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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
Imax Corporation
(Exact name of registrant as specified in its charter)
Canada 98-0140269
----------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
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(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
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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 July 30, 1999
- -------------------------------- -------------------------------
Common stock, no par value 29,628,888
Page 1 of 20
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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 11
Item 3. Quantitative and Qualitative Factors about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Listing of Exhibits and Reports on Form 8-K 19
Signatures 20
FORWARD LOOKING INFORMATION
Certain statements included herein may constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform Act
of 1995. These forward-looking statements may include, but are not limited to,
references to future capital expenditures (including the amount and nature
thereof), business strategies and measures to implement strategies, competitive
strengths, goals, expansion and growth of its business and operations, plans and
references to the future success of the Company and the known Year 2000 issues
confronting the Company. These forward-looking statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the expectations and predictions of the Company is subject to a number of
risks and uncertainties, including, but not limited to, general economic, market
or business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other companies;
conditions in the out-of-home entertainment industry; changes in laws or
regulations; risks associated with investments and operations in foreign
jurisdictions and any future international expansion, including those related to
economic, political and regulatory policies of local governments and laws and
policies of the United States and Canada; the potential impact of increased
competition in the markets the Company operates within; the availability of
personnel with required remediation skills, the ability of the Company to
identify and correct all relevant computer code and the success of third parties
with whom the Company does business in addressing their Year 2000 issues and
other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made herein are qualified by
these cautionary statements, and there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to, or
effects on, the Company.
Page 2
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IMAX CORPORATION
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The following condensed consolidated financial statements are filed as
part of this Report:
Condensed Consolidated Balance Sheets as at June 30, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flow
for the six month periods ended June 30, 1999 and 1998 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>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $135,405 $143,566
Short-term marketable securities 27,023 39,305
Accounts receivable 46,294 45,217
Current portion of net investment in leases 9,458 9,303
Inventories and systems under construction (note 2) 26,484 18,747
Prepaid expenses 5,014 3,766
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Total current assets 249,678 259,904
Long-term marketable securities 16,529 20,070
Net investment in leases 81,354 79,124
Film assets 37,590 34,885
Capital assets 56,231 46,563
Goodwill 37,183 38,129
Other assets 11,629 11,416
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Total assets $490,194 $490,091
============= =============
Liabilities
Current liabilities
Accounts payable $ 6,041 $ 9,882
Accrued liabilities 23,374 30,153
Current portion of deferred revenue 22,015 22,062
Income taxes payable 108 435
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Total current liabilities 51,538 62,532
Deferred revenue 21,043 15,005
Senior notes 200,000 200,000
Convertible subordinated notes 100,000 100,000
Deferred income taxes 22,080 23,263
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Total liabilities 394,661 400,800
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Minority interest 5,552 4,845
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Commitments and contingencies (notes 3 and 4)
Shareholders' equity
Capital stock 56,546 55,236
Retained earnings 33,644 29,436
Other comprehensive items (209) (226)
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Total shareholders' equity 89,981 84,446
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Total liabilities and shareholders' equity $490,194 $490,091
============= =============
</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 amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Systems $18,889 $30,890 $ 41,309 $57,254
Films 10,444 6,904 19,066 14,037
Other 4,925 5,526 10,626 8,399
---------------- ---------------- ---------------- ----------------
34,258 43,320 71,001 79,690
Costs and expenses 18,544 18,621 38,757 33,947
---------------- ---------------- ---------------- ----------------
Gross margin 15,714 24,699 32,244 45,743
Loss from equity accounted investees 44 411 162 678
Selling, general and administrative expenses 8,269 8,462 16,258 17,896
Research and development 812 630 1,287 1,359
Amortization of intangibles 472 630 945 1,259
---------------- ---------------- ---------------- ----------------
Earnings from operations 6,117 14,566 13,592 24,551
Interest income 2,858 1,142 5,269 2,404
