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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
Canada 98-0140269
---------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
--------------------------------------------------- ---------------
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of April 30, 2003
-------------------------- ---------------------------------
Common stock, no par value 32,973,366
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Page 1
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................22
Item 3. Quantitative and Qualitative Factors about Market Risk.........................................29
Item 4. Controls and Procedures........................................................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................30
Item 6. Listings of Exhibits and Reports on Form 8-K...................................................31
Signatures.......................................................................................................32
IMAX Corporation (the "Company") is filing this Amendment No. 1 on Form
10-Q/A (the "Form 10-Q/A") to amend Item 1 of its Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2003, which was originally filed with the
Securities and Exchange Commission (the "SEC") on May 6, 2003. Specifically,
Note 17 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 foreign exchange gains (losses) to be included within selling
general and administrative expenses for the three months ended March 31, 2003
and 2002 in the amounts of $0.4 million and $(0.4) 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 $0.6 million, and $1.1
million, respectively. In addition, Item 4 has been updated to reflect recent
SEC pronouncements. No other information included in the Form 10-Q is amended
hereby.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this quarterly report may constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, references to future capital expenditures
(including the amount and nature thereof), business strategies and measures to
implement strategies, competitive strengths, goals, expansion and growth of its
business and operations, plans and references to the future success of IMAX
Corporation together with its wholly owned subsidiaries (the "Company") and
expectations regarding the Company's future operating results. These
forward-looking statements are based on certain assumptions and analyses made by
the Company in light of its experience and its perception of historical trends,
current conditions and expected future developments as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
and developments will conform with the expectations and predictions of the
Company is subject to a number of risks and uncertainties, including, but not
limited to, general economic, market or business conditions; the opportunities
(or lack thereof) that may be presented to and pursued by the Company;
competitive actions by other companies; conditions in the out-of-home
entertainment industry; changes in laws or regulations; conditions in the
commercial exhibition industry; the acceptance of the Company's new
technologies; risks associated with investments and operations in foreign
jurisdictions and any future international expansion, including those related to
economic, political and regulatory policies of local governments and laws and
policies of the United States and Canada; the potential impact of increased
competition in the markets the Company operates within; and other factors, many
of which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this quarterly report are qualified by these
cautionary statements, and actual results or 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.
Page 2
IMAX CORPORATION
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Condensed Consolidated Financial Statements are filed as part of this Report:
Condensed Consolidated Balance Sheets as at March 31, 2003
and December 31, 2002...........................................................................4
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2003 and 2002.....................................................5
Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2003 and 2002.......................................6
Notes to Condensed Consolidated Financial Statements............................................7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
--------- ---------
ASSETS
Cash and cash equivalents (note 6(f)) $ 37,113 $ 37,136
Accounts receivable, less allowance for doubtful accounts of $ 9,838
(2002 - $9,248) 14,914 15,054
Financing receivables (note 3) 52,478 51,918
Inventories (note 4) 30,159 34,092
Prepaid expenses 2,498 2,383
Film assets 560 419
Fixed assets 44,278 45,308
Other assets 9,908 10,455
Deferred income taxes (note 9) 3,821 3,821
Goodwill 39,027 39,027
Other intangible assets 3,396 3,363
--------- ---------
Total assets $ 238,152 $ 242,976
========= =========
LIABILITIES
Accounts payable $ 6,680 $ 6,768
Accrued liabilities 45,279 43,451
Deferred revenue 78,264 87,284
Senior notes due 2005 200,000 200,000
Convertible subordinated notes due 2003 (note 5) 9,143 9,143
--------- ---------
Total liabilities 339,366 346,646
--------- ---------
COMMITMENTS AND CONTINGENCIES (note 6)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock. Common shares - no par value. Authorized -
unlimited number
Issued and outstanding - 32,973,366 (2002 - 32,973,366) 65,563 65,563
Other equity (note 10) 1,575 1,542
Deficit (168,997) (171,420)
Accumulated other comprehensive income 645 645
--------- ---------
Total shareholders' equity (deficit) (101,214) (103,670)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 238,152 $ 242,976
========= =========
(the accompanying notes are an integral part of these condensed
consolidated financial statements)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars, except per share amounts)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
REVENUE
IMAX systems (note 7) $ 22,315 $ 20,385
Films 6,835 6,067
Other 4,822 4,823
-------- --------
33,972 31,275
COSTS OF GOODS AND SERVICES 18,266 17,868
-------- --------
GROSS MARGIN 15,706 13,407
Selling, general and administrative expenses 8,144 9,115
Research and development 712 204
