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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002
-------------
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
--------------
N/A
- --------------------------------------------------------------------------------
(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, 2002
- ------------------------------------------ -------------------------------
Common stock, no par value 32,953,358
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Page 1
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 15
Item 3. Quantitative and Qualitative Factors about Market Risk......... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 22
Item 6. Listings of Exhibits and Reports on Form 8-K................... 24
Signatures.............................................................. 25
SPECIAL NOTE REGARDING 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 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 IMAX Corporation
together with its wholly owned subsidiaries (the "Company"). These
forward-looking statements are based on certain assumptions and analyses made by
the Company in light of its experience and its perception of historical trends,
current conditions and expected future developments as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
and developments will conform with the expectations and predictions of the
Company is subject to a number of risks and uncertainties, including, but not
limited to, general economic, market or business conditions; the opportunities
(or lack thereof) that may be presented to and pursued by the Company;
competitive actions by other companies; conditions in the out-of-home
entertainment industry; changes in laws or regulations; risks associated with
investments and operations in foreign jurisdictions and any future international
expansion, including those related to economic, political and regulatory
policies of local governments and laws and policies of the United States and
Canada; the potential impact of increased competition in the markets the Company
operates within; 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 actual results or developments
anticipated by the Company may not be realized, and even if substantially
realized, may not have the expected consequences to, or effects on, the Company.
The Company undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future
events or otherwise.
Page 2
IMAX CORPORATION
PAGE
----
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, 2002
and December 31, 2001.................................................. 4
Condensed Consolidated Statements of Operations for the three and six
month periods ended June 30, 2002 and 2001............................. 5
Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 2002 and 2001................. 6
Notes to Condensed Consolidated Financial Statements................... 7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
ASSETS
Cash and cash equivalents (note 6(g)) $ 23,203 $ 26,388
Accounts receivable, less allowance for doubtful accounts
of $15,058 (2001 -- $18,060) 20,793 18,296
Net investment in leases 49,815 51,644
Inventories (note 3) 38,897 42,723
Prepaid expenses 3,585 1,845
Film assets (note 4) 796 10,513
Fixed assets 49,423 52,652
Other assets 9,919 11,295
Deferred income taxes 3,607 3,022
Goodwill (note 2) 39,027 39,027
Other intangible assets 3,765 4,107
--------- ---------
Total assets $ 242,830 $ 261,512
========= =========
LIABILITIES
Accounts payable $ 6,377 $ 6,735
Accrued liabilities 44,705 45,041
Deferred revenue 80,942 95,082
Income taxes payable 1,184 1,356
Senior notes due 2005 200,000 200,000
Convertible subordinated notes due 2003 (note 5) 10,143 29,643
Liabilities of discontinued operations (note 14) 2,077 2,103
--------- ---------
Total liabilities 345,428 379,960
--------- ---------
COMMITMENTS AND CONTINGENCIES (note 6)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock -- no par value. Authorized -- unlimited number.
Issued and outstanding -- 32,953,358 (2001 - 31,899,114) 66,567 64,356
Deficit (169,810) (183,392)
Accumulated other comprehensive income 645 588
--------- ---------
Total shareholders' equity (deficit) (102,598) (118,448)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 242,830 $ 261,512
========= =========
(the accompanying notes are an integral part of
these condensed consolidated financial statements)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars, except per share amounts)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
------- -------- ------- --------
REVENUE
IMAX systems (note 7) $20,712 $ 22,048 $41,097 $ 38,326
Films 13,197 7,608 19,264 16,864
Other 4,942 3,129 9,765 6,274
------- -------- ------- --------
38,851 32,785 70,126 61,464
COSTS OF GOODS AND SERVICES 20,162 21,090 38,030 39,992
------- -------- ------- --------
GROSS MARGIN 18,689 11,695 32,096 21,472
Selling, general and administrative expenses 11,000 14,473 20,842 24,051
Research and development 597 1,395 801 2,590
Amortization of intangibles (note 2) 340 758 728 1,510
Loss from equity-accounted investees 23 84 79 177
Restructuring costs (note 8) -- 1,918 -- 12,860
------- -------- ------- --------
EARNINGS (LOSS) FROM OPERATIONS 6,729 (6,933) 9,646 (19,716)
Interest income 104 221 189 565
Interest expense (4,430) (5,539) (8,749) (10,842)
Foreign exchange gain (loss) 868 453 508 (1,462)
------- -------- ------- --------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES 3,271 (11,798) 1,594 (31,455)
Recovery of income taxes -- 2,903 3,682 9,801
------- -------- ------- --------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 3,271 (8,895) 5,276 (21,654)
Net loss from discontinued operations (note 14) -- (2,529) -- (3,541)
------- -------- ------- --------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM 3,271 (11,424) 5,276 (25,195)
Extraordinary gain (loss) on repurchase of convertible
subordinated notes, net of income tax expense (recovery)
of ($133) and $3,549 (note 5) (236) -- 8,306 --
------- -------- ------- --------
NET EARNINGS (LOSS) $ 3,035 $(11,424) $13,582 $(25,195)
======= ======== ======= ========
EARNINGS (LOSS) PER SHARE (note 9):
Earnings (loss) per share -- basic and diluted:
Net earnings (loss) from continuing operations $ 0.10 $ (0.29) $ 0.16 $ (0.70)
Net loss from discontinued operations $ -- $ (0.08) $ -- $ (0.12)
------- -------- ------- --------
Net earnings (loss) before extraordinary item $ 0.10 $ (0.37) $ 0.16 $ (0.82)
Extraordinary item $ (0.01) $ -- $ 0.25 $ --
------- -------- ------- --------
Net earnings (loss) $ 0.09 $ (0.37) $ 0.41 $ (0.82)
======= ======== ======= ========
(the accompanying notes are an integral part of
