LETTER TO SHAREHOLDERS
All amounts expressed are in U.S. dollars.
To Our Valued Shareholders:
Our focus is on generating customers and increasing our revenues. We are working
toward accomplishing these goals by strengthening our executive team, aligning
our Company resources, and increasing our partner channel efforts to identify
and integrate ourselves more closely with our customers.
Revenues for the first quarter of fiscal 2003 were $724,000 compared to $1.7
million in the first quarter of fiscal 2002. Our revenue growth is still being
impacted by the health of the overall telecommunications industry as customers
continue to delay the transition between trials and commercial deployment.
Approximately 70% of our total revenue this quarter is attributable to a
Canadian customer on the path to commercial deployment of broadcast television
services based on our middleware platform. The remainder of our revenue was
generated from Kingston Vision and a European PTT delivered through one of our
partners, Alcatel. Our net loss for the first quarter of fiscal 2003 was
approximately $3.3 million, or $0.13 per basic share, compared to a net loss of
$5.4 million, or $0.22 per basic share, in the first quarter of fiscal 2002.
The expense reductions from our cost containment efforts and restructuring
initiatives implemented during fiscal 2002 have been fully realized. Our first
quarter operating expenses were $3.9 million compared to $6.8 million in the
first quarter of fiscal 2002, a decrease of $2.9 million or approximately 43%.
The overall improvements continue to be the result of the numerous changes we
made throughout the organization to streamline our operations and focus our
energy on those areas directly related to customers.
Our cash position continues to be strong. At the end of the first quarter of
fiscal 2003, we had $43.2 million in cash and short-term investments, compared
to $46.0 million at February 28, 2002. One of our highest priorities is to
manage our cash resources through to profitability as we focus our efforts on
stimulating market development, adding new customers and increasing revenues.
The customer activity being generated through our partner channels is very
encouraging. ImagicTV and its partners have created a one-stop-shop for
customers based on a collaborative approach to solving customer applications. We
are seeing an increased interest in prospective channel partners as well.
New niche applications, such as video on demand and broadcast television
programming to the personal computer, are being leveraged with prospective
customers. There is also an opportunity for video on demand in the hospitality
market and we are exploring this application with a prospective customer.
Market trends are encouraging as broadband deployment continues to grow. We are
pleased with the progress we have made through our partner channels and are
equally excited about the new and evolving applications for our software.
Thank you for your continued support of ImagicTV.
Gerald L. Pond
Chief Executive Officer
July 2002
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read together with our annual
audited consolidated financial statements and the accompanying notes included in
our annual report for the year ended February 28, 2002 and the unaudited
consolidated financial statements as of and for three months ended May 31, 2002
and May 31, 2001 and accompanying notes appearing elsewhere in this report. All
financial information is presented in U.S. dollars unless otherwise noted.
Some of the statements set forth in this report are forward-looking statements
relating to our future results of operations. Our actual results may vary
materially from the results anticipated by these statements. Please see
"Information Regarding Forward-Looking Statements."
OVERVIEW
We are a provider of infrastructure software products and 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 broadband networks. We were incorporated in December
1997 and began operations in January 1998. We delivered our initial DTV Manager
software product to NBTel, our first customer, in December 1998.
Current Developments
Nasdaq
We were informed on March 6, 2002 that our shares were not in compliance with
the $1 minimum closing bid price continued listing requirement on The Nasdaq
National Market and were given a 90 day grace period to correct the situation.
During this time we applied for a transition to The Nasdaq SmallCap Market,
which would provide us with a total possible 360 day grace period, from March 6,
2002, by which to have our share price regain compliance with the continued
listing requirement of a $1 minimum closing bid price for ten consecutive
trading days. Our application to transfer to The Nasdaq SmallCap Market was
accepted and our shares began trading on that exchange on June 7, 2002.
