<PAGE>
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, 2000
-------------
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
--------------
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 31, 2000
----------------------------------------- -------------------------------
Common stock, no par value 29,830,056
Page 1 of 20
<PAGE>
IMAX CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Factors about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. 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. 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; and the
potential impact of increased competition in the markets the Company operates
within; 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
<PAGE>
IMAX CORPORATION
Page
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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, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Operations for the three
and six
month periods ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flow
for the six month periods ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Page 3
<PAGE>
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
In accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(unaudited)
June 30, December 31,
2000 1999
-------- --------
Assets
Current assets
Cash and cash equivalents $30,325 $34,573
Short-term marketable securities 14,615 49,159
Accounts receivable 55,402 42,619
Current portion of net investment in leases 34,635 33,918
Inventories and systems under construction (note 2) 39,948 31,141
Prepaid expenses 4,503 2,621
------- -------
Total current assets 179,428 194,031
Long-term marketable securities 3,358 39,873
Net investment in leases 111,377 103,087
Film assets 42,772 38,453
Capital assets 80,962 66,897
Goodwill 61,153 62,751
Other assets 29,887 28,232
Deferred income taxes 2,996 4,913
------- -------
Total assets $511,933 $538,237
======== ========
Liabilities
Current liabilities
Accounts payable $19,778 $18,361
Accrued liabilities 31,675 34,910
Current portion of deferred revenue 21,694 17,284
Income taxes payable 343 33,755
------- -------
Total current liabilities 73,490 104,310
Deferred revenue 21,767 22,862
Senior notes 200,000 200,000
Convertible subordinated notes 100,000 100,000
------- -------
Total liabilities 395,257 427,172
Commitments and contingencies (notes 3 and 4)
Shareholders' equity
Capital stock 57,855 57,471
Retained earnings 60,745 54,669
Accumulated comprehensive items (note 5) (1,924) (1,075)
------- -------
Total shareholders' equity 116,676 111,065
------- -------
Total liabilities and shareholders' equity $511,933 $538,237
======== ========
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 12)
Page 4
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IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- -------- --------
Revenue
IMAX systems $31,253 $18,889 $ 58,251 $ 41,309
Digital projection systems 11,297 -- 24,213 --
Films 10,336 10,444 20,795 19,066
Other 4,589 4,925 10,666 10,626
------- ------- -------- --------
57,475 34,258 113,925 71,001
Costs and expenses 31,822 18,544 65,100 38,757
------- ------- -------- --------
Gross margin 25,653 15,714 48,825 32,244
Loss from equity-accounted investees 372 44 370 162
Selling, general and administrative expenses 12,807 8,269 24,333 16,258
Research and development 2,014 812 3,606 1,287
Amortization of intangibles 1,036 472 2,045 945
------- ------- -------- --------
Earnings from operations 9,424 6,117 18,471 13,592
Interest income 870 2,858 2,412 5,269
Interest expense (5,122) (5,181) (10,657) (11,014)
Foreign exchange gain (loss) (512) 296 (653) 213
------- ------- -------- --------
Earnings before income taxes and minority interest 4,660 4,090 9,573 8,060
Provision for income taxes (1,678) (1,597) (3,497) (3,144)
------- ------- -------- --------
Earnings before minority interest 2,982 2,493 6,076 4,916
Minority interest -- (297) -- (707)
------- ------- -------- --------
Net earnings $ 2,982 $ 2,196 $ 6,076 $ 4,209
======= ======= ======== ========
Earnings per share (note 6)
Basic $0.10 $0.07 $0.20 $0.14
Diluted $0.10 $0.07 $0.20 $0.14
</TABLE>
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 12)
Page 5
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IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
In accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(unaudited)
Six months ended June 30,
2000 1999
-------- --------
Cash provided by (used in):
Operating Activities
Net earnings $ 6,076 $ 4,209
Items not involving cash:
Depreciation and amortization 14,048 11,193
Deferred income taxes 2,102 (592)
Loss from equity accounted investees 370 162
Minority interest -- 707
Other -- (199)
Change in net investment in leases (9,947) (2,339)
Change in deferred revenue on film production 283 1,945
Changes in non-cash operating assets and liabilities (56,083) (17,547)
-------- --------
Net cash used in operating activities (43,151) (2,461)
-------- --------
Investing Activities
Decrease in marketable securities 71,059 15,757
Increase in film assets (10,894) (8,088)
Purchase of capital assets (17,429) (12,381)
Increase in other assets (3,710) (1,993)
-------- --------
Net cash provided by (used in) investing activities 39,026 (6,705)
-------- --------
Financing Activities
Class C preferred shares dividends paid -- (365)
