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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, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
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(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
N/A
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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, 2002
---------------------------- --------------------------------
Common stock, no par value 32,915,858
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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.........................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................19
Item 6. Listings of Exhibits and Reports on Form 8-K...................................................21
Signatures.......................................................................................................22
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 March 31, 2002
and December 31, 2001...........................................................................4
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2002 and 2001.....................................................5
Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 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)
MARCH 31,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- -----------
ASSETS
Cash and cash equivalents (note 4) $ 25,363 $ 26,388
Accounts receivable, less allowance for doubtful accounts of $16,528
(2001 - $18,060) 18,104 18,296
Net investment in leases 50,080 51,644
Inventories (note 2) 40,644 42,723
Prepaid expenses 2,151 1,845
Film assets 11,176 10,513
Fixed assets 50,839 52,652
Other assets 10,735 11,295
Intangible assets 3,948 4,107
Deferred income taxes 3,243 3,022
Goodwill (note 10) 39,027 39,027
---------------- ----------------
Total assets $ 255,310 $ 261,512
================ ================
LIABILITIES
Accounts payable $ 6,299 $ 6,735
Accrued liabilities 47,023 45,041
Deferred revenue 94,108 95,082
Income taxes payable 1,398 1,356
Senior notes due 2005 200,000 200,000
Convertible subordinated notes due 2003 (note 3) 10,143 29,643
Liabilities of discontinued operations (note 11) 2,089 2,103
---------------- ----------------
Total liabilities 361,060 379,960
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (note 4)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock - no par value. Authorized - unlimited number.
Issued and outstanding - 32,915,858 (2001 - 31,899,114) 66,450 64,356
Deficit (172,845) (183,392)
Accumulated other comprehensive income 645 588
---------------- ----------------
Total shareholders' equity (deficit) (105,750) (118,448)
---------------- ----------------
Total liabilities and shareholders' equity (deficit) $ 255,310 $ 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 ENDED MARCH 31,
--------------------------------
2002 2001
--------------- ---------------
REVENUE
IMAX systems (note 5(a)) $ 20,385 $ 16,278
Films 6,067 9,256
Other 4,823 3,145
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31,275 28,679
COSTS OF GOODS AND SERVICES 17,868 18,902
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GROSS MARGIN 13,407 9,777
Selling, general and administrative expenses (note 5(b)) 9,842 9,578
Research and development 204 1,195
Amortization of intangibles (note 10) 388 752
Loss from equity-accounted investees 56 93
Restructuring costs (note 6) - 10,942
--------------- ---------------
EARNINGS (LOSS) FROM OPERATIONS 2,917 (12,783)
Interest income 85 344
Interest expense (4,319) (5,303)
Foreign exchange loss (360) (1,915)
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LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,677) (19,657)
Recovery of income taxes 3,682 6,898
--------------- ---------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 2,005 (12,759)
Net loss from discontinued operations (note 11) - (1,012)
--------------- ---------------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS 2,005 (13,771)
Extraordinary gain on repurchase of convertible subordinated notes, net
of income tax expense of $3,682 (note 3) 8,542 -
--------------- ---------------
NET EARNINGS (LOSS) $ 10,547 $ (13,771)
=============== ===============
EARNINGS (LOSS) PER SHARE (note 7):
Earnings (loss) per share - basic and diluted:
Net earnings (loss) from continuing operations $ 0.06 $ (0.42)
Net loss from discontinued operations $ - $ (0.03)
-------------- --------------
Net earnings (loss) before extraordinary items $ 0.06 $ (0.45)
Extraordinary items $ 0.26 $ -
-------------- --------------
Net earnings (loss) $ 0.32 $ (0.45)
============== ==============
(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)
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2002 2001
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CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ 2,005 $ (12,759)
Items not involving cash:
Depreciation, amortization and write-downs 6,317 6,232
Loss from equity-accounted investees 56 93
Deferred income taxes (3,903) (6,652)
Stock and other non-cash compensation 1,618 1,267
Investment in film assets (1,405) (2,205)
Changes in other non-cash operating assets and liabilities 713 3,437
Net cash used in operating activities from discontinued operations - (2,855)
------------------ -----------------
Net cash provided by (used in) operating activities 5,401 (13,442)
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INVESTING ACTIVITIES
Net sale of investments in marketable debt securities - 3,607
Purchase of fixed assets (693) (774)
Increase in other assets (448) (346)
Increase in intangible assets (229) (179)
Net cash used in investing activities from discontinued operations - (174)
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Net cash provided by (used in) investing activities (1,370) 2,134
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FINANCING ACTIVITIES
Repurchase of convertible subordinated notes (5,172) -
Common shares issued 4 16
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Net cash provided by (used in) financing activities (5,168) 16
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Effects of exchange rate changes on cash from continuing operations 112 638
Effects of exchange rate changes on cash from discontinued operations - (1,098)
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Effects of exchange rate changes on cash 112 (460)
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DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (1,025) (7,625)
Decrease in cash and cash equivalents from discontinued operations - (4,127)
------------------ -----------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (1,025) (11,752)
Cash and cash equivalents, beginning of period 26,388 30,908
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,363 $ 19,156
================== =================
(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 U.S. 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 and 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.