On September 3, 2002, if our shares have not met the ten consecutive trading
days at the $1 minimum closing bid price continued listing requirement, our
listing status on The Nasdaq SmallCap Market will be subject to review. At that
time, Nasdaq Staff will determine if we meet one of three of the Nasdaq SmallCap
Market initial listing requirements. If we meet one of these requirements, we
will be afforded an additional 180 day grace period to regain compliance with
the $1 minimum closing bid price under Nasdaq's continued listing rules. We
currently comply with and believe we will continue to comply with the initial
listing requirement for shareholder's equity of at least $5.0 million. We
believe, therefore, that we will be afforded the additional 180 day grace period
by Nasdaq, during which our share price must meet the $1 minimum closing bid
price continued listing requirement or our listing status will be subject to
review.
Aliant
On June 18, 2002 Aliant, one of our commercially deployed customers and our
largest shareholder, announced that they would no longer sell their VibeVision
branded digital television service, which uses our DTV Manager software platform
to deliver broadcast television programming to a set top box which is then
viewed on a television set. Instead they will offer Bell Canada's ExpressVu
branded digital television service, taking advantage of Bell's significant
investment in satellite broadcast television infrastructure. We continue to work
with Aliant in the development of video-on-demand and other interactive digital
services delivered to the personal computer.
Aliant's decision does not have a material impact on our revenue as we received
advance non-refundable royalty fee payments from them, prior to their shift in
strategy. Our other customers continue to use our DTV Manager software platform
to deliver digital television services. We continue to develop additional
2
applications, such as video-on-demand and time shifted television, on our
platform to enable the delivery of services to television sets and other
consumer devices.
Sources of Revenues and Revenue Recognition Policy
Typically, there are several phases that our customers go through prior to
proceeding with a commercial launch with ImagicTV. The first phase is the lab
trial where we typically do not generate royalty or license revenues. It is
during this time that a customer evaluates the technology as it is installed on
its own network, for internal purposes only. We provide technical assistance and
consulting services for these evaluations as necessary.
The second phase generally involves a market trial, during which the service is
provided to a limited number of "subscribers" who agree to test the service.
During the market trial a service provider assesses its market and product and
tries to fine-tune its offerings and services. We expect to recognize primarily
professional services revenues during market trials because they are significant
undertakings during which time our customers typically engage us in technical
and other consulting services. This is the final phase prior to moving to a
commercial deployment.
The final phase is commercial deployment of digital television and other
interactive media services. Commercial license agreements are entered into at
the start of this phase and include license fees, subscriber royalty fees and
ongoing annual maintenance fees. The current trend has been for us to offer a
lower upfront incremental license fee based on the total number of households
passed by the service provider. This license fee is structured typically to be
paid over the length of the contract to lower the cost of entry into the market
for our customers. We also offer our customers the option to pay one-time
subscriber royalties in increments or they may elect to pay ongoing subscriber
royalties. Different revenue arrangements provide for different payment
arrangements for competitive business reasons.
In the past, our license agreements provided for an initial license fee and a
one-time subscriber-based royalty fee. 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
flexible, for competitive reasons, and may use either type of subscriber royalty
fee arrangement.
Services revenues are comprised of professional services and annual maintenance
and technical support services related to the implementation and integration of
our software products. Annual maintenance and technical support revenues are
typically equal to a percentage of our customers' initial license fees. Services
revenue from professional services to licensees can be based on a
time-and-materials framework or a fixed contract for a complete project or
installation.
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"
and Section 3400 of the Canadian Institute of Chartered Accountants Handbook.
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;
3
. 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
commercial 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 non-refundable one-time royalty payment for
a pre-set number of subscribers, 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. Non- refundable one-time royalty payments for a fixed
number of subscribers are recorded as revenue when it is determined that the
software has been delivered and accepted, the collection of the amount is
probable and we have no further obligations related to the provision of the
royalty license. One-time royalty activation payments 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.
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 an
instalment 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 based on vendor-specific objective evidence of fair value. For
arrangements where we cannot establish vendor-specific objective evidence of
fair value for the delivered license portion of the arrangement, we use the
residual method to recognize revenue. Under the residual method, for
arrangements where we can establish vendor-specific objective evidence for all
undelivered elements, which are typically service and maintenance, we allocate
that value to the revenue relating to the undelivered elements and record the
remaining value of the contract as license revenue.
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 labour 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.
