===============================================================================
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 September 30, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of October 31, 2003
------------------------------- ----------------------------------
Common stock, no par value 39,260,758
===============================================================================
Page 1
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................................27
Item 3. Quantitative and Qualitative Factors about Market Risk..................................36
Item 4. Controls and Procedures.................................................................36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................37
Item 2. Changes in Securities...................................................................38
Item 6. Listings of Exhibits and Reports on Form 8-K............................................38
Signatures.......................................................................................39
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 September 30, 2003, which was originally filed with
the Securities and Exchange Commission (the "SEC") on November 12, 2003.
Specifically, Note 18 to the Condensed Consolidated Financial Statements now
provides financial information relating to the Company's Guarantor Subsidiaries
and Non-Guarantor Subsidiaries, as defined therein. 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
----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Condensed Consolidated Financial Statements are
filed as part of this Report:
Condensed Consolidated Balance Sheets as at September 30, 2003
and December 31, 2002...........................................................................4
Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 2003 and 2002.................................................5
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 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)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
---------------- ----------------
ASSETS
Cash and cash equivalents (note 7(g)) $ 23,595 $ 37,136
Accounts receivable, less allowance for doubtful accounts of $9,192
(2002 - $9,248) 13,285 15,054
Financing receivables (note 3) 53,914 51,918
Inventories (note 4) 29,012 34,092
Prepaid expenses 2,999 2,383
Film assets 580 419
Fixed assets 40,242 45,308
Other assets 8,801 10,455
Deferred income taxes (note 10) 3,821 3,821
Goodwill 39,027 39,027
Other intangible assets 3,765 3,363
---------------- ----------------
Total assets $ 219,041 $ 242,976
================ ================
LIABILITIES
Accounts payable $ 6,115 $ 6,768
Accrued liabilities 44,824 43,451
Deferred revenue 68,529 87,284
Senior notes due 2005 (note 5) 168,475 200,000
Convertible subordinated notes due 2003 (note 6) -- 9,143
---------------- ----------------
Total liabilities 287,943 346,646
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (note 7)
SHAREHOLDERS' DEFICIT
Common stock - no par value. Authorized - unlimited number
Issued and outstanding - 37,353,298 (2002 - 32,973,366) 98,695 65,563
Other equity (note 11) 2,440 1,542
Deficit (170,682) (171,420)
Accumulated other comprehensive income 645 645
---------------- ----------------
Total shareholders' deficit (68,902) (103,670)
---------------- ----------------
Total liabilities and shareholders' deficit $ 219,041 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
REVENUE
IMAX systems (note 8(a)) $ 11,455 $ 9,574 $ 55,913 $ 50,671
Films 5,275 9,786 19,570 29,050
Other 4,697 3,819 14,676 13,584
------------- ------------- ------------- -------------
21,427 23,179 90,159 93,305
COSTS OF GOODS AND SERVICES 12,081 16,397 51,075 54,427
------------- ------------- ------------- -------------
GROSS MARGIN 9,346 6,782 39,084 38,878
Selling, general and administrative expenses
(notes 8(b)) 8,265 7,564 24,864 26,672
Research and development 952 900 2,833 1,701
Amortization of intangibles 181 339 473 1,067
Income from equity-accounted investees (228) (167) (501) (88)
Receivable provisions (recoveries), net (note 9) (425) (1,173) 264 53
Restructuring recoveries (note 8(c)) -- (497) -- (497)
------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 601 (184) 11,151 9,970
Interest income 105 106 515 295
Interest expense (3,606) (4,299) (11,949) (13,048)
Gain (loss) on retirement of notes (notes 5 and 6) (146) 17 (333) 12,005
Recovery on long-term investments (note 8(d)) 355 -- 355 --
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (2,691) (4,360) (261) 9,222
Recovery of (provision for) income taxes (note 10) (163) -- 400 --
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (2,854) (4,360) 139 9,222
Net earnings from discontinued operations (note 14) 200 2,066 599 2,066
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (2,654) $ (2,294) $ 738 $ 11,288
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE (note 11): Earnings (loss) per share - basic and fully
diluted:
Net earnings (loss) from continuing operations $ (0.08) $ (0.13) $ -- $ 0.28
Net earnings from discontinued operations $ 0.01 $ 0.06 $ 0.02 $ 0.06
------------- ------------- ------------- -------------
Net earnings (loss) $ (0.07) $ (0.07) $ 0.02 $ 0.34
============= ============= ============= =============
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2003 2002
------------------ -----------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings from continuing operations $ 139 $ 9,222
Items not involving cash:
Depreciation, amortization and write-downs 8,614 12,881
Income from equity-accounted investees (501) (88)
Deferred income taxes -- (921)
Loss (gain) on retirement of notes 333 (12,005)
Stock and other non-cash compensation 4,103 3,016
Non-cash foreign exchange gain (685) (390)
Payment under certain employment agreements (1,550) --
Investment in film assets (1,108) (2,351)
Changes in other non-cash operating assets and liabilities (13,904) (2,401)
------------------ -----------------
Net cash provided by (used in) operating activities (4,559) 6,963
------------------ -----------------
INVESTING ACTIVITIES
Purchase of fixed assets (1,158) (1,137)
Increase in other assets (794) (727)
Increase in other intangible assets (435) (469)
Recovery on long-term investments 355 --
------------------ -----------------
Net cash used in investing activities (2,032) (2,333)
------------------ -----------------
FINANCING ACTIVITIES
Repayment of convertible subordinated notes (9,143) --
Repurchase of convertible subordinated notes -- (6,022)
Receipt on note receivable from discontinued operations 599 --
Common shares issued 1,410 152
------------------ -----------------
Net cash used in financing activities (7,134) (5,870)
------------------ -----------------
Effects of exchange rate changes on cash 184 64
------------------ -----------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (13,541) (1,176)
Cash and cash equivalents, beginning of period 37,136 26,388
------------------ -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,595 $ 25,212
================== =================
(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.
These interim 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 CHANGES
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 2003 and all prior period
presentations. The Company has reclassified the extraordinary gain on
repurchase of Subordinated Notes in 2002 within net earnings from
continuing operations before income taxes (see note 6 for further
details).
Effective January 1, 2002, 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 7(f).
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:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
NET INVESTMENT IN LEASES
Gross minimum lease amounts receivable $ 98,794 $ 97,167
Residual value of equipment 824 824
Unearned finance income (39,940) (39,001)
-------------- -------------
Present value of minimum lease amounts receivable 59,678 58,990
Accumulated allowance for uncollectible amounts (9,095) (8,938)
-------------- -------------
Net investment in leases 50,583 50,052
-------------- -------------
LONG-TERM RECEIVABLES 3,331 1,866
-------------- -------------
Total financing receivables $ 53,914 $ 51,918
============== =============
4. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
Raw materials $ 6,410 $ 5,042
Work-in-process 3,252 2,249
Finished goods 19,350 26,801
-------------- --------------
$ 29,012 $ 34,092
============== ==============
5. 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 obligations 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 transactions 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: 2002 - 103.938%, 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.