2. INVENTORIES
MARCH 31, DECEMBER 31,
2002 2001
---------------- ----------------
Raw materials $ 6,410 $ 6,559
Work-in-process 12,589 11,537
Finished goods 21,645 24,627
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$ 40,644 $ 42,723
================ ================
3. 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,
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 by the Company
valued at $2.1 million. The Company recorded an extraordinary gain of
$8.5 million, net of income tax expense of $3.7 million. These
transactions had the effect of reducing the principal of the Company's
outstanding Subordinated Notes to $10.1 million. The tax expense
recorded on the extraordinary gain has been offset by a reduction in
the valuation allowance on the net capital loss carry-forwards.
Page 7
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)
(UNAUDITED)
4. 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 (the "Big Screen") demanding payment of outstanding
Additional Rent 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, addressing broadly similar allegations against the
Company. In mid-2001, the European Commission sent a preliminary
letter to Euromax proposing to reject the complaint based on EC
competition rules. The European Commission has not yet taken a final
decision. Although the Court has the power to reject or reduce the
Company's demands for payment, and the European Commission has the
power to impose fines and order cessation of any infringements of EC
competition rules, the Company believes that on the basis of currently
available information, including the Commission's rejection letter and
an initial review of the facts and law, that such results are not
likely. The Company believes that all of the allegations in the
complaint as well as these allegations in Big Screen's individual
defense are meritless and will accordingly continue to defend the
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. District of California,
alleging breach of contract and fraud resulting in damages to the
Company in excess of $6.0 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 the counterclaims are meritless and
will defend against them vigorously. The Company 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.
Page 8
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)
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (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 and theft of trade secrets,
and brought claims against Muvico and MegaSystems, Inc.
("MegaSystems"), a large-format theater system manufacturer, for
tortious interference, unfair competition and/or deceptive trade
practices, violations of the U.S. Lanham Act, 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 an adversary action in the bankruptcy court
against Edwards for violations of the Lanham Act for unfair
competition and false advertising, trademark dilutions under federal
and state law, common law trademark infringement and unfair
competition, unfair business practices under state law and
misappropriation of trade secrets. 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 May 2002, the Company moved for summary
judgement on substantially all of the claims in the action. Also in
May, 2002, Edwards filed a Motion for Partial Summary Judgement with
respect to IMAX's trade secret misappropriation, trademark
infringement and dilution, unfair competition, and false advertising
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 defend
the matter vigorously. The Company 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) As of March 31, 2002, the Company has letters of credit of $5.9 million
outstanding, which have been collateralized by cash deposits. The
Company expects these commitments to be reduced to approximately $3.3
million by the end of the second quarter of 2002.
(g) 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 litigation.
Page 9
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)
(UNAUDITED)
5. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL
INFORMATION
(a) Included in IMAX systems revenue for the three months ended March 31,
2002, is an amount of $2.7 million (2001 - $2.8 million) for
terminated lease arrangements.
(b) The following adjustments were included in selling, general and
administrative expenses for the three months ended March 31, 2002.
