AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
ImagicTV Inc.
(Exact name of Registrant as specified in its charter)
Canada 7373 Not Applicable
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
One Brunswick Square Marjean Henderson
14th Floor c/o iMagicTV (US), Inc.
Saint John, NB E2L 3Y2, Canada 1200 17th Street, Suite 1000
(506) 631-3000 Denver, CO 80202
(Address, including zip code, and (303) 623-1224
telephone number, including area code, (Name, address, including zip code,
of registrant's principal executive and telephonenumber, including area
offices) code, of agent for service)
Copies to:
Kenneth R. Garth M. Girvan, Michael J. Philip J. Brown,
Blackman, Esq. Esq. Schiavone, Esq. Esq.
Fried, Frank, McCarthy Tetrault Shearman & Torys
Harris, Shriver & Toronto Dominion Sterling Suite 3000,
Jacobson Bank Tower, Suite 599 Lexington Maritime Life
One New York Plaza 4700 Avenue Tower
New York, NY 10004 Toronto, ON M5K New York, NY 10022 79 Wellington
(212) 859-8000 1E6, Canada (212) 848-4000 Street West
(416) 362-1812 Box 270, Toronto
Dominion Centre
Toronto, ON M5K
1N2, Canada
(416) 865-0040
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
-----------------------
Calculation of Registration Fee
-----------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Proposed Proposed
Title of Each Class of Amount to be Maximum Offering Maximum Aggregate Amount of
Securities to be Registered Registered Price Per Share Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------
Common shares, without par
value 5,462,500(1) $13.00(2) $71,012,500 $18,748
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes an aggregate of 712,500 common shares which the underwriters have
the option to purchase from the Registrant to cover over-allotments, if
any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Part I
Information Required to be Delivered to Offerees or Purchasers
Explanatory Note
This registration statement contains two forms of prospectus: (a) one
prospectus to be used in connection with an offering in the United States and
outside the United States and Canada and (b) one prospectus to be used in
connection with a concurrent offering in all of the provinces and territories
of Canada. The U.S. prospectus and the Canadian prospectus are identical in all
respects except for the front cover page, an additional table of contents and
the supplemental Canadian disclosure section. The front cover page, the table
of contents and the supplemental Canadian disclosure section of the Canadian
prospectus are included immediately before Part II of this registration
statement and are marked to show that they are alternate pages of the Canadian
prospectus.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated October 23, 2000
PROSPECTUS
4,750,000 Shares
Common Shares
-----------
This is ImagicTV Inc.'s initial public offering. ImagicTV is selling all of
the shares. The underwriters are offering the shares in the United States and
Canada. Subject to applicable law, the underwriters may offer the shares
outside the United States and Canada.
We expect the public offering price to be between $11.00 and $13.00 per
share. Currently, no public market exists for the shares. We have applied to
have the shares quoted on the Nasdaq National Market under the symbol "IMTV"
and listed on The Toronto Stock Exchange under the symbol "IMT".
Investing in the common shares involves risks that are described in the
"Risk Factors" section beginning on page 8 of this prospectus.
-----------
Per Share Total
--------- -----
Public offering price.................................. $ $
Underwriting commission................................ $ $
Proceeds, before expenses, to ImagicTV................. $ $
The underwriters may also purchase up to an additional 712,500 common
shares from ImagicTV at the public offering price within 30 days from the date
of this prospectus to cover over-allotments. ImagicTV will pay the underwriting
commission for each additional common share purchased.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
-----------
Merrill Lynch & Co.
Chase H&Q
CIBC World Markets
-----------
The date of this prospectus is , 2000.
[INSERT ARTWORK]
TABLE OF CONTENTS
Page
----
Summary.................................................................. 4
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Exchange Rate Information................................................ 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 32
Management............................................................... 51
Related Party Transactions............................................... 60
Principal Shareholders................................................... 63
Description of Share Capital............................................. 64
Shares Eligible for Future Sale.......................................... 65
Certain Canadian and United States Income Tax Considerations............. 67
Underwriting............................................................. 72
Legal Matters............................................................ 77
Experts.................................................................. 77
Enforceability of Certain Civil Liabilities.............................. 77
Where You Can Find Additional Information................................ 77
Index to Consolidated Financial Statements............................... F-1
In this prospectus, "ImagicTV," "we," "us," "our" and "our company" refer
to ImagicTV Inc., a corporation governed by the laws of Canada, and its
subsidiaries, unless the context otherwise requires.
All dollar amounts in this prospectus are expressed in U.S. dollars,
except where indicated to the contrary. References to "$" or "U.S.$" are to
U.S. dollars and references to "C$" are to Canadian dollars.
References to any fiscal year are references to the twelve-month period
ended on the last day of February of the referenced calendar year.
3
SUMMARY
This summary highlights certain information found in greater detail
elsewhere in this prospectus. In addition to this summary, we urge you to read
carefully the entire prospectus, especially the discussion of the risks of
investing in our common shares under "Risk Factors," before deciding whether to
purchase our common shares.
ImagicTV
We develop and license infrastructure software products and provide
related services that enable telephone companies and other service providers to
deliver multi-channel digital television and interactive media services to
their subscribers' televisions and personal computers over a broadband or high-
speed communications network. Service providers can implement our software over
a network using existing copper wire and digital subscriber line, or xDSL,
technology, including asymmetric DSL, or ADSL, currently the most commonly
deployed xDSL technology. Our software also operates over other broadband
access network technologies, including fiber to the home and broadband wireless
technologies. Our software is based on open, Internet-based standards for
software and networking and is designed to work in conjunction with industry
standard, third-party hardware and software, some of which our customers may
already have installed.
Our customers are established and emerging telephone companies, such as
incumbent local exchange carriers and competitive local exchange carriers, as
well as multiple dwelling unit service providers. We also market our software
products to other service providers, such as power and utility companies,
Internet service providers and other providers of high-speed communications
services. We currently generate revenues from nine customers in North America
and Europe. Of these customers, two telephone companies, using our primary
software product which we license under the name DTV Manager, have launched
commercial services to subscribers, and five telephone companies and two
multiple dwelling unit service providers have licensed DTV Manager for
commercial deployment. In addition, we have installed DTV Manager for limited
testing purposes on networks of five other service providers in North America
and Europe. We have not generated any revenues from these test installations.
The telecommunications, cable and satellite industries are undergoing
significant changes that are resulting in a convergence of the core service
offerings of voice, Internet and television. The barriers that once restricted
telephone and cable service providers to a specific geographic area or service
offering, such as telephone service or broadcast television, are disappearing.
Factors contributing to these changes include effects of the deregulation of
the global telecommunications and cable television industries, technological
advancements, the emergence of Internet Protocol and growth of the Internet and
enhanced media services.
We believe telephone companies and other service providers are seeking
solutions that will allow them to deliver multi-channel digital television
services bundled with their existing voice and Internet service offerings and
thus compete with cable and satellite television operators in the emerging
market for integrated voice, Internet and television services. By implementing
our DTV Manager software over existing broadband networks and by acquiring and
installing additional equipment as subscribers activate service, telephone
companies and other service providers can, in our judgment, cost-effectively
offer the following services to their subscribers through televisions and
personal computers:
. digital television with unlimited channel capacity; and
. interactive media services, such as:
. Internet-on-television, including e-mail and Web access;
. video-on-demand;
. self-service pay-per-view;
4
. an interactive program guide; and
. a customized television portal that provides access to various
available services, including television stations, websites,
digital music channels and e-commerce sites.
DTV Manager also enables service providers to manage subscriber accounts
through service provisioning and customized package offerings and allows,
subject to any regulatory restrictions, integrated billing for voice, Internet
and television services. Through pcVu, our other software product, service
providers can offer their subscribers the ability to watch televison on their
personal computers.
On an on-going basis, we will derive revenues from three primary sources.
First, we charge license fees to our customers who license our software
products. Second, our customers pay royalty fees on a per subscriber basis.
Third, we generate services fees from professional services and maintenance and
technical support services. In addition, although we have historically also
generated some revenue from sales of set-top boxes, we anticipate that this
will decline as customers purchase this equipment directly from vendors rather
than through us. In the fiscal year ended February 29, 2000, we generated 85%
of our revenues from initial license fees charged to three customers that
licensed our primary software product, DTV Manager, and from related service
fees charged to these customers.
We have a history of significant losses and, since our inception, have
never generated positive operating income. We incurred net losses of
approximately $110,000 from our inception on December 24, 1997 to February 28,
1998, $3.1 million in fiscal 1999, $5.6 million in fiscal 2000 and $5.0 million
for the six months ended August 31, 2000. We expect to continue incurring net
losses for the foreseeable future. As of August 31, 2000, we had an accumulated
deficit of approximately $13.8 million. Because our business model is unproven,
we may never be profitable.
After completion of this offering, our officers, directors and principal
shareholders will collectively own approxiamately 67.3% of our outstanding
common shares. Should they choose to vote together, they would have the ability
to control the election of our board of directors and other actions requiring
shareholder approval.
We were incorporated in December 1997. We began operations in January
1998 by acquiring technology from NBTel Inc., the incumbent local exchange
carrier in the Province of New Brunswick, Canada, which then owned all of our
outstanding shares. Those shares are now beneficially owned by its parent
company, Aliant Inc., our largest current shareholder. We concurrently entered
into a funded research and development arrangement through which NBTel and a
subsidiary of Celtic House International Corporation, a private venture capital
company unrelated to NBTel, funded further enhancements to our software. We
delivered the initial version of DTV Manager to NBTel in December 1998 for
technical trials. In the fall of 1999, we delivered the current generation of
DTV Manager to NBTel and Kingston Vision, an affiliate of the incumbent local
exchange carrier in East Yorkshire, England, and shortly after delivery, each
of them commercially deployed multi-channel digital television services to
subscribers. In February 2000, we released our pcVu software product.
Our principal executive offices are located at One Brunswick Square, 14th
Floor, Saint John, New Brunswick E2L 3Y2, Canada. Our telephone number is (506)
631-3000 and our website is located at www.imagictv.com. We do not intend the
information contained in our website to be part of this prospectus, and you
should not rely upon such information for purposes of determining whether to
invest in our common shares.
We have obtained a trademark registration in Canada for the mark
"iMagic," and we have filed trademark applications in Canada, the European
Union and the United States with respect to several other marks, including our
"iMagicTV" and "DTV Manager" marks. Trademarks of other companies are also
referenced in this prospectus.
5
The Offering
Common shares offered by
ImagicTV............... 4,750,000 shares
Shares outstanding after 24,581,780 shares
the offering...........
Use of proceeds......... We estimate that our net proceeds from this offering,
without exercise of the underwriters' over-allotment
option, will be approximately $50.8 million based on
an assumed offering price of $12.00 per share. We intend
to use these net proceeds:
. to expand our sales and marketing activities;
. for research and development;
. for working capital; and
. for general corporate purposes, including the
funding of potential future acquisitions.
Risk factors............ See "Risk Factors" and other information included
in this prospectus for a discussion of factors you should
carefully consider before deciding to invest in our
common shares.
Proposed Nasdaq National "IMTV"
Market symbol..........
Proposed Toronto Stock "IMT"
Exchange symbol........
The number of common shares outstanding after the offering excludes
4,916,356 shares reserved for issuance under our stock option plans, subject to
necessary approvals, of which options to purchase 3,037,171 shares at a
weighted average exercise price of $1.68 per share have been issued as of
September 30, 2000. This number also assumes that the underwriters do not
exercise their over-allotment option. If the underwriters exercise their over-
allotment option in full, we will issue and sell an additional 712,500 common
shares.
Unless otherwise indicated, the information in this prospectus:
. gives effect to the reclassification of our share capital, to occur
before completion of this offering, consisting of:
. the conversion of all of our outstanding Class A, Class B and
Class C common shares into a single new class of common shares on
a one-for-one basis; and
. the creation of a new class of preferred shares;
. gives effect to an assumed 1.1636-for-1 stock split of the new common
shares, which will occur before completion of this offering; and
. assumes that the underwriters do not exercise their over-allotment
option.
6
Summary Consolidated Financial Data
The following table sets forth summary consolidated financial data of
ImagicTV as of the dates or for the periods indicated. You should read the
following summary consolidated financial data in conjunction with our
consolidated financial statements and the related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere in this prospectus.
The unaudited pro forma consolidated balance sheet data gives effect (1)
to the reclassification of our share capital, (2) to our sale to five of our
existing shareholders by private placement of warrants on September 19, 2000
for aggregate gross proceeds of $10.0 million and the automatic exercise of
these warrants on October 2, 2000 for 909,061 common shares for no additional
consideration, (3) to our sale to America Online, Inc. by private placement of
272,719 common shares on October 2, 2000 for aggregate gross proceeds of $3.0
million and (4) to our sale to Cisco Systems, Inc. by private placement of
1,090,875 common shares on October 6, 2000 for aggregate gross proceeds of
$12.0 million. The unaudited pro forma, as adjusted, consolidated balance sheet
data further gives effect to the transactions referred to in the preceding
sentence and our sale of the common shares in this offering at an assumed
public offering price of $12.00 per common share and the receipt by us of
approximately $50.8 million of net proceeds, after deducting underwriting
commissions and estimated offering expenses payable by us.
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles, or Canadian GAAP, and are
subject to Canadian auditing and auditor independence requirements. As applied
to our current financial statements, Canadian GAAP conforms in all material
respects with U.S. generally accepted accounting principles, or U.S. GAAP,
except as disclosed in note 10 to our consolidated financial statements,
included elsewhere in this prospectus.
Period from Year Ended Six Months Ended
December 24, 1997 ------------------------- ---------------------
(inception) to February 28, February 29, August 31, August 31,
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ---------- ----------
(in thousands of U.S. dollars, except per share amounts)
Consolidated Statement
of Operations Data:
Total revenues.......... $ -- $ 479 $ 2,098 $ 216 $ 3,569
Total cost of revenues.. -- 604 988 241 1,703
------ ------- ------- ------- -------
Gross profit (loss)..... -- (125) 1,110 (25) 1,866
Operating expenses:
Sales and marketing... 18 543 2,325 823 2,731
Research and
development.......... 66 2,014 4,084 1,606 3,169
General and
administrative....... 26 344 827 347 1,002
------ ------- ------- ------- -------
Total operating
expenses............... 110 2,901 7,236 2,776 6,902
------ ------- ------- ------- -------
Loss from operations.... (110) (3,026) (6,126) (2,801) (5,036)
Other income (expense),
net.................... -- (25) 524 470 116
Provision for income
taxes.................. -- (17) (44) (24) (30)
------ ------- ------- ------- -------
Net loss--in accordance
with Canadian and U.S.
GAAP................... $ (110) $(3,068) $(5,646) $(2,355) $(4,950)
====== ======= ======= ======= =======
Basic and diluted net
loss per share--in
accordance with
Canadian and U.S.
GAAP................... $(0.05) $ (0.57) $ (0.40) $ (0.19) $ (0.28)
====== ======= ======= ======= =======
Weighted average number
of shares used in
computing basic and
diluted net loss
per share (000s)....... 2,331 5,336 13,968 12,495 17,556
As of August 31, 2000
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands of U.S. dollars)
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 619 $25,619 $76,419
Working capital............................... (424) 24,576 75,376
Total assets.................................. 6,032 31,032 81,832
Long-term debt................................ 1,711 1,711 1,711
Total shareholders' equity.................... 754 25,754 76,554
7
RISK FACTORS
An investment in our common shares involves a high degree of risk and
should be considered speculative. You should carefully consider the risks and
uncertainties described below, as well as other information in this prospectus,
before buying shares in this offering. If any of the following risks occur, our
business, operating results and financial condition could be seriously harmed
and you could lose all or part of your investment. Further, if we fail to meet
the expectations of the public market in any given period, the market price of
our common shares could decline.
Risks Related to Our Financial Condition
We began operations in January 1998. This limited operating history and the
fact that our business is essentially dependent on one product, our DTV Manager
software, makes our business and prospects difficult to evaluate.
We have a limited operating history on which to base your evaluation of
our business and prospects. We began our operations in January 1998 and did not
release a product until December 1998. Our present operations consist of
licensing our DTV Manager software and pcVu software, which works in
conjunction with DTV Manager, to telephone companies and other service
providers, providing related services and further developing our software
products. As such, our business is essentially dependent on our success in
developing DTV Manager software and licensing it to service providers. There is
no significant historical basis to assess how we, as a company in an early
stage of development and whose business involves new and rapidly developing
technologies, will respond to competitive, economic and technological
challenges. If we fail to meet any of these challenges, our operating results
could suffer, and you could lose all or part of your investment.
We incurred net losses of $5.0 million for six months ended August 31, 2000, we
expect to continue to incur losses for the foreseeable future, and we may never
achieve or sustain profitability.
Since our inception, we have not had a profitable quarter. We incurred
net losses of approximately $110,000 for the period from our inception on
December 24, 1997 to February 28, 1998, $3.1 million for the fiscal year ended
February 28, 1999, $5.6 million for the fiscal year ended February 29, 2000 and
$5.0 million for the six months ended August 31, 2000. As of August 31, 2000,
we had an accumulated deficit of approximately $13.8 million. We expect to
incur significant operating expenses over the next several years. In
particular, we currently estimate that in the twelve months ending August 31,
2001 we will spend approximately $12.0 million on sales and marketing, 183%
more than what we spent in the prior twelve-month period, and approximately
$9.5 million on research and development, 68% more than what we spent in the
prior twelve-month period. As a result of these expenditures, we expect to
incur further losses for the foreseeable future, and we may never become
profitable.
To achieve profitability, we must generate and sustain substantially
increased revenues and control future expense levels. We forecast our future
expense levels based on our operating plans and on estimates of future
revenues. We may find it necessary to accelerate expenditures relating to our
sales and marketing efforts or otherwise increase our financial commitment to
the development of our products and services. If our revenues grow at a slower
rate than we anticipate, or if our spending levels exceed our expectations or
cannot be adjusted to reflect slower revenue growth, we may not achieve or
sustain profitability. If we fail to become profitable, the value of your
investment in our common shares could be significantly reduced.
Our sales cycle typically ranges from six to 12 months, which causes
significant fluctuations in our quarterly operating results that could cause
our share price to decline.
We believe that the purchase of our DTV Manager and pcVu software and our
related services involves a significant commitment of capital and other
resources by a telephone company or other service
8
provider. In many cases, the service provider's decision to offer services
based on our software products may require a service provider to change its
established business practices, to conduct its business in new ways and
potentially to make substantial upgrades to its infrastructure. As a result, we
must educate service providers on the use and benefits of our software
products, which can require us to commit significant time and resources without
necessarily resulting in revenues. In addition, service providers generally
must consider a wide range of other issues before committing to purchase our
software products. Many potential customers enter into test license agreements
with us in order to use our software products on a trial basis. The success of
these trials often determines whether or not the potential customer licenses
our software on a commercial basis. They may also need to obtain approval at a
number of management levels and one or more regulatory approvals, which may
delay a decision to purchase our software products.
As a result of the foregoing, our sales cycle, from an initial product
demonstration to a customer to the entering into of a commercial license with
the customer, typically ranges from six to 12 months and may be significantly
longer. This lengthy sales cycle limits our ability to forecast the timing and
amount of specific sales in a particular quarter and will likely continue to
cause significant fluctuations in our quarterly operating results. Because of
these fluctuations, we believe that neither our past performance nor period-to-
period comparisons of our operating results are, or will be, a good indication
of our future performance. If our operating results for a particular period
fail to meet analyst and investor expectations that are based on our past
performance or on period-to-period comparisons of our operating results, our
share price could decline.
If we cannot raise needed additional capital in the future, our business could
suffer.
We expect that our existing capital resources, combined with the net
proceeds of this offering and without considering future revenues from our
operations, will be sufficient to meet our cash requirements through at least
the next 24 months. However, as we continue to add new sales offices and expand
our direct sales efforts, and as we increase our marketing and research and
development activities, we may need to raise additional capital, which may not
be available on terms acceptable to us, if at all. If we cannot raise necessary
additional capital on acceptable terms, we may not be able to increase sales,
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements, any of which could cause our business to suffer.
Risks Related to Our Business and Industry
If service providers do not successfully deploy broadband technologies and
services, a market for our software products will not develop.
Our software products can only be implemented over a broadband network.
Telephone companies and other service providers have only recently begun
offering broadband services such as xDSL. If a significant number of service
providers decides not to enter the broadband services market, the market for
our software products will not grow in the way we anticipate. Sales of our
software products largely depend on the increased use and widespread adoption
of broadband services and the ability of service providers to market and sell
broadband services, such as high-speed Internet access and multi-channel
digital television services, to residential subscribers.
Even if service providers decide to deploy broadband services, this
deployment may not be successful. Service providers have delayed deployments in
the past and may delay deployments in the future. Factors that could cause a
service provider not to deploy, to delay deployment of or to fail to
successfully deploy the broadband services for which our software products are
designed include the following:
. industry consolidation;
. regulatory prohibitions, restrictions, uncertainties and delays;
9
. the quality of the service provider's network infrastructure and cost
of infrastructure upgrades and maintenance;
. the inexperience of the service provider in providing broadband
services and the lack of sufficient technical expertise and personnel
to install products and implement services effectively; and
. the inability of the service provider to predict return on its
investment in broadband-capable infrastructure and equipment.
Unless service providers successfully deploy the infrastructure required
to provide broadband services to their subscribers, who are the ultimate
consumers of services based upon our software products, their networks will not
be capable of supporting our software products. If that deployment does not
occur, a market for our software products will not develop, and we will not be
able to achieve our business objectives and increase our revenues.
If service providers fail to deploy services based upon our software throughout
their service areas, our business will not grow.
We generate revenues from initial license fees charged to our customers
based on the size of the geographic area under license, and from ongoing
royalty fees charged to customers on a per subscriber basis. As a result, our
growth and future success depend substantially on our ability to attract new
customers and to convince these customers to deploy services based upon our
software products to their subscribers throughout their service areas. We
believe that many service providers will be unwilling to commit to broad
deployment of services based on our products until they have completed trials
of our products as well as those of our competitors. Our ability to sell our
software products will depend principally on how successfully we can
demonstrate to service providers that:
. our software is reliable and capable of delivering service to a large
number of subscribers without degradation of quality;
. subscribers will purchase multi-channel digital television and
interactive media services based on our software at prices and in
quantities that will justify the service provider's investment in our
products and related services and in any necessary infrastructure
upgrades;
. our software will remain compatible with industry standards and
technology as they evolve; and
. our software will enable the service provider to sell new services to
existing and new subscribers.
We have licensed our software products to nine customers in North America
and Europe. Of these customers, two telephone companies have launched
commercial services to subscribers and five telephone companies and two
multiple dwelling unit service providers have licensed DTV Manager for
commercial deployment. In addition, we have installed DTV Manager for limited
testing purposes on networks of six other service providers in North America
and Europe. None of our customers is contractually obligated to deploy, market
or promote services based on our software, nor is any of our customers
contractually required to achieve any specific introduction schedule.
Accordingly, even if a service provider initiates a consumer trial of services
based on our products, the service provider is under no obligation to continue
its relationship with us or to launch a full-scale deployment of services based
on our products in the geographic area under license or more broadly through
its service territories. If service providers determine that services based on
our products are not viable as a business proposition or if they determine that
the services do not meet their business or operational strategies, they may
stop using our software products to provide those services. If we are unable to
sell our products and services to a substantial number of additional service
providers or if our existing and any new customers fail to broadly deploy
services based on our software products, our growth prospects and revenues will
suffer.
10
If our customers are unable to attract and retain subscribers, our revenues
will suffer.
Our customers' subscribers are the ultimate consumers of multi-channel
digital television and interactive media services based upon our software
products. We expect to derive a substantial portion of our future revenues from
royalties charged to our customers on a per subscriber basis. Accordingly, our
revenues will depend to a significant extent upon the number of subscribers to
whom our customers deliver multi-channel digital television and interactive
media services based upon our software products. The extent to which our
customers attract and retain subscribers will depend on, among other things,
their ability to effectively configure and package, competitively price and
effectively market their service offerings.
Also, many of our customers will face competition from companies that
offer multi-channel digital television and interactive media services through
alternative technologies that are incompatible with our software products.
These alternative technologies include coaxial cable, some fixed wireless and
satellite technologies. Cable operators, in particular, are currently deploying
products that are capable of delivering voice, Internet and television services
over cable.
We cannot assure you that our customers will succeed in attracting and
retaining a meaningful subscriber base that purchases services delivered
through our software products. If our customers are unable to attract and
retain a significant number of subscribers, our revenues will suffer, and we
may never become profitable.
Competitive products may reduce demand for our products and thus reduce the
value of your investment in our company.
We compete directly with Next Level Communications, Inc., mPhase
Technologies, Inc. and Myrio Corporation, which provide products and services
that are competitive with all or part of our products and related services. In
addition, Liberate Technologies, an indirect competitor, provides technology
and services relating to interactive television. Competition in the market for
software solutions for the delivery of multi-channel digital television or
interactive media services is significant and will likely persist and intensify
over time. We cannot predict that we will obtain or maintain the market share
or pricing levels that we need to become and remain profitable. By using the
same standards upon which our software products are based, a competitor with
sufficient resources could design and market a similar product that competes
directly with our software products. Some of our competitors may develop some
or all of the interactive media services that we intend to develop and may sell
these services to service providers for deployment separately or in conjunction
with our software products. This could have a significant effect on our ability
to expand the range of our product offerings over time.
Many of our existing and potential competitors have longer operating
histories, larger customer bases, greater brand name recognition and
significantly greater financial, technical, sales, marketing and other
resources than we have. If we are unable to continuously improve our software
products and if we cannot generate effective responses to our competitors'
products, pricing strategies, advertising campaigns, strategic partnerships and
other initiatives, sales of our products and our profit margins may suffer, and
we may never become profitable.
Three customers generated 85% of our revenues in fiscal 2000, and we expect to
continue to rely on a limited number of customers for a significant portion of
our revenues for the foreseeable future.
In our first two years of operation, we derived a significant portion of
our revenues from only three customers. Since our target customer base is
primarily telephone companies and other service providers, excluding cable and
satellite network operators, we expect to continue to derive a significant
portion of our revenues from a limited customer base. In fiscal 1999, NBTel, an
affiliate of our largest shareholder, accounted for 97% of our revenues. For
fiscal 2000, NBTel, Kingston Vision and SaskTel, the incumbent local
11
exchange carrier in the Province of Saskatchewan, each accounted for more than
10% of our revenues and together accounted for 85% of our revenues. For the six
months ended August 31, 2000, NBTel, Boardwalk Equities, an operator of several
multiple dwelling units in the provinces of Alberta, Saskatchewan and Ontario,
Integrated Homes, an operator of a broadband residential network in Florida,
and Eircom, an incumbent local exchange carrier in Ireland, each accounted for
more than 10% of our revenues and together accounted for 87% of our revenues.
In particular, for the six months ended August 31, 2000, NBTel accounted for
33% of our total revenues and 5% of our revenues excluding equipment sales, an
activity from which we do not anticipate substantial future revenues. For
further information on our sources of revenue, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview." If new
customers from our limited base of potential customers do not license our
software or if our existing and any new customers are not successful in selling
services based upon our software products to a significant number of
subscribers, we may never become profitable.
The failure of interactive television to gain broad market acceptance could
limit our potential growth and revenues.
Our DTV Manager software enables service providers to deliver interactive
media services in addition to multi-channel digital television services. Some
of our anticipated growth depends, among other things, on the broad acceptance
of interactive television by industry participants, including broadcast and
pay-television networks and manufacturers of televisions and set-top boxes, and
their ability to successfully market interactive television to viewers and
advertisers. Interactive television is a relatively new and emerging business,
and we cannot guarantee that it will attract widespread demand or acceptance in
any of our markets. There have been several well-financed, high-profile
attempts in the United States to develop and deploy systems in the broad
category of interactive television. None of these attempts has resulted in
large scale deployment, and many key industry participants have avoided
participating in interactive television. If interactive television fails to
gain market acceptance, subscriber growth may be adversely affected, and our
ability to generate revenues may be restricted.
If we fail to introduce new functionality in our products or if our new
products are unsuccessful, our growth prospects will be limited.
We generate revenues from one-time license fees, royalties payable by
service providers on a per subscriber basis and fees for maintenance and
professional services. In order to generate long-term revenue growth and become
profitable, we believe we must continue to add new functionality to our
products. In many instances, this new functionality may require use of new
technologies and/or new industry standards. To meet this challenge, we must
obtain key contributions from programmers, product planners, technical
architects and other internal staff. We must also obtain proper information
from the marketplace, including our customers and industry analysts. Our
failure to meet this challenge in any way could limit our growth prospects.
If we fail to develop and maintain relationships with industry participants,
our business could suffer.
We rely and expect to continue to rely upon non-exclusive relationships
with a number of major participants in the telecommunications, computer and
software industries to ensure the interoperability of our software with their
hardware and software, such as network and encoder equipment, set-top boxes and
database software systems, and to market and jointly promote the sale of our
products with their products. Generally, our arrangements and formal agreements
with these industry participants are short-term or terminable on short notice.
Further, other industry relationships remain informal. We typically do not
receive any monetary compensation, in the form of revenues, referral fees or
otherwise, under these arrangements, and we do not directly generate revenues
from these arrangements. If the nature of these relationships changed
significantly, or if these relationships failed to evolve in ways consistent
with our business plan, our software would still operate with their third-party
hardware and software, but our ability to market and sell our software products
could suffer.
12
If we fail to properly manage our growth, our business will suffer.
Our development activities and operations have expanded rapidly since our
operations began in January 1998. In the nine months ended August 31, 2000, the
number of our employees grew from approximately 90 to 160. We expect that
significant further expansion will be necessary to meet our growth objectives
and to take advantage of market opportunities. Our expansion to date has placed
substantial strain on our managerial, operational and financial resources and
systems. To manage our growth, we must successfully implement, constantly
improve and effectively utilize our operational and financial systems while
aggressively expanding our workforce. Our existing or planned operational and
financial systems may not be sufficient to support our potential growth, and
our management may not be able to effectively identify, manage and exploit
existing and emerging market opportunities. If our growth is not adequately
managed, our business will suffer.
If we fail to hire and retain needed personnel, the implementation of our
business plan could slow or our future growth could halt.
Competition for highly skilled technical, sales, marketing and support
personnel is intense because there are a limited number of people available
with the necessary technical skills, knowledge of the telecommunications
industry and understanding of the market. As our business grows, we plan to
hire additional technical support, sales and marketing personnel. In that
regard, as of September 15, 2000 we were actively seeking to fill approximately
30 positions. Any failure to attract, assimilate, train or retain qualified
personnel to fulfill our current or future needs could slow implementation of
our business plan or halt our future growth.
Our future success depends upon the continued services of our executive
officers who have critical industry experience and relationships that we rely
on to implement our business plan. Our executive officers are Marcel LeBrun,
President and Chief Executive Officer, Allan Cameron, Vice President of
Technology, Gerry Verner, Vice President of Marketing and Business Development,
Marjean Henderson, Vice President and Chief Financial Officer, and Doug
Harrington, Vice President of Sales and Customer Service. The loss of the
services of any of these individuals could delay the development and
introduction of, and negatively impact our ability to sell, our products.
Currency exchange rate fluctuations could adversely affect our financial
results.
Fluctuations in foreign exchange rates may affect our results of
operations, which in turn may adversely affect reported earnings and the
comparability of period-to-period results of operations. As our operations are
currently based in Canada, a significant portion of our expenses are in
Canadian dollars. However, substantially all of our revenues are currently
generated in U.S. dollars, and we expect that a majority of our revenues for
the foreseeable future will be generated in U.S. dollars. If the Canadian
dollar appreciates against the U.S. dollar, our results of operations could be
materially adversely affected. Also, changes in foreign exchange rates may
affect the relative prices at which we and foreign competitors sell products in
the same market.
Risks Related to Our Technology
If our software cannot support and manage a substantial number of users, demand
for our products and services will decline significantly.
Our software relies on the large-scale use of Internet Protocol and, more
specifically, Internet Protocol multicast technology. Our customers' commercial
deployments to date have shown that our software can support the concurrent
delivery of multi-channel digital television and interactive media services to
approximately 1,000 subscribers. While we believe that our software, through
the use of Internet Protocol multicast technology, can support delivery of
multi-channel digital television and interactive media services to a
significantly larger number of customers without significant redesign or
expense, there is currently no large scale customer deployment of our software
products to support our belief. If our software's reliance on Internet
13
Protocol multicast technology significantly limits the ability of our customers
to serve their desired subscriber base, demand for our products and services
will decline, our ability to generate revenues will suffer, and we may incur
significant costs.
If suppliers do not continue to manufacture and make available products that
support our software, we may be unable to meet the demands of service
providers.
Although we have designed our software so that it can be adapted to work
on a number of different hardware and software platforms, we must modify our
software each time we adapt it to a new platform. At this time, our software
operates only on the following server, database and set-top box platforms:
. a Sun Microsystems server platform;
. an Oracle database platform; and
. a Pace set-top box platform.
If the availability of these products becomes limited, or if the cost of
these products increases, we may be unable to meet, in a timely and cost-
effective manner, demand for software that runs on alternative servers,
databases and set-top boxes. Our current agreements with Sun Microsystems and
Oracle expire in November 2000 and June 2001, respectively, and are currently
being renegotiated. Moreover, although we believe that we can adapt our
software to operate on other server, database and set-top box platforms, we
would incur additional costs to do so, and we cannot assure you that our
products would operate successfully in actual deployment on any of these other
platforms. If we fail to satisfy our customers' demands, they may cease doing
business with us, and our revenues would suffer.
Rapid technological advances or the adoption of new standards could impair our
ability to deliver our products to service providers in a timely manner, and as
a result, our revenues would suffer.
Our success depends in large part on our ability to keep our software
current and compatible with evolving technologies and standards. Unexpected
changes in technology or standards could disrupt the development of our
software products and prevent us from meeting deadlines for the delivery of our
software products. If we are unable to keep pace with technological
advancements and adapt our software to new standards in a timely manner, we may
lose customers, and our revenues would suffer.