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)
5. SENIOR NOTES DUE 2005 (cont'd)
In June 2003, the Company retired an aggregate of $25.0 million of the
Company's Senior Notes and accrued interest of $0.1 million in exchange
for the issuance of 3,237,845 common shares of the Company at an
average value of $7.74 per share. The Company recorded a loss of $0.2
million related to costs associated with this retirement.
During the quarter ended September 30, 2003, the Company retired an
additional $6.5 million in the aggregate of the Company's Senior Notes
and accrued interest of $0.1 million in exchange for the issuance of
736,431 common shares of the Company at an average value of $9.06 per
share. The Company recorded an additional charge of $0.1 million as a
result of these transactions related to costs associated with this
retirement. These transactions had the effect of reducing the principal
amount of the Company's outstanding Senior Notes to $168.5 million as
of September 30, 2003.
During October 2003, the Company retired an additional $15.7 million in
the aggregate of the Company's Senior Notes and accrued interest of
$0.5 million in exchange for the issuance of 1,864,077 common shares of
the Company at an average value of $8.91 per share. The Company will
record an additional charge of approximately $0.2 million as a result
of these transactions in the fourth quarter of 2003 related to costs
associated with this retirement. These transactions had the effect of
reducing the principal amount of the Company's outstanding Senior Notes
to $152.8 million as of October 31, 2003.
6. 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").
In 2001 and 2002, the Company and a wholly owned subsidiary of the
Company purchased an aggregate of $90.9 million of Subordinated Notes
for $21.8 million consisting of $18.5 million in cash and common shares
of the Company valued at $3.3 million.
The Company cancelled the purchased Subordinated Notes and recorded a
gain of $11.9 million related to the $20.5 million of Subordinated
Notes purchased in the first nine months of 2002. 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.
On April 1, 2003, the Company repaid the remaining outstanding
Subordinated Notes balance of $9.1 million plus accrued interest on the
maturity date and retired the issue.
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)
7. COMMITMENTS AND CONTINGENCIES
(a) In March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and
seeking rescission in respect of the system lease agreements between
the Company and Muvico. The complaint was subsequently amended to add
claims for fraud based upon the same factual allegations underlying its
prior claims. The Company filed counterclaims against Muvico for breach
of contract, unjust enrichment unfair competition and/or deceptive
trade practices and theft of trade secrets, and brought claims against
MegaSystems, Inc. ("MegaSystems"), a large-format theater system
manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from
using the Company's confidential and proprietary information. The case
is being heard in the U.S. District Court, Southern District of
Florida, Miami Division. The Company's motion for a summary judgement
on its contract claims against Muvico was heard in September 2003; a
decision has not yet been rendered. The Company believes that the
allegations made by Muvico in its complaint are entirely without merit
and will accordingly defend the claims vigorously. The Company further
believes that the amount of loss, if any, suffered in connection with
this lawsuit would not have a material impact on the financial position
or results of operation of the Company, although no assurance can be
given with respect to the ultimate outcome of any such litigation.
(b) In May 2003, the Company filed a Statement of Claim in the Ontario
Superior Court of Justice against United Cinemas International
Multiplex B.V. ("UCI") for specific performance, or alternatively,
damages of $25.0 million with respect to the breach of a 1999 agreement
between the Company and UCI whereby UCI committed to purchase IMAX
theatre systems from the Company. In August 2003, UCI filed a Statement
of Defence denying it is in breach. No assurance can be given with
respect to the ultimate outcome of such litigation.
(c) In November 2001, the Company filed a complaint with the High Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin
("Big Screen"), demanding payment of rental payments and certain other
amounts owed to the Company. Big Screen has raised a defense based on
alleged infringement of German antitrust rules, relating mainly to an
allegation of excessive pricing. Big Screen had brought a number of
motions for restraining orders in this matter relating to the Company's
provision of films and maintenance, all of which have been rejected by
the courts, including the Berlin Court of Appeals, and for which all
appeals have been exhausted. The Company believes that all of the
allegations in Big Screen's individual defense are 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.
(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.
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)
7. COMMITMENTS AND CONTINGENCIES (cont'd)
(e) The Company's total minimum annual rental payments to be made under
operating leases for premises as of September 30, 2003 are as follows:
2003 $ 1,329
2004 5,017
2005 4,938
2006 4,952
2007 4,799
Thereafter 37,647
----------
$ 58,682
(f) 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"), which
expands previously issued accounting guidance and requires additional
disclosure by a guarantor in its interim and annual financial
statements 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 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 Company leases theater systems to customers with one year's free
maintenance on the system from the date of installation. The fair value
of this component of the arrangement is deferred when the systems
revenue is recognized and is amortized over the one year free
maintenance period. All costs associated with this maintenance program
are expensed as incurred. The Company has therefore not recognized any
additional warranty accrual on systems installed.
Significant guarantees that the Company has provided to third parties
are as follows:
FINANCIAL GUARANTEES
In addition to the minimum annual rental payments as in note 7(e), the
Company has provided guarantees up to a maximum amount of $4.8 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 terms of
the guarantees are equal to the terms of the related debt or lease
arrangements, which range from expiry dates between 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 statements of $2.3
million related to potential claims under these guarantees.
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)
7. COMMITMENTS AND CONTINGENCIES (cont'd)
DIRECTOR/OFFICER INDEMNIFICATIONS
The Company's General By-law contains an indemnification of its
directors/officers, former directors/officers and persons who have
acted at its request to be a director/officer of an entity in which the
Company is a shareholder or creditor, to indemnify them, to the extent
permitted by the Canada Business Corporations Act, against expenses
(including legal fees), judgements, fines and any amount actually and
reasonably incurred by them in connection with any action, suit or
proceeding in which the directors and/or officers are sued as a result
of their service, if they acted honestly and in good faith with a view
to the best interests of the Company. The nature of the indemnification
prevents the Company from making a reasonable estimate of the maximum
potential amount it could be required to pay to counterparties. The
Company has purchased directors' and officers' liability insurance. No
amount has been accrued in the Condensed Consolidated Balance Sheet as
of September 30, 2003, with respect to this indemnity.
OTHER INDEMNIFICATION AGREEMENTS
In the normal course of the Company's operations, it provides
indemnifications to counterparties in transactions such as: theater
system lease and sale agreements; film production, exhibition and
distribution agreements; real property lease agreements; and employment
agreements. These indemnification agreements require the Company to
compensate the counterparties for costs incurred as a result of
litigation claims that may be suffered by the counterparty as a
consequence of the transaction or the Company's breach or
non-performance under these agreements. The terms of these
indemnification agreements 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.
(g) As of September 30, 2003, the Company has letters of credit of $3.5
million outstanding, which have been collateralized by cash deposits.
8. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL
INFORMATION
(a) In instances where customers of the Company are not in compliance with
the terms of their leases for theatre systems not yet installed, the
leases are in default. There is typically deferred revenue associated
with these leases, representing initial lease payments collected prior
to the default. These initial lease payments are recognized as revenue
when the Company exercises its rights to terminate the lease and the
Company is released legally or by virtue of an agreement with the
customer from its obligations under the lease arrangement. Included in
systems revenue for the three and nine month periods ended September
30, 2003, are amounts of $3.4 million and $7.6 million, respectively
(2002 - $nil and $5.3 million) for amounts recognized under terminated
lease agreements.
(b) Included in selling, general and administrative expenses for the three
and nine months ended September 30, 2003, are amounts of $0.2 million
and $1.2 million, respectively (2002 - ($0.3 million) and $0.2 million)
for net foreign exchange gains (losses) relating to the translation of
foreign currency denominated monetary assets, liabilities and
integrated subsidiaries.
(c) During the third quarter of 2002, the Company reversed $0.5 million of
restructuring accrued liabilities for terminated employees who obtained
employment prior to completion of their severance period. As at
September 30, 2003, the Company has accrued liabilities of $0.7 million
(December 31, 2002 - $1.4 million) for costs to be paid out over the
next two years for employees severed during 2001. During the three and
nine month periods ended September 30, 2003, the Company paid out $0.1
million and $0.7 million, respectively, in termination benefits.
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)
8. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL
INFORMATION (cont'd)
(D) In August 2003, the Company agreed to restructure its 6% Senior Secured
Convertible Debenture (the "Debenture") due from Mainframe
Entertainment, Inc. ("Mainframe"), which matures June 30, 2004. Under
the terms of the restructuring agreement, the payment terms of the
Debenture were revised, while the Company retained its security over
all of Mainframe's property and assets for the balance of the payments
due. The Company has recorded $0.4 million in income for the three and
nine month periods ended September 30, 2003 (2002 - $nil) related to
cash received under the debt restructuring agreement. In 2001, $3.0
million of the Debenture principal amount, the remaining balance at the
time, was fully provided for due to uncertainty of collection.
9. RECEIVABLE PROVISIONS (RECOVERIES), NET
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Accounts receivable provisions
(recoveries), net $ 93 $ (326) $ 515 $ (1,254)
Financing receivable provisions
(recoveries), net(1) $ (518) $ (847) $ (251) $ 1,307
------------- -------------- -------------- -------------
Receivable provisions (recoveries), net $ (425) $ (1,173) $ 264 $ 53
============ ============= ============= =============
(1) For the three and nine month periods ended September 30, 2003, the
Company recorded a recovery of previously provided amounts of $0.4
million and $1.2 million (2002 - $1.0 million and $2.0 million) as
collectibility uncertainty associated with certain leases was
resolved by amendment, settlement of the leases, or other
resolving conditions.
10. INCOME TAXES
The effective tax rate on earnings differs significantly from the
Canadian statutory rate due to the effect of permanent differences,
income taxed at differing rates in foreign and other provincial
jurisdictions and changes in the Company's valuation allowance on
deferred tax assets. The income tax expense (recovery) for the quarter
is calculated by applying the estimated average annual effective tax
rate to quarterly pre-tax income. The Company recorded a current tax
expense of $0.2 million in the current quarter.
As at September 30, 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
September 30, 2003, the Company had a gross deferred income tax asset
of $50.8 million, against which the Company is carrying a $47.0 million
valuation allowance.
Page 13
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
11. 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 and nine months ended September 30, would
have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net earnings (loss) as reported $ (2,654) $ (2,294) $ 738 $ 11,288
Stock based compensation expense, if the
methodology prescribed by FAS 123 had
been adopted (2,323) (2,742) (6,904) (7,990)
------------ ------------- ------------- -------------
Adjusted net earnings (loss) $ (4,977) $ (5,036) $ (6,166) $ 3,298
============ ============= ============= =============
Earnings (loss) per share - basic and fully diluted:
Net earnings (loss) as reported $ (0.07) $ (0.07) $ 0.02 $ 0.34
FAS 123 stock based compensation expense $ (0.06) $ (0.08) $ (0.20) $ (0.24)
------------- ------------- ------------- -------------
Adjusted net earnings (loss) $ (0.13) $ (0.15) $ (0.18) $ 0.10
============= ============= ============= =============
The weighted average fair value of common share options granted to
employees for the three and nine months ended September 30, 2003 at the
time of grant was $1.2 million and $1.7 million, respectively (2002 -
$0.4 million and $2.1 million). For the three months ended March 31,
2003 and prior, the Company used the Black-Scholes option-pricing model
to determine the fair value of common share options granted as
estimated at the grant date. The following assumptions were used during
the three months ended March 31, 2003: dividend yield of 0%, an average
risk free interest rate of 2.1% (three and nine month periods ended
September 30, 2002 - 2.5% and 2.5%, respectively), 20% forfeiture of
options vesting greater than two years, expected life of one to seven
years and expected volatility of 50% (three and nine month periods
ended September 30, 2002 - 50% and 50%, respectively). As of April 1,
2003, the Company adopted a Binomial option-pricing model to determine
the fair value of common share options at the grant date for the three
and six month periods ended September 30, 2003 with the following
assumptions: dividend yield of 0% and 0%, an average risk free interest
rate of 4.1% and 3.0%, an equity risk premium between 4.7% and 10.7%, a
beta between 0.85 and 1.03, expected option life between 2.6 and 5.1
years, an average expected volatility of 62.0% and an annual
termination probability between 8.1% and 9.6%.
Of the total pro forma stock based compensation expense for the three
and nine month periods ended September 30, 2003 of $2.3 million and
$6.9 million, respectively, $1.9 million and $5.7 million,
respectively, relates to stock grants made in years 1998 to 2000 at an
average exercise price of $23.29. In accordance with FAS 123, the total
expense reflected in the above pro forma charge represents amortization
of stock option charges that were valued at the grant date using an
option-pricing model with assumptions that were valid at the time with
no further update of current stock trends and assumptions.
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)
11. CAPITAL STOCK (cont'd)
(a) STOCK BASED COMPENSATION (cont'd)
Stock-based compensation related to stock options granted to
non-employees is recognized as the stock options are earned. During the
three and nine month periods ended September 30, 2003, the Company
issued, respectively, 13,335 and 675,059 options and warrants to
purchase the Company's common stock to strategic partners and certain
advisors. These options have an average exercise price of $8.20 and
$6.22, respectively, expire in 5 years, and vest either immediately or
as certain milestone events are achieved. Of the 675,059 options and
warrants granted in 2003, up to 350,000 will automatically terminate if
some or all of such milestones are not realized. The Company measures
the fair value of the options at each vesting date, and as a result,
the stock based compensation to be recorded in the future will
fluctuate as the fair market value of common stock fluctuates. The
Company believes that the fair value of the stock options vested is
more reliably measured than the fair value of the benefits received.