RESULTS OF OPERATIONS
Three months ended May 31, 2002 (first quarter, fiscal 2003) compared to the
three months ended May 31, 2001 (first quarter, fiscal 2002).
Revenues
Our total revenues decreased to $724,000 for the three months ended May 31, 2002
from $1.7 million for the three months ended May 31, 2001.
License Fees. Our license fee revenues were zero for the three months ended May
31, 2002 versus $522,000 for the three months ended May 31, 2001. We did not
enter into any commercial licenses to generate license fees revenues in the
first quarter of fiscal 2003.
4
Royalty Fees. Our royalty fee revenues increased to $491,000 for the three
months ended May 31, 2002 from $82,000 for the three months ended May 31, 2001.
The increase was the result of non-refundable fixed subscriber fees paid by
Saskatchewan Telecommunications (SaskTel) in anticipation of their commercial
launch. The remainder is from Kingston Vision for their commercially deployed
service. We have three commercially deployed customers at May 31, 2002.
Services. Our services revenues decreased to $233,000 for the three months ended
May 31, 2002 from $1.0 million for the three months ended May 31, 2001. The
decrease is primarily due to a decrease in the activities for our customers as
they remain in market trials pending a decision to move forward with a
commercial deployment. Also included in our services revenues for the three
months ended May 31, 2002 is $135,000 in maintenance fees from our commercially
licensed customers compared to $243,000 for the three months ended May 31, 2001.
Cost of Revenues
Cost of revenues decreased to $429,000 for the three months ended May 31, 2002
from $810,000 for the three months ended May 31, 2001. The decrease reflects a
decrease in customer service and professional services staff to 19 at May 31,
2002 from 26 at May 31, 2001 and the reduced professional services and customer
service staff expense allocated to cost of revenues as they devoted their
efforts to sales and marketing activities.
Operating Expenses
We undertook a restructuring in November 2001 which resulted in a significant
reduction in staff. The full benefit of the cost reductions associated with the
decreased staff size is fully realized in the three months ended May 31, 2002
compared to the three months ended May 31, 2001 as indicated in the following
information.
Sales and Marketing. Sales and marketing expenses decreased to $1.5 million for
the three months ended May 31, 2002 from $3.0 million for the three months ended
May 31, 2001. The decrease reflects a decrease in staff to 10 in sales and 19 in
marketing at May 31, 2002 from 23 in sales and 32 in marketing at May 31, 2001
and a decrease in marketing events as we focus on fewer, but more specific,
activities that we believe have a higher likelihood to turn into revenue
generating opportunities. These activities included attendance at the NAB2002
conference in Las Vegas in May 2002, which is the world's leading conference and
exhibition for digital communications technologies. Also included are fees for
public relations activities.
Research and Development. Research and development expenses decreased to $1.5
million for the three months ended May 31, 2002 from $2.3 million for the three
months ended May 31, 2001. The decrease reflects a decrease in staff to 62 at
May 31, 2002 from 106 at May 31, 2001 and the streamlining of our products and
processes that was implemented during our fourth quarter of fiscal 2002.
General and Administrative. General and administrative expenses decreased to
$946,000 for the three months ended May 31, 2002 from $1.5 million for the three
months ended May 31, 2001. The decrease reflects a decrease in staff in our
finance, human resources and corporate operations departments to 17 at May 31,
2002 from 23 at May 31, 2001. Other savings resulted from a reduction in legal
fees related to customer activity, a centralizing of financial operations and a
reduction in facilities expenses associated with the closing of our Dallas
office.
We remain committed to manage prudently our resources.
5
Non-Cash Operating Expenses
The following non-cash operating expenses have been incorporated in the
operating expense categories to which they relate.
Depreciation. Depreciation increased to $500,000 for the three months ended May
31, 2002 from $436,000 for the three months ended May 31, 2001. The increase is
due to higher capital investments made last year in computer and other equipment
and leasehold improvements where the depreciation is now being realized.
