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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 March 31, 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
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NONE
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(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 April 30, 2000
- ---------------------- --------------------------------
Common stock, no par value 29,782,356
Page 1 of 16
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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 11
Item 3. Quantitative and Qualitative Factors about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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
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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 March 31, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Page 3
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IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
In accordance with U.S. Generally Accepted Accounting Principles
(in thousands of U.S. dollars)
(unaudited)
March 31, December 31,
2000 1999
--------- ------------
Assets
Current assets
Cash and cash equivalents $ 17,715 $ 34,573
Short-term marketable securities 38,132 49,159
Accounts receivable 50,324 42,619
Current portion of net investment in leases 37,068 33,918
Inventories and systems under construction (note 2) 35,108 31,141
Prepaid expenses 4,553 2,621
-------- --------
Total current assets 182,900 194,031
Long-term marketable securities 17,614 39,873
Net investment in leases 106,813 103,087
Film assets 39,395 38,453
Capital assets 74,378 66,897
Goodwill 61,951 62,751
Other assets 30,911 28,232
Deferred income taxes 2,938 4,913
-------- --------
Total assets $516,900 $538,237
======== ========
Liabilities
Current liabilities
Accounts payable $ 16,684 $ 18,361
Accrued liabilities 37,379 34,910
Current portion of deferred revenue 26,281 17,284
Income taxes payable 1,772 33,755
-------- --------
Total current liabilities 82,116 104,310
Deferred revenue 19,118 22,862
Senior notes 200,000 200,000
Convertible subordinated notes 100,000 100,000
-------- --------
Total liabilities 401,234 427,172
Commitments and contingencies (notes 3 and 4)
Shareholders' equity
Capital stock 57,662 57,471
Retained earnings 57,764 54,669
Accumulated other comprehensive items (note 6) 240 (1,075)
-------- --------
Total shareholders' equity 115,666 111,065
-------- --------
Total liabilities and shareholders' equity $516,900 $538,237
======== ========
(See accompanying notes to the condensed consolidated financial
statements on pages 7 to 10.)
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)
Three months ended March 31,
2000 1999
-------- --------
Revenue
IMAX systems $ 26,998 $22,420
Digital projection systems 12,916 --
Films 10,459 8,622
Other 6,077 5,701
-------- -------
56,450 36,743
Costs and expenses 33,274 20,213
-------- -------
Gross margin 23,176 16,530
Income (loss) from equity-accounted investees 2 (118)
Selling, general and administrative expenses (11,528) (7,989)
Research and development (1,592) (475)
Amortization of intangibles (1,009) (473)
-------- -------
Earnings from operations 9,049 7,475
Interest income 1,542 2,411
Interest expense (5,535) (5,833)
Foreign exchange loss (141) (83)
-------- -------
Earnings before income taxes and minority interest 4,915 3,970
Provision for income taxes (1,819) (1,547)
-------- -------
Earnings before minority interest 3,096 2,423
Minority interest -- (410)
-------- -------
Net earnings $ 3,096 $ 2,013
======== =======
Earnings per share (note 5)
Basic $ 0.10 $ 0.07
Diluted $ 0.10 $ 0.07
(See accompanying notes to the condensed consolidated financial
statements on pages 7 to 10.)
