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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the month of October 2002
Commission File Number 0-31943
ImagicTV Inc.
(Translation of Registrant name into English)
| One Brunswick Square 14th Floor, P.O. Box 303 Saint John, New Brunswick, Canada |
E2L 3Y2 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(506) 631-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F /x/ Form 40-F / /
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes / / No /x/
Information furnished on this form:
Second quarter report (for the quarter ended August 31, 2002)
2
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ImagicTV Inc. (Registrant) |
|||
By: |
/s/ JEFFREY WHITE Chief Financial Officer |
||
Date: October 29, 2002
3
All amounts expressed are in U.S. dollars.
To Our Valued Shareholders:
We are encouraged by the amount of customer activity we are currently experiencing. We recently signed two new trial customers in Europe and another customer, SaskTel, has launched its service commercially. We congratulate them on the commercial launch of their Max-branded interactive digital television service using our DTV Manager software platform. SaskTel's launch demonstrates both the strength of ImagicTV's products and the demand for broadband interactive media services. Our increased customer activity, along with other developments in the industry, demonstrates positive momentum for the market.
Revenues for the second quarter were $254,000 compared to $803,000 in the second quarter of last year. Approximately 23% of our total revenue this quarter is attributable to SaskTel. Our net loss for the second quarter was approximately $4.0 million, or $0.16 per basic share, compared to a net loss of $5.1 million, or $0.21 per basic share, in the second quarter of last year.
Our second quarter operating expenses were $3.9 million compared to $5.7 million, a decrease of $1.8 million from the comparable period in fiscal 2002 and consistent with our operating expenses for the first quarter of fiscal 2003. At the end of the quarter ended August 31, 2002, we had $39.9 million in cash and short-term investments, compared to $43.2 million at the end of the first quarter of fiscal 2003. We are continuing to manage prudently our cash resources as we focus our efforts on winning new customers, containing our costs and maximizing shareholder value. Given our current cash operating expense rate of approximately $4.0 million per quarter, which excludes the impact of any revenues, we have approximately nine quarters of cash reserves.
We are concentrating our resources on supporting selected partners with whom we feel we can drive market development and commercial deployments evolving our sales model toward a consortium approach, as customers look to purchase end-to-end solutions. Our two new trial customers in Europe were engaged with Alcatel, one of these select strategic partners. We expect revenues for these two new trials will commence during our third fiscal quarter. Our partner channels are continuing to generate customer activity and we believe we are close to engaging additional customers. In total, we have seven customers, two of which are commercially deployed.
More positive industry developments occurred when Telus, Canada's second largest telephone company, announced on September 17, 2000 that it would begin offering digital television service to compete with cable television providers. Additionally, according to the DSL Forum in an August 27, 2002 release, broadband DSL is now in use by 25.6 million households and small businesses around the world and DSL deployments grew by 36 percent in the 6 months prior to the report.
We are pleased with our recent customer activity and the recent developments in the industry. SaskTel's commercial launch, our two new customer trials and our increased level of customer discussions are positive developments for our Company. Our partner strategy is yielding excellent results, especially our relationship with Alcatel. The growth in DSL deployments during the last six months and the recent announcement by Telus are positive indicators for the growth in the global broadband market.
We thank you for continued support of ImagicTV.
Gerald
L. Pond
Chief Executive Officer
October 2002
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read together with our annual audited consolidated financial statements and the accompanying notes included in our annual report for the year ended February 28, 2002 and the unaudited consolidated financial statements as of August 31, 2002 and for three and six months ended August 31, 2002 and August 31, 2001 and accompanying notes appearing elsewhere in this report. All financial information is presented in U.S. dollars unless otherwise noted.
Some of the statements set forth in this report are forward-looking statements relating to our future results of operations. Our actual results may vary materially from the results anticipated by these statements. Please see "Information Regarding Forward-Looking Statements."
Overview
We are a provider of infrastructure software products and services that enable telephone companies and other service providers to deliver multi-channel digital television and interactive media services to their subscribers' televisions and personal computers over broadband networks. We were incorporated in December 1997 and began operations in January 1998. We delivered our initial DTV Manager software product to our first customer in December 1998.
Current Developments
Nasdaq
We were informed on March 6, 2002 that our shares were not in compliance with the $1 minimum closing bid price continued listing requirement on The Nasdaq National Market and were given a 90-day grace period to correct the situation. Since that time, we successfully applied for a transition to The Nasdaq SmallCap Market and began trading on that exchange on June 7, 2002, which gave us an additional 90-day grace period lasting through September 3, 2002.