The Company has calculated the fair value of these options to
non-employees on the date of grant or the date on which the milestones
were achieved in the three and nine month periods ended September 30,
2003 to be $0.1 million and $0.9 million, respectively, using a
Binomial option-pricing model with the following underlying
assumptions: dividend yield of 0%, an average risk free interest rate
of 2.7%, expected option life of 5 years and an average expected
volatility of 62.0%.
The Company has recorded $nil and $0.4 million in other intangible
assets in the three and nine months ended September 30, 2003 and a
charge of $0.1 million and $0.5 million, respectively, related to the
non-employee stock options granted.
Under the terms of certain employment agreements dated July 12, 2000,
the Company was required to issue 360,000 restricted common shares or
pay their cash equivalent. The restricted shares or the related cash
obligation were fully vested effective July 1, 2002. In May 2003, the
Company paid approximately $1.6 million in cash to settle the
equivalent of 200,000 of the total 360,000 restricted common shares
under these agreements. The Company has recorded a recovery of $0.2
million and an expense of $1.4 million for the three and nine month
periods ended September 30, 2003, respectively, (2002 - ($0.4 million),
$0.9 million) due to the changes in the Company's stock price during
the period.
(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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ------------ ----------- -----------
Net earnings applicable to common shareholders:
Net earnings (loss) $ (2,654) $ (2,294) $ 738 $ 11,288
=========== =========== =========== ===========
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period 36,426 32,953 32,973 31,899
Weighted average number of shares issued during the 665 9 1,619 1,034
----------- ----------- ----------- -----------
period
Weighted average number of shares used in computing
basic earnings per share 37,091 32,962 34,592 32,933
Assumed exercise of stock options, net of shares
assumed -- -- 532 330
----------- ----------- ----------- -----------
purchased
Weighted average number of shares used in computing
fully diluted earnings per share 37,091 32,962 35,124 33,263
=========== =========== =========== ===========
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)
11. CAPITAL STOCK (cont'd)
(b) EARNINGS PER SHARE (cont'd)
The calculation of fully diluted earnings (loss) per share for the
three and nine month periods ended September 30, 2003 and 2002 excludes
common shares issuable upon conversion of the Subordinated Notes, as
the impact of these conversions would be anti-dilutive. The balance of
the Company's Subordinated Notes was retired on April 1, 2003.
12. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL
INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ----------- ----------- ------------
Interest paid $ 174 $ 47 $ 8,438 $ 8,596
Income taxes paid $ 313 $ 209 $ 2,089 $ 725
The Company excluded the following non-cash transactions in the
Statements of Cash Flows for the three and nine month periods ended
September 30, 2003: the retirement of the $6.5 million and $31.5
million of Company's Senior Notes in exchange for the issuance of
736,431 and 3,974,276 common shares of the Company valued at $6.6
million and $31.7 million, respectively; and the issuance of nil and
100,000 warrants of the Company to non-employees valued at $0.4
million, respectively.
Depreciation, amortization and write-downs for the nine months ended
September 30, 2003 includes depreciation and amortization of $8.3
million (2002 - $9.9 million) and write-downs (recoveries) of $0.3
million (2002 - $3.0 million).
13. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUE
IMAX systems $ 11,455 $ 9,574 $ 55,913 $ 50,671
Films 5,275 9,786 19,570 29,050
Other 4,697 3,819 14,676 13,584
------------ ------------ ------------ ------------
TOTAL $ 21,427 $ 23,179 $ 90,159 $ 93,305
============ ============ ============ ============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 5,667 $ 2,279 $ 26,550 $ 22,885
Films (8) 1,825 1,295 4,307
Other (364) (946) (1,098) (1,118)
Corporate overhead (4,694) (3,342) (15,596) (16,104)
------------ ------------ ------------ ------------
TOTAL $ 601 $ (184) $ 11,151 $ 9,970
============ ============ ============ ============
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)
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 and nine month periods ended September 30,
2003 of $0.2 million and $0.6 million, respectively (2002 - $2.1
million and $2.1 million), net of income tax expense of $nil and $nil,
respectively (2002 - $nil and $nil). Earnings in 2002 from the
Company's discontinued operations related to future obligations being
eliminated. The 2003 earnings represent collections on notes received
by the Company in connection with the sale of DPI which were fully
allowed for.
15. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 is currently evaluating the
impact (if any) of adopting the requirements of FIN 46.
16. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures in the unaudited Condensed Consolidated
Financial Statements for the three and nine months ended September 30,
2002 have been reclassified to conform with the presentation adopted in
2003.
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. 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.
18. 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 18
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- -------------- -------------- -------------- ----------------
ASSETS
Cash and cash equivalents $ 19,691 $ 3,618 $ 286 $ -- $ 23,595
Accounts receivable 8,574 3,796 915 -- 13,285
Financing receivables 52,425 1,412 77 -- 53,914
Inventories 30,944 248 66 (2,246) 29,012
Prepaid expenses 2,274 437 288 -- 2,999
Intercompany receivables 15,329 18,114 15,974 (49,417) --
Film assets 312 268 -- -- 580
Fixed assets 35,775 5,111 3 (647) 40,242
Other assets 8,902 (101) -- -- 8,801
Deferred income taxes 3,770 51 -- -- 3,821
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,765 -- -- -- 3,765
Investments in subsidiaries 25,344 -- -- (25,344) --
------------- ------------- ------------- ------------- -------------
Total assets $ 246,132 $ 32,954 $ 17,609 $ (77,654) $ 219,041
============= ============= ============= ============= =============
LIABILITIES
Accounts payable 2,246 3,247 622 -- 6,115
Accrued liabilities 42,810 1,806 208 -- 44,824
Intercompany payables 39,897 25,016 12,227 (77,140) --
Deferred revenue 62,311 6,061 157 -- 68,529
Senior notes due 2005 168,475 -- -- -- 168,475
Convertible subordinated notes due 2003 -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total liabilities 315,739 36,130 13,214 (77,140) 287,943
------------- ------------- ------------- ------------- -------------
SHAREHOLDER'S DEFICIT
Common stock - no par value. Authorized -
unlimited number. Issued and
outstanding - 37,353,298 98,695 -- 117 (117) 98,695
Other equity/Additional paid in
capital/Contributed surplus 1,406 46,960 -- (45,926) 2,440
Deficit (170,967) (49,522) 4,278 45,529 (170,682)
Accumulated other comprehensive income
(loss) 1,259 (614) -- -- 645
------------- -------------- ------------- ------------- -------------
Total shareholders' equity (deficit) $ (69,607) $ (3,176) $ 4,395 $ (514) $ (68,902)
------------- -------------- ------------- ------------- -------------
Total liabilities & shareholders'
equity (deficit) $ 246,132 $ 32,954 $ 17,609 $ (77,654) $ 219,041
============= ============= ============= ============= =============
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 19
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating 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 20
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 11,118 $ 221 $ 328 $ (212) $ 11,455
Films 3,245 2,799 28 (797) 5,275
Other 1,504 3,224 7 (38) 4,697
------------- ------------- ------------- -------------- -------------
15,867 6,244 363 (1,047) 21,427
COST OF GOODS AND SERVICES 7,052 7,256 120 (2,346) 12,081
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 8,815 (1,012) 243 1,299 9,346
Selling, general and administrative expenses 8,199 129 (63) -- 8,265