Common shares issued 384 1,310
-------- --------
Net cash provided by financing activities 384 945
-------- --------
Effect of exchange rate changes on cash (507) 60
-------- --------
Decrease in cash and cash equivalents during the period (4,248) (8,161)
Cash and cash equivalents, beginning of period 34,573 143,566
-------- --------
Cash and cash equivalents, end of period $ 30,325 $135,405
======== ========
(See accompanying notes to the condensed consolidated financial statements on
pages 7 to 12)
Page 6
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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, 2000 and 1999
(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, 1999
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,
2000 1999
------ ------
Raw materials $22,082 $16,831
Work-in-process 12,094 11,974
Finished goods 5,773 2,336
------- -------
$39,948 $31,141
======= =======
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 2000 and 2001, the Company had entered
into forward exchange contracts as at June 30, 2000 to hedge the conversion
of $32.4 million of its cash flow into Canadian dollars at an average
exchange rate of Canadian $1.47 per U.S. dollar
To fund Pound Sterling costs in 2000, the Company entered into forward
exchange contracts as at June 30, 2000 to hedge the conversion of $0.9
million of its cash flow into Pound Sterling at an average exchange rate of
(Pounds)0.67 per U.S. dollar.
To fund German Marks costs in 2000, the Company entered into forward
exchange contracts as at June 30, 2000 to hedge the conversion of $0.3
million of its cash flow into German Marks at an average exchange rate of
DM 0.50 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 110 million Yen at 98 Yen per
U.S. dollar through September 2004 and on 13.5 million Francs at 5.1 Francs
per U.S. dollar through September 2005.
Page 7
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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, 2000 and 1999
(unaudited)
3. Financial Instruments (cont'd)
These hedging contracts are expected to be held to maturity; however, if
they were terminated on June 30, 2000, the Company would have realized a
gain of approximately $0.4 million based on the then prevailing exchange
rates.
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 1st of December, March,
June and September. The Company adjusts interest expense over each three-
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, 2000, the Company
would have realized a loss of approximately $2.2 million based on the then
prevailing interest rates.
4. Contingencies and Measurement Uncertainty
(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. 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 Quebec Court of Appeal. The Company
believes that it will be successful in responding to these appeals and the
amount of ultimate loss, if any, would 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) In January 2000, the Commission of the European Communities (the
"Commission") informed the Company that Euromax, an association of
European large screen cinema owners had filed a complaint against the
Company under EC competition rules. The complaint addressed a variety of
alleged abuses, mainly relating to the degree of the control that the
Company asserts over the projection systems it leases, and the form and
terms of the Company's agreements. No formal investigation has been
initiated to date, and the Commission has limited itself to a request of
Imax to comment on the complaint. Should proceedings be initiated, it is
expected that no decision would be rendered until 2001 at the earliest.
Although the Commission has the power to impose fines of up to a maximum of
10% of Company revenue for breach of EC competition rules, the Company
believes on the basis of currently available information and an initial
review that such result would not be likely. The Company further believes
that the allegations in the complaint are meritless and will accordingly
defend the matter vigorously.
The Company believes that the amount of loss, if any, suffered in
connection with this proceeding would 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 matter.
Page 8
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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, 2000 and 1999
(unaudited)
4. Contingencies and Measurement Uncertainty - (cont'd)
(c) In April 2000, Themax Inc., a 33% owned investee of the Company, and
certain of its shareholders (collectively "Themax") filed a claim against
the Company in the Superior Court in the District of Longueuil, in the
Province of Quebec, alleging breach of contract in respect of the IMAX(R)
System Lease agreement between Imax Ltd. and Themax dated February 5, 1996
as well as a claim for damages suffered as a result of Imax Ltd.'s alleged
failure to adequately manage the Brossard Theatre during its tenure as
manager. Themax claimed damages representing a return of the original
investment by Themax as well as lost profits and costs. The Company
believes that the allegations are entirely without merit and has and will
accordingly defend the matter vigorously. The Company believes that the
amount of loss, if any, suffered in connection with this lawsuit would 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 for any such litigation.
