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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
(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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0140269
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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/A or any
amendment to this Form 10-K/A. [ ]
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 28, 2002 was $110.6 million
(19,544,682 common shares times $5.66).
As of February 14, 2003, there were 32,973,366 common shares of the
registrant outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed 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 scheduled to be held on or about June 4, 2003 (the "Proxy Statement")
are incorporated by reference in Part III of this Form 10-K/A, to the extent
described therein.
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Page 1 of 87
IMAX CORPORATION
ANNUAL REPORT ON FORM 10-K/A
DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business................................................................................... 4
Item 2 Properties................................................................................. 12
Item 3 Legal Proceedings.......................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders........................................ 14
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters...................... 15
Item 6 Selected Financial Data.................................................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 21
Item 7A Quantitative and Qualitative Disclosures about Market Risk................................. 34
Item 8 Financial Statements and Supplementary Data................................................ 35
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 76
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 76
Item 11 Executive Compensation..................................................................... 79
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters..................................................................... 80
Item 13 Certain Relationships and Related Transactions............................................. 84
Item 14 Controls and Procedures.................................................................... 84
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 85
Signatures.............................................................................................. 87
IMAX Corporation (the "Company") is filing this amendment no.2 on Form 10-K/A
(the "Form 10-K/A") to amend Item 8 of its Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, which was originally filed with Securities
and Exchange Commission (the "SEC") on November 10, 2003 (the "Form 10-K/A").
Specifically, Note 28 to the Condensed Consolidated Financial Statements now
provides financial information relating to the Company's Guarantor Subsidiaries
and Non-Guarantor Subsidiaries, as defined therein. The Company has also
reclassified long-term receivables from accounts receivable to financing
receivables for the years ended December 31, 2002 and 2001 in the amounts of
$1.9 million and $0.2 million, respectively. In addition, Item 14 has been
updated to reflect recent SEC pronouncements since the Company's original Form
10-K filing. No other information included in the original Form 10-K/A is
amended hereby.
The information included in this Form 10-K/A has not been updated for any
events that have occurred subsequent to the originally filed Form 10-K/A on
November 10, 2003. For a discussion of events and developments subsequent to
December 31, 2002, see the Company's reports filed with the SEC since November
10, 2003.
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, 2002 was U.S. $0.6329.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Exchange rate at end of
period ....................... U.S. $0.6329 U.S. $0.6267 U.S. $0.6669 U.S. $0.6925 U.S. $0.6522
Average exchange rate during
period ........................ 0.6368 0.6457 0.6732 0.6730 0.6740
High exchange rate during period 0.6619 0.6697 0.6944 0.6925 0.7105
Low exchange rate during period 0.6200 0.6241 0.6410 0.6535 0.6341
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 developments anticipated 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.
--------------------------------------------------------------------------------
IMAX(R), IMAX(R) Dome, IMAX(R) 3D, IMAX(R) 3D Dome, The IMAX Experience(R),
An IMAX Experience(R) and IMAX(R) DMR(TM) are trademarks and trade names of
the Company or its subsidiaries that are registered or otherwise
protected under laws of various jurisdictions.
Page 3
IMAX CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
IMAX Corporation together with its wholly owned subsidiaries (the
"Company") is one of the world's leading entertainment technology companies,
specializing in large-format film images, three-dimensional ("3D") film
presentations and large-format post-production. The Company's primary business
is the design, manufacture and lease of projection and sound systems for
giant-screen, 15-perforation film frame, 70mm format ("15/70-format") theaters
based on proprietary and patented technology. The Company is also a major
distributor of films for giant-screen theaters (IMAX 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 232 theaters operating in more
than 30 countries as of December 31, 2002. Of these 232 theaters, 112 of them
are currently located in institutional locations and 120 in commercial
locations. While the Company's roots are in the institutional market, the
Company believes that the commercial market is potentially larger. To increase
the demand for IMAX theater systems, the Company is currently working to
position the IMAX theater network as a new window for Hollywood event films. To
this end the Company has both developed a technology that allows standard 35mm
movies to be converted to its format and is also working to build strong
relationships with Hollywood studios and commercial exhibition companies.
In 2000, Buena Vista Pictures Distribution, a unit of The Walt Disney
Company, released Disney's animated feature Fantasia 2000: The IMAX
Experience(R) to 75 IMAX theaters around the world. Fantasia 2000 was the first
theatrical full-length feature film to be reformatted into 15/70-format film and
became the fastest grossing large-format film in history. In January 2002,
Disney released Beauty and the Beast to 77 IMAX theaters around the world and
has stated that it will release an additional three films over the next 12
months. The Company believes that the commercial success of Fantasia 2000 and
Beauty and the Beast coupled with its new digital re-mastering technology has
the potential to lead to the release of additional Hollywood films into IMAX
theaters which could create further demand worldwide for commercial IMAX
theaters.
In March 2002, the Company introduced a technology that can convert
live-action 35mm films to IMAX's 15/70-format film, transforming it into the
image and sound quality of The IMAX Experience(R). The Company believes that
this proprietary system, know as IMAX(R) Digital Re-Mastering(TM) (IMAX(R)
DMR(TM)), could position IMAX theaters as a new window for Hollywood event
films. Apollo 13: The IMAX Experience, was released in conjunction with
Universal Pictures and Imagine Entertainment in September 2002, and was the
first film to use this technology. Subsequently, Star Wars: Episode II Attack of
the Clones - The IMAX Experience debuted on November 1, 2002.
The Company generally does not own IMAX theaters but leases its projection
and sound systems, and licenses the use of its trademarks. IMAX theater systems
combine advanced, high-resolution projection systems, sound systems and screens
as large as eight stories high (approximately 80 feet) that extend to the edge
of a viewer's peripheral vision to create immersive audio-visual experiences. As
a result, audiences feel as if they are a part of the on-screen action in a way
that is more intense and exciting than in traditional theaters. In addition, the
Company's IMAX 3D theater systems combine the same projection and sound systems
and up to eight story 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 is the largest out-of-home, 3D-distribution network
in the world.
The Company was formed in March 1994 as a result of an amalgamation between
WGIM Acquisition Corp. and the former IMAX Corporation ("Predecessor IMAX").
Predecessor IMAX was incorporated in 1967.
Page 4
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES
The Company 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 giant-screen theaters. 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 a significant portion of its revenues from the
sale and lease of its theater systems to giant-screen theaters and related film
products and services. Segmented information is provided in note 19 to the
audited financial statements contained in Item 8.
IMAX SYSTEMS
IMAX THEATERS
The Company is the pioneer and leader in the giant-screen, large-format
film industry. The IMAX theater network has the largest installed base of
giant-screen theater systems, with systems located in 232 theaters in more than
30 countries as of December 31, 2002. IMAX theaters have flat or dome shaped
screens for two-dimensional ("2D") and 3D presentations which are many times
larger than conventional theaters, extending to the edge of the viewer's
peripheral vision. The theaters have a steeply inclined floor to provide all
audience members a clear view of the screen and typically seat 250 to 500
people.
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 are 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 systems.
To complement the film technology and viewing experience, IMAX theater
systems feature unique digital sound systems. The sound systems are among the
most advanced in the industry and help to heighten the sense of realism of a
15/70-format film. IMAX sound systems are specifically designed for IMAX
theaters and are an important competitive advantage of IMAX systems.
THEATER SYSTEM LEASES. The Company's system leases generally have 10 to
20-year initial terms and are typically renewable by the customer for one or
more additional 10-year terms. As part of the lease agreement, the Company
advises the customer on theater design, custom assemblies and supervises the
installation of the theater system, provides training in using the equipment to
theater personnel and for a separate fee provides ongoing maintenance to the
system. Prospective theater owners are responsible for providing the theater
location, the design and construction of the theater building, the installation
of the system and any other necessary improvements. Under the terms of the
typical lease agreement, the title to all theater system equipment (including
the projection screen, the projector and the sound system) remains with the
Company. The Company has the right to remove the equipment for non-payment or
other defaults by the customer. The contracts are generally not cancelable by
the customer unless the Company fails to perform its obligations. The contracts
are generally denominated in U.S. dollars, except in Canada and Japan, where
contracts are generally denominated in Canadian dollars and Japanese Yen,
respectively.
The typical lease agreement provides for three major sources of revenue:
(i) initial rental fees, (ii) ongoing additional rental payments and (iii)
ongoing maintenance fees. 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. Sales backlog
represents the total value of all signed system sales and lease agreements that
are contracted 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.
Page 5
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
The Company believes that all of the contractual obligations of customers
whose systems 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 it litigated 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 certain lease
obligations of its customers under certain circumstances, and there can be no
assurances that other backlog obligations of customers will not be modified,
reduced or otherwise restructured in the future.
The following chart shows the number of the Company's theater systems by
product, installed base and backlog as of December 31:
2002
--------------------------------------------------------------------------------------------
2D 3D
------------------------------------------- ------------------------------------------
INSTALLED INSTALLED
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
----------- --------- ------- ------- --------- -------
Flat Screen .......... IMAX(R) 56 4 IMAX(R) 3D 81 32
IMAX(R) 3D SR 30 23
Dome Screen .......... IMAX(R) Dome 65 4
2001
--------------------------------------------------------------------------------------------
2D 3D
------------------------------------------- ------------------------------------------
INSTALLED INSTALLED
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
----------- --------- ------- ------- --------- -------
Flat Screen .......... IMAX(R) 59 3 IMAX(R) 3D 79 29
IMAX(R) 3D SR 26 25
Dome Screen .......... IMAX(R) Dome 63 3
The Company's sales backlog was $154.9 million at December 31, 2002 (2001 -
$157.0 million) which represented contracts for 63 theater systems (2001 - 60
theater systems). The Company expects to install between 15 to 20 theater
systems from its sales backlog in 2003 (2002 - 13 theater systems). The Company
installed 3 theater systems in 2002, that were not included in the December 31,
2001 backlog total.
IMAX AND IMAX DOME SYSTEMS. IMAX and IMAX Dome systems make up the largest
component of the Company's installed theater base. IMAX theaters, with a flat
screen, were introduced in 1970, while IMAX Dome theaters (2D and 3D), 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 a giant 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 14 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 (up to 270 seats). The
IMAX 3D SR theater system is designed to be located primarily in multiplexes in
smaller cities and to operate at lower costs than the larger IMAX 3D theater
system.
Page 6
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
sound systems for all applications including traditional movie theaters,
auditoriums and specialized uses including the development of 3D sound
capabilities and manufacturing of the sound systems for IMAX theaters. In
February 2001, the Company decided to relocate the manufacture of sound systems
from Birmingham, Alabama to the Company's headquarters near Toronto, Canada.
FILMS
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION
The Company produces films which are financed internally and through third
parties. With respect to films financed by third parties, the Company generally
receives a film production fee in exchange for producing the films and is
appointed the exclusive distributor of the film. When the Company produces
films, it typically hires production talent and specialists on a
project-by-project basis allowing the Company to retain creative and quality
control without the burden of significant ongoing overhead expenses. Typically,
the ownership rights to films produced for third parties are held by the film
sponsors, the film investors and the Company.
The Company is a significant distributor of 15/70-format films. The Company
generally distributes films which it produces and has acquired distribution
rights to films produced by independent producers. The Company has distribution
rights to more 15/70-format films than any competing distributor. As
distributor, the Company generally receives a percentage of the theater box
office receipts.
The library of 15/70-format films includes general entertainment and
educational films on subjects such as space, wildlife, music, history and
natural wonders, and consisted of 200 films at the end of 2002, of which the
Company had distribution rights to 59 such films. In recent years, several
15/70-format commercial films have been successfully released, including SPACE
STATION which was released in April 2002 and has grossed over $39.0 million as
of December 31, 2002, T-REX: Back to the Cretaceous, which was released by the
Company in 1998 and has grossed over $72.5 million to date, Everest, which was
released by MacGillivray Freeman Films in 1998 and has grossed over $120.6
million to date and Fantasia 2000: The IMAX Experience(R) 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 film and became the fastest grossing
large-format film in history and has grossed over $80.5 million to date.
15/70-format films have significantly longer exhibition periods than
conventional 35mm films and many of the films in the library have remained
popular for significantly longer periods including the films To Fly! (1976),
Grand Canyon - The Hidden Secrets (1984) and The Dream Is Alive (1985). In 2002,
there were 21 new films released in the 15/70-format by all distributors.
In 2002, the Company commenced production of 15/70-format films, which are
re-mastered from 35mm studio films using the Company's IMAX DMR technology. The
Company generally receives a processing fee for IMAX DMR re-mastering, the cost
of which is borne by the rights holder of the 35mm film. The Company may also
receive distribution rights to the 15/70-format films produced using the IMAX
DMR technology.
The Company released the first film using IMAX DMR, Imagine Entertainment's
Apollo 13: The IMAX Experience, in 22 theaters in September 2002. The Company
produced its second IMAX DMR re-mastered film, Star Wars: Episode II Attack of
the Clones - The IMAX Experience, which was released by 20th Century Fox in
November 2002 in 58 theaters.
Page 7
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION (cont'd)
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 any 35mm
live-action film to be transformed into the unparalleled image and sound quality
of The IMAX Experience. This patent-pending, proprietary system, known as IMAX
DMR, opens the IMAX theater network up to releases from Hollywood's massive
library of films ranging from well-known classics to today's event films. The
resulting images are as large, sharp and visually stunning as the classic IMAX
films audiences historically associate with the IMAX brand.
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
developed and refined over many years;
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; and
o recording the enhanced digital signal onto 15/70-format film.
During the re-mastering process, IMAX DMR technology introduces no
perceptible digital artifacts and the highly automated system allows the process
to meet rigorous film production schedules.
For IMAX DMR releases, the original soundtrack of the 35mm film is
re-mastered for IMAX's six-channel loudspeaker system. Unlike conventional
theater sound systems, IMAX sound systems are uncompressed, full fidelity and
use proprietary loudspeaker systems that ensure every theater seat is in a good
listening position with surround sound that puts audiences in the picture. With
IMAX DMR the Company can create that immersive experience with clear,
distortion-free soundtracks for films originally produced in 35mm. While the
Company can only convert 35mm images into IMAX's 15/70-format film in 2D today,
the Company has a research and development program underway focused on
converting live action 35mm film to IMAX 3D. However, the Company currently has
the ability to convert computer generated animation to IMAX 3D and have done so
successfully with the 1999 release of Cyberworld.
OTHER
THEATER OPERATIONS AND INVESTMENTS
The Company has seven owned and operated theaters and four theaters in
which the Company has entered into commercial arrangements with third parties to
operate the theaters and share in profits and losses.
In the case of third-party theaters, the Company generally contributes the
projection and sound system to the theater in exchange for a percentage of the
theater revenues and/or profits and losses. The Company's partner is generally
responsible for constructing and outfitting the theater. The Company may also
provide management services in return for a fee or a percentage of theater
revenues as part of the equity interest.
Page 8
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
OTHER (cont'd)
CAMERAS
The Company rents 2D and 3D 15/70-format cameras and provides technical and
post-production services to third-party producers for a fee. The Company
maintains cameras and other film equipment to support third-party producers and
also offers production advice and technical assistance to filmmakers.
The Company has developed state-of-the-art patented dual and single
filmstrip 3D cameras which are among the most advanced motion pictures cameras
in the world and are the only 3D cameras of their kind. The IMAX 3D camera
simultaneously shoots left-eye and right-eye images and its compact size allows
filmmakers access to a variety of locations, such as underwater or aboard
aircrafts. The Company has dual filmstrip cameras available for rent.
MARKETING AND CUSTOMERS
The Company markets its theater systems through a direct sales force and
marketing staff located in offices in Canada, the United States, Europe, China
and Japan. 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 Company has experienced an increase in the number of commercial theater
signings and international signings since 1995. The commercial theater segment
of the Company's theater network is now its largest segment with a total of 120
theaters opened. At December 31, 2002, 38.0% of all opened theaters are for
locations outside of North America. The Company's institutional customers
include science and natural history museums, zoos, aquaria and other educational
and cultural centers. The Company also leases its systems to theme parks,
tourist destination sites, fairs and expositions. The following tables outlines
the breakdown of installations by geographic segment as at December 31:
2002 2001
-------------- --------------
INSTALLED BASE INSTALLED BASE
-------------- --------------
Canada............................................................................ 23 23
United States..................................................................... 113 110
Europe............................................................................ 43 41
Japan............................................................................. 18 20
Rest of World..................................................................... 35 33
--------------- ---------------
Total............................................................................. 232 227
=============== ===============
For information on revenue break-down by geographic area, see note 19(b) to
the audited financial statements in Item 8. No one customer represents more than
3.0% of the Company's installed base of theaters. The Company has no dependence
upon a single customer, or a few customers, the loss of any one or more of which
would have a material adverse effect on the Company.
Page 9
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
INDUSTRY AND COMPETITION
The Company competes with a number of manufacturers of large-format film
projection systems; most of which utilize smaller film formats, including
8-perforation film frame, 70mm and 10-perforation film frame, 70mm formats,
which the Company believes delivers an image that is inferior to The IMAX
Experience. The IMAX theater network and the number of 15/70-format films to
which the Company has distribution rights are substantially larger than those of
its 15/70-format competitors, and IMAX DMR reformatted films are available
exclusively to the IMAX theater network. The Company's customers generally
consider a number of criteria when selecting a large-format theater including
quality, reputation, brand name recognition, type of system, features, price and
service. The Company believes that its competitive strengths include the value
of the IMAX(R) brand name, the quality and historic up-time of IMAX theater
systems, the number and quality of 15/70-format films that it distributes, the
quality of the sound system included with the IMAX theater, the potential
availability of Hollywood event films to IMAX theaters through IMAX DMR
technology and the level of the Company's service and maintenance efforts.
Virtually all of the best performing large format theaters in the world are IMAX
theaters.
The commercial success of the Company's products is ultimately dependent
upon consumer preferences. The out-of-home entertainment industry in general
continues to go through significant changes, primarily due to technological
developments and changing consumer tastes. Numerous companies are developing new
entertainment products for the out-of-home entertainment industry and there are
not guaranties that some of these new products will not be competitive with,
superior to or more cost effective than the Company's products.
THE IMAX BRAND
The IMAX brand is world famous and stands for immersive family
entertainment that combines stunning images of exceptional quality and clarity
on screens up to one-hundred feet wide and eight stories tall with the Company's
proprietary 6-channel digital sound systems and unique theater designs. The
Company believes that like Disney, IMAX is one of the few brands generally
recognized by consumers in filmed entertainment. The Company's research shows
that moviegoers decide to take their families specifically to an IMAX theater
and consider it a special event. 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 films such as Everest, Fantasia 2000: The IMAX Experience and Beauty
and the Beast, IMAX is rapidly increasing its commercial presence. The Company
believes the strength of the IMAX brand will be an asset as it seeks for IMAX
theaters to become a new window for Hollywood films. The Company believes that
people will see the IMAX presentation of these films as a special, high-quality
experience.
RESEARCH AND DEVELOPMENT
The Company believes that it is one of the world's leading entertainment
technology companies with significant in-house proprietary expertise in
projection system, camera and sound system design, engineering and imaging
technology. The Company believes that the motion picture industry will be
affected by the development of digital technologies, particularly in the areas
of content creation (image capture), post-production (editing and special
effects), digital re-mastering (such as IMAX DMR), distribution and display. The
Company has made significant investments in digital technologies, including the
development of a proprietary, patent-pending technology to digitally enhance
image resolution and quality of 35mm motion picture films, and has a number of
patents pending and intellectual property rights in these areas.
A key to the performance and reliability of the IMAX projector system is
the Company's unique "rolling loop" film movement. The rolling loop advances the
film horizontally in a smooth, wave-like motion, which enhances the stability of
the image and greatly reduces wear of the film.
Page 10
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
RESEARCH AND DEVELOPMENT (cont'd)
In 1997, the Company introduced the IMAX 3D SR projector, which was
designed especially for multiplex operators and significantly lowered the
capital and operating costs of IMAX theaters. The introduction of the SR theater
system opened up new markets for the Company as the SR system requires a smaller
attendance draw to earn a required financial return. IMAX believes that there
are still significant operation and capital cost savings to be achieved in
building and operating IMAX theater systems and the Company is currently
involved in a research and development project focused on this area.
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.
Several of the underlying technologies and resulting products and systems
of the Company are covered by patents or patent applications. Other underlying
technologies are available to competitors, in part because of the expiration of
certain patents owned by the Company. The Company, however, has successfully
obtained patent protection covering several of its significant improvements made
to such technologies. The Company plans to continue to fund research and
development activity in areas considered important to the Company's continued
commercial success.
As of December 31, 2002, 27 of the Company's employees were connected with
research and development projects.
MANUFACTURING AND SERVICE
PROJECTION SYSTEMS MANUFACTURING
The Company assembles its giant-screen projection systems at its Corporate
Headquarters and Technology Center in Mississauga, Canada (near Toronto). A
majority of the components for the Company's systems are purchased from outside
vendors. The Company develops and designs all the key elements for the
proprietary technology involved in its projector and camera systems. Fabrication
of these components is then subcontracted to a group of carefully pre-qualified
suppliers. Manufacture and supply contracts are signed for the delivery of
components on an order-by-order basis. The Company has developed long-term
relationships with a number of significant suppliers, and the Company believes
its existing suppliers will continue to supply quality products in quantities
sufficient to satisfy its needs. The Company inspects all components and
sub-assemblies, completes the final assembly and then subjects the systems to
comprehensive testing prior to shipment. IMAX theater systems have had
historical operating uptimes based on scheduled shows of approximately 99.9%.
SOUND SYSTEMS MANUFACTURING
The Company develops, designs and assembles the key elements of its theater
sound systems. The standard IMAX theater sound system comprises components from
a variety of sources with approximately 50% of the materials cost of each system
attributable to proprietary components provided under original equipment
manufacturers agreements with outside vendors. These proprietary components
include custom loudspeaker enclosures and horns and specialized amplifiers,
signal processing and control equipment. In February 2001, the Company decided
to relocate the manufacture of sound systems from Birmingham, Alabama to the
Company's headquarters near Toronto, 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.
Page 11
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PATENTS AND TRADEMARKS
The Company's inventions cover various aspects of its proprietary
technology and many of such inventions are protected by Letters of Patent or
applications filed throughout the world, most significantly in the United
States, Canada, Japan, Korea, France, Germany and the United Kingdom. The
subject matter covered by these patents and applications encompasses electronic
circuitry and mechanisms employed in film projectors and projection systems
(including 3D projection systems), a method for synchronizing digital data
systems and a process for digitally re-mastering 35mm films into 15/70-format.
The Company has been diligent in the protection of its proprietary interests.
The Company currently holds 43 patents, has 15 patents pending in the
United States and has corresponding patents or filed applications in many
countries throughout the world. While the Company considers its patents to be
important to the overall conduct of its business, it does not consider any
particular patent essential to its operations. Certain of the Company's patents
in the United States, Canada and Japan for improvements to the IMAX projector,
IMAX 3D Dome and sound systems expire between 2008 and 2018.