Amortization of intangibles 140 388
Loss (income) from equity-accounted investees (287) 56
Receivable provisions, net of recoveries (note 8) 614 1,087
-------- --------
EARNINGS FROM OPERATIONS 6,383 2,557
Interest income 265 85
Interest expense (4,288) (4,319)
Gain on repurchase of convertible subordinated notes (note 5) -- 12,224
-------- --------
NET EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,360 10,547
Provision for income taxes (note 9) (137) --
-------- --------
NET EARNINGS FROM CONTINUING OPERATIONS 2,223 10,547
Net earnings from discontinued operations (note 14) 200 --
-------- --------
NET EARNINGS 2,423 10,547
======== ========
EARNINGS PER SHARE (note 10): Earnings per share - basic and fully diluted:
Net earnings from continuing operations $ 0.07 $ 0.32
Net earnings from discontinued operations $ -- $ --
-------- --------
Net earnings $ 0.07 $ 0.32
======== ========
(the accompanying notes are an integral part of these condensed
consolidated financial statements)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
-------- --------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings from continuing operations $ 2,223 $ 10,547
Items not involving cash:
Depreciation, amortization and write-downs 3,201 6,317
Loss (income) from equity-accounted investees (287) 56
Deferred income taxes -- (221)
Gain on repurchase of convertible subordinated notes -- (12,224)
Stock and other non-cash compensation 1,101 1,618
Non-cash foreign exchange (gain) loss (205) 55
Investment in film assets (240) (1,405)
Changes in other non-cash operating assets and liabilities (5,350) 713
-------- --------
Net cash provided by operating activities 443 5,456
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (323) (693)
Increase in other assets (195) (448)
Increase in other intangible assets (172) (229)
-------- --------
Net cash used in investing activities (690) (1,370)
-------- --------
FINANCING ACTIVITIES
Repurchase of convertible subordinated notes -- (5,172)
Receipt on note receivable from discontinued operations 200 --
Common shares issued -- 4
-------- --------
Net cash used in financing activities 200 (5,168)
-------- --------
Effects of exchange rate changes on cash 24 57
-------- --------
Decrease in cash and cash equivalents, during the period (23) (1,025)
Cash and cash equivalents, beginning of period 37,136 26,388
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 37,113 $ 25,363
======== ========
(the accompanying notes are an integral part of these condensed
consolidated financial statements)
Page 6
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
IMAX Corporation together with its wholly owned subsidiaries (the
"Company"). The nature of the Company's business is such that the
results of operations for the interim periods presented are not
necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature, except as discussed in
the accompanying notes.
These financial statements should be read in conjunction with the
Company's most recent annual report on Form 10-K/A for the year ended
December 31, 2002 which should be consulted for a summary of the
significant accounting policies utilized by the Company. These interim
financial statements are prepared following accounting policies
consistent with the Company's financial statements for the year ended
December 31, 2002, except as described in note 2.
2. ACCOUNTING CHANGE
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 is required to reclassify
any gain or loss on extinguishment of debt that was classified as an
extraordinary item to net earnings from continuing operations before
income taxes for all fiscal years beginning after May 15, 2002,
including all prior period presentations. In the first quarter of 2003
the Company has reclassified the extraordinary gain on repurchase of
Subordinated Notes within net earnings from continuing operations
before income taxes (see note 5 for further details).
Effective January 1, 2003, the Company adopted FASB Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("FAS 144"). This standard requires
that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Long-lived assets are grouped at the lowest
level for which identifiable cash flows are largely independent, when
testing for and measuring impairment. The Company reviews the carrying
values of its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In performing its review for recoverability,
the Company estimates the future cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of impairment
losses is based on the excess of the carrying amount of the asset over
the fair value calculated using discounted expected future cash flows.
Adoption of this new standard did not have an impact on the Company's
financial position, results of operations or cash flows.
Effective January 1, 2003, the Company adopted FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of an obligation assumed by
issuing a guarantee. The provision for initial recognition and
measurement of the liability is applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of
FIN 45 did not have a significant impact on the Company's financial
position or results of operations. Enhanced disclosures as required
under FIN 45 have been included in note 6.
Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
3. FINANCING RECEIVABLES
Financing receivables consisting of net investment in leases and
long-term receivables, are comprised of the following:
MARCH 31, DECEMBER 31,
2003 2002
-------- --------
NET INVESTMENT IN LEASES
Gross minimum lease amounts receivable $ 95,387 $ 97,167
Residual value of equipment 824 824
Unearned finance income (38,001) (39,001)
-------- --------
Present value of minimum lease amounts receivable 58,210 58,990
Accumulated allowance for uncollectible amounts (9,118) (8,938)
-------- --------
Net investment in leases 49,092 50,052
-------- --------
LONG-TERM RECEIVABLES 3,386 1,866
-------- --------
Total financing receivables $ 52,478 $ 51,918
======== ========
4. INVENTORIES
MARCH 31, DECEMBER 31,
2003 2002
------- -------
Raw materials $ 5,050 $ 5,042
Work-in-process 2,973 2,249
Finished goods 22,136 26,801
------- -------
$30,159 $34,092
======= =======
5. 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"). 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.