these condensed consolidated financial statements)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
2002 2001
------- --------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ 5,276 $(21,654)
Items not involving cash:
Depreciation, amortization and write-downs 10,179 15,424
Loss from equity-accounted investees 137 177
Deferred income taxes (4,267) (7,654)
Stock and other non-cash compensation 2,714 5,144
Investment in film assets (2,154) (4,379)
Changes in other non-cash operating assets and liabilities (8,010) (225)
Net cash used in operating activities from discontinued operations -- (939)
------- --------
Net cash provided by (used in) operating activities 3,875 (14,106)
------- --------
INVESTING ACTIVITIES
Net sale of investments in marketable debt securities -- 6,814
Additional consideration on acquisition of Sonics Associates, Inc. -- (1,041)
Purchase of fixed assets (672) (833)
Decrease (increase) in other assets (494) 1,978
Increase in other intangible assets (385) (342)
Net cash used in investing activities from discontinued operations -- (202)
------- --------
Net cash provided by (used in) investing activities (1,551) 6,374
------- --------
FINANCING ACTIVITIES
Repurchase of convertible subordinated notes (5,172) --
Common shares issued 121 16
------- --------
Net cash provided by (used in) financing activities (5,051) 16
------- --------
Effects of exchange rate changes on cash from continuing operations (458) 2,673
Effects of exchange rate changes on cash from discontinued operations -- (2,986)
------- --------
Effects of exchange rate changes on cash (458) (313)
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (3,185) (3,902)
Decrease in cash and cash equivalents from discontinued operations -- (4,127)
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (3,185) (8,029)
Cash and cash equivalents, beginning of period 26,388 30,908
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $23,203 $ 22,879
======= ========
(the accompanying notes are an integral part of
these condensed consolidated financial statements)
Page 6
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts
of IMAX Corporation together with its wholly owned subsidiaries (the
"Company"). 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, except as discussed in the accompanying notes.
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, 2001
which should be consulted for a summary of the significant accounting
policies utilized by the Company. These interim financial statements are
prepared following accounting policies consistent with the Company's
financial statements for the year ended December 31, 2001, except as
described in note 2.
2. ACCOUNTING CHANGE
In June 2001, the FASB issued Statement of Financial Accounting Standard
No. 142, "Goodwill and Other Intangible Assets ("FAS 142"), under which
goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed at least annually for impairment. The Company
adopted FAS 142 effective January 1, 2002. The effect of the
non-amortization provisions of FAS 142 for goodwill amounted to an increase
of $1.3 million in reported net earnings for the six months ended June 30,
2002. Pursuant to FAS 142, the Company completed its test for goodwill
impairment effective January 1, 2002 during the second quarter of 2002. FAS
142 requires that goodwill be tested at least annually for impairment using
a two-step process. The first step is to identify a potential impairment.
As a part of the first step, the Company has identified their reporting
units to be the same as their operating segments. The carrying value of
assets, liabilities, goodwill, and other intangible assets have been
appropriately assigned to each of these reporting units. To test for
impairment in accordance with FAS 142, the fair value of each reporting
unit was determined and compared to the carrying value of each unit. The
Company completed the process for each reporting unit and determined that
the fair value exceeded the carrying value and thus, did not proceed to
complete the second step under FAS 142.
In accordance with FAS 142, the effect of this change in accounting
principle is reflected prospectively. Supplemental comparative disclosure
as if the change had been applied retroactively, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
------- -------- ------- --------
Reported net income (loss) $ 3,035 $(11,424) $13,582 $(25,195)
Add back: Goodwill amortization -- 648 -- 1,296
------- -------- ------- --------
Adjusted net income (loss) $ 3,035 $(10,776) $13,582 $(23,899)
======= ======== ======= ========
Basic earnings (loss) per share:
Reported net income (loss) per share $ 0.09 $ (0.37) $ 0.41 $ (0.82)
Goodwill amortization $ -- $ 0.02 $ -- $ 0.04
------- -------- ------- --------
Adjusted net income (loss) per share $ 0.09 $ (0.35) $ 0.41 $ (0.78)
======= ======== ======= ========
Diluted earnings (loss) per share:
Reported net income (loss) per share $ 0.09 $ (0.37) $ 0.41 $ (0.82)
Goodwill amortization $ -- $ 0.02 $ -- $ 0.04
------- -------- ------- --------
Adjusted net income (loss) per share $ 0.09 $ (0.35) $ 0.41 $ (0.78)
======= ======== ======= ========
Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
3. INVENTORIES
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Raw materials $ 6,935 $ 6,559
Work-in-process 12,063 11,537
Finished goods 19,899 24,627
------- -------
$38,897 $42,723
======= =======
4. FILM ASSETS
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Completed and released films, net of
accumulated amortization $531 $ 1,682
Films in production -- 8,597
Development costs 265 234
---- -------
$796 $10,513
==== =======
Following the completion of the production and release of SPACE STATION in
April, 2002, the Company offset its related film asset against the
associated deferred revenue.
5. CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company issued $100.0 million of Convertible
Subordinated Notes (the "Subordinated Notes") due April 1, 2003 bearing
interest at 5.75% payable in arrears on April 1 and October 1. The
Subordinated Notes, subordinate to present and future senior indebtedness
of the Company, 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 (2002 - 100.821%) plus accrued interest. The Subordinated
Notes may be redeemed at any time on or after April 1, 2001 without
limitation.
During September to December 2001, the Company and a wholly owned
subsidiary of the Company purchased an aggregate of $70.4 million of the
Company's Subordinated Notes for $13.7 million, consisting of $12.5 million
in cash, and common shares of the Company valued at $1.2 million. The
Company recorded an extraordinary gain of $38.7 million in 2001, net of
income tax expense of $16.8 million.
