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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
Canada 98-0140269
----------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
--------------------------------------------------- -------------
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
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NONE
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of November 11, 1997
- --------------------------- -----------------------------------
Common stock, no par value 29,272,218
Page 1 of 16
Exhibit Index on Page 15
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IMAX CORPORATION
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Listing of Exhibits and Reports on Form 8-K 15
Signatures 16
FORWARD LOOKING INFORMATION
Certain statements in this Report on Form 10-Q under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Legal Proceedings" may constitute forward looking statements that involve
certain risks and uncertainties which could cause actual results to differ
materially from future results expressed or implied by such forward looking
statements. Important factors that could effect these statements include the
timing of theater system deliveries, the mix of theater systems shipped, the
timing of the recognition of revenues and expenses on film production and
distribution agreements, and foreign currency fluctuations. These factors and
other risks and uncertainties are discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed by the Company with the
Securities and Exchange Commission.
Page 2
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IMAX CORPORATION
<TABLE>
<CAPTION>
Page
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
The following condensed consolidated financial statements are filed as
part of this Report:
Condensed Consolidated Balance Sheets as at September 30, 1997
and December 31, 1996 4
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flow
for the nine month periods ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
</TABLE>
Page 3
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IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 72,330 $102,589
Short-term marketable securities 3,843 -
Accounts receivable 31,293 17,995
Current portion of net investment in leases 4,478 4,218
Inventories and systems under construction (note 2) 29,858 21,292
Prepaid expenses 4,852 2,109
-------- --------
Total current assets 146,654 148,203
Long-term marketable securities 23,161 18,099
Net investment in leases 43,511 34,494
Film assets 32,879 19,050
Capital assets 45,974 37,791
Deferred charges on debt financing 3,991 4,653
Goodwill 44,545 46,454
-------- --------
Total assets $340,715 $308,744
======== ========
Liabilities
Current liabilities
Accounts payable $ 6,538 $ 4,530
Accrued liabilities 18,375 16,677
Current portion of deferred revenue 37,771 40,485
Current portion of long-term debt 516 1,156
Income taxes payable 1,274 2,213
-------- --------
Total current liabilities 64,474 65,061
Long-term debt 609 1,178
Deferred revenue 20,102 14,117
Senior notes 65,000 64,689
Convertible subordinated notes 100,000 100,000
Deferred income taxes 13,503 6,081
-------- --------
Total liabilities 263,688 251,126
-------- --------
MINORITY INTEREST 2,437 1,593
-------- --------
Redeemable preferred shares 1,302 1,184
-------- --------
COMMITMENTS AND CONTINGENCIES (notes 3 and 4)
SHAREHOLDERS' EQUITY
Capital stock 51,839 46,810
Retained earnings 21,391 8,307
Cumulative translation adjustment 58 (276)
-------- --------
Total shareholders' equity 73,288 54,841
-------- --------
Total liabilities and shareholders' equity $340,715 $308,744
======== ========
</TABLE>
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 9.)
Page 4
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IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenue
Systems $22,477 $24,355 $ 60,456 $60,286
Films 10,521 5,907 33,468 21,641
Other 2,893 2,824 9,949 10,177
------- ------- -------- -------
35,891 33,086 103,873 92,104
COSTS AND EXPENSES 15,558 13,988 47,949 41,523
------- ------- -------- -------
GROSS MARGIN 20,333 19,098 55,924 50,581
Selling, general and administrative expenses 6,880 7,179 21,569 20,530
Research and development 620 565 1,429 1,916
Amortization of intangibles 632 635 1,907 1,906
------- ------- -------- -------
EARNINGS FROM OPERATIONS 12,201 10,719 31,019 26,229
Interest income 1,645 1,605 4,485 3,713
Interest expense (3,340) (3,350) (9,972) (8,453)
Foreign exchange gain (loss) (98) 67 (76) (281)
------- ------- -------- -------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 10,408 9,041 25,456 21,208
Provision for income taxes (4,536) (4,242) (11,281) (9,737)
------- ------- -------- -------
EARNINGS BEFORE MINORITY INTEREST 5,872 4,799 14,175 11,471
Minority interest (387) (555) (844) (965)
------- ------- -------- -------
NET EARNINGS $ 5,485 $ 4,244 $ 13,331 $10,506
======= ======= ======== =======
Net earnings available to common shareholders $ 5,401 $ 4,166 $ 13,084 $10,275
======= ======= ======== =======
PER SHARE DATA (NOTE 5)
Net earnings $0.18 $0.14 $0.44 $0.34
Weighted average number of shares outstanding (000's) 30,380 29,654 30,064 29,978
</TABLE>
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 9.)