The occurrence of any defects, errors or failures in our software could result
in delays in installation and loss of customers.
Our software is complex and may contain undetected defects, errors or
failures. These problems have occurred in our software in the past. Additional
problems may occur in our software in the future, which could result in the
loss of, or delay in, market acceptance of our software products. In addition,
we have limited experience with commercial deployment, and we expect additional
defects, errors and failures as our business expands from trials to commercial
deployment with customers. These problems could result in a loss of sales and
additional costs and liabilities to us, including loss of our customers.
If our technology were responsible for the failure of service providers to
deliver services to subscribers, our reputation and viability could be
seriously damaged.
We expect that most service providers that purchase our software products
will deliver multi-channel digital television and interactive media services in
conjunction with voice and Internet services. If our software is responsible,
or appears to be responsible, for a failure to deliver voice, Internet or
television, a likely result would be severe customer service or public
relations problems that could seriously damage our reputation and viability.
14
Risks Related to Legal Uncertainties
Because much of our potential success and value lies in our ownership and use
of intellectual property, our failure to protect our intellectual property may
negatively affect us.
Our ability to compete effectively is dependent in large part upon the
maintenance and protection of our intellectual property. We currently do not
have patents or trademark registrations protecting our products and other
intellectual property other than a Canadian trademark registration for
"iMagic." To date, we have relied on trade secret and copyright law, as well as
confidentiality procedures and licensing arrangements, to establish and protect
our rights to our technology. We typically enter into confidentiality or
license agreements with our employees, consultants, customers, strategic
partners and vendors in an effort to control access to and distribution of our
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary technology without authorization. Policing unauthorized
use of our intellectual property is difficult. The steps we take may not
prevent misappropriation of our intellectual property, and the agreements we
enter into may not be enforceable. In addition, effective intellectual property
protection may be unavailable or limited in some jurisdictions outside Canada
and the United States. Litigation may be necessary in the future to enforce or
protect our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. That litigation could cause us to incur
substantial costs and divert resources away from our daily business, which in
turn could materially adversely affect our business.
We may be subject to damaging and disruptive intellectual property litigation.
The software development and the interactive television businesses are
very litigious. We may be subject to intellectual property litigation that
could:
. be time-consuming and expensive;
. divert attention and resources away from our daily business;
. impede or prevent delivery of our products and services; and
. require us to pay significant royalties, licensing fees and damages.
Although we are not aware that our products or services infringe any
published patents or registered trademarks, and although we have not been
served notice of any potential infringement, we may be subject to infringement
claims in the future. Because patent applications are kept confidential for a
period of time after filing, applications may have been filed that, if issued
as patents, could relate to our products or services.
Parties making claims of infringement may be able to obtain injunctive or
other equitable relief that could effectively block our ability to provide our
products and services in Canada, the United States and other jurisdictions and
could cause us to pay substantial damages. In the event of a successful claim
of infringement, we and our customers may need to obtain one or more licenses
from third parties, which may not be available at a reasonable cost, if at all.
The defense of any lawsuit could result in time-consuming and expensive
litigation, regardless of the merits of such claims, as well as resulting
damages, license fees, royalty payments and restrictions on our ability to
provide our products or services, any of which could harm our business.
Government regulation in various jurisdictions may restrict the willingness or
ability of service providers to purchase our software and deliver multi-channel
digital television to subscribers.
Service providers in jurisdictions where we currently do business and
where we intend to do business in the future operate in heavily regulated
industries. Although we, in providing our products and services, are not now
directly subject to significant regulation, our existing and potential
customers are subject to laws, regulations and policies, including licensing
and permit requirements, zoning restrictions, laws regulating the
15
provisioning of television services and foreign share ownership restrictions,
that could adversely affect their willingness or ability to:
. invest in technology necessary for our software to operate; or
. offer multi-channel digital television and interactive media services
to subscribers.
As a result, these laws, regulations and policies may impede sales of our
products and services. For a more thorough discussion of the regulatory issues
that may affect our business, see "Business--Regulation of Service Providers."
Risks Related to This Offering
Our principal shareholders will control approximately 67.3% of our common
shares after completion of this offering and will be able to exercise control
of our company and make decisions that are not in the best interests of all
shareholders.
Insider control of a large amount of our common shares could have an
adverse effect on the market price of our common shares. Although they are
under no obligation to do so, if our officers, directors and principal
shareholders were to vote together, they would have the ability to control the
election of our board of directors and the outcome of corporate actions
requiring shareholder approval, including mergers, change of corporate control
transactions, going private transactions and other extraordinary transactions.
Additionally, Aliant Inc., the parent of NBTel, and Compagnie Financiere
Alcatel, or Alcatel, will beneficially own or control approximately 29.3% and
16.2%, respectively, of our common shares upon completion of this offering.
This concentration of ownership may have the effect of delaying or preventing a
change of control of our company, even if this change of control would benefit
our shareholders generally.
The sale or availability for sale after completion of this offering of the
19,831,780 common shares outstanding prior to completion of this offering could
adversely affect the market price of our common shares.
Upon completion of this offering, 18,468,186 of the 19,831,780 common
shares outstanding prior to completion of this offering may be sold without
registration under the U.S. Securities Act of 1933 immediately or shortly after
the completion of this offering but subject to the restrictions discussed in
the next paragraph. In addition, 1,363,594 of the common shares outstanding
prior to completion of this offering will be available for resale without
registration under the U.S. Securities Act of 1933, commencing on October 2,
2001 with respect to 272,719 shares purchased by America Online and commencing
on October 6, 2001 with respect to 1,090,875 shares purchased by Cisco Systems,
in each case purchased as part of our October 2000 private placements. Sales or
the availability for sale of these 19,831,780 common shares could adversely
affect the market price of our common shares and could materially impair our
future ability to raise capital through offerings of our common shares.
In connection with this offering, we, our executive officers and
directors and all of our existing shareholders have agreed not to offer or
transfer any of our common shares for 180 days after the date of this
prospectus, or until , 2001, without the consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated; however, Merrill Lynch, in its sole discretion,
may waive this restriction with respect to one or more shareholders at any time
or from time to time without notice. In addition, after this offering we also
intend to register common shares subject to outstanding options or reserved for
issuance under our existing and proposed stock plans. We cannot predict what
effect, if any, market sales of common shares held by any of our executive
officers, directors or existing shareholders or issued under our stock plans,
or the availability of any of these shares for future sale, will have on the
market price of our common shares. For a more detailed description of the
restrictions on selling our common shares after this offering, see "Shares
Eligible for Future Sale."
16
Investors in this offering will experience immediate and substantial dilution.
The initial public offering price per common share will significantly
exceed our pro forma consolidated net tangible book value per share, as
adjusted to give effect to the offering. As a result, assuming an initial
public offering price of $12.00 per common share, you will experience immediate
dilution of $8.92 in pro forma consolidated net tangible book value per common
share, if the underwriters do not exercise their over-allotment option, or
$8.69 per common share if the underwriters exercise their over-allotment option
in full. This dilution results because earlier investors purchased their shares
at a substantially lower price than the initial public offering price.
Additional dilution of your shares will result when outstanding options are
exercised. See "Dilution" for a more complete description of how the value of
your investment in our common shares will be diluted upon the completion of
this offering.
If we are treated as a passive foreign investment company for U.S. federal
income tax purposes, our U.S. shareholders may be subject to an unfavorable tax
regime.
It is possible that we will be treated as a passive foreign investment
company for U.S. federal income tax purposes for the current taxable year or
for future taxable years. If we are classified as such, a special tax regime
would apply to "excess distributions" with respect to shares held by a U.S.
shareholder and to any gain realized on the sale or other disposition by a U.S.
shareholder of shares held for more than one taxable year, unless the U.S.
shareholder timely makes an election available under applicable law. For a more
thorough discussion of the passive foreign investment company rules, see
"Certain Canadian and United States Income Tax Considerations--United States
Federal Income Tax Considerations--Passive Foreign Investment Company
Considerations."
Investors in our common shares may be unable to enforce civil liabilities under
U.S. securities laws against us or others.
It may be difficult for investors in our common shares to enforce civil
liabilities against us or others under applicable U.S. federal and state
securities laws because:
. we are incorporated under the federal laws of Canada;
. most of our officers and directors are residents of Canada;
. the experts named in this prospectus are residents of Canada; and
. a substantial portion of our assets and the assets of the persons
identified above may be located outside the United States.
These factors may make it difficult or impossible for investors to effect
service of process within the United States on us or on the persons identified
above. Likewise, it may be difficult for investors to realize judgments of U.S.
courts against us or against the persons identified above when those judgments
are based on civil liabilities under applicable U.S. federal and state
securities laws. In addition, you should not assume that courts in Canada or in
other jurisdictions where the persons identified above may reside or where our
assets or their assets are located would:
. enforce judgments of U.S. courts obtained in actions against us or
against the persons identified above based on the civil liability
provisions of applicable U.S. federal and state securities laws; or
. enforce, in original actions, liabilities against us or against the
persons identified above based on applicable U.S. federal and state
securities laws.
---------------
17
This prospectus contains estimates of market growth relevant to our
business. We obtained these estimates from studies published by International
Data Corporation and Cahners In-Stat Group, which are market research firms
whose estimates are widely referenced by industry participants and analysts.
These reports are not publicly available and may be obtained directly from
International Data Corporation or Cahners In-Stat Group. Although we believe
that these firms are reliable sources of market growth estimates, you should
recognize that their estimates are based on forecasting techniques whose
application to developing markets such as ours has inherent limitations and
further that these estimates assume that certain events, trends and activities
will occur. If either of these entities is wrong about any of its assumptions,
then its market growth estimates may also be wrong. Neither of these firms
guarantees the accuracy of its estimates, nor have we independently verified
the assumptions and information on which their estimates are based.
---------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell our common shares in any
jurisdictions where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under the captions "Summary," "Risk
Factors," "Use of Proceeds," "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this
prospectus constitute forward-looking statements. When used in this document,
the words "may," "would," "could," "will," "intend," "plan," "anticipate,"
"believe," "estimate," "expect" and similar expressions, as they relate to us
or our management, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events, are based
on information currently available to us and are subject to certain risks,
uncertainties and assumptions, including those discussed above. Many factors
could cause our actual results, performance or achievements to differ
materially from any future results, performance or achievements that may be
expressed or implied by such forward-looking statements. Should one or more of
these risks or uncertainties materialize, or should assumptions underlying the
forward-looking statements prove incorrect, actual results may vary materially
from those described herein as intended, planned, anticipated, believed,
estimated or expected. These factors should be considered carefully, and
prospective investors should not place undue reliance on the forward-looking
statements.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of our common shares,
after deducting underwriting commissions and estimated offering expenses
payable by us, will be approximately $50.8 million, assuming a public offering
price of $12.00 per common share, the midpoint of the range set forth on the
cover of this prospectus. If the underwriters exercise their over-allotment
option in full, we estimate that we will receive net proceeds of approximately
$58.8 million.
We currently intend to use the proceeds from this offering as follows:
. approximately $22.0 million to expand our sales and marketing
activities;
. approximately $15.0 million for research and development; and
. the remainder for working capital and general corporate purposes,
including the funding of potential future acquisitions.
Pending these uses, we will invest the proceeds of this offering in
short-term, interest-bearing, investment-grade securities, certificates of
deposit or direct or guaranteed obligations of Canada or the United States.
Currently, we have no specific understandings, commitments or agreements with
respect to any acquisition.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common shares.
At present, we expect to retain future earnings, if any, for use in the
operation and expansion of our business. We do not anticipate that we will pay
cash dividends in the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend
upon results of operations, capital requirements and such other factors as our
board of directors considers relevant.
19
CAPITALIZATION
The following table shows our capitalization as of August 31, 2000:
. on an actual basis;
. on a pro forma basis to reflect the issuance of warrants to purchase
common shares on September 19, 2000 to five of our existing
shareholders for aggregate gross proceeds of $10.0 million and the
automatic exercise of those warrants on October 2, 2000 for 909,061
common shares for no additional consideration, the issuance of
272,719 common shares on October 2, 2000 to America Online for
aggregate gross proceeds of $3.0 million and the issuance of
1,090,875 common shares on October 6, 2000 to Cisco Systems for
aggregate gross proceeds of $12.0 million; and
. on a pro forma, as adjusted, basis to reflect our sale in this
offering of 4,750,000 common shares at an assumed public offering
price of $12.00 per common share, and the application of the
estimated net proceeds from this offering, after deducting
underwriting commissions and estimated offering expenses payable by
us.
You should read this information in conjunction with our consolidated
financial statements and the related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere in this prospectus.
August 31, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands of U.S.
dollars)
Long-term debt, including current portion..... $ 1,737 $ 1,737 $ 1,737
Shareholders' equity:
Common shares, no par value; unlimited shares
authorized; 17,559,125 shares issued and
outstanding, actual; 19,831,780 shares issued
and outstanding, pro forma; 24,581,780 shares
issued and outstanding, pro forma as
adjusted..................................... 17,632 42,632 93,432
Preferred shares, issuable in series, no par
value; unlimited shares authorized; no shares
issued and outstanding, actual; no shares
issued and outstanding, pro forma; no shares
issued and outstanding, pro forma as
adjusted..................................... -- -- --
Reporting currency translation adjustments.... (62) (62) (62)
Deferred stock-based compensation............. (3,042) (3,042) (3,042)
Accumulated deficit........................... (13,774) (13,774) (13,774)
------- ------- -------
Total shareholders' equity................. 754 25,754 76,554
------- ------- -------
Total capitalization................. $ 2,491 $27,491 $78,291
======= ======= =======
The table above does not include:
. 4,916,356 common shares reserved for issuance subject to necessary
approvals pursuant to options granted under our stock option plans, of
which options to purchase 3,037,171 common shares at a weighted
average exercise price of $1.68 per share have been issued as of
September 30, 2000; and
. up to 712,500 common shares that we may sell to the underwriters to
cover any over-allotments.
20
DILUTION
Our pro forma consolidated net tangible book value as of August 31, 2000
was approximately $24.9 million, or approximately $1.25 per share on a pro
forma basis, giving effect to the issuance on September 19, 2000 of warrants to
purchase common shares, the automatic exercise of those warrants on October 2,
2000 for 909,061 common shares for no additional consideration, the issuance of
272,719 common shares on October 2, 2000 for aggregate gross proceeds of $3.0
million and the issuance of 1,090,875 common shares on October 6, 2000 for
aggregate gross proceeds of $12.0 million, the reclassification of our share
capital and an assumed 1.1636-for-1 share split. Pro forma consolidated net
tangible book value per share represents the amount of our total pro forma
consolidated tangible assets reduced by the amount of our total consolidated
liabilities and divided by the total pro forma number of common shares
outstanding as of the date the book value is determined. Assuming the sale of
4,750,000 common shares at an initial public offering price of $12.00 per
share, and after deducting underwriting commissions and estimated offering
expenses, our pro forma consolidated net tangible book value as of August 31,
2000, as adjusted for this offering, would have been $75.7 million, or $3.08
per share. This amount is equal to 25.7% of our assumed initial public offering
price of $12.00 per share. It also represents an immediate increase in pro
forma consolidated net tangible book value of $1.83 per share to our existing
shareholders and an immediate dilution of $8.92 per share if the underwriters
do not exercise their over-allotment option, or $8.69 if the underwriters
exercise their over-allotment option in full, to new investors in this
offering.
Dilution per share represents the amount by which the initial public
offering price per common share to be paid by new investors will exceed the pro
forma consolidated net tangible book value per common share immediately after
this offering. The following table illustrates the per share dilution, assuming
the underwriters do not exercise their over-allotment option:
Assumed initial public offering price per common share(1)......... $12.00
Pro forma consolidated net tangible book value per common share
as of August 31, 2000........................................... $1.25
Increase per share attributable to new investors in this
offering........................................................ 1.83
-----
Pro forma consolidated net tangible book value per common share as
adjusted for
this offering.................................................... 3.08
------
Pro forma consolidated net tangible book value dilution per common
share
to new investors in this offering(2)............................. $ 8.92
======
- --------
(1) Price per common share to U.S. investors. Price per common share to
Canadian investors is C$ , which will be the approximate equivalent of
the offering price to the public in the United States based on the
prevailing Canadian-U.S. dollar exchange rate at the time the offering
price is determined.
(2) Based on the prevailing Canadian-U.S. dollar exchange rate at the time the
offering price is determined, the pro forma consolidated net tangible book
value dilution per common share to new investors is C$ .
The following table summarizes, as of October 6, 2000, the differences
between existing common shareholders immediately prior to this offering and new
investors purchasing common shares in connection with this offering, with
respect to the number of our common shares purchased, the total consideration
paid and the average price per share paid. The table assumes no exercise of the
underwriters' over-allotment option.
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
Existing shareholders...... 19,831,780 80.7% $39,602,000 41.0% $ 2.00
New public investors....... 4,750,000 19.3 57,000,000 59.0 12.00
---------- ----- ----------- ----- ------
Total.................... 24,581,780 100.0% $96,602,000 100.0% $ 3.93
========== ===== =========== ===== ======
21
The foregoing discussion and tables exclude options to purchase 3,037,171
of our common shares that will remain outstanding upon the completion of this
offering. Based upon an assumed initial public offering price of $12.00, all
options outstanding upon the completion of this offering will have exercise
prices below the initial public offering price. The exercise of outstanding
options having an exercise price less than the initial public offering price
would increase the dilutive effect to new investors.
EXCHANGE RATE INFORMATION
The following table sets forth, for each period presented, information
concerning the exchange rates between Canadian dollars and U.S. dollars based
on the inverse of the noon buying rate in The City of New York for cable
transfers as certified for customs purposes by the Federal Reserve Bank of New
York. The table illustrates how many U.S. dollars it would take to buy one
Canadian dollar. On August 31, 2000, the noon buying rate was U.S.$.6793 per
C$1.00, and on October 19, 2000, the noon buying rate was U.S.$0.6617 per
C$1.00.
U.S.$ per C$1.00
-------------------------------
Period
Average(1) Low High End
---------- ------ ------ ------
Fiscal Year Ended
February 29, 1996.............................. $.7330 $.7035 $.7527 $.7284
February 28, 1997.............................. .7344 .7260 .7513 .7315
February 28, 1998.............................. .7127 .6832 .7335 .7024
February 28, 1999.............................. .6662 .6341 .7105 .6627
February 29, 2000.............................. .6789 .6542 .6969 .6894
Interim Period
March 1--August 31, 2000....................... $.6762 $.6629 $.6911 $.6793
- --------
(1) Average represents the average of the rates on the last business day of
each month during the period.
22
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus.
The consolidated statement of operations data for the period from our
inception on December 24, 1997 to February 28, 1998 and for the fiscal years
ended February 28, 1999 and February 29, 2000 and the consolidated balance
sheet data as of February 28, 1999 and February 29, 2000 are derived from, and
are qualified by reference to, our consolidated financial statements which have
been audited by KPMG LLP, Chartered Accountants, and are included elsewhere in
this prospectus. The consolidated financial statements are reported in U.S.
dollars and are prepared in accordance with Canadian GAAP. Differences between
Canadian GAAP and U.S. GAAP are described in note 10 to the consolidated
financial statements. The consolidated statement of operations data for the six
months ended August 31, 1999 and 2000 and the balance sheet data as of August
31, 2000 are derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. These unaudited financial statements
have been prepared on the same basis as our audited financial statements and
include, in the opinion of our management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of our
financial position and results of operations for those periods. The
consolidated balance sheet data as of February 28, 1998 is derived from audited
financial statements not included in this prospectus. The historical results
below are not necessarily indicative of the results to be expected for any
future period.
Period from Year Ended Six Months Ended
December 24, 1997 ------------------------- -----------------------
(inception) to February 28, February 29, August 31, August 31,
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ------------ ----------
(in thousands of U.S. dollars, except per share amounts)
Consolidated Statement
of Operations Data:
Revenues:
License fees.......... $ -- $ -- $ 1,384 $ -- $ 2,055
Royalty fees.......... -- -- -- -- 70
Services.............. -- 14 393 210 337
Equipment............. -- 465 321 6 1,107
------ ------- ------- ------- -------
Total revenues.......... -- 479 2,098 216 3,569
Cost of revenues:
Services.............. -- -- 657 237 673
Equipment............. -- 604 331 4 1,030
------ ------- ------- ------- -------
Total cost of revenues.. -- 604 988 241 1,703
------ ------- ------- ------- -------
Gross profit (loss)..... -- (125) 1,110 (25) 1,866
Operating expenses:
Sales and marketing... 18 543 2,325 823 2,731
Research and
development.......... 66 2,014 4,084 1,606 3,169
General and
administrative....... 26 344 827 347 1,002
------ ------- ------- ------- -------
Total operating
expenses............... 110 2,901 7,236 2,776 6,902
------ ------- ------- ------- -------
Loss from operations.... (110) (3,026) (6,126) (2,801) (5,036)
Other income (expense),
net.................... -- (25) 524 470 116
------ ------- ------- ------- -------
Loss before provision
for income taxes....... (110) (3,051) (5,602) (2,331) (4,920)
Provision for income
taxes.................. -- (17) (44) (24) (30)
------ ------- ------- ------- -------
Net loss--in accordance
with Canadian and U.S.
GAAP................... $ (110) $(3,068) $(5,646) $(2,355) $(4,950)
====== ======= ======= ======= =======
Basic and diluted net
loss per share--in
accordance with
Canadian and U.S.
GAAP................... $(0.05) $ (0.57) $ (0.40) $ (0.19) $ (0.28)
====== ======= ======= ======= =======
Weighted average number
of shares used in
computing basic and
diluted net loss per
share (000's).......... 2,331 5,336 13,968 12,495 17,556
As of February 28, As of As of
------------------------- February 29, August 31,
1998 1999 2000 2000
------------ ------------ ------------ ----------
(in thousands of U.S. dollars)
Consolidated Balance Sheet Data:
Cash and cash equivalents................. $ 245 $ 603 $ 6,396 $ 619
Working capital (deficit)................. (139) 1,852 6,154 (424)
Total assets.............................. 289 3,153 9,859 6,032
Long-term debt............................ -- -- 1,737 1,711
Total shareholders' equity (deficit)...... (109) 2,493 5,706 754
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes appearing elsewhere in
this prospectus.
Overview
We develop and license infrastructure software products and provide
related services that enable telephone companies and other service providers to
deliver multi-channel digital television and interactive media services to
their subscribers' televisions and personal computers over a broadband network.
Our customers include incumbent local exchange carriers, competitive local
exchange carriers and multiple dwelling unit service providers.
We were incorporated in December 1997 upon the initiative of NBTel. We
began operations in January 1998 by acquiring technology relating to digital
broadcasting from NBTel and entering into a research and development
arrangement funded by NBTel and a subsidiary of Celtic House International,
pursuant to which we further enhanced the acquired technology. We delivered the
initial version of DTV Manager to NBTel in December 1998 for technical trials.
As described under "Related Party Transactions" below, in January 1999 we
exercised an option to acquire the technology developed under our research and
development arrangement with NBTel and the subsidiary of Celtic House
International. In the fall of 1999, after further development, we delivered the
current generation of DTV Manager to NBTel and Kingston Vision, and shortly
thereafter each of them deployed multi-channel digital television services to
its subscribers.
Through August 31, 2000, we have earned revenues in Canada, the United
States, the United Kingdom and Ireland. In the past, we have focused our sales
and marketing efforts on these geographic areas. We anticipate significant
increases in our sales and marketing expenses as we seek to expand our
operations, particularly in the United States and other international markets.
The following discussion and analysis relate to our financial statements
which are stated in U.S. dollars and have been prepared in accordance with
Canadian GAAP. As applied to our current financial statements, these principles
conform in all material respects with U.S. GAAP, except as disclosed in note 10
to our consolidated financial statements, included elsewhere in this
prospectus.
Sources of Revenues and Revenue Recognition Policy
In the past, our license agreements provided for an initial license fee
and a one-time subscriber-based royalty fee. We currently have four customers
under this type of arrangement. In early 2000, we began structuring our license
agreements to include both an initial license fee, based on the number of
households located in the geographic area under the license, and an on-going
monthly subscriber-based royalty fee. We expect future license agreements to be
negotiated on this basis, and we expect that, in several years, more revenues
will be generated from royalty fees than from initial license fees.
Services revenues are comprised of professional services and annual
maintenance and technical support services related to the implementation and
integration of our software products. Annual maintenance and technical support
revenues are typically equal to a percentage of our customers' initial license
fees. Services revenue from professional services to licensees can be based on
a time-and-materials framework or a fixed contract for a complete project or
installation.
Equipment revenues are comprised of sales of digital set-top boxes,
manufactured by suppliers to our specifications and resold by us to our
customers at little or no mark-up above our cost. In the future, we expect our
customers to purchase set-top boxes directly from the suppliers. We anticipate
that, as our customers purchase set-top boxes directly from the suppliers, our
revenues from this activity will be substantially reduced.
24
In the six months ended August 31, 2000, our software licensing revenues,
royalty fee revenues, professional services revenues and equipment revenues
represented approximately 58%, 2%, 9% and 31%, respectively, of our total
revenues. In the same period, we earned approximately 57% of our total revenues
from sales in Canada and approximately 25% of our total revenues from sales in
the United States, and approximately 18% of our total revenues from sales in
Europe. In the six months ended August 31, 2000, NBTel, Boardwalk Equities,
Integrated Homes and Eircom accounted for approximately 33%, 23%, 16% and 15%,
respectively, of our total revenues. Excluding equipment sales, the comparable
percentages are NBTel 5%, Boardwalk Equities 31%, Integrated Homes 23% and
Eircom 22%. Based on unaudited internal financial statements, we did not
generate any revenues in September 2000 from sales of set-top boxes to NBTel.
In the fiscal year ended February 29, 2000, our software licensing
revenues, professional services revenues and equipment revenues represented
approximately 66%, 19% and 15%, respectively, of our total revenues. In the
same period, we earned approximately 65% of our total revenues in Canada and
approximately 35% in Europe. In this period, NBTel, Kingston Vision and SaskTel
accounted for 38%, 31% and 16%, respectively, of our total revenues. Excluding
equipment sales, the comparable percentages are NBTel 35%, Kingston Vision 36%
and SaskTel 15%.
We recognize software licensing revenues in accordance with all
applicable accounting regulations including the American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2 with respect to Certain
Transactions." Following the requirements of SOP 97-2, we recognize license
revenues when all of the following conditions are met:
. we have signed a license agreement with the customer;
. we have delivered the software product to the customer;
. the amount of the fees to be paid by the customer is fixed or
determinable; and
. we believe that collection of these fees is probable.
We generally negotiate formal license agreements with our customers. Each
of our license agreements includes provisions for us to receive both an up-
front license fee and royalties. Generally, service providers pay these royalty
fees either in the form of a one-time payment or as an on-going monthly fee.
On-going royalties are recognized monthly based on the number of subscribers at
month end. One-time royalties are recognized quarterly based on the number of
new subscribers at the end of each quarter.
We often negotiate license agreements that allow for the payment of the
initial license fee to be made in future installments over a period of less
than a year. Revenues recognized in advance of the installments being due are
recorded as unbilled revenues in the balance sheet.
Maintenance and technical support revenues are recognized ratably over
the applicable service period, which is usually one year. Revenues derived from
professional services are recognized upon performance of the related services.
Revenues derived from license agreements containing multiple
deliverables, such as product licenses, maintenance and technical support and
other services, are allocated among the various deliverables based on the fair
value of each deliverable.
In the six months ended August 31, 2000, we generated over 42% of our
revenues in U.S. dollars and incurred approximately 87% of our expenses in
Canadian dollars, with the balance in U.S. dollars and other currencies. We
expect that a majority of our revenues will be generated in U.S. dollars for
the foreseeable future and that most of our expenses, including labor costs as
well as capital and operating expenditures, will continue to be denominated in
Canadian dollars. If the Canadian dollar appreciates against the U.S. dollar,
our results of operations could be materially adversely affected.
25
Costs and Expenses
Cost of services revenues includes compensation, travel and other related
expenses for our maintenance and technical support services and professional
services departments, along with allocated facilities expenses.
To date, the cost of license fees revenue has been insignificant. Cost of
license fee revenues includes royalties paid to third-party software providers
whose products are embedded in our software products. Oracle Corporation and
Sun Microsystems are our principal suppliers of third-party software. We have
licensed certain database management and video server software products from
Oracle on a non-exclusive basis until June 2001. We pay variable royalties to
Oracle which increase as our customers increase their respective subscriber
bases. Sun has granted us a non-exclusive license to incorporate into and
distribute with DTV Manager certain of its Java-based system software until
November 2000. Pursuant to this license, we pay variable royalties to Sun on a
per subscriber basis, depending on the total number of our customers'
subscribers, and on a per network server basis, depending on the total number
of servers operating DTV Manager.
Cost of equipment revenues includes the cost of set-top boxes purchased
for resale.
Sales and marketing expenses consist primarily of personnel and related
costs for our direct sales force and marketing staff, costs associated with
marketing programs, including tradeshows, public relations and marketing
materials, and allocated facilities costs. We plan to increase the level of our
sales and marketing expenses substantially over the next year, as we increase
spending on advertising and marketing programs to establish sales and support
offices in new geographic markets and with a view to building our brand.
Research and development expenses consist primarily of salary and other
related costs for personnel, training, independent consultants and facilities
and technology expenses. We have utilized independent consultants to fill
various roles as a result of our rapid growth. As additional personnel are
hired, we expect the use of these consultants to diminish. Our hiring efforts
have focused on filling strategic technical roles and utilizing independent
consultants in less strategic positions. We believe that continued investment
in research and development is critical to attaining our strategic objectives.
As a result, we plan to increase the level of research and development
expenses, both to enhance the functionality of our existing software and to
continue to create interactive applications and services.
General and administrative expenses include compensation for corporate
personnel and other expenses, including professional fees, travel and
facilities, net of allocations to our customer service, research and
development and sales and marketing departments. Our general and administration
department includes a portion of our executive office, as well as finance,
human resources and corporate operations staff. We expect these expenses to
increase as we hire additional general and administrative employees worldwide
and assume the responsibilities of a public company.
Net Losses
We have incurred substantial operating losses since our inception. As of
August 31, 2000, we had an accumulated deficit of approximately $13.8 million.
We expect to incur additional losses for at least the next few years, and we
may never achieve profitability.
Results of Operations
Six Months Ended August 31, 2000 Compared with the Six Months Ended August 31,
1999
Revenues
Total revenues increased to $3.6 million for the six months ended August
31, 2000 from $216,000 for the six months ended August 31, 1999. NBTel,
Boardwalk Equities, Integrated Homes and Eircom accounted
26
for 33%, 23%, 16% and 15%, respectively, of our total revenues for the six
months ended August 31, 2000. Kingston Vision, Eircom and NBTel accounted for
54%, 21% and 10%, respectively, of our total revenues for the six months ended
August 31, 1999. Excluding equipment sales, the comparable percentages for the
six months ended August 31, 2000 are NBTel 5%, Boardwalk Equities 31%,
Integrated Homes 23% and Eircom 22% and the comparable percentages for the six
months ended August 31, 1999 are Kingston Vision 56%, Eircom 22% and NBTel 10%.
License and Royalty Fees. We had no license or royalty fee revenues for
the six months ended August 31, 1999. License and royalty fee revenues
recognized in the six months ended August 31, 2000 were $2.1 million. This
increase is due to the recognition of license fee revenues of $2.0 million from
four customers and royalty fee revenues of $70,000 from two additional
customers.
Services. Services revenues increased to $337,000 for the six months
ended August 31, 2000 from $210,000 for the six months ended August 31, 1999.
We earn these revenues from maintenance and technical support services that we
provide to our customers under the terms of their license agreements with us.
Equipment. Equipment revenues increased to $1.1 million for the six
months ended August 31, 2000 from $6,000 for the six months ended August 31,
1999. Of this increase, we generated $1.0 million from sales of set-top boxes
to NBTel under a set-top box supply agreement.
Cost of Revenues
Cost of revenues increased to $1.7 million for the six months ended
August 31, 2000 from $241,000 for the six months ended August 31, 1999. This
increase, excluding $1.0 million related to equipment costs, primarily reflects
an increase in personnel to 13 employees in our customer service department as
of August 31, 2000 from seven as of August 31, 1999 to support our increased
customer base.
Operating Expenses
Our total operating expenses increased to $6.9 million for the six months
ended August 31, 2000 from $2.8 million for the six months ended August 31,
1999.
Sales and Marketing. Sales and marketing expenses increased to $2.7
million for the six months ended August 31, 2000 from $823,000 for the six
months ended August 31, 1999. This increase is primarily due to the addition of
sales and marketing personnel, as well as increased travel and related
expenses. Our marketing department increased to 28 employees as of August 31,
2000 from 13 as of August 31, 1999. Our sales department increased to ten
employees as of August 31, 2000 from five as of August 31, 1999. These
increases in staffing levels were the result of our efforts to expand our
direct sales force coverage area and increase our marketing activities.
Research and Development. Research and development expenses increased to
$3.2 million for the six months ended August 31, 2000 from $1.6 million for the
six months ended August 31, 1999. This increase reflects an increase in
personnel in our research and development department to 89 employees as of
August 31, 2000 from 39 as of August 31, 1999 as we accelerated our efforts to
develop new products and services.
General and Administrative. General and administrative expenses increased
to $1.0 million for the six months ended August 31, 2000 from $347,000 for the
six months ended August 31, 1999. Our corporate staffing increased to 18
employees as of August 31, 2000 from 9 as of August 31, 1999 to support our
overall increase in corporate activities.
27
Other Income (Expense), Net
Other income (expense) decreased to income of $116,000 for the six months
ended August 31, 2000 from income of $470,000 for the six months ended August
31, 1999. Interest income made up $79,000 of other income (expense) for the six
months ended August 31, 2000 and $48,000 for the six months ended August 31,
1999. Other income (expense) for the six months ended August 31, 1999 also
included income of $431,000 for forgiveness of debt.