Stock-based Compensation. Stock-based compensation expenses decreased to $42,000
for the three months ended May 31, 2002 from $192,000 for the three months ended
May 31, 2001. The reduction is due primarily to the reduced amount of deferred
stock-based compensation after the majority of the deferred expense was retired
following the resignation of an executive during the fourth quarter of fiscal
2002. The deferred stock-based compensation represents the difference between
the exercise price of options granted to acquire our common shares and the
deemed fair value, for financial reporting purposes, of our common shares on the
date of their respective granting. Deferred stock-based compensation is
amortized on a straight-line basis over the vesting periods of the options.
Other Income
Interest income decreased to $179,000 for the three months ended May 31, 2002
from $666,000 for the three months ended May 31, 2001. The decrease is the
result of both lower average interest rates and the reduction of available fund
balances resulting from the use of cash to fund our operations over the course
of the year, a difference of $13.1 million, period to period.
Net Loss
Our net loss decreased to $3.3 million for the three months ended May 31, 2002
from a loss of $5.4 million for the three months ended May 31, 2001. Our net
loss per share decreased to $0.13 per share at May 31, 2002 from a loss of $0.22
per share at May 31, 2001. The decrease is primarily attributable to the staff
reductions resulting from our November 2001 restructuring and the management of
expenses during this period of delayed revenues.
Liquidity and Capital Resources
At May 31, 2002 we had available funds of $43.2 million compared to $56.3
million at May 31, 2001.
Our cash used in operating activities for the three months ended May 31, 2002
was $2.4 million, compared to $3.7 million for the three months ended May 31,
2001. The cash used during the three months ended May 31, 2002 was primarily to
fund our research and development and sales and marketing efforts.
Our cash used in investing activities, before the purchase or sale of temporary
investments, was $411,000 for the three months ended May 31, 2002 compared to
$647,000 for the three months ended May 31, 2001. Cash used in investing
activities reflects purchases of software used in our architecture and
development activities.
Our cash from financing activities was $5,000 for the three months ended May 31,
2002 from the exercise of options compared to the use of $70,000 for the three
months ended May 31, 2001 for expenses related to our initial public offering in
November 2000.
In the current marketplace the timing of the generation of revenue is an
uncertainty and is dependent upon our customers' decisions to move forward with
a commercial deployment of services based on our
6
software products. To provide the most conservative estimate, which assumes
revenue is at zero or a very nominal amount, we anticipate that we have
sufficient cash resources to fund operations for approximately the next 24
months from May 31, 2002. If our expenses vary greatly from those that are
currently expected, we may need to raise additional capital to fund our
operations prior to the end of this 24 month period. In addition, if revenues
are not timely generated to the extent necessary to fund operations beyond such
24 month period, we may also be required to raise additional capital to fund our
operations. We may attempt to obtain this additional capital through the sale of
debt or equity securities or borrowings under secured or unsecured loan
arrangements. We can provide no assurance that such capital or financing, if
necessary, will be available in a timely manner or on satisfactory terms.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Industry Risk
The telecommunications industry continues to experience significant economic
pressure on revenues, earnings and return on investment. In response, telecom
companies have made significant reductions in capital spending and are expected
to continue this in the short term in many areas of their business including new
and emerging services. As a result, we have experienced a longer sales cycle as
our customers continue to delay their decision to move from market trials to
commercial deployments. This has impacted our ability to earn license revenues
which are primarily earned from our customers' commercial deployments.
Because the pressure on revenues for telecom companies is so great, we expect
that they will continue market trials in the next 18 months to explore new
avenues of generating additional revenues over existing infrastructure. If the
current economic conditions continue, however, our customers could continue to
delay their move from the market trial stage to commercial deployment until such
time as the industry economics improve. Accordingly, our license fee and royalty
fee revenues may be significantly delayed, may be less than previously
anticipated or may not significantly materialize if customers or potential
customers direct their capital spending to areas other than video deployment.
Impact of Interest Rate Exposure
As of May 31, 2002 we had approximately $43.2 million in available funds. A
significant portion of the cash earns interest at variable rates. Our interest
income is sensitive to changes in the level of prevailing interest rates.
Interest rates declined over the previous year and a half and as a result we
anticipate our average yield earned on surplus funds in fiscal 2003 to be lower
than yields earned in fiscal 2002. We do not anticipate this situation to have
any short-term material adverse impact on our cash position or financial
condition.