Page 5
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IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Amounts in accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
--------------- ---------------
<S> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 13,331 $ 10,506
Items not involving cash:
Depreciation and amortization 9,926 8,168
Deferred income taxes 8,024 7,077
Minority interest 844 965
Amortization of discount on senior notes 311 1,398
Other 115 377
Change in net investment in leases (9,261) (8,687)
Change in deferred revenue 3,270 (1,346)
Changes in non-cash operating assets and liabilities (22,832) (11,545)
-------- --------
Net cash provided by operating activities 3,728 6,913
-------- --------
INVESTING ACTIVITIES
Increase in marketable securities (8,803) (66,069)
Purchase of capital assets (12,082) (9,491)
Increase in film assets (17,137) (8,896)
-------- --------
Net cash used in investing activities (38,022) (84,456)
-------- --------
FINANCING ACTIVITIES
Repayment of long-term debt (1,201) (547)
Issue of convertible subordinated notes - 100,000
Repurchase of senior notes - (4,919)
Deferred charges on debt financing - (3,289)
Common shares repurchased - (19,508)
Common shares issued 4,993 1,417
-------- --------
Net cash provided by financing activities 3,792 73,154
-------- --------
Effect of exchange rate changes on cash 243 (73)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD (30,259) (4,462)
Cash and cash equivalents, beginning of period 102,589 50,747
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,330 $ 46,285
======== ========
</TABLE>
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 9.)
Page 6
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Imax
Corporation and its wholly-owned and majority owned subsidiaries. The
results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature.
These financial statements should be read in conjunction with the Company's
annual report on Form 10-K and the financial statements contained therein.
2. INVENTORIES AND SYSTEMS UNDER CONSTRUCTION:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(000's) (000's)
<S> <C> <C>
Raw materials $ 7,260 $ 4,840
Work-in-process 22,128 15,008
Finished goods 470 417
Acquired contracts in process - 1,027
------- -------
$29,858 $21,292
======= =======
</TABLE>
3. FINANCIAL INSTRUMENTS
From time to time the Company engages in hedging activities to reduce the
impact of fluctuations in foreign currencies on its profitability and cash
flow. The credit risk exposure associated with these activities would be
limited to all unrealized gains on contracts based on current market
prices. The Company believes that this credit risk has been minimized by
dealing with highly rated financial institutions.
To fund Canadian dollar costs through December 1998, the Company had
entered into forward exchange contracts as at September 30, 1997 to hedge
the conversion of $30 million of its cash flow into Canadian dollars at an
average exchange rate of Canadian $1.36 per U.S. dollar. In addition,
the Company had entered into forward exchange contracts as at September 30,
1997 to hedge the conversion of 55 million Yen of its cash flow in 1997
into U.S. dollars at an average exchange rate of 106 Yen per U.S. dollar.
The Company has also entered into foreign currency swap transactions to
hedge minimum lease payments receivable under sales-type lease contracts
denominated in Japanese Yen and French Francs. These swap transactions fix
the foreign exchange rates on conversion of 168 million Yen at 98 Yen per
U.S. dollar through September 2004 and on 17.4 million Francs at 5.1 Francs
per U.S. dollar through September 2005.
These hedging contracts are expected to be held to maturity; however, if
they were terminated on September 30, 1997, the Company would have realized
a gain of approximately $0.2 million based on the then prevailing exchange
rates.
Page 7
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
For the Nine Month Periods Ended September 30, 1997 and 1996
(unaudited)
4. CONTINGENCIES
a) In April 1994, Compagnie France Film Inc. filed a claim against the
Company in the Superior Court in the District of Montreal, in the Province
of Quebec, alleging breach of contract and bad faith in respect of an
agreement which the Plaintiff claims it entered into with the Company for
the establishment of an IMAX theater in Quebec City, Quebec, Canada. Until
December 1993, Imax was in negotiations with the Plaintiff and another
unrelated party for the establishment of an IMAX theater in Quebec City.