Fiscal Year Ended February 29, 2000 Compared with the Fiscal Year Ended
February 28, 1999
Revenues
Total revenues increased to $2.1 million for the fiscal year ended
February 29, 2000 from $479,000 for the fiscal year ended February 28, 1999.
NBTel, Kingston Vision and SaskTel accounted for 38%, 31% and 16%,
respectively, of our total revenues in the fiscal year ended February 29, 2000.
NBTel accounted for 97% of our total revenues in the fiscal year ended February
28, 1999.
License Fees. License fee revenues increased to $1.4 million for the
fiscal year ended February 29, 2000 from nil in the fiscal year ended February
28, 1999. This increase is due to the recognition of license fee revenues on
three of our customer license agreements.
Services. Services revenues increased to $393,000 for the fiscal year
ended February 29, 2000 from $14,000 for the fiscal year ended February 28,
1999. The increase is primarily due to the provision of maintenance and
technical support and training services to our customers under the terms of
their license agreements.
Equipment. Equipment revenues decreased to $321,000 for the fiscal year
ended February 29, 2000 from $465,000 for the fiscal year ended February 28,
1999. The equipment revenues during both periods resulted from our sales of
set-top boxes to NBTel for its roll out of multi-channel digital television
service in the Province of New Brunswick.
Cost of Revenues
Cost of revenues increased to $988,000 for the fiscal year ended February
29, 2000 from $604,000 for the fiscal year ended February 28, 1999. The
increase in the cost of services revenues in fiscal 2000 is attributable to the
hiring of nine employees in our customer services department to support our
licensed customers. The 45% decrease in cost of equipment revenues to $331,000
in fiscal 2000 from $604,000 in fiscal 1999 is due to the one-time charge of
$383,000 recorded in fiscal 1999 related to the write-off of a non-refundable
deposit pursuant to a contract to purchase digital set-top boxes.
Operating Expenses
Our total operating expenses increased to $7.2 million for the fiscal
year ended February 29, 2000 from $2.9 million for the fiscal year ended
February 28, 1999.
Sales and Marketing. Sales and marketing expenses increased to $2.3
million for the fiscal year ended February 29, 2000 from $543,000 for the
fiscal year ended February 28, 1999. This $1.8 million increase is primarily
due to the addition of sales and marketing personnel, as well as increased
travel and related expenses. Our sales and marketing department increased to 28
employees as of February 29, 2000 from nine as of February 28, 1999.
28
Research and Development. Research and development expenses increased to
$4.1 million for the fiscal year ended February 29, 2000 from $2.0 million for
the fiscal year ended February 28, 1999. This $2.1 million increase reflects an
increase in our research and development staff to 60 employees as of
February 29, 2000 from 24 as of February 28, 1999 as a result of increased
research and development activity surrounding our release of the current
version of DTV Manager.
General and Administrative. General and administrative expenses increased
to $827,000 for the fiscal year ended February 29, 2000 from $344,000 for the
fiscal year ended February 28, 1999. The increase largely resulted from an
increase in our corporate staffing to 12 employees as of February 29, 2000 from
four as of February 28, 1999.
Other Income (Expense), Net
Other income (expense) increased to income of $524,000 in the fiscal year
ended February 29, 2000 from an expense of $25,000 in the fiscal year ended
February 28, 1999. The increase is primarily due to the forgivable government
assistance obtained from the Province of New Brunswick, through Newbridge
Networks, in the amount of $434,000. Interest income of $121,000 for fiscal
2000 related to the short-term investments of surplus funds.
Fiscal Year Ended February 28, 1999 Compared with the Period from December 24,
1997 (Inception) to February 28, 1998
We were incorporated on December 24, 1997 and commenced operations on a
limited basis in January 1998.
Revenues
We recognized $14,000 of services revenues and $465,000 of equipment
revenues for the fiscal year ended February 28, 1999 from the provision of
professional services and digital set-top boxes. NBTel accounted for 97% of our
total revenues in the fiscal year ended February 28, 1999. We did not have any
revenues for the period ended February 28, 1998.
Cost of Revenues
Cost of equipment revenues was $604,000 for the fiscal year ended
February 28, 1999 and consisted of direct purchase costs and the write-off of a
non-refundable deposit pursuant to a contract to purchase digital set-top
boxes. We had no cost of revenues for the period ended February 28, 1998.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $543,000
for the fiscal year ended February 28, 1999 from $18,000 for the period ended
February 28, 1998, as we established our sales and marketing department.
Research and Development. Research and development expenses increased to
$2.0 million in the fiscal year ended February 28, 1999 from $66,000 for the
period ended February 28, 1998, as staff levels increased to 24 as of February
28, 1999 from three as of February 28, 1998. We also incurred significant costs
for contract consultants during the fiscal year ended February 28, 1999 in
connection with the initial release of our software.
General and Administrative. General and administrative expenses increased
to $344,000 for the fiscal year ended February 28, 1999 from $26,000 for the
period ended February 28, 1998, primarily due to an increase in our corporate
staff.
29
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statements
of operations data for each of the 10 quarters ended May 31, 1998 through
August 31, 2000. This information has been derived from our unaudited
consolidated financial statements that, in the opinion of our management, have
been prepared on a basis consistent with the audited consolidated financial
statements contained elsewhere in this prospectus and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for fair presentation of our financial position and
results of operations for those periods. These operating results are not
necessarily indicative of results for any future period. You should not rely on
them to predict our future performance.
Quarter Ended
---------------------------------------------------------------------------------------------
May 31, Aug. 31, Nov. 30, Feb. 28, May 31, Aug. 31, Nov. 30, Feb. 29, May 31, Aug. 31,
1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
------- -------- -------- -------- ------- -------- -------- -------- ------- --------
(in thousands of U.S. dollars, except per share amounts)
Consolidated Statement
of Operations Data
Revenues:
License fees........... $ -- $ -- $ -- $ -- $ -- $ -- $ 720 $ 664 $ 512 $ 1,543
Royalty fees........... -- -- -- -- -- -- -- -- 23 47
Services............... -- -- 3 11 110 100 82 101 137 200
Equipment.............. -- -- 67 398 -- 6 226 89 59 1,048
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Total revenues.......... -- -- 70 409 110 106 1,028 854 731 2,838
Cost of revenues:
Services............... -- -- -- -- 81 156 231 189 316 357
Equipment.............. -- -- 425 179 -- 4 225 102 58 972
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Total cost of revenues.. -- -- 425 179 81 160 456 291 374 1,329
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Gross profit (loss)..... -- -- (355) 230 29 (54) 572 563 357 1,509
Operating expenses:
Sales and marketing.... 85 134 118 206 318 505 677 825 1,235 1,496
Research and
development........... 245 480 721 568 690 916 1,269 1,209 1,531 1,638
General and
administrative........ 44 90 100 110 167 180 214 266 364 638
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Total operating
expenses............... 374 704 939 884 1,175 1,601 2,160 2,300 3,130 3,772
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Loss from operations.... (374) (704) (1,294) (654) (1,146) (1,655) (1,588) (1,737) (2,773) (2,263)
Other income (expense),
net.................... -- -- (21) (4) (2) 472 19 35 99 17
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Loss before provision
for income taxes....... (374) (704) (1,315) (658) (1,148) (1,183) (1,569) (1,702) (2,674) (2,246)
Provision for income
taxes.................. -- -- -- (17) (20) (4) (8) (12) (11) (19)
------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Net loss--in accordance
with Canadian and U.S.
GAAP................... $ (374) $ (704) $(1,315) $ (675) $(1,168) $(1,187) $(1,577) $(1,714) $(2,685) $(2,265)
====== ====== ======= ====== ======= ======= ======= ======= ======= =======
Basic and diluted net
loss per share--in
accordance with
Canadian and
U.S. GAAP.............. $(0.16) $(0.15) $ (0.26) $(0.07) $ (0.10) $ (0.09) $ (0.12) $ (0.10) $ (0.15) $ (0.13)
====== ====== ======= ====== ======= ======= ======= ======= ======= =======
Weighted average number
of shares used in
computing basic and
diluted net loss
per share (000s)....... 2,331 4,658 5,094 9,263 12,040 12,949 13,336 17,548 17,552 17,556
Liquidity and Capital Resources
From our inception, we have financed our operations primarily through the
issuance of common equity, long-term debt and revenues from our operations.
Through August 31, 2000, we had received aggregate proceeds of $14.5 million
from the issuance of common equity, and as of that date, we had cash and cash
30
equivalents of $619,000. As of August 31, 2000, we had an accumulated deficit
of approximately $13.8 million.
Our operating activities used cash in the amount of $3.6 million for the
six months ended August 31, 2000, $3.8 million in fiscal 2000 and $4.5 million
in fiscal 1999 and provided cash in the amount of $272,000 for the period from
December 24, 1997 to February 28, 1998. The cash utilized during these periods
was primarily to fund our research and development and sales and marketing
efforts. The cash generated for the period from December 24, 1997 to February
28, 1998 was primarily derived from advances from our shareholders for our
initial research and development efforts.
Our cash used in investing activities was $1.2 million for the six months
ended August 31, 2000, $992,000 for the fiscal year ended February 29, 2000,
$780,000 for the fiscal year ended February 28, 1999 and $31,000 for the period
from December 24, 1997 to February 28, 1998. Cash used in investing activities
reflects purchases of computer equipment, office furniture and equipment and
leasehold improvements. We anticipate that our expenditures will continue to
increase in the future.
Our cash used in financing activities was $877,000, consisting of
$886,000 used for deferred common share issuance costs, offset by $9,000 from
the issuance of common shares, for the six months ended August 31, 2000. Our
cash from financing activities was $10.6 million, consisting of $8.8 million
from the issuance of common shares and proceeds from long term debt of $1.8
million, for fiscal year ended February 29, 2000, $5.7 million from the
issuance of common shares for fiscal year ended February 28, 1999 and $2,000
from the issuance of common shares for the period from December 24, 1997 to
February 28, 1998. These cash flows reflect the net proceeds received from
issuance of our common equity.
On September 19, 2000, we completed a private placement of warrants to
purchase common shares to five of our existing shareholders resulting in gross
proceeds of $10.0 million. Each warrant was automatically exercised on October
2, 2000 for 909,061 common shares for no additional consideration to us. On
October 2, 2000, we completed a private placement of 272,719 common shares to
America Online for gross proceeds of $3.0 million. On October 6, 2000 we
completed a private placement of 1,090,875 common shares to Cisco Systems for
gross proceeds of $12.0 million. For more information about our private
placements, see "Business--Recent Financings" and "Related Party Transactions--
Financings, Loans and Inter-Company Arrangements."
With no increase in expenses, we expect that cash on hand of
approximately $25.6 million, consisting of cash on hand as of August 31, 2000
plus the proceeds of our September and October 2000 private placements of
warrants and common shares, but not including the proceeds of this offering and
without considering future revenues from our operations, will be sufficient to
satisfy our cash requirements for at least the next 12 months. However, we
expect our operating expenses to increase significantly, particularly in our
research and development and sales and marketing departments, as we seek to
enhance and brand our products. We have budgeted approximately $25 million for
these operating expenses for the next 12 months. In that period, we plan to
increase staffing levels for research and development by approximately
40 individuals and for sales and marketing by approximately 66 individuals. We
believe the net proceeds from the sale of common shares in this offering along
with cash on hand, including the proceeds from the September and October 2000
private placements but without considering future revenues from our operations,
will be sufficient to satisfy our cash requirements for the next 24 months. In
the longer-term, we may require additional equity financing or borrowing to
fund our business.
Impact of Foreign Exchange Rate Exposure
We expect that in the future a majority of our revenues will be earned in
U.S. dollars, and that most of our operating expenses and capital asset
purchases will continue to be in Canadian dollars. To date, the effects of
changes in foreign currency exchange rates on revenues and operating expenses
have not been material. We currently do not use financial instruments to hedge
these operating expenses. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an on-going basis.
31
BUSINESS
We develop and license infrastructure software products and provide
related services that enable telephone companies and other service providers to
deliver multi-channel digital television and interactive media services to
their subscribers' televisions and personal computers over a broadband or high-
speed communications network. Our software is based on open, Internet-based
standards for software and networking and is designed to work in conjunction
with industry standard, third-party hardware and software. Service providers
can implement our software in conjunction with industry standard third-party
hardware and software over existing copper phone lines using xDSL technology,
including ADSL and various broadband access technologies such as fiber to the
home and broadband wireless technologies.
Our customers include incumbent local exchange carriers, competitive
local exchange carriers which compete with incumbent local exchange carriers in
local telephone markets, and multiple dwelling unit service providers. We also
target other providers of broadband transmission services such as power and
utility companies and Internet service providers.
We believe telephone companies and other service providers are seeking
solutions that will allow them to deliver multi-channel digital television
services bundled with their existing voice and Internet service offerings and
thus to compete with cable and satellite television operators in the emerging
market for integrated voice, Internet and television services. By implementing
our primary software product, DTV Manager, over existing broadband networks and
by acquiring and installing additional equipment as subscribers activate
service, we believe that service providers can cost-effectively offer their
subscribers the following services through televisions and personal computers:
. digital television with unlimited channel capacity; and
. interactive media services, such as:
. Internet-on-television, including e-mail and Web access;
. video-on-demand;
. self-service pay-per-view;
. an interactive program guide; and
. a customizable television portal that provides access to various
available services, including television stations, websites,
digital music channels and e-commerce sites.
Our DTV Manager software also enables service providers to manage subscriber
accounts through service provisioning, customized package offerings and
integrated voice, Internet and television billing.
Industry Background
The telecommunications, cable and satellite industries are currently
undergoing significant changes that are resulting in a convergence of the core
service offerings of voice, Internet and television. The barriers that once
restricted telephone and cable service providers to a specific geographic area
or service offering are disappearing. A number of factors are contributing to
these changes, including:
. the effects of deregulation of the global telecommunications and
cable television industries;
. advancements in communications transmission, as well as video and
audio compression technologies;
. the emergence of Internet Protocol as the industry standard for
network protocol and application development; and
. growth of the Internet and other enhanced media services.
32
Effects of Industry Deregulation
Deregulation of the telephone and cable industries has created intense
competition and has opened these markets to many new service providers. In an
effort to attract and retain subscribers, telephone companies and other service
providers, as well as cable and satellite operators, are seeking new and
differentiated service offerings. For example, many cable companies have
upgraded their infrastructure and deployed cable modems on a wide scale to
offer high-speed Internet services to their cable television subscribers. Also,
many cable companies have stated their intention to offer access to voice
services through their cable networks. In order to compete effectively with
cable companies, we believe that telephone companies are seeking solutions that
provide fast and reliable Internet access and that enable the delivery of non-
traditional telephone company service offerings, such as multi-channel digital
television, in order to protect and enhance their revenues.
Broadband "Last Mile" Technologies
Generally speaking, telephone companies have upgraded or are in the
process of upgrading their networks to improve the transmission of data at
high-speeds throughout the network backbone; however, copper wire continues to
connect most residential subscribers to the network. Referred to as the "last
mile" or local loop, this copper wire infrastructure creates a bottleneck in
the delivery of high-speed data to residential subscribers.
Telephone companies face a number of options in upgrading the capacity of
the local loop. These range from implementing xDSL technologies to deploying
fiber optic cable closer to the subscriber. Because xDSL technology uses the
existing copper wire infrastructure, the initial fixed investment in an xDSL
network is generally lower than an investment in alternative technologies, such
as optical fiber or wireless technologies. Subsequent variable investments in
xDSL technologies are directly related to the actual and anticipated number of
subscribers. As a result, we believe telephone companies will initially seek to
capitalize on their investment in copper wire and may over time pursue fiber
optic cable upgrades.
xDSL technology emerged in the 1990s, and we believe it is gaining
increasing acceptance in the market. Recent advances in semiconductor
technology and digital signal processing algorithms and falling equipment
prices have made the wide spread deployment of xDSL technology more economical.
In its November 1999 report titled "Worldwide DSL Equipment Forecasts and
Market Review, 1998-2003," International Data Corporation estimated that there
were approximately 400,000 residential xDSL Internet connections worldwide in
1999 and projected that this number would grow to approximately 20 million in
2003, representing a compound annual growth rate of approximately 166%.
There are several varieties of xDSL, the most common of which is ADSL.
ADSL technology is most commonly used to provide high-speed Internet access,
which is typically offered at downstream transmission rates to the subscriber
of up to approximately 1.5 megabits per second. However, existing ADSL
equipment is currently capable of delivering data at speeds of at least six
megabits and up to eight megabits per second depending on the length and
condition of the copper line. As service providers continue to deploy high-
speed Internet access and other broadband services, such as multi-channel
digital television and interactive media services, we expect that service
providers will fully utilize ADSL's transmission capacity.
Current ADSL technology represents one variety of xDSL technology
available to improve data speeds for subscribers. Various manufacturers,
including Alcatel and ECI Telecom Ltd., an Israeli telecommunications company,
have announced very high data rate DSL, or VDSL, products with published
transmission rates of 13 to 52 megabits per second over shorter copper loops
than ADSL requires. Other technologies, such as fiber to the home, offer the
potential of even higher transmission rates.
33
Advancements in Compression Technologies
MPEG2, the international video compression standard, compresses a digital
data stream to allow for the transmission of video and audio data at rates of
3.5 megabits per second. Recent advances in compression technology allow for
the transmission of video and audio data at rates as low as 2.5 megabits per
second with little or no loss in perceived quality. This greater compression
more efficiently utilizes the capacity of broadband networks, such as xDSL-
enhanced copper wire and fiber optic cable, and would allow the service
provider to deliver broadband services to a greater number of devices in the
home.
Growth of Internet Protocol Networks
With the growth in the Internet and its related applications, Internet
Protocol has become the universally accepted fundamental protocol for the
packet-based delivery of data over networks. We believe that this standard is
widely deployed and that most network applications are developed using Internet
Protocol. We also expect that the Internet Protocol standard will remain the
dominant standard for network applications for the foreseeable future.
Growth of the Internet and Enhanced Media Services
Although Internet-related services will continue to be directed to the
personal computer, we believe that an increasing number of these services will
also be directed to the television, as televisions are more common than
personal computers among residences. According to a March 2000 report titled
"It's All Alphabet Soup to Me: The Consumer Devices Survey Report,"
International Data Corporation estimates that in 1999 over 99% of U.S.
households owned at least one television while only 52% of households owned a
personal computer. The television is widely accepted as a primary source for
entertainment and information in the home, and its display and sound
capabilities make it well suited as a platform for the delivery of interactive
media services such as interactive program guides, e-commerce and video-on-
demand. Accordingly, we believe it should increasingly gain acceptance as a
device for the delivery of interactive media services in the home. For example,
Cahners In-Stat Group, in its February 2000 report titled "Video Over DSL:
Beyond the Trial Phase?," projects that the number of residential customers
subscribing for video over xDSL services worldwide will grow to approximately
22 million by 2005.
Challenges Faced by Telephone Companies and Other Service Providers
Telephone companies and other service providers face significant
challenges in implementing a solution for the delivery of multi-channel digital
television and interactive media services. We believe service providers want a
solution that:
. uses existing network infrastructure to minimize up-front capital
investment by the service provider;
. delivers the service over a variety of hardware and network
architectures;
. provides the capability to deliver television and other services,
including voice and Internet, concurrently over the same line;
. integrates with existing billing and other administrative systems;
. provides subscribers with quality service; and
. allows for the delivery of interactive media services.
34
The ImagicTV Solution
Our software enables telephone companies and other service providers to
deploy multi-channel digital television and interactive media services over a
broadband network. It is standards-based and is designed to work in conjunction
with industry standard, third-party hardware and software and to integrate with
the service provider's existing network and systems. Our software takes
advantage of advancements in communications transmission technology, Internet
Protocol networking standards and video and audio compression technologies. To
implement our software, the service provider's network must comply with various
Internet-based standards for software and networking.
Third-party hardware and software are required to utilize our software
products. At this time, our software operates on a Sun Microsystems server
platform, an Oracle database platform and a Pace set-top box platform. Required
video encoder equipment is available from Pixstream Incorporated. We are
currently upgrading the set-top box components of DTV Manager to operate on a
Motorola set-top box platform. We anticipate further modification of our
software in the future so that it will operate on other server, database and
set-top box platforms. Furthermore, our software products are designed to
operate over standard network equipment deployed by our customers, which
consists of hardware products from a variety of vendors, including Alcatel,
Cisco Systems, Inc., ECI Telecom, Lucent Technologies Inc. and Nortel Networks
Corp.
Our software products are designed to support multiple televisions and
personal computers in the home. The number of televisions and personal
computers in a home that our software can support will depend upon the capacity
of the broadband network and the type of video compression employed by the
service provider. For example, using current ADSL technology at transmission
rates of six megabits per second and with data compression allowing video
transmission at a rate of 3.5 megabits per second, our software can support one
television and one personal computer over a single line to the home. By further
compressing data to allow video transmission at a rate of 2.5 megabits per
second, the service provider can simultaneously support service to two
televisions and a personal computer over the same line. With faster
technologies such as VDSL and fiber to the home, where and when available, the
service provider can use our software to support additional devices in the
home. In each case, a subscriber can also use the telephone and access high-
speed Internet services while using the television.
Products and Services
Our software products currently consist of DTV Manager and pcVu, which
are offered together with our professional services and maintenance and
technical support services.
DTV Manager
DTV Manager, our primary product, is a suite of software that integrates,
supports and manages the hardware and software components of the service
provider's network to enable the service provider to deliver multi-channel
digital television and interactive media services from its head office to its
subscribers' homes. DTV Manager software falls into three broad categories:
viewer component software, administration system software and operations system
software.
Viewer Component Software. The viewer component software supports set-top
boxes in a subscriber's home and allows the subscriber, through the use of a
standard television remote control, a wireless keyboard or other device, to
browse through a television portal or an interactive program guide, to make on-
screen selections of video-on-demand programming and television, pay-per-view
and Web channels, and to view information banners that appear at the top of the
television screen when new channels are selected. The interactive program guide
and the television portal are features of the viewer component software that a
service provider can customize to brand its service offering and incorporate
local content. The interactive program guide includes up to seven days of
information on channel content which a service provider may update on a regular
basis. The television portal also provides access to interactive channels
which, for example, may offer
35
online shopping, online banking, Web browsing, video-on-demand and other
services. The viewer component software is stored in memory on the set-top box.
Without any action required by the subscriber, a service provider can make
changes to the viewer component software by remotely distributing software
updates over the service provider's network to the subscriber's set-top box.
Administration System Software. The administration system software allows
service providers to maintain information about subscribers, including the
subscriber's profile, class of service, passwords and usage. It supports
workstations at a service provider's head office, where the service provider's
administrative personnel can use subscriber information to define and configure
subscriber accounts and programming packages. Administration system software
also allows a service provider's administrative personnel to manage individual
subscriber accounts, for example, by blocking particular television channels
pursuant to a subscriber's requests.
Operations System Software. The operations system software facilitates
the service provider's management of the content delivered to subscribers. The
operations system software consists of a variety of components resident on
servers at the service provider's head office and at the subscriber's premises
on a set-top box or PC. These components allow the service provider to track
and collect subscriber usage data, to deliver television programming
information to set-top boxes, to initialize and support the set-top boxes and
to run a business support system and a network management system. Through the
operations system, a service provider can also customize programming packages.
pcVu
pcVu works in conjunction with DTV Manager and allows a subscriber to
receive multi-channel digital television services on a personal computer. It
includes a software-based tuner resident on the personal computer and does not
require additional hardware in the personal computer. pcVu is designed to
deliver high quality digital broadcast television signals so that, to the
subscriber, there is no visible distinction between a broadcast delivered over
a television and a broadcast delivered over a personal computer. The software
is designed to allow a subscriber to watch television while simultaneously
using his or her Web browser and other standard software packages.
Services
Professional Services. We provide professional services that a service
provider may need in conjunction with the introduction of a DTV Manager service
offering. For example, we offer project management services, which assist the
service provider in defining its subscribers' needs and creating an
implementation plan. We also offer on-going program management services, which
include operational planning, marketing strategy and portal design and
customization. In addition, we assist service providers in identifying and
negotiating agreements with potential hardware, software and content providers.
Maintenance and Technical Support Services. We provide comprehensive
services that include training, installation, configuration, maintenance and
support services. We assist customers in the design of their networks, the
selection of hardware and software components and the integration of our
software with their existing systems. We also offer a training course for all
new customers prior to receiving and installing a system. In addition, we
provide direct on site or telephone support. To monitor service activities, we
maintain a customer call tracking system. We also maintain an Internet-based
management interface to our equipment to assist with diagnostics.
Our service and support organization consists of 13 full time employees.
Historically, support personnel have been resident at our head office and in
each region in which service providers have licensed DTV Manager. We plan to
continue this practice. We provide our services through our own personnel with
outside consultants providing certain specialized maintenance and technical
support services.
36
Benefits of our Software
Our products and related services provide numerous potential benefits to
service providers and enable service providers to deliver various benefits to
their subscribers.
Benefits to the Service Provider
Our software provides the following potential benefits to service
providers:
. Integrated Bundled Services to Subscribers. Service providers can
offer subscribers multi-channel digital television and interactive
media services, through the television and the personal computer, in
conjunction with voice and high-speed Internet services. This offers
a service provider the opportunity potentially to increase its
revenue stream from existing subscribers and to increase its
subscriber base.
. Uses Existing Infrastructure. Service providers can take advantage of
existing broadband networks, including xDSL, fiber optic and wireless
broadband access technologies, to implement DTV Manager. As a result,
we believe that service providers can quickly and cost-effectively
design and implement our software products. Subsequent investments in
technology are variable and directly related to the number of
subscribers the service provider activates or anticipates activating.
. Flexible Technology Architecture. Our software products are based on
open, Internet-based standards and are designed to work in
conjunction with industry standard, third-party hardware and
software. Our software can simultaneously support xDSL, fiber optic
and wireless broadband technologies on a single network so that a
service provider can continue to use our software throughout its
network upgrade process.
. Scalability. Our software products take advantage of Internet
Protocol multicast technology and are designed to enable a service
provider to simultaneously serve a large number of subscribers from a
single server without degradation of service and without any changes
to our software.
. Ability to Fully Manage Network Remotely. Using features of DTV
Manager, a service provider can remotely perform diagnostics and
reboot set-top boxes in subscribers' homes. DTV Manager keeps track
of a variety of information related to subscriber usage and maintains
error-log files so that the service provider can troubleshoot
problems from its premises.
. Ability to Deliver Integrated Television Portal. An important element
of DTV Manager is its ability to enable our customers to integrate a
Web-based portal page with the services they offer. A service
provider can customize its portal with local content and seek to
generate additional revenue by selling space to advertisers, such as
e-commerce companies and local subscriber area merchants.
. Customized Services and Pricing. Service providers can brand their
service offerings and customize them to particular subscribers or
groups of subscribers by offering a variety of program packages.
Service providers can also structure a variety of subscriber payment
packages based on subscription, pay-per-view and other pricing
models.
. Unlimited Channel Capacity and Enhanced Media Services. Our software
can support an unlimited number of channels and allows for the
delivery of video-on-demand, digital music, Internet content and
websites as separate channels in addition to broadcast television
channels.
. Integration with Existing Systems. DTV Manager is designed to
integrate with a service provider's existing accounting, marketing
and network management software systems. For example, DTV Manager's
integration with existing billing systems allows, subject to
regulatory restrictions, a service provider to deliver one bill to a
subscriber for voice, Internet and television services.
37
Benefits to the Subscriber
With our software, service providers can deliver the following benefits
to their subscribers:
. Multi-channel Digital Television. Subscribers can access multi-
channel digital television through standard televisions and personal
computers.
. Feature-Rich Interactive Program Guide. An interactive program guide
allows subscribers to view present and future programming information
and to make on-screen selections of television shows, pay-per-view
programs, websites and other content. Subscribers can also use the
interactive program guide to access a parental control feature that
enables them to select and block access to channels.
. Always on Internet-on-Television. Our software allows for "always on"
Internet access through the television. With browser software
resident in set-top boxes and "always on" Internet access,
subscribers can be one click away from the Internet at all times.
Subscribers can browse the Web and can send and receive e-mail using
the set-top's remote control or wireless keyboard.
. New Programming and Entertainment Options. The subscriber may access
a host of enhanced services, including video-on-demand, e-commerce,
digital music, Web channels and self-serve pay-per-view, without
requiring equipment changes or service calls.
. Convenient Service Offering Package. Subscribers can receive voice,
Internet and television services through one service provider and can
pay for these services on a single bill, if offered.
Strategy
Our goal is to be the leading developer and provider of software products
and related services that enable telephone companies and other service
providers to cost-effectively deliver and manage multi-channel digital
television and interactive media services. Our strategy includes the following
key objectives:
. Expand Our Sales and Marketing Efforts. We intend to establish market
leadership by continuing to focus on the successful and wide scale
deployment of our software with our current customers and by
expanding our customer base to include a broad range of service
providers, particularly those with large subscriber bases.
. Build Our Global Presence. Currently we have sales offices in Canada,
the United States and the United Kingdom. Initially, we plan to
expand our presence in North America and Western Europe, where we
intend to establish sales, service and product demonstration centers.
In other geographic areas, we intend to take advantage of
opportunities as they arise with a long-term goal of establishing a
worldwide presence.
. Develop and Expand Our Industry Relationships. We currently have
sales, marketing and development relationships with several vendors.
We believe that forging and expanding relationships with key vendors
is critical to a broad deployment of our products and services and
for the further development of our software products.
. Continue to Enhance Our Products and Develop New Applications. We
intend to continue investing in research and development, focusing
our spending on product enhancements and new applications that are
designed to enable service providers to reduce costs or generate
additional revenue. Further, it is our goal to continue to develop
software that is based on open systems.
. Adhere to Industry Standards. We believe that adherence to industry
standards and development principles strengthens our market position.
Accordingly, we support these standards and development principles
throughout our product line. This approach is designed to enable
service providers to integrate our software products with their
existing infrastructure on a cost-effective basis.
38
Technology
Implementation Architecture
Our software products work with network, head-end and set-top box
components and operate on network architecture that is based on Internet
Protocol and other standard protocols. Head-end equipment is located at the
service provider's premises and consists of digital video equipment and a
server suite. Digital video equipment gathers, processes and distributes video,
and typically includes satellite dishes and receiver units, encoders and
Internet Protocol gateways. The server suite stores and powers DTV Manager
software, standard Web server software and standard database software. Set-top
boxes run DTV Manager client software, provide support for the MPEG and
Internet Protocol multicast technology used in our software, and include a Web
browser for integrated Internet capability.
Three key technologies support our implementation architecture: MPEG,
Internet Protocol multicast and broadband transmission.
. MPEG is our main data standard and supports the delivery of high
quality video and audio over an Internet Protocol network;
. Internet Protocol multicast, our data transmission standard, supports
the efficient delivery of generic data such as video and audio, as
well as software and set-top configuration data throughout the
network; it delivers large amounts of data over a network efficiently
because the server can broadcast one message to many recipients
simultaneously; and
. Broadband communications technology provides the speed and capacity
necessary to deliver multiple data streams, including video channels,
over a single medium such as twisted pair copper wire or fiber optic
cable.
To enhance the capabilities of existing twisted pair copper wire, service
providers can deploy an xDSL-based architecture, including DSL access
multiplexers and xDSL modems. Generally, DSL access multiplexers connect
broadband lines in the service provider's transport network, or backbone, to
xDSL lines in the service provider's access network. In addition, DSL access
multiplexers separate high-speed data from voice data, putting high-speed data
on the network and low-speed voice data on the conventional phone system. DSL
access multiplexers are located in the service provider's central office or
remote switching center. xDSL modems connect a set-top box or personal computer
in the home to the xDSL lines in the access network. When MPEG video is
delivered to the set-top box through the xDSL modem, the set-top box decodes
the MPEG video and sends it to the television. In some cases, the xDSL modem is
built into the set-top box.
The diagram below represents an xDSL implementation of our software
products:
[Graphic depicting an xDSL implementation of Imagic TV's software products]
39
How Video is Delivered Over an Internet Protocol Network
Typically, video is distributed from the service provider's head-end to
subscribers in three steps.
. Video Capture. Satellite dishes and receiver units capture digital
television signals in the form of MPEG streams.
. Video Conversion. Video encoders or other similar devices convert the
MPEG streams into Internet Protocol-compliant video streams.
. Video Multicasting. Video encoders and network components transmit
Internet Protocol-compliant video streams over the network to the
home.
At the home, when subscribers use a remote control or wireless keyboard,
this action triggers the set-top box to issue a request to join the
corresponding Internet Protocol multicast address where the corresponding
channel can be found. In response to the request, the server adds the
subscriber to the Internet Protocol multicast address and sends the related
channel data to the set-top box.
Research and Development
Our research and development efforts focus on the continued development
and enhancement of our existing products and services as well as the
development of new applications and services. These efforts are based on input
both from our customers and from our research and development staff.
We are engaged in the development of the following new products which we
expect to offer as enhancements or "add ons" to DTV Manager:
. Virtual VCR. This service would enable subscribers to store and
replay digital broadcast television and other video content on an
"on-demand" basis without a video cassette recorder.
. Two-Way Channels. This service would enable service providers to
deliver a pre-packaged bundle of interactive broadband channels to
subscribers with imbedded interactive e-commerce applications linked
to third parties. One example is a channel offering a movie and pizza
package that subscribers can order through their television. We
expect that two-way channel services would often be co-branded with
retail and consumer brands.
. Movie Manager. This application would enable service providers to
deliver a searchable database of movies to subscribers that can be
accessed and played by a subscriber using standard video cassette
recorder type features.
. iComponents. These software development tools would enable service
providers to customize and enhance their service offerings by
building custom applications that interact with DTV Manager.
Other research and development efforts which are currently underway
include:
. developing the next release of DTV Manager and pcVu to provide
additional enhancements and features based upon input we have
received from service providers; and
. upgrading the viewer component of DTV Manager to enable it to operate
on the next generation of set-top boxes from Pace and Motorola.