On September 4, 2002 The Nasdaq Stock Market notified us that we meet the Nasdaq SmallCap Market initial listing requirement for a minimum shareholders' equity of $5 million. Under existing Nasdaq rules this allows our grace period to be extended to March 3, 2003. During this time our share price must close at or above $1 for 10 or more consecutive trading days or our listing status will be subject to review. There are no additional grace periods permitted to ImagicTV under current Nasdaq continued listing qualifications.
Our shares continue to be in compliance with the Toronto Stock Exchange listing criteria.
Saskatchewan Telecommunications
On September 12, 2002, Saskatchewan Telecommunications ("SaskTel") announced a commercial deployment of its new Max Interactive Service, which uses our DTV Manager solution. SaskTel's Max Interactive Service is available to approximately 80,000 households, allowing these households the opportunity to subscribe to voice, video and data over DSL. As a result of SaskTel's commercial deployment, we will recognize monthly royalty revenues based on the incremental number of active subscribers at the end of each month. SaskTel joins Kingston Vision as our second current commercially deployed customer.
Critical Accounting Policies
We periodically review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosure system provided accurate and transparent information relative to the current economic and business environment. As part of the process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. We note that we have determined that our critical accounting policies relating to our core ongoing business activities are primarily those that relate to revenue recognition. Other important accounting policies are described in Note 1 to our audited annual consolidated financial statements as of and for the year ended February 28, 2002, which we encourage you to read.
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Sources of Revenues and Revenue Recognition Policy
Typically, our customers go through several phases prior to proceeding with a commercial deployment of services based on our DTV Manager software. The first phase is the lab trial where we normally generate minimal service revenues, and do not generate royalty or license revenues. It is during this time that a customer evaluates the technology as it is installed on its own network, for internal testing and evaluation purposes. We provide technical assistance and consulting services for these evaluations as necessary.
The second phase generally involves a market trial, during which the customer's service is provided to a limited number of their "subscribers" who agree to test the service. During the market trial our customers assess the marketability of their service offering based on feedback solicited from their trial customers. We expect to primarily generate professional services revenues during market trials as customers typically engage us in technical and other consulting services during this phase.
Professional services revenue, generated during the first and second phases of deployment — the trial phases, is recognized as services are performed. Non-refundable up-front payments received for the use of our software during the trial phases are generally recognized ratably over the contracted trial period.
The final phase is the commercial deployment of digital television and other interactive media services. Commercial license agreements are generally entered into at the start of this phase and typically include license fees, subscriber royalty fees and annual maintenance fees.
Services revenues are comprised of professional services and annual maintenance and technical support services related to the implementation and integration of our software products. Annual maintenance and technical support revenues are typically equal to a percentage of our customers' initial license fees. Services revenue from professional services to licensees can be based on a time-and-materials framework or a fixed contract for a complete project or installation.
We recognize software licensing revenues in accordance with all applicable accounting regulations, including the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2 with respect to Certain Transactions" and Section 3400 of the Canadian Institute of Chartered Accountants Handbook. Following the requirements of SOP 97-2, we recognize license revenues when all of the following conditions are met:
- •
- we
have signed a license agreement with the customer;
- •
- we
have delivered the software product to the customer;
- •
- the
amount of the fees to be paid by the customer is fixed or determinable; and
- •
- we believe that collection of these fees is probable.
Revenues derived from license agreements containing multiple deliverables, such as product licenses, maintenance and technical support and other services, are allocated among the various deliverables based on the fair value of each deliverable based on vendor-specific objective evidence of fair value. For arrangements where we cannot establish vendor-specific objective evidence of fair value for the delivered license portion of the arrangement, we use the residual method to recognize revenue. Under the residual method, for arrangements where we can establish vendor-specific objective evidence for all undelivered elements, which are typically professional services and maintenance, we allocate that value to the revenue relating to the undelivered elements and record the remaining value of the contract as license revenue.
We often negotiate license agreements that allow for the payment of the initial license fee to be made in future instalments over a period of less than a year. The entire license fee is recognized as revenue when a license agreement with a customer has been executed, software delivered and accepted, the license fee is fixed and determinable, and collection of the related receivables is deemed probable by management. Revenues recognized in advance of the instalments being due are recorded as an instalment receivable on the balance sheet.
In addition to up-front license fees, our commercial license agreements include provisions for us to receive royalties. Generally, our customers pay these royalty fees either in the form of a non-refundable one-time royalty
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payment for a pre-set number of subscribers, a one-time per subscriber activation royalty payment or a combination thereof. Alternatively, a customer may pay an ongoing monthly royalty fee based upon the number of active subscribers at the end of each month. Non-refundable one-time royalty payments for a pre-set number of subscribers are recorded as revenue when it is determined that the software has been delivered and accepted, the collection of the amount is probable and we have no further obligations related to the provision of the royalty license. One-time royalty activation payments are recognized monthly based on the net increase in the number of subscribers at the end of each month. Monthly ongoing royalty fees are recognized monthly based on the total number of active subscribers at the end of each month.
