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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0140269
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
2525 SPEAKMAN DRIVE, MISSISSAUGA, ONTARIO, CANADA L5K 1B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code: (905) 403-6500
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the common shares of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on June 30, 2004 was $194.29 million
(35,134,664 common shares times $5.53).
As of February 14, 2005, there were 39,511,959 common shares of the
registrant outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed within 120
days of the close of IMAX Corporation's fiscal year ended December 31, 2004,
with the Securities and Exchange Commission pursuant to Regulation 14A involving
the election of directors and the annual meeting of the stockholders of the
registrant (the "Proxy Statement") are incorporated by reference in Part III of
this Form 10-K to the extent described therein.
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Page 1 of 91
IMAX CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business................................................................................... 4
Item 2 Properties................................................................................. 14
Item 3 Legal Proceedings.......................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders........................................ 15
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.................................................................... 16
Item 6 Selected Financial Data.................................................................... 19
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 22
Item 7A Quantitative and Qualitative Disclosures about Market Risk................................. 42
Item 8 Financial Statements and Supplementary Data................................................ 43
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 86
Item 9A Controls and Procedures.................................................................... 86
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 87
Item 11 Executive Compensation..................................................................... 87
Item 12 Security Ownership of Certain Beneficial Owners and Management............................. 87
Item 13 Certain Relationships and Related Transactions............................................. 87
Item 14 Principal Accounting Fees and Services..................................................... 87
Item 15 Exhibits and Financial Statement Schedules................................................. 88
Signatures.............................................................................................. 91
Page 2
IMAX CORPORATION
EXCHANGE RATE DATA
Unless otherwise indicated, all dollar amounts in this document are
expressed in United States ("U.S.") dollars. The following table sets forth, for
the periods indicated, certain exchange rates based on the noon buying rate in
the City of New York for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"). Such rates quoted are the number of U.S. dollars per one Canadian dollar
and are the inverse of rates quoted by the Federal Reserve Bank of New York for
Canadian dollars per U.S. $1.00. The average exchange rate is based on the
average of the exchange rates on the last day of each month during such periods.
The Noon Buying Rate on December 31, 2004 was U.S. $0.8310.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Exchange rate at end of
period.................... U.S. $0.8310 U.S. $0.7738 U.S. $0.6329 U.S. $0.6267 U.S. $0.6669
Average exchange rate
during period.............. 0.7682 0.7139 0.6368 0.6457 0.6732
High exchange rate during
period..................... 0.8493 0.7738 0.6619 0.6697 0.6944
Low exchange rate during
period..................... 0.7158 0.6349 0.6200 0.6241 0.6410
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this annual report may constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, references to future capital expenditures
(including the amount and nature thereof), business strategies and measures to
implement strategies, competitive strengths, goals, expansion and growth of
business and operations, plans and references to the future success of IMAX
Corporation together with its wholly-owned subsidiaries (the "Company") and
expectations regarding the Company's future operating results. These
forward-looking statements are based on certain assumptions and analyses made by
the Company in light of its experience and its perception of historical trends,
current conditions and expected future developments, as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
and developments will conform with the expectations and predictions of the
Company is subject to a number of risks and uncertainties, including, but not
limited to, general economic, market or business conditions; the opportunities
(or lack thereof) that may be presented to and pursued by the Company;
competitive actions by other companies; conditions in the out-of-home
entertainment industry; changes in laws or regulations; conditions in the
commercial exhibition industry; the acceptance of the Company's new
technologies; risks associated with investments and operations in foreign
jurisdictions and any future international expansion, including those related to
economic, political and regulatory policies of local governments and laws and
policies of the United States and Canada; the potential impact of increased
competition in the markets the Company operates within; and other factors, many
of which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this annual report are qualified by these
cautionary statements, and actual results or anticipated developments by the
Company may not be realized, and even if substantially realized, may not have
the expected consequences to, or effects on, the Company. The Company undertakes
no obligation to update publicly or otherwise revise any forward-looking
information, whether as a result of new information, future events or otherwise.
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IMAX(R), IMAX(R) Dome, IMAX(R) 3D, IMAX(R) 3D Dome, The IMAX
Experience(R), An IMAX Experience(R), IMAX DMR(R), IMAX MPX(TM), IMAX
think big(R) and think big(R) are trademarks and trade names of the
Company or its subsidiaries that are registered or otherwise protected under
laws of various jurisdictions.
Page 3
IMAX CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") is one of the world's leading entertainment technology companies,
specializing in large-format and three-dimensional ("3D") film presentations.
The Company's principal business is the design, manufacture, sale and lease of
projection systems based on proprietary and patented technology for
large-format, 15-perforation film frame, 70mm format ("15/70-format") theaters
including commercial theaters, museums and science centers, and destination
entertainment sites. In addition, the Company designs and manufactures high-end
sound systems and produces and distributes films for IMAX(R) theaters. The
majority of IMAX theaters are operated by third parties under lease agreements
with the Company.
The Company is also engaged in the production, post-production, digital
re-mastering and distribution of 15/70-format films, the operation of IMAX
theaters and other operations in support of IMAX theaters and the IMAX theater
network.
The Company believes the IMAX theater network is the most extensive
large-format theater network in the world with 248 theaters operating in more
than 35 countries as of December 31, 2004. Of these 248 theaters, 135 are
located in commercial locations, such as multiplex complexes, and 113 of them
are currently located in institutional locations, such as museums and science
centers. While the Company's roots are in the institutional market, the Company
believes that the commercial market is potentially significantly larger. To
increase the demand for IMAX theater systems, the Company has positioned the
IMAX theater network as a new distribution platform for Hollywood event, or
blockbuster films. To this end, the Company has developed a technology that
allows standard 35mm movies to be converted to its 15/70-format, has introduced
a lower cost projection system designed for multiplex owners, and has developed
a method for converting 2D live-action 35mm films to IMAX 3D. The Company is
also continuing to build strong relationships with Hollywood studios and
commercial exhibition companies.
The Company generally does not own IMAX theaters, but leases or sells its
projection and sound systems, and licenses the use of its trademarks. IMAX
theater systems combine advanced, high-resolution projection systems, sound
systems and screens as large as eight stories high (approximately 80 feet) that
extend to the edge of a viewer's peripheral vision to create immersive
audio-visual experiences. As a result, audiences feel as if they are a part of
the on-screen action in a way that is more intense and exciting than in
traditional theaters. In addition, the Company's IMAX(R) 3D theater systems
combine the same projection and sound systems and screens with 3D images that
further increase the audience's feeling of immersion in the film. The Company
believes that the network of IMAX 3D theaters represents the largest out-of-home
3D distribution network in the world.
In 2002, the Company introduced a technology that can convert live-action
35mm films to its 15/70-format at a modest incremental cost, while meeting the
Company's high standards of image and sound quality. The Company believes that
this proprietary system, known as IMAX DMR(R) (Digital Re-Mastering), can
position IMAX theaters as a new release window, or distribution platform for
Hollywood's event films. As of December 31, 2004, the Company, along with its
studio partner, had released seven IMAX DMR films and had reached an agreement
for two more such films to be released in 2005. In June 2004, the Company
converted Warner Bros. Pictures' ("WB") Harry Potter and the Prisoner of
Azkaban, WB's third film release based on the popular Harry Potter book series,
through IMAX DMR technology. Harry Potter and the Prisoner of Azkaban: The IMAX
Experience ran exclusively on approximately 50 IMAX screens beginning June 4,
2004, contemporaneous with the release of the film to conventional 35mm
theaters. On July 23, 2004, Sony's Columbia Pictures released Spider-Man 2: The
IMAX Experience, an IMAX DMR version of one of the year's top-grossing Hollywood
film, to the IMAX theater network. In November 2004, an IMAX 3D DMR version of
WB's CGI-animated holiday film, The Polar Express was released to IMAX theaters,
contemporaneous with the film's 35mm release. The Polar Express: The IMAX 3D
Experience was the first Hollywood feature film ever released in IMAX 3D and
become the Company's most successful DMR release to date, grossing over $41.4
million worldwide in eleven weeks. In November 2004, the Company announced an
agreement to release an IMAX DMR version of Twentieth Century Fox's Robots, an
animated feature produced by BlueSky Productions, to IMAX theaters in March
2005. In December 2004, the Company announced an agreement to release an IMAX
DMR version of WB's Charlie and the Chocolate Factory, a Tim Burton-directed
adaptation of the best-selling Ronald Dahl novel, in July 2005.
Page 4
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
GENERAL (cont'd)
In March 2003, the Company introduced IMAX(R) MPX(TM), a new theater
projection system designed specifically for use by commercial multiplex
operators. The IMAX MPX system, which is highly automated, was designed to
reduce the capital and operating costs required to run an IMAX theater while
still offering consumers the image and sound quality of the trademarked
experience viewers derive from IMAX theaters known as "The IMAX Experience(R)".
During 2004, the Company signed agreements for 22 MPX theater systems from North
American and international commercial theater exhibitors.
The Company was formed in March 1994 as a result of an amalgamation between
WGIM Acquisition Corp. and the former IMAX Corporation ("Predecessor IMAX").
Predecessor IMAX was incorporated in 1967.
PRODUCT LINES
The Company is the pioneer and leader in the large-format film industry,
and believes it is the largest designer and manufacturer of specialty projection
and sound systems, and a significant producer and distributor of 15/70-format
films, for large-format theaters around the world. The Company's theater systems
include specialized projection equipment, advanced sound systems, specialty
screens, theater automation control systems and film handling equipment. The
Company derives its revenues from the sale and lease of its theater systems to
large-format theaters, the licensing of related film products to the IMAX
theater network, post-production services for large-format films and through its
owned and operated theater operations. Segmented information is provided in note
22 to the audited financial statements contained in Item 8.
IMAX SYSTEMS
IMAX THEATERS
The Company's primary products are its large-format theater systems. IMAX
theater systems traditionally include a unique rolling loop 15/70-format
projector that offers superior image quality and stability; a 6-channel, digital
sound system delivering up to 12,000 watts; a screen with a proprietary coating
technology; a digital theater control system and extensive theater planning,
design and installation services. Theater systems are also leased or sold with a
license for the use of the IMAX brand. The Company primarily offers four types
of these theater systems: the GT projection system for the largest IMAX
theaters; the SR system for smaller theaters; the Company's newest introduction,
the IMAX MPX system, which is targeted for multiplex complexes; and a fourth
category of theater systems featuring heavily curved and tilted screens that are
used in dome shaped theaters. The GT, SR and IMAX MPX systems come with "flat"
screens that have a minimum of curvature and tilt and can exhibit both
two-dimensional ("2D") and 3D films, while dome shaped theaters are generally 2D
only and are popular with the Company's institutional clients.
Screens in IMAX theaters are as large as one hundred or more feet wide and
eight stories tall and the Company believes they are the largest cinema screens
in the world. Unlike standard cinema screens, IMAX screens extend to the edge of
a viewer's peripheral vision to create immersive experiences which, when
combined with the Company's superior sound system, make audiences feel as if
they are a part of the on-screen action in a way that is more intense and
exciting than in traditional theaters, a critical part of The IMAX Experience.
The Company's IMAX 3D theaters further increase the audience's feeling of
immersion in the film by bringing images off the screen. All IMAX theaters have
a steeply inclined floor to provide each audience member with a clear view of
the screen.
The Company's projection systems utilize the largest commercially available
film format (15-perforation film frame, 70mm), which is nearly 10 times larger
than conventional film (4-perforation film frame, 35mm) and therefore able to
project significantly more detail on a larger screen. The Company believes its
projectors, which utilize the Company's rolling loop technology, are unsurpassed
in their ability to project film with maximum steadiness and clarity with
minimal film wear while substantially enhancing the quality of the projected
image. As a result, the Company's projection systems deliver a higher level of
clarity, detail and brightness compared to conventional movies and competing
film or digital based projection systems.
To complement the film technology and viewing experience, IMAX theater
systems feature unique digital sound systems. The sound systems are among the
most advanced in the industry and help to heighten the sense of realism of a
15/70-format film. IMAX sound systems are specifically designed for IMAX
theaters and are an important competitive advantage of IMAX systems.
Page 5
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
THEATER SYSTEM LEASES AND SALES. The Company's system leases generally have
10 to 20-year initial terms and are typically renewable by the customer for one
or more additional 10-year terms. As part of the lease agreement, the Company
advises the customer on theater design, custom assemblies and supervises the
installation of the theater system, provides training in using the equipment to
theater personnel, and for a separate fee, provides ongoing maintenance to the
system. Prospective theater owners are responsible for providing the theater
location, the design and construction of the theater building, the installation
of the system and any other necessary improvements as well as the marketing and
programming at the theater. Under the terms of the typical lease agreement, the
title to all theater system equipment (including the projection screen, the
projector and the sound system) remains with the Company. The Company has the
right to remove the equipment for non-payment or other defaults by the customer.
The contracts are generally not cancelable by the customer unless the Company
fails to perform its obligations. In certain circumstances, the Company enters
into sale agreements with their customers. In these instances, the title to the
theater system equipment remains with the customer, however, the Company retains
the first right to purchase the systems back at the end of the trademark license
term. The contracts are generally denominated in U.S. dollars, except in Canada,
Japan and parts of Europe, where contracts are denominated in local currency.
The typical lease agreement provides for three major sources of revenue for
the Company: initial rental fees; ongoing minimum and additional rental
payments; and ongoing maintenance fees. Ongoing minimum and additional rental
payments and maintenance fees are generally received over the life of the
contract and are usually adjusted annually based on changes in the local
consumer price index. The terms of each lease agreement vary according to the
system technology provided and the geographic location of the customer.
SALES BACKLOG. Signed contracts for theater system installations are listed
as sales backlog prior to the time of revenue recognition. The value of sales
backlog represents the total value of all signed system sales and sales-type
lease agreements that are expected to be recognized as revenue in the future.
Sales backlog includes initial rental fees along with the present value of
contractual minimum rents due over the lease term, but excludes maintenance
revenues as well as rents in excess of contractual minimums that might be
received in the future. Sales backlog does not include revenues from theaters in
which the Company has an equity-interest, agreements covered by letters of
intent or conditional theater commitments.
The Company believes that the contractual obligations for system
installations that are listed in sales backlog are valid and binding
commitments. However, there can be no assurances that customers will ultimately
honor such obligations, or that the Company will be successful if litigation is
required to enforce such obligations. In addition, customers with system
obligations in backlog sometimes request that the Company agree to modify or
reduce such obligations. The Company has, from time-to-time, agreed to
restructure the obligations of its customers under certain circumstances, and
there can be no assurances that additional backlog obligations of customers will
not be modified, reduced or otherwise restructured in the future.
Page 6
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
The following chart shows the number of the Company's theater systems by
product, theater network base and backlog as of December 31:
2004
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2D 3D
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THEATER THEATER
PRODUCT NETWORK BACKLOG PRODUCT NETWORK BACKLOG
BASE BASE
Flat Screen IMAX 50 0 IMAX 3D 82 17
IMAX 3D SR 44 12
Dome Screen IMAX Dome 65 4 IMAX MPX 7 27
2003
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2D 3D
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THEATER THEATER
PRODUCT NETWORK BACKLOG PRODUCT NETWORK BACKLOG
BASE BASE
Flat Screen IMAX 55 2 IMAX 3D 81 25
IMAX 3D SR 38 21
Dome Screen IMAX Dome 66 5 IMAX MPX 0 8
IMAX AND IMAX DOME SYSTEMS. IMAX and IMAX Dome systems make up
approximately half of the Company's installed theater base. IMAX theaters, with
a flat screen, were introduced in 1970, while IMAX Dome theaters, which are
designed for tilted dome screens, were introduced in 1973. There have been
several significant proprietary and patented enhancements to these systems since
their introduction.
IMAX 3D AND IMAX 3D SR SYSTEMS. IMAX 3D theaters utilize a flat screen 3D
system, which produces realistic three-dimensional images on an IMAX screen. The
Company believes that the IMAX 3D system offers consumers one of the most
realistic 3D experiences available today. To create the 3D effect, the audience
uses either polarized or electronic glasses that separate the left-eye and
right-eye images. The IMAX 3D projectors can project both 2D and 3D films,
allowing theater owners the flexibility to exhibit either type of film. The
Company offers upgrades to existing theaters, which have 2D IMAX projection
systems to IMAX 3D projection systems. Since the introduction of IMAX 3D
technology, the Company has upgraded 16 theater systems.
In 1997, the Company launched a smaller IMAX 3D system called IMAX 3D SR, a
patented theater system that combines a proprietary theater design, a more
automated projection system and specialized sound system to replicate the
experience of a larger IMAX 3D theater in a smaller space.
IMAX MPX. In 2003, the Company launched its new large-format theater system
designed specifically for use in multiplex theaters. Known as IMAX MPX, this
system projects 15/70-format film onto screens, which are curved and tilted
forward to further immerse the audience. An MPX theater utilizes the Company's
next generation proprietary digital sound system, capable of multi-channel
uncompressed 24bit studio quality digital audio. The projector is capable of
playing both 2D and 3D films, and installs into a standard 35mm projection
booth. The MPX system can be installed as part of a newly-constructed multiplex,
as an add-on to an existing multiplex or as a retrofit of one or two existing,
stadium seat auditoriums within a multiplex. With lower capital and operating
costs, the MPX is designed to improve a multiplex-owner's financial returns and
allow for the installation of IMAX theaters in markets that might previously not
have been able to support one. The Company has signed agreements for 31 MPX
theater systems, seven of which were installed in 2004. In addition, three
existing customers switched their product commitments to IMAX MPX systems from
other theater systems in the year.
Page 7
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
SOUND SYSTEMS
The Company believes it is a world leader in the design and manufacture of
digital sound systems for applications including traditional movie theaters,
auditoriums and IMAX theaters.
FILMS
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION
Films produced by the Company are typically financed through third parties,
whereby the Company will generally receive a film production fee in exchange for
producing the film and will be a distributor of the film. The ownership rights
to such films may be held by the film sponsors, the film investors and/or the
Company. In the past, the Company often internally financed film production, but
has increasingly moved towards a model utilizing third-party funding for the
large-format films it distributes.
The Company is a significant distributor of 15/70-format films. The Company
generally distributes films which it has produced or for which it has acquired
distribution rights from independent producers. As a distributor, the Company
generally receives a percentage of the theater box office receipts.
The library of 15/70-format films includes Hollywood event films converted
into 15/70 format through IMAX DMR technology, such as the 2004 hit The Polar
Express: The IMAX 3D Experience, along with general entertainment and
educational films on subjects such as space, wildlife, music, history and
natural wonders, and consisted of 226 films at the end of 2004, of which the
Company had distribution rights to 52 such films. In recent years, 15/70-format
films have been successfully released by the Company, including NASCAR 3D: The
IMAX Experience, which was released by the Company and WB in March 2004 and has
grossed more than $20.6 million to date, SPACE STATION which was released in
April 2002 and has grossed over $80.3 million to date, T-REX: Back to the
Cretaceous, which was released by the Company in 1998 and has grossed over $87.6
million to date and Fantasia 2000: The IMAX Experience which was released by the
Company and Buena Vista Pictures Distribution, a unit of The Walt Disney Company
in 2000. Fantasia 2000, the first theatrical full-length feature film to be
reformatted into 15/70-format, has grossed over $80.4 million to date.
15/70-format films have significantly longer exhibition periods than
conventional 35mm films and many of the films in the large-format library have
remained popular for many decades including the films To Fly! (1976), Grand
Canyon - The Hidden Secrets (1984) and The Dream Is Alive (1985).
In 2002, the Company introduced its IMAX DMR technology, which allows 35mm
live-action films to be digitally converted to IMAX's 15/70-format at a modest
incremental cost. In some instances, the Company has received a processing fee
for re-mastering an IMAX DMR film release, the cost of which is borne by the
rights holder of the 35mm film. In other instances the Company has paid for the
cost of DMR re-mastering and recouped this cost from a percentage of the gross
box office receipts of the picture. The Company may also have certain
distribution rights to the 15/70-format films produced using its IMAX DMR
technology.
The first IMAX DMR film, Apollo 13: The IMAX Experience, produced in
conjunction with Universal Pictures and Imagine Entertainment, was released to
22 IMAX theaters in September 2002. The Company's second IMAX DMR film, Star
Wars: Episode II Attack of the Clones - The IMAX Experience, was released in
conjunction with Twentieth Century Fox, in November 2002, to 58 IMAX theaters.
On June 6, 2003, an IMAX DMR version of WB's The Matrix Reloaded, was
released to over 70 IMAX screens four weeks after the domestic release of the
film to conventional 35mm theaters. On November 5, 2003, The Matrix Revolutions
became the first-ever live-action Hollywood film released simultaneously to both
35mm theaters and 48 IMAX screens.
Page 8
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION (cont'd)
On March 12, 2004, IMAX and WB released NASCAR 3D: The IMAX Experience,
their first IMAX 3D film collaboration. On June 4, 2004, an IMAX DMR version of
WB's Harry Potter and the Prisoner of Azkaban was released to IMAX theaters
contemporaneous with the 35mm domestic release. On July 23, 2004, IMAX and
Sony's Columbia Pictures released the IMAX DMR version of one of the year's top
grossing Hollywood feature films, Spider-Man 2, to IMAX theaters. Spider-Man 2:
The IMAX Experience, was released on 45 IMAX screens, in the fourth week of the
film's 35mm run.
In November 2004, in conjunction with WB, the Company released the
first-ever Hollywood 3D feature film in IMAX's format. The Polar Express: The
IMAX 3D Experience, opened on November 9, contemporaneous with the film's 35mm
release. The animated film, based on the popular Chris Van Allsburg children's
book, grossed $3.0 million domestically in its first five days in 59 IMAX
theaters. In just eleven weeks, the film grossed nearly $34.5 million
domestically and over $43.8 million worldwide, making it the most successful
release in IMAX DMR history.
The Company believes that these releases have helped to position IMAX
theaters as a separate distribution platform for Hollywood films similar to the
type created when Hollywood studios began including the pay TV and home video
industries as release windows for their films.
On November 24, 2004, IMAX and Twentieth Century Fox announced that Robots,
an animated feature from the creators of the 2002 film ICE AGE, will be
simultaneously released to both IMAX and conventional theaters on March 11,
2005. On December 16, 2004, IMAX and WB announced that their seventh film
collaboration would be an IMAX DMR version of Charlie and the Chocolate Factory,
to be released to IMAX on July 15, 2005, simultaneously with the conventional
35mm release.
David Keighley Productions 70MM Inc., a wholly-owned subsidiary of the
Company, provides film post-production and quality control services for
15/70-format films (whether produced internally or externally), and digital
post-production services.
DIGITAL RE-MASTERING (IMAX DMR)
The Company has developed technology that makes it possible for 35mm
live-action film to be transformed into IMAX's 15/70-format at a cost of roughly
$2 - $3 million. This patent-pending system, known as IMAX DMR, opens the IMAX
theater network up to potential film releases from Hollywood's broad library of
new and old films.
The IMAX DMR process involves the following:
o scanning, at the highest resolution possible, each individual frame of
the 35mm film and converting it into a digital image;
o optimizing the image using proprietary image enhancement tools;
o analyzing the information contained within a 35mm frame format and
enhancing the digital image using techniques such as sharpening, color
correction, grain removal and the elimination of unsteadiness, removal
of unwanted artifacts; and
o recording the enhanced digital image onto 15/70-format film.
Page 9
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
DIGITAL RE-MASTERING (IMAX DMR) (cont'd)
The highly automated system typically allows the re-mastering process to
meet aggressive film production schedules. The Company is continuing to improve
the length of time it takes to reformat a film with its IMAX DMR technology.
Apollo 13: The IMAX Experience was re-mastered in 16 weeks, while Spider-Man 2:
The IMAX Experience was re-mastered in less than three weeks. The IMAX DMR
conversion of simultaneous, or "day-and-date", releases are done in parallel
with the movie's filming and editing, which is necessary for the simultaneous,
or day-and-date, release of an IMAX DMR film.
For IMAX DMR releases, the original soundtrack of the 35mm film is
re-mastered for IMAX's five or six-channel digital sound system. Unlike
conventional theater sound systems, IMAX sound systems are uncompressed, full
fidelity and use proprietary loudspeaker systems and surround sound that ensure
every theater seat is in a good listening position. While the Company has to
date only converted live-action 35mm films into IMAX's 15/70-format film in 2D,
the Company has developed a technology to convert live action 2D 35mm movies to
IMAX 3D films, a technology which the Company believes can offer significant
potential benefits to the Company and the IMAX theater network. The Company has
successfully demonstrated its ability to convert computer generated animation to
IMAX 3D, with the 1999 release of Cyberworld, the 2002 release of Steve
Oedekerk's Santa vs. the Snowman, and the 2004 release of the full length CGI
feature, The Polar Express: The IMAX 3D Experience.
THEATER OPERATIONS
The Company has seven owned and operated theaters. In addition, the Company
has entered into commercial arrangements with two theaters resulting in the
sharing of profits and losses. The Company also provides management services to
two theaters.
OTHER
CAMERAS
The Company rents 2D and 3D 15/70-format cameras and provides technical and
post-production services to third-party producers for a fee. The Company
maintains cameras and other film equipment to support third-party producers and
also offers production advice and technical assistance to filmmakers.
The Company has developed state-of-the-art patented dual and single
filmstrip 3D cameras which are among the most advanced motion pictures cameras
in the world and are the only 3D cameras of their kind. The IMAX 3D camera
simultaneously shoots left-eye and right-eye images and its compact size allows
filmmakers access to a variety of locations, such as underwater or aboard
aircraft. The Company has dual filmstrip cameras available for rent.
Page 10
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
MARKETING AND CUSTOMERS
The Company markets its theater systems through a direct sales force and
marketing staff located in offices in Canada, the United States, Europe,
Singapore, Japan and China. In addition, the Company has agreements with
consultants, business brokers and real estate professionals to locate potential
customers and theater sites for the Company on a commission basis.
The commercial theater segment of the Company's theater network is now its
largest segment with a total of 135 theaters opened. At December 31, 2004, 36.3%
of all opened IMAX theaters were in locations outside of North America. The
Company's institutional customers include science and natural history museums,
zoos, aquaria and other educational and cultural centers. The Company also
leases its systems to theme parks, tourist destination sites, fairs and
expositions. The following table outlines the breakdown of the theater network
by geographic segment as at December 31:
2004 2003
--------------- ---------------
THEATER THEATER
NETWORK NETWORK
BASE BASE
--------------- ---------------
Canada............................................................................ 24 23
United States..................................................................... 125 120
Europe............................................................................ 46 45
Japan............................................................................. 14 17
Rest of World..................................................................... 39 35
--------------- ---------------
Total............................................................................. 248 240
=============== ===============
For information on revenue breakdown by geographic area, see note 22 to the
audited financial statements in Item 8. No one customer represents more than
5.3% of the Company's installed base of theaters. The Company has no dependence
upon a single customer, the loss of which would have a material adverse effect
on the Company.
