This annual report contains forward-looking statements. These statements include
statements regarding: conditions in the telecom industry, our goals, business
model and plans, our efforts to develop and enhance our products, our expected
sources of revenue, our future costs and losses, our capital requirements and
the outlook for our business. When used in this document, the words "will,"
"plan," "anticipate," "expect," "intend," "believe" and similar expressions 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 risks and uncertainties, including:
unanticipated trends and conditions in our industry, delays and difficulties
that we encounter in developing enhanced products, the risk that we will not
have sufficient capital to maintain or expand our operations, delays and
difficulties in obtaining customers or in their commercial deployment of
services based on our products, and other risks described in our filings with
the U.S. Securities and Exchange Commission and Canadian Securities
Administrators, including the prospectus for our initial public offering. These
and other 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. These factors should
be considered carefully, and readers should not place undue reliance on the
forward-looking statements. We do not undertake any obligation to update this
forward-looking information.
LETTER TO SHAREHOLDERS
OUR PROGRESS
For ImagicTV, fiscal year 2001 was marked by exciting growth and development.
Total revenues increased to U.S.$9.0 million from U.S.$2.1 million, while
license and royalty fees increased to U.S.$6.1 million from U.S.$1.4 million.
Our first licensed customers, Aliant Telecom Inc. of Canada and Kingston Vision
of the UK, completed commercial launches and collectively delivered services to
more than 10,000 subscribers. These commercial launches continue to provide us
with valuable customer feedback that assists us in developing additional
products and services. Meanwhile, in North America, Europe, and Asia, we secured
trial licenses with new customers, including Telenor of Norway, and recently we
secured a trial license with SingTel of Singapore. In September and October
2000, we completed private placements of our securities, and in November, we
completed an initial public offering and listed our shares on the Nasdaq
National Market and the Toronto Stock Exchange. In total, we raised net proceeds
of approximately U.S.$70 million.
Extending our product lines and developing partnerships were key achievements in
fiscal 2001. Our U.S.$8.0 million investment in research and development yielded
product enhancements such as adding features to DTV Manager, our flagship
product, as well as release 2.0 of pcVu and our video-on-demand product, Movie
Manager. Through our Broadband Alliance program, we worked with leading
companies to develop better broadband TV solutions. ImagicTV developed new
alliances across categories that offer our customers a choice of technologies.
These new relationships range from Motorola and Thomson Multimedia to AFC
(Advanced Fibre Communications) for broadband access technologies.
Looking forward, we believe that we are well positioned to thrive in the
emerging broadband TV market. While telecommunications industry spending has
slowed significantly in recent months and while we believe that our customers
are likely to extend market trials before making the significant investment
necessary to commence commercial deployment, we remain confident that the
broadband TV market will expand globally and that our products will have a
leading place in this expansion. Our job is to demonstrate to telephone
companies and other service providers that our products and services can assist
them in offering high quality digital television, as well as the other services
available through DTV Manager (including interactive program guides, pay-per-
view, channel blocking, Internet-on-TV, e-mail and video-on-demand) and thereby
to allow our customers to improve their operations and to meet their competitive
challenges.
We have welcomed several new executives to our management team. These new
positions reinforce our commitment and focus on specific markets and
initiatives. Our new Regional Vice Presidents, Pierre-Jean Chalon as Vice
President of Operations for Asia Pacific, Norman Bier as Vice President of Sales
for North and South America, and Nigel Bealing as Vice President of Sales for
Europe, Middle East and Africa, give ImagicTV the global perspective and
individual market focus for us to succeed. In addition, Dany DeGrace, Vice
President of our newest division, Customer Solutions, works globally to build
technology and service solutions that are tailored for our customer base. Also
joining ImagicTV this year was Marjean Henderson as Vice President and Chief
Financial Officer who played an integral role in our initial public offering and
leads our financial and administrative teams.
On the broadband technology front, encoding companies found new and better ways
to lower the bit rate of video streams and increase quality, while networking
companies found new and better ways to deliver higher bandwidth over longer
lines. These developments have two effects on us: one, they reaffirm our
business model, and two, they expand the quality and quantity of options
available to our customers.
FOCUS FOR THE COMING YEAR
The telecom industry has experienced a significant slow down and markets have
reacted accordingly. We plan to use this time to strengthen our products and
services and continue to learn from our customer deployments. We will continue
to pace our R&D and operational activities to stay ahead of the competition
while staying in tune with market conditions. We intend to be well positioned,
prepared, and strong as markets develop.
Building on the past, our goal in fiscal 2002 is to continue to develop our
products and services, with a focus on consulting and professional services as
customers extend their market trials. We are particularly focused on providing
customized service to our customers with a view to allowing them to commence
commercial deployment more quickly. Our flagship product, DTV manager, will
continue to be enhanced with features that are designed to make our customers'
businesses easier to run and bring their subscribers an unparalleled TV and
broadband experience. We appreciate the support of our shareholders, customers
and employees as we seek to help our customers succeed in the broadband
television marketplace and, at the same time, build our business and enhance
shareholder value.
Marcel LeBrun............................... Peter Jollymore
President and Chief Executive Officer....... Chairman of the Board of Directors
June 20, 2001
MANAGEMENT'S DISCUSSION AND ANALYSIS
You should read the following discussion and analysis in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
annual report. All financial information presented in this annual report is
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.
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 Inc., the
incumbent local exchange carrier in New Brunswick, Canada, and a subsidiary of
Aliant Inc., our largest shareholder. 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, another of our largest shareholders, pursuant to
which we further enhanced the acquired technology. We delivered the initial
version of our primary software product, DTV Manager, to NBTel in December 1998
for technical trials. In the fall of 1999, after further development, 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 thereafter each of them deployed multi-channel digital television
services to its subscribers. We presently have twelve customers in North
America, Europe and Asia and currently generate revenues from nine of these
customers. Of these customers, five telephone companies and one multiple
dwelling unit service provider have licensed DTV Manager for commercial
deployment and four other telephone companies have entered into trial license
agreements. In addition, we have installed DTV Manager for limited testing
purposes on networks of 12 other service providers in North America, Europe and
Asia. We have not generated any revenues from these test installations. We also
generate revenues in limited circumstances from demonstration license and
services agreements with certain industry participants.