Our research and development expenses were approximately $4.1 million or
56% of total operating expenses in the fiscal year ended February 29, 2000 as
compared to $2.0 million or 69% in the previous fiscal year. As of August 31,
2000, we had 89 of a total of our 159 employees engaged in research and
development activities. Research and development activities are currently
conducted both out of our headquarters in Saint John, New Brunswick and in
Cambridge, England.
40
Customers
Currently, we have licensed our DTV Manager software for commercial
deployment to a total of nine service providers, two of which have commercially
launched their service to subscribers. Our license agreements generally grant
to service providers a long-term or perpetual license to use our software
products within a specified territory, sometimes on an exclusive basis. These
licenses generally provide for limited termination rights and for the payment
of an initial license fee, fixed per subscriber royalty fees, typically
calculated on a monthly basis, and fees for maintenance and technical support
services. Because we negotiate our license agreements on an individual basis,
the type of agreement, the amount, timing and other payment terms of initial
license fees, royalty fees and fees for maintenance and technical support
services typically differ from one customer to another.
When we started licensing DTV Manager, our license agreements generally
provided for, among other things, the payment of an initial license fee, one-
time per subscriber royalty fees and maintenance and technical support fees.
The initial license fees for these agreements ranged from approximately
$335,000 to $650,000 and typically were payable in installments. The one-time
royalty fee applicable to a new subscriber under these agreements is determined
either by the total number of active subscribers at that time, or by a pre-
determined block pricing structure. These royalty fees range from $100 to $50
under the total number of active subscriber fee structure and $150 to $10 under
the block pricing fee structure. Maintenance and technical support fees range
from approximately 10% to 20% of the initial license fee and one-time
subscriber royalty fees.
In early 2000, we began structuring our license agreements to provide for
an initial license fee, generally based on the number of households located in
the geographic area under the license, on-going monthly subscriber-based
royalty fees and maintenance and technical support fees. The initial license
fees for these agreements range from approximately $850,000 to $2.4 million and
are typically payable in installments. The on-going monthly royalty fees are
typically fixed at $1.25 per subscriber, as is the case for three of our
agreements. However, under two other agreements, the royalty fee applicable to
new subscribers may be less than $1.25 if the customer attains specified
incremental levels of active subscribers. Lower royalty fees would only apply
to the number of active subscribers above a specified threshold, while the
higher royalty fee would continue to apply to the existing subscribers below
the specified threshold. In these two agreements the lower royalty fees range
from approximately $1.15 to $0.70 depending on the incremental level of
subscribers. Maintenance and technical support services fees range from
approximately 10% to 20% of the initial license fee for the territory licensed.
In addition, we plan to charge separate initial license fees and on-going
royalty fees for any new products that we may introduce.
41
We also have test installations of our software on the networks of five
other service providers in North America and Europe. Our existing customers are
located in Canada, the United States and Europe. The following table describes,
as of September 20, 2000, the customers who have licensed our software for
commercial deployment.
Estimated Size of
Customer Name Description and Geographic Area Service Area(1)
------------- ------------------------------- -----------------
Kingston Vision A subsidiary of Kingston 233,000
Communications (Hull) plc, the
incumbent local exchange
carrier in East Yorkshire,
England
NBTel The incumbent local exchange 308,000
carrier in the Province of
New Brunswick
Boardwalk Equities An operator of several multiple 25,000
dwelling units in the
Provinces of Alberta,
Saskatchewan and Ontario
Century Tel A provider of integrated 1,296,000
communications services in
20 U.S. states
Eircom An incumbent local exchange 1,600,000
carrier in Ireland
Eltel Telecommunications A competitive local exchange Not Available
carrier in Greece
Integrated Homes An operator of a broadband Not Available
residential area network
located in Boca Raton, Florida
MTT The incumbent local exchange 381,000
carrier in the Province
of Nova Scotia and a
subsidiary of Aliant
SaskTel The incumbent local exchange 644,000
carrier in the Province
of Saskatchewan
-------------
Total Access Lines.................................. 4,487,000
- --------
(1) Estimated size of service area refers to the number of access lines in the
geographic area as published by the applicable service provider. Not all of
these access lines are residential, not all lines are currently xDSL or
broadband enabled and the service provider may not have obtained necessary
regulatory approvals.
Selected Case Studies
The following case studies illustrate our understanding of how NBTel and
Kingston Vision have implemented DTV Manager to their subscribers.
NBTel. NBTel received its broadcast license from the Canadian Radio-
television and Telecommunications Commission in June 1998. We delivered the
initial version of DTV Manager in December 1998. Following market trials
throughout 1999, NBTel commercially launched in January 2000, its multi-channel
digital interactive television service, VibeVision, to a service area of 7,000
homes in Moncton, New Brunswick. In June 2000, the service area was expanded to
a total of approximately 27,000 homes in Moncton and in Saint John, New
Brunswick. As of September 30, 2000, NBTel had approximately 1,200 subscribers
for VibeVision and approximately 300 additional subscribers have placed orders
for the VibeVision service. Before a subscriber can use the service NBTel must
deliver and install an ADSL modem and a set-top box at the subscriber's home. A
typical installation can be completed two or three days after the order is made
by the subscriber unless the line to the subscriber's home requires
reconditioning in which case installation may take up to a week. NBTel's
VibeVision offers over 130 video and audio channels as well as access to a wide
variety of services, including an interactive program guide, Web browsing, e-
mail communication, telephone directory, news, weather and sports listings, a
variety of self-serve applications such as pay-per-view and bill payment, and a
community events channel. Through this service, customers can watch interactive
television, surf the Web on the television and use the telephone all at the
same time over a single telephone line.
42
Kingston Vision. Kingston Vision provides digital interactive television,
video-on-demand, online shopping and Internet services over its telephone
network to subscribers in East Yorkshire, England. After a trial deployment in
the second quarter of 1999, Kingston Vision commercially launched Kingston
Interactive Television, its multi-channel digital interactive television
service, in October 1999. As of July 31, 2000, these services have been made
available to a service area of approximately 40,000 homes, of which
approximately 1,000 are subscribers. Kingston Interactive Television delivers
over 50 digital TV channels, video-on-demand, Internet and e-mail, and a
community channel and information service.
Industry Relationships
We believe that our success depends, among other things, on our ability
to:
. market our software products and services to a substantial number of
customers, and thereby build a large potential royalty base;
. ensure the interoperability of our software with hardware and
software from third-party vendors; and
. develop new products and services to enhance our software products.
In order to better achieve these goals, we have entered into non-exclusive
agreements or understandings with a number of participants in the
telecommunications, computer, software and interactive media industries,
including:
. network and encoder equipment providers, such as Advanced Fibre
Communications, Inc., Alcatel, Harmonic Software Inc., Nortel
Networks and Pixstream Incorporated;
. server hardware and software providers, such as Oracle and Sun
Microsystems;
. set-top box manufacturers, such as Motorola, Pace Micro Technology
plc and Thomson Consumer Electronics Inc.; and
. content and interactive media service providers and broadcasters,
such as America Online and Federal Hill Communications Inc.
Generally, our agreements and understandings with these industry
participants are short-term or terminable on short notice, and neither generate
revenues from the participant nor require us to pay any fee to the participant
other than out-of-pocket expenses. In addition, in the case of joint marketing
arrangements, we generally do not pay or receive referral fees, and our
obligations are generally limited to marketing and promotional related
activities. We also have and may continue to pursue informal industry
relationships with other third parties. Our principal industry relationships
are described below:
. Advanced Fibre Communications. We have entered into an agreement to
engage in joint marketing with Advanced Fibre Communications, a
vendor of access equipment in the independent operating carrier
marketplace. By co-marketing DTV Manager with AFC's suite of access
equipment, our goal is to gain access to AFC's existing customer
base.
. Alcatel. Alcatel is a major ADSL chip vendor and a key participant in
the ADSL and DSL access multiplexer market and the market for ADSL
modems. We have entered into an agreement with Alcatel pursuant to
which we have joined the Alcatel Access Partnering Program which
enables us to perform interoperability testing on products such as
Alcatel's next generation digital loop carrier access platform,
LiteSpan(R). We also believe this arrangement will permit us to gain
access to Alcatel's ADSL customer base.
. America Online. America Online is a provider of Internet technologies
and Web, interactive and e-commerce services. We have entered into an
agreement to develop custom applications together with America
Online. We have agreed to spend up to $3.0 million on research and
development related to these custom applications. We have also agreed
to discuss with America Online the commercialization of custom
applications and to share information regarding relevant development
activities and schedules for the introduction of our respective
products.
43
. ECI Telecom. ECI is a vendor of both ADSL and VDSL products. We have
entered into an agreement with ECI to engage in joint
interoperability testing of our software with ECI's products and have
engaged in joint marketing activities, including demonstrations to
customers.
. Harmonic. We have entered into an agreement with Harmonic to engage
in interoperability testing of our software with their multi-pass
MPEG2 encoders. This technology is designed to allow the delivery of
multi-channel digital television and interactive media services to
multiple devices in the home.
. Motorola. Motorola provides set-top boxes. We have entered into an
agreement with Motorola to determine the interoperability and feature
compatibility of our products with Motorola's.
. Nortel Networks. We have entered into an agreement to establish a co-
marketing, promotion and sales arrangement with Nortel. We chose
Nortel because of its position as a leading supplier of access
equipment. We believe that Nortel's extensive customer base will
broaden our market opportunities. We work with Nortel to establish
the interoperability of its high-speed access equipment with DTV
Manager.
. Oracle. We have entered into an agreement to engage in joint
marketing and development efforts with Oracle, a leader in the
interactive television marketplace. Oracle Database products provide
essential database management functionality for DTV Manager. In
addition, we use Oracle Video Server products as part our video-on-
demand application.
. Pace. Pace provides set-top boxes to service providers, including
some of our customers. We have entered into an agreement with Pace to
engage in joint development to determine the interoperability and
feature compatability of our products with those of Pace.
. Pixstream. Pixstream provides video head-end encoding equipment to
some of our customers. We have entered into an agreement with
Pixstream to engage in joint marketing and interoperability testing
with Pixstream's head-end video encoding products.
. Sun Microsystems. We have entered into an agreement to engage in
joint marketing and development with Sun Microsystems. Sun is a
leader in Internet Protocol-based solutions and server platforms. Our
software runs on a range of Sun platforms and Sun's Solaris(TM)
operating system.
. Thomson. Thomson provides set-top boxes. We have entered into an
agreement with Thomson to engage in the joint marketing and
development of digital television services that are based on the
interoperability of our products with those of Thomson.
Sales and Marketing
We currently sell our software products and services through a direct
sales force. As of August 31, 2000, our sales force consisted of ten employees
supported by a staff of 13 systems integrators, sales engineers and technical
support specialists. Sales representatives are paid a competitive salary plus
incentive bonuses based on sales. Direct sales professionals are located in
Saint John, New Brunswick; Ottawa, Ontario; Atlanta, Georgia; Denver, Colorado;
Washington, D.C.; Raleigh, North Carolina; McLean, Virginia; and Cambridge,
England. We use our direct sales force to target service providers we believe
provide the highest potential for service deployment.
To complement our direct sales efforts, we participate in trade shows in
North America, Europe and Asia and engage in joint marketing with vendors and
other market participants with whom we have relationships. We belong to related
industry associations, and our representatives also speak at
telecommunications, e-commerce and multimedia events. We also encourage our
potential customers to visit our facilities. In addition, we have installed our
DTV Manager software in customer demonstration centers of various strategic
equipment and software vendors, including Sun Microsystems, Nortel and Alcatel,
which are accessible to our potential customers.
44
Competition
We face competition from a number of companies in the market for multi-
channel digital television and interactive media services. Our direct
competitors, Next Level Communications Inc., mPhase Technologies, Inc. and
Myrio Corporation, provide products that are sold to telephone companies and
other service providers and are competitive with all or part of our products.
Our indirect competitor, Liberate Technologies, provides technology and
services related to interactive television. We also expect additional
competition from other established and emerging companies. Many of our existing
and potential competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial,
technical, sales, marketing and other resources than we have. We expect
competition to persist and intensify as the market for digital interactive
television over broadband further develops.
We believe that the success of companies seeking to develop software that
provides telephone companies and other service providers with the ability to
deliver multi-channel digital television and interactive media services will
depend on the following factors:
. the ability to provide a complete solution for the delivery and
management of digital interactive television;
. technology that is standards-based and non-proprietary, and is
designed to work in conjunction with industry standard, third-party
hardware and software;
. the quality and reliability of product offerings;
. the price and value of product offerings; and
. customer service.
We anticipate that a significant part of our future revenues will be
derived from subscriber-based royalties. These royalties will be wholly
dependent on our customers' success in attracting and retaining subscribers.
Our existing and potential customers compete for subscribers with many
different companies that offer video, audio, programming, entertainment,
Internet and voice services, such as cable television companies and direct
broadcast satellite service providers. Cable companies such as Cox
Communications, AT&T and Time Warner Inc. in the United States and Rogers
Communications and Shaw Communications in Canada offer digital television and,
in some cases, limited interactive media services to their subscribers. Direct-
to-home satellite television services such as DIRECTV, Inc. in the United
States, Bell Expressvu Inc. in Canada and British Sky Broadcasting Group plc in
the United Kingdom also offer digital television and, in a limited number of
cases, interactive media services. If existing and potential customers offer
personal television services using our Virtual VCR product currently under
development, their services will compete for subscribers with products and
services provided by TiVo, Inc. and ReplayTV. Many of these competitors have
greater brand recognition, a larger subscriber base and more significant
financial, technical and other resources than those of our customers. These
competitors may also undertake more extensive marketing campaigns than our
customers and may adopt more aggressive pricing policies.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. We cannot predict the effect that on-going or future developments
might have on the video programming distribution industry generally, on our
customers or on our company.
Regulation of Service Providers
Overview
Although, in providing our products and services, we are not now subject
to significant regulation, our existing and potential customers operate in
heavily regulated industries. Our existing customers are located in
45
the United States, various member countries of the European Union and Canada.
The paragraphs below summarize various regulatory matters within these
jurisdictions.
United States
In the United States, the telecommunications and multi-channel video
programming distribution industries are subject to extensive regulation at the
federal, state and local levels. At the federal level, the Federal
Communications Commission, or FCC, regulates the interstate, mixed
intrastate/interstate and international aspects of the telecommunications
industries pursuant to its authority under the Communications Act of 1934, as
amended. Under the Communications Act, state authorities retain jurisdiction to
regulate intrastate telecommunications. Local authorities, pursuant to their
general zoning and police powers, regulate the distinctly local aspects of
telecommunications services, such as tower siting and infrastructure placement.
Federal, state and local authorities also share responsibility for regulating
the provision of multi-channel video programming distribution services.
Federal Regulation. Several FCC regulatory policies may affect the way in
which our customers can or choose to offer integrated voice, data and video
services. For example, federal law requires incumbent local exchange carriers
to offer their competitors cost-based access to certain network elements, which
elements comprise many of the significant facilities, features and capabilities
of their networks, in order to enable their competitors to provide competing
services. Although at this time incumbent local exchange carriers in most cases
are not required to provide unbundled access to high-speed data switching
equipment, they are required to offer high-speed data services to their
competitors for resale. Further, the FCC has required the unbundling of the
"high-frequency" portion of local transmission facilities, which makes it
easier and less expensive for competing carriers to offer advanced services.
These FCC network access regulations are currently the subject of
petitions for reconsideration at the FCC and appeals in federal courts. The
uncertainties caused by these proceedings may cause potential customers to
delay purchasing our products and services. In addition, the outcomes of
related regulatory proceedings may cause potential customers to deploy less
than all of the high-speed data and broadband services for which our software
is designed, or to delay the widespread introduction of these services. For
example, these regulations and other developing laws, regulations and policies
may cause carriers to elect to provide high-speed data and broadband services
through a structurally separate affiliate, which could negatively affect demand
for our products and services.
Legislation also has been proposed in Congress that could affect the
regulation of carriers providing high-speed data and broadband services. One
bill before Congress would, if it became law, grant incumbent local exchange
carriers substantially more flexibility in offering broadband services. Another
bill, if it became law, would grant competitive local exchange carriers a right
to access private apartment complexes and other multiple dwelling units for the
purpose of providing service to the residents of such properties. We cannot
predict whether either of these bills will become law and, if they do, what
affect they would have on our business.
In addition, FCC rules prohibit incumbent local exchange carriers from
providing voice or data services along with customer premises equipment as a
packaged offering at a single price. Further, FCC rules prohibit incumbent
local exchange carriers from offering enhanced information or data processing
services, including Internet access services, bundled with local exchange
services. Accordingly, these rules may limit the ability of our customers to
use our software and related services in the offering of a packaged service to
their subscribers. The FCC is considering amending or repealing these bundling
restrictions, but we cannot assure you that it will do so.
46
Finally, to the extent that they are used for multi-channel video
programming distribution, our customers' networks may, for regulatory purposes,
be deemed to be "cable systems." Under the Communications Act, all cable
systems are required to:
. obtain a local franchise;
. comply with certain customer service standards;
. retransmit certain broadcast television programming;
. conform subscriber service and equipment rates to applicable federal
regulations;
. comply with FCC equal employment opportunity rules and policies;
. make channel capacity available for public, educational and
government programming; and
. comply with rules concerning the technical operation of cable
systems.
We cannot assure you that the burdens associated with federal cable
system regulation will not prevent or discourage potential customers from
purchasing or using our software and related services.
State and Local Regulation. State and local authorities also have a role
in regulating the telecommunications and multi-channel video programming
distribution industries. Among other things, state regulatory authorities are
charged with developing and implementing cost-based prices for access to
network elements, and they may, consistent with federal law and policy,
establish additional network elements that must be made available by incumbent
local exchange carriers. At the local level, carriers seeking to install
additional transmission facilities may be required to obtain any of the
following:
. street opening and construction permits;
. permission to use rights-of-way;
. zoning variances; and
. other approvals from municipal authorities.
Further, some state authorities have adopted cable television franchising
rules, and local jurisdictions throughout the United States regulate cable
television systems pursuant to their franchising authority. We cannot assure
you that regulatory developments at the state or local level will not prevent
or discourage our customers from developing or deploying networks capable of
supporting our software.
European Union
In the European Union, which currently comprises 15 European countries,
including the United Kingdom, Ireland and Greece where we currently have
existing customers, the telecommunications and multi-channel video programming
industries are subject to detailed sector-specific regulation. Various laws,
regulations and policies may require our customers to obtain and be subject to
approvals or authorizations in order to make use of our software and related
services within the European Union. For example, in the United Kingdom,
operators of telecommunication systems and providers of television programming
services are required to obtain licenses under the Telecommunications Act of
1984 and the Broadcasting Act of 1990, respectively. In addition, the United
Kingdom's Office of Telecommunications, also known as Oftel, has issued two
general authorizations, known as class licenses, which set out the rules which
may apply to our existing and potential customers that control the supply of
multi-channel digital television and other digital services to end users.
On a broader scale, the European Union Commission has recently issued a
proposal that would require unbundled access to the local loop by December 31,
2000. As a result, fixed public telephone network operators that have been
designated by their national regulatory authority as having significant market
power
may be required to provide unbundled access to their local loop network. For
example, Oftel has proposed a "determination" which would require British
Telecommunications plc to provide access to its local loops.
47
The European Union Commission and the various national regulatory
authorities of the member countries frequently review the regulatory
environment relating to telecommunications, broadcasting, media and e-commerce
industries. We understand that the general thrust of this review is to make
changes to the regulatory environment with the objective of creating an open
and competitive communications industry. We cannot assure you that these
changes will not result in our being subject to direct regulation or that
future regulation of our existing and potential customers will not slow sales
of our products and services or impede our ability to compete effectively.
Canada
Telecommunications and broadcasting services are subject to regulation
under several federal communications statutes, the most important of which are
the 1993 Telecommunications Act (Canada) and the 1991 Broadcasting Act
(Canada). These statutes permit the Canadian Radio-television and
Telecommunications Commission, or CRTC, to regulate certain aspects of the
provision of telecommunications and broadcasting services in Canada.
The Broadcasting Act. Depending on how they use our products and
services, service providers may be required to obtain a license issued by the
CRTC under the Broadcasting Act if they transmit programs for reception by the
public through devices capable of receiving broadcasting signals. Such devices
include television sets, and in some cases computers and other terminal
equipment. The most common type of broadcasting license required by service
providers that use our products and services is a Broadcasting Distribution
Undertaking license. NBTel currently has such a licence to provide services
using our software and related services.
To be eligible to hold a broadcasting license, a service provider must
comply with rules that require certain levels of ownership and control by
Canadians. These constraints should not limit the number of Canadian incumbent
local exchange carriers or competitive local exchange carriers that may wish to
buy our software and related services, since they must already meet similar
Canadian ownership and control rules. However, these constraints may limit the
ability of other service providers to use our software and related services, in
that some may not be able to qualify for a broadcasting license under the
Canadian ownership and control rules under the Telecommunications Act.
The CRTC now licenses competing service providers to operate within the
service areas of incumbent cable television systems. To date, the CRTC has
licensed on a national basis five Direct-to-Home satellite-based distribution
services, two of which are operational and, on a local basis, wireless digital
multi-point multi-channel distribution services. In addition, the CRTC has
granted a Broadcasting Distribution Undertaking license to NBTel.
The Telecommunications Act. Incumbent local exchange carriers,
competitive local exchange carriers and other providers of non-programming
telecommunication services are subject to regulation by the CRTC under the
Telecommunications Act. However, the CRTC has gradually been forebearing from
regulating many of the services offered by these carriers.
The CRTC has also taken steps to promote competition in local
telecommunications service markets by issuing a number of decisions and orders
aimed at breaking down barriers to competition in these markets. We believe
that these decisions and orders will have a variety of impacts on service
providers. For example, CRTC regulation requires incumbent local exchange
carriers to offer their competitors cost-based access to some network elements,
to enable their competitors to provide competing services. We cannot predict
what effect these decisions and orders will have on our business.
48
Intellectual Property
Our ability to compete is dependent in part upon our ability to protect
our intellectual property. We currently do not have patents or trademark
registrations protecting our products and other intellectual property, other
than a Canadian trademark registration for "iMagic." To date, we have relied on
trade secret and copyright law, as well as confidentiality and licensing
agreements, to establish and protect our rights in our technology. Our current
policy requires our officers, employees and consultants to execute
confidentiality agreements upon the commencement of an employment or other
relationship with us. These agreements typically provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees,
the agreements provide that all technology that is conceived by the individual
during the course of employment with us is our exclusive property. In spite of
these efforts, it may be possible for a third party to obtain or use our
technology without our authorization or to develop similar technology through
reverse engineering or other means.
In June 1998, we filed a provisional patent application in the United
States in respect of aspects of our software products, which we formalized in
an application made under the Patent Co-Operation Treaty in June 1999.
On September 19, 2000, we filed a continuation-in-part application in the
United States with respect to the event capturing component of the
administration system software within DTV Manager. Our event capturing software
enables a telephone company or other service provider to define, capture, store
and process all activities on its service network in real time. On September
28, 2000, we filed a continuation-in-part application in the United States with
respect to our pcVu software product. On September 29, 2000, we filed a
continuation-in-part application in the United States with respect to aspects
of the functionality of the proposed Virtual VCR enhancement to our DTV Manager
software that is currently under development. We cannot assure you that we will
receive any of the patents for which we have applied to date or will apply in
the future.
We have several pending trademark applications in the United States, the
European Union and Canada covering some of our important trademarks, logos and
slogans, including:
IMAGICTV "Eye" Design
DTV Manager PCVU
See "Risk Factors--Because much of our success and value lies in our
ownership and use of intellectual property, our failure to protect our
intellectual property may negatively affect us."
Employees
As of August 31, 2000, we employed approximately 160 full-time employees,
excluding temporary personnel and consultants. We are not subject to any
collective bargaining agreements and believe our relationship with our
employees is good.
Facilities
Our corporate headquarters and executive offices are located in Saint
John, New Brunswick, Canada, where we occupy approximately 22,000 square feet
of space, of which we sublease approximately 17,000 square feet from NBTel for
approximately $235,000 per year. The leases on this facility expire in February
2001 and April 2005. We believe that we will be able to renew these leases or
secure sufficient alternative space upon expiration of these leases. We also
lease sales and marketing offices in Cambridge, England, and Denver, Colorado,
and we intend to establish a U.S. headquarters in Raleigh, North Carolina.
49
Litigation
There currently are no outstanding material legal proceedings to which we
are a party or any of our properties is subject, nor do we know of any material
threatened or contemplated proceedings against us.
Recent Financings
Pursuant to share subscription agreements, in the October 2000 private
placements we issued 272,719 of our common shares to America Online for
aggregate proceeds of $3,000,000 and 1,090,875 of our common shares to Cisco
Systems for aggregate proceeds of $12,000,000.
Concurrently, with our private placement to America Online, we entered
into the agreement with America Online referred to above under "--Industry
Relationships." Further, in connection with our private placement to Cisco
Systems, we granted Cisco Systems a right of first negotiation. Pursuant to
this right of first negotiation, if our board of directors receives a bona fide
offer to acquire us or all or substantially all of our assets from any of three
specified entities, or if our board of directors votes to initiate a sale to
any of these three specified entities of 25% or more of our total voting equity
or all or substantially all of our assets, we must, within 24 hours, give Cisco
Systems notice of the terms of the sale proposal. After we deliver this notice,
Cisco Systems will have ten days to submit a proposal to our board of
directors. If our board of directors decides to pursue Cisco Systems' proposal,
we have agreed to negotiate in good faith exclusively with Cisco Systems for a
period of ten days. However, (a) if Cisco Systems does not submit a proposal
within ten days of receipt of our notice, (b) if Cisco Systems' proposal is not
pursued by our board of directors, or (c) if Cisco Systems and we fail to
mutually agree on the terms of a transaction, then the right of first
negotiation expires as to that proposal, and we can negotiate and enter into a
definitive agreement with the entity that made the initial proposal. Further,
this right of first negotiation terminates (1) in the event that Cisco Systems
owns less than 50% of the common shares it purchased on October 6, 2000 or (2)
upon the date of the closing of the acquisition of all or substantially all of
our assets or an acquisition by us of another corporation in which the holders
of our outstanding voting equity immediately prior to the transaction own,
immediately after the transaction, securities representing less than 50% of the
voting equity of the surviving entity.
50
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about our directors
and executive officers, as of the date of this prospectus.
Name Age Position
- ---- --- --------
Marcel LeBrun........... 30 President, Chief Executive Officer and Director
Peter G.
Jollymore(2)(3)........ 61 Chairman of the Board of Directors
Allan Cameron........... 46 Vice President of Technology
Gerry Verner............ 36 Vice President of Marketing and Business Development
Marjean Henderson....... 49 Vice President and Chief Financial Officer
Doug Harrington......... 52 Vice President of Sales and Customer Service
Joe C. Culp(1)(2)....... 67 Director
Carey Diamond(1)(3)..... 46 Director
Dr. Terence H.
Matthews............... 57 Director
Michael J. McCloskey.... 44 Director
Robert E. Neal(1)....... 46 Director
Gerald L. Pond(2)(3).... 56 Director
Paul Spruyt............. 37 Director
- --------
(1) Member of audit committee
(2) Member of compensation committee
(3) Member of governance committee
The term of office for each of the above directors will expire at the
time of our next annual shareholders meeting. The following is a summary of the
background of each director and executive officer.
Marcel LeBrun. Mr. LeBrun co-founded ImagicTV and has served as President
and Chief Executive Officer and as a director since January 1998. From June
1992 to December 1997, Mr. LeBrun held various positions at NBTel, including
Managing Director of E-Business Services and other senior technical, marketing
and strategic business planning positions. Mr. LeBrun has a Bachelor of Science
in Electrical and Computer Engineering from the University of New Brunswick.
Mr. LeBrun resides in Fredericton, New Brunswick.
Peter G. Jollymore. Mr. Jollymore was appointed Chairman of the Board and
elected as a director of ImagicTV in January 1998. He is also currently the
Acting Dean of the Faculty of Business at the University of New Brunswick in
Saint John, New Brunswick. From 1967 until his retirement in December 1998,
Mr. Jollymore served in various positions at NBTel from design engineer to Vice
President of NBTel and its affiliate Bruncor Inc. He serves on the board of
directors of the Business Development Bank of Canada and of Callistro
Multimedia Inc., a computer software company producing video-on-demand
applications. Mr. Jollymore serves on the board of directors of CrossKeys
Systems Corporation, a provider of network management software to the
telecommunications industry. He has a Bachelor of Science in Engineering from
Mount Allison University and a Bachelor of Engineering from the Technical
University of Nova Scotia. Mr. Jollymore resides in Saint John, New Brunswick.
51
Allan Cameron. Mr. Cameron co-founded ImagicTV and has served as Vice
President of Technology since January 1998. From May 1978 to December 1997, Mr.
Cameron held various positions, including strategic and technical planning
positions, at NBTel, where, among other things, he worked on the creation of
NBTel's Beacon/VideoActive(TM) initiative, a deployment of broadband access
capabilities using coaxial cable. Mr. Cameron has a Bachelor of Science in
Engineering and a Master of Science in BioEngineering from the University of
New Brunswick. Mr. Cameron resides in Saint John, New Brunswick.
Gerry Verner. Mr. Verner has served as Vice President of Marketing and
Business Development of ImagicTV since July 2000 and served as Vice President,
Marketing and Chief Financial Officer of ImagicTV from November 1998 to July
2000. From May 1986 to November 1998, Mr. Verner held various technical,
marketing and management positions at NBTel, including Strategic Planning
Manager. He has a Bachelor of Science in Electrical Engineering and a Masters
in Business Administration from the University of New Brunswick. Mr. Verner
resides in Quispamsis, New Brunswick.
Marjean Henderson. Ms. Henderson has been Vice President and Chief
Financial Officer of ImagicTV, since July 31, 2000. From August 1997 until July
2000, Ms. Henderson was Senior Vice President and Chief Financial Officer of
Nucentrix Broadband Network, Inc., a provider of wireless broadband Internet
and wireless cable services. From April 1996 to May 1997, she was Senior Vice
President and Chief Financial Officer of Panda Energy Corporation, a global
energy company. From December 1993 to June 1995, Ms. Henderson served as Senior
Vice President and Chief Financial Officer of Nest Entertainment, Inc., a
company which produces and markets home videos and feature length movies. From
October 1987 to December 1993, Ms. Henderson was Chief Financial Officer of RCL
Enterprises, Inc. and its affiliate, Lyrick Studios, which owns the character
"Barney the Purple Dinosaur" and owns and produces the series "Barney and
Friends." She has a Bachelor of Business Administration from the University of
Texas. Ms. Henderson is a Certified Public Accountant. She resides in Dallas,
Texas.
Doug Harrington. Mr. Harrington has served as Vice President of Sales and
Customer Services of ImagicTV since April 1998. From January 1997 to December
1997, Mr. Harrington was a Vice President at Multi Media Publishing, a company
that offers magazine publishing and event planning services. From January 1987
to January 1997, he was Vice President of Sales and Marketing for Intellicall
Inc., a company that designs, manufactures and distributes telecommunications
products worldwide. Prior to January 1986, Mr. Harrington held various sales
and management positions with Xerox Canada Ltd. Mr. Harrington has a Bachelor
of Commerce from St. Mary's University. Mr. Harrington resides in Fredericton,
New Brunswick.
Joe C. Culp. Mr. Culp was elected as a director of ImagicTV in August
1999. Since 1990, he has served as President of Culp Communications Associates,
a management consulting firm for the telecommunications industry. Mr. Culp has
served as President of Lightnet, a fiber optic telecommunications carrier that
Southern New England Telephone Company (now SBC Corporation) and CSX
Corporation owned. He has also served as President of Rockwell International, a
provider of electronic controls and telecommunications equipment. Mr. Culp
currently serves on the board of directors of CrossKeys Systems and two
privately-held telecommunications companies. He has served on the Advisory
Board of the telecommunications group of the University of Texas, Arlington and
the University of Arkansas. Mr. Culp resides in Austin, Texas.
Carey Diamond. Mr. Diamond was elected as a director of ImagicTV in
January 2000. Since 1996, he has served as President and Chief Executive
Officer of Whitecastle Investments Limited, a private venture capital firm in
Canada. From 1989 to 1996, Mr. Diamond served as Executive Vice President of
Whitecastle. He currently serves on the board of directors of Alterna
Technologies Group Inc. and Texar Corporation, both of which are privately held
high technology companies. Mr. Diamond resides in Toronto, Ontario.
Dr. Terence H. Matthews. Dr. Matthews was elected as a director of
ImagicTV in January 1998. Dr. Matthews founded Newbridge Networks Corporation,
a company that designs, manufactures, markets and
52
services wide area network solutions, in March 1986 and served as Chairman of
the Board and Chief Executive Officer of Newbridge from its inception to May
2000. Dr. Matthews was a co-founder of Mitel Corporation, a designer and
manufacturer of telecommunications integrated circuit devices. He is also the
principal of Celtic House International. Since June 2000, he has been Chairman
and Chief Executive Officer of March Networks Corp., a networked video
applications company. Dr. Matthews serves on the board of directors of
CrossKeys Systems. He resides in Kanata, Ontario.
Michael J. McCloskey. Mr. McCloskey was appointed a director of ImagicTV
in July 2000. Since June 1999, Mr. McCloskey has served as Chief Executive
Officer and a director of Kana Communications Inc., a publicly traded company
which is a provider of customer communication and commerce tools for e-
businesses. Prior to joining Kana, from September 1996 to December 1998, Mr.
McCloskey served in various senior management positions with Genesys
Telecommunications Laboratories, Inc., a provider of enterprise interaction
management software, including President, Chief Operating Officer, Vice
President--Finance and International, Chief Financial Officer and Secretary.
From May 1995 to September 1996, he served as Vice President, Finance, Chief
Financial Officer and Vice President, Operations at Network Appliance, Inc., a
network data storage device company. Mr. McCloskey resides in Pleasanton,
California.
