegment
transactions are not significant.
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Revenue
Systems 25,458 $35,793 $ 66,767 $ 93,047
Films 11,042 5,313 30,108 19,350
Other 5,953 3,293 16,579 11,692
---------- ------- -------- --------
Total consolidated revenues $ 42,453 $44,399 $113,454 $124,089
========== ======= ======== ========
Earnings (loss) from operations
Systems $13,629 $19,387 $ 34,692 $ 53,026
Films 123 147 (358) 1,083
Other (1,030) 786 (1,149) 676
Corporate overhead (3,810) (3,618) (10,681) (13,532)
------- ------- -------- --------
Consolidated earnings from operations $ 8,912 $16,702 $ 22,504 $ 41,253
======= ======= ======== ========
8. Subsequent Event
On October 5, 1999, the Company announced it had acquired the remaining 49%
interest in Sonics Associates Inc. ("Sonics"), the exclusive provider of
sound systems for the Company's theater systems, from Sonics' management,
who will continue as the senior management of this 100% owned subsidiary.
The purchase price was $12 million in cash paid on October 5, 1999 plus a
deferred payment of $0.7 million be paid in cash no later than December 31,
1999. The purchase price also contains an additional earn out amount to
the original shareholders payable over the period 2000 to 2004 which is
contingent on Sonics' level of earnings over that period.
Page 10
IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Theater Signings and Backlog
During the third quarter of 1999, the Company signed contracts for 9 IMAX
theater systems valued at $28.9 million. The Company's sales backlog grew to
$218.8 million at September 30, 1999, a 4% increase from $209.7 million at June
30, 1999 and a 25% increase from $175.8 million at December 31, 1998.
The Company's sales backlog at September 30, 1999 represented contracts for 85
theater systems, including seven systems which will be located at theaters in
which the Company will have an equity interest and the upgrade of one existing
theater to Imax 3D. The Company's sales backlog will vary from quarter to
quarter depending on the signing of new systems which adds to backlog and the
delivery of systems which reduces backlog. Sales backlog represents the minimum
revenues under signed system sale and lease agreements that will be recognized
as revenue as the associated theater systems are delivered. The minimum revenue
comprises the upfront fees plus the present value of the minimum royalties due
under sales-type lease agreements for the first 10 years of the initial lease
term. The value of sales backlog does not include revenues from theaters in
which the Company has an equity interest, letters of intent, or long-term
conditional theater commitments.
Three months ended September 30, 1999 versus three months ended September 30,
1998
The Company reported net earnings of $3.2 million or $0.11 per share on a
diluted basis for the third quarter of 1999 compared to $7.1 million or $0.23
per share on a diluted basis for the third quarter of 1998.
The Company's revenues in the third quarter of 1999 were $42.5 million compared
to $44.4 million in the corresponding quarter last year. The 4% decline was due
mainly to a decline in systems revenue which more than offset increases in film
and other revenues.
Systems revenue, which includes revenue from theater system sales and leases,
royalties and maintenance fees, decreased approximately 29% to $25.5 million in
the third quarter of 1999 from $35.8 million in the same quarter last year. The
Company delivered seven theater systems in the third quarter of 1999, including
two system upgrades, versus nine theater systems in the third quarter of 1998.
Recurring revenues from royalties and maintenance fees increased approximately
15% in the third quarter over the corresponding period last year as a result of
growth in the Imax theater network.
Film revenue increased 108% to $11.0 million in the third quarter of 1999 from
$5.3 million in the same quarter last year. The increase was due to an increase
in film post-production activity and an increase in film distribution revenues,
due mainly to the strong performance of the Company's film T-REX: Back to the
Cretaceous which was released in the fourth quarter of 1998.
Other revenues increased 81% to $6.0 million in the third quarter of 1999 from
$3.3 million in the same quarter last year. Other revenue in the third quarter
of 1999 includes revenue of Digital Projection International ("DPI") a 100%
owned subsidiary acquired in the current quarter. Revenues from owned and
operated theaters increased in the third quarter compared to the same quarter
last year due to three owned and operated theaters, two of which commenced
operations in 1999 and one of which commenced operations late in the third
quarter of 1998.
