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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 September 30, 2004
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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
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(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
--------------
N/A
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate 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 October 15, 2004
- -------------------------- ----------------------------------
Common stock, no par value 39,315,491
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Page 1
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................. 31
Item 3. Quantitative and Qualitative Factors about Market Risk......................................... 43
Item 4. Controls and Procedures........................................................................ 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 44
Item 6. Exhibits....................................................................................... 46
Signatures.............................................................................................. 47
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
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Condensed Consolidated Financial Statements are filed
as part of this Report:
Condensed Consolidated Balance Sheets as at September 30, 2004 and
December 31, 2003................................................. 4
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 2004 and 2003.............. 5
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 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)
SEPTEMBER 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
---------------- ---------------
ASSETS
Cash and cash equivalents $ 20,664 $ 47,282
Restricted cash (note 7(b)) -- 4,961
Accounts receivable, net of allowance for doubtful accounts of $7,902
(2003 - $7,278) 17,574 13,887
Financing receivables (note 3) 60,774 56,742
Inventories (note 4) 27,374 28,218
Prepaid expenses 3,480 1,902
Film assets 734 1,568
Fixed assets 31,357 35,818
Other assets 13,275 13,827
Deferred income taxes (note 11) 4,545 3,756
Goodwill 39,027 39,027
Other intangible assets 3,116 3,388
---------------- ---------------
Total assets $ 221,920 $ 250,376
================ ===============
LIABILITIES
Accounts payable $ 6,633 $ 5,780
Accrued liabilities (note 7(c)) 53,792 43,794
Deferred revenue 50,640 63,344
New Senior Notes due 2010 (note 5) 160,000 160,000
Old Senior Notes due 2005 (note 6) -- 29,234
---------------- ---------------
Total liabilities 271,065 302,152
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (notes 7 and 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock - no par value. Authorized -
unlimited number. Issued and outstanding - 39,315,491 (2003 - 39,301,758) 115,653 115,609
Other equity 3,290 3,159
Deficit (168,733) (171,189)
Accumulated other comprehensive income 645 645
---------------- ---------------
Total shareholders' deficit (49,145) (51,776)
---------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 221,920 $ 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 NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
REVENUE
IMAX systems (note 9(a)) $ 21,309 $ 11,455 $ 57,811 $ 55,913
Films 6,076 5,275 17,166 19,570
Theater operations 3,689 3,367 11,203 10,142
Other 753 1,131 2,276 3,702
------------- ------------- ------------- -------------
31,827 21,228 88,456 89,327
COSTS OF GOODS AND SERVICES 17,356 11,538 47,014 49,352
------------- ------------- ------------- -------------
GROSS MARGIN 14,471 9,690 41,442 39,975
Selling, general and administrative expenses (note 9(b)) 7,587 8,265 24,541 24,864
Research and development 1,019 952 3,034 2,833
Amortization of intangibles 240 181 545 473
Income from equity-accounted investees -- (228) -- (501)
Receivable provisions, net of (recoveries) (note 10) 2 (425) (965) 264
------------- ------------- ------------- -------------
EARNINGS FROM OPERATIONS 5,623 945 14,287 12,042
Interest income 439 105 664 515
Interest expense (4,378) (3,606) (12,566) (11,949)
Loss on retirement of notes (note 6) -- (146) (784) (333)
Recovery on long-term investments (note 9(c)) -- 355 -- 355
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 1,684 (2,347) 1,601 630
Recovery of (provision for) income taxes (note 11) (84) (163) 255 400
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 1,600 (2,510) 1,856 1,030
Net earnings (loss) from discontinued operations (note 15) 200 (144) 600 (292)
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 1,800 $ (2,654) $ 2,456 $ 738
============= ============= ============= =============
EARNINGS PER SHARE (note 12(b)):
Earnings per share - basic and diluted:
Net earnings (loss) from continuing operations $ 0.04 $ (0.07) $ 0.05 $ 0.03
Net earnings (loss) from discontinued operations $ 0.01 $ -- $ 0.01 $ (0.01)
------------- ------------- ------------- -------------
Net earnings (loss) $ 0.05 $ (0.07) $ 0.06 $ 0.02
============= ============= ============= =============
(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)
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings from continuing operations $ 1,856 $ 1,030
Items not involving cash:
Depreciation and amortization 10,537 8,243
Write-downs (recoveries) (963) 260
Income from equity-accounted investees -- (501)
Deferred income taxes (788) --
Loss on retirement of notes 784 333
Stock and other non-cash compensation 2,264 4,103
Non-cash foreign exchange gain (12) (685)
Premium on repayment of notes (576) --
Payment under certain employment agreements -- (1,550)
Investment in film assets (2,782) (1,108)
Changes in restricted cash 4,961 (142)
Changes in other non-cash operating assets and liabilities (10,606) (14,111)
Net cash used in operating activities from discontinued operations -- (573)
------------- -------------
Net cash provided by (used in) operating activities 4,675 (4,701)
------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (693) (1,147)
Increase in other assets (857) (794)
Increase in other intangible assets (271) (435)
Recovery on long-term investments -- 355
Net cash used in investing activities from discontinued operations -- (11)
------------- -------------
Net cash used in investing activities (1,821) (2,032)
------------- -------------
FINANCING ACTIVITIES
Repayment of Old Senior Notes due 2005 (29,234) --
Repayment of Subordinated Notes -- (9,143)
Financing costs related to New Senior Notes due 2010 (681) --
Common shares issued 44 1,410
Net cash provided by financing activities from discontinued operations 400 599
------------- -------------
Net cash used in financing activities (29,471) (7,134)
------------- -------------
Effects of exchange rate changes on cash (1) 184
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (27,018) (13,698)
Increase in cash and cash equivalents from discontinued
operations 400 15
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (26,618) (13,683)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47,282 33,801
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,664 $ 20,118
============= =============
(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.
The Company reports its results under United States Generally Accepted
Accounting Principles ("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/A (amendment No. 2) 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.
EMPLOYEE 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 FASB Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") had been
adopted by the Company, pro forma results for the three and nine months
ended September 30, would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Net earnings (loss) as reported $ 1,800 $ (2,654) $ 2,456 $ 738
Stock based compensation expense, if the
methodology prescribed by FAS 123 had
been adopted (1,930) (2,323) (5,292) (6,904)
------------- -------------- ------------- ------------
Adjusted net loss $ (130) $ (4,977) $ (2,836) $ (6,166)
============= ============= ============= ============
Earnings (loss) per share - basic and diluted:
Net earnings as reported $ 0.05 $ (0.07) $ 0.06 $ 0.02
FAS 123 stock based compensation expense (0.05) $ (0.06) $ (0.13) $ (0.20)
------------- ------------- ------------- -------------
Adjusted net loss $ -- $ (0.13) $ (0.07) $ (0.18)
============= ============= ============= =============
Of the total stock based compensation expense under FAS 123 for the three
and nine months ended September 30, 2004, $1,206 and $3,616, respectively
relate 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.