The Company owns or otherwise has rights to trademarks and trade names used
in conjunction with the sale of its products, systems and services. The
following trademarks are considered significant in terms of the current and
contemplated operations of the Company: IMAX(R), The IMAX Experience(R), An IMAX
Experience(R), IMAX(R) DMR(TM), IMAX(R) 3D and IMAX(R) Dome. These trademarks
are widely protected by registration or common law throughout the world. The
Company also owns the service mark IMAX THEATRE(TM). The Company vigorously
enforces its trademarks and trade names against whomever it believes is
infringing upon the Company's rights.
EMPLOYEES
As of December 31, 2002, the Company had 288 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/A, 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
Securities and Exchange Commission. 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........ Headquarters, Administrative, Assembly and
Research and Development Own N/A
New York, New York.......... Executive Lease 2004
Santa Monica, California.... Sales, Marketing, Film Production and Post-
Production Lease 2012
Birmingham, Alabama(1)...... Sound Facilities Service Lease 2004
Kempten, Germany(2)......... Sales and Marketing Lease 2003
Shanghai, China............. Sales and Marketing Lease 2003
Singapore(3)................ Sales and Marketing Lease N/A
Tokyo, Japan................ Sales, Marketing, Maintenance and Theater Design Lease 2003
Toronto, Canada............. Film Production Lease 2003
(1) This facility was sold as a manufacturing office in May 2002. Following the
sale, the Company entered into lease agreement for a limited space to
continue sound facilities services.
(2) This facility was closed as a business office in March 2002.
(3) This facility was closed as a business office in July 2002.
Page 12
IMAX CORPORATION
ITEM 3. LEGAL PROCEEDINGS
In November 2001, the Company filed a complaint with the High Court of
Munich (the "Court") 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 is also a member of Euromax, an association of
European large-screen cinema owners that filed a complaint in 2000 with the
European Commission based on European Community ("EC") competition rules, which
was dismissed in its entirety by the EC in July 2002. Euromax is entitled to a
decision in appealable form, therefore the Company expects the EC to confirm its
rejection of the complaint in the form of an appealable decision. Big Screen had
brought a number of motions for restraining orders in this matter relating to
the Company's provision of films and maintenance, all of which have been
rejected by the courts, including the Berlin Court of Appeals, and for which all
appeals have been exhausted. The Company believes that all of the allegations in
Big Screen's individual defense are meritless 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 June 2000, a complaint was filed against the Company and a third party
by Mandalay Resort Group formerly known as Circus Circus Enterprises, Inc.,
alleging breach of contract and express warranty, fraud and misrepresentation in
connection with the installation of certain motion simulation bases in Nevada.
The case is being heard in the U.S. District Court for the District of Nevada.
The complainant is seeking damages in excess of $4.0 million. The Company has
brought a third party action against Tri-Tech International, Inc. ("Tri-Tech")
claiming that any liability of the Company would be due to Tri-Tech's
non-performance. The Company believes that the allegations made against it in
the complaint are meritless and will accordingly defend the matter vigorously.
The Company further believes that the amount of loss, if any, suffered in
connection with this lawsuit would not have a material impact on the financial
position or results of operations of the Company, although no assurance can be
given with respect to the ultimate outcome of any such litigation.
In December 2000, the Company filed a complaint against George Krikorian
Premiere Theaters LLC and certain other related parties (collectively
"Krikorian") in the U.S. Central District of California, alleging breach of
contract, negligent misrepresentation and fraud resulting in damages to the
Company. In February 2001, Krikorian filed counterclaims against the Company
alleging, among other things, fraudulent inducement and negligent
misrepresentation, which counterclaims were subsequently dismissed and then
amended. Further counterclaims were filed in May 2001. On October 23, 2002, the
parties entered into an agreement to settle all existing litigation.
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 Company filed counterclaims against Muvico for breach of contract,
unjust enrichment unfair competition and/or deceptive trade practices and theft
of trade secrets, and brought claims against MegaSystems, Inc. ("MegaSystems"),
a large-format theater system manufacturer, for tortious interference and unfair
competition and/or deceptive trade practices and to enjoin Muvico and
MegaSystems from using the Company's confidential and proprietary information.
The case is being heard in the U.S. District Court, Southern District of
Florida, Miami Division. The Company moved for summary judgement on its contract
claims against Muvico in September 2002 and is awaiting a ruling by the court.
The Company believes that the allegations made by Muvico in its complaint are
entirely without merit and will accordingly defend the claims vigorously. The
Company further believes that the amount of loss, if any, suffered in connection
with this lawsuit would not have a material impact on the financial position or
results of operation of the Company, although no assurance can be given with
respect to the ultimate outcome of any such litigation.
In August 2000, Edwards Theaters Circuit, Inc. and related companies
("Edwards") filed for protection under Chapter 11 of the United States
bankruptcy code in the U.S. Bankruptcy Court for the Central District of
California, Santa Ana Division. On August 2, 2001, the Company filed a proof of
claim in the amount of $28.9 million for amounts due and owing to the Company at
the time of the commencement of the bankruptcy and for damages arising from
Edwards' rejection of certain IMAX equipment leases pursuant to section 365 of
the Bankruptcy Code. On October 29, 2002, the Company entered into an agreement
with Regal Entertainment Group, Inc., an affiliate of Edwards, resolving all
litigation and bankruptcy claims between the Company and Edwards.
Page 13
IMAX CORPORATION
ITEM 3. LEGAL PROCEEDINGS (cont'd)
The Company has received requests for information from the United States
Securities and Exchange Commission (the "Commission") in connection with an
informal inquiry by the Commission into certain trading in the equity securities
of the Company in January 2002. The Company is co-operating fully with the
Commission's requests and does not believe that it is the target of the
Commission's inquiry or that such inquiry will have a material adverse effect on
the Company's business, financial condition or results of operation.
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, 2002.
Page 14
IMAX CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 2002
Fourth quarter............................................ 5.600 3.500
Third quarter............................................. 6.050 2.850
Second quarter............................................ 7.850 3.554
First quarter............................................. 4.890 1.850
Year ended December 31, 2001
Fourth quarter............................................ 2.650 0.760
Third quarter............................................. 2.470 0.550
Second quarter............................................ 3.219 1.450
First quarter............................................. 7.188 2.750
CANADIAN DOLLARS
------------------------------
HIGH LOW
----- -----
TSX
Year ended December 31, 2002
Fourth quarter............................................ 8.700 5.450
Third quarter............................................. 9.500 5.100
Second quarter............................................ 12.000 5.820
First quarter............................................. 7.600 3.000
Year ended December 31, 2001
Fourth quarter............................................ 4.100 1.150
Third quarter............................................. 3.700 0.800
Second quarter............................................ 5.100 2.250
First quarter............................................. 10.900 4.200
As of December 31, 2002 the Company had approximately 285 registered
holders of record on the Company's common shares.
The Company has not paid within the last three fiscal years, and has no
current plans to pay, 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 note 11 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 15
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(cont'd)
EQUITY COMPENSATION PLAN
The following table sets forth information regarding the Company's Stock
Option Plan as of December 31, 2002:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
--------------------------------- ------------------------- ------------------------ --------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 5,640,898 $11.31 2,726,742
Equity compensation plans not
approved by security holders nil nil nil
------------------------- ------------------------ --------------------------
Total 5,640,898 $11.31 2,726,742
========================= ======================== ==========================
RECENT SALES OF UNREGISTERED SECURITIES
In 2002, the Company and a subsidiary of the Company purchased an
additional $20.5 million in the aggregate of the Company's 5.75% Convertible
Subordinated Notes due April 1, 2003 (the "Subordinated Notes") for $8.1 million
consisting of $6.0 million in cash and 1,000,000 common shares of the Company
valued at $2.1 million. (See Liquidity and Capital Resources in Item 7).
On January 7, 2002, the Company issued 1,000,000 common shares of the
Company to holders of the Company's Subordinated Notes, in connection with the
purchase by the Company and a subsidiary of the Company of $19.5 million in the
aggregate of the Company's Subordinated Notes for $7.3 million, consisting of
$5.2 million in cash and common shares of the Company valued at $2.1 million.
During 2001, the Company issued 677,600 common shares of the Company to holders
of the Company's Subordinated Notes, in connection with the purchase by the
Company and a subsidiary of the Company of $70.4 million in the aggregate of the
Company's Subordinated Notes for $13.7 million, consisting of $12.5 million in
cash and common shares of the Company valued at $1.2 million. These transactions
were exempt from registration under the U.S. Securities Act of 1933 (the "1933
Act") pursuant Section 3(a)(9) of the 1933 Act on the basis that the common
shares were exchanged by the Company exclusively with its existing security
holders.
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" 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).
Page 16
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(cont'd)
CERTAIN INCOME TAX CONSIDERATIONS (cont'd)
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS (cont'd)
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 ordinary 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). The amount of a distribution
that exceeds the earnings and profits of the Company will be treated first as a
non-taxable return of capital to the extent of the U.S. Holder's tax basis in
the common shares and thereafter as taxable capital gain. Corporate holders
generally will not be allowed a deduction for dividends received in respect of
distributions on common shares. Subject to the limitations set forth in the U.S.
Internal Revenue Code, as modified by the United States-Canada income tax
treaty, U.S. Holders may elect to claim a foreign tax credit against their U.S.
federal income tax liability for Canadian income tax withheld from dividends.
Alternatively, U.S. Holders may claim a deduction for such amounts of Canadian
tax withheld.
DISPOSITION OF COMMON SHARES
Upon the sale or other disposition of common shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the sale and such holder's tax basis in the common
shares. Gain or loss upon the disposition of the common shares will be long-term
if, at the time of the disposition, the common shares have been held for more
than one year. The deduction of capital losses is subject to limitations for
U.S. federal income tax purposes.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
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 Toronto Stock Exchange) unless such
holder, persons with whom such holder did not deal at arm's length or such
holder together with all such persons, owned 25.0% or more of the issued shares
of any class or series of shares of the Company at any time within the 60 month
period immediately preceding such time.
Under the Canada-United States income tax treaty, a holder who is a
resident of the United States for purposes of such 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 17
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 audited
consolidated financial statements of the Company. The financial statements have
been prepared in accordance with United States Generally Accepted Accounting
Principles. All financial information referred to herein is expressed in U.S.
dollars unless otherwise noted.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
REVENUE
IMAX systems(1)............................................ $ 70,959 $ 76,582 $ 113,226 $ 126,826 $ 140,874
Films...................................................... 40,556 29,923 41,711 47,227 30,824
Other...................................................... 19,135 12,154 18,179 18,783 18,657
---------- ---------- ---------- ---------- ----------
Total revenue.............................................. 130,650 118,659 173,116 192,836 190,355
COSTS OF GOODS AND SERVICES(2)............................... 78,438 97,391 112,655 97,973 111,784
---------- ---------- ---------- ---------- ----------
GROSS MARGIN................................................. 52,212 21,268 60,461 94,863 78,571
Selling, general and administrative expenses(3).............. 34,906 46,690 42,079 32,524 36,507
Research and development..................................... 2,362 3,385 6,497 3,136 2,745
Amortization of intangibles(4)............................... 1,418 3,005 2,948 2,159 5,948
Loss (income) from equity-accounted investees(5)............. (283) (73) 4,811 683 6,763
Receivable provisions, net of (recoveries)................... (1,233) 17,262 13,086 949 1,682
Restructuring costs and asset impairments (recoveries)(6).... (121) 46,235 11,152 -- --
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS.............................. 15,163 (95,236) (20,112) 55,412 24,926
Interest income.............................................. 413 847 3,285 9,977 5,320
Interest expense............................................. (17,570) (22,020) (21,961) (21,860) (14,646)
Gain (loss) on retirement of notes(7)........................ 11,900 55,577 -- -- (3,683)
Impairment of long-term investments(8)....................... -- (5,584) (4,133) -- --
---------- ----------- ----------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTEREST................................ 9,906 (66,416) (42,921) 43,529 11,917
Recovery of (provision for) income taxes(9) ................. -- (27,848) 13,139 (16,642) (8,222)
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST.................................................. 9,906 (94,264) (29,782) 26,887 3,695
Minority interest............................................ -- -- -- (1,207) (1,895)
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS............... 9,906 (94,264) (29,782) 25,680 1,800
Net earnings (loss) from discontinued operations............. 2,066 (50,850) (2,055) (447) --
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES..................................... 11,972 (145,114) (31,837) 25,233 1,800
Cumulative effect of changes in accounting principles,
net of income tax benefit of $37,286(10).................. -- -- (61,110) -- --
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS).......................................... $ 11,972 $ (145,114) $ (92,947) $ 25,233 $ 1,800
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations............. $ 0.30 $ (3.05) $ (1.00) $ 0.86 $ 0.03
Net earnings (loss) from discontinued operations........... $ 0.06 $ (1.64) $ (0.07) $ (0.01) $ --
---------- ---------- ---------- ---------- ----------
Net earnings (loss) before cumulative effect of changes in
accounting principles.................................... $ 0.36 $ (4.69) $ (1.07) $ 0.85 $ 0.03
Cumulative effect of changes in accounting principles...... $ -- $ -- $ (2.04) $ -- $ --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........................................ $ 0.36 $ (4.69) $ (3.11) $ 0.85 $ 0.03
========== ========== ========== ========== ==========
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations............. $ 0.30 $ (3.05) $ (1.00) $ 0.84 $ 0.03
Net earnings (loss) from discontinued operations........... $ 0.06 $ (1.64) $ (0.07) $ (0.01) $ --
---------- ---------- ---------- ---------- ----------
Net earnings (loss) before cumulative effect of changes in
accounting principles.................................... $ 0.36 $ (4.69) $ (1.07) $ 0.83 $ 0.03
Cumulative effect of changes in accounting principles...... $ -- $ -- $ (2.04) $ -- $ --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........................................ $ 0.36 $ (4.69) $ (3.11) $ 0.83 $ 0.03
========== ========== ========== ========== ==========
Page 18
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(1) Included in IMAX systems revenue is $5.1 million for 2002, $5.5 million in
2001 and $1.4 million in 2000 for restructured and/or terminated lease
agreements with customers.
(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. The year ended December 31,
1998 included a $7.9 million charge related to rationalization of the
Company's motion simulation division and $19.1 million related to the
write-down of the value of some of the Company's films.
(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) Amortization of intangibles in 1998 included a $3.3 million charge related
to the write-off of goodwill associated with the Ridefilm business.
(5) In 2000, loss (income) from equity-accounted investees included a $4.0
million provision related to the guarantee of a term loan undertaken by
the Forum Ride Associates joint venture. In 1998, it included the
Company's 50% share of the loss of Forum Ride Associates and a provision
against the remaining carrying value of the Company's equity investment in
Forum Ride Associates totaling $6.1 million and a $0.5 million provision
against an equity investment in a motion simulation ride.
(6) In 2001, restructuring costs and asset impairments (recoveries) included a
charge of $16.3 million as part of the Company's efforts to streamline the
business by reducing its overall corporate workforce and relocate its
sound-system facility to near Toronto, Canada. In addition, the Company
recorded charges of $26.7 million to fixed assets, and $3.3 million of
other assets to recognize a decline in value the Company considered other
than temporary. In 2000, asset impairments included charges of $11.2
million relating to fixed assets.
(7) During 2002, the Company and a wholly owned subsidiary of the Company
purchased and cancelled an aggregate of $20.5 million of the Company's
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. During
2001, the Company and a wholly owned subsidiary of the Company purchased
and cancelled an aggregate of $70.4 million of the Company's Subordinated
Notes for $13.7 million, represented by $12.5 million in cash by the
subsidiary and $1.2 million in common shares by the Company. In 1998, all
of the 10% senior notes due 2001 were redeemed. The excess of the
redemption price over the principal amount of $2.8 million and the
write-off of the unamortized deferred financing costs of $0.9 million
resulted in a loss of $3.7 million.
(8) Impairment of long-term investments includes a charge of $5.6 million and
$4.1 million relating to the impairment of certain of the Company's
long-term investments, for the years ended December 31, 2001 and 2000,
respectively.
(9) In 2001, the provision for income taxes includes a $41.2 million increase
in the valuation allowance to reflect uncertainty associated with
realization of the Company's deferred income tax asset.
(10) 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.
Page 19
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
QUARTERLY STATEMENTS OF OPERATIONS SUPPLEMENTARY DATA:
2002
----------------------------------------------------
Q1(1) Q2 Q3(1) Q4
----------- ----------- ----------- -----------
Sales............................................................ $ 31,275 $ 38,851 $ 23,179 $ 37,345
Cost of goods and services....................................... 17,868 20,162 16,397 24,011
----------- ----------- ----------- -----------
Gross margin..................................................... $ 13,407 $ 18,689 $ 6,782 $ 13,334
=========== =========== =========== ===========
Net earnings (loss) from continuing operations................... $ 10,547 $ 3,035 $ (4,360) $ 684
Net earnings from discontinued operations........................ -- -- 2,066 --
----------- ----------- ----------- ----------
Net earnings (loss).............................................. $ 10,547 $ 3,035 $ (2,294) $ 684
=========== =========== =========== ===========
Net earnings (loss) per share - basic............................ $ 0.32 $ 0.09 $ (0.07) $ 0.02
Net earnings (loss) per share - fully diluted.................... $ 0.32 $ 0.09 $ (0.07) $ 0.02
2001
-----------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Sales............................................................ $ 28,679 $ 32,785 $ 23,337 $ 33,858
Cost of goods and services....................................... 18,902 21,090 33,139 24,260
----------- ----------- ----------- -----------
Gross margin..................................................... $ 9,777 $ 11,695 $ (9,802) $ 9,598
=========== =========== =========== ===========
Net loss from continuing operations.............................. $ (12,759) $ (8,895) $ (84,382) $ 11,772
Net earnings (loss) from discontinued operations................. (1,012) (2,529) (55,171) 7,862
Net earnings (loss).............................................. $ (13,771) $ (11,424) $ (139,553) $ 19,634
=========== =========== =========== ===========
Net earnings (loss) per share - basic............................ $ (0.45) $ (0.37) $ (4.48) $ 0.63
Net earnings (loss) per share - fully diluted.................... $ (0.45) $ (0.37) $ (4.48) $ 0.63
(1) Certain comparative figures have been reclassified to conform with the
presentation adopted in the current period.
AS AT DECEMBER 31,
------------------------------------------------------------------
BALANCE SHEETS DATA: 2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ---------
Cash, cash equivalents and investments in marketable
debt securities......................................... $ 37,136 $ 26,388 $ 34,310 $121,502 $202,941
Total assets(1)........................................... 242,976 261,512 492,100 538,237 490,091
Total long-term indebtedness.............................. 209,143 229,643 300,000 300,000 300,000
Total shareholders' equity (deficit)...................... (103,670) (118,448) 22,263 111,065 84,446
(1) Includes the assets of discontinued operations.
PRO FORMA AMOUNTS IN ACCORDANCE WITH SAB 101:
Pro forma amounts for the year ended December 31, 1999 as if SAB 101 had been applied during all years
presented: 1999
--------
Total revenue.............................................................................................. $ 166,617
Net earnings .............................................................................................. $ 7,655
Net earnings per share - basic:......................................................................... $ 0.26
Net earnings per share - fully diluted:................................................................. $ 0.25
Page 20
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is one of the world's leading entertainment technology
companies and is known for presenting the world's best cinematic presentations
together with IMAX and IMAX 3D. The IMAX(R) brand is recognized throughout the
world for extraordinary and immersive family experiences. As of December 2002,
there were 232 theaters operating in more than 30 countries.
The Company derives revenue principally from long-term theater system lease
agreements, maintenance agreements, the distribution of films and film
production agreements. The Company also derives revenue from its owned and
operated theaters, camera rentals and post-production services.
THEATER SYSTEMS
The Company generally provides its theater systems to customers on a
long-term lease basis with initial lease terms of typically 10 to 20 years.
Lease agreements typically provide for three major sources of revenue: (i)
initial rental fees; (ii) ongoing rental payments which include annual
contractual minimum payments; and (iii) 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 or a percentage of box office receipts. An annual
maintenance fee is generally payable commencing in the second year of theater
operations. Both minimum rental payments and maintenance fees are typically
indexed to the consumer price index.
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". All other leases are treated as
operating leases. Revenue from sales-type leases is recorded at the time the
installation process is complete when; persuasive evidence of an agreement
exists, the price is fixed or determinable and collection is reasonably assured.
Upon revenue recognition, the initial rental fees due under the contract, along
with the present value of minimum ongoing rental payments are recorded as
revenues and the related projector costs including installation expenses are
recorded in cost of goods and services. The Company recognizes revenue on
theater systems, sales-type leases and sales at the time that installation is
complete. The Company in certain circumstances sells its theater systems.
Cash received 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 Company is dependent in part on the viability of the North American
commercial exhibitor market for collections under long-term leases and for
future system contracts. In the last few years, 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.
Recently, many of these exhibitors have emerged from those proceedings with new
capital. Some have raised capital in the public markets, while others have plans
to do so. While the Company views these recent developments in the North
American commercial exhibitor market as positive, there is no guarantee that
they will continue.
Page 21
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
FILM PRODUCTION AND DISTRIBUTION
In accordance with SOP 00-2 "Accounting by Producers or Distributors of
Films", the Company recognizes revenue from licensing of exhibition rights to
motion pictures produced or distributed by the Company when the film is complete
and has been delivered, the license period has begun, the fee is fixed or
determinable and collection is reasonably assured. Where the license fees are
based on a share of the customer's revenue, and all other revenue recognition
criteria are met, the Company recognizes revenue as the customer exhibits the
film. Costs of producing films and acquiring film distribution rights are
capitalized and amortized using the individual film-forecast-computation method,
which amortizes film costs and accrues participation costs in the same ratio
that current period actual revenue bears to estimated remaining unrecognized
ultimate revenue as of the beginning of the fiscal year. All advertising,
exploitation costs and marketing costs are expensed as incurred.
The Company has developed a proprietary, patent-pending technology to
digitally re-master 35mm live-action films into 15/70-format film for exhibition
in IMAX theaters. This system, known as IMAX DMR, digitally enhances image
resolution quality of 35mm motion picture films for projection on screens up to
eight stories high and up to 120 feet wide, while maintaining the visual clarity
and sound quality for which IMAX films are 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 simultaneous new releases. The
Company believes that the development of this new technology is key to helping
it execute on its strategy of growing its commercial theater network by becoming
a new window for Hollywood films. While the Company is optimistic about the IMAX
DMR technology, there is no guarantee that it will be commercially successful.
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are made to customers located
outside of the United States and Canada. During 2002, 2001 and 2000, 36.6%,
35.2%, and 47.2%, respectively, of the Company's revenues were derived outside
the United States and Canada. The Company expects that international operations
will continue to account for a substantial portion of its revenues in the
future. The Company is subject to risks associated with operating in foreign
countries. In order to minimize exposure to exchange rate risk, the Company
prices theater systems (the largest component of revenues) in U.S. dollars
except in Canada and Japan where they are priced in Canadian dollars and
Japanese Yen, respectively. Annual minimum rental payments and maintenance fees
follow a similar currency policy.
