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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
Canada 98-0140269
- ----------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
- --------------------------------------------------- ----------------
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of April 30, 2004
- ------------------------- --------------------------------
Common stock, no par value 39,304,991
Page 1
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................28
Item 3. Quantitative and Qualitative Factors about Market Risk.........................................37
Item 4. Controls and Procedures........................................................................37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................38
Item 2. Change in Securities...........................................................................39
Item 6. Listings of Exhibits and Reports on Form 8-K...................................................39
Signatures..............................................................................................40
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this quarterly 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 quarterly 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.
Page 2
IMAX CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Condensed Consolidated Financial Statements are filed as part
of this Report:
PAGE
----
Condensed Consolidated Balance Sheets as at March 31, 2004
and December 31, 2003...........................................................................4
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2004 and 2003.....................................................5
Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2004 and 2003.......................................6
Notes to Condensed Consolidated Financial Statements............................................7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
MARCH 31,
2004 DECEMBER 31,
(UNAUDITED) 2003
---------------- ---------------
ASSETS
Cash and cash equivalents $ 23,187 $ 47,282
Restricted cash (note 7(b)) 1,229 4,961
Accounts receivable, net of allowance for doubtful accounts of $7,226
(2003 - $7,278) 16,150 13,887
Financing receivables (note 3) 56,808 56,742
Inventories (note 4) 27,599 28,218
Prepaid expenses 3,395 1,902
Film assets 1,227 1,568
Fixed assets 34,522 35,818
Other assets 13,575 13,827
Deferred income taxes (note 11) 3,923 3,756
Goodwill 39,027 39,027
Other intangible assets 3,278 3,388
---------------- ---------------
Total assets $ 223,920 $ 250,376
================ ===============
LIABILITIES
Accounts payable $ 5,037 $ 5,780
Accrued liabilities (note 7(c)) 51,388 43,794
Deferred revenue 60,105 63,344
New Senior Notes due 2010 (note 5) 160,000 160,000
Old Senior Notes due 2005 (note 6) -- 29,234
---------------- ---------------
Total liabilities 276,530 302,152
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (notes 7 and 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock - no par value. Authorized -
unlimited number. Issued and outstanding - 39,304,491 (2003 - 39,301,758) 115,620 115,609
Other equity 3,210 3,159
Deficit (172,085) (171,189)
Accumulated other comprehensive income 645 645
---------------- ---------------
Total shareholders' deficit (52,610) (51,776)
---------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 223,920 $ 250,376
================ ===============
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars, except per share amounts)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- -------------
REVENUE
IMAX systems (note 9(a)) $ 16,021 $ 22,315
Films 4,489 6,835
Theater operations 3,742 3,166
Other 629 1,333
------------- -------------
24,881 33,649
COSTS OF GOODS AND SERVICES 12,519 17,648
------------- -------------
GROSS MARGIN 12,362 16,001
Selling, general and administrative expenses (note 9 (b)) 8,335 8,144
Research and development 1,144 712
Amortization of intangibles 151 140
Income from equity-accounted investees -- (287)
Receivable provisions, net of (recoveries) (note 10) (898) 614
------------- -------------
EARNINGS FROM OPERATIONS 3,630 6,678
Interest income 126 265
Interest expense (4,068) (4,288)
Loss on retirement of notes (note 6) (784) --
------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,096) 2,655
Provision for income taxes (note 11) -- (137)
------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (1,096) 2,518
Net earnings (loss) from discontinued operations (note 15) 200 (95)
------------- -------------
NET EARNINGS (LOSS) (896) 2,423
============= =============
EARNINGS (LOSS) PER SHARE (note 12): Earnings (loss) per share - basic and
diluted:
Net earnings (loss) from continuing operations $ (0.03) $ 0.07
Net earnings (loss) from discontinued operations $ 0.01 $ --
-------------- --------------
Net earnings (loss) $ (0.02) $ 0.07
============== ==============
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2004 2003
------------------ ------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (1,096) $ 2,518
Items not involving cash:
Depreciation and amortization 2,483 2,533
Write-downs (recoveries) (898) 628
Income from equity-accounted investees -- (287)
Deferred income taxes (167) --
Loss on retirement of notes 784 --
Stock and other non-cash compensation 561 1,101
Non-cash foreign exchange (gain) loss 165 (205)
Premium on repayment of notes (576)
Investment in film assets (71) (240)
Changes in restricted cash 3,732 (998)
Changes in other non-cash operating assets and liabilities 907 (5,357)
Net cash provided by (used in) operating activities from discontinued
operations -- (248)
------------------ ------------------
Net cash provided by (used in) operating activities 5,824 (555)
------------------ ------------------
INVESTING ACTIVITIES
Purchase of fixed assets (164) (302)
Increase in other assets (318) (195)
Increase in other intangible assets (40) (172)
Net cash used in investing activities from discontinued operations -- (21)
------------------ ------------------
Net cash used in investing activities (522) (690)
------------------ ------------------
FINANCING ACTIVITIES
Repayment of Old Senior Notes due 2005 (29,234) --
Financing costs related to New Senior Notes due 2010 (347) --
Common shares issued 11 --
Net cash provided by financing activities from discontinued operations 200 200
------------------ ------------------
Net cash provided by (used in) financing activities (29,370) 200
------------------ ------------------
Effects of exchange rate changes on cash (27) 24
------------------ ------------------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (24,295) (952)
Increase (decrease) in cash and cash equivalents from discontinued
operations 200 (69)
------------------ ------------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (24,095) (1,021)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47,282 33,801
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,187 $ 32,780
================== ==================
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 6
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
IMAX Corporation together with its wholly owned subsidiaries (the
"Company"). The nature of the Company's business is such that the
results of operations for the interim periods presented are not
necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature, except as discussed in
the accompanying notes.
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). The financial statements and
results referred herein are reported under U.S. GAAP. Significant
differences between United States and Canadian Generally Accepted
Accounting Principles are described in note 19.
These financial statements should be read in conjunction with the
Company's most recent annual report on Form 10-K for the year ended
December 31, 2003 which should be consulted for a summary of the
significant accounting policies utilized by the Company. These interim
financial statements are prepared following accounting policies
consistent with the Company's financial statements for the year ended
December 31, 2003, except as described in note 2.