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)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
The weighted average fair value of common share options granted to
employees for the three and nine months ended September 30, 2004 at the
time of grant was $2.11 and $2.07 per share, respectively (2003 - $2.85
and $2.70 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 and nine
months ended September 30, 2004, the following assumptions were used:
dividend yield of 0%. (three and six months ended September 30, 2003 -
0%); an average risk free interest rate of 4.1% and 4.8% (three and six
months ended September 30, 2003 - 4.1% and 3.0%); an equity risk premium
between 5.5% and 6.3% and between 3.8% and 6.3% (three and six months
ended September 30, 2003 - between 4.7% and 6.3% and between 4.7% and
10.7%); a beta between 1.04 and 1.11 and between 0.95 and 1.11 (three and
six months ended September 30, 2003 - between 0.85 and 1.03); expected
option life between 4.4 and 5.4 years and between 2.6 and 5.4 years (three
and six months ended September 30, 2003 - between 2.6 and 4.4 years and
between 2.6 and 5.1 years); an average expected volatility of 62% (three
and six months ended September 30, 2003 - 62%); and an annual termination
probability of between 8.1% and 9.6% (three and six months ended September
30, 2003 - 8.1% and 9.6%). Had the Company changed from using the
Black-Scholes option pricing model to a Binomial option pricing model
effective January 1, 2003 rather than April 1, 2003, the impact would not
have been significant.
2. ACCOUNTING CHANGES
As of January 1, 2004, the Company adopted 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 considered 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 $0.1 million and total liabilities of $0.1
million as at September 30, 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.
The Company also has interests in three other film production companies
which are VIE's, however the Company did not consolidate these film
entities since it did not bear the majority of the expected losses or
expected residual returns.
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)
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:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ----------------
NET INVESTMENT IN LEASES
Gross minimum lease amounts receivable $ 103,016 $ 97,408
Residual value of equipment 787 824
Unearned finance income (41,255) (38,847)
--------------- ----------------
Present value of minimum lease amounts receivable 62,548 59,385
Accumulated allowance for uncollectible amounts (5,116) (5,840)
--------------- ----------------
Net investment in leases 57,432 53,545
--------------- ----------------
Long-term receivables 3,342 3,197
--------------- ----------------
Total financing receivables $ 60,774 $ 56,742
=============== ================
4. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ----------------
Raw materials $ 6,831 $ 5,868
Work-in-process 6,695 4,327
Finished goods 13,848 18,023
--------------- ----------------
$ 27,374 $ 28,218
=============== ================
5. NEW SENIOR NOTES DUE 2010
As at September 30, 2004, the Company has $160.0 million aggregate
principal of 9.625% senior notes due December 1, 2010 (the "New Senior
Notes"). On October 6, 2004, the Company commenced an offer to exchange up
to US$160,000,000 aggregate principal amount of its outstanding New Senior
Notes for a like principal amount of its 9.625% Senior Notes due 2010 (the
"Registered Notes"). The Company's registration statement on Form S-4
relating to the Registered Notes was declared effective by the Securities
and Exchange Commission on September 30, 2004. The Registered Notes are
unconditionally guaranteed, jointly and severally, by certain of the
Company's wholly-owned subsidiaries. The terms of the Registered Notes are
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 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)
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 a 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 New Senior Notes (see note 5).
In January 2004, the Company recorded a loss of $0.8 million related to
the retirement of the Company's Old Senior Notes. During the first nine
months of 2003, the Company recorded a loss of $0.3 million from the
retirement of $31.5 million 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 September 30, 2004 for each of the
years ended December 31 are as follows:
2004 (three months remaining) $ 1,385
2005 5,956
2006 5,765
2007 5,551
2008 5,334
Thereafter 37,171
----------
$ 61,162
==========
(b) As at September 30, 2004, the Company has letters of credit of $5.2
million outstanding under the Company's credit facility arrangement (see
note 17). As at December 31, 2003, the Company had letters of credit of
$5.0 million outstanding, which had been collateralized by cash deposits.
(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
motion picture title. The Company has expended $0.3 million of these funds
as at September 30, 2004.
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. On September 27,
2004, the Court granted the Company's motion for summary judgment,
awarding the Company judgment as a matter of law on all of the substantive
claims asserted by Muvico in the complaint. The Company is awaiting final
decision from the Court with regard to its damages claims.
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)
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 operations 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 District 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 May, 2002, the Company filed a complaint with the District Court of
Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"),
demanding payment of rental obligations and other amounts owed to the
Company. Siewert raised a defense based on alleged infringement of German
antitrust rules. By judgement of December 20, 2002, the District Court
rejected the defense and awarded judgement in documentary proceedings in
favor of the Company and added further amounts that had fallen due.
Siewert applied for leave to appeal to the German Supreme Court on matters
of law, which was rejected by the German Supreme Court in March 2004.
Siewert subsequently made a partial payment of amounts awarded to the
Company. Siewert has filed follow up proceedings to the documentary
proceedings in the District Court, in large part repeating the claims
rejected in the documentary proceeding. On September 30, 2004, Siewert
filed for insolvency with the Local Court in Wuerzburg. To the extent the
lawsuit will be continued following the commencement of the insolvency
proceedings, the Company will continue to vigorously pursue its claims and
believes that the amount of loss, if any, suffered in connection with
these proceedings would not have a material impact on the financial
position or results of operations of the Company, although no assurance
can be given with respect to the ultimate outcome of any such litigation.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONTINGENCIES (cont'd)
(e) 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 (the "ICC") 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. In June 2004, the Company commenced a related
arbitration before the ICC against EML's affiliate, E-CITI Entertainment
(I) PVT Limited ("E-Citi"), seeking $17,777,950 as a result of E-Citi's
breach of a September 2000 lease agreement. E-Citi has responded to the
arbitration demand and has asserted several defenses, including that the
ICC does not have jurisdiction for the arbitration. The Company believes
that the allegations made by EML in its counterclaim are entirely without
merit and has requested that the counterclaim be dismissed on the basis
that EML has recently advised the ICC that it has insufficient funds to
pay its share of the arbitration costs. The Company believes that the
amount of loss, if any, suffered in connection with the arbitration would
not have a material impact on the financial position or results of
operations of the Company, although no assurance can be given with respect
to the ultimate outcome of any such litigation.
(f) In addition to the 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.
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 three and
nine months ended September 30, 2004 are $2.9 million and $9.5 million,
respectively (2003 - $3.4 million, $7.6 million) for amounts recognized
under terminated lease agreements.
(b) Included in selling, general and administrative expenses for the three and
nine months ended September 30, 2004 are $0.3 million gain and $0.1
million loss, respectively (2003 - $0.2 million gain, $1.2 million gain)
for net foreign exchange related to the translation of foreign currency
denominated monetary assets, liabilities and integrated subsidiaries.
(c) In August 2003, the Company agreed to restructure its 6% Senior Secured
Convertible Debenture (the "Debenture") due from Mainframe Entertainment,
Inc. ("Mainframe"). Under the terms of the restructuring agreement, the
payment terms of the Debenture were revised, while the Company retained
its security over all of Mainframe's property and assets for the balance
of the payments due. The Company recorded $0.4 million in income for the
three and nine month periods ended September 30, 2003 related to cash
received under the debt restructuring agreement.
Page 12
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
10. RECEIVABLE PROVISIONS (RECOVERIES), NET
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Accounts receivable provisions (recoveries),
net $ 2 $ 93 $ (240) $ 515
Financing receivables provisions (recoveries),
net(1) $ -- $ (518) $ (725) $ (251)
------------- ------------- ------------- ------------
Receivable provisions (recoveries), net $ 2 $ (425) $ (965) $ 264
============= ============= ============= ============
(1) For the three and nine months ended September 30, 2004, the Company
recorded a recovery of previously provided amounts of $nil and $0.7
million, respectively (2003 - $0.5 million, $0.3 million) as the
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, tax
recoveries and charges relating to favourable or unfavourable tax
examinations, 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 within the tax provision in
the current quarter a tax recovery of $0.4 million related to refunds
resulting from favourable conclusions to two separate tax examinations and
the utilization of previously recorded income tax credits.