ACCOUNTING POLICIES AND ESTIMATES
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 that are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
audited financial statements in Item 8.
Page 22
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SIGNIFICANT ACCOUNTING POLICIES
Management considers the following critical accounting policies to have the
most significant effect on its estimates, assumptions and judgements:
REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a result
of meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is
recognized, the initial rental fees due under the contract, along with the
present value of minimum ongoing rental payments, are recorded as revenues for
the period, and the related projector costs including installation expenses are
recorded as cost of goods and services. Additional ongoing rentals in excess of
minimums are recognized as revenue when reported by the theater operator,
provided that collection is reasonably assured.
The Company recognizes revenues from sales-type leases upon installation of
the theater system. Revenue associated with a sales-type lease is recognized
when all of the following criteria are met: persuasive evidence of an agreement
exists; the price is fixed or determinable; and collection is reasonably
assured. Prior to January 1, 2000, the Company recognized revenue using the same
criteria, except that the time of delivery rather than completion of
installation was used as the point at which revenue was recognized.
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 Company monitors the performance of the theaters to which it has leased
equipment. When facts and circumstances indicate that it may need to change the
terms of a lease which had previously been recorded as a sales-type lease, the
Company evaluates the likely outcome of such negotiations. A provision is
recorded against the net investment in leases if the Company believes that it is
probable that the negotiation will result in a reduction in the minimum lease
payments such that the lease will be reclassified as an operating lease. The
provision is equal to the excess of the carrying value of the net investment in
lease over the fair value of the equipment.
If the Company and a lessee agree to change the terms of the lease, other
than by renewing the lease or extending its terms, management evaluates whether
the new agreement would be classified as a sales-type lease or an operating
lease under the provisions of FAS 13. Any adjustments which result from a change
in classification from a sales-type lease to an operating lease are reported as
a charge to income during the period the change occurs.
From time to time, the Company is involved in legal proceedings relating to
terminated lease agreements. When settlements are received, the Company will
allocate the total settlement to each of the elements based on their relative
fair value.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
Page 23
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)
ACCOUNTS RECEIVABLE AND NET INVESTMENT IN LEASES
The allowance for doubtful accounts and provision against the net
investment in leases are based on the Company's assessment of the collectibility
of specific customer balances and the underlying asset value of the equipment
under lease where applicable. If there is a deterioration in a customer's credit
worthiness or actual defaults under the terms of the leases are higher than the
Company's historical experience, the Company's estimates of recoverability for
these assets could be adversely affected.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions, proves to
be incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
GOODWILL
The Company adopted FAS 142 "Goodwill and Other Intangibles" effective
January 1, 2002 (see note 3 of the audited financial statements in Item 8). Upon
adoption of this standard, no impairment in goodwill was found to exist.
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
FIXED ASSETS
Management reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. In performing its review for recoverability,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of impairment losses is based on the excess of the
carrying amount of the asset over the fair value calculated using discounted
expected future cash flows. If the actual future cash flows are less than the
Company's estimates, future earnings could be adversely affected.
TAX ASSET VALUATION
As at December 31, 2002, the Company has net deferred income tax assets of
$3.8 million, comprised of tax credit carryforwards, net operating loss and
capital loss carryforwards and other deductible temporary differences, which can
be utilized to reduce either taxable income or taxes otherwise payable in future
years. Management assesses realization of these net deferred income tax assets
based on all available evidence and has concluded that it is more likely than
not that these net deferred income tax assets will be realized. Positive
evidence includes, but is not limited to, the Company's projected future
earnings based on contracted sales backlog at December 31, 2002, and the ability
to realize certain deferred income tax assets through loss and tax credit
carryback strategies. However, if the Company's projected future earnings do not
materialize, these net deferred income tax assets may not be realizable and the
Company may need to establish additional valuation allowances for all or a
portion of the net deferred income tax assets. As of December 31, 2002, the
Company had a net deferred income tax asset of $47.5 million, against which the
Company is carrying a $43.7 million valuation allowance.
Page 24
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued FAS 146 which replaces EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)". EITF 94-3
required an entity to record a liability for certain termination costs when it
adopted a plan to restructure operations. The FASB has concluded that an
entity's commitment to a plan, by itself, does not create a liability. Under the
new rules, exit costs and restructuring liabilities generally will be recognized
only when incurred. The provisions are effective for exit or disposal activities
that are initiated after December 31, 2002, with earlier application encouraged.
The pronouncement has no current impact on the Company's financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("FAS 148"), which provides alternate methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation prescribed by FAS 123. In addition, FAS 148 requires
prominent disclosures in both annual and interim financial statements about the
method of accounting and the effect of the method used on reported results. The
Company has adopted FAS 148 for disclosure purposes only effective December 31,
2002. The Company uses the Black-Scholes option-pricing model. Based on the
Company's experience and its perception of historical trends, current
conditions, expected future developments, as well as other factors it believes
are appropriate under the circumstances, it has elected to utilize a lower
expected volatility percentage than it has in recent years, though there can be
no assurances that this volatility percentage will be accurate. The Company
intends to continue investigating alternative option-pricing models in the next
fiscal year as further discussions on this topic continue in the marketplace.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements will be
effective for the third quarter of fiscal 2003. The Company is currently
evaluating the effects of FIN 45; however, it does not expect that the adoption
will have a material impact on the results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46") which addresses consolidation by
business enterprises of variable interest entities. In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The objective of FIN 46 is not to
restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, a
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. Adoption is not
expected to have a material effect on the Company.
Page 25
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,
-------------------------------------------
2002 2001 2000
------------ ------------ -----------
Restructuring costs (recoveries) $ (497) $ 16,292 $ --
------------ ------------ ------------
Asset impairments (recoveries):
Fixed assets 376 26,660 11,152
Other assets -- 3,283 --
Other significant charges (recoveries):
Accounts receivable (1,941) 4,469 13,086
Inventories 1,229 4,053 --
Film assets -- 16,514 8,602
Fixed assets 2,799 -- --
Other assets 216 -- --
Net investment in leases 708 13,633 --
Long-term investments -- 5,584 4,133
------------ ------------ ------------
Total asset impairments and other significant (recoveries) 3,387 74,196 36,973
------------ ------------ ------------
Net charges (recoveries) $ 2,890 $ 90,488 $ 36,973
============ ============ ============
RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
During 2001 the Company rationalized its operations, reduced staffing
levels, wrote-down certain assets to be disposed of, and recorded a
restructuring charge of $16.3 million in 2001 (2000 - $nil). During 2002, the
Company recovered $0.5 million of restructuring accrued liabilities for
terminated employees who obtained employment prior to the completion of their
severance period. In 2001, the Company also recorded asset impairment charges of
$29.9 million (2000 - $11.2 million) after assessing the carrying value of
certain of the Company's assets. The 2001 asset impairment charge consisted of
$26.7 million against fixed assets (2000 - $11.2 million) and $3.3 million
against other assets (2000 - $nil) as the carrying values for the assets
exceeded the discounted future cash flows expected from the assets. During 2002,
the Company incurred an additional $0.4 million of asset impairment charges
relating to fixed assets.
The Company believes its restructuring plan and related write-downs were
necessary in light of market trends and industry-wide economic and financial
conditions. As of December 31, 2001, the restructuring plan was complete. Of the
$16.3 million for restructuring, $14.4 million has been spent as of December 31,
2002, and $1.4 million represented severance costs for severed employees to be
paid out over the next 24 months.
OTHER SIGNIFICANT CHARGES (RECOVERIES)
Due to industry-wide economic and financial difficulties faced by many of
the Company's customers, the Company also recorded the following charges as part
of its ongoing review of the carrying value of the Company's assets.
Included in receivables provisions, net of recoveries, the Company recorded
a charge of $4.5 million in 2001 (2000 - $13.1 million) relating to the
Company's accounts receivable, as collectibility on certain accounts was
considered uncertain. During 2002, the Company recorded recoveries of $1.9
million relating to the Company's accounts receivable. In 2002, the Company also
recorded a charge of $0.7 million (2001 - $13.6 million, 2000 - $nil) relating
to the Company's net investment in leases as collectibility of certain leases
was considered uncertain.
Within costs of goods and services, the Company recorded a charge of $16.5
million in 2001 (2000 - $8.6 million) based on the reduced fair values of the
Company's film assets. In 2002, the Company recorded a charge of $1.2 million
(2001 - $4.1 million, 2000 - $nil) for inventories, due to a reduced net
realizable value and fixed assets of $2.8 million (2001 - $nil, 2000 - $nil) as
the carrying value for the fixed assets exceeded the discounted future cash
flows expected from the assets.
Page 26
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
OTHER SIGNIFICANT CHARGES (RECOVERIES) (cont'd)
After assessing the carrying value of long-term investments, the Company
recorded a charge of $5.6 million in 2001 (2000 - $4.1 million) in charges for
declines in the value of these investments that are considered to be other than
temporary. There were no charges recorded in 2002.
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,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
% % % % %
Revenue
IMAX systems ................................ 54.3 64.5 65.4 65.8 74.0
Films ....................................... 31.0 25.2 24.1 24.5 16.2
Other ....................................... 14.7 10.3 10.5 9.7 9.8
----- ----- ----- ----- -----
Total revenue ................................. 100.0 100.0 100.0 100.0 100.0
Costs and goods and services .................. 60.0 82.1 65.1 50.8 58.7
----- ----- ----- ----- -----
Gross margin .................................. 40.0 17.9 34.9 49.2 41.3
Selling, general and administrative expenses .. 26.6 39.3 24.3 16.9 19.2
Research and development ...................... 1.8 2.9 3.8 1.6 1.4
Amortization of intangibles ................... 1.0 2.5 1.7 1.1 3.1
Loss (income) from equity-accounted
investees ................................... -- -- 2.8 0.4 3.6
Receivable provisions, net of
(recoveries) ................................ (0.9) 14.5 7.5 0.5 0.9
Restructuring costs and asset impairments
(recovery) .................................. (0.1) 39.0 6.4 -- --
----- ----- ----- ----- -----
Earnings (loss) from operations ............... 11.6 (80.3) (11.6) 28.7 13.1
===== ===== ===== ===== =====
Net earnings (loss) before cumulative effect of
changes in accounting principles ............ 2.8 (154.9) (18.4) 13.1 2.0
===== ===== ===== ===== =====
Net earnings (loss) ........................... 9.2 (122.3) (53.7) 13.1 0.9
===== ===== ===== ===== =====
REVENUES
The Company's revenues in 2002 were $130.7 million, compared to $118.7
million in 2001, an increase of 10.1%. The following table sets forth the
breakdown of revenue by category:
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
IMAX SYSTEMS REVENUE
Sales and leases.................................. $ 46,656 $ 53,409 $ 87,384
Ongoing rent(1)................................... 9,746 8,969 12,097
Maintenance....................................... 14,557 14,204 13,745
-------------- -------------- --------------
70,959 76,582 113,226
-------------- -------------- --------------
FILMS REVENUE
Production and DMR(2)............................. 3,010 -- --
Distribution...................................... 20,697 16,645 21,221
Post-production................................... 16,849 13,278 20,490
-------------- -------------- --------------
40,556 29,923 41,711
-------------- -------------- --------------
OTHER REVENUE 19,135 12,154 18,179
-------------- -------------- --------------
$ 130,650 $ 118,659 $ 173,116
============== ============== ==============
(1) Includes finance income.
(2) This total does not include certain costs incurred by third parties in
connection with the conversion of a film through the IMAX DMR process.
Page 27
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001 (cont'd)
RESULTS OF OPERATIONS (cont'd)
REVENUES (cont'd)
Systems revenue decreased to $71.0 million in 2002 from $76.6 million in
2001, a decrease of 7.3%. Revenue from sales and leases in 2002 decreased to
$46.7 million in 2002 from $53.4 million in 2001, a decrease of 12.6%. In 2002,
16 theater systems were installed, of which one was an operating lease, as
compared to 15 theater systems installed, of which one was an operating lease in
2001. In addition, for 2001 the Company recognized revenue on 2 systems that
were converted from operating leases to sales-type leases. Ongoing rental
revenue in 2002 increased 8.7% from 2001 primarily due to the increased number
of theaters in the network in the current year. Maintenance revenue in 2002
increased 2.5% over the prior year principally due to the increased number of
theater systems in the network.
Films revenues increased to $40.6 million in 2002 from $29.9 million in
2001. Film distribution revenues increased to $20.7 million in 2002 from $16.6
million in 2001, an increase of 24.3%, and film post-production revenues
increased to $16.8 million in 2002 from $13.3 million in 2001, an increase of
26.9%. The increase in film post-production revenues was mainly due to the
release of SPACE STATION and Star Wars: Episode II Attack of The Clones in 2002
versus 2001, while the increase in film distribution revenues was primarily due
to stronger performance of films distributed in 2002 especially SPACE STATION
which had gross box office of more than $39.0 million in 2002. Film production
and DMR revenues increased to $1.8 million and $1.3 million, respectively in
2002, as new film services were provided.
Other revenue increased to $19.1 million in 2002 from $12.2 million in
2001, an increase of 57.4%, largely as a result of stronger performance from the
Company's owned and operated theaters. In 2002, the Company's owned and operated
theaters benefited from the strong performance of SPACE STATION and Star Wars:
Episode II Attack of The Clones.
The Company believes it will see higher revenues in 2003 due to a
combination of higher system installations and higher attendance throughout the
IMAX theater network.
GROSS MARGIN
Gross margin in 2002 was $52.2 million versus $21.3 million in 2001. Gross
margin increased largely due to the stronger performance of films in 2002
primarily SPACE STATION and Star Wars: Episode II Attack of The Clones, compared
to 2001. In addition, gross margin in 2001 was reduced by $16.5 million
associated with the write-down of the value of certain films in the Company's
library and a $4.1 million write-down due to the reduced net realizable value of
the Company's inventories. Gross margin as a percentage of total revenues was
40.0% in 2002 compared to 17.9% in 2001.
The Company believes it will see higher gross margin in 2003 due to a
combination of higher system installations and higher attendance throughout the
IMAX theater network.
OTHER
Selling, general and administrative expenses were $34.9 million in 2002
versus $46.7 million in 2001. The Company recorded a foreign exchange gain of
$0.4 million in 2002 compared to a loss of $1.4 million in 2001. The foreign
exchange gains and losses resulted primarily from fluctuations in exchange rates
on Canadian dollar cash balances and Canadian dollar and Japanese Yen
denominated net investment in leases. The 2001 selling, general and
administrative expenses also includes a non-cash item of $2.6 million in
connection with a stock compensation grant. The Company anticipates that
selling, general and administrative expenses will decline in 2003 due to the
reductions in staff costs, legal fees and other expenses.
Amortization of intangibles decreased to $1.4 million in 2002, from $3.0
million in 2001 due to the Company's adoption of FAS 142 which does not require
the amortization of goodwill as of January 1, 2002.
Interest income decreased to $0.4 million in 2002 from $0.8 million in 2001
due mainly to a decline in the average rate of returns on cash and cash
equivalents.
Page 28
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001 (cont'd)
OTHER (cont'd)
Interest expense decreased to $17.6 million in 2002, from $22.0 million in
2001 due to the repurchases of the Company's Subordinated Notes (see Gain (loss)
on retirement of notes and Liquidity and Capital Resources, below).
In performing its assessment of the recoverability of long-term
investments, the Company recorded a $5.6 million charge in 2001. During 2002, no
additional charges were taken.
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, the Canadian manufacturing and processing profits deduction, the
provision for income taxes at different rates in foreign and other provincial
jurisdictions, enacted statutory tax rate reductions in the year, and changes in
the Company's valuation allowance. The 2002 deferred income tax recovery
included a $1.8 million decrease in the valuation allowance to reflect revised
estimates regarding the realization of the Company's deferred income tax assets
and the utilization of loss carryforwards directly against gains from the
repurchase of convertible notes. As of December 31, 2002, the Company had a net
deferred income tax asset of $47.5 million, against which the Company is
carrying a $43.7 million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.4 million in 2002 versus $3.4
million in 2001. The lower level of expenses in 2002 was due partly to staff
reductions in 2001 and partly due to management's decision to focus on a smaller
number of projects with a higher potential of success and minimal capital
outlay. The Company believes that the motion picture industry will be affected
by the development of digital technologies, particularly in the areas of content
creation (image capture), post-production (editing and special effects), digital
re-mastering distribution and display. Consequently, the Company has made
significant investments in digital technologies, including the development of a
proprietary, patent-pending technology to digitally enhance image resolution and
quality of 35mm motion picture films and has a number of patents pending and
intellectual property rights in these areas. However, there can be no assurance
that the Company will be awarded patents covering this technology or that
competitors will not develop similar technologies.
GAIN (LOSS) ON RETIREMENT OF NOTES
During 2002, the Company and a wholly owned subsidiary purchased an
additional $20.5 million in the aggregate of the Company's Subordinated Notes
for $8.1 million, consisting of $6.0 million in cash and common shares of the
Company valued at $2.1 million. The Company cancelled the purchased Subordinated
Notes and recorded a gain of $11.9 million. These transactions had the effect of
reducing the principal of the Company's outstanding Subordinated Notes to $9.1
million as at December 31, 2002.
During 2001, the Company and a wholly owned subsidiary of the Company
purchased an aggregate of $70.4 million of the Company's $100.0 million
aggregate principal amount of Subordinated Notes for $13.7 million, consisting
of $12.5 million in cash and common shares of the Company valued at $1.2
million. The Company cancelled the purchased Subordinated Notes and recorded a
gain of $55.6 million.
DISCONTINUED OPERATIONS
The Company's 2001 discontinuance of its digital projection systems
operations was completed December 11, 2001 through the sale of its wholly owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company 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 of DPI's 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.
DPI also agreed to release the Company from its ongoing obligations to DPI.
Page 29
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001 (cont'd)
DISCONTINUED OPERATIONS (cont'd)
The Company recorded an after-tax charge of $50.9 million in 2001, relating
to operational losses of $8.5 million and a loss of $42.3 million on disposal of
DPI's net assets. Included in the loss on disposal is a provision of $12.7
million to reflect the uncertainty associated with the collectibility of the
loans receivable. In 2002, the Company recorded a recovery of $2.1 million
relating to future obligations that have been eliminated.
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000
Systems revenue decreased to $76.6 million in 2001 from $113.2 million in
2000, a decrease of 32.4%. Revenue from sales and leases decreased to $53.4
million in 2001 from $87.4 million in 2000, a decrease of 38.9%. In 2001, 15
theater systems were installed, of which one was an operating lease, as compared
to 24 theater systems installed in 2000. Ongoing rental revenue decreased 25.9%
from 2000 primarily due to lower ongoing rents in excess of minimums received in
the current year. Maintenance revenue increased 3.3% over the prior year
principally due to the increased number of theater systems in the network.
Films revenues decreased to $29.9 million in 2001 from $41.7 million in
2000. Film distribution revenues decreased to $16.6 million in 2001 from $21.2
million in 2000, a decrease of 21.6%, and film post-production activities
decreased to $13.3 million in 2001 from $20.5 million in 2000, a decrease of
35.2%. The decrease in film post-production revenues was due to a decline in the
number of films in release in 2001 versus 2000, while the decrease in film
distribution revenues was primarily due to both a smaller number of films in
release and poorer performance of films distributed by the Company in 2001.
Other revenue decreased to $12.2 million in 2001 from $18.2 million in
2000, a decrease of 33.1%, primarily related to decreased owned and operated
theater operations revenue in 2001 versus 2000, which included the strong
performance of Fantasia 2000.
GROSS MARGIN
Gross margin in 2001 was $21.3 million versus $60.5 million in 2000. Gross
margin in 2001 was reduced by $16.5 million associated with the write-down of
the value of certain films in the Company's library as compared to a write-down
of $8.6 million in 2000, and a $4.1 million write-down due to the reduced net
realizable value of the Company's inventories.
The decline in the gross margin in 2001 over 2000 is primarily due to lower
system revenues on 15 theater systems, of which one was an operating lease, in
2001, versus 24 theater systems in 2000, and the provisions noted above. Gross
margin as a percentage of total revenues was 17.9% in 2001 compared to 34.9% in
2000.
OTHER
Selling, general and administrative expenses were $46.7 million in 2001
versus $42.1 million in 2000. The 2001 expense included a non-cash item of $2.6
million in connection with a stock compensation grant. We experienced a foreign
exchange loss of $1.4 million in 2001 compared to a loss of $1.8 million in
2000. The foreign exchange losses resulted primarily from fluctuations in
exchange rates on Canadian dollar cash balances and Canadian dollar and Japanese
Yen denominated net investment in leases.
Interest income decreased to $0.8 million in 2001 from $3.3 million in 2000
due mainly to a decline in the average balance of cash, cash equivalents and
investments in marketable debt securities held.
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, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000 (cont'd)
OTHER (cont'd)
In performing its assessment of the carrying value of long-term
investments, the Company recorded a charge of $5.6 million in 2001, as compared
to $4.1 million in 2000 for declines in the value of these investments that are
considered to be other than temporary.
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of the amortization of
goodwill, which is not deductible for tax purposes, the Canadian manufacturing
and processing profits deduction, the provision for income taxes at different
rates in foreign and other provincial jurisdictions, enacted statutory tax rate
reductions in the year and movements in the Company's valuation allowance. The
2001 deferred income tax expense included a $41.2 million increase in the
valuation allowance to reflect uncertainties associated with the realization of
the Company's deferred income tax asset. As of December 31, 2001, the Company
had a deferred income tax asset of $48.5 million which was largely provided
against through the Company's valuation allowance of $45.5 million.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.4 million in 2001 versus $6.5
million in 2000. The lower level of expenses in 2001 was due partly to staff
reductions and management's decision to focus on a smaller number of projects
with a higher potential of success and minimal capital outlay.
GAIN (LOSS) ON RETIREMENT OF NOTES
During 2001, the Company and a wholly owned subsidiary of the Company
purchased an aggregate of $70.4 million of the Company's $100.0 million
aggregate principal amount of Subordinated Notes for $13.7 million, consisting
of $12.5 million in cash by the subsidiary and common shares by the Company
valued at $1.2 million. The Company cancelled the purchased Subordinated Notes
and recorded a gain of $55.6 million.
DISCONTINUED OPERATIONS
The Company's 2001 discontinuance of its digital projection systems
operations was completed December 11, 2001 through the sale of its wholly owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company 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 of DPI's 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.
DPI also agreed to release the Company from its ongoing obligations to DPI.
The Company recorded an after-tax charge of $50.9 million in 2001, relating
to operational losses of $8.5 million and a loss of $42.3 million on disposal of
DPI's net assets. Included in the loss on disposal is a provision of $12.7
million to reflect the uncertainty associated with the collectibility of the
loans receivable. In 2000, the Company recorded digital projection systems
operating losses of $2.1 million. The Company restated the financial statements
to segregate the discontinued operations for all comparative years.
Page 31
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company's principal source of liquidity included
cash and cash equivalents of $37.1 million, trade accounts receivable of $16.9
million and net investment in leases due within one year of $5.1 million.