Impact of Foreign Exchange Rate Exposure
We continue to expect the majority of our revenues will be earned in U.S.
dollars, and that a significant portion of our operating expenses and capital
expenditures will 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 affect 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 on our operating results. 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.
7
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS:
This report contains forward-looking statements. These statements include
statements regarding: conditions in the telecom industry, our strategy and
plans, our efforts to develop and enhance our products, our expected sources of
revenues, our future expected 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 referring to
the future or events to occur in the future are intended to identify
forward-looking statements. Forward-looking statements reflect our current views
with respect to future events and are based on information currently available
to us. These statements are not guarantees of future results, performance or
achievements and are subject to risks, uncertainties and assumptions, 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 (SEC) and Canadian Securities
Administrators, including our Form 20-F and Annual Information Form for the
fiscal year ended February 28, 2002. 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.
8
ImagicTV Inc.
Consolidated Balance Sheets
[In thousands of U.S. dollars, except number of shares]
May 31, February 28,
2002 2002
- ------------------------------------------------------------------------------------------------------
[unaudited]
Assets
Current assets:
Cash and cash equivalents $ 16,343 $ 45,641
Short-term investments 26,902 359
Accounts receivable, trade, net of allowance of nil 275 448
[February 28, 2002 - nil]
Prepaid expenses, deposits and other receivables 951 904
- ------------------------------------------------------------------------------------------------------
Total current assets 44,471 47,352
Capital assets 2,044 2,133
- ------------------------------------------------------------------------------------------------------
Total assets $ 46,515 $ 49,485
======================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 700 $ 667
Accrued liabilities 1,274 1,083
Deferred revenue 425 437
Current portion of long-term debt 10 9
- ------------------------------------------------------------------------------------------------------
Total current liabilities 2,409 2,196
Long-term debt 1,564 1,496
Shareholders' equity:
Authorized:
Unlimited common shares, no par value
Unlimited preferred shares, no par value
Issued and outstanding:
24,678,063 common shares
[February 28, 2002 - 24,669,336] 85,703 85,698
Nil preferred - -
Deferred stock-based compensation (351) (393)
Accumulated deficit (42,284) (38,986)
Cumulative currency translation adjustment (526) (526)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 42,542 45,793
- ------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 46,515 $ 49,485
======================================================================================================
See accompanying notes to the consolidated financial statements
9
ImagicTV Inc.
Consolidated Statements of Operations (unaudited)
[In thousands of U.S. dollars, except per share amounts]
Three Months Ended
May 31, May 31,
2002 2001
- ----------------------------------------------------------------------------------------------------
Revenues:
License fees $ - $ 522
Royalty fees 491 82
Services 233 1,046
- ----------------------------------------------------------------------------------------------------
Total revenues 724 1,650
Cost of revenues:
Services 429 810
- ----------------------------------------------------------------------------------------------------
Total cost of revenues 429 810
Gross profit 295 840
Operating expenses:
Sales and marketing 1,458 3,024
Research and development 1,458 2,251
General and administrative 946 1,545
- ----------------------------------------------------------------------------------------------------
Total operating expenses 3,862 6,820
Loss from operations (3,567) (5,980)
Interest income, net 179 666
Foreign exchange gain 144 15
- ----------------------------------------------------------------------------------------------------
Loss before provision for income taxes (3,244) (5,299)
Provision for income taxes (54) (139)
- ----------------------------------------------------------------------------------------------------
Net loss for the period $ (3,298) $ (5,438)
====================================================================================================
Basic and diluted net loss per share $ (0.13) $ (0.22)
====================================================================================================
Weighted average number of shares used in
computing basic and diluted net loss per
share (000s) 24,672 24,596
See accompanying notes to the consolidated financial statements
10
ImagicTV Inc.