The following discussion and analysis relate to our consolidated financial
statements which are stated in U.S. dollars and have been prepared in accordance
with Canadian GAAP. As applied to our current consolidated financial statements,
these principles conform in all material respects with U.S. GAAP, except as
disclosed in note 11 to our consolidated financial statements, included
elsewhere in this annual report.
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 two 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.
Services revenues comprise 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 comprise of sales of digital set-top boxes resold by us to
our customers at little or no mark-up above our cost. Historically, we purchased
set-top boxes for resale in order to have a source of supply available to our
customers. Except in limited circumstances, we ceased that practice in the
fiscal year ended February 28, 2001, and we expect our customers will purchase
set-top boxes directly from suppliers. As a result, we anticipate our revenues
from this activity will be substantially reduced.
In the fiscal year ended February 28, 2001, our software licensing revenues,
royalty fee revenues, services revenues and equipment revenues represented
approximately 53%, 14%, 20% and 13%, respectively, of our total revenues. In the
same period, we earned approximately 42% of our total revenues in Canada,
approximately 41% in the United States and approximately 17% in Europe. In this
period, NBTel, CenturyTel and Boardwalk Equities accounted for approximately
28%, 18% and 10%, respectively, of our total revenues. Excluding equipment
sales, the comparable percentages are NBTel 19%, CenturyTel 20% and Boardwalk
Equities 10%. An additional 10% of our total revenues (12% excluding equipment
sales) came from non-recurring license fees received under our demonstration
license agreement with Nortel Networks.
In the fiscal year ended February 29, 2000, our software licensing revenues,
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%.
Historically, we have generated revenues from NBTel principally from initial
licensing fees, royalty fees, fees for maintenance and technical support
services and equipment sales. Since August 31, 2000, we have not sold any set-
top boxes to NBTel, and we understand that NBTel has placed an order for
additional set-top boxes directly from the supplier. Thus, we anticipatethat, in
the future, our revenues from NBTel will not include any significant amount of
equipment sales, but rather will be principally from subscriber-based royalties
and maintenance and technical support services. On that basis, we expect that,
at least for the next several years, the percentage of our total revenues
generated from NBTel will be significantly less than in the past.
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 instalments over a period of less than a year.
Revenues recognized in advance of the instalments being due are recorded as
instalments receivable in the balance sheet.
Maintenance and technical support revenues are recognized evenly 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 fiscal year ended February 28, 2001, we generated over 57% of our
revenues in U.S. dollars and incurred approximately 75% 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. 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 fee revenues 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 have been our principal suppliers of third-party software. Sun
granted us a non-exclusive license to incorporate into and distribute with DTV
Manager certain of its Java-based system software until November 2000. While the
parties are negotiating a new agreement, the parties continue to operate under
the terms of the original license. Pursuant to the original 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. As Oracle
software is no longer embedded in our DTV Manager software and is now licensed
by our customers directly from Oracle, cost of license fees revenues will no
longer include royalties payable to Oracle.
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, technical sales support staff and marketing staff,
costs associated with marketing programs, including tradeshows, public relations
and marketing materials, and allocated facilities costs.
Research and development expenses consist primarily of salary and other related
costs for personnel, training, independent consultants and facilities and
technology expenses. Technology expenses include license and support fees for
development software, the cost of tools and supplies and third party support
fees. We believe that continued investment in research and development is
critical to assist our customers in achieving successful commercial deployments.
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.
Net Losses
We have incurred substantial operating losses since our inception. As of
February 28, 2001, we had an accumulated deficit of approximately $20.3 million.
We expect to incur additional losses for at least the next few years.
RESULTS OF OPERATIONS
Fiscal year ended February 28, 2001 compared with the fiscal year ended February
29, 2000
Revenues
Total revenues increased to $9.0 million for the fiscal year ended February 28,
2001 from $2.1 million for the fiscal year ended February 29, 2000. NBTel,
CenturyTel, Nortel and Boardwalk Equities accounted for approximately 28%, 18%,
10% and 10%, respectively, of our total revenues for the fiscal year ended
February 28, 2001. NBTel, Kingston Vision and SaskTel accounted for 38%, 31% and
16%, respectively, of our total revenues for the fiscal year ended February 29,
2000. Excluding equipment sales, the comparable percentages for the fiscal year
ended February 28, 2001 are NBTel 19%, CenturyTel 20%, Nortel 12% and Boardwalk
Equities 10% and the comparable percentages for the fiscal year ended February
29, 2000 are NBTel 35%, Kingston Vision 36% and SaskTel 15%.
License and Royalty Fees. License and royalty fee revenues increased to $6.1
million for the fiscal year ended February 28, 2001 from $1.4 million for the
fiscal year ended February 29, 2000. This increase is due to the recognition of
license fee revenues of $4.8 million from eleven customers and royalty fee
revenues of $1.3 million consisting of $1.2 million in one-time subscriber based
royalties from NBTel and $48,000 in on-going monthly subscriber based royalties
from Kingston Vision.
Services. Services revenues increased to $1.8 million for the fiscal year
ended February 28, 2001 from $393,000 for the fiscal year ended February 29,
2000. During the year we recognized approximately $900,000 of the services
revenues for consulting and implementation services provided to one of our
customers, CenturyTel. The remainder of these services revenues came 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 fiscal year
ended February 28, 2001 from $321,000 for the fiscal year ended February 29,
2000. This increase is due to the recognition of $1.0 million of equipment
revenues from sales of set-top boxes to NBTel under a set-top box supply
agreement.
Cost of Revenues
Cost of revenues increased to $3.5 million for the fiscal year ended February
28, 2001 from $988,000 for the fiscal year ended February 29, 2000. This
increase, excluding $1.0 million related to equipment costs, primarily reflects
an increase in personnel in our customer service department to support our
increased customer base from nine employees as of February 29, 2000 to 21
employees as at February 28, 2001.
Operating Expenses
Our total operating expenses increased to $18.6 million for the fiscal year
ended February 28, 2001 from $7.2 million for the fiscal year ended February 29,
2000.
Sales and Marketing. Sales and marketing expenses increased to $7.8 million
for the fiscal year ended February 28, 2001 from $2.3 million for the fiscal
year ended February 29, 2000. 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 41 employees as of February 28, 2001 from
20 as of February 29, 2000. Our sales department increased to 16 employees as of
February 28, 2001 from six as of February 29, 2000. 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 $8.0
million for the fiscal year ended February 28, 2001 from $4.1 million for the
fiscal year ended February 29, 2000. This increase reflects an increase in
personnel in our research and development department to 113 employees as of
February 28, 2001 from 60 as of February 29, 2000 as we accelerated our efforts
to develop new products and services.