(d) In December 1999, John Q. Hammons ("Hammons") filed a claim against the
Company in the United States District Court for the Southern District of
Iowa Central Division, alleging breach of contract in respect of the
parties' agreement, as well as a claim for alleged tortious interference
with contract in connection with Hammons' alleged attempts to assign
certain of its rights under the agreement to a third party. Hammons
claimed damages including lost profits and costs. The Company believes
that the allegations made by Hammons are without merit and has and will
accordingly defend the matter vigorously. The Company believes that the
amount of loss, if any, suffered in connection with this lawsuit would 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 for any such litigation.
(e) In June 2000, a complaint was filed against the Company and a third party
by Mandalay Resort Group f/k/a Circus Circus Enterprises, Inc., alleging
breach of contract and express warranty, fraud and misrepresentation in
connection with the installation of certain motion simulation bases in
Nevada. The complaint alleges damages in excess of $30,000. The Company
believes that the allegations brought against it in this complaint are
meritless and will accordingly defend the matter vigorously. The Company
further believes that the amount of loss, if any, suffered in connection
with this lawsuit would 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 for any such litigation.
(f) 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.
(g) On May 31, 2000, Cinema Plus, a client of the Company based in Australia,
voluntarily allowed for the appointment of an administrator to restructure
its financing and liquidity under the protection of Australian bankruptcy
laws, at which point claims of all creditors and lessors of Cinema Plus
were frozen. On August 1, 2000, the administrator held a meeting with
creditors and Cinema Plus was placed into liquidation. Cinema Plus held
nine system leases with the Company and, as of June 30, 2000, the Company's
balance sheet reflected a total of $10.8 million receivable under these
leases. Under the terms of the leases, the Company has the right to the
return of the systems plus all amounts due under the full term of the
contracts upon default. The Company is currently in negotiations with the
administrator and related parties for the settlement of amounts due. On
July 25, 2000 the Company announced that it had signed a conditional
agreement with MTM Entertainment Trust to lease and operate four IMAX
theaters previously operated by Cinema Plus in Sydney, Melbourne, Adelaide
and Brisbane. While the final exposure to the Company from the bankruptcy
of Cinema Plus cannot be determined with any degree of certainty at
present, the Company estimates the potential shortfall between the value of
the eventual settlement of amounts owed and the June 30, 2000 carrying
value of the receivable to be in the range of nil to $3.4 million.
Page 9
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IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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, 2000 and 1999
(unaudited)
5. Comprehensive Income
Comprehensive income amounted to $816,000 in the three months ended June
30, 2000 and $5,227,000 in the six months ended June 30, 2000.
6. 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 June 30, Six months ended June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- ------- -------
Net earnings available to common shareholders: $ 2,982 $ 2,196 $ 6,076 $ 4,209
======= ======= ======= =======
Weighted average number of common shares (000's):
Issued and outstanding at beginning of period 29,780 29,587 29,758 29,478
Weighted average shares issued in the period 7 8 22 103
------- ------- ------- -------
Weighted average used in computing basic 29,787 29,595 29,780 29,581
earnings per share
Assumed exercise of stock options, net of shares 863 798 987 854
assumed acquired under the Treasury Stock
Method
Assumed conversion of Convertible Subordinated -- -- -- --
Notes ------- ------- ------- -------
Weighted average used in computing diluted 30,650 30,393 30,767 30,435
earnings per share ======= ======= ======= =======
</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, 2000 as they would have had an antidilutive effect on earnings per
share.
Page 10
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IMAX CORPORATION
7. Segmented Information
The Company has four reportable segments : IMAX systems, Films, Other and,
commencing in 2000, Digital projection systems, following the acquisition
of Digital Projection International "DPI" on September 3, 1999.