Research and development 952 -- -- -- 952
Amortization of intangibles 181 -- -- -- 181
Loss (income) from equity-accounted
investees 669 82 -- (980) (228)
Receivable provisions (recoveries), net (426) 1 -- -- (425)
Restructuring recoveries -- -- -- -- --
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (760) (1,224) 306 2,279 601
Interest income 105 -- -- -- 105
Interest expense (3,592) (14) -- -- (3,606)
Gain (loss) on retirement of notes (146) -- -- -- (146)
Recovery on long-term investments 355 -- -- -- 355
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (4,038) (1,238) 306 2,279 (2,691)
Recovery of (provision for) income taxes (125) 15 (53) -- (163)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (4,163) (1,223) 253 2,279 (2,854)
Net earnings from discontinued operations 200 -- -- -- 200
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (3,963) $ (1,223) $ 253 $ 2,279 $ (2,654)
============= ============= ============= ============= =============
Page 21
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
September 30, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 9,161 $ 172 $ 315 $ (74) $ 9,574
Films 6,046 3,740 -- -- 9,786
Other 1,691 1,673 10 445 3,819
------------- ------------- ------------- ------------- -------------
16,898 5,585 325 371 23,179
COST OF GOODS AND SERVICES 10,005 5,924 55 413 16,397
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 6,893 (339) 270 (42) 6,782
Selling, general and administrative expenses 7,259 110 268 (73) 7,564
Research and development 900 -- -- -- 900
Amortization of intangibles 339 -- -- -- 339
Loss (income) from equity-accounted
investees 364 135 -- (666) (167)
Receivable provisions (recoveries), net (1,236) 20 43 -- (1,173)
Restructuring recoveries (497) -- -- -- (497)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (236) (604) (41) 697 (184)
Interest income 106 -- -- -- 106
Interest expense (4,279) (20) -- -- (4,299)
Gain (loss) on retirement of notes 17 -- -- -- 17
Recovery on long-term investments -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (4,392) (624) (41) 697 (4,360)
Recovery of (provision for) income taxes -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (4,392) (624) (41) 697 (4,360)
Net earnings from discontinued operations 2,066 -- -- -- 2,066
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (2,326) $ (624) $ (41) $ 697 $ (2,294)
============= ============= ============= ============= =============
Page 22
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the nine months ended
September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 54,693 $ 2,259 $ 1,061 $ (2,100) $ 55,913
Films 10,741 11,011 48 (2,230) 19,570
Other 4,217 10,509 125 (175) 14,676
------------- ------------- ------------- -------------- -------------
69,651 23,779 1,234 (4,505) 90,159
COST OF GOODS AND SERVICES 31,437 24,954 496 (5,812) 51,075
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 38,214 (1,175) 738 1,307 39,084
Selling, general and administrative expenses 24,125 530 209 -- 24,864
Research and development 2,833 -- -- -- 2,833
Amortization of intangibles 473 -- -- -- 473
Loss (income) from equity-accounted
investees (539) 101 -- (63) (501)
Receivable provisions (recoveries), net 486 (178) (44) -- 264
Restructuring recoveries -- -- -- -- --
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 10,836 (1,628) 573 1,370 11,151
Interest income 515 -- -- -- 515
Interest expense (11,919) (30) -- -- (11,949)
Gain (loss) on retirement of notes (333) -- -- -- (333)
Recovery on long-term investments 355 -- -- -- 355
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (546) (1,658) 573 1,370 (261)
Recovery of (provision for) income taxes (632) 1,077 (45) -- 400
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (1,178) (581) 528 1,370 139
Net earnings from discontinued operations 599 -- -- -- 599
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (579) $ (581) $ 528 $ 1,370 $ 738
============= =============- ============= ============= =============
Page 23
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the nine months ended
September 30, 2002:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUE
IMAX systems $ 47,937 $ 4,836 $ 928 $ (3,030) $ 50,671
Films 18,078 10,972 -- -- 29,050
Other 4,466 9,087 52 (21) 13,584
------------- ------------- ------------- -------------- -------------
70,481 24,895 980 (3,051) 93,305
COST OF GOODS AND SERVICES 32,236 24,874 389 (3,072) 54,427
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 38,245 21 591 21 38,878
Selling, general and administrative expenses 25,472 502 708 (10) 26,672
Research and development 1,699 2 -- -- 1,701
Amortization of intangibles 1,067 -- -- -- 1,067
Loss (income) from equity-accounted
investees (671) 272 -- 311 (88)
Receivable provisions (recoveries), net 1,385 (991) (341) -- 53
Restructuring recoveries (497) -- -- -- (497)
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 9,790 236 224 (280) 9,970
Interest income 291 1 3 -- 295
Interest expense (12,885) (163) -- -- (13,048)
Gain (loss) on retirement of notes 12,005 -- -- -- 12,005
Recovery on long-term investments -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 9,201 74 227 (280) 9,222
Recovery of (provision for) income taxes -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 9,201 74 227 (280) 9,222
Net earnings from discontinued operations 2,066 -- -- -- 2,066
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 11,267 $ 74 $ 227 $ (280) $ 11,288
============= ============= ============= =============- =============
Page 24
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the nine months ended
September 30, 2003:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- ------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $ (1,178) $ (581) $ 528 $ 1,370 $ 139
Items not involving cash:
Depreciation, amortization and write-downs 7,897 758 (41) -- 8,614
Loss (income) from equity-accounted
investees (539) 101 -- (63) (501)
Deferred income taxes -- -- -- -- --
Loss on retirement of notes 333 -- -- -- 333
Stock and other non-cash compensation 4,103 -- -- -- 4,103
Non-cash foreign exchange gain (685) -- -- -- (685)
Payment under certain employment agreements (1,550) -- -- -- (1,550)
Investment in film assets (840) (268) -- -- (1,108)
Changes in other non-cash operating assets and
liabilities (10,643) (1,449) (568) (1,244) (13,904)
------------- ------------- ------------- ------------- -------------
Net cash used in operating activities (3,102) (1,439) (81) 63 (4,559)
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (453) (642) -- (63) (1,158)
Increase in other assets (794) -- -- -- (794)
Increase in other intangible assets (435) -- -- -- (435)
Recovery on long-term investments 355 -- -- -- 355
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (1,327) (642) -- (63) (2,032)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repayment of convertible subordinated notes (9,143) -- -- -- (9,143)
Repurchase of convertible subordinated notes -- -- -- -- --
Receipt on note receivable from discontinued
operations 599 -- -- -- 599
Common shares issued 1,410 -- -- -- 1,410
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (7,134) -- -- -- (7,134)
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash 163 4 17 -- 184
------------- ------------- ------------- ------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING
THE PERIOD (11,400) (2,077) (64) -- (13,541)
Cash and cash equivalents, beginning of period 31,091 5,695 350 -- 37,136
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,691 $ 3,618 $ 286 $ -- $ 23,595
============= ============= ============= ============= =============
Page 25
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the nine months ended
September 30, 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 $ 9,201 $ 74 $ 227 $ (280) $ 9,222
Items not involving cash:
Depreciation, amortization and write-downs 13,027 187 (333) -- 12,881
Loss (income) from equity-accounted
investees (671) 272 -- 311 (88)
Deferred income taxes (921) -- -- -- (921)
Loss on retirement of notes (12,005) -- -- -- (12,005)
Stock and other non-cash compensation 3,016 -- -- -- 3,016
Non-cash foreign exchange gain (390) -- -- -- (390)
Payment under certain employment agreements -- -- -- -- --