On January 7, 2002 and January 9, 2002, the Company and a wholly owned
subsidiary of the Company purchased an additional $19.5 million in the
aggregate of the Company's Subordinated Notes for $7.3 million, consisting
of $5.2 million in cash, and common shares of the Company valued at $2.1
million. The Company recorded an extraordinary gain of $8.3 million, net of
income tax expense of $3.5 million. The Company incurred additional
expenses in the amount of $0.2 million in the second quarter of 2002, net
of an income tax recovery of $0.1 million related the repurchase of the
Subordinated Notes.
On August 2, 2002, the Company and a wholly owned subsidiary of the Company
purchased an additional $1.0 million in the aggregate of the Company's
Subordinated Notes for $0.85 million in cash by the subsidiary. The Company
will record an additional extraordinary pre-tax gain of $0.15 million as a
result of this transaction in the third quarter of 2002. This transaction
had the effect of reducing the principal amount of the Company's
outstanding Subordinated Notes to $9.1 million.
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
(a) In November 2001, the Company filed a complaint with the High Court of
Munich (the "Court") against Big Screen, a German large-screen cinema owner
in Berlin ("Big Screen"), demanding payment of rental payments and certain
other amounts owed to the Company. Big Screen has raised a defense based on
alleged infringement of German antitrust rules, relating mainly to an
allegation of excessive pricing. Big Screen is also a member of Euromax, an
association of European large-screen cinema owners that filed a complaint
in 2000 with the European Commission based on European Community ("EC")
competition rules, which was dismissed in its entirety by the EC in July
2002. Big Screen had brought a number of motions for restraining orders in
this matter relating to the Company's provision of films and maintenance,
all of which have been rejected by the courts, including the Berlin Court
of Appeals, and for which all appeals have been exhausted. The Company
believes that all of the allegations in Big Screen's individual defense are
meritless and will accordingly continue to prosecute this matter
vigorously. The Company believes that the amount of the loss, if any,
suffered in connection with this dispute 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 any such
litigation.
(b) 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 case is being heard in the U.S. District Court for the District
of Nevada. The complainant is seeking damages in excess of $4.0 million.
The Company has brought a third party action against Tri-Tech
International, Inc. ("Tri-Tech") claiming that any liability of the Company
would be due to Tri-Tech's non-performance. The Company believes that the
allegations made against it in the 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 of any such litigation.
(c) In December 2000, the Company filed a complaint against George Krikorian
Premiere Theaters LLC and certain other related parties (collectively
"Krikorian") in the U.S. Central District of California, alleging breach of
contract, negligent misrepresentation and fraud resulting in damages to the
Company in excess of $7.0 million. In February 2001, Krikorian filed
counterclaims against the Company alleging, among other things, fraudulent
inducement and negligent misrepresentation, which counterclaims were
subsequently dismissed and then amended. Further counterclaims were filed
in May 2001. The Company believes that the allegations made against it in
these counterclaims are meritless and will defend against them vigorously.
The Company further believes that the amount of loss, if any, suffered in
connection with any such claims 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 any such
litigation.
(d) In March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking
rescission in respect of the system lease agreements between the Company
and Muvico. The Company filed counterclaims against Muvico for breach of
contract, unjust enrichment unfair competition and/or deceptive trade
practices and theft of trade secrets, and brought claims against
MegaSystems, Inc. ("MegaSystems"), a large-format theater system
manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from using
the Company's confidential and proprietary information. The case is being
heard in the U.S. District Court, Southern District of Florida, Miami
Division. The Company believes that the allegations made by Muvico in its
complaint are entirely without merit and will accordingly defend the claims
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 operation of the Company, although
no assurance can be given with respect to the ultimate outcome of any such
litigation.
Page 9
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
(e) In August 2000, Edwards Theaters Circuit, Inc. and related companies
("Edwards") filed for protection under Chapter 11 of the United States
bankruptcy code in the U.S. Bankruptcy Court for the Central District of
California, Santa Ana Division. Pursuant to a stipulation reached among
Edwards and the Company and approved by the court, Edwards' leases of
Company theater system equipment were deemed rejected as of August 1, 2001.
On August 2, 2001, the Company filed a proof of claim in the amount of
$28.9 million for amounts due and owing to the Company at the time of the
commencement of the bankruptcy and for damages arising from Edwards'
rejection of the leases pursuant to section 365 of the Bankruptcy Code. In
addition, on August 1, 2001, the Company brought further claims against
Edwards relating to trademark dilution and related claims (the "Trademark
and Related Claims"). Edwards has objected to the Company's claim and moved
to disallow it and, on September 4, 2001, Edwards answered the Company's
complaint and asserted counterclaims against the Company, alleging
non-compliance with the California Franchise Investment Law and negligent
misrepresentation. By stipulation of the Company and Edwards, the motion to
disallow the Company's claim, and the adversary action filed by the Company
including Edwards' counterclaims have been consolidated. In December 2001,
the Company filed multiple writs of attachment for return of its equipment
from Edwards, which actions were removed to the Bankruptcy Court. In March
2002, Edwards amended its counterclaim to add additional counts, including
fraudulent concealment and intentional misrepresentation. In June 2002, the
Bankruptcy Court dismissed the Trademark and Related Claims. The Company
believes that the allegations made by Edwards in its objection to the
Company's claim and Edwards' counterclaims are entirely without merit and
the Company has and will accordingly continue to prosecute the matter
vigorously. The Company further believes that the amount of loss, if any,
suffered in connection with such counterclaims 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
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 of any such proceedings.
(g) As of June 30, 2002, the Company has letters of credit of $3.5 million
outstanding, which have been collateralized by cash deposits.
7. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
Included in IMAX systems revenue for the three and six months ended June
30, 2002, are amounts of $2.6 million and $5.3 million, respectively (2001
-- $2.7 million and $5.5 million) for terminated lease agreements.
Page 10
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. RESTRUCTURING COSTS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
2002 2001 2002 2001
---- ------ ---- -------
Restructuring costs(1) $ -- $1,918 $ -- $12,860
===== ====== ===== =======
----------
(1) During 2001, in its efforts to stabilize and rationalize the business,
the Company reduced its expenses and changed its corporate structure
to reflect industry-wide economic and financial difficulties faced by
certain of the Company's customers. During the year ended December 31,
2001, the Company relocated its Sonics sound-system facility in
Birmingham, Alabama to the Company's current facilities near Toronto,
Canada, and reduced its overall corporate workforce by 208 employees.
As at June 30, 2002 the Company has outstanding accrued liabilities of
$3.0 million (as at December 31, 2001 - $5.1 million) for the costs of
these severed employees that will be paid over the next two years.
9. EARNINGS (LOSS) PER SHARE
Reconciliations of the numerators and denominators of the basic and fully
diluted per-share computations, comprise of the following:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
------- -------- ------- --------
Net earnings (loss) applicable to common shareholders:
Net earnings (loss) before extraordinary items $ 3,271 $(11,424) $ 5,276 $(25,195)
Extraordinary gain (loss) on repurchase of convertible
subordinated notes, net of income tax expense
(recovery) of ($133) and $3,549 (236) -- 8,306 --
------- -------- ------- --------
$ 3,035 $(11,424) $13,582 $(25,195)
======= ======== ======= ========
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period 32,916 30,127 31,899 30,052
Weighted average number of shares issued during the period 9 1,000 1,020 568
------- -------- ------- --------
Weighted average number of shares used in computing basic
and fully diluted earnings (loss) per share 32,925 31,127 32,919 30,620
Assumed exercise of stock options, net shares assumed
acquired under the Treasury Stock Method 803 -- 495 --
------- -------- ------- --------
Weighted average used in computing diluted earnings per
share 33,728 31,127 33,414 30,620
======= ======== ======= ========
The calculation of fully diluted earnings (loss) per share for the quarters
ended June 30, 2002 and 2001, excludes common shares issuable upon
conversion of the Subordinated Notes, as the impact of these conversions
would be anti-dilutive. The calculation of fully diluted earnings (loss)
per share for the quarter ended June 30, 2001, also excludes net shares
assumed acquired under the Treasury Stock Method, as the impact of these
conversions would be anti-dilutive.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
10. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
2002 2001 2002 2001
------ ------- ------ -------
Interest paid $8,167 $10,750 $8,308 $10,750
Income taxes paid $ 295 $ 524 $ 516 $ 567
11. SEGMENTED INFORMATION
The Company has three reportable segments: IMAX systems, films and other.
The Company's digital projection systems operating segment was disposed of
effective December 11, 2001 and has been reflected as discontinued
operations (see note 14).
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, 2001. Intersegment transactions are not significant.
THREE MONTHS SIX MONTHS ENDED
ENDED ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2002 2001 2002 2001
------- -------- -------- --------
REVENUE
IMAX systems $20,712 $ 22,048 $ 41,097 $ 38,326
Films 13,197 7,608 19,264 16,864
Other 4,942 3,129 9,765 6,274
------- -------- -------- --------
TOTAL $38,851 $ 32,785 $ 70,126 $ 61,464
======= ======== ======== ========
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $11,912 $ 7,433 $ 21,226 $ 13,126
Films 2,192 (2,557) 1,811 (3,837)
Other 269 (1,584) 109 (2,324)
Corporate overhead (7,644) (10,225) (13,500) (26,681)
------- -------- -------- --------
TOTAL $ 6,729 $ (6,933) $ 9,646 $(19,716)
======= ======== ======== ========
Page 12
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. SUBSEQUENT EVENTS
(a) On July 2, 2002, the Standstill Agreement between Richard L. Gelfond,
Bradley J. Wechsler and the Company dated July 9, 2001 was extended through
July 8, 2003.
(b) In July 2002, the European Commission issued a letter dismissing all counts
of the complaint brought in 2000 against the Company by Euromax, an
association of large-screen cinema owners, alleging violation of European
competition rules.
(c) On August 2, 2002, the Company and a wholly owned subsidiary of the Company
purchased an additional $1.0 million in the aggregate of the Company's
Subordinated Notes for $0.85 million in cash by the subsidiary. The Company
will record an additional extraordinary pre-tax gain of $0.15 million as a
result of this transaction in the third quarter of 2002. This transaction
had the effect of reducing the principal amount of the Company's
outstanding Subordinated Notes to $9.1 million.
13. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(a) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 144, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("FAS 144")
FAS 144 supersedes FAS 121 and the accounting and reporting provisions of
APB 30 for segments of a business to be disposed of. The pronouncement was
effective January 1, 2002, and has been adopted by the Company.
(b) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 145, "RESCISSION OF FAS
NOS. 4, 44 AND 64, AMENDMENT OF FAS 13, AND TECHNICAL CORRECTIONS AS OF
APRIL 2002" ("FAS 145")
In May 2002, the FASB issued FAS 145, under which gains and losses from
extinguishment of debt should be classified as extraordinary items only if
they meet the criteria in APB 30. Under FAS 145 the Company will be
required to reclass any gain or loss on extinguishment of debt that was
classified as an extraordinary item to normal operations for all fiscal
years beginning after May 15, 2002, including all prior period
presentations. The Company expects to implement FAS 145 by no later than
the first quarter of 2003, at which time the comparatives will be restated
to classify the extraordinary gain on repurchase of convertible
subordinated notes to be included within earnings (loss) from continuing
operations before income taxes.