Page 11
IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
Three months ended September 30, 1999 versus three months ended September 30,
1998 (Cont'd)
Gross margin for the third quarter of 1999 was $19.4 million, or 46% of total
revenue, compared to $26.5 million, or 60% of total revenue, in the
corresponding quarter last year. The decline in gross margin as a percentage
of total revenue is due to the lower proportion of systems revenue (which
generally has a higher margin than film and other revenues) in the third quarter
of 1999 compared to the corresponding quarter in 1998.
Selling, general and administrative expenses were $8.6 million in the third
quarter of 1999 compared to $7.8 million in the corresponding quarter last year.
The increase resulted from additional expenses from DPI, and general corporate
costs.
Interest income increased to $2.3 million in the third quarter of 1999 from $1.0
million in the same quarter last year primarily due to an increase in the
Company's cash and marketable securities balances following the Senior Notes
offering in December, 1998.
Interest expense increased to $5.4 million in the third quarter of 1999 from
$3.3 million in the corresponding quarter last year primarily as a result of the
$200 million Senior Notes issued in December, 1998.
The effective tax rate on earnings before taxes differs from the statutory tax
rate and will vary from quarter to quarter primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, and the
provision of income taxes at different tax rates in foreign and other provincial
jurisdictions. The effective tax rate in the third quarter of 1999 also
benefited from an increase in tax credits associated with the Company's
manufacturing activities compared to the corresponding quarter in 1998.
Nine months ended September 30, 1999 versus nine months ended September 30, 1998
The Company reported net earnings of $7.5 million or $0.24 per share on a
diluted basis for the first nine months of 1999 compared to $17.5 million or
$0.57 per share on a diluted basis for the first nine months of 1998.
The Company's revenues for the first nine months of 1999 were $113.5 million
compared to $124.1 million in the corresponding period last year, a decrease of
9%. Increases in film and other revenue were more than offset by a decline in
systems revenue.
Systems revenue decreased approximately 28% to $66.8 million in the first nine
months of 1999 from $93.0 million in the same period last year. The Company
delivered 17 theater systems compared to 25 theater systems in the same period
last year. Recurring revenues from both royalties and maintenance fees increased
approximately 11% in the first nine months of 1999 over the prior year period as
a result of growth in the IMAX theater network.
Film revenue increased 56% to $30.1 million in the first nine months of 1999
from $19.4 million in the same period last year due to an increase in film
distribution and post production revenues. Film distribution revenue increased
58% in the first nine months of 1999 compared to the same period last year
primarily as a result of the strong performance of the Company's film, T-REX:
Back to the Cretaceous which was released in the fourth quarter of 1998.
Other revenues increased 42% to $16.6 million in the nine months ended September
30, 1999 from $11.7 million in the same period last year as a result of an
increase in the number of theaters in operation in which the Company has an
equity interest, and revenue earned by DPI since its acquisition, partially
offset by a decline in camera rental revenues.
Page 12
IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
Nine months ended September 30, 1999 versus nine months ended September 30,
1998(Cont'd)
Gross margin for the first nine months of 1999 was $51.7 million or 46% of total
revenue compared to $72.2 million or 58% of total revenue in the corresponding
period last year. The decrease in gross margin as a percentage of total revenue
is primarily due to the decreased proportion of systems revenue (which generally
has a higher margin than film and other revenue) in the first nine months of
1999 compared to the corresponding period in 1998.
Selling, general and administrative expenses were $24.9 million in the first
nine months of 1999 compared to $25.7 million in the first nine months of 1998.
The decrease in selling, general and administrative expenses in 1999 over 1998
resulted from declines in executive compensation and legal costs, partially
offset by increased affiliate relations initiatives.
Interest income increased to $7.5 million in the first nine months of 1999 from
$3.4 million in the same period last year primarily due to an increase in the
Company's cash and marketable securities balances following the $200 million
Senior Notes offering in December, 1998.
Interest expense increased from $9.9 million in the first nine months of 1998 to
$16.4 million in the first nine months of 1999 primarily as a result of the $200
million Senior Notes offering in December, 1998.
The effective tax rate on earnings before taxes differs from the statutory tax
rate and will vary from quarter to quarter primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, and the
provision of income taxes at different tax rates in foreign and other provincial
jurisdictions. The effective tax rate in the first nine months of 1999 also
benefited from an increase in tax credits associated with the Company's
manufacturing activities compared to the corresponding period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's principal source of liquidity included cash
and cash equivalents of $52.7 million, marketable securities totalling $94.3
million, trade accounts receivable of $46.8 million, net investment in leases
due within one year of $11.0 million and the amounts receivable under contracts
in backlog which are not yet reflected on the balance sheet. The Company also
has unused lines of credit under a working Capital facility of $2.3 million.
