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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0140269
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
2525 SPEAKMAN DRIVE, MISSISSAUGA, ONTARIO, CANADA L5K 1B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code: (905) 403-6500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12B-2 of the Exchange Act
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerate Filer [ ]
Indicate by check mark whether the registrant is a shell Company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common shares of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on June 30, 2005 was $335.13 million
(35,727,325 common shares times $9.94).
As of February 21, 2006, there were 40,214,242 common shares of the
registrant outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed within 120
days of the close of IMAX Corporation's fiscal year ended December 31, 2005,
with the Securities and Exchange Commission pursuant to Regulation 14A involving
the election of directors and the annual meeting of the stockholders of the
registrant (the "Proxy Statement") are incorporated by reference in Part III of
this Form 10-K to the extent described therein.
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IMAX CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2005
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business............................................................................................... 4
Item 1A Risk Factors........................................................................................... 14
Item 1B Unresolved Staff Comments.............................................................................. 22
Item 2 Properties............................................................................................. 22
Item 3 Legal Proceedings...................................................................................... 23
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 24
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities................................................................................. 25
Item 6 Selected Financial Data................................................................................ 28
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 31
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................................. 53
Item 8 Financial Statements and Supplementary Data............................................................ 54
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 100
Item 9A Controls and Procedures................................................................................ 100
Item 9B Other Information...................................................................................... 100
PART III
Item 10 Directors and Executive Officers of the Registrant..................................................... 101
Item 11 Executive Compensation................................................................................. 101
Item 12 Security Ownership of Certain Beneficial Owners and Management......................................... 101
Item 13 Certain Relationships and Related Transactions......................................................... 101
Item 14 Principal Accounting Fees and Services................................................................. 101
PART IV
Item 15 Exhibits and Financial Statement Schedules............................................................. 102
Signatures........................................................................................................... 106
Page 2
IMAX CORPORATION
EXCHANGE RATE DATA
Unless otherwise indicated, all dollar amounts in this document are
expressed in United States ("U.S.") dollars. The following table sets forth, for
the periods indicated, certain exchange rates based on the noon buying rate in
the City of New York for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"). Such rates quoted are the number of U.S. dollars per one Canadian dollar
and are the inverse of rates quoted by the Federal Reserve Bank of New York for
Canadian dollars per U.S. $1.00. The average exchange rate is based on the
average of the exchange rates on the last day of each month during such periods.
The Noon Buying Rate on December 31, 2005 was U.S. $0.8579.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Exchange rate at end of period............... U.S. $0.8579 U.S. $0.8310 U.S. $0.7738 U.S. $0.6329 U.S. $0.6267
Average exchange rate during period.......... 0.8254 0.7682 0.7139 0.6368 0.6457
High exchange rate during period............. 0.8690 0.8493 0.7738 0.6619 0.6697
Low exchange rate during period.............. 0.7872 0.7158 0.6349 0.6200 0.6241
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this annual report may constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, references to future capital expenditures
(including the amount and nature thereof), business and technology strategies
and measures to implement strategies, competitive strengths, goals, expansion
and growth of business and operations, plans and references to the future
success of IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") and expectations regarding the Company's future operating results.
These forward-looking statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the expectations and
predictions of the Company is subject to a number of risks and uncertainties,
including, but not limited to, general economic, market or business conditions;
the opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other companies; conditions in the in-home and
out-of-home entertainment industries; changes in laws or regulations; conditions
and developments in the commercial exhibition industry; the acceptance of the
Company's new technologies; risks associated with investments and operations in
foreign jurisdictions and any future international expansion, including those
related to economic, political and regulatory policies of local governments and
laws and policies of the United States and Canada; the potential impact of
increased competition in the markets the Company operates within; and other
factors, many of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this quarterly report are qualified by
these cautionary statements, and actual results or anticipated developments by
the Company may not be realized, and even if substantially realized, may not
have the expected consequences to, or effects on, the Company. The Company
undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future
events or otherwise.
IMAX(R), IMAX(R) Dome, IMAX(R) 3D, IMAX(R) 3D Dome, The IMAX Experience(R),
An IMAX Experience(R), IMAX DMR(R), IMAX MPX(R), IMAX think big(R)
and think big(R) are trademarks and trade names of the Company or
its subsidiaries that are registered or otherwise protected under
laws of various jurisdictions.
Page 3
IMAX CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") is one of the world's leading entertainment technology companies,
specializing in large-format and three-dimensional ("3D") film presentations.
The Company's principal business is the design, manufacture, sale and lease of
projection systems based on proprietary and patented technology for
large-format, 15-perforation film frame, 70mm format ("15/70-format") theaters
including commercial theaters, museums and science centers, and destination
entertainment sites. In addition, the Company designs and manufactures high-end
sound systems and produces and distributes films for IMAX theaters. The majority
of IMAX theaters are operated by third parties under lease agreements with the
Company.
The Company is also engaged in the production, post-production, digital
re-mastering and distribution of 15/70-format films, the operation of IMAX
theaters and other operations in support of IMAX theaters and the IMAX theater
network.
The Company believes the IMAX theater network is the most extensive
large-format theater network in the world with 266 theaters operating in 38
countries as of December 31, 2005. Of these 266 theaters, 151 are located in
commercial locations, such as multiplex complexes, and 115 of them are currently
located in institutional locations, such as museums and science centers. While
the Company's roots are in the institutional market, the Company believes that
the commercial market is potentially significantly larger. To increase the
demand for IMAX theater systems, the Company has positioned the IMAX theater
network as a new distribution platform for Hollywood blockbuster films. To this
end, the Company has developed a technology that allows standard 35mm movies to
be converted to its 15/70-format, has introduced a lower cost projection system
designed for multiplex owners, and is continuing to build strong relationships
with Hollywood studios and commercial exhibition companies.
The Company generally does not own IMAX theaters, but leases or sells its
projection and sound systems, and licenses the use of its trademarks. IMAX
theater systems combine advanced, high-resolution projection systems, sound
systems and screens as large as eight stories high (approximately 80 feet) that
extend to the edge of a viewer's peripheral vision to create immersive
audio-visual experiences. As a result, audiences feel as if they are a part of
the on-screen action in a way that is more intense and exciting than in
traditional theaters. In addition, the Company's IMAX 3D theater systems combine
the same projection and sound systems and screens with 3D images that further
increase the audience's feeling of immersion in the film. The Company believes
that the network of IMAX 3D theaters represents the largest out-of-home 3D
distribution network in the world.
In 2002, the Company introduced a technology that can convert live-action
35mm films to its 15/70-format at a modest incremental cost, while meeting the
Company's high standards of image and sound quality. The Company believes that
this proprietary system, known as IMAX DMR (Digital Re-Mastering), has
positioned IMAX theaters as a new release window or distribution platform, for
Hollywood biggest event films. As of December 31, 2005, the Company, along with
its studio partners, had released 11 IMAX DMR films. In 2005, the Company
released four films converted through the IMAX DMR process contemporaneous with
the releases of the films to conventional 35mm theaters, re-released one IMAX
DMR film that had previously been released in 2004, and released one film made
specifically for IMAX theaters.
In March 2003, the Company introduced IMAX MPX, a new theater projection
system designed specifically for use by commercial multiplex operators. The IMAX
MPX system, which is highly automated, was designed to reduce the capital and
operating costs required to run an IMAX theater while still offering consumers
the image and sound quality of the trademarked experience viewers derive from
IMAX theaters known as "The IMAX Experience". During 2005, the Company signed
agreements for 31 MPX theater systems from North American and international
commercial theater exhibitors.
The Company was formed in March 1994 as a result of an amalgamation
between WGIM Acquisition Corp. and the former IMAX Corporation ("Predecessor
IMAX"). Predecessor IMAX was incorporated in 1967.
Page 4
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES
The Company is the pioneer and leader in the large-format film industry,
and believes it is the largest designer and manufacturer of specialty projection
and sound systems, and a significant producer and distributor of 15/70-format
films, for large-format theaters around the world. The Company's theater systems
include specialized projection equipment, advanced sound systems, specialty
screens, theater automation control systems and film handling equipment. The
Company derives its revenues from the sale and lease of its theater systems to
large-format theaters, the licensing of related film products to the IMAX
theater network, post-production services for large-format films and through its
owned and operated theater operations. Segmented information is provided in note
22 to the audited financial statements contained in Item 8.
IMAX SYSTEMS
IMAX THEATERS
The Company's primary products are its large-format theater systems. IMAX
theater systems traditionally include a unique rolling loop 15/70-format
projector that offers superior image quality and stability; a 6-channel, digital
sound system delivering up to 12,000 watts; a screen with a proprietary coating
technology; a digital theater control system and extensive theater planning,
design and installation services. Theater systems are also leased or sold with a
license for the use of the IMAX brand. The Company primarily offers four types
of these theater systems: the GT projection system for the largest IMAX
theaters; the SR system for smaller theaters; the Company's newest introduction,
the IMAX MPX system, which is targeted for multiplex complexes; and a fourth
category of theater systems featuring heavily curved and tilted screens that are
used in dome shaped theaters. The GT, SR and IMAX MPX systems come with "flat"
screens that have a minimum of curvature and tilt and can exhibit both
two-dimensional ("2D") and 3D films, while dome shaped theaters are generally 2D
only and are popular with the Company's institutional clients.
Screens in IMAX theaters are as large as one hundred or more feet wide and
eight stories tall and the Company believes they are the largest cinema screens
in the world. Unlike standard cinema screens, IMAX screens extend to the edge of
a viewer's peripheral vision to create immersive experiences which, when
combined with the Company's superior sound system, make audiences feel as if
they are a part of the on-screen action in a way that is more intense and
exciting than in traditional theaters, a critical part of The IMAX Experience.
The Company's IMAX 3D theaters further increase the audience's feeling of
immersion in the film by bringing images off the screen. All IMAX theaters have
a steeply inclined floor to provide each audience member with a clear view of
the screen. The geometrical design of an IMAX theater is proprietary and is
patented.
The Company's projection systems utilize the largest commercially
available film format (15-perforation film frame, 70mm), which is nearly 10
times larger than conventional film (4-perforation film frame, 35mm) and
therefore able to project significantly more detail on a larger screen. The
Company believes its projectors, which utilize the Company's rolling loop
technology, are unsurpassed in their ability to project film with maximum
steadiness and clarity with minimal film wear while substantially enhancing the
quality of the projected image. As a result, the Company's projection systems
deliver a higher level of clarity, detail and brightness compared to
conventional movies and competing film or digital based projection systems.
To complement the film technology and viewing experience, IMAX theater
systems feature unique digital sound systems. The sound systems are among the
most advanced in the industry and help to heighten the sense of realism of a
15/70-format film. IMAX sound systems are specifically designed for IMAX
theaters and are an important competitive advantage of IMAX systems.
Page 5
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
THEATER SYSTEM LEASES AND SALES. The Company's system leases generally
have 10 to 20-year initial terms and are typically renewable by the customer for
one or more additional 10-year term. As part of the lease agreement, the Company
advises the customer on theater design and custom assemblies, supervises the
installation of the theater system, provides training in using the equipment to
theater personnel and, for a separate fee, provides ongoing maintenance to the
system. Prospective theater owners are responsible for providing the theater
location, the design and construction of the theater building, the installation
of the system and any other necessary improvements as well as the marketing and
programming at the theater. Under the terms of the typical lease agreement, the
title to all theater system equipment (including the projection screen, the
projector and the sound system) remains with the Company. The Company has the
right to remove the equipment for non-payment or other defaults by the customer.
The contracts are generally not cancelable by the customer unless the Company
fails to perform its obligations. In certain circumstances, the Company enters
into sale agreements with its customers. In these instances, the title to the
theater system equipment remains with the customer, however, the Company retains
the first right to purchase the system back at the end of the trademark license
term. Recently the Company has entered into joint profit-sharing arrangements,
where the Company receives a large portion of a theater's box office revenue in
exchange for contributing the projection system to the venue. The Company's
contracts are generally denominated in U.S. dollars, except in Canada, Japan and
parts of Europe, where contracts are denominated in local currency.
The typical theater system lease agreement provides for three major
sources of revenue and cash flows for the Company: initial rental fees; ongoing
minimum and additional rental payments; and ongoing maintenance fees. Ongoing
minimum and additional rental payments and maintenance fees are generally
received over the life of the contract and are usually adjusted annually based
on changes in the local consumer price index. The terms of each lease agreement
vary according to the system technology provided and the geographic location of
the customer.
SALES BACKLOG. Signed contracts for theater system installations are
listed as sales backlog prior to the time of revenue recognition. The value of
sales backlog represents the total value of all signed system sales and
sales-type lease agreements that are expected to be recognized as revenue in the
future. Sales backlog includes initial rental fees along with the present value
of contractual minimum rents due over the lease term, but excludes maintenance
revenues as well as rents in excess of contractual minimums that might be
received in the future. Sales backlog does not include revenues from theaters in
which the Company has an equity-interest, agreements covered by letters of
intent or conditional theater commitments.
Page 6
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
The following chart shows the number of the Company's theater systems by
product, opened theater network base and backlog as of December 31:
2005
------------------------------------------------------------------------------------
2D 3D
------------------------------- ----------------------------------
THEATER THEATER
NETWORK NETWORK
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
--------- ------- ------- ------------ ------- -------
Flat Screen IMAX 45 -- IMAX 3D 77 12
IMAX 3D SR 48 11
IMAX MPX 21 38
Dome Screen IMAX Dome 68 1 IMAX 3D Dome 7 --
2004
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2D 3D
------------------------------- ----------------------------------
THEATER THEATER
NETWORK NETWORK
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
--------- ------- ------- ------------ ------- -------
Flat Screen IMAX 50 -- IMAX 3D 75 17
IMAX 3D SR 44 12
IMAX MPX 7 27
Dome Screen IMAX Dome 65 4 IMAX 3D Dome 7 --
As of December 31, 2005, the Company had ten theater systems which have
been installed in 2005 but scheduled to open in the first quarter and second
quarter of 2006. These systems have not been included in either the opened
theater network base, or the backlog figures above. As of December 31, 2004, the
Company had three such theater systems installed but not included in the 2004
table above.
IMAX AND IMAX DOME SYSTEMS. IMAX and IMAX Dome systems make up
approximately half of the Company's installed theater base. IMAX theaters, with
a flat screen, were introduced in 1970, while IMAX Dome theaters, which are
designed for tilted dome screens, were introduced in 1973. There have been
several significant proprietary and patented enhancements to these systems since
their introduction.
IMAX 3D AND IMAX 3D SR SYSTEMS. IMAX 3D theaters utilize a flat screen 3D
system, which produces realistic three-dimensional images on an IMAX screen. The
Company believes that the IMAX 3D system offers consumers one of the most
realistic 3D experiences available today. To create the 3D effect, the audience
uses either polarized or electronic glasses that separate the left-eye and
right-eye images. The IMAX 3D projectors can project both 2D and 3D films,
allowing theater owners the flexibility to exhibit either type of film. The
Company offers upgrades to existing theaters, which have 2D IMAX projection
systems to IMAX 3D projection systems. Since the introduction of IMAX 3D
technology, the Company has upgraded 15 theater systems.
In 1997, the Company launched a smaller IMAX 3D system called IMAX 3D SR,
a patented theater system that combines a proprietary theater design, a more
automated projection system and specialized sound system to replicate the
experience of a larger IMAX 3D theater in a smaller space.
Page 7
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
IMAX MPX. In 2003, the Company launched its new large-format theater
system designed specifically for use in multiplex theaters. Known as IMAX MPX,
this system projects 15/70-format film onto screens, which are curved and tilted
forward to further immerse the audience. An MPX theater utilizes the Company's
next generation proprietary digital sound system, capable of multi-channel
uncompressed studio quality digital audio. The projector is capable of playing
both 2D and 3D films, and installs into a standard 35mm projection booth. The
MPX system can be installed as part of a newly-constructed multiplex, as an
add-on to an existing multiplex or as a retrofit of one or two existing, stadium
seat auditoriums within a multiplex. With lower capital and operating costs, the
MPX is designed to improve a multiplex-owner's financial returns and allow for
the installation of IMAX theaters in markets that might previously not have been
able to support one. The Company has signed agreements for 62 MPX theater
systems since its introduction, 17 of which were installed in 2005. In addition,
two existing customers switched their product commitments to IMAX MPX systems
from other theater systems in the year.
SOUND SYSTEMS
The Company believes it is a world leader in the design and manufacture of
digital sound systems for applications including traditional movie theaters,
auditoriums and IMAX theaters.
FILMS
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION
Films produced by the Company are typically financed through third
parties, whereby the Company will generally receive a film production fee in
exchange for producing the film and will be a distributor of the film. The
ownership rights to such films may be held by the film sponsors, the film
investors and/or the Company. In the past, the Company often internally financed
film production, but has increasingly moved towards a model utilizing
third-party funding for the large-format films it distributes.
The Company is a significant distributor of 15/70-format films. The
Company generally distributes films which it has produced or for which it has
acquired distribution rights from independent producers. As a distributor, the
Company generally receives a percentage of the theater box office receipts.
The library of 15/70-format films includes Hollywood event films converted
into 15/70 format through IMAX DMR technology, such as the 2004 (and 2005) hit
The Polar Express: The IMAX 3D Experience, along with general entertainment and
educational films on subjects such as space, wildlife, music, history and
natural wonders. The Library consisted of 241 films at the end of 2005, of which
the Company had distribution rights to 52 such films. In recent years,
15/70-format films have been successfully released by the Company, including
NASCAR 3D: The IMAX Experience, which was released by the Company and Warner
Bros. Pictures ("WB") in March 2004 and has grossed more than $22.3 million to
date, SPACE STATION, which was released in April 2002 and has grossed over $90.7
million to date, T-REX: Back to the Cretaceous, which was released by the
Company in 1998 and has grossed over $92.6 million to date and Fantasia 2000:
The IMAX Experience, which was released by the Company and Buena Vista Pictures
Distribution, a unit of The Walt Disney Company, in 2000. Fantasia 2000: The
IMAX Experience, the first theatrical full-length feature film to be reformatted
into 15/70-format, has grossed over $80.4 million to date. 15/70-format films
have significantly longer exhibition periods than conventional 35mm films and
many of the films in the large-format library have remained popular for many
decades including the films To Fly! (1976), Grand Canyon - The Hidden Secrets
(1984) and The Dream Is Alive (1985).
In 2002, the Company introduced its IMAX DMR technology, which allows 35mm
live-action films to be digitally converted to IMAX's 15/70-format at a modest
incremental cost. In a typical DMR film arrangement, the Company will absorb its
costs for the DMR re-mastering and then recoup this cost from a percentage of
the gross box office receipts of the picture, which will generally range from
10-15%. The Company may also have certain distribution rights to the
15/70-format films produced using its IMAX DMR technology.
Page 8
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION (cont'd)
The first IMAX DMR film, Apollo 13: The IMAX Experience, produced in
conjunction with Universal Pictures and Imagine Entertainment, was released in
September 2002. Since the release of that film, the Company has released an
additional ten IMAX DMR films.
In 2005, the Company released four films converted through the IMAX DMR
process contemporaneous with the releases of the films to conventional 35mm
theaters, re-released one IMAX DMR film that had previously been released in
2004 and released one film made specifically for IMAX theaters.
On March 11, 2005, IMAX and 20th Century Fox released the IMAX DMR version
of Robots: The IMAX Experience to IMAX theaters. On June 15, 2005, WB released
Batman Begins: The IMAX Experience, an IMAX DMR version of one of the year's
top-grossing Hollywood films, to the IMAX theater network. This was shortly
followed by the release on July 17, 2005 of WB's Charlie and the Chocolate
Factory: The IMAX Experience. On September 23, 2005 the Company released
Magnificent Desolation: Walking on the Moon 3D, a Playtone/IMAX production,
presented and narrated by Tom Hanks. On November 18, 2005, Harry Potter and the
Goblet of Fire: The IMAX Experience, WB's fourth film release based on the
popular Harry Potter book series, was released on approximately 98 IMAX screens.
This compares to the 87 screens that Harry Potter and the Prisoner of Azkaban:
The IMAX Experience was launched in June 2004, with the increase resulting from
the growth in the IMAX theater network. Also in November 2005, an IMAX 3D DMR
version of WB's computer generated imagery animated holiday film, The Polar
Express: The IMAX 3D Experience, was re-released to IMAX theaters,
contemporaneous with the film's DVD release. The Polar Express was the first
Hollywood feature film ever released in IMAX 3D and is the Company's most
successful DMR release to date. It grossed an additional $14.5 million in its
re-release, and a total of $59.3 million since its initial release in 2004.
The Company believes that these releases have positioned IMAX theaters as
a separate distribution platform for Hollywood films similar to the type created
when Hollywood studios began including the pay TV and home video industries as
release windows for their films.
For 2006, the Company has signed agreements with WB to release five IMAX
DMR films to IMAX theaters contemporaneous with the releases of the films to
conventional 35mm theaters, and is working with a number of studios on
potentially adding a sixth film to the 2006 IMAX DMR slate. In March 2006, the
Company will release V For Vendetta: The IMAX Experience, an action-adventure
from the creators of The Matrix trilogy, produced by Joel Silver and the
Wachowski Brothers, directed by James McTeigue and starring Natalie Portman.
Also in March 2006, the Company will release Deep Sea 3D in conjunction
with WB. This original documentary is directed by underwater cinematographer
Howard Hall, narrated by Johnny Depp and Kate Winslet, with an original score by
Danny Elfman.
In May 2006, the Company will release Poseidon: The IMAX Experience, a
re-envisioning of the 1972 adventure film The Poseidon Adventure, directed by
Wolfgang Petersen (The Perfect Storm, Troy).
In June 2006, the Company will release Superman Returns: The IMAX
Experience, a new chapter in the saga of the superhero, directed by Bryan Singer
(X-Men, The Usual Suspects).
In August 2006, the Company will release The Ant Bully: An IMAX 3D
Experience, an animated computer generated imagery film, which has been
converted into IMAX 3D from the director of the 2001 film Jimmy Neutron: Boy
Genius.
In November 2006, the Company will release a second film converted to IMAX
3D, Happy Feet: An IMAX 3D Experience, an animated musical comedy directed by
George Miller (the Babe films, Lorenzo's Oil and the Mad Max trilogy).
Page 9
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS (cont'd)
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION (cont'd)
David Keighley Productions 70MM Inc., a wholly-owned subsidiary of the
Company, provides film post-production and quality control services for
15/70-format films (whether produced internally or externally), and digital
post-production services.
DIGITAL RE-MASTERING (IMAX DMR)
The Company has developed technology that makes it possible for 35mm
live-action film to be transformed into IMAX's 15/70-format at a cost of roughly
$2 - $3 million per film. This patent-pending system, known as IMAX DMR, has
opened the IMAX theater network up to film releases from Hollywood's broad
library of films.
The IMAX DMR process involves the following:
- scanning, at the highest resolution possible, each individual frame
of the 35mm film and converting it into a digital image;
- optimizing the image using proprietary image enhancement tools;
- analyzing the information contained within a 35mm frame format and
enhancing the digital image using techniques such as sharpening,
color correction, grain removal and the elimination of unsteadiness
and removal of unwanted artifacts; and
- recording the enhanced digital image onto 15/70-format film.
The highly automated system typically allows the re-mastering process to
meet aggressive film production schedules. The Company is continuing to improve
the length of time it takes to reformat a film with its IMAX DMR technology.
Apollo 13: The IMAX Experience, released in 2002, was re-mastered in 16 weeks,
while Spider-Man 2: The IMAX Experience, released in 2004, was re-mastered in
approximately two weeks. The IMAX DMR conversion of simultaneous, or
"day-and-date", releases are done in parallel with the movie's filming and
editing, which is necessary for the simultaneous, or day-and-date, release of an
IMAX DMR film with the domestic release to conventional theaters.
For IMAX DMR releases, the original soundtrack of the 35mm film is
re-mastered for IMAX's five or six-channel digital sound system. Unlike
conventional theater sound systems, IMAX sound systems are uncompressed, full
fidelity and use proprietary loudspeaker systems and surround sound that ensure
every theater seat is in a good listening position. While the Company has to
date only converted live-action 35mm films into IMAX's 15/70-format film in 2D,
the Company has developed a technology to convert live action 2D 35mm movies to
IMAX 3D films, a patented technology which the Company believes can offer
significant potential benefits to the Company and the IMAX theater network. The
Company has successfully demonstrated its ability to convert computer generated
animation to IMAX 3D, with the 1999 release of Cyberworld, the 2002 release of
Steve Oedekerk's Santa vs. the Snowman and the 2004 release of the full length
CGI feature, The Polar Express: The IMAX 3D Experience.
THEATER OPERATIONS
The Company has seven owned and operated theaters. In addition, the
Company has entered into commercial arrangements with two theaters resulting in
the sharing of profits and losses. The Company also provides management services
to two theaters.
Page 10
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
OTHER
CAMERAS
The Company rents 2D and 3D 15/70-format cameras and provides technical
and post-production services to third-party producers for a fee. The Company
maintains cameras and other film equipment to support third-party producers and
also offers production advice and technical assistance to filmmakers.
The Company has developed state-of-the-art patented dual and single
filmstrip 3D cameras which are among the most advanced motion pictures cameras
in the world and are the only 3D cameras of their kind. The IMAX 3D camera
simultaneously shoots left-eye and right-eye images and its compact size allows
filmmakers access to a variety of locations, such as underwater or aboard
aircraft. The Company has dual filmstrip cameras available for rent.
MARKETING AND CUSTOMERS
The Company markets its theater systems through a direct sales force and
marketing staff located in offices in Canada, the United States, Europe,
Singapore, Japan and China. In addition, the Company has agreements with
consultants, business brokers and real estate professionals to locate potential
customers and theater sites for the Company on a commission basis.
The commercial theater segment of the Company's theater network is now its
largest segment with a total of 151 theaters opened. At December 31, 2005, 36%
of all opened IMAX theaters were in locations outside of North America. The
Company's institutional customers include science and natural history museums,
zoos, aquaria and other educational and cultural centers. The Company also
leases its systems to theme parks, tourist destination sites, fairs and
expositions. The following table outlines the breakdown of the theater network
by geographic segment as at December 31:
2005 2004
------- -------
THEATER THEATER
NETWORK NETWORK
BASE BASE
------- -------
Canada............. 22 24
United States...... 134 125
Europe............. 47 46
Japan.............. 14 14
Rest of World...... 49 39
------- -------
Total.............. 266 248
======= =======
For information on revenue breakdown by geographic area, see note 22 to
the audited financial statements in Item 8. No one customer represents more than
5% of the Company's installed base of theaters. The Company has no dependence
upon a single customer, the loss of which would have a material adverse effect
on the Company.
Page 11
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
INDUSTRY AND COMPETITION
The Company competes with a number of manufacturers of large-format film
projection systems. Most of these competitors utilize smaller film formats,
including 8-perforation film frame, 70mm and 10-perforation film frame, 70mm
formats, which the Company believes deliver an image that is inferior to The
IMAX Experience. The IMAX theater network and the number of 15/70-format films
to which the Company has distribution rights are substantially larger than those
of its 15/70-format competitors, and IMAX DMR reformatted films are available
exclusively to the IMAX theater network. The Company's customers generally
consider a number of criteria when selecting a large-format theater including
quality, reputation, brand-name recognition, type of system, features, price and
service. The Company believes that its competitive strengths include the value
of the IMAX(R) brand name, the quality and historic up-time of IMAX theater
systems, the return on investment of an IMAX theater system, the number and
quality of 15/70-format films that it distributes, the quality of the sound
system included with the IMAX theater, the availability of Hollywood event films
to IMAX theaters through IMAX DMR technology and the level of the Company's
service and maintenance efforts. Virtually all of the best performing
large-format theaters in the world are IMAX theaters.
In 2003, the Company introduced IMAX MPX, a new theater projection system
designed specifically for use in multiplex auditoriums. The IMAX MPX system is
designed to reduce the capital and operating costs required to run an IMAX
theater while still offering consumers the image and sound quality of The IMAX
Experience.
THE IMAX BRAND
The IMAX brand is world famous and stands for immersive family
entertainment that combines stunning images of exceptional quality and clarity
on screens up to one-hundred feet wide and eight stories tall with the Company's
proprietary 6-channel digital sound systems and unique theater designs. The
Company's research shows that the IMAX brand is a significant factor in a
consumer's decision to go to an IMAX theater, and that movie-goers are willing
to travel significantly farther and pay more to see films in IMAX's immersive
format. In addition, the Company believes that its significant brand loyalty
among consumers provides it with a strong, sustainable position in the
exhibition industry. The IMAX brand name cuts across geographic and demographic
boundaries.
Historically, the Company's brand identity was grounded in its educational
film presentations to families around the world. With an increasing number of
IMAX theaters based in multiplexes and with a recent history of commercially
successful large-format films such as Fantasia 2000: The IMAX Experience, The
Matrix Reloaded: The IMAX Experience, The Polar Express: The IMAX 3D Experience,
Harry Potter and The Goblet of Fire: The IMAX Experience, and Batman Begins: The
IMAX Experience, the Company is rapidly increasing its presence in commercial
settings. The Company believes the strength of the IMAX brand will be an asset
as it continues to establish IMAX theaters as a new and desirable release window
for Hollywood films.
RESEARCH AND DEVELOPMENT
The Company believes that it is one of the world's leading entertainment
technology companies with significant in-house proprietary expertise in
projection system, camera and sound system design, engineering and imaging
technology, particularly in 3D. The Company believes that the motion picture
industry will be affected by the development of digital technologies,
particularly in the areas of content creation (image capture), post-production
(editing and special effects), digital re-mastering (such as IMAX DMR),
distribution and display. The Company has made significant investments in
digital technologies, including the development of a proprietary, patent-pending
technology to digitally enhance image resolution and quality of 35mm motion
picture films, the conversion of monoscopic (2D) to stereoscopic (3D) images and
the creation of an IMAX digital projector, and holds a number of patents,
patents pending and other intellectual property rights in these areas. In
addition, the Company holds numerous digital patents and long-term relationships
with key manufacturers and suppliers in digital technology.
Page 12
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
RESEARCH AND DEVELOPMENT (cont'd)
A key to the performance and reliability of the IMAX projection system is
the Company's unique "rolling loop" film movement. The rolling loop advances the
film horizontally in a smooth, wave-like motion, which enhances the stability of
the image and greatly reduces wear of the film.
The IMAX DMR technology converts a 35mm frame into its digital form at a
very high resolution. The proprietary system recreates a pristine form of the
original photography. The Company believes the proprietary computer process
makes the images sharper than the original and the completed re-mastered film,
now nearly 10 times larger than the original, is transferred onto the world's
largest film format, 15/70-format. Each film's original soundtrack is also
recreated and upgraded to Company standards.
In March 2003, the Company launched its new large-format theater system
designed specifically for use in multiplex theaters. Known as IMAX MPX, this new
lower cost system allows commercial exhibitors to add an IMAX theater to a new
multiplex, an existing multiplex or to retrofit one or two existing multiplex
auditoriums into an IMAX theater. The IMAX MPX system is lighter and simpler to
operate, with proprietary theater geometries designed to reduce construction,
installation, facility and operating costs. An IMAX MPX system projects
15/70-format film onto screens that are curved and tilted forward to further
immerse the audience. An IMAX MPX theater utilizes the Company's next generation
proprietary digital sound system, capable of multi-channel uncompressed studio
quality digital audio. The IMAX MPX projector is capable of playing both 2D and
3D films, and installs into a standard 35mm projection booth.
Several of the underlying technologies and resulting products and systems
of the Company are covered by patents or patent applications. Other underlying
technologies are available to competitors, in part because of the expiration of
certain patents owned by the Company. The Company, however, has successfully
obtained patent protection covering several of its significant improvements made
to such technologies. The Company plans to continue to fund research and
development activity in areas considered important to the Company's continued
commercial success.