Maintenance and technical support revenues are recognized evenly over the applicable service period, which is usually one year. Revenues derived from professional services, which are not essential to the functionality of the software, are recognized upon performance of the related services.
We expect that a majority of our revenues will be generated in U.S. dollars for the foreseeable future and that most of our expenses, including labour costs as well as capital and operating expenditures, will continue to be denominated in Canadian dollars. If the Canadian dollar appreciates against the U.S. dollar, our results of operations could be materially adversely affected.
Results of Operations
Three and six months ended August 31, 2002 (second quarter, fiscal 2003) compared to the three and six months ended August 31, 2001 (second quarter, fiscal 2002).
Revenues
Our total revenues decreased to $254,000 for the three months ended August 31, 2002 from $803,000 for the three months ended August 31, 2001 and decreased to $978,000 for the six months ended August 31, 2002 from $2.5 million for the six months ended August 31, 2001.
License Fees. Due to the effects of the prolonged economic downturn and its particular impact on the telecommunications sector (see "Quantitative and Qualitative Disclosures About Market Risks — Industry Risks"), we have not been able to sign any new license agreements in the six months ended August 31, 2002, and, therefore, we did not receive any up-front license fees during this period. In the six months ended August 31, 2001, we recorded license revenue of $522,000 related primarily to the commercial license payment from SaskTel.
Royalty Fees. Our royalty fee revenues decreased to $31,000 for the three months ended August 31, 2002 from $37,000 for the three months ended August 31, 2001 and increased to $522,000 for the six months ended August 31, 2002 from $118,000 for the six months ended August 31, 2001. The increase for the six months ended August 31, 2002 was the result of non-refundable one-time royalty fees paid in the first quarter by SaskTel in anticipation of their commercial launch. The remainder of our royalty revenues is from Kingston Vision, who is our one commercially deployed customer at August 31, 2002. Kingston had approximately 8,100 subscribers at August 31, 2002.
Services. Our services revenues decreased to $223,000 for the three months ended August 31, 2002 from $766,000 for the three months ended August 31, 2001 and decreased to $456,000 for the six months ended August 31, 2002 from $1.8 million for the six months ended August 31, 2001. The decrease is primarily due to a decrease in the activities for our customers as they remain in market trials pending a decision to move forward with a commercial deployment. Also included in our services revenues are maintenance fees from our commercially licensed customers. Our maintenance fees decreased to $101,000 for the three months ended August 31, 2002 from $246,000 for the three months ended August 31, 2001 and decreased to $236,000 for the six months ended August 31, 2002 from $490,000 for the six months ended August 31, 2001. The decrease is primarily due to two customers no longer receiving maintenance services from us, one of which is Aliant Inc.
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Cost of Revenues
Cost of revenues decreased to $411,000 for the three months ended August 31, 2002 from $801,000 for the three months ended August 31, 2001 and decreased to $840,000 for the six months ended August 31, 2002 from $1.6 million for the six months ended August 31, 2001. The decrease reflects a decrease in customer service and professional services staff to 18 at August 31, 2002 from 34 at August 31, 2001 and the reduced professional services and customer service staff expense allocated to cost of revenues as they devoted their efforts to sales and marketing activities due to the decreased levels of commercial deployment activities by our customers.
Operating Expenses
We undertook a restructuring in November 2001, which resulted in a significant reduction in staff. The full benefit of the cost reductions associated with the decreased staff size is fully realized in the three and six months ended August 31, 2002 compared to the three and six months ended August 31, 2001 as indicated in the following information.
Sales and Marketing. Sales and marketing expenses decreased to $1.7 million for the three months ended August 31, 2002 from $2.5 million for the three months ended August 31, 2001 and decreased to $3.2 million for the six months ended August 31, 2002 from $5.5 million for the six months ended August 31, 2001. The decrease reflects a decrease in staff to 10 in sales and 20 in marketing at August 31, 2002 from 18 in sales and 38 in marketing at August 31, 2001 and a decrease in marketing events as we focus on fewer, but more specific, activities that we believe have a higher likelihood to turn into revenue generating opportunities. During the three months ended August 31, 2002, these specific activities included attendance at Supercomm 2002 in June in Atlanta, Georgia, and increased focus on partner channel activities.
Research and Development. Research and development expenses decreased to $1.4 million for the three months ended August 31, 2002 from $1.9 million for the three months ended August 31, 2001 and decreased to $2.9 million for the six months ended August 31, 2002 from $4.1 million for the six months ended August 31, 2001. The decrease reflects a decrease in staff to 63 at August 31, 2002 from 99 at August 31, 2001 and the streamlining of our products and processes that was implemented during our fourth quarter of fiscal 2002.