Interest expense (5,181) (3,330) (11,014) (6,617)
Foreign exchange gain (loss) 296 (156) 213 (229)
---------------- ---------------- ---------------- ----------------
Earnings before income taxes and minority interest 4,090 12,222 8,060 20,109
Provision for income taxes (1,597) (5,679) (3,144) (9,147)
---------------- ---------------- ---------------- ----------------
Earnings before minority interest 2,493 6,543 4,916 10,962
Minority interest (297) (382) (707) (602)
---------------- ---------------- ---------------- ----------------
Net earnings $ 2,196 $ 6,161 $ 4,209 $10,360
================ ================ ================ ================
Earnings per share (note 5)
Basic $ 0.07 $ 0.21 $ 0.14 $ 0.35
Diluted $ 0.07 $ 0.20 $ 0.14 $ 0.34
</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>
Six months ended June 30,
1999 1998
-------------------- --------------------
<S> <C> <C>
Cash provided by (used in):
Operating Activities
Net earnings $ 4,209 $ 10,360
Items not involving cash:
Depreciation and amortization 11,193 8,068
Deferred income taxes (592) 6,706
Loss from equity accounted investees 162 678
Minority interest 707 602
Other (199) (228)
Change in net investment in leases (2,339) (17,579)
Change in deferred revenue on film production 1,945 2,799
Changes in non-cash operating assets and liabilities (17,547) (4,411)
-------------------- --------------------
Net cash (used in) provided by operating activities (2,461) 6,995
-------------------- --------------------
Investing Activities
Decrease in marketable securities 15,757 1,296
Increase in film assets (8,088) (7,712)
Purchase of capital assets (12,381) (5,409)
Increase in other assets (1,993) (2,144)
-------------------- --------------------
Net cash used in investing activities (6,705) (13,969)
-------------------- --------------------
Financing Activities
Class C preferred shares dividends paid (365) (386)
Common shares issued 1,310 1,276
-------------------- --------------------
Net cash provided by financing activities 945 890
-------------------- --------------------
Effect of exchange rate changes on cash 60 (46)
-------------------- --------------------
Decrease in cash and cash equivalents during the period (8,161) (6,130)
Cash and cash equivalents, beginning of period 143,566 64,069
-------------------- --------------------
Cash and cash equivalents, end of period $135,405 $ 57,939
==================== ====================
</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
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Six Month Periods Ended June 30, 1999 and 1998
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Imax
Corporation and its wholly owned and majority owned subsidiaries. The
nature of the Company's business is such that the results of operations for
the interim periods presented are not necessarily indicative of results to
be expected for the fiscal year. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of such
operations. All such adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the Company's
most recent annual report on Form 10-K for the year ended December 31, 1998
which should be consulted for a summary of the significant accounting
policies utilized by the Company.
2. Inventories and Systems Under Construction
June 30, December 31,
1999 1998
-------------------- --------------------
Raw materials $12,430 $ 7,555
Work-in-process 13,258 10,686
Finished goods 796 506
-------------------- --------------------
$26,484 $18,747
==================== ====================
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 in 1999 and 2000, the Company had entered
into forward exchange contracts as at June 30, 1999 to hedge the conversion
of $31.0 million of its cash flow into Canadian dollars at an average
exchange rate of Canadian $1.46 per U.S. dollar. The company recognizes an
exchange gains or losses on the forward contracts when the contracts
mature.
The Company has also entered into foreign currency swap transactions to
hedge minimum lease payments receivable under sales-type lease contracts
denominated in Japanese Yen and French Francs. These swap transactions fix
the foreign exchange rates on conversion of 139 million Yen at 98 Yen per
U.S. dollar through September 2004 and on 15.5 million Francs at 5.1 Francs
per U.S. dollar through September 2005.
These hedging contracts are expected to be held to maturity; however, if
they were terminated on June 30, 1999, the Company would have realized a
gain of approximately $0.3 million based on the then prevailing exchange
rates.
Page 7
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Six Month Periods Ended June 30, 1999 and 1998
(unaudited)
3. Financial Instruments (Cont'd)
The Company entered into an interest rate swap transaction in May 1999 for
a term commencing June 1, 1999 and terminating on December 1, 2002. The
Company has agreed to pay a floating rate of LIBOR plus 1.49% to June 1,
2000 and LIBOR plus 2.09% for the remainder of the term and the
counterparty has agreed to pay a fixed rate of 7.875% on notional principal
of $65 million. The floating rate is revised every 1/st/ of December and
June. The counterparty may cancel the remaining payments on the swap
transaction prior to May 31, 2000 with no early termination cost to either
party. The Company adjusts interest expense over each 6-month period for
the net amount it receives from or pays to the counterparty. The interest
rate swap is expected to be held to maturity; however, if it were
terminated by the Company on June 30, 1999, the Company would have realized
a loss of approximately $0.7 million based on the then prevailing interest
rates.