Investment in film assets (8,333) 5,982 -- -- (2,351)
Changes in other non-cash operating assets and
liabilities 7,257 (9,497) 177 (338) (2,401)
------------- ------------- ------------- -------------- -------------
Net cash provided by (used in) operating
activities 10,181 (2,982) 71 (307) 6,963
------------- ------------- ------------- -------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (1,026) (402) -- 291 (1,137)
Increase in other assets (1,733) 1,006 -- -- (727)
Decrease (increase) in other intangible assets (469) -- -- -- (469)
Recovery on long-term investments -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities (3,228) 604 -- 291 (2,333)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Repayment of convertible subordinated notes -- -- -- -- --
Repurchase of convertible subordinated notes (6,022) -- -- -- (6,022)
Receipt on note receivable from discontinued
operations -- -- -- -- --
Common shares issued 152 -- -- -- 152
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (5,870) -- -- -- (5,870)
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash -- 49 (1) 16 64
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD 1,083 (2,329) 70 -- (1,176)
Cash and cash equivalents, beginning of period 20,039 6,144 205 -- 26,388
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,122 $ 3,815 $ 275 $ -- $ 25,212
============= ============= ============= ============= =============
Page 26
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business is the design, manufacture, sales and leasing
of projector systems for giant screen theaters for customers including
commercial theaters, museums and science centers, and destination entertainment
sites. In addition, the Company designs and manufactures high-end sound systems
and produces and distributes large format films. There are more than 235 IMAX
theaters operating in more than 30 countries worldwide as of September 30, 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 27
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. In instances where customers of the Company are not
in compliance with the terms of their leases for theatre systems not yet
installed, the leases are in default. There is typically deferred revenue
associated with these leases, representing initial lease payments collected
prior to the default. These initial lease payments are recognized as revenue
when the Company exercises its rights to terminate the lease and the Company is
released legally or by virtue of an agreement with the customer from its
obligations under the lease arrangement. When settlements are received, the
Company will allocate the total settlement to each of the elements based on
their relative fair value.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
The allowance for doubtful accounts and provision against the financing
receivables are based on the Company's assessment of the collectibility of
specific customer balances and the underlying asset value of the equipment under
lease where applicable. If there is a deterioration in a customer's credit
worthiness or actual defaults under the terms of the leases are higher than the
Company's historical experience, the Company's estimates of recoverability for
these assets could be adversely affected.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions 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.
Page 28
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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 September 30, 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 September 30, 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 September 30, 2003, the
Company had a gross deferred income tax asset of $50.8 million, against which
the Company is carrying a $47.0 million valuation allowance.
Page 29
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (cont'd)
SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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 is evaluating the impacts (if
any) of adopting FIN 46.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2002
The Company reported net losses from continuing operations of $2.9 million or
$0.08 per share on a fully diluted basis for the third quarter of 2003 compared
to net losses of $4.4 million or $0.13 per share on a fully diluted basis for
the third quarter of 2002.
REVENUE
The Company's revenues for the third quarter of 2003 decreased 7.6% to $21.4
million from $23.2 million.
IMAX systems revenue increased approximately 19.6% to $11.5 million in the third
quarter of 2003 from $9.6 million in the same quarter last year. The Company
installed 1 theater system in the third quarter of 2003 versus 1 theater system
in the third quarter of 2002. Included in IMAX systems revenue for the third
quarter of 2003 is $3.4 million compared to $nil in the corresponding quarter
last year for terminated lease agreements with customers.
Films revenue decreased 46.1% to $5.3 million in the third quarter of 2003 from
$9.8 million in the same quarter last year largely due to the performance in
2002 of SPACE STATION.
Other revenues increased 23.0% to $4.7 million in the third quarter of 2003 from
$3.8 million in the same quarter last year, mainly due to higher revenues from
owned and operated theaters.
GROSS MARGIN
Gross margin for the third quarter of 2003 was $9.3 million, or 43.6% of total
revenue, compared to $6.8 million, or 29.3% of total revenue, in the
corresponding quarter last year. The increase in margin for 2003 is due
primarily to $3.4 million for terminated lease agreements with customers
included in IMAX systems gross margins for the third quarter of 2003 compared to
$nil in the corresponding quarter last year. Because of the nature and size of
the capital commitment that our prospective customers are required to make to
the Company, it is occasionally necessary for the Company to terminate customers
that are on default on cash payments owing and other obligations under lease
agreements. When revenue is recognized on terminated lease agreements, minimal
costs are recognized on this revenue.
Page 30
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2002 (cont'd)
OTHER
Selling, general and administrative expenses were $8.3 million in the third
quarter of 2003 compared to $7.6 million in the corresponding quarter last year.
The reason for the increase was partially due to an increase in the Canadian
foreign exchange rate impacting the Canadian operations salaries and expenses.
Research and development expenses were $1.0 million in the third quarter of 2003
compared to $0.9 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 theater projection system. Through
research and development, the Company plans to continue to design and develop
cinema-based equipment and software to enhance its product offering.
Amortization of intangibles was $0.2 million in the third quarter of 2003
compared to $0.3 million in the same quarter last year. The prior year's amount
included write-downs related to the Company's sound system intangibles.
Receivable provisions (recoveries), net, were a net recovery of $0.4 million in
the third quarter of 2003, compared to a net recovery of $1.2 million in the
same quarter last year. The Company recorded accounts and financing net
receivable recoveries of less than $0.1 million as compared to $0.2 million in
the same quarter last year. The Company also recorded recoveries of $0.4 million
compared to $1.0 million in the same quarter last year, on previously provided
amounts for financing receivables, as collectibility associated with certain
leases was resolved due to amendment, settlement of the leases, or other
resolving conditions.
Restructuring recoveries for the third quarter of 2002 were $0.5 million
compared to $nil in the same quarter in 2003.
Interest income remained consistent at $0.1 million in the third quarter of 2003
and 2002.
Interest expense decreased to $3.6 million in the third quarter of 2003 from
$4.3 million in the same quarter last year as a result of the Company's
repayment of the remaining $9.1 million outstanding Subordinated Notes in April
2003 and retirement of an aggregate of $31.5 million of the Company's Senior
Notes through September 30, 2003.