General and Administrative. General and administrative expenses decreased to $774,000 for the three months ended August 31, 2002 from $1.3 million for the three months ended August 31, 2001 and decreased to $1.7 million for the six months ended August 31, 2002 from $2.9 million for the six months ended August 31, 2001. The decrease reflects a decrease in staff in our finance, human resources and corporate operations departments to 16 at August 31, 2002 from 21 at August 31, 2001. Other savings resulted from a reduction in legal fees related to customer activity, centralizing our financial operations by replacing a key executive position located in the United States with one located in New Brunswick, and a reduction in our stock-based compensation expense related to the retirement of a large amount of our deferred stock-based compensation due to the resignation of an executive during our fourth quarter of fiscal 2002.
We remain committed to manage prudently our cash resources.
Non-Cash Operating Expenses
The following non-cash operating expenses have been incorporated in the operating expense categories to which they relate.
Depreciation. Depreciation increased to $479,000 for the three months ended August 31, 2002 from $457,000 for the three months ended August 31, 2001 and increased to $980,000 for the six months ended August 31, 2002 from $893,000 for the six months ended August 31, 2001. The increase is due to capital investments made during fiscal 2002 in computer and other equipment and leasehold improvements upon which the depreciation is now being recognized.
Stock-based Compensation. Stock-based compensation expense decreased to $10,000 for the three months ended August 31, 2002 from $101,000 for the three months ended August 31, 2001 and decreased to $52,000 for the six months ended August 31, 2002 from $293,000 for the six months ended August 31, 2001. The reduction is
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due primarily to the reduced amount of deferred stock-based compensation after the majority of the deferred expense was retired following the resignation of an executive during the fourth quarter of fiscal 2002. The deferred stock-based compensation represents the difference between the exercise price of options granted to acquire our common shares and the deemed fair value, for financial reporting purposes, of our common shares on the date of their respective granting. Deferred stock-based compensation is amortized on a straight-line basis over the vesting periods of the options.
Other Income
Interest income decreased to $154,000 for the three months ended August 31, 2002 from $490,000 for the three months ended August 31, 2001 and decreased to $333,000 for the six months ended August 31, 2002 from $1.2 million for the six months ended August 31, 2001. The decrease is the result of both lower average interest rates and a lower average balance of excess cash available for investment.
Net Loss
Our net loss decreased to $4.0 million for the three months ended August 31, 2002 from a loss of $5.1 million for the three months ended August 31, 2001 and decreased to $7.3 million for the six months ended August 31, 2002 from $10.6 million for the six months ended August 31, 2001. Our net loss per share decreased to $0.16 per share for the three months ended August 31, 2002 from a loss of $0.21 per share for the three months ended August 31, 2001 and decreased to $0.30 per share for the six months ended August 31, 2002 from $0.43 per share for the six months ended August 31, 2001. The decrease is primarily attributable to the reduction in our total operating expenses to $3.9 million for the three months ended August 31, 2002 from $5.7 million for the three month ended August 31, 2001 and $7.7 million for the six months ended August 31, 2002 from $12.5 million for the six months ended August 31, 2001.
Liquidity and Capital Resources
At August 31, 2002 we had available funds of $39.9 million compared to $51.9 million at August 31, 2001.
Our cash used in operating activities for the three months ended August 31, 2002 was $3.3 million, compared to $4.4 million for the three months ended August 31, 2001 and was $5.7 million for the six months ended August 31, 2002 compared to $8.1 million for the six months ended August 31, 2001. The cash used during the three and six months ended August 31, 2002 was primarily to fund our research and development and sales and marketing efforts. The decrease reflects the streamlining of our products and processes in our research and development group and our product planning group as well as our refocused efforts in sales and marketing.
Our cash used in investing activities, before the purchase or sale of temporary investments, was $29,000 for the three months ended August 31, 2002 compared to $56,000 for the three months ended August 31, 2001 and was $441,000 for the six months ended August 31, 2002 compared to $703,000 for the six months ended August 31, 2001. Cash used in investing activities during the six months ended August 31, 2002 primarily reflects purchases in the first quarter of software used in our architecture and development activities.
Our cash from financing activities was nil for the three months ended August 31, 2002 and August 31, 2001. It was $5,000 for the six months ended August 31, 2002 from the exercise of options compared to the use of $70,000 for the six months ended August 31, 2001 for expenses related to our initial public offering in November 2000.