For 2005, 2004 and 2003, the Company recorded research and development
expenses of $3.3 million, $4.0 million and $3.8 million, respectively.
As of December 31, 2005, 40 of the Company's employees were connected with
research and development projects.
MANUFACTURING AND SERVICE
PROJECTION SYSTEMS MANUFACTURING
The Company assembles its large-format projection systems at its Corporate
Headquarters and Technology Center in Mississauga, Canada (near Toronto). A
majority of the components for the Company's systems are purchased from outside
vendors. The Company develops and designs all the key elements for the
proprietary technology involved in its projector and camera systems. Fabrication
of these components is then subcontracted to a group of carefully pre-qualified
suppliers. Manufacture and supply contracts are signed for the delivery of
components on an order-by-order basis. The Company has developed long-term
relationships with a number of significant suppliers, and the Company believes
its existing suppliers will continue to supply quality products in quantities
sufficient to satisfy its needs. The Company inspects all components and
sub-assemblies, completes the final assembly and then subjects the systems to
comprehensive testing prior to shipment. In 2005, IMAX theater systems had
operating uptimes based on scheduled shows of approximately 99.8%.
SOUND SYSTEMS MANUFACTURING
The Company develops, designs and assembles the key elements of its
theater sound systems. The standard IMAX theater sound system comprises
components from a variety of sources with approximately 50% of the materials
cost of each system attributable to proprietary components provided under
original equipment manufacturers agreements with outside vendors. These
proprietary components include custom loudspeaker enclosures and horns and
specialized amplifiers, signal processing and control equipment.
Page 13
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
MANUFACTURING AND SERVICE (cont'd)
SERVICE AND MAINTENANCE
The Company provides key services and support functions for the IMAX
theater network and for filmmakers. To support the IMAX theater network, the
Company has personnel stationed in major markets who provide periodic and
emergency service and maintenance on existing systems throughout the world. The
Company's personnel typically visit each theater every three months to service
the projection and sound systems. The Company also provides theater design
expertise for both the visual and audio aspects of the theater, as well as
system installation and equipment training.
PATENTS AND TRADEMARKS
The Company's inventions cover various aspects of its proprietary
technology and many of such inventions are protected by Letters of Patent or
applications filed throughout the world, most significantly in the United
States, Canada, Belgium, Japan, France, Germany and the United Kingdom. The
subject matter covered by these patents, applications and other licenses
encompasses theater design and geometry, electronic circuitry and mechanisms
employed in film projectors and projection systems (including 3D projection
systems), a method for synchronizing digital data systems, a method of
generating stereoscopic (3D) imaging data from a 2D source, a process for
digitally re-mastering 35mm films into 15/70-format and other inventions
relating to digital technologies. The Company has been diligent in the
protection of its proprietary interests.
The Company currently holds or licenses 45 patents, has 15 patents pending
in the United States and has corresponding patents or filed applications in many
countries throughout the world. While the Company considers its patents to be
important to the overall conduct of its business, it does not consider any
particular patent essential to its operations. Certain of the Company's patents
in the United States, Canada and Japan for improvements to the IMAX projector,
IMAX 3D Dome and sound systems expire between 2008 and 2020.
The Company owns or otherwise has rights to trademarks and trade names
used in conjunction with the sale of its products, systems and services. The
following trademarks are considered significant in terms of the current and
contemplated operations of the Company: IMAX(R), The IMAX Experience(R), An IMAX
Experience(R), IMAX DMR(R), IMAX(R) 3D, IMAX(R) Dome, IMAX MPX(R), IMAX think
big(R) and think big(R). These trademarks are widely protected by registration
or common law throughout the world. The Company also owns the service mark IMAX
THEATRE(TM).
EMPLOYEES
As of December 31, 2005, the Company had 376 employees not including
hourly employees at Company owned and operated theaters.
AVAILABLE INFORMATION
The Company makes available free of charge its annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as soon as
reasonably practicable after such filing has been made with the United States
Securities and Exchange Commission (the "SEC"). Reports may be obtained through
the Company's website at www.imax.com or by calling the Company's investor
relations at 212-821-0100.
ITEM 1A. RISK FACTORS
If any of the risks described below occurs, the Company's business,
operating results and financial condition could be materially adversely
affected.
The risks described below are not the only ones the Company faces.
Additional risks not presently known to the Company or that it deems immaterial,
may also impair its business or operations.
Page 14
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S FINANCIAL PERFORMANCE OR CONDITION
THE COMPANY IS HIGHLY LEVERAGED, AND THIS IMPAIRS ITS ABILITY TO OBTAIN
FINANCING AND LIMITS CASH FLOW AVAILABLE FOR ITS OPERATIONS.
The Company is highly leveraged. As at December 31, 2005, its total
long-term indebtedness was $160.0 million. At December 31, 2005, the Company's
shareholders' deficiency was $23.0 million. The Company's high leverage has
important possible consequences. It may:
- make it more difficult for the Company to satisfy its financial
obligations;
- limit its ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes;
- require the Company to dedicate all or a substantial portion of its
cash flow from operations to the payment of principal and interest
on its indebtedness, resulting in less cash available for its
operations and other purposes;
- limit its ability to rapidly adjust to changing market conditions;
and
- increase its vulnerability to downturns in its business or in
general economic conditions.
The Company's ability to satisfy its obligations and to reduce its total
debt depends on its future operating performance. The Company's future operating
performance is subject to many factors, including economic, financial and
competitive factors, which may be beyond its control. As a result, it may not be
able to generate sufficient cash flow, and future financings may not be
available to provide sufficient net proceeds, to meet these obligations or to
execute its business strategy successfully.
THE COMPANY MAY STILL BE ABLE TO INCUR MORE INDEBTEDNESS, WHICH COULD FURTHER
EXACERBATE THE RISKS ASSOCIATED WITH ITS EXISTING INDEBTEDNESS.
The Company may be able to incur substantial additional indebtedness in
the future. Although the agreements governing the indebtedness contain
restrictions on the incurrence of additional indebtedness, debt incurred in
compliance with these restrictions could be substantial. If additional
indebtedness is added to its current indebtedness levels, the related risks that
the Company faces would be magnified.
THE COMPANY MAY NOT GENERATE CASH FLOW SUFFICIENT TO SERVICE ALL OF ITS
OBLIGATIONS.
The Company's ability to make payments on and to refinance its
indebtedness and to fund its operations, working capital and capital
expenditures, depends on its ability to generate cash in the future. The
Company's cash flow is subject to general economic, industry, financial,
competitive, operating, regulatory and other factors, many of which are beyond
its control. The Company's business may not generate cash flow in an amount
sufficient to enable it to repay its indebtedness or to fund its other liquidity
needs.
THE AGREEMENTS GOVERNING THE COMPANY'S INDEBTEDNESS CONTAIN SIGNIFICANT
RESTRICTIONS THAT LIMIT ITS OPERATING AND FINANCIAL FLEXIBILITY.
The indenture governing the Company's indebtedness including the agreement
governing its credit facility contains covenants that, among other things, limit
its ability to:
- incur additional indebtedness;
- pay dividends and make distributions;
- repurchase stock;
- make certain investments;
- transfer or sell assets;
- create liens;
- enter into transactions with affiliates;
- issue or sell stock of subsidiaries;
- create dividend or other payment restrictions affecting restricted
subsidiaries; and
- merge, consolidate, amalgamate or sell all or substantially all of
its assets to another person.
Page 15
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S FINANCIAL PERFORMANCE OR CONDITION (cont'd)
THE AGREEMENTS GOVERNING THE COMPANY'S INDEBTEDNESS CONTAIN SIGNIFICANT
RESTRICTIONS THAT LIMIT ITS OPERATING AND FINANCIAL FLEXIBILITY. (cont'd)
These restrictions may limit the Company's ability to execute its business
strategy. Moreover, if operating results fall below current levels, the Company
may be unable to comply with these covenants. If that occurs, the Company's
lenders could accelerate its indebtedness.
CERTAIN BANKRUPTCY AND INSOLVENCY LAWS MAY IMPAIR A CREDITOR'S ABILITY TO
ENFORCE REMEDIES IN AN INSOLVENCY.
The Company is incorporated under the laws of Canada, and substantially
all of its assets are located in Canada. Under bankruptcy laws in the United
States, courts typically have jurisdiction over a debtor's property, wherever
located, including property situated in other countries. There can be no
assurance, however, that courts outside the United States would recognize the
U.S. bankruptcy court's jurisdiction. Accordingly, difficulties may arise in
administering a U.S. bankruptcy case involving a Canadian company like the
Company with property located outside the United States, and any orders or
judgments of a bankruptcy court in the United States may not be enforceable in
Canada against the Company.
The rights of a creditor to enforce remedies may be significantly impaired
by the restructuring provisions of applicable Canadian federal bankruptcy,
insolvency and other restructuring legislation if the benefit of such
legislation is sought with respect to the Company. For example, both the
Bankruptcy and Insolvency Act (Canada) and the Companies' Creditors Arrangement
Act (Canada) contain provisions enabling an "insolvent person" to obtain a stay
of proceeding as against its creditors and others and to prepare and file a
proposal for consideration by all or some of its creditors to be voted on by the
various classes of its creditors. Moreover, this legislation permits, in certain
circumstances, an insolvent debtor to retain possession and administration of
its property, even though it may be in default under the applicable debt
instrument.
RISKS RELATED TO THE COMPANY'S BUSINESS
THE COMPANY'S THEATER SYSTEM REVENUE CAN VARY SIGNIFICANTLY FROM ITS CASH FLOWS
UNDER THEATER SYSTEM SALES AND LEASE AGREEMENTS.
The Company's theater system revenue can vary significantly from the
associated cash flows. The Company generally provides its theater systems to
customers on a long-term lease basis with initial lease terms of typically 10 to
20 years. The Company's lease agreements typically provide for three major
sources of cash flow:
- initial rental fees, which are paid in installments commencing upon
the signing of the lease agreement until installation of the system;
- ongoing rental payments, which are paid monthly after system
installation and are generally equal to the greater of a fixed
minimum amount per annum and a percentage of box office receipts;
and
- annual maintenance fees, which are generally payable commencing in
the second year of theater operations.
Initial rental payments generally make up a majority of cash received for
a theater system lease.
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases. Revenue
from sales-type leases is recorded at the time installation is complete and
other revenue recognition conditions are satisfied. The revenue recorded is
equal to the sum of initial rental payments and the present value of minimum
additional rental fees due under the lease agreement. Cash received from initial
rental fees in advance of installation is recorded as deferred revenue.
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 ongoing rental payments are recognized as
revenue on a straight-line basis over the lease term.
Periodically, the Company sells its theater systems to customers. These
sales generally provide for initial cash receipts and the receipt of payments
over time, typically 10 to 20 years.
Page 16
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S BUSINESS (cont'd)
THERE IS COLLECTION RISK ASSOCIATED WITH LEASE PAYMENTS TO BE RECEIVED OVER THE
TERMS OF THE COMPANY'S THEATER SYSTEM LEASES.
The Company is dependent in part on the viability of its customers for
collections under long-term leases. The Company cannot assure that exhibitors or
other operators to whom it leases theater systems will not experience financial
difficulties in the future. The Company may not collect all of its contracted
future lease payments. The Company's revenue can vary significantly from its
cash flows under theater system sales and lease agreements, and there is
collection risk associated with rental payments to be received over the terms of
its leases.
THE COMPANY MAY NOT CONVERT ALL OF ITS BACKLOG INTO REVENUE AND CASH FLOWS.
The Company lists signed contracts for theater system sales and sales-type
leases as sales backlog prior to the time of revenue recognition. Sales backlog
represents the total value of all signed system sales and lease agreements that
are expected to be recognized as revenue in the future and includes initial
rental fees along with the present value of contractual minimum rents due over
the lease term, but excludes maintenance revenues as well as rents in excess of
contractual minimums that might be received in the future. All of the Company's
customers with which it has signed contracts may not accept delivery of theater
systems that are included in the Company's backlog. Moreover, if the Company
litigates to enforce a customer's contractual obligations, there are no
guarantees that such obligations will ultimately be deemed to be enforceable.
This could adversely affect the Company's future revenues. In addition,
customers with system obligations in backlog sometimes request that the Company
agree to modify or reduce such obligations. The Company has in the past, under
certain circumstances, restructured backlog obligations of certain customers.
The backlog obligations of other customers may also be modified, reduced or
otherwise restructured in the future, which can adversely affect the Company's
future revenues and cash flows.
THE COMPANY DEPENDS ON COMMERCIAL MOVIE EXHIBITORS TO LEASE ITS IMAX THEATER
SYSTEMS AND TO PROVIDE ADDITIONAL REVENUES AND VENUES IN WHICH TO EXHIBIT ITS
IMAX DMR FILMS.
A number of its commercial exhibition customers emerged from bankruptcy
protection in recent years. The Company is unable to predict if or when they or
other exhibitors will lease or continue to lease IMAX theater systems from the
Company or whether other commercial movie exhibitors will experience significant
financial difficulties in the future. If exhibitors choose to reduce their
levels of expansion or decide not to lease IMAX theater systems for their
existing or new theaters, the Company's revenues would not increase at an
anticipated rate and motion picture studios may be less willing to reformat
Hollywood 35mm films into the Company's 15/70 film format for exhibition in
commercial IMAX theaters. As a result, the Company's future revenues could be
adversely affected.
THE COMPANY'S OPERATING RESULTS AND CASH FLOW CAN VARY SUBSTANTIALLY FROM
QUARTER TO QUARTER AND COULD INCREASE THE VOLATILITY OF ITS SHARE PRICE.
The Company's operating results and cash flow can fluctuate substantially
from quarter to quarter. In particular, fluctuations in theater system
installations can materially affect operating results. Factors that have
affected the Company's operating results and cash flow in the past, and are
likely to affect its operating results and cash flow in the future include,
among other things:
- the timing of signing and installation of new theater systems;
- demand for, and acceptance of, its products and services;
- revenue recognition of sales and sales-type leases;
- classification of leases as sales-type versus operating leases;
- volume of orders received and that can be fulfilled in the quarter;
- the level of its sales backlog;
- the timing and commercial success of films produced and distributed
by the Company and others;
- the signing of film distribution agreements;
- the financial performance of IMAX theaters operated by the Company's
customers and by the Company; and
- the financial difficulties, including bankruptcies, faced by
customers, particularly customers in the commercial exhibition
industry.
Page 17
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S BUSINESS (cont'd)
THE COMPANY'S OPERATING RESULTS AND CASH FLOW CAN VARY SUBSTANTIALLY FROM
QUARTER TO QUARTER AND COULD INCREASE THE VOLATILITY OF ITS SHARE PRICE.
(cont'd)
Most of the Company's operating expenses are fixed in the short term. The
Company may be unable to rapidly adjust its spending to compensate for any
unexpected sales shortfall, which would harm quarterly operating results. The
results of any quarterly period are not necessarily indicative of its results
for any other quarter or for a full fiscal year.
THE COMPANY MAY NOT BE ABLE TO GENERATE PROFITS IN THE FUTURE.
The Company may not be able to generate profits in any future period. If
the Company does not generate profits in future periods, it may be unable to
finance the operations of its business or meet its debt obligations.
THE SUCCESS OF THE IMAX THEATER NETWORK IS DIRECTLY RELATED TO THE AVAILABILITY
AND SUCCESS OF 15/70 FORMAT FILMS, PARTICULARLY IMAX DMR FILMS.
An important factor affecting the growth and success of the IMAX theater
network is the availability of 15/70 format films. The Company produces only a
small number of 15/70 format films and, as a result, the Company relies
principally on 15/70 format films produced by third party filmmakers and
studios, particularly those converted from 35mm format using the Company's IMAX
DMR technology. There are no guarantees that these filmmakers and studios will
continue to release 15/70 or IMAX DMR films, or that the 15/70 format films they
produce will be commercially successful.
THE COMPANY'S REVENUES FROM EXISTING CUSTOMERS ARE DERIVED IN PART FROM
FINANCIAL REPORTING PROVIDED BY ITS CUSTOMERS, WHICH MAY BE INACCURATE OR
INCOMPLETE, RESULTING IN LOST OR DELAYED REVENUES.
A portion of the Company's lease payments and its film license fees are
based upon financial reporting provided by its customers. If such reporting is
inaccurate, incomplete or withheld, the Company's ability to invoice and receive
the proper amount from its customers in a timely fashion will be impaired. The
Company's contractual audits may not rectify payments lost or delayed as a
result of customers not fulfilling their contractual requirements with respect
to financial reporting.
THE COMPANY CONDUCTS BUSINESS INTERNATIONALLY WHICH EXPOSES IT TO UNCERTAINTIES
AND RISKS THAT COULD NEGATIVELY AFFECT ITS OPERATIONS AND SALES.
A significant portion of the Company's sales are made to customers located
outside the United States and Canada. Approximately 44%, 43% and 40% of its
revenues were derived outside of the United States and Canada in 2005, 2004 and
2003, respectively. The Company expects its international operations to continue
to account for a significant portion of its revenues in the future and plan to
expand into new markets in the future. The Company does not have significant
experience in operating in certain foreign countries and are subject to the
risks associated with operating in those countries. The Company currently has
installation and sales activity projected in countries where economies have been
unstable in recent years. The economies of other foreign countries important to
the Company's operations could also suffer slower economic growth or instability
in the future. The following are among the risks that could negatively affect
the Company's operations and sales in foreign markets:
Page 18
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S BUSINESS (cont'd)
THE COMPANY CONDUCTS BUSINESS INTERNATIONALLY WHICH EXPOSES IT TO UNCERTAINTIES
AND RISKS THAT COULD NEGATIVELY AFFECT ITS OPERATIONS AND SALES. (cont'd)
- new restrictions on access to markets;
- unusual or burdensome foreign laws or regulatory requirements or
unexpected changes to those laws or requirements;
- fluctuations in the value of foreign currency versus the U.S. dollar
and potential currency devaluations;
- new tariffs, trade protection measures, import or export licensing
requirements, trade embargoes and other trade barriers;
- imposition of foreign exchange controls in such foreign
jurisdictions;
- dependence on foreign distributors and their sales channels;
- difficulties in staffing and managing foreign operations;
- adverse changes in monetary and/or tax policies;
- poor recognition of intellectual property rights;
- inflation;
- requirements to provide performance bonds and letters of credit to
international customers to secure system deliveries; and
- political, economic and social instability in foreign countries.
THE COMPANY FACES RISKS IN CONNECTION WITH THE CONTINUED EXPANSION OF ITS
BUSINESS IN CHINA AND OTHER PARTS OF ASIA.
The first IMAX projection system in a theater in China was installed in
December 2001 and 13 additional IMAX theater systems are scheduled to be
installed in China by 2008. China is now the Company's second largest and
fastest growing market. However, the geopolitical instability of the region
comprising China, Taiwan, North Korea and South Korea could result in economic
embargoes, disruptions in shipping or even military hostilities, which could
interfere with both the fulfillment of the Company's existing contracts and its
pursuit of additional contracts in China.
THE INTRODUCTION OF NEW PRODUCTS AND TECHNOLOGIES AND CHANGES IN THE WAY THE
COMPANY'S COMPETITORS OPERATE COULD HARM THE COMPANY'S BUSINESS.
The out-of-home entertainment industry is very competitive, and the
Company faces a number of challenges. The Company competes with other
large-format film projection system manufacturers as well as, indirectly,
conventional motion picture exhibitors. In addition to existing competitors, the
Company may also face competition in the future from companies in the
entertainment industry with new technologies and/or substantially greater
capital resources. The Company also faces competition from a number of
alternative motion picture distribution channels such as home video,
pay-per-view, video-on-demand, DVD, and syndicated and broadcast television. The
Company also competes for the public's leisure time and disposable income with
other forms of entertainment, including sporting events, concerts, live theater
and restaurants.
Furthermore, the out-of-home entertainment industry in general is
undergoing significant changes. Primarily due to technological developments and
changing consumer tastes, numerous companies are developing, and are expected to
continue to develop, new entertainment products for the out-of-home
entertainment industry, which may compete directly with the Company's products.
Competitors may design products which are more attractive to the consumer and/or
more cost effective than the Company's and may make its products less
competitive. The products that the Company is currently developing may never be
attractive to consumers or be competitive. As a result of this competition, the
Company could lose market share as demand for its products declines, which could
seriously harm its business and operating results.
The motion picture exhibition industry is in the early stages of
conversion from film based media to electronic based media. The Company is
similarly in the very early stages of developing a digital projection system
that can be utilized in IMAX theaters. Such risks could include the need for the
Company to raise additional capital to finance remanufacturing of theater
systems and associated conversion costs, which capital may not be available to
the Company on attractive terms, or at all.
Page 19
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S BUSINESS (cont'd)
AN ECONOMIC DOWNTURN COULD MATERIALLY AFFECT THE COMPANY'S BUSINESS BY REDUCING
DEMAND FOR IMAX THEATER SYSTEMS AND REVENUE GENERATED FROM BOX OFFICE SALES.
The Company depends on the sale and lease of IMAX theater systems to
commercial movie exhibitors to generate a significant portion of its revenues.
Most of the Company's lease agreements provide for additional revenues based on
a percentage of theater box office receipts when attendance at an IMAX theater
exceeds a minimum threshold. Commercial movie exhibitors generate revenues from
consumer attendance at their theaters, which are subject to general political,
social and economic conditions and the willingness of consumers to spend
discretionary money at movie theaters. If there is a prolonged economic
downturn, commercial movie exhibitors could be less willing to invest capital in
new theaters resulting in a decline in demand for new IMAX theater systems. In
addition, any decline in attendance at commercial IMAX theaters will reduce the
additional revenues the Company generates from a percentage of theater box
office receipts. Institutional exhibitors may also experience a decline in
attendance given general political, social and economic conditions, which may
result in reduced revenues generated from receipts attributed to IMAX theaters
at such institutions and reduced film license fees.
THE COMPANY MAY EXPERIENCE ADVERSE EFFECTS DUE TO EXCHANGE RATE FLUCTUATIONS.
A substantial portion of the Company's revenues is denominated in U.S.
dollars, while a substantial portion of its expenses is denominated in Canadian
dollars. The Company also generates revenues in Euros and Japanese Yen. From
time to time, the Company enters into forward contracts to hedge its exposure to
exchange rate fluctuations. However, the Company's strategy may not be
successful in reducing its exposure to these fluctuations. Any material increase
in the value of the Canadian dollar in relation to the U.S. dollar compared to
historical levels could have a material adverse effect on its operating results.
THE COMPANY IS SUBJECT TO IMPAIRMENT LOSSES ON ITS ASSETS.
The Company amortizes its film assets using the individual film forecast
method whereby the costs of film assets are amortized and participation costs
are accrued for each film in the ratio of revenues earned in the current period
to management's estimate of total revenues ultimately expected to be received
for that title. Management regularly reviews and revises when necessary its
estimates of ultimate revenues on a title-by-title basis, which may result in a
change in the rate of amortization of the film assets and write-downs to film
assets. Results of operations in future years depend upon the amortization of
the Company's film assets and may be significantly affected by periodic
adjustments in amortization rates.
IF THE COMPANY'S GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED THE
COMPANY MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS.
Under United States Generally Accepted Accounting Principles ("U.S.
GAAP"), the Company reviews its amortizable intangible assets for impairment
when events or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at least annually.
Factors that may be considered a change in circumstances indicating that the
carrying value of the Company's goodwill or amortizable intangible assets may
not be recoverable include a decline in stock price and market capitalization,
future cash flows, and slower growth rates in Company's the industry. The
Company may be required to record a significant charge to earnings in its
financial statements during the period in which any impairment of its goodwill
or amortizable intangible assets is determined resulting in an impact on the
Company's results of operations.
Page 20
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S BUSINESS (cont'd)
CHANGES IN ACCOUNTING AND CHANGES IN MANAGEMENT'S ESTIMATES MAY AFFECT THE
COMPANY'S REPORTED EARNINGS AND OPERATING INCOME.
U.S. GAAP and accompanying accounting pronouncements, implementation
guidelines and interpretations for many aspects of the Company's business, such
as revenue recognition, multiple element arrangements, film accounting,
accounting for pensions, accounting for income taxes, and treatment of goodwill
or amortizable intangible assets, are highly complex and involve subjective
judgments. Changes in these rules, their interpretation, management's estimates,
or changes in the Company's products or business could significantly change its
reported earnings and operating income and could add significant volatility to
those measures, without a comparable underlying change in cash flow from
operations. See item 7 under Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies of this
report.
THE COMPANY RELIES ON ITS KEY PERSONNEL, AND THE LOSS OF ONE OR MORE OF THOSE
PERSONNEL COULD HARM ITS ABILITY TO CARRY OUT ITS BUSINESS STRATEGY.
The Company's operations and prospects depend in large part on the
performance and continued service of its senior management team. The Company may
not find qualified replacements for any of these individuals if their services
are no longer available. The loss of the services of one or more members of the
Company's senior management team could adversely affect its ability to
effectively pursue its business strategy.
THE COMPANY'S ABILITY TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY IS
LIMITED, AND COMPETITORS MAY MISAPPROPRIATE ITS TECHNOLOGY, WHICH COULD WEAKEN
ITS COMPETITIVE POSITION.
The Company depends on its proprietary knowledge regarding IMAX theater
systems and film technology. The Company relies principally upon a combination
of copyright, trademark, patent and trade secret laws, restrictions on
disclosures and contractual provisions to protect its proprietary and
intellectual property rights. These laws and procedures may not be adequate to
prevent unauthorized parties from attempting to copy or otherwise obtain the
Company's processes and technology or deter others from developing similar
processes or technology, which could weaken the Company's competitive position.
The protection provided to the Company's proprietary technology by the laws of
foreign jurisdictions may not protect it as fully as the laws of Canada or the
United States. Some of the underlying technologies of the Company's products and
systems are not covered by patents or patent applications.
The Company has patents issued, provisional patents and patent
applications pending, including those pending for its digital conversion
technology, IMAX DMR and new projection system technology, IMAX MPX. The
Company's patents are filed in the United States often with corresponding
patents or filed applications in other jurisdictions, such as Canada, Japan,
Korea, France, Germany and the United Kingdom. The patents may not be issued or
provide the Company with any competitive advantages. The patent applications may
also be challenged by third parties. Several of the Company's issued patents in
the United States, Canada and Japan for improvements to IMAX projection systems,
IMAX 3D Dome and sound systems expire between 2008 and 2020. Any claims or
litigation initiated by the Company to protect its proprietary technology could
be time consuming, costly and divert the attention of its technical and
management resources.
Page 21
IMAX CORPORATION
ITEM 1A. RISK FACTORS (cont'd)
RISKS RELATED TO THE COMPANY'S BUSINESS (cont'd)
THE COMPANY IS SUBJECT TO LAWSUITS THAT COULD DIVERT ITS RESOURCES AND RESULT IN
THE PAYMENT OF SUBSTANTIAL DAMAGES.
The Company's industry is characterized by frequent claims and related
litigation regarding breach of contract and related issues. The Company is
subject to a number of legal proceedings and claims that arise in the ordinary
course of its business. The Company cannot assure that it will succeed in
defending any claims, that judgments will not be entered against it with respect
to any litigation or that reserves the Company may set aside will be adequate to
cover any such judgments. If any of these actions or proceedings against the
Company is successful, it may be subject to significant damages awards. In
addition, the Company is the plaintiff in a number of material lawsuits in which
it seeks the recovery of substantial payments.
The Company is incurring significant legal fees in prosecuting these
lawsuits, and it may not ultimately prevail in such lawsuits or be able to
collect on such judgments if it does. In addition, the defense and prosecution
of these claims divert the attention of the Company's management and other
personnel for significant periods of time.
As the largest manufacturer of large-format theater projection systems in
the world, the Company has been the subject of anti-trust complaints and
investigations in the past. The Company may be unsuccessful in defeating
potential claims against it, and it may be sued or investigated on similar
grounds in the future.
BECAUSE THE COMPANY IS INCORPORATED IN CANADA, IT MAY BE DIFFICULT FOR
PLAINTIFFS TO ENFORCE AGAINST THE COMPANY LIABILITIES BASED SOLELY UPON U.S.
FEDERAL SECURITIES LAWS.
The Company is incorporated under the federal laws of Canada, some of its
directors and officers are residents of Canada and a substantial portion of its
assets and the assets of such directors and officers are located outside the
United States. As a result, it may be difficult for United States' plaintiffs to
effect service within the United States upon those directors or officers who are
not residents of the United States, or to realize against them or the Company in
the United States upon judgments of courts of the United States predicated upon
the civil liability under the United States federal securities laws. In
addition, it may be difficult for plaintiffs to bring an original action outside
of the United States against the Company to enforce liabilities based solely on
U.S. federal securities laws.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Mississauga,
Ontario, Canada, New York, New York and Santa Monica, California. The Company's
principal facilities are as follows:
OPERATION OWN/LEASE EXPIRATION
Mississauga, Headquarters, Administrative, Assembly and Own N/A
Ontario(1).................. Research and Development
New York, New York.......... Executive Lease 2014
Santa Monica, California.... Sales, Marketing, Film Production and Post- Lease 2012
Production
Shanghai, China............. Sales and Marketing Lease 2007
Tokyo, Japan................ Sales, Marketing, Maintenance and Theater Design Lease 2006
(1) This facility is subject to a charge in favor of Congress Financial
Corporation (Canada) in connection with a secured revolving credit
facility (see note 14 to the Audited Financial Statements contained in
Item 8).
Page 22
IMAX CORPORATION
ITEM 3. LEGAL PROCEEDINGS
In March 2005, the Company, together with Three-Dimensional Media Group,
Ltd. ("3DMG"), filed a complaint in the U.S. District Court for the Central
District of California, Western Division, against In-Three, Inc. ("In-Three")
alleging patent infringement and seeking injunctive relief and damages. In April
2005, In-Three filed an answer denying infringement and asserting counterclaims
that seek a declaratory judgment of non-infringement, invalidity and
unenforceability of the patent in suit, and damages for alleged false
advertising, false designation of origin, breach of contract, interference with
prospective economic advantage and/or unfair competition, and further sought a
stay of the proceedings pending a review of the patent in suit by the U.S.
Patent and Trademark Office ("PTO"), which review was granted by the PTO on
August 5, 2005. On June 7, 2005, In-Three moved to dismiss the Company's and
3DMG's claims against it for lack of jurisdiction and on July 21, 2005,
In-Three's claims were amended to assert counterclaims against the Company for
willful infringement of In-Three's patents, and to seek an injunction against
the Company to enjoin it from practicing its film conversion technology. On July
21 and July 29, 2005, the Court issued orders: (i) rejecting In-Three's motion
to dismiss the proceedings, (ii) rejecting In-Three's motion for a preliminary
injunction against the Company, (iii) rejecting In-Three's motion to stay the
proceedings for an examination by the PTO and (iv) rejecting the Company's
motion for a preliminary injunction against In-Three. Accordingly, the Company
believes the case will proceed to trial, and the Court informed the parties that
it intends to oversee a swift resolution of the proceedings. On October 21,
2005, In-Three and the Company agreed to engage in mandatory private mediation
of the matter pursuant to Local Rule 16-14 of the District Court. On January 20,
2006, the PTO procedurally rejected certain claims under the patent in suit in
the first stage proceedings. The Company will continue to vigorously pursue its
claims and believes that all of the allegations made by In-Three are without
merit. The Company further believes the amount of the loss, if any, suffered in
connection with the counterclaims would not have a material impact on the
financial position or results of operations of the Company, although no
assurance can be given with respect to the ultimate outcome of any such
litigation.