General and Administrative. General and administrative expenses increased to
$2.9 million for the fiscal year ended February 28, 2001 from $827,000 for the
fiscal year ended February 29, 2000. Our corporate staffing increased to 25
employees as of February 28, 2001 from 15 as of February 29, 2000, principally
to support our increased corporate activities related to becoming a public
company. We also incurred additional expenses to support our international
expansion.
Stock-based compensation. Stock-based compensation expenses have been
allocated to the operating expense items based on the nature of the work
performed by the employee to whom the options were granted. Stock-based
compensation expenses were $550,000 for the fiscal year ended February 28, 2001.
We did not record any stock-based compensation expense for the fiscal year ended
February 29, 2000. Stock based-compensation expense represents the difference
between the exercise price of options granted and the deemed fair value, for
financial reporting purposes, of our common shares on the date of their
respective granting. This stock-based compensation expense is being amortized on
a straight-line basis over the vesting period of the options which is generally
four years. The expense is largely attributable to amortization of deferred
stock-based compensation related to options granted between May 2000 and August
2000.
Other Income (Expense), Net
Other income increased to $1.6 million for the fiscal year ended February 28,
2001 from $524,000 for the fiscal year ended February 29, 2000. Interest income
made up $1.1 million of other income for the fiscal year ended February 28, 2001
as compared to $121,000 forthe fiscal year ended February 29, 2000. This
increase in interest income is primarily due to the investment of excess funds
received from our private placements in December 1999 and September and October
2000 and our November 2000 initial public offering. Other income for the fiscal
year ended February 29, 2000 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.
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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data for each of the eight most recent quarters ended February 28,
2001. 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 annual report 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, 1999 Aug. 31, 1999 Nov. 30, 1999 Feb. 29, 2000 May 31, 2000 Aug. 31 2000 Nov. 30,2000 Feb. 28, 2001
Consolidated Statement of
- -- Operations Data
Revenues:
- -- License fees $ -- $ -- $ 720 $ 664 $ 512 $ 1,543 $ 1,662 $ 1,053
Royalty fees -- -- -- -- 23 47 142 1,076
- -- Services 110 100 82 101 137 200 357 1,097
- -- Equipment -- 6 226 89 59 1,048 4 39
Total revenues 110 106 1,028 854 731 2,838 2,165 3,265
Cost of revenues:
- -- Services 81 156 231 189 318 360 624 1,077
- -- Equipment -- 4 225 102 58 972 4 34
Total cost of revenues 81 160 456 291 376 1,332 628 1,111
Gross profit (loss) 29 (54) 572 563 355 1,506 1,537 2,154
Operating expenses:
- -- Sales and marketing 318 505 677 825 1,242 1,510 2,066 2,945
- -- Research and
- -- development 690 916 1,269 1,209 1,537 1,653 2,444 2,333
- -- General and
- -- administrative 167 180 214 266 349 606 842 1,018
Total operating expenses 1,175 1,601 2,160 2,300 3,128 3,769 5,352 6,296
Loss from operations (1,146) (1,655) (1,588) (1,737) (2,773) (2,263) (3,815) (4,142)
Other income (expense), net (2) 472 19 35 99 17 605 838
Loss before provision for
- -- income taxes (1,148) (1,183) (1,569) (1,702) (2,674) (2,246) (3,210) (3,304)
Provision for income taxes (20) (4) (8) (12) (11) (19) (7) (13)
Net loss--in accordance with
- -- Canadian and U.S. GAAP $(1,168) $(1,187) $(1,577) $(1,714) $(2,685) $(2,265) $(3,217) $(3,291)
Basic and diluted net loss per
- -- share--in accordance with
- -- Canadian and U.S. GAAP $ (0.10) $ (0.09) $ (0.12) $ (0.10) $ (0.15) $ (0.13) $ (0.16) $ (0.13)
Weighted average number of
- -- shares used in computing
- -- basic and diluted net loss
- -- per share (000s) 12,040 12,949 13,336 17,548 17,552 17,556 19,586 24,593
See accompanying notes to the consolidated financial statements
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. In
September and October 2000 we completed private placements for net proceeds of
$25.0 million resulting in the issuance of aggregate of 2,272,655 common shares.
In November 2000, we completed our initial public offering of an aggregate of
4,750,000 common shares for net proceeds of $46.2 million. Through February 28,
2001, we had received aggregate proceeds of $87.7 million from the issuance of
common equity, and as of that date, we had cash equivalents of $1.3 million and
short term investments of $59.5 million. As of February 28, 2001, we had an
accumulated deficit of approximately $20.3 million. Our operating activities
used cash in the amount of $12.1 million for the fiscal year ended February 28,
2001, $3.8 million in fiscal 2000 and $4.5 million in fiscal 1999. The cash
utilized during these periods was primarily to fund our research and development
and sales and marketing efforts.
Our cash used in investing activities, before the purchase of temporary
investments, was $3.0 million for the fiscal year ended February 28, 2001,
$992,000 for the fiscal year ended February 29, 2000 and $780,000 for the fiscal
year ended February 28, 1999. 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 from financing activities was $70.0 million for the fiscal year ended
February 28, 2001. 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 and $5.7
million from the issuance of common shares for fiscal year ended February 28,
1999.
We expect that our cash position as at February 28, 2001 will be sufficient to
cover our working capital requirements for approximately the next 24 months. In
the long-term we may require additional equity financing or borrowing to fund
our business.
OUTLOOK
At the present time, the telecommunications industry is experiencing a
significant reduction in capital spending. As a result, we anticipate a
lengthening of our sales cycle as our customers extend market trials and delay
the significant capital commitments associated with commercial deployment. This
will delay licensing revenues generated by us from the commercial deployment of
DTV Manager. We expect, however, that we will generate some revenues from
professional services provided to customers during market trials.
While expenses for the fiscal year ending February 28, 2002 will increase when
compared to the fiscal year ended February 28, 2001, we intend to hold expenses
at present levels and conserve cash so as to maintain our operations as
presently constituted.