Page 13
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
14. DISCONTINUED OPERATIONS
Effective December 11, 2001, the Company completed the sale of its wholly
owned subsidiary, Digital Projection International, including its
subsidiaries (collectively "DPI"), to a company owned by members of DPI
management. In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"), the Company has segregated
the discontinued operations for all comparative periods presented.
The liabilities of discontinued operations, summarized in the Condensed
Consolidated Balance Sheets, comprise of the following:
AT JUNE 30, AT DECEMBER 31,
2002 2001
----------- ---------------
LIABILITIES
Accrued liabilities $2,077 $2,103
------ ------
Total liabilities of discontinued operations $2,077 $2,103
====== ======
The net loss from discontinued operations, summarized in the Condensed
Consolidated Statements of Operations, comprise of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2002 2001 2002 2001
------ ------- ------ -------
Revenue $ -- $ 5,833 $ -- $12,232
====== ======= ====== =======
Net loss from discontinued operations(1) $ -- $(2,529) $ -- $(3,541)
====== ======= ====== =======
----------
(1) Net of income tax recovery of $nil in the three and six months ended
June 30, 2002 (2001 - $986 and $1,319, respectively).
15. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures in the unaudited Condensed Consolidated
Financial Statements for the three and six months ended June 30, 2001, and
December 31, 2001 have been reclassified to conform with the presentation
adopted in 2002.
Page 14
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IMAX's principal business is the design, manufacture, sales and leasing of
projector systems for giant screen theaters for customers including commercial
theaters, museums and science centers, and destination entertainment sites. In
addition, IMAX designs and manufactures high-end sound systems and produces and
distributes large format film. There are more than 225 IMAX(R) theaters
operating in 30 countries worldwide as of June 30, 2002. IMAX Corporation is a
publicly traded company listed on both the TSX and NASDAQ.
ACCOUNTING POLICIES AND ESTIMATES
The Company reports its results under both United States Generally Accepted
Accounting Principles ("U.S. GAAP") and Canadian Generally Accepted Accounting
Principles. The financial statements and results referred to herein are reported
under U.S. GAAP.
The preparation of these financial statements requires management to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
its estimates, including those related to accounts receivable, net investment in
leases, inventories, fixed and film assets, investments, intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, future expectations and other assumptions that are
believed to be reasonable at the date of the financial statements. Actual
results may differ from these estimates due to uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
The Company's significant accounting policies are discussed in the Company's
most recent annual report on form 10-K for the year ended December 31, 2001.
ACCOUNTING CHANGE
In June 2001, the FASB issued Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets ("FAS 142"), under which goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
at least annually for impairment. The Company adopted FAS 142 effective January
1, 2002. The effect of the non-amortization provisions of FAS 142 for goodwill
amounted to an increase of $1.3 million in reported net earnings for the six
months ended June 30, 2002. Pursuant to FAS 142, the Company completed its test
for goodwill impairment effective January 1, 2002 during the second quarter of
2002. FAS 142 requires that goodwill be tested at least annually for impairment
using a two-step process. The first step is to identify a potential impairment.
As a part of the first step, the Company has identified their reporting units to
be the same as their operating segments. The carrying value of assets,
liabilities, goodwill, and other intangible assets have been appropriately
assigned to each of these reporting units. To test for impairment in accordance
with FAS 142, the fair value of each reporting unit was determined and compared
to the carrying value of each unit. The Company completed the process for each
reporting unit and determined that the fair value exceeded the carrying value
and thus, did not proceed to complete the second step under FAS 142.
Page 15
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" which
supercedes FASB Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30") for segments of a business to be
disposed of. The pronouncement was effective January 1, 2002, and has been
adopted by the Company.
In May 2002, the FASB issued Statement of Financial Accounting Standard No. 145,
"Recission of FAS Nos. 4,44 and 64, Amendment of FAS 13, and Technical
Corrections as of April 2002" ("FAS 145"), under which gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB 30. Under FAS 145 the Company will be required to
reclassify any gain or loss on extinguishment of debt that was classified as an
extraordinary item to normal operations for all fiscal years beginning after May
15, 2002, including all prior period presentations. The Company expects to
implement FAS 145 by no later than the first quarter of 2003, at which time the
comparatives will be restated to classify the extraordinary gain on repurchase
of convertible subordinated notes to be included within earnings (loss) from
continuing operations before income taxes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 VERSUS THREE MONTHS ENDED JUNE 30, 2001
During the second quarter of 2002, the Company signed contracts for 2 IMAX
theaters valued at $4.6 million. The Company's sales backlog was $145.5 million
at June 30, 2002 which represented contracts for 55 theater systems. The
Company's sales backlog will vary from quarter to quarter depending on the
signing of new systems which adds to backlog and the installation of systems
which reduces backlog. Sales backlog typically represents the minimum revenues
under signed system sale and lease agreements that will be recognized as revenue
as the associated theater systems are installed. Operating leases where revenues
are recognized over the term of the lease are assigned no value in the sales
backlog. The minimum revenue comprises the upfront fees plus the present value
of the minimum rent 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.
The Company reported net earnings from continuing operations of $3.3 million or
$0.10 per share on a diluted basis for the second quarter of 2002 compared to
net losses of $8.9 million or $0.29 per share on a diluted basis for the second
quarter of 2001.
The Company discontinued its digital projection systems operating segment in the
fourth quarter of 2001. DPI was sold to DPI management. The Company reported net
losses from discontinued operations of $2.5 million or $0.08 per share on a
diluted basis for the second quarter of 2001.