4. Contingencies
In April 1994, Compagnie France Film Inc. filed a claim against the Company
in the Superior Court in the District of Montreal, in the Province of
Quebec, alleging breach of contract and bad faith in respect of an
agreement which the plaintiff claims it entered into with the Company for
the establishment of an IMAX theater in Quebec City, Quebec, Canada. The
plaintiffs claimed damages of Canadian $4.6 million, together with expenses
and pre-judgment interest. Compagnie France Film had also incorporated a
shell company, 3101-8450 Quebec Inc. ("3101"). 3101 was sued in an
unrelated action to which the Company was not a party and, in February
1996, was found liable to pay damages in the amount of Canadian $2.5
million. Subsequent to that judgment 3101 intervened in the lawsuit
between Compagnie France Film and the Company in order to claim such amount
from the Company. In a decision rendered in April 1998, the Court dismissed
the plaintiffs' claims with costs. In May 1998, Compagnie France Film Inc.
and 3101 both filed appeals to the Court of Appeal. The Company believes
that it will be successful in responding to these appeals and the ultimate
loss, if any, will not have a material impact on the financial position or
results of operations of the Company, although no assurance can be given
with respect to the ultimate outcome of this litigation.
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
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Six Month Periods Ended June 30, 1999 and 1998
(unaudited)
5. Earnings Per Share
Reconciliations of the numerators and denominators of the basic and diluted
per-share computations are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings available to common
shareholders:
Net earnings $ 2,196 $ 6,161 $ 4,209 $10,360
Less:
Accrual of dividends on preferred shares - (43) - (86)
Accretion of discount of preferred shares - (44) - (88)
------- ------- ------- -------
Net earnings used in computing basic earnings
per share 2,196 6,074 4,209 10,186
Interest expense on Convertible Subordinated - 885 - 885
Notes, net of tax ------- ------- ------- -------
Net earnings used in computing diluted
earnings per share $ 2,196 $ 6,959 $ 4,209 $11,071
======= ======= ======= =======
Weighted average number of common shares (000's):
Issued and outstanding at beginning of period 29,587 29,115 29,478 29,115
Weighted average shares issued in the period 8 138 103 103
------- ------- ------- -------
Weighted average used in computing basic
earnings per share 29,595 29,253 29,581 29,218
Assumed exercise of stock options, net of shares
assumed acquired under the Treasury Stock
Method 798 1,205 854 1,218
Assumed conversion of Convertible Subordinated
Notes - 4,671 - 2,336
------- ------- ------- -------
Weighted average used in computing diluted
earnings per share 30,393 35,129 30,435 32,772
======= ======= ======= =======
</TABLE>
Common shares potentially issuable pursuant to the Convertible Subordinated
Notes were excluded from the computations in the three and six months ended June
30, 1999 and in the three months ended March 31, 1998 as they would have had an
antidilutive effect on earnings per share.
Page 9
<PAGE>
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with U.S. Generally Accepted Accounting Principles
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the Six Month Periods Ended June 30, 1999 and 1998
(unaudited)
6. Segmented Information
There has been no change in the basis of segmentation or in the basis of
measurement of segment profit or loss from the Company's most recent annual
report on Form 10-K for the year ended December 31, 1998. Intersegment
transactions are not significant.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
Systems $ 18,889 $30,890 $41,309 $57,254
Films 10,444 6,904 19,066 14,037
Other 4,925 5,526 10,626 8,399
------------- ------------- ------------- -------------
Total consolidated revenues $ 34,258 $43,320 $71,001 $79,690
============= ============= ============= =============
Earnings (loss) from operations
Systems $ 10,330 $18,392 $21,063 $33,639
Films (532) (339) (481) 936
Other (293) 759 (119) (110)
Corporate overhead (3,388) (4,246) (6,871) (9,914)
---------- ------- ------- -------
Consolidated earnings from operations $ 6,117 $14,566 $13,592 $24,551
========== ======= ======= =======
</TABLE>
Page 10
<PAGE>
IMAX
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Theater Signings and Backlog
During the second quarter of 1999, the Company signed contracts for 12 IMAX
theater systems valued at $27.6 million, representing a 4% decrease over the
$28.8 million value of the eight theater systems contracts signed in the second
quarter of 1998. All of the signings in the second quarter of 1999 were for
commercial locations and the majority were for international locations,
including an agreement with United Cinemas International to open an additional
eight IMAX theaters in Europe, Asia and South America. For the six months ended
June 30, 1999, the Company signed contracts for 23 theater systems valued at
$60.1 million, approximately equal to the $60.5 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 $209.7 million at June 30, 1999, a
9% increase from $192.9 million at March 31, 1999 and a 19% increase from $175.8
million at December 31, 1998.