As at September 30, 2004, the Company has recognized net deferred income
tax assets of $4.5 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 September 30,
2004, the Company had a gross deferred income tax asset of $50.6 million,
against which the Company is carrying a $46.1 million valuation allowance.
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)
12. CAPITAL STOCK
(a) STOCK BASED COMPENSATION
In the three and nine months ended September 30, 2004, an aggregate of
13,335 and 40,005 options (2003 - 13,335 and 125,059) with an average
exercise price of $5.27 and $5.96 (2003 - $8.20 and $6.22) to purchase the
Company's common stock were issued to certain advisors and strategic
partners of the Company, respectively. The Company has calculated the fair
value of these options on the date of grant for the three and nine months
ended September 30, 2004 to be $0.04 million and $0.1 million (2003 - $0.1
million and $0.4 million), respectively, using a Binomial option-pricing
model with the following underlying assumptions: dividend yield of 0%; an
average risk free interest rate of 3.49% and 3.37% (2003 - 3.09% and
2.45%), expected option life of 5 years; and an average expected
volatility of 62.0%.
The Company has recorded a charge of $0.04 million and $0.1 million to
costs of goods and services related to the non-employee stock options
granted in the three and nine months ended September 30, 2004 (2003 - $0.1
million, $0.4 million).
There were no warrants issued in the three and nine months ended September
30, 2004 (2003 - nil and 550,000). 450,000 warrants remain outstanding of
the 550,000 warrants issued in 2003, which vest when certain film related
milestones are met, and have an exercise price of $6.06. The warrants
generally expire 5 years after the date of grant or vesting. At September
30, 2004, 200,000 warrants were vested and exercisable. The Company
believes that no additional warrants will ultimately vest.
(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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net earnings applicable to common
shareholders:
Net earnings (loss) $ 1,800 $ (2,654) $ 2,456 $ 738
============= ============= ============= =============
Weighted average number of common shares
(000's):
Issued and outstanding, beginning of period 39,316 36,426 39,302 32,973
Weighted average number of shares issued during
the period -- 665 8 1,619
------------- ------------- ------------- -------------
Weighted average number of shares used in
computing basic earnings per share 39,316 37,091 39,310 34,592
Assumed exercise of stock options, net of
shares assumed repurchased 576 -- 401 532
------------- ------------- ------------- -------------
Weighted average number of shares used in
computing diluted earnings per share 39,892 37,091 39,711 35,124
============= ============= ============= =============
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)
13. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Interest paid $ 65 $ 174 $ 7,961 $ 8,438
Income taxes paid $ 352 $ 313 $ 1,280 $ 2,089
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/A for the
year ended December 31, 2003. Inter-segment transactions are not
significant.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 21,309 $ 11,455 $ 57,811 $ 55,913
Films 6,076 5,275 17,166 19,570
Theater operations 3,689 3,367 11,203 10,142
Other 753 1,131 2,276 3,702
------------- ------------- ------------- -------------
TOTAL $ 31,827 $ 21,228 $ 88,456 $ 89,327
============= ============= ============= =============
EARNINGS FROM OPERATIONS
IMAX systems $ 11,725 $ 6,008 $ 33,271 $ 26,824
Films (1,653) (283) (4,060) 506
Theater operations (8) (466) 886 (1,346)
Other (58) 635 (670) 1,687
Corporate overhead (4,383) (4,949) (15,140) (15,629)
------------- ------------- ------------- -------------
TOTAL $ 5,623 $ 945 $ 14,287 $ 12,042
============= ============= ============= =============
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 abandonment of assets and removal of
its projection system 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 amount of
loss to the Company has been estimated at between $0.8 million and $2.3
million, of which the Company had accrued $0.8 million as at December 31,
2003. During 2004, the Company paid out $0.8 million with respect to
amounts owing to the landlord. As the Company is uncertain as to the
outcome of the proceeding, no additional amount has been recorded.
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)
15. DISCONTINUED OPERATIONS (cont'd)
(b) DIGITAL PROJECTION INTERNATIONAL
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries (collectively "DPI"), to a company owned by members of DPI
management.
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 three and nine months ended September 30, 2004, the
Company recognized $0.2 million and $0.6 million in income from
discontinued operations for cash ultimately received (2003 - $0.2 million,
$0.6 million). As of September 30, 2004, the remaining loan receivable
balance is $11.3 million, which has been fully provided for.
(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 September 30,
was comprised of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------ ------------- ------------
Net earnings (loss) from discontinued operations $ 200 $ (144) $ 600 $ (292)
============= ============ ============= ============
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 September 30, 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 September 30:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
Service cost $ 516 $ 489 $ 1,548 $ 1,467
Interest cost 317 272 951 816
Amortization of prior service cost 349 349 1,047 1,048
------------ ------------- ------------ ------------
Pension expense $ 1,182 $ 1,110 $ 3,546 $ 3,331
============ ============= ============ ============
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)
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 September 30, 2004, the Company has not drawn down on the Credit
Facility, however, it has issued letters of credit for $5.2 million under
the Credit Facility arrangement.
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's New Senior Notes and Registered 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 nor the Registered 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 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 September 30, 2004:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
ASSETS
Cash and cash equivalents $ 16,181 $ 4,412 $ 71 $ -- $ 20,664
Restricted cash -- -- -- -- --
Accounts receivable 13,570 3,610 394 -- 17,574
Financing receivables 59,385 1,389 -- -- 60,774
Inventories 27,065 242 67 -- 27,374
Prepaid expenses 3,168 183 129 -- 3,480
Intercompany receivables 12,426 28,970 11,355 (52,751) --
Film assets 714 20 -- -- 734
Fixed assets 29,770 1,585 2 -- 31,357
Other assets 13,275 -- -- -- 13,275
Deferred income taxes 4,482 63 -- -- 4,545
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,116 -- -- -- 3,116
Investments in subsidiaries 30,392 -- -- (30,392) --
------------- ------------- ------------- ------------- -------------
Total assets $ 252,571 $ 40,474 $ 12,018 $ (83,143) $ 221,920
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 2,769 3,864 -- -- 6,633
Accrued liabilities 52,188 1,432 172 -- 53,792
Intercompany payables 42,062 33,952 6,935 (82,949) --
Deferred revenue 45,615 4,867 158 -- 50,640
New Senior Notes due 2010 160,000 -- -- -- 160,000
------------- ------------- ------------- ------------- -------------
Total liabilities 302,634 44,115 7,265 (82,949) 271,065
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock 115,653 -- 117 (117) 115,653
Other equity/Additional paid in
capital/Contributed surplus 2,256 46,960 -- (45,926) 3,290
Deficit (169,231) (49,987) 4,636 45,849 (168,733)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- ------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (50,063) $ (3,641) $ 4,753 $ (194) $ (49,145)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 252,571 $ 40,474 $ 12,018 $ (83,143) $ 221,920
============= ============= ============= ============= =============
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 $30.3 million as at September
30, 2004.