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, 1999. Intersegment
transactions are not significant.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------- ---------- -------- -------
Revenue
IMAX systems $ 31,253 $ 18,889 $ 58,251 $41,309
Digital projection systems 11,297 -- 24,213 --
Films 10,336 10,444 20,795 19,066
Other 4,589 4,925 10,666 10,626
---------- ---------- -------- -------
Total consolidated revenues $ 57,475 $ 34,258 $113,925 $71,001
========== ========== ======== =======
Earnings (loss) from operations
IMAX systems $16,570 $10,330 $29,713 $21,063
Digital projection systems (144) -- 121 --
Films (1,767) (532) (2,149) (481)
Other (675) (293) (104) (119)
Corporate overhead (4,560) (3,388) (8,570) (6,871)
------- ------- ------- -------
Consolidated earnings from operations $ 9,424 $ 6,117 $18,471 $13,592
======= ======= ======= =======
</TABLE>
8. Impact of Recently Issued Accounting Pronoucements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivatives Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133",
which deferred the required date of adoption of SFAS No. 133 for one year,
to fiscal years beginning after June 15, 2000. This standard is applicable
for the Company's 2001 fiscal year and currently its impact, if any, has
not been determined.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin Number 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 is applicable to the Company's
fiscal 2000 year. The effects of applying SAB 101 to the Company have not
yet been determined.
In March 2000, the FASB issued Interpretation No.44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
APB Opinion No. 25. The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB 25. The
Interpretation provides a great deal of guidance, some of which is a
significant departure from current practice. The Interpretation generally
provides for prospective application for grants or modifications to
existing stock options or awards made after June 30, 2000 and is effective
July 1, 2000. Its impact, if any, has not been determined.
Page 11
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IMAX CORPORATION
8. Impact of Recently Issued Accounting Pronoucements - (cont'd)
In June 2000, the American Institute of Certified Public Accountants issued
Statement of Position 00-2 "Accounting by Producers or Distributors of
Films" ("SOP 00-2"), which is effective for the Company's 2001 fiscal year.
SOP 00-2 establishes new accounting standards for producers and
distributors of films, including changes to existing revenue recognition
criteria, a more restrictive definition of the components of revenue
projections used for amortization and valuation purposes for Investments in
Films and Television Programs, and accounting for promotional, advertising,
development and overhead costs. Among other changes, SOP 00-2 requires
that promotional and advertising costs for Films and Television Programs be
expensed as incurred. The Company is in the process of evaluating the
impact of SOP 00-2 on its consolidated financial statements.
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 2000, the Company signed contracts for 6 IMAX
theater systems valued at $18.0 million. All of the theater signings for the
second quarter of 2000 were for commercial locations and three were for
international locations. For the six months ended June 30, 2000, the Company
signed contracts for 15 theater systems valued at $45.1 million. As a result of
these theater signings, the Company's sales backlog was $194.8 million at June
30, 2000, a 2% decrease from $198.7 million at March 31, 2000 and a 1% increase
from $192.5 million at December 31, 1999.
The Company's sales backlog at June 30, 2000 represented contracts for 76
theater systems, including 4 systems which will be located at theaters in which
the Company will have an equity interest. 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. 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, 2000 versus three months ended June 30, 1999
The Company reported net earnings of $3.0 million or $0.10 per share on a
diluted basis for the second quarter of 2000 compared to $2.2 million or $0.07
per share on a diluted basis for the second quarter of 1999.
The Company's revenues for the second quarter of 2000 increased 68% to $57.5
million from $34.3 million in the corresponding quarter last year due mainly to
an increase in systems revenue and the inclusion of revenues from digital
projection systems of $11.3 million.
Systems revenue, which includes revenue from theater system sales and leases,
royalties and maintenance fees, increased approximately 65% to $31.3 million in
the second quarter of 2000 from $18.9 million in the same quarter last year. The
Company delivered seven theater systems in the second quarter of 2000 versus
four theater systems in the second quarter of 1999. Recurring revenues from
royalties and maintenance fees increased approximately 10% in the second quarter
over the corresponding period last year as a result of growth in the IMAX
theater network.