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. Changes in the value of the Canadian
dollar relative to the U.S. dollar may result in currency translation gains or
losses, which could have a material impact on our operating results. We also
deal in other foreign currencies; however, we anticipate changes in the exchange
rates of these currencies will not have a material impact. While we do not hedge
our foreign exchange rate exposure with financial derivative instruments, we do
maintain a portion of our short term investment portfolio in Canadian dollar
denominated instruments.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements and all of the information
included in this annual report have been prepared by and are the responsibility
of management and the Board of Directors of ImagicTV Inc. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and reflect management's best estimates and judgements
based on currently available information. The significant accounting policies
which management believes are appropriate for ImagicTV are described in Note 1
of the consolidated financial statements.
ImagicTV has developed and maintains an appropriate system of internal controls
in order to ensure, on a reasonable and cost-effective basis, that relevant and
reliable financial information is produced.
The Board of Directors is responsible for reviewing and approving the
consolidated financial statements and overseeing management's performance of its
financial reporting responsibilities. The Board has appointed an Audit Committee
comprised of three Directors.
The Audit Committee reviews the financial statements, the adequacy of internal
controls, the audit process and financial reporting with management and the
external auditors. The Audit Committee reports to the Directors prior to the
approval of the audited financial statements for publication.
KPMG LLP have been appointed as external auditors to perform an audit of the
consolidated financial statements in accordance with generally accepted auditing
standards to enable them to express to the shareholders their opinion on the
consolidated financial statements.
/s/ Marcel LeBrun /s/ Marjean Henderson
Marcel LeBrun Marjean Henderson
President and Chief Executive Officer, Vice President and Chief
ImagicTV Inc. Financial Officer,
ImagicTV Inc.
AUDITOR'S REPORT TO SHAREHOLDERS
We have audited the consolidated balance sheets of ImagicTV Inc. as at February
28, 2001 and February 29, 2000, and the consolidated statements of operations,
shareholders' equity and cash flows for the years ended February 28, 2001 ,
February 29, 2000 and February 28, 1999. 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.
With respect to the consolidated financial statements for the year ended
February 28, 2001, we conducted our audit in accordance with Canadian generally
accepted auditing standards and United States generally accepted auditing
standards. With respect to the consolidated financial statements for the years
ended February 29, 2000 and February 28, 1999, 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 28, 2001
and February 29, 2000 and the results of its operations and its cash flows for
the years ended February 28, 2001, February 29, 2000 and February 28, 1999 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. Application of
accounting principles generally accepted in the United States would have
affected reported results of operations for the years ended February 28, 2001,
February 29, 2000 and February 28, 1999 to the extent summarized in note 11 to
the consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
March 21, 2001
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except number of shares)
FEBRUARY 29, FEBRUARY 28,
2000 2001
Assets
Current assets:
Cash and cash equivalents (note 2) $ 6,396 $ 1,332
Short-term investments (note 2) -- 59,428
Accounts receivable, trade 1,230 4,240
Accounts receivable, trade-related parties 749 1,440
Instalment receivables -- 705
Inventory -- 295
Prepaid expenses, deposits and other receivables 195 1,436
Total current assets 8,570 68,876
Capital assets (note 3) 1,289 2,970
Total assets $ 9,859 $ 71,846
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 240 $ 1,055
Accrued liabilities 396 2,973
Payable to related parties 324 850
Deferred revenue and customer deposits 1,430 1,119
Current portion of long-term debt (note 4) 26 72
Total current liabilities 2,416 6,069
Long-term debt (note 4) 1,737 1,577
Shareholders' equity (note 5):
Authorized:
Unlimited common shares, no par value
Unlimited preferred shares, no par value
Issued and outstanding:
24,592,624 Common Shares at February 28, 2001
(February 29, 2000 -17,548,653) 14,489 87,678
Nil preferred -- --
Deferred stock-based compensation (note 5(c)) -- (2,670)
Accumulated deficit (8,824) (20,282)
Reporting currency translation adjustments 41 (526)
Total shareholders' equity 5,706 64,200
Total liabilities and shareholders' equity $ 9,859 $ 71,846
See accompanying notes to the consolidated financial statements
Signed on behalf of the Board of Directors
/s/ Peter G. Jollymore /s/ Robert E. Neal
Peter G. Jollymore Robert E. Neal
Chairman
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
Revenues:
License fees $ -- $ 1,384 $ 4,770
Royalty fees -- -- 1,288
Services 14 393 1,791
Equipment 465 321 1,150
Total revenues 479 2,098 8,999
Cost of revenues:
Services -- 657 2,379
Equipment 604 331 1,068
Total cost of revenues 604 988 3,447
Gross profit (loss) (125) 1,110 5,552
Operating expenses:
Sales and marketing 543 2,325 7,763
Research and development 2,014 4,084 7,967
General and administrative 344 827 2,815
Total operating expenses 2,901 7,236 18,545
Loss from operations (3,026) (6,126) (12,993)
Interest income (expense), net (1) 121 1,133
Forgivable government assistance (note 4) -- 434 --
Foreign exchange gain (loss) (24) (31) 426
Loss before provision for income taxes (3,051) (5,602) (11,434)
Provision for income taxes (note 6) (17) (44) (24)
Net loss $ (3,068) $ (5,646) $ (11,458)
Basic and diluted net loss per share $ (0.57) $ (0.40) $ (0.58)
Weighted average number of shares used in
computing basic and diluted net loss per
share (000s) 5,336 13,968 19,796
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars)
DEFERRED REPORTING
STOCK-BASED CURRENCY TOTAL
COMMON SHARES COMPENSATION ONACCUMULATED TRANSLATION
SHAREHOLDERS'
NUMBER AMOUNT STOCK OPTIONS DEFICIT ADJUSTMENTS EQUITY
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 for cash 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 for cash 6,418 8,831 -- -- -- 8,831
Balances, February 29, 2000 17,549 14,489 -- (8,824) 41 5,706
Net loss -- -- -- (11,458) -- (11,458)
Amortization of deferred
stock-based compensation -- -- 550 -- -- 550
Deferred stock-based
compensation -- 3,220 (3,220) -- -- --
Reporting currency translation
adjustments -- -- -- -- (567) (567)
Issuance of shares for cash 7,044 69,969 -- -- -- 69,969
Balances, February 28, 2001 24,593 $87,678 $ (2,670) $(20,282) $(526) $ 64,200
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
Cash flows from operating activities:
Net loss $ (3,068) $ (5,646) $ (11,458)
Items not involving cash:
Depreciation and amortization 163 483 1,169
Non-monetary transaction (note 8(b)) -- (102) --
Stock-based compensation -- -- 550
Change in operating assets and liabilities:
Accounts receivable, trade (33) (1,160) (2,893)
Accounts receivable, trade-related parties (419) (312) (748)
Instalment receivables -- -- (979)
Inventory (231) 234 (302)
Prepaid expenses, deposits, and other
receivables (1,228) 1,052 (1,281)
Accounts payable and accrued liabilities 280 289 3,510
Payable to related parties 32 286 556
Deferred revenue and customer deposits 301 1,099 (238)
Advances from shareholders (328) -- --
Cash used in operating activities (4,531) (3,777) (12,114)
Cash flows from investing activities:
Purchases of capital assets (780) (992) (2,964)
Purchases of short-term investments -- -- (59,428)
Cash used in investing activities (780) (992) (62,392)
Cash flows from financing activities:
Issuance of common shares 5,656 8,831 69,969
Proceeds from long-term debt -- 1,763 --
Principal repayment of long-term debt -- -- (20)
Cash from financing activities 5,656 10,594 69,949
Effect of foreign currency exchange
adjustments 13 (32) (507)
Increase (decrease) in cash and cash equivalents 358 5,793 (5,064)
Cash and cash equivalents, beginning period 245 603 6,396
Cash and cash equivalents, end of period $ 603 $ 6,396 $ 1,332
Supplemental cash flow information:
Cash paid for taxes $ 17 $ 44 $ 37
See accompanying notes to the consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
ImagicTV Inc. 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 11, 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 Inc.