In September 2001, the Company's demand facility with Toronto Dominion Bank
Financial Group matured. At the time of maturity, the Company had no cash
advances outstanding under the facility, which had been used in the past to
facilitate U.S. and Canadian letters of credit and cross currency swaps which
were entered into by the Company in connection with the sale of projection
systems. This line was secured by the Company's accounts receivable, inventory,
certain real estate and other assets of the Company. As of December 31, 2002,
the Company has letters of credit of $3.3 million outstanding, which have been
collateralized by cash deposits.
In December 1998, the Company issued $200.0 million of 7.875% Senior Notes
due December 1, 2005 (the "Senior Notes"). The Senior Notes are subject to
redemption by the Company, in whole or in part, at any time on or after December
1, 2002 at redemption prices expressed as percentages of the principal amount
for each 12-month period commencing December 1 of the years indicated: 2003 -
101.969%; 2004 and thereafter - 100.000% together with interest accrued thereon
to the redemption date. If certain changes result in the imposition of
withholding taxes under Canadian law, the Senior Notes may be redeemed by the
Company at a redemption price equal to 100% of the principal amount plus accrued
interest to the date of redemption. In the event of a change in control, holders
of the Senior Notes may require the Company to repurchase all or part of the
Senior Notes at a price equal to 101% of the principal amount plus accrued
interest to the date of repurchase.
The terms of the Company's outstanding Senior Notes impose certain
restrictions on its operating and financing activities, including restrictions
on its ability to:
o issue additional debt;
o create liens;
o make investments;
o enter into transactions with affiliates;
o effect sales of assets;
o declare or pay dividends or other distributions to shareholders; and
o effect consolidations, amalgamations and mergers.
As of December 31, 2002, the Company has $9.1 million outstanding on its
Subordinated Notes. In April 1996, the Company completed a private placement of
$100.00 million of the Company's Subordinated Notes. The Subordinated Notes are
convertible into common shares of the Company at the option of the holder at a
conversion price of $21.406 per share (equivalent to a conversion rate of
46.7154 shares per $1,000 principal amount of Subordinated Notes) at any time
prior to maturity. The Subordinated Notes are redeemable at the option of the
Company after April 1, 1999, plus accrued interest. The Subordinated Notes may
be redeemed at any time on or after April 1, 2001 without limitation. During
2001, the Company and a wholly owned subsidiary of the Company purchased an
aggregate of $70.4 million of the Company's Subordinated Notes for $13.7 million
consisting of $12.5 million in cash and common shares of the Company valued at
$1.2 million. The Company cancelled the purchased Subordinated Notes and
recorded a gain of $55.6 million. During 2002, the Company and the subsidiary of
the Company purchased an additional $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.
Page 32
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
The Company's total minimum annual rental payments to be made under
operating leases for premises as of December 31, 2002 are as follows:
2003 $ 4,825
2004 4,454
2005 4,544
2006 4,667
2007 4,537
Thereafter 36,177
--------------
$ 59,204
==============
As of December 31, 2002, the Company has an unfunded and accrued projected
benefit obligation of approximately $17.2 million (2001 - $13.8 million) in
respect of its 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, the survivor benefits due and payable under the
plan, although there can be no assurance that the Company will ultimately do so.
The Company substantially funds its operations through cash flow from
operations. Under the terms of the Company's typical theater system lease
agreement, the Company receives substantial cash payments before it completes
the performance of its obligations. Similarly, the Company receives cash
payments for some of its film productions in advance of related cash
expenditures.
Cash provided by operating activities amounted to $20.4 million for the
year ended December 31, 2002 after the payment of $16.9 million of interest and
other working capital requirements. Changes in other non-cash operating assets
and liabilities include $2.4 million that was invested in film assets, a
decrease in accounts receivables of $3.4 million, and a decrease of $8.1 million
in inventories in 2002. Cash used by investing activities in 2002 amounted to
$3.2 million, primarily consisting of $1.5 million invested in fixed assets.
Cash used in financing activities in 2002 amounted to $5.9 million mainly
related to the $6.0 million repurchase by a subsidiary of a portion of the
Company's Subordinated Notes. Capital expenditures including the purchase of
fixed assets and investments in film assets were $4.0 million in 2002 and the
Company anticipates a similar expenditure amount in 2003.
Cash provided by operating activities amounted to $2.7 million for the year
ended December 31, 2001 after the payment of $21.9 million of interest and other
working capital requirements. Changes in other non-cash operating assets and
liabilities included a decrease of $1.3 million in accounts receivable and a
decrease of $5.7 million in net investment in leases in 2001. Investment in film
assets was $8.3 million. Cash provided by investing activities in 2001 amounted
to $5.7 million. Of this amount, $7.5 million was received from the sale of
investments in marketable debt securities, and $1.1 million was invested in
fixed assets. Cash used in financing activities amounted to $12.5 million in
2001, related to the repurchase by a subsidiary of a portion of the Company's
Subordinated Notes.
Cash used in operating activities amounted to $54.1 million for the year
ended December 31, 2000 after the payment of $21.5 million of interest, $33.6
million of income taxes and working capital requirements. Changes in other
non-cash operating assets and liabilities included an increase of $0.1 million
in accounts receivable, an increase of $9.3 million in net investment in leases
and a decrease of $42.6 million in current taxes payable due to tax payments in
connection with the reorganization of the Company's lines of business in 1999.
Investment in film assets was $19.7 million. Cash provided by investing
activities in 2000 amounted to $45.3 million. Of this amount, $81.5 million was
received from the sale of investments in marketable debt securities, $27.6
million was invested in fixed assets, principally for owned and operated
theaters and theater systems contributed to joint ventured theaters, and
facilities, and $6.2 million was invested in other assets including patents,
trademarks and software. Cash provided by financing activities amounted to $2.5
million, which included proceeds of $1.4 million from the issuance of common
shares pursuant to the Company's stock option plan.
Page 33
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
The Company believes that cash flow from operations together with existing
cash will be sufficient to meet cash requirements for the next several years.
The Company's accounts receivable, inventory, certain fixed assets and net
investment in leases are currently unsecured and available as collateral for
future borrowing. The Company believes it has access to other sources of
liquidity, however, there can be no assurance that it will be successful in
securing additional financing. In addition, if management's projections of
future signings and installations are not realized, there is no guarantee the
Company will continue to be able to fund its operations through cash flows from
operations.
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 substantial portion of the Company's revenues are denominated in U.S.
dollars while a substantial portion of its costs and expenses denominated in
Canadian dollars. A portion of the net U.S. dollar flows of the Company are
converted to Canadian dollars to fund Canadian dollar expenses through the spot
market. The Company plans to convert Canadian dollar expenses to U.S. dollars
through the spot market on a go-forward basis. In Japan, the Company has ongoing
operating expenses related to its operations. Net Japanese Yen flows are
converted to U.S. dollars through the spot market. The Company also has cash
receipts under leases denominated in Japanese Yen and Euros. The Company plans
to convert Japanese Yen and Euros lease cash flows to U.S. dollars through the
spot market on a go-forward basis.
Page 34
IMAX CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are filed as part
of this Report:
PAGE
----
Report of Independent Accountants to the Shareholders of IMAX Corporation......................................... 36
Consolidated Balance Sheets as at December 31, 2002 and 2001...................................................... 37
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000........................ 38
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000........................ 39
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000.... 40
Notes to Consolidated Financial Statements........................................................................ 41
Page 35
IMAX CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS OF IMAX CORPORATION
We have audited the accompanying consolidated balance sheets of IMAX
Corporation (the "Company") as at December 31, 2002 and 2001 and the related
consolidated statements of operations, cash flows and shareholders' equity
(deficit) for each year in the three-year period ended December 31, 2002. These
financial statements and the financial statement schedule listed in the index
appearing under Item 15(a)(2) of this Form 10-K/A (Amendment No. 2) are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as at December 31, 2002 and 2001 and the results of its operations and cash
flows for each year in the three-year period ended December 31, 2002 in
accordance with accounting principles generally accepted in the United States.
As described in note 26 to the consolidated financial statements, the
Company changed its accounting policy for extinguishment of debt effective
January 1, 2003.
In addition, in our opinion, the financial statement schedule referred to
above presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 14, 2003, except as to Notes 26 and 27
which are as of February 6, 2004.
Page 36
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
AS AT DECEMBER 31,
-------------------------------
2002 2001
------------- -------------
ASSETS
Cash and cash equivalents (note 13) $ 37,136 $ 26,388
Accounts receivable, net of allowance for doubtful accounts of $9,248
(2001 - $18,060) 15,054 18,072
Financing receivables (note 4) 51,918 51,868
Inventories (note 5) 34,092 42,723
Prepaid expenses 2,383 1,845
Film assets (note 6) 419 10,513
Fixed assets (note 7) 45,308 52,652
Other assets (note 8) 10,455 11,295
Deferred income taxes (note 9) 3,821 3,022
Goodwill (note 3) 39,027 39,027
Other intangible assets (note 10) 3,363 4,107
------------- -------------
Total assets $ 242,976 $ 261,512
============= =============
LIABILITIES
Accounts payable $ 6,768 $ 6,735
Accrued liabilities (note 21) 43,451 46,397
Deferred revenue 87,284 95,082
Senior notes due 2005 (note 11) 200,000 200,000
Convertible subordinated notes due 2003 (note 12) 9,143 29,643
Liabilities of discontinued operations (note 23) -- 2,103
------------- -------------
Total liabilities 346,646 379,960
------------- -------------
COMMITMENTS AND CONTINGENCIES (notes 13 and 14)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 15) Common shares - no par value. Authorized -
unlimited number. Issued and outstanding - 32,973,366
(2001 - 31,899,114) 65,563 63,322
Other equity 1,542 1,034
Deficit (171,420) (183,392)
Accumulated other comprehensive income 645 588
------------- -------------
Total shareholders' deficit (103,670) (118,448)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 242,976 $ 261,512
============= =============
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 37
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,
-------------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
REVENUE
IMAX systems (note 16) $ 70,959 $ 76,582 $ 113,226
Films 40,556 29,923 41,711
Other 19,135 12,154 18,179
-------------- --------------- ---------------
130,650 118,659 173,116
COSTS OF GOODS AND SERVICES 78,438 97,391 112,655
-------------- --------------- ---------------
GROSS MARGIN 52,212 21,268 60,461
Selling, general and administrative expenses 34,906 46,690 42,079
Research and development 2,362 3,385 6,497
Amortization of intangibles 1,418 3,005 2,948
Loss (income) from equity-accounted investees (283) (73) 4,811
Receivable provisions, net of (recoveries) (1,233) 17,262 13,086
Restructuring costs and asset impairments (recoveries) (note 17) (121) 46,235 11,152
-------------- --------------- ---------------
EARNINGS (LOSS) FROM OPERATIONS 15,163 (95,236) (20,112)
Interest income 413 847 3,285
Interest expense, net of interest capitalized of $nil (2001 - $511,
2000 - $1,393) (17,570) (22,020) (21,961)
Gain on retirement of notes 11,900 55,577 --
Impairment of long-term investments -- (5,584) (4,133)
-------------- ---------------- ----------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 9,906 (66,416) (42,921)
Recovery of (provision for) income taxes (note 9) -- (27,848) 13,139
-------------- --------------- ---------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 9,906 (94,264) (29,782)
Net earnings (loss) from discontinued operations (note 23) 2,066 (50,850) (2,055)
-------------- --------------- ---------------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 11,972 (145,114) (31,837)
Cumulative effect of changes in accounting principles, net of
income tax benefit of $37,286 (note 24) -- -- (61,110)
-------------- --------------- ---------------
NET EARNINGS (LOSS) $ 11,972 $ (145,114) $ (92,947)
============== =============== ===============
EARNINGS (LOSS) PER SHARE (note 15):
Earnings (loss) per share - basic and fully diluted:
Net earnings (loss) from continuing operations $ 0.30 $ (3.05) $ (1.00)
Net earnings (loss) from discontinued operations $ 0.06 $ (1.64) $ (0.07)
-------------- -------------- --------------
Net earnings (loss) before cumulative effect of changes in
accounting principles $ 0.36 $ (4.69) $ (1.07)
Cumulative effect of changes in accounting principles $ -- $ -- $ (2.04)
-------------- --------------- -------------
Net earnings (loss) $ 0.36 $ (4.69) $ (3.11)
============== =============== ==============
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 38
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,
--------------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ 9,906 $ (94,264) $ (29,782)
Items not involving cash:
Depreciation, amortization and write-downs (note 18) 16,073 99,801 61,626
Loss (income) from equity-accounted investees (283) (73) 4,811
Deferred income taxes (799) 41,411 (5,201)
Gain on retirement of notes (11,900) (55,577)
Impairment of long-term investments -- 5,584 4,133
Stock and other non-cash compensation 3,685 5,182 1,242
Investment in film assets (2,441) (8,297) (19,665)
Changes in other non-cash operating assets and liabilities (note 18) 6,116 14,520 (73,929)
Net cash provided by (used in) operating activities from
discontinued operations -- (5,607) 2,676
-------------- --------------- ---------------
Net cash provided by (used in) operating activities 20,357 2,680 (54,089)
-------------- --------------- ---------------
INVESTING ACTIVITIES
Purchase of fixed assets (1,541) (1,091) (27,643)
Decrease (increase) in other assets (964) 1,140 (6,190)
Increase in other intangible assets (675) (642) --
Net sale of investments in marketable debt securities -- 7,529 81,503
Acquisition of Digital Projection International, net of cash
acquired -- -- (900)
Acquisition of minority interest in Sonics Associates, Inc. -- (1,041) (295)
Net cash used in investing activities from discontinued operations -- (217) (1,139)
-------------- --------------- ---------------
Net cash provided by (used in) investing activities (3,180) 5,678 45,336
-------------- --------------- ---------------
FINANCING ACTIVITIES
Repurchase of convertible subordinated notes (6,022) (12,540) --
Common shares issued 152 31 1,442
Paid-in-capital on stock options -- -- 1,034
-------------- --------------- ---------------
Net cash provided by (used in) financing activities (5,870) (12,509) 2,476
-------------- --------------- ---------------
Effects of exchange rate changes on cash from continuing
operations (559) (2,066) 2,125
Effects of exchange rate changes on cash from discontinued
operations -- 1,697 487
-------------- --------------- ---------------
Effects of exchange rate changes on cash (559) (369) 2,612
-------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS 10,748 (393) (5,689)
Increase (decrease) in cash and cash equivalents from discontinued
operations -- (4,127) 2,024
-------------- ---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, DURING
THE YEAR 10,748 (4,520) (3,665)
Cash and cash equivalents, beginning of year 26,388 30,908 34,573
-------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,136 $ 26,388 $ 30,908
============== =============== ===============
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 39
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 TOTAL
SHARES RETAINED OTHER SHAREHOLDERS' COMPREHENSIVE
ISSUED AND CAPITAL OTHER EARNINGS COMPREHENSIVE EQUITY INCOME
OUTSTANDING STOCK EQUITY (DEFICIT) INCOME (LOSS)(1) (DEFICIT) (LOSS)
----------- ----- ------ --------- ---------------- --------- ------
BALANCE AT DECEMBER 31, 1999 29,757,888 $ 57,471 $ -- $ 54,669 $ (1,075) $ 111,065 $--
Issuance of common stock 293,626 1,631 -- -- -- 1,631 --
Adjustment in paid-in-capital for
stock options exercised -- -- 1,034 -- -- 1,034 --
Net loss -- -- -- (92,947) -- (92,947) (92,947)
Net adjustment on available-for-
sale securities -- -- -- -- 586 586 586
Foreign currency translation
adjustments -- -- -- -- 894 894 894
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ (91,467)
==========
BALANCE AT DECEMBER 31, 2000 30,051,514 59,102 1,034 (38,278) 405 22,263 $ --
Issuance of common stock 1,847,600 4,220 -- -- -- 4,220 --
Net loss -- -- -- (145,114) -- (145,114) (145,114)
Net adjustment on available-for-
sale securities -- -- -- -- 281 281 281
Foreign currency translation
adjustments -- -- -- -- (98) (98) (98)
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ (144,931)
==========
BALANCE AT DECEMBER 31, 2001 31,899,114 63,322 1,034 (183,392) 588 (118,448) $ --
Issuance of common stock 1,074,252 2,241 -- -- -- 2,241 --
Net earnings -- -- -- 11,972 -- 11,972 11,972
Adjustment in paid-in capital for
non-employee stock options
granted -- -- 508 -- -- 508 --
Foreign currency translation
adjustments -- -- -- -- 57 57 57
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002 32,973,366 $ 65,563 $ 1,542 $ (171,420) $ 645 $ (103,670) $ 12,029
========== ========== ========== ========== ========== ========== ==========
(1) Components of accumulated other comprehensive income (loss) consist of:
AS AT DECEMBER 31,
---------------------------------
2002 2001 2000
----- ----- -----
Foreign currency translation adjustments $ 645 $ 588 $ 686
Unrealized loss on
available-for-sale security -- -- (281)
----- ----- -----
Accumulated other comprehensive
income $ 645 $ 588 $ 405
===== ===== =====
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 40
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 of proprietary
projection and sound systems for IMAX theaters principally owned and
operated by institutional and commercial customers located in more
than 30 countries as of December 31, 2002;
o the development, production, digital re-mastering, post-production and
distribution of certain films shown in 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
designing and manufacturing IMAX camera equipment for rental to
filmmakers and providing ongoing maintenance services for the IMAX
projection and sound systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 allowances for potential uncollectibility of accounts receivable
and net investment in leases, provisions for inventory obsolescence,
ultimate revenues for film assets, estimates of future cash flows
associated with long-lived assets, goodwill, accruals for contingencies and
valuation allowances for deferred income tax assets. 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.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
Allowances for doubtful accounts receivable and net investment in leases
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 41
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)
(d) INVENTORIES
Inventories are carried at the lower of cost, 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 appropriate provisions for 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.
(e) 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" ("SOP 00-2"). Film assets are amortized and
participation costs are accrued using the individual-film-forecast method
in the same ratio that current gross revenues bear to anticipated total
ultimate revenues. Estimates of ultimate revenues are prepared on a
title-by-title basis and reviewed regularly by management and revised where
necessary to reflect most current information. Ultimate revenue for films
includes estimates of revenue over a period not to exceed ten years
following the date of initial release.
Film exploitation costs, including advertising costs, are expensed as
incurred. Costs of film prints are capitalized and expensed over a period
of three months.
The recoverability of film costs is dependent upon commercial acceptance of
the films. If events or circumstances indicate that the fair value of a
film is less than the unamortized film costs, the film is written down to
fair value by a charge to earnings. The Company determines the fair value
of its films using a discounted cash flow model.
(f) FIXED ASSETS
Fixed assets are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives as follows:
Projection equipment -- 10 to 15 years
Camera equipment -- 5 to 10 years
Buildings -- 20 to 25 years
Office and production equipment -- 3 to 5 years
Leasehold improvements -- Over the term of the underlying leases
The Company reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In performing its review for
recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of impairment losses
is based on the excess of the carrying amount of the asset over the fair
value calculated using discounted expected future cash flows.
Page 42
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)
(g) OTHER ASSETS
Other assets include investments, unrecognized prior service pension costs
and deferred charges on debt financing.
Costs of debt financing are deferred and amortized over the term of the
debt.
Investments in marketable debt 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 debt 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.
(h) GOODWILL
The Company adopted FASB Financial Accounting Standard No. 142 "Goodwill
and Other Intangibles" ("FAS 142") effective January 1, 2002. Goodwill
represents the excess of purchase price over the fair value of 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 is tested by comparing the fair value of goodwill assigned to a
particular reporting unit to its carrying value.
Effective January 1, 2002, the Company no longer amortizes goodwill. The
Company performs an impairment test on at least an annual basis and
additionally, whenever events in changes and circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at
the reporting unit level by comparing the recording 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.
(i) 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.
(j) DEFERRED REVENUE
Deferred revenue represents cash received under theater system, film
contracts and for various services not yet recognized as revenue.
(k) 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 43
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)
(l) REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a
result of meeting the criteria established by FASB Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"). When
revenue is recognized, the initial rental fees due under the contract,
along with the present value of minimum ongoing rental payments, are
recorded as revenues for the period, and the related projector costs
including installation expenses are recorded as cost of goods and services.
Additional ongoing rentals in excess of minimums are recognized as revenue
when reported by the theater operator, provided that collection is
reasonably assured.
The Company recognizes revenues from sales-type leases upon installation of
the theater system 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. The associated
costs of 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.
The Company is periodically involved in settlements and legal proceedings
relating to terminated lease agreements with customers. When settlement
amounts are received, the Company allocates the total proceeds to the
underlying elements based on their relative fair value.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these
leases, initial rental fees and minimum lease payments are recognized as
revenue on a straight-line basis over the lease term. Additional rentals in
excess of minimum annual amounts are recognized as revenue when the
contracted portions of theater admissions due to the Company reported by
theater operators exceed the minimum amounts, provided that collection is
reasonably assured.
SALES OF THEATER SYSTEMS
Revenue from sales of theater systems is recognized when all of the
following criteria are met: persuasive evidence of an agreement exists; the
price is fixed or determinable; title passes to the customer; installation
of the system is complete; and collection is reasonably assured.
FILM LICENSING
Revenue from licensing of films is recognized when a contractual licensing
arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collection is
reasonably assured. Where the license fees are based on a share of the
customer's revenue, and all other revenue recognition criteria stated in
the preceding sentence are met, the Company recognizes revenue as the
customer exhibits the film.
Page 44
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)
(l) REVENUE RECOGNITION (cont'd)
MAINTENANCE AND OTHER SERVICES
Maintenance revenues are recognized on a straight-line basis over the
maintenance period. Revenues from digital re-mastering and 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.
(m) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(n) 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.
(o) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the intrinsic value
method set out in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and its related interpretations, and has
made pro forma disclosures of net earnings (loss) and earnings (loss) per
share in note 15 as if the methodology prescribed by FASB Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), had been adopted.
(p) 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 are amortized over the expected future service 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 CHANGE
The Company adopted FAS 142, effective January 1, 2002 under which goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed at least annually for impairment. If the Company had continued to
amortize goodwill, the charge for 2002 would have been $2.3 million.
Pursuant to FAS 142, the Company completed its test for goodwill impairment
effective January 1, 2002. The Company identified its reporting units to be
the same as its operating segments. The carrying values of assets,
liabilities, goodwill and other intangible assets were assigned to each of
these reporting units. To test for impairment in accordance with FAS 142,
the fair value of each reporting unit was determined and compared to the
carrying value of each unit. The Company completed the process for each
reporting unit and determined that the fair value exceeded the carrying
value and thus, concluded that there was no impairment in goodwill.