The Company's revenue from digital projection systems amounted to $11.3 million
in the second quarter of 2000, (nil in the corresponding quarter last year)
following the acquisition of 100% of DPI on September 3, 1999.
Page 12
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three months ended June 30, 2000 versus three months ended June 30, 1999 -
(cont'd)
Film revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Film revenue decreased 1% to
$10.3 million in the second quarter of 2000 from $10.4 million in the same
quarter last year as a modest increase in post-production revenue offset a
modest decline in film distribution revenue.
Other revenues decreased 7% to $4.6 million in the first quarter in 2000 from
$4.9 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,
as increased revenue from company-owned theaters and camera rentals were offset
by reduced revenues from its motion simulation business.
Gross margin for the second quarter of 2000 was $25.7 million, or 45% of total
revenue, compared to $15.7 million, or 46% of total revenue, in the
corresponding quarter last year. The small reduction in gross margin as a
percentage of total revenue is due to slightly lower systems margins versus the
corresponding quarter of last year, due to the mix of deliveries.
Selling, general and administrative expenses were $12.8 million in the second
quarter of 2000 compared to $8.3 million in the corresponding quarter last year.
The increase resulted mainly from the inclusion of selling, general and
administrative costs of DPI acquired in September 1999, and an increase in
general corporate costs.
Research and development expenses were $2.0 million in the second quarter of
2000 compared to $0.8 million in the same period last year. The higher level of
expenses in 2000 reflects the inclusion of research and development costs of DPI
and increased activity in digital technologies.
Interest income decreased to $0.9 million in the second quarter of 2000 from
$2.9 million in the same quarter last year primarily due to a decline in the
average balance of cash and cash equivalents held.
Interest expense decreased to $5.1 million in the second quarter of 2000 from
$5.2 million in the corresponding quarter last year due mainly to an increase in
interest capitalized to assets under construction.
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.
Six months ended June 30, 2000 versus six months ended June 30, 1999
The Company reported net earnings of $6.1 million or $0.20 per share on a
diluted basis for the first half of 2000 compared to $4.2 million or $0.14 per
share on a diluted basis for the first half of 1999.
The Company's revenues for the first half of 2000 increased 60% to $113.9
million from $71.0 million in the corresponding period last year primarily as a
result of increased systems revenue and the inclusion of revenue from digital
projection systems of $24.2 million.
Systems revenue increased approximately 41% to $58.3 million in the first half
of 2000 from $41.3 million in the same period last year as the Company
recognized revenues on fourteen third-party theater systems compared to ten
theater systems in the same period last year. Recurring revenues from both
royalties and maintenance fees increased 14% in the first half of 2000 over the
prior year period due to growth in the IMAX theater network.
The Company's revenue from digital projection systems amounted to $24.2 million
in the first half of 2000, (nil in the corresponding period last year).
Film revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Film revenue increased 9% to
$20.8 million in the first half of 2000 from $19.1 million in the same period
last year due principally to increases in film post-production revenues.
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (cont'd)
Six months ended June 30, 2000 versus six months ended June 30, 1999 (cont'd)
Other revenue increased slightly in the six months ended June 30, 2000 to $10.7
million as compared to $10.6 million in the same period last year. Increased
revenues from company-owned theaters and camera rentals offset reduced revenues
from its motion simulation business.
Gross margin for the first half of 2000 was $48.8 million or 43% of total
revenue, compared to $32.2 million or 45% 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 higher proportion of revenues other than IMAX systems
revenues (which generally have a lower margin than systems revenue) in the first
half of 2000 compared to the corresponding period in 1999.
Selling, general and administrative expenses were $24.3 million in the first
half of 2000 compared to $16.3 million in the first half of 1999. The increase
resulted mainly of the inclusion of selling, general and administrative costs of
DPI acquired in September 1999, and an increase in general corporate costs.
Research and development expenses were $3.6 million in the first half of 2000
compared to $1.3 million in the first half of 1999. The higher level of
expenses in 2000 reflects the inclusion of research and development costs of DPI
and increased activities in digital technologies.
Interest income decreased to $2.4 million in the first half of 2000 from $5.3
million in the same period last year primarily due to a decline in the average
balance of cash and cash equivalents held.
