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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0140269
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
2525 SPEAKMAN DRIVE, MISSISSAUGA, ONTARIO, CANADA L5K 1B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code: (905) 403-6500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE
----------------------- ON WHICH REGISTERED
None ---------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the common shares of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on June 30, 2003 was $36.09 million
(4,005,427 common shares times $9.01).
As of February 20, 2004, there were 39,304,491 common shares of the
registrant outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed within 120
days of the close of IMAX Corporation's fiscal year ended December 31, 2003,
with the Securities and Exchange Commission pursuant to Regulation 14A involving
the election of directors and the annual meeting of the stockholders of the
registrant (the "Proxy Statement") are incorporated by reference in Part III of
this Form 10-K to the extent described therein.
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1 of 88
IMAX CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business................................................................................... 4
Item 2 Properties................................................................................. 14
Item 3 Legal Proceedings.......................................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders........................................ 15
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.................................................................... 16
Item 6 Selected Financial Data.................................................................... 19
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 22
Item 7A Quantitative and Qualitative Disclosures about Market Risk................................. 39
Item 8 Financial Statements and Supplementary Data................................................ 40
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 83
Item 9A Controls and Procedures.................................................................... 83
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 84
Item 11 Executive Compensation..................................................................... 84
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters..................................................................... 84
Item 13 Certain Relationships and Related Transactions............................................. 84
Item 14 Principal Accounting Fees and Services..................................................... 84
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 85
Signatures.............................................................................................. 88
Page 2
IMAX CORPORATION
EXCHANGE RATE DATA
Unless otherwise indicated, all dollar amounts in this document are
expressed in United States ("U.S.") dollars. The following table sets forth, for
the periods indicated, certain exchange rates based on the noon buying rate in
the City of New York for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"). Such rates quoted are the number of U.S. dollars per one Canadian dollar
and are the inverse of rates quoted by the Federal Reserve Bank of New York for
Canadian dollars per U.S. $1.00. The average exchange rate is based on the
average of the exchange rates on the last day of each month during such periods.
The Noon Buying Rate on December 31, 2003 was U.S. $0.7738.
YEARS ENDED DECEMBER 31,
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2003 2002 2001 2000 1999
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Exchange rate at end of
period.................... U.S. $0.7738 U.S. $0.6329 U.S. $0.6267 U.S. $0.6669 U.S. $0.6925
Average exchange rate
during period.............. 0.7136 0.6368 0.6457 0.6732 0.6730
High exchange rate during
period..................... 0.7738 0.6619 0.6697 0.6944 0.6925
Low exchange rate during
period..................... 0.6349 0.6200 0.6241 0.6410 0.6535
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this annual report 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
business and operations, plans and references to the future success of IMAX
Corporation together with its wholly-owned subsidiaries (the "Company") and
expectations regarding the Company's future operating results. 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; conditions in the
commercial exhibition industry; the acceptance of the Company's new
technologies; 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 in this annual report are qualified by these
cautionary statements, and actual results or anticipated developments 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.
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IMAX(R), IMAX(R) Dome, IMAX(R) 3D, IMAX(R) 3D Dome, The IMAX Experience(R),
An IMAX Experience(R), IMAX DMR(R), IMAX(R) MPX(TM), IMAX Think Big(TM) and
Think Big(TM) are trademarks and trade names of the Company or its subsidiaries
that are registered or otherwise protected under laws of various jurisdictions.
Page 3
IMAX CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") is one of the world's leading entertainment technology companies,
specializing in large-format and three-dimensional ("3D") film presentations.
The Company's principal business is the design, manufacture, sale and lease of
projection systems based on proprietary and patented technology for
large-format, 15-perforation film frame, 70mm format ("15/70-format") theaters
including commercial theaters, museums and science centers, and destination
entertainment sites. In addition, the Company designs and manufactures high-end
sound systems and produces and distributes films for IMAX(R) theaters. The
majority of IMAX theaters are operated by third parties under lease agreements
with the Company.
The Company is also engaged in the production, post-production, digital
re-mastering and distribution of 15/70-format films, the operation of IMAX
theaters and other operations in support of IMAX theaters and the IMAX theater
network.
The Company believes the IMAX theater network is the most extensive
large-format theater network in the world with 240 theaters operating in more
than 35 countries as of December 31, 2003. Of these 240 theaters, 115 of them
are currently located in institutional locations, such as museums and science
centers, and 125 in commercial locations. While the Company's roots are in the
institutional market, the Company believes that the commercial market is
potentially significantly larger. To increase the demand for IMAX theater
systems, the Company is currently working to position the IMAX theater network
as a new release window for Hollywood event, or blockbuster films. To this end
the Company has both developed a technology that allows standard 35mm movies to
be converted to its 15/70 format, and has introduced a lower cost projection
system designed for multiplex owners. The Company is also working to build
strong relationships with Hollywood studios and commercial exhibition companies.
The Company generally does not own IMAX theaters, but leases its projection
and sound systems, and licenses the use of its trademarks. IMAX theater systems
combine advanced, high-resolution projection systems, sound systems and screens
as large as eight stories high (approximately 80 feet) that extend to the edge
of a viewer's peripheral vision to create immersive audio-visual experiences. As
a result, audiences feel as if they are a part of the on-screen action in a way
that is more intense and exciting than in traditional theaters. In addition, the
Company's IMAX(R) 3D theater systems combine the same projection and sound
systems and screens with 3D images that further increase the audience's feeling
of immersion in the film. The Company believes that the network of IMAX 3D
theaters represents the largest out-of-home 3D distribution network in the
world.
In 2002, the Company introduced a technology that can convert live-action
35mm films to IMAX's 15/70-format film at a modest incremental cost, while
meeting the Company's high standards of image and sound quality. The Company
believes that this proprietary system, know as IMAX Digital Re-Mastering(TM)
("IMAX DMR(R)"), can position IMAX theaters as a new release window for
Hollywood's event films. In 2003, the Company converted The Matrix Reloaded and
The Matrix Revolutions, the last two films of the Matrix trilogy that began with
the 1999 blockbuster film The Matrix, to IMAX's 15/70 format. The Matrix
Reloaded: The IMAX Experience ran exclusively on over 70 IMAX screens beginning
June 6, 2003, approximately four weeks after the domestic release of the film to
conventional 35mm theaters. On November 5, 2003, The Matrix Revolutions became
the first-ever live-action Hollywood film released simultaneously to both IMAX
theaters and 35mm theaters. Also in 2003, the Company signed an agreement with
Warner Bros. Pictures to release an IMAX DMR version of Harry Potter and the
Prisoner of Azkaban to IMAX theaters in June 2004.
In March 2003, the Company introduced IMAX(R) MPX(TM), a new theater
projection system designed specifically for use in multiplex auditoriums, which
reduces the capital and operating costs required to run an IMAX theater while
still offering consumers the image and sound quality of the trademarked
experience viewers derive from IMAX theaters known as "The IMAX Experience(R)".
The Company was formed in March 1994 as a result of an amalgamation between
WGIM Acquisition Corp. and the former IMAX Corporation ("Predecessor IMAX").
Predecessor IMAX was incorporated in 1967.
Page 4
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES
The Company is the pioneer and leader in the large-format film industry,
and believes it is the largest designer and manufacturer of specialty projection
and sound systems for, and a significant producer and distributor of
15/70-format films for, large-format theaters around the world. The Company's
theater systems include specialized projection equipment, advanced sound
systems, specialty screens, theater automation control systems and film handling
equipment. The Company derives its revenues from the sale and lease of its
theater systems to large-format theaters, the licensing of related film products
to the IMAX theater network, post-production services for large-format films and
through its owned and operated theater operations. Segmented information is
provided in note 21 to the audited financial statements contained in Item 8.
IMAX SYSTEMS
IMAX THEATERS
The Company's primary products are its large-format theater systems. IMAX
theater systems traditionally include a unique rolling loop 15/70-format
projector that offers superior image quality and stability; a 6-channel, digital
sound system delivering up to 12,000 watts; a screen with a proprietary coating
technology; a digital theater control system and extensive theater planning,
design and installation services. All theater systems also come with a license
for the use of the IMAX brand. The Company primarily offers four types of these
theater systems: the GT projection system for the largest IMAX theaters; the SR
system for smaller theaters; the Company's recently introduced IMAX MPX system,
which is targeted for multiplex complexes; and a fourth category of theater
systems featuring heavily curved and tilted screens that are used in dome shaped
theaters. The GT, SR and IMAX MPX systems come with "flat" screens that have a
minimum of curvature and tilt and can exhibit both two dimensional ("2D") and 3D
films, while dome shaped theaters are generally 2D only and are popular with the
Company's institutional clients.
Screens in IMAX theaters are as large as one hundred or more feet wide and
eight stories tall and the Company believes they are the largest cinema screens
in the world. Unlike standard cinema screens, IMAX screens extend to the edge of
a viewer's peripheral vision to create immersive experiences which, when
combined with the Company's superior sound system, make audiences feel as if
they are a part of the on-screen action in a way that is more intense and
exciting than in traditional theaters, a critical part of The IMAX Experience.
The Company's IMAX 3D theaters further increase the audience's feeling of
immersion in the film by bringing images off the screen. All IMAX theaters have
a steeply inclined floor to provide each audience member with a clear view of
the screen.
The Company's projection systems utilize the largest commercially available
film format (15-perforation film frame, 70mm), which is nearly 10 times larger
than conventional film (4-perforation film frame, 35mm) and therefore able to
project significantly more detail on a larger screen. The Company believes its
projectors, which utilize the Company's rolling loop technology, are unsurpassed
in their ability to project film with maximum steadiness and clarity with
minimal film wear while substantially enhancing the quality of the projected
image. As a result, the Company's projection systems deliver a higher level of
clarity, detail and brightness compared to conventional movies and competing
film and digital based projection systems.
To complement the film technology and viewing experience, IMAX theater
systems feature unique digital sound systems. The sound systems are among the
most advanced in the industry and help to heighten the sense of realism of a
15/70-format film. IMAX sound systems are specifically designed for IMAX
theaters and are an important competitive advantage of IMAX systems.
THEATER SYSTEM LEASES. The Company's system leases generally have 10 to
20-year initial terms and are typically renewable by the customer for one or
more additional 10-year terms. As part of the lease agreement, the Company
advises the customer on theater design, custom assemblies and supervises the
installation of the theater system, provides training in using the equipment to
theater personnel and for a separate fee provides ongoing maintenance to the
system. Prospective theater owners are responsible for providing the theater
location, the design and construction of the theater building, the installation
of the system and any other necessary improvements as well as the marketing and
programming at the theater. Under the terms of the typical lease agreement, the
title to all theater system equipment (including the projection screen, the
projector and the sound system) remains with the Company. The Company has the
right to remove the equipment for non-payment or other defaults by the customer.
The contracts are generally not cancelable by the customer unless the Company
fails to perform its obligations. The contracts are generally denominated in
U.S. dollars, except in Canada and Japan, where contracts are generally
denominated in Canadian dollars and Japanese yen, respectively.
Page 5
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
The typical lease agreement provides for three major sources of revenue for
the Company: initial rental fees; ongoing minimum and additional rental
payments; and ongoing maintenance fees. Ongoing rental income and additional
payments and maintenance fees are generally received over the life of the
contract and are usually adjusted annually based on changes in the local
consumer price index. The terms of each lease agreement vary according to the
system technology provided and the geographic location of the customer.
SALES BACKLOG. Signed contracts for theater system installations are listed
as sales backlog prior to the time of revenue recognition. The value of sales
backlog represents the total value of all signed system sales and sales-type
lease agreements that are expected to be recognized as revenue in the future.
Sales backlog includes initial rental fees along with the present value of
contractual minimum rents due over the lease term, but excludes maintenance
revenues as well as rents in excess of contractual minimums that might be
received in the future. Sales backlog does not include revenues from theaters in
which the Company has an equity-interest, agreements covered by letters of
intent or conditional theater commitments.
The Company believes that the contractual obligations for system
installations that are listed in sales backlog are valid and binding
commitments. However, there can be no assurances that customers will ultimately
honor such obligations, or that the Company will be successful if litigation is
required to enforce such obligations. In addition, customers with system
obligations in backlog sometimes request that the Company agrees to modify or
reduce such obligations. The Company has, from time-to-time, agreed to
restructure the obligations of its customers under certain circumstances, and
there can be no assurances that additional backlog obligations of customers will
not be modified, reduced or otherwise restructured in the future.
The following chart shows the number of the Company's theater systems by
product, installed base and backlog as of December 31:
2003
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2D 3D
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INSTALLED INSTALLED
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
-------------- --------- ------- ---------- --------- -------
Flat Screen IMAX 55 2 IMAX 3D 81 25
IMAX 3D SR 38 21
Dome Screen IMAX Dome 66 5 IMAX MPX 0 8
2002
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2D 3D
------------------------------------------ --------------------------------------------
INSTALLED INSTALLED
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
-------------- --------- ------- ---------- --------- -------
Flat Screen IMAX 56 4 IMAX 3D 81 32
IMAX 3D SR 30 23
Dome Screen IMAX Dome 65 4 IMAX MPX 0 0
Page 6
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
IMAX AND IMAX DOME SYSTEMS. IMAX and IMAX Dome systems make up the largest
component of the Company's installed theater base. IMAX theaters, with a flat
screen, were introduced in 1970, while IMAX Dome theaters, which are designed
for tilted dome screens, were introduced in 1973. There have been several
significant proprietary and patented enhancements to these systems since their
introduction.
IMAX 3D AND IMAX 3D SR SYSTEMS. IMAX 3D theaters utilize a flat screen 3D
system which produces realistic three-dimensional images on an IMAX screen. The
Company believes that the IMAX 3D system offers consumers one of the most
realistic 3D experiences available today. To create the 3D effect, the audience
uses either polarized or electronic glasses that separate the left-eye and
right-eye images. The IMAX 3D projectors can project both 2D and 3D films,
allowing theater owners the flexibility to exhibit either type of film. The
Company offers upgrades to existing theaters, which have 2D IMAX projection
systems to IMAX 3D projection systems. Since the introduction of IMAX 3D
technology, the Company has upgraded 16 theater systems.
In 1997, the Company launched a smaller IMAX 3D system called IMAX 3D SR, a
patented theater system that combines a proprietary theater design, a more
automated projection system and specialized sound system to replicate the
experience of a larger IMAX 3D theater in a smaller space.
IMAX MPX. In 2003, the Company announced that it had launched its new
large-format theater system designed specifically for use in multiplex theaters.
Known as IMAX MPX, this projection system projects 15/70-format film onto
screens up to 70ft x 44ft, which are curved and tilted forward to further
immerse the audience. An IMAX MPX theater utilizes the Company's next generation
proprietary digital sound system, capable of multi-channel uncompressed 24bit
studio quality digital audio. The projector is capable of playing both 2D and 3D
films, and installs into a standard 35mm projection booth. The IMAX MPX system
can be installed as part of a newly-constructed multiplex, as an add-on to an
existing multiplex or as a retrofit of two existing, stadium seat auditoriums
within a multiplex. With lower capital and operating costs, the IMAX MPX is
designed to improve a multiplex-owner's financial returns and allow for the
installation of IMAX theaters in markets that might previously not have been
able to support one. The Company has signed agreements for nine IMAX MPX theater
systems, the first of which is scheduled to be installed in the first half of
2004.
SOUND SYSTEMS
The Company believes it is a world leader in the design and manufacture of
digital sound systems for applications including traditional movie theaters,
auditoriums and IMAX theaters. In February 2001, the Company decided to relocate
the manufacture of sound systems from Birmingham, Alabama to the Company's
headquarters near Toronto, Canada.
FILMS
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION
The Company produces films which are financed internally and through third
parties. With respect to films financed by third parties, the Company generally
receives a film production fee in exchange for producing the films and is
appointed the exclusive distributor of the film. When the Company produces
films, it typically hires production talent and specialists on a
project-by-project basis allowing the Company to retain creative and quality
control without the burden of significant ongoing overhead expenses. Typically,
the ownership rights to films produced for third parties are held by the film
sponsors, the film investors and the Company. The Company is increasingly
utilizing third-party funding for the large-format films it distributes.
The Company is a significant distributor of 15/70-format films. The Company
generally distributes films which it produces or for which it has acquired
distribution rights from independent producers. The Company has distribution
rights to more 15/70-format films than any competing distributor. As a
distributor, the Company generally receives a percentage of the theater box
office receipts.
Page 7
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION (cont'd)
The library of 15/70-format films includes general entertainment and
educational films on subjects such as space, wildlife, music, history and
natural wonders, and consisted of 214 films at the end of 2003, of which the
Company had distribution rights to 47 such films. In recent years, 15/70-format
films have been successfully released by the Company, including SPACE STATION
which was released in April 2002 and has grossed nearly $70 million to date,
T-REX: Back to the Cretaceous, which was released by the Company in 1998 and has
grossed over $80 million to date and Fantasia 2000: The IMAX Experience which
was released by the Company and Buena Vista Pictures Distribution, a unit of The
Walt Disney Company in 2000. Fantasia 2000, the first theatrical full-length
feature film to be reformatted into 15/70-format became the fastest grossing
large-format film in history and has grossed over $80.5 million to date.
15/70-format films have significantly longer exhibition periods than
conventional 35mm films and many of the films in the library have remained
popular for significantly longer periods including the films To Fly! (1976),
Grand Canyon - The Hidden Secrets (1984) and The Dream Is Alive (1985). In 1991,
Everest was released MacGillivray Freeman Films and has grossed over $120.0
million to date. In 2003, there were 13 new films released in the 15/70 format.
In 2002, the Company introduced its IMAX DMR technology which allows
virtually any 35mm live-action film to be digitally converted to IMAX's 15/70
format at a modest incremental cost. The Company generally receives a processing
fee for IMAX DMR re-mastering of films, the cost of which is often borne by the
rights holder of the 35mm film. The Company may also receive distribution rights
to the 15/70-format films produced using its IMAX DMR technology.
The Company released its first IMAX DMR film Apollo 13: The IMAX
Experience, in conjunction with Universal Pictures and Imagine Entertainment, to
22 IMAX theaters in September 2002. The Company released its second IMAX DMR
film, Star Wars: Episode II Attack of the Clones - The IMAX Experience, in
conjunction with 20th Century Fox in November 2002 to 58 IMAX theaters.
On April 23, 2003, the Company announced an agreement with Warner Bros.
Pictures to convert The Matrix Reloaded and The Matrix Revolutions, the last two
films of the Matrix trilogy that began with the 1999 blockbuster film The
Matrix, to IMAX's 15/70 format. The IMAX DMR version of The Matrix Reloaded ran
exclusively on over 70 IMAX screens beginning June 6, 2003, approximately four
weeks after the domestic release of the film to conventional 35mm theaters.
After the IMAX release on June 6, IMAX screens accounted for 27% of the film's
total box office receipts in North America, despite accounting for just 7.3% of
the screens exhibiting the film. On November 5, 2003, The Matrix Revolutions
became the first-ever live-action Hollywood film released simultaneously to both
IMAX theaters and 35mm theaters. In North America, the film grossed
approximately $3.0 million in the first five days of its release on 48 IMAX
screens, representing approximately $63,000 in per-screen revenue. The Company
believes that these releases have helped to position IMAX theaters as a separate
and unique release window for Hollywood films similar to the type created when
Hollywood studios began including the pay TV and home video industries as
release windows for their films.
David Keighley Productions 70MM Inc., a wholly-owned subsidiary of the
Company, provides film post-production and quality control services for
15/70-format films (whether produced internally or externally), and digital
post-production services.
Page 8
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
DIGITAL RE-MASTERING (IMAX DMR)
The Company has developed technology that makes it possible for 35mm
live-action film to be transformed into IMAX's 15/70 format at a minor
incremental cost of roughly $2 - $3 million. This patent-pending system, known
as IMAX DMR, opens the IMAX theater network up to potential film releases from
Hollywood's broad library of new and old films.
The IMAX DMR process involves the following:
- scanning, at the highest resolution possible, each individual frame
of the 35mm film and converting it into a digital image;
- optimizing the image using proprietary image enhancement tools
developed and refined over many years;
- analyzing the information contained within a 35mm frame format and
enhancing the digital image using techniques such as sharpening,
color correction, grain removal and the elimination of unsteadiness,
removal of unwanted artifacts; and
- recording the enhanced digital image onto 15/70-format film.
During the re-mastering process, the highly automated system allows the
process to meet rigorous film production schedules. The Company is continuing to
improve the length of time it takes to reformat a film with its IMAX DMR
technology. Apollo 13: The IMAX Experience was re-mastered in 16 weeks, Star
Wars Episode II: Attack of the Clones: The IMAX Experience was re-mastered in
eight weeks and The Matrix Reloaded: The IMAX Experience was re-mastered in less
than four weeks. The IMAX DMR conversion of The Matrix Revolutions: The IMAX
Experience was done in parallel with the movie's filming and editing, which is
necessary for the simultaneous release of an IMAX DMR film.
For IMAX DMR releases, the original soundtrack of the 35mm film is
re-mastered for IMAX's six-channel digital sound system. Unlike conventional
theater sound systems, IMAX sound systems are uncompressed, full fidelity and
use proprietary loudspeaker systems and surround sound that ensure every theater
seat is in a good listening position. While the Company can only convert 35mm
images into IMAX's 15/70-format film in 2D today, the Company has a research and
development program underway focused on converting live action 35mm film to IMAX
3D. The Company currently has the ability to convert computer generated
animation to IMAX 3D and has done so successfully with the 1999 release of
Cyberworld and the 2002 release of Steve Oedekerk's Santa vs. the Snowman.
THEATER OPERATIONS
The Company has seven owned and operated theaters. In addition, the Company
has entered into commercial arrangements with two theaters resulting in the
sharing of profits and losses. The Company also provides management services to
two theaters.
Page 9
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
OTHER
CAMERAS
The Company rents 2D and 3D 15/70-format cameras and provides technical and
post-production services to third-party producers for a fee. The Company
maintains cameras and other film equipment to support third-party producers and
also offers production advice and technical assistance to filmmakers.
The Company has developed state-of-the-art patented dual and single
filmstrip 3D cameras which are among the most advanced motion pictures cameras
in the world and are the only 3D cameras of their kind. The IMAX 3D camera
simultaneously shoots left-eye and right-eye images and its compact size allows
filmmakers access to a variety of locations, such as underwater or aboard
aircrafts. The Company has dual filmstrip cameras available for rent.
MARKETING AND CUSTOMERS
The Company markets its theater systems through a direct sales force and
marketing staff located in offices in Canada, the United States, Europe,
Singapore, Japan and China. In addition, the Company has agreements with
consultants, business brokers and real estate professionals to locate potential
customers and theater sites for the Company on a commission basis.
The commercial theater segment of the Company's theater network is now its
largest segment with a total of 125 theaters opened. At December 31, 2003, 37.0%
of all opened theaters are for locations outside of North America. The Company's
institutional customers include science and natural history museums, zoos,
aquaria and other educational and cultural centers. The Company also leases its
systems to theme parks, tourist destination sites, fairs and expositions. The
following table outlines the breakdown of installations by geographic segment as
at December 31:
2003 2002
-------------- --------------
INSTALLED BASE INSTALLED BASE
Canada........................ 23 23
United States................. 120 113
Europe........................ 45 43
Japan......................... 17 18
Rest of World................. 35 35
--------------- ---------------
Total......................... 240 232
=============== ===============
For information on revenue break-down by geographic area, see note 21(b) to
the audited financial statements in Item 8. No one customer represents more than
5.4% of the Company's installed base of theaters. The Company has no dependence
upon a single customer, or a few customers, the loss of any one or more of which
would have a material adverse effect on the Company.
Page 10
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
INDUSTRY AND COMPETITION
The Company competes with a number of manufacturers of large-format film
projection systems; most of which utilize smaller film formats, including
8-perforation film frame, 70mm and 10-perforation film frame, 70mm formats,
which the Company believes delivers an image that is inferior to The IMAX
Experience. The IMAX theater network and the number of 15/70-format films to
which the Company has distribution rights are substantially larger than those of
its 15/70-format competitors, and IMAX DMR reformatted films are available
exclusively to the IMAX theater network. The Company's customers generally
consider a number of criteria when selecting a large-format theater including
quality, reputation, brand-name recognition, type of system, features, price and
service. The Company believes that its competitive strengths include the value
of the IMAX(R) brand name, the quality and historic up-time of IMAX theater
systems, the number and quality of 15/70-format films that it distributes, the
quality of the sound system included with the IMAX theater, the potential
availability of Hollywood event films to IMAX theaters through IMAX DMR
technology and the level of the Company's service and maintenance efforts.
Virtually all of the best performing large-format theaters in the world are IMAX
theaters.
In 2003, the Company introduced IMAX MPX, a new theater projection system
designed specifically for use in multiplex auditoriums, which reduces the
capital and operating costs required to run an IMAX theater while still offering
consumers the image and sound quality of The IMAX Experience.
The commercial success of the Company's products is ultimately dependent
upon consumer preferences. The out-of-home entertainment industry in general
continues to go through significant changes, primarily due to technological
developments and changing consumer tastes. Numerous companies are developing new
entertainment products for the out-of-home entertainment industry and there are
no guaranties that some of these new products will not be competitive with,
superior to or more cost effective than the Company's products.
THE IMAX BRAND
The IMAX brand is world famous and stands for immersive family
entertainment that combines stunning images of exceptional quality and clarity
on screens up to one-hundred feet wide and eight stories tall with the Company's
proprietary 6-channel digital sound systems and unique theater designs. The
Company's research shows that the IMAX brand is a significant factor in a
consumer's decision to go to an IMAX theater. In addition, the Company believes
that its significant brand loyalty among consumers provides it with a strong,
sustainable position in the large-format theater industry. The IMAX brand name
cuts across geographic and demographic boundaries.
Historically, the Company's brand identity was grounded in its educational
film presentations to families around the world. With an increasing number of
IMAX theaters based in multiplexes and with a recent history of commercially
successful large-format films such as Everest, Fantasia 2000: The IMAX
Experience, Beauty and the Beast and the recent IMAX DMR releases including The
Matrix Reloaded: The IMAX Experience and The Matrix Revolutions: The IMAX
Experience, the Company is rapidly increasing its presence in commercial
settings. The Company believes the strength of the IMAX brand will be an asset
as it seeks to establish IMAX theaters as a new release window for Hollywood
films.