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 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 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
September 30, 2004:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 21,001 $ 168 $ 222 $ (82) $ 21,309
Films 5,159 1,399 3 (485) 6,076
Theater operations 136 3,578 -- (25) 3,689
Other 753 -- -- -- 753
------------- ------------- ------------- ------------- -------------
27,049 5,145 225 (592) 31,827
COST OF GOODS AND SERVICES 13,089 4,710 149 (592) 17,356
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 13,960 435 76 -- 14,471
Selling, general and administrative expenses 7,219 221 147 -- 7,587
Research and development 1,019 -- -- -- 1,019
Amortization of intangibles 240 -- -- -- 240
Loss (income) from equity-accounted
investees (68) -- -- 68 --
Receivable provisions (recoveries), net 2 -- -- -- 2
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 5,548 214 (71) (68) 5,623
Interest income 439 -- -- -- 439
Interest expense (4,372) (6) -- -- (4,378)
Loss on retirement of notes -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 1,615 208 (71) (68) 1,684
Provision for income taxes (17) -- (67) -- (84)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 1,598 208 (138) (68) 1,600
Net earnings from discontinued operations 200 -- -- -- 200
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 1,798 $ 208 $ (138) $ (68) $ 1,800
============= ============= ============= ============== =============
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 Operations for the three months ended
September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 11,118 $ 221 $ 328 $ (212) $ 11,455
Films 3,245 2,799 28 (797) 5,275
Theater Operations 380 3,025 -- (38) 3,367
Other 1,124 -- 7 -- 1,131
------------- ------------- ------------- ------------- -------------
15,867 6,045 363 (1,047) 21,228
COST OF GOODS AND SERVICES 7,051 6,713 120 (2,346) 11,538
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 8,816 (668) 243 1,299 9,690
Selling, general and administrative expenses 8,199 129 (63) -- 8,265
Research and development 952 -- -- -- 952
Amortization of intangibles 181 -- -- -- 181
Loss (income) from equity-accounted
investees 670 82 -- (980) (228)
Receivable provisions (recoveries), net (426) 1 -- (425)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (760) (880) 306 2,279 945
Interest income 105 -- -- -- 105
Interest expense (3,592) (14) -- -- (3,606)
Loss on retirement of notes (146) -- -- -- (146)
Recovery on long-term investments 355 -- -- -- 355
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (4,038) (894) 306 2,279 (2,347)
Recovery of (provision for) income taxes (125) 15 (53) -- (163)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (4,163) (879) 253 2,279 (2,510)
Net earnings from discontinued operations 200 (344) -- -- (144)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (3,963) $ (1,223) $ 253 $ 2,279 $ (2,654)
============= ============= ============= ============= =============
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 Operations for the nine months ended
September 30, 2004:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 56,408 $ 793 $ 881 $ (271) $ 57,811
Films 15,209 4,183 18 (2,244) 17,166
Theater operations 456 10,823 -- (76) 11,203
Other 2,275 -- 1 -- 2,276
------------- ------------- ------------- ------------- -------------
74,348 15,799 900 (2,591) 88,456
COST OF GOODS AND SERVICES 34,144 15,087 374 (2,591) 47,014
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 40,204 712 526 -- 41,442
Selling, general and administrative expenses 23,554 537 450 -- 25,541
Research and development 3,034 -- -- -- 3,034
Amortization of intangibles 545 -- -- -- 545
Loss (income) from equity-accounted
investees (210) -- -- 210 --
Receivable provisions (recoveries), net (889) (76) -- -- (965)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 14,170 251 76 (210) 14,287
Interest income 664 -- -- -- 664
Interest expense (12,516) (20) (30) -- (12,566)
Loss on retirement of notes (784) -- -- -- (784)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 1,534 231 46 (210) 1,601
Recovery of (provision for) income taxes 322 -- (67) -- 255
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 1,856 231 (21) (210) 1,856
Net earnings from discontinued operations 600 -- -- -- 600
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 2,456 $ 231 $ (21) $ (210) $ 2,456
============= ============= ============= ============== =============
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)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the nine months ended
September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 54,693 $ 2,259 $ 1,061 $ (2,100) $ 55,913
Films 10,741 11,011 48 (2,230) 19,570
Theater Operations 575 9,677 -- (110) 10,142
Other 3,642 -- 125 (65) 3,702
------------- ------------- ------------- -------------- -------------
69,651 22,947 1,234 (4,505) 89,327
COST OF GOODS AND SERVICES 31,437 23,231 496 (5,812) 49,352
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 38,214 (284) 738 1,307 39,975
Selling, general and administrative expenses 24,125 530 209 -- 24,864
Research and development 2,833 -- -- -- 2,833
Amortization of intangibles 473 -- -- -- 473
Loss (income) from equity-accounted
investees (539) 101 -- (63) (501)
Receivable provisions (recoveries), net 486 (178) (44) -- 264
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 10,836 (737) 573 1,370 12,042
Interest income 515 -- -- -- 515
Interest expense (11,919) (30) -- -- (11,949)
Loss on retirement of notes (333) -- -- -- (333)
Recovery of long-term investments 355 -- -- -- 355
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (546) (767) 573 1,370 630
Recovery of (provision for) income taxes (632) 1,077 (45) -- 400
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (1,178) 310 528 1,370 1,030
Net earnings (loss) from discontinued
operations 599 (891) -- -- (292)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (579) $ (581) $ 528 $ 1,370 $ 738
============= ============= ============= ============= =============
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)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the nine months ended
September 30, 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 $ 1,856 $ 231 $ (21) $ (210) $ 1,856
Items not involving cash:
Depreciation and amortization 10,133 403 1 -- 10,537
Write-downs (recoveries) (887) (76) -- -- (963)
Loss (income) from equity-accounted
investees (210) -- -- 210 --
Deferred income taxes (776) (12) -- -- (788)
Loss on retirement of notes 784 -- -- -- 784
Stock and other non-cash compensation 2,264 -- -- -- 2,264
Non-cash foreign exchange gain (12) -- -- -- (12)
Premium on repayment of notes (576) -- -- -- (576)
Investment in film assets (3,969) 1,187 -- -- (2,782)
Changes in restricted cash 4,961 -- -- -- 4,961
Changes in other non-cash operating assets and
liabilities (7,497) (2,931) (178) -- (10,606)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 6,071 (1,198) (198) -- 4,675
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (623) (70) -- -- (693)
Increase in other assets (857) -- -- -- (857)
Increase in other intangible assets (271) -- -- -- (271)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (1,751) (70) -- -- (1,821)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repayment of Old Senior Notes due 2005 (29,234) -- -- -- (29,234)
Financing costs related to New Senior Notes due
2010 (681) -- -- -- (681)
Common shares issued 44 -- -- -- 44
Net cash provided by financing activities from
discontinued operations 400 -- -- -- 400
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (29,471) -- -- -- (29,471)
------------- ------------- ------------- ----------------------------
Effects of exchange rate changes on cash 21 (16) (6) -- (1)
------------- ------------- ------------- ------------- -------------
DECREASE IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (25,530) (1,284) (204) -- (27,018)
Increase in cash and cash equivalents
from discontinued operations 400 -- -- -- 400
------------- ------------- ------------- ------------- -------------
DECREASE IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (25,130) (1,284) (204) -- (26,618)
Cash and cash equivalents, beginning of period 41,311 5,696 275 -- 47,282
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,181 $ 4,412 $ 71 $ -- $ 20,664
============= ============= ============= ============= =============
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)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the nine months ended
September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (1,178) $ 310 $ 528 $ 1,370 $ 1,030
Items not involving cash:
Depreciation and amortization 7,549 691 3 -- 8,243
Write-downs (recoveries) 348 (44) (44) -- 260