Interest expense decreased to $10.7 million in the first six months of 2000 from
$11.0 million in the first half of 1999 due mainly to an increase in interest
capitalized to assets under construction.
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 June 30, 2000, the Company's principal source of liquidity included cash and
cash equivalents of $30.3 million, marketable securities totaling $18.0 million,
trade accounts receivable of $55.4 million, net investment in leases due within
one year of $34.6 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 $5.3 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 Senior 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 Senior Notes may require the Company to repurchase all or part of
the Senior Notes at a price equal to 101% of the principal amount plus accrued
interest to the date of repurchase.
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IMAX CORPORATION
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 substantial 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 2000, cash used in operating activities amounted to $43.2
million after the payment of $30.0 million of income taxes and working capital
requirements. The income tax payment in the first half of 2000 was due mainly
to the impact of the reorganization of the Company's lines of business, most
notably the transfer of its lease portfolio to Imax Ltd., a 100% owned
subsidiary of the Company. Working capital requirements included an increase of
$12.7 million in accounts receivable due mainly to increases in upfronts billed
and increased sales volumes, particularly at DPI and an increase of $9.3 million
in inventory due mainly to an increase in digital projection inventory at DPI
due to increased sales volume and an increase in raw materials for IMAX systems.
In the first half of 2000, cash provided by investing activities amounted to
$39.0 million and included a decrease in marketable securities of $71.1 million,
partially offset by an $10.9 million increase in film assets, primarily related
to the company's films, Cyberworld and China:The Panda Experience and a $17.4
million increase in capital assets, principally office premises dedicated to
film post-production and distribution and investments in company-owned theaters.
During the first half of 2000, cash provided by financing activities included
$0.4 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
and marketable securities balances and the working capital facility will
continue to be sufficient to meet cash requirements in the foreseeable future.
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (cont'd)
Subsequent Event
On July 13, 2000 the Company announced that consistent with the priority and
commitment of its Board of Directors and senior management to realizing enhanced
value for all IMAX shareholders, the Company retained Goldman, Sachs & Co. and
Wasserstein, Perella & Co. as financial advisors to assist in the evaluation of
potential strategic alternatives that may be available to the Company, including
the potential sale or merger of the Company. The Company expects to make a
further announcement regarding this process later this year.
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 for the notional
amounts of $65 million to partially hedge this exposure.
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IMAX CORPORATION
Item 3 - Quantitative and Qualitative factors about Market Risk - (cont'd)
The following table provides information about the Company's foreign exchange
and interest rate swap contracts at June 30, 2000. The fair value represents
the amount the Company would receive or pay to terminate the contracts at June
30, 2000.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30,
2000 2001 2002 2003 2004 Thereafter Total Fair Value
------ ------- -------- ------ ------ ---------- ----- ----------
(in thousands of U.S. dollars)
Foreign currency exch. Contracts
(Receive Canadian $, pay US$) $16,000 $ 6,000 -- -- -- -- $22,000 ($31)
Average contractual exchange rate 1.47 1.48 -- -- -- -- 1.47
per one U.S. dollar
(Receive Pound Sterling (Pounds), $ 900 -- -- -- -- -- $ 900 $ 7
pay US$) 0.67 -- -- -- -- -- 0.67
Average contractual exchange rate
per one U.S. dollar
(Pay German Marks, receive U.S. $) $ 300 -- -- -- -- -- $ 300 ($4)
Average contractual exchange rate 2.02 -- -- -- -- -- 2.02
per one U.S. dollar
(Pay Yen, receive U.S. $) $ 311 $ 318 $ 174 $ 179 $ 137 -- $ 1,119 ($29)
Average contractual exchange 97.85 97.85 97.85 97.85 97.85 -- 97.85
rate per one U.S. dollar
(Pay FF, receive U.S. $) $ 410 $ 423 $ 435 $ 448 $ 462 $ 476 $ 2,654 $ 497
Average contractual exchange 5.07 5.07 5.07 5.07 5.07 5.07 5.07
rate per one U.S. dollar
Interest rate swap
Fixed to floating $65,000 $65,000 $65,0001 $65,000 ($2,158)
Average pay rate L*+ L*+ L*+
2.09% 2.09% 2.09%
Receive rate 7.875% 7.875% 7.875%
</TABLE>
* LIBOR
1 Agreement terminates on December 1, 2002
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IMAX CORPORATION
PART II OTHER INFORMATION
Item 1. Legal Proceedings
(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. 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 Quebec Court of Appeal. The Company
believes that it will be successful in responding to these appeals and the
amount of ultimate loss, if any, would 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) In January 2000, the Commission of the European Communities (the
"Commission") informed the Company that Euromax, an association of
European large screen cinema owners had filed a complaint against the
Company under EC competition rules. The complaint addressed a variety of
alleged abuses, mainly relating to the degree of the control that the
Company asserts over the projection systems it leases, and the form and
terms of the Company's agreements. No formal investigation has been
initiated to date, and the Commission has limited itself to a request of
Imax to comment on the complaint. Should proceedings be initiated, it is
expected that no decision would be rendered until 2001 at the earliest.