RESEARCH AND DEVELOPMENT
The Company believes that it is one of the world's leading entertainment
technology companies with significant in-house proprietary expertise in
projection system, camera and sound system design, engineering and imaging
technology. The Company believes that the motion picture industry will be
affected by the development of digital technologies, particularly in the areas
of content creation (image capture), post-production (editing and special
effects), digital re-mastering (such as IMAX DMR), distribution and display. The
Company has made significant investments in digital technologies, including the
development of a proprietary, patent-pending technology to digitally enhance
image resolution and quality of 35mm motion picture films, and has a number of
patents pending and intellectual property rights in these areas.
A key to the performance and reliability of the IMAX projection system is
the Company's unique "rolling loop" film movement. The rolling loop advances the
film horizontally in a smooth, wave-like motion, which enhances the stability of
the image and greatly reduces wear of the film.
Page 11
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
RESEARCH AND DEVELOPMENT (cont'd)
The IMAX DMR technology converts a 35mm frame into its digital form at a
very high resolution. The proprietary system recreates a pristine form of the
original photography. The Company believes the proprietary computer process
makes the images sharper than the original and the completed re-mastered film,
now nearly 10 times larger than the original, is transferred onto the world's
largest film format, 15/70-format. Each film's original soundtrack is also
recreated and upgraded to Company standards.
In March 2003, the Company officially launched its new large-format theater
system designed specifically for use in multiplex theaters. Known as IMAX MPX,
this new lower cost system allows commercial exhibitors to add an IMAX theater
to a new multiplex, an existing multiplex or to retrofit two existing multiplex
auditoriums into an IMAX theater. IMAX MPX is a new, lighter and easier to use
IMAX projection system with theater geometries designed to reduce construction,
installation, facility and operating costs. The system is further designed to
enable more commercial exhibitors to add IMAX theaters in a cost-effective
manner and broaden the potential audience for IMAX films, including both
Hollywood blockbuster films that have been digitally re-mastered into
15/70-format using the Company's proprietary IMAX DMR technology, as well as
traditional 2D and IMAX 3D films. An IMAX MPX system projects 15/70-format film,
onto screens up to 70ft x 44ft, that are curved and tilted forward to further
immerse the audience. An IMAX MPX theater utilizes the Company's next generation
proprietary digital sound system, capable of multi-channel uncompressed 24bit
studio quality digital audio. The IMAX MPX projector is capable of playing both
2D and 3D films, and installs into a standard 35mm projection booth.
The Company is currently developing intellectual property for digital
projection. Several of the underlying technologies and resulting products and
systems of the Company are covered by patents or patent applications. Other
underlying technologies are available to competitors, in part because of the
expiration of certain patents owned by the Company. The Company, however, has
successfully obtained patent protection covering several of its significant
improvements made to such technologies. The Company plans to continue to fund
research and development activity in areas considered important to the Company's
continued commercial success.
As of December 31, 2003, 26 of the Company's employees were connected with
research and development projects.
MANUFACTURING AND SERVICE
PROJECTION SYSTEMS MANUFACTURING
The Company assembles its large-format projection systems at its Corporate
Headquarters and Technology Center in Mississauga, Canada (near Toronto). A
majority of the components for the Company's systems are purchased from outside
vendors. The Company develops and designs all the key elements for the
proprietary technology involved in its projector and camera systems. Fabrication
of these components is then subcontracted to a group of carefully pre-qualified
suppliers. Manufacture and supply contracts are signed for the delivery of
components on an order-by-order basis. The Company has developed long-term
relationships with a number of significant suppliers, and the Company believes
its existing suppliers will continue to supply quality products in quantities
sufficient to satisfy its needs. The Company inspects all components and
sub-assemblies, completes the final assembly and then subjects the systems to
comprehensive testing prior to shipment. IMAX theater systems have had
historical operating uptimes based on scheduled shows of approximately 99.9%.
SOUND SYSTEMS MANUFACTURING
The Company develops, designs and assembles the key elements of its theater
sound systems. The standard IMAX theater sound system comprises components from
a variety of sources with approximately 50% of the materials cost of each system
attributable to proprietary components provided under original equipment
manufacturers agreements with outside vendors. These proprietary components
include custom loudspeaker enclosures and horns and specialized amplifiers,
signal processing and control equipment. In February 2001, the Company decided
to relocate the manufacture of sound systems from Birmingham, Alabama to the
Company's Headquarters and Technology Center in Mississauga, Canada.
Page 12
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
MANUFACTURING AND SERVICE (cont'd)
SERVICE AND MAINTENANCE
The Company provides key services and support functions for the IMAX
theater network and for filmmakers. To support the IMAX theater network, the
Company has personnel stationed in major markets who provide periodic and
emergency service and maintenance on existing systems throughout the world. The
Company's personnel typically visit each theater every three months to service
the projection and sound systems. The Company also provides theater design
expertise for both the visual and audio aspects of the theater, as well as
system installation and equipment training.
PATENTS AND TRADEMARKS
The Company's inventions cover various aspects of its proprietary
technology and many of such inventions are protected by Letters of Patent or
applications filed throughout the world, most significantly in the United
States, Canada, Japan, Korea, France, Germany and the United Kingdom. The
subject matter covered by these patents and applications encompasses electronic
circuitry and mechanisms employed in film projectors and projection systems
(including 3D projection systems), a method for synchronizing digital data
systems and a process for digitally re-mastering 35mm films into 15/70-format.
The Company has been diligent in the protection of its proprietary interests.
The Company currently holds 43 patents, has 16 patents pending in the
United States and has corresponding patents or filed applications in many
countries throughout the world. While the Company considers its patents to be
important to the overall conduct of its business, it does not consider any
particular patent essential to its operations. Certain of the Company's patents
in the United States, Canada and Japan for improvements to the IMAX projector,
IMAX 3D Dome and sound systems expire between 2008 and 2018.
The Company owns or otherwise has rights to trademarks and trade names used
in conjunction with the sale of its products, systems and services. The
following trademarks are considered significant in terms of the current and
contemplated operations of the Company: IMAX(R), The IMAX Experience(R), An IMAX
Experience(R), IMAX DMR(R), IMAX(R) 3D, IMAX(R) Dome, IMAX(R) MPX(TM), IMAX
Think Big(TM) and Think Big(TM). These trademarks are widely protected by
registration or common law throughout the world. The Company also owns the
service mark IMAX THEATRE(TM).
EMPLOYEES
As of December 31, 2003, the Company had 339 employees not including hourly
employees at Company owned and operated theaters.
AVAILABLE INFORMATION
The Company makes available free of charge its annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K as soon as
reasonably practicable after the such filing has been made with the United
States Securities and Exchange Commission (the "SEC"). Reports may be obtained
through the Company's website at www.imax.com or by calling investor relations
at 905-403-6500.
Page 13
IMAX CORPORATION
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Mississauga,
Ontario, Canada, New York, New York and Santa Monica, California. The Company's
principal facilities are as follows:
OPERATION OWN/LEASE EXPIRATION
--------- --------- ----------
Mississauga, Headquarters, Administrative, Assembly and Own N/A
Ontario(1).......... Research and Development
New York, New York.......... Executive Lease 2014
Santa Monica, California.... Sales, Marketing, Film Production and Post- Lease 2012
Production
Birmingham, Alabama(2)...... Sound Facilities Service Lease 2004
Berlin, Germany............. Sales and Marketing Lease 2004
Shanghai, China............. Sales and Marketing Lease 2004
Tokyo, Japan................ Sales, Marketing, Maintenance and Theater Design Lease 2004
Toronto, Canada............. Film Production Lease 2004
(1) This facility is subject to a charge in favor of Congress Financial
Corporation (Canada) in connection with a secured revolving credit
facility (see note 27 to the Audited Financial Statements contained in
Item 8).
(2) This facility was sold as a manufacturing office in May 2002. Following
the sale, the Company entered into lease agreement for a limited space to
continue sound facilities services.
Page 14
IMAX CORPORATION
ITEM 3. LEGAL PROCEEDINGS
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 complaint was subsequently amended to add claims for fraud based
upon the same factual allegations underlying its prior claims. The Company filed
counterclaims against Muvico for breach of contract, unjust enrichment unfair
competition and/or deceptive trade practices and theft of trade secrets, and
brought claims against MegaSystems, Inc. ("MegaSystems"), a large-format theater
system manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from using the
Company's confidential and proprietary information. The case is being heard in
the U.S. District Court, Southern District of Florida, Miami Division. The
Company's motion for a summary judgement on its contract claims against Muvico
was heard in September 2003; a decision has not yet been rendered. 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.
In May 2003, the Company filed a Statement of Claim in the Ontario Superior
Court of Justice against United Cinemas International Multiplex B.V. ("UCI") for
specific performance, or alternatively, damages of $25.0 million with respect to
the breach of a 1999 agreement between the Company and UCI whereby UCI committed
to purchase IMAX theater systems from the Company. In August 2003, UCI filed a
Statement of Defence denying it is in breach. On December 10, 2003, UCI and its
two subsidiaries in the United Kingdom and Japan filed a claim against the
Company claiming alleged breaches of the 1999 agreement referred to in the
Company's claim against UCI, and repeating allegations contained in UCI's
Statement of Defence to the Company's action. The Company believes that the
allegations made by UCI in its complaint are entirely without merit and will
accordingly defend the claims vigorously. The Company believes that the amount
of loss, if any, suffered in connection with this lawsuit would not have a
material impact on the financial position or results of operation of the
Company, although no assurance can be given with respect to the ultimate outcome
of any such litigation.
In November 2001, the Company filed a complaint with the High Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin ("Big
Screen"), demanding payment of rental payments and certain other amounts owed to
the Company. Big Screen has raised a defense based on alleged infringement of
German antitrust rules, relating mainly to an allegation of excessive pricing.
Big Screen had brought a number of motions for restraining orders in this matter
relating to the Company's provision of films and maintenance, all of which have
been rejected by the courts, including the Berlin Court of Appeals, and for
which all appeals have been exhausted. The Company believes that all of the
allegations in Big Screen's individual defense are entirely without merit and
will accordingly continue to prosecute this matter vigorously. The Company
believes that the amount of the loss, if any, suffered in connection with this
dispute would not have a material impact on the financial position or results of
operations of the Company, although no assurance can be given with respect to
the ultimate outcome of any such litigation.
In addition to the matters described above, the Company is currently
involved in other legal proceedings which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect to the
ultimate outcome of any such proceedings.
The Company has received requests for information from the SEC in
connection with an inquiry by the SEC into certain trading in the equity
securities of the Company in January 2002. The Company is co-operating fully
with the SEC's requests and does not believe that it is a target of the SEC's
inquiry or that such inquiry will have a material adverse effect on the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the quarter ended December 31, 2003.
Page 15
IMAX CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are listed for trading under the trading symbol
"IMAX" on the Nasdaq National Market System ("Nasdaq"). The common shares are
also listed on the Toronto Stock Exchange ("TSX") under the trading symbol
"IMX". The following table sets forth the range of high and low sales prices per
share for the common shares on Nasdaq and the TSX.
U.S. DOLLARS
--------------------------------
HIGH LOW
-------- -------
NASDAQ
Year ended December 31, 2003
Fourth quarter........................... 10.400 6.840
Third quarter............................ 9.750 6.950
Second quarter........................... 9.500 4.830
First quarter............................ 5.060 2.610
Year ended December 31, 2002
Fourth quarter........................... 5.600 3.500
Third quarter............................ 6.050 2.850
Second quarter........................... 7.850 3.554
First quarter............................ 4.890 1.850
CANADIAN DOLLARS
--------------------------------
HIGH LOW
-------- -------
TSX
Year ended December 31, 2003
Fourth quarter........................... 13.890 9.070
Third quarter............................ 13.480 9.570
Second quarter........................... 12.750 7.110
First quarter............................ 7.470 4.000
Year ended December 31, 2002
Fourth quarter........................... 8.700 5.450
Third quarter............................ 9.500 5.100
Second quarter........................... 12.000 5.820
First quarter............................ 7.600 3.000
As of February 20, 2004, the Company had approximately 294 registered
holders of record of the Company's common shares.
The Company has not paid within the last three fiscal years, and has no
current plans to pay, cash dividends on its common shares. The payment of
dividends by the Company is subject to certain restrictions under the terms of
the Company's indebtedness (see notes 11 and 27 to the audited financial
statements in Item 8 and the discussion of liquidity and capital resources in
Item 7). The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board of Directors.
Page 16
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES (cont'd)
EQUITY COMPENSATION PLANS
The following table sets forth information regarding the Company's Equity
Compensation Plan as of December 31, 2003:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
- ----------------------------- ------------------------ -------------------- ------------------------
(a) (b) (c)
Equity compensation plans 5,677,806 $11.11 2,199,795
approved by security holders
Equity compensation plans not
approved by security holders 550,000(1) $ 6.06 nil
--------- ------
---------
Total 6,227,806 $10.66 2,199,795
========= ====== =========
(1) Warrants granted to strategic partners of the Company, see note 16(c) to
the audited financial statements in Item 8.
CERTAIN INCOME TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax consequences of the ownership and disposition of the common shares by
a U.S. Holder (a "U.S. Holder"). A U.S. Holder generally means a holder of
common shares that is an individual resident of the United States or a United
States corporation. This discussion does not discuss all aspects of U.S. federal
income taxation that may be relevant to investors subject to special treatment
under U.S. federal income tax law (including, for example, owners of 10.0% or
more of the voting shares of the Company).
DISTRIBUTIONS ON COMMON SHARES
In general, distributions (without reduction for Canadian withholding
taxes) paid by the Company with respect to the common shares will be taxed to a
U.S. Holder as dividend income to the extent that such distributions do not
exceed the current and accumulated earnings and profits of the Company (as
determined for U.S. federal income tax purposes). Subject to certain
limitations, dividends paid to non-corporate U.S. Holders may be eligible for a
reduced rate of taxation as long as the Company is considered to be a "qualified
foreign corporation". A qualified foreign corporation includes a foreign
corporation that is eligible for the benefits of an income tax treaty with the
United States. The amount of a distribution that exceeds the earnings and
profits of the Company will be treated first as a non-taxable return of capital
to the extent of the U.S. Holder's tax basis in the common shares and thereafter
as taxable capital gain. Corporate holders generally will not be allowed a
deduction for dividends received in respect of distributions on common shares.
Subject to the limitations set forth in the U.S. Internal Revenue Code, as
modified by the United States-Canada Income Tax Treaty, U.S. Holders may elect
to claim a foreign tax credit against their U.S. federal income tax liability
for Canadian income tax withheld from dividends. Alternatively, U.S. Holders may
claim a deduction for such amounts of Canadian tax withheld.
DISPOSITION OF COMMON SHARES
Upon the sale or other disposition of common shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the sale and such holder's tax basis in the common
shares. Gain or loss upon the disposition of the common shares will be long-term
if, at the time of the disposition, the common shares have been held for more
than one year. The deduction of capital losses is subject to limitations for
U.S. federal income tax purposes.
Page 17
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES (cont'd)
CERTAIN INCOME TAX CONSIDERATIONS (cont'd)
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
This summary is applicable to a holder or prospective purchaser of common
shares who is not (and is not deemed to be) resident in Canada, does not (and is
not deemed to) use or hold the common shares in, or in the course of, carrying
on a business in Canada, and is not an insurer that carries on an insurance
business in Canada and elsewhere.
This summary is based on the current provisions of the Income Tax Act
(Canada), the regulations thereunder, all specific proposals to amend such Act
and regulations publicly announced by or on behalf of the Minister of Finance
(Canada) prior to the date hereof and the Company's understanding of the
published administrative practices of the Canada Revenue Agency. This summary
does not otherwise take into account any change in law or administrative
practice, whether by judicial, governmental, legislative or administrative
action, nor does it take into account provincial, territorial or foreign income
tax consequences, which may vary from the Canadian federal income tax
considerations described herein.
This summary is of a general nature only and it is not intended to be, nor
should it be construed to be, legal or tax advice to any holder of the common
shares and no representation with respect to Canadian federal income tax
consequences to any holder of common shares is made herein. Accordingly,
prospective purchasers and holders of the common shares should consult their own
tax advisers with respect to their individual circumstances.
DIVIDENDS ON COMMON SHARES
Canadian withholding tax at a rate of 25.0% (subject to reduction under the
provisions of any relevant tax treaty) will be payable on dividends paid or
credited to a holder of common shares. Under the Canada-U.S. Income Tax Treaty,
the withholding tax rate is generally reduced to 15.0% for a holder entitled to
the benefits of the treaty (or 5.0% if the holder is a corporation that owns at
least 10.0% of the common shares).
CAPITAL GAINS AND LOSSES
Subject to the provisions of a relevant tax treaty, capital gains realized
by a holder on the disposition or deemed disposition of common shares held as
capital property will not be subject to Canadian tax unless the common shares
are taxable Canadian property (as defined in the Income Tax Act (Canada)), in
which case the capital gains will be subject to Canadian tax at rates which will
approximate those payable by a Canadian resident. Common shares will not be
taxable Canadian property to a holder provided that, at the time of the
disposition or deemed disposition, the common shares are listed on a prescribed
stock exchange (which currently includes the TSX) unless such holder, persons
with whom such holder did not deal at arm's length or such holder together with
all such persons, owned 25.0% or more of the issued shares of any class or
series of shares of the Company at any time within the 60 month period
immediately preceding such time.
Under the Canada-United States Income Tax Treaty, a holder entitled to the
benefits of the treaty and to whom the common shares are taxable Canadian
property will not be subject to Canadian tax on the disposition or deemed
disposition of the common shares unless at the time of disposition or deemed
disposition, the value of the common shares is derived principally from real
property situated in Canada.
Page 18
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
(In thousands of U.S. dollars, except per share amounts)
The selected financial data set forth below is derived from the
consolidated financial statements of the Company. The financial statements have
been prepared in accordance with United States Generally Accepted Accounting
Principles ("U.S. GAAP"). All financial information referred to herein is
expressed in U.S. dollars unless otherwise noted. Certain comparative figures
have been reclassified to conform with classifications adopted in 2003.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999(1)
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
REVENUE
IMAX systems(2)............................................. $ 75,848 $ 70,959 $ 76,582 $ 113,226 $ 126,826
Films....................................................... 25,803 40,556 29,923 41,711 47,227
Theater operations.......................................... 13,109 12,284 6,540 8,467 7,159
Other....................................................... 4,500 5,303 4,654 7,096 9,393
---------- ---------- ---------- ---------- ----------
Total revenue............................................... 119,260 129,102 117,699 170,500 190,605
COSTS OF GOODS AND SERVICES(3)................................. 67,283 75,634 94,969 106,429 94,407
---------- ---------- ---------- ---------- ----------
GROSS MARGIN................................................... 51,977 53,468 22,730 64,071 96,198
Selling, general and administrative expenses(4)................ 33,312 34,906 45,850 42,079 32,524
Research and development....................................... 3,794 2,362 3,385 6,497 3,136
Amortization of intangibles.................................... 573 1,418 3,005 2,948 2,159
Loss (income) from equity-accounted investees(5)............... (2,496) (283) (73) 4,811 683
Receivable provisions (recoveries), net........................ (2,225) (1,233) 18,102 13,086 949
Restructuring costs and asset impairments (recoveries)(6)...... 969 (121) 45,269 11,152 --
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS................................ 18,050 16,419 (92,808) (16,502) 56,747
Interest income................................................ 656 413 847 3,285 9,977
Interest expense............................................... (15,856) (17,564) (22,020) (21,961) (21,860)
Gain (loss) on retirement of notes(7).......................... (4,910) 11,900 55,577 -- --
Recovery (impairment) of long-term investments(8).............. 1,892 -- (5,584) (4,133) --
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST....................................... (168) 11,168 (63,988) (39,311) 44,864
Recovery of (provision for) income taxes(9) ................... 386 -- (27,848) 11,700 (17,175)
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST.................................................... 218 11,168 (91,836) (27,611) 27,689
Minority interest.............................................. -- -- -- -- (1,207)
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS................. 218 11,168 (91,836) (27,611) 26,482
Net earnings (loss) from discontinued operations............... 195 804 (53,278) (4,226) (1,249)
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES....................................... 413 11,972 (145,114) (31,837) 25,233
Cumulative effect of changes in accounting principles,
net of income tax benefit of $nil and $37,286(10)........... (182) -- -- (61,110) --
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS)............................................ $ 231 $ 11,972 $ (145,114) $ (92,947) $ 25,233
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations.............. $ 0.01 $ 0.34 $ (2.97) $ (0.93) $ 0.89
Net earnings (loss) from discontinued operations............ $ -- $ 0.02 $ (1.72) $ (0.14) $ (0.04)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) before cumulative effect of changes in
accounting principles...................................... $ 0.01 $ 0.36 $ (4.69) $ (1.07) $ 0.85
Cumulative effect of changes in accounting principles....... $ -- $ -- $ -- $ (2.04) $ --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)......................................... $ 0.01 $ 0.36 $ (4.69) $ (3.11) $ 0.85
========== ========== ========== ========== ==========
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations.............. $ 0.01 $ 0.34 $ (2.97) $ (0.93) $ 0.84
Net earnings (loss) from discontinued operations............ $ -- $ 0.02 $ (1.72) $ (0.14) $ (0.04)
---------- ----------- ---------- ---------- ----------
Net earnings (loss) before cumulative effect of changes in
accounting principles...................................... $ 0.01 $ 0.36 $ (4.69) $ (1.07) $ 0.80
Cumulative effect of changes in accounting principles....... $ -- $ -- $ -- $ (2.04) $ --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)......................................... $ 0.01 $ 0.36 $ (4.69) $ (3.11) $ 0.80
========== ========== ========== ========== ==========
Page 19
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(1) In accordance with the interpretive guidance of SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), effective January 1, 2000, the Company recognizes revenue on theater
system sales and sales-type leases at the time that installation is
complete. Prior to January 1, 2000, the Company recognized revenue on
theater systems at the time of delivery. Pro forma revenue and net earnings
(loss) as if SAB 101 had been applied during 1999 would have been $166.6
million and $7.7 million, respectively. As the SAB 101 adjustment was
reflected in the statement of operations through a one-time cumulative
adjustment in 2000, certain line items in this table may reflect a revenue
transaction twice.
(2) In the normal course of its business, the Company each year will have
customers who, for a number of reasons including the inability to obtain
certain consents, approvals or financing, are unable to proceed with
theater construction. Once the determination is made that the customer will
not proceed with installation, the lease agreement with the customer is
generally terminated. Upon the Company being released from its future
obligations under the agreement, the initial lease payments that the
customer previously made to the Company are recognized as revenue. Included
in IMAX systems revenue is $9.6 million for 2003, $5.1 million for 2002,
$5.5 million in 2001 and $1.4 million in 2000 for restructured and/or
terminated lease agreements with customers.
(3) In 2001, costs of goods and services included a $4.1 million and a $16.5
million charge relating to a decline in net realizable value of the
Company's inventories and film assets, respectively. The year ended
December 31, 2000 included a $8.6 million charge which related to the
write-down of certain films in distribution.
(4) The year ended December 31, 2001 selling, general and administrative
expenses included a $2.6 million non-cash compensation charge resulting
from a stock grant issuance.
(5) In 2003, loss (income) from equity-accounted investees included a gain of
$2.3 million from the release of a financial guarantee. In 2000, loss
(income) from equity-accounted investees included a $4.0 million provision
related to the guarantee of a term loan.
(6) In 2001, restructuring costs and asset impairments (recoveries) included a
charge of $16.3 million as part of the Company's efforts to streamline the
business by reducing its overall corporate workforce and relocate its
sound-system facility to near Toronto, Canada. In addition, the Company
recorded charges of $26.7 million to fixed assets, and $3.3 million of
other assets to recognize a decline in value the Company considered other
than temporary. In 2000, asset impairments included charges of $11.2
million relating to fixed assets.
(7) During 2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of $170.8
million of the Company's 7.875% senior notes due 2005 (the "Old Senior
Notes"). During 2002, the Company and a wholly-owned subsidiary of the
Company purchased and cancelled an aggregate of $20.5 million of the
Company's convertible subordinated notes due April 1, 2003 (the
"Subordinated Notes") for $8.1 million, represented by $6.0 million in cash
by the subsidiary and $2.1 million in common shares by the Company. The
Company cancelled the purchased Subordinated Notes and recorded a gain of
$11.9 million. During 2001, the Company and a wholly-owned subsidiary of
the Company purchased and cancelled an aggregate of $70.4 million of the
Company's Subordinated Notes for $13.7 million, represented by $12.5
million in cash by the subsidiary and $1.2 million in common shares by the
Company.
(8) Impairment of long-term investments includes a recovery of $1.9 million in
2003 as a result of the Company entering into a settlement agreement with
Mainframe Entertainment, Inc. The Company had recorded a charge of $5.6
million and $4.1 million relating to the impairment of certain long-term
investments for the years ended December 31, 2001 and 2000, respectively.
(9) In 2001, the provision for income taxes includes a $41.2 million increase
in the valuation allowance to reflect uncertainty associated with
realization of the Company's deferred income tax asset.
Page 20
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(10) In 2003, the Company recorded a charge as a cumulative effect of change in
accounting principle of $0.2 million in accordance with SFAS No. 143
"Accounting for Asset Retirement Obligations" which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In
2000, the Company recognized an after-tax charge of $54.5 million in
accordance with the interpretive guidance of SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). In
fiscal 2000, the Company also adopted AICPA Statement of Position 00-2,
"Accounting by Producers or Distributors of Film" ("SOP 00-2") and recorded
an after-tax charge of $6.6 million to reflect the adoption of this new
principle.
AS AT DECEMBER 31,
---------------------------------------------------------------------
BALANCE SHEETS DATA: 2003 2002 2001 2000 1999(2)
----------- ----------- ----------- ----------- -----------
Cash, cash equivalents, restricted cash and
investments in marketable debt securities........ $ 52,243 $ 37,136 $ 26,388 $ 34,310 $ 121,502
Total assets(1).................................... 250,376 242,976 261,512 492,100 538,237
Total long-term indebtedness....................... 189,234 209,143 229,643 300,000 300,000
Total shareholders' equity (deficit)............... (51,776) (103,670) (118,448) 22,263 111,065
(1) Includes the assets of discontinued operations.