2. ACCOUNTING CHANGES
In January 2003, the FASB issued FIN 46 (revised 2003 by FIN 46R) which
requires a variable interest entity ("VIE") to be consolidated by its
primary beneficiary ("PB"). The PB is the party that absorbs a majority
of the VIE's expected losses and/or receives a majority of the expected
residual returns. The Company has evaluated its various variable
interests to determine whether they are in VIE's.
The Company reviewed its management agreements relating to theaters
which the Company manages, and has no equity interest, and concluded
that such arrangements were not variable interests since the Company's
fees are commensurate with the level of service and the theater owner
retains the right to terminate the service.
The Company has also reviewed its financial arrangements with theaters
where it shares in the profit or losses of the theater. The Company has
not evaluated these arrangements under FIN 46R as the arrangements meet
the scope exceptions defined in the pronouncement.
The Company has determined that one of its film production companies is
a VIE with total assets of $0.5 million and total liabilities of $0.6
million as at March 31, 2004. Since the Company absorbs a majority of
the VIE's losses, the Company has determined that it is the PB of the
entity. The Company continues to consolidate this entity with no
material impact on the operating results or financial condition of the
Company.
Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
3. FINANCING RECEIVABLES
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:
MARCH 31, DECEMBER 31,
2004 2003
--------------- ----------------
NET INVESTMENT IN LEASES
Gross minimum lease amounts receivable $ 97,248 $ 97,408
Residual value of equipment 824 824
Unearned finance income (39,290) (38,847)
--------------- ----------------
Present value of minimum lease amounts receivable 58,782 59,385
Accumulated allowance for uncollectible amounts (5,115) (5,840)
--------------- ----------------
Net investment in leases 53,667 53,545
--------------- ----------------
Long-term receivables 3,141 3,197
--------------- ----------------
Total financing receivables $ 56,808 $ 56,742
=============== ================
4. INVENTORIES
MARCH 31, DECEMBER 31,
2004 2003
---------------- ----------------
Raw materials $ 5,765 $ 5,868
Work-in-process 4,671 4,327
Finished goods 17,163 18,023
--------------- ----------------
$ 27,599 $ 28,218
=============== ================
5. NEW SENIOR NOTES DUE 2010
As at March 31, 2004, the Company has $160.0 million aggregate
principal of 9.625% senior notes due December 1, 2010 (the "New Senior
Notes"). The Company conducted 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 were
registered, but which are not yet effective 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 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 were 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 are registered under U.S.
securities laws, do not contain restrictions on transfer or provisions
relating to special interest under circumstances related to the timing
of the exchange offer, bear a different CUSIP number from the New
Senior Notes and do not entitle their holders to registration rights.
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
6. OLD SENIOR NOTES DUE 2005
In December 2003 the Company completed a tender offer and consent
solicitation for the remaining $152.8 million of principal of senior
notes due December 1, 2005 bearing interest at a rate of 7.875% per
annum (the "Old Senior Notes") that were not retired previously. 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 5).
In the first quarter of 2004, the Company recorded a loss of $0.8
million related to the retirement of the Company's Old Senior Notes.
7. COMMITMENTS
(a) The Company's total minimum annual rental payments to be made under
operating leases for premises as of March 31, 2004 for each of the
years ended December 31 are as follows:
2004 $ 4,145
2005 5,827
2006 5,720
2007 5,554
2008 5,339
Thereafter 37,184
----------
$ 63,769
==========
(b) As at March 31, 2004, the Company has letters of credit of $4.3 million
outstanding of which $1.2 million have been collateralized by cash
deposits and the remainder have been issued under the credit facility
arrangement (see note 17).
(C) In March 2004, the Company received $5.0 million in cash under a film
financing arrangement which is included in accrued liabilities. The
Company is required to expend these funds towards the production of a
future motion picture title.
8. CONTINGENCIES
(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.
Page 9
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONTINGENCIES (cont'd)
(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 January 2004, the Company and IMAX Theatre Services Ltd., a
subsidiary of the Company, commenced an arbitration seeking damages of
approximately $3.7 million before the International Court of
Arbitration of the International Chambers of Commerce with respect to
the breach by Electronic Media Limited ("EML") of its December 2000
agreement with the Company. In April 2004, EML filed an answer and
counterclaim seeking the return of funds EML has paid to the Company,
incidental expenses and punitive damages. The Company believes that the
allegations made by EML in its counterclaim 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
arbitration would not have a material impact on the financial position
or results of operation of the Company, although no assurance can be
given with respect to the ultimate outcome of any such litigation.
(E) In January 2000, Euromax, an association of European large-screen
cinema owners, filed a compliant against the Company with the European
Commission based on European Community ("EC") competition rules. The
complaint alleged illegal tying and excessive pricing practices. The EC
issued a final written decision in rejecting the complaint in its
entirety on March 25, 2004.
(F) 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.
Page 10
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
9. CONDENSED 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 by the Company. Upon the customer
and the Company being released from their 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 the first quarter of 2004 is $4.5 million (2003 - $2.6 million) for
amounts recognized under terminated lease agreements.
(B) Included in selling, general and administrative expenses for 2004 is
$0.3 million (2003 - $0.4 million gain) for net foreign exchange losses
related to the translation of foreign currency denominated monetary
assets, liabilities and integrated subsidiaries.
10. RECEIVABLE PROVISIONS (RECOVERIES), NET
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------- ------------
Accounts receivable provisions (recoveries), net $ (173) $ 614
Financing receivables provisions (recoveries), net(1) $ (725) $ --
------------ ------------
Receivable provisions (recoveries), net $ (898) $ 614
============ ============
(1) For the quarter ended March 31, 2004, the Company recorded a
recovery of previously provided amounts of $0.7 million (2003
- $nil) as collectibility uncertainty associated with certain
leases was resolved by amendment or settlement of the leases.
11. INCOME TAXES
The effective tax rate on earnings differs significantly from the
Canadian statutory rate due to the effect of permanent differences,
income taxed at differing rates in foreign and other provincial
jurisdictions and changes in the Company's valuation allowance on
deferred tax assets. The income tax expense (recovery) for the quarter
is calculated by applying the estimated average annual effective tax
rate to quarterly pre-tax income. The Company recorded a current tax
expense of $nil in the current quarter (2003 - $0.1 million).