Page 45
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
3. ACCOUNTING CHANGE (cont'd)
In accordance with FAS 142, the effect of this change in accounting
principle is reflected prospectively. Supplemental comparative disclosure
as if the change had been applied retroactively, is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2002 2001 2000
---------- ----------- ----------
Reported net earnings (loss) $ 11,972 $ (145,114) $ (92,947)
Add back: Goodwill amortization -- 2,310 1,812
---------- ----------- ----------
Adjusted net earnings (loss) $ 11,972 $ (142,804) $ (91,135)
========== =========== ==========
Basic and fully diluted earnings (loss) per share:
Reported net earnings (loss) per share $ 0.36 $ (4.69) $ (3.11)
Goodwill amortization $ -- $ 0.07 $ 0.06
---------- ----------- ----------
Adjusted net earnings (loss) per share $ 0.36 $ (4.62) $ (3.05)
========== =========== ==========
4. FINANCING RECEIVABLES
(a) NET INVESTMENT IN LEASES
The Company enters into sales-type leases, for which the customer makes
initial rental payments and additional rental payments with contracted
minimums, which are generally indexed with inflation. The Company's net
investment in sales-type leases, at December 31, is comprised of the
following:
2002 2001
--------- ---------
Gross minimum lease amounts receivable $ 97,167 $ 105,379
Residual value of equipment 824 898
Unearned finance income (39,001) (42,888)
--------- ---------
Present value of minimum lease amounts receivable 58,990 63,389
Accumulated allowance for uncollectible amounts (8,938) (11,745)
--------- ---------
Net investment in leases $ 50,052 $ 51,644
========= =========
LONG-TERM RECEIVABLES 1,866 224
--------- ---------
Total financing receivables $ 51,918 $ 51,868
========= =========
(b) RENTAL AMOUNTS
Revenue includes the following annual rental amount, for the years ended
December 31:
2002 2001 2000
------- ------- -------
Ongoing minimum rental amounts on operating leases $ 849 $ 562 $ 879
Additional rentals in excess of minimum amounts on
sales-type leases 681 660 1,804
Additional rentals in excess of minimum amounts on
operating leases 3,525 2,595 2,807
Finance income on sales-type leases 4,691 5,152 6,607
------- ------- -------
$ 9,746 $ 8,969 $12,097
======= ======= =======
Page 46
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
4. LEASES (cont'd)
(b) RENTAL AMOUNTS (cont'd)
The estimated amount of gross minimum rental amounts receivable from
operating and sales-type leases at December 31, 2002, for each of the next
five years is as follows:
2003 $ 10,287
2004 9,408
2005 8,842
2006 8,598
2007 7,470
Thereafter 60,080
----------
$ 104,685
==========
5. INVENTORIES
AT DECEMBER 31,
-----------------------
2002 2001
------- -------
Raw materials $ 5,042 $ 5,939
Work-in-process 2,249 4,313
Finished goods 26,800 32,471
------- -------
$34,092 $42,723
======= =======
6. FILM ASSETS
AT DECEMBER 31,
-----------------------
2002 2001
------- -------
Completed and released films, net of accumulated amortization $ 206 $ 1,682
Films in production -- 8,597
Development costs 213 234
------- -------
$ 419 $10,513
======= =======
Included in costs of goods and services for 2002 are charges of $nil (2001
- $16.5 million, 2000 - $8.6 million) to reflect write-downs of unamortized
film costs.
All unamortized film costs as at December 31, 2002 for released films are
expected to be amortized within three years from December 31, 2002. The
amount of accrued participation liabilities that the Company expects to pay
during 2003 is $3.7 million.
Film assets include $nil of interest capitalized in 2002 (2001 - $0.5
million, 2000 - $0.8 million).
Page 47
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
7. FIXED ASSETS
AT DECEMBER 31, 2002
-------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
------- ------------ --------------
Equipment leased or held for use
Projection equipment $38,460 $20,468 $17,992
Camera equipment 9,548 7,629 1,919
------- ------- -------
48,008 28,097 19,911
------- ------- -------
Assets under construction 1,672 -- 1,672
------- ------- -------
Other fixed assets
Land 1,648 -- 1,648
Buildings 15,505 5,620 9,885
Office and production equipment 24,023 19,081 4,942
Leasehold improvements 8,928 1,678 7,250
------- ------- -------
50,104 26,379 23,725
------- ------- -------
$99,784 $54,476 $45,308
======= ======= =======
AT DECEMBER 31, 2001
-------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
------- ------------ --------------
Equipment leased or held for use
Projection equipment $ 40,497 $ 18,099 $ 22,398
Camera equipment 9,442 7,239 2,203
-------- -------- --------
49,939 25,338 24,601
-------- -------- --------
Assets under construction 1,452 -- 1,452
-------- -------- --------
Other fixed assets
Land 1,949 -- 1,949
Buildings 16,192 5,052 11,140
Office and production equipment 22,404 16,875 5,529
Leasehold improvements 8,893 912 7,981
-------- -------- --------
49,438 22,839 26,599
-------- -------- --------
$100,829 $ 48,177 $ 52,652
======== ======== ========
Interest capitalized in 2002 to fixed assets amounted to $nil (2001 - $nil,
2000 - $0.6 million).
8. OTHER ASSETS
AT DECEMBER 31,
-----------------------
2002 2001
------- -------
Pension asset, representing unrecognized prior service costs $ 7,036 $ 6,647
Deferred charges on debt financing 2,184 3,092
Investments in equity-accounted investees -- 314
Other assets 1,235 1,242
------- -------
$10,455 $11,295
======= =======
Page 48
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
9. INCOME TAXES
(a) Earnings (loss) from continuing operations before income taxes and minority
interest by tax jurisdiction, for the years ended December 31, is comprised
of the following:
2002 2001 2000
-------- -------- --------
Canada $ 8,845 $(35,837) $(31,884)
United States 583 (29,368) (8,008)
Japan 1,031 291 338
Other (553) (1,502) (3,367)
-------- -------- --------
$ 9,906 $(66,416) $(42,921)
======== ======== ========
(b) The recovery of (provision for) income taxes related to income from
operations, for the year ended December 31, comprise of the following:
2002 2001 2000
-------- -------- --------
Current:
Canada $ (754) $ 13,598 $ 8,167
Foreign (45) (35) (229)
-------- -------- --------
(799) 13,563 7,938
-------- -------- --------
Deferred:
Canada 799 (32,954) 1,915
Foreign -- (8,457) 3,286
-------- -------- --------
799 (41,411) 5,201
-------- -------- --------
$ -- $(27,848) $ 13,139
======== ======== ========
(c) The recovery of (provision for) income taxes from operations differs from
the amount that would have resulted by applying the combined Canadian
federal and provincial statutory income tax rates to earnings, for the
years ended December 31, is due to the following:
2002 2001 2000
-------- -------- --------
Income tax recovery at combined statutory rates $ (3,826) $ 27,642 $ 18,863
Increase (decrease) resulting from:
Permanent differences 3,070 (3,434) (3,113)
Manufacturing and processing credits deduction (141) (1,704) (2,841)
Decrease (increase) in valuation allowance 1,762 (41,239) (1,338)
Large corporations tax (403) (402) (405)
Income tax at different rates in foreign and other
provincial jurisdictions (37) (1,156) (353)
Investment tax credits and other 11 (903) 2,326
Effect of legislated tax rate reductions -- (6,651) --
Other (436) -- --
======== -------- --------
Recovery of (provision for) income taxes, as reported $ -- $(27,848) $ 13,139
======== ======== ========
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)
9. INCOME TAXES (cont'd)
(d) The deferred income tax asset, at December 31, is comprised of the
following:
2002 2001
-------- --------
Net operating loss and capital loss carryforwards $ 11,581 $ 16,959
Investment tax credit and other tax credit carryforwards 1,883 1,944
Write-downs of other assets 5,596 5,085
Excess tax over accounting basis in fixed assets and inventories 37,875 37,920
Accrued reserves 4,636 9,628
Other 2,298 3,135
-------- --------
Total deferred income tax assets 63,869 74,671
Income recognition on net investment in leases (16,306) (26,145)
-------- --------
47,563 48,526
Valuation allowance (43,742) (45,504)
-------- --------
Net deferred income tax asset $ 3,821 $ 3,022
======== ========
Loss carryforwards and tax credit carryforwards expire as follows:
INVESTMENT TAX
CREDITS AND OTHER NET OPERATING
TAX CREDIT CAPITAL LOSS LOSS
CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
----------------- --------------- -----------------
2003 $ 300 $ -- $ --
2004 -- -- --
2005 -- -- --
2006 -- -- 537
2007 -- -- 465
Thereafter 1,583 24,370 32,207
----------------- ----------------- -----------------
$ 1,883 $ 24,370 $ 33,209
================= ================ =================
Net operating loss carryforwards can be carried forward to reduce taxable
income through to 2022. Net capital loss carryforwards 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 2012.
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)
10. OTHER INTANGIBLE ASSETS
AT DECEMBER 31, 2002
-------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
----------------- ----------------- -----------------
Patents and trademarks $ 4,007 $ 1,417 $ 2,590
Intellectual property rights 1,193 420 773
Other intangible assets 1,264 1,264 --
----------------- ----------------- ----------------
$ 6,464 $ 3,101 $ 3,363
================= ================ =================
AT DECEMBER 31, 2001
-------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
----------------- ----------------- -----------------
Patents and trademarks $ 3,332 $ 977 $ 2,355
Intellectual property rights 1,193 248 945
Other intangible assets 1,264 457 807
----------------- ----------------- -----------------
$ 5,789 $ 1,682 $ 4,107
================= ================ =================
The Company expects to amortize approximately $0.7 million of other
intangible assets for each of the next 5 years.
11. SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of Senior Notes due
December 1, 2005 (the "Senior Notes") bearing interest at 7.875% per annum
with interest payable in arrears on June 1 and December 1 of each year,
commencing June 1, 1999. The Senior Notes are the senior unsecured
obligation of the Company, ranking pari passu in right of payment to all
existing and future senior unsecured and unsubordinated indebtedness of the
Company and senior in right of payment to any subordinated indebtedness of
the Company.
The Senior Notes contain covenants that, among other things, limit the
ability of the Company to incur additional indebtedness, pay dividends or
make other distributions, make certain investments, create certain liens,
engage in certain transactions with affiliates, engage in certain sale and
leaseback transaction or engage in mergers, consolidations or the transfer
of all or substantially all of the assets of the Company. The Senior Notes
are subject to redemption by the Company, in whole or in part, at any time
on or after December 1, 2002, at redemption prices expressed as percentages
of the principal amount for each 12-month period commencing December 1 of
the years indicated: 2003 - 101.969%, 2004 and thereafter - 100.000%,
together with interest accrued thereon to the redemption date. If certain
changes result in the imposition of withholding taxes under Canadian law,
the Senior Notes are subject to redemption at the option of the Company, in
whole but not in part, at a redemption price of 100% of the principal
amount thereof plus accrued interest to the date of redemption. In the
event of a change in control, holders of the Senior Notes may require the
Company to repurchase all or part of the Senior Notes at a price equal to
101% of the principal amount thereof plus accrued interest to the date of
repurchase.
Interest expense on the Senior Notes amounted to $15.8 million in 2002
(2001 - $15.8 million, 2000 - $15.8 million).
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)
12. CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company issued $100.0 million of 5.75% Convertible
Subordinated Notes due April 1, 2003 (the "Subordinated Notes") payable in
arrears on April 1 and October 1. The Subordinated Notes, subordinate to
present and future senior indebtedness of the Company, are convertible into
common shares of the Company at the option of the holder at a conversion
price of $21.406 per share (equivalent to a conversion rate of 46.7154
shares per $1,000 principal amount of Subordinated Notes) at any time prior
to maturity.
The Subordinated Notes are redeemable at the option of the Company after
April 1, 1999, without limitation equal to the principal amount plus
accrued interest.
During 2001, the Company and a wholly owned subsidiary of the Company
purchased an aggregate of $70.4 million of the Company's Subordinated Notes
for $13.7 million, consisting of $12.5 million in cash, and common shares
of the Company valued at $1.2 million. The Company cancelled the purchased
Subordinated Notes and recorded a gain of $55.6 million.
During 2002, the Company and a wholly owned subsidiary of the Company
purchased an additional $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. This transaction had the effect of reducing the principal amount
of the Company's outstanding Subordinated Notes as at December 31, 2002 to
$9.1 million.
13. COMMITMENTS
(a) Total minimum annual rental payments to be made by the Company under
operating leases for premises are as follows:
2003 $ 4,825
2004 4,454
2005 4,544
2006 4,667
2007 4,537
Thereafter 36,177
--------------
$ 59,204
Rent expense was $4.0 million for 2002 (2001 - $5.6 million, 2000 - $5.5
million). In addition, in 2002 an accrual of $nil (2001 - $4.2 million,
2000 - $nil) was charged to selling, general and administrative expenses
for exit costs associated with a plan to vacate and sub-lease one of the
Company's premises.
(b) As of December 31, 2002, the Company has letters of credit of $3.3 million
outstanding, which have been collateralized by cash deposits.
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)
14. CONTINGENCIES
(a) In November 2001, the Company filed a complaint with the High Court of
Munich (the "Court") 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 is also a member of Euromax, an
association of European large-screen cinema owners that filed a complaint
in 2000 with the European Commission based on European Community ("EC")
competition rules, which was dismissed in its entirety by the EC in July
2002. Euromax is entitled to a decision in appealable form, therefore the
Company expects the EC to confirm its rejection of the complaint in the
form of an appealable decision. Big Screen had brought a number of motions
for restraining orders in this matter relating to the Company's provision
of films and maintenance, all of which have been rejected by the courts,
including the Berlin Court of Appeals, and for which all appeals have been
exhausted. The Company believes that all of the allegations in Big Screen's
individual defense are meritless 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.
(b) In June 2000, a complaint was filed against the Company and a third party
by Mandalay Resort Group formerly known as Circus Circus Enterprises, Inc.,
alleging breach of contract and express warranty, fraud and
misrepresentation in connection with the installation of certain motion
simulation bases in Nevada. The case is being heard in the U.S. District
Court for the District of Nevada. The complainant is seeking damages in
excess of $4.0 million. The Company has brought a third party action
against Tri-Tech International, Inc. ("Tri-Tech") claiming that any
liability of the Company would be due to Tri-Tech's non-performance. The
Company believes that the allegations made against it in the complaint are
meritless and will accordingly defend the matter vigorously. The Company
further believes that the amount of loss, if any, suffered in connection
with this lawsuit would not have a material impact on the financial
position or results of operations of the Company, although no assurance can
be given with respect to the ultimate outcome of any such litigation.
(c) 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 Company filed counterclaims against Muvico for breach of
contract, unjust enrichment unfair competition and/or deceptive trade
practices and theft of trade secrets, and brought claims against
MegaSystems, Inc. ("MegaSystems"), a large-format theater system
manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from using
the Company's confidential and proprietary information. The case is being
heard in the U.S. District Court, Southern District of Florida, Miami
Division. The Company moved for summary judgement on its contract claims
against Muvico in September 2002 and is awaiting a ruling by the court. The
Company believes that the allegations made by Muvico in its complaint are
entirely without merit and will accordingly defend the claims vigorously.
The Company further believes that the amount of loss, if any, suffered in
connection with this lawsuit would not have a material impact on the
financial position or results of operation of the Company, although no
assurance can be given with respect to the ultimate outcome of any such
litigation.
(d) 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.
(e) As of December 31, 2002, the Company has letters of credit of $3.3 million
outstanding, which have been collateralized by cash deposits.
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)
15. 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 2002, the Company issued 74,252 common shares pursuant to the exercise
of stock options for cash proceeds of $0.2 million and 1,000,000 common
shares with an ascribed value of $2.1 million as partial payment for the
repurchase of a portion of the Subordinated Notes (see note 12).
In 2001, the Company issued 150,000 common shares pursuant to the exercise
of stock options for cash proceeds of $0.03 million, 20,000 common shares
with a value of $0.4 million relating to additional consideration for a
prior period business acquisition, 1,000,000 common shares under terms of
the Company's employment contracts with an ascribed value of $2.6 million
and 677,600 common shares with an ascribed value of $1.2 million as partial
payment for the repurchase of a portion the Subordinated Notes (see note
12).
In 2000, the Company issued 281,300 common shares pursuant to the exercise
of stock options for cash proceeds of $1.4 million, 10,658 common shares
with a value of $0.2 million related to additional consideration for a
prior period business acquisition and 1,668 common shares under the terms
of an employment contract with an ascribed value of $0.03 million.
(c) SHARES HELD BY A SUBSIDIARY
During 2000, 148,000 common shares held by a subsidiary were sold to a
former employee of the Company in connection with the exercise of a stock
option grant for cash proceeds of $0.03 million.
(d) STOCK BASED COMPENSATION
As at December 31, 2002, the Company has reserved a total of 8,367,640
(2001 - 8,372,550) common shares for future issuance as follows:
(i) 8,367,640 common shares remain reserved for issuance under the Stock
Option Plan, of which options in respect of 5,640,898 common shares are
outstanding at December 31, 2002. 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, 2002, options in
respect of 3,360,165 common shares were vested and exercisable. During
2002, the number of common shares reserved was decreased by 42,500 upon
the exercise of options under the Stock Option Plan; decreased by
31,752 upon the exercise of other options; and was increased by 69,342
upon the termination of share grant obligations to executives of a
former subsidiary.
(ii)Under the terms of certain employment agreements, the Company is
required to issue 360,000 restricted common shares or pay their cash
equivalent. The restricted shares or the related cash obligation are
fully vested effective July 1, 2002. The Company has recorded an
expense of $0.7 million in 2002 (2001 - $0.6 million, 2000 - $0.2
million) under these agreements.
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)
15. CAPITAL STOCK (cont'd)
(d) STOCK BASED COMPENSATION (cont'd)
The following table summarizes certain information in respect of option
activity under the Stock Option Plan:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
---------------------------------- -------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- --------- --------- ---------
Options outstanding, beginning of year 4,609,086 8,071,072 5,157,400 $ 16.98 $ 21.91 $ 20.18
Granted 2,229,893 1,395,128 3,224,972 4.76 2.95 24.25
Exercised (42,500) -- (131,300) 3.11 -- 9.06
Cancelled(1) (869,681) (2,867,100 ) -- 22.81 21.42 --
Forfeited (285,900) (1,990,014) (180,000) 24.66 21.94 26.17
----------- ---------- ----------
Options outstanding, end of year 5,640,898 4,609,086 8,071,072 11.31 16.98 21.91
========== ========== ==========
Options exercisable, end of year 3,360,165 2,549,182 3,269,728 13.89 20.31 19.65
========== ========== ==========
(1) Included in 2001 are stock options for 2,600,000 common shares
cancelled for $nil consideration in conjunction with the issuance of
650,000 common shares under the terms of certain employment
agreements. The cancellation of other stock options was done for $nil
consideration.
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at December 31, 2002:
NUMBER OF SHARES
--------------------------------------------
WEIGHTED
RANGE OF EXERCISE AVERAGE EXERCISE AVERAGE REMAINING
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE TERM
-------------------- ----------------- ----------------- --------------- -----------------
$ 0.00 - $ 2.99 364,128 180,459 $ 2.62 5.7 Years
$ 3.00 - $ 4.99 2,660,009 1,120,870 4.10 6.2 Years
$ 5.00 - $ 9.99 429,889 257,064 6.78 3.8 Years
$10.00 - $ 14.99 11,000 11,000 13.48 3.1 Years
$15.00 - $ 19.99 258,400 256,400 16.27 3.7 Years
$20.00 - $ 24.99 1,503,172 1,266,172 22.26 6.3 Years
$25.00 - $ 28.04 414,300 268,200 27.11 6.9 Years
----------------- -----------------
Total 5,640,898 3,360,165 11.31 5.7 Years
================= =================
The Company recorded compensation expenses relating to stock options
granted to non-employees for $0.5 million in 2002 (2001 - $nil, 2000 -
$nil) and credited the amounts to other equity.
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)
15. CAPITAL STOCK (cont'd)
(d) STOCK BASED COMPENSATION (cont'd)
The Company currently follows APB 25 and if the methodology prescribed by
FAS 123 had been adopted by the Company, pro forma results for the year
ended December 31, would have been as follows:
2002 2001 2000
---------------- ---------------- ----------------
Net earnings (loss) as reported $ 11,972 $ (145,114) $ (92,947)
Stock-based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (10,765) (10,290) (6,367)
---------------- --------------- ----------------
Adjusted net earnings (loss) $ 1,207 $ (155,404) $ (99,314)
================ =============== ================
Earnings (loss) per share - basic and fully diluted:
Net earnings (loss) as reported $ 0.36 $ (4.69) $ (3.11)
FAS 123 stock-based compensation expense $ (0.32) $ (0.34) $ (0.21)
--------------- --------------- ---------------
Adjusted net earnings (loss) $ 0.04 $ (5.03) $ (3.32)
=============== =============== ===============
The weighted average fair value of common share options granted in 2002 at
the time of grant was $2.2 million (2001 - $3.2 million, 2000 - $24.1
million). The fair value of common share options granted is estimated at
the grant date using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, an average risk free interest
rate of 2.6% (2001 - 4.5%, 2000 - 6.0%), 20% forfeiture of options vesting
greater than two years, expected life of one to seven years and expected
volatility of 50% (2001 - 200%, 2000 - 200%).
(e) EARNINGS (LOSS) PER SHARE
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
--------------- --------------- ----------------
Net earnings (loss) applicable to common shareholders:
Earnings (loss) before cumulative effect of changes in
accounting principles $ 11,972 $ (145,114) $ (31,837)
Cumulative effect of changes in accounting principles,
net of income tax benefit of $37,286 -- -- (61,110)
--------------- --------------- ----------------
$ 11,972 $ (145,114) $ (92,947)
=============== =============== ===============
Weighted average number of common shares:
Issued and outstanding, beginning of year 31,899,114 30,051,514 29,757,888
Weighted average number of shares
issued during the year 1,044,279 864,167 116,227
--------------- --------------- ---------------
Weighted average number of shares used in computing
basic earnings (loss) per share 32,943,393 30,915,681 29,874,115
Assumed exercise of stock options, net of
shares assumed 362,935 -- --
--------------- --------------- --------------
Weighted average number of shares used in computing
fully diluted earnings (loss) per share 33,306,328 30,915,681 29,874,115
=============== =============== ===============
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)
15. CAPITAL STOCK (cont'd)
(e) EARNINGS (LOSS) PER SHARE (cont'd)
The calculation of fully diluted loss per share for 2001 and 2000 excludes
options to purchase common shares of stock which were outstanding, and for
2002, 2001 and 2000 excludes common shares issuable upon conversion of the
Subordinated Notes as the impact of these exercises and conversions would
be anti-dilutive.
16. CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
(a) Included in IMAX systems revenue for 2002 is $5.1 million (2001 - $5.5
million, 2000 - $1.4 million) for restructured and/or terminated lease
agreements with customers.
(b) Included in selling, general and administrative expenses for 2002 is $0.4
million (2001 - ($1.4 million), 2000 - ($1.8 million) for net foreign
exchange gains (losses) related to the translation of foreign currency
denominated monetary assets, liabilities and integrated subsidiaries.