(2) Pro Forma Amounts in Accordance with SAB 101:
Pro forma amounts for the year ended December 31, 1999 as if SAB 101 had been
applied during all years presented:
1999
----------
Total revenue................................................... $ 166,617
Net earnings ................................................... $ 7,655
Net earnings per share - basic:.............................. $ 0.26
Net earnings per share - fully diluted:...................... $ 0.25
QUARTERLY STATEMENTS OF OPERATIONS SUPPLEMENTARY DATA:
2003
----------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Sales............................................................ $ 33,649 $ 34,450 $ 21,228 $ 29,933
Cost of goods and services....................................... 17,649 20,164 11,538 17,932
----------- ----------- ----------- -----------
Gross margin..................................................... $ 16,000 $ 14,286 $ 9,690 $ 12,001
=========== =========== =========== ===========
Net earnings (loss) from continuing operations................... $ 2,514 $ 1,026 $ (2,510) $ (812)
Net earnings from discontinued operations........................ (91) (57) (144) 487
----------- ----------- ----------- -----------
Net earnings (loss) before cumulative effect of changes in
accounting principles....................................... 2,423 969 (2,654) (325)
Cumulative effect of changes in accounting principles net of
income tax benefit.......................................... -- -- -- (182)
----------- ----------- ----------- -----------
Net earnings (loss).............................................. $ 2,423 $ 969 $ (2,654) $ (507)
=========== =========== =========== ===========
Net earnings (loss) per share - basic and fully diluted.......... $ 0.07 $ 0.03 $ (0.07) $ (0.02)
2002
----------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Sales............................................................ $ 30,202 $ 38,515 $ 23,404 $ 36,981
Cost of goods and services....................................... 16,702 19,681 15,854 23,397
----------- ----------- ----------- -----------
Gross margin..................................................... $ 13,500 $ 18,834 $ 7,550 $ 13,584
=========== =========== =========== ===========
Net earnings (loss) from continuing operations................... $ 10,731 $ 3,433 $ (3,968) $ 972
Net earnings from discontinued operations........................ (184) (398) 1,674 (288)
----------- ----------- ----------- -----------
Net earnings (loss).............................................. $ 10,547 $ 3,035 $ (2,294) $ 684
=========== =========== =========== ===========
Net earnings (loss) per share - basic and fully diluted.......... $ 0.32 $ 0.09 $ (0.07) $ 0.02
Page 21
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of IMAX Corporation together with its wholly-owned
subsidiaries (the "Company") is the design, manufacture, sale and lease of
projection systems for large-format theaters including commercial theaters,
museums and science centers, and destination entertainment sites. In addition,
the Company designs and manufactures high-end sound systems and produces and
distributes large-format films. At December 31, 2003, there were 240 IMAX
theaters operating in 35 countries.
The Company derives revenue principally from long-term theater system lease
and sale agreements, maintenance agreements, and film distribution and
production agreements. The Company also derives revenue from the operation of
its own theaters, camera rentals and post-production services.
Important factors that the Company's CEOs use in assessing the Company's
business and prospects include the signing of new theater systems, profits from
the Company's business units, earnings from operations as adjusted for unusual
items that the Company views as non-recurring, such as costs associated with the
repurchase and refinancing of the Company's 7.875% senior notes due 2005 (the
"Old Senior Notes"), and the success of strategic initiatives such as the
securing of new film projects, particularly IMAX DMR and IMAX 3D film projects.
THEATER SYSTEMS
The Company generally provides its theater systems to customers on a
long-term lease basis, typically with initial lease terms of 10 to 20 years.
Lease agreements typically provide for three major sources of revenue: initial
rental fees; ongoing rental payments, which include annual contractual minimum
payments; and maintenance fees. The initial rental fees vary depending on the
type of system and location and generally are paid to the Company in
installments commencing upon the signing of the agreement. Ongoing rental
payments are paid monthly over the term of the contract, commencing after system
installation and are generally equal to the greater of a fixed minimum amount
per annum and a percentage of box office receipts. Ongoing rental payments
include rental income and finance income. An annual maintenance fee is generally
payable commencing after the warranty period. Both minimum rental payments and
maintenance fees are typically indexed to the local consumer price index.
Revenue on theater system leases and sales are recognized at a different time
than when cash is collected. See "Significant Accounting Policies" below for
further discussion on the Company's revenue recognition policies.
Periodically, the Company sells theater systems to customers. These sales
generally provide for upfront cash payments received prior to installation and
the receipt of minimum payments over time, typically 10 to 20 years.
Cash received from initial rental fees in advance of installation is
recorded as deferred revenue. The associated costs of manufacturing the theater
system are recorded as inventory. At the time of installation, the deferred
revenue is recognized in income, and the inventory costs are fully expensed.
The timing of installation of the theater system is largely dependent on
the timing of the construction of the customer's theater. Therefore, while
revenue for theater systems is generally predictable on a long-term basis, it
can vary substantially from year to year or quarter to quarter depending on the
timing of installation.
As at December 31, 2003, there were 55 installed 2D flat screen systems, 66
installed 2D dome screen systems, 78 installed 3D standard systems and 38
installed 3D SR systems in the world. As at December 31, 2002, there were 56
installed 2D flat screen systems, 65 installed 2D dome screen systems, 81
installed 3D standard systems and 30 installed 3D SR systems in the world.
The North American commercial exhibitor market represents an important
customer base for the Company in terms of both collections under existing
long-term leases and potential future system contracts. In 2000 and 2001, many
of the North American commercial exhibitor chains faced financial difficulties
due to over-expansion, which in some cases led to bankruptcy proceedings and/or
consolidations. Many of these exhibitors have emerged from those proceedings
with new capital, including from the public markets. While the Company views
these developments in the North American commercial exhibitor market as
positive, there is no assurance that they will continue or that other commercial
exhibitors will not encounter additional financial difficulties. To minimize the
Company's credit risk in this area, the Company retains title to underlying
theater systems leased, registers theater systems sold as collateral, performs
initial and ongoing credit evaluations of its customers and makes ongoing
provisions for its estimates of potentially uncollectible amounts.
Page 22
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
GENERAL (cont'd)
THEATER SYSTEMS (cont'd)
The average initial rent or sales price charged to customers under the
Company's theater system lease or sales agreements can vary from quarter to
quarter and year to year based on a number of factors including the type of
system sold or leased, the region of the world, the type of contract and other
factors specific to individual contracts. The Company has taken steps in recent
years to accelerate the growth of the global IMAX theater network and the sale
or lease of its products by developing lower-cost systems designed to appeal to
broader customer bases, particularly in commercial multiplex markets. Although
such systems are lower-cost, the Company has endeavored to successfully maintain
its percentage margins on a unit basis and maintain aggregate sales margins
through increased volume. The Company signed twenty-five theater system
agreements in 2003 (2002 - 21, 2001 - 12).
SALES BACKLOG
During the year ended December 31, 2003, the Company signed contracts for
25 IMAX theaters, valued at $41.2 million. At December 31, 2003, the sales
backlog, which represented contracts for 61 theater systems, totaled $138.1
million. The sales backlog will vary from quarter to quarter depending on the
signing of new theater systems, which adds to backlog, and the installation of
theater systems and the settlement of theater system contracts, both of which
reduce backlog. Sales backlog typically represents the minimum revenue under
signed theater system sale and lease agreements that the Company believes will
be recognized as revenue as the associated theater systems are installed.
Operating leases are assigned no value in the sales backlog. The minimum revenue
comprises the upfront payments plus the present value of the minimum payments
due under sales-type lease and sale agreements. The value of sales backlog does
not include revenue from theaters in which the Company has an equity interest,
letters of intent or long-term conditional theater commitments.
In the normal course of its business the Company each year will have
customers who, for a number of reasons including the inability to obtain certain
consents, approvals or financing, are unable to proceed with theater
construction. Once the determination is made that the customer will not proceed
with installation, the lease agreement with the customer is generally terminated
and removed from backlog. Upon the Company being released from its future
obligations under the agreement, the initial lease payments that the customer
previously made to the Company are recognized as revenue.
FILM PRODUCTION AND DISTRIBUTION
Effective January 1, 2000, the Company adopted SOP 00-2 "Accounting by
Producers or Distributors of Films." The Company recognizes revenue from
licensing of exhibition rights to motion pictures produced or distributed by the
Company when the film is complete and has been delivered, the license period has
begun, the fee is fixed or determinable and collection is reasonably assured.
Where the license fees are based on a share of the customer's revenue, and all
other revenue recognition criteria are met, the Company recognizes revenue as
the customer exhibits the film. Costs of producing films and acquiring film
distribution rights are capitalized and amortized using the individual
film-forecast-computation method, which amortizes film costs and accrues
participation costs in the same ratio that current period actual revenue bears
to estimated remaining unrecognized ultimate revenue as of the beginning of the
fiscal year. All advertising, exploitation costs and marketing costs are
expensed as incurred.
The Company has developed a proprietary, patent-pending technology to
digitally re-master 35mm live-action films into 15/70-format film at a modest
cost for exhibition in IMAX theaters. This system, known as IMAX DMR, digitally
enhances the image resolution quality of 35mm motion picture films for
projection on IMAX screens while maintaining the visual clarity and sound
quality for which The IMAX Experience is known. The Company believes that this
technology has opened the IMAX theater network up to potential releases of
Hollywood films including both library titles and contemporaneous new releases.
The Company believes that the development of this new technology is key to
helping it execute on its strategy of growing its commercial theater network by
becoming a new release window for Hollywood films.
While the Company is optimistic about the IMAX DMR technology, there is no
guarantee that it will be commercially successful or receive widespread
acceptance by film studios.
Page 23
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
GENERAL (cont'd)
THEATER OPERATIONS
The Company has seven owned and operated theaters. In addition, the Company
has entered into commercial arrangements with two theaters resulting in the
sharing of profits and losses. The Company also provides management services to
two theaters.
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are made to customers located
outside the United States and Canada. During 2003, 2002 and 2001, 39.7%, 37.0%
and 35.5%, respectively, of the Company's revenue was derived outside the United
States and Canada. The Company expects that international operations will
continue to account for a substantial portion of the Company's revenue in the
future. In order to minimize exposure to exchange rate risk, the Company prices
theater systems (the largest component of revenue) in U.S. dollars except in
Canada and Japan where they may be priced in Canadian dollars and Japanese yen,
respectively. Annual minimum rental payments and maintenance fees follow a
similar currency policy.
SIGNIFICANT ACCOUNTING POLICIES
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 the Company's financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue 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 note 2
of its audited financial statements in Item 8.
The Company considers the following critical accounting policies to have
the most significant effect on its estimates, assumptions and judgments:
REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a result
of meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is
recognized, the initial rental fees due under the contract, along with the
present value of minimum ongoing rental payments, are recorded as revenues for
the period, and the related projector costs including installation expenses are
recorded as cost of goods and services. Additional ongoing rentals in excess of
minimums are recognized as revenue when reported by the theater operator,
provided that collection is reasonably assured.
The Company recognizes revenues from sales-type leases upon installation of
the theater system. Revenue associated with a sales-type lease is recognized
when all of the following criteria are met: persuasive evidence of an agreement
exists; the price is fixed or determinable; and collection is reasonably
assured.
The timing of installation of the theater system is largely dependent on
the timing of the construction of the customer's theater. Therefore, while
revenue for theater systems is generally predictable on a long-term basis, it
can vary from quarter to quarter or year to year depending on the timing of
installation.
Page 24
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
GENERAL (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
The Company monitors the performance of the theaters to which it has leased
equipment. When facts and circumstances indicate that it may need to change the
terms of a lease which had previously been recorded as a sales-type lease, the
Company evaluates the likely outcome of such negotiations. A provision is
recorded against the net investment in leases if the Company believes that it is
probable that the negotiation will result in a reduction in the minimum lease
payments such that the lease will be reclassified as an operating lease. The
provision is equal to the excess of the carrying value of the net investment in
lease over the fair value of the equipment.
In the ordinary course of its business, the Company will from time to time
determine that a provision it had previously taken against the net investment in
leases in connection with a customer's lease agreement should be reversed due to
a change in the circumstances that led to the original provision.
If the Company and a lessee agree to change the terms of the lease, other
than by renewing the lease or extending its terms, management evaluates whether
the new agreement would be classified as a sales-type lease or an operating
lease under the provisions of FAS 13. Any adjustments which result from a change
in classification from a sales-type lease to an operating lease are reported as
a charge to income during the period the change occurs.
In the normal course of its business, the Company each year will have
customers who, for a number of reasons including the inability to obtain certain
consents, approvals or financing, are unable to proceed with theater
construction. In these instances, where customers of the Company are not in
compliance with the terms of their leases for theater systems not yet installed,
the leases are in default. There is typically deferred revenue associated with
these leases, representing initial lease payments collected prior to the
default. These initial lease payments are recognized as revenue when the Company
exercises its rights to terminate the lease and the Company is released legally
and/or by virtue of an agreement with the customer from its obligations under
the lease arrangement. When settlements are received, the Company will allocate
the total settlement to each of the elements based on their relative fair value.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
The allowance for doubtful accounts receivable and provision against the
financing receivables are based on the Company's assessment of the
collectibility of specific customer balances and the underlying asset value of
the equipment under lease where applicable. If there is a deterioration in a
customer's credit worthiness or actual defaults under the terms of the leases
are higher than the Company's historical experience, the Company's estimates of
recoverability for these assets could be adversely affected.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions prove to be
incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
Page 25
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
GENERAL (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
GOODWILL
The Company adopted FASB Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangibles" ("FAS 142") effective January 1, 2002. Upon
adoption of this standard, no impairment in goodwill was found to exist.
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
FIXED ASSETS
Management reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. In performing its review for recoverability,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of impairment losses is based on the excess of the
carrying amount of the asset over the fair value calculated using discounted
expected future cash flows. If the actual future cash flows are less than the
Company's estimates, future earnings could be adversely affected.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This standard requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently amortized over the
asset's useful life. Accordingly, the Company recorded a charge in its
consolidated results of operations for 2003 including a cumulative effect of
change in accounting principle of $0.2 million, which was recorded as a
reduction of net income.
Page 26
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
GENERAL (cont'd)
TAX ASSET VALUATION
As at December 31, 2003, the Company had net deferred income tax assets of
$3.8 million, comprised of tax credit carryforwards, net operating loss and
capital loss carryforwards and other deductible temporary differences, which can
be utilized to reduce either taxable income or taxes otherwise payable in future
years. The Company's management assesses realization of these net deferred
income tax assets based on all available evidence and has concluded that it is
more likely than not that these net deferred income tax assets will be realized.
Positive evidence includes, but is not limited to, the Company's projected
future earnings based on contracted sales backlog at December 31, 2003, and the
ability to realize certain deferred income tax assets through loss and tax
credit carryback strategies. If and when the Company's operations in some
jurisdictions were to reach a requisite level of profitability or where the
Company's future profitability estimates increase due to changes in positive
evidence, the Company would reduce all or a portion of the applicable valuation
allowance in the period when such determination is made. This would result in an
increase to reported earnings and a decrease to the Company's effective tax rate
in such period. However, if the Company's projected future earnings do not
materialize, or if the Company operates at a loss in certain jurisdictions, or
if there is a material change in actual effective tax rates or time period
within which the Company's underlying temporary differences become taxable or
deductible, the Company could be required to increase the valuation allowance
against all or a significant portion of the Company's deferred tax assets
resulting in a substantial increase to the Company's effective tax rate for the
period of the change and a material adverse impact on its operating results for
the period. Adjustments to the Company's valuation allowance, through charges
(credits) to expense, were $ 3.0 million, $ (1.8) million, and $ 41.2 million
for the years ended December 31, 2003, 2002, and 2001, respectively. As at
December 31, 2003, the Company had a gross deferred income tax asset of $50.5
million, against which the Company is carrying a $46.8 million valuation
allowance.
The Company is subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, the Company may incur additional tax expense
based upon the outcomes of such matters. In addition, when applicable, the
Company adjusts tax expense to reflect both favorable and unfavorable
examination results. The Company's ongoing assessments of the probable outcomes
of examinations and related tax positions require judgement and can materially
increase or decrease its effective rate as well as impact operating results.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FIN 46, "Consolidation of Variable Interest Entities", ("FIN 46") is
effective for all enterprises with variable interests in variable interest
entities created after January 31, 2003. FIN 46(R), which was revised in
December 2003, is effective for all entities to which the provision of FIN 46
were not applied as of December 24, 2003. The provision of FIN 46(R) must be
applied to all entities subject to FIN46 from the beginning of the first quarter
of 2004. If an entity is determined to be a variable interest entity ("VIE"), it
must be consolidated by the enterprise that absorbs the majority of the entity's
expected losses, receives a majority of the entity's expected residual returns,
or both. In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial assets, including
loans or receivables, real estate or other property. A variable interest entity
may be essentially passive or it may engage in research and development or other
activities on behalf of another company. The objective of FIN 46 is not to
restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, a
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The Company has not entered into any material arrangements with variable
interest entities created after January 31, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 for any variable interest
entities created prior to February 1, 2003 will have on its results of
operations and financial condition.
Page 27
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
SPECIAL ITEMS
The Company recognized a number of special items in its 2003 operating
results which may not be reflective of future operating results. In 2003, the
Company recorded $2.3 million in income from equity-accounted investees
reflecting the release of the Company from a joint venture debt guarantee that
had been provided for in previous years.
In 2003, the Company received $1.9 from Mainframe Entertainment, Inc. to
settle the outstanding Debenture which was previously fully provided for.
In 2003, the Company recorded a loss of $4.9 million in connection with the
retirement of $170.8 million of its Old Senior Notes. In 2004, the Company
expects to record an additional loss of $0.8 million in the first quarter of
2004 when the remaining $29.2 million in outstanding Old Senior Notes were
redeemed.
RESTRUCTURING COSTS AND OTHER SIGNIFICANT CHARGES (RECOVERIES)
(In thousands of U.S. dollars, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Restructuring costs (recoveries) $ -- $ (497) $ 16,292
------------ ------------ ------------
Asset impairments (recoveries):
Fixed assets 969 376 25,694
Other assets -- -- 3,283
Other significant charges (recoveries):
Accounts receivable 714 (1,942) 4,469
Inventories -- 1,229 4,053
Film assets -- -- 16,514
Fixed assets 353 2,799 --
Other assets 73 216 --
Financing receivables (2,939) 709 13,633
Long-term investments (1,892) -- 5,584
------------ ------------ ------------
Total asset impairments and other significant (recoveries) (2,722) 3,387 73,230
------------ ------------ ------------
Net charges (recoveries) $ (2,722) $ 2,890 $ 89,522
============ ============ ============
Page 28
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
GENERAL (cont'd)
RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
In 2001, the Company rationalized its operations, reduced staffing levels,
wrote-down certain assets to be disposed of, and recorded a restructuring charge
of $16.3 million. During 2002, the Company recovered $0.5 million of
restructuring accrued liabilities for terminated employees who obtained
employment prior to the completion of their severance period. The Company did
not incur any restructuring expenses in 2003.
During 2003, 2002 and 2001, the Company recorded asset impairment charges
of $1.0 million, $0.4 million, and $29.0 million, respectively, after assessing
the carrying value of certain assets. The 2001 asset impairment charges
consisted of $25.7 million against fixed assets and $3.3 million against other
assets, as the carrying values for the assets exceeded the discounted future
cash flows expected from these assets.
The Company believes its 2001 restructuring plan and related write-downs
were necessary in light of market trends and industry-wide economic and
financial conditions. As of December 31, 2001, the Company had fully executed
its restructuring plan. Of the $16.3 million originally accrued, $15.3 million
has been spent as of December 31, 2003, $0.5 million was reversed in 2002 for
terminated employees who obtained employment prior to completion of their
severance period and $0.6 million remains accrued for amounts to be paid out to
employees over the next 12 months.
OTHER SIGNIFICANT CHARGES (RECOVERIES)
In 2003, the Company recorded net recoveries in financing receivables of
$2.9 million (2002 - $0.7 million provision). The 2003 recoveries consisted of
$4.1 million on previously provided amounts as collectibility associated with
certain leases was resolved and $1.2 million in new provisions for the current
year. The 2002 provisions consisted of $3.5 million charged for 2002 year leases
offset by $2.8 million recovered on previously provided amounts.
The Company recorded a charge of $0.7 million in 2003 (2002 - $1.9 million
recovery) in accounts receivable provisions as collectibility on certain
accounts was considered uncertain.
The Company recorded charges of $0.4 million in 2003 (2002 - $2.8 million)
against fixed assets and $0.1 million (2002 - $0.2 million) against other
assets, as the carrying values for the assets exceeded the discounted future
cash flows expected from the assets.
During 2003, the Company entered into a settlement agreement with Mainframe
Entertainment, Inc. ("MFE"), whereby the parties settled all of MFE's
indebtedness and obligations to the Company arising under the Company's 6.0%
Senior Secured Convertible Debenture due from MFE (the "Debenture"). The Company
has recorded a gain of $1.9 million related to the final settlement. The Company
had previously recorded $5.6 million in 2001 as a charge for the decline in its
MFE long-term investment that was considered to be other than temporary.
Due to industry-wide economic and financial difficulties faced by many of
the Company's customers in 2001, the Company also recorded the following charges
as part of its ongoing review of the carrying value of the Company's assets. The
Company recorded a charge of $4.5 million in 2001 in receivable provisions, net
of recoveries relating to the Company's accounts receivable, as collectibility
on certain accounts was considered uncertain and $13.6 million against financing
receivables as collectibility associated with a number of leases was considered
uncertain. The Company recorded a charge of $16.5 million in 2001 in costs of
goods and services, based on the reduced fair values of the Company's film
assets. In 2002, the Company also recorded a charge of $1.2 million (2001 - $4.1
million) in costs of goods and services, for inventories, due to a reduced net
realizable value.
Page 29
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for each of
the items set forth below:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
% % % % %
Revenue
IMAX systems.......................................... 63.6 55.0 65.0 66.4 66.5
Films................................................. 21.6 31.4 25.4 24.5 24.8
Theater operations.................................... 11.0 9.5 5.6 5.0 3.8
Other................................................. 3.8 4.1 4.0 4.1 4.9
----- ---- ------ ----- -----
Total revenue........................................... 100.0 100.0 100.0 100.0 100.0
Costs and goods and services............................ 56.4 58.6 80.7 62.4 49.5
----- ---- ------ ----- -----
Gross margin............................................ 43.6 41.4 19.3 37.6 50.5
Selling, general and administrative expenses............ 28.0 27.0 39.0 24.7 17.1
Research and development................................ 3.2 1.8 2.9 3.8 1.6
Amortization of intangibles............................. 0.5 1.1 2.6 1.7 1.1
Loss (income) from equity-accounted investees........... (2.1) (0.2) (0.1) 2.8 0.4
Receivable provisions, net of (recoveries).............. (1.9) (1.0) 15.3 7.8 0.5
Restructuring costs and asset impairments (recovery).... 0.8 (0.1) 38.5 6.5 --
----- ---- ------ ----- -----
Earnings (loss) from operations......................... 15.1 12.7 (78.9) (9.7) 29.8
===== ==== ====== ===== =====
Net earnings (loss) before cumulative effect of
changes in accounting principles........................ 0.3 9.3 (123.3) (18.7) 13.2
===== ==== ====== ===== =====
Net earnings (loss)..................................... 0.2 9.3 (123.3) (54.5) 13.2
===== ==== ====== ===== =====
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002
REVENUES
The Company's revenues in 2003 were $119.1 million, compared to $129.1
million in 2002, a decrease of 7.8% due in large part to a decrease in Film
revenue (see below). The following table sets forth the breakdown of revenue by
category:
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001
--------------- --------------- --------------
IMAX SYSTEMS REVENUE
Sales and leases.................................. $ 52,269 $ 46,656 $ 53,409
Ongoing rent(1)................................... 9,207 9,746 8,969
Maintenance....................................... 14,372 14,557 14,204
-------------- -------------- --------------
75,848 70,959 76,582
-------------- -------------- --------------
FILMS REVENUE
Production and Post-production ................... 13,821 19,859 13,278
Distribution...................................... 11,982 20,697 16,645
-------------- -------------- --------------
25,803 40,556 29,923
-------------- -------------- --------------
THEATER OPERATIONS................................ 13,109 12,284 6,540
-------------- -------------- --------------
OTHER REVENUE..................................... 4,500 5,303 4,654
-------------- -------------- --------------
$ 119,260 $ 129,102 $ 117,699
============== ============== ==============
(1) Includes rental income and finance income.
Systems revenue increased to $75.8 million in 2003 from $71.0 million in
2002, an increase of 6.9%. Revenue from sales and leases increased to $52.3
million in 2003 from $46.7 million in 2002, an increase of 12.0%. In 2003, 20
theater systems were installed, of which one was an operating lease, as compared
to 16 theater systems installed, of which one was an operating lease in 2002.
Ongoing rental revenue in 2003 decreased 5.5% from 2002 and maintenance revenue
in 2003 decreased 1.3% over the prior year. Settlements relating to terminated
lease agreements with customers who were unable to proceed with theater
construction included in revenue for 2003 total $9.6 million (2002 - $5.1
million).
Page 30
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002 (cont'd)
REVENUES (cont'd)
Film revenues decreased to $25.8 million in 2003 from $40.6 million in
2002. Film distribution revenues decreased to $12.0 million in 2003 from $20.7
million in 2002, a decrease of 42.1%, and film post-production revenues
decreased to $12.9 million in 2003 from $16.8 million in 2002, a decrease of
23.2%. The decrease in film distribution revenues was primarily due to stronger
performance of films distributed in 2002, particularly SPACE STATION, which had
gross box office performance of more than $39.0 million in 2002. The decrease in
film post-production revenues was mainly due to higher volume of film print
processing in 2002.
Theater operations revenue increased to $13.1 million in 2003 from $12.3
million in 2002 primarily due to a full year of operations for the Company's
Navy Pier IMAX Theatre in Chicago.
Other revenue decreased to $4.5 million in 2003 from $5.3 million in 2002,
a decrease of 15.1%, largely as a result of decreased revenue related to quick
turn reel units.
Based on the Company's expectation of 2004 system installations and its
estimate of films to be released in 2004, the Company believes it will see
higher revenues in 2004.
GROSS MARGIN
Gross margin in 2003 was $52.0 million, or 43.6% of total revenue, compared
to $53.5 million, or 41.4% of total revenue in 2002. Gross margin decreased
slightly in 2003, primarily due to higher margins in Systems, and an increase in
settlement revenues of $4.5 million which were partially offset by decreased
margins in Films.
The Company believes it will see higher gross margin in 2004 due to a
combination of higher system installations and higher attendance throughout the
IMAX theater network.
OTHER
Selling, general and administrative expenses were $33.3 million in 2003
versus $34.9 million in 2002. The Company recorded a foreign exchange gain of
$1.7 million in 2003 compared to a gain of $0.4 million in 2002. The foreign
exchange gains and losses resulted primarily from fluctuations in exchange rates
on Canadian dollar cash balances and Canadian dollar, Euro dollar and Japanese
Yen denominated net investment in leases. Legal expenses for 2003 declined
significantly to $2.1 million compared to $6.1 million in 2002 as the Company
settled or otherwise favorably resolved certain litigation matters, largely
offset by higher compensation expense of $3.7 million which was due in large
part to higher stock based compensation as well as stronger Canadian dollar in
2003.