In November 2001, the Company filed a complaint with the District Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin ("Big
Screen"), demanding payment of rental payments and certain other amounts owed to
the Company. Big Screen 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. On November 8, 2005, the District Court
of Munich rendered a judgment in favor of the Company on all accounts. Big
Screen has appealed the judgment to the Munich Court of Appeals and at the same
time asked for an order to stay the execution under the judgment of the District
Court. On November 30, 2005, Big Screen filed an application for the opening of
insolvency proceedings. While the appeal on the merits is pending, by order of
January 12, 2006, the Court of Appeals has rejected Big Screen's application
regarding a stay of execution so that the judgment remains executable.
In May 2002, the Company filed a complaint with the District Court of
Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"),
demanding payment of rental obligations and other amounts owed to the Company.
Siewert raised a defense based on alleged infringement of German antitrust
rules. By judgement of December 20, 2002, the District Court rejected the
defense and awarded judgement in documentary proceedings in favor of the Company
and added further amounts that had fallen due. Siewert applied for leave to
appeal to the German Supreme Court on matters of law, which was rejected by the
German Supreme Court in March 2004. Siewert subsequently made a partial payment
of amounts awarded to the Company. Siewert has filed follow up proceedings to
the documentary proceedings in the District Court, essentially repeating the
claims rejected in the documentary proceeding. On September 30, 2004, Siewert
filed for insolvency with the Local Court in Wuerzburg. In a recent criminal
matter before the District Court of Wuerzburg, unrelated to the above-referenced
proceedings, Mr. Siewert was convicted of credit fraud, delaying the filing for
insolvency and other charges, and was sentenced to 30 months in prison.
Page 23
IMAX CORPORATION
ITEM 3. LEGAL PROCEEDINGS (cont'd)
In January 2004, the Company and IMAX Theater Services Ltd., a subsidiary
of the Company, commenced an arbitration seeking damages of approximately $3.7
million before the International Court of Arbitration of the International
Chambers of Commerce (the "ICC") with respect to the breach by Electronic Media
Limited ("EML") of its December 2000 agreement with the Company. In June 2004,
the Company commenced a related arbitration before the ICC against EML's
affiliate, E-CITI Entertainment (I) PVT Limited ("E-Citi"), seeking $17.8
million as a result of E-Citi's breach of a September 2000 lease agreement. The
arbitration hearing on both claims took place on November 16-18, 2005. On
January 31, 2006, the ICC informed the parties that the liability stage of the
proceedings was closed, and on February 1, 2006, the ICC issued an award finding
unanimously in the Company's favor. The amount of damages awarded to the Company
is not yet known, and no amount has been recorded for these damages.
In June 2004, Robots of Mars, Inc. ("Robots") initiated an arbitration
proceeding against the Company in California with the American Arbitration
Association pursuant to an arbitration provision in a 1994 film production
agreement between Robots' predecessor-in-interest and a subsidiary of the
Company, asserting claims for breach of contract, fraud, breach of fiduciary
duty and intentional interference with contract. Robots is seeking an accounting
of the Company's revenues and an award of all sums alleged to be due to Robots
under the production agreement, as well as punitive damages. The Company filed a
cross claim for indemnity against a third party, SIMEX, Inc. ("SIMEX"). In
response, SIMEX filed an application in Toronto, Ontario, Canada, seeking a
declaration that it is not subject to the arbitration provision or payment
obligations in the production agreement. The Ontario Superior Court dismissed
SIMEX's application, with costs. SIMEX appealed part of this decision to the
Ontario Court of Appeal which found that SIMEX was not subject to some of the
obligations which the Company contended were set forth the production agreement,
including, specifically, the obligation to pay Robots directly based on the
receipts of proceeds from the distribution of the films produced under the
production agreement. The Company intends to vigorously defend the arbitration
proceeding and believes the amount of the loss, if any, that may be suffered in
connection with this proceeding will 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 such arbitration.
In addition to the matters described above, the Company is currently
involved in other legal proceedings which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect to the
ultimate outcome of any such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the quarter ended December 31, 2005.
Page 24
IMAX CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are listed for trading under the trading
symbol "IMAX" on the Nasdaq National Market System ("Nasdaq"). The common shares
are also listed on the Toronto Stock Exchange ("TSX") under the trading symbol
"IMX". The following table sets forth the range of high and low sales prices per
share for the common shares on Nasdaq and the TSX.
U.S. DOLLARS
---------------
HIGH LOW
----- ----
NASDAQ
Year ended December 31, 2005
Fourth quarter............... 10.50 6.98
Third quarter................ 11.10 9.00
Second quarter............... 10.84 7.62
First quarter................ 12.45 7.64
Year ended December 31, 2004
Fourth quarter............... 8.70 5.06
Third quarter................ 6.14 4.22
Second quarter............... 6.47 4.04
First quarter................ 8.36 5.60
CANADIAN DOLLARS
---------------
HIGH LOW
----- ----
TSX
Year ended December 31, 2005
Fourth quarter............... 12.42 8.02
Third quarter................ 13.48 10.70
Second quarter............... 13.49 9.60
First quarter................ 15.49 9.39
Year ended December 31, 2004
Fourth quarter............... 10.60 6.34
Third quarter................ 7.98 5.55
Second quarter............... 8.79 5.50
First quarter................ 10.75 7.31
As of February 21, 2006, the Company had approximately 304 registered
holders of record of the Company's common shares.
The Company has not paid within the last three fiscal years, and has no
current plans to pay, cash dividends on its common shares. The payment of
dividends by the Company is subject to certain restrictions under the terms of
the Company's indebtedness (see notes 11 and 14 to the audited financial
statements in Item 8 and the discussion of liquidity and capital resources in
Item 7). The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board of Directors.
Page 25
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES (cont'd)
EQUITY COMPENSATION PLANS
The following table sets forth information regarding the Company's Equity
Compensation Plan as of December 31, 2005:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
------------------------------ ----------------------- ------------------- -----------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 5,504,324 $ 7.26 1,542,365
Equity compensation plans not
approved by security holders
nil nil nil
---------------------- ------------------ ----------------------
Total 5,504,324 $ 7.26 1,542,365
====================== ================== ======================
CERTAIN INCOME TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax consequences of the ownership and disposition of the common shares by
a U.S. Holder (a "U.S. Holder"). A U.S. Holder generally means a holder of
common shares that is an individual resident of the United States or a United
States corporation. This discussion does not discuss all aspects of U.S. federal
income taxation that may be relevant to investors subject to special treatment
under U.S. federal income tax law (including, for example, owners of 10.0% or
more of the voting shares of the Company).
DISTRIBUTIONS ON COMMON SHARES
In general, distributions (without reduction for Canadian withholding
taxes) paid by the Company with respect to the common shares will be taxed to a
U.S. Holder as dividend income to the extent that such distributions do not
exceed the current and accumulated earnings and profits of the Company (as
determined for U.S. federal income tax purposes). Subject to certain
limitations, dividends paid to non-corporate U.S. Holders may be eligible for a
reduced rate of taxation as long as the Company is considered to be a "qualified
foreign corporation". A qualified foreign corporation includes a foreign
corporation that is eligible for the benefits of an income tax treaty with the
United States. The amount of a distribution that exceeds the earnings and
profits of the Company will be treated first as a non-taxable return of capital
to the extent of the U.S. Holder's tax basis in the common shares and thereafter
as taxable capital gain. Corporate holders generally will not be allowed a
deduction for dividends received in respect of distributions on common shares.
Subject to the limitations set forth in the U.S. Internal Revenue Code, as
modified by the U.S.-Canada Income Tax Treaty, U.S. Holders may elect to claim a
foreign tax credit against their U.S. federal income tax liability for Canadian
income tax withheld from dividends. Alternatively, U.S. Holders may claim a
deduction for such amounts of Canadian tax withheld.
DISPOSITION OF COMMON SHARES
Upon the sale or other disposition of common shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the sale and such holder's tax basis in the common
shares. Gain or loss upon the disposition of the common shares will be long-term
if, at the time of the disposition, the common shares have been held for more
than one year. The deduction of capital losses is subject to limitations for
U.S. federal income tax purposes.
Page 26
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES (cont'd)
CERTAIN INCOME TAX CONSIDERATIONS (cont'd)
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
This summary is applicable to a holder or prospective purchaser of common
shares who is not (and is not deemed to be) resident in Canada, does not (and is
not deemed to) use or hold the common shares in, or in the course of, carrying
on a business in Canada, and is not an insurer that carries on an insurance
business in Canada and elsewhere.
This summary is based on the current provisions of the Income Tax Act
(Canada), the regulations thereunder, all specific proposals to amend such Act
and regulations publicly announced by or on behalf of the Minister of Finance
(Canada) prior to the date hereof and the Company's understanding of the
published administrative and assessing practices of the Canada Revenue Agency.
This summary does not otherwise take into account any change in law or
administrative practice, whether by judicial, governmental, legislative or
administrative action, nor does it take into account provincial, territorial or
foreign income tax consequences, which may vary from the Canadian federal income
tax considerations described herein.
This summary is of a general nature only and it is not intended to be, nor
should it be construed to be, legal or tax advice to any holder of the common
shares and no representation with respect to Canadian federal income tax
consequences to any holder of common shares is made herein. Accordingly,
prospective purchasers and holders of the common shares should consult their own
tax advisers with respect to their individual circumstances.
DIVIDENDS ON COMMON SHARES
Canadian withholding tax at a rate of 25.0% (subject to reduction under
the provisions of any relevant tax treaty) will be payable on dividends paid or
credited to a holder of common shares outside of Canada. Under the Canada-U.S.
Income Tax Treaty, the withholding tax rate is generally reduced to 15.0% for a
holder entitled to the benefits of the treaty (or 5.0% if the holder is a
corporation that owns at least 10.0% of the common shares).
CAPITAL GAINS AND LOSSES
Subject to the provisions of any relevant tax treaty, capital gains
realized by a holder on the disposition or deemed disposition of common shares
held as capital property will not be subject to Canadian tax unless the common
shares are taxable Canadian property (as defined in the Income Tax Act
(Canada)), in which case the capital gains will be subject to Canadian tax at
rates which will approximate those payable by a Canadian resident. Common shares
will not be taxable Canadian property to a holder provided that, at the time of
the disposition or deemed disposition, the common shares are listed on a
prescribed stock exchange (which currently includes the TSX) unless such holder,
persons with whom such holder did not deal at arm's length or such holder
together with all such persons, owned 25.0% or more of the issued shares of any
class or series of shares of the Company at any time within the 60 month period
immediately preceding such time.
Under the Canada-U.S. Income Tax Treaty, a holder entitled to the benefits
of the treaty and to whom the common shares are taxable Canadian property will
not be subject to Canadian tax on the disposition or deemed disposition of the
common shares unless at the time of disposition or deemed disposition, the value
of the common shares is derived principally from real property situated in
Canada.
Page 27
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
(In thousands of U.S. dollars, except per share amounts)
The selected financial data set forth below is derived from the
consolidated financial statements of the Company. The financial statements have
been prepared in accordance with U.S. GAAP. All financial information referred
to herein is expressed in U.S. dollars unless otherwise noted.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
REVENUE
IMAX systems(1)............................................. $ 97,753 $ 86,570 $ 75,848 $ 70,959 $ 76,582
Films....................................................... 26,451 27,887 25,803 40,556 29,923
Theater operations.......................................... 17,498 17,415 13,109 12,284 6,540
Other....................................................... 3,228 4,108 4,500 5,303 4,654
---------- ---------- ---------- ---------- ----------
Total revenue............................................... 144,930 135,980 119,260 129,102 117,699
COSTS OF GOODS AND SERVICES(2)................................. 73,005 70,062 67,283 75,634 94,969
---------- ---------- ---------- ---------- ----------
GROSS MARGIN................................................... 71,925 65,918 51,977 53,468 22,730
Selling, general and administrative expenses(3)................ 37,287 36,066 33,312 34,906 45,850
Research and development....................................... 3,264 3,995 3,794 2,362 3,385
Amortization of intangibles.................................... 911 719 573 1,418 3,005
Income from equity-accounted investees(4)...................... -- -- (2,496) (283) (73)
Receivable provisions net of (recoveries)...................... (859) (1,487) (2,225) (1,233) 18,102
Restructuring costs and asset impairments (recoveries)(5)...... -- 848 969 (121) 45,269
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS................................ 31,322 25,777 18,050 16,419 (92,808)
Interest income................................................ 1,004 756 656 413 847
Interest expense............................................... (16,773) (16,853) (15,856) (17,564) (22,020)
Gain (loss) on retirement of notes(6).......................... -- (784) (4,910) 11,900 55,577
Recovery (impairment) of long-term investments(7).............. -- 293 1,892 -- (5,584)
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES................................................... 15,553 9,189 (168) 11,168 (63,988)
Recovery of (provision for) income taxes(8) ................... (934) 255 386 -- (27,848)
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS................. 14,619 9,444 218 11,168 (91,836)
Net earnings (loss) from discontinued operations............... 1,979 800 195 804 (53,278)
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES....................................... 16,598 10,244 413 11,972 (145,114)
Cumulative effect of changes in accounting principles,
net of income tax benefit of $nil(9)....................... -- -- (182) -- --
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS)............................................ $ 16,598 $ 10,244 $ 231 $ 11,972 $ (145,114)
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations.............. $ 0.37 $ 0.24 $ 0.01 $ 0.34 $ (2.97)
Net earnings (loss) from discontinued operations............ $ 0.05 $ 0.02 $ -- $ 0.02 $ (1.72)
---------- ---------- ---------- ---------- ----------
Net earnings (loss)......................................... $ 0.42 $ 0.26 $ 0.01 $ 0.36 $ (4.69)
========== ========== ========== ========== ==========
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations.............. $ 0.35 $ 0.24 $ 0.01 $ 0.34 $ (2.97)
Net earnings (loss) from discontinued operations............ $ 0.05 $ 0.02 $ -- $ 0.02 $ (1.72)
---------- ---------- ---------- ---------- ----------
Net earnings (loss)......................................... $ 0.40 $ 0.26 $ 0.01 $ 0.36 $ (4.69)
========== ========== ========== ========== ==========
Page 28
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(1) The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between
lease signing and system installation, certain customers each year
generally are unable, or elect not, to proceed with system installation
for a number of reasons including business considerations, or the
inability to obtain certain consents, approvals or financing. Once the
determination is made that the customer will not proceed with
installation, the customer and the Company may enter into a consensual
lease buyout, whereby the parties are released from all their future
obligations under the lease, the initial lease payments that the customer
previously made to the Company are recognized as revenue and the
geographic territory granted to the customer reverts to the Company. In
addition, since the introduction of its new IMAX MPX theater system in
2003, the Company has agreed with several customers to modify their lease
agreements to substitute MPX systems for the systems for which the
customers previously contracted, which were in the Company's backlog.
Included in IMAX systems revenue are: $0.6 million related to MPX backlog
upgrades, $11.7 million related to consensual lease buyouts and $2.0
million related to terminations due to customer defaults (an aggregate of
$14.3 million for 2005, $19.1 million for 2004, $9.5 million for 2003,
$5.1 million for 2002 and $5.5 million for 2001).
(2) In 2001, costs of goods and services included a $4.1 million and a $16.5
million charge relating to a decline in net realizable value of the
Company's inventories and film assets, respectively.
(3) The year ended December 31, 2001 selling, general and administrative
expenses included a $2.6 million non-cash compensation charge resulting
from a stock grant issuance.
(4) In 2003, income from equity-accounted investees included a gain of $2.3
million from the release of a financial guarantee.
(5) Asset impairment charges amounted to $0.8 million and $1.0 million in 2004
and 2003, respectively, after the Company assessed the carrying value of
certain assets. In 2001, restructuring costs and asset impairments
(recoveries) included a charge of $16.3 million as part of the Company's
efforts to streamline the business by reducing its overall corporate
workforce and relocate its sound-system facility to near Toronto, Canada.
In addition, the Company recorded charges of $26.7 million to fixed
assets, and $3.3 million of other assets to recognize a decline in value
the Company considered other than temporary in 2001.
(6) During 2001, the Company and a wholly-owned subsidiary of the Company
purchased and cancelled an aggregate of $70.4 million of the Company's
convertible subordinated notes due April 1, 2003 (the "Subordinated
Notes") for $13.7 million, represented by $12.5 million in cash by the
subsidiary and $1.2 million in common shares by the Company. During 2002,
the Company and a wholly-owned subsidiary of the Company purchased and
cancelled an aggregate of $20.5 million of the Subordinated Notes for $8.1
million, represented by $6.0 million in cash by the subsidiary and $2.1
million in common shares by the Company. The Company cancelled the
purchased Subordinated Notes and recorded a gain of $11.9 million. During
2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of $170.8
million of the Company's 7.875% senior notes due 2005 (the "Old Senior
Notes"). During 2003, the Company also repaid the remaining outstanding
Subordinated Notes balance of $9.1 million. During 2004, the Company
recorded a loss of $0.8 million related to costs associated with the
redemption of $29.2 million of the Old Senior Notes. This transaction had
the effect of fully extinguishing the Old Senior Notes.
(7) Included in 2004 is a gain of $0.4 million from the sale of its equity
investment in Mainframe Entertainment, Inc. ("MFE"). During 2003, the
Company entered into a settlement agreement with MFE, whereby the parties
settled all of MFE's indebtedness and obligations to the Company arising
under the Company's 6.0% Senior Secured Convertible Debenture due from
MFE. The Company had recorded a gain of $1.9 million related to the final
settlement. The Company had recorded a charge of $5.6 million relating to
the impairment of certain long-term investments for the years ended
December 31, 2001.
(8) In 2001, the provision for income taxes includes a $41.2 million increase
in the valuation allowance to reflect uncertainty associated with
realization of the Company's deferred income tax asset.
Page 29
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(9) In 2003, the Company recorded a charge as a cumulative effect of change in
accounting principle of $0.2 million in accordance with SFAS No. 143,
"Accounting for Asset Retirement Obligations" which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
AS AT DECEMBER 31,
---------------------------------------------------------------
BALANCE SHEETS DATA: 2005 2004 2003 2002 2001
--------- ---------- --------- --------- ----------
Cash, cash equivalents, restricted cash and
short-term investments..................... $ 32,495 $ 28,964 $ 52,243 $ 37,136 $ 26,388
Total assets(1).............................. 243,411 230,853 251,648 244,248 262,784
Total long-term indebtedness................. 160,000 160,000 189,234 209,143 229,643
Total shareholders' equity (deficit)......... (23,043) (42,376) (51,776) (103,670) (118,448)
(1) Includes the assets of discontinued operations.
QUARTERLY STATEMENTS OF OPERATIONS SUPPLEMENTARY DATA:
2005
-------------------------------------------------
Q1 Q2 Q3 Q4
--------- ---------- --------- ---------
Sales.......................................... $ 31,368 $ 30,878 $ 33,374 $ 49,310
Cost of goods and services..................... 15,223 15,009 17,600 25,173
--------- ---------- --------- ---------
Gross margin................................... $ 16,145 $ 15,869 $ 15,774 $ 24,137
========= ========== ========= =========
Net earnings from continuing operations........ $ 956 $ 925 $ 1,920 $ 10,818
Net earnings from discontinued operations...... 240 186 360 1,193
--------- ---------- --------- ---------
Net earnings................................... $ 1,196 $ 1,111 $ 2,280 $ 12,011
========= ========== ========= =========
Net earnings per share - basic................. $ 0.03 $ 0.03 $ 0.06 $ 0.30
Net earnings per share - diluted............... $ 0.03 $ 0.03 $ 0.05 $ 0.29
2004
-------------------------------------------------
Q1 Q2 Q3 Q4
--------- ---------- --------- ---------
Sales.......................................... $ 24,881 $ 31,748 $ 31,827 $ 47,524
Cost of goods and services..................... 12,519 17,139 17,356 23,048
--------- ---------- --------- ---------
Gross margin................................... $ 12,362 $ 14,609 $ 14,471 $ 24,476
========= ========== ========= =========
Net earnings (loss) from continuing
operations.................................... $ (1,096) $ 1,352 $ 1,600 $ 7,588
Net earnings from discontinued operations...... 200 200 200 200
--------- ---------- --------- ---------
Net earnings (loss)............................ $ (896) $ 1,552 $ 1,800 $ 7,788
========= ========== ========= =========
Net earnings (loss) per share - basic.......... $ (0.02) $ 0.04 $ 0.05 $ 0.20
Net earnings (loss) per share - diluted........ $ (0.02) $ 0.04 $ 0.05 $ 0.19
Page 30
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The principal business of IMAX Corporation together with its wholly-owned
subsidiaries (the "Company") is the design, manufacture, sale and lease of
projection systems for large-format theaters including commercial theaters,
museums and science centers, and destination entertainment sites. In addition,
the Company designs and manufactures high-end sound systems and produces and
distributes large-format films. At December 31, 2005, there were 266 IMAX
theaters operating in 38 countries.
The Company derives revenue principally from long-term theater system
lease and sale agreements, maintenance agreements, and film distribution and
production agreements. The Company also derives revenue from the operation of
its own theaters, camera rentals and post-production services.
Important factors that the Company's CEOs use in assessing the Company's
business and prospects include the signing of new theater systems, profits from
the Company's operating segments, earnings from operations as adjusted for
unusual items that the Company views as non-recurring and the success of
strategic initiatives such as the securing of new film projects, particularly
IMAX DMR and IMAX 3D film projects.
THEATER SYSTEMS
The Company provides its theater systems to customers on a long-term lease
basis, typically with initial lease terms of 10 to 20 years. Lease agreements
typically provide for three major sources of revenue: initial rental fees;
ongoing rental payments, which include annual contractual minimum payments; and
maintenance fees. The initial rental fees vary depending on the type of system
and location and generally are paid to the Company in installments commencing
upon the signing of the agreement. Ongoing rental payments are paid monthly over
the term of the contract, commencing after system installation and are generally
equal to the greater of a fixed minimum amount per annum and a percentage of box
office receipts. Ongoing rental payments include rental income and finance
income. An annual maintenance fee is generally payable commencing after the
first year. Both minimum rental payments and maintenance fees are typically
indexed to the local consumer price index. Revenue on theater system leases and
sales are recognized at a different time than when cash is collected. See
"Significant Accounting Policies" below for further discussion on the Company's
revenue recognition policies.
In addition, the Company sells theater systems to new and existing
customers. These sales generally provide for upfront cash payments received
prior to installation and the receipt of minimum payments over time, typically
10 to 20 years.
Cash received from initial rental fees in advance of installation is
recorded as deferred revenue. The associated costs of manufacturing the theater
system are recorded as inventory. At the time of installation, the deferred
revenue is recognized in income, and the inventory costs are fully expensed.
The timing of installation of the theater system is largely dependent on
the timing of the construction of the customer's theater. Therefore, while
revenue for theater systems is generally predictable on a long-term basis, it
can vary substantially from year to year or quarter to quarter depending on the
timing of installation.
As at December 31, 2005, there were 45 installed 2D flat screen systems,
69 installed 2D dome screen systems, 81 installed 3D standard systems, 50
installed 3D SR systems, 24 installed MPX systems, and seven 3D Dome screen
systems in the world. These numbers above include ten theater systems which have
been installed in 2005 and are expected to open in 2006. As at December 31,
2004, there were 50 installed 2D flat screen systems, 67 installed 2D dome
screen systems, 75 installed 3D standard systems, 45 installed 3D SR systems,
seven installed MPX systems, and seven 3D Dome screen systems in the world. The
2004 numbers included three theater systems which were installed in 2004 but had
not opened as at December 31, 2004.
Page 31
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
THEATER SYSTEMS (cont'd)
Although 37% of installed IMAX theater bases are located outside of North
America and more than 80% of IMAX theater systems in backlog are scheduled to be
installed outside of North America, the North American commercial exhibitor
market represents an important customer base for the Company in terms of both
collections under existing long-term leases and potential future system
contracts. Many large North American exhibitors have recently consolidated with
new capital raised, often in public markets. Along with numerous international
and regional operators, the Company has targeted these North American operators
for the sale and lease of its IMAX MPX systems. The IMAX MPX system, launched in
March 2003, is a new large format theater system designed specifically for use
in multiplex theaters, which can be installed as part of a newly constructed
multiplex or as a retrofit to existing commercial multiplex auditoriums, and is
designed to improve a multiplex owner's financial returns through lower
operating and capital costs. Since the product's introduction, the Company has
signed agreements for 62 IMAX MPX theater systems of which 19 were signed with
North American exhibitors. Seventeen of the IMAX MPX systems were installed in
2005. Two existing customers have also switched their backlog commitments to the
IMAX MPX projection systems in the year. While the Company is pleased with the
external developments in the North American commercial exhibitor market, there
is no assurance that they will continue or that other commercial exhibitors will
not encounter additional financial difficulties. To minimize the Company's
credit risk in this area, the Company retains title to underlying theater
systems leased, registers theater systems sold as collateral, performs initial
and ongoing credit evaluations of its customers and makes ongoing provisions for
its estimates of potentially uncollectible amounts.
The average initial rent or sales price and minimum payments earned from
customers under the Company's theater system lease or sales agreements can vary
from quarter to quarter and year to year based on a number of factors including
the mix of systems sold or leased, the type of contract and other factors
specific to individual contracts, although the typical rent or sales price for
its various projection systems does not generally vary significantly from region
to region. The Company has taken steps in recent years to accelerate the growth
of the global IMAX theater network and the sale or lease of its products by
developing a lower-cost projection system designed to appeal to broader customer
bases, particularly in commercial multiplex markets. Although this system is
lower-cost, the Company has endeavored to successfully maintain its per unit
margins on a percentage basis and to maintain the aggregate revenues and gross
margins through increased volume. The Company signed 45 theater system
agreements in 2005 (2004 - 36, 2003 - 25).
SALES BACKLOG
During the year ended December 31, 2005, the Company signed contracts for
45 IMAX theaters, valued at $62.4 million. At December 31, 2005, the sales
backlog, which represented contracts for 62 theater systems, totaled $101.0
million. The Company believes that the contractual obligations for system
installations that are listed in sales backlog are valid and binding
commitments. The sales backlog will vary from quarter to quarter depending on
the signing of new theater systems, which adds to backlog, and the installation
of theater systems and the settlement of theater system contracts, both of which
reduce backlog. Sales backlog typically represents the minimum revenue under
signed theater system sale and lease agreements that the Company believes will
be recognized as revenue as the associated theater systems are installed. Sales
backlog includes initial fees along with the present value of contractual
minimums due over the lease term, but excludes maintenance revenues as well as
rents in excess of contractual minimums that might be received in the future.
The minimum revenue comprises the upfront payments plus the present value of the
minimum payments due under sales-type lease and sale agreements. Operating
leases are assigned no value in the sales backlog. The value of sales backlog
does not include revenue from theaters in which the Company has an equity
interest, letters of intent or long-term conditional theater commitments.
The Company's backlog can be segregated by both territory of future
installation and by customer type. The percentage of backlog relevant to each
territory (based on installed dollar value of anticipated systems revenue as at
December 31, 2005) is as follows: Asia - 43%, North America - 18%, Europe - 16%,
Central and South America - 12%, and Middle East - 11%. In addition, 89% of
backlog represents future installations to commercial theater customers and 11%
to institutional customers.
Page 32
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SALES BACKLOG (cont'd)
The Company estimates that approximately 37 of the 62 theater systems
currently in backlog will be recognized subsequent to 2006. The Company reached
agreements for the sale or lease of 45 projection systems in 2005 of which 31
were for IMAX MPX theater systems. Shorter install cycles are likely to occur
more frequently with the continued roll-out of the IMAX MPX theater system,
which requires less construction time (as little as 1-2 months) due to its
design and retrofit capability. The components of the Company's backlog as at
December 31, 2005 by product type has been disclosed on page 7.
In the normal course of its business the Company each year will have
customers who, for a number of reasons including the inability to obtain certain
consents, approvals or financing, are unable to proceed with theater
construction. Once the determination is made that the customer will not proceed
with installation, the lease agreement with the customer is generally terminated
or amended. If the agreement is terminated, upon the Company and the customer
being released from all their future obligations under the agreement, the
initial lease cash payments that the customer previously made to the Company are
recognized as revenue.
FILM PRODUCTION AND DISTRIBUTION
The Company recognizes revenue from licensing of exhibition rights to
motion pictures produced or distributed by the Company when the film is complete
and has been delivered, the license period has begun, the fee is fixed or
determinable and collection is reasonably assured. Where the license fees are
based on a share of the customer's revenue, and all other revenue recognition
criteria are met, the Company recognizes revenue as the customer exhibits the
film. Costs of producing films and acquiring film distribution rights are
capitalized and amortized using the individual film-forecast-computation method,
which amortizes film costs and accrues participation costs in the same ratio
that current period actual revenue bears to estimated remaining unrecognized
ultimate revenue as of the beginning of the fiscal year. All advertising,
exploitation costs and marketing costs are expensed as incurred.
The Company has developed a proprietary, patent-pending technology to
digitally re-master 35mm live-action films into 15/70-format film at a modest
cost for exhibition in IMAX theaters. This system, known as IMAX DMR, digitally
enhances the image resolution quality of 35mm motion picture films for
projection on IMAX screens while maintaining the visual clarity and sound
quality for which The IMAX Experience is known. This technology has opened the
IMAX theater network up to releases of Hollywood films including, particularly
new films which are released to IMAX theaters simultaneously with the domestic
release to conventional 35mm theaters. The Company believes that the development
of this new technology is key to helping it execute on its strategy of growing
its commercial theater network by its establishment of a new distribution
platform for Hollywood films.
While the Company is optimistic about the success of, and consumer
reaction, to its IMAX DMR technology to date, there is no guarantee that it will
continue to be commercially successful, or receive widespread acceptance by film
studios and audiences.
THEATER OPERATIONS
The Company has seven owned and operated theaters. In addition, the
Company has entered into commercial arrangements with two theaters resulting in
the sharing of profits and losses. The Company also provides management services
to two theaters.
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are made to customers located
outside the United States and Canada. During 2005, 2004 and 2003, 44.3%, 42.6%
and 39.7% respectively, of the Company's revenue was derived outside the United
States and Canada. The Company expects that international operations will
continue to account for a substantial portion of the Company's revenue in the
future. In order to minimize exposure to exchange rate risk, the Company prices
theater systems (the largest component of revenue) in U.S. dollars except in
Canada, Japan and parts of Europe where they may be priced in local currency.
Annual minimum rental payments and maintenance fees follow a similar currency
policy.
Page 33
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
CRITICAL ACCOUNTING POLICIES
The Company reports its results under U.S. GAAP. Significant differences
between United States and Canadian Generally Accepted Accounting Principles are
summarized in note 29 of the Company's audited financial statements in item 8.
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, other assets,
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, and the differences may be material. The Company's significant
accounting policies are discussed in note 2 of its audited financial statements
in item 8.
The Company considers the following critical accounting policies to have
the most significant effect on its estimates, assumptions and judgments:
REVENUE RECOGNITION
The Company's system sales and lease transactions typically involve the
delivery of several products and services, including the projector, projection
screen and sound system, supervision of installation, training of theater
personnel, and advice on theater design and custom assemblies. In addition, on
occasion, the Company will include film licenses or other specified elements as
part of these transactions.
When the elements of theater systems meet the criteria for treatment as
separate units of accounting, the Company generally allocates revenue to each
element based on its relative fair value. Revenue allocated to an individual
element is recognized when revenue recognition criteria for that element is met.
SALES AND SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a result
of meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is
recognized, the initial rental fees due under the contract, along with the
present value of minimum ongoing rental payments, are recorded as revenues for
the period, and the related theater system costs including installation expenses
are recorded as cost of goods and services. Additional ongoing rentals in excess
of minimums are recognized in future periods as revenue when reported by the
theater operator, provided that collection is reasonably assured. Maintenance
revenues are recognized when the services are rendered.
The Company recognizes revenue from sales and sales type leases when the
installation of the respective theater system element is substantially complete
and 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
installations.