The Company recorded an extraordinary loss of $0.2 million, net of income tax
recovery of $0.1 million. The loss resulted from the Company incurring
additional expenses related to the repurchase of the Company's Subordinated
Notes by a wholly owned subsidiary.
Page 16
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED JUNE 30, 2002 VERSUS THREE MONTHS ENDED JUNE 30, 2001
(cont'd)
REVENUE
The Company's revenues for the second quarter of 2002 increased 18.5% to $38.9
million from $32.8 million in the same quarter last year primarily as a result
of the release of the Company's film, SPACE STATION.
IMAX systems revenue, which includes revenue from theater system sales and
leases, rent and maintenance fees, decreased approximately 6.1% to $20.7 million
in the second quarter of 2002 from $22.0 million in the same quarter last year.
Although the Company installed 4 theater systems in the second quarter of 2002,
versus 3 theater systems in the second quarter of 2001, in addition, for 2001
the Company also recognized revenue on 2 systems that were converted from
joint-ventures to sales-type leases.
Films revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Films revenue increased 73.5%
to $13.2 million in the second quarter of 2002 from $7.6 million in the same
quarter last year primarily due to the release of SPACE STATION.
Other revenues increased 57.9% to $4.9 million in the second quarter of 2002
from $3.1 million in the same quarter last year, mainly due to stronger
performance from owned and operated theater operations primarily attributed to
the release of SPACE STATION.
GROSS MARGIN
Gross margin for the second quarter of 2002 was $18.7 million, or 48.1% of total
revenue, compared to $11.7 million, or 35.7% of total revenue, in the
corresponding quarter last year. The increase in gross margin during the quarter
was due to the stronger performance of Films, along with margin improvements in
the Company's owned and operated theaters due to the release of SPACE STATION.
Page 17
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED JUNE 30, 2002 VERSUS THREE MONTHS ENDED JUNE 30, 2001
(cont'd)
OTHER
Selling, general and administrative expenses were $11.0 million in the second
quarter of 2002 compared to $14.5 million in the corresponding quarter last
year. A portion of the decrease from the prior year is as a result of a lower
provision for bad debts in 2002 of $0.1 million compared to $2.2 million in the
same quarter last year. In addition, the second quarter of 2001 included a $2.6
million charge in connection with a stock grant as compared to $nil in 2002.
Partially offsetting the above were higher legal fees in the current quarter
associated with actions where the Company is a plaintiff of $1.7 million
compared to $0.2 million in the same quarter last year.
Research and development expenses were $0.6 million in the second quarter of
2002 compared to $1.4 million in the same quarter last year. The lower level of
expenses in 2002 primarily reflects the timing of general research and
development activities.
Amortization of intangibles were $0.3 million in the second quarter of 2002
compared to $0.8 million in the same quarter last year. The lower level of
amortization is primarily due to the Company's adoption of the new accounting
principle which does not require the amortization of goodwill as of January 1,
2002.
During 2001, in light of market trends, industry-wide economic and financial
conditions, the Company recorded a restructuring charge of $1.9 million to
rationalize its operations, reduce staffing levels and write-down certain assets
to be disposed of.
Interest expense decreased to $4.4 million in the second quarter of 2002 from
$5.5 million in the same quarter last year related to the repurchase of the
Company's Subordinated Notes.
Interest income decreased to $0.1 million in the second quarter of 2002 from
$0.2 million in the same quarter last year primarily due to a decline in the
average balance of cash and cash equivalents held.
The effective tax rate on earnings and losses before taxes differs from the
statutory tax rate and will vary from quarter to quarter primarily as a result
of changes in the valuation allowance and the provision of income taxes at
different tax rates in foreign and other provincial jurisdictions. The Company
has not recorded an accounting tax provision in the quarter as any taxable
income has been sheltered with loss carry forwards that are currently available.
The valuation allowance has been adjusted in the quarter to reflect this
utilization of loss carry forwards.
Page 18
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2002 VERSUS SIX MONTHS ENDED JUNE 30, 2001
The Company reported net earnings from continuing operations of $5.3 million or
$0.16 per share on a diluted basis for the first half of 2002 compared to net
losses of $21.7 million or $0.70 per share on a diluted basis for the first half
of 2001.
The Company discontinued its digital projection systems operating segment in the
fourth quarter of 2001. DPI was sold to DPI management. The Company reported net
losses from discontinued operations of $3.5 million or $0.12 per share on a
diluted basis for the first half of 2001.
The Company recorded an extraordinary gain of $8.3 million, net of income tax
expense of $3.5 million from the repurchase of $19.5 million of the Company's
Subordinated Notes by a wholly owned subsidiary.
REVENUE
The Company's revenues for the first half of 2002 increased 14.1% to $70.1
million from $61.5 million in the same half last year.
IMAX systems revenue, which includes revenue from theater system sales and
leases, rent and maintenance fees, increased approximately 7.2% to $41.1 million
in the first half of 2002 from $38.3 million in the same half last year. The
Company installed 10 theater systems in the first half of 2002, one of which was
an operating lease, versus 6 theater systems in the first half of 2001. In
addition, for 2001 the Company recognized revenue on 2 systems that were
converted from joint-ventures to sales-type leases.
Films revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Films revenue increased 14.2%
to $19.3 million in the first half of 2002 from $16.9 million in the same half
last year primarily due to the stronger performance of films in release,
especially SPACE STATION.
Other revenues increased 55.6% to $9.8 million in the first half of 2002 from
$6.3 million in the same half last year, mainly due to stronger performance from
owned and operated theater operations primarily attributed to the release of
SPACE STATION and Beauty and the Beast.