Robert E. Neal. Mr. Neal was elected as a director of ImagicTV in June
1999. Since June 2000, he has served as President of Innovatia Inc., a company
within Aliant's emerging business group that focuses on the development and
sale of Internet-based technology. Mr. Neal joined NBTel in 1979 and since that
time has held various positions with NBTel and its affiliates, including Vice
President from September 1998 to February 2000. Mr. Neal resides in Quispamsis,
New Brunswick.
Gerald L. Pond. Mr. Pond was elected as a director of ImagicTV in January
1998. From November 1994 to March 1999, Mr. Pond served as President and Chief
Executive Officer of Bruncor Inc. Since March 1999, Mr. Pond has served as
Executive Vice President of Aliant, the parent company of NBTel. Mr. Pond is
also the President of the information technology and emerging business groups
of Aliant. Since June 2000, Mr. Pond has also been the Chief Executive Officer
and a director of xwave Solutions Inc., an Aliant affiliate that provides
information technology services and products, systems integration and data
center operations. Mr. Pond resides in Rothesay, New Brunswick.
Paul Spruyt. Mr. Spruyt was appointed as a director of ImagicTV in July
2000. Since September 1999, he has served as General Manager of VDSL Virtual
Company of Alcatel, a corporation which builds next generation networks,
delivering integrated end-to-end voice and data communications solutions. From
November 1997 to August 1999, he was Project Manager of Metallic Access Systems
for Alcatel and from August 1995 to October 1997, he was Project Manager of
Twisted Pair Access Systems for Alcatel. Mr. Spruyt resides in Heverlee,
Belgium.
Board of Directors
Our board of directors is currently comprised of nine persons. Pursuant
to our unanimous shareholders agreement, the following directors were nominated
by the following shareholders:
Nominee Shareholder
------- ----------
Carey Diamond Whitecastle
Dr. Terence H. Matthews Celtic House
Robert E. Neal Aliant
Gerald L. Pond Aliant
Paul Spruyt Alcatel
In addition, our shareholders agreement provides that the Chief Executive
Officer shall be a director and that there shall be at least three independent
directors, one appointed by Aliant, Peter Jollymore, and the remainder,
53
Joe C. Culp and Michael J. McCloskey, approved by Whitecastle and either Aliant
or Alcatel. Our unanimous shareholders agreement will terminate automatically
upon completion of the offering, and thereafter there are no contractual
arrangements with respect to the composition of the board of directors.
In accordance with the provisions of the Canada Business Corporations
Act, our directors are authorized from time to time to increase the size of the
board of directors, and to fix the number of directors, up to a maximum of ten
persons as currently provided under our Articles of Incorporation, without the
prior consent of the shareholders. Each director is elected at the annual
meeting of shareholders to serve until the next annual meeting or until a
successor is elected or appointed.
Board Committees
Our board of directors has established an audit committee, a compensation
committee and a governance committee. All of the committees of our board of
directors were appointed on February 3, 2000.
Our audit committee must include at least three directors, a majority of
whom must be independent, non-executive directors in accordance with applicable
Canadian law. Our audit committee currently has three members: Joe Culp, Carey
Diamond and Robert Neal. The audit committee is responsible for, among other
things:
. recommending the annual appointment of our auditors;
. reviewing the independence of our auditors;
. reviewing our audited financial statements with management and our
auditors;
. assessing accounting principles we use in financial reporting; and
. reviewing internal auditing procedures and the adequacy of our
internal control procedures.
Pursuant to our 2000 Share Option Plan, our compensation committee must
be comprised of at least two non-employee directors. The compensation committee
currently consists of Peter Jollymore, Gerald Pond and Joe Culp. The
committee's mandate is to establish salaries, incentives, and other forms of
compensation for our directors, executive officers, employees, and consultants.
The compensation committee also administers our stock option and other benefit
plans. Compensation for our chief executive officer and those employees who
report directly to him is reviewed and approved by the full board of directors.
None of the members of our compensation committee is currently, or has been at
any time since our formation, an officer or employee of ImagicTV. The
compensation committee approved the compensation of the executive employees
listed under the heading "Employment Contracts" below. Prior to the formation
of the compensation committee, all decisions regarding compensation for
directors, officers, employees and consultants and administration of stock
incentive and other benefit plans were made solely by the board of directors.
The governance committee consists of Carey Diamond, Peter Jollymore and
Gerald Pond. The committee's mandate is to develop and monitor our approach to
corporate governance issues, establish procedures for the identification of new
nominees to our board, develop and implement orientation procedures for new
directors and assess the effectiveness of our board and its committees.
Compensation of Directors and Officers
The aggregate salary, bonus, and other compensation paid by us to our
executive officers and directors as a group during the fiscal year ended
February 29, 2000 was approximately $316,900. Our directors do not currently
receive cash compensation for serving as directors other than the reimbursement
of out-of-pocket expenses incurred in attending board and committee meetings.
Non-executive, independent directors are entitled to participate in our share
option plan.
54
The following table sets forth information for the fiscal years ended
February 29, 2000 and February 28, 1999 and the fiscal period ended February
28, 1998 regarding the compensation of our current chief executive officer and
each of our executive officers whose total salary and bonus exceeded C$100,000
for the fiscal year ended February 29, 2000. Unless otherwise indicated, the
amounts set out in the table below are expressed in U.S. dollars.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
----------------------------- ---------------------- ---
Name and Principal Other Annual Securities
Position Year(1) Salary($) Compensation ($)(2) Underlying Options (#)
- ------------------ ------- --------- ------------------- ----------------------
Marcel LeBrun........... 2000 $ 81,300 $ 7,050 186,176
President and Chief
Executive 1999 68,700 4,400 --
Officer 1998 9,400 -- 116,360
Allan Cameron........... 2000 73,100 6,550 162,904
Vice President of
Technology 1999 67,500 3,700 --
1998 9,400 -- 110,542
Doug Harrington(3)...... 2000 69,600 6,250 69,816
Vice President of Sales
and 1999 60,000 2,600 104,724
Customer Service 1998 -- -- --
Gerry Verner(4)......... 2000 63,700 6,150 104,724
Vice President of
Marketing 1999 15,200 -- 69,816
and Business
Development 1998 -- -- --
- --------
(1) The amounts are determined for the applicable fiscal year or period. We
commenced operations in December 1997. The amounts shown for 1998 are for
the period from inception to February 28, 1998.
(2) Amounts include payments made by us as matching registered retirement
savings plan contributions to those made by our executive officers and an
automobile allowance.
(3) Mr. Harrington joined our company in April 1998.
(4) Mr. Verner joined our company in November 1998.
55
Option Grants in Last Fiscal Year
We granted options to the executive officers named in the summary
compensation table during the year ended February 29, 2000 as follows:
Market Value of Common Grant
Shares Date
Common Shares Percent of Total Underlying Options on Present
Under Options Options Granted Exercise Price Date of Expiration Value $
Name Granted (#) in Fiscal 2000 (%) ($ per share) Grant(1) ($ per share) Date (2)
- ---- ------------- ------------------ -------------- ---------------------- ---------- -------
Marcel LeBrun........... 116,360 8.3% $1.63 $1.63 12/17/06 $38,100
69,816 5.0 0.95 0.95 04/13/06 13,260
Allan Cameron........... 116,360 8.3 1.63 1.63 12/17/06 38,100
46,544 3.3 0.95 0.95 04/13/06 8,840
Doug Harrington......... 29,090 2.1 1.63 1.63 02/03/07 9,525
40,726 2.9 0.95 0.95 04/13/06 7,735
Gerry Verner............ 104,724 7.5 1.63 1.63 02/03/07 34,290
- --------
(1) There was no public market for our common shares as of the dates of the
option grants. Therefore, the amounts set forth in this column represent
the fair market value of each of our common shares as of those dates, as
determined by our board.
(2) The grant date present value has been calculated as of the date of grant
through the Black Scholes pricing model using the minimum value method,
which assumes no volatility, and by applying the following assumptions:
weighted average interest rate of 5.76%; dividend yield of 0%; and an
expected period of four years.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year Option Values
The officers named in the summary compensation table did not exercise any
options during the fiscal year ended February 29, 2000. The following table
sets forth the estimated value as of February 29, 2000 of the exercisable and
unexercisable options held by these officers.
Number of Common Shares
Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at Fiscal Year End (#) Fiscal Year End ($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Marcel LeBrun............... 58,180 244,356 $60,000 $108,000
Allan Cameron............... 55,271 218,175 57,000 89,000
Doug Harrington............. 26,181 148,359 27,000 109,000
Gerry Verner................ 17,454 157,086 12,000 36,000
- --------
(1) The value of an "in-the-money" option represents the difference between the
aggregate estimated fair market value of the common shares issuable upon
exercise of the option and the aggregate exercise price of the option.
There was no public market for our common shares as of February 29, 2000.
Therefore, the amounts set forth in this column represent the fair market
value of our common shares as of February 29, 2000, $1.63 (C$2.36) per
share, as determined by our board.
56
Employment Contracts
Each of Marcel LeBrun, Allan Cameron, Gerry Verner, Marjean Henderson and
Doug Harrington has entered into an employment agreement with us dated as of
July 17, 2000.
Pursuant to these agreements, the annual base salary for each officer is
as follows: Mr. LeBrun, $220,000; Mr. Cameron, $110,000; Mr. Verner, $110,000;
Ms. Henderson, $210,000; and Mr. Harrington, $150,000. These base salaries are
subject to review by our board of directors in its discretion. Further, the
officers are entitled to an annual bonus, up to a maximum of 50% of his or her
annual base salary, as determined by our board of directors in its discretion
based upon target profit and revenue performance levels and upon individual
performance. In addition, Ms. Henderson's employment agreement entitles her to
receive options to purchase 197,812 common shares. Pursuant to his employment
agreement, Mr. Harrington has relocated to Raleigh, North Carolina.
In addition, under his or her respective employment agreement, each
executive officer is subject to non-competition provisions during his or her
employment and for 12 months thereafter and to confidentiality restrictions.
Each employment agreement provides that in the event of termination without
cause, the executive officer is entitled to monthly severance payments equal to
his or her respective base salary for one year, continued benefits coverage for
one year, the pro-rated portion of any earned bonus and the exercise of vested
options and any unvested options that otherwise would have vested in the 12-
month period following the date of termination. In the event of termination for
cause, the executive officer is entitled to receive his or her respective
salary and bonus through the date of termination and vested options for which
the executive officer had provided notice of exercise prior to the date of
termination.
In the event of a change of control of us, which is defined as the
acquisition by a person of 51% or more of our outstanding voting shares, we may
terminate the employment of any executive officer. Each executive officer also
has the right to terminate his or her employment in the event of a change of
control. In either case, the executive officer is entitled to a severance
payment equal to his or her respective accrued base salary, the pro-rated
portion of any earned bonus and the right to exercise, within 90 days, any
options granted to that executive officer, regardless of vesting date.
We have purchased a key-man employee insurance policy with respect to
each of Marcel LeBrun and Allan Cameron, that provides coverage of
approximately C$1 million per individual.
Option Plans
We currently maintain one share option plan and expect to add a new share
option plan. Each is intended to attract, retain and motivate employees,
officers and directors of, and consultants to, our company. The compensation
committee of our board of directors administers the option plans. The
compensation committee determines, among other things, the term, vesting
periods and the price of options granted under the plan. As of the date of this
prospectus, options to purchase 3,037,171 shares at a weighted average exercise
price of $1.68 per share have been granted under the plans.
Employee Share Option Plan
We adopted our current share option plan in February 1998 and amended it
on December 17, 1999. It provides for the grant of options to employees,
officers and directors of, and consultants to, our company. Options granted to
employees generally have the following terms. All options granted under the
plan have a maximum term of seven years. In the past, the exercise price per
share for each option has been determined by the compensation committee with
reference to the value of our company, as determined by our board of directors,
and to the number of our shares that are outstanding. If we terminate an option
holder's employment without cause, the vested portion of any grant will remain
exercisable for the lesser of 60 days or the balance
57
of the option term. In the event we terminate an option holder's employment for
cause, any option held by such option holder shall thereupon immediately
terminate, whether exercisable or not. If the option holder dies, the vested
options may be exercised for a period of one year or the balance of the term,
whichever is shorter. In the event the option holder retires, the option holder
may exercise vested options for 60 days or the balance of the option term,
whichever is shorter. In the event of disability, the option holder has six
months or the balance of the option term, whichever is shorter, to exercise
vested options. Unvested options will expire upon termination of employment for
any reason. The terms of the options granted to the officers referred to under
the "Employment Contracts" are described in that section.
2000 Share Option Plan
We propose to adopt a new share option plan which will not affect options
granted under our existing plan. Our new plan will replace the existing plan,
and no new options will be granted under the existing plan. The compensation
committee of our board of directors will administer the new plan and will
determine, among other things, the eligibility of persons to participate in the
plan, vesting periods and other attributes of individual options. The new plan
will provide for the grant of options to employees, officers and directors of,
and consultants to, ImagicTV and its affiliates. Both incentive share options
and non-qualified share options will be available to U.S. residents.
Options held by any person under the new plan together with any other
options granted to that person may not at any time exceed 5% of the aggregate
number of our common shares outstanding from time to time. The maximum number
of shares issuable under the new plan is 1,879,185, subject to necessary
approvals. The options granted under the new plan will have a maximum term of
10 years and an exercise price no less than the fair market value of our common
shares on the date of the grant, or 110% of fair market value in the case of an
incentive stock option granted to an employee who owns common shares having
more than 10% of the votes outstanding.
Under the new plan, if a change of control of our company should occur,
our board of directors will be permitted, without any action or consent
required on the part of any option holder to, among other things accelerate the
vesting of all options so that they become immediately exercisable.
Outstanding Options to Purchase Shares
The following table sets forth, as of September 30, 2000, our outstanding
options granted to our executive officers, directors, employees and others:
Number of
Common Shares Exercise Price Per
Subject to Option Common Share(1) Expiration Date
----------------- ------------------ -----------------
Executive Officers (5 01/05/05 to
persons in total)...... 331,626 $0.57 04/01/05
11/30/05 to
226,902 0.91 04/13/06
12/17/06 to
564,346 1.56 07/31/07
Directors who are not
also executive officers 03/23/07 to
(3 persons in total)... 75,634 1.56 08/10/07
Employees (176 persons 01/05/05 to
in total).............. 343,262 0.57 10/13/05
11/23/05 to
611,181 0.91 09/30/06
10/01/06 to
94,252 1.14 12/06/06
12/17/06 to
625,319 1.56 07/13/07
06/19/07 to
164,649 11.17 09/13/07
- --------
(1) The market value is not determinable as the common shares were not publicly
traded at the date of grant. We believe the exercise price represents the
fair value of the common shares at the date of grant.
58
Directors' and Officers' Indemnification
Under the Canada Business Corporations Act, we are permitted to indemnify
our directors and officers and former directors and officers against costs and
expenses, including amounts paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which they are made
parties because of their position as directors or officers, including an action
against us. To be entitled to indemnification under this act, the director or
officer must act honestly and in good faith with a view to our best interests.
In the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, the director or officer must have reasonable
grounds for believing that his or her conduct was lawful.
Under our by-laws, we may indemnify our current and former directors, as
well as current and former officers, employees and agents, to the fullest
extent permitted by the Canada Business Corporations Act. Our by-laws authorize
us to purchase and maintain insurance on behalf of our current and past
directors, officers, employees and agents against any liability incurred by
them in their duties. We believe that the provisions of our by-laws are
necessary to attract and retain qualified persons as directors and officers.
Currently, there is no pending litigation or proceeding in which a
current or past director, officer or employee seeks indemnification.
Furthermore, we are not aware of any threatened litigation that may result in
claims for indemnification. We have purchased a liability insurance policy
covering our directors and officers.
59
RELATED PARTY TRANSACTIONS
The following describes the significant transactions entered into between
us and our directors, executive officers, shareholders, and affiliates of the
shareholders. All future transactions between us and any of those parties will
be subject to approval by a majority of the disinterested members of the board.
Technology Agreements
On January 1, 1998, we entered into a technology transfer agreement with
NBTel, under which NBTel transferred intellectual property relating to digital
broadcasting to us in exchange for 2,327,200 common shares. NBTel owned all of
our outstanding common shares at January 1, 1998, and NBTel was wholly owned by
Bruncor Inc., a public company in Canada. As the transaction occurred between
companies under common control, the asset transfer has been accounted for at
the carrying value of nil. We estimated the fair value of the transferred
intellectual property to be approximately $1,330,000 at the time of the
transfer. On January 5, 1998, we entered into a development agreement with
NBTel and a subsidiary of Celtic House International, a private venture capital
company unrelated to NBTel. Pursuant to this agreement, NBTel and the Celtic
House subsidiary jointly engaged our services and agreed to provide up to C$4
million in funding for a research project to carry out research and development
on this intellectual property. Under the terms of the development agreement,
all of the technology developed under this research project remained the
property of NBTel and the Celtic House subsidiary. On the same date, we entered
into a technology transfer option agreement. Pursuant to this agreement, NBTel
and the Celtic House subsidiary granted to us an option to acquire the
technology developed pursuant to the development agreement from NBTel and the
Celtic House subsidiary in return for the issuance of a number of our Class A
common shares. Concurrently with the execution of the development agreement,
Dr. Terence H. Matthews, the principal of Celtic House, became a director of
ImagicTV.
During the year ended February 28, 1999, we received C$2,800,000 under
the development agreement. On January 5, 1999, we exercised our option to
acquire the technology developed under the research project and issued
1,890,850 common shares to NBTel and 1,890,850 common shares to Celtic House,
having an ascribed value of C$2,800,000, the amount of cash we received under
the development agreement. Upon exercise of the option, the development
agreement and the technology transfer option agreement terminated. The cash
received under the development agreement was initially recorded as a liability
when received and was subsequently recorded as the paid-up capital for the
3,781,700 common shares issued pursuant to the exercise of the option.
On April 19, 1999, we entered into a licensing agreement with NBTel.
Pursuant to this agreement, NBTel received a perpetual, non-exclusive license
to use DTV Manager in the Province of New Brunswick for cash consideration of
C$500,000 and future one-time per subscriber payments decreasing from C$150 to
C$80 based on the number of active NBTel subscribers to DTV Manager in New
Brunswick. In addition, the license agreement provides for the annual payment
of fees for maintenance and technical support services in an amount equal to
20% of the total license fees, including the initial fee and cumulative
subscriber royalties. If requested by NBTel, we have agreed to provide
consulting and training services at our then current rates.
In April 2000, NBTel made its first payment for maintenance and technical
support services of C$100,000. On December 16, 1999, NBTel assigned the license
agreement to its parent, Aliant Inc., and we amended it to include a license
for our pcVu product and to expand the geographic territory of the license to
the provinces of Nova Scotia, Prince Edward Island and Newfoundland on an
exclusive basis. In connection with the assignment and amendment, Aliant agreed
to pay us cash consideration amounting to C$900,000, of which C$500,000 was
paid on January 31, 2000 and C$400,000 is due in installments of C$200,000 each
on January 31, 2001 and 2002. Under the amended agreement, the future one-time
per subscriber payments based on the number of subscribers also applies to
subscribers in Nova Scotia, Prince Edward Island and Newfoundland. In
accordance with the amended agreement, MTT, the incumbent local exchange
carrier in the Province of Nova Scotia and a subsidiary of Aliant, has licensed
and stated its intention to commercially deploy our DTV Manager software.
60
In addition, we have supplied NBTel and Aliant with set-top boxes at
little or no mark-up above our cost. We received no revenues in fiscal 1998,
$462,000 in fiscal 1999, $180,000 in fiscal 2000 and $1.0 million in the six
months ended August 31, 2000 from the sales of set-top boxes to NBTel and
Aliant.
In November 1999, we entered into a license agreement with Newbridge
Networks Corporation, one of our principal shareholders. Pursuant to this
agreement, Newbridge received a license to use DTV Manager for internal testing
purposes at six technical laboratories. The license also permitted Newbridge to
use DTV Manager in sales and marketing demonstrations of its hardware products.
In exchange for the license, we received switching equipment from Newbridge
that enables the prioritized transmission of voice, Internet and television
data in high-speed, networked environments. We have used this equipment for
research and development purposes. The transaction was recorded at the fair
value of the equipment, which amounted to $103,000. In connection with the
transaction, we recorded license fee revenues for the same amount. In February
2000, we amended the license agreement to provide Newbridge with the
opportunity to purchase additional twelve-month site licenses for demonstration
purposes. As of August 31, 2000, we have received aggregate cash consideration
of C$40,000 for these additional licenses and $17,000 for a 90-day trial
license. We also currently supply Newbridge with set-top boxes for laboratory
test installations at little or no mark-up above our cost. We received $23,000
in fiscal 2000 and $17,000 in the six months ended August 31, 2000 from the
sales of set-top boxes to Newbridge.
Financings, Loans and Inter-Company Arrangements
During the year ended February 28, 2000, the Minister of Economic
Development, Tourism and Culture for the Province of New Brunswick, through an
application filed by Newbridge, indirectly granted us a government assistance
loan, or the repayable loan, in the amount of C$2,560,000 and a forgivable loan
in the amount of C$640,000, to assist us in creating research and development
employment in the Province of New Brunswick. The forgivable loan was fully
forgiven and recognized in the statement of operations as forgiveness of debt.
The repayable loan is repayable in annual installments equal to 1.5% of the
license fee revenues of the immediately preceding year, and the balance, if
any, is due on February 25, 2006. The repayable loan is interest-free until
February 25, 2006 and, if not paid at that date, thereafter will bear interest
at 6.3% per annum. As of August 31, 2000, we have not made, and have not been
required to make, any payments under the repayable loan.
In addition, we may be required to accelerate our repayment of the
repayable loan if the total number of our full-time employees employed in the
Province of New Brunswick falls below 60 at any time during our current fiscal
year or below 92 at any time during our next fiscal year, which will end on
February 28, 2002. As of August 31, 2000, we employed approximately 143 full-
time employees in the Province of New Brunswick.
During fiscal 1999 and fiscal 2000, we issued to our existing
shareholders an aggregate of 4,509,223 common shares for aggregate
consideration of $4,116,000 in connection with preemptive rights granted
pursuant to our unanimous shareholders agreement. These preemptive rights,
which do not apply to this offering and which will terminate upon completion of
this offering, provide that holders of our existing voting shares can subscribe
for a portion of any new issuance of our securities in an amount equal to their
percentage ownership of our voting shares. Of these 4,509,223 common shares
issued, 2,618,373 were issued to Aliant, 1,454,500 were issued to Alcatel and
436,350 were issued to Celtic House.
In September 2000, we issued warrants to purchase common shares to four
of our existing principal shareholders and one other shareholder for an
aggregate purchase price of $10,000,000. These warrants were automatically
exercised in October 2000. In accordance with the terms of the warrants, each
warrantholder was entitled to receive upon completion of a sale of common
shares to outside investors, for no additional consideration, a number of
shares per warrant which reflected the price paid per common share by outside
investors. As a result of the October 2000 sale of common shares to America
Online at $11.00 per share, 1.11 common shares per warrant were issued upon
exercise of the warrants. This resulted in the issuance of the following
numbers of common shares to these four principal shareholders: 205,157 to
Alcatel, 371,001 to Aliant, 126,312 to Celtic House, and 137,727 to
Whitecastle.
61
Leases
We sublease a portion of our principal executive offices from NBTel. Of
the approximately 22,000 square feet that we occupy at our principal executive
offices, we sublease approximately 17,000 square feet from NBTel at a cost of
approximately $235,000 per year. The lease on this facility expires in February
2001, subject to a renewal option of one additional year. See "Business--
Facilities."
62
PRINCIPAL SHAREHOLDERS
The following table provides information regarding the beneficial
ownership of our common shares as of October 6, 2000, and as adjusted to
reflect the sale of 4,750,000 common shares in this offering by:
. each person or entity who is known to us to own beneficially more
than 10% of our outstanding common shares; and
. all of our directors and executive officers as a group.
As used in the following table, "beneficial ownership" means the sole or
shared power to vote or direct the voting or to dispose or direct the
disposition of any security. A person is deemed to be the beneficial owner of
securities that can be acquired within 60 days from the date of this
prospectus. Common shares subject to options, warrants or rights that are
currently exercisable or exercisable within 60 days are deemed outstanding for
computing the ownership percentage of the person holding these options,
warrants or rights, but are not deemed outstanding for computing the ownership
percentage of any other person. The amounts and percentages are based upon
19,831,780 common shares outstanding as of October 6, 2000.
Percentage of Shares
Beneficially Owned
------------------------
Title
Name & Address of of Number of Shares Prior to After
Beneficial Owner Class Beneficially Owned Offering Offering
- ----------------- ------ ------------------ ---------- ----------
Aliant Inc. (held through common 7,209,751 36.35% 29.33%
Aliant Horizons Inc.)(1)..
One Brunswick Square, 19th
floor
Saint John, New Brunswick
E2L 4R5
Compagnie Financiere
Alcatel (held through its common 3,986,857 20.10 16.22
subsidiary, Newbridge
Networks Corporation).....
600 March Road
Kanata, Ontario K2K 2E6
Celtic House International common 2,454,676 12.38 9.99
(held through 506048 N.B.
Ltd.).....................
555 Legget Drive, Suite
211
Kanata, Ontario K2K 3X3
Whitecastle Investments common 2,464,927 12.43 10.03
Limited(2)................
22 St. Clair Avenue East,
Suite 1010,
Toronto, Ontario M4T 2S3
Directors and executive common 436,525 2.17 1.78
officers, as a group (13
persons)..................
- --------
(1) Aliant Inc. is the parent of NBTel.
(2) Pursuant to a voting trust agreement that will terminate upon completion of
the offering, Whitecastle exercises effective voting control over an
additional 1,549,810 common shares.
63
DESCRIPTION OF SHARE CAPITAL
Concurrently with the closing of the offering, we will reclassify our
share capital so that it will consist of common shares and preferred shares,
issuable in series. This reclassification will be effected by amending our
articles of incorporation shortly before the completion of this offering to
convert each of our existing Class A, Class B and Class C common shares into a
single new class of common shares. We will also create the class of preferred
shares. After the reclassification and prior to the completion of this
offering, each new common share outstanding will be split into new common
shares on an assumed 1.1636-for-1 basis.
Common Shares
Following the reclassification of our share capital and the share split,
we will have authorized for issuance an unlimited number of common shares. Each
of our outstanding common shares will be entitled to one vote at meetings of
our shareholders and to receive dividends if, as, and when declared by our
board of directors. Subject to the rights of holders of shares of any class
ranking senior to the common shares, holders of our common shares are entitled
to receive our remaining property or assets in the event of our liquidation,
dissolution or winding-up. A holder of common shares will have no preemptive,
redemption or conversion rights upon completion of this offering.
The registrar and transfer agent for our common shares in Canada is CIBC
Mellon Trust Company at its principal stock and bond transfer offices located
in Toronto, Ontario, and the co-transfer agent and registrar for our common
shares in the United States is ChaseMellon Shareholder Services, LLC. at its
offices located in New York, New York.
Preferred Shares
Our board of directors will have the authority, without further action by
the shareholders, to issue an unlimited number of preferred shares in one or
more series. These preferred shares may be entitled to dividend and liquidation
preferences over the common shares. The board will be able to fix the
designations, powers, preferences, privileges and relative, participating,
optional or special rights of any preferred shares issued, including any
qualifications, limitations or restrictions. Special rights which may be
granted to a series of preferred shares may include dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any of
which may be superior to the rights of the common shares. Preferred share
issuances could decrease the market price of the common shares and may
adversely affect the voting and other rights of the holders of common shares.
The issuance of preferred shares could also have the effect of delaying or
preventing a change of control of our company.
64
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, a total of 24,581,780 of our common
shares will be outstanding, assuming no exercise of the underwriters' over-
allotment option or of any outstanding options. The sale or the availability
for sale of substantial numbers of common shares in the public market could
adversely affect prevailing market prices for our common shares and could
impair our ability to raise capital or effect acquisitions through the issuance
of our common shares. As described below, all of our common shares currently
outstanding will not be available for sale immediately after this offering
because of contractual or legal restrictions on resale.
U.S. Resale Restrictions
All of the 4,750,000 common shares sold in this offering will be freely
tradable without restriction under the U.S. Securities Act of 1933, except by
"affiliates" as defined in Rule 144 under the Securities Act.
For the reasons set forth below, we believe that the following presently
outstanding common shares will be eligible for resale in the public market in
the United States at the following times:
Number of
Shares
----------
At the date of this prospectus.................................. --
180 days after the date of this prospectus...................... 18,468,186
Commencing in October 2001...................................... 1,363,590
Holders of approximately 19,831,780 common shares have entered into lock-
up agreements pursuant to which they have agreed, with limited exceptions, not
to sell or transfer any of their common shares for 180 days following the date
of this prospectus without first obtaining the consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the underwriters. Merrill
Lynch may waive this lockup provision with respect to one or more shareholders
at any time or from time to time without notice. For a description of these
lockup arrangements, see "Underwriting."
We believe that, upon completion of this offering, 18,420,425 presently
outstanding common shares will be held by persons who purchased the shares
outside the United States in transactions exempt from registration in the
United States pursuant to Regulation S under the Securities Act. As a result of
the lockup agreements and, in the case of our affiliates, the provisions of
Rule 144 under the Securities Act, these common shares will be available for
sale in the public market in the United States commencing 180 days after the
date of this prospectus, subject, in the case of our affiliates, to Rule 144
limitations discussed below, other than the one-year holding period
requirement.
We believe that, upon completion of this offering, U.S. residents will
hold 1,411,355 presently outstanding common shares purchased by them in private
placements, which shares are treated as "restricted securities" for purposes of
Rule 144. As a result of the lockup agreements and the provisions of Rule 144
under the Securities Act, these common shares will be available for sale in the
public market in the United States, as to 47,765 shares, commencing 180 days
after the date of this prospectus and as to 1,363,590 shares commencing in
October 2001, subject to Rule 144 limitations.
In general, under Rule 144, as in effect on the date of this prospectus,
any person, including any of our affiliates, who has beneficially owned common
shares for at least one year will be entitled to sell, in any
65
three-month period, a number of shares that, together with sales of any common
shares with which such person's sales must be aggregated, does not exceed the
greater of:
. 1% of our then outstanding common shares, which will equal
approximately 245,818 common shares upon the completion of this
offering; and
. the average weekly trading volume of the common shares on the Nasdaq
National Market during the four calendar weeks immediately preceding
filing of a Form 144 with respect to such sale.
Sales of restricted securities pursuant to Rule 144 are also subject to
requirements relating to manner of sale, notice and the availability of current
public information about us.
In general, under Rule 144(k), a person who was not an affiliate of ours
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell shares treated as "restricted securities" without having to comply with
the volume limitation, manner of sale, notice or current public information
provisions of Rule 144.
Our directors, officers and employees may rely on Rule 701 to resell
common shares issued to them, pursuant to written compensatory benefit plans or
written contracts relating to their compensation. We believe that upon
completion of this offering, Rule 701 will apply to approximately 10,473
outstanding common shares. Rule 701 also will apply to common shares acquired
upon exercise of options granted before the date of this prospectus, including
exercises after the date of this prospectus. Common shares issued in reliance
on Rule 701 are treated as "restricted securities" and, subject to the 180-day
lockup agreements described above, may be sold beginning 90 days after the date
of this prospectus:
. by persons other than affiliates of ours, subject only to the manner
of sale provisions of Rule 144; and
. by persons deemed to be affiliates of ours under Rule 144 without
compliance with its one-year minimum holding period requirement.
We intend to file with the U.S. Securities and Exchange Commission
("SEC") a registration statement on Form S-8 covering our new share option plan
following the date of this prospectus. The S-8 registration statement will
allow holders of common shares that are issued under our new share option plan
to resell those common shares in the public market, subject to any lockup
agreements entered into by option holders.
Canadian Resale Restrictions
Upon completion of this offering, Canadian residents will hold 18,420,425
presently outstanding common shares and options to purchase 2,527,630 common
shares, excluding any common shares bought in this offering. Under applicable
Canadian securities laws, these common shares or common shares issuable upon
exercise of these options may be subject to resale restrictions pursuant to
which the common shares may not be sold or otherwise disposed of for value in
Canada, except pursuant to a prospectus, a discretionary exemption or a
statutory exemption available only in specific limited circumstances, until we
have been a reporting issuer under Canadian securities laws for at least 12
months or 18 months in the case of a "control person" under applicable Canadian
securities laws, in the province in which such shareholder or optionee is
resident. Legislative changes have been proposed in Canada which, if enacted in
the form proposed, could eliminate or reduce such holding periods depending
upon the place of residence of the selling shareholder and the jurisdiction
into which the shareholder proposes to sell the common shares. It is unclear as
to when the proposed rules will come into effect and whether, if effective
after the completion of this offering, they will have retroactive effect.
66
CERTAIN CANADIAN AND UNITED STATES INCOME TAX CONSIDERATIONS
United States Holders
The following summary discusses the material Canadian federal income tax
and U.S. federal income consequences generally applicable to the acquisition,
ownership and disposition of shares by a U.S. Holder (as defined below):
. that is resident in the United States and is not resident in Canada
for the purpose of the Canada-United States Income Tax Convention
(the "Treaty");
. that otherwise qualifies for full benefits under the Treaty; and
. whose shares are not, for purposes of the Treaty, effectively
connected with a permanent establishment or fixed base in Canada.
As used herein, a "U.S. Holder" means a beneficial owner of shares that
is, for U.S. federal income tax purposes:
. a citizen or individual resident of the United States;
. a corporation, partnership or other entity organized in or under the
laws of the United States or any state thereof (including the
District of Columbia);
. an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
. a trust if, in general, the trust is subject to the primary
supervision of a court within the United States and the control of
one or more United States persons as described in section 7701(a)(30)
of the U.S. Internal Revenue Code of 1986, as amended (the "U.S.
Internal Revenue Code").
This summary is based on U.S. federal income tax law, regulations,
administrative pronouncements and court decisions, all as of the date of this
prospectus and all of which are subject to change or differing interpretation,
possibly with retroactive effect, and Canadian federal income tax law, as more
fully described below.
This summary does not purport to address all aspects of Canadian federal
income and U.S. federal income taxation that may be relevant to a U.S. Holder,
and does not take into account the U.S. federal income tax consequences to U.S.