17. RESTRUCTURING COSTS AND ASSET IMPAIRMENTS (RECOVERIES)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------- ------------- ------------
Restructuring costs(1) (recovery) $ (497) $ 16,292 $ --
Asset impairments (recovery)
Fixed assets(2) 376 26,660 11,152
Other assets -- 3,283 --
------------- ------------- ------------
Total $ (121) $ 46,235 $ 11,152
============= ============= ============
(1) During 2001, the Company reduced its expenses and changed its corporate
structure to reflect industry-wide economic and financial difficulties
faced by certain of the Company's customers. During the year ended December
31, 2001, the Company relocated its Sonics sound-system facility in
Birmingham, Alabama to the Company's current facilities near Toronto,
Canada, and reduced its overall corporate workforce by 208 employees. In
2001, the Company recorded expenses of $12.6 million for staff severances
and $3.7 million for premises relocation charges. During 2002, the Company
recovered $0.5 million of restructuring liabilities for terminated
employees who obtained employment prior to the completion of their
severance period. As at December 31, 2002 the Company has accrued
liabilities of $1.4 million (2001 - $5.1 million, 2000 - $nil) for costs of
severed employees to be paid over the next two years. During 2002, the
Company paid out $3.2 million of termination benefits.
(2) The Company, in assessing the carrying value of its long-lived assets
recorded write-downs of $0.4 million in 2002 (2001 - $26.7 million,
2000 - $11.2 million) relating to fixed assets as estimated discounted
future cash flows were less than the carrying amount of the asset.
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)
18. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
(a) Changes in other non-cash operating assets and liabilities
comprise of the following:
Decrease (increase) in:
Accounts receivable $ 3,383 $ 1,331 $ (111)
Net investment in leases 220 5,687 (9,258)
Inventories 8,092 6,852 (6,657)
Prepaid expenses (688) (33) (1,939)
Increase (decrease) in:
Accounts payable 33 (9,862) (7,127)
Accrued liabilities (7,838) 19,880 (40,224)
Deferred revenue 2,914 (9,335) (8,613)
------------ ------------ ------------
$ 6,116 $ 14,520 $ (73,929)
============ ============ ============
(b) Cash payments made during the year on account of:
Income taxes $ 1,256 $ 1,107 $ 33,613
============ ============ ============
Interest $ 16,868 $ 21,910 $ 21,500
============ ============ ============
(c) Depreciation, amortization and write-downs (recoveries)
comprise of the following:
Depreciation and amortization:
Film assets $ 1,973 $ 10,544 $ 9,346
Fixed assets 6,300 8,652 11,131
Other assets 2,202 3,075 4,982
Goodwill -- 2,310 1,812
Other intangible assets 1,419 695 302
Deferred financing costs 792 1,149 1,213
------------ ------------ ------------
12,686 26,425 28,786
Write-downs (recoveries):
Accounts receivable (1,941) 4,469 13,086
Net investment in leases 708 13,633 --
Inventories 1,229 4,053 --
Film assets -- 16,514 8,602
Fixed assets 3,175 26,660 11,152
Other assets 216 8,047 --
------------ ------------ ------------
3,387 73,376 32,840
------------ ------------ ------------
$ 16,073 $ 99,801 $ 61,626
============ ============ ============
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)
19. SEGMENTED AND OTHER INFORMATION
As of December 31, 2002, the Company has three reportable segments: IMAX
systems, films and other. The Company's digital projection systems
operating segment was disposed of effective December 11, 2001 and has been
reflected as discontinued operations (see note 23). The IMAX systems
segment designs, manufactures, sells or leases and maintains IMAX theater
projection systems. The films segment produces and distributes films, and
performs film post-production services. The other segment includes camera
rentals and theater operations. 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.
(a) OPERATING SEGMENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUE
IMAX systems $ 70,959 $ 76,582 $ 113,226
Films 40,556 29,923 41,711
Other 19,135 12,154 18,179
------------ ------------ ------------
Total $ 130,650 $ 118,659 $ 173,116
============ ============ ============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 31,376 $ 3,648 $ 37,929
Films 5,379 (33,022) (13,734)
Other (899) (21,850) (23,321)
Corporate overhead (20,693) (44,012) (20,986)
------------ ------------ ------------
Total $ 15,163 $ (95,236) $ (20,112)
============ ============ ============
DEPRECIATION, AMORTIZATION AND WRITE-DOWNS
Depreciation and amortization:
IMAX systems $ 5,030 $ 12,548 $ 8,187
Films 3,556 8,725 11,208
Other and corporate 4,100 5,152 9,391
------------ ------------ ------------
12,686 26,425 28,786
------------ ------------ ------------
Write-downs (recoveries):
IMAX systems 4,505 24,421 13,086
Films -- 30,901 8,602
Other and corporate (1,118) 18,054 11,152
------------ ------------ ------------
3,387 73,376 32,840
------------ ------------ ------------
Total $ 16,073 $ 99,801 $ 61,626
============ ============ ============
PURCHASE (DISPOSALS) OF FIXED ASSETS
IMAX systems $ (344) $ 173 $ 3,600
Films 152 3 15,147
Other 1,733 915 8,896
------------ ------------ ------------
Total $ 1,541 $ 1,091 $ 27,643
============ ============ ============
AT DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
ASSETS
IMAX systems $ 163,795 $ 182,319 $ 222,119
Films 17,680 30,372 68,609
Other 9,823 9,014 38,262
Corporate 51,678 39,807 101,219
Discontinued operations -- -- 61,891
------------ ------------ ------------
Total $ 242,976 $ 261,512 $ 492,100
============ ============ ============
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)
19. SEGMENTED AND OTHER INFORMATION (cont'd)
(b) GEOGRAPHIC INFORMATION
Revenue by geographic area is based on the location of the theater.
YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUE
Canada $ 7,236 $ 5,524 $ 8,454
United States 75,620 71,357 82,987
Europe 23,846 21,880 43,141
Japan 6,395 3,971 4,512
Rest of World 17,553 15,927 34,022
------------ ------------ ------------
Total $ 130,650 $ 118,659 $ 173,116
============ ============ ============
AT DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
LONG-LIVED ASSETS
Canada $ 20,958 $ 20,197 $ 28,684
United States 32,459 42,634 74,782
Europe 2,258 1,126 3,810
Japan 25 40 840
Rest of World 3,426 4,057 8,580
------------ ------------ ------------
Total $ 59,126 $ 68,054 $ 116,696
============ ============ ============
Long-lived assets include fixed assets, other assets and other intangible
assets.
(c) REVENUE AND COST OF GOODS AND SERVICES
YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenue:
Products $ 77,024 $ 80,403 $ 121,478
Services 53,626 38,256 51,638
------------ ------------ ------------
Total revenue $ 130,650 $ 118,659 $ 173,116
============ ============ ============
Costs of goods and services:
Products $ 35,611 $ 63,270 $ 66,321
Services 42,827 34,121 46,334
------------ ------------ ------------
Total costs of goods and services $ 78,438 $ 97,391 $ 112,655
============ ============ ============
Product revenue includes sales and sales-type leases of theater systems,
revenue from film distribution and the sales of other products. Service
revenue includes rentals from operating leases, maintenance,
post-production services, camera rentals, theater operations and other
services.
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)
20. FINANCIAL INSTRUMENTS
The Company is exposed to market risk from changes in foreign currency
rates. The Company does not use financial instruments for trading or other
speculative purposes. The Company maintains cash and cash equivalents with
various major financial institutions. The Company's cash is invested with
highly rated financial institutions.
A substantial portion of the Company's revenues are denominated in U.S.
dollars while a substantial portion of its costs and expenses are
denominated in Canadian dollars. A portion of the net U.S. dollar cash
flows of the Company is periodically converted to Canadian dollars to fund
Canadian dollar expenses through the spot market. The Company plans to
convert Canadian dollar expenses to U.S. dollars through the spot markets
on a go-forward basis. In Japan, the Company has ongoing operating expenses
related to its operations. Net Japanese Yen flows are converted to U.S.
dollars generally through the spot markets. The Company also has cash
receipts under leases denominated in Japanese Yen and Euros which were
converted to U.S. dollars generally through the spot market. 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. As at December 31, 2002, no
foreign currency forward contracts are outstanding.
The Company's adoption of FASB Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities",
effective January 1, 2001, did not have a significant impact on the
accounts.
The carrying values of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair
values due to the short-term maturity of these instruments. The Company's
other financial instruments at December 31, comprise of the following:
2002 2001
------------------------------ -------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- -------------- ---------------
Senior Notes due 2005 $ 200,000 $ 156,000 $ 200,000 $ 80,000
Convertible Subordinated Notes due 2003 9,143 8,686 29,643 9,189
The fair values of the Company's Senior Notes and Subordinated Notes are
estimated based on quoted market prices for the Company's debt.
A substantial proportion of the Company's revenues are generated from
customers in the commercial exhibition industry, which experienced
significant deterioration in financial condition in 2001 and 2000. To
minimize its credit risk in this area, the Company retains title to
underlying theater systems leased, registers theater systems sold as
collateral, performs initial and ongoing credit evaluations of its
customers and makes ongoing provisions for its estimate of potentially
uncollectible amounts.
Page 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)
21. EMPLOYEE PENSION PLANS
(a) DEFINED BENEFIT PLAN
On July 12, 2000, the Company established a defined benefit pension plan
covering its two Co-Chief Executive Officers. The plan provides for a
lifetime retirement benefit from age 55 determined as 75% of the member's
best average 60 consecutive months of earnings during the 120 months
preceding retirement. Once benefit payments begin, the benefit is indexed
annually to the cost of living and further provides for 100% continuance
for life to the surviving spouse. The benefits were 50% vested as at July
12, 2000, the plan initiation date. The vesting percentage increases on a
straight-line basis from inception until age 55. The vesting percentage of
a member whose employment terminates other than by voluntary retirement
shall be 100%. Also, upon the occurrence of a change in control of the
Company prior to termination of a member's employment, the vesting
percentage shall become 100%. The following assumptions were used in
determining the unfunded status of the Company's defined benefit pension
plan at December 31:
2002 2001 2000
--------------- --------------- --------------
Discount rate 6.0% 7.0% 7.0%
Rate of increase in compensation levels nil% 1.5% 1.5%
The amounts accrued for the plan are determined as follows:
2002 2001 2000
--------------- --------------- ---------------
Projected benefit obligation:
Obligation, beginning of year $ 13,819 $ 11,595 $ --
Obligation arising on initiation of plan -- -- 11,321
Service cost 1,777 1,701 831
Interest cost 1,029 871 411
Actuarial loss (gain) 525 (348) (968)
--------------- --------------- ---------------
Obligation, end of year $ 17,150 $ 13,819 $ 11,595
=============== =============== ===============
Unfunded status:
Obligation, end of year $ 17,150 $ 13,819 $ 11,595
Unrecognized prior service cost (7,826) (9,224) (10,622)
Unrecognized actuarial gain 791 1,316 968
--------------- --------------- ---------------
Accrued pension liability $ 10,115 $ 5,911 $ 1,941
=============== =============== ===============
In addition, included in accrued liabilities, is a minimum pension
liability of $7.0 million (2001 - $6.6 million), representing unrecognized
prior service costs.
The following table provides disclosure of pension expense for the defined
benefit plan for the year ended December 31:
2002 2001 2000
--------------- --------------- ---------------
Service cost $ 1,777 $ 1,701 $ 831
Interest cost 1,029 871 411
Amortization of prior service cost 1,398 1,398 699
--------------- --------------- ---------------
Pension expense $ 4,204 $ 3,970 $ 1,941
=============== =============== ===============
At the time the Company established the defined benefit pension plan, it
also took out life insurance policies on its two Co-Chief Executive
Officers. The Company intends to use the proceeds of such insurance
policies to satisfy, in whole or in part, the survival benefits due and
payable under the plan, although there can be no assurance that the Company
will ultimately do so. At December 31, 2002, the cash surrender value of
the insurance policies is $0.9 million (2001 - $0.4 million).
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)
21. EMPLOYEE PENSION PLANS (cont'd)
(b) DEFINED CONTRIBUTION PLANS
The Company also maintains defined contribution employee 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
2002, the Company contributed and expensed an aggregate of $0.4 million
(2001 - $0.5 million, 2000 - $0.6 million) to its Canadian plan and an
aggregate of $0.1 million (2001 - $0.3 million, 2000 - $0.4 million) to its
Company's defined contribution employee pension plan under Section 401(k)
of the U.S. Internal Revenue Code.
22. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(a) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 144, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("FAS 144")
FAS 144 supercedes FAS 121 and the accounting and reporting provisions of
APB 30 for segments of a business to be disposed of. The pronouncement was
effective January 1, 2002, and has been adopted by the Company. The
pronouncement has no current impact on the Company's financial position or
results of operations.
(b) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 146, "ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES" ("FAS 146")
In June 2002, the FASB issued FAS 146 which replaces EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit and Activity (including Certain Costs Incurred in a Restructuring)".
EITF 94-3 required an entity to record a liability for certain termination
costs when it adopted a plan to restructure operations. The FASB has
concluded that an entity's commitment to a plan, by itself, does not create
a liability. Under the new rules, exit costs and restructuring liabilities
generally will be recognized only when incurred. The provisions are
effective for exit or disposal activities that are initiated after December
31, 2002. The pronouncement has no current impact on the Company's
financial position or results of operations.
(c) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 148 "ACCOUNTING FOR
STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE" ("FAS 148")
In December 2002, the FASB issued FAS 148 which provides alternate methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation prescribed by FAS 123. In
addition, FAS 148 requires prominent disclosures in both annual and interim
financial statements about the method of accounting and the effect of the
method used on reported results. The Company has adopted FAS 148 effective
December 31, 2002, for disclosure purposes only. The Company intends to
continue investigating alternative option-pricing models in the next fiscal
year as further discussions on this topic continue in the marketplace.
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)
22. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (cont'd)
(d) FASB INTERPRETATION NO. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS
OF OTHERS" ("FIN 45")
In November 2002, the FASB issued FIN 45 which requires that upon issuance
of a guarantee, a guarantor must recognize a liability for the fair value
of an obligation assumed under a guarantee. FIN 45 also requires additional
disclosures by a guarantor in its interim and annual financial statements
about the obligations associated with guarantees issued. The recognition
provisions of FIN 45 will be effective for any guarantees that are issued
or modified after December 31, 2002. The disclosure requirements will be
effective for the third quarter of fiscal 2003. The Company is currently
evaluating the effects of FIN 45; however, it does not expect that the
adoption will have a material impact on the results of operations or
financial position.
(e) FASB INTERPRETATION NO. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES",
("FIN 46")
In January 2003, the FASB issued FIN 46 which addresses consolidation by
business enterprises of variable interest entities. In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial assets,
including loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in research and
development or other activities on behalf of another company. The objective
of FIN 46 is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established.
Adoption is not expected to have a material effect on the Company.
23. DISCONTINUED OPERATIONS
Effective December 11, 2001, the Company completed the sale of its wholly
owned subsidiary, Digital Projection International, including its
subsidiaries (collectively "DPI"), to a company owned by members of DPI
management. In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"), the Company has segregated
the discontinued operations for all comparative periods presented.
As part of the transaction, the Company restructured its advances to DPI,
releasing DPI from obligations to repay any amounts in excess of $12.7
million previously advanced by the Company, and reorganized the remaining
$12.7 million of debt owing to the Company into two separate loan
agreements. The loans receivable are collateralized by fixed and floating
charges over all DPI assets including intellectual properties. One of the
loans is convertible, upon the occurrence of certain events, into shares
representing 49% of the total share capital of DPI. DPI also agreed to
release the Company from its ongoing obligations to DPI.
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)
23. DISCONTINUED OPERATIONS (cont'd)
The liabilities of discontinued operations are comprised of the following:
AT DECEMBER 31, AT DECEMBER 31,
2002 2001
------------------ ------------------
LIABILITIES
Accrued liabilities(1) $ -- $ 2,103
------------------ ------------------
Total liabilities of discontinued operations $ -- $ 2,103
================== ==================
(1) During 2002, the Company recorded earnings of $2.1 million from
discontinued operations relating to future obligations that have
been eliminated.
The net loss from discontinued operations for the years ended December 31,
are comprised of the following:
2002 2001 2000
------------- ------------- -------------
Revenue $ -- $ 21,965 $ 46,356
============= ============= =============
Net income (loss) from discontinued operations(1) $ 2,066 $ (8,508) $ (2,055)
Net loss on disposal of discontinued operations(2) -- (42,342) --
------------- ------------- ------------
Net income (loss) from discontinued operations $ 2,066 $ (50,850) $ (2,055)
============= ============= =============
(1) Net of income tax recovery of $nil in 2002 (2001 - $2,422, 2000 -
$99).
(2) Net of income tax recovery of $nil in 2001; includes $12.7 million
in allowances for uncollectibility of loans receivable. Any
recoveries on these loans will be included in the results from
discontinued operations as cash is received.
24. CHANGES IN ACCOUNTING POLICIES
(a) SEC STAFF ACCOUNTING BULLETIN NO. 101, "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS" ("SAB 101")
In accordance with the interpretive guidance of SAB 101, the Company,
effective January 1, 2000, recognizes revenue on theater systems, whether
pursuant to sales-type leases or sales, at the time that installation is
complete. Prior to January 1, 2000, the Company recognized revenue from
sales-type leases and sales of theater systems at the time of delivery. The
effect of applying this change in accounting principle was a fiscal 2000
non-cash charge of $54.5 million, net of income taxes of $33.4 million, or
$1.82 per share, representing the cumulative impact on retained earnings as
at December 31, 1999.
(b) AICPA STATEMENT OF POSITION 00-2, "ACCOUNTING BY PRODUCERS OR DISTRIBUTORS
OF FILMS" ("SOP 00-2")
Effective January 1, 2000, the Company adopted SOP 00-2. Prior to January
1, 2000, film costs and associated licensing revenues were recognized in
accordance with FASB Statement of Financial Accounting Standard No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films"
and exploitation costs were capitalized and amortized. As a result of
adopting SOP 00-2, the Company recorded a non-cash charge of $6.6 million,
net of income taxes of $3.9 million, or $0.22 per share, to fiscal 2000
earnings, representing the cumulative impact on retained earnings as at
December 31, 1999.
25. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
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)
26. AMENDMENTS
Effective January 1, 2003, the Company adopted FASB Statement of Financial
Accounting Standard No. 145, "Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002" ("FAS
145"), under which gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB 30.
Under FAS 145, the Company was required to reclassify any gain or loss on
extinguishment of debt that was classified as an extraordinary item to net
earnings from continuing operations before income taxes for 2003 and all
prior period presentations. The Company has reclassified the extraordinary
gain on repurchase of Subordinated Notes in 2002 and 2001 within net
earnings from continuing operations before income taxes. The Company has
applied FAS 145 within this Form 10-K/A for the fiscal years ended December
31, 2002, 2001 and 2000 which had the effect of reclassifying gains on the
retirement of notes of $8.3 million, net of income tax expense of $3.6
million, $38.7 million, net of income tax expense of $16.8 million, and
$nil, respectively from extraordinary items to net earnings from continuing
operations before income taxes.
The Company has also reclassified foreign exchange gains (losses) to be
included within selling, general and administrative expenses for the fiscal
years ended December 31, 2002, 2001 and 2000 in the amounts of $0.4
million, $(1.4) million, and $(1.8) million, respectively. The Company has
also reclassified receivable provisions (recoveries) previously included
within selling, general and administrative expenses and restructuring costs
and asset impairment (recoveries) to be separately reported as receivable
provisions, net of (recoveries) in the amounts of $(1.2) million, $17.3
million, and $13.1 million, respectively. The Company has also reclassified
long-term receivables from accounts receivable to financing receivables for
the years ended December 31, 2002 and 2001 in the amounts of $1.9 million
and $0.2 million, respectively.
27. SUBSEQUENT EVENTS
In December 2003, the Company completed a private placement of $160.0
million, 9.625% Senior Notes due December 1, 2010 with net proceeds of
$154.0 million. Also, the Company completed a tender offer and consent
solicitation in December 2003 for the $152.8 million outstanding 7.785%
Senior Notes due 2005 in which the Company purchased approximately $123.6
million of such Senior Notes. In January 2004, the Company redeemed the
remaining 7.785% Senior Notes not acquired in the tender offer. The 9.625%
Senior Notes impose certain restrictions on the Company's operating and
financing activities and are unconditionally guaranteed by certain of the
Company's wholly-owned subsidiaries. The Company has agreed to conduct an
exchange offer to exchange all the outstanding Senior Notes for Senior
Notes that are registered under the US Securities Act of 1933.
On February 6, 2004, the company entered into a new $20.0 million credit
facility which is secured by substantially all of the assets of IMAX
Corporation and certain of its subsidiaries. The credit facility imposes
certain restrictions on the Company's operating and financing activities,
including covenants that restrict the Company's ability to: incur certain
additional indebtedness; make certain loans, investments or guarantees; pay
dividends; make asset sales; incur certain liens or other encumbrances;
conduct certain transactions with affiliates and enter into certain
corporate transactions.
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's 9.625% senior notes due 2010 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 (the "Non-Guarantor Subsidiaries"): IMAX Japan Inc., IMAX B.V., and
IMAX Entertainment Pte. Inc., 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.
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- -------------- --------------- --------------- --------------
ASSETS
Cash and cash equivalents $ 31,091 $ 5,695 $ 350 $ -- $ 37,136
Accounts receivable 10,274 3,373 1,407 -- 15,054
Financing receivables 50,492 1,249 177 -- 51,918
Inventories 37,239 280 62 (3,489) 34,092
Prepaid expenses 1,856 340 187 -- 2,383
Intercompany receivables 29,740 15,863 13,338 (58,941) --
Film assets 419 -- -- -- 419
Fixed assets 40,610 5,402 6 (710) 45,308
Other assets 10,455 -- -- -- 10,455
Deferred income taxes 3,770 51 -- -- 3,821
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,363 -- -- -- 3,363
Investments in subsidiaries 25,472 -- -- (25,472) --
------------- ------------- ------------- ------------- -------------
Total assets $ 283,808 $ 32,253 $ 15,527 $ (88,612) $ 242,976
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 2,641 3,113 1,014 -- 6,768
Accrued liabilities 41,230 1,913 308 -- 43,451
Intercompany payables 54,093 22,523 10,122 (86,738) --
Deferred revenue 79,759 7,309 216 -- 87,284
Senior notes due 2005 200,000 -- -- -- 200,000
Convertible subordinated notes due 2003 9,143 -- -- -- 9,143
Liabilities of discontinued operation -- -- -- -- --
------------- ------------- ------------- ------------- ------------
Total liabilities 386,866 34,858 11,660 (86,738) 346,646
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock - no par value. Authorized -
unlimited number. Issued and outstanding
- 32,973,366 65,563 -- 117 (117) 65,563
Other equity/Additional paid in
capital/Contributed surplus 508 46,950 -- (45,916) 1,542
Deficit (170,388) (48,941) 3,750 44,159 (171,420)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- -------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (103,058) $ (2,605) $ 3,867 $ (1,874) $ (103,670)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders' equity
(deficit) $ 283,808 $ 32,253 $ 15,527 $ (88,612) $ 242,976
============= ============= ============= ============= =============
In certain guarantor subsidiaries accumulated losses have exceeded the original
investment balance. As a result of applying equity accounting, the parent
company has consequently reduced intercompany receivable balances with respect
to these guarantor subsidiaries in the amounts of $25.2 million.