Amortization of intangibles decreased to $0.6 million in 2003, from $1.4
million in 2002. The 2002 amount includes write-downs related to the Company's
sound system intangibles.
Income from equity-accounted investees includes a gain of $2.3 million as a
result of the Company being released from a financial guarantee.
Receivable provisions net of recoveries were recorded as a net recovery of
$2.2 million in 2003 compared to a net recovery of $1.2 million in 2002. The
Company recorded an accounts receivable provision of $0.7 million as compared to
a recovery of $1.9 million in 2002. There was a net recovery of $2.9 million in
2003 on financing receivables as compared to a provision of $0.7 million in
2002.
Restructuring recoveries in 2003 amounted to $nil compared to $0.5 million
in 2002. Asset impairment charges amounted to $1.0 million compared to $0.4
million in 2002 after the Company assessed the carrying value of certain assets.
Page 31
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002 (cont'd)
OTHER (cont'd)
Interest income increased to $0.6 million in 2003 from $0.4 million in 2002
due mainly to an increase in the average balance of cash and cash equivalents
held.
Interest expense decreased to $15.9 million in 2003, from $17.6 million in
2002 due largely to lower average debt balances in 2003. The Company repaid the
remaining $9.1 million of its outstanding 5.75% convertible subordinated notes
due 2003, (the "Subordinated Notes") in April 2003 and retired an aggregate of
$47.2 million of its Old Senior Notes, prior to redeeming the remaining Old
Senior Notes pursuant to a tender offer and refinancing in December 2003 and
January 2004.
Recovery on long-term investments was $1.9 million in 2003. The Company
entered into a settlement agreement with Mainframe Entertainment, Inc. ("MFE"),
whereby MFE made payments to the Company in full and final settlement of all of
its indebtedness and obligations to the Company arising under the Debenture. The
Company has recorded a recovery of $1.9 million related to the final settlement.
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, the Canadian manufacturing and processing profits deduction, the
provision for income taxes at different rates in foreign and other provincial
jurisdictions, enacted statutory tax rate increases or reductions in the year,
changes in the Company's valuation allowance based on the Company's
recoverability assessments of deferred tax assets, and favorable resolution of
various examinations. The 2003 deferred income tax recovery included a net $2.9
million increase in the valuation allowance to reflect revised estimates
regarding the realization of the Company's deferred income tax assets stemming
from an increase in deferred tax assets based on a 6.0% increase in enacted tax
rates in the year, partially offset by increases in deferred tax asset
recoverability based on an assessment of positive evidence. As of December 31,
2003, the Company had a gross deferred income tax asset of $50.5 million,
against which the Company is carrying a $46.8 million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.8 million in 2003 versus $2.4
million in 2002. The higher level of expenses in 2003 primarily reflects
research and development activities pertaining to the Company's new IMAX MPX
theater projection system. Through research and development, the Company plans
to continue to design and develop cinema-based equipment and software to enhance
its product offering. The Company believes that the motion picture industry will
be affected by the development of digital technologies, particularly in the
areas of content creation (image capture), post-production (editing and special
effects), digital re-mastering distribution and display. Consequently, the
Company has made significant investments in digital technologies, including the
development of a proprietary, patent-pending technology to digitally enhance
image resolution and quality of 35mm motion picture films and has a number of
patents pending and intellectual property rights in these areas. However, there
can be no assurance that the Company will be awarded patents covering this
technology or that competitors will not develop similar technologies.
GAIN (LOSS) ON RETIREMENT OF NOTES
During 2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of $170.8 million of
the Company's Old Senior Notes. These transactions had the effect of reducing
the principal of the Company's outstanding Old Senior Notes to $29.2 million as
at December 31, 2003, which notes were subsequently redeemed on January 2, 2004.
During 2002, the Company and a wholly-owned subsidiary purchased $20.5
million in the aggregate of the Company's Subordinated Notes for $8.1 million,
consisting of $6.0 million in cash and common shares of the Company valued at
$2.1 million. The Company cancelled the purchased Subordinated Notes and
recorded a gain of $11.9 million. These transactions had the effect of reducing
the principal of the Company's outstanding Subordinated Notes to $9.1 million as
at December 31, 2002.
Page 32
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002 (cont'd)
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company will remove all of its assets from the theater in the first
quarter of 2004. The Company is involved in an arbitration proceeding with the
landlord of the theater with respect to the amount owing to the landlord by the
Company for lease and guarantee obligations. The minimum amount of loss to the
Company has been established at $0.8 million, which the Company has accrued. As
the Company is uncertain as to the outcome of the proceeding no additional
amount has been recorded.
In accordance with FASB Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), the Company assessed the fair value of the assets based on the estimated
discounted future cash flows the assets are expected to generate.
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries (collectively "DPI"), to a company owned by members of DPI
management. In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), the Company has segregated the discontinued
operations for all comparative periods presented.
As part of the transaction, the Company restructured its advances to DPI,
releasing DPI from obligations to repay any amounts in excess of $12.7 million
previously advanced by the Company, and reorganized the remaining $12.7 million
of debt owing to the Company into two separate loan agreements. The loans
receivable are collateralized by fixed and floating charges over all DPI assets
including intellectual properties. One of the loans is convertible, upon the
occurrence of certain events, into shares representing 49% of the total share
capital of DPI. During 2003, the Company received $0.8 million in cash towards
the repayment of this debt, and has recorded a corresponding gain in net
earnings (loss) from discontinued operations. As of December 31, 2003, the
remaining balance is $11.9 million, which has been fully allowed for.
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001
REVENUES
Systems revenue decreased to $71.0 million in 2002 from $76.6 million in
2001, a decrease of 7.3%. Revenue from sales and leases in 2002 decreased to
$46.7 million in 2002 from $53.4 million in 2001, a decrease of 12.6%. In 2002,
16 theater systems were installed, of which one was an operating lease, as
compared to 15 theater systems installed, of which one was an operating lease in
2001. In addition, for 2001 the Company recognized revenue on 2 systems that
were converted from operating leases to sales-type leases. Ongoing rental
revenue in 2002 increased 8.7% from 2001 primarily due to the increased number
of theaters in the network in the current year. Maintenance revenue in 2002
increased 2.5% over the prior year principally due to the increased number of
theater systems in the network.
Film revenue increased to $40.6 million in 2002 from $29.9 million in 2001.
Film distribution revenues increased to $20.7 million in 2002 from $16.6 million
in 2001, an increase of 24.3%, and film post-production revenues increased to
$16.8 million in 2002 from $13.3 million in 2001, an increase of 26.9%. The
increase in film post-production revenues was mainly due to the release of SPACE
STATION and Star Wars: Episode II Attack of The Clones: The IMAX Experience in
2002 versus 2001, while the increase in film distribution revenues was primarily
due to stronger performance of films distributed in 2002 especially SPACE
STATION which had gross box office of more than $39.0 million in 2002.
Theater operations revenue increased to $12.3 million in 2002 from $6.5
million in 2001. In 2002, the Company's owned and operated theaters benefited
from the strong performance of SPACE STATION and Star Wars: Episode II Attack of
The Clones: The IMAX Experience. The Company also acquired an additional
theater, the Navy Pier IMAX Theatre in Chicago in October 2002.
Other revenue increased to $5.3 million in 2002 from $4.7 million in 2001,
an increase of 13.9%, largely as a result of $1.4 million in sales from quick
turn reel units compared to $nil in 2001.
Page 33
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001 (cont'd)
GROSS MARGIN
Gross margin in 2002 was $53.5 million versus $22.7 million in 2001. Gross
margin increased largely due to the stronger performance of films in 2002
primarily SPACE STATION and Star Wars: Episode II Attack of The Clones: The IMAX
Experience, compared to 2001. In addition, gross margin in 2001 was reduced by
$16.5 million associated with the write-down of the value of certain films in
the Company's library and a $4.1 million write-down due to the reduced net
realizable value of the Company's inventories. Gross margin as a percentage of
total revenues was 41.4% in 2002 compared to 19.3% in 2001.
OTHER
Selling, general and administrative expenses were $34.9 million in 2002
versus $45.9 million in 2001. The Company recorded a foreign exchange gain of
$0.4 million in 2002 compared to a loss of $1.4 million in 2001. The foreign
exchange gains and losses resulted primarily from fluctuations in exchange rates
on Canadian dollar cash balances and Canadian dollar and Japanese yen
denominated net investment in leases. The 2001 selling, general and
administrative expenses also include a non-cash item of $2.6 million in
connection with a stock compensation grant.
Amortization of intangibles decreased to $1.4 million in 2002, from $3.0
million in 2001 due to the Company's adoption of FAS 142 which does not require
the amortization of goodwill as of January 1, 2002.
Interest income decreased to $0.4 million in 2002 from $0.8 million in 2001
due mainly to a decline in the average rate of returns on cash and cash
equivalents.
Interest expense decreased to $17.6 million in 2002, from $22.0 million in
2001 due to the repurchases of the Company's Subordinated Notes (see Gain (loss)
on retirement of notes and Liquidity and Capital Resources, below).
In performing its assessment of the recoverability of long-term
investments, the Company recorded a $5.6 million charge in 2001. During 2002, no
additional charges were taken.
Receivable provisions net of recoveries were recorded as a net recovery of
$1.2 million in 2002 compared to a net provision of $18.1 million in 2001. The
Company recorded an accounts receivable recovery of $1.9 million as compared to
a provision of $4.5 million in 2001. The financing receivables provision was
$0.7 million as compared to a provision of $13.6 million in 2001. The 2002
financing receivables recovery consisted of a current year charge of $3.5
million offset by the recovery of $2.8 million on previously provided amounts
for financing receivables, as collectibility associated with certain leases was
resolved due to amendment, settlement of the leases, or other resolving
conditions.
Restructuring recoveries in 2002 amounted to $0.5 compared to restructuring
costs of $16.3 million in 2001. Asset impairment charges amounted to $0.4
million compared to $29.0 million in 2001 after the Company assessed the
carrying value of certain assets
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, the Canadian manufacturing and processing profits deduction, the
provision for income taxes at different rates in foreign and other provincial
jurisdictions, enacted statutory tax rate reductions in the year, and changes in
the Company's valuation allowance based on the Company's recoverability
assessments of deferred tax assets. The 2002 deferred income tax recovery
included a $1.8 million decrease in the valuation allowance to reflect revised
estimates regarding the realization of the Company's deferred income tax assets
and the utilization of previously reserved loss carryforwards directly against
gains from the repurchase of Subordinated Notes. As of December 31, 2002, the
Company had a gross deferred income tax asset of $47.5 million, against which
the Company was carrying a $43.7 million valuation allowance.
Page 34
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001 (cont'd)
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.4 million in 2002 versus $3.4
million in 2001. The lower level of expenses in 2002 was due partly to staff
reductions in 2001 and partly due to management's decision to focus on a smaller
number of projects with a higher potential of success and minimal capital
outlay. The Company believes that the motion picture industry will be affected
by the development of digital technologies, particularly in the areas of content
creation (image capture), post-production (editing and special effects), digital
re-mastering distribution and display. Consequently, the Company has made
significant investments in digital technologies, including the development of a
proprietary, patent-pending technology to digitally enhance image resolution and
quality of 35mm motion picture films and has a number of patents pending and
intellectual property rights in these areas. However, there can be no assurance
that the Company will be awarded patents covering this technology or that
competitors will not develop similar technologies.
GAIN (LOSS) ON RETIREMENT OF NOTES
During 2002, the Company and a wholly-owned subsidiary purchased $20.5
million in the aggregate of the Company's Subordinated Notes for $8.1 million,
consisting of $6.0 million in cash and common shares of the Company valued at
$2.1 million. The Company cancelled the purchased Subordinated Notes and
recorded a gain of $11.9 million. These transactions had the effect of reducing
the principal of the Company's outstanding Subordinated Notes to $9.1 million as
at December 31, 2002.
During 2001, the Company and a wholly-owned subsidiary of the Company
purchased an aggregate of $70.4 million of the Company's $100.0 million
aggregate principal amount of Subordinated Notes for $13.7 million, consisting
of $12.5 million in cash and common shares of the Company valued at $1.2
million. The Company cancelled the purchased Subordinated Notes and recorded a
gain of $55.6 million.
DISCONTINUED OPERATIONS
The Company's 2001 discontinuance of its digital projection systems
operations was completed December 11, 2001 through the sale of its wholly-owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company entered into certain loan agreements, one of the
loans is convertible, upon the occurrence of certain events, into shares
representing 49% of the total share capital of DPI.
The Company recorded an after-tax charge of $50.9 million in 2001, relating
to operational losses of $8.5 million and a loss of $42.3 million on disposal of
DPI's net assets. Included in the loss on disposal is a provision of $12.7
million to reflect the uncertainty associated with the collectibility of the
loans receivable. In 2002, the Company recorded a recovery of $2.1 million
relating to future obligations that have been eliminated.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
As at December 31, 2003, the Company's principal sources of liquidity
included cash, cash equivalents and restricted cash of $52.2 million, trade
accounts receivable of $13.9 million and net investment in leases due within one
year of $5.0 million. In January 2004, the Company entered into a loan agreement
with Congress Financial Corporation (Canada) for a three-year revolving credit
facility (the "Credit Facility") permitting maximum borrowings of $20.0 million,
subject to a borrowing base calculation and reserve requirements. In January
2004, the Company retired the remaining $29.2 million in Old Senior Notes using
existing cash balances.
The Company substantially 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 the Company
completes the performance of its obligations. Similarly, the Company receives
cash payments for some of its film productions in advance of related cash
expenditures.
Page 35
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENT (cont'd)
The Company's net cash provided by (used in) operating activities is
impacted by a number of factors including the proceeds associated with new
signings of theater system lease and sale agreements in the year, the box office
performance of large format films distributed by the Company and/or exhibited in
the Company's theaters, increases or decreases in the Company's operating
expenses, and the level of cash collections received from its customers.
Cash used in operating activities amounted to $9.2 million for the year
ended December 31, 2003. Changes in other non-cash operating assets as compared
to December 31, 2002 include a decrease of $7.8 million in inventories, an
increase of $1.0 million in financing receivables, a $0.5 million decrease in
accounts receivable and a $0.5 million decrease in prepaid expenses. Changes in
other non-cash operating liabilities as compared to December 31, 2002 include a
decrease in deferred revenue of $22.3 million, a decrease in accounts payable of
$1.2 million and an increase of $0.8 million in accrued liabilities. Included in
2003 operating activities were $3.1 million in premiums paid to retire $123.6
million of principal of the Company's Old Senior Notes.
Included in the Company's 2003 net cash used in operating activities of
$9.2 million were a number of special items, which may not be reflective of
future operating cash flow levels. The Company paid $3.1 million in call
premiums in connection with the redemption of $123.6 million of its Old Senior
Notes. Similarly, net cash used in operating activities increased by $1.6
million in 2003 due to an increase in the Company's restricted cash balances,
which are used, as collateral for letters of credit. The Company intends to
secure future letters of credit through the Credit Facility, which was entered
into in February 2004.
Cash used in investing activities amounted to $1.8 million in 2003, which
includes purchases of $1.6 million in fixed assets, an increase in other assets
of $1.5 million and an increase in other intangible assets of $0.6 million. The
Company also received $1.9 million in cash in connection with a settlement of
the Debenture with MFE.
Cash provided from financing activities in 2003 amounted to $24.2 million
and includes proceeds of $160.0 million received from the issuance of the
Company's 9.625% Senior Notes due 2010 (the "New Senior Notes") less financing
costs of $5.6 million. The Company in turn used $126.7 million of the proceeds
from this offering to retire $123.6 million of principal of the Company's Old
Senior Notes. Cash used in financing activities included a $9.1 million
repayment of its remaining outstanding Subordinated Notes. The Company also
received $0.8 million in cash on a note receivable from a discontinued
operation.
Capital expenditures including the purchase of fixed assets and investments
in film assets were $4.6 million for the year ended December 31, 2003 and the
Company anticipates a similar expenditure amount in 2004.
Cash provided by operating activities amounted to $22.3 million for the
year ended December 31, 2002. Changes in other non-cash operating assets and
liabilities included a decrease in accounts receivables of $4.2 million, and a
decrease of $8.1 million in inventories in 2002. Cash used by investing
activities in 2002 amounted to $3.2 million, primarily consisting of $1.5
million invested in fixed assets. Cash used in financing activities in 2002
amounted to $5.9 million mainly related to the $6.0 million repurchase by a
wholly-owned subsidiary of a portion of the Company's Subordinated Notes.
Capital expenditures including the purchase of fixed assets and investments in
film assets were $4.0 million in 2002.
The Company's Credit Facility is secured by a first priority security
interest in all of the current and future assets of the Company. The Company
believes that cash flow from operations together with existing cash and
borrowing available under the Credit Facility will be sufficient to meet
operating needs for the next several years. However, if management's projections
of future signings and installations are not realized, there is no guarantee the
Company will continue to be able to fund its operations through cash flows from
operations.
LETTERS OF CREDIT
As at December 31, 2003, the Company had letters of credit of $5.0 million
outstanding, which have been collateralized by cash deposits.
Page 36
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
NEW SENIOR NOTES DUE 2010
In December 2003, the Company completed a private placement of $160.0
million principal amount of 9.625% senior notes due December 1, 2010 (the "New
Senior Notes") to a group of initial purchasers. The New Senior Notes bear
interest at a rate of 9.625% per annum and are unsecured obligations that rank
equally with any of the Company's existing and future senior indebtedness and
senior to all of the Company's existing and future subordinated indebtedness.
The payment of principal, premium, if any, and interest on the New Senior Notes
is unconditionally guaranteed, jointly and severally, by certain of the
Company's wholly-owned subsidiaries. The New Senior Notes are subject to
redemption for cash by the Company, in whole or in part, at any time on or after
December 1, 2007, at redemption prices expressed as percentages of the principal
amount for each 12-month period commencing December 1 of the years indicated:
2007 - 104.813%; 2008 - 102.406%; 2009 and thereafter - 100.000%, together with
accrued and unpaid interest thereon to the redemption date. If certain changes
were to result in the imposition of withholding taxes under Canadian law, the
New Senior Notes are subject to redemption at the Company's option, in whole but
not in part, at a redemption price of 100% of the principal amount thereof plus
accrued and unpaid interest to the date of redemption. In the event of a change
in control, the Company will be required to make an offer to repurchase the New
Senior Notes at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the date of repurchase. In addition, prior
to December 1, 2006, under certain conditions the Company may redeem up to 35%
of the New Senior Notes with the proceeds of certain equity offerings at
109.625% of the principal amount thereof together with accrued and unpaid
interest thereon to the date of redemption.
The terms of the Company's New Senior Notes impose certain restrictions on
its operating and financing activities, including certain restrictions on the
Company's ability to: incur additional indebtedness; make distributions or
certain other restricted payments; grant liens; create dividend and other
payment restrictions affecting the Company's subsidiaries; sell certain assets
or merge with or into other companies; and enter into transactions with
affiliates.
The Company has agreed to conduct an exchange offer to exchange all
outstanding New Senior Notes for up to $160.0 million aggregate principal amount
of senior notes due December 1, 2010 that are registered under the U.S.
Securities Act of 1933, as amended (the "Registered Notes"). On February 27,
2004, the Company filed a registration statement on Form S-4 in relation to the
Registered Notes. The Registered Notes will continue to be unconditionally
guaranteed, jointly and severally, by certain of the Company's wholly-owned
subsidiaries. The terms of the Registered Notes will be substantially identical
to the terms of the New Senior Notes, and evidence the same indebtedness as the
New Senior Notes, except that the Registered Notes will be registered under U.S.
securities laws, will not contain restrictions on transfer or provisions
relating to special interest under circumstances related to the timing of the
exchange offer, will bear a different CUSIP number from the New Senior Notes and
will not entitle their holders to registration rights.
OLD SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of senior notes due
December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old Senior
Notes").
The Old Senior Notes contained covenants that, among other things, limited
the ability of the Company to incur additional indebtedness, pay dividends or
make other distributions, make certain investments, create certain liens, engage
in certain transactions with affiliates, engage in certain sale and leaseback
transaction or engage in mergers, consolidations or the transfer of all or
substantially all of the assets of the Company. The Old Senior Notes were
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: 2003 - 101.969%; 2004 and thereafter - 100.000%, together with
interest accrued thereon to the redemption date. If certain changes resulted in
the imposition of withholding taxes under Canadian law, the Old Senior Notes
were subject to redemption at the option of the Company, in whole but not in
part, at a redemption price of 100% of the principal amount thereof plus accrued
interest to the date of redemption. In the event of a change in control, holders
of the Old Senior Notes had the right to require the Company to repurchase all
or part of the Old Senior Notes at a price equal to 101% of the principal amount
thereof plus accrued interest to the date of repurchase.
Page 37
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
OLD SENIOR NOTES DUE 2005 (cont'd)
During 2003, the Company retired an aggregate of $47.2 million principal
amount of the Old Senior Notes and accrued interest of $0.7 million in exchange
for the issuance of 5,838,353 of its common shares at an average value of $8.28
per share. The Company recorded additional charges of $0.3 million related to
costs associated with this retirement. These transactions had the effect of
reducing the principal amount of the Company's outstanding Old Senior Notes to
$152.8 million as at October 31, 2003.
In December 2003, the Company completed a tender offer and consent
solicitation for its remaining $152.8 million of the Old Senior Notes. In
December 2003, $123.6 million in principal of the Old Senior Notes were redeemed
pursuant to the tender offer. Notice of Redemption for all remaining outstanding
Old Senior Notes was delivered on December 4, 2003 and the remaining $29.2 of
outstanding Old Senior Notes were redeemed on January 2, 2004.
CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company completed a private placement of $100.0 million
of 5.75% convertible subordinated notes due April 1, 2003 (the "Subordinated
Notes"). In 2001 and 2002, the Company and a wholly-owned subsidiary purchased
an aggregate of $90.9 million principal of Subordinated Notes for $21.8 million
consisting of $18.5 million in cash and common shares of the Company valued at
$3.3 million. On April 1, 2003, the Company repaid the remaining outstanding
Subordinated Notes balance of $9.1 million plus accrued interest on the maturity
date.
RENTAL OBLIGATIONS
The Company's total minimum annual rental payments to be made under
operating leases for premises as of December 31, 2003 are as follows:
2004 $ 5,201
2005 5,248
2006 5,226
2007 5,067
2008 4,839
Thereafter 34,783
-----------
$ 60,364
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As at December 31, 2003, the Company had an unfunded and
accrued projected benefit obligation of approximately $20.1 million (December
31, 2002 - $17.2 million) in respect of this defined benefit pension plan. The
Company intends to use the proceeds of life insurance policies taken on its
Co-Chief Executive Officers to satisfy, in whole or in part, certain of the
benefits due and payable under the plan, although there can be no assurance that
the Company will ultimately do so.
Page 38
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility with Congress Financial Corporation (Canada)
(the "Credit Facility") The Credit Facility is a three-year revolving credit
facility with yearly renewal options thereafter, permitting maximum aggregate
borrowings of $20.0 million, subject to a borrowing base calculation which
includes the Company's financing receivables, and certain reserve requirements.
The Credit Facility bears interest at Prime + 0.25% per annum or Libor + 2.0%
per annum and is collateralized by a first priority security interest in all of
the current and future assets of the Company. The Credit Facility contains
typical affirmative and negative covenants, including covenants that restrict
the Company's ability to: incur certain additional indebtedness; make certain
loans, investments or guarantees; pay dividends; make certain asset sales; incur
certain liens or other encumbrances; conduct certain transactions with
affiliates and enter into certain corporate transactions or dissolve. In
addition, the Credit Facility contains customary events of default, including
upon an acquisition or a change of control that has a material adverse effect on
the Company's financial condition. The Credit Facility also requires the Company
to maintain a minimum level of earnings before interest, taxes, depreciation and
amortization, and cash collections.
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations are as
follows:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------------ ------------- ------------ ----------- ------------
Long-term debt obligations $ 189,234 $ 29,234 $ -- $ -- $ 160,000
Lease obligations 60,364 5,201 10,473 9,906 34,783
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses are denominated in Canadian
dollars. In 2003, the Company estimates that the strengthening Canadian dollar
increased its expense base by $1.5 million. A portion of the Company's net U.S.
dollar flows is converted to Canadian dollars to fund Canadian dollar expenses,
either through the spot market or through forward contracts. The Company plans
to convert Canadian dollar expenses to U.S. dollars through the spot and forward
markets on a go-forward basis. In Japan, the Company has ongoing operating
expenses related to its operations. Net Japanese yen flows are converted to U.S.
dollars through the spot market. The Company also has cash receipts under leases
denominated in Japanese yen, Euros and Canadian dollar. In 2003, the Company
recorded translation gains of $1.7 million primarily from the receivables
associated with these leases, as the value of the U.S. dollar declined in
relation to these currencies. The Company plans to convert Japanese yen and
Euros lease cash flows to U.S. dollars through the spot markets on a go-forward
basis.