As at March 31, 2004, the Company has recognized net deferred income
tax assets of $3.9 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. As of March 31,
2004, the Company had a gross deferred income tax asset of $50.9
million, against which the Company is carrying a $47.0 million
valuation allowance.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK
(A) STOCK BASED COMPENSATION
The Company currently follows the intrinsic value method of accounting
for employee stock options as prescribed by APB 25. If the fair value
methodology prescribed by FAS 123 had been adopted by the Company, pro
forma results for the three months ended March 31, would have been as
follows:
2004 2003
---------------- ----------------
Net earnings (loss) as reported $ (896) $ 2,423
Stock based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (1,594) (2,223)
--------------- ----------------
Adjusted net earnings $ (2,490) $ 200
=============== ================
Earnings per share - basic and diluted:
Net earnings (loss) as reported $ (0.02) $ 0.07
FAS 123 stock based compensation expense (0.04) $ (0.06)
--------------- ----------------
Adjusted net earnings (loss) $ (0.06) $ 0.01
=============== ================
Of the total stock based compensation expense under FAS 123 for the
three months ended March 31, 2004 of $1,594, $1,205 relates to stock
grants made in 2000 at an average exercise price of $24.25. In
accordance with FAS 123, this expense 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.
The weighted average fair value of common share options granted to
employees for the three months ended March 31, 2004 at the time of
grant was $2.49 per share (2003 - $1.55 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% an average risk free interest rate of 2.1%,
20% forfeiture of options vesting greater than two years; expected life
of one to seven years; and expected volatility of 50%. 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 three
months ended March 31, 2004, the following assumptions were used:
dividend yield of 0%; an average risk free interest rate of 3.68%; an
equity risk premium between 5.23% and 5.53%; a beta between .95 and
1.03; expected option life between 4.38 and 4.44 years; an average
expected volatility of 62%; and an annual termination probability of
9.62%. 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 the first quarter of 2004, an aggregate of 13,335 options with an
average exercise price of $7.11 to purchase the Company's common stock
were issued to certain advisors and strategic partners of the Company.
The Company has calculated the fair value of these options to
non-employees on the date of grant for the period ended March 31, 2004
to be $0.05 million (2003 - $0.03 million), using a Binomial
option-pricing model with the following underlying assumptions:
dividend yield of 0%; an average risk free interest rate of 2.92%;
expected option life of 5 years; and an average expected volatility of
62.0%.
The Company has recorded a charge of $0.05 million to film cost of
sales related to the non-employee stock options granted in the quarter
ended March 31, 2004 (2003 - $0.03 million).
Page 12
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK (cont'd)
(B) EARNINGS (LOSS) PER SHARE
Reconciliations of the numerators and denominators of the basic and
diluted per-share computations, are comprised of the following:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
----------- -----------
Net earnings (loss) applicable to common shareholders:
Net (loss) earnings $ (896) $ 2,423
=========== ===========
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period 39,302 32,973
Weighted average number of shares issued during the period 2 --
----------- -----------
Weighted average number of shares used in computing basic
earnings per share 39,304 32,973
Assumed exercise of stock options, net of shares assumed -- 300
----------- -----------
Weighted average number of shares used in computing diluted
earnings per share 39,304 33,273
=========== ===========
The calculation of diluted earnings (loss) per share for the first
quarter of 2004 excludes options to purchase common shares of stock
which were outstanding, and for the first quarter of 2003 excludes
common shares issuable upon conversion of 5.75% convertible
subordinated notes due April 1, 2003 (the "Subordinated Notes") as the
impact of these exercises and conversions would be anti-dilutive. The
balance of the Company's Subordinated Notes was retired April 1, 2003.
13. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL
INFORMATION
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
------------ ------------
Interest paid $ 235 $ 20
Income taxes paid $ 576 $ 534
Page 13
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
14. SEGMENTED INFORMATION
The Company has four reportable segments: IMAX systems, films, theater
operations and other.
There has been no change in the basis of measurement of segment profit
or loss from the Company's most recent annual report on form 10-K for
the year ended December 31, 2003. Inter-segment transactions are not
significant.
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------ ------------
REVENUE
IMAX systems $ 16,021 $ 22,315
Films 4,489 6,835
Theater operations 3,742 3,166
Other 629 1,333
------------ ------------
TOTAL $ 24,881 $ 33,649
============ ============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 9,722 $ 10,645
Films (1,103) 630
Theater operations 404 (417)
Other (241) 1,064
Corporate overhead (5,152) (5,244)
------------ ------------
TOTAL $ 3,630 $ 6,678
============ ============
15. DISCONTINUED OPERATIONS
(A) MIAMI THEATER LLC
On December 23, 2003, the Company closed its owned and operated Miami
IMAX theater. The Company completed its removal of its assets from the
theater in the first quarter of 2004, with no financial impact. 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.
(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.
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. During the first quarter of 2004, the Company received
$0.2 million in cash towards the repayment of this debt, and has
recorded a corresponding gain in net earnings (loss) from discontinued
operations (2003 - $0.2 million). As of March 31, 2004, the remaining
balance is $11.7 million, which has been fully provided for.
Page 14
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. DISCONTINUED OPERATIONS (cont'd)
(C) CONSOLIDATED STATEMENT OF OPERATIONS FOR MIAMI THEATER AND DPI
The net earnings (loss) from discontinued operations summarized in the
Consolidated Statements of Operations, for the periods ended March 31,
was comprised of the following:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- -------------
Net earnings (loss) from discontinued operations(1) $ 200 $ (95)
============= =============
(1) Net of income tax provision of $nil in 2004 (2003 - $nil).
16. DEFINED BENEFIT PLAN
The Company has a 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%. As
the plan is unfunded, the Company had not paid any contributions in the
period ended March 31, 2004 and does not expect to pay any
contributions in the remainder of the year. The following table
provides disclosure of pension expense for the defined benefit plan for
the periods ended March 31:
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2004 2003
--------------- ---------------
Service cost $ 516 $ 489
Interest cost 317 272
Amortization of prior service cost 349 349
--------------- ---------------
Pension expense $ 1,182 $ 1,110
=============== ===============
Page 15
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. 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. As at March
31, 2004, no amount is outstanding on the facility.