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2001:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- -------------- --------------- --------------- --------------
ASSETS
Cash and cash equivalents $ 20,039 $ 6,144 $ 205 $ -- $ 26,388
Accounts receivable 13,293 2,936 1,843 -- 18,072
Financing receivables 50,331 1,140 397 -- 51,868
Inventories 45,095 2,892 53 (5,317) 42,723
Prepaid expenses 1,128 508 209 -- 1,845
Intercompany receivables 31,849 38,285 4,450 (74,584) --
Film assets 4,531 5,982 -- -- 10,513
Fixed assets 45,602 7,596 12 (558) 52,652
Other assets 9,975 1,320 -- -- 11,295
Deferred income taxes 2,971 51 -- -- 3,022
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 4,107 -- -- -- 4,107
Investments in subsidiaries 19,355 -- -- (19,355) --
------------- ------------- ------------- ------------- -------------
Total assets $ 287,303 $ 66,854 $ 7,169 $ (99,814) $ 261,512
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 3,908 1,462 1,365 -- 6,735
Accrued liabilities 41,687 4,398 312 -- 46,397
Intercompany payables 44,692 50,597 1,953 (97,242) --
Deferred revenue 83,072 14,873 17 (2,880) 95,082
Senior notes due 2005 200,000 -- -- -- 200,000
Convertible subordinated notes due 2003 29,643 -- -- -- 29,643
Liabilities of discontinued operation 2,103 -- -- -- 2,103
------------- ------------- ------------- ------------- -------------
Total liabilities 405,105 71,330 3,647 (100,122) 379,960
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock - no par value. Authorized -
unlimited number. Issued and outstanding
- 31,899,114 63,322 -- 117 (117) 63,222
Other equity/Addition paid in
capital/Contributed surplus -- 46,950 -- (45,916) 1,034
Deficit (182,383) (50,771) 3,405 46,357 (183,392)
Accumulated other comprehensive income
(loss) 1,259 (655) -- (16) 588
------------- ------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (117,802) $ (4,476) $ 3,522 $ 308 $ (118,448)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders' equity
(deficit) $ 287,303 $ 66,854 $ 7,169 $ (99,814) $ 261,512
============= ============= ============= ============= =============
In certain guarantor subsidiaries accumulated losses have exceeded the original
investment balance. As a result of applying equity accounting, the parent
company has consequently reduced intercompany receivable balances with respect
to these guarantor subsidiaries in the amounts of $21.3 million
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 67,991 $ 4,704 $ 1,388 $ (3,124) $ 70,959
Films 24,614 16,849 37 (944) 40,556
Other 5,700 13,383 62 (10) 19,135
------------- ------------- ------------- ------------- -------------
98,305 34,936 1,487 (4,078) 130,650
COST OF GOODS AND SERVICES 48,475 33,177 840 (4,054) 78,438
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 49,830 1,759 647 (24) 52,212
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 cost and asset impairments,
(recoveries) (121) -- -- -- (121)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 14,935 2,084 342 (2,198) 15,163
Interest income 408 2 3 -- 413
Interest expense (17,314) (256) -- -- (17,570)
Gain on retirement of notes 11,900 -- -- -- 11,900
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 9,929 1,830 345 (2,198) 9,906
Recovery of (provision for) income taxes -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 9,929 1,830 345 (2,198) 9,906
Net earnings from discontinued operations 2,066 -- -- -- 2,066
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 11,995 $ 1,830 $ 345 $ (2,198) $ 11,972
============= ============= ============= ============== =============
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2001:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 72,656 $ 3,152 $ 1,138 $ (364) $ 76,582
Films 16,638 13,285 82 (82) 29,923
Other 3,361 8,713 630 (550) 12,154
------------- ------------- ------------- ------------- -------------
92,655 25,150 1,850 (996) 118,659
COST OF GOODS AND SERVICES 69,260 28,382 476 (727) 97,391
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 23,395 (3,232) 1,374 (269) 21,268
Selling, general and administrative expenses 34,001 11,094 1,684 (89) 46,690
Research and development 2,969 416 -- -- 3,385
Amortization of intangibles 3,005 -- -- -- 3,005
Loss (income) from equity-accounted
investees 39,147 503 -- (39,723) (73)
Receivable provisions, net of (recoveries) 17,262 -- -- -- 17,262
Restructuring cost and asset impairments 32,586 15,630 340 (2,321) 46,235
------------- ------------- ------------- -------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (105,575) (30,875) (650) 41,864 (95,236)
Interest income 828 19 -- -- 847
Interest expense (21,743) (277) -- -- (22,020)
Gain on retirement of notes 55,577 -- -- -- 55,577
Impairment of long-term investments (5,584) -- -- -- (5,584)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (76,497) (31,133) (650) 41,864 (66,416)
Recovery of (provision for) income taxes (18,156) (8,134) 194 (1,752) (27,848)
------------- ------------- ------------- -------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (94,653) (39,267) (456) 40,112 (94,264)
Net earnings (loss) from discontinued
operations (50,850) -- -- -- (50,850)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (145,503) $ (39,267) $ (456) $ 40,112 $ (145,114)
============= ============= ============= ============= =============
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2000:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- --------------
REVENUE
IMAX systems $ 107,617 $ 26,113 $ 1,567 $ (22,071) $ 113,226
Films 21,209 20,490 82 (70) 41,711
Other 6,114 12,036 2,775 (2,746) 18,179
------------- ------------- ------------- ------------- -------------
134,940 58,639 4,424 (24,887) 173,116
COST OF GOODS AND SERVICES 89,564 46,061 1,385 (24,355) 112,655
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 45,376 12,578 3,039 (532) 60,461
Selling, general and administrative expenses 33,831 6,512 2,284 (548) 42,079
Research and development 5,440 1,057 -- -- 6,497
Amortization of intangibles 2,948 -- -- -- 2,948
Loss (income) from equity-accounted
investees 8,606 781 -- (4,576) 4,811
Receivable provisions, net of (recoveries) 12,303 477 306 -- 13,086
Restructuring costs and asset impairments -- 11,152 -- -- 11,152
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (17,752) (7,401) 449 4,592 (20,112)
Interest income 3,222 63 -- -- 3,285
Interest expense (21,961) -- -- -- (21,961)
Gain (loss) on retirement of notes -- -- -- -- --
Impairment of long-term investments (4,133) -- -- -- (4,133)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (40,624) (7,338) 449 4,592 (42,921)
Recovery of (provision for) income taxes 11,253 2,355 (42) (427) 13,139
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (29,371) (4,983) 407 4,165 (29,782)
Net earnings (loss) from discontinued
operations (2,055) -- -- -- (2,055)
------------- ------------- ------------- ------------- -------------
Net earnings (loss) before cumulative effect
of changes in accounting principles (31,426) (4,983) 407 4,165 (31,837)
Cumulative effect of changes in accounting
principles (61,110) -- -- -- (61,110)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (92,536) $ (4,983) $ 407 $ 4,165 $ (92,947)
============= ============= ============= ============= =============
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- -------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ 9,929 $ 1,830 $ 345 $ (2,198) $ 9,906
Items not involving cash:
Depreciation, amortization and write-downs 16,016 496 (439) -- 16,073
Loss (income) from equity-accounted
investees (2,781) 314 -- 2,184 (283)
Deferred income taxes (799) -- -- -- (799)
Gain on retirement of notes (11,900) -- -- -- (11,900)
Stock and other non-cash compensation 3,685 -- -- -- 3,685
Investment in film assets (8,423) 5,982 -- -- (2,441)
Changes in other non-cash operating assets and
liabilities 15,239 (9,211) 242 (154) 6,116
------------- ------------- ------------- -------------- -------------
Net cash provided by (used in) operating
activities 20,966 (589) 148 (168) 20,357
------------- ------------- ------------- -------------- -------------
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets (786) (905) (2) 152 (1,541)
Decrease (increase) in other assets (1,970) 1,006 -- -- (964)
Decrease (increase) in other intangible assets (675) -- -- -- (675)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (3,431) 101 (2) 152 (3,180)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of convertible 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 (613) 39 (1) 16 (559)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD 11,052 (449) 145 -- 10,748
Cash and cash equivalents, beginning of period 20,039 6,144 205 -- 26,388
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,091 $ 5,695 $ 350 $ -- $ 37,136
============= ============= ============= ============= =============
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2001:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ---------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (94,653) $ (39,267) $ (456) $ 40,112 $ (94,264)
Items not involving cash:
Depreciation, amortization and write-downs 82,834 19,242 384 (2,659) 99,801
Loss (income) from equity-accounted
investees 39,147 503 -- (39,723) (73)
Deferred income taxes 31,253 8,662 (496) 1,992 41,411
Loss (gain) on retirement of notes (55,577) -- -- -- (55,577)
Impairment of long-term investments 5,584 -- -- -- 5,584
Stock and other non-cash compensation 5,182 -- -- -- 5,182
Investment in film assets (7,889) 174 -- (582) (8,297)
Changes in other non-cash operating assets and
liabilities 5,487 7,791 334 908 14,520
Net cash provided by (used in) discontinued
operations (5,607) -- -- -- (5,607)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 5,761 (2,895) (234) 48 2,680
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets 136 (1,083) 102 (246) (1,091)
Decrease (increase) in other assets 208 734 -- 198 1,140
Decrease (increase) in other intangible assets (642) -- -- -- (642)
Net sale of investments in marketable 7,529 -- -- -- 7,529
securities
Acquisition of minority interest in Sonics (621) (420) -- -- (1,041)
Investment in subsidiaries -- -- -- -- --
Net cash used in investing activities from
discontinued operations (217) -- -- -- (217)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities 6,393 (769) 102 (48) 5,678
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of convertible subordinated notes (12,540) -- -- -- (12,540)
Common shares issued 31 -- -- -- 31
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (12,509) -- -- -- (12,509)
------------- ------------- ------------- ------------- -------------
Effects of exchange rates on cash continuing
operations (2,013) (33) (20) -- (2,066)
Effects of exchange rates on cash discontinued
operations 1,697 -- -- -- 1,697
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash (316) (33) (20) -- (369)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 3,456 (3,697) (152) -- (393)
Increase (decrease) in cash and cash
equivalents from discontinued operations (4,127) -- -- -- (4,127)
------------- ------------- ------------- ------------- -------------
INCREASE DECREASE IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (671) (3,697) (152) -- (4,520)
Cash and cash equivalents, beginning of period 20,710 9,841 357 -- 30,908
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,039 $ 6,144 $ 205 $ -- $ 26,388
============= ============= ============= ============= =============
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)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2000:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (29,371) $ (4,983) $ 407 $ 4,165 $ (29,782)
Items not involving cash:
Depreciation, amortization and write-downs 47,547 14,181 399 (501) 61,626
Loss (income) from equity-accounted 8,606 781 -- (4,576) 4,811
investees
Deferred income taxes (2,684) (3,055) (167) 705 (5,201)
Impairment of long-term investments 4,133 -- -- -- 4,133
Stock and other non-cash compensation 1,242 -- -- -- 1,242
Investment in film assets (18,296) (1,369) -- -- (19,665)
Changes in other non-cash operating assets and
liabilities (58,452) (12,730) (3,613) 866 (73,929)
Net cash provided by (used in) operating
activities from discontinued operations 2,676 -- -- -- 2,676
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating (44,599) (7,175) (2,974) 659 (54,089)
activities ------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets (22,832) (5,310) 515 (16) (27,643)
Decrease (increase) in other assets (3,340) (2,246) -- (604) (6,190)
Net sale of investments in marketable 81,503 -- -- -- 81,503
securities
Acquisition of Digital Projection Inc., net (900) -- -- -- (900)
cash acquired
Acquisition of minority interest in Sonics (295) -- -- -- (295)
Investments in subsidiaries (9,885) -- -- 9,885 --
Net cash used in investing activities from
discontinued operations (1,139) -- -- -- (1,139)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing 43,112 (7,556) 515 9,265 45,336
activities ------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Other equity/Additional paid in
capital/Contributed surplus issued -- 9,885 -- (9,885) --
Common shares issued 1,442 -- -- -- 1,442
Paid - in - capital on stock options -- 1,034 -- -- 1,034
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities 1,442 10,919 -- (9,885) 2,476
------------- ------------- ------------- ------------- -------------
Effect of exchange rates on cash from
continuing operations 2,003 112 49 (39) 2,125
Effect of exchange rates on cash from
discontinued operations 487 -- -- -- 487
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash 2,490 112 49 (39) 2,612
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, FROM CONTINUING OPERATIONS 421 (3,700) (2,410) -- (5,689)
Increase (decrease) in cash and cash
equivalents from discontinued operations 2,024 -- -- -- 2,024
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS DURING THE YEAR 2,445 (3,700) (2,410) -- (3,665)
Cash and cash equivalents, beginning of period 18,265 13,541 2,767 -- 34,753
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,710 $ 9,841 $ 357 $ -- $ 30,908
============= ============= ============= ============= =============
Page 75
IMAX CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Position
---- --- --------
Richard L. Gelfond............. 47 Co-Chairman and Co-Chief Executive Officer and Director
Bradley J. Wechsler............ 51 Co-Chairman and Co-Chief Executive Officer and Director
Kenneth G. Copland............. 65 Director
J. Trevor Eyton................ 68 Director
Michael Fuchs.................. 56 Director(1)
Garth M. Girvan................ 53 Director
Ellis B. Jones................. 49 Director
G. Edmund King................. 69 Director
Murray B. Koffler.............. 79 Director
Marc A. Utay................... 43 Director
W. Townsend Ziebold............ 41 Director
Francis T. Joyce............... 49 Chief Financial Officer
Greg Foster.................... 40 President, Filmed Entertainment
Robert D. Lister............... 34 Executive Vice President, Business & Legal Affairs and General Counsel
Brian Bonnick.................. 46 Senior Vice President, Technology
Brian Hall..................... 40 Senior Vice President, Theatre Operations
David B. Keighley.............. 54 Senior Vice President & President, David Keighley Productions 70MM Inc.
Larry O'Reilly................. 40 Senior Vice President, Theatre Development & Film Distribution
G. Mary Ruby................... 45 Deputy General Counsel, Senior Vice President, Legal Affairs
and Corporate Secretary
Mary C. Sullivan............... 39 Senior Vice President, Human Resources & Administration
Mark Welton.................... 39 Senior Vice President, Business Affairs
Kathryn A. Gamble.............. 35 Vice President, Finance and Controller
Edward MacNeil................. 38 Vice President, Finance, Special Projects
(1) Michael Fuchs was appointed to the board of directors on October 10, 2002.
Under the Articles of IMAX Corporation, the Board of Directors is divided
into three classes, each of which serves for a three year term. The term of
Class I directors, currently composed of J. Trevor Eyton, O.C., G. Edmund King,
Michael Fuchs and W. Townsend Ziebold expires in 2003. The term of Class III
directors, currently composed of Richard L. Gelfond, Ellis B. Jones and Bradley
J. Wechsler expires in 2004. The term of Class II directors, currently composed
of Kenneth G. Copland, Garth M. Girvan, Murray B. Koffler and Marc A. Utay
expires in 2005.
RICHARD L. GELFOND has been Co-Chairman of the Company since June 1999 and
Co-Chief Executive Officer since May 1996. From March 1994 to June 1999 Mr.
Gelfond served as Vice Chairman of the Company. In addition, Mr. Gelfond serves
on the boards of Mainframe Entertainment, Inc. and several private and
philanthropic entities.
BRADLEY J. WECHSLER has been Co-Chairman of the Company since March 1994
and Co-Chief Executive Officer with Mr. Gelfond since May, 1996. Mr. Wechsler
serves on the boards of Mainframe Entertainment, Inc., NYU Hospital, the
Kernochan Center for Law, Media and the Arts, and the American Museum of the
Moving Image.
Page 76
IMAX CORPORATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
KENNETH G. COPLAND, a director of the Company since June 1999, is the
Chairman of KGC Ltd. Mr. Copland was the Vice-Chairman of BMO Nesbitt Burns Inc.
from 1994 to May 2001. He is Chairman of Humber College Foundation and HC
Educational Ventures Limited. Mr. Copland is a director of the Investment
Dealers Association of Canada.
THE HONOURABLE J. TREVOR EYTON, a director of the Company since June 1999,
is a senior director of Brascan Corporation, and prior to May 2000 was a senior
officer of Brascan Corporation in various capacities dating back to 1979 when he
was appointed President and Chief Executive Officer. He is also a director of
Noranda Inc., Coca-Cola Enterprises, General Motors of Canada, Limited and
Ivernia West Inc., as well as a member of the Advisory Board of Nestle Canada
Ltd. Senator Eyton has been a member of the Senate of Canada since September
1990 and is an Officer of the Order of Canada.
MICHAEL FUCHS was appointed to the Board of Directors on October 10, 2002;
previously he was a director of the Company from May 1996 to June 1999. Mr.
Fuchs held the position of Chairman and Chief Executive Officer of Home Box
Office from October 1984 until November 1995. In May 1995, he also became
chairman of Warner Music Group.
GARTH M. GIRVAN, a director of the Company since 1994, is a partner of
McCarthy Tetrault, Canadian counsel to the Company. Mr. Girvan is a director of
Corby Distilleries Limited.
ELLIS B. JONES, a director of the Company since June 2001, has been the
Chief Executive Officer of Wasserstein & Co., LP, a merchant banking and venture
capital firm since January 2001. Prior to that he was a Managing Director in
charge of merchant banking at Wasserstein Perella & Co., Inc. Mr. Jones serves
as a director for a number of privately held companies.
G. EDMUND KING, a director of the Company since June 1999, has been Deputy
Chairman and a director of Rockwater Capital Corporation (formerly McCarvill
Corporation) since January 1996. Mr. King is also a director of Falconbridge
Ltd., and Afton Food Group Ltd. From June 1994 to January 1998, Mr. King was
Chairman of WIC Western International Communications. From 1988 to 1995 Mr. King
was Chairman and CEO of Wood Gundy Ltd. and of CIBC Wood Gundy Ltd. Mr. King is
a director of the Canadian Association for Mental Health and of the Canadian
Cardiovascular Academy.
MURRAY B. KOFFLER, a director of the Company since May 1996, founded
Shoppers Drug Mart in 1968 and presently serves as its Honorary Chairman. Mr.
Koffler co-founded Four Seasons Hotels Limited and presently serves as a
director. Since 1988, Mr. Koffler has been Chairman of the International Board
of Directors of the Weizmann Institute of Science in Israel. Mr. Koffler holds
numerous other directorships. Mr. Koffler is an Officer of the Order of Canada.
MARC A. UTAY, a director of the Company since May 1996, has been a Managing
Member of Clarion Capital Partners since November 1999. Prior to joining
Clarion, Mr. Utay was a Managing Director of Wasserstein Perella & Co. Inc. and
a member of Wasserstein Perella's Policy Committee. Mr. Utay was co-head of
Wasserstein Perella's Leveraged Finance, Retailing and Media, Telecommunication
and Entertainment groups. Until December 2002, Mr. Utay was also a Senior
Advisor to Dresdner Kleinwort Wasserstein. Prior to his joining Wasserstein
Perella, Mr. Utay was Managing Director at Bankers Trust Company where he
specialized in leveraged finance and mergers and acquisitions. Mr. Utay is a
director of P & F Industries, Inc and FONS Corp.
W. TOWNSEND ZIEBOLD, a director of the Company since June 1999 and has been
the Non-Executive Chairman of the Board since June 2001. Mr. Ziebold is
currently President of the Venture Capital Practice of Wasserstein & Co., L.P.,
formerly the private equity arm of Wasserstein Perella Group Inc. Previously,
Mr. Ziebold was a Managing Director of Wasserstein Perella & Co., Inc. and head
of its Venture Capital Practice. Mr. Ziebold was a director of Maybelline, Inc.
and Collins & Aikman Corporation and currently serves on several private company
boards in the media, entertainment and Internet industries.
Page 77
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
FRANCIS T. JOYCE joined the Company in March 2001, as Chief Financial
Officer. Prior to joining the Company Mr. Joyce held the position of Chief
Financial Officer of the Internet company theglobe.com from 1998 until his
employment with the Company. From 1997 to 1998, Mr. Joyce served as Chief
Financial Officer of Reed Travel Group, a division of Reed Elsevier PLC and from
1994 to 1997 served as Chief Financial Officer of the Alexander Consulting
Group, a division of Alexander and Alexander Services Inc., an international
professional services firm. Mr. Joyce is a member of Financial Executive
International and the American Institute of Certified Public Accountants.
GREG FOSTER joined the Company in March 2001 as President, Filmed
Entertainment. Prior to joining the Company, Mr. Foster was Executive
Vice-President of Production at MGM/UA. Prior to that Mr. Foster held other
senior positions including Senior Vice-President of Motion Picture Marketing
Research during his 15 years at MGM/UA.
ROBERT D. LISTER joined the Company as Senior Vice President, Legal Affairs
and General Counsel in May 1999 and was appointed Executive Vice President,
Business & Legal Affairs in May 2001. Prior to joining the Company, Mr. Lister
was Vice President, General Counsel and Secretary of Clearview Cinemas, a film
exhibitor, from March 1998 until his employment with the Company. Prior to that,
Mr. Lister served as Associate General Counsel of Merit Behavioral Care
Corporation, a behavioral healthcare company, from March 1996 through March
1998. Mr. Lister is a member of the New York State Bar Association.
BRIAN BONNICK joined the Company in January 1999 as Vice President,
Research & Development and was appointed Senior Vice President, Technology in
August 2001. Prior to joining the Company, Mr. Bonnick was Vice President,
Engineering and Operations for Electrohome Corporation. Prior to that Mr.
Bonnick was Vice President and General Manager at TSB International Inc. a
telecommunications company. Mr. Bonnick is registered as a professional engineer
by the Association of Professional Engineers of Ontario.
BRIAN HALL joined the company in 1987 in Theatre Sales and Marketing. Mr.
Hall was appointed Vice President & General Manager, Japan & Asia Pacific in
1994. Mr. Hall left the Company in 1997 to assume the position of Managing
Director and CEO of Cinema Plus Ltd. He returned to the Company in July 2000 as
Senior Vice President, Theatre Operations.
DAVID B. KEIGHLEY has been a Senior Vice President of the Company since
July 1997 and is President of David Keighley Productions 70MM Inc. From January
1995 to July 1997, Mr. Keighley was a Vice President of the Company. He is
responsible for motion picture and digital post-production and image quality
assurance for 15/70-format films.
LARRY O'REILLY joined the Company in March 1994 as the Sales Manager, Film
Distribution and was appointed Senior Vice President, Theatre Development &
Film Distribution in January 2002. Mr. O'Reilly has held various positions
within the Company including Manager, Business Development: Film; Director,
Strategic Partnerships; Director, Commercial Marketing: The Americas and Vice
President, Sales, The Americas.