Management's estimate of the 2001 accrued bonuses to be paid during
2002, was reduced by $1.0 million (2001 - $nil), offset by a variable
stock-based compensation charge of $0.9 million (2001 - $0.6 million),
along with total litigation fees of $1.9 million (2001 - $0.3 million)
associated with actions in which the Company is a plaintiff.
6. RESTRUCTURING COSTS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
------------- --------------
Restructuring costs(1) $ - $ 10,942
============= ==============
(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 ending 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 March 31, 2002
the Company has outstanding accrued liabilities of $3.7 million
(As at December 31, 2001 - $5.1 million) for the costs of these
severed employees in 2001, that will be paid over the next three
years.
Page 10
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)
(UNAUDITED)
7. 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 ENDED MARCH 31,
---------------------------------------
2002 2001
------------------ ------------------
Net earnings (loss) applicable to common shareholders:
Net earnings (loss) before extraordinary items $ 2,005 $ (13,771)
Extraordinary gain on repurchase of convertible subordinated
notes, net of income tax expense of $3,682 8,542 -
------------------ -----------------
$ 10,547 $ (13,771)
================== ==================
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period 31,899 30,052
Weighted average number of shares issued during the period 14 62
------------------ ------------------
Weighted average number of shares used in computing basic
and fully diluted earnings (loss) per share 32,913 30,114
Assumed exercise of stock options, net shares assumed acquired
under the Treasury Stock Method 186 -
------------------ -----------------
Weighted average used in computing diluted earnings per share 33,099 30,114
================== ==================
The calculation of fully diluted earnings (loss) per share for the
quarters ended March 31, 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 March 31, 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 U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL
INFORMATION
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
---------- --------
Interest paid $141 $--
Income taxes paid $221 $43
9. 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 11).
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 ENDED MARCH 31,
----------------------------
2002 2001
----------- ---------
REVENUE
IMAX systems $20,385 $ 16,278
Films 6,067 9,256
Other 4,823 3,145
------- --------
TOTAL $31,275 $ 28,679
======= ========
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 9,314 $ 5,693
Films (381) (1,280)
Other (160) (740)
Corporate overhead (5,856) (16,456)
------- --------
TOTAL $ 2,917 $(12,783)
======= ========
Page 12
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)
(UNAUDITED)
10. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(a) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS" ("FAS 142")
In June 2001, FASB issued FAS 142, under which goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed
at least annually for impairment. With respect to goodwill
amortization, 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 $0.6 million in reported net earnings for
the three months ended March 31, 2002. The amortization of goodwill was
$0.6 million for the period ended March 31, 2001. Pursuant to FAS 142,
the Company will complete its test for goodwill impairment during the
second quarter of 2002 and, if impairment is indicated, record such
impairment as a cumulative effect of accounting change effective
January 1, 2002. The Company is currently evaluating the effect that
the impairment review may have on its consolidated results of operation
and financial position.
As of March 31, 2002, the Company carried the following values for
goodwill and intangibles on its balance sheet, net of accumulated
amortization:
INTANGIBLES
Patents, trademarks and other intangibles $ 3,948
===========
GOODWILL
IMAX $ 32,457
Sonics Associates, Inc. 6,570
-----------
$ 39,027
===========
(b) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 144, "ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("FAS 144")
FAS 144 supercedes 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.
(c) FASB 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")
In May 2002, 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 Opinion 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.
Page 13
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)
(UNAUDITED)
11. 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 the comparative period
presented.
The liabilities of discontinued operations, summarized in the Condensed
Consolidated Balance Sheets, comprise of the following:
AT MARCH 31, AT DECEMBER 31,
2002 2001
---------------- ------------------
LIABILITIES
Accrued liabilities $ 2,089 $ 2,103
------- -------
Total liabilities of discontinued operations $ 2,089 $ 2,103
======= =======
The net loss from discontinued operations, summarized in the Condensed
Consolidated Statements of Operations, comprise of the following:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2002 2001
-------------- --------------
Revenue $ - $ 6,399
===== ========
Net loss from discontinued operations(1) $ - $ (1,012)
===== ========
(1) Net of income tax recovery of $nil in 2002 (2001 - $333).
12. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures in the unaudited Condensed Consolidated
Financial Statements for the three months ended March 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 lease 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 theaters operating
in 30 countries worldwide as of March 31, 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS 142, 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. Application of the non-amortization provisions of FAS 142 for goodwill
resulted in an increase in operating income of approximately $0.6 million in the
first quarter of 2002. At March 31, 2002, the Company has goodwill of
approximately $39.0 million. Pursuant to FAS 142, the Company will test its
goodwill for impairment under the new methodology upon adoption and, if
impairment is indicated, record such impairment as a cumulative effect of
changes in accounting principles. The Company is currently evaluating the effect
of adopting this pronouncement.
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" for segments of a business to be disposed of.
The pronouncement is effective January 1, 2002, and has been adopted by the
Company. The current impact of adopting this pronouncement is considered
insignificant.
Page 15
IMAX CORPORATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 VERSUS THREE MONTHS ENDED MARCH 31, 2001
During the first quarter of 2002, the Company signed contracts for 3 IMAX
theaters valued at $8.2 million. The Company's sales backlog was $155.0 million
at March 31, 2002 which represented contracts for 58 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 $2.0 million or
$0.06 per share on a diluted basis for the first quarter of 2002 compared to net
losses of $13.8 million or $0.42 per share on a diluted basis for the first
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 $1.0 million or $0.03 per share on a
diluted basis for the first quarter of 2001.
The Company recorded an extraordinary gain of $8.5 million, net of income tax
expense of $3.7 from the purchase of $19.5 million of the Company's Subordinated
Notes by a wholly owned subsidiary.
REVENUE
The Company's revenues for the first quarter of 2002 increased 9.1% to $31.3
million from $28.7 million in the same quarter last year primarily as a result
of more installations in the current year.
Systems revenue, which includes revenue from theater system sales and leases,
rent and maintenance fees, increased approximately 25.2% to $20.4 million in the
first quarter of 2002 from $16.3 million in the same quarter last year. The
Company installed six theater systems in the first quarter of 2002, one of which
was an operating lease, versus three theater systems in the first quarter of
2001.
Films revenue comprises revenue recognized from film production, film
distribution and film post-production activities. Films revenue decreased 34.5%
to $6.1 million in the first quarter of 2002 from $9.3 million in the same
quarter last year primarily due to film post-production activities which
experienced a decline in the number of films in release in 2002 versus 2001.
Other revenues increased 53.4% to $4.8 million in the first 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 Beauty and the Beast.
The Company expects the increased revenue trends to continue for the remainder
of 2002 due to a combination of higher system installations, greater commercial
appeal of the films in release, and higher attendance throughout the IMAX
theater network including its owned and operated theaters.
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 MARCH 31, 2002 VERSUS THREE MONTHS ENDED MARCH 31, 2001
(cont'd)
GROSS MARGIN
Gross margin for the first quarter of 2002 was $13.4 million, or 42.9% of total
revenue, compared to $9.8 million, or 34.1% of total revenue, in the
corresponding quarter last year. The increase in gross margin as a percentage of
total revenue is due primarily to greater systems revenue which normally has a
higher margin than other revenues.
The Company expects the increased gross margin trends to continue for the
remainder of 2002 due to a combination of higher system installations, greater
commercial appeal of the films the Company produces and distributes, and higher
attendance throughout the IMAX theater network including its owned and operated
theaters.
OTHER
Selling, general and administrative expenses were $9.8 million in the first
quarter of 2002 compared to $9.6 million in the corresponding quarter last year.
The following adjustments were included in selling, general and administrative
expenses for the three months ended March 31, 2002. Management's estimate of the
2001 accrued bonuses to be paid during 2002, was reduced by $1.0 million (2001 -
$nil), offset by a variable stock-based compensation charge of $0.9 million
(2001 - $0.6 million), along with total litigation fees of $1.9 million (2001 -
$0.3 million) associated with actions, in which the Company is a plaintiff. In
future quarters the Company expects selling, general and administrative expenses
to decline due to the cost savings implemented in 2001.
Research and development expenses were $0.2 million in the first quarter of 2002
compared to $1.2 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 $0.4 million in the first 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 $11.0 million to
rationalize its operations, reduce staffing levels and write-down certain assets
to be disposed of.