During the year ended December 31, 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. During the year ended December 31, 2002, the Company and a
wholly owned subsidiary of the Company purchased $20.5 million ($19.5
million during the three months ended March 31, 2002) 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 $12.2 million related to the $19.5 million purchased
in the first quarter. Following the adoption of FAS 145 the Company was
required to reclassify this gain from extraordinary items to earnings
from continuing operations in the comparative figures. The repurchase
transactions had the effect of reducing the principal amount of the
Company's outstanding Subordinated Notes as at March 31, 2003 to $9.1
million.
On April 1, 2003, the Company repaid the remaining outstanding
Subordinated Notes balance of $9.1 million plus accrued interest on the
maturity date.
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
6. COMMITMENTS AND 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 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 Company moved for summary judgement on its contract
claims against Muvico in September 2002. The case is being heard in the
U.S. District Court, Southern District of Florida, Miami Division. 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 litigation described above, the Company is currently
involved in other litigation which, in the opinion of the Company's
management, will not materially affect the Company's financial position
or future results of operations, although no assurance can be given
with respect to the ultimate outcome of any such proceedings.
Page 9
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
(e) In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which expands previously issued accounting guidance and requires
additional disclosure by a guarantor in its interim and annual
financial statements issued after December 15, 2002 for certain
guarantees.
In the normal course of business, the Company enters into agreements
that may contain features that meet the FIN 45 definition of a
guarantee. FIN 45 defines a guarantee to be a contract (including an
indemnity) that contingently requires the Company to make payments
(either in cash, financial instruments, other assets, shares of the its
stock or provision of services) to a third party based on (i) changes
in an underlying interest rate, foreign exchange rate, equity or
commodity instrument, index or other variable, that is related to an
asset, a liability or an equity security of the counterparty, (ii)
failure of another party to perform under an obligating agreement or
(iii) failure of another third party to pay its indebtedness when due.
The customer leases theater systems with one year's free maintenance on
the system at inception. The fair value of this component of the
arrangement is deferred when the systems revenue is recognized and is
amortized over the maintenance period. All costs associated with this
maintenance program are expensed as incurred. The Company has therefore
not recognized an additional warranty accrual on systems installed.
Significant guarantees that the Company has provided to third parties
are as follows:
FINANCIAL GUARANTEES
The Company has provided guarantees up to a maximum amount of $5.2
million related to debt and real estate lease obligations entered into
by theaters in which it holds a minority equity interest. In the event
that one of the theaters fails to meet certain financial obligations,
the lenders or landlord may draw upon these guarantees. The term of the
guarantees is equal to the term of the related debt or lease
arrangement, which range from 2009 and 2013. In the event that the
landlord guarantees are drawn upon, the Company would investigate
various options available to mitigate the financial damages. The
Company has accruals in its financial statement of $2.5 million related
to potential claims under these guarantees.
DIRECTOR/OFFICER INDEMNIFICATIONS
The Company's General By-law contains an indemnification of its
directors/officers, former directors/officers and persons who have
acted at its request to be a director/officer of an entity in which the
Company is a shareholder or creditor, to indemnify them, to the extent
permitted by the Canada Business Corporations Act, against expenses
(including legal fees), judgements, fines and any amount actually and
reasonably incurred by them in connection with any action, suit or
proceeding in which the directors and officers are sued as a result of
their service, if they acted honestly and in good faith with a view to
the best interests of the Company. The nature of the indemnification
prevents the Company from making a reasonable estimate of the maximum
potential amount it could be required to pay to counterparties. The
Company has purchased directors' and officers' liability insurance. No
amount has been accrued in the Condensed Consolidated Balance Sheet as
of March 31, 2003, with respect to this indemnity.
Page 10
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
OTHER INDEMNIFICATION AGREEMENTS
In the normal course of the Company's operations, it provides
indemnification agreements to counterparties in transactions such as:
theater system lease and sale agreements; film production, exhibition
and distribution agreements; real property lease agreements and
employment agreements. These indemnification agreements require the
Company to compensate the counterparties for costs incurred as a result
of litigation claims that may be suffered by the counterparty as a
consequence of the transaction or the Company's breach or
non-performance under these agreements. The terms of these
indemnification agreements will vary based upon the contract. The
nature of the indemnification agreements prevents the Company from
making a reasonable estimate of the maximum potential amount it could
be required to pay to counterparties. Historically, the Company has not
made any significant payments under such indemnifications.
(f) As of March 31, 2003, the Company has letters of credit of $4.3 million
outstanding, which have been collateralized by cash deposits.
7. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL
INFORMATION
Included in IMAX systems revenue for the three months ended March 31,
2003, is $2.6 million (2002 - $2.7 million) for restructured and/or
terminated lease agreements with customers.
8. RECEIVABLE PROVISIONS, NET OF RECOVERIES
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
------- -------
Accounts receivable provisions (recoveries), net $ 614 $ (498)
Financing receivables provisions, net $ -- $ 2,573
Recovery of asset impairment provisions
Financing receivables (1) $ -- $ (988)
------- -------
Receivable provisions, net of recoveries $ 614 $ 1,087
======= =======
(1) For the quarter ended March 31, 2003, the Company recorded a
recovery of previously provided amounts of $nil million (2002
- $1.0 million) as collectibility uncertainty associated with
certain leases was resolved by amendment, settlement of the
leases, or other resolving conditions.