Page 39
IMAX CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are filed as part
of this Report:
PAGE
----
Report of Independent Auditors.................................................................................... 41
Consolidated Balance Sheets as at December 31, 2003 and 2002...................................................... 42
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001........................ 43
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001........................ 44
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001.... 45
Notes to Consolidated Financial Statements........................................................................ 46
Page 40
IMAX CORPORATION
REPORT OF INDEPENDENT AUDITORS
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of IMAX Corporation (the "Company") as at December 31, 2003
and 2002, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in note 3 to the consolidated financial statements, the
Company changed its accounting policies for extinguishment of debt and asset
retirement obligations upon the adoption of new accounting pronouncements
effective January 1, 2003, and its accounting policies for goodwill and
discontinued operations upon the adoption of new accounting pronouncements
effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 27, 2004
Page 41
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
AS AT DECEMBER 31,
-----------------------------
2003 2002
------------- -------------
ASSETS
Cash and cash equivalents $ 47,282 $ 33,801
Restricted cash (note 14 (b)) 4,961 3,335
Accounts receivable, net of allowance for doubtful accounts of $7,278
(2002 - $9,248) 13,887 15,054
Financing receivables (note 4) 56,742 51,918
Inventories (note 5) 28,218 34,092
Prepaid expenses 1,902 2,372
Film assets (note 6) 1,568 419
Fixed assets (note 7) 35,818 43,616
Other assets (note 8) 13,827 10,455
Deferred income taxes (note 9) 3,756 3,821
Goodwill 39,027 39,027
Other intangible assets (note 10) 3,388 3,363
Assets of discontinued operations (note 25) -- 1,703
------------- -------------
Total assets $ 250,376 $ 242,976
============= =============
LIABILITIES
Accounts payable $ 5,780 $ 6,167
Accrued liabilities (notes 6 and 23) 43,794 43,365
Deferred revenue 63,344 85,590
New Senior Notes due 2010 (note 11) 160,000 --
Old Senior Notes due 2005 (note 12) 29,234 200,000
Subordinated Notes due 2003 (note 13) -- 9,143
Liabilities of discontinued operations (note 25) -- 2,381
------------- -------------
Total liabilities 302,152 346,646
------------- -------------
COMMITMENTS, CONTINGENCIES AND GUARANTEES (notes 14 and 15)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 16(b)) Common shares - no par value. Authorized -
unlimited number. Issued and outstanding - 39,301,758 (2002 - 32,973,366) 115,609 65,563
Other equity 3,159 1,542
Deficit (171,189) (171,420)
Accumulated other comprehensive income 645 645
------------- -------------
Total shareholders' deficit (51,776) (103,670)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 250,376 $ 242,976
============= =============
(the accompanying notes are an integral part of these consolidated
financial statements)
Page 42
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars, except per share amounts)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2003 2002 2001
--------------- --------------- --------------
REVENUE
IMAX systems (note 17(a)) $ 75,848 $ 70,959 $ 76,582
Films 25,803 40,556 29,923
Theater operations 13,109 12,284 6,540
Other 4,500 5,303 4,654
--------------- --------------- --------------
119,260 129,102 117,699
COSTS OF GOODS AND SERVICES 67,283 75,634 94,969
--------------- --------------- --------------
GROSS MARGIN 51,977 53,468 22,730
Selling, general and administrative expenses (note 17(b)) 33,312 34,906 45,850
Research and development 3,794 2,362 3,385
Amortization of intangibles 573 1,418 3,005
Income from equity-accounted investees (note 17(d) and (e)) (2,496) (283) (73)
Receivable provisions (recoveries), net (note 18) (2,225) (1,233) 18,102
Restructuring costs and asset impairments (recoveries) (note 19) 969 (121) 45,269
--------------- --------------- --------------
EARNINGS (LOSS) FROM OPERATIONS 18,050 16,419 (92,808)
Interest income 656 413 847
Interest expense (15,856) (17,564) (22,020)
Gain (loss) on retirement of notes (notes 3, 12 and 13) (4,910) 11,900 55,577
Recovery (impairment) of long-term investments (note 17(c)) 1,892 -- (5,584)
--------------- --------------- ---------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (168) 11,168 (63,988)
Recovery of (provision for) income taxes (note 9) 386 -- (27,848)
--------------- --------------- --------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 218 11,168 (91,836)
Net earnings (loss) from discontinued operations (note 25) 195 804 (53,278)
--------------- --------------- --------------
Net earnings (loss) before cumulative effect of changes in
accounting principles 413 11,972 (145,114)
Cumulative effect of changes in accounting principles (note 3) (182) -- --
--------------- --------------- --------------
NET EARNINGS (LOSS) $ 231 $ 11,972 $ (145,114)
=============== =============== ==============
EARNINGS (LOSS) PER SHARE (note 16):
Earnings (loss) per share - basic and diluted:
Net earnings (loss) from continuing operations $ 0.01 $ 0.34 $ (2.97)
Net earnings (loss) from discontinued operations $ -- $ 0.02 $ (1.72)
--------------- --------------- --------------
Net earnings (loss) before cumulative effect of changes in
accounting principles 0.01 0.36 (4.69)
Cumulative effect of changes in accounting principles -- -- --
--------------- --------------- --------------
Net earnings (loss) $ 0.01 $ 0.36 $ (4.69)
=============== =============== ==============
(the accompanying notes are an integral part of these consolidated
financial statements)
Page 43
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations 218 11,168 (91,836)
Items not involving cash:
Depreciation, amortization and write-downs (note 20) 9,633 15,931 98,665
Income from equity-accounted investees (2,496) (283) (73)
Deferred income taxes 81 (799) 43,380
Loss (gain) on retirement of notes 4,910 (11,900) (55,577)
Impairment of long-term investments -- -- 5,584
Stock and other non-cash compensation 4,926 3,685 5,182
Non-cash foreign exchange (gain) loss (1,281) (605) 578
Premium on repayment of notes (3,088) -- --
Payment under certain employment agreements (1,550) -- --
Investment in film assets (2,993) (2,441) (8,297)
Changes in restricted cash (1,626) 2,538 (5,873)
Changes in other non-cash operating assets and liabilities (note 20) (14,924) 5,788 12,529
Net cash used in operating activities from discontinued operations (993) (791) (6,877)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (9,183) 22,291 (2,615)
--------------- --------------- ---------------
INVESTING ACTIVITIES
Purchase of fixed assets (1,560) (1,517) (1,076)
Decrease (increase) in other assets (1,526) (964) 1,140
Decrease (increase) in other intangible assets (597) (675) (642)
Net sale of investments in marketable debt securities -- -- 7,529
Acquisition of minority interest in Sonics Associates, Inc. -- -- (1,041)
Settlement of debenture 1,892 -- --
Net cash used in investing activities from discontinued operations (15) (24) (232)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities (1,806) (3,180) 5,678
--------------- --------------- ---------------
FINANCING ACTIVITIES
Repayment of Subordinated Notes due 2003 (9,143) -- --
Repurchase of Subordinated Notes due 2003 -- (6,022) (12,540)
Repayment of Old Senior Notes due 2005 (123,577) -- --
Issuance of New Senior Notes due 2010 160,000 -- --
Financing costs related to New Senior Notes due 2010 (5,615) -- --
Common shares issued under stock option plan 1,722 152 31
Net cash provided by financing activities from discontinued operations 799 -- --
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 24,186 (5,870) (12,509)
--------------- --------------- ---------------
Effects of exchange rate changes on cash from continuing operations 284 45 (2,644)
Effects of exchange rate changes on cash from discontinued operations -- -- 1,697
--------------- --------------- ---------------
Effects of exchange rate changes on cash 284 45 (947)
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS 13,690 14,101 (4,981)
Increase (decrease) in cash and cash equivalents from discontinued
operations (209) (815) (5,412)
------------ --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, DURING THE YEAR 13,481 13,286 (10,393)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 33,801 20,515 30,908
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 47,282 $ 33,801 $ 20,515
=============== =============== ===============
(the accompanying notes are an integral part of these consolidated
financial statements)
Page 44
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
NUMBER OF
COMMON ACCUMULATED
SHARES RETAINED OTHER TOTAL
ISSUED AND CAPITAL OTHER EARNINGS COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
OUTSTANDING STOCK EQUITY (DEFICIT) INCOME (LOSS)(1) EQUITY (DEFICIT) INCOME (LOSS)
----------- -------- ----------- ----------- ---------------- ---------------- -------------
BALANCE AT DECEMBER 31, 2000 30,051,514 59,102 1,034 (38,278) 405 22,263 $ --
Issuance of common stock 1,847,600 4,220 -- -- -- 4,220 --
Net loss -- -- -- (145,114) -- (145,114) (145,114)
Net adjustment on available-for-
sale securities -- -- -- -- 281 281 281
Foreign currency translation
adjustments -- -- -- -- (98) (98) (98)
------------ -------- ---------- ----------- -------------- ------------- -----------
$ (144,931)
===========
BALANCE AT DECEMBER 31, 2001 31,899,114 63,322 1,034 (183,392) 588 (118,448) $ --
Issuance of common stock 1,074,252 2,241 -- -- -- 2,241 --
Net earnings -- -- -- 11,972 -- 11,972 11,972
Adjustment in paid-in capital for
non-employee stock
options granted -- -- 508 -- -- 508 --
Foreign currency translation
adjustments -- -- -- -- 57 57 57
------------ -------- ---------- ----------- -------------- ------------- -----------
$ 12,029
===========
BALANCE AT DECEMBER 31, 2002 32,973,366 65,563 1,542 (171,420) 645 (103,670) $ --
Issuance of common stock 6,328,392 50,046 -- -- -- 50,046 --
Net income -- -- -- 231 -- 231 231
Adjustment in paid-in-capital for
non-employee stock options
and warrants granted
(note 16(c)) -- -- 1,617 -- -- 1,617 --
------------ -------- ---------- ----------- -------------- ------------- -----------
BALANCE AT DECEMBER 31, 2003 39,301,758 $115,609 $ 3,159 $ (171,189) $ 645 $ (51,776) $ 231
============ ======== ========== =========== ============== ============= ===========
(1) Components of accumulated other comprehensive income (loss) consist of:
AS AT DECEMBER 31,
------------------------------------------------
2003 2002
------------------- -------------------
Foreign currency
translation adjustments $ 645 $ 645
------------------- -------------------
Accumulated other comprehensive
income $ 645 $ 645
=================== ===================
(the accompanying notes are an integral part of these consolidated
financial statements)
Page 45
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
1. DESCRIPTION OF THE BUSINESS
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") is an entertainment technology company whose principal
activities are:
- the design, manufacture, marketing and leasing of proprietary
projection and sound systems for IMAX theaters principally owned
and operated by institutional and commercial customers located in
more than 35 countries as of December 31, 2003;
- the development, production, digital re-mastering, post-production
and distribution of certain films shown throughout the IMAX
theater network;
- the operation of certain IMAX theaters located primarily in the
United States and Canada; and
- the provision of other services to the IMAX theater network
including designing and manufacturing IMAX camera equipment for
rental to filmmakers and providing ongoing maintenance services
for the IMAX projection and sound systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are summarized as follows:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
together with its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
(b) USE OF ESTIMATES
The preparation of the financial statements in conformity with United
States Generally Accepted Accounting Principles requires management to make
estimates and judgements that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could be materially
different from these estimates. Significant estimates made by management
include, but are not limited to, fair values associated with the individual
elements in multiple element arrangements, residual values, economic lives
of leased assets, allowances for potential uncollectibility of accounts
receivable and net investment in leases, provisions for inventory
obsolescence, ultimate revenues for film assets, estimates of fair values
for long-lived assets and goodwill, restructuring and related charges,
depreciable lives of assets, useful lives of intangible assets, pension
plan assumptions, accruals for contingencies and valuation allowances for
deferred income tax assets.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(d) ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
Allowances for doubtful accounts receivable and financing receivables are
based on the Company's assessment of the collectibility of specific
customer balances which is based upon a review of the customer's credit
worthiness, past collection history and the underlying asset value of the
equipment under lease where applicable. When facts and circumstances
indicate that there is a potential impairment in the net investment in
lease owing from a customer, the Company will evaluate the potential
outcome of either renegotiations or defaults on the original lease
agreement and will record a provision if it is considered probable that the
renegotiated lease amount will cause a reclassification of a sales-type
lease to an operating lease. The provision is equal to the excess of the
carrying value of the net investment in lease over the fair value of the
equipment. Interest on overdue accounts is recognized as income as the
amounts are collected.
Page 46
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(e) INVENTORIES
Inventories are carried at the lower of cost determined on a first in first
out basis, and net realizable value. Finished goods and work-in-process
include the cost of raw materials, direct labor, design costs and, an
applicable share of manufacturing overhead costs.
The Company records provisions for obsolete theater systems inventory,
based upon current estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, growth
prospects within the customers' ultimate marketplace and the market
acceptance of the Company's current and pending projection systems.
(f) FILM ASSETS
Costs of producing films, including capitalized interest, and costs of
acquiring film rights are recorded as film assets and accounted for in
accordance with AICPA Statement of Position 00-2, "Accounting by Producers
or Distributors of Films". Production financing provided by third parties
that acquire substantive rights in the film is recorded as a reduction of
the cost of the production. Film assets are amortized and participation
costs are accrued using the individual-film-forecast method in the same
ratio that current gross revenues bear to anticipated total ultimate
revenues. Estimates of ultimate revenues are prepared on a title-by-title
basis and reviewed regularly by management and revised where necessary to
reflect most current information. Ultimate revenue for films includes
estimates of revenue over a period not to exceed ten years following the
date of initial release.
Film exploitation costs, including advertising costs, are expensed as
incurred. Costs of film prints are capitalized and expensed over a period
of three months.
The recoverability of film costs is dependent upon commercial acceptance of
the films. If events or circumstances indicate that the fair value of a
film is less than the unamortized film costs, the film is written down to
fair value by a charge to earnings. The Company determines the fair value
of its films using a discounted cash flow model.
(g) FIXED ASSETS
Fixed assets are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives as follows:
Projection equipment -- 10 to 15 years
Camera equipment -- 5 to 10 years
Buildings -- 20 to 25 years
Office and production equipment -- 3 to 5 years
Leasehold improvements -- Over the term of the underlying leases
The Company reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In performing its review for
recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of impairment losses
is based on the excess of the carrying amount of the asset over the fair
value calculated using discounted expected future cash flows.
Page 47
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(h) OTHER ASSETS
Other assets include investments, unrecognized prior service pension costs
and deferred charges on debt financing.
Costs of debt financing are deferred and amortized over the term of the
debt.
Investments in marketable securities categorized as available-for-sale
securities are carried at fair value with unrealized gains or losses
included in accumulated other comprehensive income. Investments in
marketable securities categorized as held-to-maturity securities are
carried at amortized cost. Investments in joint ventures are accounted for
by the equity method of accounting under which net earnings (loss) include
the Company's share of earnings or losses of the investees. A loss in value
of an investment, which is other than a temporary decline, is recognized as
a charge to earnings.
(i) GOODWILL
The Company adopted FASB Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangibles" ("FAS 142") effective January 1, 2002.
Goodwill represents the excess of purchase price over the fair value of net
identifiable assets acquired in a purchase business combination. Goodwill
is not subject to amortization and is tested for impairment annually, or
more frequently if events or circumstances indicate that the asset might be
impaired. Impairment of goodwill is tested at the reporting unit level by
comparing the reporting unit's carrying amount, including goodwill, to the
fair value of the reporting unit. The fair values of the reporting units
are estimated using a discounted cash flows approach. If the carrying
amount of the reporting unit exceeds its fair value, then a second step is
performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
(j) OTHER INTANGIBLE ASSETS
Patents, trademarks and other intangibles are recorded at cost and are
amortized on a straight-line basis over estimated useful lives ranging from
7 to 10 years.
The Company reviews the carrying values of its other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. In performing its
review for recoverability, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows is less than the carrying
amount of the asset, an impairment loss is recognized. Measurement of
impairment losses is based on the excess of the carrying amount of the
asset over the fair value calculated using discounted expected future cash
flows.
(k) DEFERRED REVENUE
Deferred revenue represents cash received under theater system agreements
and film contracts and for various services for which revenue recognition
criteria have not yet been met.
(l) INCOME TAXES
Income taxes are accounted for under the liability method whereby deferred
income tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the accounting and tax
bases of assets and liabilities. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in earnings in the period in which the
change is enacted. Valuation allowances are recorded where there is
uncertainty of realization of a deferred income tax asset. Investment tax
credits are recognized as a reduction of income tax expense in the year the
credit is earned.
The Company assesses realization of net deferred income tax assets and
based on all available evidence, concludes whether it is more likely than
not that the net deferred income tax assets will be realized.
Page 48
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(m) REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a
result of meeting the criteria established by FASB Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"). When
revenue is recognized, the initial rental fees due under the contract,
along with the present value of minimum ongoing rental payments, are
recorded as revenues for the period, and the related theater system costs
including installation expenses are recorded as cost of goods and services.
Additional ongoing rentals in excess of minimums are recognized as revenue
when reported by the theater operator, provided that collection is
reasonably assured.
The Company recognizes revenues from sales-type leases upon installation of
the theater system when all of the following criteria are met: persuasive
evidence of an agreement exists; the price is fixed or determinable; and
collection is reasonably assured.
Cash installments of initial rents received in advance of the time at which
revenue is recognized are recorded as deferred revenue. Costs incurred in
constructing the theater systems not yet recognized as revenue are included
in inventories.
If the Company and a lessee agree to change the terms of the lease, other
than by renewing the lease or extending its terms, management evaluates
whether the new agreement would be classified as a sales-type lease or an
operating lease under the provisions of FAS 13. Any adjustments which
result from a change in classification from a sales-type lease to an
operating lease are recorded as a charge to earnings during the period in
which the change occurs.
In the normal course of its business, the Company each year will have
customers who, for a number of reasons including the inability to obtain
certain consents, approvals or financing, are unable to proceed with
theater construction. In these instances, where customers of the Company
are not in compliance with the terms of their leases for theater systems
not yet installed, the leases are in default. There is typically deferred
revenue associated with these leases, representing initial lease payments
collected prior to the default. These initial lease payments are recognized
as revenue when the Company exercises its rights to terminate the lease and
the Company is released legally or by virtue of an agreement with the
customer from its obligations under the lease arrangement.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these
leases, initial rental fees and minimum lease payments are recognized as
revenue on a straight-line basis over the lease term. Additional rentals in
excess of minimum annual amounts are recognized as revenue when the
contracted portions of theater admissions due to the Company reported by
theater operators exceed the minimum amounts, provided that collection is
reasonably assured.
SALES OF THEATER SYSTEMS
Revenue from sales of theater systems is recognized when all of the
following criteria are met: persuasive evidence of an agreement exists; the
price is fixed or determinable; title passes to the customer; installation
of the system is complete; and collection is reasonably assured.
FILM LICENSING
Revenue from licensing of films is recognized when a contractual licensing
arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collection is
reasonably assured. Where the license fees are based on a share of the
customer's revenue, and all other revenue recognition criteria stated in
the preceding sentence are met, the Company recognizes revenue as the
customer exhibits the film.
Page 49
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(m) REVENUE RECOGNITION (cont'd)
MAINTENANCE AND OTHER SERVICES
The Company frequently leases theater systems to customers with one year's
free maintenance on the system from the date of installation. The fair
value of this component of the arrangement is deferred when the systems
revenue is recognized and is amortized over the one-year free maintenance
period. All costs associated with this maintenance program are expensed as
incurred. Maintenance revenues are recognized on a straight-line basis over
the maintenance period. Revenues from post-production film services are
recognized as the service is performed. Revenues on camera rentals are
recognized over the rental period. Theater admission revenues are
recognized on the date of the exhibition. Other service revenues are
recognized when the services are performed.
(n) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(o) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of the Company's operations, which are
denominated in currencies other than the functional currency, are
translated into the functional currency at the exchange rates prevailing at
the end of the period. Non-monetary items are translated at historical
exchange rates. Revenue and expense transactions are translated at exchange
rates prevalent at the transaction date. Such exchange gains and losses are
included in the determination of net earnings (loss) in the period in which
they arise. For foreign subsidiaries with functional currencies other than
the U.S. dollar, assets and liabilities are translated at the year-end
exchange rates and revenue and expense items are translated at the average
rate for the period, with translation gains and losses being included in
other comprehensive income.
(p) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the intrinsic value
method set out in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and its related interpretations, and has
made pro forma disclosures of net earnings (loss) and earnings (loss) per
share in note 16 as if the methodology prescribed by FASB Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), had been adopted.
The Company accounts for stock options and warrants issued to non-employees
in accordance with the provisions of FAS 123 and Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring or in Conjunction with Selling Goods or Services".
(q) PENSION PLANS
Defined benefit pension plan liabilities are recorded as the excess of the
accumulated projected benefit obligation over the fair value of plan
assets. Assumptions used in computing defined benefit obligations are
regularly reviewed by management in consultation with its actuaries and
adjusted for market conditions. Prior service costs resulting from plan
inception or amendments together with unrecognized actuarial gains and
losses are amortized over the expected future service life of the employees
while current service costs are expensed when earned.
For defined contribution pension plans, amounts contributed by the Company
are recorded as an expense.
Page 50
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
3. ACCOUNTING CHANGES
Effective January 1, 2003, the Company adopted FASB Statement of Financial
Accounting Standard No. 145, "Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002" ("FAS
145"), under which gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB 30.
Under FAS 145, the Company was required to reclassify any gain or loss on
extinguishment of debt that was classified as an extraordinary item to net
earnings from continuing operations before income taxes for all prior
period presentations. The Company has reclassified the extraordinary gain
on repurchase of Subordinated Notes in 2002 and 2001 within net earnings
from continuing operations before income taxes. The Company has applied FAS
145 within these consolidated financial statements the fiscal years ended
December 31, 2002 and 2001 which had the effect of reclassifying gains on
the retirement of Subordinated Notes of $8.3 million, net of income tax
expense of $3.6 million and $38.7 million, net of income tax expense of
$16.8 million respectively from extraordinary items to net earnings from
continuing operations before income taxes.
Effective January 1, 2003, the Company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability is applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have an
impact on the Company's financial position or results of operations.
Enhanced disclosures as required under FIN 45 have been included in note
15(d).
Effective January 1, 2003, the Company adopted FASB Statement of Financial
Accounting Standards No. 143 "Accounting for Asset Retirement Obligations"
which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This standard requires that the fair
value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset and subsequently amortized
over the asset's useful life. Adoption of this new standard resulted in a
charge of $0.2 million to 2003 earnings and an increase of $0.2 million to
accrued liabilities.
Effective January 1, 2002, the Company adopted FASB Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("FAS 144"). This standard requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets are now grouped at the lowest level for
which identifiable cash flows are largely independent when testing for and
measuring impairment, as well as when identifying assets to be
discontinued. The Company reviews the carrying values of its long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In
performing its review for recoverability, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement
of impairment losses is based on the excess of the carrying amount of the
asset over the fair value calculated using discounted expected future cash
flows. Adoption of this new standard did not have an impact on the
Company's financial position, results of operations or cash flows.
The Company adopted FAS 142, effective January 1, 2002 under which goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed at least annually for impairment. If the Company had continued to
amortize goodwill, the charge would have been $2.3 million in each of 2003
and 2002. Upon initial adoption of this standard the Company completed this
impairment test on the balance of goodwill and concluded that this asset
was not impaired.
Page 51
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
3. ACCOUNTING CHANGES (cont'd)
In accordance with FAS 142, the effect of this change in accounting
principle is reflected prospectively. Supplemental comparative disclosure
as if the change had been applied retroactively, is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
Reported net earnings (loss) $ 231 $ 11,972 $ (145,114)
Add back: Goodwill amortization -- -- 2,310
------------------ ------------------ -----------------
Adjusted net earnings (loss) $ 231 $ 11,972 $ (142,804)
================== ================== =================
Basic and diluted earnings (loss) per share:
Reported net earnings (loss) per share $ 0.01 $ 0.36 $ (4.69)
Goodwill amortization $ -- $ -- $ 0.07
------------------ ------------------ -----------------
Adjusted net earnings (loss) per share $ 0.01 $ 0.36 $ (4.62)
================== ================== =================
4. FINANCING RECEIVABLES
(a) NET INVESTMENT IN LEASES
The Company generally provides its theater systems to customers on a
long-term lease basis, typically with initial lease terms of 10 to 20
years. Financing receivables consisting of net investment in leases and
long term receivables are comprised of the following:
2003 2002
------------ ------------
Gross minimum lease amounts receivable $ 97,408 $ 97,167
Residual value of equipment 824 824
Unearned finance income (38,847) (39,001)
------------ ------------
Present value of minimum lease amounts receivable 59,385 58,990
Accumulated allowance for uncollectible amounts (5,840) (8,938)
------------ ------------
Net investment in leases $ 53,545 $ 50,052
Long-term receivables 3,197 1,866
------------ ------------
Total financing receivables $ 56,742 $ 51,918
============ ============
Page 52
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
4. FINANCING RECEIVABLES (cont'd)
(b) RENTAL AMOUNTS
IMAX systems revenue includes the following annual rental amounts, for the
years ended December 31:
2003 2002 2001
-------------- -------------- --------------
Ongoing minimum rental amounts on operating leases $ 849 $ 849 $ 562
Additional rentals in excess of minimum amounts on
sales-type leases 444 681 660
Additional rentals in excess of minimum amounts on
operating leases 3,482 3,525 2,595
Finance income on sales-type leases 4,432 4,691 5,152
-------------- -------------- --------------
$ 9,207 $ 9,746 $ 8,969
============== ============== ==============
Estimated gross minimum rental amounts receivable from operating and
sales-type leases at December 31, 2003, for each of the next five years are
as follows:
2004 $ 9,678
2005 8,938
2006 8,941
2007 7,750
2008 7,900
Thereafter 60,139
----------
$ 103,346
==========
5. INVENTORIES
AT DECEMBER 31,
----------------------------------
2003 2002
--------------- ---------------
Raw materials $ 5,868 $ 5,042
Work-in-process 4,327 2,249
Finished goods 18,023 26,801
--------------- ---------------
$ 28,218 $ 34,092
=============== ===============
6. FILM ASSETS
AT DECEMBER 31,
----------------------------------
2003 2002
--------------- ---------------
Completed and released films, net of accumulated amortization $ 314 $ 206
Films in production 1,022 --
Development costs 232 213
--------------- ---------------
$ 1,568 $ 419
=============== ===============
Included in costs of goods and services for 2003 are charges of $nil (2002
- $nil, 2001 - $16.5 million) to reflect write-downs of unamortized film
costs.
All unamortized film costs as at December 31, 2003 for released films are
expected to be amortized within two years from December 31, 2003. The
amount of accrued participation liabilities that the Company expects to pay
during 2004 is $6.2 million.
Page 53
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
7. FIXED ASSETS
AT DECEMBER 31, 2003
-------------------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
----------------- ----------------- -----------------
Equipment leased or held for use or rental
Projection equipment(1) $ 34,847 $ 22,720 $ 12,127
Camera equipment 9,971 8,061 1,910
----------------- ----------------- -----------------
44,818 30,781 14,037
----------------- ----------------- -----------------
Assets under construction 877 -- 877
----------------- ----------------- -----------------
Other fixed assets
Land 1,593 -- 1,593
Buildings 14,734 5,406 9,328
Office and production equipment(2) 21,590 17,748 3,842
Leasehold improvements 8,569 2,428 6,141
----------------- ----------------- -----------------
46,486 25,582 20,904
----------------- ----------------- -----------------
$ 92,181 $ 56,363 $ 35,818
================= ================= =================
AT DECEMBER 31, 2002
-------------------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
----------------- ----------------- -----------------
Equipment leased or held for use or rental
Projection equipment(1) $ 37,199 $ 20,143 $ 17,056
Camera equipment 9,548 7,629 1,919
----------------- ----------------- -----------------
46,747 27,772 18,975
----------------- ----------------- -----------------
Assets under construction 1,672 -- 1,672
----------------- ----------------- -----------------
Other fixed assets
Land 1,648 -- 1,648
Buildings 15,505 5,620 9,885
Office and production equipment(2) 24,023 19,081 4,942
Leasehold improvements 8,127 1,633 6,494
----------------- ----------------- -----------------
49,303 26,334 22,969
----------------- ----------------- -----------------
$ 97,722 $ 54,106 $ 43,616
================= ================= =================
(1) Included in projection equipment are assets with costs of $31.9 million
(2002 - $33.5 million) and accumulated depreciation of $21.0 million
(2002 - $19.1 million) that are leased to customers under operating
leases.