During the third quarter of 2003, the Company recorded a loss of $0.1 million
from the retirement of $6.5 million of the Company's Senior Notes. During the
third quarter of 2002, the Company recorded a gain of less than $0.1 million
related to the purchase of an additional $1.0 million of the Company's
Subordinated Notes and related expenses.
In August 2003, the Company agreed to restructure its 6% Senior Secured
Convertible Debenture (the "Debenture") due from Mainframe Entertainment, Inc.
("Mainframe"), which matures June 30, 2004. Under the terms of the restructuring
agreement, the payment terms of the Debenture were revised, while the Company
retained its security over all of Mainframe's property and assets for the
balance of the payments due. The Company has recorded $0.4 million in income for
the three and nine month periods ended September 30, 2003 (2002 - $nil) related
to cash received under the debt restructuring agreement.
Page 31
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2002 (cont'd)
OTHER (cont'd)
The effective tax rate on earnings differs significantly from the statutory rate
due to the effect of permanent differences, income taxed at differing rates in
foreign and other provincial jurisdictions and changes in the Company's
valuation allowance on deferred tax assets. The income tax expense (recovery)
for the quarter is calculated by applying the estimated average annual effective
tax rate to quarterly pre-tax income. The Company recorded a current tax expense
of $0.2 million in the current quarter. 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
September 30, 2003, the Company had a gross deferred tax asset of $50.8 million,
against which the Company is carrying a $47.0 million valuation allowance.
NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2002
The Company reported net earnings from continuing operations of $0.1 million or
$0.00 per share on a fully diluted basis for the first nine months of 2003
compared to net earnings of $9.2 million or $0.28 per share on a fully diluted
basis for the first nine months of 2002. The 2002 net earnings included a $12.0
million gain on the retirement of notes.
REVENUE
The Company's revenues for the first nine months of 2003 decreased 3.4% to $90.2
million from $93.3 million in the same period last year.
IMAX systems revenue increased approximately 10.3% to $55.9 million in the first
nine months of 2003 from $50.7 million in the same period last year. The Company
installed 15 theater systems in the first nine months of 2003, one of which was
an operating lease, versus 11 theater systems in the first nine months of 2002,
one of which was an operating lease. Included in IMAX systems revenue for the
first nine months of 2003 is $7.6 million compared to $5.3 million in the
corresponding period last year for terminated lease agreements with customers.
Films revenue decreased 32.6% to $19.6 million in the first nine months of 2003
from $29.1 million in the same period last year largely due to the stronger
performance of films in release in 2002, particularly SPACE STATION, which was
released April 2002.
Other revenues increased 8.0% to $14.7 million in the first nine months of 2003
from $13.6 million in the same period last year, mainly due to higher revenues
from owned and operated theaters.
GROSS MARGIN
Gross margin for the first nine months of 2003 was $39.1 million, or 43.4% of
total revenue, compared to $38.9 million, or 41.7% of total revenue, in the same
period last year. The increase in margin for 2003 is due primarily to $7.6
million included in IMAX systems gross margins for the first nine months of 2003
compared to $5.3 million in the corresponding period last year for terminated
lease agreements with customers. Because of the nature and size of the capital
commitment that our prospective customers are required to make to the Company,
it is occasionally necessary for the Company to terminate customers that are on
default on cash payments owing and other obligations under lease agreements.
When revenue is recognized on terminated lease agreements, minimal costs are
recognized on this revenue.
Page 32
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2002
(cont'd)
OTHER
Selling, general and administrative expenses were $24.9 million in the first
nine months of 2003 compared to $26.7 million in the corresponding period last
year. A significant reason for the decrease was a decrease of $3.8 million in
legal fees compared to the first nine months of last year, as the Company
prevailed in or otherwise resolved and settled a number of its litigation
matters during 2002. Partially offsetting the above are higher bonus and stock
based compensation charges of $2.0 million for the first nine months of 2003
compared to the same period in 2002.
Research and development expenses were $2.8 million in the first nine months of
2003, compared to $1.7 million in the same period last year. The higher level of
expenses in 2003 primarily reflects research and development activities
pertaining to the Company's new IMAX MPX theater projection system. Through
research and development, the Company plans to continue to design and develop
cinema-based equipment and software to enhance its product offering.
Amortization of intangibles were $0.5 million in the first nine months of 2003
compared to $1.1 million in the same period last year. The prior year's amount
included write-downs related to the Company's sound system intangibles.
Receivable provisions (recoveries), net, were a net provision of $0.3 million in
the first nine months of 2003, compared to a net provision of $0.1 million in
the same period last year. The Company recorded accounts and financing net
receivables provisions of $1.4 million as compared to $2.0 million in the same
period last year, offset by the recovery of $1.2 million compared to $2.0
million in the same period last year on previously provided amounts for
financing receivables, as collectibility associated with certain leases was
resolved due to amendment, settlement of the leases, or other resolving
conditions.
Restructuring recoveries for the nine months ended 2002 amounted to $0.5 million
compared to $nil in the same period in 2003.
Interest income increased to $0.5 million in the first nine months of 2003 from
$0.3 million in the same period last year primarily due to an increase in the
average balance of cash and cash equivalents held.
Interest expense decreased to $11.9 million in the first nine months of 2003
from $13.1 million in the same period last year as a result of the Company's
repayment of the remaining $9.1 million of outstanding Subordinated Notes in
April 2003 and retirement of an aggregate of $31.5 million of the Company's
Senior Notes throughout 2003.
During the first nine months of 2003, the Company recorded a loss of $0.3
million related to costs associated with the retirement of $31.5 million of the
Company's Senior Notes. In the first nine months of 2002, the Company recorded a
gain of $12.0 million from the repurchase of $20.5 million of the Company's
Subordinated Notes by the Company and its wholly owned subsidiary.
The effective tax rate on earnings differs significantly from the statutory rate
due to the effect of permanent differences, income taxed at differing rates in
foreign and other provincial jurisdictions and changes in the Company's
valuation allowance on deferred tax assets. The income tax expense (recovery)
for the quarter is calculated by applying the estimated average annual effective
tax rate to quarterly pre-tax income. The Company recorded $1.5 million of
refunds relating to previously unrecognized tax loss carrybacks offset by a
current tax expense of $1.1 million in the current year. 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 September 30, 2003, the Company had a gross deferred
tax asset of $50.8 million, against which the Company is carrying a $47.0
million valuation allowance.
Page 33
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company's principal source of liquidity included
cash and cash equivalents of $23.6 million, trade accounts receivable of $13.3
million and net investment in leases due within one year of $5.3 million.
As of September 30, 2003, the Company has letters of credit of $3.5 million
outstanding, which have been collateralized by cash deposits.
The Company's Senior Notes, which bear interest at 7.875% per annum with
interest payable in arrears on June 1 and December 1 of each year, commencing
June 1, 1999, 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: 2002 - 103.938%,
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.