and its wholly owned subsidiaries, iMagicTV (US), Inc., and ImagicTV (UK)
Limited. All intercompany transactions and balances are eliminated on
consolidation.
(b) Currency translation:
Effective December 1, 2000, the U.S. dollar became the functional currency of
ImagicTV. This change resulted from the increased significance of U.S. dollar
denominated revenues and expenditures in relation to the ImagicTV's Canadian
dollar denominated transactions. In addition, ImagicTV's recent issuances of
common shares have been primarily denominated in U.S. dollars. Exchange gains
and losses resulting from transactions denominated in currencies other than U.S.
dollars are included in the results of operations in the period from December 1,
2000 to February 28, 2001.
Prior to December 1, 2000, the functional currency of ImagicTV was the Canadian
dollar. Accordingly, prior to this date, exchange gains and losses resulting
from the translation of transactions denominated in currencies other than the
Canadian dollar were included in the results of operations in the period in
which they occurred.
(c) 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.
(d) Cash and cash equivalents and short-term investments:
All highly liquid investments, with an original term to maturity of three months
or less at the time of purchase, are classified as cash equivalents. Investments
with a term to maturity of more than three months but one year or less are
classified as short-term investments.
(e) Inventory:
Inventory is recorded at the lower of cost, determined on an average basis, and
net realizable value.
(f) 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.
(g) 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 Transaction' of the American Institute of
Certified Public Accountants.
ImagicTV's revenues are derived primarily from license fees (which include
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 revenues is
based on the 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 revenues. 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 instalment receivables. Instalment receivables primarily represents future
instalment payments on license fee revenue which are due within 12 months from
the balance sheet date.
(h) 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
11
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.
Research and development arrangements funded by third parties are accounted for
either as an obligation to perform contractual services or as an obligation to
repay the funding party, depending upon the specific nature of the funding
arrangement, including whether ImagicTV has an intent or obligation to repay and
the nature of the relationship between ImagicTV and the funding party. If the
contract is determined to be a contract to perform contractual services, the
funding is recorded as either revenue over the period in which the development
activity is conducted, if ImagicTV is at risk for the research and development
costs incurred, or an offset to the expenses incurred. If the contract is
determined to be an obligation to repay the funding party, the funding received
is recorded as a liability as the funds are advanced.
(i) 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.
(j) 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 liabilitiesof 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.
(k) 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.
(l) Fair value:
Financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable trade, accounts receivable trade-related
parties, instalment receivables, 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.
(m) Concentration of credit risk:
Financial instruments that potentially expose ImagicTV to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments, accounts receivable trade and instalment receivables. 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.
Short-term investments consist primarily of high-grade fixed income securities
with maturities of more than three months but less than one year.
At February 28, 2001, 77% of the accounts receivable were concentrated with five
customers. At February 29, 2000, 77% of the accounts receivable were
concentrated with three customers. Allowances are maintained for potential
credit losses consistent with the credit risk of specific customers.
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
All short-term debt securities are classified as held to maturity because
ImagicTV has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion discounts to maturity. ImagicTV owns no
short-term investments that are considered to be trading securities nor
available for sale securities.
12
The components of cash and cash equivalents and short-term investments are
summarized as follows (in thousands):
FEBRUARY 29, FEBRUARY 28, 2000 2001
Cash and cash equivalents:
Cash $6,396 $ 1,332
Short-term investments:
Corporate commercial paper -- 14,116
Term deposit -- 230
Short-term debt securities -- 45,082
Net book value $ -- $59,428
3. CAPITAL ASSETS (IN THOUSANDS):
FEBRUARY 29, FEBRUARY 28,
2000 2001
Computer hardware $1,142 $ 2,156
Office furniture and equipment 478 1,419
Leasehold improvements 165 300
Software licenses 165 427
1,950 4,302
Less: accumulated depreciation and amortization 661 1,332
Net book value $1,289 $ 2,970
4. 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 $1,766,000 and a
forgivable loan ("Forgivable Loan") in the amount of $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 instalments 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 February 28, 2001, the number of full-
time employees employed in the Province of New Brunswick, being approximately
180, exceeded the prescribed amounts.
5. SHAREHOLDERS' EQUITY:
(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 has 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
13
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 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. The Development Agreement has
been accounted for as a funded research and development arrangement rather than
as an agreement to perform research and development for NBTel and 506NB with an
option to purchase the resulting technology, as there existed a presumption that
ImagicTV would repay the funds provided regardless of the outcome of the
research and development arrangement and based on the significant related party
relationship between ImagicTV and NBTel and 506NB. As a funded research and
development agreement, 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
repaid the funds provided by issuing a total of 3,781,700 common shares to NBTel
(1,890,850 common shares) and 506NB (1,890,850 common shares). Upon repayment of
the funds provided, 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 repayment of the funds provided.