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's New Senior Notes 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 16
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at March 31, 2004:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents $ 12,910 $ 10,080 $ 197 $ -- $ 23,187
Restricted cash 1,229 -- -- -- 1,229
Accounts receivable 12,335 3,412 403 -- 16,150
Financing receivables 55,407 1,401 -- -- 56,808
Inventories 27,269 259 71 -- 27,599
Prepaid expenses 2,964 148 283 -- 3,395
Intercompany receivables 20,267 22,408 17,554 (60,229) --
Film assets 18 1,209 -- -- 1,227
Fixed assets 32,737 1,782 3 -- 34,522
Other assets 13,575 -- -- -- 13,575
Deferred income taxes 3,872 51 -- -- 3,923
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,278 -- -- -- 3,278
Investments in subsidiaries 30,390 -- -- (30,390) --
------------- ------------- ------------- ------------- ------------
Total assets $ 255,278 $ 40,750 $ 18,511 $ (90,619) $ 223,920
============= ============= ============= ============= ============
LIABILITIES
Accounts payable 2,126 2,908 3 -- 5,037
Accrued liabilities 49,416 1,752 220 -- 51,388
Intercompany payables 42,268 35,045 13,269 (90,582) --
Deferred revenue 54,997 4,988 120 -- 60,105
Senior notes due 2010 160,000 -- -- -- 160,000
------------- ------------- ------------- ------------- -------------
Total liabilities 308,807 44,693 13,612 (90,582) 276,530
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock 115,620 -- 117 (117) 115,620
Other equity/Additional paid in
capital/Contributed surplus 2,176 46,960 -- (45,926) 3,210
Deficit (172,584) (50,289) 4,782 46,006 (172,085)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- ------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (53,529) $ (3,943) $ 4,899 $ 37 $ (52,610)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 255,278 $ 40,750 $ 18,511 $ (90,619) $ 223,920
============= ============= ============= ============= =============
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 intercompany receivable balances with respect
to these guarantor subsidiaries in the amounts of $30.5 million as at March 31,
2004.
Page 17
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-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 as at December 31, 2003.
Page 18
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2004:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- -------------- -------------
REVENUE
IMAX systems $ 15,537 $ 270 $ 322 $ (108) $ 16,021
Films 3,673 1,477 4 (665) 4,489
Theater operations 137 3,622 -- (17) 3,742
Other 628 -- 1 -- 629
------------- ------------- ------------- ------------- -------------
19,975 5,369 327 (790) 24,881
COST OF GOODS AND SERVICES 7,817 5,369 123 (790) 12,519
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 12,158 -- 204 -- 12,362
Selling, general and administrative expenses 8,118 138 79 -- 8,335
Research and development 1,144 -- -- -- 1,144
Amortization of intangibles 151 -- -- -- 151
Loss (income) from equity-accounted
investees (53) -- -- 53 --
Receivable provisions (recoveries), net (822) (76) -- -- (898)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 3,620 (62) 125 (53) 3,630
Interest income 126 -- -- -- 126
Interest expense (4,059) (9) -- -- (4,068)
Loss on retirement of notes (784) -- -- -- (784)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,097) (71) 125 (53) (1,096)
Recovery of (provision for) income taxes -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (1,097) (71) 125 (53) (1,096)
Net earnings from discontinued operations 200 -- -- -- 200
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (897) $ (71) $ 125 $ (53) $ (896)
============= ============= ============= ============= =============
Page 19
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------- ------------- --------------
REVENUE
IMAX systems $ 21,862 $ 1,850 $ 318 $ (1,715) $ 22,315
Films 4,042 3,394 17 (618) 6,835
Theater operations 90 3,111 -- (35) 3,166
Other 1,291 -- 107 (65) 1,333
------------- ------------- ------------- -------------- -------------
27,285 8,355 442 (2,433) 33,649
COST OF GOODS AND SERVICES 11,771 8,123 174 (2,420) 17,648
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 15,514 232 268 (13) 16,001
Selling, general and administrative expenses 7,710 277 157 -- 8,144
Research and development 712 -- -- -- 712
Amortization of intangibles 140 -- -- -- 140
Loss (income) from equity-accounted
investees (37) 34 -- (284) (287)
Receivable provisions (recoveries), net 614 -- -- -- 614
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 6,375 (79) 111 271 6,678
Interest income 265 -- -- -- 265
Interest expense (4,279) (9) -- -- (4,288)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 2,361 (88) 111 271 2,655
Provision for income taxes (125) (12) -- -- (137)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 2,236 (100) 111 271 2,518
Net earnings from discontinued operations 200 (295) -- -- (95)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 2,436 $ (395) $ 111 $ 271 $ 2,423
============= ============= ============= ============= =============
Page 20
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the three months ended
March 31, 2004:
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 $ (1,097) $ (71) $ 125 $ (53) $ (1,096)
Items not involving cash:
Depreciation and amortization 2,338 145 -- -- 2,483
Write-downs (recoveries) (822) (76) -- -- (898)
Loss from equity-accounted investees (53) -- -- 53 --
Deferred income taxes (167) -- -- -- (167)
Loss on retirement of notes 784 -- -- -- 784
Stock and other non-cash compensation 561 -- -- -- 561
Non-cash foreign exchange loss 165 -- -- -- 165
Premium on repayment of notes (576) -- -- -- (576)
Investment in film assets (69) (2) -- -- (71)
Changes in restricted cash 3,732 -- -- -- 3,732
Changes in other non-cash operating assets and
liabilities (3,275) 4,390 (208) -- 907
Net cash used in operating activities from
discontinued operations -- -- -- -- --
------------- ------------- ------------- ----------- -----------
Net cash provided by (used in) operating 1,521 4,386 (83) -- 5,824
------------- ------------- ------------- ----------- -----------
activities
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets (155) (9) -- -- (164)
Decrease (increase) in other assets (318) -- -- -- (318)
Decrease (increase) in other intangible assets (40) -- -- -- (40)
------------- ------------- ------------- ----------- -----------