The Company's sales backlog at June 30, 1999 represented contracts for 87
theater systems, including eleven systems which will be located at theaters in
which the Company will have an equity interest and the upgrade of two 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 minimum
revenues under signed system sale and lease agreements that will be recognized
as revenue as the associated theater systems are delivered. The minimum revenue
comprises the upfront fees plus the present value of the minimum royalties due
under sales-type lease agreements for the first 10 years of the initial lease
term. The value of sales backlog does not include revenues from theaters in
which the Company has an equity interest, letters of intent or long-term
conditional theater commitments.
Three months ended June 30, 1999 versus three months ended June 30, 1998
The Company reported net earnings of $2.2 million or $0.07 per share on a
diluted basis for the second quarter of 1999 compared to $6.2 million or $0.20
per share on a diluted basis for the second quarter of 1998.
The Company's revenues for the second quarter of 1999 decreased 21% to $34.3
million from $43.3 million in the corresponding quarter last year due mainly to
a decline in systems revenue which more than offset an increase in film revenue.
Systems revenue, which includes revenue from theater system sales and leases,
royalties and maintenance fees, decreased approximately 39% to $18.9 million in
the second quarter of 1999 from $30.9 million in the same quarter last year. The
Company delivered four theater systems in the second quarter of 1999 versus
eight theater systems in the second quarter of 1998. Recurring revenues from
royalties and maintenance fees increased approximately 13% in the second quarter
over the corresponding period last year as a result of growth in the IMAX
theater network.
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 June 30, 1999 versus three months ended June 30, 1998
(Cont'd)
Film revenue increased 51% to $10.4 million in the second quarter of 1999 from
$6.9 million in the same quarter last year primarily as a result of an increase
in film distribution and post-production revenue. Film distribution revenue in
the second quarter of 1999 increased 65% compared to the same quarter last year
due mainly to the strong performance of the Company's film T-REX: Back to the
Cretaceous which was released late in 1998.
Other revenues decreased 11% to $4.9 million in the first quarter in 1999 from
$5.5 million in the same quarter last year. Revenues from owned and operated
theaters increased in the second quarter compared to the same quarter last year
due to two owned and operated theaters which commenced operations late in 1998
and in early 1999 however, this was more than offset by declines in Ridefilm
revenues and in camera rental revenues.
Gross margin for the second quarter of 1999 was $15.7 million, or 46% of total
revenue, compared to $24.7 million, or 57% of total revenue, in the
corresponding quarter last year. The decrease in gross margin as a percentage
of total revenue is due to the lower proportion of systems revenue (which is
generally higher margin than film and other revenues) in the second quarter of
1999 compared to the corresponding quarter in 1998.
Selling, general and administrative expenses were $8.3 million in the second
quarter of 1999 compared to $8.5 million in the corresponding quarter last year.
Decreases in executive compensation costs were partially offset by increases in
affiliate relations initiatives.
Interest income increased to $2.9 million in the second quarter of 1999 from
$1.1 million in the same quarter last year primarily due to an increase in the
Company's cash and marketable securities balances following the Senior Notes
offering in December, 1998.
Interest expense increased to $5.2 million in the second quarter of 1999 from
$3.3 million in the corresponding quarter last year primarily as a result of the
$200 million Senior Notes issued in December, 1998.
The effective tax rate on earnings before taxes differs from the statutory tax
rate and will vary from quarter to quarter primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, and the
provision of income taxes at different tax rates in foreign and other provincial
jurisdictions. The effective tax rate in the second quarter of 1999 also
benefited from an increase in tax credits associated with the Company's
manufacturing activities compared to the corresponding quarter in 1998.
Six months ended June 30, 1999 versus six months ended June 30, 1998
The Company reported net earnings of $4.2 million or $0.14 per share on a
diluted basis for the first half of 1999 compared to $10.4 million or $0.34 per
share on a diluted basis for the first half of 1998.