(2) Included in office and production equipment are assets under capital
lease with costs of $0.4 million (2002 - $0.3 million) and accumulated
depreciation of $0.2 million (2002 - $nil).
Page 54
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
8. OTHER ASSETS
AT DECEMBER 31,
--------------------------------
2003 2002
--------------- ---------------
Pension asset, representing unrecognized prior service costs $ 5,530 $ 7,035
Deferred charges on debt financing 6,461 2,184
Other assets 1,836 1,236
--------------- ---------------
$ 13,827 $ 10,455
=============== ===============
9. INCOME TAXES
(a) Earnings (loss) from continuing operations before income taxes by tax
jurisdiction, for the years ended December 31, are comprised of the
following:
2003 2002 2001
---------------- ---------------- ----------------
Canada $ 1,363 $ 13,707 $ (35,837)
United States (5,267) (3,209) (26,940)
Japan 839 1,031 291
Other 2,897 (361) (1,502)
---------------- ---------------- ----------------
$ (168) $ 11,168 $ (63,988)
================ ================ ================
(b) The recovery of (provision for) income taxes related to income from
continuing operations, for the year ended December 31, is comprised of the
following:
2003 2002 2001
---------------- ---------------- ----------------
Current:
Canada $ (920) $ (754) $ 13,598
Foreign 1,225 (45) (35)
---------------- ---------------- ----------------
305 (799) 13,563
---------------- ----------------- ----------------
Deferred:
Canada 81 799 (32,954)
Foreign -- -- (8,457)
---------------- ---------------- ----------------
81 799 (41,411)
---------------- ---------------- ----------------
$ 386 $ -- $ (27,848)
================ ================ ================
(c) The recovery of (provision for) income taxes from continuing operations
differs from the amount that would have resulted by applying the combined
Canadian federal and provincial statutory income tax rates to earnings
(losses), for the years ended December 31, is due to the following:
2003 2002 2001
------------ ------------ -------------
Income tax recovery (provision) at combined statutory rates $ 61 $ (4,314) $ 26,632
Increase (decrease) resulting from:
Permanent differences (5,241) 3,070 (3,434)
Manufacturing and processing credits deduction (300) (141) (1,704)
Decrease (increase) in valuation allowance (2,869) 1,259 (40,272)
Large corporations tax (476) (403) (402)
Income tax at different rates in foreign and other
provincial jurisdictions (285) (52) (1,114)
Investment tax credits 661 11 (594)
Tax recoveries through loss carrybacks 1,062 -- --
Effect of legislated tax rate (reductions) increases 4,833 -- (6,651)
Audit and other tax return adjustments 2,760 424 --
Other 180 146 (309)
------------ ------------ ------------
Recovery of (provision for) income taxes, as reported $ 386 $ -- $ (27,848)
============ ============ ============
Page 55
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
9. INCOME TAXES (cont'd)
(d) The net deferred income tax asset, at December 31, is comprised of the
following:
2003 2002
------------- -------------
Net operating loss and capital loss carryforwards $ 9,835 $ 11,581
Investment tax credit and other tax credit carryforwards 1,425 1,883
Write-downs of other assets 5,074 5,596
Excess tax over accounting basis in fixed assets and inventories 50,696 37,875
Accrued reserves 5,834 4,636
Other 2,566 2,298
------------- -------------
Total deferred income tax assets 75,430 63,869
Income recognition on net investment in leases (24,883) (16,306)
------------- -------------
50,547 47,563
Valuation allowance (46,791) (43,742)
------------- -------------
Net deferred income tax asset $ 3,756 $ 3,821
============= =============
Net operating loss carryforwards and tax credit carryforwards expire as
follows:
INVESTMENT TAX
CREDITS AND OTHER NET OPERATING
TAX CREDIT LOSS
CARRYFORWARDS CARRYFORWARDS
----------------- -----------------
2004 $ -- $ --
2005 -- --
2006 -- 645
2007 -- 565
2008 -- 963
Thereafter 1,425 39,230
----------------- -----------------
$ 1,425 $ 41,403
================= =================
Net operating loss carryforwards can be carried forward to reduce taxable
income through to 2023. Net capital loss carryforwards amount to $6.4
million as at December 31, 2003 and can be carried forward indefinitely to
reduce capital gains. Investment tax credits and other tax credits can be
carried forward to reduce income taxes payable through to 2013.
10. OTHER INTANGIBLE ASSETS
AT DECEMBER 31, 2003
-------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
----------------- ----------------- -----------------
Patents and trademarks $ 4,604 $ 1,819 $ 2,785
Intellectual property rights 1,193 590 603
Other intangible assets 1,264 1,264 --
----------------- ---------------- -----------------
$ 7,061 $ 3,673 $ 3,388
================= ================ =================
AT DECEMBER 31, 2002
-------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
----------------- ----------------- -----------------
Patents and trademarks $ 4,007 $ 1,417 $ 2,590
Intellectual property rights 1,193 420 773
Other intangible assets 1,264 1,264 --
----------------- ----------------- -----------------
$ 6,464 $ 3,101 $ 3,363
================= ================= =================
The Company expects to amortize approximately $0.6 million of other
intangible assets for each of the next 5 years.
Page 56
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
11. NEW SENIOR NOTES DUE 2010
In December 2003, the Company completed a private placement of $160.0
million principal amount of 9.625% senior notes due December 1, 2010 (the
"New Senior Notes") to a group of initial purchasers. The net proceeds of
the issuance after deducting offering expenses and underwriting commissions
were $154.4 million. The New Senior Notes bear interest at a rate of 9.625%
per annum and are unsecured obligations that rank equally with any of the
Company's existing and future senior indebtedness and senior to all of the
Company's existing and future subordinated indebtedness. The payment of
principal, premium, if any, and interest on the New Senior Notes is
unconditionally guaranteed, jointly and severally, by certain of the
Company's wholly-owned subsidiaries. The New Senior Notes are subject to
redemption for cash by the Company, in whole or in part, at any time on or
after December 1, 2007, at redemption prices expressed as percentages of
the principal amount for each 12-month period commencing December 1 of the
years indicated: 2007 - 104.813%; 2008 - 102.406%; 2009 and thereafter -
100.000%, together with accrued and unpaid interest thereon to the
redemption date. If certain changes resulted in the imposition of
withholding taxes under Canadian law, the New Senior Notes are subject to
redemption at the Company's option, in whole but not in part, at a
redemption price of 100% of the principal amount thereof plus accrued and
unpaid interest to the date of redemption. In the event of a change in
control, the Company will be required to make an offer to repurchase the
New Senior Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase. In
addition, prior to December 1, 2006, under certain conditions the Company
may redeem up to 35% of the New Senior Notes with the proceeds of certain
equity offerings at 109.625% of the principal amount thereof together with
accrued and unpaid interest thereon to the date of redemption.
The terms of the Company's New Senior Notes impose certain restrictions on
its operating and financing activities, including certain restrictions on
the Company's ability to: incur additional indebtedness; make distributions
or certain other restricted payments; grant liens; create dividend and
other payment restrictions affecting the Company's subsidiaries; sell
certain assets or merge with or into other companies; and enter into
transactions with affiliates.
The Company has agreed to conduct an exchange offer to exchange all
outstanding New Senior Notes for up to $160.0 million aggregate principal
amount of senior notes due December 1, 2010 that are registered under the
U.S. Securities Act of 1933, as amended (the "Registered Notes"). On
February 27, 2004, the Company filed a registration statement on Form S-4
in relation to the Registered Notes. The Registered Notes will continue to
be unconditionally guaranteed, jointly and severally, by certain of the
Company's wholly-owned subsidiaries. After the exchange the terms of the
Registered Notes will be substantially identical to the terms of the New
Senior Notes, and evidence the same indebtedness as the New Senior Notes,
except that the Registered Notes will be registered under U.S. securities
laws, will not contain restrictions on transfer or provisions relating to
special interest under circumstances related to the timing of the exchange
offer, will bear a different CUSIP number from the New Senior Notes and
will not entitle their holders to registration rights.
12. OLD SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of senior notes due
December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old
Senior Notes").
The Old Senior Notes contained covenants that, among other things, limited
the ability of the Company to incur additional indebtedness, pay dividends
or make other distributions, make certain investments, create certain
liens, engage in certain transactions with affiliates, engage in certain
sale and leaseback transaction or engage in mergers, consolidations or the
transfer of all or substantially all of the assets of the Company. The Old
Senior Notes were 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: 2003 - 101.969%; 2004 and
thereafter - 100.000%, together with interest accrued thereon to the
redemption date. If certain changes were to result in the imposition of
withholding taxes under Canadian law, the Old Senior Notes were subject to
redemption at the option of the Company, in whole but not in part, at a
redemption price of 100% of the principal amount thereof plus accrued
interest to the date of redemption. In the event of a change in control,
holders of the Old Senior Notes had the right to require the Company to
repurchase all or part of the Old Senior Notes at a price equal to 101% of
the principal amount thereof plus accrued interest to the date of
repurchase.
Page 57
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
12. OLD SENIOR NOTES DUE 2005 (cont'd)
During 2003, the Company retired an aggregate of $47.2 million principal
amount of the Old Senior Notes and accrued interest of $0.7 million in
exchange for the issuance of 5,838,353 of its common shares at an average
value of $8.28 per share. The Company recorded additional charges of $0.3
million related to costs associated with this retirement. These
transactions had the effect of reducing the principal amount of the
Company's outstanding Old Senior Notes to $152.8 million on October 31,
2003.
In December 2003 the Company completed a tender offer and consent
solicitation for its remaining $152.8 million of the Old Senior Notes. In
December 2003, $123.6 million in principal of the Old Senior Notes were
redeemed pursuant to the tender offer. Notice of Redemption for all
remaining outstanding Old Senior Notes was delivered on December 4, 2003
and the remaining $29.2 of outstanding Old Senior Notes were redeemed on
January 2, 2004 using proceeds from its private placement (see note 11).
During 2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of the Company's
Old Senior Notes.
Interest expense on the Old Senior Notes amounted to $13.5 million in 2003
(2002 - $15.8 million, 2001 - $15.8 million).
13. CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company issued $100.0 million of 5.75% convertible
subordinated notes due April 1, 2003 (the "Subordinated Notes") payable in
arrears on April 1 and October 1. The Subordinated Notes were subordinate
to present and future senior indebtedness of the Company and were
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.
In 2001 and 2002, the Company and a wholly-owned subsidiary of the Company
purchased an aggregate of $90.9 million of Subordinated Notes for $21.8
million consisting of $18.5 million in cash and common shares of the
Company valued at $3.3 million. The Company cancelled the purchased
Subordinated Notes and recorded a gain of $11.9 million in 2002 and
recorded a gain of $55.5 million in 2001.
On April 1, 2003, the Company repaid the remaining outstanding Subordinated
Notes balance of $9.1 million plus accrued interest on the maturity date
and retired the issue.
14. COMMITMENTS
(a) Total minimum annual rental payments to be made by the Company under
operating leases for premises are as follows:
2004 $ 5,201
2005 5,248
2006 5,226
2007 5,067
2008 4,839
Thereafter 34,783
-------------
$ 60,364
Rent expense was $4.0 million for 2003 (2002 - $4.0 million, 2001 - $5.6
million). In addition, in 2003 a provision of $nil (2002 - $nil, 2001 -
$4.2 million) was charged to selling, general and administrative expenses
for exit costs associated with a plan to vacate and sub-lease one of the
Company's premises.
(b) As of December 31, 2003, the Company has letters of credit of $5.0 million
outstanding (2002 - $3.3 million), which have been collateralized by cash
deposits.
Page 58
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
15. CONTINGENCIES AND GUARANTEES
(a) 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 complaint was subsequently amended to add claims for fraud
based upon the same factual allegations underlying its prior claims. The
Company filed counterclaims against Muvico for breach of contract, unjust
enrichment unfair competition and/or deceptive trade practices and theft of
trade secrets, and brought claims against MegaSystems, Inc.
("MegaSystems"), a large-format theater system manufacturer, for tortious
interference and unfair competition and/or deceptive trade practices and to
enjoin Muvico and MegaSystems from using the Company's confidential and
proprietary information. The case is being heard in the U.S. District
Court, Southern District of Florida, Miami Division. The Company's motion
for a summary judgement on its contract claims against Muvico was heard in
September 2003; a decision has not yet been rendered. 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.
(b) In May 2003, the Company filed a Statement of Claim in the Ontario Superior
Court of Justice against United Cinemas International Multiplex B.V.
("UCI") for specific performance, or alternatively, damages of $25.0
million with respect to the breach of a 1999 agreement between the Company
and UCI whereby UCI committed to purchase IMAX theater systems from the
Company. In August 2003, UCI filed a Statement of Defence denying it is in
breach. On December 10, 2003, UCI and its two subsidiaries in the United
Kingdom and Japan filed a claim against the Company claiming alleged
breaches of the 1999 agreement referred to in the Company's claim against
UCI, and repeating allegations contained in UCI's Statement of Defence to
the Company's action. The Company believes that the allegations made by UCI
in its complaint are entirely without merit and will accordingly defend the
claims vigorously. The Company believes that the amount of loss, if any,
suffered in connection with this lawsuit would not have a material impact
on the financial position or results of operation of the Company, although
no assurance can be given with respect to the ultimate outcome of any such
litigation.
(c) In November 2001, the Company filed a complaint with the High Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin
("Big Screen"), demanding payment of rental payments and certain other
amounts owed to the Company. Big Screen has raised a defense based on
alleged infringement of German antitrust rules, relating mainly to an
allegation of excessive pricing. Big Screen had brought a number of motions
for restraining orders in this matter relating to the Company's provision
of films and maintenance, all of which have been rejected by the courts,
including the Berlin Court of Appeals, and for which all appeals have been
exhausted. The Company believes that all of the allegations in Big Screen's
individual defense are entirely without merit and will accordingly continue
to prosecute this matter vigorously. The Company believes that the amount
of the loss, if any, suffered in connection with this dispute would not
have a material impact on the financial position or results of operations
of the Company, although no assurance can be given with respect to the
ultimate outcome of any such litigation.
(d) In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which expands previously
issued accounting guidance and requires additional disclosure by a
guarantor in its interim and annual financial statements for certain
guarantees.
Page 59
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
15. CONTINGENCIES (cont'd)
(d) (cont'd)
In the normal course of business, the Company enters into agreements that
may contain features that meet the FIN 45 definition of a guarantee. FIN 45
defines a guarantee to be a contract (including an indemnity) that
contingently requires the Company to make payments (either in cash,
financial instruments, other assets, shares of its stock or provision of
services) to a third party based on (a) changes in an underlying interest
rate, foreign exchange rate, equity or commodity instrument, index or other
variable, that is related to an asset, a liability or an equity security of
the counterparty, (b) failure of another party to perform under an
obligating agreement or (c) failure of another third party to pay its
indebtedness when due.
The Company has estimated under its lease and sale arrangements that there
will not be costs associated with warranty provisions.
FINANCIAL GUARANTEES
Significant guarantees that the Company has provided to third parties are
as follows:
In addition to the minimum annual rental payments as in note 14(a), the
Company had previously provided guarantees up to a maximum amount of $4.8
million related to debt and real estate lease obligations entered into by
theaters in which it holds a minority equity interest. In the event that
one of the theaters failed to meet certain financial obligations, the
lenders or landlords may have drawn upon these guarantees.
On December 2, 2003, the Company acquired the remaining 50% interest in the
company that operates the IMAX Theatre at Arizona Mills in Tempe, Arizona,
and thus, the full amount of the real estate lease obligation has been
included in the lease commitment note (see note 14(a)) to reflect the
Company's new ownership.
On December 31, 2003, the Company obtained a release from a debt guarantee
in the amount of $2.3 million (see note 17(c)).
DIRECTOR/OFFICER INDEMNIFICATIONS
The Company's General By-law contains an indemnification of its
directors/officers, former directors/officers and persons who have acted at
its request to be a director/officer of an entity in which the Company is a
shareholder or creditor, to indemnify them, to the extent permitted by the
Canada Business Corporations Act, against expenses (including legal fees),
judgements, fines and any amount actually and reasonably incurred by them
in connection with any action, suit or proceeding in which the directors
and/or officers are sued as a result of their service, if they acted
honestly and in good faith with a view to the best interests of the
Company. The nature of the indemnification prevents the Company from making
a reasonable estimate of the maximum potential amount it could be required
to pay to counterparties. The Company has purchased directors' and
officers' liability insurance. No amount has been accrued in the
consolidated balance sheet as of December 31, 2003, with respect to this
indemnity.
OTHER INDEMNIFICATION AGREEMENTS
In the normal course of the Company's operations, it provides
indemnifications to counterparties in transactions such as: theater system
lease and sale agreements; film production, exhibition and distribution
agreements; real property lease agreements; and employment agreements.
These indemnification agreements require the Company to compensate the
counterparties for costs incurred as a result of litigation claims that may
be suffered by the counterparty as a consequence of the transaction or the
Company's breach or non-performance under these agreements. While the terms
of these indemnification agreements vary based upon the contract, they
normally extend for the life of the agreements. A small number of
agreements do not provide for any limit on the maximum potential amount of
indemnification, however virtually all of the Company's system lease and
sale agreements limit such maximum potential liability to the purchase
price of the system. The fact that the maximum potential amount of
indemnification required by the Company is not specified in some cases
prevents the Company from making a reasonable estimate of the maximum
potential amount it could be required to pay to counterparties.
Historically, the Company has not made any significant payments under such
indemnifications and no amount has been accrued in the accompanying
consolidated financial statements with respect to the contingent aspect of
these indemnities.
Page 60
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CAPITAL STOCK
(a) AUTHORIZED
The authorized capital of the Company consists of an unlimited number of
common shares.
The following is a summary of the rights, privileges, restrictions and
conditions of the common shares.
COMMON SHARES
The holders of common shares are entitled to receive dividends if, as and
when declared by the directors of the Company, subject to the rights of the
holders of any other class of shares of the Company entitled to receive
dividends in priority to the common shares.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of the shareholders.
(b) CHANGES DURING THE PERIOD
In 2003, the Company issued 490,039 common shares pursuant to the exercise
of stock options for cash proceeds of $1.7 million. In addition, the
Company issued 5,838,353 common shares with a value of $48.3 million in
exchange for the repurchase of a portion of the Old Senior Notes (see note
12).
In 2002, the Company issued 74,252 common shares pursuant to the exercise
of stock options for cash proceeds of $0.2 million and 1,000,000 common
shares with a value of $2.1 million as partial payment for the repurchase
of a portion of the Subordinated Notes (see note 13).
In 2001, the Company issued 150,000 common shares pursuant to the exercise
of stock options for cash proceeds of $0.03 million, 20,000 common shares
with a value of $0.4 million relating to additional consideration for a
prior period business acquisition, 1,000,000 common shares under terms of
the Company's employment contracts with an ascribed value of $2.6 million
and 677,600 common shares with an ascribed value of $1.2 million as partial
payment for the repurchase of a portion the Subordinated Notes (see note
13).
(c) STOCK BASED COMPENSATION
As at December 31, 2003, the Company has reserved a total of 7,877,601
(2002 - 8,367,640) common shares for future issuance as follows:
(i) 7,877,601 common shares remain reserved for issuance under the Stock
Option Plan, of which options in respect of 5,677,806 common shares
are outstanding at December 31, 2003. The options granted under the
Stock Option Plan generally vest between one and five years and
expire 10 years or less from the date granted. At December 31, 2003,
options in respect of 4,108,212 common shares were vested and
exercisable.
(ii) Under the terms of certain employment agreements dated July 12,
2000, the Company is required to issue either 360,000 restricted
common shares or pay their cash equivalent. The restricted shares or
the related cash obligation were fully vested effective July 1,
2002. In May 2003, the Company paid approximately $1.6 million in
cash to settle the equivalent of 200,000 of the total 360,000
restricted common shares under these agreements. The Company has
recorded an expense of $1.4 million for the year ended December 31,
2003 (2002 - $0.7 million), due to the changes in the Company's
stock price during the period.
Page 61
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CAPITAL STOCK (cont'd)
(c) STOCK BASED COMPENSATION (CONT'D)
The following table summarizes certain information in respect of option
activity under the Stock Option Plan:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
---------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
---------- ---------- ---------- --------- --------- ---------
Options outstanding, beginning of year 5,640,898 4,609,086 8,071,072 $ 11.31 $ 16.98 $ 21.91
Granted 786,110 2,229,893 1,395,128 6.99 4.76 2.95
Exercised (490,039) (42,500) -- 4.40 3.11 --
Cancelled (259,163) (869,681) (1,990,014) 18.91 22.81 21.94
Forfeited(1) -- (285,900) (2,867,100) -- 24.66 21.42
---------- ----------- ----------
Options outstanding, end of year 5,677,806 5,640,898 4,609,086 11.11 11.31 16.98
========== ========== ==========
Options exercisable, end of year 4,108,212 3,360,165 2,549,182 13.53 13.89 20.31
========== ========== ==========
(1) Included in 2001 are stock options for 2,600,000 common shares cancelled for
$nil consideration in conjunction with the issuance of 650,000 common shares
under the terms of certain employment agreements.
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at December 31, 2003:
NUMBER OF SHARES WEIGHTED
RANGE OF EXERCISE --------------------------------------- AVERAGE EXERCISE AVERAGE REMAINING
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE TERM
- --------------------- ----------------- ----------------- ---------------- -----------------
$ 0.00 - $ 2.99 261,384 154,214 $ 2.65 4.3 Years
$ 3.00 - $ 4.99 2,411,887 1,768,758 4.23 5.4 Years
$ 5.00 - $ 9.99 988,697 350,002 7.26 4.9 Years
$ 10.00 - $ 14.99 11,000 11,000 13.48 2.1 Years
$ 15.00 - $ 19.99 239,200 239,200 11.06 2.7 Years
$ 20.00 - $ 24.99 1,410,338 1,315,338 22.23 4.9 Years
$ 25.00 - $ 28.04 355,300 269,700 27.12 5.9 Years
----------------- -----------------
Total 5,677,806 4,108,212 10.89 5.0 Years
================= =================
The Company currently follows the intrinsic value method of accounting for
employee stock options as prescribed by Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees", ("APB25"). If the fair
value methodology prescribed by FAS 123 had been adopted by the Company,
pro forma results for the year ended December 31, would have been as
follows:
2003 2002 2001
---------------- ---------------- ----------------
Net earnings (loss) as reported $ 231 $ 11,972 $ (145,114)
Stock-based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (9,260) (10,765) (10,290)
--------------- --------------- ----------------
Adjusted net earnings (loss) $ (9,029) $ 1,207 $ (155,404)
=============== =============== ================
Earnings (loss) per share - basic and diluted:
Net earnings (loss) as reported $ 0.01 $ 0.36 $ (4.69)
FAS 123 stock-based compensation expense $ (0.25) $ (0.32) $ (0.34)
--------------- --------------- ----------------
Adjusted net earnings (loss) $ (0.24) $ 0.04 $ (5.03)
=============== =============== ================
Of the total pro forma stock based compensation expense for the year ended
December 31, 2003 of $9.3 million, $7.6 million relates to stock grants
made in years 1998 to 2000 at an average exercise price of $23.29. In
accordance with FAS 123, the total expense reflected in the above pro forma
charge represents amortization of stock option charges that were valued at
the grant date using an option-pricing model with assumptions that were
valid at the time with no further update of current stock trends and
assumptions.
Page 62
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CAPITAL STOCK (cont'd)
(c) STOCK BASED COMPENSATION (cont'd)
The weighted average fair value of common share options granted to
employees in 2003 at the time of grant was $2.92 per share (2002 - $1.25
per share, 2001 - $2.39 per share). For the three months ended March 31,
2003 and prior, the Company used the Black-Scholes option-pricing model to
determine the fair value of common share options granted as estimated at
the grant date. The following assumptions were used during the three months
ended March 31, 2003: dividend yield of 0% (December 31, 2002 - 0%,
December 31, 2001 - 0%); an average risk free interest rate of 2.1%
(December 31, 2002 - 2.6%, December 31, 2001 - 4.5%), 20% forfeiture of
options vesting greater than two years; expected life of one to seven
years; and expected volatility of 50% (December 31, 2002 - 50.0%, December
31, 2001 - 200.0%). As of April 1, 2003, the Company adopted a Binomial
option-pricing model to determine the fair value of common share options at
the grant date for the nine month period ended December 31, 2003 with the
following assumptions: dividend yield of 0%; an average risk free interest
rate of 3.0%; an equity risk premium between 4.6% and 10.7%; a beta between
0.85 and 1.03; expected option life between 2.6 and 5.1 years; an average
expected volatility of 62.0%; and an annual termination probability between
8.1% and 9.6%. Had the Company changed from using the Black-Scholes option
pricing model to a Binomial option pricing model effective January 1, 2003
rather than April 1, 2003, the impact would not have been significant.
In 2003, an aggregate of 143,394 options with an average exercise price of
$6.82 and 550,000 warrants with an exercise price of $6.06 to purchase the
Company's common stock were issued to certain advisors and strategic
partners of the Company, respectively. Of the 550,000 warrants, the Company
believes that only 200,000 will ultimately vest. The warrants generally
expire 5 years after the date of grant or vesting. At December 31, 2003,
200,000 warrants were vested and exercisable. The Company has calculated
the fair value of these options and warrants to non-employees on the date
of grant or the date on which certain milestones were achieved in the year
ended December 31, 2003 to be $0.5 million and $1.1 million, respectively,
using a Binomial option-pricing model with the following underlying
assumptions: dividend yield of 0%; an average risk free interest rate of
2.8%; expected option life of 5 years; and an average expected volatility
of 62.0%.
The Company has recorded $1.1 million in film assets in the year ended
December 31, 2003 and a charge of $0.5 million to film cost of sales
related to the non-employee stock options and warrants granted.