The Company recorded no restructuring costs during the three-month
periods ended March 31, 2002 and 2003. As at March 31, 2003 the Company
has accrued liabilities of $1.0 million (December 31, 2002 - $1.4
million) for costs of previously severed employees to be paid out over
the next two years. During the three months ended March 31, 2003, the
Company paid out $0.4 million in termination benefits.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
9. INCOME TAXES
The effective tax rate on earnings differs significantly from the
statutory rate due to the effect of permanent differences, income taxed
at differing rates in foreign and other provincial jurisdictions and
changes in the Company's valuation allowance on deferred tax assets.
The income tax expense for the quarter is calculated by applying the
estimated average annual effective tax rate to quarterly pre-tax
income.
As at March 31, 2003, the Company has recognized 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. As of March 31,
2003, 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.
10. CAPITAL STOCK
(a) STOCK BASED COMPENSATION
The Company currently follows the intrinsic value method of accounting
for employee stock options as prescribed by APB 25. If the fair value
methodology prescribed by FAS 123 had been adopted by the Company, pro
forma results for the three months ended March 31, would have been as
follows:
2003 2002
--------- ----------
Net earnings as reported $ 2,423 $ 10,547
Stock based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (2,223) (2,529)
--------- ----------
Adjusted net earnings $ 200 $ 8,018
========= ==========
Earnings per share - basic and fully diluted:
Net earnings as reported $ 0.07 $ 0.32
FAS 123 stock based compensation expense $ (0.06) $ (0.08)
--------- ----------
Adjusted net earnings $ 0.01 $ 0.24
========= ==========
The weighted average fair value of common share options granted for the
three months ended March 31, 2003 at the time of grant was $0.1 million
(2002 - $0.3 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 2.1% (2002 - 2.6%), 20% forfeiture of
options vesting greater than two years, expected life of one to seven
years and expected volatility of 50% (2002 - 50%).
Of the total stock based compensation expense for 2003 of $2,223,
$1,890 relates to stock grants made in years 1998-2000 at an average
exercise price of $23.29. In accordance with FAS 123, this expense
represents amortization of stock option charges that were valued at the
grant date using an option-pricing model with assumptions that were
valid at the time with no further update of current stock trends and
assumptions.
The Company recorded compensation expense relating to stock options
granted to non-employees for $0.03 million for the three months ended
March 31, 2003 (2002 - $nil) and credited the amounts to other equity.
Page 12
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
10. CAPITAL STOCK (cont'd)
(b) EARNINGS PER SHARE
Reconciliations of the numerators and denominators of the basic and
fully diluted per-share computations, are comprised of the following:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
------- -------
Net earnings applicable to common shareholders:
Net earnings $ 2,423 $10,547
======= =======
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period 32,973 32,899
Weighted average number of shares issued during the period -- 14
------- -------
Weighted average number of shares used in computing basic
earnings per share 32,973 32,913
Assumed exercise of stock options, net of shares assumed 300 186
------- -------
Weighted average number of shares used in computing fully diluted
earnings per share 33,273 33,099
======= =======
The calculation of fully diluted earnings per share for the quarters
ended March 31, 2003 and 2002 excludes common shares issuable upon
conversion of the Subordinated Notes, as the impact of these
conversions would be anti-dilutive.
11. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL
INFORMATION
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
--------- ---------
Interest paid $ 20 $141
Income taxes paid $534 $221
Page 13
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. SEGMENTED INFORMATION
The Company has three reportable segments: IMAX systems, films and
other.
There has been no change in the basis of measurement of segment profit
or loss from the Company's most recent annual report on form 10-K/A for
the year ended December 31, 2002. Inter-segment transactions are not
significant.
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
-------- --------
REVENUE
IMAX systems $ 22,315 $ 20,385
Films 6,835 6,067
Other 4,822 4,823
-------- --------
TOTAL $ 33,972 $ 31,275
======== ========
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 11,082 $ 9,314
Films 679 (381)
Other 23 (160)
Corporate overhead (5,844) (5,856)
-------- --------
TOTAL $ 5,940 $ 2,917
======== ========
13. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(a) 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 Company has evaluated the requirements of
FIN 46 to be implemented in the subsequent quarter, and does not
believe that its adoption will have a material effect on the Company.
14. 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. The Company recorded net earnings from discontinued
operations for the three months ended March 31, 2003 of $0.2 million
(2002 - $nil), net of income tax expense of $nil (2002 - $nil)
representing payments on notes received by the Company in connection
with the sale of DPI which were fully allowed for.