Net cash used in investing activities (513) (9) -- -- (522)
------------- ------------- ------------- ----------- -----------
FINANCING ACTIVITIES
Repayment of Old Senior Notes due 2005 (29,234) -- -- -- (29,234)
Financing costs related to New Senior Notes due
2010 (347) -- -- -- (347)
Common shares issued 11 -- -- -- 11
Net cash provided by financing activities from
discontinued operations 200 -- -- -- 200
------------- ------------- ------------- ----------- -----------
Net cash used in financing activities (29,370) -- -- -- (29,370)
------------- ------------- ------------- ----------- -----------
Effects of exchange rate changes on cash (39) 7 5 -- (27)
------------- ------------- ------------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (28,601) 4,384 (78) -- (24,295)
Increase (decrease) in cash and cash equivalents
from discontinued operations 200 -- -- -- 200
------------- ------------- ------------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (28,401) 4,384 (78) -- (24,095)
Cash and cash equivalents, beginning of period 41,311 5,696 275 -- 47,282
------------- ------------- ------------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,910 $ 10,080 $ 197 $ -- $ 23,187
============= ============= ============= =========== ===========
Page 21
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the three months ended
March 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 $ 2,236 $ (100) $ 111 $ 271 $ 2,518
Items not involving cash:
Depreciation and amortization 2,303 228 2 -- 2,533
Write-downs (recoveries) 614 14 -- -- 628
Loss (income) from equity-accounted
investees (37) 34 -- (284) (287)
Stock and other non-cash compensation 1,101 -- -- -- 1,101
Non-cash foreign exchange gain (205) -- -- (205)
Investment in film assets (240) -- -- -- (240)
Changes in restricted cash (998) -- -- -- (998)
Changes in other non-cash operating assets and
liabilities (5,132) (296) 37 34 (5,357)
Net cash used in operating activities from
discontinued operations (274) 26 -- -- (248)
---------- ---------- ---------- ---------- ---------
Net cash provided by (used in) operating
activities (632) (94) 150 21 (555)
---------- ---------- ---------- ---------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets (69) (210) (2) (21) (302)
Increase in other assets (195) -- -- -- (195)
Increase in other intangible assets (172) -- -- -- (172)
Net cash used in investing activities from
discontinued operations -- (21) -- -- (21)
---------- ---------- ---------- ---------- ---------
Net cash used in investing activities (436) (231) (2) (21) (690)
---------- ---------- ---------- ---------- ---------
FINANCING ACTIVITIES
Net cash used in financing activities from
discontinued operations 200 -- -- -- 200
---------- ---------- ---------- ---------- ---------
Net cash used in financing activities 200 -- -- -- 200
---------- ---------- ---------- ---------- ---------
Effects of exchange rate changes on cash 44 (22) 2 -- 24
---------- ---------- ---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (750) (352) 150 -- (952)
Increase (decrease) in cash and cash
equivalents (74) 5 -- -- (69)
---------- ---------- ---------- ---------- ---------
from discontinued operations
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (824) (347) 150 -- (1,021)
Cash and cash equivalents, beginning of period 27,756 5,695 350 -- 33,801
---------- ---------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,932 $ 5,348 $ 500 $ -- $ 32,780
========== ========== ========== ========== =========
Page 22
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA
The accounting principles followed by the Company conform with U.S.
GAAP. Significant differences affecting the Company between U.S. GAAP
and Canadian Generally Accepted Accounting Principles ("Canadian GAAP")
are described below.
1. EQUITY ACCOUNTED INVESTEES
Canadian GAAP requires the accounts of jointly controlled enterprises
to be proportionately consolidated. Under U.S. GAAP, investments in
jointly controlled entities are accounted as equity investments. During
the three month period ended March 31, 2004, the Company did not have
any investments in jointly controlled entities.
2. FIXED ASSET IMPAIRMENTS
Fixed asset impairments under U.S. GAAP are calculated based on a
discounted future cash flow basis. Under Canadian GAAP, prior to
January 1, 2002, impairments were calculated based on an undiscounted
future cash flow basis. Any impairment differences resulted in higher
depreciation for the remaining useful life of the assets.
3. STOCK-BASED COMPENSATION
Under U.S GAAP, 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 13 as if the
methodology prescribed by FASB Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), had been adopted. Under Canadian GAAP, the Company adopted the
fair value provisions of CICA Section 3870, "Stock-based Compensation
and Other Stock-based Payments" effective January 1, 2003. As of this
date, stock options given to employees or directors are recorded as an
expense in the consolidated statement of operations and credited to
other equity.
4. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the period ended March 31, 2003, the U.S. GAAP financial statements
included an additional $0.5 million in selling, general and
administrative expenses which was recorded in the December 31, 2002
Canadian GAAP financial statements due to the timing of finalization of
certain compensation awards.
5. INTEREST ON CONVERTIBLE SUBORDINATED NOTES
Convertible Subordinated Notes are carried at face value as a liability
under U.S. GAAP. Under Canadian GAAP, the carrying value of the
convertible subordinated notes is allocated between debt and equity
elements and classified separately in the balance sheet. The debt
element was calculated by discounting the stream of future payments of
interest and principal at the prevailing market rate for a similar
liability that does not have an associated conversion feature. The
accretion of the liability component of the notes is recorded as
interest expense in the statement of operations.
Page 23
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
6. PENSION ASSET AND LIABILITIES
Under U.S. GAAP, included in accrued liabilities, is a minimum pension
liability of $5.2 million as at March 31, 2004 and $5.5 million as at
December 31, 2003, representing unrecognized prior service costs. There
is an equal amount recorded in other assets. Under Canadian GAAP, a
minimum pension liability and corresponding asset are not recorded.