The 7.875% Senior Notes due December 1, 2005 are subject to redemption by the
Company, in whole or in part, at any time on or after December 1, 2002 at
redemption prices expressed as percentages of the principal amount for each 12-
month period commencing December 1 of the years indicated: 2002 - 103.938%; 2003
- - 101.969%; 2004 and thereafter - 100.000% together with interest accrued
thereon to the redemption date and are subject to redemption by the Company
prior to December 1, 2002 at a redemption price equal to 100% of the principal
amount plus a "make whole premium". If certain changes result in the imposition
of withholding taxes under Canadian law, the notes may be redeemed by the
Company at a redemption price equal to 100% of the principal amount plus accrued
interest to the date of redemption. In the event of a change in control,
holders of the notes may require the Company to repurchase all or part of the
notes at a price equal to 101% of the principal amount plus accrued interest to
the date of repurchase.
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
The 5 3/4 % Convertible Subordinated Notes (the "Subordinated Notes") due April
1, 2003 are convertible into common shares of the Company at the option of the
holder at a conversion price of $21.406 per share (equivalent to a conversion
rate of 46.7154 shares per $1,000 principal amount of Subordinated Notes) at any
time prior to maturity. The Subordinated Notes are redeemable at the option of
the Company on or after April 1, 1999 at redemption prices expressed as
percentages of the principal amount (1999 - 103.286%; 2000 - 102.464%; 2001 -
101.643%; 2002 - 100.821%) plus accrued interest. The Subordinated Notes may
only be redeemed by the Company between April 1, 1999 and April 1, 2001 if the
last reported market price of the Company's common shares is equal to or greater
than $30 per share for any 20 of the 30 consecutive trading days prior to the
notice of redemption. The Subordinated Notes may be redeemed at any time on or
after April 1, 2001 without limitation.
The Company partially funds its operations through cash flow from operations.
Under the terms of the Company's typical theater system lease agreement, the
Company receives cash payments before it completes the performance of its
obligations. Similarly, the Company receives cash payments for some of its film
productions in advance of related cash expenditures. These cash flows have
generally been adequate to finance the ongoing operations of the Company.
In the first nine months of 1999, cash provided by operating activities amounted
to $14.7 million after the payment of interest on the Senior and Convertible
Notes totaling $10.6 million and working capital requirements. Working capital
requirements included an increase of $8.2 million in inventory due mainly to an
increase in raw materials and work-in-process inventory anticipated for
completion and delivery of systems later in the year and in early 2000. Cash
flow from operations also includes an increase of $4.5 million in funds held for
sponsored film productions, which will be expended in future periods.
In the first nine months of 1999, cash used in investing activities amounted to
$107.1 million and included: an increase in marketable securities of $35.0
million, the purchase of DPI net of acquired cash of $25.7 million, an increase
in film assets of $11.7 million, primarily Galapagos, Siegfried & Roy and
Cyberworld; an increase in capital assets of $19.7 million, primarily theaters
in which the Company has an equity interest; and an increase of $15.0 million in
other assets, primarily as a result of the acquisition of a 19% equity interest
plus an $8 million CDN convertible debenture in Mainframe Entertainment Inc., a
leading producer of 3D computer generated animation.
During the first nine months of 1999, cash provided by financing activities
included $1.5 million of proceeds from common shares issued under the Company's
stock option plan.
The Company believes that cash flows from operations together with existing cash
balances and the working capital facility will continue to be sufficient to meet
cash requirements in the foreseeable future.
IMPACT OF THE YEAR 2000
The Year 2000 issue involves computer programs and embedded chips, which use two
digit date fields, failing or creating errors as a result of the change in the
century.
Background and Process
In order to assess the likely impact of the Year 2000 issue on its operations,
the Company established a Year 2000 Committee in 1998, consisting of senior
managers and reporting to the Chief Operating Officer, and designated a manager
or coordinator in each department. The Company also retained external
consultants who developed a Year 2000 project plan and conducted awareness
sessions for the Company's staff.