In the current marketplace the timing of the generation of revenue is an uncertainty and is dependent upon our customers' decisions to move forward with a commercial deployment of services based on our software products. To provide the most conservative estimate, which assumes revenue is at nil or a very nominal amount, we anticipate that we have sufficient cash resources to fund operations for approximately the next 24 months from August 31, 2002. If our expenses vary greatly from those that are currently expected, we may need to raise additional capital to fund our operations prior to the end of this 24-month period. In addition, if revenues are not timely generated to the extent necessary to fund operations beyond such 24-month period, we may also be required to raise additional capital to fund our operations. We may attempt to obtain this additional capital through the sale of debt or equity securities or borrowings under secured or unsecured loan arrangements. We
9
can provide no assurance that such capital or financing, if necessary, will be available in a timely manner or on satisfactory terms.
Quantitative and Qualitative Disclosures About Market Risks
Industry Risk
The telecommunications industry continues to experience significant economic pressure on revenues, earnings and return on investment. In response, telecom companies have made significant reductions in capital spending and are expected to continue this in the short term in many areas of their business including new and emerging services. As a result, we have experienced a longer sales cycle as our customers continue to delay their decision to move from market trials to commercial deployments. This has impacted our ability to earn license revenues which are primarily earned from our customers' commercial deployments.
Because the pressure on revenues for telecom companies is so great, we expect that they will continue market trials until such time as the industry economics improve. Accordingly, our license fee and royalty fee revenues may be significantly delayed, may be less than previously anticipated or may not significantly materialize if customers or potential customers direct their capital spending to areas other than video deployment.
Impact of Interest Rate Exposure
As of August 31, 2002 we had approximately $39.9 million in available funds. A significant portion of the cash earns interest at variable rates. Our interest income is sensitive to changes in the level of prevailing interest rates. Interest rates declined over the previous year and a half and as a result we anticipate our average yield earned on surplus funds in fiscal 2003 to be lower than yields earned in fiscal 2002. We do not anticipate this situation to have any short-term material adverse impact on our cash position or financial condition.
Impact of Foreign Exchange Rate Exposure
We continue to expect the majority of our revenues will be earned in U.S. dollars, and that a significant portion of our operating expenses and capital expenditures will be in Canadian dollars. Changes in the value of the Canadian dollar relative to the U.S. dollar may result in currency translation gains or losses, which could affect our operating results. We also deal in other foreign currencies; however, we anticipate changes in the exchange rates of these currencies will not have a material impact on our operating results. While we do not hedge our foreign exchange rate exposure with financial derivative instruments, we do maintain a portion of our short-term investment portfolio in Canadian dollar denominated instruments.
Information Regarding Forward-Looking Statements:
This report contains forward-looking statements. These statements include statements regarding: conditions in the telecom industry, our strategy and plans, our efforts to develop and enhance our products, our expected sources of revenues, our future expected costs and losses, our capital requirements and the outlook for our business. When used in this document, the words "will," "plan," "anticipate," "expect," "intend," "believe" and similar expressions referring to the future or events to occur in the future are intended to identify forward- looking statements. Forward-looking statements reflect our current views with respect to future events and are based on information currently available to us. These statements are not guarantees of future results, performance or achievements and are subject to risks, uncertainties and assumptions, including: unanticipated trends and conditions in our industry, delays and difficulties that we encounter in developing enhanced products, the risk that we will not have sufficient capital to maintain or expand our operations, delays and difficulties in obtaining customers or in their commercial deployment of services based on our products, and other risks described in our filings with the U.S. Securities and Exchange Commission (SEC) and Canadian Securities Administrators, including our Form 20-F and Annual Information Form for the fiscal year ended February 28, 2002. These and other factors could cause our actual results, performance or achievements to differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors should be considered carefully, and readers should not place undue reliance on the forward-looking statements. We do not undertake any obligation to update this forward-looking information.