INDUSTRY AND COMPETITION
The Company competes with a number of manufacturers of large-format film
projection systems; most of which utilize smaller film formats, including
8-perforation film frame, 70mm and 10-perforation film frame, 70mm formats,
which the Company believes delivers an image that is inferior to The IMAX
Experience. The IMAX theater network and the number of 15/70-format films to
which the Company has distribution rights are substantially larger than those of
its 15/70-format competitors, and IMAX DMR reformatted films are available
exclusively to the IMAX theater network. The Company's customers generally
consider a number of criteria when selecting a large-format theater including
quality, reputation, brand-name recognition, type of system, features, price and
service. The Company believes that its competitive strengths include the value
of the IMAX(R) brand name, the quality and historic up-time of IMAX theater
systems, the number and quality of 15/70-format films that it distributes, the
quality of the sound system included with the IMAX theater, the availability of
Hollywood event films to IMAX theaters through IMAX DMR technology and the level
of the Company's service and maintenance efforts. Virtually all of the best
performing large-format theaters in the world are IMAX theaters.
In 2003, the Company introduced IMAX MPX, a new theater projection system
designed specifically for use in multiplex auditoriums. The IMAX MPX system is
designed to reduce the capital and operating costs required to run an IMAX
theater while still offering consumers the image and sound quality of The IMAX
Experience.
The commercial success of the Company's products and technologies is
ultimately dependent upon consumer preferences. The out-of-home entertainment
industry in general continues to go through significant changes, primarily due
to technological developments and changing consumer tastes. Numerous companies
are developing new entertainment products for the out-of-home entertainment
industry and there are no guaranties that some of these new products or
technologies will not be competitive with, superior to or more cost effective
than the Company's products or technologies.
Page 11
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
THE IMAX BRAND
The IMAX brand is world famous and stands for immersive family
entertainment that combines stunning images of exceptional quality and clarity
on screens up to one-hundred feet wide and eight stories tall with the Company's
proprietary 6-channel digital sound systems and unique theater designs. The
Company's research shows that the IMAX brand is a significant factor in a
consumer's decision to go to an IMAX theater. In addition, the Company believes
that its significant brand loyalty among consumers provides it with a strong,
sustainable position in the large-format theater industry. The IMAX brand name
cuts across geographic and demographic boundaries.
Historically, the Company's brand identity was grounded in its educational
film presentations to families around the world. With an increasing number of
IMAX theaters based in multiplexes and with a recent history of commercially
successful large-format films such as Fantasia 2000: The IMAX Experience and
Beauty and the Beast and the recent IMAX DMR releases including The Polar
Express: The IMAX 3D Experience, Harry Potter and the Prisoner of Azkaban: The
IMAX Experience, The Matrix Reloaded: The IMAX Experience and The Matrix
Revolutions: The IMAX Experience, the Company is rapidly increasing its presence
in commercial settings. The Company believes the strength of the IMAX brand will
be an asset as it seeks to establish IMAX theaters as a new release window for
Hollywood films.
RESEARCH AND DEVELOPMENT
The Company believes that it is one of the world's leading entertainment
technology companies with significant in-house proprietary expertise in
projection system, camera and sound system design, engineering and imaging
technology, particularly in 3D. The Company believes that the motion picture
industry will be affected by the development of digital technologies,
particularly in the areas of content creation (image capture), post-production
(editing and special effects), digital re-mastering (such as IMAX DMR),
distribution and display. The Company has made significant investments in
digital technologies, including the development of a proprietary, patent-pending
technology to digitally enhance image resolution and quality of 35mm motion
picture films, and the conversion of monoscopic (2D) to stereoscopic (3D)
images, and holds a number of patents, patents pending and intellectual property
rights in these areas. In addition, the Company holds numerous digital patents
and an exclusive supply arrangement with Texas Instruments Corp. in the
large-format field of use.
A key to the performance and reliability of the IMAX projection system is
the Company's unique "rolling loop" film movement. The rolling loop advances the
film horizontally in a smooth, wave-like motion, which enhances the stability of
the image and greatly reduces wear of the film.
The IMAX DMR technology converts a 35mm frame into its digital form at a
very high resolution. The proprietary system recreates a pristine form of the
original photography. The Company believes the proprietary computer process
makes the images sharper than the original and the completed re-mastered film,
now nearly 10 times larger than the original, is transferred onto the world's
largest film format, 15/70-format. Each film's original soundtrack is also
recreated and upgraded to Company standards.
In March 2003, the Company launched its new large-format theater system
designed specifically for use in multiplex theaters. Known as IMAX MPX, this new
lower cost system allows commercial exhibitors to add an IMAX theater to a new
multiplex, an existing multiplex or to retrofit one or two existing multiplex
auditoriums into an IMAX theater. The IMAX MPX system is lighter and simpler to
operate, with theater geometries designed to reduce construction, installation,
facility and operating costs. An IMAX MPX system projects 15/70-format film onto
screens that are curved and tilted forward to further immerse the audience. An
IMAX MPX theater utilizes the Company's next generation proprietary digital
sound system, capable of multi-channel uncompressed 24bit studio quality digital
audio. The IMAX MPX projector is capable of playing both 2D and 3D films, and
installs into a standard 35mm projection booth.
Several of the underlying technologies and resulting products and systems
of the Company are covered by patents or patent applications. Other underlying
technologies are available to competitors, in part because of the expiration of
certain patents owned by the Company. The Company, however, has successfully
obtained patent protection covering several of its significant improvements made
to such technologies. The Company plans to continue to fund research and
development activity in areas considered important to the Company's continued
commercial success.
Page 12
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
RESEARCH AND DEVELOPMENT (cont'd)
For 2004, 2003 and 2002, the Company recorded research and development
expenses of $4.0 million, $3.8 million and $2.4 million, respectively.
As of December 31, 2004, 28 of the Company's employees were connected with
research and development projects.
MANUFACTURING AND SERVICE
PROJECTION SYSTEMS MANUFACTURING
The Company assembles its large-format projection systems at its Corporate
Headquarters and Technology Center in Mississauga, Canada (near Toronto). A
majority of the components for the Company's systems are purchased from outside
vendors. The Company develops and designs all the key elements for the
proprietary technology involved in its projector and camera systems. Fabrication
of these components is then subcontracted to a group of carefully pre-qualified
suppliers. Manufacture and supply contracts are signed for the delivery of
components on an order-by-order basis. The Company has developed long-term
relationships with a number of significant suppliers, and the Company believes
its existing suppliers will continue to supply quality products in quantities
sufficient to satisfy its needs. The Company inspects all components and
sub-assemblies, completes the final assembly and then subjects the systems to
comprehensive testing prior to shipment. In 2004, IMAX theater systems had
operating uptimes based on scheduled shows of approximately 99.9%.
SOUND SYSTEMS MANUFACTURING
The Company develops, designs and assembles the key elements of its theater
sound systems. The standard IMAX theater sound system comprises components from
a variety of sources with approximately 50% of the materials cost of each system
attributable to proprietary components provided under original equipment
manufacturers agreements with outside vendors. These proprietary components
include custom loudspeaker enclosures and horns and specialized amplifiers,
signal processing and control equipment. In February 2001, the Company decided
to relocate the manufacture of sound systems from Birmingham, Alabama to the
Company's Headquarters and Technology Center in Mississauga, Canada.
SERVICE AND MAINTENANCE
The Company provides key services and support functions for the IMAX
theater network and for filmmakers. To support the IMAX theater network, the
Company has personnel stationed in major markets who provide periodic and
emergency service and maintenance on existing systems throughout the world. The
Company's personnel typically visit each theater every three months to service
the projection and sound systems. The Company also provides theater design
expertise for both the visual and audio aspects of the theater, as well as
system installation and equipment training.
PATENTS AND TRADEMARKS
The Company's inventions cover various aspects of its proprietary
technology and many of such inventions are protected by Letters of Patent or
applications filed throughout the world, most significantly in the United
States, Canada, Belgium, Japan, France, Germany and the United Kingdom. The
subject matter covered by these patents, applications and other licenses
encompasses electronic circuitry and mechanisms employed in film projectors and
projection systems (including 3D projection systems), a method for synchronizing
digital data systems, a method of generating stereoscopic (3D) imaging data from
a 2D source and a process for digitally re-mastering 35mm films into
15/70-format. The Company has been diligent in the protection of its proprietary
interests.
The Company currently holds or licenses 45 patents, has 16 patents pending
in the United States and has corresponding patents or filed applications in many
countries throughout the world. While the Company considers its patents to be
important to the overall conduct of its business, it does not consider any
particular patent essential to its operations. Certain of the Company's patents
in the United States, Canada and Japan for improvements to the IMAX projector,
IMAX 3D Dome and sound systems expire between 2008 and 2020.
Page 13
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
MANUFACTURING AND SERVICE (cont'd)
PATENTS AND TRADEMARKS (cont'd)
The Company owns or otherwise has rights to trademarks and trade names used
in conjunction with the sale of its products, systems and services. The
following trademarks are considered significant in terms of the current and
contemplated operations of the Company: IMAX(R), The IMAX Experience(R), An IMAX
Experience(R), IMAX DMR(R), IMAX(R) 3D, IMAX(R) Dome, IMAX MPX(TM), IMAX think
big(R) and think big(R). These trademarks are widely protected by registration
or common law throughout the world. The Company also owns the service mark IMAX
THEATRE(TM).
EMPLOYEES
As of December 31, 2004, the Company had 363 employees not including hourly
employees at Company owned and operated theaters.
AVAILABLE INFORMATION
The Company makes available free of charge its annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K as soon as
reasonably practicable after the such filing has been made with the United
States Securities and Exchange Commission (the "SEC"). Reports may be obtained
through the Company's website at www.imax.com or by calling investor relations
at 905-403-6500.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Mississauga,
Ontario, Canada, New York, New York and Santa Monica, California. The Company's
principal facilities are as follows:
OPERATION OWN/LEASE EXPIRATION
--------- --------- ----------
Mississauga, Ontario(1)..... Headquarters, Administrative, Assembly and Own N/A
Research and Development
New York, New York.......... Executive Lease 2014
Santa Monica, California.... Sales, Marketing, Film Production and Post- Lease 2012
Production
Shanghai, China............. Sales and Marketing Lease 2007
Tokyo, Japan................ Sales, Marketing, Maintenance and Theater Design Lease 2006
(1) This facility is subject to a charge in favor of Congress Financial
Corporation (Canada) in connection with a secured revolving credit
facility (see note 14 to the Audited Financial Statements contained in
Item 8).
ITEM 3. LEGAL PROCEEDINGS
In March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking
rescission in respect of the system lease agreements between the Company and
Muvico. The complaint was subsequently amended to add claims for fraud based
upon the same factual allegations underlying its prior claims. The Company filed
counterclaims against Muvico for breach of contract, unjust enrichment, unfair
competition and/or deceptive trade practices and theft of trade secrets, and
brought claims against MegaSystems, Inc. ("MegaSystems"), a large-format theater
system manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from using the
Company's confidential and proprietary information. The case is being heard in
the U.S. District Court, Southern District of Florida, Miami Division. 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 14
IMAX CORPORATION
ITEM 3. LEGAL PROCEEDINGS (cont'd)
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. In December 2004, the parties
entered into an agreement to settle all existing litigation.
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
exhausting all appeals. The Company believes that all of the allegations in Big
Screen's individual defense are entirely without merit and will accordingly
continue to prosecute this matter vigorously. The Company believes that the
amount of the loss, if any, suffered in connection with this dispute would not
have a material impact on the financial position or results of operations of the
Company, although no assurance can be given with respect to the ultimate outcome
of any such litigation.
In 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. Following an appeal to the Munich Court of Appeals, Siewert's appeal
was largely rejected and the Munich Court of Appeals 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, and such proceedings were opened with effect as of November
30, 2004, as a result of which the proceedings are temporarily stayed. To the
extent the lawsuit will be continued 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.
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 $17.8 million 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 ICC has rejected the lack of
jurisdiction defense and has set the case for arbitration. As E-Citi has refused
to pay its share of the arbitration costs set by the ICC, the Company has
accordingly applied for relief from the ICC and has requested that adjudication
proceed expeditiously. The Company also 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the quarter ended December 31, 2004.
Page 15
IMAX CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are listed for trading under the trading symbol
"IMAX" on the Nasdaq National Market System ("Nasdaq"). The common shares are
also listed on the Toronto Stock Exchange ("TSX") under the trading symbol
"IMX". The following table sets forth the range of high and low sales prices per
share for the common shares on Nasdaq and the TSX.
U.S. DOLLARS
----------------------
HIGH LOW
---- ---
NASDAQ
Year ended December 31, 2004
Fourth quarter......................................... 8.70 5.06
Third quarter.......................................... 6.14 4.22
Second quarter......................................... 6.47 4.04
First quarter.......................................... 8.36 5.60
Year ended December 31, 2003
Fourth quarter......................................... 10.40 6.84
Third quarter.......................................... 9.75 6.95
Second quarter......................................... 9.50 4.83
First quarter.......................................... 5.06 2.61
CANADIAN DOLLARS
-----------------------
HIGH LOW
---- ---
TSX
Year ended December 31, 2004
Fourth quarter......................................... 10.60 6.34
Third quarter.......................................... 7.98 5.55
Second quarter......................................... 8.79 5.50
First quarter.......................................... 10.75 7.31
Year ended December 31, 2003
Fourth quarter......................................... 13.89 9.07
Third quarter.......................................... 13.48 9.57
Second quarter......................................... 12.75 7.11
First quarter.......................................... 7.47 4.00
As of February 21, 2005, the Company had approximately 307 registered
holders of record of the Company's common shares.
The Company has not paid within the last three fiscal years, and has no
current plans to pay, cash dividends on its common shares. The payment of
dividends by the Company is subject to certain restrictions under the terms of
the Company's indebtedness (see notes 11 and 14 to the audited financial
statements in Item 8 and the discussion of liquidity and capital resources in
Item 7). The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board of Directors.
Page 16
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES (cont'd)
EQUITY COMPENSATION PLANS
The following table sets forth information regarding the Company's Equity
Compensation Plan as of December 31, 2004:
Number of securities
remaining available for
Number of securities to Weighted average future issuance under
be issued upon exercise exercise price of equity compensation
Plan category of outstanding options, outstanding options, plans (excluding
warrants and rights warrants and rights securities reflected in
column (a))
- --------------------------------- ------------------------- ------------------------ --------------------------
(a) (b) (c)
Equity compensation plans 5,593,101 $6.82 2,139,294
approved by security holders
Equity compensation plans not
approved by security holders
350,000(1) $6.06 nil
------------------------- ------------------------ --------------------------
Total 5,943,101 $6.78 2,139,294
========================= ======================== ==========================
(1) Warrants granted to strategic partners of the Company, see note 17(c) to
the audited financial statements in Item 8.
CERTAIN INCOME TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax consequences of the ownership and disposition of the common shares by
a U.S. Holder (a "U.S. Holder"). A U.S. Holder generally means a holder of
common shares that is an individual resident of the United States or a United
States corporation. This discussion does not discuss all aspects of U.S. federal
income taxation that may be relevant to investors subject to special treatment
under U.S. federal income tax law (including, for example, owners of 10.0% or
more of the voting shares of the Company).
DISTRIBUTIONS ON COMMON SHARES
In general, distributions (without reduction for Canadian withholding
taxes) paid by the Company with respect to the common shares will be taxed to a
U.S. Holder as dividend income to the extent that such distributions do not
exceed the current and accumulated earnings and profits of the Company (as
determined for U.S. federal income tax purposes). Subject to certain
limitations, dividends paid to non-corporate U.S. Holders may be eligible for a
reduced rate of taxation as long as the Company is considered to be a "qualified
foreign corporation". A qualified foreign corporation includes a foreign
corporation that is eligible for the benefits of an income tax treaty with the
United States. The amount of a distribution that exceeds the earnings and
profits of the Company will be treated first as a non-taxable return of capital
to the extent of the U.S. Holder's tax basis in the common shares and thereafter
as taxable capital gain. Corporate holders generally will not be allowed a
deduction for dividends received in respect of distributions on common shares.
Subject to the limitations set forth in the U.S. Internal Revenue Code, as
modified by the U.S.-Canada Income Tax Treaty, U.S. Holders may elect to claim a
foreign tax credit against their U.S. federal income tax liability for Canadian
income tax withheld from dividends. Alternatively, U.S. Holders may claim a
deduction for such amounts of Canadian tax withheld.
DISPOSITION OF COMMON SHARES
Upon the sale or other disposition of common shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the sale and such holder's tax basis in the common
shares. Gain or loss upon the disposition of the common shares will be long-term
if, at the time of the disposition, the common shares have been held for more
than one year. The deduction of capital losses is subject to limitations for
U.S. federal income tax purposes.
Page 17
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES (cont'd)
CERTAIN INCOME TAX CONSIDERATIONS (cont'd)
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
This summary is applicable to a holder or prospective purchaser of common
shares who is not (and is not deemed to be) resident in Canada, does not (and is
not deemed to) use or hold the common shares in, or in the course of, carrying
on a business in Canada, and is not an insurer that carries on an insurance
business in Canada and elsewhere.
This summary is based on the current provisions of the Income Tax Act
(Canada), the regulations thereunder, all specific proposals to amend such Act
and regulations publicly announced by or on behalf of the Minister of Finance
(Canada) prior to the date hereof and the Company's understanding of the
published administrative and assessing practices of the Canada Revenue Agency.
This summary does not otherwise take into account any change in law or
administrative practice, whether by judicial, governmental, legislative or
administrative action, nor does it take into account provincial, territorial or
foreign income tax consequences, which may vary from the Canadian federal income
tax considerations described herein.
This summary is of a general nature only and it is not intended to be, nor
should it be construed to be, legal or tax advice to any holder of the common
shares and no representation with respect to Canadian federal income tax
consequences to any holder of common shares is made herein. Accordingly,
prospective purchasers and holders of the common shares should consult their own
tax advisers with respect to their individual circumstances.
DIVIDENDS ON COMMON SHARES
Canadian withholding tax at a rate of 25.0% (subject to reduction under the
provisions of any relevant tax treaty) will be payable on dividends paid or
credited to a holder of common shares. Under the Canada-U.S. income tax treaty,
the withholding tax rate is generally reduced to 15.0% for a holder entitled to
the benefits of the treaty (or 5.0% if the holder is a corporation that owns at
least 10.0% of the common shares).
CAPITAL GAINS AND LOSSES
Subject to the provisions of a relevant tax treaty, capital gains realized
by a holder on the disposition or deemed disposition of common shares held as
capital property will not be subject to Canadian tax unless the common shares
are taxable Canadian property (as defined in the Income Tax Act (Canada)), in
which case the capital gains will be subject to Canadian tax at rates which will
approximate those payable by a Canadian resident. Common shares will not be
taxable Canadian property to a holder provided that, at the time of the
disposition or deemed disposition, the common shares are listed on a prescribed
stock exchange (which currently includes the TSX) unless such holder, persons
with whom such holder did not deal at arm's length or such holder together with
all such persons, owned 25.0% or more of the issued shares of any class or
series of shares of the Company at any time within the 60 month period
immediately preceding such time.
Under the Canada-U.S. income tax treaty, a holder entitled to the benefits
of the treaty and to whom the common shares are taxable Canadian property will
not be subject to Canadian tax on the disposition or deemed disposition of the
common shares unless at the time of disposition or deemed disposition, the value
of the common shares is derived principally from real property situated in
Canada.
Page 18
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
(In thousands of U.S. dollars, except per share amounts)
The selected financial data set forth below is derived from the
consolidated financial statements of the Company. The financial statements have
been prepared in accordance with United States Generally Accepted Accounting
Principles ("U.S. GAAP"). All financial information referred to herein is
expressed in U.S. dollars unless otherwise noted. Certain comparative figures
have been reclassified to conform with classifications adopted in 2004.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
REVENUE
IMAX systems(1)............................................. $ 86,570 $ 75,848 $ 70,959 $ 76,582 $ 113,226
Films....................................................... 27,887 25,803 40,556 29,923 41,711
Theater operations.......................................... 17,415 13,109 12,284 6,540 8,467
Other....................................................... 4,108 4,500 5,303 4,654 7,096
---------- ---------- ---------- ---------- ----------
Total revenue............................................... 135,980 119,260 129,102 117,699 170,500
COSTS OF GOODS AND SERVICES(2)................................. 70,062 67,283 75,634 94,969 106,429
---------- ---------- ---------- ---------- ----------
GROSS MARGIN................................................... 65,918 51,977 53,468 22,730 64,071
Selling, general and administrative expenses(3)................ 36,066 33,312 34,906 45,850 42,079
Research and development....................................... 3,995 3,794 2,362 3,385 6,497
Amortization of intangibles.................................... 719 573 1,418 3,005 2,948
Loss (income) from equity-accounted investees(4)............... -- (2,496) (283) (73) 4,811
Receivable provisions net of (recoveries)...................... (1,487) (2,225) (1,233) 18,102 13,086
Restructuring costs and asset impairments (recoveries)(5)...... 848 969 (121) 45,269 11,152
---------- ---------- ----------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS................................ 25,777 18,050 16,419 (92,808) (16,502)
Interest income................................................ 756 656 413 847 3,285
Interest expense............................................... (16,853) (15,856) (17,564) (22,020) (21,961)
Gain (loss) on retirement of notes(6).......................... (784) (4,910) 11,900 55,577 --
Recovery (impairment) of long-term investments(7).............. 293 1,892 -- (5,584) (4,133)
---------- ---------- ---------- ----------- -----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. 9,189 (168) 11,168 (63,988) (39,311)
Recovery of (provision for) income taxes(8) ................... 255 386 -- (27,848) 11,700
---------- ---------- ---------- ----------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS................. 9,444 218 11,168 (91,836) (27,611)
Net earnings (loss) from discontinued operations............... 800 195 804 (53,278) (4,226)
---------- ---------- ---------- ----------- -----------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES....................................... 10,244 413 11,972 (145,114) (31,837)
Cumulative effect of changes in accounting principles,
net of income tax benefit of $nil and $37,286(9)............ -- (182) -- -- (61,110)
---------- ----------- ---------- ---------- -----------
NET EARNINGS (LOSS)............................................ $ 10,244 $ 231 $ 11,972 $ (145,114) $ (92,947)
========== ========== ========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share - basic and diluted:
Net earnings (loss) from continuing operations.............. $ 0.24 $ 0.01 $ 0.34 $ (2.97) $ (0.93)
Net earnings (loss) from discontinued operations............ $ 0.02 $ -- $ 0.02 $ (1.72) $ (0.14)
----------- ---------- ---------- ------------ ------------
Net earnings (loss) before cumulative effect of changes in
accounting principles...................................... $ 0.26 $ 0.01 $ 0.36 $ (4.69) $ (1.07)
Cumulative effect of changes in accounting principles....... $ -- $ -- $ -- $ -- $ (2.04)
---------- ------------ ---------- ----------- ------------
Net earnings (loss)......................................... $ 0.26 $ 0.01 $ 0.36 $ (4.69) $ (3.11)
=========== =========== ========== ============ ============
Page 19
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(1) The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between
lease signing and system installation, certain customers each year
generally are unable, or elect not, to proceed with system installation for
a number of reasons including business considerations, or the inability to
obtain certain consents, approvals or financing. Once the determination is
made that the customer will not proceed with installation, the customer and
the Company may enter into a consensual lease buyout, whereby the parties
are released from all their future obligations under the lease, the initial
lease payments that the customer previously made to the Company are
recognized as revenue and the geographic territory granted to the customer
reverts to the Company. In addition, since the introduction of its new IMAX
MPX theater system in 2003, the Company has agreed with several customers
to modify their lease agreements to substitute MPX systems for the systems
for which the customers previously contracted, which were in the Company's
backlog. Included in IMAX systems revenue are: $6.0 million related to MPX
backlog upgrades, $12.3 million related to consensual lease buyouts and
$0.8 million related to terminations due to customer defaults (an aggregate
of $19.1 million for 2004, $9.5 million for 2003, $5.1 million for 2002,
$5.5 million for 2001 and $1.4 million for 2000).
(2) In 2001, costs of goods and services included a $4.1 million and a $16.5
million charge relating to a decline in net realizable value of the
Company's inventories and film assets, respectively. The year ended
December 31, 2000 included a $8.6 million charge which related to the
write-down of certain films in distribution.
(3) The year ended December 31, 2001 selling, general and administrative
expenses included a $2.6 million non-cash compensation charge resulting
from a stock grant issuance.
(4) In 2003, loss (income) from equity-accounted investees included a gain of
$2.3 million from the release of a financial guarantee. In 2000, loss
(income) from equity-accounted investees included a $4.0 million provision
related to the guarantee of a term loan.
(5) Asset impairment charges amounted to $0.8 million and $1.0 million in 2004
and 2003, respectively, after the Company assessed the carrying value of
certain assets. In 2001, restructuring costs and asset impairments
(recoveries) included a charge of $16.3 million as part of the Company's
efforts to streamline the business by reducing its overall corporate
workforce and relocate its sound-system facility to near Toronto, Canada.
In addition, the Company recorded charges of $26.7 million to fixed assets,
and $3.3 million of other assets to recognize a decline in value the
Company considered other than temporary in 2001. In 2000, asset impairments
included charges of $11.2 million relating to fixed assets.
(6) During 2001, the Company and a wholly-owned subsidiary of the Company
purchased and cancelled an aggregate of $70.4 million of the Company's
convertible subordinated notes due April 1, 2003 (the "Subordinated Notes")
for $13.7 million, represented by $12.5 million in cash by the subsidiary
and $1.2 million in common shares by the Company. During 2002, the Company
and a wholly-owned subsidiary of the Company purchased and cancelled an
aggregate of $20.5 million of the Subordinated Notes for $8.1 million,
represented by $6.0 million in cash by the subsidiary and $2.1 million in
common shares by the Company. The Company cancelled the purchased
Subordinated Notes and recorded a gain of $11.9 million. During 2003, the
Company recorded a loss of $4.9 million related to costs associated with
the repurchase, retirement and refinancing of $170.8 million of the
Company's 7.875% senior notes due 2005 (the "Old Senior Notes"). During
2003, the Company also repaid the remaining outstanding Subordinated Notes
balance of $9.1. During 2004, the Company recorded a loss of $0.8 million
related to costs associated with the redemption of $29.2 million of the Old
Senior Notes. This transaction had the effect of fully extinguishing the
Old Senior Notes.