Holders that may be subject to special rules (including, but not limited to,
tax-exempt entities, U.S. expatriates, financial institutions, insurance
companies, broker-dealers, traders in securities, investors liable for
alternative minimum tax, investors that own (directly, indirectly or by
attribution) 2% or more of our voting shares, investors that hold shares as
part of a straddle, hedging, conversion or integrated transaction, or investors
whose functional currency is not the U.S. dollar). Furthermore, this summary
does not address U.S. state, local or other (such as U.S. estate or gift) tax
consequences of the acquisition, ownership and disposition of shares. Holders
of shares should consult their own tax advisers as to the particular Canadian
tax and U.S. federal, state and local income and other tax consequences to them
of the acquisition, ownership and disposition of shares. The summary which
follows is generally limited to U.S. Holders that hold the shares as capital
assets for U.S. and Canadian federal income tax purposes. A share will
generally be considered to be a capital asset to a U.S. Holder (for Canadian
tax purposes) unless the holder holds it as inventory in the course of carrying
on a business or acquired it in a transaction or transactions considered to be
an adventure in the nature of a trade.
In addition, the following summary of Canadian federal income tax
considerations applies only to a U.S. Holder who, for purposes of the Income
Tax Act (Canada) (the "Canadian Act") and at all relevant times, is not
resident or deemed to be resident in Canada, deals at arm's length with
ImagicTV, does not use or hold,
67
and is not deemed to use or hold, the shares in, or in the course of carrying
on, a business or providing independent personal services in Canada, does not
carry on an insurance business in Canada and elsewhere, and who, for purposes
of the Treaty and at all relevant times, does not own (or is not treated as
owning) 10% or more of the outstanding voting shares of ImagicTV.
Canadian Federal Income Tax Considerations
This portion of the summary is based upon the current provisions of the
Canadian Act, under the Canadian Act regulations and counsel's understanding of
the current published administrative practices and policies of the Canada
Customs and Revenue Agency. The summary also takes into account all specific
proposals to amend the Canadian Act and the regulations publicly announced
prior to the date of this prospectus (the "Proposed Amendments"), and, while we
cannot assure you that the Proposed Amendments will be enacted as announced, or
at all, this summary assumes that the Proposed Amendments will be enacted
substantially as proposed. This summary does not otherwise take into account or
anticipate any changes in law, whether by way of legislative, judicial or
governmental decision, action or interpretation.
Canadian Federal Taxation of Dividends on Shares
Dividends, including deemed dividends and stock dividends, paid or
credited on shares owned by a U.S. Holder will be subject to Canadian
withholding tax under the Canadian Act at a rate of 25% on the gross amount of
the dividends. The rate of withholding tax generally is reduced under the
Treaty to 15% where the U.S. Holder is the beneficial owner of the dividends.
Under the Treaty, dividends, or deemed dividends, paid or credited to a U.S.
Holder that is a United States tax-exempt organization as described in Article
XXI of the Treaty, other than such dividends that constitute income from
carrying on a trade or business, will generally not be subject to Canadian
withholding tax, although such entities may be subject to administrative
procedures to confirm their eligibility to such exemption.
Under Canadian tax law, dividends may be deemed to be paid in certain
circumstances. For example, when a corporation redeems or purchases for
cancellation shares of its capital stock, a dividend will be deemed to be paid
in an amount equal to the amount by which the amount paid exceeds the "paid-up
capital" (as defined in the Canadian Act) of the shares so redeemed or
purchased for cancellation. The "paid-up capital" of the shares issued to a
U.S. Holder may be less than the holder's cost of such shares by reason of, for
example, the averaging of the paid-up capital with that of shares of such class
already issued and outstanding. The paid-up capital attributable to each share
will be relevant to the holder of that share in connection with a purchase for
cancellation of that share or upon the winding-up of ImagicTV.
Canadian Federal Taxation on Sale or Other Disposition of Shares
A gain realized by a U.S. Holder on a disposition or deemed disposition
of shares generally will not be subject to tax under the Canadian Act unless
the shares constitute taxable Canadian property within the meaning of the
Canadian Act. Shares generally will not be taxable Canadian property to a U.S.
Holder if the shares are listed on a prescribed stock exchange at the time of
disposition unless, at any time within the 60 month period immediately
preceding the disposition, the U.S. Holder, persons with whom the U.S. Holder
did not deal at arm's length or the U.S. Holder together with persons with whom
the U.S. Holder did not deal at arm's length owned or had an interest in or
option to acquire 25% or more of the issued shares of any class or series of
ImagicTV's shares. The shares will constitute taxable Canadian property to a
U.S. Holder if at the time of their disposition the shares are not listed on
The Toronto Stock Exchange or another prescribed stock exchange (in this event,
a U.S. Holder would have to comply with notification requirements under the
Canadian Act in respect of the disposition of the shares).
Even if the shares constitute or are deemed to constitute taxable
Canadian property to a particular U.S. Holder, an exemption from tax under the
Canadian Act may be available under the terms of the Treaty.
68
United States Federal Income Tax Considerations
Taxation of Dividends
Subject to the discussion below under "Passive Foreign Investment Company
Considerations," for U.S. federal income tax purposes, a U.S. Holder will
generally include in gross income the amount of a distribution paid by us,
unreduced by the applicable Canadian withholding tax, to the extent paid out of
our current or accumulated earnings and profits (as determined for U.S. federal
income tax purposes), as ordinary dividend income when the distribution is
actually or constructively received by the U.S. Holder. The dividend will not
be eligible for the dividends-received deduction generally allowed to U.S.
corporations in respect of dividends received from other U.S. corporations. If
the dividend distribution is paid in Canadian dollars, the amount of the
dividend includible in the income of a U.S. Holder will be the U.S. dollar
value of the dividend, determined at the spot Canadian dollar/U.S. dollar rate
on the date the dividend is includible in the income of the U.S. Holder,
regardless of whether the payment is in fact converted into U.S. dollars. A
U.S. Holder will have a basis in any Canadian dollar distributed by us equal to
the U.S. dollar value of the Canadian dollar on the date it is actually or
constructively received by the U.S. Holder. Generally, any gain or loss
resulting from currency exchange fluctuations during the period from the date
the dividend payment is includible in income to the date the payment is
converted into U.S. dollars will be treated as ordinary income or loss. Such
gain or loss will generally be income from sources within the United States for
foreign tax credit limitation purposes. Distributions in excess of our current
and accumulated earnings and profits, as determined for U.S. federal income tax
purposes, will be treated as a non-taxable return of capital to the extent of
the U.S. Holder's tax basis in the shares and thereafter as capital gain.
A U.S. Holder may, subject to certain limitations, be eligible to claim
as a credit or deduction, for purposes of computing its U.S. federal income tax
liability, the Canadian withholding tax paid in respect of dividends from us.
Dividends from us will generally constitute foreign-source income and will
generally be classified as "passive income" or, in the case of certain U.S.
Holders, "financial services income" for purposes of determining the U.S.
foreign tax credit limitation. The calculation of foreign tax credits and, in
the case of a U.S. Holder that elects to deduct foreign taxes, the availability
of deductions, involves the application of complex rules that depend on a U.S.
Holder's particular circumstances. U.S. Holders should consult their own tax
advisors regarding the availability of foreign tax credits and deductions for
such Canadian withholding tax.
Under rules enacted by the U.S. Congress in 1997 and other guidance
recently released by the U.S. Department of the Treasury, foreign tax credits
will not be allowed for withholding taxes imposed in respect of certain short-
term or hedged positions in stock or in respect of arrangements in which a U.S.
Holder's expected economic profit, after non-U.S. taxes, is insubstantial. U.S.
Holders should consult their own tax advisers concerning the implications of
these rules in light of their particular circumstances.
Taxation of Capital Gains
A U.S. Holder will, upon the sale, exchange or other taxable disposition
of a share, recognize a gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the U.S. dollar value of the amount
realized and the U.S. Holder's tax basis, determined in U.S. dollars, in the
share. In general, such gain or loss will be treated as arising from sources
within the United States for U.S. federal income tax purposes, unless it is
attributable to an office or other fixed place of business maintained by the
U.S. Holder outside the United States and certain other conditions are
satisfied.
Subject to the discussion below, under "Passive Foreign Investment
Company Considerations," the gain or loss recognized upon the sale of a share
will be a capital gain or loss. The maximum non-corporate U.S. federal income
tax rate on net capital gains is currently 20% for capital assets held for more
than one year. Net capital gains on the sale of capital assets held for one
year or less are subject to U.S. federal income tax at ordinary income tax
rates. For a corporate U.S. Holder, all capital gains are currently taxed at
the same rate as ordinary income. The deductibility of capital losses is
subject to limitations.
69
Any tax imposed by Canada directly on the gain from such a sale or other
disposition would generally be eligible for the U.S. foreign tax credit;
however, if such gain were not treated as arising from sources outside the
United States, the U.S. Holder might not be able to use the credit otherwise
available because of the U.S. foreign tax credit limitation rules. The rules
relating to the determination of the U.S. foreign tax credit are complex and
U.S. Holders should consult their own tax advisers with respect to these rules.
A U.S. Holder that purchases shares with previously owned foreign
currency generally will recognize ordinary income or loss in an amount equal to
any difference between the U.S. Holder's tax basis in the foreign currency and
the U.S. dollar value of the foreign currency at the spot rate on the date the
shares are purchased. The U.S. Holder's basis in the shares generally will be
equal to the U.S. dollar value of the foreign currency at the spot rate on the
date of the purchase (or, if the shares are traded on an established securities
market, in the case of cash basis and electing accrual basis taxpayers, the
settlement date). A U.S. Holder that receives foreign currency upon sale or
other disposition of the shares will realize an amount equal to the U.S. dollar
value of the foreign currency on the date of the sale or other disposition (or,
if the shares are traded on an established securities market, in the case of
cash basis and electing accrual basis taxpayers, the settlement date). A U.S.
Holder will have tax basis in the foreign currency received equal to the U.S.
dollar amount realized. Any gain or loss realized by a U.S. Holder upon a
subsequent disposition of foreign currency (including upon an exchange for U.S.
dollars) will be ordinary income or loss.
Passive Foreign Investment Company Considerations
It is possible that we will be treated as a passive foreign investment
company for U.S. federal income tax purposes for our current taxable year, or
for future taxable years. However, an actual determination of passive foreign
investment company status is fundamentally factual in nature and generally
cannot be made until the close of the applicable taxable year. Accordingly,
there can be no assurance that we will not become a passive foreign investment
company in the future.
In general terms, we will be a passive foreign investment company with
respect to a taxable year if either:
. 75% or more of our gross income in such taxable year is passive
income; or
. the average quarterly percentage of the value of our assets that
produce or are held for the production of passive income is at least
50%.
For this purpose, if we own (directly or indirectly) at least 25% (by
value) of the stock of another corporation, we will be treated as if we had
directly received our proportionate share of the gross income of the other
corporation and as if we directly owned our proportionate share of the assets
of the other corporation. In addition, the IRS has indicated that cash
balances, even if held as working capital, are considered to be assets that
produce passive income.
If we were classified as a passive foreign investment company, unless a
U.S. Holder timely made one of specific available elections, a special tax
regime would apply to both:
. any "excess distribution," which would be such U.S. Holder's share of
distributions on the shares in any year that are greater than 125% of
the average annual distributions on the shares received by the U.S.
Holder in the three preceding years or the U.S. Holder's holding
period for the shares, if shorter; and
. any gain realized on the sale or other disposition of the shares held
by the U.S. Holder for more than one taxable year.
70
Under this regime, any excess distribution and any gain so realized would
be treated as ordinary income and would be subject to tax as if:
. the excess distribution or gain had been realized ratably over the
U.S. Holder's holding period;
. the amount deemed realized had been subject to tax in each year of
that holding period at the highest applicable tax rate; and
. the interest charge generally applicable to underpayment of tax had
been imposed on the taxes deemed to have been payable in each of
those years in which we were classified as a passive foreign
investment company.
In addition, the estate of an individual U.S. Holder who dies while
owning shares may not be eligible to step-up the tax basis of the shares.
The foregoing rules with respect to distributions and dispositions may be
avoided if a U.S. Holder is eligible for and timely makes a valid "mark-to-
market" election. If a mark-to-market election is made, the U.S. Holder will,
in general, include as ordinary income each year the excess, if any, of the
fair market value of its shares for that year (measured at the close of the
U.S. Holder's taxable year) over its adjusted tax basis in the shares. The U.S.
Holder will also be allowed an ordinary loss each year of the excess, if any,
of its adjusted tax basis over the fair market value of its shares, but only to
the extent of the net amount of previously included mark-to-market income as a
result of the mark-to-market election. The U.S. Holder's tax basis in the
shares will be adjusted to reflect these income or loss amounts. The mark-to-
market election is made on a shareholder-by-shareholder basis and, once made,
can only be revoked with the consent of the Internal Revenue Service. Assuming
the shares are regularly traded, the mark-to-market election would be available
with respect to the shares.
Each U.S. Holder is urged to consult its own tax advisor concerning the
potential application of the passive foreign investment company rules to the
U.S. Holder's ownership and disposition of shares.
U.S. Backup Withholding and Information Reporting
In general, information reporting requirements will apply to dividends in
respect of the shares and the proceeds received on the sale or disposition of
the shares paid within the United States, and in certain cases outside of the
United States, to a U.S. Holder unless the U.S. Holder is an exempt recipient,
such as a corporation, and a 31% backup withholding may apply to such amounts
if the U.S. Holder fails to provide an accurate taxpayer identification number
or to report interest and dividends required to be shown on its federal income
tax returns. The amount of any backup withholding from a payment to a U.S.
Holder will be allowed as a credit against the U.S. Holder's U.S. federal
income tax liability.
71
UNDERWRITING
General
Subject to the terms and conditions described in a purchase agreement
among us and each of the underwriters named below, we have agreed to sell to
the underwriters, and the underwriters severally have agreed to purchase from
us, the number of shares listed opposite their names below.
Number
Underwriter of Shares
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Chase Securities Inc.............................................
CIBC World Markets Inc...........................................
---------
Total....................................................... 4,750,000
=========
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and applicable Canadian
securities legislation, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
This offering is being made concurrently in the United States and in all
of the provinces and territories of Canada. The common shares will be offered
in the United States through the underwriters either directly or through their
respective U.S. broker-dealer affiliates or agents. The common shares will be
offered in all of the provinces and territories of Canada by Merrill Lynch
Canada Inc., the Canadian affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, CIBC World Markets Inc. Subject to applicable law, the
underwriters may offer the common shares outside the United States and Canada.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as receipt by the underwriters of
officers' certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
Commissions, Discounts and Expenses
The underwriters have advised us that they propose initially to offer the
shares to the public at the initial public offering price on the cover page of
this prospectus, and to dealers at that price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may reallow, a
discount not in excess of $ per share to other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
We will sell the shares to the underwriters at a per-share price of $ ,
which represents the public offering price of $ per share less a commission
of $ per share that we will pay to the underwriters. This commission, which
equals % of the public offering price, is the underwriters' compensation. The
following table shows the public offering price, underwriting commission and
proceeds
72
before expenses to ImagicTV. The information assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price............... $ $ $
Underwriting commission............. $ $ $
Proceeds, before expenses, to
ImagicTV........................... $ $ $
The public offering price for common shares offered in the United States
is payable in U.S. dollars and the public offering price for common shares
offered in Canada is payable in Canadian dollars. The Canadian public offering
price is the approximate equivalent of the offering price to the public in the
United States based on the prevailing Canadian-U.S. dollar exchange rate as of
the date of this prospectus.
The expenses of this offering, not including underwriting commissions,
are estimated at approximately $2.2 million and are payable by us, as set forth
in the following table:
SEC registration fee.......................................... $ 18,748
National Association of Securities Dealers ("NASD") filing
fee.......................................................... 7,600
Nasdaq National Market fee.................................... 75,000
Filing fees with Canadian securities regulatory
authorities(/1/)............................................. 28,700
The Toronto Stock Exchange fee................................ 34,000
U.S. state securities law qualification fees and expenses..... 10,000
Printing and engraving expenses............................... 325,000
Accountant's fees and expenses................................ 250,000
Legal fees and expenses....................................... 1,150,000
Miscellaneous................................................. 300,952
----------
Total....................................................... $2,200,000
==========
--------
(1) This assumes that 15% of the shares in the offering will be sold in
Canada.
Over-Allotment Option
We have granted an option to the underwriters to purchase up to 712,500
additional common shares at the public offering price. The underwriters may
exercise this option for 30 days from the date of this prospectus solely to
cover any over-allotments. If the underwriters exercise this option, each will
be obligated, subject to customary conditions contained in the purchase
agreement, to purchase a number of additional shares proportionate to that
underwriter's initial amount reflected in the above table. We will pay the
underwriters the underwriting commission for each additional common share
purchased.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to common shares offered by this prospectus for
sale to our directors and officers and some of their family members, and to
some of our consultants, employees and business associates. If these persons
purchase reserved shares, this will reduce the number of common shares
available for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
Purchasers of common shares pursuant to the reserved share program
generally will not be subject to lockup agreements in respect of the common
shares so purchased unless required by the Conduct Rules of the
73
NASD. The NASD's conduct rules will require that some purchasers of common
shares who are affiliated or associated with NASD members or who hold senior
positions at financial institutions or members of their immediate families be
subject to three-month lockup agreements.
No Sales of Common Shares or Similar Securities
We and our officers, directors and all of our existing shareholders have
agreed, with limited exceptions, not to sell or transfer any common shares for
180 days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Specifically, we
and these other individuals and entities have agreed not to directly or
indirectly
. offer, pledge, sell or contract to sell any common shares;
. sell any option or contract to purchase any common shares;
. purchase any option or contract to sell any common shares;
. grant any option, right or warrant for the sale of any common shares;
. lend or otherwise dispose of or transfer any common shares;
. file, or request or demand that we file, a registration statement
related to the common shares; or
. enter into any swap or other agreement that transfers all or any
portion of the economic consequence of ownership of any common
shares, whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
This lockup provision applies to common shares and to securities
convertible into or exchangeable or exercisable for or repayable with common
shares. It also applies to common shares owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition. Merrill Lynch may waive this lockup
provision with respect to one or more shareholders at any time or from time to
time without notice.
No Public Market
After pricing of this offering, we expect that our common shares will be
quoted on the Nasdaq National Market under the symbol "IMTV" and listed on The
Toronto Stock Exchange under the symbol "IMT."
Before this offering, there has been no public market for our common
shares. The initial public offering price will be determined through
negotiations among us and the underwriters. In addition to prevailing market
conditions, the principal factors considered in determining the initial public
offering price include:
. the valuation multiples of publicly traded companies that the
underwriters believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, our company and the industry
in which we compete;
. an assessment of our management, our past and present operations and
the prospects for, and anticipated timing of, future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
74
An active trading market for the common shares may not develop. It is
also possible that after the offering, the common shares will not trade in the
public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the common shares
in the aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common shares is completed, SEC rules may
limit underwriters and selling group members from bidding for and purchasing
our common shares. However, the representatives may engage in transactions that
stabilize the price of our common shares, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common shares in
connection with the offering, that is, if they sell more common shares than are
listed on the cover of this prospectus, the underwriters may reduce that short
position by purchasing shares in the open market. The underwriters may also
elect to reduce any short position by exercising all or part of the over-
allotment described above. Purchases of common shares to stabilize their price
or to reduce a short position may cause the price of the common shares to be
higher than it might be in the absence of such purchases.
The underwriters may also impose a penalty bid on underwriters and
selling group members. This means that if the underwriters purchase shares in
the open market to reduce the underwriters' short position or to stabilize the
price of the shares, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares. The
imposition of a penalty bid may also affect the price of the shares in that it
discourages resales of those shares.
Pursuant to policy statements issued by the securities commissions of
several Canadian provinces, including the Ontario Securities Commission and the
Commission des valeurs mobilieres du Quebec, the underwriters may not,
throughout the period of distribution, bid for or purchase common shares. The
foregoing restriction is subject to certain exceptions, on the condition that
the bid or purchase not be engaged in for the purpose of creating actual or
apparent active trading in, or raising the price of, the common shares. Those
exceptions include a bid or purchase permitted under the by-laws and rules of
The Toronto Stock Exchange relating to market stabilization and passive market
making activities and a bid or purchase made for or on behalf of a customer
where the order was not solicited during the period of distribution. Subject to
the foregoing, in connection with this offering and pursuant to the first
mentioned exception, the underwriters may over-allot or effect transactions
which stabilize or maintain the market price of the common shares at levels
other than those which might otherwise prevail on the open market.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition,
neither we nor any of the underwriters makes any representation that the
underwriters will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
Electronic Prospectus
Merrill Lynch, Pierce, Fenner & Smith Incorporated will be facilitating
Internet distribution for this offering to certain of its Internet subscription
customers. Merrill Lynch intends to allocate a limited number of shares for
sale to its online brokerage customers. An electronic prospectus is available
on the Internet website maintained by Merrill Lynch. Other than the prospectus
in electronic format, the information on the Merrill Lynch website is not part
of this prospectus.
75
UK Selling Restrictions
Each underwriter has agreed that:
. it has not offered or sold and will not offer or sell any common
shares to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common shares in, from or otherwise involving the
United Kingdom; and
. it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investments
Advertisements) (Exemptions) Order 1996 as amended by the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997
or is a person to whom the document may otherwise lawfully be issued
or passed on.
No Public Offering Outside the United States and Canada
No action has been or will be taken in any jurisdiction (except in the
United States and Canada) that would permit a public offering of our common
shares, or the possession, circulation or distribution of this prospectus or
any other material relating to our company or common shares in any jurisdiction
where action for that purpose is required. Accordingly, our common shares may
not be offered or sold, directly or indirectly, and neither this prospectus nor
any other offering material or advertisements in connection with the common
shares may be distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations of that country
or jurisdiction.
Purchasers of the common shares offered by this prospectus may be
required to pay stamp taxes and other charges in accordance with the laws and
practices of the country of purchase in addition to the offering price on the
cover page of this prospectus.
76
LEGAL MATTERS
The validity of the common shares offered in this prospectus and certain
legal matters concerning the common shares in connection with the offering will
be passed upon for us by McCarthy Tetrault, Toronto, Ontario, concerning
matters of Canadian law, and Fried, Frank, Shriver, Harris & Jacobson (a
partnership including professional corporations), New York, New York,
concerning matters of U.S. law.
Certain legal matters in connection with the offering will be passed upon
for the underwriters by Torys, Toronto, Ontario, concerning matters of Canadian
law, and Shearman & Sterling, New York, New York, concerning matters of U.S.
law.
EXPERTS
Our consolidated financial statements as of February 28, 1999 and
February 29, 2000 and for the period from our inception on December 24, 1997 to
February 28, 1998 and for the fiscal years ended February 28, 1999 and February
29, 2000 included in this prospectus have been so included in reliance on the
report of KPMG LLP, Chartered Accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. KPMG LLP's
address is 4120 Yonge Street, Suite 500, Toronto, Ontario M2P 2B8, Canada.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
We are governed by the laws of Canada. Most of our directors and officers
and the experts named in this prospectus are residents of Canada or other
jurisdictions outside the United States, and all or a substantial portion of
their assets and our assets are located outside the United States. As a result,
it may be difficult for shareholders to effect service within the United States
upon those directors, officers and experts who are not residents of the United
States or to realize in the United States upon judgments of courts of the
United States predicated upon the civil liability provisions of the U.S.
federal securities laws. We have been advised by McCarthy Tetrault, our
Canadian counsel, that there is doubt as to the enforceability in Canada
against us or against our directors, officers and experts who are not residents
of the United States, in original actions or in actions for enforcement of
judgments rendered by U.S. courts, of civil liabilities predicated solely upon
U.S. federal securities laws.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1 under the
Securities Act, and the rules and regulations promulgated thereunder,
concerning the common shares offered by this prospectus. This prospectus, which
forms a part of the registration statement, does not contain all of the
information included in or annexed as exhibits or schedules to the registration
statement. Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits
and schedules filed with it, at the SEC's public reference facilities in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and at the Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You
may call the SEC at
77
1-800-SEC-0330 for further information on the public reference rooms. The SEC
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
You may read and copy any reports, statements or other information that
we file with the SEC at the addresses indicated above, and you may also access
them electronically at the website set forth above. These SEC filings are also
available to the public from commercial document retrieval services.
We are a "foreign private issuer" as defined in Rule 405 of the
Securities Act. As a foreign private issuer, we are exempt from provisions of
the Securities Exchange Act of 1934, as amended, which prescribe the furnishing
and content of proxy statements to shareholders and relating to short swing
profits reporting and liability.
Following consummation of the offering, we will be required to file
reports and other information with the securities commission in all provinces
of Canada. You are invited to read and copy any reports, statements or other
information, other than confidential filings, that we file with the provincial
securities commissions at their public reference rooms. These filings are also
electronically available from the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent
of the SEC's electronic document gathering and retrieval system (EDGAR).
Copies of any documents referred to in this prospectus and filed with the
SEC can be obtained without charge by contacting our secretary, c/o ImagicTV
Inc., One Brunswick Square, 14th Floor, Saint John, New Brunswick, Canada,
telephone number: (506) 631-3000. In order to obtain timely delivery of these
documents, you must request this information no later than five business days
before the date on which you would like to receive the documents.
78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of KPMG LLP, Independent Auditors.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1
When the transaction referred to in note 11(a) of the Notes to
Consolidated Financial Statements has been consumated, we will be in a position
to render the following report.
KPMG LLP
INDEPENDENT AUDITORS' REPORT TO BOARD OF DIRECTORS OF IMAGICTV INC.
We have audited the consolidated balance sheets of ImagicTV Inc. as at
February 29, 2000 and February 28, 1999, and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended February
29, 2000 and February 28, 1999, and for the period from December 24, 1997
(inception) to February 28, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at February
29, 2000 and February 28, 1999 and the results of its operations and its cash
flows for the years ended February 29, 2000 and February 28, 1999, and for the
period from December 24, 1997 (inception) to February 28, 1998 in accordance
with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles differ in some respects
from accounting principles generally accepted in the United States (note 10).
Chartered Accountants
Toronto, Canada
May 25, 2000, except as to note 11 which is as of October , 2000.
F-2
ImagicTV Inc.
Consolidated Balance Sheets
(In thousands of U.S. dollars, except number of shares)
February 28, February 29, August 31,
1999 2000 2000
------------ ------------ ----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents............... $ 603 $6,396 $ 619
Accounts receivable, trade.............. 46 1,230 539
Accounts receivable, trade-related
parties................................ 416 749 147
Unbilled revenues....................... -- -- 1,081
Inventory............................... 229 -- 404
Prepaid expenses, deposits and other
receivables............................ 1,218 195 353
------ ------ -------
Total current assets..................... 2,512 8,570 3,143
Defered charges related to initial public
offering................................ -- -- 886
Capital assets (note 2).................. 641 1,289 2,003
------ ------ -------
Total assets............................. $3,153 $9,859 $ 6,032
====== ====== =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable........................ $ 99 $ 240 $ 685
Accrued liabilities..................... 230 396 1,356
Payable to related parties.............. 32 324 934
Deferred revenue and customer deposits.. 299 1,430 566
Current portion of long-term debt (note
3)..................................... -- 26 26
------ ------ -------
Total current liabilities................ 660 2,416 3,567
Long-term debt (note 3).................. -- 1,737 1,711
Shareholders' equity (notes 4 and 11(a)):
Authorized:
Unlimited Common Shares, no par value
Unlimited preferred shares, no par
value
Issued and outstanding:
17,559,125 Common Shares at August 31,
2000 (February 29, 2000--17,548,653;
February 28, 1999--11,130,552)........ 5,658 14,489 17,632
Nil preferred shares at August 31,
2000.................................. -- -- --
Reporting currency translation
adjustments............................ 13 41 (62)
Deferred stock-based compensation (note
4(c)).................................. -- -- (3,042)
Accumulated deficit..................... (3,178) (8,824) (13,774)
------ ------ -------
Total shareholders' equity............... 2,493 5,706 754
------ ------ -------
Total liabilities and shareholders'
equity.................................. $3,153 $9,859 $ 6,032
====== ====== =======
/s/ /s/
------------------------------- -------------------------------
Director Director
See accompanying notes to the consolidated financial statements.
F-3
ImagicTV Inc.
Consolidated Statements of Operations
(In thousands of U.S. dollars, except per share amounts)
Six Months
Period from Ended
December 24, 1997 Year Ended Year Ended August 31,
(Inception) to February 28, February 29, ----------------
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ------- -------
(unaudited)
Revenues:
License fees- related
parties............... $ -- $ -- $ 671 $ -- $ --
- third parties........ -- -- 713 -- 2,055
Royalty fees- related
parties............... -- -- -- -- 66
- third parties........ -- -- -- -- 4
Services- related
parties............... -- -- 110 22 104
- third parties........ -- -- 283 188 233
Equipment- related
parties............... -- 462 205 -- 1,056
- third parties........ -- 3 116 6 51
------ ------- ------- ------- -------
Total revenues.......... -- 479 2,098 216 3,569
Cost of revenues:
Services............... -- -- 657 237 673
Equipment.............. -- 604 331 4 1,030
------ ------- ------- ------- -------
Total cost of revenues.. -- 604 988 241 1,703
------ ------- ------- ------- -------
Gross profit (loss)..... -- (125) 1,110 (25) 1,866
Operating expenses:
Sales and marketing.... 18 543 2,325 823 2,731
Research and
development........... 66 2,014 4,084 1,606 3,169
General and
administrative........ 26 344 827 347 1,002
------ ------- ------- ------- -------
Total operating
expenses............... 110 2,901 7,236 2,776 6,902
------ ------- ------- ------- -------
Loss from operations.... (110) (3,026) (6,126) (2,801) (5,036)
Interest income
(expense), net......... -- (1) 121 48 79
Forgivable government
assistance (note 3).... -- -- 434 431 --
Foreign exchange gain
(loss)................. -- (24) (31) (9) 37
------ ------- ------- ------- -------
Loss before provision
for income taxes....... (110) (3,051) (5,602) (2,331) (4,920)
Provision for income
taxes (note 5)......... -- (17) (44) (24) (30)
------ ------- ------- ------- -------
Net loss................ $ (110) $(3,068) $(5,646) $(2,355) $(4,950)
====== ======= ======= ======= =======
Basic and diluted net
loss per share......... $(0.05) $ (0.57) $ (0.40) $ (0.19) $ (0.28)
====== ======= ======= ======= =======
Weighted average number
of shares used in
computing basic and
diluted net loss per
share (000s)........... 2,331 5,336 13,968 12,495 17,556
See accompanying notes to the consolidated financial statements.
F-4
ImagicTV Inc.
Consolidated Statements of Shareholders' Equity
(In thousands of U.S. dollars)
Deferred Reporting
Common Shares Stock-Based Currency Total
-------------- Compensation on Accumulated Translation Shareholders'
Number Amount Stock Options Deficit Adjustments Equity
------ ------- --------------- ----------- ----------- -------------
(000s)
Balances, December 24,
1997 (inception)....... -- $ -- $ -- $ -- $ -- $ --
Net loss................ -- -- -- (110) -- (110)
Reporting currency
translation
adjustments............ -- -- -- -- (1) (1)
Issuance of shares...... 2,331 2 -- -- -- 2
------ ------- ------- --------- ----- -------
Balances, February 28,
1998................... 2,331 2 -- (110) (1) (109)
Net loss................ -- -- -- (3,068) -- (3,068)
Reporting currency
translation
adjustments............ -- -- -- -- 14 14
Issuance of shares...... 8,800 5,656 -- -- -- 5,656
------ ------- ------- --------- ----- -------
Balances, February 28,
1999................... 11,131 5,658 -- (3,178) 13 2,493
Net loss................ -- -- -- (5,646) -- (5,646)
Reporting currency
translation
adjustments............ -- -- -- -- 28 28
Issuance of shares...... 6,418 8,831 -- -- -- 8,831
------ ------- ------- --------- ----- -------
Balances, February 29,
2000................... 17,549 14,489 -- (8,824) 41 5,706
Net loss................ -- -- -- (4,950) -- (4,950)
Amortization of deferred
stock-based
compensation........... -- -- 92 -- -- 92
Deferred stock-based
compensation........... -- 3,134 (3,134) -- -- --
Reporting currency
translation
adjustments............ -- -- -- -- (103) (103)
Issuance of shares...... 10 9 -- -- -- 9
------ ------- ------- --------- ----- -------
Balances, August 31,
2000 (unaudited)....... 17,559 $17,632 $(3,042) $(13,774) $ (62) $ 754
====== ======= ======= ========= ===== =======
See accompanying notes to the consolidated financial statements.
F-5
ImagicTV Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Period from Six Months Ended
December 24, 1997 Year Ended Year Ended August 31,
(Inception) to February 28, February 29, ------------------
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ -------- --------
(unaudited)
Cash flows from
operating activities:
Net loss............... $(110) $(3,068) $(5,646) $ (2,355) $ (4,950)
Items not involving
cash:
Depreciation and
amortization......... 1 163 483 204 484
Non-monetary
transaction
(note 7(b)).......... -- -- (102) -- --
Stock-based
compensation......... -- -- -- -- 92
Change in operating
assets and
liabilities:
Accounts receivable,
trade................ -- (33) (1,160) (364) 670
Accounts receivable,
trade-related
parties.............. -- (419) (312) 421 588
Unbilled revenues..... -- -- -- -- (1,078)
Inventory............. -- (231) 234 (30) (402)
Prepaid expenses,
deposits, and other
receivables.......... (14) (1,228) 1,052 147 (157)
Accounts payable and
accrued liabilities.. 53 280 289 371 1,411
Payable to related
parties.............. -- 32 286 (33) 612
Deferred revenue and
customer deposits.... -- 301 1,099 542 (839)
Advances from
shareholders......... 342 (328) -- -- --
----- ------- ------- -------- --------
Cash from (used in)
operating activities.. 272 (4,531) (3,777) (1,097) (3,569)
Cash flows from
investing activities:
Purchases of capital
assets................ (31) (780) (992) (433) (1,215)
----- ------- ------- -------- --------
Cash used in investing
activities............ (31) (780) (992) (433) (1,215)
Cash flows from
financing activities:
Issuance of common
shares................ 2 5,656 8,831 1,676 9
Proceeds from long-term
debt.................. -- -- 1,763 1,711 --
Deferred charges
related to initial
public offering....... -- -- -- -- (886)
----- ------- ------- -------- --------
Cash from financing
activities............ 2 5,656 10,594 3,387 (877)
Effect of foreign
currency exchange
adjustments............ 2 13 (32) 10 (116)
----- ------- ------- -------- --------
Increase (decrease) in
cash and cash
equivalents............ 245 358 5,793 1,867 (5,777)
Cash and cash
equivalents, beginning
period................. -- 245 603 603 6,396
----- ------- ------- -------- --------
Cash and cash
equivalents, end of
period................. $ 245 $ 603 $ 6,396 $ 2,470 $ 619
===== ======= ======= ======== ========
Supplemental cash flow
information:
Cash paid for taxes.... $ -- $ 17 $ 44 $ 16 $ 31
See accompanying notes to the consolidated financial
statements.