Interest expense decreased to $4.3 million in the first quarter of 2002 from
$5.3 million in the same quarter last year related to the repurchase of $89.9
million of the Company's Subordinated Notes.
Interest income decreased to $0.1 million in the first quarter of 2002 from $0.3
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.
Page 17
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company's principal source of liquidity included cash and
cash equivalents of $25.4 million, trade accounts receivable of $21.1 million
and net investment in leases due within one year of $4.8 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. This
line was secured by the Company's accounts receivable, inventory, certain real
estate and other assets of the Company. As of March 31, 2002, the Company has
letters of credit of $6.1 million outstanding, which have been collateralized by
cash deposits. The Company expects these commitments to be reduced to
approximately $3.3 million by the end of the second quarter of 2002. The Company
is currently in 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.
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 by the subsidiary
and common shares by 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 by the subsidiary and common shares by the Company
valued at $2.1 million. The Company recorded a gain of $8.5 million, net of
income tax expense of $3.7 million. These transactions had the effect of
reducing the principal of the Company's outstanding Subordinated Notes to $10.1
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 quarter of 2002, cash provided by operating activities amounted to
$5.4 million. Changes in operating assets and liabilities amounted to an
increase of $0.3 million.
Cash used in investing activities amounted to $1.4 million in the first quarter
of 2002, which included an increase of $0.7 million in fixed assets and an
increase in other assets of $0.4 million.
During the first quarter of 2002, cash used in financing activities amounted to
$5.2 million, mainly related to the repurchase by the Company and the subsidiary
of the Company of a portion of the Company's Subordinated Notes.
Page 18
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 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
including accessing the capital markets, or securing an operating line facility
with a financial institution. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A substantial portion of the Company's revenues are denominated in U.S. dollars
while a substantial portion of its costs and expenses are denominated in
Canadian dollars. A portion of the net U.S. dollar flows of the Company are
converted to Canadian dollars to fund Canadian dollar expenses, either through
the spot market or through forward contracts. In Japan, the Company has ongoing
operating expenses related to its operations. Net Japanese Yen flows are
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.
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 (the "Big Screen") demanding payment of outstanding Additional
Rent 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. The 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, addressing broadly similar
allegations against the Company. In mid-2001, the European Commission sent
a preliminary letter to Euromax proposing to reject the complaint based on
EC competition rules. The European Commission has not yet taken a final
decision. Although the Court has the power to reject or reduce the
Company's demands for payment, and the European Commission has the power to
impose fines and order cessation of any infringements of EC competition
rules, the Company believes that on the basis of currently available
information, including the Commission's rejection letter and an initial
review of the facts and law, that such results are not likely. The Company
believes that all of the allegations in the complaint as well as the
allegations in Big Screen's individual defense are meritless and will
accordingly continue to defend these matters 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.
Page 19
IMAX CORPORATION
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(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
the counterclaims are meritless and will defend against them vigorously.
The Company 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
practises 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 an adversary action in the
bankruptcy court against Edwards for violations of the Lanham Act for
unfair competition and false advertising, trademark dilutions under federal
and state law, common law trademark infringement and unfair competition,
unfair business practices under state law and misappropriation of trade
secrets. 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 May 2002, the
Company moved for summary judgement on substantially all of the claims in
the action. Also in May, 2002, Edwards filed a Motion for Partial Summary
Judgement with respect to IMAX's trade secret misappropriation, trademark
infringement and dilution, unfair competition, and false advertising
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 defend the matter
vigorously. The Company 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) As of March 31, 2002, the Company has letters of credit of $5.9 million
outstanding, which have been collateralized by cash deposits. The Company
expects these commitments to be reduced to approximately $3.3 million by
the end of the second quarter of 2002.
Page 20
IMAX CORPORATION
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(g) 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 litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
There were no exhibits filed in the three-month period ended March
31, 2002.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on February 26, 2002, pursuant
to Item 5 - Other Events. The Company reported that it had reached
agreement with Regal Cinemas, Inc. ("Regal"), under which the
Company's master theater lease agreement with Regal would be assumed
by Regal in connection with its bankruptcy, and the Company would
receive a lump sum payment from Regal, subject to court approval, in
satisfaction of all amounts owing to the Company under the master
lease.
Page 21
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: May 15, 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 22