The critical estimates that the Company considers with respect to the
Company's lease accounting are the determination of economic useful life and the
fair value of the projection equipment, including its residual value. These
estimates are based upon historical experience with all of its projection
systems. Residual values are established at lease inception using estimates of
fair value at the end of the lease term with consideration for forecasted supply
and demand for various systems, future product launch plans, end of lease
customer behavior, refurbishment strategies and changes in technology.
Page 34
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES AND 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 using the
criteria under FAS 13. A provision is recorded against the net investment in
leases if the Company believes that it is probable that the negotiation will
result in a reduction in the minimum lease payments such that the lease will be
reclassified as an operating lease. The provision is equal to the excess of the
carrying value of the net investment in lease over the fair value of the
equipment. Any adjustments which result from a change in classification from a
sales-type lease to an operating lease are reported as a charge to income during
the period the change occurs.
In the normal course of its business, the Company will from time to time
determine that a provision it had previously taken against the net investment in
leases in connection with a customer's lease agreement should be reversed due to
a change in the circumstances that led to the original provision.
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from all
their future obligations under the lease and the geographic territory granted to
the customer reverts to the Company. Once an agreement is reached by both
parties, the initial lease payments that the customer previously made to the
Company are typically recognized as revenue. For this reason, the Company has a
high degree of certainty of collecting a substantial value of a signed contract,
either through the installation of a theater system or a consensual lease
buyout. In addition, since the introduction of its new IMAX MPX theater system
in 2003, the Company has agreed with several customers to terminate their
existing lease agreements, which were in the Company's backlog, and sign new MPX
system agreements.
Where these agreements have multiple elements meeting the criteria for
treatment as separate units of accounting, the total consideration to be
received in these situations generally is allocated to each individual element
based on the relative fair values of each element. Each element is then
accounted for based on applicable revenue recognition criteria.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
Page 35
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
SHORT-TERM INVESTMENTS
The Company has short-term investments, which generally have maturities of
more than three months and less than one year from the date of purchase. The
short-term investments are classified as held to maturity based on the Company's
positive intent and ability to hold the securities to maturity. The Company
invests primarily in Canadian and U.S. government securities and commercial
paper rated "A1+" by Standard & Poor's and these investments are stated at
amortized cost, which approximates fair market value. Income related to these
securities is reported as a component of interest income. At December 31, 2005,
the Company had $2.1 million invested in U.S. government securities and $6.1
million in Canadian government securities.
ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
The allowance for doubtful accounts receivable and provision against the
financing receivables are based on the Company's assessment of the
collectibility of specific customer balances and the underlying asset value of
the equipment under lease where applicable. If there is a deterioration in a
customer's credit worthiness or actual defaults under the terms of the leases
are higher than the Company's historical experience, the Company's estimates of
recoverability for these assets could be adversely affected.
The evaluation of collectibility of customer accounts is typically done on
an individual account basis. If, based on an evaluation of accounts, the Company
concludes that it is probable that a customer will not be able to pay all
amounts due, the Company estimates the expected loss. In developing the
estimates for an allowance, the Company considers general and industry economic
and market conditions as well as other credit information available for the
customer. The Company only records recoveries of provisions when objective
verifiable evidence supports the change in the original provision.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions prove to be
incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
FILM ASSETS
Estimates of ultimate revenues are prepared on a title by title basis and
reviewed regularly by management and revised where necessary to reflect the most
current information. Ultimate revenue for films includes estimates of revenues
over a period not to exceed 10 years following the date of initial release.
GOODWILL
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
Page 36
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
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.
PENSION PLAN ACTUARIAL ASSUMPTIONS
The Company's pension benefit obligations and related costs are calculated
using actuarial concepts, within the framework of Statement of Financial
Accounting Standards No. 87, "Employer's Accounting for Pensions". A critical
assumption, the discount rate, is an important element of expense and/or
liability measurement. The Company evaluates this critical assumption annually.
Other assumptions include factors such as expected retirement, mortality, rate
of compensation increase, and estimates of inflation.
The discount rate enables the Company to state expected future cash
payments for benefits as a present value on the measurement date. The guideline
for setting this rate is a high-quality long-term corporate bond rate. A lower
discount rate increases the present value of benefit obligations and increases
pension expense. The Company's discount rate was determined by considering the
average of pension yield curves constructed of a large population of
high-quality corporate bonds. The resulting discount rate reflects the matching
of plan liability cash flows to the yield curves.
TAX ASSET VALUATION
As at December 31, 2005, the Company had net deferred income tax assets of
$6.2 million, comprised of tax credit carryforwards, net operating loss and
capital loss carryforwards and other deductible temporary differences, which can
be utilized to reduce either taxable income or taxes otherwise payable in future
years. The Company's management assesses realization of these net deferred
income tax assets based on all available evidence and has concluded that it is
more likely than not that these net deferred income tax assets will be realized.
Positive evidence includes, but is not limited to, the Company's historical
earnings, projected future earnings, contracted sales backlog at December 31,
2005, and the ability to realize certain deferred income tax assets through loss
and tax credit carryback strategies. If and when the Company's operations in
some jurisdictions were to reach a requisite level of profitability or where the
Company's future profitability estimates increase due to changes in positive
evidence, the Company would reduce all or a portion of the applicable valuation
allowance in the period when such determination is made. This would result in an
increase to reported earnings and a decrease to the Company's effective tax rate
in such period. However, if the Company's projected future earnings do not
materialize, or if the Company operates at a loss in certain jurisdictions, or
if there is a material change in actual effective tax rates or time period
within which the Company's underlying temporary differences become taxable or
deductible, the Company could be required to increase the valuation allowance
against all or a significant portion of the Company's deferred tax assets
resulting in a substantial increase to the Company's effective tax rate for the
period of the change and a material adverse impact on its operating results for
the period.
The Company is subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, the Company may incur additional tax expense
based upon the outcomes of such matters. In addition, when applicable, the
Company adjusts tax expense to reflect both favorable and unfavorable
examination results. The Company's ongoing assessments of the probable outcomes
of examinations and related tax positions require judgement and can materially
increase or decrease its effective rate as well as impact operating results.
Page 37
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued a revision to Financial Accounting Standards
No. 123, ("FAS 123R"). FAS 123R is focused primarily on the accounting for
transactions in which a company obtains employee services in exchange for stock
options or share-based payments. Currently, the Company grants stock options to
its employees and discloses the pro forma effect of compensation expense for
these stock options. Under FAS 123R, the Company will be required to record this
compensation expense in the Company's results of operations. FAS 123R is
effective for the beginning of the first annual reporting period that begins
after December 31, 2005. The Company has evaluated the effect the adoption of
FAS 123R and expects to adopt the pronouncement beginning on January 1, 2006.
The Company estimates that based on the currently issued options, and not
including any further grants which may occur in 2006, the additional
compensation expense for the year ended December 31, 2006 will approximate $0.8
million before taxes.
SPECIAL ITEMS
The Company recognized the following special item in its 2005 operating
results which may not be reflective of future operating results.
On December 29, 2005, the Company and a previously wholly-owned
subsidiary, Digital Projection International ("DPI"), entered into an agreement
to settle its loan agreements in exchange for a payment of $3.5 million to be
received in two tranches in the first quarter of 2006. During 2005, the Company
recognized $2.0 million (2004 - $0.8 million) in income from discontinued
operations from DPI.
ASSET IMPAIRMENTS AND OTHER SIGNIFICANT CHARGES (RECOVERIES)
(In thousands of U.S. dollars, except per share amounts) YEARS ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
--------- -------- --------
Asset impairments
Fixed assets -- 848 969
Other significant charges (recoveries):
Accounts receivable (96) (81) 714
Fixed assets -- 4 353
Other assets (excluding long-term investments) -- -- 73
Financing receivables (763) (1,406) (2,939)
Long-term investments -- (293) (1,892)
--------- -------- --------
Total asset impairments and other significant charges (recoveries) $ (859) $ (928) $ (2,722)
========= ======== ========
ASSET IMPAIRMENTS
The Company did not realize any asset impairment charges in 2005. During
2004 and 2003, the Company recorded asset impairment charges of $0.8 million,
and $1.0 million, respectively, after assessing the carrying value of certain of
its camera assets in 2004 due to lower volume in 2D camera rentals and certain
of its owned and operated theater assets in 2003 due primarily to lower than
anticipated revenues at one of its locations. The Company recognized that the
future cash flows of these assets did not support their recoverability.
Page 38
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
ASSET IMPAIRMENTS AND OTHER SIGNIFICANT CHARGES (RECOVERIES) (cont'd)
OTHER SIGNIFICANT CHARGES (RECOVERIES)
In 2005, the Company recorded a net recovery of previously provided
amounts of $0.8 million in financing receivables (2004 - $1.4 million, 2003 -
$2.9 million) as the collectibility uncertainty associated with certain leases
was resolved by amendment or settlement of the leases.
The Company also recorded a recovery of $0.1 million in 2005 (2004 - $0.1
million recovery, 2003 - $0.7 million provision) in accounts receivable as
collectibility associated with certain accounts was settled. In 2003, the
Company recorded a charge as collectibility on certain accounts was considered
uncertain based on facts and circumstances at the time.
The Company did not record any fixed asset charges in 2005. During 2004
and 2003, the Company recorded less than $0.1 million and $0.4 million,
respectively, against fixed assets as the carrying values for the assets
exceeded the discounted future cash flows expected from the assets.
In 2004, the Company recorded a gain of $0.4 from the sale of its equity
investment in MFE. During 2003, the Company entered into a settlement agreement
with MFE, whereby the parties settled all of MFE's indebtedness and obligations
to the Company arising under the Company's 6.0% Senior Secured Convertible
Debenture due from MFE (the "Debenture"). The Company recorded a gain of $1.9
million related to the final settlement in 2003. The Company had previously
recorded $5.6 million in 2001 as a charge for the decline in its MFE long-term
investment that was considered to be other than temporary.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for each of
the items set forth below:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2005 2004 2003 2002 2001
----- ----- ----- ----- -----
% % % % %
Revenue
IMAX systems...................................... 67.4 63.7 63.6 55.0 65.0
Films............................................. 18.3 20.5 21.6 31.4 25.4
Theater operations................................ 12.1 12.8 11.0 9.5 5.6
Other............................................. 2.2 3.0 3.8 4.1 4.0
----- ----- ----- ----- -----
Total revenue....................................... 100.0 100.0 100.0 100.0 100.0
Costs and goods and services........................ 50.4 51.5 56.4 58.6 80.7
----- ----- ----- ----- -----
Gross margin........................................ 49.6 48.5 43.6 41.4 19.3
Selling, general and administrative expenses........ 25.7 26.5 28.0 27.0 39.0
Research and development............................ 2.3 2.9 3.2 1.8 2.9
Amortization of intangibles......................... 0.6 0.5 0.5 1.1 2.6
Income from equity-accounted investees.............. -- -- (2.1) (0.2) (0.1)
Receivable provisions, net of (recoveries).......... (0.6) (1.1) (1.9) (1.0) 15.3
Restructuring costs and asset impairments
(recovery)......................................... -- 0.6 0.8 (0.1) 38.5
----- ----- ----- ----- -----
Earnings (loss) from operations..................... 21.6 19.1 15.1 12.7 (78.9)
===== ===== ===== ===== =====
Net earnings (loss) before cumulative effect of
changes in accounting principles................... 11.5 7.5 0.3 9.3 (123.3)
===== ===== ===== ===== =====
Net earnings (loss)................................. 11.5 7.5 0.2 9.3 (123.3)
===== ===== ===== ===== =====
Page 39
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED DECEMBER 31, 2004
REVENUES
The Company's revenues in 2005 were $144.9 million, compared to $136.0
million in 2004, an increase of 6.6% due in large part to an increase in Systems
revenue (see below). The following table sets forth the breakdown of revenue by
category:
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
--------- ---------- ----------
IMAX SYSTEMS REVENUE
Sales and leases................. $ 72,552 $ 63,482 $ 52,269
Ongoing rent(1).................. 11,066 9,215 9,207
Maintenance...................... 14,135 13,873 14,372
--------- ---------- ----------
97,753 86,570 75,848
--------- ---------- ----------
FILMS REVENUE
Distribution..................... 11,706 13,432 14,391
DMR.............................. 8,847 7,487 42
Production and Post-production... 5,898 6,968 11,370
--------- ---------- ----------
26,451 27,887 25,803
--------- ---------- ----------
THEATER OPERATIONS............... 17,498 17,415 13,109
--------- ---------- ----------
OTHER REVENUE.................... 3,228 4,108 4,500
--------- ---------- ----------
$ 144,930 $ 135,980 $ 119,260
========= ========== ==========
(1) Includes rental income and finance income.
Systems revenue increased to $97.8 million in 2005 from $86.6 million in
2004, an increase of 12.9%. Revenue from sales and leases increased to $72.6
million in 2005 from $63.5 million in 2004, an increase of 14.3%. This increase
was due primarily to a greater number of system recognitions, and partially
offset by a decrease in settlement revenues and slightly lower average revenue
per system. The Company recognized revenue on 38 theater systems which qualified
as either sales or sales-type leases in 2005 versus 22 theater systems in 2004.
Nine of the systems recognized in 2005 related to the sale of used theater
systems versus one used system in 2004. More specifically, for additional cash
consideration, two customers exercised an option to convert their operating
leases into an outright purchase resulting in the sale of seven used theater
systems. In addition, the Company sold two used theater systems to new
owner/operators, upon termination of operating leases with the original lessees
in 2005, versus nil in 2004. As these transactions represent the sale of used
systems that were several years old, their average value is substantially lower
than that of a new theater system installation.
Page 40
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED DECEMBER 31, 2004 (cont'd)
REVENUES (cont'd)
Average revenue per sales and sales-type systems decreased due to a greater
number of used systems sold in 2005 and due to a change in mix of the systems
outlined in the table below.
2005 2004
---- ----
Sales and Sales-type leases
IMAX 2D GT.................................... 2 2
IMAX 2D SR.................................... 1 -
IMAX 3D GT.................................... 16 7
IMAX 3D SR.................................... 7 6
IMAX 3D MPX................................... 12 7
-- --
Total .......................................... 38 22
== ==
In addition, the Company installed and began recognizing revenue on five
theater systems that qualified as operating leases in 2005 versus nil in 2004.
The Company recognizes revenue on operating leases over the term of the leases.
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons, including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from
their future obligations under the lease and the geographic territory granted to
the customer reverts to the Company. Once an agreement is reached by both
parties, the initial lease payments that the customer previously made to the
Company are typically recognized as revenue. For this reason, the Company has a
high degree of certainty of collecting a substantial value of a signed contract,
either through a consensual lease buyout or the installation of a theater
system. In addition, since the introduction of its new IMAX MPX theater system
in 2003, the Company has agreed with several customers to terminate their
existing lease agreements which were in the Company's backlog and sign new MPX
system agreements. Amounts relating to settlement revenue for 2005 total $14.3
million compared to $19.1 million in 2004. The settlement amounts are detailed
as follows: $0.6 million in 2005 related to MPX conversion agreements compared
to $6.0 million in 2004; $11.7 million in 2005 related to consensual lease
buyouts compared to $12.3 million in 2004; and $2.0 million in 2005 related to
termination of agreements after customer default compared to $0.8 in 2004. The
Company anticipates that, while MPX conversion agreements may continue as MPX
systems continue to prove popular with commercial customers, overall revenue
from consensual lease buyouts and terminations of agreements by customer default
will likely decrease in 2006 in comparison to 2005.
Ongoing rental revenue and maintenance revenue in 2005 increased 20.1% and
1.9%, respectively. The Company expects to see an increase in 2006 compared to
2005 in both ongoing rent and maintenance revenue as the Company's theater
network continues to grow in 2006.
Page 41
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED DECEMBER 31, 2004 (cont'd)
REVENUES (cont'd)
Film revenues decreased to $26.5 million in 2005 from $27.9 million in
2004. IMAX DMR revenues, which are revenues to the Company generated from the
gross box office performance of IMAX DMR films, increased to $8.8 million in
2005 from $7.5 million in 2004. The increase in DMR revenue was due to the
successful launch and performance of four new DMR films in 2005 versus three new
DMR films in 2004. The 2005 DMR films included; the March 2005 release of
Robots: The IMAX Experience, the June 2005 release of Batman Begins: The IMAX
Experience, the July 2005 release of Charlie and the Chocolate Factory: The IMAX
Experience, and the November 2005 release of Harry Potter and the Goblet of
Fire: The IMAX Experience. The increase in DMR revenues was partially offset by
a decrease in film distribution revenues and film post-production revenues. Film
distribution revenues are revenues related to the release of films in the IMAX
15/70 library or new 15/70 productions to which the Company has distribution
rights. Film distribution revenues decreased to $11.7 million in 2005 from $13.4
million in 2004, a decrease of 12.9%, primarily due to the timing of new film
releases. NASCAR 3D: The IMAX Experience was first released in March 2004
whereas Magnificent Desolation: Walking on the Moon 3D was released in September
2005. Post-production revenues decreased to $5.2 million in 2005 from $6.6
million in 2004, a decrease of 21.3% mainly due to a decrease in third party
business at the Company's post-production unit.
The Company believes it will continue to see higher film revenues in 2006
due to the increase in the number of new films expected to be released during
the year. The Company intends to release in conjunction with studios at least
six new films in 2006 including V for Vendetta: The IMAX Experience (March
2006), Deep Sea 3D (March 2006), Poseidon: The IMAX Experience (May 2006),
Superman Returns: The IMAX Experience (June 2006), The Ant Bully: An IMAX 3D
Experience (August 2006), and Happy Feet: An IMAX 3D Experience (November 2006).
Theater operations revenue increased slightly to $17.5 million in 2005
from $17.4 million in 2004 due to an increase in the average ticket prices of
7.1%, partially offset by an overall attendance decrease of 6.2%. The Company
believes it will see higher attendance rates in its theater operations due to
the new films expected to be released in 2006.
Other revenue decreased to $3.2 million in 2005 from $4.1 million in 2004,
a decrease of 21.4%, largely as a result of a decrease in sponsorship revenue
and after market sales.
Based on the Company's expectation of 2006 system installations and its
estimate of films to be released in 2006, the Company believes it will see
higher revenues in 2006.
GROSS MARGIN
Gross margin in 2005 was $71.9 million, or 49.6% of total revenue,
compared to $65.9 million, or 48.5% of total revenue in 2004. The increase in
gross margins for 2005 is partially due to systems margins on a total of 43
systems, 38 of which were sales and sales-type leases recognized as revenue
during the period compared to 22 sales and sales-type leases recognized in the
prior year. The margin impact of system recognitions was partially offset by a
lower margin impact of settlement revenues in 2005 compared to 2004. Average
gross margin on sales and sales-type lease of projection systems decreased in
2005 versus 2004 by 29.0% primarily due to the difference in the mix of
projector systems recognized, and a greater number of used systems sold during
the year. Included in gross margin are amounts for 2005 related to consensual
lease buyouts of $11.7 million compared to $12.3 million in 2004, termination of
agreements after customer default of $2.0 million compared to $0.8 million in
2004, and MPX conversion agreements $0.6 million compared to $6.0 million in
2004.
Page 42
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED DECEMBER 31, 2004 (cont'd)
GROSS MARGIN (cont'd)
The Company's film gross margin increased in 2005 by $4.4 million. The
Company's IMAX DMR gross margin increased by $1.8 million primarily due to the
strong box office results from the 2005 release of Charlie and The Chocolate
Factory: The IMAX Experience and Harry Potter and the Goblet of Fire: The IMAX
Experience along with the continued strong performance of The Polar Express: The
IMAX 3D Experience which was re-released in 2005. Although not all DMR film
releases performed equally in the year due to differences in the structuring of
the arrangements with each studio and box office performance of each DMR
release, the Company believes it has achieved its strategic objectives for 2005
in this important area of the business. The Company's film distribution gross
margin increased $1.6 million due to the release of Magnificent Desolation:
Walking on the Moon 3D in September 2005, and due to the continued success of
Nascar 3D: The IMAX Experience. Post-production gross margin increased by $0.5
million in 2005 compared to 2004 mainly due to higher margins from consulting
services and increased supplier volume rebates.
The Company's owned and operated theater gross margin decreased by $0.7
million in 2005 in comparison to 2004 as a result of higher rental fees paid to
third parties for film.
Margins on other revenue increased significantly in 2005 primarily due to
the increased revenues related to the rental of 2D and 3D cameras, and also
because the Company had a write down of camera assets in 2004. As a result,
there was a minimal amount of camera assets to depreciate in 2005.
The Company anticipates higher gross margins in 2006 in comparison to
2005, due to a combination of higher system installations and DMR film releases,
as commercial exhibitors continue to install new projection systems in their
multiplexes.
OTHER
Selling, general and administrative expenses were $37.3 million in the
2005 versus $36.1 million in 2004. Legal fees for 2005 increased by $2.4 million
as the Company incurred legal costs related to patent infringement matters and
settled certain litigation matters. Other professional fees decreased by $0.8
million in 2005 due to lower costs incurred during the year to comply with
Sarbanes-Oxley in comparison to 2004. Non-cash stock-based compensation
decreased by $0.2 million in 2005 due to changes in the Company share price. The
Company recorded a net capital tax recovery of $0.4 million in 2005 due to
refunds received in the year and releases of related tax reserve and expensed
$0.7 million for capital taxes paid in 2004. The Company recorded a foreign
exchange loss of $0.6 million in 2005 compared to a gain of $0.4 million in 2004
primarily due to the impact of a stronger U.S dollar on Euro receivable
balances. The Company records foreign exchange translation gains and losses
primarily on a portion of its financing receivable balances which are
denominated in Canadian dollars, Euros and Japanese Yen.
Amortization of intangibles increased to $0.9 million in 2005 from $0.7
million in 2004.
Receivable provisions net of recoveries for accounts receivable and
financing receivables amounted to a net recovery of $0.9 million in 2005
compared to a net recovery of $1.5 million in 2004, due to favorable outcomes on
lease amendments for both periods.
The Company did not realize any asset impairment charges in 2005. The
Company took in asset impairment charges of $0.8 million in 2004 after the
Company assessed the carrying value of certain of its camera assets in 2004 due
to lower volume in 2D camera rentals. The Company recognized that the future
cash flows of these assets did not support their recoverability.
Interest income increased to $1.0 million in 2005 from $0.8 million in
2004 primarily due to higher average cash and short-term investment balances
along with higher yields throughout 2005 compared to 2004.
Page 43
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED DECEMBER 31, 2004 (cont'd)
OTHER (cont'd)
Interest expense decreased to $16.8 million in 2005 from $16.9 million in
2004. Included in interest expense is the amortization of deferred finance costs
in the amount of $1.2 million in 2005 and 2004. The Company's policy is to defer
and amortize all the costs relating to a debt financing over the life of the
debt instrument.
In 2004, the Company recorded a gain of $0.4 million from the sale of its
equity investment in Mainframe Entertainment, Inc. ("MFE"). The Company did not
have any interests in long-term investments in 2005.
INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, investment and other tax credits, the provision for income taxes at
different rates in foreign and other provincial jurisdictions, enacted statutory
tax rate increases or reductions in the year, changes in the Company's valuation
allowance based on the Company's recoverability assessments of deferred tax
assets, and favorable or unfavorable resolution of various tax examinations. The
2005 income tax provision of $0.9 million includes a net $7.0 million decrease
in the valuation allowance against deferred tax assets to reflect revised
estimates regarding the realization of the Company's deferred income tax assets
based on an assessment of positive and negative evidence. The Company also
favorably resolved certain tax audits in the year resulting in tax recoveries of
$0.2 million and the release of related tax reserves of $0.2 million to the
income tax provision. In addition, the Company concluded an examination by the
provincial authorities for the 1999 and 2000 taxation years. The audit resulted
in a net cash tax recovery of $0.3 million in the year. The recovery was
recorded in two parts. An amount of $0.4 million has been charged through the
current income tax provision offset by a recovery of provincial capital taxes in
the amount of $0.7 million through selling, general and administrative expenses
in the year and the release of related capital tax reserves of $0.3 million. As
of December 31, 2005, the Company had a gross deferred income tax asset of $44.8
million, against which the Company is carrying a $38.6 million valuation
allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.3 million in 2005 versus $4.0
million in 2004. The lower level of expenses in 2005 primarily reflects lower
research and development expenses pertaining to the Company's IMAX MPX theater
projection system in 2004, which is now complete. Through research and
development, the Company continues to design and develop cinema-based equipment,
software and other technologies to enhance its product offering, including the
continued enhancement of a method of generating stereoscopic (3D) imaging data
from a monoscopic (2D) source. The Company believes that the motion picture
industry will be affected by the development of digital technologies,
particularly in the areas of content creation (image capture), post-production
(editing and special effects), digital re-mastering, distribution and display.
Consequently, the Company has made significant investments in digital
technologies, including the development of a proprietary, patent-pending
technology to digitally enhance image resolution and quality of motion picture
films, the conversion of monoscopic (2D) to stereoscopic (3D) images and the
development of an IMAX digital projector, and holds a number of patents, patents
pending and intellectual property rights in these areas. In addition, the
Company holds numerous digital patents and long-term relationships with key
manufacturers and suppliers in digital technology. However, there can be no
assurance that the Company will be awarded patents covering its technology or
that competitors will not develop similar technologies.
LOSS ON RETIREMENT OF NOTES
During 2004, the Company recorded a loss of $0.8 million related to costs
associated with the redemption of $29.2 million of the Company's Old Senior
Notes. This transaction had the effect of fully extinguishing the Old Senior
Notes.
Page 44
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED DECEMBER 31, 2004 (cont'd)
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company abandoned or removed all of its assets from the theater in
the first quarter of 2004. The Company is involved in a legal proceeding with
the landlord of the theater with respect to the amount owing to the landlord by
the Company for lease and guarantee obligations. The amount of loss to the
Company has been estimated as between $0.8 million and $2.3 million. The Company
paid out $0.8 million with respect to amounts owing to the landlord during 2003
and 2004. As the Company is uncertain as to the outcome of the proceeding, no
additional amount has been recorded. The Company recorded $nil in net earnings
from discontinued operations related to Miami IMAX theater in 2005 and 2004.
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries, to a company owned by members of DPI management. As part of the
transaction, the Company restructured its advances to DPI, releasing DPI from
obligations to repay any amounts in excess of $12.7 million previously advanced
by the Company, and reorganized the remaining $12.7 million of debt owing to the
Company into two separate loan agreements. The loans receivable are
collateralized by fixed and floating charges over all DPI assets including
intellectual properties. One of the loans is convertible, upon the occurrence of
certain events, into shares representing 49% of the total share capital of DPI
related to these loans. On December 29, 2005, the Company and DPI entered into
an agreement to settle the remaining loans in exchange for a payment of $3.5
million to be received in two tranches in the first quarter of 2006. During
2005, the Company recognized $2.0 million (2004 - $0.8 million) in income from
discontinued operations.
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003
REVENUES
Systems revenue increased to $86.6 million in 2004 from $75.8 million in
2003, an increase of 14.1%. Revenue from sales and leases increased to $63.5
million in 2004 from $52.3 million in 2003, an increase of 21.5%. This increase
was due to a greater number of system recognitions, and higher revenue from
consensual lease buyouts and MPX backlog upgrades in the period, partially
offset by slightly lower average revenue per system. The Company recognized
revenue on 22 theater systems in 2004, versus 21 theater systems in 2003, one of
which was an operating lease. Average sales and sales-type lease revenue
per-system decreased in 2004 versus 2003 by 4.9% primarily due to a difference
in the mix of projector systems recognized in each period as outlined in the
table below:
2004 2003
---- ----
Sales and Sales-type leases
IMAX 2D GT.................................... 2 --
IMAX 2D SR.................................... -- 4
IMAX 3D GT.................................... 7 9
IMAX 3D SR.................................... 6 8
IMAX 3D MPX................................... 7 --
-- --
Total Recognitions.............................. 22 21
== ==
Page 45
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
REVENUES (cont'd)
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons, including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from
their future obligations under the lease, the initial lease payments that the
customer previously made to the Company are recognized as revenue and the
geographic territory granted to the customer reverts to the Company. In
addition, since the introduction of its new IMAX MPX theater system in 2003, the
Company has agreed with several customers to modify their lease agreements to
substitute MPX systems for systems for which the customers previously
contracted, which were in the Company's backlog. Amounts relating to the three
categories of MPX backlog upgrades, consensual lease buyouts and terminations
due to default of customers included in revenue for 2004 total $19.1 million
compared to $9.5 million in 2003. $6.0 million of the total $19.1 million
related to customers that restructured their existing lease agreements in order
to obtain the Company's new IMAX MPX projection system technology, and $12.3
million of the total $19.1 million was recognized in respect of consensual lease
buyouts. The remaining $0.8 million of the total $19.1 million was recognized in
respect of terminations of agreements after customer default.
Ongoing rental revenue in 2004 increased 0.1% from 2003 and maintenance
revenue in 2004 decreased 3.5% over the prior year.
Film revenues increased to $27.9 million in 2004 from $25.8 million in
2003. IMAX DMR revenues, which are revenues to the Company generated from the
gross box office performance of IMAX DMR films, increased to $7.5 million in
2004 from less than $0.1 million in 2003. Film distribution revenues, which are
revenues related to the release of films in the IMAX 15/70 library or new
productions to which the Company has distribution rights, decreased to $13.4
million in 2004 from $14.4 million in 2003, a decrease of 6.7%, and film
production and post-production revenues decreased to $7.0 million in 2004 from
$11.4 million in 2003, a decrease of 38.7%. The decrease in film post-production
revenues was mainly due to a decline in third party business at the Company's
post-production unit. The increase in DMR revenue was due to the successful
performance of the 2004 IMAX DMR film slate which included, The Polar Express:
The IMAX 3D Experience, Spider-Man 2: The IMAX Experience and Harry Potter and
the Prisoner of Azkaban: The IMAX Experience. The increase in DMR revenues was
partially offset by a decrease in film distribution revenues primarily due to
stronger performances in 2003 of SPACE STATION and T-REX: Back to the
Cretaceous.
Theater operations revenue increased to $17.4 million in 2004 from $13.1
million in 2003, primarily due to the success of the 2004 film slate which
contributed to an overall attendance increase of 5.4% and to an increase in the
average ticket prices of 7.0%. The Company's Tempe theater was also consolidated
for the entire 2004 year compared to equity-accounting treatment in 2003 when it
was only 50% owned.
Other revenue decreased to $4.1 million in 2004 from $4.5 million in 2003,
a decrease of 8.7%, largely as a result of decreased camera rentals in 2004.
GROSS MARGIN
Gross margin in 2004 was $65.9 million, or 48.5% of total revenue,
compared to $52.0 million, or 43.6% of total revenue in 2003. The increase in
gross margins for 2004 is primarily due to a combination of higher average gross
margins for 22 systems installed during the year, and the margin impact of
higher consensual lease buyouts and MPX backlog upgrades during the year.
Average gross margin on sales and sales-type lease of projection systems
increased in 2004 versus 2003 by 11.8% primarily due to the recognition of three
refurbished or upgraded systems in 2004 compared to eight refurbished or
upgraded systems in 2003 which typically have lower margins. Included in gross
margin are revenues for 2004 related to consensual lease buyouts ($12.3
million), MPX backlog upgrades ($6.0 million) and terminations due to default of
customers ($0.8 million) (an aggregate $19.1 million, compared to $9.5 million
in 2003).