The Company's revenues for the first half of 1999 decreased 11% to $71.0 million
from $79.7 million in the corresponding period last year primarily as a result
of decreased systems revenue which more than offset increases in film and other
revenues.
Systems revenue decreased approximately 28% to $41.3 million in the first half
of 1999 from $57.3 million in the same period last year as the Company
recognized revenues on ten third-party theater systems compared to sixteen
theater systems in the same period last year. Recurring revenues from both
royalties and maintenance fees increased 9% in the first half of 1999 over the
prior year period due to growth in the IMAX theater network.
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Six months ended June 30, 1999 versus six months ended June 30, 1998 (Cont'd)
Film revenue increased 36% to $19.1 million in the first half of 1999 from $14.0
million in the same period last year due to increases in film distribution and
post-production revenues. Film distribution revenues increased 50% in the first
half of 1999 over the same period last year primarily as a result of the strong
performance of the Company's fill T-REX: Back to the Cretaceous which was
released late in 1998.
Other revenue increased 27% to $10.6 million in the six months ended June 30,
1999 from $8.4 million in the same period last year as a result of an increase
in the number of theaters in operation in which the Company has an equity
interest, partially offset by a decline in camera rental revenues.
Gross margin for the first half of 1999 was $32.2 million or 45% of total
revenue, compared to $45.7 million or 57% of total revenue in the corresponding
period last year. The decline in gross margin as a percentage of total revenue
is primarily due to the lower proportion of systems revenue (which has generally
a higher margin than film and other revenue) in the first half of 1999 compared
to the corresponding period in 1998.
Selling, general and administrative expenses were $16.3 million in the first
half of 1999 compared to $17.9 million in the first half of 1998. The decrease
in selling, general and administrative expenses in 1999 over 1998 resulted from
declines in executive compensation, partially offset by increased affiliate
relations initiatives.
Interest income increased to $5.3 million in the first half of 1999 from $2.4
million in the same period last year primarily due to an increase in the
Company's cash and marketable securities balances following the $200 million
Senior Notes offering in December 1998.
Interest expense increased from $6.6 million in the first six months of 1998 to
$11.0 million in the first half of 1999 primarily as a result of the $200
million Senior Notes offering in December 1998.
The effective tax rate on earnings before taxes differs from the statutory tax
rate and will vary from quarter to quarter primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, and the
provision of income taxes at different tax rates in foreign and other provincial
jurisdictions. The effective tax rate in the first half of 1999 also benefited
from an increase in tax credits associated with the Company's manufacturing
activities compared to the corresponding period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's principal source of liquidity included cash and
cash equivalents of $135.4 million, marketable securities totaling $43.6
million, trade accounts receivable of $46.3 million, net investment in leases
due within one year of $9.5 million and the amounts receivable under contracts
in backlog which are not yet reflected on the balance sheet. The Company also
has unused lines of credit under a working capital facility of $2.7 million.
The 7.875% Senior Notes due December 1, 2005 are subject to redemption by the
Company, in whole or in part, at any time on or after December 1, 2002 at
redemption prices expressed as percentages of the principal amount for each 12-
month period commencing December 1 of the years indicated: 2002 - 103.938%; 2003
- - 101.969%; 2004 and thereafter - 100.000% together with interest accrued
thereon to the redemption date and are subject to redemption by the Company
prior to December 1, 2002 at a redemption price equal to 100% of the principal
amount plus a "make whole premium". If certain changes result in the imposition
of withholding taxes under Canadian law, the notes may be redeemed by the
Company at a redemption price equal to 100% of the principal amount plus accrued
interest to the date of redemption. In the event of a change in control, holders
of the notes may require the Company to repurchase all or part of the notes at a
price equal to 101% of the principal amount plus accrued interest to the date of
repurchase.
Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
Liquidity And Capital Resources (Cont'd)
The 5 3/4% Convertible Subordinated Notes (the "Subordinated Notes") due April
1, 2003 are convertible into common shares of the Company at the option of the
holder at a conversion price of $21.406 per share (equivalent to a conversion
rate of 46.7154 shares per $1,000 principal amount of Subordinated Notes) at any
time prior to maturity. The Subordinated Notes are redeemable at the option of
the Company on or after April 1, 1999 at redemption prices expressed as
percentages of the principal amount (1999 - 103.286%; 2000 - 102.464%; 2001 -
101.643%; 2002 - 100.821%) plus accrued interest. The Subordinated Notes may
only be redeemed by the Company between April 1, 1999 and April 1, 2001 if the
last reported market price of the Company's common shares is equal to or greater
than $30 per share for any 20 of the 30 consecutive trading days prior to the
notice of redemption. The Subordinated Notes may be redeemed at any time on or
after April 1, 2001 without limitation.