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)
Three months ended March 31,
2000 1999
-------- --------
Cash provided by (used in) :
Operating Activities
Net earnings $ 3,096 $ 2,013
Items not involving cash:
Depreciation and amortization 6,444 5,662
Deferred income taxes 1,703 600
(Gain) loss from equity accounted investees (2) 118
Minority interest -- 410
Other -- (19)
Change in net investment in leases (6,921) (1,306)
Change in deferred revenue on film production 139 1,942
Changes in non-cash operating assets and liabilities (39,464) (12,430)
-------- --------
Net cash used in operating activities (35,005) (3,010)
-------- --------
Investing Activities
Decrease in marketable securities 33,263 24,813
Increase in film assets (4,067) (4,112)
Purchase of capital assets (9,532) (5,347)
Increase in other assets (1,689) (1,600)
-------- --------
Net cash provided by investing activities 17,975 13,754
-------- --------
Financing Activities
Common shares issued 191 1,131
Class C preferred shares dividends paid -- (365)
-------- --------
Net cash provided by financing activities 191 766
-------- --------
Effect of exchange rate changes on cash (19) (50)
-------- --------
(Decrease) increase in cash and cash equivalents
during the period (16,858) 11,460
Cash and cash equivalents, beginning of period 34,573 143,566
-------- --------
Cash and cash equivalents, end of period $ 17,715 $155,026
======== ========
(See accompanying notes to the condensed consolidated financial
statements on pages 7 to 10.)
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 Three Month Periods Ended March 31, 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:
March 31, December 31,
2000 1999
-------- --------
Raw materials $17,904 $16,831
Work-in-process 13,154 11,974
Finished goods 4,050 2,336
------- -------
$35,108 $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 a portion of its Canadian dollar costs in 2000, the Company had
entered into forward exchange contracts as at March 31, 2000 to hedge the
conversion of $21.0 million of its cash flow into Canadian dollars at an
average exchange rate of Canadian $1.47 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.
These hedging contracts are expected to be held to maturity; however, if
they were terminated on March 31, 2000, the Company would have realized a
gain of approximately $0.6 million based on the then prevailing exchange
rates.
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 Three Month Periods Ended March 31, 2000 and 1999
(unaudited)
(3) Financial Instruments - (continued)
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 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 three-
month period for the net amount it is to receive from or pay to the
counterparty. The interest rate swap is expected to be held to maturity;
however, if it were terminated on March 31, 2000, the Company would have
realized a loss of approximately $2.2 million based on the then prevailing
interest rates.
4. Contingencies
(a) In April 1994, Compagnie France Film Inc. filed a claim against the Company
in the Superior Court in the District of Montreal, in the Province of
Quebec, alleging breach of contract and bad faith in respect of an
agreement which the plaintiff claims it entered into with the Company for
the establishment of an IMAX theater in Quebec City, Quebec, Canada. 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
ultimate loss, if any, will not have a material impact on the financial
position or results of operations of the Company, although no assurance can
be given with respect to the ultimate outcome of this litigation.
(b) 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 the 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 of this litigation.
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 Three Month Periods Ended March 31, 2000 and 1999
(unaudited)
(c) In April 2000, Themax Inc., a 33% owned subsidiary 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.
(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.
(e) 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.
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 March 31,
2000 1999
-------- --------
<S> <C> <C>
Net earnings available to common shareholders: $ 3,096 $ 2,013
======= =======
Weighted average number of common shares (000's):
Issued and outstanding at beginning of period 29,758 29,478
Weighted average shares issued in the period 16 89
------- -------
Weighted average used in computing basic earnings per share 29,774 29,567
Assumed exercise of stock options, net of shares assumed 1,110 910
acquired under the Treasury Stock Method ------- -------
Weighted average used in computing diluted earnings per share 30,884 30,477
======= =======
</TABLE>
Common shares potentially issuable pursuant to the Convertible Subordinated
Notes would have an antidilutive effect on earnings per share and have not
been included in the above computations.
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 Three Month Periods Ended March 31, 2000 and 1999
(unaudited)
6. Comprehensive income
Comprehensive income amounted to $4,411 in the three months ended March 31,
2000.
7. Segmented Information
The Company has four reportable segments: IMAX systems, Films, Other and,
commencing in 2000, Digital projection systems, following the acquisition
of DPI on September 3, 1999.
There has been no change 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.