G. MARY RUBY joined the Company in October 1987 as Associate General
Counsel and was appointed Senior Vice President, Legal Affairs in July 2001. Ms.
Ruby was General Counsel from February 1989 to February 1997. Ms. Ruby is Deputy
General Counsel and acts as Corporate Secretary to the Board of Directors. Ms.
Ruby is a member of the Ontario Bar.
MARY C. SULLIVAN joined the Company in January 1996 as Director, Human
Resources and was appointed Vice President, Human Resources and Administration
in 1998 and Senior Vice President, Human Resources and Administration in January
2000. Prior to joining the Company, Ms. Sullivan was Director, Human Resources
of Central Park Lodges. Ms. Sullivan is a director of the Women's Legal
Education and Action Fund Foundation.
MARK WELTON joined the Company in July 1997 as Director, Business Affairs
and was appointed Senior Vice President, Business Affairs in September 2001.
Previous to that Mr. Welton was Vice President, Business Affairs, a position he
held since January 2000. Prior to joining the Company Mr. Welton was an
Associate Lawyer at Stikeman, Elliot from 1994 until his employment with the
Company.
Page 78
IMAX CORPORATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
KATHRYN A. GAMBLE joined the Company in July 2001 as Vice President,
Finance and Controller. Prior to joining the Company Ms. Gamble served as Vice
President, Finance and Chief Financial Officer of the Internet company
Healthyconnect.com Inc. from 2000 until her employment with the Company. From
1996 to 2000, Ms. Gamble served as Vice President and Chief Financial Officer of
Med-emerg Inc. healthcare company. Ms. Gamble is a member of the Canadian
Institute of Chartered Accountants.
EDWARD MACNEIL joined the Company in April, 1994 as Director, Taxation &
Treasury and was appointed Vice President, Finance, Special Projects in
September 2001. From October 1999 to August 2001, Mr. MacNeil held the position
of Director and Senior Vice President, Digital Projection Limited, a former
subsidiary of the Company. Prior to joining the Company Mr. MacNeil was a
Taxation Manager at PricewaterhouseCoopers. Mr. MacNeil is a member of the
Canadian Institute of Chartered Accountants.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers and
persons who own more than 10% of a registered class of the Company's equity
securities (collectively, the "Reporting Persons") to file reports of ownership
on Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and
Exchange Commission. The Reporting Persons are also required by the Exchange Act
to furnish the Company with copies of all Section 16(a) reports they file.
Based solely upon review of Forms 3 and 4 (and amendments thereto) received
from or written representations by the Reporting Persons, in respect of the
fiscal year ended December 31, 2002, the Company believes that an initial report
on Form 3 may not have been timely filed for Wasserstein Management Partners,
L.P. and for each of the Reporting Persons listed above. Messrs. Copland, Jones,
King, and Ziebold filed a late Form 4 relating to one grant of options. Mr. Utay
filed a late Form 4 relating to two grants of options. These required forms were
not filed pending the Company's most recent review of its continued status as a
foreign private issuer under applicable Commission regulations and its ultimate
determination that this designation was no longer applicable. The required forms
were subsequently filed immediately following this determination.
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", "Pension Plans", "Employment
Contracts", "Compensation Committee", "Compensation Committee Interlocks and
Insider Participation", "Directors' Compensation" and "Performance Graph".
Page 79
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the beneficial
ownership of each class of the Company's securities as at December 31, 2002 or
as otherwise indicated in the notes below, including (i) all beneficial owners
of more than 5% of the Company's voting capital stock, (ii) all directors and
Named Executive Officers individually, and (iii) all directors and executive
officers as a group.
SHARES BENEFICIALLY OWNED
-------------------------------------------
TITLE OF CLASS BENEFICIAL OWNERS NUMBER OF SHARES(1) % OF CLASS(2)
----------------- --------------------------------------------------- ------------------- -------------
Common Shares WASSERSTEIN MANAGEMENT PARTNERS, L.P.: 10,195,384 (3) 30.92
Wasserstein Perella Partners, L.P.
Wasserstein Perella Offshore Partners, L.P.
WPPN, L.P.
Michael J. Biondi solely in his capacity as
Voting Trustee
Wasserstein Capital, L.P.
PRUDENTIAL FINANCIAL, INC.: 2,050,275 (4) 6.22
Prudential Financial, Inc.
Jennison Associates LLC
Richard L. Gelfond ......................................... 2,326,900 (5) 6.89
Bradley J. Wechsler ........................................ 2,211,800 (6) 6.55
Kenneth G. Copland ......................................... 45,602 (7) *
J. Trevor Eyton ............................................ 25,934 (8) *
Michael Fuchs............................................... 21,741 (9) *
Garth M. Girvan ............................................ 71,636 (10) *
Ellis B. Jones.............................................. 25,668 (11) *
G. Edmund King ............................................. 35,602 (7) *
Murray B. Koffler .......................................... 40,200 (12) *
Marc A. Utay ............................................... 437,602 (13) 1.32
W. Townsend Ziebold ........................................ 35,602 (7) *
Greg Foster................................................. 78,333 (14) *
Francis T. Joyce............................................ 33,333 (15) *
Robert D. Lister............................................ 58,333 (16) *
David B. Keighley........................................... 110,833 (17) *
All executive officers and directors as a group (23 persons) 5,686,287 (18) 16.05
Statements as to securities beneficially owned by directors and by
executive officers, or as to securities over which they exercise control or
direction, are based upon information obtained from such directors and executive
officers and from records available to the Company.
* less than 1%
(1) Includes number of shares owned at December 31, 2002 and common shares as
to which each individual had at December 31, 2002 the right to acquire
beneficial ownership through the exercise of options plus options that
vested within 60 days of December 31, 2002.
(2) Based on dividing the Number of Shares by the total shares outstanding as
of December 31, 2002 adjusted for shares issuable through the exercise of
options that vested within 60 days of December 31, 2002.
(3) Based on information contained in a Schedule 13G/A dated February 14, 2003
filed by Wasserstein Management Partners L.P., 1301 Avenue of the Americas,
New York, New York.
Page 80
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS (cont'd)
(4) Based on information contained in a Schedule 13G/A dated February 7, 2003
filed by Prudential Financial, Inc., 751 Broad Street, Newark, New Jersey
and information contained in a Schedule 13G dated February 14, 2003 filed
by Jennison Associates LLC., 466 Lexington Avenue, New York, New York.
(5) Included in the amount shown are 804,000 common shares as to which Mr.
Gelfond had the right to acquire beneficial ownership through the exercise
of options.
(6) Included in the amount shown are 804,000 common shares as to which Mr.
Wechsler had the right to acquire beneficial ownership through the exercise
of options.
(7) Included in the amount shown are 35,602 common shares as to which Messrs.
Copland, King and Ziebold had the right to acquire beneficial ownership
through the exercise of options.
(8) Included in the amount shown are 25,934 common shares as to which Mr. Eyton
had the right to acquire beneficial ownership through the exercise of
options.
(9) Included in the amount shown are 21,741 common shares as to which Mr. Fuchs
had the right to acquire beneficial ownership through the exercise of
options.
(10) Included in the amount shown are 45,738 common shares as to which Mr.
Girvan had the right to acquire beneficial ownership through the exercise
of options.
(11) Included in the amount shown are 25,668 common shares as to which Mr. Jones
had the right to acquire beneficial ownership through the exercise of
options.
(12) Included in the amount shown are 36,000 common shares as to which Mr.
Koffler had the right to acquire beneficial ownership through the exercise
of options.
(13) Included in the amount shown are 197,602 common shares as to which Mr. Utay
had the right to acquire beneficial ownership through the exercise of
options.
(14) Included in the amount shown are 78,333 common shares as to which Mr.
Foster had the right to acquire beneficial ownership through the exercise
of options.
(15) Included in the amount shown are 33,333 common shares as to which Mr. Joyce
had the right to acquire beneficial ownership through the exercise of
options.
(16) Included in the amount shown are 55,333 common shares as to which Mr.
Lister had the right to acquire beneficial ownership through the exercise
of options.
(17) Included in the amount shown are 100,833 common shares as to which Mr.
Keighley had the right to acquire beneficial ownership through the exercise
of options.
(18) Included in the amount shown are 2,452,987 common shares as to which all
directors and executive officers as a group had the right to acquire
beneficial ownership through the exercise of options.
EQUITY COMPENSATION PLAN
See Equity Compensation Plan in Item 5.
Page 81
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS (cont'd)
SHAREHOLDERS' AGREEMENTS
IMAX Corporation (the "Corporation"), Wasserstein Perella Partners, L.P.,
Wasserstein Perella Offshore Partners, L.P., WPPN, Inc., and the Michael J.
Biondi Voting Trust (collectively "WP"), and each of Messrs. Gelfond and
Wechsler are parties to a Second Amended and Restated Shareholders' Agreement
(the "Shareholders' Agreement") dated as of February 9, 1999, which amends and
restates the previous amended and restated shareholders' agreement among those
parties dated June 16, 1994. The Shareholders' Agreement includes, among other
things, certain restrictions on transfers of common shares, take-along rights
and come-along rights. If WP holds at least 35% of their original holdings and
WP desires to transfer all of their securities in a transaction in which a
majority of the shares of outstanding common stock are to be sold, then Messrs.
Gelfond and Wechsler will be required to sell their securities on the same terms
as WP sells its securities.
The Shareholders' Agreement also contains provisions related to the
composition of the Board of Directors and committees thereof. WP is entitled,
but not required, to designate individuals to be nominated for election as
directors as follows: so long as WP holds 3,685,759 or more common shares, it
may designate six nominees, of whom three may be employees of WP and its
affiliates (the "WP Employee Designees") and three shall be independent persons
and resident Canadians. If WP holds less than 3,685,759 common shares, but
1,842,879 or more common shares, it may designate four nominees, of whom two may
be WP Employee Designees and two shall be independent persons and resident
Canadians. If WP holds less than 1,842,879 common shares but 921,439 or more
common shares, it may designate two nominees, one of whom may be a WP Employee
Designee and the other of whom shall be an independent person and shall be a
resident Canadian. In addition to these provisions, each of Messrs. Gelfond and
Wechsler is entitled to be a director of the Corporation so long as he is either
a Co-Chief Executive Officer or is the Chief Executive Officer of the
Corporation or Messrs. Gelfond and Wechsler own more than 375,000 common shares.
In addition, Messrs. Gelfond and Wechsler are collectively entitled, but not
required, to designate individuals to be nominated for election as directors as
follows: so long as they hold 1,628,000 or more common shares, they may
designate three nominees, all of whom shall be independent persons and resident
Canadians. If they hold less than 1,628,000 common shares, but 1,075,000 or more
common shares, they may designate two nominees, both of whom shall be
independent and resident Canadians. If they hold less than 1,075,000 common
shares but 375,000 or more common shares, they may designate one nominee who
shall be an independent person and resident Canadian. If the requirement that
the Corporation have 'resident Canadian' directors is changed, then neither WP
nor Messrs. Gelfond and Wechsler will be required to designate resident Canadian
nominees.
The Shareholders' Agreement also provides that the Corporation, WP and each
of Messrs. Gelfond and Wechsler shall use their best efforts to cause the
Corporation to establish a nominating committee of the Board of Directors
consisting of two directors, one designated by WP and the other designated by
Messrs. Gelfond and Wechsler. In addition, WP has the right, subject to the
approval of Messrs. Gelfond and Wechsler, to designate a WP Employee Designee
for appointment by the Board of Directors of the Corporation as the
Non-Executive Chairman of the Board, as long as WP holds at least 2,948,607
common shares. W. Townsend Ziebold has been approved as such designee. If Mr.
Ziebold no longer holds that position, then WP is to propose three replacements
and Messrs. Gelfond and Wechsler shall select one of those proposed for
appointment by the Board as the Non-Executive Chairman. Each of Messrs. Gelfond
and Wechsler is entitled to be appointed as a Co-Chairman or Chairman of the
Corporation as long as he is a Co-Chief Executive Officer or the Chief Executive
Officer of the Corporation. The Agreement provides that the duties of the
Non-Executive Chairman and the Co-Chief Executive Officers shall be as set forth
in the Bylaws, including the requirement that the following actions be approved
by the Non-Executive Chairman and at least one of the Co-Chief Executive
Officers: setting the dates and times of meetings of the directors and
shareholders (other than normal quarterly Board of Directors, and annual
shareholders' meetings), setting the agenda of such meetings, and appointing
members of committees of the Board of Directors other than persons designated by
WP and Messrs. Gelfond and Wechsler as provided in the Shareholders' Agreement.
Each of WP and Messrs. Gelfond and Wechsler have the right to designate one
director to serve on each committee of the Board of Directors of the
Corporation, provided that each such person meets applicable regulatory
requirements.
Page 82
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS (cont'd)
SHAREHOLDERS' AGREEMENTS (cont'd)
Each of WP and Messrs. Gelfond and Wechsler agreed to use their best
efforts to cause there no longer to be CEO Advisors as of the date upon which
all of the WP Employee Designees are elected as directors of the Corporation.
All of the WP Employee Designees were elected as directors at the Corporation's
annual and special meeting of shareholders held June 7, 1999 and the CEO
Advisors were disbanded in June 1999.
REGISTRATION RIGHTS AGREEMENT
The Corporation, WP and Messrs. Gelfond and Wechsler also entered into a
registration rights agreement (the "Registration Rights Agreement") dated as of
February 9, 1999, which carried forward the corresponding provisions of the June
16, 1994 shareholders' agreement, and pursuant to which each of WP and Messrs.
Gelfond and Wechsler have certain rights to cause the Corporation to use its
best efforts to register their securities under the U.S. Securities Act of 1933.
WP is entitled to effect up to four demand registrations and Messrs. Gelfond and
Wechsler are entitled to make two such demand registrations. WP and Messrs.
Gelfond and Wechsler also have unlimited piggyback rights to register their
securities under the Registration Rights Agreement whenever the Corporation
proposes to register any securities under the U.S. Securities Act, other than
the registration of securities pursuant to an initial public offering or the
registration of securities upon Form S-4 or S-8 under the U.S. Securities Act or
filed in connection with an exchange offer or an offering of securities solely
to the Corporation's existing shareholders. In addition to these provisions, if
Messrs. Gelfond and Wechsler hold at least 25% of their original holdings, WP
has recouped its original investment plus a 30% compounded annual return on such
investment, and WP initiates the sale of the Corporation, then for 60 days
thereafter, WP will enter into exclusive negotiations with Messrs. Gelfond and
Wechsler for this sale of the Company, and for another 60 days thereafter WP may
not enter into an agreement for the sale of the Corporation to a third party.
The former shareholders of the Corporation have substantially similar
piggyback registration rights that commenced on March 1, 1996 pursuant to the
terms of the Selling Shareholders' Agreement (as defined below).
WP, Messrs. Gelfond and Wechsler, and the former shareholders of
Predecessor IMAX have entered into another shareholders' agreement (the "Selling
Shareholders' Agreement") which includes, among other things, registration
rights, tag along rights and drag along rights.
STANDSTILL AGREEMENT
See Standstill Agreement in Item 13.
Page 83
IMAX CORPORATION
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STANDSTILL AGREEMENT
On July 9, 2001 pursuant to Section 3(c)(iv) of the Shareholders'
Agreement, the Corporation and each of Messrs. Gelfond and Wechsler entered into
a Standstill Agreement (the "GW Standstill Agreement"). Under the terms of the
GW Standstill Agreement, each of Messrs. Gelfond and Wechsler agreed to vote in
any election for directors in favor of each person nominated by the then current
Board of Directors, not to participate in or facilitate proxy contests, not to
deposit into a voting trust or subject voting securities to an agreement with
respect to voting such securities, not to acquire or effect or attempt to
acquire or effect control of the Corporation or to participate in a "group" as
defined pursuant to Section 13(d) of the U.S. Securities Exchange Act of 1934,
which owns or seeks to acquire beneficial ownership or control of the
Corporation, and not to attempt to influence the Corporation except through
normal Board of Directors' processes; provided, however, that the GW Standstill
Agreement does not prevent either of Messrs. Gelfond and Wechsler from taking
any action in his capacity as an officer or employee of the Corporation or any
of its subsidiaries, including as Co-Chief Executive Officer or Co-Chairman of
the Corporation. As a result of entering into the GW Standstill Agreement, in
the event of the resignation, death, disqualification under the Canada Business
Corporations Act or the removal or expiration of the term of any director
designated by Messrs. Gelfond and Wechsler pursuant to the Shareholders'
Agreement, Messrs. Gelfond and Wechsler shall have the right to designate a
replacement for such director pursuant to the terms of the Shareholders'
Agreement, and WP shall use its best efforts to cause each such designated
director to be elected or appointed as a director of the Corporation. The GW
Standstill Agreement expires on July 8, 2003, and provides that Messrs. Gelfond
and Wechsler may, from time to time, extend the term of the GW Standstill
Agreement for additional one year terms thereafter (but in no event beyond March
1, 2004).
The Articles of the Corporation set forth the requirement that certain
matters be approved by 75% of the directors then in office. These matters are:
(i) hiring or terminating the employment of the Chief Executive Officer or any
Co-Chief Executive Officer of the Corporation; (ii) issuing any shares of
capital stock for a purchase price, or incurring indebtedness, in an amount of
$25.0 million or more; (iii) disposing of any material single asset, or all or
substantially all of the assets of the Corporation or approving the sale or
merger of the Corporation; (iv) acquiring a substantial interest in any other
entity or entering into any major strategic alliance; and (v) entering into or
changing the terms of any agreement or transaction with WP or Messrs. Gelfond
and Wechsler (other than agreements in the ordinary course of business, such as
employment agreements).
On December 4, 2002, the Company granted to Marc Utay, a director of the
Company, options to acquire 150,000 common shares, in accordance with the
Company's Stock Option Plan, in consideration of the services rendered by Mr.
Utay in connection with the purchase by the Company and a wholly-owned
subsidiary of the Company of certain Subordinated Notes in 2002 (see Recent
Sales of Unregistered Securities in Item 5).
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Co-Chief Executive Officers and Chief Financial Officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d- 15(e)) as of the end of the period covered by this report, have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and the Company's
consolidated subsidiaries would be made known to them by others within those
entities.
CHANGES IN INTERNAL 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 84
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The consolidated financial statements filed as part of this Report are
included under Item 8 in Part II.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedule for each year in the three-year period
ended December 31, 2002
II. Valuation and Qualifying Accounts
(a)(3) EXHIBITS
The Items listed as Exhibits 10.1 to 10.15 relate to management contracts
or compensatory plans or arrangements.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Amalgamation of IMAX Corporation, dated January 1, 2002. Incorporated by reference
to Exhibit 3.1 to Form 10-K for the year ended December 31, 2001.
3.2 New By-Law No.1 of IMAX Corporation enacted on June 7, 1999. Incorporated by reference to Exhibit
3.2 to Form 10-Q for the quarter ended September 30, 1999.
4.1 Share Option Agreement, dated as of March 1, 1994, between WGIM Acquisition Corporation and
Douglas Trumbull. Incorporated by reference to Exhibit 4.1 to Form 10-K for the year ended
December 31, 2000.
4.2 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.
4.3 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.
4.4 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.
4.5 Standstill Agreement, dated as of July 9, 2001 among IMAX Corporation, Richard L. Gelfond and
Bradley J. Wechsler. Incorporated by reference to Exhibit 4.9 to Form 10-Q for the period ended
June 30, 2001.
4.6 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.
4.7 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.2 to the Company's Registration Statement on Form F-3
(File No. 333-5212).
4.8 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.
10.1 Stock Option Plan of IMAX Corporation, dated June 7, 1999. Incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended September 30, 1999.
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 Form 10-K for the year ended
December 31, 2002.
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.
Page 85
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
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.
10.6 Amended Employment Agreement, dated April 23, 2002 between IMAX Corporation and Bradley J.
Weschler. Incorporated by reference to Exhibit 10.14 to Form 10-Q for the quarter ended June 30,
2002.
10.7 Employment Agreement, dated July 1, 1998 between IMAX Corporation and Richard L. Gelfond.
Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1998.
10.8 Amended Employment Agreement, dated July 12, 2000 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.9 to Form 10-Q for the quarter ended September
30, 2000.
10.9 Amended Employment Agreement, dated April 3, 2001 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.16 to Form 10-Q for the quarter ended March 31,
2001.
10.10 Amended Employment Agreement, dated April 23, 2002 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.13 to Form 10-Q for the quarter ended June 30,
2002.
10.11 Employment Agreement, dated March 9, 2001 between IMAX Corporation and Greg Foster. Incorporated
by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 2001.
10.12 Amending Agreement, dated August 8, 2002 between IMAX Corporation and Greg Foster. Incorporated by
reference to Exhibit 10.12 to Form 10-K for the year ended December 31, 2002.
10.13 Employment Agreement, dated May 9, 2001 between IMAX Corporation and Francis T. Joyce.
Incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended December 31, 2002.
10.14 Employment Agreement, dated May 17, 1999 between IMAX Corporation and Robert D. Lister.
Incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended December 31, 2002.
10.15 Amended Employment Agreement, dated April 4, 2001 between IMAX Corporation and Robert D. Lister.
Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2002.
21 Subsidiaries of IMAX Corporation. Incorporated by reference to Exhibit 10.21 to Form 10-K for the
year ended December 31, 2002.
*23 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney of certain directors. Incorporated by reference to Exhibit 10.24 to Form 10-K
for the year ended December 31, 2002.
*31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated February 27,
2004, by Bradley J. Wechsler.
*31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated February 27,
2004, by Richard L. Gelfond.
*31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated February 27,
2004, by Francis T. Joyce.
*32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated February 27,
2004, by Bradley J. Wechsler.
*32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated February 27,
2004, by Richard L. Gelfond.
*32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated February 27,
2004, by Francis T. Joyce.
_* Filed herewith
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2002.
Page 86
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: February 27, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on February 27, 2004.
/s/ BRADLEY J. WECHSLER /s/ RICHARD L. GELFOND /s/ FRANCIS T. JOYCE
---------------------------------------- --------------------------------------------- ------------------------------------
Bradley J. Wechsler Richard L. Gelfond Francis T. Joyce
Director and Director and Chief Financial Officer
Co-Chief Executive Officer Co-Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer) (Principal Executive Officer)
/s/ KATHRYN A. GAMBLE KENNETH G. COPLAND* MICHAEL FUCHS*
---------------------------------------- --------------------------------------------- ------------------------------------
Kathryn A. Gamble Kenneth G. Copland Michael Fuchs
Vice President, Finance and Controller Director Director
(Principal Accounting Officer)
GARTH M. GIRVAN* MARC A. UTAY*
---------------------------------------- ---------------------------------------------
Garth M. Girvan Marc A. Utay
Director Director
By * /s/ FRANCIS T. JOYCE
--------------------------------------
Francis T. Joyce (as attorney-in-fact)
Page 87