Loss (income) from equity-accounted
investees (539) 101 -- (63) (501)
Loss on retirement of notes 333 -- -- -- 333
Stock and other non-cash compensation 4,103 -- -- -- 4,103
Non-cash foreign exchange gain (685) -- -- (685)
Payment under certain employment agreements (1,550) -- -- -- (1,550)
Investment in film assets (840) (268) -- -- (1,108)
Changes in restricted cash (142) -- -- -- (142)
Changes in other non-cash operating assets and
liabilities (10,140) (2,159) (568) (1,244) (14,111)
Net cash used in operating activities from
discontinued operations (503) (70) -- -- (573)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities (3,244) (1,439) (81) 63 (4,701)
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (453) (631) -- (63) (1,147)
Increase in other assets (794) -- -- -- (794)
Increase in other intangible assets (435) -- -- -- (435)
Recovery on long-term investments 355 -- -- -- 355
Net cash used in investing activities from
discontinued operations -- (11) -- -- (11)
------------- -------------- ------------- ------------- -------------
Net cash used in investing activities (1,327) (642) -- (63) (2,032)
------------- -------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repayment of Subordinated Notes (9,143) -- -- -- (9,143)
Common shares issued 1,410 -- -- -- 1,410
Net cash used in financing activities from
discontinued operations 599 -- -- -- 599
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (7,134) -- -- -- (7,134)
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash 163 4 17 -- 184
------------- ------------- ------------- ------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS (11,638) (1,996) (64) -- (13,698)
Increase (decrease) in cash and cash
equivalents from discontinued operations 96 (81) -- -- 15
------------- ------------- ------------- ------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING
THE PERIOD (11,542) (2,077) (64) -- (13,683)
Cash and cash equivalents, beginning of period 27,756 5,695 350 -- 33,801
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,214 $ 3,618 $ 286 $ -- $ 20,118
============= ============= ============= ============= =============
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 SIGNIFICANT 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.
(a) 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
and nine month periods ended September 30, 2004, the Company did not have
any investments in jointly controlled entities.
(b) 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 differences resulted in higher depreciation for the
remaining useful life of the assets.
(c) 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 as if the methodology prescribed by 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 granted to employees or directors are recorded as an expense in
the consolidated statement of operations and credited to other equity.
(d) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the three and nine month periods ended September 30, 2003, the U.S.
GAAP financial statements included an additional $nil and $0.5 million in
selling, general and administrative expenses which were recorded in the
December 31, 2002 Canadian GAAP financial statements due to the timing of
finalization of certain compensation awards.
(e) 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. The debt associated with this interest was
settled in April 2003.
(f) PENSION ASSET AND LIABILITIES
Under U.S. GAAP, included in accrued liabilities, is a minimum pension
liability of $4.5 million as at September 30, 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.
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)
RECONCILIATION TO CANADIAN GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS
The following is a reconciliation of net earnings (loss) reflecting the
differences between U.S. and Canadian GAAP:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings (loss) in accordance with U.S. GAAP $ 1,800 $(2,654) $ 2,456 $ 738
Equity accounted investees(a) -- (499) -- (1,246)
Depreciation of Fixed assets(b) (40) (40) (122) (122)
Stock-based compensation(c) (742) (102) (920) (241)
Timing differences - Selling, general and
administrative expenses(d) -- -- -- 500
Interest accretion on Subordinated Notes(e) -- -- -- (48)
------- ------- ------- -------
Net earnings (loss) in accordance with Canadian GAAP
$ 1,018 $(3,295) $ 1,414 $ (419)
======= ======= ======= =======
Earnings (loss) per share (note 12):
Earnings (loss) per share - basic and diluted:
Net earnings (loss) from continuing
operations $ 0.02 $ (0.09) $ 0.02 $ --
Net earnings (loss) from discontinued
operations $ 0.01 $ -- $ 0.02 $ (0.01)
------- ------- ------- -------
Net earnings (loss) $ 0.03 $ (0.09) $ 0.04 $ (0.01)
======= ======= ======= =======
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
The following is a reconciliation of shareholders' equity (deficit)
reflecting the difference between Canadian and U.S. GAAP:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Shareholders' equity (deficit) in accordance with U.S. GAAP $(49,145) $(51,776)
Fixed asset impairments(b) 730 852
-------- --------
Shareholders' equity (deficit) in accordance with Canadian GAAP $(48,415) $(50,924)
======== ========
Page 27
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 - 39,301,758 114,153
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 28
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 are the Canadian GAAP Consolidated Statements of Operations
for the three and nine months ended September 30, 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
REVENUE
IMAX systems $ 11,454 $ 55,913
Films 5,276 19,570
Theater operations 3,367 10,142
Other 1,955 6,135
-------- --------
22,052 91,760
COSTS OF GOODS AND SERVICES 12,589 52,389
-------- --------
GROSS MARGIN 9,463 39,371
Selling, general and administrative expenses 8,366 24,605
Research and development 952 2,833
Amortization of intangibles 182 473
Receivable provisions, net of (recoveries) (425) 264
-------- --------
EARNINGS FROM OPERATIONS 388 11,196
Interest income 105 515
Interest expense (3,691) (12,260)
Loss on retirement of notes (146) (333)
Recovery on long-term investments 355 355
-------- --------
NET LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,989) (527)
Recovery of (provision for) income taxes (163) 400
-------- --------
NET LOSS FROM CONTINUING OPERATIONS (3,152) (127)
Net loss from discontinued operations (143) (292)
-------- --------
NET LOSS (3,295) (419)
======== ========
Page 29
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 nine months ended September 30, 2003:
NINE MONTHS ENDED
SEPTEMBER 30,
2003
----
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings from continuing operations $ (127)
Items not involving cash:
Depreciation and amortization 9,255
Write-downs 260
Loss on retirement of notes 333
Stock and other non-cash compensation 4,344
Interest related to accretion on Subordinated Notes 48
Non-cash foreign exchange gain (685)
Payment under certain employment agreements (1,550)
Investment in film assets (1,108)
Changes in restricted cash (142)
Changes in other non-cash operating assets and liabilities (14,461)
Net cash used in operating activities from discontinued operations (573)
--------
Net cash used in operating activities (4,406)
--------
INVESTING ACTIVITIES
Purchase of fixed assets (1,169)
Increase in other assets (794)
Increase in other intangible assets (435)
Recovery on long-term investments 355
Net cash used in investing activities from discontinued operations (11)
--------
Net cash used in investing activities (2,054)
--------
FINANCING ACTIVITIES
Repayment of Subordinated Notes (9,143)
Common shares issued 1,410
Repayment of long-term debt (576)
Net cash provided by financing activities from discontinued
operations 599
--------
Net cash used in financing activities (7,710)
--------
Effects of exchange rate changes on cash 184
--------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (14,001)
Increase in cash and cash equivalents from discontinued operations 15
--------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (13,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,380
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,394
========
Page 30
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, sale and lease 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 35 countries worldwide as of September 30, 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"). 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/A (amendment No. 2) 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 generally 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 31
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. 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 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.