RECONCILIATION TO CANADIAN GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS
The following is a reconciliation of net earnings (loss) reflecting the
difference between Canadian and U.S. GAAP:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- -------------
Net earnings (loss) in accordance with United States GAAP $ (896) $ 2,423
Equity accounted investees(1) -- (599)
Depreciation of Fixed assets(2) (41) (41)
Stock-based compensation(3) (1) (2)
Timing differences - Selling, general and administrative
expenses(4) -- 500
Interest accretion on Subordinated Notes(5) -- (48)
------------- -------------
Net earnings in accordance with Canadian GAAP $ (938) $ 2,233
============= =============
Earnings (loss) per share (note 12):
Earnings (loss) per share - basic and diluted:
Net earnings (loss) from continuing operations $ (0.03) $ 0.07
Net earnings from discontinued operations $ 0.01 $ --
-------------- -------------
Net earnings (loss) $ (0.02) $ 0.07
============== =============
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
The following is a reconciliation of shareholders' equity (deficit)
reflecting the difference between Canadian and U.S. GAAP:
MARCH 31, DECEMBER 31,
2004 2003
--------------- ---------------
Shareholders' equity (deficit) in accordance with United States
GAAP $ (52,610) $ (51,776)
Fixed asset impairments(2) 811 852
------------- ---------------
Shareholders' equity (deficit) in accordance with Canadian GAAP $ (51,799) $ (50,924)
============= ===============
Page 24
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
CONSOLIDATED BALANCE SHEET
The following is the Canadian GAAP Consolidated Balance Sheet as at
December 31, 2003:
AS AT
DECEMBER 31,
2003
-----------
ASSETS
Cash and cash equivalents $ 47,282
Restricted cash 4,961
Accounts receivable 13,887
Financing receivable 56,742
Inventories 28,218
Prepaid expenses 1,902
Film assets 1,568
Property, plant and equipment 36,670
Other assets 8,297
Future income taxes 3,756
Goodwill 39,027
Other intangible assets 3,388
-----------
Total assets $ 245,698
===========
LIABILITIES
Accounts payable $ 5,780
Accrued liabilities 38,264
Deferred revenue 63,344
New senior notes due 2010 160,000
Old senior notes due 2005 29,234
-----------
Total liabilities 296,622
-----------
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock Common shares. Authorized - unlimited number.
Issued and outstanding - 39,301,758 (2002 - 32,973,366) 114,153
Other equity 3,536
Contributed surplus 11,857
Deficit (182,297)
Cumulative foreign currency translation adjustments 1,827
-----------
Total shareholders' equity (deficit) (50,924)
-----------
Total liabilities and shareholders' equity (deficit) $ 245,698
===========
Page 25
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
CONSOLIDATED STATEMENT OF OPERATIONS
The following is the Canadian GAAP Consolidated Statement of Operations
for the three months ended March 31, 2003:
THREE MONTHS ENDED
MARCH 31,
2003
------------------
REVENUE
IMAX systems $ 22,315
Films 6,835
Theater operations 3,166
Other 2,079
-----------
34,395
COSTS OF GOODS AND SERVICES 18,657
-----------
GROSS MARGIN 15,738
Selling, general and administrative expenses 7,646
Research and development 712
Amortization of intangibles 140
Receivable provisions, net of (recoveries) 614
-----------
EARNINGS FROM OPERATIONS 6,626
Interest income 265
Interest expense (4,426)
-----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,465
Provision for income taxes (137)
-----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 2,328
Net earnings (loss) from discontinued operations (95)
-----------
NET EARNINGS (LOSS) 2,223
===========
Page 26
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
CONSOLIDATED STATEMENT OF CASH FLOWS
The following is the Canadian GAAP Consolidated Statement of Cash Flows
for the three months ended March 31, 2003:
THREE MONTHS ENDED
MARCH 31,
2003
-----------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings from continuing operations $ 2,328
Items not involving cash:
Depreciation and amortization 2,870
Write-downs 628
Stock and other non-cash compensation 1,103
Interest related to accretion on convertible subordinated notes 48
Non-cash foreign exchange (gain) loss (205)
Recovery (investment) in film assets (240)
Changes in restricted cash (998)
Changes in other non-cash operating assets and liabilities (5,811)
Net cash provided by (used in) operating activities from discontinued
operations (248)
------------
Net cash provided by (used in) operating activities (525)
------------
INVESTING ACTIVITIES
Purchase of fixed assets (317)
Increase in other assets (195)
Increase in other intangible assets (172)
Net cash used in investing activities from discontinued operations (21)
------------
Net cash used in investing activities (705)
------------
FINANCING ACTIVITIES
Repayment of long-term debt (288)
Net cash provided by financing activities from discontinued
operations 200
------------
Net cash provided by (used in) financing activities (88)
------------
Effects of exchange rate changes on cash 24
------------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (1,225)
Increase (decrease) in cash and cash equivalents from discontinued (69)
------------
operations
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (1,294)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,380
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,086
============
Page 27
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business is the design, manufacture, sales and leasing
of projector systems for giant screen theaters for customers including
commercial theaters, museums and science centers, and destination entertainment
sites. In addition, the Company designs and manufactures high-end sound systems
and produces and distributes large format films. There are more than 235 IMAX
theaters operating in 34 countries worldwide as of March 31, 2004. IMAX
Corporation is a publicly traded company listed on both the TSX and NASDAQ.
ACCOUNTING POLICIES AND ESTIMATES
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). The financial statements and results
referred herein are reported under U.S. GAAP. Significant differences between
United States and Canadian Generally Accepted Accounting Principles are
described in note 19 of the Consolidated financial statements.
The preparation of these financial statements requires management to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
its estimates, including those related to accounts receivable, net investment in
leases, inventories, fixed and film assets, investments, intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, future expectations and other assumptions that are
believed to be reasonable at the date of the financial statements. Actual
results may differ from these estimates due to uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
Consolidated Financial Statements in the Company's most recent annual report on
Form 10-K for the year ended December 31, 2003 and are summarized below.
SIGNIFICANT ACCOUNTING POLICIES
Management considers the following critical accounting policies to have the most
significant effect on its estimates, assumptions and judgements:
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. 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 28
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (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.
Page 29
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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.
GOODWILL
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.
TAX ASSET VALUATION
As at March 31, 2004, the Company had net deferred income tax assets of $3.9
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 historical
earnings, projected future earnings, contracted sales backlog at March 31, 2004,
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. As at March 31, 2004, the Company had a gross deferred income tax
asset of $50.9 million, against which the Company is carrying a $47.0 million
valuation allowance.
Page 30
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
TAX ASSET VALUATION (cont'd)
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS ENDED MARCH 31, 2003
The Company reported net losses from continuing operations of $1.1 million or
$0.02 per share on a diluted basis for the first quarter of 2004, compared to
net earnings from continuing operations of $2.5 million or $0.07 per share on a
diluted basis for the first quarter of 2003.