In December 1993, Imax executed a system lease agreement with the other
party. During the negotiations, both parties were aware of the other
party's interest in also establishing an IMAX theater in Quebec City. The
Plaintiffs are claiming damages of Canadian $4.6 million, representing the
amount of profit they claim they are denied due to their inability to
proceed with an IMAX theater in Quebec City, together with expenses
incurred in respect of this project and pre-judgment interest. The Company
disputes this claim and has filed a defense in response. Trial is
scheduled for January 1998.
Compagnie France Film had also incorporated a shell company, 3101-8450
Quebec Inc. ("3101"). 3101 was to, among other things, enter into a lease
for the proposed IMAX theater site. In November 1993, while negotiations
between Compagnie France Film and the Company were still ongoing, 3101
entered into a lease for the site. 3101 defaulted on the lease and the
landlord sued 3101 in an unrelated action to which the Company was not a
party. In February 1996, 3101 was found liable to pay the landlord damages
in the amount of Canadian $2.5 million. Subsequent to that judgment 3101
intervened in the lawsuit between Compagnie France Film and the Company in
order to claim from the Company damages in the amount of Canadian $2.5
million.
The Company believes that it will be successful in its defense of these
claims and the ultimate loss, if any, will not have a material impact on
the financial position or results of operations of the Company, although no
assurance can be given with respect to the ultimate outcome of this
litigation.
(b) On February 26, 1996, Iwerks Entertainment Inc. filed a complaint
against the Company alleging violations under the Sherman Act, the Clayton
Act, tortious interference with contracts and prospective economic
advantage, and unfair competition. The plaintiff is seeking unquantified
damages, injunctive relief and restitution. The Company has filed an
answer denying the material allegations of the complaint and is vigorously
defending this action. The amount of the loss, if any, cannot be
determined at this time.
(c) In July 1997, Debra B. Altman filed a claim against the Company, and
certain unidentified individuals, in the Superior Court of the State of
California for the County of Los Angeles, alleging breach of contract,
breach of implied covenant of good faith and fair dealing, breach of
implied-in-fact contract, breach of confidence, constructive fraud, quantum
meruit, unjust enrichment and constructive trust with respect to a film
project the Plaintiff claims to have pursued with the Company. The
Plaintiff is seeking unquantified damages exceeding $5 million. The
Company disputes this claim and has removed it to the U.S. District Court
for the Central District of California, Western Division, and intends to
vigorously defend this action. The amount of the loss, if any, cannot be
determined at this time.
In addition to the litigation described above, the Company is currently
involved in other litigation which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect
to the ultimate outcome for any such litigation.
Page 8
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
For the Nine Month Periods Ended September 30, 1997 and 1996
(unaudited)
5. EARNINGS PER SHARE
In deriving the net earnings available to common shareholders, the net
earnings for the period have been decreased for the accretion and
cumulative dividends on preferred shares.
Pursuant to shareholders' approval at the Annual and Special Meeting held
on May 6, 1997 the Company's shares were split on a 2-for-1 basis in May
1997. Earnings per share data for the current and comparative periods give
effect to the stock split as if it had taken place at the beginning of the
respective period.
Financial Accounting Standards No.128, Earnings Per Share ("FAS 128")
requires a change in the method of calculation of basic and diluted
earnings per share for periods ended after December 15, 1997. The Company
plans to adopt FAS 128 in the fourth quarter of 1997 for the year ended
December 31, 1997. If FAS 128 had been adopted at September 30, 1997,
basic earnings per share would have been $0.19 and $0.15 for the three
month periods ended September 30, 1997 and 1996, respectively, and $0.46
and $0.37 for the nine month periods ended September 30, 1997 and 1996,
respectively. Diluted earnings per share would have been $0.18 and $0.14
for the three month periods ended September 30, 1997 and 1996,
respectively, and $0.44 and $0.34 for the nine month periods ended
September 30, 1997 and 1996, respectively.
Page 9
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business of the Company
The Company derives revenue principally from long-term theater system lease
agreements, maintenance agreements, film production agreements, from the
distribution of films and from the sale of motion simulator and other
attractions products.
Under the Company's theater system sales and lease agreements, the Company
receives upfront fees prior to the delivery of a system which are deferred and
not recorded as revenue. At the time of delivery of the system, the upfront
fees, plus in the case of sales-type leases the present value of the minimum
annual royalty stream, are recognized as revenue. The cost of the system is
charged as a cost of sale at the time of delivery. The discounted future
minimum royalties are recorded on the Company's balance sheet as net investment
in leases. In the event of default of payment of minimum contracted royalties
the Company may repossess the system and refurbish it for resale.