Consolidated Statements of Shareholders' Equity (unaudited)
(In thousands of U.S. dollars)
Deferred Stock- Cumulative
Based Currency Total
Common Shares Compensation on Accumulated Translation Shareholders'
Number Amount Stock Options Deficit Adjustment Equity
- ----------------------------------------------------------------------------------------------------------------------------
Balances, February 28, 2001 24,593 $ 87,678 $ (2,670) $ (20,282) $ (526) .$ 64,200
Net loss - - - (5,438) - (5,438)
Amortization of deferred
stock-based compensation - - 192 - - 192
Deferred stock-based compensation - (96) 96 - - -
Issuance of shares for cash 5 (70) - - - (70)
- ----------------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2001 24,598 $ 87,512 $ (2,382) $ (25,720) $ (526) $ 58,884
============================================================================================================================
Balances, February 28, 2002 24,669 $ 85,698 $ (393) $ (38,986) $ (526) $ 45,793
Net loss - - - (3,298) - (3,298)
Amortization of deferred
stock-based compensation - - 42 - - 42
Issuance of shares for cash 9 5 - - - 5
- ----------------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2002 24,678 $ 85,703 $ (351) $ (42,284) $ (526) $ 42,542
============================================================================================================================
See accompanying notes to consolidated financial statements
11
ImagicTV Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands of U.S. dollars)
Three Months Ended
May 31, May 31,
2002 2001
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,298) $ (5,438)
Items not involving cash:
Depreciation and amortization 500 436
Stock-based compensation 42 192
Change in operating assets and liabilities:
Accounts receivable, trade 173 3,433
Instalment receivables - 118
Inventory - 11
Prepaid expenses, deposits, and other receivables (47) 154
Accounts payable 33 (637)
Accrued liabilities 191 (1,762)
Deferred revenue (12) (238)
- --------------------------------------------------------------------------------------------------------
Cash used in operating activities (2,418) (3,731)
Cash flows from investing activities:
Purchases of capital assets (411) (647)
Sale (purchase) of short-term investments, net (26,543) 22,551
- --------------------------------------------------------------------------------------------------------
Cash from (used in) investing activities (26,954) 21,904
Cash flows from financing activities:
Issuance of common shares, net of share issue costs 5 (70)
- --------------------------------------------------------------------------------------------------------
Cash from (used in) financing activities 5 (70)
Effect of foreign currency exchange adjustments 69 (15)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (29,298) 18,088
Cash and cash equivalents, beginning of period 45,641 1,332
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 16,343 $ 19,420
========================================================================================================
Supplemental cash flow information:
Cash paid for taxes $ 28 $ -
Cash received for interest $ 172 $ 820
See accompanying notes to consolidated financial statements
12
ImagicTV Inc.
Notes to Consolidated Financial Statements (unaudited)
1. Basis of presentation
The accompanying financial statements include the accounts of ImagicTV Inc.
and its wholly owned subsidiaries. All intercompany transactions and
balances are eliminated on consolidation.
The financial statements are stated in U.S. dollars. They have been
prepared in accordance with Canadian generally accepted accounting
principles, which, in all material respects, conform with U.S. generally
accepted accounting principles. Unless otherwise noted, the interim
financial statements follow the same accounting policies and methods of
application as the most recent annual financial statements. For further
information, reference should be made to the audited annual consolidated
financial statements as of and for the year ended February 28, 2002.
The information furnished as at May 31, 2002 and for the three month
periods ended May 31, 2002 and May 31, 2001 reflects, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of the
interim periods presented. Interim results are not necessarily indicative
of results for future periods.
2. Significant accounting policies
The unaudited interim consolidated financial statements are based upon
accounting principles consistent with those used and described in
ImagicTV's audited annual consolidated financial statements for the year
ended February 28, 2002, except for the following:
Stock-based compensation and other stock-based payments
Effective March 1, 2002, ImagicTV adopted the new CICA Handbook Section
3870, "Stock-based Compensation and Other Stock-based Payments," which
requires that a fair value based method of accounting be applied to all
stock-based payments to non-employees and to direct awards of stock to
employees. The requirements of the new standard are consistent with
ImagicTV's accounting policies for these types of transactions as disclosed
in ImagicTV's audited annual consolidated financial statements and
therefore do not require any adjustment be made. The new section also
requires ImagicTV to select an accounting methodology for the accounting
for stock-based awards, other than a direct award of stock, granted to
employees. ImagicTV's existing accounting policy, as disclosed in the
audited annual consolidated financial statements, is the application of the
intrinsic method for accounting for employee stock-based awards and is an
acceptable methodology under the new handbook section and therefore
requires no adjustment. Section 3870 also requires additional disclosures
including pro forma earnings and pro forma earnings per share, which are
provided in note 5.