Three months ended March 31,
2000 1999
-------- --------
Revenue
IMAX systems $26,998 $22,420
Digital projection systems 12,916 --
Films 10,459 8,622
Other 6,077 5,701
------- -------
Total consolidated revenues $56,450 $36,743
======= =======
Earnings (loss) from operations
IMAX systems $12,598 $10,733
Digital projection systems 265 --
Films (380) 51
Other 576 174
Corporate overhead (4,010) (3,483)
------- -------
Consolidated earnings from operations $ 9,049 $ 7,475
======= =======
Page 10
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IMAX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Theater Signings and Backlog
During the first quarter of 2000, the Company signed contracts for nine IMAX
theater systems valued at $27.1 million, compared to the $32.5 million value of
the 11 third-party contracts signed in the first quarter of 1999. The majority
of theater signings for the first quarter of 2000 were for commercial and
international locations. The Company's sales backlog was $198.7 million at March
31, 2000, a 3% increase from $192.5 million at December 31, 1999.
The Company's sales backlog at March 31, 2000 represents contracts for 79
theater systems, including seven theater 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 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 March 31, 2000 versus three months ended March 31, 1999
The Company reported net earnings of $3.1 million or $0.10 per share on a
diluted basis for the first quarter of 2000 compared to $2.0 million or $0.7 per
share on a diluted basis for the first quarter of 1999.
The Company recorded revenues for the first quarter of 2000 of $56.5 million
compared to $36.7 million recorded in the corresponding quarter last year, an
increase of 54%.
Systems revenue, which includes revenue from theater system sales and leases,
royalties and maintenance fees, increased approximately 20% to $27.0 million in
the first quarter of 2000 from $22.4 million in the same quarter last year. The
Company delivered seven theater systems in the first quarter of 2000 compared to
six theater systems in the first quarter of 1999. Recurring revenues from
royalties and maintenance fees increased 14% and 22% respectively in the first
quarter of 2000 over the corresponding period last year as a result of growth in
the IMAX theater network.
The Company's revenue from the sale of digital projection systems amounted to
$12.9 million in the first quarter of 2000, (nil in the corresponding quarter
last year) following the acquisition of 100% of Digital Projection International
"DPI" on September 3, 1999.
Film revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Film revenue increased 21% to
$10.5 million in the first quarter of 2000 from $8.6 million in the same quarter
last year primarily as a result of an increase in film post-production revenue
of 41%.
Other revenues increased 7% in the first quarter of 2000 to $6.1 million from
$5.7 million in the prior year quarter. Declines in Ridefilm revenues were more
than offset by increases in revenues from the Company's owned and operated
theaters, resulting from an increase in the number of theatres in operation in
the first quarter of 2000 over the first quarter of 1999 and the positive
impact of Fantasia 2000: The IMAX Experience on theatre box office revenues.
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 March 31, 2000 versus three months ended March 31, 1999
(cont'd)
Gross margin for the first quarter of 2000 was $23.2 million compared to $16.5
million in the corresponding quarter last year, an increase of 40%. Gross
margin was approximately 41% of total revenue in the first quarter of 2000
compared to approximately 45% of total revenue in the same quarter of 1999. The
decline in gross margin as a percentage of revenues was due mainly to the higher
proportion of revenues other than IMAX systems revenue (which have lower margins
than systems revenues).
Selling, general and administrative expenses were $11.5 million in the first
quarter of 2000 compared to $8.0 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 $1.6 million in the first quarter of 2000
compared to $0.5 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 from $2.4 million in the first quarter of 1999 to $1.5
million in the first quarter of 2000 due to a decline in the average balance of
cash and cash equivalents held.
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 March 31, 2000, the Company's principal source of liquidity included cash and
cash equivalents of $17.7 million, trade accounts receivable of $50.3 million,
net investment in leases due within one year of $37.1 million, marketable
securities of $55.8 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 $1.6 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.
Page 12
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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 quarter of 2000, cash used in operating activities amounted to
$35.0 million after the payment of $32.1 million of income taxes and working
capital requirements. The income tax payment in the first quarter 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 $7.7 million in accounts receivable due mainly to increases in
upfronts billed and increased sales volumes, particularly at DPI and an increase
of $3.8 million in inventory due mainly to an increase in digital projection
inventory at DPI and an increase in raw materials for IMAX systems.