REVENUE
The Company's revenues for the first quarter of 2004 decreased 26.1% to $24.9
million from $33.6 million in the same period last year.
IMAX systems revenue decreased approximately 28.2% to $16.0 million in the first
quarter of 2004 from $22.3 million in the same period last year. The Company
installed 2 theater systems, as scheduled, in the first quarter of 2004, versus
8 theater systems in the first quarter of 2003, one of which was an operating
lease. 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. Settlements relating to terminated lease
agreements with customers who were unable to proceed with theater construction
included in revenue for the first quarter of 2004 total $4.5 million compared to
$2.6 million in the corresponding period last year. A significant portion of
such revenue in the first quarter of 2004 related to an existing customer which
restructured its lease agreement and ordered the Company's new IMAX(R) MPX(TM)
projection system.
Films revenue decreased 34.3% to $4.5 million in the first quarter of 2004 from
$6.8 million in the same period last year largely due to the strong comparative
performance of the Company's film, Space Station in the first quarter of 2003.
Theater operations revenue increased to $3.7 million in the first quarter of
2004 from $3.2 million in the same period last year primarily due to the
consolidation of the Company's Tempe theater in the first quarter of 2004
compared to equity-accounting treatment in same period last year when the
theater was only 50% owned.
Other revenues decreased 52.9% to $0.6 million in the first quarter of 2004 from
$1.3 million in the same period last year.
Page 31
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS ENDED MARCH 31, 2003
(cont'd)
GROSS MARGIN
Gross margin for the first quarter of 2004 was $12.4 million, or 49.7% of total
revenue, compared to $16.0 million, or 47.6% of total revenue, in the same
period last year. The decrease in gross margin in dollar terms is due to the
timing of theater system installations which resulted in 2 installations in the
first quarter of 2004 as compared to 8 installations in the first quarter of
2003, one of which was an operating lease. The decrease in gross margin is also
attributed to the decline in film revenue during the first quarter of 2004
largely due to the strong comparative performance of the Company's film, Space
Station in the first quarter of 2003. The increase in margin as a percentage of
revenue for 2004 is due primarily to $4.5 million included in IMAX settlement
revenues for the first quarter of 2004 compared to $2.6 million in the
corresponding period last year for terminated lease agreements with customers. A
significant portion of such revenue in the first quarter of 2004 related to an
existing customer which restructured its lease agreement and ordered the
Company's new IMAX MPX projection system. In addition, the Company improved its
gross margin in its owned and operated theater segment.
OTHER
Selling, general and administrative expenses were $8.3 million in the first
quarter of 2004 compared to $8.1 million in the corresponding period last year.
The Company recorded a foreign exchange loss of $0.3 million in the first
quarter of 2004 compared to a gain of $0.4 million in the first quarter of 2003.
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. The Company also recorded
a recovery to stock based compensation of $0.3 million in the first quarter of
2004 due the decrease in the Company's share price compared to an expense of
$0.3 million in the first quarter of 2003.
The Company no longer has any interests in equity-accounted investees as of
December 31, 2003.
Amortization of intangibles was $0.2 million in the first quarter of 2004
compared to $0.1 million in the same period last year.
Receivable provisions net of recoveries amounted to as a net recovery of $0.9
million in the first quarter of 2004 compared to a net provision of $0.6 million
in the same period last year. The Company recorded an accounts receivable
recovery of $0.2 million as compared to a provision of $0.6 million in the same
period last year. There was a net recovery of $0.7 million in the first quarter
of 2004 on financing receivables as compared to $nil in the same period last
year due to a favorable outcome on lease amendments.
Interest income decreased to $0.1 million in the first quarter of 2004 from $0.3
million in the same period last year primarily due to a decrease in the average
balance of cash and cash equivalents held.
Interest expense decreased to $4.1 million in the first quarter of 2004 from
$4.3 million in the same period last year due largely to lower average debt
balances in 2004. The Company retired and repaid an aggregate of $170.8 million
of the Company's Old Senior Notes in December 2003 and $9.1 million of 5.75%
convertible subordinated notes due April 1, 2003 (the "Subordinated Notes"). As
at March 31, 2004, the Company had $160.0 million aggregate principal of 9.625%
senior notes due December 1, 2010 (the "New Senior Notes").
Page 32
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS ENDED MARCH 31, 2003
(cont'd)
OTHER (cont'd)
The effective tax rate on earnings differs significantly from the statutory rate
due to the effect of permanent differences, income taxed at differing rates in
foreign and other provincial jurisdictions and changes in the Company's
valuation allowance on deferred tax assets. The income tax expense (recovery)
for the quarter is calculated by applying the estimated average annual effective
tax rate to quarterly pre-tax income. The Company recorded an income tax
provision of $nil in the current quarter from $0.1 million in the same period
last year primarily due to the application of its estimate average annual
effective tax rate to the quarterly pre-tax loss. As at March 31, 2004, the
Company had a gross deferred tax asset of $50.9 million, against which the
Company is carrying a $47.0 million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.1 million in the first quarter of 2004
versus $0.7 million in the same period last year. The higher level of expenses
in 2004 primarily reflects research and development activities pertaining to the
Company's new IMAX MPX theater projection system. Through research and
development, the Company continues 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.
LOSS ON RETIREMENT OF NOTES
During the first quarter of 2004, the Company recorded a loss of $0.8 million
related to costs associated with the redemption of $29.2 million of the
Company's Old Senior Notes. This transaction had the effect of fully
extinguishing the Old Senior Notes.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company removed 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 amount of loss to the Company
has been estimated at between $0.8 million and $2.3 million, of which the
Company has accrued $0.8 million. As the Company is uncertain as to the outcome
of the proceeding no additional amount has been recorded.
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. 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. During the first quarter
of 2004, the Company received $0.2 million in cash towards the repayment of this
debt, and has recorded a corresponding gain in net earnings (loss) from
discontinued operations (2003 - $0.2 million). As of March 31, 2004, the
remaining balance is $11.7 million, which has been fully provided for.
Page 33
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
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. As at March 31, 2004, no amount is
outstanding on the facility.