13
ImagicTV Inc.
Notes to Consolidated Financial Statements (unaudited) - Continued
3. Segmented information
ImagicTV operates in a single reportable operating segment, that is to
provide software solutions to telecommunications companies and other
service providers that enable the delivery of digital broadcast television
services to residential subscribers over high-speed Internet Protocol
networks. The single reportable operating segment derives its revenue from
the licensing of software and providing of related services. As at May 31,
2002, 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 of U.S. dollars):
- -------------------------------------------------------------------------------------------
Three months ended
- -------------------------------------------------------------------------------------------
May 31, 2002 May 31, 2001
- -------------------------------------------------------------------------------------------
Revenues by geographic location:
Canada $ 547 $ 652
Europe 162 193
United States 15 762
Asia - 43
- -------------------------------------------------------------------------------------------
Total $ 724 $ 1,650
- -------------------------------------------------------------------------------------------
4. Related Party Transactions
ImagicTV transacts with certain shareholders or their affiliates who own in
excess of 10% of the outstanding shares of ImagicTV. These transactions
were in the normal course of operations and were recorded at the exchange
amount. The following table summarizes the related party transactions and
balances (in thousands of U.S. dollars):
- ------------------------------------------------------------------------------------
Three months ended
- ------------------------------------------------------------------------------------
May 31, 2002 May 31, 2001
- ------------------------------------------------------------------------------------
Revenues:
Services $ 83 $ 15
Operating expenses: 131 321
- -----------------------------------------------------------------------------------------------
As at
- -----------------------------------------------------------------------------------------------
May 31, 2002 February 28, 2002
- -----------------------------------------------------------------------------------------------
Related party balances:
Accounts receivable, trade $ - $ 143
Accounts payable and accrued liabilities 256 290
Deferred revenues 125 219
14
ImagicTV Inc.
Notes to Consolidated Financial Statements (unaudited) - Continued
5. Stock options
A summary of the status of ImagicTV's options as of May 31, 2002 is as
follows:
--------------------------------------------------------------------------------------------
Weighted Average
Range of Remaining Contractual Number of Options
Exercise Prices Number of Options Life (Years) Exercisable
--------------------------------------------------------------------------------------------
$ 0.56 - $ 0.65 547,348 3.14 466,789
$ 0.76 - $ 0.99 1,102,119 3.04 444,513
$ 1.12 - $ 2.93 1,137,323 5.09 483,408
$ 7.36 - $ 11.17 201,988 5.43 50,507
------------------------------------------------------------------------------------------
2,988,778 4.84 1,445,217
------------------------------------------------------------------------------------------
In addition to the disclosures relating to ImagicTV's outstanding stock
options presented in note 5 (c) of the audited annual consolidated
financial statements, the new Canadian standard as described in note 2
requires the disclosure of pro forma net earnings and earnings per share
information as if ImagicTV had accounted for employee stock options under
the fair value method. ImagicTV has elected to disclose pro forma net loss
and pro forma net loss per share as if ImagicTV had accounted for its stock
options issued from inception under the fair value method. A summary of the
pro forma disclosure and the impact on the consolidated statement of
operations is presented in the table below.
--------------------------------------------------------------------------------------------------------------
Three Months Ended May
31, 2002
--------------------------------------------------------------------------------------------------------------
Net loss $ (3,298)
Compensation expense related to the fair
value of stock options (65)
--------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (3,363)
--------------------------------------------------------------------------------------------------------------
Pro forma net loss per share $ (0.14)
--------------------------------------------------------------------------------------------------------------
The fair value of each option granted in the period ended May 31, 2002 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 of 130%, risk-free rate of return of 2.5%, 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 in the three months ended May 31, 2002
was $0.73.
15