Immediately prior to the repayment of the funds provided and completion of the
arrangement, 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) In July 2000, ImagicTV's board of directors authorized a private
placement of up to $25,000,000, of which $10,000,000 was reserved for specified
existing shareholders. On September 19, 2000, ImagicTV issued warrants to
purchase commom-shares to five existing shareholders for a total cash
consideration of $10,000,000. In October 2000, in connection with the additional
private placements described below, the share purchase warrants were converted
into 909,061 common shares.
(xi) 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. Upon completion of these share issuances, America
Online owned 1.3% and Cisco Systems owned 5.5% of ImagicTV's issued and
outstanding common shares.
(xii) On November 21, 2000, ImagicTV completed its initial public offering with
regulatory authorities in Canada and the United States. ImagicTV sold 4,750,000
common shares for net proceeds of $46,200,000. In connection with the initial
public offering, all of ImagicTV's outstanding Class A common shares, Class B
common shares and Class C common shares were converted into a single new class
of common shares on a one-for-one basis. In addition, ImagicTV effected a share
split on a 1.1636-for-1 basis. ImagicTV also created a class of preferred shares
issuable in series, none of which have been issued. ImagicTV's share capital and
earnings (loss) per share have been restated on a retroactive basis to give
effect to the conversion of the shares to a single new class of common shares
and the share split.
14
(xiii) During the year ended February 29, 2001 ImagicTV issued 21,382 common
shares to employees on the exercise of options for cash consideration of
$17,537.
(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 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, provided that the
board of directors has the right to increase the number of shares reserved. The
stock options granted under the 1998Plan 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.
ImagicTV's board of directors adopted a new share option plan on November 9,
2000 (the "2000 Plan"). The 2000 Plan does not affect options granted under its
1998 or 1999 Plans. No new options will be granted under the 1998 or 1999 Plans.
The compensation committee of ImagicTV's board of directors administers the 2000
Plan and determines, among other things, the persons eligible to participate in
the 2000 Plan and the vesting periods and other attributes of individual
options. The 2000 Plan provides for the grant of options to employees, officers
and directors of, and consultants to, ImagicTV and its affiliates. ImagicTV may
issue non-qualified stock options or incentive stock options to U.S. residents
under the 2000 Plan.
Options held by any person under the 2000 Plan, together with any new 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 2000 Plan is 1,879,185. The options granted under the 2000
Plan will have a maximum term of 10 years and an exercise price no less than the
fair market value of ImagicTV's 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 combined voting
power of the shares outstanding.
Under the 2000 Plan, if a change of control of ImagicTV should occur, ImagicTV's
board of directors is 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. A summary of the status of
ImagicTV's options as of February 28, 2001 is as follows:
WEIGHTED AVERAGE
REMAINING CONTRACTUAL NUMBER OF OPTIONS
EXERCISE PRICES NUMBER OF OPTIONS LIFE (YEARS) EXERCISABLE
$ 0.56 671,979 4.02 429,084
0.89 796,049 5.17 226,924
1.10 104,728 5.65 26,185
1.54 1,207,225 6.08 122,476
2.94 368,276 6.95 291
7.38 279,195 6.79 --
11.17 137,887 6.47 --
3,565,339 5.64 804,960
The following table summarizes options issued:
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
Outstanding, beginning
of period 378,170 $ 0.60 849,428 $ 0.64 2,188,155 $ 0.96
Granted 471,258 0.69 1,399,234 1.21 1,588,903 3.51
Cancelled -- -- (60,507) 0.91 (190,337) 2.30
Exercised -- -- -- -- (21,382) 0.80
Outstanding, end
of period 849,428 $ 0.64 2,188,155 $ 0.96 3,565,339 $ 2.02
Options exercisable,
end of period 94,543 $ 0.57 295,205 $ 0.63 804,960 $ 0.82
To February 28, 2001, all stock options have been granted to employees,
officers and
15
directors of ImagicTV. ImagicTV recorded deferred stock-based compensation
relating to options issued under ImagicTV's option plan amounting to $3,220,000
for the year ended February 28, 2001. Amortization of deferred stock-based
compensation amounted to $550,000 for the same period and has been recorded as
an operating expense during this period.
6. INCOME TAXES:
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):
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
Statutory rate applied to loss before
provision for income taxes $(1,414) $(2,583) $(5,157)
Adjustments resulting from:
Taxable portion related to capital
transaction 856 -- --
Stock-based compensation not deducted
for tax -- -- 249
Large Corporation Tax 17 44 24
Other 134 62 62
(407) (2,477) (4,822)
Unrecognized benefit of net operating losses
carried forward and timing differences 424 2,521 4,846
Income taxes $ 17 $ 44 $ 24
Significant components of ImagicTV's deferred tax assets are as
follows (in thousands):
AS OF AS OF
FEBRUARY 29, FEBRUARY 28,
2000 2001
Research and development expenses
deferred for income tax purposes $ 1,354 $ 3,911
Net operating losses carried forward 1,674 4,674
Deferred tax assets 3,028 8,585
Less valuation allowance (2,964) (7,825)
Net deferred tax asset 64 760
Deferred tax liability (64) (760)
$ -- $ --
In addition to the above, to the extent that ImagicTV is able to utilize the
research and development expenses that have been deferred for income tax
purposes to reduce taxable income, ImagicTV will have available investment tax
credits of approximately $345,000 as at February 29, 2000 and $2,251,000 as at
February 28, 2001 that would be available to reduce income taxes otherwise
payable and which begin expiring in 2010.
Except as indicated in the table and paragraph above, at each of the financial
reporting dates, ImagicTV had no available taxable or deductible temporary
differences due to differences between carrying value for accounting purposes
and basis for tax purposes.
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 $19,000,000 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.
In accordance with income tax law in Canada, research and development expenses
may be deducted in periods subsequent to the period incurred. The amounts set
out in the table above represent research and development expenses in the
consolidated statement of operations that will be deductible in future years for
income tax purposes. The amounts do not represent taxation benefits renounced to
NBTel and 506NB as part of the funding arrangement discussed in note 5(b)(iv).
Under the terms of the research and development arrangement between ImagicTV and
NBTel and 506NB described in note 5(b)(iv), investment tax credits that would,
subject to certain restrictions, have become available to ImagicTV were
renounced by ImagicTV
16
and became available to NBTel and 506NB. The renounced investment tax credits
aggregated approximately $374,000. If ImagicTV had not renounced its rights to
these investment tax credits, the dollar value of benefits available as deferred
tax assets would have increased, and this increase would have been offset by a
corresponding increase in the allowance provision.