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
IMPACT OF THE YEAR 2000 (Cont'd)
As part of the Year 2000 project plan beginning in 1998, the Company's Internal
Audit department, in conjunction with the Year 2000 Committee, distributed an
asset inventory questionnaire and business partner questionnaire within the
Company, and a key vendor questionnaire externally to identify and inventory
likely areas of concern.
Assessment and Action Taken
The Internal Audit department and the Year 2000 Committee reviewed the responses
to these questionnaires and assessed the areas of risk under the following
categories: information technology systems, non-information technology systems,
facilities, and third party suppliers.
The Internal Audit department and the Year 2000 Committee determined that the
Company's information technology at risk were its cost accounting and financial
software systems. Accordingly, the cost accounting and financial software
systems were upgraded in the first quarter of 1999, which upgrades have been
certified as Year 2000 ready by the vendors.
Digital Projection International's accounting and production systems have been
certified as Year 2000 ready by the vendors.
For non-information technology systems, the Company evaluated the projection
system and concluded that the performance of the projection system would not be
negatively impacted by the change in the century.
With respect to the sound systems used in connection with the projection system,
the systems supplier Sonics, a subsidiary, has been evaluating each of the
subsystems of the sound system. Sonics has advised the Company that the current
standard sound system hardware would not be negatively impacted by Year 2000
risks. Sonics also evaluated the proprietary software elements incorporated
into sound system software and has advised the Company that they, too, would not
be negatively impacted by the change in the century. Sonics has advised the
Company that it has verified that the manufacturer of each "off-the-shelf"
utility software element, also incorporated into the sound system software, had
tested and certified its product as Year 2000 ready.
Sonics has completed testing of the automation subsystems incorporated in their
sound systems in all but four theaters which will be tested by the end of the
year. The testing to date indicates that the automation subsystems would not be
negatively impacted by the change in the century. If there is a failure in an
automation subsystem to be Year 2000 ready, this failure would impact on the
ability of a theater to present pre-show material but would not affect the
theater's ability to present a 15/70-format film.
Digital Projection International has evaluated its product line and concluded
that the product line would not be negatively impacted by the change in the
century.
The Internal Audit department and the Year 2000 Committee determined that the
Company's facilities that could be at risk include each of the Company's office
premises. The Company has contacted utility suppliers to determine their Year
2000 readiness. The Company is reviewing and assessing responses from its
utility suppliers. Such process is largely completed. With respect to third
party risks, the Company is continuing to review and assess the responses to the
key vendor questionnaires and following up with those key vendors who have not
yet responded. Based upon its efforts and assessment to date, the Company
believes that its information technology systems and non-information technology
systems will remain operational during the Year 2000 transition process and that
facilities will be largely unaffected subject to third party compliance.
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
IMPACT OF THE YEAR 2000 (Cont'd)
Cost
The cost of the Company's Year 2000 efforts are not expected to be material nor
have a material effect on the Company's financial position. The Company is not
separately tracking the internal cost for its Year 2000 review activities.
Contingency Plans
Based on the Company's current review of its Year 2000 readiness, the Company
does not anticipate the need for significant contingency planning for its
information technology systems or non-information technology systems. The
Company is, however, making plans to have additional customer service
representatives available to handle inquiries or concerns from the Company's
customers during the first few weeks of Year 2000. The Company is in the
process of identifying alternate vendors of components for the projection system
in the event that any key vendor fails to be Year 2000 ready. The Company's few
sole source vendors of components for the projection system have indicated to
the Company that they are Year 2000 ready. Sonics has pre-ordered sufficient
quantities of key sound system components to meet the Company's scheduled
deliverables in the first quarter of Year 2000. The Company is prioritizing its
key utility suppliers and assessing the need and extent of a contingency plan
for its facilities. The Company will continue to assess the need for additional
contingency plans.
No assurance can be given that the Company will not be materially adversely
affected by Year 2000 issues. Although the Company is not currently aware of any
material operational issues with preparing its information technology systems,
non-information technology systems and facilities for the Year 2000, the Company
may experience material unanticipated problems and costs caused by undetected
errors or defects. In addition, the failure of third parties to timely address
their Year 2000 issues could have a material adverse impact on the Company's
business, operations and financial condition. If, for example, third party
suppliers of utilities and other commercial products and services experience
interruptions in services as a result of Year 2000 issues, the Company's
operations could be adversely affected.