Page 46
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
GROSS MARGIN (cont'd)
During 2004, the Company and its studio partners released four films:
NASCAR: The IMAX Experience, Harry Potter and the Prisoner of Azkaban: The IMAX
Experience, Spider-Man 2: The IMAX Experience and The Polar Express: The IMAX 3D
Experience. As at December 31, 2004, these films have collectively grossed in
excess of $75.0 million on IMAX screens. Although not all DMR film releases
performed equally in the year due to differences in the structuring of the
arrangements with each studio and box office performance of each DMR release,
the Company believes it has achieved its strategic objectives for 2004 in this
important area of the business. The Company's DMR gross margin improved
significantly in comparison to 2003 due to the success of its 2004 IMAX DMR film
slate. The film gross margins were also impacted by a decline in film
distribution gross margin primarily due to the stronger performances in 2003 of
SPACE STATION and T-REX: Back to the Cretaceous.
The Company's owned and operated theater gross margin improved
significantly in comparison to 2003 due to the success of its 2004 IMAX DMR film
slate.
Margins on other revenue also decreased significantly, primarily due to
the decrease of camera rentals in 2004.
OTHER
Selling, general and administrative expenses were $36.1 million in 2004
versus $33.3 million in 2003. The Company recorded a foreign exchange gain of
$0.4 million in 2004 compared to a gain of $1.7 million in 2003. The Company
records foreign exchange translation gains and losses primarily on a portion of
its financing receivable balances which are denominated in Canadian dollars,
Euros and Japanese Yen. Professional fees increased by $1.3 million in the
period primarily relating to the costs associated with compliance in connection
with the Sarbanes-Oxley Act of 2002. Legal fees for 2004 declined by $0.9
million as the Company settled or otherwise favorably resolved certain
litigation matters. Compensation expense increased by $0.5 million in 2004 due
in part to a higher Canadian dollar offset by a lower stock compensation charge.
The Company also incurred higher Canadian capital taxes of $0.7 million in 2004
due to receipts of capital tax refunds received and recorded in 2003.
Amortization of intangibles increased to $0.7 million in 2004, from $0.6
million in 2003.
The Company no longer has any interests in equity-accounted investees as
of December 31, 2003. Included in 2003 was a gain of $2.3 million as a result of
the Company being released from a financial guarantee.
Receivable provisions net of recoveries amounted to a net recovery of $1.5
million in 2004 compared to a net recovery of $2.2 million in 2003. The Company
recorded an accounts receivable recovery of $0.1 million as compared to a
provision of $0.7 million in 2003. There was a net recovery of $1.4 million in
2004 on financing receivables as compared to a net recovery of $2.9 million in
2003 due to a favorable outcome on lease amendments.
Asset impairment charges amounted to $0.8 million compared to $1.0 million
in 2003 after the Company assessed the carrying value of certain of its camera
assets in 2004 due to lower volume in 2D camera rentals, and certain of its
owned and operated theater assets in 2003 due primarily to lower than
anticipated revenues at one of its locations. The Company recognized that the
future cash flows of these assets did not support their recoverability. The
Company does not anticipate any further impairment charges relating to its
remaining camera assets.
Interest income increased to $0.8 million in 2004 from $0.7 million in
2003 primarily due to interest received relating to tax refunds from favorable
tax examinations paid to the Company in 2004.
Page 47
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
OTHER (cont'd)
Interest expense increased to $16.9 million in 2004 from $15.9 million in
2003 due to a higher effective interest rate in the current period. In December
2003, the Company retired and repaid an aggregate of $123.6 million of its
7.875% Old Senior Notes. The balance of the Old Senior Notes of $29.2 million
were retired and repaid in January 2005. In December 2003, The Old Senior Notes
were replaced with $160.0 million aggregate principal of 9.625% senior notes due
December 1, 2010 (the "Senior Notes"). Included in interest expense is the
amortization of deferred finance costs in the amount $1.2 million in 2004 and
$0.7 million for 2003. The Company's policy is to defer and amortize all the
costs relating to a debt financing over the life of the debt instrument.
Recovery on long-term investments was $0.3 million in 2004. The Company
recorded a gain of $0.4 from the sale of its equity investment in MFE. Recovery
on long-term investments was $1.9 million in 2003 as a result of a settlement
agreement with MFE, whereby MFE made payments to the Company in full and final
settlement of all of its indebtedness and obligations to the Company arising
under a Debenture loan.
INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate and
will vary from year to year primarily as a result of numerous permanent
differences, the Canadian manufacturing and processing profits deduction,
investments and other tax credits, the provision for income taxes at different
rates in foreign and other provincial jurisdictions, enacted statutory tax rate
increases or reductions in the year, changes in the Company's valuation
allowance based on the Company's recoverability assessments of deferred tax
assets, and favorable or unfavorable resolution of various tax examinations. The
2004 deferred income tax recovery included a net $1.3 million decrease in the
valuation allowance to reflect revised estimates regarding the realization of
the Company's deferred income tax assets based on an assessment of positive and
negative evidence. The Company also favorably resolved tax audits in respect of
its 1999, 2000 and 2001 taxation years and filed amended tax returns for these
years, which resulted in the verification by the authorities of additional
investment tax credits and future tax deductions for use by the Company. These
amounts have been reflected in the Company's effective rate reconciliation and
gross deferred tax assets for the year. The audits and amended returns also
resulted in the refund of tax of approximately $0.8 million in the year which
was not previously recorded. As of December 31, 2004, the Company had a gross
deferred income tax asset of $51.6 million, against which the Company is
carrying a $45.5 million valuation allowance.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.0 million in 2004 versus $3.8
million in 2003. The higher level of expenses in 2004 primarily reflects
research and development activities pertaining to the Company's new IMAX MPX
theater projection system. Through research and development, the Company
continues to design and develop cinema-based equipment, software and other
technologies to enhance its product offering, including the development of a
method of generating stereoscopic (3D) imaging data from a monoscopic (2D)
source. The Company believes that the motion picture industry will be affected
by the development of digital technologies, particularly in the areas of content
creation (image capture), post-production (editing and special effects), digital
re-mastering, distribution and display. Consequently, the Company has made
significant investments in digital technologies, including the development of a
proprietary, patent-pending technology to digitally enhance image resolution and
quality of 35mm motion picture films, and the conversion of monoscopic (2D) to
stereoscopic (3D) images and holds a number of patents, patents pending and
intellectual property rights in these areas. In addition, the Company holds
numerous digital patents and an exclusive supply arrangement with Texas
Instruments Corp. in the large-format field of use. However, there can be no
assurance that the Company will be awarded patents covering this technology or
that competitors will not develop similar technologies.
Page 48
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2004 VERSUS YEAR ENDED DECEMBER 31, 2003 (cont'd)
GAIN (LOSS) ON RETIREMENT OF NOTES
During 2004, the Company recorded a loss of $0.8 million related to costs
associated with the redemption of $29.2 million of the Company's Old Senior
Notes. This transaction had the effect of fully extinguishing the Old Senior
Notes.
During 2003, the Company recorded a loss of $4.9 million related to costs
associated with the repurchase, retirement and refinancing of $170.8 million of
the Company's Old Senior Notes. These transactions had the effect of reducing
the principal of the Company's outstanding Old Senior Notes to $29.2 million as
at December 31, 2003.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company abandoned or removed all of its assets from the theater in
the first quarter of 2004. The Company is involved in a legal proceeding with
the landlord of the theater with respect to the amount owing to the landlord by
the Company for lease and guarantee obligations. The amount of loss to the
Company has been estimated as between $0.8 million and $2.3 million, of which
the Company had accrued $0.8 million as at December 31, 2003. During 2004, the
Company paid out $0.8 million with respect to amounts owing to the landlord. As
the Company is uncertain as to the outcome of the proceeding, no additional
amount has been recorded. The Company recorded $nil in net earnings from
discontinued operations related to Miami IMAX theater in 2004 compared to a loss
of $0.5 million in 2003.
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries (collectively, "DPI"), to a company owned by members of DPI
management. As part of the transaction, the Company restructured its advances to
DPI, releasing DPI from obligations to repay any amounts in excess of $12.7
million previously advanced by the Company, and reorganized the remaining $12.7
million of debt owing to the Company into two separate loan agreements. The
loans receivable are collateralized by fixed and floating charges over all DPI
assets including intellectual properties. One of the loans is convertible, upon
the occurrence of certain events, into shares representing 49% of the total
share capital of DPI. During 2004, the Company received $0.8 million in cash
towards the repayment of this debt, and has recorded this amount in net earnings
(loss) from discontinued operations. As of December 31, 2004, the remaining
balance of the loans receivable is $11.1 million, which has been fully provided
for. On January 31, 2006, the Company and DPI agreed to terminate and extinguish
the loan agreements in exchange for a $3.5 million payment to the Company.
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility (the "Credit Facility"). The Credit Facility
is a three-year revolving credit facility with yearly renewal options
thereafter, permitting maximum aggregate borrowings of $20.0 million, subject to
a borrowing base calculation which includes the Company's financing receivables,
and certain reserve requirements and further reduced by outstanding letters of
credit. The Credit Facility currently bears interest at Prime + 0.5% per annum
or Libor + 2.25% per annum and is collateralized by a first priority security
interest in all of the current and future assets of the Company. The Credit
Facility contains typical affirmative and negative covenants, including
covenants that restrict the Company's ability to: incur certain additional
indebtedness; make certain loans, investments or guarantees; pay dividends; make
certain asset sales; incur certain liens or other encumbrances; conduct certain
transactions with affiliates and enter into certain corporate transactions. In
addition, the Credit Facility contains customary events of default, including
upon an acquisition or a change of control that has a material adverse effect on
the Company's financial condition. The Credit Facility also requires the Company
to maintain a minimum level of earnings before interest, taxes, depreciation and
amortization, and cash collections.
Page 49
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENTS
As at December 31, 2005, the Company's principal sources of liquidity
included cash and cash equivalents of $24.3 million, short-term investments of
$8.2 million, the Credit Facility, trade accounts receivable of $26.2 million
and anticipated collection from net investment in leases due in the next 12
months of $8.4 million. As at December 31, 2005, the Company has not drawn down
on the Credit Facility, and has letters of credit for $7.6 million secured by
the Credit Facility arrangement.
The Company believes that cash flow from operations together with existing
cash and borrowing available under the Credit Facility will be sufficient to
meet operating needs for the foreseeable future. However, the Company's
operating cash flow will be adversely impacted if management's projections of
future signings and installations are not realized. The Company forecasts its
short-term liquidity requirements on a quarterly and annual basis. Since the
Company's future cash flows are based on estimates and there may be factors that
are outside of the Company's control, there is no guarantee the Company will
continue to be able to fund its operations through cash flows from operations.
Under the terms of the Company's typical theater system lease agreement, the
Company receives substantial cash payments before the Company completes the
performance of its obligations. Similarly, the Company receives cash payments
for some of its film productions in advance of related cash expenditures.
The Company's net cash provided by (used in) operating activities is
impacted by a number of factors, including the proceeds associated with new
signings of theater system lease and sale agreements in the year, the box office
performance of large format films distributed by the Company and/or exhibited in
the Company's theaters, increases or decreases in the Company's operating
expenses, and the level of cash collections received from its customers.
Cash provided by operating activities amounted to $1.8 million for the
year ended December 31, 2005. Changes in other non-cash operating assets as
compared to December 31, 2004 include an increase of $3.3 million in financing
receivables, a $5.0 million increase in accounts receivable, an increase of $0.4
million in inventories, and a $1.5 million increase in prepaid expenses which
mostly relates to prepaid film print costs which will be expensed over the
period to be benefited. Changes in other non-cash operating liabilities as
compared to December 31, 2004 include a decrease in deferred revenue of $6.1
million related to current year installations, an increase in accounts payable
of $1.1 million and a decrease of $6.7 million in accrued liabilities. Included
in accrued liabilities for 2005 were $0.4 million in film finance proceeds which
are required to be spent on a specific film project and an amount of $31.1
million in respect of accrued pension obligations which are long-term in nature.
Cash used in investing activities amounted to $10.7 million in 2005, which
includes purchases of short-term investments of $31.3 million, proceeds from
maturities of short-term investments of $23.5 million, purchases of $1.6 million
in fixed assets, an increase in other assets of $0.7 million and an increase in
other intangible assets of $0.6 million.
Cash provided by financing activities in 2005 amounted to $4.4 million.
Cash received from the issuance of common shares through the exercise of stock
options amounted to $3.6 million. The Company also received $0.8 million in cash
on a note receivable from a discontinued operation.
Capital expenditures including the purchase of fixed assets net of sales
proceeds and investments in film assets were $11.4 million for the year ended
December 31, 2005.
Cash provided by operating activities amounted to $11.4 million in the
year ended December 31, 2004. Changes in other non-cash operating assets and
liabilities included a decrease in deferred revenue of $12.8 million, an
increase in accrued liabilities of $6.0 million and an increase of $5.7 million
in accounts receivable. The Company also had a decrease in restricted cash of
$5.0 million in 2004. Cash used by investing activities in the year ended
December 31, 2004 amounted to $1.4 million, primarily consisting of $1.0 million
invested in other assets. The Company also recorded $0.4 million in income
related to cash received under a restructuring agreement with MFE. Cash used in
financing activities in 2004 included a $29.2 million retirement of its Old
Senior Notes. The Company also received $0.8 million in cash on a note
receivable from a discontinued operation. Capital expenditures including the
purchase of fixed assets net of sales proceeds and investments in film assets
were $5.2 million in the year ended December 31, 2004.
Page 50
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at December 31, 2005, the Company has letters of credit of $7.6 million
outstanding of which the entire balance has been secured by the Credit Facility.
In addition, the Company is required to expend $0.4 million included in accrued
liabilities towards the distribution of a motion picture title.
SENIOR NOTES DUE 2010
In December 2003, the Company completed a private placement of $160.0
million principal of 9.625% senior notes due December 1, 2010 (the "Unregistered
Senior Notes") to a group of initial purchasers. The net proceeds of the
issuance after deducting expenses and underwriting commissions were $154.4
million. In November 2004, the Company completed an exchange offer wherein
$159.0 million of the Company's Unregistered Senior Notes were exchanged for
senior notes registered under the Securities Act of 1933, as amended (the
"Registered Senior Notes"), pursuant to a registration statement on Form S-4
that had been declared effective by the Securities and Exchange Commission on
September 30, 2004. Apart from the fact that the Registered Senior Notes have
been registered under the Securities Act, the Unregistered Senior Notes and the
Registered Senior Notes are substantially identical and are referred to herein
as the "Senior Notes".
The Senior Notes bear interest at a rate of 9.625% per annum and are
unsecured obligations that rank equally with any of the Company's existing and
future senior indebtedness and senior to all of the Company's existing and
future subordinated indebtedness. The payment of principal, premium, if any, and
interest on the Senior Notes is unconditionally guaranteed, jointly and
severally, by certain of the Company's wholly-owned subsidiaries. The Senior
Notes are subject to redemption for cash by the Company, in whole or in part, at
any time on or after December 1, 2007, at redemption prices expressed as
percentages of the principal amount for each 12-month period commencing December
1 of the years indicated: 2007 - 104.813%; 2008 - 102.406%; 2009 and thereafter
- 100.000%, together with accrued and unpaid interest thereon to the redemption
date. If certain changes were to result in the imposition of withholding taxes
under Canadian law, the Senior Notes are subject to redemption at the Company's
option, in whole but not in part, at a redemption price of 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption. In
the event of a change in control, the Company will be required to make an offer
to repurchase the Senior Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, prior to December 1, 2006, under certain conditions,
the Company may redeem up to 35% of the Senior Notes with the proceeds of
certain equity offerings at 109.625% of the principal amount thereof together
with accrued and unpaid interest thereon to the date of redemption.
The terms of the Company's Senior Notes impose certain restrictions on its
operating and financing activities, including certain restrictions on the
Company's ability to: incur certain additional indebtedness; make certain
distributions or certain other restricted payments; grant liens; create certain
dividend and other payment restrictions affecting the Company's subsidiaries;
sell certain assets or merge with or into other companies; and enter into
certain transactions with affiliates. The Company believes these restrictions
will not have a material impact on its financial condition or results of
operations.
As at December 31, 2005, the Company had outstanding $159.0 million
aggregate principal of Registered Senior Notes and $1.0 million aggregate
principal of Unregistered Senior Notes.
Page 51
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
OLD SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of senior notes due
December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old Senior
Notes").
During 2003, the Company retired an aggregate of $47.2 million principal
amount of the Old Senior Notes and accrued interest of $0.7 million in exchange
for the issuance of 5,838,353 of its common shares at an average value of $8.28
per share. The Company recorded additional charges of $0.3 million related to
costs associated with this retirement. These transactions had the effect of
reducing the principal amount of the Company's outstanding Old Senior Notes to
$152.8 million. In December 2003, the Company completed a tender offer and
consent solicitation for its remaining $152.8 million of the Old Senior Notes.
In December 2003, $123.6 million in principal of the Old Senior Notes were
redeemed pursuant to the tender offer. Notice of Redemption for all remaining
outstanding Old Senior Notes was delivered on December 4, 2003 and the remaining
$29.2 of outstanding Old Senior Notes were redeemed on January 2, 2004. A loss
of $0.8 million related to the retirement was recorded in 2004.
CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company completed a private placement of $100.0 million
of 5.75% convertible subordinated notes due April 1, 2003 (the "Subordinated
Notes"). In 2001 and 2002, the Company and a wholly-owned subsidiary purchased
an aggregate of $90.9 million principal of Subordinated Notes for $21.8 million
consisting of $18.5 million in cash and common shares of the Company valued at
$3.3 million. On April 1, 2003, the Company repaid the remaining outstanding
Subordinated Notes balance of $9.1 million plus accrued interest on the maturity
date.
RENTAL OBLIGATIONS
The Company's total minimum annual rental payments to be made under
operating leases for premises as of December 31, 2005 are as follows:
2006 $ 5,458
2007 5,348
2008 5,045
2009 5,035
2010 5,225
Thereafter 18,982
-----------
$ 45,093
===========
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As at December 31, 2005, the Company had an unfunded and
accrued projected benefit obligation of approximately $31.1 million (December
31, 2004 - $25.9 million) in respect of this defined benefit pension plan. At
the time the Company established the defined benefit pension plan, it also took
out life insurance policies on its two Co-Chief Executive Officers with coverage
amounts of $21.5 million in aggregate. The Company intends to use the proceeds
of life insurance policies taken on its Co-Chief Executive Officers to be
applied towards the benefits due and payable under the plan, although there can
be no assurance that the Company will ultimately do so. As at December 31, 2005,
the cash surrender value of the insurance policies is $3.3 million (December 31,
2004 - $2.5 million).
On March 6, 2006, the Company and the Co-Chief Executive Officers
negotiated an amendment to the plan in order to reduce certain benefits
thereunder. Under the terms of the plan amendment, the cost of living adjustment
and surviving spouse benefits previously owed to the Co-Chief Executive Officers
are each reduced by 50%, subject to a recoupment of a percentage of such
benefits upon a change of control of the Company, and benefit payments are
accelerated and paid out upon the occurrence of certain events, including a
change of control of the Company. The Company is currently evaluating the effect
that these plan amendments will have on the pension liability, future pension
expense, expected contributions, and benefit payments, although the Company
expects a significant reduction in the total projected benefit obligation
approximating $9 million and future reductions in pension expense approximating
$11 million over the 5 years.
Page 52
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
CONTRACTUAL OBLIGATIONS
Payments to be made by the Company under contractual obligations are as
follows:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
---------- ----------- --------- --------- -----------
Long-term debt obligations $ 160,000 $ -- $ -- $ 160,000 $ --
Lease obligations 45,297 5,618 10,437 10,260 18,982
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
rates. The Company does not use financial instruments for trading or other
speculative purposes.
A majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses is denominated in Canadian
dollars. A portion of the Company's net U.S. dollar flows is converted to
Canadian dollars to fund Canadian dollar expenses through the spot market. In
Japan, the Company has ongoing operating expenses related to its operations. Net
Japanese yen flows are converted to U.S. dollars through the spot market. The
Company also has cash receipts under leases denominated in Japanese yen, Euros
and Canadian dollars. In 2005, the Company recorded translation losses of $0.6
million primarily from the receivables associated with leases denominated in
Euros, as the value of the U.S. dollar increased in relation to the Euro. The
value of the U.S. dollar declined in relation to the Canadian dollar and
therefore had a negative impact on working capital. The Company plans to convert
Japanese yen and Euros lease cash flows to U.S. dollars through the spot markets
on a go-forward basis.
Page 53
IMAX CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are filed as part
of this Report:
Page
----
Report of Independent Registered Public Accounting Firm........................................................... 55
Consolidated Balance Sheets as at December 31, 2005 and 2004...................................................... 57
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003........................ 58
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003........................ 59
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003.... 60
Notes to Consolidated Financial Statements........................................................................ 61
Page 54
IMAX CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of IMAX Corporation
We have completed integrated audits of IMAX Corporation's 2005 and 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005 and audit of its 2003 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
------------------------------------------------------------------
In our opinion, the consolidated financial statements listed under the
accompanying index, present fairly, in all material respects, the financial
position of IMAX Corporation (the "Company") and its subsidiaries at December
31, 2005 and December 31, 2004, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a) (2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in note 2(h) to the consolidated financial statements, the
Company changed its accounting policy for asset retirement obligations upon the
adoption of new accounting pronouncements effective January 1, 2003.
Internal control over financial reporting
-----------------------------------------
Also, in our opinion, management's assessment, included in Management's
Annual Report on Internal Control over Financial Reporting appearing in Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
Page 55
IMAX CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (cont'd)
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Independent Registered Public Accounting Firm
Toronto, Canada
March 9, 2006
Page 56
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
AS AT DECEMBER 31,
----------------------------------
2005 2004
---------------- ---------------
ASSETS
Cash and cash equivalents $ 24,324 $ 28,964
Short-term investments 8,171 --
Accounts receivable, net of allowance for doubtful accounts of $5,892
(2004 - $8,390) 26,165 19,899
Financing receivables (note 4) 63,006 59,492
Inventories (note 5) 28,294 29,001
Prepaid expenses 3,825 2,279
Film assets (note 6) 3,329 871
Fixed assets (note 7) 26,780 28,712
Other assets (note 8) 11,618 13,377
Deferred income taxes (note 9) 6,171 6,171
Goodwill 39,027 39,027
Other intangible assets (note 10) 2,701 3,060
---------------- ---------------
Total assets $ 243,411 $ 230,853
================ ===============
LIABILITIES
Accounts payable $ 6,935 $ 5,827
Accrued liabilities (notes 6, 15(c), 24 and 27) 55,122 56,897
Deferred revenue 44,397 50,505
Senior Notes due 2010 (note 11) 160,000 160,000
---------------- ---------------
Total liabilities 266,454 273,229
---------------- ---------------
COMMITMENTS, CONTINGENCIES AND GUARANTEES (notes 15 and 16)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 17) Common shares - no par value. Authorized -
unlimited number. Issued and outstanding - 40,213,542 (2004 - 39,446,964) 121,674 116,281
Other equity 1,758 3,227
Deficit (144,347) (160,945)
Accumulated other comprehensive income (loss) (2,128) (939)
---------------- ---------------
Total shareholders' deficit (23,043) (42,376)
---------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 243,411 $ 230,853
================ ===============
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 57
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars, except per share amounts)
YEARS ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003
--------------- --------------- --------------
REVENUE
IMAX systems (note 18(a)) $ 97,753 $ 86,570 $ 75,848
Films 26,451 27,887 25,803
Theater operations 17,498 17,415 13,109
Other 3,228 4,108 4,500
--------------- --------------- --------------
144,930 135,980 119,260
COSTS OF GOODS AND SERVICES 73,005 70,062 67,283
--------------- --------------- --------------
GROSS MARGIN 71,925 65,918 51,977
Selling, general and administrative expenses (note 18(b)) 37,287 36,066 33,312
Research and development 3,264 3,995 3,794
Amortization of intangibles 911 719 573
Income from equity-accounted investees (note 18(d) and (e)) -- -- (2,496)
Receivable provisions net of (recoveries) (note 19) (859) (1,487) (2,225)
Asset impairments (note 20) -- 848 969
--------------- --------------- --------------
EARNINGS FROM OPERATIONS 31,322 25,777 18,050
Interest income 1,004 756 656
Interest expense (16,773) (16,853) (15,856)
Loss on retirement of notes (notes 12 and 13) -- (784) (4,910)
Recovery of long-term investments (note 18(c)) -- 293 1,892
--------------- --------------- --------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 15,553 9,189 (168)
Recovery of (provision for) income taxes (note 9) (934) 255 386
--------------- --------------- --------------
NET EARNINGS FROM CONTINUING OPERATIONS 14,619 9,444 218
Net earnings from discontinued operations (note 26) 1,979 800 195
--------------- --------------- --------------
Net earnings before cumulative effect of changes in accounting
principles 16,598 10,244 413
Cumulative effect of changes in accounting principles (note 2(h)) -- -- (182)
--------------- --------------- --------------
NET EARNINGS $ 16,598 $ 10,244 $ 231
=============== =============== ==============
EARNINGS PER SHARE (note 17):
Earnings per share - basic:
Net earnings from continuing operations $ 0.37 $ 0.24 $ 0.01
Net earnings from discontinued operations $ 0.05 $ 0.02 $ --
--------------- --------------- --------------
Net earnings $ 0.42 $ 0.26 $ 0.01
=============== =============== ==============
Earnings per share - diluted:
Net earnings from continuing operations $ 0.35 $ 0.24 $ 0.01
Net earnings from discontinued operations $ 0.05 $ 0.02 $ --
--------------- --------------- --------------
Net earnings $ 0.40 $ 0.26 $ 0.01
=============== =============== ==============
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 58
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 16,598 $ 10,244 $ 231
Net (earnings) from discontinued operations (1,979) (800) (195)
Items not involving cash:
Cumulative effect of changes in accounting principles -- -- 182
Depreciation and amortization (note 21) 15,867 14,947 12,355
Write-downs (recoveries) (note 21) (859) (928) (2,722)
Income from equity-accounted investees -- -- (2,496)
Change in deferred income taxes -- (1,143) 81
Loss on retirement of notes -- 784 4,910
Stock and other non-cash compensation 4,075 3,567 4,926
Non-cash foreign exchange (gain) loss 266 (605) (1,281)
Interest on short-term investments (353) -- --
Premium on repayment of notes -- (576) (3,088)
Payment under certain employment agreements -- -- (1,550)
Investment in film assets (9,828) (4,876) (2,993)
Changes in restricted cash -- 4,961 (1,626)
Changes in other non-cash operating assets and liabilities (note 21) (22,001) (14,164) (14,924)
Net cash used in operating activities from discontinued operations -- -- (993)
-------------- -------------- --------------
Net cash provided by (used in) operating activities 1,786 11,411 (9,183)
-------------- -------------- --------------
INVESTING ACTIVITIES
Purchases of short-term investments (31,276) -- --
Proceeds from maturities of short-term investments 23,458 -- --
Purchase of fixed assets (1,597) (320) (1,560)
Increase in other assets (749) (1,044) (1,526)
Increase in other intangible assets (552) (391) (597)
Recovery on long-term investments -- 393 1,892
Net cash used in investing activities from discontinued operations -- -- (15)
-------------- -------------- --------------
Net cash used in investing activities (10,716) (1,362) (1,806)
-------------- -------------- --------------
FINANCING ACTIVITIES
Repayment of Subordinated Notes -- -- (9,143)
Repayment of Old Senior Notes due 2005 -- (29,234) (123,577)
Issuance of Senior Notes due 2010 -- -- 160,000
Financing costs related to Senior Notes due 2010 -- (535) (5,615)
Common shares issued 3,633 558 1,722
Net cash provided by financing activities from discontinued
operations 786 800 799
-------------- -------------- --------------
Net cash (used in) provided by financing activities 4,419 (28,411) 24,186
-------------- -------------- --------------
Effects of exchange rate changes on cash (129) 44 284
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS (5,426) (19,118) 13,690
Increase (decrease) in cash and cash equivalents from discontinued
operations 786 800 (209)
------------ -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, DURING THE YEAR (4,640) (18,318) 13,481
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 28,964 47,282 33,801
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,324 $ 28,964 $ 47,282
============== ============== ==============
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 59
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
NUMBER OF
COMMON ACCUMULATED
SHARES RETAINED OTHER TOTAL
ISSUED AND CAPITAL OTHER EARNINGS COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
OUTSTANDING STOCK EQUITY (DEFICIT) INCOME (LOSS)(1) EQUITY (DEFICIT) INCOME (LOSS)
----------- -------- --------- ---------- ---------------- ---------------- -------------
BALANCE AT DECEMBER 31, 2002 32,973,366 $ 65,563 $ 1,542 $ (171,420) $ $645 $ (103,670) $ --
Issuance of common stock 6,328,392 50,046 -- -- -- 50,046 --
Net income -- -- -- 231 -- 231 231
Adjustment to paid-in-capital for
non-employee stock options
and warrants granted
(note 17(c)) -- -- 1,617 -- -- 1,617 --
----------- -------- --------- ---------- -------------- --------------- -------------
$ 231
=============
BALANCE AT DECEMBER 31, 2003 39,301,758 $115,609 $ 3,159 $ (171,189) $ 645 $ (51,776)
Issuance of common stock 145,206 558 -- -- -- 558 --
Net income -- -- -- 10,244 -- 10,244 10,244
Adjustment to paid-in-capital for
non-employee stock options
and warrants granted
(note 17(c)) -- -- 182 -- -- 182 --
Adjustment for exercise of
non-employee stock options -- 114 (114) -- -- -- --
Unrecognized actuarial loss on
defined benefit plan (net of
income tax recovery of $nil) -- -- -- -- (1,584) (1,584) (1,584)
----------- -------- --------- ---------- -------------- --------------- -------------
$ 8,660
=============
BALANCE AT DECEMBER 31, 2004 39,446,964 $116,281 $ 3,227 $ (160,945) $ (939) $ (42,376)
Issuance of common stock 766,578 3,633 -- -- -- 3,633 --
Net income -- -- -- 16,598 -- 16,598 16,598
Adjustment to paid-in-capital for
non-employee stock options
granted (note 17(c)) -- -- 291 -- -- 291 --
Adjustment for exercise of
non-employee stock options
and warrants -- 1,760 (1,760) -- -- -- --
Unrecognized actuarial loss on
defined benefit plan (net of
income tax recovery of $nil) -- -- -- -- (1,189) (1,189) (1,189)
----------- -------- --------- ---------- -------------- --------------- -------------
$ 15,409
=============
BALANCE AT DECEMBER 31, 2005 40,213,542 $121,674 $ 1,758 $ (144,347) $ (2,128) $ (23,043)
=========== ======== ========= ========== ============== ===============
(1) Components of accumulated other comprehensive income (loss) consist of:
AS AT DECEMBER 31,
------------------------------
2005 2004
------------- ------------
Unrecognized actuarial loss on defined benefit
plan (net of income tax recovery of $nil) $ (2,773) $ (1,584)
Foreign currency translation adjustments 645 645
------------- ------------
Accumulated other comprehensive income $ (2,128) $ (939)
============= ============
(the accompanying notes are an integral part of these
consolidated financial statements)
Page 60
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
1. DESCRIPTION OF THE BUSINESS
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") is an entertainment technology company whose principal
activities are:
- the design, manufacture, marketing and leasing or selling of
proprietary projection and sound systems for IMAX theaters
principally owned and operated by commercial and institutional
customers located in 38 countries as of December 31, 2005;
- the development, production, digital re-mastering,
post-production and distribution of certain films shown
throughout the IMAX theater network;
- the operation of certain IMAX theaters located primarily in
the United States and Canada; and
- the provision of other services to the IMAX theater network
including ongoing maintenance services for the IMAX projection
and sound systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are summarized as follows:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
together with its wholly-owned subsidiaries, except subsidiaries which the
Company has identified as variable interest entities ("VIE's") where the
Company is not the primary beneficiary ("PB") (note 3). All significant
inter-company accounts and transactions have been eliminated.