As of February 28, 2001, ImagicTV had approximately $10,364,000 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-
$898,000; 2007-$2,619,000; 2008-$6,807,000.
7. SEGMENTED INFORMATION:
ImagicTV operates in a single reportable operating segment, that is, to provide
software products to telecommunications companies and other service providers
that enablethe delivery of digital broadcast television services to residential
subscribers over high-speed Internet Protocol networks. The single reportable
operating segment derives its revenues from the sale of software and related
services. As of February 28, 2001, substantially all assets related to
ImagicTV's operations were located in Canada. Revenues are attributable to
geographic location based on the location of the customer, as follows (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
Revenue by geographic location:
Canada $ 479 $1,362 $3,757
United States -- -- 3,699
Europe -- 736 1,543
$ 479 $2,098 $8,999
For the year ended February 28, 2001, Aliant Inc. accounted for approximately
27.9% of total revenues. In addition, two other customers accounted for 17.5%
and 10.2% 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.
8. 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 C$500,000
($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 the 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. On
January 16, 2001, the license agreement was further amended to include a sale of
40,000 subscriber-based license fees for C$3,200,000, payable in non-refundable
instalments of C$1,600,000 on January 16, 2001 and C$1,600,000 on February 28,
2002. The initial license agreement 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 are 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, C$200,000 was recognized as revenue when it became due
on January 16, 2001 and the remaining C$200,000 will only be recognized as
revenue when the amount becomes due.
Of the C$3,200,000 for the sale of 40,000 subscriber based licence fees,
C$1,600,000 was recognized in February 2001 as it became due and the C$1,600,000
due on February 28, 2002 will only be recognized as revenue when the amount
becomes due.
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 year ended February 28, 2001, and
$180,000 for the year ended February 29, 2000 and $462,000 for the year ended
February 28, 1999.
ImagicTV reimburses NBTel for certain operating expenses incurred on its behalf,
including premises rent, communications, and corporate services.
(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 revenues in the same amount.
In February 2000, ImagicTV entered into an amendment to the above agreement
which provides Newbridge with additional licenses to use ImagicTV's product for
demonstration purposes. The term of the additional site licenses was one year,
expiring on February 7, 2001. As of February 28, 2001, ImagicTV has sold
additional licenses
to Newbridge for aggregate cash consideration of $40,000 of which $40,000 has
been recognized.
In June 2000, ImagicTV provided Newbridge with a 90-day trial license for
$17,000 which was used for demonstration purposes. As of February 28, 2001, the
$17,000 has been recognized.
ImagicTV has also supplied Newbridge with set-top boxes at little or no mark-up
above cost.
(c) America Online, Inc. and Cisco Systems, Inc.:
In October 2000, ImagicTV entered into a memorandum of understanding with
America Online to develop custom applications for them. Specifically, ImagicTV
agreed to provide America Online with up to $3,000,000 in research and
development services, calculated at ImagicTV's commercial rates for consulting
and development services and based on pricing and other terms no less favorable
than that received by any third party. Of this amount, ImagicTV is obligated to
expend $500,000 to conduct investigative research and development to be
specified by the parties.
The obligation to perform the remaining $2,500,000 in services for continued
research and development is contingent upon America Online entering into a trial
or commercial license with ImagicTV for its software. While, at the date of the
memorandum of understanding, ImagicTV had not entered into any licensing
arrangements or agreements with America Online and the memorandum of
understanding does not contain any contractual commitment that would require
ImagicTV to license its software to America Online, it would be in ImagicTV's
commercial interest to do so. ImagicTV cannot, however, assure that it will
enter into a license agreement with America Online, nor can it predict the
extent or nature of any future licensing or other revenues or other funding for
services from America Online. As with the commitment to provide $500,000 in
research and development services, America Online and ImagicTV are to negotiate
in good faith the ownership and licensing rights of the intellectual property
resulting from the future research and development related to this contingent
obligation prior to the commencement of the development activities. At the date
of the memorandum of understanding, and as at the date of the financial
statements, ImagicTV had not entered into any agreements in this regard with
America Online.
The common shares issued to America Online note 5(b)(xi) do not contain any
terms or conditions, including any put or redemption rights, that would cause
ImagicTV to repay or refund any of the proceeds received for the common shares
sold to America Online. There also are no contractual or other agreements that
provide America Online with a right to sell the shares back to ImagicTV or to
cause ImagicTV to repay or refund any of the $3,000,000 received for the shares
for any reason, including ImagicTV's failure to perform under the memorandum of
understanding. Moreover, there are no contractual commitments that would require
ImagicTV to pay or refundany of the $3,000,000 received for the shares for any
reason, including ImagicTV's failure to perform under the memorandum of
understanding. Moreover, there are no contractual commitments that would require
ImagicTV to pay or refund America Online any cash or other consideration if
America Online fails to take advantage of ImagicTV's commitment to provide
services under the memorandum of understanding.
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 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 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 to acquire ImagicTV at a
price to be set out in the proposal. In effect, under the limited circumstances
described above, Cisco Systems has been granted an option to make an offer to
acquire ImagicTV. 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 of ImagicTV by another entity 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. The current financing arrangements with Cisco
Systems do not include any research and development, marketing, licensing,
future financing or similar arrangements.
(d) Innovatia Inc.:
In December 2000, ImagicTV entered into an agreement with Innovatia Inc., a
wholly owned subsidiary of Aliant Inc. According to this agreement, Innovatia
is to provide ImagicTV with consulting services by utilizing Innovatia's Living
Lab environment to assist in the development, marketing and sale of ImagicTV
products and create an environment in the Living Lab for ImagicTV to test new
services in a productionenvironment. ImagicTV's commitment is to pay C$50,000
per month from the date of this agreement to May 31, 2001 with the option to
renew for a further 6 months. For the year ended February 28, 2001, ImagicTV
has recorded an expense of C$150,000 in relation to this agreement.
The following table summarizes the related party transactions and balances
(in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
Related party transactions:
Revenues
License fees $ -- $ 671 $ 116
Services -- 110 168
Royalty fees -- -- 1,249
Equipment 462 205 1,052
Operating Expenses 165 469 805
Interest income -- 87 --
AS OF AS OF
FEBRUARY 29, FEBRUARY 28,
2000 2001
Related party balances:
Accounts receivable trade $ 749 $1,440
Deferred revenues 705 27
Accounts payable 324 850
9. 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 3,565,339 for the period ended February 28, 2001.