(7) Included in 2004 is a gain of $0.4 from the sale of its equity investment
in Mainframe Entertainment, Inc. ("MFE"). During 2003, the Company entered
into a settlement agreement with MFE, whereby the parties settled all of
MFE's indebtedness and obligations to the Company arising under the
Company's 6.0% Senior Secured Convertible Debenture due from MFE. The
Company has recorded a gain of $1.9 million related to the final
settlement. The Company had recorded a charge of $5.6 million and $4.1
million relating to the impairment of certain long-term investments for the
years ended December 31, 2001 and 2000, respectively.
(8) In 2001, the provision for income taxes includes a $41.2 million increase
in the valuation allowance to reflect uncertainty associated with
realization of the Company's deferred income tax asset.
Page 20
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(9) In 2003, the Company recorded a charge as a cumulative effect of change in
accounting principle of $0.2 million in accordance with SFAS No. 143
"Accounting for Asset Retirement Obligations" which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In
2000, the Company recognized an after-tax charge of $54.5 million in
accordance with the interpretive guidance of SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). In
fiscal 2000, the Company also adopted AICPA Statement of Position 00-2,
"Accounting by Producers or Distributors of Film" ("SOP 00-2") and recorded
an after-tax charge of $6.6 million to reflect the adoption of this new
principle.
AS AT DECEMBER 31,
---------------------------------------------------------------------
BALANCE SHEETS DATA: 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- ----------
Cash, cash equivalents, restricted cash and investments
in marketable debt securities..................... $ 28,964 $ 52,243 $ 37,136 $ 26,388 $ 34,310
Total assets(1)........................................ 230,853 251,648 244,248 262,784 493,372
Total long-term indebtedness........................... 160,000 189,234 209,143 229,643 300,000
Total shareholders' equity (deficit)................... (42,376) (51,776) (103,670) (118,448) 22,263
(1) Includes the assets of discontinued operations.
QUARTERLY STATEMENTS OF OPERATIONS SUPPLEMENTARY DATA:
2004
----------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Sales............................................................ $ 24,881 $ 31,748 $ 31,827 $ 47,524
Cost of goods and services....................................... 12,519 17,139 17,356 23,048
----------- ----------- ----------- -----------
Gross margin..................................................... $ 12,362 $ 14,609 $ 14,471 $ 24,476
=========== =========== =========== ===========
Net earnings (loss) from continuing operations................... $ (1,096) $ 1,352 $ 1,600 $ 7,588
Net earnings (loss) from discontinued operations................. 200 200 200 200
----------- ----------- ----------- -----------
Net earnings (loss).............................................. $ (896) $ 1,552 $ 1,800 $ 7,788
=========== =========== =========== ===========
Net earnings (loss) per share - basic............................ $ (0.02) $ 0.04 $ 0.05 $ 0.20
Net earnings (loss) per share - diluted.......................... $ (0.02) $ 0.04 $ 0.05 $ 0.19
2003
----------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Sales............................................................ $ 33,649 $ 34,450 $ 21,228 $ 29,933
Cost of goods and services....................................... 17,648 20,164 11,538 17,933
----------- ----------- ----------- -----------
Gross margin..................................................... $ 16,001 $ 14,286 $ 9,690 $ 12,000
=========== =========== =========== ===========
Net earnings (loss) from continuing operations................... $ 2,518 $ 1,023 $ (2,510) $ (813)
Net earnings from discontinued operations........................ (95) (54) (144) 488
------------ ------------ ------------ -----------
Net earnings (loss) before cumulative effect of changes in
accounting principles....................................... 2,423 969 (2,654) (325)
Cumulative effect of changes in accounting principles net of
income tax benefit.......................................... -- -- -- (182)
----------- ----------- ----------- ------------
Net earnings (loss).............................................. $ 2,423 $ 969 $ (2,654) $ (507)
=========== =========== ============ ============
Net earnings (loss) per share - basic and diluted................ $ 0.07 $ 0.03 $ (0.07) $ (0.02)
Page 21
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The principal business of IMAX Corporation together with its wholly-owned
subsidiaries (the "Company") is the design, manufacture, sale and lease of
projection systems for large-format theaters including commercial theaters,
museums and science centers, and destination entertainment sites. In addition,
the Company designs and manufactures high-end sound systems and produces and
distributes large-format films. At December 31, 2004, there were 248 IMAX
theaters operating in 36 countries.
The Company derives revenue principally from long-term theater system lease
and sale agreements, maintenance agreements, and film distribution and
production agreements. The Company also derives revenue from the operation of
its own theaters, camera rentals and post-production services.
Important factors that the Company's CEOs use in assessing the Company's
business and prospects include the signing of new theater systems, profits from
the Company's operating segments, earnings from operations as adjusted for
unusual items that the Company views as non-recurring, such as costs associated
with the repurchase and refinancing of the Company's 7.875% senior notes due
2005 (the "Old Senior Notes"), and the success of strategic initiatives such as
the securing of new film projects, particularly IMAX DMR and IMAX 3D film
projects.
THEATER SYSTEMS
The Company provides its theater systems to customers on a long-term lease
basis, typically with initial lease terms of 10 to 20 years. Lease agreements
typically provide for three major sources of revenue: initial rental fees;
ongoing rental payments, which include annual contractual minimum payments; and
maintenance fees. The initial rental fees vary depending on the type of system
and location and generally are paid to the Company in installments commencing
upon the signing of the agreement. Ongoing rental payments are paid monthly over
the term of the contract, commencing after system installation and are generally
equal to the greater of a fixed minimum amount per annum and a percentage of box
office receipts. Ongoing rental payments include rental income and finance
income. An annual maintenance fee is generally payable commencing after the
first year. Both minimum rental payments and maintenance fees are typically
indexed to the local consumer price index. Revenue on theater system leases and
sales are recognized at a different time than when cash is collected. See
"Significant Accounting Policies" below for further discussion on the Company's
revenue recognition policies.
In addition, the Company sells theater systems to customers. These sales
generally provide for upfront cash payments received prior to installation and
the receipt of minimum payments over time, typically 10 to 20 years.
Cash received from initial rental fees in advance of installation is
recorded as deferred revenue. The associated costs of manufacturing the theater
system are recorded as inventory. At the time of installation, the deferred
revenue is recognized in income, and the inventory costs are fully expensed.
The timing of installation of the theater system is largely dependent on
the timing of the construction of the customer's theater. Therefore, while
revenue for theater systems is generally predictable on a long-term basis, it
can vary substantially from year to year or quarter to quarter depending on the
timing of installation.
As at December 31, 2004, there were 50 installed 2D flat screen systems, 65
installed 2D dome screen systems, 82 installed 3D standard systems, 44 installed
3D SR systems and 7 installed MPX systems in the world. As at December 31, 2003,
there were 55 installed 2D flat screen systems, 66 installed 2D dome screen
systems, 81 installed 3D standard systems, 38 installed 3D SR systems and no
installed MPX systems in the world.
Page 22
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
THEATER SYSTEMS (cont'd)
Although almost 40% of installed IMAX theater bases are located outside of
North America and more than 80% of IMAX theater systems in backlog are scheduled
to be installed outside of North America, the North American commercial
exhibitor market represents an important customer base for the Company in terms
of both collections under existing long-term leases and potential future system
contracts. In 2000 and 2001, many of the North American commercial exhibitor
chains faced financial difficulties due to over-expansion, which in some cases
led to bankruptcy proceedings and/or consolidations The Company believes it has
adequately minimized its exposure to these exhibitors. In 2003, the Company
launched a new large format theater system designed specifically for use in
multiplex theaters, the IMAX MPX projection system, which can be installed as
part of a newly constructed multiplex or as a retrofit to existing commercial
multiplex auditoriums, and is designed to improve a multiplex owner's financial
returns through lower operating and capital costs. Many North American
exhibitors have emerged from bankruptcy proceedings or consolidations with new
capital raised often in public markets. Along with numerous international and
regional operators, the Company has targeted these North American operators for
the sale and lease of its IMAX MPX systems. Since the product's introduction,
the Company has signed agreements for 31 IMAX MPX theater systems of which ten
were signed with North American exhibitors. Seven of the IMAX MPX systems were
installed in 2004. Three existing customers have also switched their backlog
commitments to the IMAX MPX projection systems in the year. While the Company is
pleased with the positive developments in the North American commercial
exhibitor market, there is no assurance that they will continue or that other
commercial exhibitors will not encounter additional financial difficulties. To
minimize the Company's credit risk in this area, the Company retains title to
underlying theater systems leased, registers theater systems sold as collateral,
performs initial and ongoing credit evaluations of its customers and makes
ongoing provisions for its estimates of potentially uncollectible amounts.
The average initial rent or sales price and minimum payments earned from
customers under the Company's theater system lease or sales agreements can vary
from quarter to quarter and year to year based on a number of factors including
the mix of systems sold or leased, the type of contract and other factors
specific to individual contracts, although the typical rent or sales price for
its various projection systems does not generally vary significantly from region
to region. The Company has taken steps in recent years to accelerate the growth
of the global IMAX theater network and the sale or lease of its products by
developing a lower-cost projection system designed to appeal to broader customer
bases, particularly in commercial multiplex markets. Although this system is
lower-cost, the Company has endeavored to successfully maintain its per unit
margins on a percentage basis and to maintain the aggregate revenues and gross
margins through increased volume. The Company signed 36 theater system
agreements in 2004 (2003 - 25, 2002 - 21).
SALES BACKLOG
During the year ended December 31, 2004, the Company signed contracts for
36 IMAX theaters, valued at $57.9 million. At December 31, 2004, the sales
backlog, which represented contracts for 60 theater systems, totaled $104.9
million. The Company believes that the contractual obligations for system
installations that are listed in sales backlog are valid and binding
commitments. The sales backlog will vary from quarter to quarter depending on
the signing of new theater systems, which adds to backlog, and the installation
of theater systems and the settlement of theater system contracts, both of which
reduce backlog. Sales backlog typically represents the minimum revenue under
signed theater system sale and lease agreements that the Company believes will
be recognized as revenue as the associated theater systems are installed. Sales
backlog includes initial fees along with the present value of contractual
minimums due over the lease term, but excludes maintenance revenues as well as
rents in excess of contractual minimums that might be received in the future.
The minimum revenue comprises the upfront payments plus the present value of the
minimum payments due under sales-type lease and sale agreements. Operating
leases are assigned no value in the sales backlog. The value of sales backlog
does not include revenue from theaters in which the Company has an equity
interest, letters of intent or long-term conditional theater commitments.
The Company's backlog can be segregated by both territory of future
installation and by customer type. The percentage of backlog relevant to each
territory (based on installed dollar value of anticipated systems revenue as at
December 31, 2004) is as follows: Europe - 25.5%, Asia - 45.5%, North America -
18.0%, South America - 3.9%, and rest of world - 7.1%. In addition, 80.9% of
backlog represents future installations to commercial theater customers and
19.1% to institutional customers.
Page 23
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SALES BACKLOG (cont'd)
The Company estimates that 32 to 37 of the 60 theater systems currently in
backlog will be recognized subsequent to 2005. The Company reached agreements
for the sale or lease of 36 projection systems in 2004 of which 22 were for IMAX
MPX theater systems. Shorter install cycles are likely to occur more frequently
with the introduction of the IMAX MPX theater system, which requires less
construction time (as little as 1-2 months) due to its design and retrofit
capability. The components of the Company's backlog as at December 31, 2004 by
product type has been disclosed on page 7.
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
or amended. If the agreement is terminated, upon the Company and the customer
being released from all their future obligations under the agreement, the
initial lease cash payments that the customer previously made to the Company are
recognized as revenue.
FILM PRODUCTION AND DISTRIBUTION
The Company recognizes revenue from licensing of exhibition rights to
motion pictures produced or distributed by the Company when the film is complete
and has been delivered, the license period has begun, the fee is fixed or
determinable and collection is reasonably assured. Where the license fees are
based on a share of the customer's revenue, and all other revenue recognition
criteria are met, the Company recognizes revenue as the customer exhibits the
film. Costs of producing films and acquiring film distribution rights are
capitalized and amortized using the individual film-forecast-computation method,
which amortizes film costs and accrues participation costs in the same ratio
that current period actual revenue bears to estimated remaining unrecognized
ultimate revenue as of the beginning of the fiscal year. All advertising,
exploitation costs and marketing costs are expensed as incurred.
The Company has developed a proprietary, patent-pending technology to
digitally re-master 35mm live-action films into 15/70-format film at a modest
cost for exhibition in IMAX theaters. This system, known as IMAX DMR, digitally
enhances the image resolution quality of 35mm motion picture films for
projection on IMAX screens while maintaining the visual clarity and sound
quality for which The IMAX Experience is known. The Company believes that this
technology has opened the IMAX theater network up to potential releases of
Hollywood films including both library titles and contemporaneous new releases.
The Company believes that the development of this new technology is key to
helping it execute on its strategy of growing its commercial theater network by
its establishment of a new distribution platform for Hollywood films.
While the Company is optimistic about the success of its IMAX DMR
technology to date, there is no guarantee that it will continue to be
commercially successful and receive widespread acceptance by film studios.
THEATER OPERATIONS
The Company has seven owned and operated theaters. In addition, the Company
has entered into commercial arrangements with two theaters resulting in the
sharing of profits and losses. The Company also provides management services to
two theaters.
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are made to customers located
outside the United States and Canada. During 2004, 2003 and 2002, 42.6%, 39.7%
and 37.0% respectively, of the Company's revenue was derived outside the United
States and Canada. The Company expects that international operations will
continue to account for a substantial portion of the Company's revenue in the
future. In order to minimize exposure to exchange rate risk, the Company prices
theater systems (the largest component of revenue) in U.S. dollars except in
Canada, Japan and parts of Europe where they may be priced in local currency.
Annual minimum rental payments and maintenance fees follow a similar currency
policy.
Page 24
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SIGNIFICANT ACCOUNTING POLICIES
The Company reports its results under both United States Generally Accepted
Accounting Principles ("U.S. GAAP") and Canadian Generally Accepted Accounting
Principles. The financial statements and results referred to herein are reported
under U.S. GAAP. The preparation of these financial statements requires
management to make estimates and judgements that affect the reported amounts of
assets, liabilities, revenues and expenses. On an ongoing basis, management
evaluates its estimates, including those related to accounts receivable, net
investment in leases, inventories, fixed and film assets, investments,
intangible assets, income taxes, contingencies and litigation. Management bases
its estimates on historical experience, future expectations and other
assumptions that are believed to be reasonable at the date of the financial
statements. Actual results may differ from these estimates due to uncertainty
involved in measuring, at a specific point in time, events which are continuous
in nature. The Company's significant accounting policies are discussed in note 2
of its audited financial statements in Item 8.
The Company considers the following critical accounting policies to have
the most significant effect on its estimates, assumptions and judgments:
REVENUE RECOGNITION
SALES AND 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 in future periods as revenue when reported by the
theater operator, provided that collection is reasonably assured. Maintenance
revenues are recognized when the services are rendered.
The Company recognizes revenues from sales and sales-type leases generally
upon installation of the theater system. Revenue associated with a sale or
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.
The critical estimates that the Company considers with respect to the
Company's lease accounting are the determination of economic useful life and the
fair value of the projection equipment, including its residual value. These
estimates are based upon historical experience with all our projection systems.
Residual values are established at lease inception using estimates of fair value
at the end of the lease term with consideration for forecasted supply and demand
for various systems, future product launch plans, end of lease customer
behavior, refurbishment strategies and changes in technology.
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 using the criteria
under FAS 13. 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 normal 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.
Page 25
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from all
their future obligations under the lease, the initial lease payments that the
customer previously made to the Company are recognized as revenue and the
geographic territory granted to the customer reverts to the Company. In
addition, since the introduction of its new IMAX MPX theater system in 2003, the
Company has agreed with several customers to modify their lease agreements to
substitute MPX systems for the systems for which the customers previously
contracted, which were in the Company's backlog.
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.
MULTIPLE ELEMENT ARRANGEMENTS
On occasion, the Company will include film licenses or other specified
elements as part of system sales or lease agreements. When separate prices are
listed in a multiple element arrangement, these prices may not be indicative of
the fair values of those elements because the prices of the different components
of the arrangements may be modified through negotiation although the aggregate
consideration may not. Revenues under these arrangements are allocated based
upon the estimated relative fair values of each element.
In the normal course of its business, the Company will have customers who,
for a number of reasons are unable to proceed with theater construction or wish
to modify the terms of an existing arrangement. There is typically deferred
revenue involved with these arrangements representing initial cash payments in
advance of the default, settlement or modification of the arrangement. Pursuant
to the policies discussed above, the total consideration to be received in these
situations is allocated to each individual element of the settlement or
modification arrangement based on the relative fair values of each element.
Upon allocation of value to each element, each element is accounted for
based on applicable revenue recognition criteria.
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.
The evaluation of collectibility of customer accounts is typically done on
an individual account basis. If, based on an evaluation of accounts, the Company
concludes that it is probable that the customer will not be able to pay all
amounts due, the Company estimates the expected loss. In developing the
estimates for an allowance, the Company considers general and industry economic
and market conditions as well as other credit information available for the
customer. The Company only records recoveries of provisions when objective
verifiable evidence supports the change in the original provision.
Page 26
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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.
FILM ASSETS
Estimates of ultimate revenues are prepared on a title by title basis and
reviewed regularly by management and revised where necessary to reflect the most
current information. Ultimate revenue for films includes estimates of revenues
over a period not to exceed 10 years following the date of initial release.
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.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This standard requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently amortized over the
asset's useful life. Accordingly, the Company recorded a charge in its
consolidated results of operations for 2004 and 2003 including a cumulative
effect of change in accounting principle of $0.2 million in 2003, which was
recorded as a reduction of net income.
Page 27
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
TAX ASSET VALUATION
As at December 31, 2004, the Company had net deferred income tax assets of
$6.2 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 December 31,
2004, and the ability to realize certain deferred income tax assets through loss
and tax credit carryback strategies. If and when the Company's operations in
some jurisdictions were to reach a requisite level of profitability or where the
Company's future profitability estimates increase due to changes in positive
evidence, the Company would reduce all or a portion of the applicable valuation
allowance in the period when such determination is made. This would result in an
increase to reported earnings and a decrease to the Company's effective tax rate
in such period. However, if the Company's projected future earnings do not
materialize, or if the Company operates at a loss in certain jurisdictions, or
if there is a material change in actual effective tax rates or time period
within which the Company's underlying temporary differences become taxable or
deductible, the Company could be required to increase the valuation allowance
against all or a significant portion of the Company's deferred tax assets
resulting in a substantial increase to the Company's effective tax rate for the
period of the change and a material adverse impact on its operating results for
the period.
The Company is subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, the Company may incur additional tax expense
based upon the outcomes of such matters. In addition, when applicable, the
Company adjusts tax expense to reflect both favorable and unfavorable
examination results. The Company's ongoing assessments of the probable outcomes
of examinations and related tax positions require judgement and can materially
increase or decrease its effective rate as well as impact operating results.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued a revision to Financial Accounting Standards
No. 123 ("FAS 123R"). FAS 123R is focused primarily on the accounting for
transactions in which a company obtains employee services in exchange for stock
options or share-based payments. Currently, the Company grants stock options to
their employees and discloses the pro forma effect of compensation expense for
these stock options. Under FAS 123R, the Company will be required to record this
compensation expense in the Company's results of operations. FAS 123R is
effective for the beginning of the first fiscal reporting period that begins
after June 15, 2005. The Company has evaluated the effect the adoption of
FAS 123R and will adopt the pronouncement beginning on July 1, 2005. The Company
estimates that based on the currently issued options, and not including any
further grants which may occur in 2005, the compensation expense for the six
month period from July 1, 2005 to December 31, 2005 will approximate
$1.3 million before taxes.
SPECIAL ITEMS
The Company recognized the following special items in its 2004 operating
results which may not be reflective of future operating results.
In 2004, the Company recorded a gain of $0.4 from the sale of its equity
investment in Mainframe Entertainment, Inc. ("MFE").
In 2004, the Company recorded a loss of $0.8 million when its remaining
$29.2 million in outstanding Old Senior Notes were redeemed.
Page 28
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
RESTRUCTURING COSTS AND OTHER SIGNIFICANT CHARGES (RECOVERIES)
(In thousands of U.S. dollars, except per share amounts) YEARS ENDED DECEMBER 31,
---------------------------------------------
2004 2003 2002
------------ ------------ -------------
Restructuring costs (recoveries) $ -- $ -- $ (497)
------------ ------------ -------------
Asset impairments (recoveries):
Fixed assets 848 969 376
Other significant charges (recoveries):
Accounts receivable (81) 714 (1,942)
Inventories -- -- 1,229
Fixed assets 4 353 2,799
Other assets (excluding long-term investments) -- 73 216
Financing receivables (1,406) (2,939) 709
Long-term investments (293) (1,892) --
------------ ------------ ------------
Total asset impairments and other significant charges (recoveries) (928) (2,722) 3,387
------------ ------------ ------------
Net charges (recoveries) $ (928) $ (2,722) $ 2,890
============ ============ ============
RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
The Company did not incur any restructuring related charges in 2004, 2003
or 2002. In 2001, the Company recorded a restructuring charge of $16.3 million.
As of December 31, 2004, $15.6 million of the restructuring accrual has been
spent. In 2002, $0.5 million of the accrual was reversed for terminated
employees who obtained employment prior to completion of their severance period.
As of December 31, 2004, $0.2 million remains accrued for amounts to be paid out
to terminated employees.
During 2004, 2003 and 2002, the Company recorded asset impairment charges
of $0.8 million, $1.0 million, and $0.4 million, respectively, after assessing
the carrying value of certain of its camera assets in 2004 due to lower volume
in 2D camera rentals and certain of its owned and operated theater assets in
2003 and 2002 due primarily to lower than anticipated revenues at one of its
locations. The Company recognized that the future cashflows of these assets did
not support their recoverability.
OTHER SIGNIFICANT CHARGES (RECOVERIES)
In 2004, the Company recorded a recovery of previously provided amounts of
$1.4 million in financing receivables (2003 - $2.9 million net recovery, 2002 -
$0.7 million net provision) as the collectibility uncertainty associated with
certain leases was resolved by amendment or settlement of the leases. In 2002
the Company recorded a charge as collectibility on certain accounts was
considered uncertain.
The Company also recorded a recovery of $0.1 million in 2004 (2003 - $0.7
million provision, 2002 - $1.9 million recovery) in accounts receivable as
collectibility associated with certain accounts was settled. In 2003 the Company
recorded a charge as collectibility on certain accounts was considered uncertain
based on facts and circumstances at the time.
The Company recorded charges of less than $0.1 million in 2004 (2003 - $0.4
million, 2002 - $2.8 million) against fixed assets and $nil against other assets
(2003 - $0.1 million, 2002 - $0.2 million), as the carrying values for the
assets exceeded the discounted future cash flows expected from the assets.
In 2004, the Company recorded a gain of $0.4 from the sale of its equity
investment in MFE. During 2003, the Company entered into a settlement agreement
with MFE, whereby the parties settled all of MFE's indebtedness and obligations
to the Company arising under the Company's 6.0% Senior Secured Convertible
Debenture due from MFE (the "Debenture"). The Company recorded a gain of $1.9
million related to the final settlement in 2003. The Company had previously
recorded $5.6 million in 2001 as a charge for the decline in its MFE long-term
investment that was considered to be other than temporary.
In 2002, the Company recorded a charge for inventories of $1.2 million in
costs of goods and services to reflect net realizable value.
Page 29
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for each of
the items set forth below:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
% % % % %
Revenue
IMAX systems.................................... 63.7 63.6 55.0 65.0 66.4
Films........................................... 20.5 21.6 31.4 25.4 24.5
Theater operations.............................. 12.8 11.0 9.5 5.6 5.0
Other........................................... 3.0 3.8 4.1 4.0 4.1
------------ ------------ ------------ ----------- -----------
Total revenue..................................... 100.0 100.0 100.0 100.0 100.0
Costs and goods and services...................... 51.5 56.4 58.6 80.7 62.4
------------ ------------ ------------ ----------- -----------
Gross margin...................................... 48.5 43.6 41.4 19.3 37.6
Selling, general and administrative expenses...... 26.5 28.0 27.0 39.0 24.7
Research and development.......................... 2.9 3.2 1.8 2.9 3.8
Amortization of intangibles....................... 0.5 0.5 1.1 2.6 1.7
Loss (income) from equity-accounted investees..... -- (2.1) (0.2) (0.1) 2.8
Receivable provisions, net of (recoveries)........ (1.1) (1.9) (1.0) 15.3 7.8
Restructuring costs and asset impairments (recovery) 0.6 0.8 (0.1) 38.5 6.5
------------ ------------ ------------ ----------- -----------
Earnings (loss) from operations................... 19.1 15.1 12.7 (78.9) (9.7)
============ ============ ============ =========== ===========
Net earnings (loss) before cumulative effect of
changes in accounting principles.................. 7.5 0.3 9.3 (123.3) (18.7)
============ ============ ============ =========== ===========
Net earnings (loss)................................. 7.5 0.2 9.3 (123.3) (54.5)
============ ============ ============ =========== ===========
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003
REVENUES
The Company's revenues in 2004 were $136.0 million, compared to $119.3
million in 2003, an increase of 14.0% due in large part to an increase in
Systems revenue (see below). The following table sets forth the breakdown of
revenue by category:
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- --------------
IMAX SYSTEMS REVENUE
Sales and leases.................................. $ 63,482 $ 52,269 $ 46,656
Ongoing rent(1)................................... 9,215 9,207 9,746
Maintenance....................................... 13,873 14,372 14,557
-------------- -------------- --------------
86,570 75,848 70,959
-------------- -------------- --------------
FILMS REVENUE
DMR .............................................. 7,487 42 1,252
Production and Post-production ................... 6,968 11,370 17,663
Distribution...................................... 13,432 14,391 21,641
-------------- -------------- --------------
27,887 25,803 40,556
-------------- -------------- --------------
THEATER OPERATIONS................................ 17,415 13,109 12,284
-------------- -------------- --------------
OTHER REVENUE..................................... 4,108 4,500 5,303
-------------- -------------- --------------
$ 135,980 $ 119,260 $ 129,102
============== ============== ==============
(1) Includes rental income and finance income.