In the normal course of its business, the Company each year will have customers
who, for a number of reasons including the inability to obtain certain consents,
approvals or financing, are unable to proceed with theater construction. In
these instances, where customers of the Company are not in compliance with the
terms of their leases for theater systems not yet installed, the leases are in
default. There is typically deferred revenue associated with these leases,
representing initial lease payments collected prior to the default. These
initial lease payments are recognized as revenue when the Company exercises its
rights to terminate the lease and the Company is released legally and/or by
virtue of an agreement with the customer from its obligations under the lease
arrangement. When settlements are received, the Company will allocate the total
settlement to each of the elements based on their relative fair value.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
The allowance for doubtful accounts receivable and provision against the
financing receivables are based on the Company's assessment of the
collectibility of specific customer balances and the underlying asset value of
the equipment under lease where applicable. If there is a deterioration in a
customer's credit worthiness or actual defaults under the terms of the leases
are higher than the Company's historical experience, the Company's estimates of
recoverability for these assets could be adversely affected.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions prove to be
incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
Page 32
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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 September 30, 2004, the Company had net deferred income tax assets of $4.5
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 September 30,
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.
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.
Page 33
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2003
The Company reported net earnings from continuing operations of $1.6 million or
$0.04 per share on a diluted basis for the third quarter of 2004, compared to
net loss from continuing operations of $2.5 million or $0.07 per share on a
diluted basis for the third quarter of 2003.
REVENUE
The Company's revenues for the third quarter of 2004 increased 49.9% to $31.8
million from $21.2 million in the same period last year.
IMAX systems revenue increased approximately 86.0% to $21.3 million in the third
quarter of 2004 from $11.5 million in the same period last year. The Company
recognized revenue on 6 theater systems in the third quarter of 2004, versus 1
theater system in the third quarter of 2003. The increase in systems revenue
from installations over the same period last year was partially offset by lower
settlement revenue in the period. 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 their theater lease arrangement included in revenue for the third
quarter of 2004 total $2.9 million compared to $3.4 million in the corresponding
period last year. A significant portion of such revenue in the third quarter of
2004 related to existing customers that restructured their lease agreements and
obtained an option to order the Company's new IMAX(R) MPX(TM) projection system.
Films revenue increased 15.2% to $6.1 million in the third quarter of 2004 from
$5.3 million in the same period last year. There was an increase in film revenue
primarily due to the release of Spider-Man 2 in July 2004 and due to the release
of Harry Potter and the Prisoner of Azkaban: The IMAX Experience in June 2004.
The increase was partially offset by a decline in the third party business at
the Company's post production unit.
Theater operations revenue increased to $3.7 million in the third quarter of
2004 from $3.4 million in the same period last year primarily due to the
consolidation of the Company's Tempe theater in 2004 compared to
equity-accounting treatment in same period last year when the theater was only
50% owned.
Other revenues decreased 33.4% to $0.8 million in the third quarter of 2004 from
$1.1 million in the same period last year primarily due to a decline in camera
rentals.
Page 34
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 SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2003 (cont'd)
GROSS MARGIN
Gross margin for the third quarter of 2004 was $14.5 million, or 45.5% of total
revenue, compared to $9.7 million, or 45.6% of total revenue, in the same period
last year. The increase in gross margin in dollar terms is due to the
installation of 6 theater systems in the third quarter of 2004, compared to 1
theater system installation in the third quarter of 2003. Included in gross
margin is $2.9 million of settlement revenues for the third quarter of 2004
(compared to $3.4 million of settlement revenue in the corresponding period last
year) for terminated lease agreements with customers, a significant portion of
which related to existing customers that restructured their lease agreements in
order to obtain the Company's new IMAX MPX projection system. Further offsetting
the increase in systems gross margin was a decline in film distribution gross
margin primarily from costs related to the release of Spider-Man 2. Camera
margins have also decreased significantly, primarily due to the decrease of
camera rentals in 2004.
The Company improved its gross margin in its owned and operated theater segment
due to increased cost efficiencies over the same period last year.
OTHER
Selling, general and administrative expenses were $7.6 million in the third
quarter of 2004 compared to $8.3 million in the corresponding period last year.
The Company incurred lower legal fees and miscellaneous expenses in the amount
of $1.6 million in the third quarter of 2004 versus $2.4 million in the third
quarter of 2003. Partially offsetting the decline was an increase in
professional fees relating to the implementation of certain policies and
procedures in connection with the Sarbanes-Oxley Act of 2002. The Company also
recorded a recovery of $0.2 million in its phantom stock plan expense in the
third quarter of 2003 compared to $nil in the third quarter of 2004.
The Company no longer has any interests in equity-accounted investees as of
December 31, 2003.
Receivable provisions net of recoveries amounted to $nil in the third quarter of
2004 compared to a net recovery of $0.4 million in the same period last year.
Interest income increased to $0.4 million in the third quarter of 2004 from $0.1
million in the same period last year primarily due to interest received relating
to tax refunds from favourable tax examinations paid to the Company in the third
quarter. This was partially offset by a slight decrease in the average balance
of cash and cash equivalents held.
Interest expense increased to $4.4 million in the third quarter of 2004 compared
to $3.6 million in the corresponding period last year due to a higher effective
interest rate in the current period. The Company retired and repaid an aggregate
of $170.8 million of the Company's Old Senior Notes and $9.1 million of 5.75%
convertible subordinated notes due April 1, 2003 (the "Subordinated Notes")
throughout 2003. As at September 30, 2004, the Company had outstanding $160.0
million aggregate principal of 9.625% senior notes due December 1, 2010 (the
"New Senior Notes"). Included in interest expense is the amortization of
deferred finance costs in the amount $ 0.3 million in the third quarter of 2004
relating to the New Senior Notes and the Credit Facility and $0.2 million for
the third quarter of 2003 relating to the Old Senior Notes. The Company's policy
is to defer and amortize all the costs relating to a debt financing over the
life of the debt instrument.
Page 35
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 SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2003 (cont'd)
OTHER (cont'd)
In August 2003, the Company agreed to restructure its 6% Senior Secured
Convertible Debenture (the "Debenture") due from Mainframe Entertainment, Inc.
("Mainframe"). Under the terms of the restructuring agreement, the payment terms
of the Debenture were revised, while the Company retained its security over all
of Mainframe's property and assets for the balance of the payments due. The
Company recorded $0.4 million in income for the three month period ended
September 30, 2003 related to cash received under the debt restructuring
agreement.
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, tax recoveries and charges relating
to favourable or unfavourable tax examinations, 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. Included within the tax provision in the
current quarter the Company recorded a tax recovery of $0.4 million related to
refunds resulting from favourable conclusions to two separate tax examinations
and the utilization of previously recorded income tax credits. As at September
30, 2004, the Company had a gross deferred tax asset of $50.6 million, against
which the Company is carrying a $46.1 million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.0 million in both the third quarter of
2004 and 2003. The expenses primarily reflect 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 third quarter of 2003, the Company recorded a loss of $0.1 million
from the retirement of $6.5 million of the Company's Old Senior Notes.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company completed its abandonment of assets and removal of its
projection system 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 amount of loss to the Company
has been estimated at between $0.8 million and $2.3 million, of which the
Company had accrued $0.8 million as at December 31, 2003. During 2004, the
Company paid out $0.8 million with respect to amounts owing to the landlord. As
the Company is uncertain as to the outcome of the proceeding, no additional
amount has been recorded. The Company recorded $nil in net earnings from
discontinued operations related to Miami IMAX theater in the three months ended
September 30, 2004 compared to a loss of $0.3 million in the same period for
2003.