10. COMMITMENTS:
Future minimum lease payments under non-cancelable operating leases for premises
are as follows (in thousands):
AS OF FEBRUARY 28, 2001
2002------------------------------ $ 751
2003------------------------------ 264
2004------------------------------ 273
2005------------------------------ 278
2006------------------------------ 189
2007 and thereafter--------------- 14
Included in the lease commitments above are amounts related to an operating
lease with a shareholder, NBTel, for office premises. The lease expired on
February 28, 2001 and the company exercised its renewal option of one year.
Rental expense under this lease amounted to $250,000 for the year ended February
28, 2001, $270,000 for the year ended February 29, 2000, and $92,000 for the
year ended February 28, 1999.
On January 31, 2001 ImagicTV signed an agreement with Atom Corporation which
specifies that Atom will develop a one-time package of demo films for a 12 month
period from the effective date of the agreement and a monthly package of service
films for a 12 month period beginning March 1, 2001. ImagicTV's commitment
consists of non-refundable payments of $50,000 and $25,000 per month for a 12
month period.
11. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES:
The consolidated 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 accrued liabilities that exceed 5% of
current liabilities.
Included in accrued liabilities at February 28, 2001 are accrued vacation pay
expenses of $302,000 and accrued initial public offering costs of $1,401,000.
At February 29, 2000 vacation pay expenses of $129,000 were included in accrued
liabilities. (b) Impairment in long-lived assets:
As described in note 1(f), 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
ImagicTV 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 on
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.
(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 employee stock options at fair value and, accordingly, a
summary of the pro forma impact on the statement of operations is presented in
the table below (in thousands of dollars, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
Net loss $ (3,068) $ (5,646) $ (11,458)
Compensation expense related to the fair value
of stock options (27) (69) (160)
Pro forma net loss $ (3,095) $ (5,715) $(11,618)
Pro forma net loss per share $ (0.58) $ (0.41) $ (0.59)
The fair value of each option granted prior to the Company becoming a publicly
traded company has been estimated at the date of grant using the minimum value
method and by applying the following assumptions: weighted average risk-free
interest rate of 5.18% for the year ended February 28, 1999; 5.76% for the year
ended February 29, 2000; and 5.88% for the year ended February 28, 2001;
dividend yield of 0%; and expected terms equal to the option vesting period.
The fair value of each option granted between the date the Company became a
publicly traded company and February 28, 2001 has been estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions used: dividend yield of 0%, expected volatility at 109%, risk-free
rate of return of 5.88% 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 $0.17, $0.19 and $0.37, for the years ended February 28,
1999, February 29, 2000, and February 28, 2001 respectively.
(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 year ended February 28, 1999, February 29,
2000 and February 28, 2001 the difference between net loss and comprehensive
loss arises solely from reporting currency translation adjustments. As a result,
total comprehensive loss amounted to $3,054,000 for the year ended February 28,
1999; $5,618,000 for the year ended February 29, 2000; $12,025,000 for the year
ended February 28, 2001.
CORPORATE INFORMATION
ANNUAL MEETING
- -The Annual Meeting of Shareholders
- -of ImagicTV Inc. will be held on
- -July 31, 2001 at 10:00 am,
- -at the Saint John Trade & Convention Centre,
- -in Saint John, New Brunswick, Canada.
TRANSFER AGENT
- -CIBC Mellon Trust Company
AUDITORS
- -KPMG LLP, Toronto
INVESTOR RELATIONS
- -Tracy Torena, Dallas, Texas
- -ttorena@imagictv.com
SHARE INFORMATION
- -Market Listing [Symbol]
- -Toronto Stock Exchange [IMT]
- -Nasdaq National Market [IMTV]
CORPORATE INFORMATION
- -Internet site
- -www.imagictv.com
- -Canada
- -ImagicTV Inc.
- -One Brunswick Square
- -14th Floor
- -P.O. Box 303
- -Saint John, New Brunswick, Canada
- -E2L 3Y2
- -Telephone: 506-631-3000
- -Fax: 506-631-3001
- -USA
- -5956 Sherry Lane
- -Suite 1000
- -Dallas, Texas
- -75225 USA
- -Telephone: 214-346-2921
- -Fax: 214-346-2923
- -UK
- -Wellington House
- -Suite 315
- -East Road, Cambridge, UK
- -CB1 1BG
- -Telephone: 44 1223 528111
- -Fax: 44 1223 528112
BOARD OF DIRECTORS
- -Peter Jollymore
- -Chairman
- -Saint John, New Brunswick
- -Marcel LeBrun
- -President and CEO
- -Fredericton, New Brunswick
- -Gregory Allemann
- -Vice President of Marketing and Sales
- -WebOffice, Inc.
- -Austin, Texas
- -Joe Culp
- -President
- -Culp Communications Associates
- -Austin, Texas
- -Carey Diamond
- -President and CEO
- -Whitecastle Investments Limited
- -Toronto, Ontario
- -Dr. Terence Matthews
- -Chairman and CEO
- -March Networks Corp.
- -Kanata, Ontario
- -Michael McCloskey
- -Director
- -Pleasonton, California
- -Robert Neal
- -President
- -Innovatia Inc.
- -Rothesay, New Brunswick
- -Gerald Pond
- -Executive Vice President
- -Aliant Inc.
- -Rothesay, New Brunswick
- -Paul Spruyt
- -General Manager
- -VDSL Virtual Company of Alcatel
- -Heverlee, Belgium
EXECUTIVE OFFICERS
- -Marcel LeBrun
- -President and CEO
- -Fredericton, New Brunswick
- -Nigel Bealing
- -Vice President of Sales for EMEA
- -ImagicTV Inc.
- -Norman Bier
- -Vice President of Sales for
- -North and South America
- -ImagicTV Inc.
- -Allan Cameron
- -Vice President of Technology
- -ImagicTV Inc.
- -Pierre-Jean Chalon
- -Vice President of Sales for
- -Asia Pacific
- -ImagicTV Inc.
- -0any DeGrace
- -Vice President of Customer
- -Solutions
- -ImagicTV Inc.
- -Marjean Henderson
- -CFO and Vice President
- -ImagicTV Inc.
- -Gerry Verner
- -Vice President of Marketing and
- -Business Development
- -ImagicTV Inc.