Page 30
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
REVENUES (cont'd)
Systems revenue increased to $86.6 million in 2004 from $75.8 million in
2003, an increase of 14.1%. Revenue from sales and leases increased to $63.5
million in 2004 from $52.3 million in 2003, an increase of 21.5%. This increase
was due to a greater number of system recognitions, and higher revenue from
consensual lease buyouts and MPX backlog upgrades in the period, partially
offset by slightly lower average revenue per system. The Company recognized
revenue on 22 theater systems in 2004, versus 21 theater systems in 2003, one of
which was an operating lease. Average sales and sales-type lease revenue
per-system decreased in 2004 versus 2003 by 4.9% primarily due to a difference
in the mix of projector systems recognized in each period as outlined in the
table below:
2004 2003
--------- ----------
IMAX 3D..................................................... 6 7
IMAX 3D SR.................................................. 6 10
IMAX Dome................................................... 3 3
IMAX MPX.................................................... 7 --
IMAX 2D..................................................... -- 1
--------- ----------
22 21
========= ==========
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons, including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from
their future obligations under the lease, the initial lease payments that the
customer previously made to the Company are recognized as revenue and the
geographic territory granted to the customer reverts to the Company. In
addition, since the introduction of its new IMAX MPX theater system in 2003, the
Company has agreed with several customers to modify their lease agreements to
substitute MPX systems for systems for which the customers previously
contracted, which were in the Company's backlog. Amounts relating to the three
categories of MPX backlog upgrades, consensual lease buyouts and terminations
due to default of customers included in revenue for 2004 total $19.1 million
compared to $9.5 million in 2003. $6.0 million of the total $19.1 million
related to customers that restructured their existing lease agreements in order
to obtain the Company's new IMAX MPX projection system technology, and $12.3
million of the total $19.1 million was recognized in respect of consensual lease
buyouts. The remaining $0.8 million of the total $19.1 million was recognized in
respect of terminations of agreements after customer default. The Company
anticipates that while MPX backlog upgrades may continue as MPX systems continue
to prove popular with commercial customers, overall revenue from consensual
lease buyouts and terminations of agreements by customer default will likely
decrease in 2005.
Ongoing rental revenue in 2004 increased 0.1% from 2003 and maintenance
revenue in 2004 decreased 3.5% over the prior year. The Company expects to see
an increase in both ongoing rent and maintenance revenue as the Company's
theater network continues to grow in 2005.
Film revenues increased to $27.9 million in 2004 from $25.8 million in
2003. IMAX DMR revenues, which are revenues to the Company generated from the
gross box office performance of IMAX DMR films, increased to $7.5 million in
2004 from less than $0.1 million in 2003. Film distribution revenues, which are
revenues related to the release of films in the IMAX 15/70 library or new
productions to which the Company has distribution rights, decreased to $13.4
million in 2004 from $14.4 million in 2003, a decrease of 6.7%, and film
production and post-production revenues decreased to $7.0 million in 2004 from
$11.4 million in 2003, a decrease of 38.7%. The decrease in film post-production
revenues was mainly due to a decline in third party business at the Company's
post-production unit. The increase in DMR revenue was due to the successful
performance of the 2004 IMAX DMR film slate which included, The Polar Express:
The IMAX 3D Experience, Spider-Man 2: The IMAX Experience and Harry Potter and
the Prisoner of Azkaban: The IMAX Experience. The increase in DMR revenues was
partially offset by a decrease in film distribution revenues primarily due to
stronger performances in 2003 of SPACE STATION and T-REX: Back to the
Cretaceous.
Page 31
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
REVENUES (cont'd)
The Company believes it will continue to see higher film revenues in 2005
due to the increase in the number of new films expected to be released during
the year. The Company intends to release in conjunction with studios five films
in 2005 including Robots (March 2005), Batman Begins (June 2005), Charlie and
The Chocolate Factory (July 2005), Magnificent Desolation 3D (September 2005),
and one-or two other DMR films for which the Company is currently in
negotiations.
Theater operations revenue increased to $17.4 million in 2004 from $13.1
million in 2003, primarily due to the success of the 2004 film slate which
contributed to an overall attendance increase of 5.4% and to an increase in the
average ticket prices of 7.0%. The Company's Tempe theater was also consolidated
for the entire 2004 year compared to equity-accounting treatment in 2003 when it
was only 50% owned. The Company believes it will continue to see higher
attendance rates in its theater operations due to an increase in the number of
new films expected to be released in 2005.
Other revenue decreased to $4.1 million in 2004 from $4.5 million in 2003,
a decrease of 8.7%, largely as a result of decreased camera rentals in 2004.
Based on the Company's expectation of 2005 system installations and its
estimate of films to be released in 2005, the Company believes it will see
higher revenues in 2005.
GROSS MARGIN
Gross margin in 2004 was $65.9 million, or 48.5% of total revenue, compared
to $52.0 million, or 43.6% of total revenue in 2003. The increase in gross
margins for 2004 is primarily due to a combination of higher average gross
margins for 22 systems installed during the year, and the margin impact of
higher consensual lease buyouts and MPX backlog upgrades during the year.
Average gross margin on sales and sales-type lease of projection systems
increased in 2004 versus 2003 by 11.8% primarily due to the recognition of three
refurbished or upgraded systems in 2004 compared to eight refurbished or
upgraded systems in 2003 which typically have lower margins. Included in gross
margin are revenues for 2004 related to consensual lease buyouts ($12.3
million), MPX backlog upgrades ($6.0 million) and terminations due to default of
customers ($0.8 million) ( an aggregate $19.1 million, compared to $9.5 million
in 2003).
During 2004, the Company and its studio partners released four films:
NASCAR: The IMAX Experience, Harry Potter and the Prisoner of Azkaban: The IMAX
Experience, Spider-Man 2: The IMAX Experience and Polar Express: The IMAX 3D
Experience. As at December 31, 2004, these films have collectively grossed in
excess of $75.0 million on IMAX screens. Although not all DMR film releases
performed equally in the year due to differences in the structuring of the
arrangements with each studio and box office performance of each DMR release,
the Company believes it has achieved its strategic objectives for 2004 in this
important area of the business. The Company's DMR gross margin improved
significantly in comparison to 2003 due to the success of its 2004 IMAX DMR film
slate. The film gross margins were also impacted by a decline in film
distribution gross margin primarily due to the stronger performances in 2003 of
SPACE STATION and T-REX: Back to the Cretaceous.
The Company's owned and operated theater gross margin improved
significantly in comparison to 2003 due to the success of its 2004 IMAX DMR film
slate.
Margins on other revenue also decreased significantly, primarily due to the
decrease of camera rentals in 2004.
The Company anticipates higher gross margins in 2005 due to a combination
of higher system installations and relating to its DMR film releases as
commercial exhibitors continue to install new projection systems in their
multiplexes. The Company does not anticipate any margin erosion in the Company's
post-production unit.
Page 32
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
OTHER
Selling, general and administrative expenses were $36.1 million in 2004
versus $33.3 million in 2003. The Company recorded a foreign exchange gain of
$0.4 million in 2004 compared to a gain of $1.7 million in 2003. The Company
records foreign exchange translation gains and losses primarily on a portion of
its financing receivable balances which are denominated in Canadian dollars,
Euros and Japanese Yen. Professional fees increased by $1.3 million in the
period primarily relating to the costs associated with compliance in connection
with the Sarbanes-Oxley Act of 2002. Legal fees for 2004 declined by $0.9
million as the Company settled or otherwise favorably resolved certain
litigation matters. Compensation expense increased by $0.5 million in 2004 due
in part to a higher Canadian dollar offset by a lower stock compensation charge.
The Company also incurred higher Canadian capital taxes of $0.7 million in 2004
due to receipts of capital tax refunds received and recorded in 2003.
Amortization of intangibles increased to $0.7 million in 2004, from $0.6
million in 2003.
The Company no longer has any interests in equity-accounted investees as of
December 31, 2003. Included in 2003 was a gain of $2.3 million as a result of
the Company being released from a financial guarantee.
Receivable provisions net of recoveries amounted to a net recovery of $1.5
million in 2004 compared to a net recovery of $2.2 million in 2003. The Company
recorded an accounts receivable recovery of $0.1 million as compared to a
provision of $0.7 million in 2003. There was a net recovery of $1.4 million in
2004 on financing receivables as compared to a net recovery of $2.9 million in
2003 due to a favorable outcome on lease amendments.
Asset impairment charges amounted to $0.8 million compared to $1.0 million
in 2003 after the Company assessed the carrying value of certain of its camera
assets in 2004 due to lower volume in 2D camera rentals, and certain of its
owned and operated theater assets in 2003 due primarily to lower than
anticipated revenues at one of its locations. The Company recognized that the
future cashflows of these assets did not support their recoverability. The
Company does not anticipate any further impairment charges relating to its
remaining camera assets.
Interest income increased to $0.8 million in 2004 from $0.7 million in 2003
primarily due to interest received relating to tax refunds from favorable tax
examinations paid to the Company in 2004.
Interest expense increased to $16.9 million in 2004 from $15.9 million in
2003 due to a higher effective interest rate in the current period. In December
2003, the Company retired and repaid an aggregate of $123.6 million of its
7.875% Old Senior Notes. The balance of the Old Senior Notes of $29.2 million
were retired and repaid in January 2005. In December 2003, The Old Senior Notes
were replaced with $160.0 million aggregate principal of 9.625% senior notes due
December 1, 2010 (the "Senior Notes"). Included in interest expense is the
amortization of deferred finance costs in the amount $1.2 million in 2004 and
$0.7 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.
Recovery on long-term investments was $0.3 million in 2004. The Company
recorded a gain of $0.4 from the sale of its equity investment in MFE. Recovery
on long-term investments was $1.9 million in 2003 as a result of a settlement
agreement with MFE, whereby MFE made payments to the Company in full and final
settlement of all of its indebtedness and obligations to the Company arising
under a Debenture loan.
Page 33
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, the Canadian manufacturing and processing profits deduction,
investments and other tax credits, the provision for income taxes at different
rates in foreign and other provincial jurisdictions, enacted statutory tax rate
increases or reductions in the year, changes in the Company's valuation
allowance based on the Company's recoverability assessments of deferred tax
assets, and favorable or unfavourable resolution of various tax examinations.
The 2004 deferred income tax recovery included a net $1.3 million decrease in
the valuation allowance to reflect revised estimates regarding the realization
of the Company's deferred income tax assets based on an assessment of positive
and negative evidence. The Company also favorably resolved tax audits in respect
of its 1999, 2000 and 2001 taxation years and filed amended tax returns for
these years, which resulted in the verification by the authorities of additional
investment tax credits and future tax deductions for use by the Company. These
amounts have been reflected in the Company's effective rate reconciliation and
gross deferred tax assets for the year. The audits and amended returns also
resulted in the refund of tax of approximately $0.8 million in the year which
was not previously recorded. As of December 31, 2004, the Company had a gross
deferred income tax asset of $51.6 million, against which the Company is
carrying a $45.5 million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.0 million in 2004 versus $3.8
million in 2003. 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, software and other
technologies to enhance its product offering, including the development of a
method of generating stereoscopic (3D) imaging data from a monoscopic (2D)
source. 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 the conversion of monoscopic (2D) to
stereoscopic (3D) images and holds a number of patents, patents pending and
intellectual property rights in these areas. In addition, the Company holds
numerous digital patents and an exclusive supply arrangement with Texas
Instruments Corp. in the large-format field of use. However, there can be no
assurance that the Company will be awarded patents covering this technology or
that competitors will not develop similar technologies.
GAIN (LOSS) ON RETIREMENT OF NOTES
During 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 2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of $170.8 million of
the Company's Old Senior Notes. These transactions had the effect of reducing
the principal of the Company's outstanding Old Senior Notes to $29.2 million as
at December 31, 2003.
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 a legal 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 as 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 2004 compared to a loss
of $0.5 million in 2003.
Page 34
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 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. The
loans receivable are collateralized by fixed and floating charges over all DPI
assets including intellectual properties. One of the loans is convertible, upon
the occurrence of certain events, into shares representing 49% of the total
share capital of DPI. During 2004, the Company received $0.8 million in cash
towards the repayment of this debt, and has recorded this amount in net earnings
(loss) from discontinued operations. As of December 31, 2004, the remaining
balance of the loans receivable is $11.1 million, which has been fully allowed
for.
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002
Systems revenue increased to $75.8 million in 2003 from $71.0 million in
2002, an increase of 6.9%. Revenue from sales and leases increased to $52.3
million in 2003 from $46.7 million in 2002, an increase of 12.0%. This increase
was due, in part, to an increase in consensual lease buyouts of $2.6 million and
MPX backlog upgrades of $1.4 million over 2002. Revenues relating to consensual
lease buyouts, MPX backlog upgrades, and terminations due to default of
customers included in sales and leases revenue for 2003, total $9.5 million
(2002 - $5.1 million). A portion of such revenue in 2003, $1.4 million related
to customers that restructured their existing lease agreements in order to
obtain the Company's new IMAX MPX projection system technology. In addition, in
2003, $7.6 million of the total $9.5 million was recognized in respect of
consensual lease buyouts and $0.5 million was recognized in respect of
terminations of agreements by default. In 2003, 20 theater systems were
installed, of which one was an operating lease, as compared to 16 theater
systems installed, of which one was an operating lease in 2002. Average sales
and leases revenue decreased in 2003 versus 2002 due to a combination of factors
including a difference in the mix of projection systems installed in each
period, multi system discounts granted to commercial exhibitors for systems
installed during the period, and the installation of eight refurbished or
upgraded systems in 2003. Ongoing rental revenue in 2003 decreased 5.5% from
2002 and maintenance revenue in 2003 decreased 1.3% over the prior year.
Film revenues decreased to $25.8 million in 2003 from $40.6 million in
2002. Film distribution revenues decreased to $14.4 million in 2003 from $21.6
million in 2002, a decrease of 35.5%, and film production and post-production
revenues decreased to $11.4 million in 2003 from $17.7 million in 2002, a
decrease of 35.6%. IMAX DMR revenues, which are revenues generated from the
gross box office performance of IMAX DMR films, decreased to less than $0.1
million in 2003 from $1.3 million in 2002. The decrease in film distribution
revenues was primarily due to stronger performance of films distributed in 2002,
particularly SPACE STATION, which had gross box office performance of more than
$39.0 million in 2002. The decrease in film post-production revenues was mainly
due to higher volume of film print processing in 2002.
Theater operations revenue increased to $13.1 million in 2003 from $12.3
million in 2002, primarily due to a full year of operations for the Company's
Navy Pier IMAX Theater in Chicago, which commenced operations in October 2002.
Other revenue decreased to $4.5 million in 2003 from $5.3 million in 2002,
a decrease of 15.1%, largely as a result of decreased revenue related to after
market part sales for projection systems and sponsorship program.
GROSS MARGIN
Gross margin in 2003 was $52.0 million, or 43.6% of total revenue, compared
to $53.5 million, or 41.4% of total revenue in 2002. Gross margin decreased
slightly in dollar terms in 2003, primarily due to higher margins in Systems,
and an increase in settlement revenues of $4.5 million which were more than
offset by decreased margins in Films.
Page 35
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002 (cont'd)
OTHER
Selling, general and administrative expenses were $33.3 million in 2003
versus $34.9 million in 2002. The Company recorded a foreign exchange gain of
$1.7 million in 2003 compared to a gain of $0.4 million in 2002. The foreign
exchange gains and losses resulted primarily from fluctuations in exchange rates
on Canadian dollar cash balances and Canadian dollar, Euro dollar and Japanese
Yen denominated net investment in leases. Legal expenses for 2003 declined
significantly to $2.1 million compared to $6.1 million in 2002 as the Company
settled or otherwise favorably resolved certain litigation matters, largely
offset by higher compensation expense of $3.7 million which was due in large
part to higher stock based compensation as well as stronger Canadian dollar in
2003.
Amortization of intangibles decreased to $0.6 million in 2003, from $1.4
million in 2002. The 2002 amount includes write-downs related to the Company's
sound system intangibles. The Company continues to assess the on-going
recoverability of its intangible asset by estimating the future cash flows
expected to result from the use of the asset and its eventual disposition.
Income from equity-accounted investees includes a gain of $2.3 million as a
result of the Company being released from a financial guarantee.
Receivable provisions net of recoveries were recorded as a net recovery of
$2.2 million in 2003 compared to a net recovery of $1.2 million in 2002. The
Company recorded an accounts receivable provision of $0.7 million as compared to
a recovery of $1.9 million in 2002. There was a net recovery of $2.9 million in
2003 on financing receivables as compared to a provision of $0.7 million in
2002.
Restructuring recoveries in 2003 amounted to $nil compared to $0.5 million
in 2002. Asset impairment charges amounted to $1.0 million compared to $0.4
million in 2002 after the Company assessed the carrying value of its owned and
operated theater assets and recognized that the future cash flows of certain of
its theaters did not support the recoverability of its assets.
Interest income increased to $0.6 million in 2003 from $0.4 million in 2002
due mainly to an increase in the average balance of cash and cash equivalents
held. The Company's strategy is to invest any excess cash in U.S. and Canadian
short-term t-bills and other short-term instruments.
Interest expense decreased to $15.9 million in 2003, from $17.6 million in
2002 due largely to lower average debt balances in 2003. The Company repaid the
remaining $9.1 million of its outstanding Subordinated Notes in April 2003 and
retired an aggregate of $47.2 million of its Old Senior Notes, prior to
redeeming the remaining Old Senior Notes pursuant to a tender offer and
refinancing in December 2003 and January 2004. Included in interest expense is
the amortization of deferred finance costs in the amount $0.7 million in 2003 as
compared to $0.9 million for 2002. The Company's policy is to defer and amortize
all the costs relating to a debt financing over the life of the debt instrument.
Recovery on long-term investments was $1.9 million in 2003. The Company
entered into a settlement agreement with MFE, whereby MFE made payments to the
Company in full and final settlement of all of its indebtedness and obligations
to the Company arising under the Debenture. The Company has recorded a recovery
of $1.9 million related to the final settlement.
Page 36
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002 (cont'd)
INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, the Canadian manufacturing and processing profits deduction, the
provision for income taxes at different rates in foreign and other provincial
jurisdictions, enacted statutory tax rate increases or reductions in the year,
changes in the Company's valuation allowance based on the Company's
recoverability assessments of deferred tax assets, and favorable resolution of
various examinations. The 2003 deferred income tax recovery included a net $2.9
million increase in the valuation allowance to reflect revised estimates
regarding the realization of the Company's deferred income tax assets stemming
from an increase in deferred tax assets based on a 6.0% increase in enacted tax
rates in the year, partially offset by increases in deferred tax asset
recoverability based on an assessment of positive evidence. The Company also
favorably resolved tax audits in respect of its 1998 and 1999 taxation years
which allowed it to release specific tax reserves of $2.8 million in respect of
those audit years. As of December 31, 2003, the Company had a gross deferred
income tax asset of $51.8 million, against which the Company is carrying a $46.8
million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.8 million in 2003 versus $2.4
million in 2002. The higher level of expenses in 2003 primarily reflects
research and development activities pertaining to the Company's new IMAX MPX
theater projection system. Through research and development, the Company plans
to continue to design and develop cinema-based equipment and software to enhance
its product offering. The Company believes that the motion picture industry will
be affected by the development of digital technologies, particularly in the
areas of content creation (image capture), post-production (editing and special
effects), digital re-mastering distribution and display. Consequently, the
Company has made significant investments in digital technologies, including the
development of a proprietary, patent-pending technology to digitally enhance
image resolution and quality of 35mm motion picture films and has a number of
patents pending and intellectual property rights in these areas. In addition,
the Company holds numerous digital patents and an exclusive supply arrangement
with Texas Instruments Corp. in the large-format field of use. However, there
can be no assurance that the Company will be awarded patents covering this
technology or that competitors will not develop similar technologies.
GAIN (LOSS) ON RETIREMENT OF NOTES
During 2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of $170.8 million of
the Company's Old Senior Notes. These transactions had the effect of reducing
the principal of the Company's outstanding Old Senior Notes to $29.2 million as
at December 31, 2003, which notes were subsequently redeemed on January 2, 2004.
During 2002, the Company and a wholly-owned subsidiary purchased $20.5
million in the aggregate of the Company's Subordinated Notes for $8.1 million,
consisting of $6.0 million in cash and common shares of the Company valued at
$2.1 million. The Company cancelled the purchased Subordinated Notes and
recorded a gain of $11.9 million. These transactions had the effect of reducing
the principal of the Company's outstanding Subordinated Notes to $9.1 million as
at December 31, 2002.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company will remove all of its assets from the theater in the first
quarter of 2004. The Company is involved in a legal proceeding with the landlord
of the theater with respect to the amount owing to the landlord by the Company
for lease and guarantee obligations. The minimum amount of loss to the Company
has been established at $0.8 million, which the Company has accrued. As the
Company is uncertain as to the outcome of the proceeding no additional amount
has been recorded.
In accordance with FAS 144, the Company assessed the fair value of the
assets based on the estimated discounted future cash flows the assets are
expected to generate.
Page 37
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002 (cont'd)
DISCONTINUED OPERATIONS (cont'd)
Effective December 11, 2001, the Company completed the sale of DPI, to a
company owned by members of DPI management. In accordance with APB 30, the
Company has segregated the discontinued operations for all comparative periods
presented.
As part of the transaction, the Company restructured its advances to DPI,
releasing DPI from obligations to repay any amounts in excess of $12.7 million
previously advanced by the Company, and reorganized the remaining $12.7 million
of debt owing to the Company into two separate loan agreements. The loans
receivable are collateralized by fixed and floating charges over all DPI assets
including intellectual properties. One of the loans is convertible, upon the
occurrence of certain events, into shares representing 49% of the total share
capital of DPI. During 2003, the Company received $0.8 million in cash towards
the repayment of this debt, and has recorded a corresponding gain in net
earnings (loss) from discontinued operations. As of December 31, 2003, the
remaining balance is $11.9 million, which has been fully allowed for.
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility (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 and further reduced by outstanding letters of credit. 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 December 31, 2004, the Company has not
drawn down on the Credit Facility, however, it has issued letters of credit for
$5.5 million under the Credit Facility arrangement.
CASH AND CASH EQUIVALENTS
As at December 31, 2004, the Company's principal sources of liquidity
included cash and cash equivalents of $29.0 million, the Credit Facility, trade
accounts receivable of $19.9 million and anticipated collection from net
investment in leases due in the next 12 months of $7.8 million. As at December
31, 2004, the Company had not drawn down any amounts under the Credit Facility.
The Company believes that cashflow 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, the Company's
operating cashflow can be impacted if management's projections of future
signings and installations are not realized. The Company forecasts its
short-term liquidity requirements on a quarterly and annual basis and expects it
will end 2005 with a cash balance greater than $30.0 million. Since the
Company's future cashflows are based on estimates and there may be factors that
are outside of the Company's control, 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 38
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
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 $11.4 million for the
year ended December 31, 2004. Changes in other non-cash operating assets as
compared to December 31, 2003 include an increase of $0.3 million in
inventories, an increase of $1.0 million in financing receivables, a $5.7
million increase in accounts receivable and a $0.4 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 $12.8
million, an increase in accounts payable of less than $0.1 million and an
increase of $6.0 million in accrued liabilities. Included in accrued liabilities
for 2004 were $3.4 million in film finance proceeds which are required to be
spent on a specific film project and an amount of $25.9 million in respect of
accrued pension obligations which are long-term in nature. Included in operating
activities for 2004 is $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 2004 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 $1.4 million in 2004, which
includes purchases of $0.3 million in fixed assets, an increase in other assets
of $1.0 million and an increase in other intangible assets of $0.4 million. The
Company also received $0.4 million in cash in connection with the sale of its
equity investment in MFE.
Cash used in financing activities in 2004 amounted to $28.4 million. The
Company retired $29.2 million of principal of the Company's Old Senior Notes.
Financing costs related to the Senior Notes amounted to $0.5 million. Cash
received from the issuance of common shares through the exercise of stock
options amounted to $0.6 million. The Company also received $0.8 million in cash
on a note receivable from a discontinued operation.
Capital expenditures including the purchase of fixed assets net of sales
proceeds and investments in film assets were $5.2 million for the year ended
December 31, 2004.
Cash used in operating activities amounted to $9.2 million in the year
ended December 31, 2003. Changes in other non-cash operating assets and
liabilities included a decrease in deferred revenue of $22.3 million, and a
decrease of $7.8 million in inventories. Cash used by investing activities in
the year ended December 31, 2003 amounted to $1.8 million, primarily consisting
of $1.6 million invested in fixed assets. The Company also recorded $1.9 million
in income related to cash received under a restructuring agreement with MFE.
Cash provided from financing activities in 2003 amounted to $24.2 million and
includes proceeds of $160.0 million received from the issuance of the Company's
Senior Notes less financing costs of $5.6 million. The Company in turn used
$126.7 million of the proceeds from this offering to retire $123.6 million of
principal of the Company's Old Senior Notes plus expenses. Cash used in
financing activities included a $9.1 million repayment of its remaining
outstanding Subordinated Notes. The Company also received $0.8 million in cash
on a note receivable from a discontinued operation. Capital expenditures
including the purchase of fixed assets net of sales proceeds and investments in
film assets were $4.6 million in the year ended December 31, 2003.
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at December 31, 2004, the Company has letters of credit of $5.5 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 $1.6
million of these funds as at December 31, 2004.
Page 39
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
SENIOR NOTES DUE 2010
In December 2003, the Company completed a private placement of $160.0
million principal of 9.625% senior notes due December 1, 2010 (the "Unregistered
Senior Notes") to a group of initial purchasers. The net proceeds of the
issuance after deducting expenses and underwriting commissions were $154.4
million. In November 2004, the Company completed an exchange offer wherein
$159.0 million of the Company's Unregistered Senior Notes were exchanged for
senior notes registered under the Securities Act of 1933, as amended (the
"Registered Senior Notes"), pursuant to a registration statement on Form S-4
that had been declared effective by the Securities and Exchange Commission on
September 30, 2004. Apart from the fact that the Registered Senior Notes have
been registered under the Securities Act, the Unregistered Senior Notes and the
Registered Senior Notes are substantially identical and are referred to herein
as the "Senior Notes".
The Senior Notes bear interest at a rate of 9.625% per annum and are
unsecured obligations that rank equally with any of the Company's existing and
future senior indebtedness and senior to all of the Company's existing and
future subordinated indebtedness. The payment of principal, premium, if any, and
interest on the Senior Notes is unconditionally guaranteed, jointly and
severally, by certain of the Company's wholly-owned subsidiaries. The Senior
Notes are subject to redemption for cash by the Company, in whole or in part, at
any time on or after December 1, 2007, at redemption prices expressed as
percentages of the principal amount for each 12-month period commencing December
1 of the years indicated: 2007 - 104.813%; 2008 - 102.406%; 2009 and thereafter
- - 100.000%, together with accrued and unpaid interest thereon to the redemption
date. If certain changes were to result in the imposition of withholding taxes
under Canadian law, the Senior Notes are subject to redemption at the Company's
option, in whole but not in part, at a redemption price of 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption. In
the event of a change in control, the Company will be required to make an offer
to repurchase the Senior Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, prior to December 1, 2006, under certain conditions,
the Company may redeem up to 35% of the Senior Notes with the proceeds of
certain equity offerings at 109.625% of the principal amount thereof together
with accrued and unpaid interest thereon to the date of redemption.