Page 14
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. AMENDMENTS
The Company has reclassified foreign exchange gains (losses) to be
included within selling, general and administrative expenses for the
three months ended March 31, 2003 and 2002 in the amounts of $0.4
million and $(0.4) million, respectively. The Company has also
reclassified receivable provisions (recoveries) previously included
within selling, general and administrative expenses and restructuring
costs and asset impairments (recoveries) to be separately reported as
receivable provisions, net of (recoveries) in the amounts of $0.6
million, and $1.1 million, respectively.
16. 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.
17. 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 15
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at March 31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 31,265 $ 5,348 $ 500 $ -- $ 37,113
Accounts receivable 9,186 4,733 995 -- 14,914
Financing receivables 51,091 1,244 143 -- 52,478
Inventories 33,348 272 62 (3,523) 30,159
Prepaid expenses 1,663 601 234 -- 2,498
Intercompany receivables 32,052 12,128 13,848 (58,028) --
Film assets 560 -- -- -- 560
Fixed assets 39,587 5,374 6 (689) 44,278
Other assets 9,942 (34) -- -- 9,908
Deferred income taxes 3,770 51 -- -- 3,821
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,396 -- -- -- 3,396
Investments in subsidiaries 26,369 -- -- (26,369) --
------------- ------------- ------------- ------------- -------------
Total assets $ 281,256 $ 29,717 $ 15,788 $ (88,609) $ 238,152
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 2,875 3,131 674 -- 6,680
Accrued liabilities 43,504 1,601 174 -- 45,279
Intercompany payables 54,605 21,625 10,776 (87,006) --
Deferred revenue 71,718 6,360 186 -- 78,264
Senior notes due 2005 200,000 -- -- -- 200,000
Convertible subordinated notes due 2003 9,143 -- -- -- 9,143
------------- ------------- ------------- ------------- -------------
Total liabilities 381,845 32,717 11,810 (87,006) 339,366
------------- ------------- ------------- ------------- -------------
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 541 46,950 -- (45,916) 1,575
Deficit (167,952) (49,336) 3,861 44,430 (168,997)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- ------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (100,589) $ (3,000) $ 3,978 $ (1,603) $ (101,214)
------------- ------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 281,256 $ 29,717 $ 15,788 $ (88,609) $ 238,152
============= ============= ============= ============= =============
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 $26.4 million.
Page 16
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. 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 17
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
REVENUE
IMAX systems $ 21,862 $ 1,850 $ 318 $ (1,715) $ 22,315
Films 4,042 3,394 17 (618) 6,835
Other 1,381 3,434 107 (100) 4,822
-------- -------- -------- -------- --------
27,285 8,678 442 (2,433) 33,972
COST OF GOODS AND SERVICES 11,771 8,741 174 (2,420) 18,266
-------- -------- -------- -------- --------
GROSS MARGIN 15,514 (63) 268 (13) 15,706
Selling, general and administrative expenses 7,710 277 157 -- 8,144
Research and development 712 -- -- -- 712
Amortization of intangibles 140 -- -- -- 140
Loss (income) from equity-accounted
investees (37) 34 -- (284) (287)
Receivable provisions (recoveries), net 614 -- -- -- 614
Restructuring recoveries -- -- -- -- --
-------- -------- -------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS 6,375 (374) 111 271 6,383
Interest income 265 -- -- -- 265
Interest expense (4,279) (9) -- -- (4,288)
Gain (loss) on retirement of notes -- -- -- -- --
Recovery on long-term investments -- -- -- -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 2,361 (383) 111 271 2,360
Provision for income taxes (125) (12) -- -- (137)
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 2,236 (395) 111 271 2,223
Net earnings from discontinued operations 200 -- -- -- 200
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) $ 2,436 $ (395) $ 111 $ 271 $ 2,423
======== ======== ======== ======== ========
Page 18
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
REVENUE
IMAX systems $ 18,658 $ 1,681 $ 310 $ (264) $ 20,385
Films 3,548 2,519 -- -- 6,067
Other 1,193 3,622 8 -- 4,823
-------- -------- -------- -------- --------
23,399 7,822 318 (264) 31,275
COST OF GOODS AND SERVICES 11,080 6,997 87 (296) 17,868
-------- -------- -------- -------- --------
GROSS MARGIN 12,319 825 231 32 13,407
Selling, general and administrative expenses 8,488 137 499 (9) 9,115
Research and development 202 2 -- -- 204
Amortization of intangibles 388 -- -- -- 388
Loss (income) from equity-accounted
investees 6 56 -- (6) 56
Receivable provisions (recoveries), net 846 241 -- -- 1,087
Restructuring recoveries -- -- -- -- --
-------- -------- -------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS 2,389 389 (268) 47 2,557
Interest income 82 -- 3 -- 85
Interest expense (4,177) (142) -- -- (4,319)
Loss on retirement of notes 12,224 -- -- -- 12,224
Recovery on long-term investments -- -- -- -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 10,518 247 (265) 47 10,547
Recovery of (provision for) income taxes -- -- -- -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 10,518 247 (265) 47 10,547
Net earnings from discontinued operations -- -- -- -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) $ 10,518 $ 247 $ (265) $ 47 $ 10,547
======== ======== ======== ======== ========