Revenue from theater system sale and sales-type lease agreements is recognized
on the completed contract method (that is, upon delivery of the system). The
timing of theater system deliveries is largely dependent on timing of the
construction and opening of the customer's theater. Revenue from system
deliveries generally represents results from contracts signed 12 to 24 months
prior to the date of recognition. Revenue from films produced for third parties
is recognized when the film is completed and delivered to the sponsor. The
completion of films for third parties depends upon the contracted delivery dates
with film sponsors.
Revenue from theater systems and film production is generally predictable on a
long-term basis given the relationship to projected theater systems deliveries
and film completion dates. However, systems revenue and film revenue in any
given quarter may vary significantly depending on the nature and timing of the
delivery of systems and the completion of films.
The Company's other sources of revenue, which are independent from the delivery
of theater systems and the completion of films for third parties, include:
royalties not subject to minimums, royalties in excess of minimum royalties and
finance income on sales-type leases, maintenance fees on systems, film
distribution fees, film post-production fees, revenue from Company-operated
theaters and camera rentals.
Results of Operations
Theater Signings and Backlog
During the third quarter of 1997, the Company signed contracts for 16 IMAX
theater systems valued at $41.4 million. The value of signings represents a 49%
increase over the $27.7 million value of the eight theater contracts signed in
the third quarter of 1996. The theater signings for the third quarter of 1997
include one owned and operated location.
For the nine months ended September 30, 1997, the Company signed contracts for
40 theater systems valued at $93.0 million, a 49% increase over the $62.4
million value of the 21 contracts signed in the prior year period. As a result
of these theater signings, the Company's sales backlog grew to $172.7 million at
September 30, 1997, a 13% increase from $152.4 million at June 30, 1997 and a
31% increase from $131.8 million at December 31, 1996. The theater signings for
the first nine months of 1997 include three owned and operated locations versus
one owned and operated location in the same period last year.
Page 10
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (CONT'D)
THEATER SIGNINGS AND BACKLOG (CONT'D)
The Company's sales backlog at September 30, 1997 represented contracts for 68
theater systems, including two upgrades of existing theaters to IMAX 3D. The
Company's sales backlog will vary from quarter to quarter depending on the
signing of new systems which adds to backlog and the delivery of systems which
reduces backlog. Sales backlog represents the revenue under firm contracts for
new theater system installations not yet completed which will be recognized as
revenue over approximately the next two years as the theater systems are
delivered. The value of sales backlog does not include owned and operated,
participation or joint venture theaters, letters of intent, IMAX(R) Ridefilm(TM)
contracts or long-term theater commitments. As of September 30, 1997, there
was a backlog of 27 IMAX Ridefilm systems, including six upgrades, and 16 IMAX
Ridefilm theaters in operation.
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1996
The Company reported net earnings of $5.5 million or $0.18 per share for the
third quarter of 1997 compared to $4.2 million or $0.14 per share for the third
quarter of 1996. Earnings per share information has been adjusted for the 2-
for-1 stock split which became effective by May 27, 1997.
The Company's revenues for the third quarter of 1997 increased 8% to $35.9
million from $33.1 million in the corresponding quarter last year as a result of
growth in film and other revenues offsetting a decline in system revenues.
Systems revenue, which includes revenue from theater system sales and leases,
royalties and maintenance fees, decreased approximately 8% to $22.5 million in
the third quarter of 1997 from $24.4 million in the same quarter last year.
Revenue from theater system deliveries was lower in the third quarter of 1997
compared to the third quarter of 1996. The Company recognized revenues on five
theater systems in the third quarter of 1997 versus eight theater systems in the
third quarter of 1996. Revenues in the third quarter of 1997 reflect a higher
average value of theater systems contracts recognized compared to 1996 due to a
higher proportion of international and IMAX 3D theater system deliveries.
Recurring revenues from both royalties and maintenance fees increased 23% in the
third quarter of 1997 over the prior year period principally as a result of
growth in the IMAX theater network.
Film revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Film revenue increased 78% to
$10.5 million in the third quarter of 1997 from $5.9 million in the same quarter
last year due to an increase in film distribution and post-production revenues.