(d) EARNINGS (LOSS) PER SHARE
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Net earnings (loss) applicable to common shareholders $ 231 $ 11,972 $ (145,114)
=============== =============== ===============
Weighted average number of common shares:
Issued and outstanding, beginning of year 32,973,366 31,899,114 30,051,514
Weighted average number of shares
issued during the year 2,689,888 1,044,279 864,167
--------------- --------------- ---------------
Weighted average number of shares used in computing
basic earnings (loss) per share 35,663,254 32,943,393 30,915,681
Assumed exercise of stock options and warrants, net of
shares assumed 767,307 362,935 --
--------------- --------------- ---------------
Weighted average number of shares used in computing
diluted earnings (loss) per share 36,430,561 33,306,328 30,915,681
=============== =============== ===============
The calculation of diluted earnings (loss) per share for 2001 excludes
options to purchase common shares of stock which were outstanding, and for
2003, 2002 and 2001 excludes common shares issuable upon conversion of the
Subordinated Notes as the impact of these exercises and conversions would
be anti-dilutive.
Page 63
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
(a) In the normal course of its business, the Company each year will have
customers who, for a number of reasons including the inability to obtain
certain consents, approvals or financing, are unable to proceed with
theater construction. Once the determination is made that the customer will
not proceed with installation, the lease agreement with the customer is
generally terminated. Upon the Company being released from its future
obligations under the agreement, the initial lease payments that the
customer previously made to the Company are recognized as revenue. Included
in systems revenue for 2003 is $9.6 million (2002 - $5.1 million, 2001 -
$5.5 million) for amounts recognized under terminated lease agreements.
(b) Included in selling, general and administrative expenses for 2003 is $1.6
million (2002 - $0.4 million, 2001 - $1.4 million) for net foreign exchange
gains related to the translation of foreign currency denominated monetary
assets, liabilities and integrated subsidiaries.
(c) The Company has entered into a settlement agreement with Mainframe
Entertainment, Inc. ("MFE"), whereby the parties settled all of MFE's
indebtedness and obligations to the Company arising under the Company's
6.0% Senior Secured Convertible Debenture due from MFE (the "Debenture").
The Company has recorded a gain of $1.9 million related to the final
settlement. In 2001, $5.6 million of the Debenture principal amount, the
remaining balance at the time, was fully provided for due to uncertainty of
collection.
(d) On December 2, 2003, the Company acquired the remaining 50% interest in the
company that operates the IMAX Theatre at Arizona Mills in Tempe, Arizona,
for nil consideration. On the date of the transaction, the net assets
acquired and liabilities assumed had nominal value.
(e) On December 31, 2003, the Company obtained a release from the remaining
debt guarantee in the amount of $2.3 million. In 2000, the Company had
recorded a $4.0 million debt guarantee which was reduced over time due to
reductions in the underlying debt.
18. RECEIVABLE PROVISIONS (RECOVERIES), NET
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------- ------------- -------------
Accounts receivable provisions (recoveries), net $ 714 $ (1,942) $ 4,469
Financing receivable provisions (recoveries), net(1) $ (2,939) $ 709 $ 13,633
------------- ------------- -------------
Receivable provisions (recoveries), net $ (2,225) $ (1,233) $ 18,102
============= ============= =============
(1) For the year ended December 31, 2003, the Company recorded a recovery of
previously provided amounts of $4.1 million (2002 - $2.8 million, 2001 -
$nil) as collectibility uncertainty associated with certain leases, due in
large part to financial difficulties faced by the commercial exhibition
segment of the Company's customers in previous years, was resolved by
amendment, settlement of the leases, or other resolving conditions.
Page 64
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
19. RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------- ------------- -------------
Restructuring costs(1) (recoveries) $ -- $ (497) $ 16,292
Asset impairments (recoveries)
Fixed assets(2) 969 376 25,694
Other assets -- -- 3,283
------------- ------------- -------------
Total $ 969 $ (121) $ 45,269
============= ============= =============
(1) During 2001, the Company reduced its expenses and changed its corporate
structure to reflect industry-wide economic and financial difficulties
faced by certain of the Company's customers. During the year ended
December 31, 2001, the Company relocated its Sonics sound-system
facility in Birmingham, Alabama to the Company's current facilities
near Toronto, Canada, and reduced its overall corporate workforce. In
2001, the Company recorded expenses of $12.6 million for staff
severances and $3.7 million for premises relocation charges. During
2002, the Company recovered $0.5 million of restructuring liabilities
for terminated employees who obtained employment prior to the
completion of their severance period. As at December 31, 2003 the
Company has accrued liabilities of $0.6 million (2002 - $1.4 million,
2001 - $5.1 million) for costs of severed employees to be paid over the
next year. During 2003, the Company paid out $0.8 million (2002 - $3.2
million) of termination benefits.
(2) The Company, in assessing the carrying value of its long-lived assets
recorded write-downs of $1.0 million in 2003 (2002 - $0.4 million, 2001
- $25.7 million) relating to fixed assets in its theater operations as
estimated discounted future cash flows were less than the carrying
amounts of the assets.
Page 65
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
20. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ -------------
(a) Changes in other non-cash operating assets and liabilities
are comprised of the following:
Decrease (increase) in:
Accounts receivable $ 460 $ 4,202 $ 1,099
Financing receivables (1,044) (580) 5,687
Inventories 7,847 8,092 6,845
Prepaid expenses 522 (693) (67)
Increase (decrease) in:
Accounts payable (1,230) (478) (9,910)
Accrued liabilities 799 (7,765) 18,151
Deferred revenue (22,278) 3,010 (9,276)
------------ ------------ ------------
$ (14,924) $ 5,788 $ 12,529
============ ============ ============
(b) Cash payments made during the year on account of:
Income taxes $ 2,294 $ 1,256 $ 1,107
============ ============ ============
Interest $ 15,123 $ 16,868 $ 21,910
============ ============ ============
Non-cash transactions for financing and investing:
Issuance of common stock to repurchase Old Senior Notes
due 2005 $ 48,324 $ -- $ --
============ ============ ============
(c) Depreciation, amortization and write-downs (recoveries)
comprise of the following:
Depreciation and amortization:
Film assets $ 2,940 $ 1,973 $ 10,544
Fixed assets 6,592 6,158 8,482
Other assets 1,545 2,202 3,075
Goodwill -- -- 2,310
Other intangible assets 573 1,419 695
Deferred financing costs 705 792 1,149
------------ ------------ ------------
12,355 12,544 26,255
Write-downs (recoveries):
Accounts receivable 714 (1,942) 4,469
Financing receivables (2,939) 709 13,633
Inventories -- 1,229 4,053
Film assets -- -- 16,514
Fixed assets 1,322 3,175 25,694
Other assets (1,819) 216 8,047
------------ ------------ ------------
(2,722) 3,387 72,410
------------ ------------ ------------
$ 9,633 $ 15,931 $ 98,665
============ ============ ============
21. SEGMENTED AND OTHER INFORMATION
As of December 31, 2003, the Company has four reportable segments: IMAX
systems; films; theater operations; 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 25). The
IMAX systems segment designs, manufactures, sells or leases and maintains
IMAX theater projection systems. The films segment produces and distributes
films, and performs film post-production services. The theater operations
segment owns and operates certain IMAX theaters. The other segment includes
camera rentals. The accounting policies of the segments are the same as
those described in note 2. Segment performance is evaluated based on gross
margin less selling, general and administrative expenses, research and
development expenses, amortization of intangibles, loss (income) from
equity-accounted investees and restructuring costs and asset impairments
(recoveries). Inter-segment transactions are not significant.
Page 66
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
21. SEGMENTED AND OTHER INFORMATION (cont'd)
(a) OPERATING SEGMENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUE
IMAX systems $ 75,848 $ 70,959 $ 76,582
Films 25,803 40,556 29,923
Theater operations 13,109 12,284 6,540
Other 4,500 5,303 4,654
------------ ------------ ------------
Total $ 119,260 $ 129,102 $ 117,699
============ ============ ============
RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
IMAX systems $ -- $ -- $ 7,516
Films -- -- --
Theater operations 969 376 10,062
Other -- (497) 27,691
------------ ------------ ------------
Total $ 969 $ (121) $ 45,269
============ ============ ============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 38,402 $ 33,975 $ 3,648
Films (519) 4,947 (33,022)
Theater operations (1,505) (763) (4,077)
Other 3,352 1,196 (15,345)
Corporate overhead (21,680) (22,935) (44,012)
------------ ------------ ------------
Total $ 18,050 $ 16,419 $ (92,808)
============ ============ ============
DEPRECIATION, AMORTIZATION AND WRITE-DOWNS
Depreciation and amortization:
IMAX systems $ 4,722 $ 5,030 $ 12,548
Films 4,268 3,556 8,725
Theater operations 178 172 819
Other and corporate 3,187 3,786 4,163
------------ ------------ ------------
12,355 12,544 26,255
------------ ------------ ------------
Write-downs (recoveries):
IMAX systems (2,939) 4,505 24,421
Films -- -- 30,901
Theater operations 1,104 607 8,867
Other and corporate (887) (1,725) 8,221
------------ ------------ ------------
(2,722) 3,387 72,410
------------ ------------ ------------
Total $ 9,633 $ 15,931 $ 98,665
============ ============ ============
PURCHASE OF LONG-LIVED ASSETS
IMAX systems $ 1,215 $ 1,308 $ 851
Films 400 152 3
Theater operations 242 526 121
Other and corporate 411 1,183 1,403
------------ ------------ ------------
Total $ 2,268 $ 3,169 $ 2,378
============ ============ ============
Page 67
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
21. SEGMENTED AND OTHER INFORMATION (CONT'D)
(a) OPERATING SEGMENTS (cont'd)
AT DECEMBER 31,
----------------------------
2003 2002
------------ ------------
ASSETS
IMAX systems $ 158,093 $ 163,795
Films 15,226 17,680
Theater operations 1,068 1,810
Other 5,633 6,310
Corporate 70,356 51,678
Discontinued operations -- 1,703
------------ ------------
Total $ 250,376 $ 242,976
============ ============
Income from equity-accounted investees relates to the Theater operations
segment.
(b) GEOGRAPHIC INFORMATION
Revenue by geographic area is based on the location of the theater.
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUE
Canada $ 6,057 $ 7,236 $ 5,524
United States 65,881 74,072 70,397
Europe 26,629 23,846 21,880
Japan 3,350 6,395 3,971
Rest of World 17,343 17,553 15,927
------------ ------------ ------------
Total $ 119,260 $ 129,102 $ 117,699
============ ============ ============
AT DECEMBER 31,
----------------------------
2003 2002
------------ ------------
LONG-LIVED ASSETS
Canada $ 57,345 $ 59,985
United States 31,501 30,767
Europe 1,045 2,258
Japan 16 25
Rest of World 2,153 3,426
------------ ------------
Total $ 92,060 $ 96,461
============ ============
Long-lived assets include fixed assets, other assets, other intangible
assets and goodwill.
(c) REVENUE AND COST OF GOODS AND SERVICES
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenue:
Products $ 71,361 $ 77,024 $ 77,290
Services 47,899 52,078 40,409
------------ ------------ ------------
Total revenue $ 119,260 $ 129,102 $ 117,699
============ ============ ============
Costs of goods and services:
Products $ 30,077 $ 35,611 $ 63,270
Services 37,206 40,023 31,699
------------ ------------ ------------
Total costs of goods and services $ 67,283 $ 75,634 $ 94,969
============ ============ ============
Page 68
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
21. SEGMENTED AND OTHER INFORMATION (cont'd)
(c) REVENUE AND COST OF GOODS AND SERVICES (cont'd)
Product revenue includes sales and sales-type leases of theater systems,
revenue from film distribution and the sales of other products. Service
revenue includes rentals from operating leases, maintenance,
post-production services, camera rentals, theater operations and other
services.
22. FINANCIAL INSTRUMENTS
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. The Company maintains cash and cash equivalents with
various major financial institutions. The Company's cash is invested with
highly rated financial institutions.
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 cash
flows of the Company is periodically converted to Canadian dollars to fund
Canadian dollar expenses through the spot market. In Japan, the Company has
ongoing operating expenses related to its operations. Net Japanese yen
flows are converted to U.S. dollars generally through the spot markets. The
Company also has cash receipts under leases denominated in Japanese yen and
Euros which are converted to U.S. dollars generally through the spot
market. As at December 31, 2003, no foreign currency forward contracts are
outstanding.
The Company's adoption of FASB Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities",
effective January 1, 2001, did not have a significant impact on the
accounts.
The carrying values of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair
values due to the short-term maturity of these instruments. The Company's
other financial instruments at December 31, are comprised of the following:
2003 2002
------------------------------ ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------- -------------- --------------
Old Senior Notes due 2005 $ 29,234 $ 29,810 $ 200,000 $ 156,000
Subordinated Notes due 2003 -- -- 9,143 8,686
New Senior Notes due 2010 160,000 160,000 -- --
Long-term receivables 3,197 3,197 1,866 1,866
As at December 31, 2003, the fair value of the Old Senior Notes is based on
the amounts paid by the Company on January 2, 2004 to repurchase a portion
of the Old Senior Notes and the fair value of the New Senior Notes are
assumed to equal the carrying amount given the recent transaction date of
December 4, 2003. The fair values of the Old Senior Notes and Subordinated
Notes as at December 31, 2002 are estimated based on quoted market prices
for the Company's debt. The fair value of long-term receivables is
estimated based on current market rates at December 31, 2003.
The North American commercial exhibitor market represents an important
customer base for the Company in terms of both collections under existing
long-term leases and potential future system contracts. In 2000 and 2001,
many of the North American commercial exhibitor chains faced financial
difficulties due to over-expansion, which in some cases led to bankruptcy
proceedings and/or consolidations. Many of these exhibitors have emerged
from those proceedings with new capital, including from the public markets.
While the Company views these developments in the North American commercial
exhibitor market as positive, there is no assurance that they will continue
or that other commercial exhibitors will not encounter additional financial
difficulties. To minimize the Company's credit risk in this area, the
Company retains title to underlying theater systems leased, registers
theater systems sold as collateral, performs initial and ongoing credit
evaluations of its customers and makes ongoing provisions for its estimate
of potentially uncollectible amounts.
Page 69
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
23. EMPLOYEE PENSIONS
(a) DEFINED BENEFIT PLAN
The Company has a foreign defined benefit pension plan covering its two
Co-Chief Executive Officers. The plan provides for a lifetime retirement
benefit from age 55 determined as 75% of the member's best average 60
consecutive months of earnings during the 120 months proceeding retirement.
Once benefit payments begin, the benefit is indexed annually to the cost of
living and further provides for 100% continuance for life to the surviving
spouse. The benefits were 50% vested as at July 12, 2000, the plan
initiation date. The vesting percentage increases on a straight-line basis
from inception until age 55. The vesting percentage of a member whose
employment terminates other than by voluntary retirement shall be 100%.
Also, upon the occurrence of a change in control of the Company prior to
termination of a member's employment, the vesting percentage shall become
100%. The following assumptions were used in determining the unfunded
status of the Company's defined benefit pension plan at December 31:
2003 2002 2001
--------------- --------------- --------------
Discount rate 6.0% 6.0% 7.0%
Rate of increase in qualifying compensation levels nil% nil% 1.5%
The amounts accrued for the plan are determined as follows:
Projected benefit obligation: 2003 2002 2001
--------------- --------------- ---------------
Obligation, beginning of year $ 17,150 $ 13,819 $ 11,595
Service cost 1,956 1,777 1,701
Interest cost 1,088 1,029 871
Actuarial loss (gain) (108) 525 (348)
--------------- --------------- ---------------
Obligation, end of year $ 20,086 $ 17,150 $ 13,819
=============== =============== ===============
Unfunded status:
Obligation, end of year $ 20,086 $ 17,150 $ 13,819
Unrecognized prior service cost (6,429) (7,826) (9,224)
Unrecognized actuarial gain 899 791 1,316
--------------- --------------- ---------------
Accrued pension liability $ 14,556 $ 10,115 $ 5,911
=============== =============== ===============
In addition, included in accrued liabilities, is a minimum pension
liability of $5.5 million (2002 - $7.0 million, 2001 - $7.9 million),
representing unrecognized prior service costs.
PENSION BENEFITS
---------------------------------------------
2003 2002 2001
------------- -------------- --------------
Accrued benefits cost $ (20,086) $ (17,150) $ (13,819)
Other assets 5,530 7,035 7,908
------------- ------------- -------------
Net amount recognized $ (14,556) $ (10,115) $ (5,911)
============= ============= =============
The following table provides disclosure of pension expense for the defined
benefit plan for the year ended December 31:
2003 2002 2001
--------------- --------------- ---------------
Service cost $ 1,956 $ 1,777 $ 1,701
Interest cost 1,088 1,029 871
Amortization of prior service cost 1,398 1,398 1,398
--------------- --------------- ---------------
Pension expense $ 4,442 $ 4,204 $ 3,970
=============== =============== ===============
At the time the Company established the defined benefit pension plan, it
also took out life insurance policies on its two Co-Chief Executive
Officers. The Company intends to use the proceeds of such insurance
policies to satisfy, in whole or in part, the survival benefits due and
payable under the plan, although there can be no assurance that the Company
will ultimately do so. At December 31, 2003, the cash surrender value of
the insurance policies is $1.7 million (2002 - $0.9 million, 2001 - $0.4
million) and has been included in other assets.
Page 70
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
23. EMPLOYEE PENSIONS (cont'd)
(b) DEFINED CONTRIBUTION PLAN
The Company also maintains defined contribution pension plans for its
employees, including its executive officers. The Company makes
contributions to these plans on behalf of employees in an amount equal to
5% of their base salary subject to certain prescribed maximums. During
2003, the Company contributed and expensed an aggregate of $0.5 million
(2002 - $0.4 million, 2001 - $0.5 million) to its Canadian plan and an
aggregate of $0.1 million (2002 - $0.1 million, 2001 - $0.3 million) to its
defined contribution employee pension plan under Section 401(k) of the U.S.
Internal Revenue Code.
24. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB INTERPRETATION NO. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES"
("FIN 46")
FIN 46, "Consolidation of Variable Interest Entities", ("FIN 46") is
effective for all enterprises with variable interests in variable interest
entities created after January 31, 2003. FIN 46(R), which was revised in
December 2003, is effective for all entities to which the provision of FIN
46 were not applied as of December 24, 2003. The provision of FIN 46(R)
must be applied to all entities subject to FIN 46 from the beginning of the
first quarter of 2004. If an entity is determined to be a variable interest
entity ("VIE"), it must be consolidated by the enterprise that absorbs the
majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both. A VIE is an entity that is
structured such that either (a) the equity is not sufficient to permit that
entity to finance its activities without external support, or (b) equity
investors lack either direct or indirect ability to make decisions about
the entity's activities, an obligation to absorb expected losses or the
right to receive expected residual returns. A primary beneficiary is an
enterprise that will absorb a majority of a VIE's expected losses, receive
a majority of its expected residual returns, or both. The consolidation
requirements of FIN 46 apply immediately to VIEs created after January 31,
2003 and for all fiscal periods beginning on or after November 1, for
entities created before February 1, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 for VIEs created prior to
February 1, 2003 will have on its results of operations and financial
conditions.
25. DISCONTINUED OPERATIONS
(a) MIAMI THEATER LLC
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company will remove all of its assets from the theater in the
first quarter of 2004. The Company is involved in an arbitration proceeding
with the landlord of the theater with respect to the amount owing to the
landlord by the Company for lease and guarantee obligations. The minimum
amount of loss to the Company has been established at $0.8 million, which
the Company has accrued. As the Company is uncertain as to the outcome of
the proceeding no additional amount has been recorded.
In accordance with FASB Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), the Company assessed the fair value of the assets based on the
estimated discounted future cash flows the assets are expected to generate.
Page 71
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
25. DISCONTINUED OPERATIONS (cont'd)
(b) DIGITAL PROJECTION INTERNATIONAL
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries (collectively "DPI"), to a company owned by members of DPI
management. In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"), the Company has segregated
the discontinued operations for all comparative periods presented.
As part of the transaction, the Company restructured its advances to DPI,
releasing DPI from obligations to repay any amounts in excess of $12.7
million previously advanced by the Company, and reorganized the remaining
$12.7 million of debt owing to the Company into two separate loan
agreements. The loans receivable are collateralized by fixed and floating
charges over all DPI assets including intellectual properties. One of the
loans is convertible, upon the occurrence of certain events, into shares
representing 49% of the total share capital of DPI. During 2003, the
Company received $0.8 million in cash towards the repayment of this debt,
and has recorded a corresponding gain in net earnings (loss) from
discontinued operations. As of December 31, 2003, the remaining balance is
$11.9 million, which has been fully allowed for.
(c) CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR MIAMI THEATER
AND DPI
The Company has restated the financial statements to segregate the
discontinued operations for all comparative years presented.
The assets and liabilities of discontinued operations for Miami Theater
LLC, summarized in the Consolidated Balance Sheets, at December 31, 2002
comprise of the following:
2002
------------------
ASSETS
Accounts receivable $ --
Prepaid Expenses 11
Inventories --
Fixed assets 1,692
Deferred income tax assets --
------------------
Total assets of discontinued operations $ 1,703
==================
LIABILITIES
Accounts payable $ 601
Accrued liabilities 86
Deferred revenue 1,694
------------------
Total liabilities of discontinued operations 2,381
==================
The assets related to the Miami theater will be transferred to other
components of the Company and the liabilities will be settled by the
Company; accordingly, as at December 31, 2003, the remaining assets and
liabilities have been included in continuing operations.
Page 72
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
25. DISCONTINUED OPERATIONS (cont'd)
(c) CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR MIAMI THEATER
AND DPI (cont'd)
The net earnings (loss) from discontinued operations summarized in the
Consolidated Statements of Operations, for the years ended December 31, was
comprised of the following:
2003 2002 2001
------------- ------------- -------------
Revenue $ 1,123 $ 1,548 $ 22,925
============= ============= =============
Net earnings (loss) from discontinued operations(1) $ 374 $ 804 $ (10,936)
Net loss on disposal of discontinued operations(2) (179) -- (42,342)
-------------- ------------- -------------
Net earnings (loss) from discontinued operations $ 195 $ 804 $ (53,278)
============= ============= =============
(1) Net of income tax provision of $0.1 million in 2003 (2002 - $nil, 2001
- $2.4 million recovery).
(2) Net of income tax recovery of $nil in 2001; includes $12.7 million in
allowances for uncollectibility of loans receivable. Any recoveries on
these loans are included in the results from discontinued operations as
cash is received.
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's New Senior Notes (see note 11) are unconditionally
guaranteed, jointly and severally by specific wholly-owned subsidiaries of
the Company (the "Guarantor Subsidiaries"). The main Guarantor Subsidiaries
are David Keighley Productions 70 MM Inc., Sonics Associates Inc., and the
subsidiaries that own and operate certain theaters. These guarantees are
full and unconditional. The information under the column headed
"Non-Guarantor Subsidiaries" relates to the following subsidiaries of the
Company: IMAX Japan Inc., IMAX B.V., and IMAX Entertainment Pte. Inc., (the
"Non-Guarantor Subsidiaries") which have not provided any guarantees of the
New Senior Notes.
Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Some
subsidiaries may be unable to pay dividends due to negative working
capital.
Page 73
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2003:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
ASSETS
Cash and cash equivalents $ 41,311 $ 5,696 $ 275 $ -- $ 47,282
Restricted cash 4,961 -- -- -- 4,961
Accounts receivable 9,924 3,468 495 -- 13,887
Financing receivables 55,294 1,407 41 -- 56,742
Inventories 29,775 620 69 (2,246) 28,218
Prepaid expenses 1,098 523 281 -- 1,902
Inter-company receivables 21,203 21,745 15,184 (58,132) --
Film assets 361 1,207 -- -- 1,568
Fixed assets 33,897 1,918 3 -- 35,818
Other assets 13,827 -- -- -- 13,827
Deferred income taxes 3,705 51 -- -- 3,756
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,388 -- -- -- 3,388
Investments in subsidiaries 26,196 -- -- (26,196) --
------------- ------------- ------------- ------------- -------------
Total assets $ 283,967 $ 36,635 $ 16,348 $ (86,574) $ 250,376
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 3,605 2,175 -- -- $ 5,780
Accrued liabilities 41,618 1,803 373 -- 43,794
Inter-company payables 43,885 31,640 11,065 (86,590) --
Deferred revenue 58,319 4,889 136 -- 63,344
New Senior Notes due 2010 160,000 -- -- -- 160,000
Old Senior Notes due 2005 29,234 -- -- -- 29,234
------------- ------------- ------------- ------------- -------------
Total liabilities 336,661 40,507 11,574 (86,590) 302,152
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock 115,609 -- 117 (117) 115,609
Other equity/Additional paid in
capital/Contributed surplus 2,125 46,960 -- (45,926) 3,159
Deficit (171,687) (50,218) 4,657 46,059 (171,189)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- ------------- ------------- ------------- -------------
Total shareholders' (deficit) $ (52,694) $ (3,872) $ 4,774 $ 16 (51,776)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 283,967 $ 36,635 $ 16,348 $ (86,574) $ 250,376
============= ============= ============= ============= =============
In certain guarantor subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced inter-company receivable balances
with respect to these guarantor subsidiaries in the amounts of $26.5
million.
Page 74
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
ASSETS
Cash and cash equivalents $ 27,756 $ 5,695 $ 350 $ -- $ 33,801
Restricted cash 3,335 -- -- -- 3,335
Accounts receivable 10,274 3,373 1,407 -- 15,054
Financing receivables 50,492 1,249 177 -- 51,918
Inventories 37,239 280 62 (3,489) 34,092
Prepaid expenses 1,856 329 187 -- 2,372
Inter-company receivables 29,740 15,863 13,338 (58,941) --
Film assets 419 -- -- -- 419
Fixed assets 40,610 3,000 6 -- 43,616
Other assets 10,455 -- -- -- 10,455
Deferred income taxes 3,770 51 -- -- 3,821
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,363 -- -- -- 3,363
Investments in subsidiaries 25,472 -- -- (25,472) --
Assets of discontinued operations -- 2,413 -- (710) 1,703
------------- ------------- ------------- ------------- -------------
Total assets $ 283,808 $ 32,253 $ 15,527 $ (88,612) $ 242,976
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 2,641 2,512 1,014 -- 6,167
Accrued liabilities 41,230 1,827 308 -- 43,365
Inter-company payables 54,093 22,523 10,122 (86,738) --
Deferred revenue 79,759 5,615 216 -- 85,590
Old Senior Notes due 2005 200,000 -- -- -- 200,000
Subordinated Notes due 2003 9,143 -- -- -- 9,143
Liabilities of discontinued operations -- 2,381 -- -- 2,381
------------- ------------- ------------- ------------- -------------
Total liabilities 386,866 34,858 11,660 (86,738) 346,646
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock 65,563 -- 117 (117) 65,563
Other equity/Additional paid in
capital/Contributed surplus 508 46,950 -- (45,916) 1,542
Deficit (170,388) (48,941) 3,750 44,159 (171,420)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- ------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (103,058) $ (2,605) $ 3,867 $ (1,874) $ (103,670)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 283,808 $ 32,253 $ 15,527 $ (88,612) $ 242,976
============= ============= ============= ============= =============
In certain guarantor subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced inter-company receivable balances
with respect to these guarantor subsidiaries in the amounts of $25.2
million.