The terms of the Company's Senior Notes impose certain restrictions on its
operating and financing activities, including certain restrictions on the
Company's ability to: incur certain additional indebtedness; make certain
distributions or certain other restricted payments; grant liens; create certain
dividend and other payment restrictions affecting the Company's subsidiaries;
sell certain assets or merge with or into other companies; and enter into
certain transactions with affiliates. The Company believes these restrictions
will not have a material impact on its financial condition or results of
operations.
As at December 31, 2004, the Company had outstanding $159.0 million
aggregate principal of Registered Senior Notes and $1.0 million aggregate
principal of Unregistered Senior Notes.
OLD SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of senior notes due
December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old Senior
Notes").
During 2003, the Company retired an aggregate of $47.2 million principal
amount of the Old Senior Notes and accrued interest of $0.7 million in exchange
for the issuance of 5,838,353 of its common shares at an average value of $8.28
per share. The Company recorded additional charges of $0.3 million related to
costs associated with this retirement. These transactions had the effect of
reducing the principal amount of the Company's outstanding Old Senior Notes to
$152.8 million. In December 2003, the Company completed a tender offer and
consent solicitation for its remaining $152.8 million of the Old Senior Notes.
In December 2003, $123.6 million in principal of the Old Senior Notes were
redeemed pursuant to the tender offer. Notice of Redemption for all remaining
outstanding Old Senior Notes was delivered on December 4, 2003 and the remaining
$29.2 of outstanding Old Senior Notes were redeemed on January 2, 2004. A loss
of $0.8 million related to the retirement was recorded in 2004.
Page 40
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company completed a private placement of $100.0 million
of 5.75% convertible subordinated notes due April 1, 2003 (the "Subordinated
Notes"). In 2001 and 2002, the Company and a wholly-owned subsidiary purchased
an aggregate of $90.9 million principal of Subordinated Notes for $21.8 million
consisting of $18.5 million in cash and common shares of the Company valued at
$3.3 million. On April 1, 2003, the Company repaid the remaining outstanding
Subordinated Notes balance of $9.1 million plus accrued interest on the maturity
date.
RENTAL OBLIGATIONS
The Company's total minimum annual rental payments to be made under
operating leases for premises as of December 31, 2004 are as follows:
2005 $ 5,630
2006 5,407
2007 5,118
2008 4,903
2009 4,955
Thereafter 24,181
-----------
$ 50,194
===========
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive officers. As at December 31, 2004, the Company had an unfunded and
accrued projected benefit obligation of approximately $25.9 million (December
31, 2003 - $20.1 million) in respect of this defined benefit pension plan. The
Company intends to use the proceeds of life insurance policies taken on its
Co-Chief Executive Officers to satisfy, in whole or in part, certain of the
benefits due and payable under the plan, although there can be no assurance that
the Company will ultimately do so.
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations are as
follows:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------------ ------------- ------------ ------------ ------------
Long-term debt obligations $ 160,000 $ -- $ -- $ -- $ 160,000
Lease obligations 50,194 5,630 10,525 9,858 24,181
Page 41
IMAX CORPORATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
rates. The Company does not use financial instruments for trading or other
speculative purposes.
A majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses is denominated in Canadian
dollars. In 2004, the Company estimates that the strengthening Canadian dollar
increased its expense base by $1.4 million. 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. Net Japanese yen flows are converted to U.S. dollars
through the spot market to fund the Company's operations in Japan. The Company
also has cash receipts under leases denominated in Japanese yen, Euros and
Canadian dollars. In 2004, the Company recorded translation gains of $0.4
million primarily from the receivables associated with these leases, as the
value of the U.S. dollar declined in relation to theses currencies. The Company
plans to convert Japanese yen and Euros lease cash flows to U.S. dollars through
the spot markets on a go-forward basis.
Page 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are filed as part
of this Report:
PAGE
Report of Independent Registered Public Accounting Firm........................................................... 44
Consolidated Balance Sheets as at December 31, 2004 and 2003...................................................... 46
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002........................ 47
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002........................ 48
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2004, 2003 and 2002.... 49
Notes to Consolidated Financial Statements........................................................................ 50
Page 43
IMAX CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF IMAX CORPORATION
We have completed an integrated audit of IMAX Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the
accompanying index, present fairly, in all material respects, the financial
position of IMAX Corporation (the "Company")and its subsidiaries at December 31,
2004 and December 31, 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a) (2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in note 3 to the consolidated financial statements, the
Company changed its accounting policies for extinguishment of debt and asset
retirement obligations upon the adoption of new accounting pronouncements
effective January 1, 2003.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's
Annual Report on Internal Control over Financial Reporting appearing in Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
Page 44
IMAX CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (cont'd)
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chartered Accountant
Toronto, Canada
March 10, 2005
Page 45
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
AS AT DECEMBER 31,
-----------------------------------
2004 2003
----------------- ---------------
ASSETS
Cash and cash equivalents $ 28,964 $ 47,282
Restricted cash (note 15(b)) -- 4,961
Accounts receivable, net of allowance for doubtful accounts of $8,390
(2003 - $7,278) 19,899 13,887
Financing receivables (note 4) 59,492 56,742
Inventories (note 5) 29,001 28,218
Prepaid expenses 2,279 1,902
Film assets (note 6) 871 1,568
Fixed assets (note 7) 28,712 35,818
Other assets (note 8) 13,377 13,827
Deferred income taxes (note 9) 6,171 5,028
Goodwill 39,027 39,027
Other intangible assets (note 10) 3,060 3,388
---------------- ---------------
Total assets $ 230,853 $ 251,648
================ ===============
LIABILITIES
Accounts payable $ 5,827 $ 5,780
Accrued liabilities (notes 6, 15(c) and 24) 56,897 45,066
Deferred revenue 50,505 63,344
Senior Notes due 2010 (note 11) 160,000 160,000
Old Senior Notes due 2005 (note 12) -- 29,234
---------------- ---------------
Total liabilities 273,229 303,424
---------------- ---------------
COMMITMENTS, CONTINGENCIES AND GUARANTEES (notes 15 and 16)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 17) Common shares - no par value. Authorized -
unlimited number. Issued and outstanding - 39,446,964 (2003 - 39,301,758) 116,281 115,609
Other equity 3,227 3,159
Deficit (160,945) (171,189)
Accumulated other comprehensive income (loss) (939) 645
---------------- ---------------
Total shareholders' deficit (42,376) (51,776)
---------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 230,853 $ 251,648
================ ===============
(the accompanying notes are an integral part of these condensed consolidated financial statements)
Page 46
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars, except per share amounts)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2004 2003 2002
--------------- --------------- --------------
REVENUE
IMAX systems (note 18(a)) $ 86,570 $ 75,848 $ 70,959
Films 27,887 25,803 40,556
Theater operations 17,415 13,109 12,284
Other 4,108 4,500 5,303
--------------- --------------- --------------
135,980 119,260 129,102
COSTS OF GOODS AND SERVICES 70,062 67,283 75,634
--------------- --------------- --------------
GROSS MARGIN 65,918 51,977 53,468
Selling, general and administrative expenses (note 18(b)) 36,066 33,312 34,906
Research and development 3,995 3,794 2,362
Amortization of intangibles 719 573 1,418
Income from equity-accounted investees (note 18(d) and (e)) -- (2,496) (283)
Receivable provisions net of (recoveries) (note 19) (1,487) (2,225) (1,233)
Restructuring costs and asset impairments (recoveries) (note 20) 848 969 (121)
--------------- --------------- --------------
EARNINGS FROM OPERATIONS 25,777 18,050 16,419
Interest income 756 656 413
Interest expense (16,853) (15,856) (17,564)
Gain (loss) on retirement of notes (notes 3, 12 and 13) (784) (4,910) 11,900
Recovery of long-term investments (note 18(c)) 293 1,892 --
--------------- --------------- --------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 9,189 (168) 11,168
Recovery of income taxes (note 9) 255 386 --
--------------- --------------- --------------
NET EARNINGS FROM CONTINUING OPERATIONS 9,444 218 11,168
Net earnings from discontinued operations (note 26) 800 195 804
--------------- --------------- --------------
Net earnings before cumulative effect of changes in accounting
principles 10,244 413 11,972
Cumulative effect of changes in accounting principles (note 3 and
27) -- (182) --
--------------- -------------- --------------
NET EARNINGS $ 10,244 $ 231 $ 11,972
=============== =============== ==============
EARNINGS PER SHARE (note 17):
Earnings per share - basic and diluted:
Net earnings from continuing operations $ 0.24 $ 0.01 $ 0.34
Net earnings from discontinued operations $ 0.02 $ -- $ 0.02
-------------- -------------- --------------
Net earnings before cumulative effect of changes in accounting
principles $ 0.26 $ 0.01 $ 0.36
Cumulative effect of changes in accounting principles -- -- --
-------------- -------------- --------------
Net earnings $ 0.26 $ 0.01 $ 0.36
============== ============== ==============
(the accompanying notes are an integral part of these consolidated financial statements)
Page 47
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 10,244 $ 231 $ 11,972
Net (earnings) from discontinued operations (800) (195) (804)
Items not involving cash:
Cumulative effect of changes in accounting principles -- 182 --
Depreciation and amortization (note 21) 14,947 12,355 12,544
Write-downs (recoveries) (note 21) (928) (2,722) 3,387
Income from equity-accounted investees -- (2,496) (283)
Change in deferred income taxes (1,143) 81 (799)
Loss (gain) on retirement of notes 784 4,910 (11,900)
Stock and other non-cash compensation 3,567 4,926 3,685
Non-cash foreign exchange gain (605) (1,281) (605)
Premium on repayment of notes (576) (3,088) --
Payment under certain employment agreements -- (1,550) --
Investment in film assets (4,876) (2,993) (2,441)
Changes in restricted cash 4,961 (1,626) 2,538
Changes in other non-cash operating assets and liabilities (note 21) (14,164) (14,924) 5,788
Net cash used in operating activities from discontinued operations -- (993) (791)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 11,411 (9,183) 22,291
--------------- --------------- ---------------
INVESTING ACTIVITIES
Purchase of fixed assets (320) (1,560) (1,517)
Increase in other assets (1,044) (1,526) (964)
Increase in other intangible assets (391) (597) (675)
Recovery on long-term investments 393 1,892 --
Net cash used in investing activities from discontinued operations -- (15) (24)
--------------- --------------- ---------------
Net cash used in investing activities (1,362) (1,806) (3,180)
--------------- ---------------- ---------------
FINANCING ACTIVITIES
Repayment of Subordinated Notes -- (9,143) --
Repurchase of Subordinated Notes -- -- (6,022)
Repayment of Old Senior Notes due 2005 (29,234) (123,577) --
Issuance of Senior Notes due 2010 -- 160,000 --
Financing costs related to Senior Notes due 2010 (535) (5,615) --
Common shares issued 558 1,722 152
Net cash provided by financing activities from discontinued
operations 800 799 --
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (28,411) 24,186 (5,870)
--------------- --------------- ---------------
Effects of exchange rate changes on cash 44 284 45
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS (19,118) 13,690 14,101
Increase (decrease) in cash and cash equivalents from discontinued
operations 800 (209) (815)
------------ --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, DURING THE YEAR (18,318) 13,481 13,286
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 47,282 33,801 20,515
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 28,964 $ 47,282 $ 33,801
=============== =============== ===============
(the accompanying notes are an integral part of these consolidated financial statements)
Page 48
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
NUMBER OF
COMMON ACCUMULATED
SHARES RETAINED OTHER TOTAL
ISSUED AND CAPITAL OTHER EARNINGS COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
OUTSTANDING STOCK EQUITY (DEFICIT) INCOME (LOSS)(1) EQUITY INCOME (LOSS)
----------- -------- ----------- ------------ ---------------- ------------- ------------
(DEFICIT)
BALANCE AT DECEMBER 31, 2001 31,899,114 63,322 1,034 (183,392) 588 (118,448) $ --
Issuance of common stock 1,074,252 2,241 -- -- -- 2,241 --
Net earnings -- -- -- 11,972 -- 11,972 11,972
Adjustment in paid-in capital for
non-employee stock
options granted -- -- 508 -- -- 508 --
Foreign currency translation
adjustments -- -- -- -- 57 57 57
------------ -------- ---------- ----------- -------------- ------------- -----------
$ 12,029
===========
BALANCE AT DECEMBER 31, 2002 32,973,366 65,563 1,542 (171,420) 645 (103,670) $ --
Issuance of common stock 6,328,392 50,046 -- -- -- 50,046 --
Net income -- -- -- 231 -- 231 231
Adjustment in paid-in-capital for
non-employee stock options
and warrants granted
(note 17(c)) -- -- 1,617 -- -- 1,617 --
------------ -------- ---------- ----------- -------------- ------------- -----------
$ 231
===========
BALANCE AT DECEMBER 31, 2003 39,301,758 $115,609 $ 3,159 $ (171,189) $ 645 $ (51,776) $ --
Issuance of common stock 145,206 558 -- -- -- 558 --
Net income -- -- -- 10,244 -- 10,244 10,244
Adjustment in paid-in-capital for
non-employee stock options
and warrants granted
(note 17(c)) -- -- 182 -- -- 182 --
Adjustment for expense of
non-employee stock options -- 114 (114) -- -- -- --
Unrecognized actuarial loss on
defined benefit plan (net of
income tax recovery of $nil) -- -- -- -- (1,584) (1,584) (1,584)
------------ -------- ---------- ----------- ------------- ------------- ------------
$ 8,660
===========
BALANCE AT DECEMBER 31, 2004 39,446,964 $116,281 $ 3,227 $ (160,945) $ (939) $ (42,376)
============ ======== ========== =========== ============== =============
(1) Components of accumulated other comprehensive income (loss) consist of:
AS AT DECEMBER 31,
--------------------------------------------
2004 2003
------------------- -------------------
Unrecognized actuarial loss on
defined benefit plan (net of
income tax recovery of $nil) $ (1,584) $ --
Foreign currency
translation adjustments 645 645
------------------- -------------------
Accumulated other comprehensive
income $ (939) $ 645
================== ===================
(the accompanying notes are an integral part of these consolidated financial statements)
Page 49
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
1. DESCRIPTION OF THE BUSINESS
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") is an entertainment technology company whose principal
activities are:
o the design, manufacture, marketing and leasing or selling of
proprietary projection and sound systems for IMAX theaters
principally owned and operated by commercial and institutional
customers located in more than 35 countries as of December 31,
2004;
o the development, production, digital re-mastering,
post-production and distribution of certain films shown
throughout the IMAX theater network;
o the operation of certain IMAX theaters located primarily in the
United States and Canada; and
o the provision of other services to the IMAX theater network
including providing ongoing maintenance services for the IMAX
projection and sound systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are summarized as follows:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
together with its wholly-owned subsidiaries, except subsidiaries which the
Company has identified as variable interest entities ("VIE's") where the
Company is not the primary beneficiary ("PB") (note 3). All significant
inter-company accounts and transactions have been eliminated.
(b) USE OF ESTIMATES
The preparation of the financial statements in conformity with United
States Generally Accepted Accounting Principles requires management to make
estimates and judgements that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could be materially
different from these estimates. Significant estimates made by management
include, but are not limited to, fair values associated with the individual
elements in multiple element arrangements, residual values of leased
theater systems, economic lives of leased assets, allowances for potential
uncollectibility of accounts receivable and net investment in leases,
provisions for inventory obsolescence, ultimate revenues for film assets,
estimates of fair values for long-lived assets and goodwill, depreciable
lives of fixed assets, useful lives of intangible assets, pension plan
assumptions, accruals for contingencies including tax contingencies,
valuation allowances for deferred income tax assets, and stock option
assumptions.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(d) ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
Allowances for doubtful accounts receivable and financing receivables are
based on the Company's assessment of the collectibility of specific
customer balances which is based upon a review of the customer's credit
worthiness, past collection history and the underlying asset value of the
equipment under lease where applicable. When facts and circumstances
indicate that there is a potential impairment in the net investment in
lease owing from a customer, the Company will evaluate the potential
outcome of either renegotiations or defaults on the original lease
agreement and will record a provision if it is considered probable that the
renegotiated lease amount will cause a reclassification of a sales-type
lease to an operating lease. The provision is equal to the excess of the
carrying value of the net investment in lease over the fair value of the
equipment. Interest on overdue accounts is recognized as income as the
amounts are collected.
Page 50
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(e) INVENTORIES
Inventories are carried at the lower of cost determined on an average cost
basis, and net realizable value. Finished goods and work-in-process include
the cost of raw materials, direct labor, design costs and an applicable
share of manufacturing overhead costs.
The Company records provisions for obsolete theater systems inventory,
based upon current estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, growth
prospects within the customers' ultimate marketplace and the market
acceptance of the Company's current and pending projection systems.
(f) FILM ASSETS
Costs of producing films, including capitalized interest, and costs of
acquiring film rights are recorded as film assets and accounted for in
accordance with AICPA Statement of Position 00-2, "Accounting by Producers
or Distributors of Films". Production financing provided by third parties
that acquire substantive rights in the film is recorded as a reduction of
the cost of the production. Film assets are amortized and participation
costs are accrued using the individual-film-forecast method in the same
ratio that current gross revenues bear to anticipated total ultimate
revenues. Estimates of ultimate revenues are prepared on a title-by-title
basis and reviewed regularly by management and revised where necessary to
reflect most current information. Ultimate revenue for films includes
estimates of revenue over a period not to exceed ten years following the
date of initial release.
Film exploitation costs, including advertising costs, are expensed as
incurred.
Costs of digitally re-mastering films where the copyright is owned by a
third party are recorded as film assets. These costs are amortized over the
period of benefit using the individual-film-forecast method in the same
ratio that current gross revenues bear to anticipated ultimate revenues
from the re-mastered film.
The recoverability of film costs is dependent upon commercial acceptance of
the films. If events or circumstances indicate that the fair value of a
film is less than the unamortized film costs, the film is written down to
fair value by a charge to earnings. The Company determines the fair value
of its films using a discounted cash flow model.
(g) FIXED ASSETS
Fixed assets are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives as follows:
Projection equipment -- 10 to 15 years
Camera equipment -- 5 to 10 years
Buildings -- 20 to 25 years
Office and production equipment -- 3 to 5 years
Leasehold improvements -- Over the shorter of the term of the underlying
leases, and the useful life of the asset
The Company reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In performing its review for
recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of impairment losses
is based on the excess of the carrying amount of the asset over the fair
value calculated using discounted expected future cash flows.
Page 51
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(h) OTHER ASSETS
Other assets include investments, unrecognized prior service pension costs,
cash surrender value of life insurance policies and deferred charges on
debt financing.
Costs of debt financing are deferred and amortized over the term of the
debt.
Investments in marketable securities categorized as available-for-sale
securities are carried at fair value with unrealized gains or losses
included in accumulated other comprehensive income. Investments in
marketable securities categorized as held-to-maturity securities are
carried at amortized cost. Investments in joint ventures are accounted for
by the equity method of accounting under which net earnings (loss) include
the Company's share of earnings or losses of the investees. A loss in value
of an investment, which is other than a temporary decline, is recognized as
a charge to earnings.
(i) GOODWILL
Goodwill represents the excess of purchase price over the fair value of net
identifiable assets acquired in a purchase business combination. Goodwill
is not subject to amortization and is tested for impairment annually, or
more frequently if events or circumstances indicate that the asset might be
impaired. Impairment of goodwill is tested at the reporting unit level by
comparing the reporting unit's carrying amount, including goodwill, to the
fair value of the reporting unit. The fair values of the reporting units
are estimated using a discounted cash flows approach. If the carrying
amount of the reporting unit exceeds its fair value, then a second step is
performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
(j) OTHER INTANGIBLE ASSETS
Patents, trademarks and other intangibles are recorded at cost and are
amortized on a straight-line basis over estimated useful lives ranging from
7 to 10 years.
The Company reviews the carrying values of its other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. In performing its
review for recoverability, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows is less than the carrying
amount of the asset, an impairment loss is recognized. Measurement of
impairment losses is based on the excess of the carrying amount of the
asset over the fair value calculated using discounted expected future cash
flows.
(k) DEFERRED REVENUE
Deferred revenue represents cash received prior to revenue recognition
criteria being met for theater system sales or leases, film contracts and
services.
(l) INCOME TAXES
Income taxes are accounted for under the liability method whereby deferred
income tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the accounting and tax
bases of assets and liabilities. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in earnings in the period in which the
change is enacted. Valuation allowances are recorded where there is
uncertainty of realization of a deferred income tax asset. Investment tax
credits are recognized as a reduction of income tax expense in the year the
credit is earned.
The Company assesses realization of net deferred income tax assets and
based on all available evidence, concludes whether it is more likely than
not that the net deferred income tax assets will be realized.
Page 52
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(m) REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a
result of meeting the criteria established by FASB Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"). When
revenue is recognized, the initial rental fees due under the contract,
along with the present value of minimum ongoing rental payments, are
recorded as revenues for the period, and the related theater system costs
including installation expenses are recorded as cost of goods and services.
Additional ongoing rentals in excess of minimums are recognized as revenue
when reported by the theater operator, provided that collection is
reasonably assured.
The Company recognizes revenues from sales-type leases upon installation of
the theater system when all of the following criteria are met: persuasive
evidence of an agreement exists; the price is fixed or determinable; and
collection is reasonably assured.
Cash installments of initial rents received in advance of the time at which
revenue is recognized are recorded as deferred revenue. Costs incurred in
constructing the theater systems not yet recognized as revenue are included
in inventories.
If the Company and a lessee agree to change the terms of the lease, other
than by renewing the lease or extending its terms, management evaluates
whether the new agreement would be classified as a sales-type lease or an
operating lease under the provisions of FAS 13. Any adjustments which
result from a change in classification from a sales-type lease to an
operating lease are recorded as a charge to earnings during the period in
which the change occurs.
In the normal course of its business, the Company each year will have
customers who, for a number of reasons including the inability to obtain
certain consents, approvals or financing, are unable to proceed with
theater construction. In these instances, where customers of the Company
are not in compliance with the terms of their leases for theater systems
not yet installed, the leases are in default. There is typically deferred
revenue associated with these leases, representing initial lease payment
cash collected prior to the default. These cash payments are recognized as
revenue when the Company exercises its rights to terminate the lease and
the Company is released legally or by virtue of an agreement with the
customer from its obligations under the lease arrangement.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these
leases, initial rental fees and minimum lease payments are recognized as
revenue on a straight-line basis over the lease term. Additional rentals in
excess of minimum annual amounts are recognized as revenue when the
contracted portions of theater admissions due to the Company reported by
theater operators exceed the minimum amounts, provided that collection is
reasonably assured.
MULTIPLE ELEMENT ARRANGEMENTS
On occasion, the Company will include film licenses or other specified
elements as part of system sales or lease agreements. When separate prices
are listed in a multiple element arrangement, these prices may not be
indicative of the fair values of those elements because the prices of the
different components of the arrangements may be modified through
negotiation although the aggregate consideration may not. Revenues under
these arrangements are allocated based upon the estimated relative fair
values of each element.
In the normal course of its business, the Company will have customers who,
for a number of reasons are unable to proceed with theater construction or
wish to modify the terms of an existing arrangement. There is typically
deferred revenue involved with these arrangements representing initial cash
payments in advance of the default, settlement or modification of the
arrangement. Pursuant to the policies discussed in the preceding paragraph,
the total consideration to be received in these situations is allocated to
each individual element of the settlement or modification arrangement based
on the relative fair values of each element.
Page 53
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(m) REVENUE RECOGNITION (cont'd)
MULTIPLE ELEMENT ARRANGEMENTS (cont'd)
Upon allocation of value to each element, each element is accounted for
based on applicable revenue recognition criteria.
SALES OF THEATER SYSTEMS
Revenue from sales of theater systems is recognized when all of the
following criteria are met: persuasive evidence of an agreement exists; the
price is fixed or determinable; title passes to the customer; installation
of the system is complete; and collection is reasonably assured.
FILM LICENSING
Revenue from licensing of films is recognized when a contractual licensing
arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collection is
reasonably assured. Where the license fees are based on a share of the
customer's revenue, and all other revenue recognition criteria stated in
the preceding sentence are met, the Company recognizes revenue as the
customer exhibits the film.
DMR FILM REVENUE
Revenues from digitally re-mastering film where third parties own the
related film rights are derived in the form of processing fees or
recoupments as a percentage of box office receipts from the re-mastered
films. Processing fees are recognized as revenues as the related
re-mastering service is performed. Recoupments as a percentage of box
office receipts are recognized as revenue when the contracted portions of
box office receipts due to the Company are reported by theater operators,
provided that collection is reasonably assured.
MAINTENANCE AND OTHER SERVICES
The Company frequently leases theater systems to customers with one year's
free maintenance on the system from the date of installation. The fair
value of this component of the arrangement is deferred when the systems
revenue is recognized and is amortized on a straight-line basis over the
one-year free maintenance period. All costs associated with this
maintenance program are expensed as incurred. Maintenance revenues are
recognized on a straight-line basis over the maintenance period. Revenues
from post-production film services are recognized as the service is
performed. Revenues on camera rentals are recognized over the rental
period. Theater admission revenues are recognized on the date of the
exhibition. Other service revenues are recognized when the services are
performed.
(n) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and primarily
include projector and sound parts, labor and other related materials which
pertain to the Company's development of ongoing products.
(o) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of the Company's operations, which are
denominated in currencies other than the functional currency, are
translated into the functional currency at the exchange rates prevailing at
the end of the period. Non-monetary items are translated at historical
exchange rates. Revenue and expense transactions are translated at exchange
rates prevalent at the transaction date. Such exchange gains and losses are
included in the determination of net earnings (loss) in the period in which
they arise. For foreign subsidiaries with functional currencies other than
the U.S. dollar, assets and liabilities are translated at the year-end
exchange rates and revenue and expense items are translated at the average
rate for the period, with translation gains and losses being included in
other comprehensive income. Since 2001, the Company has not had any foreign
subsidiaries with functional currencies other than the U.S. dollar.
Page 54
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(p) STOCK-BASED COMPENSATION
The Company currently follows the intrinsic value method of accounting for
employee stock options as prescribed by Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees", ("APB 25"). If the fair
value methodology prescribed by FASB Statement, "Accounting for Stock Based
Compensation" ("FAS 123") had been adopted by the Company, pro forma
results for the year ended December 31, would have been as follows:
2004 2003 2002
---------------- ---------------- ----------------
Net earnings as reported $ 10,244 $ 231 $ 11,972
---------------- --------------- ----------------
Stock-based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (7,268) (9,260) (10,765)
----------------- ---------------- -----------------
Adjusted net earnings (loss) $ 2,976 $ (9,029) $ 1,207
---------------- ---------------- ----------------
Earnings (loss) per share - basic:
Net earnings as reported $ 0.26 $ 0.01 $ 0.36
--------------- --------------- ---------------
FAS 123 stock-based compensation expense $ (0.18) $ (0.25) $ (0.32)
---------------- ---------------- ----------------
Adjusted net earnings (loss) $ 0.08 $ (0.24) $ 0.04
--------------- ---------------- ---------------
Earnings (loss) per share - diluted:
Net earnings as reported $ 0.26 $ 0.01 $ 0.36
--------------- --------------- ---------------
FAS 123 stock-based compensation expense $ (0.19) $ (0.25) $ (0.32)
---------------- ---------------- ----------------
Adjusted net earnings (loss) $ 0.07 $ (0.24) $ 0.04
--------------- ---------------- ---------------
Of the total pro forma stock based compensation expense for the year ended
December 31, 2004 of $7.3 million, $4.8 million relates to stock grants
made in 2000 at an average exercise price of $24.25. In accordance with FAS
123, the total expense reflected in the above pro forma charge represents
amortization of stock option charges that were valued at the grant date
using an option-pricing model with assumptions that were valid at the time
with no further update of current stock trends and assumptions.