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Significant differences between
United States and Canadian Generally Accepted Accounting Principles are
described in note 29.
(b) USE OF ESTIMATES
The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could be materially different from these estimates.
Significant estimates made by management include, but are not limited to,
fair values associated with the individual elements in multiple element
arrangements, residual values of leased theater systems, economic lives of
leased assets, allowances for potential uncollectibility of accounts
receivable and net investment in leases, provisions for inventory
obsolescence, ultimate revenues for film assets, estimates of fair values
for long-lived assets and goodwill, depreciable lives of fixed assets,
useful lives of intangible assets, pension plan assumptions, accruals for
contingencies including tax contingencies, valuation allowances for
deferred income tax assets, and stock option assumptions.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(d) SHORT-TERM INVESTMENTS
The Company has short-term investments, which generally have maturities of
more than three months and less than one year from the date of purchase.
The short-term investments are classified as held to maturity based on the
Company's positive intent and ability to hold the securities to maturity.
The Company invests primarily in Canadian and U.S. government securities
and commercial paper rated "A1+" by Standard & Poor's and these
investments are stated at amortized cost, which approximates fair market
value. Income related to these securities is reported as a component of
interest income. At December 31, 2005, the Company had $2.1 million
invested in U.S. government securities and $6.1 million in Canadian
government securities.
Page 61
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(e) ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
Allowances for doubtful accounts receivable and financing receivables are
based on the Company's assessment of the collectibility of specific
customer balances which is based upon a review of the customer's credit
worthiness, past collection history and the underlying asset value of the
equipment under lease where applicable. When facts and circumstances
indicate that there is a potential impairment in the net investment in
lease owing from a customer, the Company will evaluate the potential
outcome of either renegotiations or defaults on the original lease
agreement and will record a provision if it is considered probable that
the renegotiated lease amount will cause a reclassification of a
sales-type lease to an operating lease. The provision is equal to the
excess of the carrying value of the net investment in lease over the fair
value of the equipment. Interest on overdue accounts is recognized as
income as the amounts are collected.
(f) INVENTORIES
Inventories are carried at the lower of cost determined on an average cost
basis, and net realizable value. Finished goods and work-in-process
include the cost of raw materials, direct labor, design costs and an
applicable share of manufacturing overhead costs.
The Company records provisions for obsolete theater systems inventory,
based upon current estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, growth
prospects within the customers' ultimate marketplace and the market
acceptance of the Company's current and pending projection systems.
(g) FILM ASSETS
Costs of producing films, including capitalized interest, and costs of
acquiring film rights are recorded as film assets and accounted for in
accordance with AICPA Statement of Position 00-2, "Accounting by Producers
or Distributors of Films". Production financing provided by third parties
that acquire substantive rights in the film is recorded as a reduction of
the cost of the production. Film assets are amortized and participation
costs are accrued using the individual-film-forecast method in the same
ratio that current gross revenues bear to anticipated total ultimate
revenues. Estimates of ultimate revenues are prepared on a title-by-title
basis and reviewed regularly by management and revised where necessary to
reflect most current information. Ultimate revenue for films includes
estimates of revenue over a period not to exceed ten years following the
date of initial release.
Film exploitation costs, including advertising costs, are expensed as
incurred.
Costs of digitally re-mastering films where the copyright is owned by a
third party are recorded as film assets. These costs are amortized over
the period of benefit using the individual-film-forecast method in the
same ratio that current gross revenues bear to anticipated ultimate
revenues from the re-mastered film.
The recoverability of film costs is dependent upon commercial acceptance
of the films. If events or circumstances indicate that the fair value of a
film is less than the unamortized film costs, the film is written down to
fair value by a charge to earnings. The Company determines the fair value
of its films using a discounted cash flow model.
Page 62
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(h) FIXED ASSETS
Fixed assets are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives as follows:
Projection equipment -- 10 to 15 years
Camera equipment -- 5 to 10 years
Buildings -- 20 to 25 years
Office and production equipment -- 3 to 5 years
Leasehold improvements -- Over the shorter of the initial
term of the underlying leases
plus any reasonably assured
renewal terms, and the useful
life of the asset
The Company reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In performing its review for
recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of impairment losses
is based on the excess of the carrying amount of the asset over the fair
value calculated using discounted expected future cash flows.
FASB Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs, requires that
the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
subsequently amortized over the asset's useful life. Adoption of this
standard on January 1, 2003 resulted in a charge of $0.2 million to 2003
earnings and an increase of $0.2 million to accrued liabilities.
(i) OTHER ASSETS
Other assets include unrecognized prior service pension costs, cash
surrender value of life insurance policies and deferred charges on debt
financing.
Costs of debt financing are deferred and amortized over the term of the
debt.
Investments in marketable securities categorized as held-to-maturity
securities are carried at amortized cost. Investments in joint ventures
are accounted for by the equity method of accounting under which net
earnings (loss) include the Company's share of earnings or losses of the
investees. A loss in value of an investment, which is other than a
temporary decline, is recognized as a charge to earnings.
(j) GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net identifiable assets acquired in a purchase business combination.
Goodwill is not subject to amortization and is tested for impairment
annually, or more frequently if events or circumstances indicate that the
asset might be impaired. Impairment of goodwill is tested at the reporting
unit level by comparing the reporting unit's carrying amount, including
goodwill, to the fair value of the reporting unit. The fair values of the
reporting units are estimated using a discounted cash flows approach. If
the carrying amount of the reporting unit exceeds its fair value, then a
second step is performed to measure the amount of impairment loss, if any.
Any impairment loss would be expensed in the statement of operations.
Page 63
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(k) OTHER INTANGIBLE ASSETS
Patents, trademarks and other intangibles are recorded at cost and are
amortized on a straight-line basis over estimated useful lives ranging
from 7 to 10 years.
The Company reviews the carrying values of its other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset or asset group 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 or asset group over the fair value calculated using
discounted expected future cash flows.
(l) DEFERRED REVENUE
Deferred revenue represents cash received prior to revenue recognition
criteria being met for theater system sales or leases, film contracts and
maintenance services.
(m) INCOME TAXES
Income taxes are accounted for under the liability method whereby deferred
income tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the accounting and tax
bases of assets and liabilities. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in earnings in the
period in which the change is enacted. Valuation allowances are recorded
where there is uncertainty of realization of a deferred income tax asset.
Investment tax credits are recognized as a reduction of income tax expense
in the year the credit is earned.
The Company assesses realization of net deferred income tax assets and
based on all available evidence, concludes whether it is more likely than
not that the net deferred income tax assets will be realized.
(n) REVENUE RECOGNITION
The Company's system sales and lease transactions typically involve the
delivery of several products and services, including the projector,
projection screen and sound system, supervision of installation, training
of theater personnel, and advice on theater design and custom assemblies.
In addition, on occasion, the Company will include film licenses or other
specified elements as part of these transactions.
When the elements of theater systems meet the criteria for treatment as
separate units of accounting, the Company generally allocates revenue to
each element based on its relative fair value. Revenue allocated to an
individual element is recognized when revenue recognition criteria for
that element is met.
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a
result of meeting the criteria established by FASB Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"). When
revenue is recognized, the initial rental fees due under the contract,
along with the present value of minimum ongoing rental payments, are
recorded as revenues for the period, and the related theater system costs
including installation expenses are recorded as cost of goods and
services. Additional ongoing rentals in excess of minimums are recognized
as revenue when reported by the theater operator, provided that collection
is reasonably assured.
The Company recognizes revenue from sales type leases when the
installation of the respective theater system element is substantially
complete and all of the following criteria are met: persuasive evidence of
an agreement exists; the price is fixed or determinable; and collection is
reasonably assured.
Page 64
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(n) REVENUE RECOGNITION (cont'd)
SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
Cash installments of initial rents received in advance of the time at
which revenue is recognized are recorded as deferred revenue. Costs
incurred in constructing the theater systems not yet recognized as revenue
are included in inventories.
If the Company and a lessee agree to change the terms of the lease, other
than by renewing the lease or extending its terms, management evaluates
whether the new agreement would be classified as a sales-type lease or an
operating lease under the provisions of FAS 13. Any adjustments which
result from a change in classification from a sales-type lease to an
operating lease are recorded as a charge to earnings during the period in
which the change occurs.
In the normal course of its business, the Company each year will have
customers who, for a number of reasons including the inability to obtain
certain consents, approvals or financing, are unable to proceed with
theater construction. In these instances, where customers of the Company
are not in compliance with the terms of their leases for theater systems
not yet installed, the leases are in default. There is typically deferred
revenue associated with these leases, representing initial lease payments
collected prior to the default. These cash payments are recognized as
revenue when the Company exercises its rights to terminate the lease and
the Company is released legally or by virtue of an agreement with the
customer from its obligations under the lease arrangement.
Where these agreements or legal releases have multiple elements meeting
the criteria for treatment as separate units of accounting, the total
consideration to be received in these situations generally is allocated to
each individual element based on the relative fair values of each element.
Each element is then accounted for based on applicable revenue recognition
criteria.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these
leases, initial rental fees and minimum lease payments are recognized as
revenue on a straight-line basis over the lease term. Additional rentals
in excess of minimum annual amounts are recognized as revenue when the
contracted portions of theater admissions due to the Company reported by
theater operators exceed the minimum amounts, provided that collection is
reasonably assured.
SALES OF THEATER SYSTEMS
The Company recognizes revenue from sales of theater system elements when
all of the following criteria are met: persuasive evidence of an agreement
exists; the price is fixed or determinable; title passes to the customer;
installation of the system is substantially complete; and collection is
reasonably assured.
FILM LICENSING
Revenue from licensing of films is recognized when a contractual licensing
arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collection is
reasonably assured. Where the license fees are based on a share of the
customer's revenue, and all other revenue recognition criteria stated in
the preceding sentence are met, the Company recognizes revenue as the
customer exhibits the film.
Page 65
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(n) REVENUE RECOGNITION (cont'd)
DMR FILM REVENUE
Revenues from digitally re-mastering film where third parties own the
related film rights are derived in the form of processing fees and
recoupments calculated as a percentage of box office receipts from the
re-mastered films. Processing fees are recognized as revenues as the
related re-mastering service is performed. Recoupments as a percentage of
box office receipts are recognized as revenue when the contracted portions
of box office receipts due to the Company are reported by theater
operators, provided that collection is reasonably assured.
MAINTENANCE AND OTHER SERVICES
The Company frequently leases theater systems to customers with one year's
free maintenance on the system from the date of installation. The fair
value of this component of the arrangement is deferred when the systems
revenue is recognized and is amortized on a straight-line basis over the
one-year free maintenance period. All costs associated with this
maintenance program are expensed as incurred. Maintenance revenues are
recognized on a straight-line basis over the maintenance period. Revenues
from post-production film services are recognized as the service is
performed. Revenues on camera rentals are recognized over the rental
period. Theater admission revenues are recognized on the date of the
exhibition. Other service revenues are recognized when the services are
performed.
(o) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and primarily
include projector and sound parts, labor and other related materials which
pertain to the Company's development of ongoing products.
(p) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of the Company's operations, which are
denominated in currencies other than the functional currency, are
translated into the functional currency at the exchange rates prevailing
at the end of the period. Non-monetary items are translated at historical
exchange rates. Revenue and expense transactions are translated at
exchange rates prevalent at the transaction date. Such exchange gains and
losses are included in the determination of net earnings (loss) in the
period in which they arise. Since 2001, the Company has not had any
foreign subsidiaries with functional currencies other than the U.S.
dollar. Prior to 2001, assets and liabilities were translated at the
year-end exchange rates and revenue and expense items were translated at
the average rate for the period, with translation gains and losses
included in other comprehensive income.
Page 66
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(q) STOCK-BASED COMPENSATION
The Company currently follows the intrinsic value method of accounting for
employee stock options as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25"),
see note 17(c). If the fair value methodology prescribed by FASB
Statement, "Accounting for Stock Based Compensation" ("FAS 123") had been
adopted by the Company, pro forma results for the year ended December 31,
would have been as follows:
2005 2004 2003
-------- -------- --------
Net earnings as reported $ 16,598 $ 10,244 $ 231
Stock-based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (2,899) (7,268) (9,260)
-------- -------- --------
Adjusted net earnings (loss) $ 13,699 $ 2,976 $ (9,029)
======== ======== ========
Earnings (loss) per share - basic:
Net earnings as reported $ 0.42 $ 0.26 $ 0.01
FAS 123 stock-based compensation expense $ (0.07) $ (0.18) $ (0.25)
-------- -------- --------
Adjusted net earnings (loss) $ 0.35 $ 0.08 $ (0.24)
======== ======== ========
Earnings (loss) per share - diluted:
Net earnings as reported $ 0.40 $ 0.26 $ 0.01
FAS 123 stock-based compensation expense $ (0.07) $ (0.19) $ (0.25)
-------- -------- --------
Adjusted net earnings (loss) $ 0.33 $ 0.07 $ (0.24)
======== ======== ========
In accordance with FAS 123, the total expense reflected in the above pro
forma charge represents amortization of stock option charges that were
valued at the grant date using an option-pricing model with assumptions
that were valid at the time with no further update of current stock trends
and assumptions.
The weighted average fair value of common share options granted to
employees in 2005 at the time of grant was $3.59 per share (2004 - $2.12
per share, 2003 - $2.92 per share). For the three months ended March 31,
2003 and prior, the Company used the Black-Scholes option-pricing model to
determine the fair value of common share options granted as estimated at
the grant date. The following assumptions were used during the three
months ended March 31, 2003: dividend yield of 0%, an average risk free
interest rate of 2.1%, 20% forfeiture of options vesting greater than two
years; expected life of one to seven years; and expected volatility of
50%. As of April 1, 2003, the Company adopted a Binomial option-pricing
model to determine the fair value of common share options at the grant
date. For the years ended December 31, the following assumptions were
used:
TWELVE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -----------------
2005 2004 2003
------------ ------------ -----------------
Average risk-free interest rate 4.15% 4.72% 2.98%
Equity risk premium 5.57% - 7.38% 3.82% - 6.25% 4.55% - 10.69%
Beta 1.06 - 1.31 0.95 - 1.11 0.85 - 1.03
Expected option life (in years) 2.23 - 5.44 2.57 - 5.36 2.58 - 5.05
Average expected volatility 62% 62% 62%
Annual termination probability 8.06% - 9.62% 8.06% - 9.62% 8.06% - 9.62%
Dividend yield 0% 0% 0%
As the Company stratifies its employees into two groups in order to
calculate fair value under the Binomial model, ranges of assumptions used
are presented for equity risk premium, Beta, expected option life and
annual termination probability.
Page 67
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(q) STOCK-BASED COMPENSATION (cont'd)
Had the Company changed from using the Black-Scholes option pricing model
to a Binomial option pricing model effective January 1, 2003 rather than
April 1, 2003, the impact would not have been significant.
The Company accounts for stock options and warrants issued to
non-employees in accordance with the provisions of FAS 123 and Emerging
Issues Task Force No. 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring or in Conjunction with
Selling Goods or Services".
(r) PENSION PLANS
Defined benefit pension plan liabilities are recorded as the excess of the
accumulated projected benefit obligation over the fair value of plan
assets. Assumptions used in computing defined benefit obligations are
regularly reviewed by management in consultation with its actuaries and
adjusted for market conditions. Prior service costs resulting from plan
inception or amendments together with unrecognized actuarial gains and
losses are amortized over the expected future service life of the
employees while current service costs are expensed when earned.
For defined contribution pension plans, amounts contributed by the Company
are recorded as an expense.
(s) GUARANTEES
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45") requires a guarantor to recognize, at the inception
of a guarantee, a liability for the fair value of a guarantee. Disclosures
as required under FIN 45 have been included in note 16(g).
3. ACCOUNTING CHANGES
In January 2003, the FASB issued Financial Interpretation 46 ("FIN 46"),
Consolidation of Variable Interest Entities ("VIEs"), in an effort to
expand and clarify existing accounting guidance that addresses when a
company should include in its financial statements the assets, liabilities
and activities of another entity. FIN 46 was effective immediately for all
enterprises with variable interests in VIEs created after January 31, 2003
and on January 1, 2004 for all previously existing variable interest
entities. Under FIN 46, if an entity is determined to be a variable
interest entity, it must be consolidated by the enterprise that absorbs
the majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both. On December 24, 2003, the
FASB issued a revised FIN 46, defined as FIN 46R. Commencing January 1,
2004, the Company was required to consolidate the accounts of all VIEs for
which it is the primary beneficiary ("PB"), as required by FIN 46R. The
Company has evaluated its various variable interests to determine whether
they are in VIE's. The Company reviewed its management agreements relating
to theaters which the Company manages, and has no equity interest, and
concluded that such arrangements were not variable interests since the
Company's fees are commensurate with the level of service and the theater
owner retains the right to terminate the service. The Company has also
reviewed its financial arrangements with theaters where it shares in the
profit or losses of the theater. The Company has not considered these
arrangements under FIN 46R as the arrangements meet the scope exceptions
defined in the pronouncement. The Company has determined that certain of
its film production companies are VIEs. Since in one case the Company
absorbs a majority of the VIE's losses, the Company has determined that it
is the PB of the entity. The Company consolidates this entity with no
material impact on the operating results or financial condition of the
Company as the production company has total assets of $nil and total
liabilities of $nil as at December 31, 2005. The Company also has
interests in three other film production companies which are VIEs, however
the Company did not consolidate these film entities since it does not bear
the majority of the expected losses or expected residual returns. As of
December 31, 2005, these three VIEs have total assets of $0.3 million and
total liabilities of $0.3 million.
Page 68
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
4. FINANCING RECEIVABLES
(a) NET INVESTMENT IN LEASES
The Company generally provides its theater systems to customers on a
long-term lease basis, typically with initial lease terms of 10 to 20
years. Financing receivables consisting of net investment in leases and
long term receivables are as follows:
AS AT DECEMBER 31,
---------------------------
2005 2004
---------- ---------
Gross minimum lease amounts receivable $ 88,894 $ 98,666
Residual value of equipment 635 637
Unearned finance income (33,933) (39,844)
---------- ---------
Present value of minimum lease amounts receivable 55,596 59,459
Accumulated allowance for uncollectible amounts (1,478) (4,435)
---------- ----------
Net investment in leases $ 54,118 $ 55,024
Long-term receivables 8,888 4,468
---------- ---------
Total financing receivables $ 63,006 $ 59,492
========== =========
(b) RENTAL AMOUNTS
IMAX systems revenue includes the following annual rental amounts, for the
years ended December 31:
2005 2004 2003
------- -------- --------
Ongoing minimum rental amounts on operating leases $ 1,425 $ 1,039 $ 849
Additional rentals in excess of minimum amounts on sales-type leases
1,234 847 444
Additional rentals in excess of minimum amounts on operating leases
3,775 3,338 3,482
Finance income on sales-type leases 4,632 3,991 4,432
-------- -------- --------
$ 11,066 $ 9,215 $ 9,207
======== ======== ========
Estimated gross minimum rental amounts receivable from operating and
sales-type leases at December 31, 2005, for each of the next five years
are as follows:
2006 9,818
2007 8,812
2008 9,105
2009 8,426
2010 8,616
Thereafter 55,062
-----------
$ 99,839
===========
5. INVENTORIES
AS AT DECEMBER 31,
------------------------
2005 2004
--------- ----------
Raw materials $ 10,464 $ 7,375
Work-in-process 6,893 6,512
Finished goods 10,937 15,114
--------- ----------
$ 28,294 $ 29,001
========= ==========
Page 69
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
6. FILM ASSETS
AS AT DECEMBER 31,
----------------------
2005 2004
--------- -------
Completed and released films, net of accumulated amortization $ 2,999 $ 406
Films in production 141 175
Development costs 189 290
--------- -------
$ 3,329 $ 871
========= =======
All unamortized film costs as at December 31, 2005 for released films are
expected to be amortized within four years from December 31, 2005. The
amount of accrued participation liabilities that the Company expects to
pay during 2006 is $2.1 million (2005 - $2.2 million).
7. FIXED ASSETS
AS AT DECEMBER 31, 2005
---------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
----------- ------------ --------------
Equipment leased or held for use or rental
Projection equipment(1) $ 30,680 $ 21,958 $ 8,722
Camera equipment 5,954 5,892 62
----------- ---------- --------
36,634 27,850 8,784
----------- ---------- --------
Other fixed assets
Land 1,593 -- 1,593
Buildings 14,723 6,397 8,326
Office and production equipment(2) 24,345 21,012 3,333
Leasehold improvements 8,126 3,382 4,744
----------- ---------- --------
48,787 30,791 17,996
----------- ---------- --------
$ 85,421 $ 58,641 $ 26,780
=========== ========== ========
AS AT DECEMBER 31, 2004
---------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
----------- ------------ --------------
Equipment leased or held for use or rental
Projection equipment(1) $ 33,407 $ 23,938 $ 9,469
Camera equipment 5,957 5,836 121
----------- ---------- --------
39,364 29,774 9,590
----------- ---------- --------
Assets under construction 37 -- 37
----------- ---------- --------
Other fixed assets
Land 1,593 -- 1,593
Buildings 14,723 5,896 8,827
Office and production equipment(2) 22,625 19,339 3,286
Leasehold improvements 8,067 2,688 5,379
----------- ---------- --------
47,008 27,923 19,085
----------- ---------- --------
$ 86,409 $ 57,697 $ 28,712
=========== ========== ========
(1) Included in projection equipment are assets with costs of $27.0 million
(2004 - $30.0 million) and accumulated depreciation of $19.7 million (2004
- $22.0 million) that are leased to customers under operating leases.
(2) Included in office and production equipment are assets under capital lease
with costs of $0.9 million (2004 - $0.8 million) and accumulated
depreciation of $0.6 million (2004 - $0.4 million).
Page 70
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
8. OTHER ASSETS
AS AT DECEMBER 31,
----------------------------
2005 2004
------------ -----------
Pension asset, representing unrecognized prior service costs $ 3,634 $ 5,032
Deferred charges on debt financing 4,635 5,845
Cash surrender value of life insurance policies 3,349 2,500
------------ -----------
$ 11,618 $ 13,377
============ ===========
9. INCOME TAXES
(a) Earnings (loss) from continuing operations before income taxes by tax
jurisdiction, for the years ended December 31, are comprised of the
following:
2005 2004 2003
--------- -------- ---------
Canada $ 15,092 $ 6,070 $ 1,363
United States 552 2,819 (5,267)
Japan (93) 298 839
Other 2 2 2,897
--------- -------- ---------
$ 15,553 $ 9,189 $ (168)
========= ======== =========
(b) The (provision for) recovery of income taxes related to income from
continuing operations, for the year ended December 31, is comprised of the
following:
2005 2004 2003
------ --------- ---------
Current:
Canada $ (934) $ (820) $ (920)
Foreign -- (68) 1,225
------ --------- ---------
(934) (888) 305
------ --------- ---------
Deferred:
Canada 52 1,143 81
Foreign (52) -- --
------ --------- --------
-- 1,143 81
------ --------- ---------
$ (934) $ 255 $ 386
====== ========= =========
(c) The (provision for) recovery of income taxes from continuing operations
differs from the amount that would have resulted by applying the combined
Canadian federal and provincial statutory income tax rates to earnings
(losses), for the years ended December 31, is due to the following:
2005 2004 2003
--------- ---------- ----------
Income tax (provision for) recovery at combined statutory rates $ (5,618) $ (3,319) $ 61
Adjustments resulting from:
Permanent differences (97) (1,222) (5,241)
Manufacturing and processing credits deduction -- -- (300)
Decrease (increase) in valuation allowance 7,231 1,908 (2,869)
Effect of unrecognized actuarial loss on defined benefit
pension plan (429) (572) --
Large corporations tax and other taxes (52) (281) (476)
Income tax at different rates in foreign and other provincial
jurisdictions 173 (17) (285)
Investment and other tax credits 380 1,480 661
Tax recoveries through loss and tax credit carrybacks 158 808 1,062
Effect of legislated tax rate (reductions) increases -- -- 4,833
Changes to deferred tax assets and liabilities resulting from
audit and other tax return adjustments (2,556) 1,644 2,760
Other (124) (174) 180
--------- ---------- ----------
(Provision for) recovery of income taxes, as reported $ (934) $ 255 $ 386
========= ========== ==========
Page 71
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
9. INCOME TAXES (cont'd)
(d) The net deferred income tax asset, at December 31, is comprised of the
following:
2005 2004
--------- ----------
Net operating loss and capital loss carryforwards $ 15,014 $ 6,093
Investment tax credit and other tax credit carryforwards 3,285 2,905
Write-downs of other assets 2,545 3,920
Excess tax over accounting basis in fixed assets and inventories 41,639 56,179
Accrued reserves 9,532 7,678
Other 8 2,288
--------- ----------
Total deferred income tax assets 72,023 79,063
Income recognition on net investment in leases (27,199) (27,437)
--------- ----------
44,824 51,626
Valuation allowance (38,653) (45,455)
--------- ----------
Net deferred income tax asset $ 6,171 $ 6,171
========= ==========
The gross deferred tax assets include an amount of $0.4 million relating
to the tax effect of the unrealized actuarial loss for 2005 on the defined
benefit pension plan. This tax asset has been offset with an equal
valuation allowance, both of which have been charged through comprehensive
income in the year.
Estimated net operating loss carryforwards and estimated tax credit
carryforwards expire as follows:
INVESTMENT TAX
CREDITS AND OTHER NET OPERATING
TAX CREDIT LOSS
CARRYFORWARDS CARRYFORWARDS
------------------ -------------
2006 $ -- $ 7
2007 -- --
2008 1,098 429
2009 583 23
2010 376 84
Thereafter 1,228 47,343
------------------ -------------
$ 3,285 $ 47,886
================== =============
Estimated net operating loss carryforwards can be carried forward to
reduce taxable income through to 2025. Estimated capital loss
carryforwards amount to $7.0 million as at December 31, 2005 and can be
carried forward indefinitely to reduce capital gains. Investment tax
credits and other tax credits can be carried forward to reduce income
taxes payable through to 2015.
Page 72
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
10. OTHER INTANGIBLE ASSETS
AS AT DECEMBER 31, 2005
--------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
------------- -------------- --------------
Patents and trademarks $ 5,238 $ 2,628 $ 2,610
Intellectual property rights 100 9 91
Other 250 250 --
------------- -------------- --------------
$ 5,588 $ 2,887 $ 2,701
============= ============== ==============
AS AT DECEMBER 31, 2004
--------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET BOOK VALUE
------------- -------------- --------------
Patents and trademarks $ 4,792 $ 2,164 $ 2,628
Intellectual property rights 1,193 761 432
Other 1,264 1,264 --
------------- -------------- --------------
$ 7,249 $ 4,189 $ 3,060
============= ============== ==============
The Company expects to amortize approximately $0.5 million of other
intangible assets for each of the next 5 years.
11. SENIOR NOTES DUE 2010
In December 2003, the Company completed a private placement of $160.0
million principal amount of 9.625% senior notes due December 1, 2010 (the
"Unregistered Senior Notes") to a group of initial purchasers. The net
proceeds of the issuance after deducting expenses and underwriting
commissions were $154.4 million. In November 2004, the Company completed
an exchange offer wherein $159.0 million of the Company's Unregistered
Senior Notes were exchanged for senior notes registered under the
Securities Act of 1933, as amended (the "Registered Senior Notes"),
pursuant to a registration statement on Form S-4 that had been declared
effective by the Securities and Exchange Commission on September 30, 2004.
Apart from the fact that the Registered Senior Notes have been registered
under the Securities Act, the Unregistered Senior Notes and the Registered
Senior Notes are substantially identical and are referred to herein as the
"Senior Notes".
The Senior Notes bear interest at a rate of 9.625% per annum and are
unsecured obligations that rank equally with any of the Company's existing
and future senior indebtedness and senior to all of the Company's existing
and future subordinated indebtedness. The payment of principal, premium,
if any, and interest on the Senior Notes is unconditionally guaranteed,
jointly and severally, by certain of the Company's wholly-owned
subsidiaries. The Senior Notes are subject to redemption for cash by the
Company, in whole or in part, at any time on or after December 1, 2007, at
redemption prices expressed as percentages of the principal amount for
each 12-month period commencing December 1 of the years indicated: 2007 -
104.813%; 2008 - 102.406%; 2009 and thereafter - 100.000%, together with
accrued and unpaid interest thereon to the redemption date. If certain
changes were to result in the imposition of withholding taxes under
Canadian law, the Senior Notes are subject to redemption at the Company's
option, in whole but not in part, at a redemption price of 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption. In the event of a change in control, the Company will be
required to make an offer to repurchase the Senior Notes at a purchase
price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. In addition, prior to December
1, 2006, under certain conditions, the Company may redeem up to 35% of the
Senior Notes with the proceeds of certain equity offerings at 109.625% of
the principal amount thereof together with accrued and unpaid interest
thereon to the date of redemption.
Page 73
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
11. SENIOR NOTES DUE 2010 (cont'd)
The terms of the Company's Senior Notes impose certain restrictions on its
operating and financing activities, including certain restrictions on the
Company's ability to: incur certain additional indebtedness; make certain
distributions or certain other restricted payments; grant liens; create
certain dividend and other payment restrictions affecting the Company's
subsidiaries; sell certain assets or merge with or into other companies;
and enter into certain transactions with affiliates. The Company believes
these restrictions will not have a material impact on its financial
condition or results of operations.
As at December 31, 2005, the Company had outstanding $159.0 million (2004
- $159.0) aggregate principal of Registered Senior Notes and $1.0 million
(2004 - $1.0 million) aggregate principal of Unregistered Senior Notes.
12. OLD SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of senior notes due
December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old
Senior Notes").
During 2003, the Company retired an aggregate of $47.2 million principal
amount of the Old Senior Notes and accrued interest of $0.7 million in
exchange for the issuance of 5,838,353 of its common shares at an average
value of $8.28 per share. The Company recorded additional charges of $0.3
million related to costs associated with this retirement. These
transactions had the effect of reducing the principal amount of the
Company's outstanding Old Senior Notes to $152.8 million. In December
2003, the Company completed a tender offer and consent solicitation for
its remaining $152.8 million of the Old Senior Notes. In December 2003,
$123.6 million in principal of the Old Senior Notes were redeemed pursuant
to the tender offer. Notice of Redemption for all remaining outstanding
Old Senior Notes was delivered on December 4, 2003 and the remaining $29.2
of outstanding Old Senior Notes were redeemed on January 2, 2004. A loss
of $0.8 million related to the retirement was recorded in 2004.
Interest expense on the Old Senior Notes amounted to less than $0.1
million in 2004 (2003 - $13.5 million, 2002 - $15.8 million).
13. CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company issued $100.0 million of 5.75% convertible
subordinated notes due April 1, 2003 (the "Subordinated Notes") payable in
arrears on April 1 and October 1.
In 2001 and 2002, the Company and a wholly-owned subsidiary of the Company
purchased an aggregate of $90.9 million of Subordinated Notes for $21.8
million consisting of $18.5 million in cash and common shares of the
Company valued at $3.3 million. The Company cancelled the purchased
Subordinated Notes and recorded a gain of $11.9 million in 2002 and
recorded a gain of $55.5 million in 2001.
On April 1, 2003, the Company repaid the remaining outstanding
Subordinated Notes balance of $9.1 million plus accrued interest on the
maturity date and retired the issue.