Page 19
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the three months ended
March 31, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ 2,236 $ (395) $ 111 $ 271 $ 2,223
Items not involving cash:
Depreciation, amortization and write-downs 2,917 282 2 -- 3,201
Loss (income) from equity-accounted
investees (37) 34 -- (284) (287)
Deferred income taxes -- -- -- -- --
Loss (gain) on retirement of notes -- -- -- -- --
Stock and other non-cash compensation 1,101 -- -- -- 1,101
Non-cash foreign exchange gain (205) -- -- (205)
Payment under certain employment agreements -- -- -- -- --
Investment in film assets (240) -- -- -- (240)
Changes in other non-cash operating assets and
liabilities (5,406) (15) 37 34 (5,350)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 366 (94) 150 21 443
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (69) (231) (2) (21) (323)
Increase in other assets (195) -- -- -- (195)
Increase in other intangible assets (172) -- -- -- (172)
Recovery on long-term investments -- -- -- -- --
-------- -------- -------- -------- --------
Net cash used in investing activities (436) (231) (2) (21) (690)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of convertible subordinated notes -- -- -- -- --
Repurchase of convertible subordinated notes -- -- -- -- --
Receipt on note receivable from discontinued
operations 200 -- -- -- 200
Common shares issued -- -- --
-------- -------- -------- -------- --------
Net cash used in financing activities 200 -- -- -- 200
-------- -------- -------- -------- --------
Effects of exchange rate changes on cash 44 (22) 2 -- 24
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD 174 (347) 150 -- (23)
Cash and cash equivalents, beginning of period 31,091 5,695 350 -- 37,136
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,265 $ 5,348 $ 500 $ -- $ 37,113
======== ======== ======== ======== ========
Page 20
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the three months ended
March 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 $ 10,518 $ 247 $ (265) $ 47 $ 10,547
Items not involving cash:
Depreciation, amortization and write-downs 5,727 588 2 -- 6,317
Loss from equity-accounted
investees 6 56 -- (6) 56
Deferred income taxes (221) -- -- -- (221)
Loss on retirement of notes (12,224) -- -- -- (12,224)
Stock and other non-cash compensation 1,618 -- -- -- 1,618
Non-cash foreign exchange loss 55 -- -- -- 55
Payment under certain employment agreements -- -- -- -- --
Investment in film assets (7,387) 5,982 -- -- (1,405)
Changes in other non-cash operating assets and
liabilities 11,136 (10,616) 604 (411) 713
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 9,228 (3,743) 341 (370) 5,456
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Disposal (purchase) of fixed assets 113 (1,160) -- 354 (693)
Decrease (increase) in other assets (1,354) 906 -- -- (448)
Decrease (increase) in other intangible assets (229) -- -- -- (229)
Recovery on long-term investments -- -- -- -- --
-------- -------- -------- -------- --------
Net cash used in investing activities (1,470) (254) -- 354 (1,370)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of convertible subordinated notes (5,172) -- -- -- --
Repurchase of convertible subordinated notes -- -- -- -- (5,172)
Receipt on note receivable from discontinued
operations -- -- -- -- --
Common shares issued 4 -- -- -- 4
-------- -------- -------- -------- --------
Net cash used in financing activities (5,168) -- -- -- (5,168)
-------- -------- -------- -------- --------
Effects of exchange rate changes on cash -- 41 -- 16 57
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD 2,590 (3,956) 341 -- (1,025)
Cash and cash equivalents, beginning of period 20,039 6,144 205 -- 26,388
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,629 $ 2,188 $ 546 $ -- $ 25,363
======== ======== ======== ======== ========
Page 21
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business is the design, manufacture, sales and leasing
of projector systems for giant screen theaters for customers including
commercial theaters, museums and science centers, and destination entertainment
sites. In addition, the Company's designs and manufactures high-end sound
systems and produces and distributes large format film. There are more than 230
IMAX theaters operating in more than 30 countries worldwide as of March 31,
2003. IMAX Corporation is a publicly traded company listed on both the TSX and
NASDAQ.
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 which are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
Consolidated Financial Statements in the Company's most recent annual report on
form 10-K/A for the year ended December 31, 2002 and are summarized below.
SIGNIFICANT ACCOUNTING POLICIES
Management considers the following critical accounting policies to have the most
significant effect on its estimates, assumptions and judgements:
REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and risks
of ownership to customers are classified as sales-type leases as a result of
meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is
recognized, the initial rental fees due under the contract, along with the
present value of minimum ongoing rental payments, are recorded as revenues for
the period, and the related projector costs including installation expenses are
recorded as cost of goods and services. Additional ongoing rentals in excess of
minimums are recognized as revenue when reported by the theater operator,
provided that collection is reasonably assured.