F-6
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars)
ImagicTV was incorporated on December 24, 1997 and commenced operations
on January 5, 1998. ImagicTV develops and licenses infrastructure software
products and provides related services that enable telephone companies and
other service providers to deliver multi-channel digital television and
interactive media services to their subscribers' televisions and personal
computers over a broadband network.
1. Significant accounting policies:
These financial statements are stated in U.S. dollars, except as
otherwise noted. They have been prepared in accordance with accounting
principles generally accepted in Canada which, except as disclosed in note 10,
conform, in all material respects, with accounting principles generally
accepted in the U.S.
(a) Consolidation:
These consolidated financial statements include the accounts of
ImagicTV and its wholly owned subsidiaries, iMagicTV (US), Inc., and
ImagicTV (UK) Limited. All intercompany transactions and balances are
eliminated on consolidation.
(b) Second quarter financial statements:
The financial position as of August 31, 2000 and the results of
operations and changes in cash flows for the six months ended August
31, 1999 and 2000 are unaudited. The unaudited financial statements,
in the opinion of management, include all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly
the financial information for such unaudited periods.
(c) Currency translation:
Monetary assets and liabilities of ImagicTV and of its wholly
owned subsidiary that are denominated in foreign currencies are
translated into Canadian dollars (which is considered to be the
measurement currency) at the exchange rate prevailing at the balance
sheet date. Non-monetary assets and liabilities are translated at the
historical exchange rate. Transactions included in operations are
translated at the average rate for the period. Exchange gains and
losses resulting from the translation of these foreign-denominated
amounts are reflected in the consolidated statement of operations in
the period in which they occur.
As ImagicTV's reporting currency is the U.S. dollar, ImagicTV
translates consolidated assets and liabilities denominated in
Canadian dollars into U.S. dollars at the exchange rate prevailing at
the balance sheet date, and the consolidated results of operations at
the average rate for the period. Cumulative translation adjustments
are included as a separate component of shareholders' equity.
(d) Use of estimates:
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 the disclosure of contingencies at the date of
the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
F-7
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
(e) Cash and cash equivalents:
All highly liquid investments, with an original maturity of
three months or less at the time of purchase, are classified as cash
equivalents.
(f) Inventory:
Inventory is recorded at the lower of cost, determined on an
average basis, and net realizable value.
(g) Capital assets:
Capital assets are stated at cost, net of accumulated
depreciation and amortization, and are amortized over their estimated
useful lives. Leasehold improvements are recorded at cost and are
amortized over the lesser of their useful lives or the term of the
related lease. Expenditures for maintenance and repairs have been
charged to the statement of operations as incurred.
Depreciation and amortization are computed using the straight-line
method as follows:
Computer hardware.......................................... 2 years
Office furniture and equipment............................. 5 years
Leasehold improvements..................................... Term of lease
Software licenses.......................................... 2 years
ImagicTV regularly reviews the carrying values of its capital
assets by comparing the carrying amount of the asset to the expected
undiscounted future cash flows to be generated by the asset. If the
carrying value exceeds the undiscounted future cash flows, a write-
down is charged to the statement of operations for the excess. No
capital asset write-downs have been recorded by ImagicTV.
(h) Revenue recognition:
ImagicTV's revenue recognition policies are in accordance with
the guidance provided in Section 3400 "Revenue" of the Canadian
Institute of Chartered Accountants Handbook, Statement of Position
("SOP") 97-2 "Software Revenue Recognition" and SOP 98-9
"Modification of SOP 97-2 Software Revenue Recognition with Respect
to Certain Transactions" of the American Institute of Certified
Public Accountants.
ImagicTV's revenues are derived primarily from license fees
(which includes installation), royalty fees and service elements.
Service elements, which include maintenance and technical support,
training, consulting and other services, are not essential to the
functionality of ImagicTV's licensed products. ImagicTV does not
deliver any product or service over the internet or through some
other hosting arrangement.
In cases where ImagicTV sells a multi-element arrangement, the
fees are allocated to the elements based on ImagicTV-specific
objective evidence of each element's fair value. Vendor specific
objective evidence used in determining the fair value of license
revenue is based on the
F-8
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
price charged by ImagicTV when the same element is sold separately to
a customer of a similar size and nature. Vendor specific objective
evidence used in determining the fair value of training, consulting
and other services is based on the standard hourly rates per diem for
the type of service being provided multiplied by the estimated time
to complete the task. Vendor specific objective evidence used in
determining the fair value of maintenance and technical support is
based on a percentage of the license fee revenue. Fees related to the
delivery of multi-element arrangements are non-refundable.
Revenues from product elements consist primarily of license and
royalty fees. Up front licence fees are recognized when a contract
with a customer has been executed, delivery and acceptance of the
software have occurred, the license fee is fixed and determinable,
and collection of the related receivable is deemed probable by
management. Royalty fees are either in the form of a one-time per
subscriber activation royalty payment or a monthly royalty fee based
upon the number of active subscribers at the end of each month. One-
time royalties are recognized quarterly based on the net increase in
the number of subscribers at the end of each quarter. Monthly royalty
fees are recognized monthly based on the number of active subscribers
at the end of each month.
Service revenues from training, consulting and other services
are recognized when the services are performed. Losses on
professional services contracts, if any, are recognized at the time
such losses are identified. To date, ImagicTV has not incurred any
significant losses on professional service contracts.
Maintenance and technical support revenues paid in advance are
non-refundable and are recognized ratably over the terms of the
agreements, which are typically 12 months.
Product, service and equipment revenues that have been prepaid
but do not yet qualify for recognition as revenue under ImagicTV's
revenue recognition policy are reflected as deferred revenues on
ImagicTV's balance sheet.
Product revenues that have been recognized as revenues under
ImagicTV's revenue recognition policy but for which the cash proceeds
are not yet due are reflected as unbilled revenue. Unbilled revenue
primarily represents future installment payments on license fee
revenue which are due within twelve months from the balance sheet
date.
(i) Research and development expenses:
Costs related to research, design and development of software
products are charged to research and development expenses as
incurred. Software development costs are capitalized beginning when a
product's technological feasibility has been established, which
generally occurs upon completion of a working model, and ending when
a product is available for general release to customers. To date,
completing a working model of ImagicTV's product and the general
release of the product have substantially coincided. As a result,
ImagicTV has not capitalized any software development costs since
such costs have not been significant.
F-9
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
(j) Investment tax credits:
ImagicTV is entitled to Canadian federal and provincial
investment tax credits which are earned as a percentage of eligible
research and development expenditures incurred in each taxation year.
Investment tax credits are available to be applied against future tax
liabilities, subject to a 10-year carry-forward period. Investment
tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the
related asset cost for items of a long-term nature, provided that
ImagicTV has reasonable assurance that the tax credits will be
realized. To date, no investment tax credits have been recognized.
(k) Income taxes:
Income taxes are accounted for under the asset and liability
method of accounting for income taxes. Under the asset and liability
method, future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax
credit carryforwards. Future tax assets and liabilities are measured
using enacted or substantively enacted tax rates expected to apply
when the asset is realized or the liability is settled. The effect on
future tax assets and liabilities of a change in tax rates is
recognized in income in the period that substantive enactment or
enactment occurs. A substantive enacted rate is only used when the
proposed tax rate change is specified in sufficient detail to be
understood and applied in practice and has been drafted and tabled in
legislative or regulatory form with the appropriate governing bodies.
(l) Stock-based compensation:
ImagicTV uses the intrinsic value method to account for its
stock-based employee compensation plan. As such, deferred stock-based
compensation is recorded if it is determined that on the date of
grant the fair market value of each underlying common share exceeded
the exercise price per share. Deferred stock-based compensation is
recognized as an expense over the vesting period of the option.
(m) Fair value:
Financial instruments consist of cash and cash equivalents,
accounts receivable trade, accounts receivable trade-related parties,
accounts payable, payable to related parties and accrued liabilities.
The carrying values for these financial instruments approximate their
fair values due to the relatively short periods to maturity of the
instruments. In addition, the carrying value of long-term debt
obligation approximates its fair values. ImagicTV determines the fair
value of its financial instruments based on quoted market values or
discounted cash flow analyses for instruments having similar terms
and financing characteristics.
(n) Concentration of credit risk:
Financial instruments that potentially expose ImagicTV to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable trade and unbilled revenues. Cash
and cash equivalents consist primarily of deposits with major
commercial banks and highly liquid investments, the maturities of
which are three months or less from the date of purchase. ImagicTV
performs periodic credit evaluations of the financial condition of
its customers.
F-10
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
At August 31, 2000, 91% of the accounts receivable and unbilled
revenues were concentrated with three customers. At February 29, 2000,
77% of the accounts receivable were concentrated with three customers,
and at February 28, 1999, 90% of accounts receivable were concentrated
with one customer. Allowances are maintained for potential credit losses
consistent with the credit risk of specific customers.
2. Capital assets (in thousands):
February 28, February 29, August 31,
1999 2000 2000
------------ ------------ ----------
(unaudited)
Computer hardware.................. $466 $1,142 $1,541
Office furniture and equipment..... 241 478 926
Leasehold improvements............. 59 165 244
Software licenses.................. 38 165 218
---- ------ ------
804 1,950 2,929
Less accumulated depreciation and
amortization...................... 163 661 926
---- ------ ------
Net book value..................... $641 $1,289 $2,003
==== ====== ======
3. Long-term debt:
During the year ended February 29, 2000, ImagicTV, through an application
filed by Newbridge Networks Corporation (an ImagicTV shareholder), was granted
a government assistance loan ("Repayable Loan") in the amount of C$2,560,000
($1,766,000) and a forgivable loan ("Forgivable Loan") in the amount of
C$640,000 ($434,000) by the Government of the Province of New Brunswick,
Canada, to assist ImagicTV in creating research and development employment in
New Brunswick. The Forgivable Loan was fully forgiven as advanced and
recognized in the statement of operations as forgivable government assistance.
The Repayable Loan is unsecured and repayable in annual installments equal to
1.5% of the license fee revenues of the immediately preceding year, and the
balance, if any, is due on February 25, 2006. The Repayable Loan is interest-
free until February 25, 2006 and, if not paid at that date, thereafter will
bear interest at 6.3% per annum. In addition, the Repayable Loan is subject to
accelerated repayment if the total number of full-time employees employed in
the Province of New Brunswick falls below 60 at any time during the year ended
February 28, 2001 or below 92 at any time during the year ended February 28,
2002. As at August 31, 2000, the number of full-time employees employed in the
Province of New Brunswick, if approximately 140, exceeded the prescribed
amounts.
4. Shareholder's equity:
Prior to the effective date of the offering (note 11(a)), ImagicTV
changed its capital structure by consolidating its share capital by converting
the existing Class A common shares, Class B common shares and Class C common
shares into a single new class of common shares on a one-for-one basis and by
completing a stock split on the assumed basis of 1.1636-for-1. The consolidated
financial statements give retroactive effect to these changes in capital
structure.
F-11
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Stated in U.S. dollars)
(a) Description of shares:
Common Shares
Each outstanding common share is entitled to one vote at
shareholder meetings and is entitled to receive dividends if, as, and
when declared by the board of directors. Subject to the rights of
holders of shares of any class ranking senior to the common shares,
holders of common shares are entitled to receive the remaining
property or assets of ImagicTV in the event of liquidation,
dissolution or winding-up. The common shares have no preemptive,
redemption or conversion rights.
Preferred Shares
The board of directors have the authority, without further
action by the shareholders, to issue an unlimited number of preferred
shares in one or more series. These preferred shares may be entitled
to dividend and liquidation preferences over the common shares. The
board will be able to fix the designations, powers, preferences,
privileges and relative, participating, optional or special rights of
any preferred shares issued, including any qualifications,
limitations or restrictions. Special rights which may be granted to a
series of preferred shares may include dividend rights, conversion
rights, voting rights, terms of redemption and liquidation
preferences, any of which may be superior to the rights of the common
shares.
(b) Common share issuances:
(i) ImagicTV was incorporated on December 24, 1997 to facilitate the
transfer of certain intellectual property related to a software
solution enabling video transfer over high speed Internet
Protocol networks (the "Intellectual Property"), from NBTel Inc.
to ImagicTV where the Intellectual Property would be further
developed and commercialized.
(ii) On January 1, 1998, ImagicTV entered into a technology transfer
agreement with NBTel, whereby NBTel transferred the Intellectual
Property to ImagicTV in exchange for 2,327,200 common shares. At
January 1, 1998, NBTel owned 100% of ImagicTV's outstanding
shares and NBTel was owned by Bruncor Inc., a public company in
Canada. As the transaction occurred between companies under
common control, the asset transfer has been accounted for at the
carrying value of nil.
(iii) On January 21, 1998, ImagicTV entered into a share subscription
agreement providing for the issuance of 2,327 common shares to
NBTel and 1,164 common shares to 506048 N.B. Ltd., a subsidiary
of Celtic House International ("506NB"), for total proceeds of
$2,000. Celtic House International is a private venture capital
company otherwise operating at arm's length with ImagicTV and
NBTel.
(iv) On January 5, 1998, ImagicTV entered into a Development
Agreement with NBTel and 506NB, whereby NBTel and 506NB jointly
engaged the services of ImagicTV to carry out research and
development on the Intellectual Property (the "Research
Project"). Under the terms of the Development Agreement, all of
the technology developed under the Research Project remained the
property of NBTel and 506NB. In consideration for the services
rendered under the Development Agreement, ImagicTV could have
received a contract payment of up to C$4,000,000. On the same
date, ImagicTV entered into a Technology
F-12
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Stated in U.S. dollars)
Transfer Option Agreement, whereby ImagicTV was granted an option to
acquire the technology developed under the Research Project from
NBTel and 506NB in exchange for the issuance of common shares of
ImagicTV. On January 5, 1998, the inception of the arrangement, it
was ImagicTV's intent and NBTel's understanding that upon the
completion of the development agreement ImagicTV would exercise the
option to acquire the technology developed under the Research
Project. As such, the series of transactions has been accounted for
as a funded research and development agreement whereby the proceeds
received from NBTel and 506NB were recorded as a liability as
received; the funds expended on the Research Project were expensed
as incurred; and upon the exercise of the option, the liability was
extinguished through the issuance of shares with a paid-in-capital
amount equal to the funds advanced.
During the year ended February 28, 1999, ImagicTV received
C$2,800,000 ($1,857,000) under the Development Agreement. On January
5, 1999, ImagicTV exercised its option to acquire the technology
developed under the Research Project and issued a total of 3,781,700
common shares to NBTel (1,890,850 common shares) and 506NB
(1,890,850 common shares). Upon exercise of the option, the
Development Agreement terminated. The cash received under the
Development Agreement was initially recorded as a liability when
received and was subsequently recorded as the paid-up capital for
the 3,781,700 common shares issued pursuant to the exercise of the
option. Immediately prior to the exercise of the option, ImagicTV's
common shares were owned 50.01% by NBTel, 7.91% by 506NB, and 42.08%
by Newbridge. Upon the issuance of the 3,781,700 shares, NBTel owned
approximately 47% and 506NB owned approximately 24% of the
outstanding shares of ImagicTV.
(v) On June 22, 1998, ImagicTV issued 2,327,200 common shares to
Newbridge Networks Corporation for cash consideration of $1,359,000.
(vi) During the year ended February 28, 1999, pursuant to the Preemptive
Rights granted to the shareholders of ImagicTV in the Shareholders'
Agreement, allowing for the voting shareholders to be granted a
right to subscribe for a portion of any new issuance equal to their
percentage ownership of the voting shares (the "Preemptive Rights"),
ImagicTV issued an aggregate of 2,690,961 common shares for total
cash consideration of $2,440,000.
(vii) On December 17, 1999, ImagicTV issued 3,808,146 common shares to a
group of investors for cash consideration, net of costs, of
$6,144,000.
(viii) During the year ended February 29, 2000, ImagicTV issued an
aggregate of 791,694 common shares to employees for total cash
consideration, net of costs, of $1,011,000.
(ix) During the year ended February 29, 2000, pursuant to the Preemptive
Rights granted to the shareholders of ImagicTV in the Shareholders'
Agreement, the Company issued 1,818,261 common shares for cash
consideration of $1,676,000.
(x) During the six months ended August 31, 2000, ImagicTV issued an
aggregate of 10,473 common shares to employees for a total cash
consideration of $9,000.
(c) Stock option plan:
In February 1998, ImagicTV established a Key Employee Stock
Option Plan (the "1998 Plan"). Options granted under the 1998 Plan
had a maximum term of six years and an exercise
F-13
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Stated in U.S. dollars)
price per share of no less than the fair market value of the common
shares on the date of the option grant as determined by the Board of
Directors. The options vested as to 50% after the third anniversary
date and 50% after the fourth anniversary date.
On December 17, 1999, ImagicTV adopted a new stock option plan,
the Share Option Plan (the "1999 Plan"). The 1999 Plan allows for the
granting of options to acquire common shares to employees,
consultants and directors of ImagicTV and its affiliates. Options
granted under the 1999 Plan have a maximum term of seven years and an
exercise price per share of no less than the fair market value of the
common shares as determined by the Board of Directors on the date of
the option grant. The options vest annually over four years. ImagicTV
has reserved 3,511,825 common shares, for issuance under the 1999
Plan, which is equal to 20% of the outstanding shares of ImagicTV,
provided that the Board of Directors has the right to increase the
number of shares reserved. The stock options granted under the 1998
Plan are now administered under the 1999 Plan, retaining the number
and exercise price of options originally issued but adopting the term
and vesting attributes of the new plan.
A summary of the status of ImagicTV's options as of August 31, 2000
(unaudited) is as follows:
Weighted Average Remaining Number of Options
Exercise Prices Number of Options Contractual Life (Years) Exercisable
--------------- ----------------- -------------------------- -----------------
$0.58 674,888 4.52 328,717
0.94 871,536 5.68 194,758
1.17 94,252 6.19 --
1.61 1,272,280 6.58 --
--------- ---- -------
2,912,956 5.82 523,475
========= ==== =======
The following table summarizes options issued:
February 28, February 28,
1998 1999 February 29, 2000 August 31, 2000
---------------- ---------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Average Average
of Exercise of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price Options Price
------- -------- ------- -------- --------- -------- --------- --------
(unaudited)
Outstanding, beginning
of period.............. -- $ -- 378,170 $0.60 849,428 $0.64 2,188,150 $0.96
Granted................. 378,170 0.60 471,258 0.69 1,399,229 1.21 777,517 1.61
Cancelled............... -- -- -- -- (60,507) 0.91 (42,238) 1.02
Exercised............... -- -- -- -- -- -- (10,473) 0.83
------- ----- ------- ----- --------- ----- --------- -----
Outstanding, end of
period................. 378,170 $0.60 849,428 $0.64 2,188,150 $0.96 2,912,956 $1.10
======= ===== ======= ===== ========= ===== ========= =====
Options exercisable, end
of period.............. -- $ -- 94,543 $0.57 295,205 $0.63 523,475 $0.71
To August 31, 2000, all stock options have been granted to
employees, officers and directors of ImagicTV. ImagicTV recorded
deferred stock-based compensation relating to options issued under
ImagicTV's option plan amounting to $3,134,000 for the six month period
ended August 31, 2000. Amortization of deferred stock-based compensation
amounted to $92,000 for the same period and has been recorded as an
operating expense during this period.
F-14
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
5.Income taxes:
During the periods presented, substantially all net losses were generated
from business operations in Canada. The provision for income taxes differs from
the amount computed by applying the statutory income tax rate to loss before
provision for income taxes. The sources and tax effects of the differences are
as follows (in thousands):
Period from Six Months Six Months
December 24, 1997 Year Ended Year Ended Ended Ended
(Inception) to February 28, February 29, August 31, August 31,
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ---------- ----------
(unaudited)
Statutory rate applied
to loss before
provision for income
taxes.................. $(51) $(1,414) $(2,583) $(1,075) $(2,264)
Adjustments resulting
from:
Taxable portion related
to capital
transaction........... -- 856 -- -- --
Stock based
compensation not
deducted for tax...... -- -- -- -- 39
Large Corporation Tax.. -- 17 44 24 30
Other.................. 32 134 62 12 20
---- ------- ------- ------- -------
(19) (407) (2,477) (1,039) (2,175)
Unrecognized benefit of
net operating losses
carried forward and
timing differences..... 19 424 2,521 1,063 2,205
---- ------- ------- ------- -------
Income taxes............ $ -- $ 17 $ 44 $ 24 $ 30
==== ======= ======= ======= =======
Significant components of ImagicTV's deferred tax assets are as follows
(in thousands):
February 28, February 29, August 31,
1999 2000 2000
------------ ------------ -----------
(unaudited)
Research and development expenses
deferred for income tax
purposes......................... $ -- $ 1,354 $ 2,398
Net operating losses carried
forward.......................... 443 1,674 2,878
----- ------- -------
443 3,028 5,276
Less valuation allowance.......... (443) (2,964) (5,119)
Deferred tax liability............ -- (64) (157)
----- ------- -------
$ -- $ -- $ --
===== ======= =======
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, uncertainties related to the
industry in which ImagicTV operates, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax assets, ImagicTV will
need to generate future taxable income of approximately $12,000,000 prior to
the expiration of the net operating losses carried forward. Due to the
uncertainties related to the industry in which ImagicTV operates and the
uncertainty of generating taxable income prior to the expiration of losses
carried forward, the tax benefit of the above carryforward amounts have been
completely offset by a valuation allowance.
F-15
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
As of August 31, 2000, ImagicTV had approximately $6,243,000 of operating
losses carried forward available to reduce future years' taxable income in
Canada. These losses and deductions expire as follows: 2005--$40,000; 2006--
$902,000; 2007--$2,634,000; and 2008--$2,667,000.
6.Segmented information:
ImagicTV operates in a single reportable operating segment, that is, to
provide software products to telecommunications companies and other service
providers that enable the delivery of digital broadcast television services to
residential subscribers over high-speed Internet Protocol networks. The single
reportable operating segment derives its revenue from the sale of software and
related services. As of August 31, 2000, substantially all assets related to
ImagicTV's operations were located in Canada. Revenue is attributable to
geographic location based on the location of the customer, as follows (in
thousands):
Period from Six Months Six Months
December 24, 1997 Year Ended Year Ended Ended Ended
(Inception) to February 28, February 29, August 31, August 31,
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ---------- ----------
(unaudited)
Revenue by geographic
location:
Canada................. $-- $479 $1,362 $ 47 $2,020
United States.......... -- -- -- 6 899
Europe................. -- -- 736 163 650
--- ---- ------ ---- ------
$-- $479 $2,098 $216 $3,569
=== ==== ====== ==== ======
For the six months ended August 31, 2000, NBTel accounted for
approximately 33% of total revenues. In addition, three other customers
accounted for 23%, 16% and 15% of total revenues. In the year ended February
29, 2000, NBTel accounted for 38% of total revenues. In addition, two other
customers accounted for 31% and 16% of total revenues. NBTel accounted for 97%
of total revenues in the year ended February 28, 1999.
7. Related party transactions:
The nature of the related party transactions is summarized below:
(a) NBTel and Aliant Inc.:
On April 16, 1999, ImagicTV entered into a licensing agreement
with NBTel, whereby NBTel received a perpetual, non-exclusive license
to use ImagicTV's product in the Province of New Brunswick for cash
consideration of $334,000 and future one-time royalty payments based
on the number of NBTel subscribers to the service. On December 16,
1999, the NBTel license agreement was assigned to Aliant Inc. (the
parent company of NBTel) and was amended to include a license for our
pcVu product and to expand the geographic territory of the license to
include the provinces of Nova Scotia, Prince Edward Island and
Newfoundland on an exclusive basis in these provinces. ImagicTV
received consideration amounting to C$900,000 ($610,000) payable as
to C$500,000 on January 31, 2000 and C$200,000 payable on each of
January 31, 2001 and 2002.
F-16
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
The initial license arrangement dated April 16, 1999 included
multiple elements including the delivery of DTV Manager version 1.0
and DTV Manager version 2.0, installation and maintenance and
support. For accounting purposes, the entire non-refundable cash
consideration was allocated to the various elements based on the
specific evidence of their values. DTV Manager version 1.0 was
delivered shortly after the execution of the agreement. DTV Manager
version 2.0 was not available for delivery at that time. The license
fee revenue was deferred until November 1999, the date at which
ImagicTV delivered and installed DTV Manager version 2.0. The
maintenance fee is being recognized on a straight line basis over the
term of the maintenance contract. The future one time royalty
payments based on net new subscribers will be recognized as earned.
Of the additional C$900,000 in consideration to be received in
connection with the Aliant Inc. amendment, C$500,000 was recognized
as revenue upon the delivery of pcVu in February 2000 and the
remaining C$400,000 will only be recognized as revenue when received
due to the extended payment terms.
ImagicTV also sells set-top boxes, at little or no mark-up, to
NBTel and Aliant for distribution to their subscribers. Revenue
related to the sale of set-top boxes to NBTel amounted to $1,039,000
for the six months ended August 31, 2000, nil for the six months
ended August 31, 1999, $180,000 for the year ended February 29, 2000,
$462,000 for the year ended February 28, 1999 and nil for the period
from December 24, 1997 to February 28, 1998. As of February 29, 2000,
ImagicTV had recorded a deposit from NBTel for set-top boxes in the
amounts of $635,000 all of which has been applied to shipments of
set-top boxes in the six-month period ended August 31, 2000.
ImagicTV reimburses NBTel for certain operating expenses
incurred on its behalf, including premise rent, communications,
marketing research and corporate services.
During the year ended February 29, 2000, ImagicTV advanced
excess cash to Aliant Inc. Aliant Inc. paid interest to ImagicTV at
the bankers' acceptance rate plus six basis points. The advances were
unsecured and repayable on demand. No excess cash is advanced or
balance exists on the advances at February 29, 2000 or August 31,
2000. ImagicTV does not anticipate such advances occurring in the
future.
(b) Newbridge Networks Corporation:
In November 1999, ImagicTV entered into an agreement with a
shareholder, Newbridge Networks Corporation ("Newbridge"), whereby
Newbridge received a license to use ImagicTV's product for
demonstration purposes in exchange for equipment supplied by
Newbridge. The transaction was recorded at the fair value of the
equipment received from Newbridge amounting to $103,000. In
connection with this transaction, ImagicTV recorded license revenue
in the same amount.
In February, 2000, ImagicTV entered into an amendment to the
above agreement which provides Newbridge with additional licences to
use ImagicTV's product for demonstration purposes. The term of the
additional site licences is one year, expiring on February 7, 2001.
As of August 31, 2000, ImagicTV has sold additional licenses to
Newbridge for aggregate cash consideration of $40,000 of which
$27,000 has been recognized.
F-17
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
In June 2000, ImagicTV provided Newbridge with a 90-day trial
license for $17,000 which was used for demonstration purposes. As of
August 31, 2000, the $17,000 has been recognized.
ImagicTV has also supplied Newbridge with set-top boxes at
little or no mark-up above cost.
The following table summarizes the related party transactions and
balances (in thousands):
Period from Six Months Six Months
December 24, 1997 Year Ended Year Ended Ended Ended
(Inception) to February 28, February 29, August 31, August 31,
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ---------- ----------
(unaudited)
Related party
transactions:
Revenues
License and service... $-- $-- $781 $22 $ 170
Equipment............. -- 462 205 -- 1,056
Operating Expenses...... 12 165 469 176 304
Interest income......... -- -- 87 30 --
February 28, February 29,
1999 2000 August 31, 2000
------------ ------------ ---------------
(unaudited)
Related party balances:
Accounts receivable
trade................ $416 $749 $147
Deferred revenues..... 166 705 77
Accounts payable...... 32 324 934
8. Earnings per share:
Earnings per share has been calculated based on the weighted
average number of common shares outstanding. Due to the net loss for all
periods presented, all potential common shares outstanding are considered
anti-dilutive and are excluded from the calculation of diluted loss per
share. Common shares that could potentially dilute basic loss per share in
the future, not included in the computation of diluted loss per share
because to do so would have been anti-dilutive, amounted to 2,912,956 for
the period ended August 31, 2000.
9. Lease commitments:
Future minimum lease payments under non-cancelable operating
leases for premises are as follows (in thousands):
As of August 31, 2000
---------------------
2001................................................. $251
2002................................................. 79
2003................................................. 80
2004................................................. 82
2005................................................. 55
2006 and thereafter.................................. --
F-18
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In U.S. dollars)
Included in the lease commitments above are amounts related to an
operating lease with a shareholder, NBTel, for office premises. The
lease expires on February 28, 2001 with a renewal option of one year.
Rental expense under this lease amounted to $121,000 for the six months
ended August 31, 2000, $77,000 for the six months ended August 31, 1999,
$270,000 for the year ended February 29, 2000, $92,000 for the year
ended February 28, 1999, and $7,000 for the period from December 24,
1997 to February 28, 1998.
10. Canadian and U.S. accounting policy differences:
The financial statements of ImagicTV have been prepared in
accordance with generally accepted accounting principles ("GAAP") as
applied in Canada. There are no material measurement differences between
Canadian GAAP and U.S. GAAP that apply to the consolidated financial
statements. Additional disclosures required under U.S. GAAP include the
following:
(a) Accrued liabilities:
U.S. GAAP requires the disclosure of other current liabilities
that exceed 5% of the current liabilities. At August 31, 2000, other
current liabilities include $886,000 in professional fees related to
ImagicTV's initial public offering. At February 29, 2000 and February
28, 1999, there are no other current liabilities that exceed 5% of
the current liabilities.
(b) Impairment in long-lived assets:
As described in note 1(g), under Canadian GAAP the amount of a
write down in capital assets is calculated by reference to
undiscounted future cash flows. Under U.S. GAAP, where the
undiscounted future cash flows are less than the carrying value of
capital assets, the write down is measured as the excess of the
carrying value over the fair value of the assets. In this case fair
value may be calculated by reference to a discounted cash flow model.
As to date the Company has not recorded a write down under Canadian
GAAP, no difference due to the application of Canadian or U.S.
accounting principles has arisen.
(c) Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS
No. 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No.
133, as recently amended, is effective for fiscal years beginning
after June 15, 2000. To date, ImagicTV has not entered into
derivative instruments. Management believes the adoption of SFAS No.
133 will not have a material effect on ImagicTV's financial position
or results of operations.
The U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), on December 3, 1999. SAB 101 provides
additional guidance on the application of existing generally accepted
accounting principles to revenue recognition in financial statements.
ImagicTV does not expect the guidance of SAB 101 to have a material
effect on its financial statements upon adoption.
F-19
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Stated in U.S. dollars)
The Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44"), in March 2000. This interpretation
clarifies the application of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", with respect to
certain issues in accounting for employee stock-based compensation
and is generally effective as of July 1, 2000. ImagicTV does not
expect FIN No. 44 to have a material effect on its financial
statements upon adoption.
(d) SFAS 123 pro forma information:
SFAS No. 123, "Employee Stock Compensation" encourages, but
does not require, the recording of compensation costs related to
stock options granted to employees to be valued at fair value. For
companies choosing not to adopt the fair value measurement for stock-
based compensation, the pronouncement requires the disclosure of pro
forma net income and net income (loss) per share information as if
ImagicTV had accounted for its stock options issued under the fair
value method. ImagicTV has elected not to adopt the recording of
compensation cost for stock options at fair value and, accordingly, a
summary of the pro forma impact on the statement of operations
granted to employees is presented in the table below (in thousands of
dollars except per share amounts):
Period from Six Months Six Months
December 24, 1997 Year Ended Year Ended Ended Ended
(Inception) to February 28, February 29, August 31, August 31,
February 28, 1998 1999 2000 1999 2000
----------------- ------------ ------------ ---------- ----------
(unaudited)
Net loss................ $ 110 $3,068 $5,646 $2,355 $4,950
Compensation expense
related to the fair
value of stock
options................ 9 27 69 34 64
----- ------ ------ ------ ------
Pro forma net loss...... $ 119 $3,095 $5,715 $2,389 $5,014
===== ====== ====== ====== ======
Pro forma net loss per
share.................. $0.05 $ 0.58 $ 0.41 $ 0.19 $ 0.28
===== ====== ====== ====== ======
The fair value of each option granted has been estimated at the
date of grant using the minimum value method, which assumes no
volatility, and by applying the following assumptions: weighted
average risk-free interest rate of 5.42% for the period from December
24, 1997 (inception) to February 28, 1998; 5.18% for the year ended
February 28, 1999; 5.76% for the year ended February 29, 2000; 5.09%
for the six months ended August 31, 1999 and 6.07% for the six months
ended August 31, 2000; dividend yield of 0%; and expected terms equal
to the option vesting period.
ImagicTV has assumed no forfeiture rate, as adjustments for
actual forfeitures are made in the year they occur. The weighted
average grant date fair value of options issued was $0.19 $0.17,
$0.19, $0.34 and $0.27 for the period from December 24, 1997
(inception) to February 28, 1998, for the years ended February 28,
1999 and February 29, 2000, and for the six months ended August 31,
2000 and 1999 respectively.