The weighted average fair value of common share options granted to
employees in 2004 at the time of grant was $2.12 per share (2003 - $2.92
per share, 2002 - $1.25 per share). For the three months ended March 31,
2003 and prior, the Company used the Black-Scholes option-pricing model to
determine the fair value of common share options granted as estimated at
the grant date. The following assumptions were used during the three months
ended March 31, 2003: dividend yield of 0% (December 31, 2002 - 0%); an
average risk free interest rate of 2.1% (December 31, 2002 - 2.6%), 20%
forfeiture of options vesting greater than two years; expected life of one
to seven years; and expected volatility of 50% (December 31, 2002 - 50.0%).
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
year ended December 31, 2004, the following assumptions were used: dividend
yield of 0% (nine months ended December 31, 2003 - 0%); an average risk
free interest rate of 4.7% (nine months ended December 31, 2003 - 3.0%); an
equity risk premium between 3.8% and 6.3% (nine months ended December 31,
2003 - between 4.6% and 10.7%); a beta between 0.95 and 1.11 (nine months
ended December 31, 2003 - between 0.85 and 1.03); expected option life
between 2.6 and 5.4 years (nine months ended December 31, 2003 - between
2.6 and 5.1 years); an average expected volatility of 62% (nine months
ended December 31, 2003 - 62%); and an annual termination probability of
between 8.1% and 9.6% (nine months ended December 31, 2003 - between 8.1%
and 9.6%). Had the Company changed from using the Black-Scholes option
pricing model to a Binomial option pricing model effective January 1, 2003
rather than April 1, 2003, the impact would not have been significant.
The Company accounts for stock options and warrants issued to non-employees
in accordance with the provisions of FAS 123 and Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring or in Conjunction with Selling Goods or Services".
Page 55
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(q) PENSION PLANS
Defined benefit pension plan liabilities are recorded as the excess of the
accumulated projected benefit obligation over the fair value of plan
assets. Assumptions used in computing defined benefit obligations are
regularly reviewed by management in consultation with its actuaries and
adjusted for market conditions. Prior service costs resulting from plan
inception or amendments together with unrecognized actuarial gains and
losses are amortized over the expected future service life of the employees
while current service costs are expensed when earned.
For defined contribution pension plans, amounts contributed by the Company
are recorded as an expense.
3. ACCOUNTING CHANGES
In January 2003, the FASB issued Financial Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities ("VIEs"), in an effort to
expand and clarify existing accounting guidance that addresses when a
company should include in its financial statements the assets, liabilities
and activities of another entity. FIN 46 was effective immediately for all
enterprises with variable interests in VIEs created after January 31, 2003
and January 1, 2004 for all previously existing variable interest entities.
Under FIN 46, if an entity is determined to be a variable interest entity,
it must be consolidated by the enterprise that absorbs the majority of the
entity's expected losses if they occur, receives a majority of the entity's
expected residual returns if they occur, or both. On December 24, 2003, the
FASB issued a revised FIN 46, defined as FIN 46R. Commencing January 1,
2004, the Company was required to consolidate the accounts of all VIEs for
which it is the primary beneficiary ("PB"), as required by FIN 46R. 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 certain of
its film production companies are VIEs. Since in one case 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 as the production company has total assets of less than $0.1
million and total liabilities of less than $0.1 million as at December 31,
2004. The Company also has interests in three other film production
companies which are VIEs, however the Company did not consolidate these
film entities since it does not bear the majority of the expected losses or
expected residual returns. As of December 31, 2004, these three VIEs have
total assets of $0.5 million and total liabilities of $0.5 million.
Effective January 1, 2003, the Company adopted FASB Statement of Financial
Accounting Standard No. 145, "Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002" ("FAS
145"), under which gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). Under FAS 145, the Company was required to
reclassify any gain or loss on extinguishment of debt that was classified
as an extraordinary item to net earnings from continuing operations before
income taxes for all prior period presentations. The Company reclassified
the extraordinary gain on repurchase of Subordinated Notes in 2002 within
net earnings from continuing operations before income taxes. The Company
has applied FAS 145 within these consolidated financial statements for the
fiscal year ended December 31, 2002 which had the effect of reclassifying
gains on the retirement of Subordinated Notes of $8.3 million, net of
income tax expense of $3.6 million from extraordinary items to net earnings
from continuing operations before income taxes.
Page 56
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
3. ACCOUNTING CHANGES (cont'd)
Effective January 1, 2003, the Company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability is applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have an
impact on the Company's financial position or results of operations.
Enhanced disclosures as required under FIN 45 have been included in note
16(g).
Effective January 1, 2003, the Company adopted FASB Statement of Financial
Accounting Standards No. 143 "Accounting for Asset Retirement Obligations"
which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This standard requires that the fair
value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset and subsequently amortized
over the asset's useful life. Adoption of this new standard resulted in a
charge of $0.2 million to 2003 earnings and an increase of $0.2 million to
accrued liabilities.
4. FINANCING RECEIVABLES
(a) NET INVESTMENT IN LEASES
The Company generally provides its theater systems to customers on a
long-term lease basis, typically with initial lease terms of 10 to 20
years. Financing receivables consisting of net investment in leases and
long term receivables are comprised of the following:
2004 2003
------------ ------------
Gross minimum lease amounts receivable $ 98,666 $ 97,408
Residual value of equipment 637 824
Unearned finance income (39,844) (38,847)
------------ ------------
Present value of minimum lease amounts receivable 59,459 59,385
Accumulated allowance for uncollectible amounts (4,435) (5,840)
------------- ------------
Net investment in leases $ 55,024 $ 53,545
Long-term receivables 4,468 3,197
------------ ------------
Total financing receivables $ 59,492 $ 56,742
============ ============
Page 57
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
4. FINANCING RECEIVABLES (cont'd)
(b) RENTAL AMOUNTS
IMAX systems revenue includes the following annual rental amounts, for the
years ended December 31:
2004 2003 2002
-------------- -------------- --------------
Ongoing minimum rental amounts on operating leases $ 1,039 $ 849 $ 849
Additional rentals in excess of minimum amounts on
sales-type leases 847 444 681
Additional rentals in excess of minimum amounts on
operating leases 3,338 3,482 3,525
Finance income on sales-type leases 3,991 4,432 4,691
-------------- -------------- --------------
$ 9,215 $ 9,207 $ 9,746
============== ============== ==============
Estimated gross minimum rental amounts receivable from operating and
sales-type leases at December 31, 2004, for each of the next five years are
as follows:
2005 $ 8,815
2006 8,882
2007 7,792
2008 7,975
2009 7,326
Thereafter 63,260
----------
$ 104,050
==========
5. INVENTORIES
AT DECEMBER 31,
----------------------------------
2004 2003
--------------- ---------------
Raw materials $ 7,375 $ 5,868
Work-in-process 6,512 4,327
Finished goods 15,114 18,023
--------------- ---------------
$ 29,001 $ 28,218
=============== ===============
6. FILM ASSETS
AT DECEMBER 31,
----------------------------------
2004 2003
--------------- ---------------
Completed and released films, net of accumulated amortization $ 406 $ 314
Films in production 175 1,022
Development costs 290 232
--------------- ---------------
$ 871 $ 1,568
=============== ===============
All unamortized film costs as at December 31, 2004 for released films are
expected to be amortized within two years from December 31, 2004. The
amount of accrued participation liabilities that the Company expects to pay
during 2005 is $2.2 million.
Page 58
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
7. FIXED ASSETS
AT DECEMBER 31, 2004
-------------------------------------------------------------
ACCUMULATED
DEPRECIATION
COST AND WRITE-DOWNS NET BOOK VALUE
----------------- ----------------- -----------------
Equipment leased or held for use or rental
Projection equipment(1) $ 33,407 $ 23,938 $ 9,469
Camera equipment 5,957 5,836 121
----------------- ----------------- -----------------
39,364 29,774 9,590
----------------- ----------------- -----------------
Assets under construction 37 -- 37
----------------- ----------------- -----------------
Other fixed assets
Land 1,593 -- 1,593
Buildings 14,723 5,896 8,827
Office and production equipment(2) 22,625 19,339 3,286
Leasehold improvements 8,067 2,688 5,379
----------------- ----------------- -----------------
47,008 27,923 19,085
----------------- ----------------- -----------------
$ 86,409 $ 57,697 $ 28,712
================= ================= =================
AT DECEMBER 31, 2003
-------------------------------------------------------------
ACCUMULATED
DEPRECIATION
COST AND WRITE-DOWNS NET BOOK VALUE
----------------- ----------------- -----------------
Equipment leased or held for use or rental
Projection equipment(1) $ 34,847 $ 22,720 $ 12,127
Camera equipment 9,971 8,061 1,910
----------------- ----------------- -----------------
44,818 30,781 14,037
----------------- ----------------- -----------------
Assets under construction 877 -- 877
----------------- ----------------- -----------------
Other fixed assets
Land 1,593 -- 1,593
Buildings 14,734 5,406 9,328
Office and production equipment(2) 21,590 17,748 3,842
Leasehold improvements 8,569 2,428 6,141
----------------- ----------------- -----------------
46,486 25,582 20,904
----------------- ----------------- -----------------
$ 92,181 $ 56,363 $ 35,818
================= ================= =================
(1) Included in projection equipment are assets with costs of $30.0
million (2003 - $31.9 million) and accumulated depreciation of $22.0
million (2003 - $21.0 million) that are leased to customers under
operating leases.
(2) Included in office and production equipment are assets under capital
lease with costs of $0.8 million (2003 - $0.4 million) and accumulated
depreciation of $0.4 million (2003 - $0.2 million).
8. OTHER ASSETS
AT DECEMBER 31,
--------------------------------
2004 2003
--------------- ---------------
Pension asset, representing unrecognized prior service costs $ 5,032 $ 5,530
Deferred charges on debt financing 5,845 6,461
Cash surrender value of life insurance policies 2,500 1,694
Other assets -- 142
--------------- ---------------
$ 13,377 $ 13,827
=============== ===============
Page 59
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
9. INCOME TAXES
(a) Earnings (loss) from continuing operations before income taxes by tax
jurisdiction, for the years ended December 31, are comprised of the
following:
2004 2003 2002
---------------- ---------------- ----------------
Canada $ 6,070 $ 1,363 $ 13,707
United States 2,819 (5,267) (3,209)
Japan 298 839 1,031
Other 2 2,897 (361)
---------------- ---------------- ----------------
$ 9,189 $ (168) $ 11,168
================ ================ ================
(b) The recovery of (provision for) income taxes related to income from
continuing operations, for the year ended December 31, is comprised of the
following:
2004 2003 2002
---------------- ---------------- ----------------
Current:
Canada $ (820) $ (920) $ (754)
Foreign (68) 1,225 (45)
---------------- ---------------- ----------------
(888) 305 (799)
---------------- ---------------- ----------------
Deferred:
Canada 1,143 81 799
Foreign -- -- --
---------------- ---------------- ----------------
1,143 81 799
---------------- ---------------- ----------------
$ 255 $ 386 $ --
================ ================ ================
(c) The recovery of (provision for) income taxes from continuing operations
differs from the amount that would have resulted by applying the combined
Canadian federal and provincial statutory income tax rates to earnings
(losses), for the years ended December 31, is due to the following:
2004 2003 2002
------------ ------------ ------------
Income tax recovery (provision) at combined statutory rates $ (3,319) $ 61 $ (4,314)
Adjustments resulting from:
Permanent differences (1,222) (5,241) 3,070
Manufacturing and processing credits deduction -- (300) (141)
Decrease (increase) in valuation allowance 1,908 (2,869) 1,259
Effect of unrecognized actuarial loss on defined benefit
pension plan (572) -- --
Large corporations tax (281) (476) (403)
Income tax at different rates in foreign and other
provincial jurisdictions (17) (285) (52)
Investment and other tax credits 1,480 661 11
Tax recoveries through loss and tax credit carrybacks 808 1,062 --
Effect of legislated tax rate (reductions) increases -- 4,833 --
Changes to deferred tax assets and liabilities resulting
from audit and other tax return adjustments 1,644 2,760 424
Other (174) 180 146
------------ ------------ ------------
Recovery of income taxes, as reported $ 255 $ 386 $ --
============ ============ ============
Page 60
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
9. INCOME TAXES (cont'd)
(d) The net deferred income tax asset, at December 31, is comprised of the
following:
2004 2003
------------- -------------
Net operating loss and capital loss carryforwards $ 6,093 $ 9,835
Investment tax credit and other tax credit carryforwards 2,905 1,425
Write-downs of other assets 3,920 5,074
Excess tax over accounting basis in fixed assets and inventories 56,179 50,696
Accrued reserves 7,678 5,834
Other 2,288 2,566
------------- -------------
Total deferred income tax assets 79,063 75,430
Income recognition on net investment in leases (27,437) (23,611)
------------- -------------
51,626 51,819
Valuation allowance (45,455) (46,791)
------------- -------------
Net deferred income tax asset $ 6,171 $ 5,028
============= =============
The gross deferred tax assets include an amount of $0.6 million relating to
the tax effect of the unrealized actuarial loss for 2004 on the defined
benefit pension plan. This tax asset has been offset with an equal
valuation allowance, both of which have been charged through comprehensive
income in the year.
Estimated net operating loss carryforwards and estimated tax credit
carryforwards expire as follows:
INVESTMENT TAX
CREDITS AND OTHER NET OPERATING
TAX CREDIT LOSS
CARRYFORWARDS CARRYFORWARDS
----------------- -----------------
2005 $ -- $ 195
2006 -- --
2007 -- --
2008 1,098 346
2009 583 91
Thereafter 1,224 30,545
----------------- -----------------
$ 2,905 $ 31,177
================= =================
Estimated net operating loss carryforwards can be carried forward to reduce
taxable income through to 2024. Estimated net capital loss carryforwards
amount to $0.9 million as at December 31, 2004 and can be carried forward
indefinitely to reduce capital gains. Investment tax credits and other tax
credits can be carried forward to reduce income taxes payable through to
2014.
Page 61
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
10. OTHER INTANGIBLE ASSETS
AT DECEMBER 31, 2004
-------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
----------------- ---------------- -----------------
Patents and trademarks $ 4,792 $ 2,164 $ 2,628
Intellectual property rights 1,193 761 432
Other intangible assets 1,264 1,264 --
----------------- ---------------- -----------------
$ 7,249 $ 4,189 $ 3,060
================= ================ =================
AT DECEMBER 31, 2003
-------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
----------------- ---------------- -----------------
Patents and trademarks $ 4,604 $ 1,819 $ 2,785
Intellectual property rights 1,193 590 603
Other intangible assets 1,264 1,264 --
----------------- ----------------- -----------------
$ 7,061 $ 3,673 $ 3,388
================= ================ =================
The Company expects to amortize approximately $0.7 million of other
intangible assets for each of the next 5 years.
11. SENIOR NOTES DUE 2010
In December 2003, the Company completed a private placement of $160.0
million principal amount of 9.625% senior notes due December 1, 2010 (the
"Unregistered Senior Notes") to a group of initial purchasers. The net
proceeds of the issuance after deducting expenses and underwriting
commissions were $154.4 million. In November 2004, the Company completed an
exchange offer wherein $159.0 million of the Company's Unregistered Senior
Notes were exchanged for senior notes registered under the Securities Act
of 1933, as amended (the "Registered Senior Notes"), pursuant to a
registration statement on Form S-4 that had been declared effective by the
Securities and Exchange Commission on September 30, 2004. Apart from the
fact that the Registered Senior Notes have been registered under the
Securities Act, the Unregistered Senior Notes and the Registered Senior
Notes are substantially identical and are referred to herein as the "Senior
Notes".
The Senior Notes bear interest at a rate of 9.625% per annum and are
unsecured obligations that rank equally with any of the Company's existing
and future senior indebtedness and senior to all of the Company's existing
and future subordinated indebtedness. The payment of principal, premium, if
any, and interest on the Senior Notes is unconditionally guaranteed,
jointly and severally, by certain of the Company's wholly-owned
subsidiaries. The Senior Notes are subject to redemption for cash by the
Company, in whole or in part, at any time on or after December 1, 2007, at
redemption prices expressed as percentages of the principal amount for each
12-month period commencing December 1 of the years indicated: 2007 -
104.813%; 2008 - 102.406%; 2009 and thereafter - 100.000%, together with
accrued and unpaid interest thereon to the redemption date. If certain
changes were to result in the imposition of withholding taxes under
Canadian law, the Senior Notes are subject to redemption at the Company's
option, in whole but not in part, at a redemption price of 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption. In the event of a change in control, the Company will be
required to make an offer to repurchase the Senior Notes at a purchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, prior to December 1, 2006,
under certain conditions, the Company may redeem up to 35% of the Senior
Notes with the proceeds of certain equity offerings at 109.625% of the
principal amount thereof together with accrued and unpaid interest thereon
to the date of redemption.
The terms of the Company's Senior Notes impose certain restrictions on its
operating and financing activities, including certain restrictions on the
Company's ability to: incur certain additional indebtedness; make certain
distributions or certain other restricted payments; grant liens; create
certain dividend and other payment restrictions affecting the Company's
subsidiaries; sell certain assets or merge with or into other companies;
and enter into certain transactions with affiliates. The Company believes
these restrictions will not have a material impact on its financial
condition or results of operations.
Page 62
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
11. SENIOR NOTES DUE 2010 (cont'd)
As at December 31, 2004, the Company had outstanding $159.0 million (2003 -
$nil) aggregate principal of Registered Senior Notes and $1.0 million (2003
- $160.0 million) aggregate principal of Unregistered Senior Notes.
12. OLD SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of senior notes due
December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old
Senior Notes").
During 2003, the Company retired an aggregate of $47.2 million principal
amount of the Old Senior Notes and accrued interest of $0.7 million in
exchange for the issuance of 5,838,353 of its common shares at an average
value of $8.28 per share. The Company recorded additional charges of $0.3
million related to costs associated with this retirement. These
transactions had the effect of reducing the principal amount of the
Company's outstanding Old Senior Notes to $152.8 million. In December 2003,
the Company completed a tender offer and consent solicitation for its
remaining $152.8 million of the Old Senior Notes. In December 2003, $123.6
million in principal of the Old Senior Notes were redeemed pursuant to the
tender offer. Notice of Redemption for all remaining outstanding Old Senior
Notes was delivered on December 4, 2003 and the remaining $29.2 of
outstanding Old Senior Notes were redeemed on January 2, 2004. A loss of
$0.8 million related to the retirement was recorded in 2004.
Interest expense on the Old Senior Notes amounted to less than $0.1 million
in 2004 (2003 - $13.5 million, 2002 - $15.8 million).
13. CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company issued $100.0 million of 5.75% convertible
subordinated notes due April 1, 2003 (the "Subordinated Notes") payable in
arrears on April 1 and October 1.
In 2001 and 2002, the Company and a wholly-owned subsidiary of the Company
purchased an aggregate of $90.9 million of Subordinated Notes for $21.8
million consisting of $18.5 million in cash and common shares of the
Company valued at $3.3 million. The Company cancelled the purchased
Subordinated Notes and recorded a gain of $11.9 million in 2002 and
recorded a gain of $55.5 million in 2001.
On April 1, 2003, the Company repaid the remaining outstanding Subordinated
Notes balance of $9.1 million plus accrued interest on the maturity date
and retired the issue.
14. CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility (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 and
further reduced by outstanding letters of credit. 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
December 31, 2004, the Company has not drawn down on the Credit Facility,
however, it has issued letters of credit for $5.5 million under the Credit
Facility arrangement.
Page 63
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
15. COMMITMENTS
(a) Total minimum annual rental payments to be made by the Company under
operating leases for premises are as follows:
2005 $ 5,630
2006 5,407
2007 5,118
2008 4,903
2009 4,955
Thereafter 24,181
--------------
$ 50,194
==============
Rent expense was $4.5 million for 2004 (2003 - $4.0 million, 2002 - $4.0
million).
(b) As at December 31, 2004, the Company has letters of credit of $5.5 million
outstanding under the Company's credit facility arrangement (see note 14).
As of 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. The Company is required to expend these funds
towards the production of a motion picture title. The Company has expended
$1.6 million of these funds as at December 31, 2004 and has recorded $3.4
million in accrued liabilities.
16. CONTINGENCIES AND GUARANTEES
The Company is involved in lawsuits, claims, and proceedings, including
those identified below, which arise in the ordinary course of business. In
accordance with SFAS 5, "Accounting for Contingencies," the Company will
make a provision for a liability when it is both probable that a loss has
been incurred and the amount of the loss can be reasonably estimated. The
Company believes it has adequate provisions for any such matters. The
Company reviews these provisions in conjunction with any related provisions
on assets related to the claims at least quarterly and adjusts these
provisions to reflect the impacts of negotiations, settlements, rulings,
advice of legal counsel and other pertinent information related to the
case. Should developments in any of these matters outlined below cause a
change in our determination as to an unfavorable outcome and result in the
need to recognize a material provision, or, should any of these matters
result in a final adverse judgement or be settled for significant amounts,
they could have a material adverse effect on our results of operations,
cash flows, and financial position in the period or periods in which such a
change in determination, settlement or judgement occurs.
(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 64
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. 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. In December 2004, the parties entered into an
agreement to settle all existing 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 exhausting all appeals. 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. Following an appeal to the Munich Court of Appeals,
Siewert's appeal was largely rejected and the Munich Court of Appeals
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, and such proceedings were opened with effect as of November 30,
2004, as a result of which the proceedings are temporarily stayed. To the
extent the lawsuit will be continued 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 $17.8 million 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 ICC has rejected the lack of
jurisdiction defense and has set the case for arbitration. As E-Citi has
refused to pay its share of the arbitration costs set by the ICC, the
Company has accordingly applied for relief from the ICC and has requested
that adjudication proceed expeditiously. The Company also 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.
Page 65
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CONTINGENCIES (cont'd)
(f) In addition to the matters described above and in note 26(a) in respect of
the Miami theater, the Company is currently involved in other legal
proceedings which, in the opinion of the Company's management, will not
materially affect the Company's financial position or future operating
results, although no assurance can be given with respect to the ultimate
outcome of any such proceedings.
(g) In the normal course of business, the Company enters into agreements that
may contain features that meet the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45")
definition of a guarantee. FIN 45 defines a guarantee to be a contract
(including an indemnity) that contingently requires the Company to make
payments (either in cash, financial instruments, other assets, shares of
its stock or provision of services) to a third party based on (a) changes
in an underlying interest rate, foreign exchange rate, equity or commodity
instrument, index or other variable, that is related to an asset, a
liability or an equity security of the counterparty, (b) failure of another
party to perform under an obligating agreement or (c) failure of another
third party to pay its indebtedness when due.
The Company has estimated under its lease and sale arrangements that there
will not be costs associated with contractual warranty provisions.
FINANCIAL GUARANTEES
The Company has provided no significant financial guarantees to third
parties.
DIRECTOR/OFFICER INDEMNIFICATIONS
The Company's General By-law contains an indemnification of its
directors/officers, former directors/officers and persons who have acted at
its request to be a director/officer of an entity in which the Company is a
shareholder or creditor, to indemnify them, to the extent permitted by the
Canada Business Corporations Act, against expenses (including legal fees),
judgements, fines and any amount actually and reasonably incurred by them
in connection with any action, suit or proceeding in which the directors
and/or officers are sued as a result of their service, if they acted
honestly and in good faith with a view to the best interests of the
Company. The nature of the indemnification prevents the Company from making
a reasonable estimate of the maximum potential amount it could be required
to pay to counterparties. The Company has purchased directors' and
officers' liability insurance. No amount has been accrued in the
consolidated balance sheet as of December 31, 2004, with respect to this
indemnity.
OTHER INDEMNIFICATION AGREEMENTS
In the normal course of the Company's operations, it provides
indemnifications to counterparties in transactions such as: theater system
lease and sale agreements; film production, exhibition and distribution
agreements; real property lease agreements; and employment agreements.
These indemnification agreements require the Company to compensate the
counterparties for costs incurred as a result of litigation claims that may
be suffered by the counterparty as a consequence of the transaction or the
Company's breach or non-performance under these agreements. While the terms
of these indemnification agreements vary based upon the contract, they
normally extend for the life of the agreements. A small number of
agreements do not provide for any limit on the maximum potential amount of
indemnification, however virtually all of the Company's system lease and
sale agreements limit such maximum potential liability to the purchase
price of the system. The fact that the maximum potential amount of
indemnification required by the Company is not specified in some cases
prevents the Company from making a reasonable estimate of the maximum
potential amount it could be required to pay to counterparties.
Historically, the Company has not made any significant payments under such
indemnifications and no amount has been accrued in the accompanying
consolidated financial statements with respect to the contingent aspect of
these indemnities.
Page 66
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CAPITAL STOCK
(a) AUTHORIZED
The authorized capital of the Company consists of an unlimited number of
common shares.
The following is a summary of the rights, privileges, restrictions and
conditions of the common shares.
COMMON SHARES
The holders of common shares are entitled to receive dividends if, as and
when declared by the directors of the Company, subject to the rights of the
holders of any other class of shares of the Company entitled to receive
dividends in priority to the common shares.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of the shareholders.
(b) CHANGES DURING THE PERIOD
In 2004, the Company issued 145,206 common shares pursuant to the exercise
of stock options for cash proceeds of $0.6 million.
In 2003, the Company issued 490,039 common shares pursuant to the exercise
of stock options for cash proceeds of $1.7 million. In addition, the
Company issued 5,838,353 common shares with a value of $48.3 million in
exchange for the repurchase of a portion of the Old Senior Notes (see note
12).
(c) STOCK BASED COMPENSATION
As at December 31, 2004, the Company has reserved a total of 7,732,395
(2003 - 7,877,601) common shares for future issuance under the Stock Option
Plan, of which options in respect of 5,593,101 common shares are
outstanding at December 31, 2004. The options granted under the Stock
Option Plan generally vest between one and five years and expire 10 years
or less from the date granted. At December 31, 2004, options in respect of
3,759,236 common shares were vested and exercisable.