The Company recognizes revenues from sales-type leases upon installation of the
theater system. Revenue associated with a sales-type lease is recognized when
all of the following criteria are met: persuasive evidence of an agreement
exists; the price is fixed or determinable; and collection is reasonably
assured.
The timing of installation of the theater system is largely dependent on the
timing of the construction of the customer's theater. Therefore, while revenue
for theater systems is generally predictable on a long-term basis, it can vary
from quarter to quarter or year to year depending on the timing of installation.
Page 22
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
The Company monitors the performance of the theaters to which it has leased
equipment. When facts and circumstances indicate that it may need to change the
terms of a lease which had previously been recorded as a sales-type lease, the
Company evaluates the likely outcome of such negotiations. A provision is
recorded against the net investment in leases if the Company believes that it is
probable that the negotiation will result in a reduction in the minimum lease
payments such that the lease will be reclassified as an operating lease. The
provision is equal to the excess of the carrying value of the net investment in
lease over the fair value of the equipment.
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.
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.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
GOODWILL
The Company adopted FAS 142 "Goodwill and Other Intangibles" effective January
1, 2002. Upon adoption of this standard, no impairment in goodwill was found to
exist.
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
FIXED ASSETS
Management reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. In performing its review for recoverability,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of impairment losses is based on the excess of the
carrying amount of the asset over the fair value calculated using discounted
expected future cash flows. If the actual future cash flows are less than the
Company's estimates, future earnings could be adversely affected.
TAX ASSET VALUATION
As at March 31, 2003, 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 March 31, 2003, 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 March 31, 2003, 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 Company has evaluated the requirements of
FIN 46 to be implemented in the subsequent quarter, and does not believe that
its adoption will have a material effect on the Company.
Page 24
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
The Company reported net income from continuing operations of $2.2 million or
$0.07 per share on a fully diluted basis for the first quarter of 2003, compared
to net income of $10.5 million or $0.32 per share on a fully diluted basis for
the first quarter of 2002.
During the first quarter of 2002, the Company recorded a gain of $12.2 million
from the purchase of $19.5 million of the Company's Subordinated Notes by a
wholly owned subsidiary.
REVENUE
The Company's revenues for the first quarter of 2003 increased 8.6% to $34.0
million from $31.3 million in the same quarter last year primarily as a result
of more installations in the current quarter and the continued success of the
Company's film, SPACE STATION released in April 2002, which has achieved gross
box office receipts of approximately $7.6 million in the first quarter of 2003
and $47.5 million at the end of its 51st week of release.
IMAX systems revenue in the first quarter of 2003 was $22.3 million up from
$20.4 million in the same quarter of 2002. The Company installed 8 theater
systems in the first quarter of 2003, compared to 6 theater systems in the first
quarter of 2002.
Film revenues increased 12.7% to $6.8 million in the first quarter of 2003 from
$6.1 million in the same quarter last year primarily due to the continued
success of SPACE STATION. Film post-production revenues increased to $3.4
million in the first quarter of 2003 from $3.0 million in the prior year
primarily due to the increased number of films in the network.
Other revenues remained consistent at $4.8 million in the first quarter of 2003
and 2002.
GROSS MARGIN
Gross margin for the first quarter of 2003 was $15.7 million, or 46.2% of total
revenue, compared to $13.4 million or 42.9% of total revenue in the
corresponding quarter last year. The increase in gross margin during the quarter
was due to the stronger performance of SPACE STATION.
OTHER
Selling, general and administrative expenses were $9.2 million in the first
quarter of 2003 compared to $10.8 million in the corresponding quarter last
year. A significant reason for the decrease was due to lower legal fees of $1.6
million compared to the same quarter last year as the Company prevailed in or
otherwise resolved and settled, a number of its litigation matters during 2002.
In addition, bad debts decreased by $1.5 million in the first quarter of 2003
due to the improved performance of the theater network. The above decreases were
partially offset by an increase in performance bonuses of $1.4 million compared
to the first quarter of 2002.
Page 25
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
(cont'd)
OTHER (cont'd)
Research and development expenses were $0.7 million in the first quarter of
2003, compared to $0.2 million in the same quarter last year. The higher level
of expenses in 2003 primarily reflects research and development activities
pertaining to the Company's new IMAX(R) MPXTM projection system designed to
lower the cost for multiplex customers entering the IMAX business. Through
research and development, the Company plans to continue to design and develop
cinema-based equipment and software to enhance its product offering.
Amortization of intangibles was $0.1 million in the first quarter of 2003,
compared to $0.4 million in the same quarter last year. The prior year's amount
included write-downs related to the Company's sound system intangibles in 2002.
The Company incurred no restructuring costs or asset impairments (recoveries)
during the quarter ended March 31, 2003. Comparatively the Company recorded a
$1.0 million recovery in the first quarter of 2002 on previously provided
amounts for net investment in leases as collectibility associated with certain
leases due to amendment or settlement of the leases was resolved.