Film distribution revenue increased in the current quarter over the comparable
quarter of 1996 due to strong results of films which were released in the latter
half of 1996 and the first half of 1997 and also due to growth in the IMAX
theater network.
Other revenues increased 2% to $2.9 million from $2.8 million in the prior year
quarter. There were no deliveries of IMAX Ridefilm systems to third parties in
the third quarter of 1997 or the corresponding quarter last year.
Gross margin for the second quarter of 1997 was $20.3 million, or 57% of total
revenue, compared to $19.1 million, or 58% of total revenue, in the
corresponding quarter last year. Gross margin as a percentage of total revenue
in the current year is relatively consistent with the prior year period despite
the lower proportion of systems revenue due to better margin on film production,
post-production and other activities and lower purchase accounting in the
current year.
Page 11
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (CONT'D)
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1996 (CONT'D)
Selling, general and administrative expenses were $6.9 million in the third
quarter of 1997 compared to $7.2 million in the corresponding quarter last year.
The decrease in selling, general and administrative expenses in 1997 compared to
1996 resulted from a reduction in costs associated with IMAX Ridefilm,
litigation and other corporate expenses, partially offset by increases in costs
associated with branding and affiliate relations initiatives.
The effective tax rate on earnings before taxes differs from the statutory tax
rate and will vary from quarter to quarter primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, and the
provision of income taxes at different tax rates in foreign and other provincial
jurisdictions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company reported net earnings of $13.3 million or $0.44 per share for the
first nine months of 1997 compared to $10.5 million or $0.34 per share for the
first nine months of 1996. Earnings per share information has been adjusted for
the 2-for-1 stock split which became effective by May 27, 1997.
The Company's revenues for the first nine months of 1997 increased 13% to $103.9
million from $92.1 million in the corresponding period last year as a result of
higher recurring revenues from royalties and maintenance fees and higher film
revenues.
Systems revenue was essentially flat at $60.5 million in the first nine months
of 1997 compared to $60.3 million in the same period last year. Revenue from
theater system deliveries was lower in the first nine months of 1997 compared to
the same period last year. The Company recognized revenues on 14 theater
systems in the first nine months of 1997 as compared to 19 theater systems in
the prior year period. Revenues in the first nine months of 1997 reflect a
higher average value of theater systems contracts recognized compared to the
same period in 1996 due to a higher proportion of international and IMAX 3D
theater system deliveries. Recurring revenues from both royalties and
maintenance fees increased 30% in the first nine months of 1997 over the prior
year period.
Film revenue increased 55% to $33.5 million in the first nine months of 1997
from $21.6 million in the same period last year due to an increase in film
distribution and post-production revenues. Film distribution revenue increased
in the first nine months of 1997 over the comparable period last year due to
strong results of films which were released in the latter half of 1996 and first
half of 1997 and also due to growth in the IMAX theater network. There was one
film produced for a third party in each of the first nine months of 1997 and
1996.
Page 12
<PAGE>
IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (CONT'D)
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996
(CONT'D)
Gross margin for the first nine months of 1997 was $55.9 million, or 54% of
total revenue, compared to $50.6 million, or 55% of total revenue, in the
corresponding period last year. Gross margin as a percentage of total revenue
in the current year is relatively consistent with the prior year period despite
the lower proportion of systems revenue due to better margin on film production,
post-production and other activities and lower purchase accounting in the
current year.
Selling, general and administrative expenses were $21.6 million in the first
nine months of 1997 compared to $20.5 million in the first nine months of 1996.
The increase in selling, general and administrative expenses in 1997 over 1996
resulted principally from marketing, branding and affiliate relations
initiatives and litigation costs, offset by a decrease in costs associated with
IMAX Ridefilm.
Research and development expenses decreased to $1.4 million in the first nine
months of 1997 compared to $1.9 million in the first nine months of last year.
The Company's technical staff were engaged, earlier in 1997, in the design and
production of the new IMAX 3D SR theater system and not in the typical research
and development activities. Research and development expenses returned to
historical levels in the third quarter of 1997.
The effective tax rate on earnings before taxes differs from the statutory tax
rate and will vary from quarter to quarter primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, and the
provision of income taxes at different tax rates in foreign and other provincial
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's principal source of liquidity included cash
and cash equivalents of $72.3 million, marketable securities totalling $27.0
million, trade accounts receivable of $31.3 million, and the amounts receivable
under contracts in backlog which are not yet reflected on the balance sheet.