Under the terms of certain employment agreements dated July 12, 2000, the
Company is required to issue either 360,000 restricted common shares or pay
their cash equivalent. The restricted shares or the related cash obligation
were fully vested effective July 1, 2002. In May 2003, the Company paid
approximately $1.6 million in cash to settle the equivalent of 200,000 of
the total 360,000 restricted common shares under these agreements. The
Company has recorded an expense of $0.1 million for the year ended December
31, 2004 (2003 - $1.4 million), due to the changes in the Company's stock
price during the period.
The following table summarizes certain information in respect of option
activity under the Stock Option Plan:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
----------------------------------- -------------------------------
2004 2003 2002 2004 2003 2002
---------- ---------- ---------- --------- --------- ---------
Options outstanding, beginning of
year 5,677,806 5,640,898 4,609,086 $ 11.11 $ 11.31 $ 16.98
Granted 1,633,486 786,110 2,229,893 5.53 6.99 4.76
Exercised (145,206) (490,039) (42,500) 3.89 3.71 3.11
Forfeited or expired (352,685) (259,163) (869,681) 15.56 17.00 21.37
Cancelled (1,220,300) -- (285,900) 22.87 -- 24.22
---------- ---------- -----------
Options outstanding, end of year 5,593,101 5,677,806 5,640,898 6.82 11.11 11.31
========== ========== ==========
Options exercisable, end of year 3,759,236 4,108,212 3,360,165 7.32 13.53 13.89
========== ========== ==========
In 2004, the Company cancelled 1.2 million stock options (2003 - nil, 2002
- 0.3 million) surrendered by Company employees for $nil consideration.
Page 67
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CAPITAL STOCK (cont'd)
(c) STOCK BASED COMPENSATION (cont'd)
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at December 31, 2004:
NUMBER OF SHARES
--------------------------------------------
WEIGHTED
RANGE OF EXERCISE AVERAGE EXERCISE AVERAGE
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE REMAINING TERM
-------------------- ----------------- ----------------- --------------- --------------
$ 0.00 - $ 2.99 249,051 218,383 $ 2.70 3.3 Years
$ 3.00 - $ 4.99 2,304,054 2,048,710 4.28 4.5 Years
$ 5.00 - $ 9.99 2,509,692 977,639 6.18 5.3 Years
$ 10.00 - $ 14.99 11,000 11,000 13.48 1.1 Years
$ 15.00 - $ 19.99 55,600 55,600 17.58 2.0 Years
$ 20.00 - $ 24.99 303,104 302,604 21.92 3.8 Years
$ 25.00 - $ 28.04 160,600 145,300 27.16 5.1 Years
----------------- -----------------
Total 5,593,101 3,759,236 6.82 4.7 Years
================= =================
In 2004, an aggregate of 53,340 (2003 - 143,394) options with an average
exercise price of $6.19 (2003 - $6.82) to purchase the Company's common
stock were issued to certain advisors and strategic partners of the
Company. The Company has calculated the fair value of these options to
non-employees on the date of grant to be $0.2 million (2003 - $0.5
million), using a Binomial option-pricing model with the following
underlying assumptions: dividend yield of 0% (2003 - 0%); an average risk
free interest rate of 3.4% (2003 - 2.8%); expected option life of 5 years
(2003 - 5 years); and an average expected volatility of 62.0% (2003 -
62.0%).
The Company has recorded a charge of $0.2 million (2003 - $0.5 million) to
film cost of sales related to the non-employee stock options.
There were no warrants issued in the year ended December 31, 2004 (2003 -
550,000). 350,000 warrants remain unvested 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 December 31, 2004, 200,000 warrants were
vested and exercisable. The Company believes that no additional warrants
will ultimately vest.
(d) EARNINGS (LOSS) PER SHARE
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Net earnings (loss) applicable to common shareholders $ 10,244 $ 231 $ 11,972
=============== =============== ===============
Weighted average number of common shares:
Issued and outstanding, beginning of year 39,301,758 32,973,366 31,899,114
Weighted average number of shares
issued during the year 15,289 2,689,888 1,044,279
--------------- --------------- ---------------
Weighted average number of shares used in computing
basic earnings (loss) per share 39,317,047 35,663,254 32,943,393
Assumed exercise of stock options and warrants, net of
shares assumed 662,805 767,307 362,935
--------------- --------------- ---------------
Weighted average number of shares used in computing
diluted earnings (loss) per share 39,979,852 36,430,561 33,306,328
=============== =============== ===============
The calculation of diluted earnings (loss) per share for 2003 and 2002
excludes common shares issuable upon conversion of the Subordinated Notes
due 2003 (now retired) as the impact of these exercises and conversions
would be anti-dilutive.
Page 68
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
18. CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
(a) The Company generally enters into multi-year theater system lease
agreements with customers that typically contain customer payment
obligations prior to the scheduled installation of the theater system.
During the period of time between lease signing and system installation,
certain customers each year generally are unable, or elect not, to proceed
with system installation for a number of reasons, including business
considerations, or the inability to obtain certain consents, approvals or
financing. Once the determination is made that the customer will not
proceed with installation, the customer and the Company may enter into a
consensual lease buyout, whereby the parties are released from their future
obligations under the lease and the geographic territory granted to the
customer reverts to the Company. Once an agreement is reached by both
parties, the initial lease payments that the customer previously made to
the Company are recognized as revenue. In addition, since the introduction
of its new IMAX MPX theater system in 2003, the Company has agreed with
several customers to modify their lease agreements to substitute the
original leased system for the MPX system. Upon finalizing an amended
agreement, the total consideration received is allocated to the MPX system
and lease settlement revenue using multiple-element arrangement accounting.
Included in IMAX systems revenue for 2004 are the following types of
settlement arrangements: $6.0 million related to MPX conversion agreements
(2003-$1.4 million, 2002-$nil): $12.3 million related to consensual lease
buyouts (2003-$7.6 million, 2002-$5.1 million); and $0.8 million related to
terminations due to customer defaults (2003-$0.5 million, 2002-$nil). In
aggregate: 2004-$19.1 million, 2003-$9.5 million, 2002-$5.1 million.
(b) Included in selling, general and administrative expenses for 2004 is $0.4
million (2003 - $1.7 million, 2002 - $0.4 million) for net foreign exchange
gains related to the translation of foreign currency denominated monetary
assets, liabilities and integrated subsidiaries.
(c) In 2004, the Company recorded a gain of $0.4 million from the sale of its
equity investment in Mainframe Entertainment, Inc. ("MFE"). In 2003, the
Company entered into a settlement agreement with MFE, whereby the parties
settled all of MFE's indebtedness and obligations to the Company arising
under the Company's 6.0% Senior Secured Convertible Debenture due from MFE
(the "Debenture"). The Company recorded a gain of $1.9 million related to
the final settlement. In 2001, $5.6 million of the Debenture principal
amount, the remaining balance at the time, was fully provided for due to
uncertainty of collection.
(d) On December 2, 2003, the Company acquired the remaining 50% interest in the
company that operates the IMAX Theater at Arizona Mills in Tempe, Arizona,
for $nil consideration. On the date of the transaction, the net assets
acquired and liabilities assumed had nominal fair value.
Summarized Condensed financial information for Tempe while it was
equity-accounted is included below:
2003 2002
------------- -------------
Current assets $ N/A $ 489
Non current assets N/A 2,595
Current liabilities N/A 2,449
Non current liabilities N/A 8
Revenue 2,040 2,557
Loss from continued operations (662) (729)
Net Loss $ (662) $ (729)
Subsequent to December 2, 2003, the Company consolidated 100% of the
results in operations of Tempe.
(e) On December 31, 2003, the Company recorded a gain of $2.3 million upon
obtaining a release from a remaining debt guarantee. In 2000, the Company
had recorded a $4.0 million debt guarantee which was reduced over time due
to reductions in the underlying debt.
Page 69
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
19. RECEIVABLE PROVISIONS (RECOVERIES), NET
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
------------- ------------- -------------
Accounts receivable provisions (recoveries), net $ (81) $ 714 $ (1,942)
Financing receivable provisions (recoveries), net(1) $ (1,406) $ (2,939) $ 709
------------- ------------- -------------
Receivable provisions (recoveries), net $ (1,487) $ (2,225) $ (1,233)
============= ============= =============
(1) For the year ended December 31, 2004, the Company recorded a recovery
of previously provided amounts of $1.4 million (2003 - $2.9 million
recovery, 2002 - $0.7 million provision) as the collectibility
uncertainty associated with certain leases was resolved by amendment
or settlement of the leases or other resolving conditions.
20. RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
------------- ------------- -------------
Restructuring costs(1) (recoveries) $ -- $ -- $ (497)
Asset impairments (recoveries)
Fixed assets(2) 848 969 376
------------- ------------- -------------
Total $ 848 $ 969 $ (121)
============= ============= =============
(1) During 2001, the Company reduced its expenses and changed its
corporate structure to reflect industry-wide economic and financial
difficulties faced by certain of the Company's customers. During the
year ended December 31, 2001, the Company relocated its sound-system
facility in Birmingham, Alabama to the Company's current facilities
near Toronto, Canada, and reduced its overall corporate workforce. In
2001, the Company recorded expenses of $12.6 million for severances
and $3.7 million for premises relocation charges. During 2002, the
Company recovered $0.5 million of restructuring liabilities for
terminated employees who obtained employment prior to the completion
of their severance period. As at December 31, 2004 the Company has
accrued liabilities of $0.2 million (2003 - $0.6 million) for costs of
severed employees to be paid over the next year. During 2004, the
Company paid out $0.4 million (2003 - $0.8 million, 2002 - $3.2
million) of termination benefits.
(2) Asset impairment charges amounted to $0.8 million (2003 - $1.0
million, 2002 - $0.4 million) to the carrying value of its camera
assets in 2004 and its owned and operated theater assets in 2003 and
2002. The Company assessed that the future cashflows of these assets
did not support their recoverability.
Page 70
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
21. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
(a) Changes in other non-cash operating assets and liabilities are
comprised of the following:
Decrease (increase) in:
Accounts receivable $ (5,679) $ 460 $ 4,202
Financing receivables (994) (1,044) (580)
Inventories (283) 7,847 8,092
Prepaid expenses (378) 522 (693)
Increase (decrease) in:
Accounts payable 44 (1,230) (478)
Accrued liabilities 5,964 799 (7,765)
Deferred revenue (12,838) (22,278) 3,010
------------ ------------ ------------
$ (14,164) $ (14,924) $ 5,788
============ ============ ============
(b) Cash payments made during the year on account of:
Income taxes $ 1,741 $ 2,294 $ 1,256
============ ============ ============
Interest $ 15,836 $ 15,123 $ 16,868
============ ============ ============
Non-cash transactions for financing and investing:
Issuance of common stock to repurchase Old Senior Notes
due 2005 $ -- $ 48,324 $ --
============ ============ ============
(c) Depreciation and amortization comprise of the following:
Film assets $ 5,323 $ 2,940 $ 1,973
Fixed assets 6,284 6,592 6,158
Other assets 1,382 1,545 2,202
Other intangible assets 719 573 1,419
Deferred financing costs 1,239 705 792
------------ ------------ ------------
$ 14,947 $ 12,355 $ 12,544
============ ============ ============
(d) Write-downs (recoveries) comprise of the following:
Accounts receivable (81) 714 (1,942)
Financing receivables (1,406) (2,939) 709
Inventories -- -- 1,229
Fixed assets 852 1,322 3,175
Other assets (293) (1,819) 216
------------ ------------ ------------
$ (928) $ (2,722) $ 3,387
============ ============ ============
22. SEGMENTED AND OTHER INFORMATION
The Company has four reportable segments: IMAX Systems; Films; Theater
Operations; and Other. The IMAX systems segment designs, manufactures,
sells or leases and maintains IMAX theater projection systems. The films
segment produces and distributes films, and performs film re-mastering and
post-production services. The theater operations segment owns and operates
certain IMAX theaters. The other segment includes camera rentals. The
accounting policies of the segments are the same as those described in note
2. Segment performance is evaluated based on gross margin less selling,
general and administrative expenses, research and development expenses,
amortization of intangibles, loss (income) from equity-accounted investees
and restructuring costs and asset impairments (recoveries). Inter-segment
transactions are not significant.
Page 71
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
22. SEGMENTED AND OTHER INFORMATION (cont'd)
(a) OPERATING SEGMENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
REVENUE
IMAX systems $ 86,570 $ 75,848 $ 70,959
Films 27,887 25,803 40,556
Theater operations 17,415 13,109 12,284
Other 4,108 4,500 5,303
------------ ------------ ------------
Total $ 135,980 $ 119,260 $ 129,102
============ ============ ============
RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
Theater operations $ -- $ 969 $ 376
Other 848 -- (497)
------------ ------------ -------------
Total $ 848 $ 969 $ (121)
============ ============ =============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 51,708 $ 38,238 $ 33,974
Films (1,905) (508) 4,947
Theater operations 1,412 (2,474) (763)
Corporate and other (25,438) (17,206) (21,739)
------------ ------------ ------------
Total $ 25,777 $ 18,050 $ 16,419
============ ============ ============
DEPRECIATION AND AMORTIZATION:
--IMAX systems $ 4,730 $ 4,722 $ 5,030
--Films 6,365 4,268 3,556
--Theater operations 125 178 172
--Corporate and other 3,727 3,187 3,786
------------ ------------ ------------
--Total $ 14,947 $ 12,355 $ 12,544
============ ============ ============
WRITE-DOWNS (RECOVERIES):
--IMAX systems $ (1,406) $ (2,939) $ 4,505
--Theater operations -- 1,104 607
--Corporate and other 478 (887) (1,725)
------------ ------------ ------------
--Total $ (928) $ (2,722) $ 3,387
============ ============ ============
PURCHASE OF LONG-LIVED ASSETS
IMAX systems $ 1,091 $ 1,215 $ 1,319
Films 10 400 152
Theater operations 123 242 550
Corporate and other 1,685 7,552 2,047
------------ ------------ ------------
Total $ 2,909 $ 9,409 $ 4,068
============ ============ ============
Page 72
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
22. SEGMENTED AND OTHER INFORMATION (cont'd)
(a) OPERATING SEGMENTS (cont'd)
AT DECEMBER 31,
----------------------------
2004 2003
------------ ------------
ASSETS
IMAX systems $ 163,434 $ 158,093
Films 14,388 15,226
Theater operations 1,096 1,068
Other 2,893 5,633
Corporate 49,042 71,628
------------ ------------
Total $ 230,853 $ 251,648
============ ============
Income from equity-accounted investees relates to the Theater operations
segment.
(b) GEOGRAPHIC INFORMATION
Revenue by geographic area is based on the location of the theater.
YEARS ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
REVENUE
Canada $ 9,616 $ 5,224 $ 7,236
United States 68,411 66,808 74,072
Europe 26,144 26,805 23,846
Rest of World 31,809 20,423 23,948
------------ ------------ ------------
Total $ 135,980 $ 119,260 $ 129,102
============ ============ ============
AT DECEMBER 31,
----------------------------
2004 2003
------------ ------------
LONG-LIVED ASSETS
Canada $ 53,909 $ 57,345
United States 28,392 31,501
Europe 836 1,045
Rest of World 1,039 2,169
------------ ------------
Total $ 84,176 $ 92,060
============ ============
Long-lived assets include fixed assets, other assets, other intangible
assets and goodwill.
(c) REVENUE AND COST OF GOODS AND SERVICES
YEARS ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
Revenue:
Products $ 84,188 $ 71,361 $ 77,024
Services 51,792 47,899 52,078
------------ ------------ ------------
Total revenue $ 135,980 $ 119,260 $ 129,102
============ ============ ============
Costs of goods and services:
Products $ 31,327 $ 30,077 $ 35,611
Services 38,735 37,206 40,023
------------ ------------ ------------
Total costs of goods and services $ 70,062 $ 67,283 $ 75,634
============ ============ ============
Page 73
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
22. SEGMENTED AND OTHER INFORMATION (cont'd)
(c) REVENUE AND COST OF GOODS AND SERVICES (cont'd)
Product revenue includes sales and sales-type leases of theater systems,
revenue from film production and distribution and the sales of other
products. Service revenue includes rentals from operating leases,
maintenance, film re-mastering services, post-production services, camera
rentals, theater operations and other services.
23. FINANCIAL INSTRUMENTS
The Company maintains cash and cash equivalents with various major
financial institutions. The Company's cash is invested with highly rated
financial institutions.
The Company is exposed to market risk from changes in foreign currency
rates. A majority portion of the Company's revenues is denominated in U.S.
dollars while a substantial portion of its costs and expenses is
denominated in Canadian dollars. A portion of the net U.S. dollar cash
flows of the Company is periodically converted to Canadian dollars to fund
Canadian dollar expenses through the spot market. In Japan, the Company has
ongoing operating expenses related to its operations. Net Japanese yen
flows are converted to U.S. dollars generally through the spot markets. The
Company also has cash receipts under leases denominated in Japanese yen and
Euros which are converted to U.S. dollars generally through the spot
market. As at December 31, 2004, no foreign currency forward contracts are
outstanding. The Company does not use financial instruments for trading or
other speculative purposes.
The carrying values of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair
values due to the short-term maturity of these instruments. The Company's
other financial instruments at December 31, are comprised of the following:
2004 2003
------------------------------ -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- -------------- ------------- -------------
Old Senior Notes due 2005 $ -- $ -- $ 29,234 $ 29,810
Senior Notes due 2010 160,000 174,400 160,000 160,000
Long-term receivables 4,468 4,071 3,197 3,197
The estimated fair values of the Senior Notes due 2010 and long-term
receivables are estimated based on current market rates at December 31,
2004. As at December 31, 2003, the fair value of the Old Senior Notes due
2005 was based on the amounts paid by the Company on January 2, 2004 to
repurchase a portion of the Old Senior Notes due 2005 and the fair value of
the Senior Notes due 2010 were assumed to equal the carrying amount given
the transaction date of December 4, 2003.
To minimize the Company's credit risk, the Company retains title to
underlying theater systems leased, registers theater systems sold as
collateral, performs initial and ongoing credit evaluations of its
customers and makes ongoing provisions for its estimate of potentially
uncollectible amounts. The Company believes it has adequately dealt with
the related exposures surrounding receivables and contractual commitments.
Page 74
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
24. EMPLOYEE PENSIONS
(a) DEFINED BENEFIT PLAN
The Company has a U.S. defined benefit pension plan covering its two
Co-Chief Executive Officers. The plan provides for a lifetime retirement
benefit from age 55 determined as 75% of the member's best average 60
consecutive months of earnings during the 120 months proceeding retirement.
Once benefit payments begin, the benefit is indexed annually to the cost of
living and further provides for 100% continuance for life to the surviving
spouse. The benefits were 50% vested as at July 12, 2000, the plan
initiation date. The vesting percentage increases on a straight-line basis
from inception until age 55. The vesting percentage of a member whose
employment terminates other than by voluntary retirement shall be 100%.
Also, upon the occurrence of a change in control of the Company prior to
termination of a member's employment, the vesting percentage shall become
100%. The following assumptions were used in determining the obligation and
cost status of the Company's defined benefit pension plan at December 31:
2004 2003 2002
--------------- --------------- --------------
Discount rate 5.75% 6.00% 6.00%
Rate of increase in qualifying compensation levels nil% nil% nil%
The amounts accrued for the plan are determined as follows:
Projected benefit obligation: 2004 2003 2002
--------------- --------------- ---------------
Obligation, beginning of year $ 20,086 $ 17,150 $ 13,819
Service cost 2,063 1,956 1,777
Interest cost 1,267 1,088 1,029
Actuarial loss (gain) 2,484 (108) 525
--------------- -------------- ---------------
Obligation, end of year $ 25,900 $ 20,086 $ 17,150
=============== =============== ===============
Unfunded status:
Obligation, end of year $ 25,900 $ 20,086 $ 17,150
Unrecognized prior service cost (5,032) (6,429) (7,826)
Unrecognized actuarial gain (loss) (1,584) 899 791
--------------- --------------- ---------------
Accrued pension liability $ 19,284 $ 14,556 $ 10,115
=============== =============== ===============
In addition, included in accrued liabilities, is a minimum pension
liability of $6.6 million (2003 - $5.5 million, 2002 - $7.0 million),
representing unrecognized prior service costs and unrecognized actuarial
gains or losses.
PENSION BENEFITS
--------------------------------------------
2004 2003 2002
------------- ------------- -------------
Accrued benefits cost $ (25,900) $ (20,086) $ (17,150)
Other assets 5,032 5,530 7,035
Unrecognized actuarial loss 1,584 -- --
------------- ------------- -------------
Net amount recognized $ (19,284) $ (14,556) $ (10,115)
============= ============= =============
The following table provides disclosure of pension expense for the defined
benefit plan for the year ended December 31:
2004 2003 2002
--------------- --------------- ---------------
Service cost $ 2,063 $ 1,956 $ 1,777
Interest cost 1,267 1,088 1,029
Amortization of prior service cost 1,398 1,398 1,398
--------------- --------------- ---------------
Pension expense $ 4,728 $ 4,442 $ 4,204
=============== =============== ===============
The accumulated benefit obligation for the defined benefit plan was $25.9
million and $20.1 million at December 31, 2004 and 2003, respectively.
Page 75
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
24. EMPLOYEE PENSIONS (cont'd)
(a) DEFINED BENEFIT PLAN (cont'd)
No contributions are expected to be made into the plan during 2005.
The following benefit payments are expected to be made as per the current
plan assumptions and the terms of the Plan in each of the next five years,
and in the aggregate over the five years thereafter:
2005 $ --
2006 248
2007 998
2008 1,022
2009 1,047
2010 to 2014 10,191
At the time the Company established the defined benefit pension plan, it
also took out life insurance policies on its two Co-Chief Executive
Officers with coverage amounts of $21.5 million in aggregate. The Company
intends to use the proceeds of such insurance policies to satisfy, in whole
or in part, benefits due and payable under the plan, although there can be
no assurance that the Company will ultimately do so. At December 31, 2004,
the cash surrender value of the insurance policies is $2.5 million (2003 -
$1.7 million, 2002 - $0.9 million) and has been included in other assets.
(b) DEFINED CONTRIBUTION PLAN
The Company also maintains defined contribution pension plans for its
employees, including its executive officers. The Company makes
contributions to these plans on behalf of employees in an amount equal to
5% of their base salary subject to certain prescribed maximums. During
2004, the Company contributed and expensed an aggregate of $0.5 million
(2003 - $0.5 million, 2002 - $0.4 million) to its Canadian plan and an
aggregate of $0.1 million (2003 - $0.1 million, 2002 - $0.1 million) to its
defined contribution employee pension plan under Section 401(k) of the U.S.
Internal Revenue Code.
25. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued a revision to Financial Accounting Standards
No. 123 ("FAS 123R"). FAS 123R is focused primarily on the accounting for
transactions in which a company obtains employee services in exchange for
stock options or share-based payments. Currently, the Company grants stock
options to their employees and discloses the pro forma effect of
compensation expense for these stock options. Under FAS 123R, the Company
will be required to record this compensation expense in the Company's
results of operations. FAS 123R is effective for the beginning of the first
fiscal reporting period that begins after June 15, 2005. The Company has
evaluated the effect the adoption of FAS 123R and will adopt the
pronouncement beginning on July 1, 2005. The Company estimates that based
on the currently issued options, and not including any further grants which
may occur in 2005, the compensation expense for the six month period from
July 1, 2005 to December 31, 2005 will approximate $1.3 million before
taxes.
26. 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 a legal 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 as 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 this $0.8 million to the landlord. As the
Company is uncertain as to the outcome of the proceeding, no additional
amount has been recorded.
Page 76
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. 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. The loans receivable are collateralized by fixed and
floating charges over all DPI assets including intellectual properties. One
of the loans is convertible, upon the occurrence of certain events, into
shares representing 49% of the total share capital of DPI. During 2004, the
Company received $0.8 million (2003 - $0.8 million) in cash towards the
repayment of this debt, and has recorded this amount in net earnings (loss)
from discontinued operations. As of December 31, 2004, the remaining
balance of the loans receivable is $11.1 million, which has been fully
allowed 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 years ended December 31, was
comprised of the following:
2004 2003 2002
------------- ------------- -------------
Revenue $ -- $ 1,123 $ 1,548
============= ============= =============
Net earnings (loss) from discontinued operations(1) $ 800 $ 374 $ 804
Net loss on disposal of discontinued operations -- (179) --
------------- -------------- -------------
Net earnings (loss) from discontinued operations $ 800 $ 195 $ 804
============= ============= =============
(1) Net of income tax provision of $nil in 2004 (2003 - $0.1 million, 2002
- $nil). Since the deferred tax asset relating to the original loss
from discontinued operations was fully allowed for through the
valuation allowance, any future recoveries relating to the repayment
of this outstanding debt are not tax effected.
27. ASSET RETIREMENT OBLIGATIONS
The Company has accrued costs related to obligations in respect of required
reversion costs for its theaters under long-term real estate leases which
will become due in the future. The Company does not have any legal
restrictions with respect to settling any of these long-term leases. A
reconciliation of the Company's liability in respect of required reversion
costs is shown below:
2004 2003
------------- -------------
Beginning balance, January 1 $ 204 $ 182
Accretion expense 23 22
------------- -------------
Ending balance, December 31 $ 227 $ 204
============= =============
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes (see note 11) are unconditionally guaranteed,
jointly and severally by specific wholly-owned subsidiaries of the Company
(the "Guarantor Subsidiaries"). The main Guarantor Subsidiaries are David
Keighley Productions 70 MM Inc., Sonics Associates Inc., and the
subsidiaries that own and operate certain theaters. These guarantees are
full and unconditional. The information under the column headed
"Non-Guarantor Subsidiaries" relates to the following subsidiaries of the
Company: IMAX Japan Inc. and IMAX B.V., (the "Non-Guarantor Subsidiaries")
which have not provided any guarantees of the Senior Notes.
Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Some
subsidiaries may be unable to pay dividends due to negative working
capital.