During June 2003, the Company retired an aggregate of $25.0 million of the
Company's Senior Notes and accrued interest of $0.1 million in exchange for the
issuance of 3,237,845 common shares of the Company at an average value of $7.74
per share. The Company recorded a loss of $0.2 million related to costs
associated with this retirement.
During the quarter ended September 30, 2003, the Company retired an additional
$6.5 million in the aggregate of the Company's Senior Notes and accrued interest
of $0.1 million in exchange for the issuance of 736,431 common shares of the
Company at an average value of $9.06 per share. The Company recorded an
additional charge of $0.1 million as a result of these transactions related to
costs associated with this retirement. These transactions had the effect of
reducing the principal amount of the Company's outstanding Senior Notes to
$168.5 million as of September 30, 2003.
During October 2003, the Company retired an additional $15.7 million in the
aggregate of the Company's Senior Notes and accrued interest of $0.5 million in
exchange for the issuance of 1,864,077 common shares of the Company at an
average value of $8.91 per share. The Company will record an additional charge
of approximately $0.2 million as a result of these transactions in the fourth
quarter of 2003 related to costs associated with this retirement. These
transactions had the effect of reducing the principal amount of the Company's
outstanding Senior Notes to $152.8 million as of October 31, 2003.
In April 1996, the Company completed a private placement of $100.0 million of
the Company's Subordinated Notes. In 2001 and 2002, the Company and a wholly
owned subsidiary of the Company's purchased an aggregate of $90.9 million of
Subordinated Notes for $21.8 million consisting of $18.5 million in cash and
common shares of the Company valued at $3.3 million. On April 1, 2003, the
Company repaid the remaining outstanding Subordinated Notes balance of $9.1
million on the maturity date and retired the issue.
Page 34
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 September 30, 2003 are as follows:
2003 $ 1,329
2004 5,017
2005 4,938
2006 4,952
2007 4,799
Thereafter 37,647
---------
$ 58,682
As of September 30, 2003, the Company has an unfunded and accrued projected
benefit obligation of approximately $19.4 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 nine months of 2003, cash used by operating activities amounted to
$4.6 million after the payment of $8.4 million of interest, investment of $1.1
million in film assets and other working capital requirements. Changes in other
non-cash operating assets and liabilities include a decrease in deferred revenue
of $18.8 million, a decrease of $6.1 million in inventories, a decrease in
accounts payable of $0.7 million, a decrease of $0.2 million in net investment
in leases, an increase of $0.1 million in accrued liabilities, a $2.7 million
decrease in accounts receivable and a $0.6 million increase in prepaids.
Cash used in investing activities amounted to $2.0 million in the first nine
months of 2003, which includes purchases of $1.2 million in fixed assets, an
increase in other assets of $0.8 million and an increase in other intangible
assets of $0.4 million. The Company has also recorded $0.4 million in income
related to cash received under a restructuring agreement with Mainframe
Entertainment, Inc.
During the first nine months of 2003, cash used in financing activities included
a $9.1 million repayment of the Company's remaining outstanding Subordinated
Notes. The Company also had a receipt of $0.6 million on a note receivable from
discontinued operation.
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 35
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 will be used to
purchase Canadian dollars at the spot market to satisfy its Canadian dollar
operating expenses. 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, Canadian
dollars 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 36
IMAX CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) In March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and
seeking rescission in respect of the system lease agreements between
the Company and Muvico. The complaint was subsequently amended to add
claims for fraud based upon the same factual allegations underlying its
prior claims. The Company filed counterclaims against Muvico for breach
of contract, unjust enrichment unfair competition and/or deceptive
trade practices and theft of trade secrets, and brought claims against
MegaSystems, Inc. ("MegaSystems"), a large-format theater system
manufacturer, for tortious interference and unfair competition and/or
deceptive trade practices and to enjoin Muvico and MegaSystems from
using the Company's confidential and proprietary information. The case
is being heard in the U.S. District Court, Southern District of
Florida, Miami Division. The Company's motion for a summary judgement
on its contract claims against Muvico was heard in September 2003; a
decision has not yet been rendered. The Company believes that the
allegations made by Muvico in its complaint are entirely without merit
and will accordingly defend the claims vigorously. The Company further
believes that the amount of loss, if any, suffered in connection with
this lawsuit would not have a material impact on the financial position
or results of operation of the Company, although no assurance can be
given with respect to the ultimate outcome of any such litigation.
(b) In May 2003, the Company filed a Statement of Claim in the Ontario
Superior Court of Justice against United Cinemas International
Multiplex B.V. ("UCI") for specific performance, or alternatively,
damages of $25.0 million with respect to the breach of a 1999 agreement
between the Company and UCI whereby UCI committed to purchase IMAX
theatre systems from the Company. In August 2003, UCI filed a Statement
of Defence denying it is in breach. No assurance can be given with
respect to the ultimate outcome of such litigation.
(c) In November 2001, the Company filed a complaint with the High Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin
("Big Screen"), demanding payment of rental payments and certain other
amounts owed to the Company. Big Screen has raised a defense based on
alleged infringement of German antitrust rules, relating mainly to an
allegation of excessive pricing. Big Screen had brought a number of
motions for restraining orders in this matter relating to the Company's
provision of films and maintenance, all of which have been rejected by
the courts, including the Berlin Court of Appeals, and for which all
appeals have been exhausted. The Company believes that all of the
allegations in Big Screen's individual defense are 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.
(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) The Company has received requests for information from the United
States Securities and Exchange Commission (the "Commission") in
connection with an 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 a 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.
Page 37
IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 2. CHANGES IN SECURITIES
(a) During the quarter ended September 30, 2003, the Company issued 736,431
common shares to certain holders of the Company's Senior Notes due
December 1, 2005 (the "Senior Notes"), at an average price of $9.06 per
share, in exchange for $6.5 million aggregate principal amount of
Senior Notes and accrued interest of $0.1 million. These transactions
were exempt from registration under the U.S. Securities Act of 1933
(the "'33 Act") pursuant to Section 3(a)(9) thereunder on the basis
that the common shares were exchanged by the Company exclusively with
its existing security holders and no commission or other remuneration
was paid or given to solicit the exchange. The Company subsequently
retired the purchased Senior Notes.
Subsequently, through October 31, 2003, the Company issued an
additional 1,864,077 common shares to certain holders of the Company's
Senior Notes, at an average price of $8.91 per share, in exchange for
$15.7 million aggregate principal amount of Senior Notes and accrued
interest of $0.5 million. These transactions were similarly exempt from
registration pursuant to Section 3(a)(9) of the '33 Act. The Company
subsequently retired the purchased Senior Notes.
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
The Company filed a report on Form 8-K on July 31, 2003, pursuant to
Item 12 - Results of Operations and Financial Conditions. The Company
reported that it had issued a press release announcing the Company's
financial and operating results for the quarter ended June 30, 2003.
Page 38
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 39