Interest income increased to $0.3 million in the first quarter of 2003 from $0.1
million in the same quarter last year primarily due to an increase in the
average balance of cash and cash equivalents held and interest earned on
accounts receivables.
Net earnings from continuing operations before income taxes includes the gain
pertaining to the Company's purchase of $19.5 million in the aggregate of the
Company's Subordinated Notes during the first quarter of 2002, which resulted in
the Company recording a gain of $12.2 million. The Company was required to
reclassify this gain following the adoption of FAS 145, previously recorded as
an extraordinary item, net of tax.
Interest expense remained consistent in the first quarters of 2003 and 2002 at
$4.3 million and is expected to decline following the Company's payment of the
remaining outstanding Subordinated Notes on April 1, 2003.
The effective tax rate on earnings differs significantly from the statutory rate
due to the effect of permanent differences, income taxed at differing rates in
foreign and other provincial jurisdictions and changes in the Company's
valuation allowance on deferred tax assets. The income tax expense for the
quarter is calculated by applying the estimated average annual effective tax
rate to quarterly pre-tax income. In the current year, it is expected that the
tax benefits associated with the release of the valuation allowance and the
other expected income tax recoveries will reduce the tax provision for the year
such that the effective annual tax rate will be approximately 10%. As at March
31, 2003, the Company had a net deferred tax asset of $47.5 million, against
which the Company is carrying a $43.7 million valuation allowance.
SUBSEQUENT EVENT
On April 23, 2003, the Company announced that it had reached an agreement with
Warner Bros., a division of Time Warner Entertainment Company, L.P. ("Warner
Bros.") for the creation and distribution of IMAX(R) DMRTM large format versions
of the Warner Bros. films, The Matrix Reloaded and The Matrix Revolutions, in
2003. The Matrix Reloaded: The IMAX Experience is scheduled to be released to
IMAX theaters in North America approximately two to three weeks after the 35mm
version is released to North American theaters on May 15, 2003. The Matrix
Revolutions: The IMAX Experience is scheduled to be released to IMAX theaters in
North America in November 2003, simultaneously with the 35mm release to North
American theaters. IMAX DMR is the Company's technology for the conversion of
35mm film to 15-perforation film frame, 70mm format.
Page 26
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company's principal source of liquidity included cash and
cash equivalents of $37.1 million, trade accounts receivable of $14.9 million
and net investment in leases due within one year of $4.8 million.
As of March 31, 2003, the Company has letters of credit of $4.3 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 ending 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 certain 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 March 31, 2003, the Company has $9.1 million outstanding on its
Subordinated Notes. In April 1996, the Company completed a private placement of
$100.0 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. 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 $55.5 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
$12.2 million through the first quarter of 2002. On April 1, 2003, the Company
repaid the remaining outstanding Subordinated Notes balance of $9.1 million plus
accrued interest on the maturity date.
Page 27
IMAX CORPORATION
ITEM 2. 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 March 31, 2003 are as follows:
2003 $ 3,657
2004 4,479
2005 4,554
2006 4,676
2007 4,538
Thereafter 36,177
----------
$ 58,081
As of March 31, 2003, the Company has an unfunded and accrued projected benefit
obligation of approximately $17.9 million (December 31, 2002 - $17.2 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, certain of the 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.
In the first three months of 2003, cash provided by operating activities
amounted to $0.6 million. Changes in other non-cash operating assets and
liabilities include a decrease in deferred revenue of $9.0 million, a decrease
of $3.7 million in inventories, a decrease of $1.2 million in net investment in
leases, an increase of $1.1 million in accrued liabilities, and a $1.8 million
increase in accounts receivable.
Cash used in investing activities amounted to $0.7 million in the first three
months of 2003, which includes purchases of $0.3 million in fixed assets and an
increase in other assets of $0.2 million.
During the first three months of 2003, no cash was used or provided by financing
activities.
The Company believes that cash flow from operations together with existing cash
will be sufficient to meet operating needs 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 the Company 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.
Page 28
IMAX CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A 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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Co-Chief Executive Officers and Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d- 15(e)) as of the end of the period covered by this report, have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and the Company's
consolidated subsidiaries would be made known to them by others within those
entities.
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 29
IMAX CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(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 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. The Company believes that the allegations made by
Muvico in its complaint are entirely without merit and will
accordingly defend the claims vigorously. The Company further
believes that the amount of loss, if any, suffered in connection with
this lawsuit would not have a material impact on the financial
position or results of operation of the Company, although no
assurance can be given with respect to the ultimate outcome of any
such litigation.
Page 30
IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated 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
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K in the three month period
ended March 31, 2003.
Page 31
IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: February 27, 2004 By: /s/ Francis T. Joyce
--------------------------- ------------------------------------
Francis T. Joyce
Chief Financial Officer
(Principal Financial Officer)
Date: February 27, 2004 By: /s/ Kathryn A. Gamble
------------------------ ------------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
Page 32