GROSS MARGIN
Gross margin for the first half of 2002 was $32.1 million, or 45.8% of total
revenue, compared to $21.5 million, or 34.9% of total revenue, in the same
period last year. The improvement in margin is due primarily to stronger
performance from films in release during the current year including SPACE
STATION, along with margin improvements in the Company's owned and operated
theaters due to the release of SPACE STATION and Beauty and the Beast.
Page 19
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2002 VERSUS SIX MONTHS ENDED JUNE 30, 2001 (cont'd)
OTHER
Selling, general and administrative expenses were $20.8 million in the first
half of 2002 compared to $24.1 million in the corresponding half last year. A
portion of the decrease from the prior year is as a result of a lower provision
for bad debts in 2002 of $1.2 million compared to $2.4 million in the same
period last year. In addition, the first half of 2001 included a $2.6 million
charge in connection with a stock as compared to $nil in 2002. Partially
offsetting the above were higher legal fees in the first half of 2002 associated
with actions where the Company is a plaintiff of $3.7 million compared to $0.5
million in the same period last year.
Research and development expenses were $0.8 million in the first half of 2002
compared to $2.6 million in the same half last year. The lower level of expenses
in 2002 primarily reflects the timing of general research and development
activities.
Amortization of intangibles were $0.7 million in the first half of 2002 compared
to $1.5 million in the same half last year. The lower level of amortization is
primarily due to the Company's adoption of the new accounting principle which
does not require the amortization of goodwill as of January 1, 2002.
During 2001, in light of market trends, industry-wide economic and financial
conditions, the Company recorded a restructuring charge of $12.9 million to
rationalize its operations, reduce staffing levels and write-down certain assets
to be disposed of.
Interest expense decreased to $8.7 million in the first half of 2002 from $10.8
million in the same half last year related to the repurchase of the Company's
Subordinated Notes.
Interest income decreased to $0.2 million in the first half of 2002 from $0.6
million in the same half last year primarily due to a decline in the average
balance of cash and cash equivalents held.
The effective tax rate on earnings and losses before taxes differs from the
statutory tax rate and will vary from quarter to quarter primarily as a result
of changes in the valuation allowance and the provision of income taxes at
different tax rates in foreign and other provincial jurisdictions. The tax
expense recorded on the extraordinary gain and accounting income has been offset
by a reduction in the valuation allowance on available net capital loss
carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's principal source of liquidity included cash and
cash equivalents of $23.2 million, trade accounts receivable of $20.8 million
and net investment in leases due within one year of $4.7 million.
On September 26, 2001, the Company's demand facility with Toronto Dominion Bank
Financial Group matured. At the time of maturity, the Company had no cash
advances outstanding under the facility, which had been used in the past to
facilitate U.S. and Canadian letters of credit and cross currency swaps which
were entered into by the Company in connection with the sale of systems. This
line was secured by the Company's accounts receivable, inventory, certain real
estate and other assets of the Company. As of June 30, 2002, the Company has
letters of credit of $3.5 million outstanding, which have been collateralized by
cash deposits. The Company expects these commitments to be reduced to
approximately $2.8 million by the end of 2002. The Company is currently in
various stages of discussion with other financial institutions to replace this
facility with a similar facility utilizing its net investment in leases,
accounts receivable and inventory as collateral. There is no guarantee that the
Company will be successful in these efforts.
Page 20
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 7.875% Senior Notes (the "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.
The 5.75% 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 (2002 - 100.821%) plus accrued interest. The
Subordinated Notes may be redeemed at any time on or after April 1, 2001 without
limitation. During 2001, the Company and a wholly owned subsidiary of the
Company purchased an aggregate of $70.4 million of the Company's Subordinated
Notes for $13.7 million consisting of $12.5 million in cash and common shares of
the Company valued at $1.2 million. The Company cancelled the purchased
Subordinated Notes and recorded an extraordinary gain of $38.7 million, net of
income tax expense of $16.8 million. In January 2002, the Company and the
subsidiary of the Company purchased an additional $19.5 million in the aggregate
of the Company's Subordinated Notes for $7.3 million consisting of $5.2 million
in cash and common shares of the Company valued at $2.1 million. The Company
recorded a gain of $8.3 million, net of income tax expense of $3.5 million.
Subsequent to June 30, 2002, the Company and the subsidiary of the Company
purchased an additional $1.0 million in the aggregate of the Company's
Subordinated Notes for $0.85 million in cash by the subsidiary. These
transactions had the effect of reducing the principal of the Company's
outstanding Subordinated Notes to $9.1 million.
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.
In the first half of 2002, cash provided by operating activities amounted to
$3.9 million. Changes in other non-cash operating assets and liabilities
amounted to a decrease of $8.0 million. The deferred income taxes operating
activity change includes the reduction of the valuation allowance associated
with the repurchase of the Subordinated Notes.
Cash used in investing activities amounted to $1.6 million in the first half of
2002, which included an increase of $0.7 million in fixed assets and an increase
in other assets of $0.5 million.
During the first half of 2002, cash used in financing activities amounted to
$5.1 million, mainly related to the repurchase by the Company and a subsidiary
of the Company of a portion of the Company's Subordinated Notes.
The Company believes that cash flow from operations together with existing cash
will be sufficient to meet cash requirements for the foreseeable future. In
addition, the Company believes it has access to other sources of liquidity and
is currently in various stages of discussion with other financial institutions
in securing an operating line facility. The Company's accounts receivable,
inventory, certain fixed assets and net investment in leases are currently
unsecured and available as collateral. However, there can be no assurance that
the Company will be successful in securing additional financing.