CASH AND CASH EQUIVALENTS
As at March 31, 2004, the Company's principal sources of liquidity included cash
and cash equivalents of $23.2 million, trade accounts receivable of $16.2
million and net investment in leases due within one year of $4.6 million. In
February 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. As at March 31, 2004, the
Company did not have any borrowings outstanding under the line. In January 2004,
the Company retired the remaining $29.2 million in Old Senior Notes using
existing cash balances.
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 foreseeable future. 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. 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.
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 provided by operating activities amounted to $5.8 million for the period
ended March 31, 2004. Changes in other non-cash operating assets as compared to
December 31, 2003 include a decrease of $0.6 million in inventories, a decrease
of $0.5 million in financing receivables, a $1.8 million increase in accounts
receivable and a $1.5 million increase in prepaid expenses which relates to
prepaid film print costs which will be expensed over the period to be benefited.
Changes in other non-cash operating liabilities as compared to December 31, 2003
include a decrease in deferred revenue of $3.2 million, a decrease in accounts
payable of $0.8 million and an increase of $7.1 million in accrued liabilities.
Included in operating activities for the first quarter of 2004 were $5.0 million
in film finance proceeds which are required to be spent on a specific film
project, and $0.6 million in premiums paid to retire $29.2 million of principal
of the Company's remaining Old Senior Notes. Net cash used in operating
activities increased by $3.7 million in the first quarter of 2004 primarily due
to a decrease 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.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENTS (cont'd)
Cash used in investing activities amounted to $0.5 million in the first quarter
of 2004, which includes purchases of $0.2 million in fixed assets, an increase
in other assets of $0.3 million and an increase in other intangible assets of
less than $0.1 million.
Cash used in financing activities in the first quarter of 2004 amounted to $29.4
million. The Company retired $29.2 million of principal of the Company's Old
Senior Notes. The Company also received $0.2 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 $0.2 million for the first quarter of 2004.
Cash used in operating activities amounted to $0.6 million in the first quarter
of 2003. Changes in other non-cash operating assets and liabilities included a
decrease in deferred revenue of $9.0 million, and a decrease of $3.7 million in
inventories. Cash used by investing activities in the first quarter of 2003
amounted to $0.7 million, primarily consisting of $0.3 million invested in fixed
assets. Cash provided by financing activities in the first quarter of 2003
amounted to $0.2 million from the receipt of a note receivable from a
discontinued operation. Capital expenditures including the purchase of fixed
assets and investments in film assets were $0.6 million in the first quarter of
2003.
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at March 31, 2004, the Company has letters of credit of $4.3 million
outstanding of which $1.2 million have been collateralized by cash deposits and
the remainder are secured by the Credit Facility. In addition, the Company is
required to expend $5.0 million towards the production of a future motion
picture title.
NEW SENIOR NOTES DUE 2010
As at March 31, 2004, the Company had $160.0 million aggregate principal of
9.625% senior notes due December 1, 2010 (the "New Senior Notes"). The Company
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 were registered, but which are not yet effective 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 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 were
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 are
registered under U.S. securities laws, do not contain restrictions on transfer
or provisions relating to special interest under circumstances related to the
timing of the exchange offer, bear a different CUSIP number from the New Senior
Notes and do not entitle their holders to registration rights.
OLD SENIOR NOTES DUE 2005
In December 2003 the Company completed a tender offer and consent solicitation
for the remaining $152.8 million of principal of senior notes due December 1,
2005 bearing interest at a rate of 7.875% per annum (the "Old Senior Notes")
that were not retired previously. 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.
In the first quarter of 2004, the Company recorded a loss of $0.8 million
related to the retirement of the Company's Old Senior Notes.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As March 31, 2004, the Company had an unfunded and accrued
projected benefit obligation of approximately $20.9 million (December 31, 2003 -
$20.1 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.
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.
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IMAX CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses is denominated in Canadian
dollars. A portion of the Company's net U.S. dollar flows is converted to
Canadian dollars to fund Canadian dollar expenses through the spot market. The
Company plans to convert Canadian dollar expenses to U.S. dollars through the
spot 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 dollars.
In the first quarter of 2004, the Company recorded translation losses of $0.3
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.
ITEM 4. 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. The Company will continue to periodically evaluate its disclosure
controls and procedures and will make modifications from time to time as deemed
necessary to ensure that information is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
The Company's management, including the Co-Chief Executive Officers and Chief
Financial Officer, does not expect that its disclosure controls and procedures
or internal controls and procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgements in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of the end of the period covered by this report there was no change in the
Company's internal control 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.
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IMAX CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(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 January 2004, the Company and IMAX Theatre Services Ltd., a
subsidiary of the Company, commenced an arbitration seeking damages of
approximately $3.7 million before the International Court of
Arbitration of the International Chambers of Commerce with respect to
the breach by Electronic Media Limited ("EML") of its December 2000
agreement with the Company. In April 2004, EML filed an answer and
counterclaim seeking the return of funds EML has paid to the Company,
incidental expenses and punitive damages. The Company believes that the
allegations made by EML in its counterclaim 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
arbitration 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.
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IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(E) In January 2000, Euromax, an association of European large-screen
cinema owners, filed a compliant against the Company with the European
Commission based on European Community ("EC") competition rules. The
complaint alleged illegal tying and excessive pricing practices. The EC
issued a final written decision in rejecting the complaint in its
entirety on March 25, 2004.
(f) 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.
(g) 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 2, 2004, the Company completed the redemption of $29.2
million of 7.875% senior notes due December 1, 2005 (the "7.875% Senior
Notes"). This transactions had the effect of reducing the principal
amount of the Company's outstanding 7.875% Senior Notes to $nil.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated May 10, 2004, by Bradley J. Wechsler.
31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated May 10, 2004, by Richard L. Gelfond.
31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated May 10, 2004, by Francis T. Joyce.
32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated May 10, 2004, by Bradley J. Wechsler.
32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated May 10, 2004, by Richard L. Gelfond.
32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated May 10, 2004, by Francis T. Joyce
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on March 11, 2004, 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 year ended December 31, 2003.
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IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: May 10, 2004 By: /s/ Francis T. Joyce
- ------------------- -----------------------------------
Francis T. Joyce
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2004 By: /s/ Kathryn A. Gamble
- ------------------- -----------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
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