The Company also has unused lines of credit under a working capital facility of
U.S. $6.3 million.
The Company partially funds its operations primarily through cash flow from
operations. Under the terms of the Company's typical theater system lease
agreement, the Company receives cash payments before it completes the
performance of its obligations. Similarly, the Company typically receives cash
payments for film production in advance of related cash expenditures. These
cash flows have generally been adequate to finance the ongoing operations of the
Company.
In the first nine months of 1997, cash provided by operating activities amounted
to $3.7 million after the payment of interest on the Senior and Convertible
Notes totalling $9.4 million and working capital requirements. Working capital
requirements in the first nine months of 1997 included an increase of $8.6
million in the Company's inventory due to manufacturing activity related to
systems in backlog and IMAX Ridefilm systems scheduled for delivery over the
next 18 months and an increase in accounts receivable of $13.3 million,
primarily related to an increase in the amount of upfront fees billed in
connection with the higher signings activity and the growth in the number of
systems in backlog.
Page 13
<PAGE>
IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
Cash used in investing activities in the first nine months of 1997 included an
increase in marketable securities of $8.8 million, expenditure of $12.1 million
on capital assets, principally building and other assets under construction and
motion simulation equipment, and investment of $17.1 million in film assets.
During the first nine months of 1997, the Company repaid $1.2 million of long-
term debt, compared to $0.5 million in the first nine months of 1996 and
received $5.0 million of proceeds from common shares issued under stock option
agreements.
The Company believes that cash flows from operations together with existing cash
balances and the working capital facility will continue to be sufficient to meet
cash requirements in the foreseeable future.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1994, Compagnie France Film Inc. filed a claim against the Company in
the Superior Court in the District of Montreal, in the Province of Quebec,
alleging breach of contract and bad faith in respect of an agreement which the
plaintiff claims it entered into with the Company for the establishment of an
IMAX theater in Quebec City, Quebec, Canada. Until December 1993, Imax was in
negotiations with the plaintiff and another unrelated party for the
establishment of an IMAX theater in Quebec City. In December 1993, Imax
executed a system lease agreement with the other party. During the
negotiations, both parties were aware of the other party's interest in also
establishing an IMAX theater in Quebec City. The plaintiffs are claiming
damages of Canadian $4.6 million, representing the amount of profit they claim
they are denied due to their inability to proceed with an IMAX theater in Quebec
City, together with expenses incurred in respect of this project and pre-
judgement interest. The Company disputes this claim and has filed a defense in
response. Trial is scheduled for January 1998. Compagnie France Film had also
incorporated a shell company, 3101-8450 Quebec Inc. ("3101"). 3101 was to,
among other things, enter into a lease for the proposed IMAX theater site. In
November 1993, while negotiations between Compagnie France Film and the Company
were still ongoing, 3101 entered into a lease for the site. 3101 defaulted on
the lease and the landlord sued 3101 in an unrelated action to which the Company
was not a party. In February 1996, 3101 was found liable to pay the landlord
damages in the amount of Canadian $2.5 million. Subsequent to that judgment
3101 intervened in the lawsuit between Compagnie France Film and the Company in
order to claim from the Company damages in the amount of Canadian $2.5 million.
The Company believes that it will be successful in its defense of these claims
and the ultimate loss, if any, will not have a material impact on the financial
position or results of operations of the Company, although no assurance can be
given with respect to the ultimate outcome of this litigation.
Page 14
<PAGE>
IMAX CORPORATION
Item 1. Legal Proceedings (Cont'd)
The Company filed a complaint in August 1994 in the U.S. District Court for the
Northern District of California claiming that Neil Johnson, NJ Engineering Inc.
and Cinema Technologies Inc. have misappropriated the Company's trade secrets in
the design and manufacture of defendants' 70mm 15-perforation projection
systems. The Company is seeking an injunction against Cinema Technologies Inc.
to prevent shipment of projectors, which incorporate the Company's trade
secrets, in addition to damages. The defendant has brought two motions for
summary judgement, one of which was based on the defendant's statute of
limitations defense and the other based on, among others, the defendant's
contention that the trade secrets at issue were not trade secrets. The court
denied the motion based on the statute of limitations defense, granted the
motion based on the trade secret status issue, and entered a judgement for the
defendants. The Company has filed an appeal of this decision to the U.S. Court
of Appeal for the Ninth Circuit. The Company expects that the appeal will be
heard in early 1998.