Page 21
IMAX CORPORATION
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 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 through the spot market. The
Company plans to convert Canadian dollar expenses to U.S. dollars through the
spot market on a go-forward basis. In Japan, the Company has ongoing operating
expenses related to its operations. Net Japanese Yen flows are converted to U.S.
dollars through the spot market. The Company also has cash receipts under leases
denominated in Japanese Yen and French francs. The Company plans to convert
Japanese Yen and French franc lease cash flows to U.S. dollars through the spot
market on a go-forward basis.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(A) In November 2001, the Company filed a complaint with the High Court of
Munich (the "Court") against Big Screen, a German large-screen cinema owner
in Berlin ("Big Screen"), demanding payment of rental payments and certain
other amounts owed to the Company. Big Screen has raised a defense based on
alleged infringement of German antitrust rules, relating mainly to an
allegation of excessive pricing. Big Screen is also a member of Euromax, an
association of European large-screen cinema owners that filed a complaint
in 2000 with the European Commission based on European Community ("EC")
competition rules, which was dismissed in its entirety by the EC in July
2002. Big Screen had brought a number of motions for restraining orders in
this matter relating to the Company's provision of films and maintenance,
all of which have been rejected by the courts, including the Berlin Court
of Appeals, and for which all appeals have been exhausted. The Company
believes that all of the allegations in Big Screen's individual defense are
meritless and will accordingly continue to prosecute this matter
vigorously. The Company believes that the amount of the loss, if any,
suffered in connection with this dispute 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 any such
litigation.
(B) 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 case is being heard in the U.S. District Court for the District
of Nevada. The complainant is seeking damages in excess of $4.0 million.
The Company has brought a third party action against Tri-Tech
International, Inc. ("Tri-Tech") claiming that any liability of the Company
would be due to Tri-Tech's non-performance. The Company believes that the
allegations made against it in the 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 of any such litigation.
(C) In December 2000, the Company filed a complaint against George Krikorian
Premiere Theaters LLC and certain other related parties (collectively
"Krikorian") in the U.S. Central District of California, alleging breach of
contract, negligent misrepresentation and fraud resulting in damages to the
Company in excess of $7.0 million. In February 2001, Krikorian filed
counterclaims against the Company alleging, among other things, fraudulent
inducement and negligent misrepresentation, which counterclaims were
subsequently dismissed and then amended. Further counterclaims were filed
in May 2001. The Company believes that the allegations made against it in
these counterclaims are meritless and will defend against them vigorously.
The Company further believes that the amount of loss, if any, suffered in
connection with any such claims 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 any such
litigation.
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IMAX CORPORATION
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(D) In March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking
rescission in respect of the system lease agreements between the Company
and Muvico. The Company filed counterclaims against Muvico for breach of
contract, unjust enrichment unfair competition and/or deceptive trade
practices and theft of trade secrets, and brought claims against
MegaSystems, Inc. ("MegaSystems"), a large-format theater system
manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from using
the Company's confidential and proprietary information. The case is being
heard in the U.S. District Court, Southern District of Florida, Miami
Division. The Company believes that the allegations made by Muvico in its
complaint are entirely without merit and will accordingly defend the claims
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 operation of the Company, although
no assurance can be given with respect to the ultimate outcome of any such
litigation.
(E) In August 2000, Edwards Theaters Circuit, Inc. and related companies
("Edwards") filed for protection under Chapter 11 of the United States
bankruptcy code in the U.S. Bankruptcy Court for the Central District of
California, Santa Ana Division. Pursuant to a stipulation reached among
Edwards and the Company and approved by the court, Edwards' leases of
Company theater system equipment were deemed rejected as of August 1, 2001.
On August 2, 2001, the Company filed a proof of claim in the amount of
$28.9 million for amounts due and owing to the Company at the time of the
commencement of the bankruptcy and for damages arising from Edwards'
rejection of the leases pursuant to section 365 of the Bankruptcy Code. In
addition, on August 1, 2001, the Company brought further claims against
Edwards relating to trademark dilution and related claims (the "Trademark
and Related Claims"). Edwards has objected to the Company's claim and moved
to disallow it and, on September 4, 2001, Edwards answered the Company's
complaint and asserted counterclaims against the Company, alleging
non-compliance with the California Franchise Investment Law and negligent
misrepresentation. By stipulation of the Company and Edwards, the motion to
disallow the Company's claim, and the adversary action filed by the Company
including Edwards' counterclaims have been consolidated. In December 2001,
the Company filed multiple writs of attachment for return of its equipment
from Edwards, which actions were removed to the Bankruptcy Court. In March
2002, Edwards amended its counterclaim to add additional counts, including
fraudulent concealment and intentional misrepresentation. In June 2002, the
Bankruptcy Court dismissed the Trademark and Related Claims. The Company
believes that the allegations made by Edwards in its objection to the
Company's claim and Edwards' counterclaims are entirely without merit and
the Company has and will accordingly continue to prosecute the matter
vigorously. The Company further believes that the amount of loss, if any,
suffered in connection with such counterclaims 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
any such litigation.
(F) The Company has received requests for information from the United States
Securities and Exchange Commission in connection with an informal inquiry
by the Commission into certain trading in the equity securities of the
Company in January 2002. The Company is co-operating fully with the
Commission's requests and does not believe that it is the target of the
Commission's inquiry or that such inquiry will have a material adverse
effect on the Company's business, financial condition or results of
operation.
(G) In addition to the matters described above, the Company is currently
involved in other legal proceedings 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 of any such proceedings.
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IMAX CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.13 Amended Employment Agreement, dated April 23, 2002 between IMAX
Corporation and Richard L. Gelfond.
10.14 Amended Employment Agreement, dated April 23, 2002 between IMAX
Corporation and Bradley J. Wechsler.
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K in the three month period
ended June 30, 2002.
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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, 2002 By: /s/ Francis T. Joyce
--------------- ------------------------------------
Francis T. Joyce
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Kathryn A. Gamble
------------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
Page 25