Page 74
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
14. CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility (the "Credit Facility") The Credit
Facility is a three-year revolving credit facility with yearly renewal
options thereafter, permitting maximum aggregate borrowings of $20.0
million, subject to a borrowing base calculation which includes the
Company's financing receivables, and certain reserve requirements and
further reduced by outstanding letters of credit. The Credit Facility
currently bears interest at Prime + 0.5% per annum or Libor + 2.25% per
annum and is collateralized by a first priority security interest in all
of the current and future assets of the Company. The Credit Facility
contains typical affirmative and negative covenants, including covenants
that restrict the Company's ability to: incur certain additional
indebtedness; make certain loans, investments or guarantees; pay
dividends; make certain asset sales; incur certain liens or other
encumbrances; conduct certain transactions with affiliates and enter into
certain corporate transactions or dissolve. In addition, the Credit
Facility contains customary events of default, including upon an
acquisition or a change of control that has a material adverse effect on
the Company's financial condition. The Credit Facility also requires the
Company to maintain a minimum level of earnings before interest, taxes,
depreciation and amortization, and cash collections. As at December 31,
2005, the Company has not drawn down on the Credit Facility, however, it
has issued letters of credit for $7.6 million under the Credit Facility
arrangement.
15. COMMITMENTS
(a) Total minimum annual rental payments to be made by the Company under
operating leases for premises are as follows:
2006 $ 5,458
2007 5,348
2008 5,045
2009 5,035
2010 5,225
Thereafter 18,982
--------
$ 45,093
========
Rent expense was $4.8 million for 2005 (2004 - $4.5 million, 2003 - $4.0
million).
(b) As at December 31, 2005, the Company has letters of credit of $7.6 million
outstanding under the Company's credit facility arrangement (see note 14).
As of December 31, 2004, the Company had letters of credit of $5.5 million
outstanding, which had been collateralized by cash deposits.
(c) In March 2004, the Company received $5.0 million in cash under a film
financing arrangement which was included in accrued liabilities. During
2005, the Company received another $5.1 million under the same film
financing arrangement. The Company was required to expend these funds
towards the production and distribution of a motion picture title. During
2005, the Company spent $8.1 million (2004 - $1.6 million) towards the
production. The film was released in the third quarter of 2005. As at
December 31, 2005 the Company has recorded $0.4 million in accrued
liabilities for future distribution expenses to be incurred on the film.
Page 75
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CONTINGENCIES AND GUARANTEES
The Company is involved in lawsuits, claims, and proceedings, including
those identified below, which arise in the ordinary course of business. In
accordance with SFAS 5, "Accounting for Contingencies," the Company will
make a provision for a liability when it is both probable that a loss has
been incurred and the amount of the loss can be reasonably estimated. The
Company believes it has adequate provisions for any such matters. The
Company reviews these provisions in conjunction with any related
provisions on assets related to the claims at least quarterly and adjusts
these provisions to reflect the impacts of negotiations, settlements,
rulings, advice of legal counsel and other pertinent information related
to the case. Should developments in any of these matters outlined below
cause a change in our determination as to an unfavorable outcome and
result in the need to recognize a material provision, or, should any of
these matters result in a final adverse judgement or be settled for
significant amounts, they could have a material adverse effect on our
results of operations, cash flows, and financial position in the period or
periods in which such a change in determination, settlement or judgement
occurs.
(a) In March 2005, the Company, together with Three-Dimensional Media Group,
Ltd. ("3DMG"), filed a complaint in the U.S. District Court for the
Central District of California, Western Division, against In-Three, Inc.
("In-Three") alleging patent infringement and seeking injunctive relief
and damages. In April 2005, In-Three filed an answer denying infringement
and asserting counterclaims that seek a declaratory judgment of
non-infringement, invalidity and unenforceability of the patent in suit,
and damages for alleged false advertising, false designation of origin,
breach of contract, interference with prospective economic advantage
and/or unfair competition, and further sought a stay of the proceedings
pending a review of the patent in suit by the U.S. Patent and Trademark
Office ("PTO"), which review was granted by the PTO on August 5, 2005. On
June 7, 2005, In-Three moved to dismiss the Company's and 3DMG's claims
against it for lack of jurisdiction and on July 21, 2005, In-Three's
claims were amended to assert counterclaims against the Company for
willful infringement of In-Three's patents, and to seek an injunction
against the Company to enjoin it from practicing its film conversion
technology. On July 21 and July 29, 2005, the Court issued orders: (i)
rejecting In-Three's motion to dismiss the proceedings, (ii) rejecting
In-Three's motion for a preliminary injunction against the Company, (iii)
rejecting In-Three's motion to stay the proceedings for an examination by
the PTO and (iv) rejecting the Company's motion for a preliminary
injunction against In-Three. Accordingly, the Company believes the case
will proceed to trial, and the Court informed the parties that it intends
to oversee a swift resolution of the proceedings. On October 21, 2005,
In-Three and the Company agreed to engage in mandatory private mediation
of the matter pursuant to Local Rule 16-14 of the District Court. On
January 20, 2006, the PTO procedurally rejected certain claims under the
patent in suit in the first stage proceedings. The Company will continue
to vigorously pursue its claims and believes that all of the allegations
made by In-Three are without merit. The Company further believes the
amount of the loss, if any, suffered in connection with the counterclaims
would not have a material impact on the financial position or results of
operations of the Company, although no assurance can be given with respect
to the ultimate outcome of any such litigation.
(b) In November 2001, the Company filed a complaint with the District Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin
("Big Screen"), demanding payment of rental payments and certain other
amounts owed to the Company. Big Screen 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. On November 8, 2005, the District Court of Munich rendered a
judgment in favor of the Company on all accounts. Big Screen has appealed
the judgment to the Munich Court of Appeals and at the same time asked for
an order to stay the execution under the judgment of the District Court.
On November 30, 2005, Big Screen filed an application for the opening of
insolvency proceedings. While the appeal on the merits is pending, by
order of January 12, 2006, the Court of Appeals has rejected Big Screen's
application regarding a stay of execution so that the judgment remains
executable.
Page 76
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CONTINGENCIES AND GUARANTEES (cont'd)
(c) In May 2002, the Company filed a complaint with the District Court of
Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"),
demanding payment of rental obligations and other amounts owed to the
Company. Siewert raised a defense based on alleged infringement of German
antitrust rules. By judgement of December 20, 2002, the District Court
rejected the defense and awarded judgement in documentary proceedings in
favor of the Company and added further amounts that had fallen due.
Siewert applied for leave to appeal to the German Supreme Court on matters
of law, which was rejected by the German Supreme Court in March 2004.
Siewert subsequently made a partial payment of amounts awarded to the
Company. Siewert has filed follow up proceedings to the documentary
proceedings in the District Court, essentially repeating the claims
rejected in the documentary proceeding. On September 30, 2004, Siewert
filed for insolvency with the Local Court in Wuerzburg. In a recent
criminal matter before the District Court of Wuerzburg, unrelated to the
above-referenced proceedings, Mr. Siewert was convicted of credit fraud,
delaying the filing for insolvency and other charges, and was sentenced to
30 months in prison.
(d) In January 2004, the Company and IMAX Theater Services Ltd., a subsidiary
of the Company, commenced an arbitration seeking damages of approximately
$3.7 million before the International Court of Arbitration of the
International Chambers of Commerce (the "ICC") with respect to the breach
by Electronic Media Limited ("EML") of its December 2000 agreement with
the Company. In June 2004, the Company commenced a related arbitration
before the ICC against EML's affiliate, E-CITI Entertainment (I) PVT
Limited ("E-Citi"), seeking $17.8 million as a result of E-Citi's breach
of a September 2000 lease agreement. The arbitration hearing on both
claims took place on November 16-18, 2005. On January 31, 2006, the ICC
informed the parties that the liability stage of the proceedings was
closed, and on February 1, 2006, the ICC issued an award finding
unanimously in the Company's favor. The amount of damages awarded to the
Company is not yet known, and no amount has been recorded for these
damages.
(e) In June 2004, Robots of Mars, Inc. ("Robots") initiated an arbitration
proceeding against the Company in California with the American Arbitration
Association pursuant to an arbitration provision in a 1994 film production
agreement between Robots' predecessor-in-interest and a subsidiary of the
Company, asserting claims for breach of contract, fraud, breach of
fiduciary duty and intentional interference with contract. Robots is
seeking an accounting of the Company's revenues and an award of all sums
alleged to be due to Robots under the production agreement, as well as
punitive damages. The Company filed a cross claim for indemnity against a
third party, SIMEX, Inc. ("SIMEX"). In response, SIMEX filed an
application in Toronto, Ontario, Canada, seeking a declaration that it is
not subject to the arbitration provision or payment obligations in the
production agreement. The Ontario Superior Court dismissed SIMEX's
application, with costs. SIMEX appealed part of this decision to the
Ontario Court of Appeal which found that SIMEX was not subject to some of
the obligations which the Company contended were set forth the production
agreement, including, specifically, the obligation to pay Robots directly
based on the receipts of proceeds from the distribution of the films
produced under the production agreement. The Company intends to vigorously
defend the arbitration proceeding and believes the amount of the loss, if
any, that may be suffered in connection with this proceeding will 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 such arbitration.
(f) In addition to the matters described above and in note 26(a) in respect of
the Miami theater, the Company is currently involved in other legal
proceedings which, in the opinion of the Company's management, will not
materially affect the Company's financial position or future operating
results, although no assurance can be given with respect to the ultimate
outcome of any such proceedings.
Page 77
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
16. CONTINGENCIES AND GUARANTEES (cont'd)
(g) In the normal course of business, the Company enters into agreements that
may contain features that meet the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45")
definition of a guarantee. FIN 45 defines a guarantee to be a contract
(including an indemnity) that contingently requires the Company to make
payments (either in cash, financial instruments, other assets, shares of
its stock or provision of services) to a third party based on (a) changes
in an underlying interest rate, foreign exchange rate, equity or commodity
instrument, index or other variable, that is related to an asset, a
liability or an equity security of the counterparty, (b) failure of
another party to perform under an obligating agreement or (c) failure of
another third party to pay its indebtedness when due.
The Company has estimated under its lease and sale arrangements that there
will not be costs associated with contractual warranty provisions.
FINANCIAL GUARANTEES
The Company has provided no significant financial guarantees to third
parties.
DIRECTOR/OFFICER INDEMNIFICATIONS
The Company's General By-law contains an indemnification of its
directors/officers, former directors/officers and persons who have acted
at its request to be a director/officer of an entity in which the Company
is a shareholder or creditor, to indemnify them, to the extent permitted
by the Canada Business Corporations Act, against expenses (including legal
fees), judgements, fines and any amount actually and reasonably incurred
by them in connection with any action, suit or proceeding in which the
directors and/or officers are sued as a result of their service, if they
acted honestly and in good faith with a view to the best interests of the
Company. The nature of the indemnification prevents the Company from
making a reasonable estimate of the maximum potential amount it could be
required to pay to counterparties. The Company has purchased directors'
and officers' liability insurance. No amount has been accrued in the
consolidated balance sheet as of December 31, 2005, with respect to this
indemnity.
OTHER INDEMNIFICATION AGREEMENTS
In the normal course of the Company's operations, it provides
indemnifications to counterparties in transactions such as: theater system
lease and sale agreements; film production, exhibition and distribution
agreements; real property lease agreements; and employment agreements.
These indemnification agreements require the Company to compensate the
counterparties for costs incurred as a result of litigation claims that
may be suffered by the counterparty as a consequence of the transaction or
the Company's breach or non-performance under these agreements. While the
terms of these indemnification agreements vary based upon the contract,
they normally extend for the life of the agreements. A small number of
agreements do not provide for any limit on the maximum potential amount of
indemnification, however virtually all of the Company's system lease and
sale agreements limit such maximum potential liability to the purchase
price of the system. The fact that the maximum potential amount of
indemnification required by the Company is not specified in some cases
prevents the Company from making a reasonable estimate of the maximum
potential amount it could be required to pay to counterparties.
Historically, the Company has not made any significant payments under such
indemnifications and no amount has been accrued in the accompanying
consolidated financial statements with respect to the contingent aspect of
these indemnities.
Page 78
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CAPITAL STOCK
(a) AUTHORIZED
The authorized capital of the Company consists of an unlimited number of
common shares.
The following is a summary of the rights, privileges, restrictions and
conditions of the common shares.
COMMON SHARES
The holders of common shares are entitled to receive dividends if, as and
when declared by the directors of the Company, subject to the rights of
the holders of any other class of shares of the Company entitled to
receive dividends in priority to the common shares.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of the shareholders.
(b) CHANGES DURING THE PERIOD
In 2005, the Company issued 685,706 (2004 - 145,206) common shares
pursuant to the exercise of stock options for cash proceeds of $3.6
million (2004 - $0.6 million).
(c) STOCK BASED COMPENSATION
As at December 31, 2005, the Company has reserved a total of 7,046,689
(2004 - 7,732,395) common shares for future issuance under the Stock
Option Plan, of which options in respect of 5,504,324 common shares are
outstanding at December 31, 2005. The options granted under the Stock
Option Plan generally vest between one and five years and expire 10 years
or less from the date granted. At December 31, 2005, options in respect of
4,284,508 common shares were vested and exercisable.
Under the terms of certain employment agreements dated July 12, 2000, the
Company is required to issue either 360,000 restricted common shares or
pay their cash equivalent. The restricted shares or the related cash
obligation were fully vested effective July 1, 2002. In May 2003, the
Company paid approximately $1.6 million in cash to settle the equivalent
of 200,000 of the total 360,000 restricted common shares under these
agreements. The remaining 160,000 restricted shares are required to be
issued, or payment of their cash equivalent, upon request by the
employees. The Company has recorded a recovery of $0.2 million for the
year ended December 31, 2005 (2004 - $0.1 million expense), due to the
changes in the Company's stock price during the period.
The following table summarizes certain information in respect of option
activity under the Stock Option Plan:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
------------------------------------ -----------------------------
2005 2004 2003 2005 2004 2003
---------- ---------- --------- -------- -------- --------
Options outstanding, beginning of year 5,593,101 5,677,806 5,640,898 $ 6.82 $ 11.11 $ 11.31
Granted 651,866 1,633,486 786,110 9.59 5.53 6.99
Exercised (685,706) (145,206) (490,039) 5.30 3.89 3.71
Forfeited or expired (48,337) (352,685) (259,163) 14.33 15.56 17.00
Cancelled (6,600) (1,220,300) -- 13.82 22.87 --
---------- ---------- ---------
Options outstanding, end of year 5,504,324 5,593,101 5,677,806 7.26 6.82 11.11
========== ========== =========
Options exercisable, end of year 4,284,508 3,759,236 4,108,212 7.14 7.32 13.53
========== ========== =========
In 2005, the Company cancelled less than 0.1 million stock options (2004 -
1.2 million, 2003 - nil) surrendered by Company employees for $nil
consideration.
Page 79
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CAPITAL STOCK (cont'd)
(c) STOCK BASED COMPENSATION (cont'd)
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at December 31, 2005:
NUMBER OF SHARES
-------------------------
WEIGHTED
RANGE OF EXERCISE AVERAGE EXERCISE AVERAGE
PRICS PER SHARE OUTSTANDING VESTED PRICE PER SHARE REMAINING TERM
--------------- ------------ ----------- ---------------- --------------
$ 0.00 - $ 2.99 172,746 170,746 $ 2.73 2.8 Years
$ 3.00 - $ 4.99 2,043,189 2,028,188 4.36 3.4 Years
$ 5.00 - $ 9.99 2,762,262 1,559,447 6.81 5.6 Years
$ 10.00 - $14.99 30,225 30,225 11.53 3.2 Years
$ 15.00 - $19.99 55,600 55,600 17.58 1.0 Years
$ 20.00 - $24.99 281,302 281,302 21.85 3.3 Years
$ 25.00 - $28.04 159,000 159,000 27.16 4.2 Years
----------- -----------
Total 5,504,324 4,284,508 7.26 4.6 Years
=========== ===========
In 2005, an aggregate of 53,340 (2004 - 53,340) options with an average
exercise price of $9.74 (2004 - $6.19) to purchase the Company's common
stock were issued to certain advisors and strategic partners of the
Company. The Company has calculated the fair value of these options to
non-employees on the date of grant to be $0.3 million (2004 - $0.2
million), using a Binomial option-pricing model with the following
underlying assumptions:
YEARS ENDED DECEMBER 31
-----------------------
2005 2004
-------- --------
Average risk-free interest rate 4.06% 3.40%
Expected option life 5 years 5 years
Average expected volatility 62% 62%
Dividend yield 0% 0%
In 2005, the Company has recorded a charge of $0.3 million (2004 - $0.2
million) to film cost of sales related to the non-employee stock options.
There were no warrants issued in the year ended December 31, 2005 (2004 -
nil). 550,000 warrants were issued in 2003. During 2005, 80,872 common
shares were issued upon exercise of 200,000 warrants. All remaining
warrants have expired. Upon exercise of warrants in 2005, $1.1 million
representing the fair value of the original warrants issued, were
transferred to capital stock from other equity to reflect the value of the
shares issued within capital stock.
Page 80
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CAPITAL STOCK (cont'd)
(d) EARNINGS PER SHARE
YEARS ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003
----------- ------------ -----------
Net earnings applicable to common shareholders $ 16,598 $ 10,244 $ 231
=========== =========== ===========
Weighted average number of common shares:
Issued and outstanding, beginning of year 39,446,964 39,301,758 32,973,366
Weighted average number of shares
issued during the year 452,206 15,289 2,689,888
----------- ----------- -----------
Weighted average number of shares used in computing
basic earnings per share 39,899,170 39,317,047 35,663,254
Assumed exercise of stock options and warrants, net of
shares assumed 2,119,712 662,805 767,307
----------- ----------- -----------
Weighted average number of shares used in computing
diluted earnings per share 42,018,882 39,979,852 36,430,561
=========== =========== ===========
The calculation of diluted earnings per share for 2003 excludes common
shares issuable upon conversion of the Subordinated Notes due 2003 (now
retired) as the impact of these exercises and conversions would be
anti-dilutive.
18. CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
(a) The Company generally enters into multi-year theater system lease
agreements with customers that typically contain customer payment
obligations prior to the scheduled installation of the theater system.
During the period of time between lease signing and system installation,
certain customers each year generally are unable, or elect not, to proceed
with system installation for a number of reasons, including business
considerations, or the inability to obtain certain consents, approvals or
financing. Once the determination is made that the customer will not
proceed with installation, the customer and the Company may enter into a
consensual lease buyout, whereby the parties are released from their
future obligations under the lease and the geographic territory granted to
the customer reverts to the Company. Once an agreement is reached by both
parties, the initial lease payments that the customer previously made to
the Company are typically recognized as revenue. In addition, since the
introduction of its new IMAX MPX theater system in 2003, the Company has
agreed with several customers to terminate their original agreements and
to sign new system agreements for the MPX system. Upon finalizing the new
agreement, the total consideration received under both the terminated
agreements and the new MPX arrangement is allocated first to the MPX
system and the residual amount to settlement revenue. Included in IMAX
systems revenue for 2005 are the following types of settlement
arrangements: $0.6 million related to MPX conversion agreements (2004 -
$6.0 million, 2003 - $1.4 million); $11.7 million related to consensual
lease buyouts (2004 - $12.3 million, 2003 - $7.6 million); and $2.0
million related to termination of agreements after customer default (2004
- $0.8 million, 2003 - $0.5 million). In aggregate: 2005 - $14.3 million,
2004 - $19.1 million, 2003 - $9.5 million.
(b) Included in selling, general and administrative expenses for 2005 is $0.6
million (2004 - $0.4 million gain, 2003 - $1.7 million gain) for net
foreign exchange losses related to the translation of foreign currency
denominated monetary assets, liabilities and integrated subsidiaries.
(c) In 2004, the Company recorded a gain of $0.4 million from the sale of its
equity investment in Mainframe Entertainment, Inc. ("MFE"). In 2003, the
Company entered into a settlement agreement with MFE, whereby the parties
settled all of MFE's indebtedness and obligations to the Company arising
under the Company's 6.0% Senior Secured Convertible Debenture due from MFE
(the "Debenture"). The Company recorded a gain of $1.9 million in 2003
related to the final settlement.
Page 81
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
18. CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION (cont'd)
(d) On December 2, 2003, the Company acquired the remaining 50% interest in
the company that operates the IMAX Theater at Arizona Mills in Tempe,
Arizona, for $nil consideration. On the date of the transaction, the net
assets acquired and liabilities assumed had nominal fair value.
Summarized Condensed financial information for Tempe while it was
equity-accounted is included below:
2003
---------
Current assets $ N/A
Non current assets N/A
Current liabilities N/A
Non current liabilities N/A
Revenue 2,040
Loss from continued operations (662)
Net Loss $ (662)
Subsequent to December 2, 2003, the Company consolidated 100% of the
results in operations of Tempe.
(e) On December 31, 2003, the Company recorded a gain of $2.3 million upon
obtaining a release from a previous debt guarantee.
(f) During 2001, the Company reduced its expenses and changed its corporate
structure to reflect industry-wide economic and financial difficulties
faced by certain of the Company's customers. During the year ended
December 31, 2001, the Company relocated its sound-system facility in
Birmingham, Alabama to the Company's current facilities near Toronto,
Canada, and reduced its overall corporate workforce. In 2001, the Company
recorded expenses of $12.6 million for severances and $3.7 million for
premises relocation charges. During 2002, the Company recovered $0.5
million of restructuring liabilities for terminated employees who obtained
employment prior to the completion of their severance period. As at
December 31, 2005 the Company has accrued liabilities of $0.1 million
(2004 - $0.2 million) for costs of severed employees to be paid over the
next year. During 2005, the Company paid out $0.1 million (2004 - $0.4
million, 2003 - $0.8 million) of termination benefits.
19. RECEIVABLE PROVISIONS (RECOVERIES), NET
YEARS ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003
-------------- -------------- -------------
Accounts receivable provisions (recoveries), net $ (96) $ (81) $ 714
Financing receivable provisions (recoveries), net(1) $ (763) $ (1,406) $ (2,939)
------------- ------------- -------------
Receivable provisions (recoveries), net $ (859) $ (1,487) $ (2,225)
============= ============= =============
(1) For the year ended December 31, 2005, the Company recorded a recovery of
previously provided amounts of $0.8 million (2004 - $1.4 million, 2003 -
$2.9 million) as the collectibility uncertainty associated with certain
leases was resolved by amendment or settlement of the leases or other
resolving conditions.
Page 82
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
20. ASSET IMPAIRMENTS
YEARS ENDED DECEMBER 31,
--------------------------------------------
2005 2004 2003
------------ ------------- -------------
Asset impairments
Fixed assets $ -- $ 848 $ 969
============ ============= =============
The Company did not realize any asset impairment charges during 2005.
During 2004 and 2003, the Company recorded asset impairment charges of
$0.8 million and $1.0 million, respectively, after assessing the carrying
value of certain of its camera assets in 2004 due to lower volume in 2D
camera rentals and certain of its owned and operated theater assets in
2003 due primarily to lower than anticipated revenues at one of its
locations. The Company recognized that the future cash flows of these
assets did not support their recoverability.
21. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2005 2004 2003
------------ ------------ ------------
(a) Changes in other non-cash operating assets and liabilities
are comprised of the following:
Decrease (increase) in:
Accounts receivable $ (4,977) $ (5,679) $ 460
Financing receivables (3,347) (994) (1,044)
Inventories (383) (283) 7,847
Prepaid expenses (1,545) (378) 522
Increase (decrease) in:
Accounts payable 1,108 44 (1,230)
Accrued liabilities (6,749) 5,964 799
Deferred revenue (6,108) (12,838) (22,278)
------------ ------------ ------------
$ (22,001) $ (14,164) $ (14,924)
============ ============ ============
(b) Cash payments made during the year on account of:
Income taxes $ 952 $ 1,741 $ 2,294
============ ============ ============
Interest $ 15,548 $ 15,836 $ 15,123
============ ============ ============
Non-cash transactions for financing and investing:
Issuance of common stock to repurchase Old Senior Notes
due 2005 $ -- $ -- $ 48,324
============ ============ ============
(c) Depreciation and amortization are comprised of the following:
Film assets $ 7,369 $ 5,323 $ 2,940
Fixed assets 5,080 6,284 6,592
Other assets 1,297 1,382 1,545
Other intangible assets 911 719 573
Deferred financing costs 1,210 1,239 705
------------ ------------ ------------
$ 15,867 $ 14,947 $ 12,355
============ ============ ============
(d) Write-downs (recoveries) are comprised of the following:
Accounts receivable (96) (81) 714
Financing receivables (763) (1,406) (2,939)
Fixed assets -- 852 1,322
Other assets -- (293) (1,819)
------------ ------------ ------------
$ (859) $ (928) $ (2,722)
============ ============ ============
Page 83
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
22. SEGMENTED AND OTHER INFORMATION
The Company has four reportable segments: IMAX systems; films; theater
operations; and other. The IMAX systems segment designs, manufactures,
sells or leases and maintains IMAX theater projection systems. The films
segment produces and distributes films, and performs film re-mastering and
post-production services. The theater operations segment owns and operates
certain IMAX theaters. The other segment includes camera rentals. The
accounting policies of the segments are the same as those described in
note 2. Segment performance is evaluated based on gross margin less
selling, general and administrative expenses, research and development
expenses, amortization of intangibles, income from equity-accounted
investees and asset impairments. Inter-segment transactions are not
significant.
(a) OPERATING SEGMENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2005 2004 2003
------------ ------------ ------------
REVENUE
IMAX systems $ 97,753 $ 86,570 $ 75,848
Films 26,451 27,887 25,803
Theater operations 17,498 17,415 13,109
Other 3,228 4,108 4,500
------------ ------------ ------------
Total $ 144,930 $ 135,980 $ 119,260
============ ============ ============
ASSET IMPAIRMENTS
Theater operations $ -- $ -- $ 969
Other -- 848 --
------------ ------------ ------------
Total $ -- $ 848 $ 969
============ ============ ============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 51,967 $ 51,708 $ 38,238
Films 2,072 (1,905) (508)
Theater operations 599 1,412 (2,474)
Corporate and other (23,316) (25,438) (17,206)
------------ ------------ ------------
Total $ 31,322 $ 25,777 $ 18,050
============ ============ ============
DEPRECIATION AND AMORTIZATION
IMAX systems $ 4,559 $ 4,730 $ 4,722
Films 8,388 6,365 4,268
Theater operations 150 125 178
Corporate and other 2,770 3,727 3,187
------------ ------------ ------------
Total $ 15,867 $ 14,947 $ 12,355
============ ============ ============
WRITE-DOWNS (RECOVERIES)
IMAX systems $ (763) $ (1,406) $ (2,939)
Theater operations -- -- 1,104
Corporate and other (96) 478 (887)
------------ ------------ ------------
Total $ (859) $ (928) $ (2,722)
============ ============ ============
PURCHASE OF LONG-LIVED ASSETS
IMAX systems $ 1,673 $ 1,091 $ 1,215
Films 193 10 400
Theater operations 193 123 242
Corporate and other 841 1,685 7,552
------------ ------------ ------------
Total $ 2,900 $ 2,909 $ 9,409
============ ============ ============
Page 84
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
22. SEGMENTED AND OTHER INFORMATION (cont'd)
(a) OPERATING SEGMENTS (cont'd)
AS AT DECEMBER 31,
----------------------------
2005 2004
------------- ------------
ASSETS
IMAX systems $ 167,437 $ 163,434
Films 1,203 14,388
Theater operations 19,408 1,096
Corporate and other 55,363 51,935
------------ ------------
Total $ 243,411 $ 230,853
============ ============
Goodwill is allocated to the IMAX systems segment.
(b) GEOGRAPHIC INFORMATION
Revenue by geographic area is based on the location of the theater.
YEARS ENDED DECEMBER 31,
-------------------------------------------
2005 2004 2003
------------ ------------ ------------
REVENUE
Canada $ 7,027 $ 9,616 $ 5,224
United States 73,711 68,411 66,808
Europe 26,700 26,144 26,805
Asia 22,024 18,769 9,989
Rest of World 15,468 13,040 10,434
------------ ------------ ------------
Total $ 144,930 $ 135,980 $ 119,260
============ ============ ============
AS AT DECEMBER 31,
----------------------------
2005 2004
------------ ------------
LONG-LIVED ASSETS
Canada $ 53,219 $ 53,909
United States 24,334 28,392
Europe 1,738 836
Rest of World 835 1,039
------------ ------------
Total $ 80,126 $ 84,176
============ ============
Long-lived assets include fixed assets, other assets, other intangible
assets and goodwill. Goodwill is allocated to the Canada segment.
(c) REVENUE AND COST OF GOODS AND SERVICES
YEARS ENDED DECEMBER 31,
-------------------------------------------
2005 2004 2003
------------ ------------ ------------
Revenue:
Products $ 91,629 $ 84,188 $ 71,361
Services 53,301 51,792 47,899
------------ ------------ ------------
Total revenue $ 144,930 $ 135,980 $ 119,260
============ ============ ============
Costs of goods and services:
Products $ 35,732 $ 31,327 $ 30,077
Services 37,273 38,735 37,206
------------ ------------ ------------
Total costs of goods and services $ 73,005 $ 70,062 $ 67,283
============ ============ ============
Page 85
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
22. SEGMENTED AND OTHER INFORMATION (cont'd)
(c) REVENUE AND COST OF GOODS AND SERVICES (cont'd)
Product revenue includes sales and sales-type leases of theater systems,
revenue from film production and distribution and the sales of other
products. Service revenue includes rentals from operating leases,
maintenance, film re-mastering services, post-production services, camera
rentals, theater operations and other services.
23. FINANCIAL INSTRUMENTS
The Company maintains cash and cash equivalents with various major
financial institutions. The Company's cash is invested with highly rated
financial institutions.
The Company is exposed to market risk from changes in foreign currency
rates. A majority portion of the Company's revenues is denominated in U.S.
dollars while a substantial portion of its costs and expenses is
denominated in Canadian dollars. A portion of the net U.S. dollar cash
flows of the Company is periodically converted to Canadian dollars to fund
Canadian dollar expenses through the spot market. In Japan, the Company
has ongoing operating expenses related to its operations. Net Japanese yen
flows are converted to U.S. dollars generally through the spot markets.
The Company also has cash receipts under leases denominated in Japanese
yen and Euros which are converted to U.S. dollars generally through the
spot market. As at December 31, 2005, no foreign currency forward
contracts are outstanding. The Company does not use financial instruments
for trading or other speculative purposes.
The carrying values of the Company's cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short-term maturity of these
instruments. The Company's other financial instruments at December 31, are
comprised of the following:
2005 2004
--------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
Senior Notes due 2010 160,000 166,400 160,000 174,400
Long-term receivables 8,888 8,634 4,468 4,071
The estimated fair values of the Senior Notes due 2010 are estimated based
on traded prices as at December 31, 2005 and long-term receivables are
estimated based on discounting at currently available interest rates as at
December 31, 2005.
To minimize the Company's credit risk, the Company retains title to
underlying theater systems leased, registers theater systems sold as
collateral, performs initial and ongoing credit evaluations of its
customers and makes ongoing provisions for its estimate of potentially
uncollectible amounts. The Company believes it has adequately dealt with
the related exposures surrounding receivables and contractual commitments.
Page 86
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
24. EMPLOYEE PENSIONS
(a) DEFINED BENEFIT PLAN
The Company has an unfunded U.S. defined benefit pension plan covering its
two Co-Chief Executive Officers. The plan provides for a lifetime
retirement benefit from age 55 determined as 75% of the member's best
average 60 consecutive months of earnings during the 120 months proceeding
retirement. Under the original terms of the plan, once benefit payments
begin, the benefit is indexed annually to the cost of living and further
provides for 100% continuance for life to the surviving spouse. The
benefits were 50% vested as of the plan initiation date. The vesting
percentage increases on a straight-line basis from inception until age 55.