The Company partially funds its operations through cash flow from operations.
Under the terms of the Company's typical theater system lease agreement, the
Company receives cash payments before it completes the performance of its
obligations. Similarly, the Company receives cash payments for some of its film
productions in advance of related cash expenditures. These cash flows have
generally been adequate to finance the ongoing operations of the Company.
In the first half of 1999, cash used in operating activities amounted to $2.5
million after the payment of interest on the Senior and Convertible Notes
totaling $10.6 million and working capital requirements. Working capital
requirements included an increase of $8.1 million in inventory due mainly to an
increase in raw materials and work-in-process inventory anticipated for
completion and delivery later in the year and a $10.3 million reduction in
accounts payable and accrued liabilities due to the timing of payments. Cash
flow from operations also includes an increase of $1.9 million in funds held for
sponsored film productions, which will be expended in future periods.
In the first half of 1999, cash used in investing activities amounted to $6.7
million and included a decrease in marketable securities of $15.8 million, which
was more than offset by an $8.1 million increase in film assets, primarily
Galapagos, Cyberworld and Island of the Sharks and a $12.4 million increase in
capital assets, primarily owned and operated theaters.
During the first half of 1999, cash provided by financing activities included
$1.3 million of proceeds from common shares issued under the Company's stock
option plan.
The Company believes that cash flows from operations together with existing cash
balances and the working capital facility will continue to be sufficient to meet
cash requirements in the foreseeable future.
IMPACT OF THE YEAR 2000
The Year 2000 issue involves computer programs and embedded chips, which use two
digit date fields, failing or creating errors as a result of the change in the
century.
Background and Process
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
IMPACT OF THE YEAR 2000 (Cont'd)
In order to assess the likely impact of the Year 2000 issue on its operations,
the Company established a Year 2000 Committee in 1998, consisting of senior
managers and reporting to the Chief Operating Officer, and designated a manager
or coordinator in each department. The Company also retained external
consultants who developed a Year 2000 project plan and conducted awareness
sessions for the Company's staff.
As part of the Year 2000 project plan beginning in 1998, the Company's Internal
Audit department, in conjunction with the Year 2000 Committee, distributed an
asset inventory questionnaire and business partner questionnaire within the
Company, and a key vendor questionnaire externally to identify and inventory
likely areas of concern.
Assessment and Action Taken
The Internal Audit department and the Year 2000 Committee reviewed the responses
to these questionnaires and assessed the areas of risk under the following
categories: information technology systems, non-information technology systems,
facilities, and third party suppliers.
The Internal Audit department and the Year 2000 Committee determined that the
Company's information technology at risk were its cost accounting and financial
software systems. Accordingly, the cost accounting and financial
software systems were upgraded in the first quarter of 1999, which upgrades have
been certified as Year 2000 ready by the vendors.
For non-information technology systems, the Company evaluated the projection
system and concluded that the performance of the projection system would not be
negatively impacted by the change in the century.
With respect to the sound systems used in connection with the projection system,
the systems supplier Sonics, a subsidiary, has been evaluating each of the
subsystems of the sound system. Sonics has advised the Company that the current
standard sound system hardware would not be negatively impacted by Year 2000
risks. Sonics also evaluated the proprietary software elements incorporated into
sound system software and has advised the Company that they, too, would not be
negatively impacted by the change in the century. Sonics has advised the Company
that it has verified that the manufacturer of each "off-the-shelf" utility
software element, also incorporated into the sound system software, had tested
and certified its product as Year 2000 ready.
Sonics must still complete the testing of an automation subsystem incorporated
in a sound system in 26 IMAX theaters. Sonics' service department plans to
conduct a Year 2000 readiness test on each automation subsystem during routine
service visits. Sonics has advised the Company that it expects to complete such
testing at minimal cost in the third quarter of 1999. If there is a failure in
an automation subsystem to be Year 2000 ready, this failure would impact on the
ability of a theater to present pre-show material but would not affect the
theaters ability to present a 15/70-format film.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
IMPACT OF THE YEAR 2000 (Cont'd)
The Internal Audit department and the Year 2000 Committee determined that the
Company's facilities that could be at risk include each of the Company's office
premises. The Company has contacted utility suppliers to determine their Year
2000 readiness. The Company is reviewing and assessing responses from its
utility suppliers. Such process is largely completed. With respect to third
party risks, the Company is continuing to review and assess the responses to the
key vendor questionnaires and following up with those key vendors who have not
yet responded. Based upon its efforts and assessment to date, the Company
believes that its information technology systems and non-information technology
systems will remain operational during the Year 2000 transition process and that
facilities will be largely unaffected subject to third party compliance.