Page 36
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 SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2003 (cont'd)
DISCONTINUED OPERATIONS (cont'd)
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 both the
third quarters of 2003 and 2004, the Company recognized $0.2 million in income
from discontinued operations for cash ultimately received. As of September 30,
2004, the remaining loan receivable balance is $11.3 million, which has been
fully provided for.
NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003
The Company reported net earnings from continuing operations of $1.9 million or
$0.05 per share on a diluted basis for the first nine months of 2004, compared
to net earnings from continuing operations of $1.0 million or $0.03 per share on
a diluted basis for the first nine months of 2003.
REVENUE
The Company's revenues for the first nine months of 2004 decreased 1.0% to $88.5
million from $89.3 million in the same period last year.
IMAX systems revenue increased approximately 3.4% to $57.8 million in the first
nine months of 2004 from $55.9 million in the same period last year. The
increase in systems revenue was due in part to higher average revenue per system
and higher settlement revenue in the period. In addition, the Company recognized
revenue on 13 theater systems in the first nine months of 2004, versus 15
theater systems in the first nine months of 2003, one of which was an operating
lease. Average sales and lease revenue increased in 2004 versus 2003 due to the
mix of projector systems installed during the year. 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 their theater lease arrangement included in revenue for the first
nine months of 2004 total $9.5 million compared to $7.6 million in the
corresponding period last year. A significant portion of such revenue in the
first nine months of 2004 related to existing customers that restructured their
lease agreements in order to obtain the Company's new IMAX(R) MPX(TM) projection
system.
Films revenue decreased 12.3% to $17.2 million in the first nine months of 2004
from $19.6 million in the same period last year. There was a decline in the
Company's film post production revenue due to lower third party activity. This
was partially offset by an increase in film revenue due to the releases of
Spider-Man 2 in July 2004, Harry Potter and the Prisoner of Azkaban: The IMAX
Experience in June 2004 and due to the release of NASCAR 3D: The IMAX Experience
in March 2004.
Theater operations revenue increased to $11.2 million in the first nine months
of 2004 from $10.1 million in the same period last year, primarily due to the
consolidation of the Company's Tempe theater in 2004 compared to
equity-accounting treatment in same period last year when the theater was only
50% owned.
Page 37
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003
(cont'd)
REVENUE (cont'd)
Other revenues decreased 38.5% to $2.3 million in the first nine months of 2004
from $3.7 million in the same period last year primarily due to the decrease of
camera rentals in 2004.
GROSS MARGIN
Gross margin for the first nine months of 2004 was $41.4 million, or 46.9% of
total revenue, compared to $40.0 million, or 44.8% of total revenue, in the same
period last year. The increase in gross margin in dollar terms is due primarily
to increased settlement revenues for the first nine months of 2004 for
terminated lease agreements with customers, a significant portion of which
related to existing customers that restructured their lease agreements in order
to obtain the Company's new IMAX MPX projection system. Partially offsetting the
increase in systems gross margin was a decline in film distribution gross margin
due largely to the decline in the performance of the Company's film library and
expenses incurred in connection with the release of Spider-Man 2. Camera margins
have also decreased significantly, primarily due to the decrease of camera
rentals in 2004.
The Company significantly improved its gross margin in dollar and percentage
terms in its owned and operated theater segment due to increased cost
efficiencies over the same period last year.
OTHER
Selling, general and administrative expenses were $24.5 million in the first
nine months of 2004 compared to $24.9 million in the corresponding period last
year. The Company recorded a recovery in its phantom stock plan expense of $0.4
million in the first nine months of 2004 due the decrease in the Company's share
price compared to an expense of $1.4 million in the first nine months of 2003.
The Company incurred lower legal fees and miscellaneous expenses in the amount
of $5.4 million in the first nine months of 2004 compared to $6.2 million in the
first nine months of 2003. Partially offsetting the above was an increase
professional fees in the amount of $0.5 million in the period primarily relating
to the implementation of certain policies and procedures in connection with the
Sarbanes-Oxley Act of 2002. The Company expensed $0.5 million for capital taxes
paid in the first nine months of 2004 compared to a recovery of $0.1 million for
refunds received in 2003.
The Company no longer has any interests in equity-accounted investees as of
December 31, 2003.
Receivable provisions net of recoveries amounted to as a net recovery of $1.0
million in the first nine months of 2004 compared to a net provision of $0.3
million in the same period last year. The Company recorded an accounts
receivable recovery of $0.3 million as compared to a provision of $0.5 million
in the same period last year. There was a net recovery of $0.7 million in the
first nine months of 2004 on financing receivables as compared to a net recovery
of $0.3 million in the same period last year due to a favorable outcome on lease
amendments.
Interest income increased to $0.7 million in the first nine months of 2004 from
$0.5 million in the same period last year primarily due to interest received
relating to tax refunds received by the Company. This was partially offset by a
decrease in the average balance of cash and cash equivalents held.
Interest expense increased slightly to $12.6 million in the first nine months of
2004 from $11.9 million in the same period last year due to a higher effective
interest rate in the current period. The Company retired and repaid an aggregate
of $170.8 million of the Company's Old Senior Notes throughout 2003 and $9.1
million of Subordinated Notes on April 1, 2003. As at September 30, 2004, the
Company had $160.0 million aggregate principal of the New Senior Notes
outstanding. Included in interest expense is the amortization of deferred
finance costs in the amount $0.8 million in the first nine months of 2004 and
$0.5 million for 2003. The Company's policy is to defer and amortize all the
costs relating to a debt financing over the life of the debt instrument.
Page 38
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003
(cont'd)
OTHER (cont'd)
In August 2003, the Company agreed to restructure its 6% Senior Secured
Convertible Debenture (the "Debenture") due from Mainframe Entertainment, Inc.
("Mainframe"). Under the terms of the restructuring agreement, the payment terms
of the Debenture were revised, while the Company retained its security over all
of Mainframe's property and assets for the balance of the payments due. The
Company recorded $0.4 million in income for the nine month period ended
September 30, 2003 related to cash received under the debt restructuring
agreement.
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 period is calculated by applying the estimated average annual effective
tax rate to the period pre-tax income. Included within the tax provision, the
Company recorded income tax refunds of $0.8 million in the first nine months of
2004 from $1.5 million in the same period last year.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.0 million in the first nine months of
2004 versus $2.8 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 nine months 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. During the first nine months of 2003, the
Company recorded a loss of $0.3 million from the retirement of $31.5 million of
the Company's Old Senior Notes.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company abandoned or 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 had accrued $0.8 million as at December 30, 2003. During 2004,
the Company paid out $0.8 million with respect to amounts owing to the landlord.
As the Company is uncertain as to the outcome of the proceeding, no additional
amount has been recorded. The Company recorded $nil in net earnings from
discontinued operations related to Miami IMAX theater in the nine months ended
September 30, 2004 compared to a loss of $0.9 million in the same period for
2003.
Page 39
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003
(cont'd)
DISCONTINUED OPERATIONS (cont'd)
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 nine
months of 2003 and 2004, the Company recognized $0.6 million in income from
discontinued operations for cash ultimately received. As of September 30, 2004,
the remaining loan receivable balance is $11.3 million, which has been fully
provided for.