The impact of the Year 2000 issue on the Company has been disclosed consistently
with the above to those customers of the Company who have requested such
disclosure.
Item 3. Quantitative and Qualitative Factors about Market Risk
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A substantial portion of the Company's revenues are denominated in U.S. dollars
while a substantial portion of its costs and expenses are denominated in
Canadian dollars. A portion of the net U.S. dollar flows of the Company are
converted to Canadian dollars to fund Canadian dollar expenses, either through
the spot market or through forward contracts. In Japan, the Company has ongoing
operating expenses related to its operations. Net Japanese yen flows are
occasionally converted to U.S. dollars generally through forward contracts to
minimize currency exposure. The Company also has cash receipts under leases
denominated in French francs and Japanese Yen which are converted to U.S.
dollars generally through forward contracts to minimize currency exposure.
A substantial portion of the Company's cash equivalents earn interest at short-
term floating rates while all of its long-term debt incurs interest at long-term
fixed rates. The Company entered into an interest rate swap to hedge this
exposure.
Contract amounts, average contractual exchange rates, terms and fair values for
the Company's financial instruments are disclosed in Note 4 to the Condensed
Consolidated Financial Statements contained in Item 1.
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IMAX CORPORATION
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, Compagnie France Film Inc. filed a claim against the Company in
the Superior Court in the District of Montreal, in the Province of Quebec,
alleging breach of contract and bad faith in respect of an agreement which the
plaintiff claims it entered into with the Company for the establishment of an
IMAX theater in Quebec City, Quebec, Canada. Until December 1993, Predecessor
Imax was in negotiations with the plaintiff and another unrelated party for the
establishment of an IMAX theater in Quebec City. In December 1993, Predecessor
Imax executed a system lease agreement with the other party. During the
negotiations, both parties were aware of the other party's interest in also
establishing an IMAX theater in Quebec City. The plaintiffs claimed damages of
Canadian $4.6 million, representing the amount of profit they claim they were
denied due to their inability to proceed with an IMAX theater in Quebec City,
together with expenses incurred in respect of this project and pre-judgement
interest. The Company disputed this claim and filed a defense in response.
Compagnie France Film had also incorporated a shell company, 3101-8450 Quebec
Inc. ("3101"). 3101 was to, among other things, enter into a lease for the
proposed IMAX theater site. In November 1993, while negotiations between
Compagnie France Film and the Company were still ongoing, 3101 entered into a
lease for the site. 3101 defaulted on the lease and the landlord sued 3101 in
an unrelated action to which the Company was not a party. In February 1996,
3101 was found liable to pay the landlord damages in the amount of Canadian $2.5
million. Subsequent to that judgment 3101 intervened in the lawsuit between
Compagnie France Film and the Company in order to claim from the Company damages
in the amount of Canadian $2.5 million. The Company disputed these claims and
the suit went to trial in January 1998. In a decision rendered in April 1998,
the court dismissed the plaintiffs' claims with costs. In May 1998, the
plaintiffs and 3101 both filed appeals of the decision to the Court of Appeal.
The Company believes that the amount of the loss, if any, will not have a
material impact on the financial position or results of operations of the
Company, although no assurance can be given with respect to the ultimate outcome
of this litigation.
In addition to the litigation described above, the Company is currently involved
in other litigation which, in the opinion of the Company's management, will not
materially affect the Company's financial position or future operating results,
although no assurance can be given with respect to the ultimate outcome for any
such litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Amendment dated June 7, 1999, to the Restated Articles of
Incorporation of Imax Corporation.
3.2 New By-Law No 1. of Imax Corporation, enacted on June 7, 1999.
10.1 (Amended) Stock Option Plan of Imax Corporation, dated June 7, 1999.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 17, 1999 will file
an amendment on November 15, 1999 under Item 2 - Acquisition or
Distribution of Assets. The Company reported that on September 3, 1999, it
acquired all of the outstanding Ordinary Shares and Preference Shares of
Digital Projection International ("DPI"), a designer and manufacturer of
digital image delivery systems headquartered in Manchester, England with
an office in Atlanta, Georgia.
Page 17
IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: November 15, 1999 By: / S / John M. Davison
- ------------------------- ----------------------
John M. Davison
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
By: / S / Mark J. Thornley
----------------------------
Mark J. Thornley
Vice President, Finance
(Principal Accounting Officer)
Page 18