10
IMAGICTV INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except number of shares)
| |
August 31, 2002 |
February 28, 2002 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(unaudited) |
|
||||||||
| Assets | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 15,745 | $ | 45,641 | ||||||
| Short-term investments | 24,150 | 359 | ||||||||
| Accounts receivable, trade, net of allowance of nil | 92 | 448 | ||||||||
| [February 28, 2002 — nil] | ||||||||||
| Prepaid expenses, deposits and other receivables | 873 | 904 | ||||||||
| Total current assets | 40,860 | 47,352 | ||||||||
| Capital assets | 1,594 | 2,133 | ||||||||
| Total assets | $ | 42,454 | $ | 49,485 | ||||||
| Liabilities and Shareholders' Equity | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 496 | $ | 667 | ||||||
| Accrued liabilities | 1,294 | 1,083 | ||||||||
| Deferred revenue | 558 | 437 | ||||||||
| Current portion of long-term debt | 9 | 9 | ||||||||
| Total current liabilities | 2,357 | 2,196 | ||||||||
| Long-term debt | 1,540 | 1,496 | ||||||||
| Shareholders' equity: | ||||||||||
| Authorized: | ||||||||||
| Unlimited common shares, no par value | ||||||||||
| Unlimited preferred shares, no par value | ||||||||||
| Issued and outstanding: | ||||||||||
| 24,678,063 Common Shares | ||||||||||
| [February 28, 2002 — 24,669,336] | 85,620 | 85,698 | ||||||||
| Nil preferred | — | — | ||||||||
| Deferred stock-based compensation | (258 | ) | (393 | ) | ||||||
| Accumulated deficit | (46,279 | ) | (38,986 | ) | ||||||
| Cumulative currency translation adjustments | (526 | ) | (526 | ) | ||||||
| Total shareholders' equity | 38,557 | 45,793 | ||||||||
| Total liabilities and shareholders' equity | $ | 42,454 | $ | 49,485 | ||||||
See accompanying notes to the consolidated financial statements
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IMAGICTV INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of U.S. dollars, except per share amounts)
| |
Three Months Ended |
Six Months Ended |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
August 31, 2002 |
August 31, 2001 |
August 31, 2002 |
August 31, 2001 |
||||||||||
| Revenues: | ||||||||||||||
| License fees | $ | — | $ | — | $ | — | $ | 522 | ||||||
| Royalty fees | 31 | 37 | 522 | 118 | ||||||||||
| Services | 223 | 766 | 456 | 1,813 | ||||||||||
| Total revenues | 254 | 803 | 978 | 2,453 | ||||||||||
| Cost of revenues: | ||||||||||||||
| Services | 411 | 801 | 840 | 1,612 | ||||||||||
| Total cost of revenues | 411 | 801 | 840 | 1,612 | ||||||||||
| Gross profit (loss) | (157 | ) | 2 | 138 | 841 | |||||||||
| Operating expenses: | ||||||||||||||
| Sales and marketing | 1,712 | 2,499 | 3,170 | 5,524 | ||||||||||
| Research and development | 1,392 | 1,853 | 2,850 | 4,104 | ||||||||||
| General and administrative | 774 | 1,318 | 1,720 | 2,863 | ||||||||||
| Total operating expenses | 3,878 | 5,670 | 7,740 | 12,491 | ||||||||||
| Loss from operations | (4,035 | ) | (5,668 | ) | (7,602 | ) | (11,650 | ) | ||||||
| Interest income, net | 154 | 490 | 333 | 1,157 | ||||||||||
| Foreign exchange gain (loss), net | (27 | ) | 54 | 117 | 70 | |||||||||
| Loss before provision for income taxes | (3,908 | ) | (5,124 | ) | (7,152 | ) | (10,423 | ) | ||||||
| Provision for income taxes | (87 | ) | (9 | ) | (141 | ) | (148 | ) | ||||||
| Net loss for the period | $ | (3,995 | ) | $ | (5,133 | ) | $ | (7,293 | ) | $ | (10,571 | ) | ||
| Basic and diluted net loss per share | $ | (0.16 | ) | $ | (0.21 | ) | $ | (0.30 | ) | $ | (0.43 | ) | ||
| Weighted average number of shares used in computing basic and diluted net loss per share (000s) | 24,678 | 24,599 | 24,675 | 24,597 | ||||||||||
See accompanying notes to the consolidated financial statements
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IMAGICTV INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands of U.S. dollars)
| |
Common Shares |
|
|
Cumulative Currency Translation Adjustment |
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Deferred Stock- Based Compensation on Stock Options |
Accumulated Deficit |
Total Shareholders' Equity |
||||||||||||||||
| |
Number |
Amount |
|||||||||||||||||
| Balances, February 28, 2001 | 24,593 | $ | 87,678 | $ | (2,670 | ) | $ | (20,282 | ) | $ | (526 | ) | $ | 64,200 | |||||
| Net loss | — | — | — | (10,571 | ) | — | (10,571 | ) | |||||||||||
| Amortization of deferred stock-based compensation | — | — | 293 | — | — | 293 | |||||||||||||
| Deferred stock-based compensation | — | (483 | ) | 483 | — | — | — | ||||||||||||
| Issuance of shares for cash | 5 | (70 | ) | — | — | — | (70 | ) | |||||||||||
| Balances, August 31, 2001 | 24,598 | $ | 87,125 | $ | (1,894 | ) | $ | (30,853 | ) | $ | (526 | ) | $ | 53,852 | |||||
| Balances, February 28, 2002 | 24,669 | $ | 85,698 | $ | (393 | ) | $ | (38,986 | ) | $ | (526 | ) | $ | 45,793 | |||||
| Net loss | — | — | — | (7,293 | ) | — | (7,293 | ) | |||||||||||
| Amortization of deferred stock-based compensation | — | — | 52 | — | — | 52 | |||||||||||||
| Deferred stock-based compensation | — | (83 | ) | 83 | — | — | — | ||||||||||||
| Issuance of shares for cash | 9 | 5 | — | — | — | 5 | |||||||||||||