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 September 30, 2004, the Company has
not drawn down on the Credit Facility, however, it has issued letters of credit
for $5.2 million under the Credit Facility arrangement.
CASH AND CASH EQUIVALENTS
As at September 30, 2004, the Company's principal sources of liquidity included
cash and cash equivalents of $20.7 million, trade accounts receivable of $17.6
million and net investment in leases due within one year of $5.9 million. As at
September 30, 2004, the Company had not drawn down any amounts under the Credit
Facility. 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.
Page 40
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)
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 $4.7 million for the period
ended September 30, 2004. Changes in other non-cash operating assets as compared
to December 31, 2003 include a decrease of $1.3 million in inventories, an
increase of $3.3 million in financing receivables, a $3.0 million increase in
accounts receivable and a $1.6 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 $12.7 million, an
increase in accounts payable of $0.9 million and an increase of $7.9 million in
accrued liabilities. Included in operating activities for the first nine months
of 2004 were $4.7 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
provided by operating activities increased by $5.0 million in the first nine
months of 2004 primarily due to the elimination of the Company's restricted cash
balances, which were used as collateral for letters of credit. The Company now
secures letters of credit through the Credit Facility, which was entered into in
February 2004.
Cash used in investing activities amounted to $1.8 million in the first nine
months of 2004, which includes purchases of $0.7 million in fixed assets, an
increase in other assets of $0.9 million and an increase in other intangible
assets of $0.3 million.
Cash used in financing activities in the first nine months of 2004 amounted to
$29.5 million. The Company retired $29.2 million of principal of the Company's
Old Senior Notes. Financing costs related to the New Senior Notes amounted to
$0.7 million. The Company also received $0.4 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 $3.5 million for the first nine months of 2004.
Cash used in operating activities amounted to $4.7 million in the first nine
months of 2003. Changes in other non-cash operating assets and liabilities
included a decrease in deferred revenue of $18.7 million, and a decrease of $6.1
million in inventories. Cash used by investing activities in the first nine
months of 2003 amounted to $2.0 million, primarily consisting of $1.1 million
invested in fixed assets. The Company has also recorded $0.4 million in income
related to cash received under a restructuring agreement with Mainframe
Entertainment, Inc. Cash used in financing activities in the first nine months
of 2003 amounted to $7.1 million which included a $9.1 million repayment of the
Company's remaining outstanding Subordinated Notes and $0.6 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 $2.3
million in the first nine months of 2003.
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at September 30, 2004, the Company has letters of credit of $5.2 million
outstanding of which the entire balance has been 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. The Company has expended $0.3
million of these funds as at September 30, 2004.
Page 41
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
NEW SENIOR NOTES DUE 2010
As at September 30, 2004, the Company has $160.0 million aggregate principal of
9.625% senior notes due December 1, 2010 (the "New Senior Notes"). On October 6,
2004, the Company commenced an offer to exchange up to US$160,000,000 aggregate
principal amount of its outstanding New Senior Notes for a like principal amount
of its 9.625% Senior Notes due 2010 (the "Registered Notes"). The Company's
registration statement on Form S-4 relating to the Registered Notes was declared
effective by the Securities and Exchange Commission on September 30, 2004. The
Registered Notes are unconditionally guaranteed, jointly and severally, by
certain of the Company's wholly-owned subsidiaries. The terms of the Registered
Notes are 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.
The terms of the Company's New Senior Notes impose certain restrictions on its
operating and financing activities, including certain restrictions on the
Company's ability to: incur additional indebtedness; make distributions or
certain other restricted payments; grant liens; create dividend and other
payment restrictions affecting the Company's subsidiaries; sell certain assets
or merge with or into other companies; and enter into transactions with
affiliates. The Company believes these restrictions will not have a material
impact on its financial condition or results of operations.
OLD SENIOR NOTES DUE 2005
In December 2003, the Company completed a tender offer and consent solicitation
for its 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 a 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 the Company's New Senior Notes.
In January 2004, the Company recorded a loss of $0.8 million related to the
retirement of the Company's Old Senior Notes. During the first nine months of
2003, the Company recorded a loss of $0.3 million from the retirement of $31.5
million of the Company's Old Senior Notes.
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As September 30, 2004, the Company had an unfunded and
accrued projected benefit obligation of approximately $22.6 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. 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. 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. 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 Securities and Exchange Commission's rules and
forms.
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. On September 27,
2004, the Court granted the Company's motion for summary judgment,
awarding the Company judgment as a matter of law on all of the substantive
claims asserted by Muvico in the complaint. The Company is awaiting final
decision from the Court with regard to its damages claims.
(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 operations 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 District 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.
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IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(d) In May, 2002, the Company filed a complaint with the District Court of
Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"),
demanding payment of rental obligations and other amounts owed to the
Company. Siewert raised a defense based on alleged infringement of German
antitrust rules. By judgement of December 20, 2002, the District Court
rejected the defense and awarded judgement in documentary proceedings in
favor of the Company and added further amounts that had fallen due.
Siewert applied for leave to appeal to the German Supreme Court on matters
of law, which was rejected by the German Supreme Court in March 2004.
Siewert subsequently made a partial payment of amounts awarded to the
Company. Siewert has filed follow up proceedings to the documentary
proceedings in the District Court, essentially repeating the claims
rejected in the documentary proceeding. On September 30, 2004, Siewert
filed for insolvency with the Local Court in Wuerzburg. To the extent the
lawsuit will be continued following the commencement of the insolvency
proceedings, the Company will continue to vigorously pursue its claims and
believes that the amount of loss, if any, suffered in connection with
these proceedings 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.
(e) 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 (the "ICC") 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. In June 2004, the Company commenced a related
arbitration before the ICC against EML's affiliate, E-CITI Entertainment
(I) PVT Limited ("E-Citi"), seeking $17,777,950 as a result of E-Citi's
breach of a September 2000 lease agreement. E-Citi has responded to the
arbitration demand and has asserted several defenses, including that the
ICC does not have jurisdiction for the arbitration. The Company believes
that the allegations made by EML in its counterclaim are entirely without
merit and has requested that the counterclaim be dismissed on the basis
that EML has recently advised the ICC that it has insufficient funds to
pay its share of the arbitration costs. The Company believes that the
amount of loss, if any, suffered in connection with the arbitration would
not have a material impact on the financial position or results of
operations of the Company, although no assurance can be given with respect
to the ultimate outcome of any such litigation.
(f) In addition to the matters described above, the Company is currently
involved in other legal proceedings which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect
to the ultimate outcome of any such proceedings.
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IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 6. EXHIBITS
(A) EXHIBITS
10.1 Stock Option Plan of IMAX Corporation, dated August 12, 2004.
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated October 28, 2004, by Bradley J. Wechsler.
31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated October 28, 2004, by Richard L. Gelfond.
31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated October 28, 2004, by Francis T. Joyce.
32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated October 28, 2004, by Bradley J. Wechsler.
32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated October 28, 2004, by Richard L. Gelfond.
32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated October 28, 2004, by Francis T. Joyce
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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: October 28, 2004 By: /s/ Francis T. Joyce
-------------------------------------
Francis T. Joyce
Chief Financial Officer
(Principal Financial Officer)
Date: October 28, 2004 By: /s/ Kathryn A. Gamble
-------------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
Page 47