Cash provided by investing activities in the first quarter of 2000 included a
decrease in marketable securities of $33.3 million, partially offset by an
increase in film assets of $4.1 million, primarily related to the Company's
film, Cyberworld and expenditures totaling $9.5 million on capital assets,
principally office premises dedicated to film post-production and distribution
and wholly-owned theaters.
During the first quarter of 2000, cash provided by financing activities included
$0.2 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.
Item 2. 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
occasionally 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.
Page 13
<PAGE>
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 amount of $65 million to partially hedge this exposure.
The following table provides information about the Company's foreign exchange
and interest rate swap contracts at March 31, 2000. The fair value represents
the amount the Company would receive or pay to terminate the contracts at March
31, 2000.
<TABLE>
March 31,
2000 2001 2002 2003 2004 Thereafter Total Fair Value
------ ------ ------ ------ ------ ------------ ------- -----------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign currency exchange
Contracts
(Receive Canadian $, pay U.S. $) $21,000 - - - - - $21,000 $ 240
Average contractual exchange
rate per one U.S. dollar 1.47 - - - - - 1.47
(Pay Yen, receive U.S. $) $ 311 $ 318 $ 174 $ 179 $ 137 - $ 1,119 ($74)
Average contractual exchange
rate per one U.S. dollar 97.85 97.85 97.85 97.85 97.85 - 97.85
(Pay FF, receive U.S. $) $ 410 $ 423 $ 435 $ 448 $ 462 $ 476 $ 2,654 $ 460
Average contractual exchange
rate per one U.S. dollar 5.07 5.07 5.07 5.07 5.07 5.07 5.07
Interest rate swap
Fixed to floating $65,000 $65,000 $65,0001 - - - $65,000 ($2,184)
Average pay rate L*+ 1.95% L*+ 2.09% L*+ 2.09%
Receive rate 7.875% 7.875% 7.875%
</TABLE>
* LIBOR
1 Agreement terminates on December 1, 2002
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.
Page 14
<PAGE>
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 the 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 of this litigation.
In April 2000, Themax Inc., a 33% owned subsidiary 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.
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.
In addition to the litigation described above, the Company is currently
involved in other litigation which, in the opinion of the Company's management,
will not materially affect the Company's financial position or future operating
results, although no assurance can be given with respect to the ultimate outcome
for any such litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*21 (Amended) subsidiaries of Imax Corporation as at December 31, 1999.
* Filed herewith
(b) Reports on Form 8-K
There were no reports filed on Form 8-K in the three-month period ended
March 31, 2000.
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: May 11, 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 16
<PAGE>
Exhibit 21
IMAX CORPORATION
Significant and other major subsidiary companies of the Registrant at December
31, 1999 were:
Name of Subsidiary Jurisdiction of Percentage held
- ------------------ -------------- ---------------
Organization by Registrant
------------ -------------
Imax Ltd. Ontario 100%
David Keighley Productions 70MM Inc. Delaware 100%
Sonics Associates, Inc. Alabama 100%
Ridefilm Corporation Delaware 100%
1236627 Ontario Inc. Ontario 100%
Imax Japan Inc. Japan 100%
Imax Entertainment Pte. Ltd. Singapore 100%
Imax (Netherlands) B.V. Netherlands 100%
Imax U.S.A. Inc. Delaware 100%
Nyack Theater L.L.C. Delaware 100%
Arizona Big Frame Theatres, L.L.C. Delaware 50%
Starboard Theaters Ltd. Canada 100%
Forum Ride Associates Nevada 50%
Miami Theatre, L.L.C. Delaware 100%
Digital Projection International Limited U.K. 100%
Digital Projection Inc. Georgia 100%
Themax Inc. (Brossard) Quebec 33%
Sacramento Theatre L.L.C. Delaware 100%
Panada Productions Inc. Delaware 100%
Wire Frame Films Ltd. Ontario 100%