Iwerks Entertainment, Inc. filed a complaint against the Company on February 26,
1996 in the U.S. District Court for the Central District of California alleging
violations under the Sherman Act, the Clayton Act, and tortious interference
with contracts and prospective economic advantage. Iwerks Entertainment, Inc. is
seeking unquantified damages, injunctive relief and restitution. The Company
has filed an answer denying the material allegations of the complaint and is
vigorously defending this action.
In July 1997, Debra B. Altman filed a claim against the Company, and certain
unidentified individuals, in the Superior Court of the State of California for
the County of Los Angeles, alleging breach of contract, breach of implied
covenant of good faith and fair dealing, breach of implied-in-fact contract,
breach of confidence, constructive fraud, quantum meruit, unjust enrichment and
constructive trust with respect to a film project the Plaintiff claims to have
pursued with the Company. The Plaintiff is seeking unquantified damages
exceeding $5 million. The Company disputes this claim and has removed it to the
U.S. District Court for the Central District of California, Western Division,
and intends to vigorously defend this action. The amount of the loss, if any,
cannot be determined at this time.
In addition to the litigation described above, the Company is
currently involved in other litigation which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect to the
ultimate outcome for any such litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
11 Statement Re: Computation of earnings per share for the three and nine
month periods ended September 30, 1997 and 1996
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the three month period ended
September 30, 1997.
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: November 11, 1997 By: /S/ John M. Davison
- ------------------------- ----------------------
John M. Davison
Executive Vice President, Operations
and Chief Financial Officer
(Principal Financial Officer)
By: /S/ Michael M. Davies
-----------------------------
Michael M. Davies
Vice President and Corporate
Controller
(Principal Accounting Officer)
Page 16
<PAGE>
IMAX CORPORATION Exhibit 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Expressed in thousands, except per share amounts
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------------- ---------------------------
PRIMARY FULLY PRIMARY FULLY
DILUTED DILUTED
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET EARNINGS $ 5,485 $ 5,485 $ 4,244 $ 4,244
Less: Preferred dividends (43) (43) (42) (42)
Preferred accretion (41) (41) (36) (36)
---------------- ------------ ------------ ------------
Net earnings available to common
shareholders $ 5,401 $ 5,401 $ 4,166 $ 4,166
================ ============ ============ ============
WEIGHTED AVERAGE SHARES CALCULATION:
Number of common shares outstanding
at beginning of period 27,886 27,886 28,154 28,154
Weighted average shares
Issued pursuant to employment contract 3 3 4 4
Options exercised 1,114 1,114 232 232
Shares repurchased - - (660) (660)
Assumed exercise of stock options, net
of shares assumed acquired under the
Treasury Stock Method 1,377 1,379 1,924 1,982
---------------- ------------ ------------ ------------
SHARES USED IN COMPUTING PER SHARE
AMOUNTS 30,380 30,382 29,654 29,712
================ ============ ============ ============
WEIGHTED AVERAGE PER SHARE AMOUNTS $0.18 $0.18 $0.14 $0.14
================ ============ ============ ============
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------------- ---------------------------
PRIMARY FULLY PRIMARY FULLY
DILUTED DILUTED
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET EARNINGS $13,331 $13,331 $10,506 $10,506
Less: Preferred dividends (128) (128) (127) (127)
Preferred accretion (119) (119) (104) (104)
---------------- ------------ ------------ ------------
Net earnings available to common
shareholders $13,084 $13,084 $10,275 $10,275
================ ============ ============ ============
WEIGHTED AVERAGE SHARES CALCULATION:
Number of common shares outstanding
at beginning of period 27,886 27,886 28,154 28,154
Weighted average shares
Issued pursuant to employment contract 1 1 - -
Options exercised 481 481 112 112
Shares repurchased - - (416) (416)
Assumed exercise of stock options, net
of shares assumed acquired under the
Treasury Stock Method 1,696 1,708 2,128 2,242
---------------- ------------ ------------ ------------
SHARES USED IN COMPUTING PER SHARE
AMOUNTS 30,064 30,076 29,978 30,092
================ ============ ============ ============
WEIGHTED AVERAGE PER SHARE AMOUNTS $0.44 $0.44 $0.34 $0.34
================ ============ ============ ============
</TABLE>