Although the Commission has the power to impose fines of up to a maximum of
10% of Company revenue for breach of EC competition rules, the Company
believes on the basis of currently available information and an initial
review that such result would not be likely. The Company further believes
that the allegations in the complaint are meritless and will accordingly
defend the matter vigorously.
The Company believes that the amount of loss, if any, suffered in
connection with this proceeding would 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 matter.
(c) In April 2000, Themax Inc., a 33% owned investee of the Company, and
certain of its shareholders (collectively "Themax") filed a claim against
the Company in the Superior Court in the District of Longueuil, in the
Province of Quebec, alleging breach of contract in respect of the IMAX(R)
System Lease agreement between Imax Ltd. and Themax dated February 5, 1996
as well as a claim for damages suffered as a result of Imax Ltd.'s alleged
failure to adequately manage the Brossard Theatre during its tenure as
manager. Themax claimed damages representing a return of the original
investment by Themax as well as lost profits and costs. The Company
believes that the allegations are entirely without merit and has and will
accordingly defend the matter vigorously. The Company believes that the
amount of loss, if any, suffered in connection with this lawsuit would 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 for any such litigation.
(d) In December 1999, John Q. Hammons ("Hammons") filed a claim against the
Company in the United States District Court for the Southern District of
Iowa Central Division, alleging breach of contract in respect of the
parties' agreement, as well as a claim for alleged tortious interference
with contract in connection with Hammons' alleged attempts to assign
certain of its rights under the agreement to a third party. Hammons
claimed damages including lost profits and costs. The Company believes
that the allegations made by Hammons are without merit and has and will
accordingly defend the matter vigorously. The Company believes that the
amount of loss, if any, suffered in connection with this lawsuit would 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 for any such litigation.
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IMAX CORPORATION
Item 1. Legal Proceedings - (cont'd)
(e) In June 2000, a complaint was filed against the Company and a third party
by Mandalay Resort Group f/k/a Circus Circus Enterprises, Inc., alleging
breach of contract and express warranty, fraud and misrepresentation in
connection with the installation of certain motion simulation bases in
Nevada. The complaint alleges damages in excess of $30,000. The Company
believes that the allegations brought against it in this complaint are
meritless and will accordingly defend the matter vigorously. The Company
further believes that the amount of loss, if any, suffered in connection
with this lawsuit would 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 for any such litigation.
(f) 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, 2000,
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 a term expiring in
2003, (22,790,802 shares voted for and 12,907 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 (22,804,369 shares voted for and 7,591 shares withheld); and (iii)
approved certain amendments to the Corporation's Stock Option Plan (16,104,859
shares voted for and 4,231,542 shares voted against);
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There were no exhibits filed in the three-month period ended June 30, 2000.
(b) Reports on Form 8K
There were no reports filed on Form 8K in the three-month period ended June
30, 2000.
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IMAX CORPORATION
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 14, 2000 By: / S / John M. Davison
----------------------- ----------------------
John M. Davison
President, Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
By: / S / Mark J. Thornley
----------------------------
Mark J. Thornley
Senior Vice President, Finance
(Principal Accounting Officer)
Page 20