Page 77
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2004:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
ASSETS
Cash and cash equivalents $ 23,683 $ 5,058 $ 223 $ -- $ 28,964
Accounts receivable 16,492 3,029 378 -- 19,899
Financing receivables 57,769 1,723 -- -- 59,492
Inventories 28,661 233 107 -- 29,001
Prepaid expenses 1,712 464 103 -- 2,279
Inter-company receivables 13,407 31,146 12,100 (56,653) --
Film assets 871 -- -- -- 871
Fixed assets 27,184 1,527 1 -- 28,712
Other assets 13,377 -- -- -- 13,377
Deferred income taxes 6,104 67 -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,060 -- -- -- 3,060
Investments in subsidiaries 31,693 -- -- (31,693) --
------------- ------------- ------------- ------------- -------------
Total assets $ 263,040 $ 43,247 $ 12,912 $ (88,346) $ 230,853
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 3,238 2,583 6 -- 5,827
Accrued liabilities 54,674 2,086 137 -- 56,897
Inter-company payables 43,000 34,440 7,597 (85,037) --
Deferred revenue 45,422 4,918 165 -- 50,505
Senior Notes due 2010 160,000 -- -- -- 160,000
------------- ------------- ------------- ------------- -------------
Total liabilities 306,334 44,027 7,905 (85,037) 273,229
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Capital stock 116,281 -- 117 (117) 116,281
Other equity/Additional paid in
capital/Contributed surplus 2,193 46,960 -- (45,926) 3,227
Deficit (161,443) (47,126) 4,890 42,734 (160,945)
Accumulated other comprehensive income
(loss) (325) (614) -- -- (939)
------------- -------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (43,294) $ (780) $ 5,007 $ (3,309) $ (42,376)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 263,040 $ 43,247 $ 12,912 $ (88,346) $ 230,853
============= ============= ============= ============= =============
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 $28.5
million.
Page 78
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2003:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
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 4,977 51 -- -- 5,028
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,388 -- -- -- 3,388
Investments in subsidiaries 26,196 -- -- (26,196) --
------------- ------------- ------------- ------------- -------------
Total assets $ 285,239 $ 36,635 $ 16,348 $ (86,574) $ 251,648
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 3,605 2,175 -- -- 5,780
Accrued liabilities 42,890 1,803 373 -- 45,066
Inter-company payables 43,885 31,640 11,065 (86,590) --
Deferred revenue 58,319 4,889 136 -- 63,344
Senior Notes due 2010 160,000 -- -- -- 160,000
Old Senior Notes due 2005 29,234 -- -- -- 29,234
------------- ------------- ------------- ------------- -------------
Total liabilities 337,933 40,507 11,574 (86,590) 303,424
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Capital 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) $ 285,239 $ 36,635 $ 16,348 $ (86,574) $ 251,648
============= ============= ============= ============= =============
In certain Guarantor Subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced inter-company receivable balances
with respect to these Guarantor Subsidiaries in the amounts of $26.5
million.
Page 79
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2004:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
REVENUE
IMAX systems $ 84,352 $ 2,978 $ 1,110 $ (1,870) $ 86,570
Films 22,265 8,320 23 (2,721) 27,887
Theater operations 617 16,902 -- (104) 17,415
Other 4,105 -- 27 (24) 4,108
------------- ------------- ------------- ------------- -------------
111,339 28,200 1,160 (4,719) 135,980
COST OF GOODS AND SERVICES 49,267 25,066 448 (4,719) 70,062
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 62,072 3,134 712 -- 65,918
Selling, general and administrative expenses 34,971 745 350 -- 36,066
Research and development 3,995 -- -- -- 3,995
Amortization of intangibles 719 -- -- -- 719
Loss (income) from equity-accounted
investees (3,325) -- -- 3,325 --
Receivable provisions net of (recoveries) (762) (757) 32 -- (1,487)
Restructuring cost and asset impairments 848 -- -- -- 848
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 25,626 3,146 330 (3,325) 25,777
Interest income 756 -- -- -- 756
Interest expense (16,769) (54) (30) -- (16,853)
Loss on retirement of notes (784) -- -- -- (784)
Recovery on long-term investments 293 -- -- -- 293
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 9,122 3,092 300 (3,325) 9,189
Recovery of (provision for) income taxes 322 -- (67) -- 255
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 9,444 3,092 233 (3,325) 9,444
Net earnings from discontinued operations 800 -- -- -- 800
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 10,244 $ 3,092 $ 233 $ (3,325) $ 10,244
============= ============= ============= ============= =============
Page 80
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2003:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
REVENUE
IMAX systems $ 74,180 $ 2,373 $ 1,449 $ (2,154) $ 75,848
Films 15,669 12,933 58 (2,857) 25,803
Theater operations 746 12,363 -- -- 13,109
Other 4,451 -- 115 (66) 4,500
------------- ------------- ------------- ------------- -------------
95,046 27,669 1,622 (5,077) 119,260
COST OF GOODS AND SERVICES 45,308 27,769 596 (6,390) 67,283
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 49,738 (100) 1,026 1,313 51,977
Selling, general and administrative expenses 32,210 743 359 -- 33,312
Research and development 3,794 -- -- -- 3,794
Amortization of intangibles 573 -- -- -- 573
Income from equity-accounted investees (1,903) (6) -- (587) (2,496)
Receivable provisions net of (recoveries) (1,956) (178) (91) -- (2,225)
Restructuring costs and asset impairment -- 969 -- -- 969
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 17,020 (1,628) 758 1,900 18,050
Interest income 656 -- -- -- 656
Interest expense (15,770) (86) -- -- (15,856)
Loss on retirement of notes (4,910) -- -- -- (4,910)
Recovery on long-term investments 1,892 -- -- -- 1,892
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,112) (1,714) 758 1,900 (168)
Recovery of (provision for) income taxes (840) 1,077 149 -- 386
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (1,952) (637) 907 1,900 218
Net earnings (loss) from discontinued
operations 653 (458) -- -- 195
------------- ------------- ------------- ------------- -------------
Net earnings (loss) before cumulative
effect of changes in accounting
principles (1,299) (1,095) 907 1,900 413
Cumulative effect of changes in accounting
principles -- (182) -- -- (182)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (1,299) $ (1,277) $ 907 $ 1,900 $ 231
============= ============= ============= ============= =============
Page 81
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2002:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
REVENUE
IMAX systems $ 67,991 $ 4,704 $ 1,388 $ (3,124) $ 70,959
Films 24,614 16,849 37 (944) 40,556
Theater operations 718 11,566 -- -- 12,284
Other 4,982 269 62 (10) 5,303
------------- ------------- ------------- ------------- -------------
98,305 33,388 1,487 (4,078) 129,102
COST OF GOODS AND SERVICES 48,475 30,373 840 (4,054) 75,634
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 49,830 3,015 647 (24) 53,468
Selling, general and administrative expenses 33,456 707 753 (10) 34,906
Research and development 2,360 2 -- -- 2,362
Amortization of intangibles 1,418 -- -- -- 1,418
Loss (income) from equity-accounted
investees (2,781) 314 -- 2,184 (283)
Receivable provisions, net of (recoveries) 563 (1,348) (448) -- (1,233)
Restructuring costs and asset impairment
(recoveries) (121) -- -- -- (121)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 14,935 3,340 342 (2,198) 16,419
Interest income 408 2 3 -- 413
Interest expense (17,314) (250) -- -- (17,564)
Gain on retirement of notes 11,900 -- -- -- 11,900
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 9,929 3,092 345 (2,198) 11,168
Net earnings (loss) from discontinued
operations 2,066 (1,262) -- -- 804
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 11,995 $ 1,830 $ 345 $ (2,198) $ 11,972
============= ============= ============= ============= =============
Page 82
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2004:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 10,244 $ 3,092 $ 233 $ (3,325) $ 10,244
Net (earnings) from discontinued operations (800) -- -- -- (800)
Items not involving cash:
Depreciation and amortization 14,414 531 2 -- 14,947
Write-downs (recoveries) (203) (757) 32 -- (928)
Loss (income) from equity-accounted
investees (3,325) -- -- 3,325 --
Change in deferred income taxes (1,127) (16) -- -- (1,143)
Loss on retirement of notes 784 -- -- -- 784
Stock and other non-cash compensation 3,567 -- -- -- 3,567
Non cash foreign exchange gain (605) -- -- -- (605)
Premium on repayment of notes (576) -- -- -- (576)
Investment in film assets (6,083) 1,207 -- -- (4,876)
Changes in restricted cash 4,961 -- -- -- 4,961
Changes in other non-cash operating assets and
liabilities (9,338) (4,500) (326) -- (14,164)
------------- ------------- ------------ ------------ -------------
Net cash provided by (used in) operating
activities 11,913 (443) (59) -- 11,411
------------- ------------- ------------ ------------ -------------
INVESTING ACTIVITIES
Purchase of fixed assets (180) (140) -- -- (320)
Increase in other assets (1,044) -- -- -- (1,044)
Increase in other intangible assets (391) -- -- -- (391)
Recovery on long-term investments 393 -- -- -- 393
------------- ------------- ------------ ------------ -------------
Net cash used in investing activities (1,222) (140) -- -- (1,362)
------------- ------------- ------------ ------------ -------------
FINANCING ACTIVITIES
Repayment of Old Senior Notes due 2005 (29,234) -- -- -- (29,234)
Financing costs related to Senior Notes due (535) -- -- -- (535)
2010
Common shares issued 558 -- -- -- 558
Net cash provided by financing activities
from discontinued operations 800 -- -- -- 800
------------- ------------- ------------ ------------ -------------
Net cash used in financing activities (28,411) -- -- -- (28,411)
------------- ------------- ------------ ------------ -------------
Effects of exchange rate changes on cash 92 (55) 7 -- 44
------------- -------------- ------------ ------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS (18,428) (638) (52) -- (19,118)
Increase in cash and cash equivalents from
discontinued operations 800 -- -- -- 800
------------- ------------- ------------- ------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING
THE PERIOD (17,628) (638) (52) -- (18,318)
Cash and cash equivalents, beginning of period 41,311 5,696 275 -- 47,282
------------- ------------- ------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,683 $ 5,058 $ 223 $ -- $ 28,964
============= ============= ============= ============= ============
Page 83
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2003:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ (1,299) $ (1,277) $ 907 $ 1,900 $ 231
Net (earnings) from discontinued operations (653) 458 -- -- (195)
Items not involving cash:
Cumulative effect of changes in accounting
principles -- 182 -- -- 182
Depreciation and amortization 11,482 870 3 -- 12,355
Write-downs (recoveries) (3,556) 925 (91) -- (2,722)
Income from equity-accounted investees (2,216) 307 -- (587) (2,496)
Change in deferred income taxes 81 -- -- -- 81
Gain on retirement of notes 4,910 -- -- -- 4,910
Stock and other non-cash compensation 4,926 -- -- -- 4,926
Non-cash foreign exchange loss (gain) (1,281) -- -- -- (1,281)
Premium on repayment of notes (3,088) -- -- -- (3,088)
Payment under certain employment agreements (1,550) -- -- -- (1,550)
Investment in film assets (1,786) (1,207) -- -- (2,993)
Changes in restricted cash (1,626) -- -- -- (1,626)
Changes in other non-cash operating assets and
liabilities (13,689) 1,000 (922) (1,313) (14,924)
Net cash used in operating activities from
discontinued operations (462) (531) -- -- (993)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating (9,807) 727 (103) -- (9,183)
------------- ------------- ------------- ------------- -------------
activities
INVESTING ACTIVITIES
Purchase of fixed assets (852) (708) -- -- (1,560)
Increase in other assets (1,526) -- -- -- (1,526)
Increase in other intangible assets (597) -- -- -- (597)
Recovery on long-term investments 1,892 -- -- -- 1,892
Investment in subsidiaries (10) -- -- 10 --
Net cash used in investing activities from
discontinued operations -- (15) -- -- (15)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities (1,093) (723) -- 10 (1,806)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repayment of Subordinated Notes (9,143) -- -- -- (9,143)
Repayment of Old Senior Notes due 2005 (123,577) -- -- -- (123,577)
Issuance of Senior Notes due 2010 160,000 -- -- -- 160,000
Financing costs related to Senior Notes due 2010 (5,615) -- -- -- (5,615)
Common shares issued 1,722 -- -- -- 1,722
Other equity/additional paid in
capital/contributed surplus issued -- 10 -- (10) --
Net cash provided by financing activities from
discontinued operations 799 -- -- -- 799
------------- ------------- ------------- ------------- -------------
Net cash used in (provided by) financing
activities 24,186 10 -- (10) 24,186
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash 269 (13) 28 -- 284
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 13,218 547 (75) -- 13,690
Increase (decrease) in cash and cash
equivalents from discontinued operations 337 (546) -- -- (209)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE YEAR 13,555 1 (75) -- 13,481
Cash and cash equivalents, beginning of year 27,756 5,695 350 -- 33,801
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,311 $ 5,696 $ 275 $ -- $ 47,282
============= ============= ============= ============= =============
Page 84
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2002:
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 11,995 $ 1,830 $ 345 $ (2,198) $ 11,972
Net (earnings) from discontinued operations (2,066) 1,262 -- -- (804)
Items not involving cash:
Depreciation and amortization 11,441 1,094 9 -- 12,544
Write-downs (recoveries) 4,575 (740) (448) -- 3,387
Loss (income) from equity-accounted
investees (2,781) 314 -- 2,184 (283)
Change in deferred income taxes (799) -- -- -- (799)
Gain on retirement of notes (11,900) -- -- -- (11,900)
Stock and other non-cash compensation 3,685 -- -- -- 3,685
Non-cash foreign exchange (gain) loss (605) -- -- -- (605)
Investment in film assets (8,423) 5,982 -- -- (2,441)
Changes in restricted cash 2,538 -- -- -- 2,538
Changes in other non-cash operating assets and
liabilities 16,189 (10,489) 242 (154) 5,788
Net cash provided by (used in) operating
activities from discontinued operations (950) 159 -- -- (791)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 22,899 (588) 148 (168) 22,291
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (786) (881) (2) 152 (1,517)
Decrease (increase) in other assets (1,970) 1,006 -- -- (964)
Increase (increase) in other intangible assets (675) -- -- -- (675)
Net cash used in investing activities from
discontinued operations -- (24) -- -- (24)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (3,431) 101 (2) 152 (3,180)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of Subordinated Notes (6,022) -- -- -- (6,022)
Common shares issued 152 -- 152
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (5,870) -- -- -- (5,870)
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash (8) 38 (1) 16 45
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 14,540 (584) 145 -- 14,101
Increase (decrease) in cash and cash
equivalents (950) 135 -- -- (815)
------------- ------------- ------------- ------------- -------------
from discontinued operations
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE YEAR 13,590 (449) 145 -- 13,286
Cash and cash equivalents, beginning of period 14,166 6,144 205 -- 20,515
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,756 $ 5,695 $ 350 $ -- $ 33,801
============= ============= ============= ============= =============
29. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Page 85
IMAX CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Co-Chief Executive Officers and Chief Financial Officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d- 15(e)) as of the end of the period covered by this report, have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequate and effective. 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.
The following report is provided by management in respect of the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the U.S. Securities Exchange Act of 1934):
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over the Company's financial reporting.
Management has used the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") framework in Internal Control-Integrated Framework
to evaluate the effectiveness of the Company's internal control over financial
reporting.
Management has assessed the effectiveness of the Company's internal control
over financial reporting, as at December 31, 2004, and has concluded that such
internal control over financial reporting was effective as of that date.
Additionally, based on the Company's assessment, the Company determined that
there were no material weaknesses in internal control over financial reporting
as of December 31, 2004.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, who has audited the Company's consolidated
financial statements for the year ended December 31, 2004, has also audited
management's assessment of the Company's internal control over financial
reporting under Auditing Standard No. 2 of the Public Company Accounting
Oversight Board. See Report of Independent Registered Public Accounting Firm on
pages 44 and 45.
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.
Page 86
IMAX CORPORATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Election of Directors"; "Executive Officers"; "Section 16(a) Beneficial
Ownership Reporting Compliance"; "Audit Committee"; and "Code of Ethics".
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Summary Compensation Table"; "Options Granted"; "Aggregated Option Exercises
and Year-End Option Values"; "Pension Plans"; "Employment Contracts";
"Compensation Committee Interlocks and Insider Participation"; "Report on
Executive Compensation"; "Performance Graph"; and "Directors' Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Principal Shareholders of Voting Shares"; "Security Ownership of Directors and
Management"; and "Equity Compensation Plans".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information under the following caption in the Company's Proxy Statement:
"Certain Relationships and Related Transactions".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Audit Fees"; "Audit-Related Fees"; "Tax Fees"; "All Other Fees"; and "Audit
Committee's Pre-Approved Policies and Procedures".
Page 87
IMAX CORPORATION
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The consolidated financial statements filed as part of this Report are
included under Item 8 in Part II.
Report of Independent Registered Public Accounting Firm, which covers
both the financial statements and financial statement schedule in
(a)(2), is included under Item 8 in Part II.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedule for each year in the three-year period
ended December 31, 2004.
II. Valuation and Qualifying Accounts.
(a)(3) EXHIBITS
The Items listed as Exhibits 10.1 to 10.18 relate to management contracts
or compensatory plans or arrangements.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Articles of Amendment of IMAX Corporation, dated June 25, 2004. Incorporated by reference to
Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2004 (File No. 000-24216).
3.2 By-Law No.1 of IMAX Corporation enacted on June 3, 2004. Incorporated by reference to Exhibit 3.3
to Form 10-Q for the quarter ended June 30, 2004 (File No. 000-24216)
4.1 Shareholders' Agreement, dated as of January 3, 1994, among WGIM Acquisition Corporation, the
Selling Shareholders as defined therein, Wasserstein Perella Partners, L.P., Wasserstein Perella
Offshore Partners, L.P., Bradley J. Wechsler, Richard L. Gelfond and Douglas Trumbull (the
"Selling Shareholders' Agreement"). Incorporated by reference to Exhibit 4.2 to Form 10-K for the
year ended December 31, 2000 (File No. 000-24216).
4.2 Amendment, dated as of March 1, 1994, to the Selling Shareholders' Agreement. Incorporated by
reference to Exhibit 4.3 to Form 10-K for the year ended December 31, 2000 (File No. 000-24216).
4.3 Amended and Restated Shareholders' Agreement, dated as of February 9, 1999 by and among
Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L. Gelfond and IMAX Corporation.
Incorporated by reference to Exhibit 4.10 to Form 10-K for the year ended December 31, 1998 (File
No. 000-24216).
4.4 Registration Rights Agreement, dated as of February 9, 1999, by and among IMAX Corporation,
Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L. Gelfond. Incorporated by
reference to Exhibit 4.12 to Form 10-K for the year ended December 31, 1998 (File No. 000-24216).
4.5 Indenture, dated as of April 9, 1996, between IMAX Corporation and Chemical Bank, as Trustee,
related to the issue of the 5.75% Convertible Subordinated Notes due April 1, 2003. Incorporated
by reference to Exhibit 4.3 to Amendment No.1 to the Company's Registration Statement on Form F-3
(File No. 333-5212).
4.6 Indenture, dated as of December 4, 1998 between IMAX Corporation and U.S. Bank Trust, N.A., as
Trustee, related to the issue of the 7.875% Senior Notes due December 1, 2005. Incorporated by
reference to Exhibit 4.9 to Form 10-K for the year ended December 31, 1998 (File No. 000-24216).
4.7 Registration Rights Agreement, dated as of December 4, 2003, by and among IMAX Corporation, the
Guarantors (as defined therein), Credit Suisse First Boston LLC, Jefferies & Company, Inc.,
Wachovia Capital Markets, LLC and U.S. Bancorp Piper Jaffray Inc., relating to the issuance of
9.625% Senior Notes due 2010. Incorporated by reference to Exhibit 4.2 to Registration Statement
on Form S-4 (File No. 333-113141).
4.8 Indenture, dated as of December 4, 2003, by and among IMAX Corporation, the Guarantors
(as defined therein) and U.S. Bank National Association, as Trustee, related to the issue of the
9.625% Senior Notes due December 1, 2010. Incorporated by reference to Exhibit 4.3 to
Registration Statement on Form S-4 (File No. 333-113141).
Page 88
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Stock Option Plan of IMAX Corporation, dated August 12, 2004. Incorporated by reference to
Exhibit 10.1 to IMAX Corporation's Form 10-Q for the quarter ended September 30, 2004 (File No.
000-24216).
10.2 Employment Agreement, dated as of July 15, 1997 between David Keighley Productions 70MM Inc. and
David B. Keighley. Incorporated by reference to Exhibit 10.2 to IMAX Corporation's Form 10-K for
the year ended December 31, 2002 (File No. 000-24216).
10.3 Employment Agreement, dated July 1, 1998 between IMAX Corporation and Bradley J. Wechsler.
Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1998
(File No. 000-24216).
10.4 Amended Employment Agreement, dated July 12, 2000 between IMAX Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 10.10 to Form 10-Q for the quarter ended September
30, 2000 (File No. 000-24216).
10.5 Amended Employment Agreement, dated April 3, 2001 between IMAX Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 10.15 to Form 10-Q for the quarter ended March 31,
2001 (File No. 000-24216).
10.6 Amended Employment Agreement, dated April 23, 2002 between IMAX Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 10.14 to Form 10-Q for the quarter ended June 30,
2002 (File No. 000-24216).
10.7 Amended Employment Agreement, dated June 3, 2004 between IMAX Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 10.18 to IMAX Corporation's Form 10-Q for the
quarter ended June 30, 2004 (File No. 000-24216).
10.8 Employment Agreement, dated July 1, 1998 between IMAX Corporation and Richard L. Gelfond.
Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1998
(File No. 000-24216).
10.9 Amended Employment Agreement, dated July 12, 2000 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.9 to Form 10-Q for the quarter ended September
30, 2000 (File No. 000-24216).
10.10 Amended Employment Agreement, dated April 3, 2001 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.16 to Form 10-Q for the quarter ended March 31,
2001 (File No. 000-24216).
10.11 Amended Employment Agreement, dated April 23, 2002 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.13 to Form 10-Q for the quarter ended June 30,
2002 (File No. 000-24216).
10.12 Amended Employment Agreement, dated June 3, 2004 between IMAX Corporation and Richard L. Gelfond.
Incorporated by reference to Exhibit 10.19 to IMAX Corporation's Form 10-Q for the quarter ended
June 30, 2004 (File No. 000-2426).
10.13 Employment Agreement, dated March 9, 2001 between IMAX Corporation and Greg Foster. Incorporated
by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 2001 (File No.
000-24216).
10.14 Amending Agreement, dated August 8, 2002 between IMAX Corporation and Greg Foster. Incorporated
by reference to Exhibit 10.12 to IMAX Corporation's Form 10-K for the year ended December 31,
2002 (File No. 000-24216).
*10.15 Amending Agreement, dated October 28, 2004 between IMAX Corporation ad Greg Foster.
10.16 Employment Agreement, dated May 9, 2001 between IMAX Corporation and Francis T. Joyce.
Incorporated by reference to Exhibit 10.3 to IMAX Corporation's Form 10-K for the year
ended December 31, 2002 (File No. 000-24216).
10.17 Amended Employment Agreement, dated May 14, 2003 between IMAX Corporation and Francis T. Joyce.
Incorporated by reference to Exhibit 10.16 to IMAX Corporation's Form 10-Q for the quarter ended
June 30, 2003 (File No. 000-24216).
Page 89
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.18 Employment Agreement, dated May 17, 1999 between IMAX Corporation and Robert D. Lister.
Incorporated by reference to Exhibit 10.14 to IMAX Corporation's Form 10-K for the year ended
December 31, 2002 (File No. 000-24216).
10.19 Amended Employment Agreement, dated January 1, 2004 between IMAX Corporation and Robert D.
Lister. Incorporated by reference to Exhibit 10.17 to Registration Statement on Form S-4 (File
No. 333-113141).
*10.20 Statement of Directors' Compensation, dated June 7, 2001.
10.21 Loan Agreement, dated as of February 6, 2004 by and between Congress Financial Corporation
(Canada) and IMAX Corporation. Incorporated by reference to Exhibit 10.22 to Registration
Statement on Form S-4 (File No. 333-113141).
*21 Subsidiaries of IMAX Corporation.
*23 Consent of PricewaterhouseCoopers LLP.
*24 Power of Attorney of certain directors.
*31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated March 11, 2005,
by Bradley J. Wechsler.
*31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated March 11, 2005,
by Richard L. Gelfond.
*31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated March 11, 2005,
by Francis T. Joyce.
*32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated March 11, 2005,
by Bradley J. Wechsler.
*32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated March 11, 2005,
by Richard L. Gelfond.
*32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated March 11, 2005,
by Francis T. Joyce.
* Filed herewith
Page 90
IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMAX CORPORATION
By /S/ FRANCIS T. JOYCE
--------------------------------
Francis T. Joyce
Chief Financial Officer
Date: March 11, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 11, 2005.
/S/ BRADLEY J. WECHSLER /S/ RICHARD L. GELFOND /S/ FRANCIS T. JOYCE
- ---------------------------------------- --------------------------------------------- ------------------------------------
Bradley J. Wechsler Richard L. Gelfond Francis T. Joyce
Director and Director and Chief Financial Officer
Co-Chief Executive Officer Co-Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer) (Principal Executive Officer)
/s/ KATHRYN A. GAMBLE NEIL S. BRAUN* KENNETH G. COPLAND*
- ---------------------------------------- --------------------------------------------- ------------------------------------
Kathryn A. Gamble Neil S. Braun Kenneth G. Copland
Vice President, Finance and Controller Director Director
(Principal Accounting Officer)
MICHAEL FUCHS* GARTH M. GIRVAN* DAVID W. LEEBRON*
- ---------------------------------------- --------------------------------------------- ------------------------------------
Michael Fuchs Garth M. Girvan David W. Leebron
Director Director Director
MARC A. UTAY*
- ----------------------------------------
Marc A. Utay
Director
By * /S/ FRANCIS T. JOYCE
-------------------------------
Francis T. Joyce
(as attorney-in-fact)
Page 91
IMAX CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of U.S. dollars)
ADDITIONS /
BALANCE AT (RECOVERIES) OTHER BALANCE
BEGINNING CHARGED TO ADDITIONS/ AT END OF
OF YEAR EXPENSES (DEDUCTIONS)(1) YEAR
---------- ------------ --------------- ---------
ALLOWANCE FOR NET INVESTMENT IN LEASES
Year ended December 31, 2002 11,745 708 (3,515) 8,938
Year ended December 31, 2003 8,938 (2,938) (159) 5,841
Year ended December 31, 2004 5,841 (1,406) -- 4,435
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Year ended December 31, 2002 18,060 (1,941) (6,871) 9,248
Year ended December 31, 2003 9,248 714 (2,684) 7,278
Year ended December 31, 2004 7,278 (82) 1,194 8,390
DEFERRED INCOME TAX VALUATION ALLOWANCE
Year ended December 31, 2002 45,504 (1,762) -- 43,742
Year ended December 31, 2003 43,742 3,049 -- 46,791
Year ended December 31, 2004 46,791 (1,193) -- 45,598
PROVISION FOR LOANS RECEIVABLE
Year ended December 31, 2002 15,584 40 -- 15,624
Year ended December 31, 2003 15,624 (2,693) (1,031) 11,900
Year ended December 31, 2004 11,900 (800) -- 11,100
(1) Deduction amounts represent write-offs of amounts previously charged to the
provision. Additions represent allowances made against new accounts
receivable where revenue recognition has ceased.