Cost
The cost of the Company's Year 2000 efforts are not expected to be material nor
have a material effect on the Company's financial position. The Company is not
separately tracking the internal cost for its Year 2000 review activities.
Contingency Plans
Based on the Company's current review of its Year 2000 readiness, the Company
does not anticipate the need for significant contingency planning for its
information technology systems or non-information technology systems. The
Company is, however, making plans to have additional customer service
representatives available to handle inquiries or concerns from the Company's
customers during the first few weeks of Year 2000. The Company is in the process
of identifying alternate vendors of components for the projection system in the
event that any key vendor fails to be Year 2000 ready. The Company's few sole
source vendors of components for the projection system have indicated to the
Company that they are Year 2000 ready. Sonics has pre-ordered sufficient
quantities of key sound system components to meet the Company's scheduled
deliverables in the first quarter of Year 2000. The Company is prioritizing its
key utility suppliers and assessing the need and extent of a contingency plan
for its facilities. The Company will continue to assess the need for additional
contingency plans.
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont'd)
IMPACT OF THE YEAR 2000 (Cont'd)
No assurance can be given that the Company will not be materially adversely
affected by Year 2000 issues. Although the Company is not currently aware of any
material operational issues with preparing its information technology systems,
non-information technology systems and facilities for the Year 2000, the Company
may experience material unanticipated problems and costs caused by undetected
errors or defects. In addition, the failure of third parties to timely address
their Year 2000 issues could have a material adverse impact on the Company's
business, operations and financial condition. If, for example, third party
suppliers of utilities and other commercial products and services experience
interruptions in services as a result of Year 2000 issues, the Company's
operations could be adversely affected.
The impact of the Year 2000 issue on the Company has been disclosed consistently
with the above to those customers of the Company who have requested such
disclosure.
Item 3. Quantitative and Qualitative Factors about Market Risk
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A substantial portion of the Company's revenues are denominated in U.S. dollars
while a substantial portion of its costs and expenses are denominated in
Canadian dollars. A portion of the net U.S. dollar flows of the Company are
converted to Canadian dollars to fund Canadian dollar expenses, either through
the spot market or through forward contracts. In Japan, the Company has ongoing
operating expenses related to its operations. Net Japanese yen flows are
converted to U.S. dollars generally through forward contracts to minimize
currency exposure. The Company also has cash receipts under leases denominated
in French francs and Japanese Yen which are converted to U.S. dollars generally
through forward contracts to minimize currency exposure.
A substantial portion of the Company's cash equivalents earn interest at short-
term floating rates while all of its long-term debt incurs interest at long-term
fixed rates. The Company entered into an interest rate swap to hedge this
exposure.
Contract amounts, average contractual exchange rates, terms and fair values for
the Company's financial instruments are disclosed in Note 3 to the Condensed
Consolidated Financial Statements contained in Item 1.
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IMAX CORPORATION
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, Compagnie France Film Inc. filed a claim against the Company in
the Superior Court in the District of Montreal, in the Province of Quebec,
alleging breach of contract and bad faith in respect of an agreement which the
plaintiff claims it entered into with the Company for the establishment of an
IMAX theater in Quebec City, Quebec, Canada. Until December 1993, Predecessor
Imax was in negotiations with the plaintiff and another unrelated party for the
establishment of an IMAX theater in Quebec City. In December 1993, Predecessor
Imax executed a system lease agreement with the other party. During the
negotiations, both parties were aware of the other party's interest in also
establishing an IMAX theater in Quebec City. The plaintiffs claimed damages of
Canadian $4.6 million, representing the amount of profit they claim they were
denied due to their inability to proceed with an IMAX theater in Quebec City,
together with expenses incurred in respect of this project and pre-judgement
interest. The Company disputed this claim and filed a defense in response.