| Balances, August 31, 2002 | 24,678 | $ | 85,620 | $ | (258 | ) | $ | (46,279 | ) | $ | (526 | ) | $ | 38,557 | |||||
See accompanying notes to consolidated financial statements
13
IMAGICTV INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of U.S. dollars)
| |
Three Months Ended |
Six Months Ended |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
August 31, 2002 |
August 31, 2001 |
August 31, 2002 |
August 31, 2001 |
|||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net loss | $ | (3,995 | ) | $ | (5,133 | ) | $ | (7,293 | ) | $ | (10,571 | ) | |||
| Items not involving cash: | |||||||||||||||
| Depreciation and amortization | 479 | 457 | 980 | 893 | |||||||||||
| Stock-based compensation | 10 | 101 | 52 | 293 | |||||||||||
| Change in operating assets and liabilities: | |||||||||||||||
| Accounts receivable, trade | 183 | (47 | ) | 356 | 3,386 | ||||||||||
| Instalment receivables | — | 587 | — | 705 | |||||||||||
| Inventory | — | 52 | — | 63 | |||||||||||
| Prepaid expenses, deposits, and other receivables | 78 | 202 | 31 | 356 | |||||||||||
| Accounts payable | (204 | ) | (145 | ) | (171 | ) | (782 | ) | |||||||
| Accrued liabilities | 20 | (278 | ) | 211 | (2,040 | ) | |||||||||
| Deferred revenue | 133 | (150 | ) | 121 | (388 | ) | |||||||||
| Cash used in operating activities | (3,296 | ) | (4,354 | ) | (5,713 | ) | (8,085 | ) | |||||||
| Cash flows from investing activities: | |||||||||||||||
| Purchases of capital assets | (29 | ) | (56 | ) | (441 | ) | (703 | ) | |||||||
| Sale (purchase) of short-term investments, net | 2,752 | (14,907 | ) | (23,791 | ) | 7,644 | |||||||||
| Cash from (used in) investing activities | 2,723 | (14,963 | ) | (24,232 | ) | 6,941 | |||||||||
| Cash flows from financing activities: | |||||||||||||||
| Issuance of common shares, net of share issue costs | — | — | 5 | (70 | ) | ||||||||||
| Cash from (used in) financing activities | — | — | 5 | (70 | ) | ||||||||||
| Effect of foreign currency exchange adjustments | (25 | ) | (2 | ) | 44 | (17 | ) | ||||||||
| Decrease in cash and cash equivalents | (598 | ) | (19,319 | ) | (29,896 | ) | (1,231 | ) | |||||||
| Cash and cash equivalents, beginning of period | 16,343 | 19,420 | 45,641 | 1,332 | |||||||||||
| Cash and cash equivalents, end of period | $ | 15,745 | $ | 101 | $ | 15,745 | $ | 101 | |||||||
| Supplemental cash flow information: | |||||||||||||||
| Cash paid for taxes | $ | 20 | $ | 25 | $ | 48 | $ | 77 | |||||||
| Cash received for interest | $ | 162 | $ | 524 | $ | 291 | $ | 1,352 | |||||||
See accompanying notes to consolidated financial statements
14
IMAGICTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements include the accounts of ImagicTV Inc. and its wholly owned subsidiaries. All intercompany transactions and balances are eliminated on consolidation.
The financial statements are stated in U.S. dollars. They have been prepared in accordance with Canadian generally accepted accounting principles, which, in all material respects, conform with U.S. generally accepted accounting principles. Unless otherwise noted, the interim financial statements follow the same accounting policies and methods of application as the most recent annual financial statements. For further information, reference should be made to the audited annual consolidated financial statements as of and for the year ended February 28, 2002.
The information furnished as at August 31, 2002 and for the three and six month periods ended August 31, 2002 and August 31, 2001 reflects, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for future periods.
2. SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim consolidated financial statements are based upon accounting principles consistent with those used and described in ImagicTV's audited annual consolidated financial statements for the year ended February 28, 2002, except for the following:
Stock-based compensation and other stock-based payments
Effective March 1, 2002, ImagicTV adopted the new CICA Handbook Section 3870, "Stock-based Compensation and Other Stock-based Payments", which requires that a fair value based method of accounting be applied to all stock-based payments to non-employees and to direct awards of stock to employees. The requirements of the new standard are consistent with ImagicTV's accounting policies for these types of transactions as disclosed in ImagicTV's audited annual consolidated financial statements and therefore do not require any adjustment be made. The new section also requires ImagicTV to select an accounting methodology for the accounting for stock-based awards, other than a direct award of stock, granted to employees. ImagicTV's existing accounting policy, as disclosed in the audited annual consolidated financial statements, is the application of the intrinsic method for accounting for employee stock-based awards and is an acceptable methodology under the new handbook section and therefore requires no adjustment. Section 3870 also requires additional disclosures including pro forma earnings and pro forma earnings per share, which are provided in note 5.