F-20
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Stated in U.S. dollars)
(e) Comprehensive Income:
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
establishes standards for reporting and presentation of comprehensive
income. This standard defines comprehensive income as the changes in
equity of an enterprise, except those resulting from shareholder
transactions. For the period from December 24, 1997 (inception) to
February 28, 1998 and the year ended February 28, 1999, the
difference between net loss and comprehensive loss arises solely from
reporting currency translation adjustments. As a result, total
comprehensive loss amounted to $111,000 for the period from December
24, 1997 to February 28, 1998; $3,054,000 for the year ended February
28, 1999; $5,618,000 for the year ended February 29, 2000, $2,325,000
for the six months ended August 31, 1999, and $5,053,000 for the six
months ended August 31, 2000.
11. Subsequent events
(a) ImagicTV's Board of Directors has authorized the initial filing of a
prospectus with regulatory authorities in Canada and the United
States that would permit ImagicTV to sell 4,750,000 common shares in
connection with an initial public offering ("IPO"). If the IPO is
consummated under the terms presently anticipated, all of ImagicTV's
existing Class A common shares, Class B common shares and Class C
common shares will be converted into a single new class of common
share on a one-for-one basis. In addition, ImagicTV will effect a
share split on a basis of 1.1636-for-1. Imagic TV will also create a
class of preferred shares issuable in series, none of which will
initially be issued.
The consolidated financial statements give retroactive effect to
these changes in capital structure.
(b) In July 2000, ImagicTV's Board of Directors authorized a private
placement of up to $25 million, of which $10 million was reserved
for specified existing shareholders. On September 19, 2000, ImagicTV
issued warrants to purchase common shares to five existing
shareholders for a total cash consideration of $10 million. In
October 2000, in connection with the additional private placement
described below, the share purchase warrants were converted into
909,061 common shares.
Pursuant to share subscription agreements, in October 2000 ImagicTV
issued 272,719 common shares to America Online, Inc. for aggregate
proceeds of $3,000,000 and 1,090,875 common shares to Cisco Systems,
Inc. for aggregate proceeds of $12,000,000.
Concurrently, with the private placement to America Online, ImagicTV
entered into an agreement to develop custom applications together
with America Online. ImagicTV has agreed to spend up to $3.0 million
on research and development related to these custom applications. In
connection with ImagicTV's private placement to Cisco Systems, it
granted Cisco Systems a right of first negotiation. Pursuant to this
right of first negotiation, if ImagicTV's board of directors receives
a bona fide offer to acquire ImagicTV's shares or all or
substantially all of ImagicTV's assets from any of three specified
entities, or if ImagicTV's board of directors votes to initiate a
sale to any of these three specified entities of 25% or more of
ImagicTV's total voting equity or all or
F-21
ImagicTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Stated in U.S. dollars)
substantially all of ImagicTV's assets, ImagicTV must, within 24
hours, give Cisco Systems notice of the terms of the sale proposal.
After ImagicTV delivers this notice, Cisco Systems will have ten days
to submit a proposal to ImagicTV's board of directors. If ImagicTV's
board of directors decides to pursue Cisco Systems' proposal,
ImagicTV has agreed to negotiate in good faith exclusively with Cisco
Systems for a period of ten days. However, (a) if Cisco Systems does
not submit a proposal within ten days of receipt of ImagicTV's
notice, (b) if Cisco Systems' proposal is not pursued by ImagicTV's
board of directors, or (c) if Cisco Systems and ImagicTV fail to
mutually agree on the terms of a transaction, then the right of first
negotiation expires as to that proposal, and ImagicTV can negotiate
and enter into a definitive agreement with the entity that made the
initial proposal. Further, this right of first negotiation terminates
(1) in the event that Cisco Systems owns less than 50% of the common
shares it purchased on October 6, 2000 or (2) upon the date of the
closing of the acquisition of all or substantially all of ImagicTV's
assets or an acquisition by ImagicTV of another corporation in which
the holders of ImagicTV's outstanding voting equity immediately prior
to the transaction own, immediately after the transaction, securities
representing less than 50% of the voting equity of the surviving
entity.
F-22
[Imagic TV "Eye" logo in the center of page against colored background]
Tomorrow's TV on Today's Networks
F-23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
4,750,000 Shares
Common Shares
---------------
PROSPECTUS
---------------
Merrill Lynch & Co.
Chase H&Q
CIBC World Markets
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This is a preliminary prospectus relating to these securities, a copy of +
+which has been filed with the appropriate securities commission or other +
+similar regulatory authority of each of the provinces and territories of +
+Canada but which has not yet become final for the purpose of a distribution +
+to the public. Information contained herein is subject to completion or +
+amendment. These securities may not be sold to, nor may offers to buy be +
+accepted from, residents of such jurisdictions prior to the time a receipt +
+for the final prospectus is obtained from the appropriate securities +
+commission or other similar regulatory authority. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
Preliminary Prospectus dated October 23, 2000
This preliminary prospectus has been filed under procedures in each of the
provinces and territories of Canada which permit certain information with
respect to these securities to be determined after the prospectus has become
final and permit the omission from this preliminary prospectus of such
information. Such procedures require the delivery to purchasers of a prospectus
or a prospectus supplement containing this omitted information within a
specified period of time after agreeing to purchase any of these securities,
and such information shall be deemed to be incorporated by reference into this
prospectus as of the date of the supplemented prospectus.
This preliminary prospectus constitutes a public offering of these securities
only in those jurisdictions where they may be lawfully offered for sale therein
only by persons permitted to sell such securities. No securities commission or
similar authority in Canada has in any way passed upon the merits of the
securities offered hereunder, and any representation to the contrary is an
offence. The Company has filed a Registration Statement on Form F-1 with the
United States Securities and Exchange Commission, under the United States
Securities Act of 1933, as amended, with respect to these securities.
Initial Public Offering
ImagicTV Inc.
C$ .
Common Shares
This is ImagicTV Inc.'s initial public offering. ImagicTV is selling all of the
shares.
This prospectus incorporates the prospectus included in a Registration
Statement on Form F-1 filed with the United States Securities and Exchange
Commission. We will determine the offering price of the common shares through
negotiation with the underwriters. We currently estimate the offering price
will be between US$11.00 and US$13.00. The common shares will be offered in
Canada, the United States and internationally. The offering price and
underwriting commission for common shares offered in the United States is
payable in U.S. dollars and the offering price and underwriting commission for
common shares offered in Canada is payable in Canadian dollars. The U.S. dollar
amounts will be the approximate equivalent of the Canadian dollar amounts based
on the prevailing Canadian-U.S. dollar exchange rate at the time the offering
price is determined.
Currently, no public market exists for the shares. The offering price of each
common share, after giving effect to this offering, but before exercise of the
underwriters' over-allotment option, exceeds our pro forma consolidated net
tangible book value as of August 31, 2000 by C$ . , resulting in a dilution of
. %. See "Dilution." Investing in our common shares involves risks that are
described in the "Risk Factors" section beginning on page 8 of this prospectus.
In the opinion of counsel, the shares will, at the date of closing, qualify for
investment under certain statutes as set forth under "Eligibility for
Investment."
--------------
Price: C$ . per Share
--------------
Price
to the Underwriting Net Proceeds
Public Commission to ImagicTV(/1/)
------ ------------ ----------------
Per Share.................................. C$ . C$ . C$ .
Total(/2/)................................. C$ . C$ . C$ .
- -----
(1) Before deducting expenses of this offering estimated at C$ . . We will pay
these expenses from the proceeds of the offering.
(2) The underwriters may also purchase up to an additional . common shares at
the public offering price within 30 days from the date of the closing of
this offering to cover over-allotments. If the over-allotment option is
exercised in full, the total price to the public, underwriting commission
and proceeds to us before expenses will be C$ . , C$ . and C$ . ,
respectively. This prospectus also qualifies the distribution of the common
shares issuable upon the exercise of the underwriters' over-allotment
option.
We may increase or decrease the number of common shares offered by this
prospectus by up to . common shares.
The underwriters, as principals, conditionally offer the common shares, subject
to prior sale, if, as and when issued and sold by us and accepted by the
underwriters, in accordance with the conditions contained in the underwriting
agreement referred to under "Underwriting" and subject to the approval of
certain legal matters by McCarthy Tetrault, Toronto, Ontario and Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York, on behalf of ImagicTV Inc., and by Torys, Toronto, Ontario
and Shearman & Sterling, New York, New York, on behalf of the underwriters. See
"Underwriting."
Subscriptions for shares will be received subject to rejection or allotment, in
whole or in part, and the right is reserved to close the subscription books at
any time without notice. It is expected that the closing of this offering will
take place on or about . , 2000 or on such date as we and the underwriters may
agree, and that certificates representing the shares will be ready for delivery
on or about closing.
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
TABLE OF CONTENTS
Page
----
U.S. Prospectus of ImagicTV Inc. .......................................... 3
Supplemental Canadian Disclosure........................................... C-1
2
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
SUPPLEMENTAL CANADIAN DISCLOSURE
In accordance with the requirements of applicable securities laws in all
provinces and territories of Canada, the disclosure in the U.S. Prospectus
incorporated in this prospectus is supplemented with the following additional
disclosure.
The principal and head office of ImagicTV is located at One Brunswick
Square, 14th Floor, P.O. Box 303, Saint John, New Brunswick E2L 3Y2, Canada.
ImagicTV was incorporated under the laws of Canada on December 24, 1997 under
the name "imagicTV Inc." Articles of amendment were filed on June 30, 1998 to
change the name of our company to its present name and to amend the terms of
our share capital to provide that each holder of Class B shares shall be
entitled to convert his or her Class B shares into Class A shares at any time
following the occurrence of certain events, including the making of a take-over
bid in respect of our Class A common shares or an acquisition of control of our
company. Immediately prior to the closing of the offering, the articles of
ImagicTV will be amended so that the share capital has the rights and
attributes described in the U.S. Prospectus under "Description of Share
Capital."
iMagicTV(US), Inc. is a wholly-owned subsidiary of ImagicTV and was
incorporated under the laws of the State of Delaware on November 17, 1999.
ImagicTV (UK) Limited is a wholly owned subsidiary of ImagicTV and was
incorporated under the laws of England on January 5, 2000 under the name
"Sinord 140 Limited". Its articles were subsequently amended to change its name
to its present name.
Prior Sales(/1/)
During the 12 months prior to October 13, 2000, we issued the 6,420,990
common shares indicated below for the consideration indicated.
Price Per Share
Date Reason for Issuance (U.S.$) Common Shares Issued
- ---- ------------------- --------------- --------------------
October 21, 1999 Private Placement $ 1.17 119,295
December 17, 1999 Private Placement $ 1.64 3,808,146
December 22, 1999 Private Placement $ 1.64 210,421
March 8, 2000 Exercise of Options $ 0.95 1,455
April 27, 2000 Exercise of Options $ 0.60 2,909
April 27, 2000 Exercise of Options $ 0.93 291
July 12, 2000 Exercise of Options $ 0.93 2,909
August 1, 2000 Exercise of Options $ 0.94 2,909
September 19, 2000 Private Placement $11.00 909,061(/2/)
October 2, 2000 Private Placement $11.00 272,719
October 6, 2000 Private Placement $11.00 1,090,875
- --------
(1) This section assumes the completion of the reclassification of our share
capital which will consist of (i) the conversion of all of our existing
Class A, Class B and Class C common shares into a single new class of
common shares on a one-for-one basis, and (ii) the creation of a new class
of preferred shares. Each new common share outstanding will then be split
into 1.1636 new common shares on a 1.1636-for-1 basis. See "Description of
Share Capital" in the U.S. Prospectus.
(2) Common share purchase warrants were issued on September 19, 2000 for
aggregate gross proceeds of US$10.0 million and automatically exercised on
October 2, 2000 for 909,061 common shares for no additional consideration.
Material Contracts
The material contracts which we have entered into during the two year
period prior to the date of this prospectus, other than contracts entered into
in the ordinary course of business, are as follows:
1. Purchase Agreement dated . , 2000 relating to the sale of the common
shares and referred to under "Underwriting" in the U.S. Prospectus.
2. Loan Agreement dated June 27, 1999 between Newbridge Networks
Corporation and ImagicTV described under the heading "Related Party
Transactions" in the U.S. Prospectus.
C-1
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
Copies of the above, together with certain other contracts filed as
exhibits to our Registration Statement on Form F-1, may be inspected during
ordinary office business hours at our principal and head office in Saint John,
New Brunswick, Canada during the period of distribution of the common shares
and for a period of 30 days thereafter or may be viewed at www.sec.gov as
exhibits to our Registration Statement on Form F-1.
Auditors, Registrar and Transfer Agent
Our auditors are KPMG LLP, Chartered Accountants, 4120 Yonge Street,
Suite 500, Toronto, Ontario M2P 2B8, Canada.
The registrar and transfer agent for our common shares in Canada is CIBC
Mellon Trust Company, at its principal stock and bond transfer offices located
in Toronto, Ontario, Canada.
Promoter
NBTel took the initiative in founding and organizing the business of our
company and, as a result, is a "promoter" of our company under the securities
legislation in certain of the provinces and territories of Canada. A
description of the nature of the relationship between NBTel, its affiliates and
our company, is described in the U.S. Prospectus under "Related Party
Transactions."
Eligibility for Investment
In the opinion of McCarthy Tetrault, Canadian counsel to ImagicTV, and
Torys, Canadian counsel to the underwriters, the common shares offered by this
prospectus if, as and when listed on a prescribed stock exchange within the
meaning of the Income Tax Act (Canada) and the regulations thereunder (the
"Act"), will be, at the date of closing of the offering, qualified investments
under the Act for trusts governed by registered retirement savings plans,
registered retirement income funds, deferred profit sharing plans and
registered education savings plans. For these purposes, each of The Toronto
Stock Exchange and the Nasdaq National Market is currently a prescribed stock
exchange. Based on a certificate from ImagicTV as to certain factual matters,
in the opinion of such counsel, the common shares, if issued on the date
hereof, would not, on the date hereof, be foreign property for purposes of the
Act.
Eligibility of the shares for investment by purchasers to whom any of the
following statutes apply is, in certain cases, governed by criteria which such
purchasers are required to establish as policies or guidelines pursuant to the
applicable statute (and, where applicable, the regulations thereunder) and is
subject to the prudent investment standards and general investment provisions
provided therein:
Insurance Companies Act (Canada) an Act respecting trust companies
Pension Benefits Standards Act, and savings companies (Quebec)
1985 (Canada) (for a trust company, as defined
Trust and Loan Companies Act therein, which invests its own
(Canada) funds and funds received as
Financial Institutions Act deposits or a savings company, as
(British Columbia) defined therein, which invests
Pension Benefits Standards Act its own funds)
(British Columbia) an Act respecting insurance
Employment Pension Plans Act (Quebec) (in respect of insurers
(Alberta) other than guarantee fund
Loan and Trust Corporations Act corporations)
(Alberta) Supplemental Pension Plans Act
The Insurance Act (Manitoba) (Quebec)
Pension Benefits Act (Manitoba) Trustees Act (New Brunswick)
The Trustee Act (Manitoba) Trust and Loan Companies Act (Nova
Pension Benefits Act (Ontario) Scotia)
Loan and Trust Corporations Act Pension Benefits Act (Nova Scotia)
(Ontario)
C-2
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
Purchasers' Statutory Rights
Securities legislation in certain of the provinces and territories of
Canada provides purchasers with the right to withdraw from an agreement to
purchase securities within two business days after receipt or deemed receipt of
a prospectus and any amendment. In several of the provinces and territories of
Canada, securities legislation further provides a purchaser with remedies for
rescission or, in some provinces, damages where the prospectus and any
amendment contains a misrepresentation or is not delivered to the purchaser,
provided that such remedies for rescission or damages are exercised by the
purchaser within the time limits prescribed by the securities legislation of
the purchaser's province or territory. A purchaser should refer to any
applicable provisions of the securities legislation of the purchaser's province
or territory for the particulars of these rights or consult with a legal
advisor.
Information Incorporated By Reference
The information permitted to be omitted from this prospectus will be
contained in a supplemented prospectus and will be incorporated by reference
herein as of the date of such supplemented prospectus.
C-3
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
CERTIFICATE OF THE COMPANY
Dated: October 23, 2000
The foregoing, together with the information deemed to be incorporated
herein by reference, as of the date of the supplemented prospectus providing
the information permitted to be omitted from this prospectus, will constitute
full, true and plain disclosure of all material facts relating to the
securities offered by this prospectus as required by Part 9 of the Securities
Act (British Columbia), Part 8 of the Securities Act (Alberta), Part XI of The
Securities Act, 1988 (Saskatchewan), Part VII of The Securities Act (Manitoba),
Part XV of the Securities Act (Ontario), Section 63 of the Securities Act (Nova
Scotia), Section 13 of the Security Frauds Prevention Act (New Brunswick), Part
II of the Securities Act (Prince Edward Island), Part XIV of the Securities
Act (Newfoundland), the Securities Act (Northwest Territories), by the
Securities Act (Yukon Territory) and the Securities Act (Nunavut) and the
respective rules and regulations thereunder and, for the purposes of the
Securities Act (Quebec) and the Regulations thereunder, will not contain any
misrepresentation likely to affect the value or the market price of the
securities to be distributed hereunder.
(Signed) Marcel LeBrun (Signed) Marjean Henderson
President and Chief Executive Officer Vice President and Chief Financial
Officer
On behalf of the Board of Directors
(Signed) Robert E. Neal (Signed) Peter G. Jollymore
Director Director
C-4
ALTERNATE PAGES OF THE CANADIAN PROSPECTUS
CERTIFICATE OF THE CANADIAN UNDERWRITERS
Dated: October 23, 2000
To the best of our knowledge, information and belief, the foregoing,
together with the information deemed to be incorporated herein by reference, as
of the date of the supplemented prospectus providing the information permitted
to be omitted from this prospectus, will constitute full, true and plain
disclosure of all material facts relating to the securities offered by this
prospectus as required by Part 9 of the Securities Act (British Columbia), Part
8 of the Securities Act (Alberta), Part XI of The Securities Act, 1988
(Saskatchewan), Part VII of The Securities Act (Manitoba), Part XV of the
Securities Act (Ontario), Section 13 of the Security Frauds Prevention Act (New
Brunswick), Section 64 of the Securities Act (Nova Scotia), Part II of the
Securities Act (Prince Edward Island), Part XIV of the Securities Act,
(Newfoundland), the Securities Act (Northwest Territories), the Securities Act
(Yukon Territory) and the Securities Act (Nunavut) and the respective rules and
regulations thereunder and, for the purposes of the Securities Act (Quebec) and
the Regulations thereunder, to our knowledge, will not contain any
misrepresentation that is likely to affect the value or the market price of the
securities to be distributed hereunder.
MERRILL LYNCH CANADA INC.
By: (Signed) Erik Charbonneau
CIBC WORLD MARKETS INC.
By: (Signed) Kevin W. Dalton
The following includes the name of every person or company having any
interest, directly or indirectly, to the extent of not less than 5% in the
capital of:
Merrill Lynch Canada Inc., an indirect wholly owned subsidiary of Merrill Lynch
& Co., Inc.; and
CIBC World Markets Inc., a wholly owned subsidiary of a Canadian chartered
bank.
C-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses, other than underwriting
commissions, payable by the registrant in connection with the sale of the
securities being registered. All amounts shown are estimates except for the SEC
registration fee and the NASD filing fee.
SEC registration fee........................................... $ 18,748
National Association of Securities Dealers filing fee.......... 7,600
Nasdaq National Market fee..................................... 75,000
Filing fees with Canadian securities regulatory authorities.... 28,700
The Toronto Stock Exchange fee................................. 34,000
U.S. state securities law qualification fees and expenses...... 10,000
Printing and engraving expenses................................ 325,000
Accountant's fees and expenses................................. 250,000
Legal fees and expenses........................................ 1,150,000
Miscellaneous.................................................. 300,952
----------
Total........................................................ $2,200,000
==========
Item 14. Indemnification of Certain Persons.
Please see "Directors' and Officers' Indemnification" on page 59 of the
accompanying prospectus for a description of the indemnification provided for
under the Canada Business Corporations Act as well as under the registrant's
by-laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
ImagicTV maintains directors' and officers' liability insurance with
policy limits of C$6.0 million in the aggregate, subject to a deductible in
respect of corporate reimbursement of C$25,000 for each loss. Generally, under
this insurance ImagicTV is reimbursed under corporate indemnity provision for
payments made on behalf of its directors and officers, and individual directors
and officers (or their heirs and legal representatives) are reimbursed for
losses arising during the performance of their duties for which they are not
indemnified by ImagicTV.
Item 15. Recent Sales of Unregistered Securities.
Since December 1997, ImagicTV has issued and sold unregistered securities
as described below. As indicated below, the sales were exempt from registration
under the Securities Act either pursuant to Rule 903 of
II-1
Regulation S under the Securities Act or Section 4(2) of the Securities Act. In
the case of all offerings exempt under Rule 903 of Regulation S, the
transactions were "offshore transactions;" there were no "directed selling
efforts" in the United States; all issuances were to persons believed not to be
U.S. persons and outside the United States at the time the buy order was
originated; and at the time of sale there was no "substantial U.S. market
interest" for the shares of ImagicTV. All terms used in the preceding sentence
that are defined in Regulation S are used with the meanings specified in
Regulation S.
(a) In January 1998, ImagicTV issued 2,000,000 Class A common shares to
NBTel in exchange for the transfer of intellectual property owned by
NBTel to ImagicTV, having an aggregate value of approximately
C$2,800,000. Also in January 1998, ImagicTV sold 2,000 Class A
common shares to NBTel and 1,000 Class A common shares to 506048
N.B. Ltd., a subsidiary of Celtic House International, for an
aggregate price of $2,000. In February 1999, ImagicTV issued an
aggregate of 3,250,000 Class A common shares with an ascribed value
of C$2,800,000 to NBTel and Celtic House International in connection
with the exercise of its option to acquire technology developed
under a joint research project pursuant to a technology transfer
option agreement. For the reasons set forth above, these shares were
not required to be registered pursuant to the Securities Act by
virtue of Rule 903 of Regulation S. See "Transactions with Related
Parties."
(b) In June 1998, ImagicTV issued 500,000 Class A common shares and
1,500,000 Class B common shares to Newbridge Networks for an
aggregate price of $1,359,000. For the reasons set forth above,
these shares were not required to be registered pursuant to the
Securities Act by virtue of Rule 903 of Regulation S.
(c) During fiscal 1999 and fiscal 2000, ImagicTV issued 2,312,617 and
1,562,517,Class A common shares respectively, for an aggregate price
of $2,440,000 and $1,676,000, respectively, pursuant to pre-emptive
rights granted to its shareholders under the shareholders'
agreement. For the reasons set forth above, these shares were not
required to be registered pursuant to the Securities Act by virtue
of Rule 903 of Regulation S.
(d) In December 1999, ImagicTV sold 3,272,728 Class A common shares to
Whitecastle Investments Ltd. and certain of its employees and
Centara Investments Ltd. for an aggregate price of $6,144,000
pursuant to a share subscription and purchase agreement. For the
reasons set forth above, these shares were not required to be
registered pursuant to the Securities Act by virtue of Rule 903 of
Regulation S.
(e) In fiscal 2000, ImagicTV sold an aggregate of 680,483 Class C common
shares to employees of ImagicTV and to individual investors,
consisting of directors of ImagicTV or employees of companies with
which ImagicTV has a business relationship, for an aggregate of
$1,011,000. Of these shares, 639,337 Class C common shares were not
required to be registered under the Securities Act by virtue of Rule
903 of Registration S for the reasons set forth above, and 41,046
Class C common shares were not required to be registered by reason
of the exemption provided by Section 4(2) of the Securities Act
because they were sold in transactions not involving a public
offering to two accreditied investors, as that term is defined in
Rule 501(a) under the Securities Act, and without general
solicitation.
(f) In September 2000, ImagicTV sold 704,225 warrants to purchase Class
A common shares for an aggregate purchase price of $10,000,000 to
five existing Class A shareholders of ImagicTV, which warrants were
automatically exercised, for no additional consideration, in October
2000 and 781,249 Class A common shares were issued upon exercise.
For the reasons set forth above, these securities were not required
to be registered pursuant to the Securities Act by virtue of Rule
903 of Regulation S.
(g) In October 2000, ImagicTV sold to two corporate investors, each of
which ImagicTV believes is a "qualified institutional buyer," as
that term is defined in Rule 144A of the Securities Act, an
aggregate of 1,171,875 Class A common shares for an aggregate
purchase price of $15,000,000.
II-2
These shares were not required to be registered by reason of the
exemption provided by Section 4(2) of the Securities Act and
Regulation D thereunder because they were sold to these buyers in
transactions not involving a public offering and without general
solicitation.
In addition, through August 31, 2000 ImagicTV had granted options to
purchase 2,545,700 Class C common shares to employees, officers and directors
at a weighted exercise price of $1.26 per share pursuant to its stock option
plans. These options and common shares issuable upon their exercise were not
required to be registered by virtue of Rule 903 of Regulation S under the
Securities Act with respect to optionees outside the United States and Rule
701 under the Securities Act with respect to optionees in the United States.
After the completion of this offering, ImagicTV plans to file a registration
statement on Form S-8 with respect to its stock option plans. Through August
31, 2000, ImagicTV has issued 9,000 Class C common shares to employees upon
the exercise of options for an aggregate purchase price of $8,700. These
shares were not required to be registered by virtue of Rule 903 of Regulation
S under the Securities Act.
The share amounts set forth above do not give effect to the
reclassification of ImagicTV's share capital as described under "Description
of Share Capital" in the accompanying prospectus. In the reclassification,
(1) we will convert all of ImagicTV's existing Class A, Class B and Class C
common shares into a single new class of common shares on a one-for-one basis
and (2) each new common share outstanding will then be split into new common
shares on the basis described under "Description of Share Capital." These
transactions will not be required to be registered pursuant to the Securities
Act by virtue of the exemption provided by Section 3(a)(9) of the Securities
Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. The exhibits listed in the following Exhibit Index are filed as
part of this Registration Statement.
Exhibit
Number Description of Document
------- -----------------------
1.1* Form of Purchase Agreement between ImagicTV Inc. and the several
underwriters listed therein.
3.1 Articles of Incorporation of ImagicTV Inc. filed December 24,
1997.
3.2 Amendment to Articles of Incorporation, filed June 30, 1998.
3.3 Forms of Amendment to Articles of Incorporation relating to the
reclassification and the share split.
3.4 Bylaws of ImagicTV Inc.
4.1 Form of Common Share Certificate.
5.1* Form of Opinion of McCarthy Tetrault as to the legality of the
common shares.
9.1 Form of Amended and Restated Unanimous Shareholders Agreement.
9.2 Form of Operating Agreement.
10.1 Employee Share Option Plan.
10.2 Form of Share Option Agreement with respect to the Employee Share
Option Plan.
10.3 Form of 2000 Share Option Plan.
10.4 Loan between Newbridge Networks Corporation and ImagicTV Inc.
10.5 Technology Transfer Agreement, dated January 1, 1998, between
ImagicTV Inc. and The New Brunswick Telephone Company, Ltd.
10.6 Technology Transfer Option Agreement, dated January 5, 1998,
between ImagicTV Inc., 506048 N.B. Ltd. and The New Brunswick
Telephone Company, Ltd.
10.7 Development Agreement, dated January 5, 1998, between ImagicTV
Inc., 506048 N.B., Ltd. and The New Brunswick Telephone Company,
Ltd.
10.8 Licensing Agreement, dated April 19, 1999, between ImagicTV Inc.
and The New Brunswick Telephone Company, Ltd., together with a
Novation and Amendment Agreement to Licensing Agreement and Set-
Top Box Supply and Software Licensing Agreement, dated December
16, 1999, between ImagicTV Inc., NBTel and Aliant Telecom Inc.
II-3
Exhibit
Number Description of Document
------- -----------------------
10.9 Executive Employment Agreement, dated July 26, 2000, between
iMagicTV and Marcel LeBrun.
10.10 Executive Employment Agreement, dated July 14, 2000, between
ImagicTV and Marjean Henderson.
10.11 Executive Employment Agreement, dated July 26, 2000, between
ImagicTV and Allan Cameron.
10.12 Executive Employment Agreement, dated July 26, 2000, between
ImagicTV and Doug Harrington.
10.13 Executive Employment Agreement, dated July 26, 2000, between
ImagicTV and Gerry Verner.
10.14 Form of Management Option Agreement.
10.15 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and America Online, Inc.
10.16 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and Cisco Systems, Inc., including
separate Board Observation Rights and Right of First Negotiation
Letter, made as of the same date.
10.17 Form of Share Purchase Warrant.
21.1 Subsidiaries of ImagicTV Inc.
23.1 Consent of KPMG LLP.
23.2* Consent of McCarthy Tetrault.
24.1 Power of Attorney (set forth on signature page of the Registration
Statement).
- --------
*To be filed by amendment.
(b)Financial Statement Schedules.
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the Consolidated Financial
Statements and notes thereto.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
See "Item 14. Indemnification of Certain Persons" on page II-1 of this
Part II.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form F-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Saint John, New Brunswick, Canada, on October
23, 2000.
ImagicTV Inc.
By: /s/ Marcel LeBrun
-----------------
Marcel LeBrun
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Marcel LeBrun, Gerry Verner and Marjean
Henderson, and each of them as his or her attorney-in-fact, with the power of
substitution, for him or her and any and all capacities, to sign any amendment
or post-effective amendment to this registration statement on Form F-1 or any
abbreviated registration statement (including, without limitation, any
additional registration statement filed pursuant to Rule 462 under the
Securities Act of 1933) with respect hereto and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorney-in-
fact, or his or her substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Marcel LeBrun President, Chief Executive October 23, 2000
- ---------------------------
Marcel LeBrun Officer and Director
(principal executive officer)
/s/ Marjean Henderson Vice President and October 23, 2000
- ---------------------------
Marjean Henderson Chief Financial Officer
(principal financial and
accounting officer)
/s/ Peter G. Jollymore Chairman of the Board of Directors October 23, 2000
- ---------------------------
Peter G. Jollymore
/s/ Joe C. Culp Director October 23, 2000
- ---------------------------
Joe C. Culp
/s/ Carey Diamond Director October 23, 2000
- ---------------------------
Carey Diamond
/s/ Dr. Terence E. Matthews Director October 23, 2000
- ---------------------------
Dr. Terence E. Matthews
II-5
Signature Title Date
- --------- ----- ----
/s/ Michael J. McCloskey Director October 23, 2000
- ------------------------------
Michael J. McCloskey
/s/ Robert E. Neal Director October 23, 2000
- ------------------------------
Robert E. Neal
/s/ Gerald L. Pond Director October 23, 2000
- ------------------------------
Gerald L. Pond
/s/ Paul Spruyt Director October 23, 2000
- ------------------------------
Paul Spruyt
II-6
SIGNATURE OF AUTHORIZED UNITED STATES REPRESENTATIVE
Pursuant to the Securities Act of 1933, as amended, the undersigned
certifies that she is the duly authorized representative of ImagicTV Inc. in
the United States and has signed this registration statement or amendment
thereto, on this 23rd day of October, 2000.
/s/ Marjean Henderson
------------------------------------------------
Marjean Henderson, a U.S. citizen
(Authorized representative of ImagicTV Inc. in
the United States)
II-7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ImagicTV Inc.
Exhibits
Volume I of I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
1.1* Form of Purchase Agreement between ImagicTV Inc. and the several
underwriters listed therein.
3.1 Articles of Incorporation of ImagicTV Inc. filed December 24, 1997.
3.2 Amendment to Articles of Incorporation, filed June 30, 1998.
3.3 Forms of Amendment to Articles of Incorporation relating to the
reclassification and the share split.
3.4 Bylaws of ImagicTV Inc.
4.1 Form of Common Share Certificate.
5.1* Form of Opinion of McCarthy Tetrault as to the legality of the common
shares.
9.1 Form of Amended and Restated Unanimous Shareholders Agreement.
9.2 Form of Operating Agreement.
10.1 Employee Share Option Plan.
10.2 Form of Share Option Agreement with respect to the Employee Share
Option Plan.
10.3 Form of 2000 Share Option Plan.
10.4 Loan between Newbridge Networks Corporation and ImagicTV Inc.
10.5 Technology Transfer Agreement, dated January 1, 1998, between ImagicTV
Inc. and The New Brunswick Telephone Company, Ltd.
10.6 Technology Transfer Option Agreement, dated January 5, 1998, between
ImagicTV Inc., 506048 N.B. Ltd. and The New Brunswick Telephone
Company, Ltd.
10.7 Development Agreement, dated January 5, 1998, between ImagicTV Inc.,
506048 N.B., Ltd. and The New Brunswick Telephone Company, Ltd.
10.8 Licensing Agreement, dated April 19, 1999, between ImagicTV Inc. and
The New Brunswick Telephone Company, Ltd., together with a Novation
and Amendment Agreement to Licensing Agreement and Set-Top Box Supply
and Software Licensing Agreement, dated December 16, 1999, between
ImagicTV Inc., NBTel and Aliant Telecom Inc.
10.9 Executive Employment Agreement, dated July 26, 2000, between iMagicTV
and Marcel LeBrun.
10.10 Executive Employment Agreement, dated July 14, 2000, between ImagicTV
and Marjean Henderson.
10.11 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Allan Cameron.
10.12 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Doug Harrington.
10.13 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Gerry Verner.
10.14 Form of Management Option Agreement.
10.15 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and America Online, Inc.
10.16 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and Cisco Systems, Inc., including
separate Board Observation Rights and Right of First Negotiation
Letter, made as of the same date.
10.17 Form of Share Purchase Warrant.
21.1 Subsidiaries of ImagicTV Inc.
23.1 Consent of KPMG LLP.
23.2* Consent of McCarthy Tetrault.
24.1 Power of Attorney (set forth on signature page of the Registration
Statement).
- --------
*To be filed by amendment.