Compagnie France Film had also incorporated a shell company, 3101-8450 Quebec
Inc. ("3101"). 3101 was to, among other things, enter into a lease for the
proposed IMAX theater site. In November 1993, while negotiations between
Compagnie France Film and the Company were still ongoing, 3101 entered into a
lease for the site. 3101 defaulted on the lease and the landlord sued 3101 in
an unrelated action to which the Company was not a party. In February 1996,
3101 was found liable to pay the landlord damages in the amount of Canadian $2.5
million. Subsequent to that judgment 3101 intervened in the lawsuit between
Compagnie France Film and the Company in order to claim from the Company damages
in the amount of Canadian $2.5 million. The Company disputed these claims and
the suit went to trial in January 1998. In a decision rendered in April 1998,
the court dismissed the plaintiffs' claims with costs. In May 1998, the
plaintiffs and 3101 both filed appeals of the decision to the Court of Appeal.
The Company believes that the amount of the loss, if any, will not have a
material impact on the financial position or results of operations of the
Company, although no assurance can be given with respect to the ultimate outcome
of this litigation.
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. engaged in unfair competition and misappropriated
the Company's trade secrets in the design and manufacture of the defendants'
70mm 15-perforation projection systems. The Company settled its claims with NJ
Engineering Inc. but continued to pursue an injunction against Cinema
Technologies Inc. and its principal Mr. Johnson to prevent shipment of
projectors, which incorporate the Company's trade secrets in addition to
damages. The defendants brought two motions for summary judgement, one of which
was based on the defendants' statute of limitations defense and the other based
on, among others, the defendants' 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 unfair competition and
trade secret status issues, and entered a judgement for the defendants. The
Company filed an appeal of this decision to the U.S. Court of Appeals for the
Ninth Circuit and on August 19, 1998 it affirmed the granting of the motion
based on the trade secrets claim, but vacated and reversed, and remanded for
further proceedings, with respect to the Company's unfair competition claim
against Cinema Technologies Inc. The case was returned to trial court in
October 1998; a trial date had been set for September 1999. On May 15, 1999, the
parties agreed to settle all outstanding litigation between them. In
management's opinion, the terms of the settlement will not have a material
impact on the financial position or results of the operation of the Company.
Iwerks Entertainment, Inc. ("Iwerks") 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
was seeking unquantified damages, injunctive relief and restitution. All claims
against the Company were dismissed in a summary judgment in April 1998. In May
1998, Iwerks filed an appeal of this decision to the U.S. Court of Appeals for
the Ninth Circuit. Effective April 30, 1999, the parties agreed to settle the
action. In management's opinion, the terms of the settlement will not have a
material impact on the financial position or results of the operation of the
Company.
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IMAX CORPORATION
PART II OTHER INFORMATION (Cont'd)
Item 1. Legal Proceedings (Cont'd)
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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company's shareholders held on June 7, 1999,
shareholders represented at the meeting, whether in person or by proxy: (i)
elected the Honourable J. Trevor Eyton, G. Edmund King, Sam Reisman and W.
Townsend Ziebold as Class I directors of the Company for the balance of the term
expiring in 2000, Kenneth G. Copland, Garth M. Girvan, Murray B. Koffler and
Mark A. Utay as Class II directors for a term expiring in 2002 and Michael J.
Biondi as a Class III director for the balance of the term expiring in 2001
(19,447,181 shares voted for and 73,193 shares withheld); (ii) appointed
PricewaterhouseCoopers, LLP as auditors of the Company to hold office until the
next annual meeting of shareholders at a remuneration to be fixed by the Board
of Directors (19,450,542 shares voted for and 69,832 shares withheld); (iii)
approved certain amendments to the Corporation's Stock Option Plan and thereby
to approve the grant of certain options to each of Mssrs. Wechsler and Gelfond
(17,522,457 shares voted for and 1,997,917 shares voted against); (iv) approved
certain amendments to the articles of Incorporation of the Corporation
(18,538,437 shares voted for and 981,937 shares voted against) and (v) approved
certain amendments to the By-laws of the Corporation (18,879,094 shares voted
for and 641,280 shares voted against).
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the three-month period ended
June 30, 1999.
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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: August 13, 1999 By: /s/ John M. Davison
- ----------------------- ----------------------
John M. Davison
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Mark J. Thornley
----------------------------
Mark J. Thornley
Vice President, Finance
(Principal Accounting Officer)
Page 20