3. SEGMENTED INFORMATION
ImagicTV operates in a single reportable operating segment that is to provide software solutions to telecommunications companies and other service providers that enable the delivery of digital broadcast television services to residential subscribers over high-speed Internet Protocol networks. The single reportable operating segment derives its revenue from the sale of software and related services.
15
As at August 31, 2002, substantially all assets related to ImagicTV's operations were located in Canada. Revenues are attributable to geographic location based on the location of the customer, as follows (in thousands of U.S. dollars):
| |
Three months ended August 31, |
Six months ended August 31, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
|||||||||
| Revenues by geographic location: | |||||||||||||
| Canada | $ | 59 | $ | 158 | $ | 606 | $ | 810 | |||||
| Europe | 175 | 118 | 337 | 311 | |||||||||
| United States | 20 | 467 | 35 | 1,229 | |||||||||
| Asia | — | 60 | — | 103 | |||||||||
| $ | 254 | $ | 803 | $ | 978 | $ | 2,453 | ||||||
4. RELATED PARTY TRANSACTIONS
ImagicTV transacts with certain shareholders or their affiliates who own in excess of 10% of the outstanding shares of ImagicTV. These transactions were in the normal course of operations and were recorded at the exchange amount. The following table summarizes the related party transactions and balances (in thousands of U.S. dollars):
| |
Three months ended August 31, |
Six months ended August 31, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
|||||||||
| Revenues: | |||||||||||||
| Services | $ | 89 | $ | 138 | $ | 172 | $ | 153 | |||||
Operating expenses: |
127 |
298 |
258 |
618 |
|||||||||
| |
As at August 31, 2002 |
As at February 28, 2002 |
|||||
|---|---|---|---|---|---|---|---|
| Related party balances: | |||||||
| Accounts receivable, trade | $ | 60 | $ | 143 | |||
| Accounts payable and accrued liabilities | 227 | 290 | |||||
| Deferred revenues | 96 | 219 | |||||
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5. STOCK OPTIONS
A summary of the status of ImagicTV's options as of August 31, 2002 is as follows:
| Range of Exercise Prices |
Number of Options |
Weighted Average Remaining Contractual Life (Years) |
Number of Options Exercisable |
|||
|---|---|---|---|---|---|---|
| $0.50 – $ 0.64 | 540,348 | 2.86 | 489,235 | |||
| $0.68 – $ 0.98 | 1,326,866 | 5.37 | 506,754 | |||
| $1.10 – $ 2.89 | 1,115,795 | 4.83 | 493,527 | |||
| $7.25 – $11.17 | 201,988 | 5.17 | 60,982 | |||
| 3,184,997 | 4.75 | 1,550,498 | ||||
In addition to the disclosures relating to ImagicTV's outstanding stock options presented in note 5 (c) of the audited annual consolidated financial statements, the new Canadian accounting standard as described in note 2 requires the disclosure of pro forma net earnings and earnings per share information as if ImagicTV had accounted for employee stock options under the fair value method. ImagicTV has elected to disclose pro forma net loss and pro forma net loss per share as if ImagicTV had accounted for its stock options issued from inception under the fair value method. A summary of the pro forma disclosure and the impact on the consolidated statement of operations is presented in the table below.
| |
Three Months Ended August 31, 2002 |
Six Months Ended August 31, 2002 |
|||||
|---|---|---|---|---|---|---|---|
| Net loss | $ | (3,995 | ) | $ | (7,293 | ) | |
| Compensation expense related to the fair value of stock options | (54 | ) | (119 | ) | |||
| Pro forma net loss | $ | (4,049 | ) | $ | (7,412 | ) | |
| Pro forma net loss per share | $ | (0.16 | ) | $ | (0.30 | ) | |
The fair value of each option granted in the period ended August 31, 2002 has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions used: dividend yield of 0%, expected volatility of 130%, risk-free rate of return of 2.5%, and expected terms equal to the option vesting period.
ImagicTV has assumed no forfeiture rate, as adjustments for actual forfeitures are made in the year they occur. The weighted average grant date fair value of options issued in the six months ended August 31, 2002 was $0.73.
17
SIGNATURES
LETTER TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
IMAGICTV INC. CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars, except number of shares)
IMAGICTV INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of U.S. dollars, except per share amounts)
IMAGICTV INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands of U.S. dollars)
IMAGICTV INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of U.S. dollars)
IMAGICTV INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)