Page 75
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 74,180 $ 2,373 $ 1,449 $ (2,154) $ 75,848
Films 15,669 12,933 58 (2,857) 25,803
Theater operations 746 12,363 -- -- 13,109
Other 4,451 -- 115 (66) 4,500
------------- ------------- ------------- ------------- -------------
95,046 27,669 1,622 (5,077) 119,260
COST OF GOODS AND SERVICES 45,308 27,769 596 (6,390) 67,283
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 49,738 (100) 1,026 1,313 51,977
Selling, general and administrative expenses 32,210 743 359 -- 33,312
Research and development 3,794 -- -- -- 3,794
Amortization of intangibles 573 -- -- -- 573
Income from equity-accounted investees (1,903) (6) -- (587) (2,496)
Receivable provisions (recoveries), net (1,956) (178) (91) -- (2,225)
Restructuring costs and asset impairment
(recoveries) -- 969 -- -- 969
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 17,020 (1,628) 758 1,900 18,050
Interest income 656 -- -- -- 656
Interest expense (15,770) (86) -- -- (15,856)
Gain (loss) on retirement of notes (4,910) -- -- -- (4,910)
Recovery (impairment) of long-term
investments 1,892 -- -- -- 1,892
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,112) (1,714) 758 1,900 (168)
Recovery of (provision for) income taxes (840) 1,077 149 -- 386
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (1,952) (637) 907 1,900 218
Net earnings (loss) from discontinued
operations 653 (458) -- -- 195
------------- ------------- ------------- ------------- -------------
Net earnings (loss) before cumulative
effect of changes in accounting
principles (1,299) (1,095) 907 1,900 413
Cumulative effect of changes in accounting
principles -- (182) -- -- (182)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (1,299) $ (1,277) $ 907 $ 1,900 $ 231
============= ============= ============= ============= =============
Page 76
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 67,991 $ 4,704 $ 1,388 $ (3,124) $ 70,959
Films 24,614 16,849 37 (944) 40,556
Theater operations 718 11,566 -- -- 12,284
Other 4,982 269 62 (10) 5,303
------------- ------------- ------------- ------------- -------------
98,305 33,388 1,487 (4,078) 129,102
COST OF GOODS AND SERVICES 48,475 30,373 840 (4,054) 75,634
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 49,830 3,015 647 (24) 53,468
Selling, general and administrative expenses 33,456 707 753 (10) 34,906
Research and development 2,360 2 -- -- 2,362
Amortization of intangibles 1,418 -- -- -- 1,418
Loss (income) from equity-accounted
investees (2,781) 314 -- 2,184 (283)
Receivable provisions, recoveries, net 563 (1,348) (448) -- (1,233)
Restructuring cost and asset impairment
(recoveries) (121) -- -- -- (121)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 14,935 3,340 342 (2,198) 16,419
Interest income 408 2 3 -- 413
Interest expense (17,314) (250) -- -- (17,564)
Gain on retirement of notes 11,900 -- -- -- 11,900
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 9,929 3,092 345 (2,198) 11,168
Recovery of (provision for) income taxes -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 9,929 3,092 345 (2,198) 11,168
Net earnings (loss) from discontinued
operations 2,066 (1,262) -- -- 804
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 11,995 $ 1,830 $ 345 $ (2,198) $ 11,972
============= ============= ============= ============= =============
Page 77
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2001:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 72,656 $ 3,152 $ 1,138 $ (364) $ 76,582
Films 16,638 13,285 82 (82) 29,923
Theater operations 96 6,444 -- -- 6,540
Other 3,265 1,309 630 (550) 4,654
------------- ------------- ------------- ------------- -------------
92,655 24,190 1,850 (996) 117,699
COST OF GOODS AND SERVICES 69,260 25,960 476 (727) 94,969
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 23,395 (1,770) 1,374 (269) 22,730
Selling, general and administrative expenses 33,161 11,094 1,684 (89) 45,850
Research and development 2,969 416 -- -- 3,385
Amortization of intangibles 3,005 -- -- -- 3,005
Loss (income) from equity-accounted
investees 39,147 503 -- (39,723) (73)
Receivable provisions (recoveries), net 18,102 -- -- -- 18,102
Restructuring cost and asset impairments
(recoveries) 32,586 14,664 340 (2,321) 45,269
------------- ------------- ------------- -------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (105,575) (28,447) (650) 41,864 (92,808)
Interest income 828 19 -- -- 847
Interest expense (21,743) (277) -- -- (22,020)
Gain on retirement of notes 55,577 -- -- -- 55,577
Impairment of long-term investments (5,584) -- -- -- (5,584)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (76,497) (28,705) (650) 41,864 (63,988)
Recovery of (provision for) income taxes (18,156) (8,134) 194 (1,752) (27,848)
------------- ------------- ------------- -------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (94,653) (36,839) (456) 40,112 (91,836)
Net earnings (loss) from discontinued
operations (50,850) (2,428) -- -- (53,278)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (145,503) $ (39,267) $ (456) $ 40,112 $ (145,114)
============= ============= ============= ============= =============
Page 78
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (1,952) $ (637) $ 907 $ 1,900 218
Items not involving cash:
Depreciation, amortization and write-downs 7,926 1,795 (88) -- 9,633
Income from equity-accounted investees (2,216) 307 -- (587) (2,496)
Deferred income taxes 81 -- -- -- 81
Loss (gain) on retirement of notes 4,910 -- -- -- 4,910
Stock and other non-cash compensation 4,926 -- -- -- 4,926
Non-cash foreign exchange loss (gain) (1,281) -- -- -- (1,281)
Premium on repayment of notes (3,088) -- -- -- (3,088)
Payment under certain employment agreements (1,550) -- -- -- (1,550)
Investment in film assets (1,786) (1,207) -- -- (2,993)
Changes in restricted cash (1,626) -- -- -- (1,626)
Changes in other non-cash operating assets and
liabilities (13,689) 1,000 (922) (1,313) (14,924)
Net cash used in operating activities from
discontinued operations (462) (531) -- -- (993)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities (9,807) 727 (103) -- (9,183)
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (852) (708) -- -- (1,560)
Decrease (increase) in other assets (1,526) -- -- -- (1,526)
(Increase) decrease in other intangible assets (597) -- -- -- (597)
Settlement of debenture 1,892 -- -- -- 1,892
Investment in subsidiaries (10) -- -- 10 --
Net cash in investing activities from
discontinued operations -- (15) -- -- (15)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities (1,093) (723) -- 10 (1,806)
------------- ------------- ------------- ------------- --------------
FINANCING ACTIVITIES
Repayment of Subordinated Notes due 2003 (9,143) -- -- -- (9,143)
Repayment of Old Senior Notes due 2005 (123,577) -- -- -- (123,577)
Issuance of New Senior Notes due 2010 160,000 -- -- -- 160,000
Financing costs related to New Senior Notes due
2010 (5,615) -- -- -- (5,615)
Common shares issued under stock option plan 1,722 -- -- -- 1,722
Other equity/additional paid in
capital/contributed surplus issued -- 10 -- (10) --
Net cash provide by financing activities from
discontinued operations 799 -- -- -- 799
------------- ------------- ------------- ------------- -------------
Net cash used in (provided by) financing
activities 24,186 10 -- (10) 24,186
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash 269 (13) 28 -- 284
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 13,218 547 (75) -- 13,690
Increase (decrease) in cash and cash
equivalents from discontinued operations 337 (546) -- -- (209)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE YEAR 13,555 1 (75) -- 13,481
Cash and cash equivalents, beginning of year 27,756 5,695 350 -- 33,801
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,311 $ 5,696 $ 275 $ -- $ 47,282
============= ============= ============= ============= =============
Page 79
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ 9,929 $ 3,092 $ 345 $ (2,198) $ 11,168
Items not involving cash:
Depreciation, amortization and write-downs 16,016 354 (439) -- 15,931
Loss (income) from equity-accounted
investees (2,781) 314 -- 2,184 (283)
Deferred income taxes (799) -- -- -- (799)
Gain on retirement of notes (11,900) -- -- -- (11,900)
Stock and other non-cash compensation 3,685 -- -- -- 3,685
Non-cash foreign exchange (gain) loss (605) -- -- -- (605)
Investment in film assets (8,423) 5,982 -- -- (2,441)
Changes in restricted cash 2,538 -- -- -- 2,538
Changes in other non-cash operating assets and
liabilities 16,189 (10,489) 242 (154) 5,788
Net cash provided by (used in) operating
activities from discontinued operations (950) 159 -- -- (791)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 22,899 (588) 148 (168) 22,291
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets (786) (881) (2) 152 (1,517)
Decrease (increase) in other assets (1,970) 1,006 -- -- (964)
Decrease (increase) in other intangible assets (675) -- -- -- (675)
Net cash used in investing activities from
discontinued operations -- (24) -- -- (24)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (3,431) 101 (2) 152 (3,180)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of Subordinated Notes due 2003 (6,022) -- -- -- (6,022)
Common shares issued 152 -- 152
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (5,870) -- -- -- (5,870)
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash (8) 38 (1) 16 45
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 14,540 (584) 145 -- 14,101
Increase (decrease) in cash and cash
equivalents from discontinued operations (950) 135 -- -- (815)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE YEAR 13,590 (449) 145 -- 13,286
Cash and cash equivalents, beginning of period 14,166 6,144 205 -- 20,515
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,756 $ 5,695 $ 350 $ -- $ 33,801
============= ============= ============= ============= =============
Page 80
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2001:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (94,653) $ (36,839) $ (456) $ 40,112 $ (91,836)
Items not involving cash:
Depreciation, amortization and write-downs 82,834 18,106 384 (2,659) 98,665
Loss (income) from equity-accounted
investees 39,147 503 -- (39,723) (73)
Deferred income taxes 31,253 10,631 (496) 1,992 43,380
Loss (gain) on retirement of notes (55,577) -- -- -- (55,577)
Impairment of long-term investments 5,584 -- -- -- 5,584
Stock and other non-cash compensation 5,182 -- -- -- 5,182
Non cash foreign exchange gain (loss) 578 -- -- -- 578
Investment in film assets (7,889) 174 -- (582) (8,297)
Changes in restricted cash (5,873) -- -- -- (5,873)
Changes in other non-cash operating assets and
liabilities 6,707 4,580 334 908 12,529
Net cash provided by (used in) discontinued
operations (6,827) (50) -- -- (6,877)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities (534) (2,895) (234) 48 (2,615)
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets 136 (1,068) 102 (246) (1,076)
Decrease (increase) in other assets 208 734 -- 198 1,140
Decrease (increase) in other intangible assets (642) -- -- -- (642)
Net sale of investments in marketable
securities 7,529 -- -- -- 7,529
Acquisition of minority interest in Sonics (621) (420) -- -- (1,041)
Investment in subsidiaries -- -- -- -- --
Net cash used in investing activities from
discontinued operations (217) (15) -- -- (232)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities 6,393 (769) 102 (48) 5,678
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of Subordinated Notes due 2003 (12,540) -- -- -- (12,540)
Common shares issued 31 -- -- -- 31
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (12,509) -- -- -- (12,509)
------------- ------------- ------------- ------------- -------------
Effects of exchange rates on cash continuing
operations (2,591) (33) (20) -- (2,644)
Effects of exchange rates on cash discontinued
operations 1,697 -- -- -- 1,697
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash (894) (33) (20) -- (947)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (1,197) (3,632) (152) -- (4,981)
Increase (decrease) in cash and cash
equivalents from discontinued operations (5,347) (65) -- -- (5,412)
------------- -------------- ------------- ------------- -------------
INCREASE DECREASE IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (6,544) (3,697) (152) -- (10,393)
Cash and cash equivalents, beginning of period 20,710 9,841 357 -- 30,908
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,166 $ 6,144 $ 205 $ -- $ 20,515
============= ============= ============= ============= =============
Page 81
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
27. SUBSEQUENT EVENTS
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility with Congress Financial Corporation
(Canada) (the "Credit Facility"). The Credit Facility is a three-year
revolving credit facility with yearly renewal options thereafter,
permitting maximum aggregate borrowings of $20.0 million, subject to a
borrowing base calculation which includes the Company's financing
receivables, and certain reserve requirements. The Credit Facility bears
interest at Prime + 0.25% per annum or Libor + 2.0% per annum and is
collateralized by a first priority security interest in all of the current
and future assets of the Company. The Credit Facility contains typical
affirmative and negative covenants, including covenants that restrict the
Company's ability to: incur certain additional indebtedness; make certain
loans, investments or guarantees; pay dividends; make certain asset sales;
incur certain liens or other encumbrances; conduct certain transactions
with affiliates and enter into certain corporate transactions or dissolve.
In addition, the Credit Facility contains customary events of default,
including upon an acquisition or a change of control that has a material
adverse effect on the Company's financial condition. The Credit Facility
also requires the Company to maintain a minimum level of earnings before
interest, taxes, depreciation and amortization, and cash collections.
Page 82
IMAX CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Co-Chief Executive Officers and Chief Financial Officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report, have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and the Company's
consolidated subsidiaries would be made known to them by others within those
entities.
CHANGES IN INTERNAL CONTROLS
As of the end of the period covered by this report there was no change in
the Company's internal controls over financial reporting that occurred during
the period covered by this report that has materially affected or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Page 83
IMAX CORPORATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Election of Directors"; "Executive Officers"; "Section 16(a) Beneficial
Ownership Reporting Compliance"; "Audit Committee"; and "Business Conduct and
Corporate Ethics Policy".
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Summary Compensation Table"; "Options Granted"; "Aggregated Option Exercises
and Year-End Option Values"; "Pension Plans"; "Employment Contracts";
"Compensation Committee Interlocks and Insider Participation"; "Report on
Executive Compensation"; "Performance Graph"; and "Directors' Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference form the
information under the following captions in the Company's Proxy Statement:
"Principal Shareholders of Voting Shares"; "Security Ownership of Directors and
Management"; "Equity Compensation Plans"; "Shareholders' Agreements"; and
"Registration Rights Agreements".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Articles of the Corporation"; and "Certain Relationships and Related
Transactions".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Audit Fees"; "Audit-Related Fees"; "Tax Fees"; "All Other Fees"; and "Audit
Committee's Pre-Approved Policies and Procedures".
Page 84
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The consolidated financial statements filed as part of this Report are
included under Item 8 in Part II.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedule for each year in the three-year period
ended December 31, 2003.
II. Valuation and Qualifying Accounts.
(a)(3) EXHIBITS
The Items listed as Exhibits 10.1 to 10.16 relate to management contracts
or compensatory plans or arrangements.
EXHIBIT NO. DESCRIPTION
3.1 Articles of Amalgamation of IMAX Corporation, dated January 1,
2002. Incorporated by reference to Exhibit 3.1 to Form 10-K for
the year ended December 31, 2001 (File No. 000-24216).
3.2 New By-Law No.1 of IMAX Corporation enacted on June 7, 1999.
Incorporated by reference to Exhibit 3.2 to Form 10-Q for the
quarter ended September 30, 1999 (File No. 000-24216)
4.1 Shareholders' Agreement, dated as of January 3, 1994, among WGIM
Acquisition Corporation, the Selling Shareholders as defined
therein, Wasserstein Perella Partners, L.P., Wasserstein Perella
Offshore Partners, L.P., Bradley J. Wechsler, Richard L. Gelfond
and Douglas Trumbull (the "Selling Shareholders' Agreement").
Incorporated by reference to Exhibit 4.2 to Form 10-K for the year
ended December 31, 2000 (File No. 000-24216).
4.2 Amendment, dated as of March 1, 1994, to the Selling Shareholders'
Agreement. Incorporated by reference to Exhibit 4.3 to Form 10-K
for the year ended December 31, 2000 (File No. 000-24216).
4.3 Amended and Restated Shareholders' Agreement, dated as of February
9, 1999 by and among Wasserstein Perella Partners, L.P.,
Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L.
Gelfond and IMAX Corporation. Incorporated by reference to Exhibit
4.10 to Form 10-K for the year ended December 31, 1998 (File No.
000-24216).
4.4 Registration Rights Agreement, dated as of February 9, 1999, by
and among IMAX Corporation, Wasserstein Perella Partners, L.P.,
Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L.
Gelfond. Incorporated by reference to Exhibit 4.12 to Form 10-K
for the year ended December 31, 1998 (File No. 000-24216).
4.5 Indenture, dated as of April 9, 1996, between IMAX Corporation and
Chemical Bank, as Trustee, related to the issue of the 5.75%
Convertible Subordinated Notes due April 1, 2003. Incorporated by
reference to Exhibit 4.3 to Amendment No.1 to the Company's
Registration Statement on Form F-3 (File No. 333-5212).
4.6 Indenture, dated as of December 4, 1998 between IMAX Corporation
and U.S. Bank Trust, N.A., as Trustee, related to the issue of the
7.875% Senior Notes due December 1, 2005. Incorporated by
reference to Exhibit 4.9 to Form 10-K for the year ended December
31, 1998 (File No. 000-24216).
4.7 Registration Rights Agreement, dated as of December 4, 2003, by
and among IMAX Corporation, the Guarantors (as defined therein),
Credit Suisse First Boston LLC, Jefferies & Company, Inc.,
Wachovia Capital Markets, LLC and U.S. Bancorp Piper Jaffray Inc.,
relating to the issuance of 9.625% Senior Notes due 2010.
Incorporated by reference to Exhibit 4.2 to Registration Statement
on Form S-4 (File No. 333-113141).
4.8 Indenture, dated as of December 4, 2003, by and among IMAX
Corporation, the Guarantors (as defined therein) and U.S. Bank
National Association, as Trustee, related to the issue of the
9.625% Senior Notes due December 1, 2010. Incorporated by
reference to Exhibit 4.3 to Registration Statement on Form S-4
(File No. 333-113141).
10.1 Stock Option Plan of IMAX Corporation, dated June 7, 1999.
Incorporated by reference to Exhibit 10.1 to Form 10-Q for the
quarter ended September 30, 1999 (File No. 000-24216).
Page 85
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
10.2 Employment Agreement, dated as of July 15, 1997 between David
Keighley Productions 70MM Inc. and David B. Keighley. Incorporated
by reference to Exhibit 10.2 to IMAX Corporation's Form 10-K for
the year ended December 31, 2002 (File No. 000-24216).
10.3 Employment Agreement, dated July 1, 1998 between IMAX Corporation
and Bradley J. Wechsler. Incorporated by reference to Exhibit 10.2
to Form 10-Q for the quarter ended September 30, 1998 (File No.
000-24216).
10.4 Amended Employment Agreement, dated July 12, 2000 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference to
Exhibit 10.10 to Form 10-Q for the quarter ended September 30,
2000 (File No. 000-24216).
10.5 Amended Employment Agreement, dated April 3, 2001 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference to
Exhibit 10.15 to Form 10-Q for the quarter ended March 31, 2001
(File No. 000-24216).
10.6 Amended Employment Agreement, dated April 23, 2002 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference to
Exhibit 10.14 to Form 10-Q for the quarter ended June 30, 2002
(File No. 000-24216).
10.7 Employment Agreement, dated July 1, 1998 between IMAX Corporation
and Richard L. Gelfond. Incorporated by reference to Exhibit 10.1
to Form 10-Q for the quarter ended September 30, 1998 (File No.
000-24216).
10.8 Amended Employment Agreement, dated July 12, 2000 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.9 to Form 10-Q for the quarter ended September 30, 2000
(File No. 000-24216).
10.9 Amended Employment Agreement, dated April 3, 2001 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.16 to Form 10-Q for the quarter ended March 31, 2001
(File No. 000-24216).
10.10 Amended Employment Agreement, dated April 23, 2002 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.13 to Form 10-Q for the quarter ended June 30, 2002
(File No. 000-24216).
10.11 Employment Agreement, dated March 9, 2001 between IMAX Corporation
and Greg Foster. Incorporated by reference to Exhibit 10.9 to Form
10-K for the year ended December 31, 2001 (File No. 000-24216).
10.12 Amending Agreement, dated August 8, 2002 between IMAX Corporation
and Greg Foster. Incorporated by reference to Exhibit 10.12 to
IMAX Corporation's Form 10-K for the year ended December 31, 2002
(File No. 000-24216).
10.13 Employment Agreement, dated May 9, 2001 between IMAX Corporation
and Francis T. Joyce. Incorporated by reference to Exhibit 10.3 to
IMAX Corporation's Form 10-K for the year ended December 31, 2002
(File No. 000-24216).
10.14 Amended Employment Agreement, dated May 14, 2003 between IMAX
Corporation and Francis T. Joyce. Incorporated by reference to
Exhibit 10.16 to IMAX Corporation's Form 10-Q for the quarter
ended June 30, 2003 (File No. 000-24216).
10.15 Employment Agreement, dated May 17, 1999 between IMAX Corporation
and Robert D. Lister. Incorporated by reference to Exhibit 10.14
to IMAX Corporation's Form 10-K for the year ended December 31,
2002 (File No. 000-24216).
10.16 Amended Employment Agreement, dated January 1, 2004 between IMAX
Corporation and Robert D. Lister. Incorporated by reference to
Exhibit 10.17 to Registration Statement on Form S-4 (File No.
333-113141).
10.17 Loan Agreement, dated as of February 6, 2004 by and between
Congress Financial Corporation (Canada) and IMAX Corporation.
Incorporated by reference to Exhibit 10.22 to Registration
Statement on Form S-4 (File No. 333-113141).
Page 86
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
*21 Subsidiaries of IMAX Corporation.
*23 Consent of PricewaterhouseCoopers LLP.
*24 Power of Attorney of certain directors.
*31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002, dated March 15, 2004, by Bradley J. Wechsler.
*31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002, dated March 15, 2004, by Richard L. Gelfond.
*31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002, dated March 15, 2004, by Francis T. Joyce.
*32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002, dated March 15, 2004, by Bradley J. Wechsler.
*32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002, dated March 15, 2004, by Richard L. Gelfond.
*32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002, dated March 15, 2004, by Francis T. Joyce.
* Filed herewith
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on November 12, 2003, pursuant
to Item 5 - Other Events. The Company reported that it planned to
refinance all of its outstanding debt through an offering of new
senior notes with a proposed maturity of 2010.
The Company filed a report on Form 8-K on November 12, 2003, pursuant
to Item 12 - Results of Operations and Financial Conditions. The
Company reported that it had issued a press release announcing the
Company's financial and operating results for the quarter ended
September 30, 2003.
The Company filed a report on Form 8-K on November 13, 2003, pursuant
to Item 5 - Other Events. The Company reported that it had commenced
an offer to purchase for cash all of its outstanding $152.8 million
principal amount of 7.875% Senior Notes due 2005. The Company further
reported that it was also soliciting consents from the holders of the
7.875% Senior Notes to approve certain amendments to the indenture
under which the 7.875% Senior Notes were issued.
The Company filed a report on Form 8-K on November 21, 2003, pursuant
to Item 5 - Other Events. The Company reported that it had signed a
purchase agreement for the sale of $160.0 million in aggregate
principal amount of 9.625% Senior Notes with a maturity of December
1, 2010. The Company further reported that it had modified its offer
to purchase all of its outstanding $152.8 million principal amount of
7.875% Senior Notes.
Page 87
IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /S/ FRANCIS T. JOYCE
--------------------------
Francis T. Joyce
Chief Financial Officer
Date: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 15, 2004.
/S/ BRADLEY J. WECHSLER /S/ RICHARD L. GELFOND /S/ FRANCIS T. JOYCE
- -------------------------------------- ----------------------------- -----------------------------
Bradley J. Wechsler Richard L. Gelfond Francis T. Joyce
Director and Director and Chief Financial Officer
Co-Chief Executive Officer Co-Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer) (Principal Executive Officer)
/s/ KATHRYN A. GAMBLE NEIL S. BRAUN* KENNETH G. COPLAND*
- -------------------------------------- ----------------------------- -----------------------------
Kathryn A. Gamble Neil S. Braun Kenneth G. Copland
Vice President, Finance and Controller Director Director
(Principal Accounting Officer)
MICHAEL FUCHS* GARTH M. GIRVAN* DAVID W. LEEBRON*
- -------------------------------------- ----------------------------- -----------------------------
Michael Fuchs Garth M. Girvan David W. Leebron
Director Director Director
MARC A. UTAY*
- --------------------------------------
Marc A. Utay
Director
By * /S/ FRANCIS T. JOYCE
--------------------------------------
Francis T. Joyce (as attorney-in-fact)
Page 88
IMAX CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of U.S. dollars)
ADDITIONS /
BALANCE AT (RECOVERIES) BALANCE
BEGINNING CHARGED TO AT END OF
OF YEAR EXPENSES DEDUCTIONS(1) YEAR
---------- ------------ ------------- ---------
ALLOWANCE FOR NET INVESTMENT IN LEASES
Year ended December 31, 2001 6,813 11,257 (6,325) 11,745
Year ended December 31, 2002 11,745 708 (3,515) 8,938
Year ended December 31, 2003 8,938 (2,938) (159) 5,841
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Year ended December 31, 2001 19,168 4,469 (5,577) 18,060
Year ended December 31, 2002 18,060 (1,941) (6,871) 9,248
Year ended December 31, 2003 9,248 714 (2,684) 7,278
DEFERRED INCOME TAX VALUATION ALLOWANCE
Year ended December 31, 2001 4,265 41,239 -- 45,504
Year ended December 31, 2002 45,504 (1,762) -- 43,742
Year ended December 31, 2003 43,742 3,049 -- 46,791
PROVISION FOR LOANS RECEIVABLE
Year ended December 31, 2001 -- 15,584 -- 15,584
Year ended December 31, 2002 15,584 40 -- 15,624
Year ended December 31, 2003 15,624 (2,693) (1,031) 11,900
(1) Amounts represent write-offs of amounts previously charged to the provision.
(2) Revised from amounts reported in prior years to be consistent with current
year's presentation.