The vesting percentage of a member whose employment terminates other than
by voluntary retirement shall be 100%. Also, upon the occurrence of a
change in control of the Company prior to termination of a member's
employment, the vesting percentage shall become 100%. The following
assumptions were used in determining the obligation and cost status of the
Company's defined benefit pension plan at the plan measurement date of
December 31:
2005 2004 2003
------------- ------------ ----------
Discount rate 5.50% 5.75% 6.00%
Rate of increase in qualifying compensation levels nil% nil% nil%
The amounts accrued for the plan are determined as follows:
2005 2004 2003
--------------- -------------- --------------
Projected benefit obligation:
Obligation, beginning of year $ 25,900 $ 20,086 $ 17,150
Service cost 2,416 2,063 1,956
Interest cost 1,559 1,267 1,088
Actuarial loss (gain) 1,189 2,484 (108)
--------------- -------------- --------------
Obligation, end of year $ 31,064 $ 25,900 $ 20,086
=============== ============== ==============
Unfunded status:
Obligation, end of year $ 31,064 $ 25,900 $ 20,086
Unrecognized prior service cost (3,634) (5,032) (6,429)
Unrecognized actuarial gain (loss) (2,773) (1,584) 899
--------------- -------------- --------------
Accrued pension liability $ 24,657 $ 19,284 $ 14,556
=============== ============== ==============
In addition, included in accrued liabilities, is a minimum pension
liability of $6.4 million (2004 - $6.6 million, 2003 - $5.5 million),
representing unrecognized prior service costs and unrecognized actuarial
gains or losses.
PENSION BENEFITS
--------------------------------------------
2005 2004 2003
------------- ------------- -------------
Accrued benefits cost $ (31,064) $ (25,900) $ (20,086)
Other assets 3,634 5,032 5,530
Unrecognized actuarial loss 2,773 1,584 --
------------ ------------ -------------
Net amount recognized $ (24,657) $ (19,284) $ (14,556)
============ ============ =============
The following table provides disclosure of pension expense for the defined
benefit plan for the year ended December 31:
2005 2004 2003
--------------- -------------- --------------
Service cost $ 2,416 $ 2,063 $ 1,956
Interest cost 1,559 1,267 1,088
Amortization of prior service cost 1,398 1,398 1,398
--------------- -------------- --------------
Pension expense $ 5,373 $ 4,728 $ 4,442
=============== ============== ==============
The accumulated benefit obligation for the defined benefit plan was $31.1
million and $25.9 million at December 31, 2005 and 2004, respectively.
Page 87
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
24. EMPLOYEE PENSIONS (cont'd)
(a) DEFINED BENEFIT PLAN (cont'd)
Contributions are expected to be made into the plan during 2006 of $0.2
million given the assumption of retirement at age 55 of the Co-Chief
Executive Officers.
The following benefit payments are expected to be made as per the current
plan assumptions and the terms of the Plan in each of the next five years,
and in the aggregate over the five years thereafter:
2006 $ 248
2007 998
2008 1,022
2009 1,047
2010 1,072
2011 to 2015 11,015
At the time the Company established the defined benefit pension plan, it
also took out life insurance policies on its two Co-Chief Executive
Officers with coverage amounts of $21.5 million in aggregate. The Company
intends to use the proceeds of life insurance policies taken on its
Co-Chief Executive Officers to be applied towards the benefits due and
payable under the plan, although there can be no assurance that the
Company will ultimately do so. At December 31, 2005, the cash surrender
value of the insurance policies is $3.3 million (2004 - $2.5 million, 2003
- $1.7 million) and has been included in other assets.
On March 6, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the plan. Under the terms of the plan amendment, the cost of
living adjustment and surviving spouse benefits previously owed to the
Co-Chief Executive Officers are each reduced by 50%, subject to a
recoupment of a percentage of such benefits upon a change of control of
the Company, and benefit payments are accelerated and paid out upon the
occurrence of certain events, including a change of control of the
Company. The Company is currently evaluating the effect that these plan
amendments will have on the pension liability, future pension expense,
expected contributions, and benefit payments, although the Company expects
a significant reduction in the total projected benefit obligation
approximating $9 million and future reductions in pension expense
approximating $11 million over the 5 years.
(b) DEFINED CONTRIBUTION PLAN
The Company also maintains defined contribution pension plans for its
employees, including its executive officers. The Company makes
contributions to these plans on behalf of employees in an amount up to 5%
of their base salary subject to certain prescribed maximums. During 2005,
the Company contributed and expensed an aggregate of $0.6 million (2004 -
$0.5 million, 2003 - $0.5 million) to its Canadian plan and an aggregate
of $0.2 million (2004 - $0.1 million, 2003 - $0.1 million) to its defined
contribution employee pension plan under Section 401(k) of the U.S.
Internal Revenue Code.
25. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued a revision to Financial Accounting Standards
No. 123 ("FAS 123R"). FAS 123R is focused primarily on the accounting for
transactions in which a company obtains employee services in exchange for
stock options or share-based payments. Currently, the Company grants stock
options to their employees and discloses the pro forma effect of
compensation expense for these stock options. Under FAS 123R, the Company
will be required to record this compensation expense in the Company's
results of operations. FAS 123R is effective for the beginning of the
first fiscal reporting period that begins after December 31, 2005. The
Company has evaluated the effect the adoption of FAS 123R and expects to
adopt the pronouncement beginning on January 1, 2006. The Company
estimates that based on the currently issued options, and not including
any further grants which may occur in 2006, the additional compensation
expense for the year ended December 31, 2006 will approximate $0.8 million
before taxes.
Page 88
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
26. DISCONTINUED OPERATIONS
(a) MIAMI THEATER LLC
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company completed its abandonment of assets and removal of
its projection system from the theater in the first quarter of 2004, with
no financial impact. The Company is involved in a legal proceeding with
the landlord of the theater with respect to the amount owing to the
landlord by the Company for lease and guarantee obligations. The amount of
loss to the Company has been estimated as between $0.8 million and $2.3
million, of which the Company had accrued $0.8 million as at December 31,
2003. During 2004, the Company paid out this $0.8 million to the landlord.
As the Company is uncertain as to the outcome of the proceeding, no
additional amount has been recorded.
(b) DIGITAL PROJECTION INTERNATIONAL
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries (collectively, "DPI"), to a company owned by members of DPI
management. As part of the transaction, the Company restructured its
advances to DPI, releasing DPI from obligations to repay any amounts in
excess of $12.7 million previously advanced by the Company, and
reorganized the remaining $12.7 million of debt owing to the Company into
two separate loan agreements. The loans receivable are collateralized by
fixed and floating charges over all DPI assets including intellectual
properties. One of the loans is convertible, upon the occurrence of
certain events, into shares representing 49% of the total share capital of
DPI related to these loans. On December 29, 2005, the Company and DPI
entered into an agreement to settle the remaining loans in exchange for a
payment of $3.5 million to be received in two tranches in the first
quarter of 2006. During 2005, the Company recognized $2.0 million (2004 -
$0.8 million, 2003 - $0.8 million) in income from discontinued operations.
(c) CONSOLIDATED STATEMENT OF OPERATIONS FOR MIAMI THEATER AND DPI
The net earnings from discontinued operations summarized in the
Consolidated Statements of Operations, for the years ended December 31,
was comprised of the following:
2005 2004 2003
------------- ------------- -------------
Revenue $ -- $ -- $ 1,123
============= ============= =============
Net earnings from discontinued operations(1) $ 1,979 $ 800 $ 374
Net loss on disposal of discontinued operations -- -- (179)
------------- ------------- -------------
Net earnings from discontinued operations $ 1,979 $ 800 $ 195
============= ============= =============
(1) Net of income tax provision of $nil in 2005 (2004 - $nil, 2003 - $0.1
million). Since the deferred tax asset relating to the original loss from
discontinued operations was fully allowed for through the valuation
allowance, any future recoveries relating to the repayment of this
outstanding debt are not tax effected.
27. ASSET RETIREMENT OBLIGATIONS
The Company has accrued costs related to obligations in respect of
required reversion costs for its theaters under long-term real estate
leases which will become due in the future. The Company does not have any
legal restrictions with respect to settling any of these long-term leases.
A reconciliation of the Company's liability in respect of required
reversion costs is shown below:
2005 2004 2003
------------- ------------- -------------
Beginning balance, January 1 $ 227 $ 204 $ 182
Accretion expense 27 23 22
------------- ------------- -------------
Ending balance, December 31 $ 254 $ 227 $ 204
============= ============= =============
Page 89
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes (see note 11) are unconditionally guaranteed,
jointly and severally by specific wholly-owned subsidiaries of the Company
(the "Guarantor Subsidiaries"). The main Guarantor Subsidiaries are David
Keighley Productions 70 MM Inc., Sonics Associates Inc., and the
subsidiaries that own and operate certain theaters. These guarantees are
full and unconditional. The information under the column headed
"Non-Guarantor Subsidiaries" relates to the following subsidiaries of the
Company: IMAX Japan Inc. and IMAX B.V., (the "Non-Guarantor Subsidiaries")
which have not provided any guarantees of the Senior Notes.
Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Some
subsidiaries may be unable to pay dividends due to negative working
capital.
Supplemental Consolidating Balance Sheets as at December 31, 2005:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
ASSETS
Cash and cash equivalents $ 17,402 $ 6,728 $ 194 $ -- $ 24,324
Short-term investments 8,171 -- -- -- 8,171
Accounts receivable 23,828 2,045 292 -- 26,165
Financing receivables 60,950 2,056 -- -- 63,006
Inventories 27,973 239 82 -- 28,294
Prepaid expenses 3,162 575 88 -- 3,825
Inter-company receivables 14,057 31,929 11,043 (57,029) --
Film assets 3,329 -- -- -- 3,329
Fixed assets 25,403 1,374 3 -- 26,780
Other assets 11,618 -- -- -- 11,618
Deferred income taxes 6,171 -- -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,701 -- -- -- 2,701
Investments in subsidiaries 31,833 -- -- (31,833) --
--------- --------- --------- --------- ---------
Total assets $ 275,625 $ 44,946 $ 11,702 $ (88,862) $ 243,411
========= ========= ========= ========= =========
LIABILITIES
Accounts payable 4,915 2,017 3 -- 6,935
Accrued liabilities 52,978 1,965 179 -- 55,122
Inter-company payables 42,766 36,088 6,466 (85,320) --
Deferred revenue 38,927 5,330 140 -- 44,397
Senior Notes due 2010 160,000 -- -- -- 160,000
--------- --------- --------- --------- ---------
Total liabilities 299,586 45,400 6,788 (85,320) 266,454
--------- --------- --------- --------- ---------
SHAREHOLDER'S DEFICIT
Capital stock 121,674 -- 117 (117) 121,674
Other equity/Additional paid in
capital/Contributed surplus 724 46,960 -- (45,926) 1,758
Deficit (144,845) (46,800) 4,797 42,501 (144,347)
Accumulated other comprehensive income
(loss) (1,514) (614) -- -- (2,128)
--------- --------- --------- --------- ---------
Total shareholders' equity (deficit) $ (23,961) $ (454) $ 4,914 $ (3,542) $ (23,043)
--------- --------- --------- --------- ---------
Total liabilities & shareholders'
equity (deficit) $ 275,625 $ 44,946 $ 11,702 $ (88,862) $ 243,411
========= ========= ========= ========= =========
In certain Guarantor Subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting,
the parent company has consequently reduced inter-company receivable
balances with respect to these Guarantor Subsidiaries in the amounts of
$28.4 million.
Page 90
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2004:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
ASSETS
Cash and cash equivalents $ 23,683 $ 5,058 $ 223 $ -- $ 28,964
Accounts receivable 16,492 3,029 378 -- 19,899
Financing receivables 57,769 1,723 -- -- 59,492
Inventories 28,661 233 107 -- 29,001
Prepaid expenses 1,712 464 103 -- 2,279
Inter-company receivables 13,407 31,146 12,100 (56,653) --
Film assets 871 -- -- -- 871
Fixed assets 27,184 1,527 1 -- 28,712
Other assets 13,377 -- -- -- 13,377
Deferred income taxes 6,104 67 -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 3,060 -- -- -- 3,060
Investments in subsidiaries 31,693 -- -- (31,693) --
--------- --------- --------- --------- ---------
Total assets $ 263,040 $ 43,247 $ 12,912 $ (88,346) $ 230,853
========= ========= ========= ========= =========
LIABILITIES
Accounts payable 3,238 2,583 6 -- 5,827
Accrued liabilities 54,674 2,086 137 -- 56,897
Inter-company payables 43,000 34,440 7,597 (85,037) --
Deferred revenue 45,422 4,918 165 -- 50,505
Senior Notes due 2010 160,000 -- -- -- 160,000
--------- --------- --------- --------- ---------
Total liabilities 306,334 44,027 7,905 (85,037) 273,229
--------- --------- --------- --------- ---------
SHAREHOLDER'S DEFICIT
Capital stock 116,281 -- 117 (117) 116,281
Other equity/Additional paid in
capital/Contributed surplus 2,193 46,960 -- (45,926) 3,227
Deficit (161,443) (47,126) 4,890 42,734 (160,945)
Accumulated other comprehensive income
(loss) (325) (614) -- -- (939)
--------- --------- --------- --------- ---------
Total shareholders' equity (deficit) $ (43,294) $ (780) $ 5,007 $ (3,309) $ (42,376)
--------- --------- --------- --------- ---------
Total liabilities & shareholders'
equity (deficit) $ 263,040 $ 43,247 $ 12,912 $ (88,346) $ 230,853
========= ========= ========= ========= =========
In certain Guarantor Subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting,
the parent company has consequently reduced inter-company receivable
balances with respect to these Guarantor Subsidiaries in the amounts of
$28.5 million.
Page 91
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2005:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
REVENUE
IMAX systems $ 96,582 $ 2,415 $ 826 $ (2,070) $ 97,753
Films 21,621 6,509 17 (1,696) 26,451
Theater operations 966 16,643 -- (111) 17,498
Other 3,202 -- 46 (20) 3,228
--------- --------- --------- --------- ---------
122,371 25,567 889 (3,897) 144,930
COST OF GOODS AND SERVICES 53,183 23,302 417 (3,897) 73,005
--------- --------- --------- --------- ---------
GROSS MARGIN 69,188 2,265 472 -- 71,925
Selling, general and administrative
expenses 35,838 883 566 -- 37,287
Research and development 3,264 -- -- -- 3,264
Amortization of intangibles 911 -- -- -- 911
Loss (income) from equity-accounted
investees (233) -- -- 233 --
Receivable provisions net of (recoveries) (1,836) 977 -- -- (859)
--------- --------- --------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS 31,244 405 (94) (233) 31,322
Interest income 1,002 -- 2 -- 1,004
Interest expense (16,773) -- -- -- (16,773)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 15,473 405 (92) (233) 15,553
Provision for income taxes (854) (79) (1) -- (934)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 14,619 326 (93) (233) 14,619
Net earnings from discontinued operations 1,979 -- -- -- 1,979
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) $ 16,598 $ 326 $ (93) $ (233) $ 16,598
========= ========= ========= ========= =========
Page 92
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2004:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
REVENUE
IMAX systems $ 84,352 $ 2,978 $ 1,110 $ (1,870) $ 86,570
Films 22,265 8,320 23 (2,721) 27,887
Theater operations 617 16,902 -- (104) 17,415
Other 4,105 -- 27 (24) 4,108
--------- --------- --------- --------- ---------
111,339 28,200 1,160 (4,719) 135,980
COST OF GOODS AND SERVICES 49,267 25,066 448 (4,719) 70,062
--------- --------- --------- --------- ---------
GROSS MARGIN 62,072 3,134 712 -- 65,918
Selling, general and administrative
expenses 34,971 745 350 -- 36,066
Research and development 3,995 -- -- -- 3,995
Amortization of intangibles 719 -- -- -- 719
Loss (income) from equity-accounted
investees (3,325) -- -- 3,325 --
Receivable provisions net of (recoveries) (762) (757) 32 -- (1,487)
Restructuring cost and asset impairments 848 -- -- -- 848
--------- --------- --------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS 25,626 3,146 330 (3,325) 25,777
Interest income 756 -- -- -- 756
Interest expense (16,769) (54) (30) -- (16,853)
Loss on retirement of notes (784) -- -- -- (784)
Recovery on long-term investments 293 -- -- -- 293
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 9,122 3,092 300 (3,325) 9,189
Recovery of (provision for) income taxes 322 -- (67) -- 255
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 9,444 3,092 233 (3,325) 9,444
Net earnings from discontinued operations 800 -- -- -- 800
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) $ 10,244 $ 3,092 $ 233 $ (3,325) $ 10,244
========= ========= ========= ========= =========
Page 93
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the year ended December
31, 2003:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
REVENUE
IMAX systems $ 74,180 $ 2,373 $ 1,449 $ (2,154) $ 75,848
Films 15,669 12,933 58 (2,857) 25,803
Theater operations 746 12,363 -- -- 13,109
Other 4,451 -- 115 (66) 4,500
--------- --------- --------- --------- ---------
95,046 27,669 1,622 (5,077) 119,260
COST OF GOODS AND SERVICES 45,308 27,769 596 (6,390) 67,283
--------- --------- --------- --------- ---------
GROSS MARGIN 49,738 (100) 1,026 1,313 51,977
Selling, general and administrative
expenses 32,210 743 359 -- 33,312
Research and development 3,794 -- -- -- 3,794
Amortization of intangibles 573 -- -- -- 573
Income from equity-accounted investees (1,903) (6) -- (587) (2,496)
Receivable provisions net of (recoveries) (1,956) (178) (91) -- (2,225)
Restructuring costs and asset impairment -- 969 -- -- 969
--------- --------- --------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS 17,020 (1,628) 758 1,900 18,050
Interest income 656 -- -- -- 656
Interest expense (15,770) (86) -- -- (15,856)
Loss on retirement of notes (4,910) -- -- -- (4,910)
Recovery on long-term investments 1,892 -- -- -- 1,892
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,112) (1,714) 758 1,900 (168)
Recovery of (provision for) income taxes (840) 1,077 149 -- 386
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (1,952) (637) 907 1,900 218
Net earnings (loss) from discontinued
operations 653 (458) -- -- 195
--------- --------- --------- --------- ---------
Net earnings (loss) before cumulative
effect of changes in accounting (1,299) (1,095) 907 1,900 413
principles
Cumulative effect of changes in accounting
principles -- (182) -- -- (182)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) $ (1,299) $ (1,277) $ 907 $ 1,900 $ 231
========= ========= ========= ========= =========
Page 94
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended
December 31, 2005:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 16,598 $ 326 $ (93) $ (233) $ 16,598
Net (earnings) from discontinued
operations (1,979) -- -- -- (1,979)
Items not involving cash:
Depreciation and amortization 15,332 532 3 -- 15,867
Write-downs (recoveries) (1,836) 977 -- -- (859)
Loss (income) from equity-accounted
investees (233) -- -- 233 --
Change in deferred income taxes (67) 67 -- -- --
Stock and other non-cash compensation 4,075 -- -- -- 4,075
Non cash foreign exchange loss 266 -- -- -- 266
Interest on short-term investments (353) -- -- -- (353)
Investment in film assets (9,828) -- -- -- (9,828)
Changes in other non-cash operating assets
and liabilities (22,227) 132 94 -- (22,001)
------------ ------------ ------------- ------------- --------------
Net cash provided by (used in) operating
activities (252) 2,034 4 -- 1,786
------------ ------------ ------------- ------------- --------------
INVESTING ACTIVITIES
Purchases of short-term investments (31,276) -- -- -- (31,276)
Proceeds from maturities of short-term
investments 23,458 -- -- -- 23,458
Purchase of fixed assets (1,213) (379) (5) -- (1,597)
Increase in other assets (749) -- -- -- (749)
Increase in other intangible assets (552) -- -- -- (552)
------------ ------------ ------------- ------------- --------------
Net cash used in investing
activities (10,332) (379) (5) -- (10,716)
------------ ------------ ------------- ------------- --------------
FINANCING ACTIVITIES
Common shares issued 3,633 -- -- -- 3,633
Net cash provided by financing
activities from discontinued
operations 786 -- -- -- 786
------------ ------------ ------------- ------------- --------------
Net cash provided by financing activities 4,419 -- -- -- 4,419
------------ ------------ ------------- ------------- --------------
Effects of exchange rate changes on cash (116) 15 (28) -- (129)
------------ ------------ ------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (7,067) 1,670 (29) -- (5,426)
Increase in cash and cash equivalents from
discontinued operations 786 -- -- -- 786
------------ ------------ ------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (6,281) 1,670 (29) -- (4,640)
Cash and cash equivalents, beginning of
period 23,683 5,058 223 -- 28,964
------------ ------------ ------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,402 $ 6,728 $ 194 $ -- $ 24,324
============ ============ ============= ============= ==============
Page 95
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2004:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ 10,244 $ 3,092 $ 233 $ (3,325) $ 10,244
Net (earnings) from discontinued
operations (800) -- -- -- (800)
Items not involving cash:
Depreciation and amortization 14,414 531 2 -- 14,947
Write-downs (recoveries) (203) (757) 32 -- (928)
Loss (income) from equity-accounted
investees (3,325) -- -- 3,325 --
Change in deferred income taxes (1,127) (16) -- -- (1,143)
Loss on retirement of notes 784 -- -- -- 784
Stock and other non-cash compensation 3,567 -- -- -- 3,567
Non cash foreign exchange gain (605) -- -- -- (605)
Premium on repayment of notes (576) -- -- -- (576)
Investment in film assets (6,083) 1,207 -- -- (4,876)
Changes in restricted cash 4,961 -- -- -- 4,961
Changes in other non-cash operating assets
and liabilities (9,338) (4,500) (326) -- (14,164)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 11,913 (443) (59) -- 11,411
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (180) (140) -- -- (320)
Increase in other assets (1,044) -- -- -- (1,044)
Increase in other intangible assets (391) -- -- -- (391)
Recovery on long-term investments 393 -- -- -- 393
-------- -------- -------- -------- --------
Net cash used in investing activities (1,222) (140) -- -- (1,362)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of Old Senior Notes due 2005 (29,234) -- -- -- (29,234)
Financing costs related to Senior Notes due
2010 (535) -- -- -- (535)
Common shares issued 558 -- -- -- 558
Net cash provided by financing
activities from discontinued
operations 800 -- -- -- 800
-------- -------- -------- -------- --------
Net cash used in financing activities (28,411) -- -- -- (28,411)
-------- -------- -------- -------- --------
Effects of exchange rate changes on cash 92 (55) 7 -- 44
-------- -------- -------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS (18,428) (638) (52) -- (19,118)
Increase in cash and cash equivalents from
discontinued operations 800 -- -- -- 800
-------- -------- -------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS,
DURING THE PERIOD (17,628) (638) (52) -- (18,318)
Cash and cash equivalents, beginning of
period 41,311 5,696 275 -- 47,282
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,683 $ 5,058 $ 223 $ -- $ 28,964
======== ======== ======== ======== ========
Page 96
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
28. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the year ended December
31, 2003:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings $ (1,299) $ (1,277) $ 907 $ 1,900 $ 231
Net (earnings) from discontinued
operations (653) 458 -- -- (195)
Items not involving cash:
Cumulative effect of changes in
accounting principles -- 182 -- -- 182
Depreciation and amortization 11,482 870 3 -- 12,355
Write-downs (recoveries) (3,556) 925 (91) -- (2,722)
Income from equity-accounted investees (2,216) 307 -- (587) (2,496)
Change in deferred income taxes 81 -- -- -- 81
Gain on retirement of notes 4,910 -- -- -- 4,910
Stock and other non-cash compensation 4,926 -- -- -- 4,926
Non-cash foreign exchange loss (gain) (1,281) -- -- -- (1,281)
Premium on repayment of notes (3,088) -- -- -- (3,088)
Payment under certain employment agreements (1,550) -- -- -- (1,550)
Investment in film assets (1,786) (1,207) -- -- (2,993)
Changes in restricted cash (1,626) -- -- -- (1,626)
Changes in other non-cash operating assets
and liabilities (13,689) 1,000 (922) (1,313) (14,924)
Net cash used in operating activities from
discontinued operations (462) (531) -- -- (993)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities (9,807) 727 (103) -- (9,183)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets (852) (708) -- -- (1,560)
Increase in other assets (1,526) -- -- -- (1,526)
Increase in other intangible assets (597) -- -- -- (597)
Recovery on long-term investments 1,892 -- -- -- 1,892
Investment in subsidiaries (10) -- -- 10 --
Net cash used in investing activities from
discontinued operations -- (15) -- -- (15)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities (1,093) (723) -- 10 (1,806)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Repayment of Subordinated Notes (9,143) -- -- -- (9,143)
Repayment of Old Senior Notes due 2005 (123,577) -- -- -- (123,577)
Issuance of Senior Notes due 2010 160,000 -- -- -- 160,000
Financing costs related to Senior Notes due
2010 (5,615) -- -- -- (5,615)
Common shares issued 1,722 -- -- -- 1,722
Other equity/additional paid in
capital/contributed surplus issued -- 10 -- (10) --
Net cash provided by financing activities
from discontinued operations 799 -- -- -- 799
--------- --------- --------- --------- ---------
Net cash used in (provided by) financing
activities 24,186 10 -- (10) 24,186
--------- --------- --------- --------- ---------
Effects of exchange rate changes on cash 269 (13) 28 -- 284
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 13,218 547 (75) -- 13,690
Increase (decrease) in cash and cash
equivalents from discontinued operations 337 (546) -- -- (209)
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE YEAR 13,555 1 (75) -- 13,481
Cash and cash equivalents, beginning of
year 27,756 5,695 350 -- 33,801
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,311 $ 5,696 $ 275 $ -- $ 47,282
========= ========= ========= ========= =========
Page 97
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
29. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA
The accounting principles followed by the Company conform with U.S. GAAP.
Significant differences affecting the Company between U.S. GAAP and
Canadian Generally Accepted Accounting Principles ("Canadian GAAP") are
summarized below.
(a) FIXED ASSET IMPAIRMENTS
Fixed asset impairments under U.S. GAAP are calculated based on a
discounted future cash flow basis. Under Canadian GAAP, prior to January
1, 2002, impairments were calculated based on an undiscounted future cash
flow basis. Any differences resulted in higher depreciation for the
remaining useful life of the assets.
(b) STOCK-BASED COMPENSATION
Under U.S. GAAP, the Company accounts for stock-based compensation under
the intrinsic value method set out in APB 25 and has made pro forma
disclosures of net earnings (loss) and earnings (loss) per share as if the
methodology prescribed by FAS 123 had been adopted. Under Canadian GAAP,
the Company adopted the fair value provisions of CICA Section 3870,
"Stock-based Compensation and Other Stock-based Payments", effective
January 1, 2003. As of this date, stock options granted to employees or
directors are recorded as an expense in the consolidated statement of
operations and credited to other equity.
(c) PENSION ASSET AND LIABILITIES
Under U.S. GAAP, included in accrued liabilities is a minimum pension
liability of $6.4 million as at December 31, 2005 and $6.6 million as at
December 31, 2004, representing unrecognized prior service costs and
unrecognized actuarial gains or losses. An amount of $3.6 million as at
December 31, 2005, and $5.0 million as at December 31, 2004 is included in
other assets, representing unrecognized prior service costs. In addition,
under U.S. GAAP, an amount of $2.8 million as at December 31, 2005 and
$1.6 million as at December 31, 2004 is recorded against accumulated other
comprehensive income, resulting from unrecognized actuarial losses. Under
Canadian GAAP, the minimum pension liability, and the corresponding
amounts recorded in other assets and accumulated other comprehensive
income are not recorded.
RECONCILIATION TO CANADIAN GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS
The following is a reconciliation of net earnings (loss) reflecting the
differences between U.S. and Canadian GAAP:
YEARS ENDED DECEMBER 31,
------------------------------------
2005 2004
----------------- ---------------
Net earnings in accordance with U.S. GAAP $ 16,598 $ 10,244
Depreciation of fixed assets(a) -- (852)
Stock-based compensation(b) (2,216) (1,438)
----------------- ---------------
Net earnings in accordance with Canadian GAAP $ 14,382 $ 7,954
================= ===============
Earnings per share (note 17):
Earnings per share - basic:
Net earnings from continuing operations $ 0.31 $ 0.18
Net earnings from discontinued operations $ 0.05 $ 0.02
----------------- ---------------
Net earnings $ 0.36 $ 0.20
================= ===============
Earnings per share - diluted:
Net earnings from continuing operations $ 0.29 $ 0.18
Net earnings from discontinued operations $ 0.05 $ 0.02
----------------- ---------------
Net earnings $ 0.34 $ 0.20
================= ===============
Page 98
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
29. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
The following is a reconciliation of shareholders' equity (deficit)
reflecting the difference between Canadian and U.S. GAAP:
DECEMBER 31, DECEMBER 31,
2005 2004
--------------- --------------
Shareholders' equity (deficit) in accordance with U.S. GAAP $ (23,043) $ (42,376)
Unrecognized actuarial loss(c) 2,773 1,584
-------------- -----------
Shareholders' equity (deficit) in accordance with Canadian GAAP $ (20,270) $ (40,792)
============== ===========
30. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Page 99
IMAX CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Co-Chief Executive Officers and Chief Financial Officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d- 15(e)) as of the end of the period covered by this report, have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequate and effective. The
Company will continue to periodically evaluate its disclosure controls and
procedures and will make modifications from time to time as deemed necessary to
ensure that information is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
The following report is provided by management in respect of the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the U.S. Securities Exchange Act of 1934):
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over the Company's financial reporting.
Management has used the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") framework in Internal Control-Integrated Framework
to evaluate the effectiveness of the Company's internal control over financial
reporting.
Management has assessed the effectiveness of the Company's internal
control over financial reporting, as at December 31, 2005, and has concluded
that such internal control over financial reporting was effective as of that
date. Additionally, based on the Company's assessment, the Company determined
that there were no material weaknesses in internal control over financial
reporting as of December 31, 2005.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, who has audited the Company's consolidated
financial statements for the year ended December 31, 2005, has also audited
management's assessment of the Company's internal control over financial
reporting under Auditing Standard No. 2 of the Public Company Accounting
Oversight Board. See Report of Independent Registered Public Accounting Firm on
pages 55 and 56.
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.
ITEM 9B. OTHER INFORMATION
None
Page 100
IMAX CORPORATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Election of Directors"; "Executive Officers"; "Section 16(a) Beneficial
Ownership Reporting Compliance"; "Audit Committee"; and "Code of Ethics".
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Summary Compensation Table"; "Options Granted"; "Aggregated Option Exercises
and Year-End Option Values"; "Pension Plans"; "Employment Contracts";
"Compensation Committee Interlocks and Insider Participation"; "Report on
Executive Compensation"; "Performance Graph"; and "Compensation of Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Principal Shareholders of Voting Shares"; "Security Ownership of Directors and
Management"; and "Equity Compensation Plans".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information under the following caption in the Company's Proxy Statement:
"Certain Relationships and Related Transactions".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Audit Fees"; "Audit-Related Fees"; "Tax Fees"; "All Other Fees"; and "Audit
Committee's Pre-Approved Policies and Procedures".
Page 101
IMAX CORPORATION
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The consolidated financial statements filed as part of this Report are
included under Item 8 in Part II.
Report of Independent Registered Public Accounting Firm, which covers
both the financial statements and financial statement schedule in
(a)(2), is included under Item 8 in Part II.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedule for each year in the three-year period
ended December 31, 2005. II. Valuation and Qualifying Accounts.
(a)(3) EXHIBITS
The Items listed as Exhibits 10.1 to 10.23 relate to management contracts
or compensatory plans or arrangements.
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
3.1 Articles of Amendment of IMAX Corporation, dated June 25, 2004.
Incorporated by reference to Exhibit 3.2 to Form 10-Q for the
quarter ended June 30, 2004 (File No. 000-24216).
3.2 By-Law No.1 of IMAX Corporation enacted on June 3, 2004.
Incorporated by reference to Exhibit 3.3 to Form 10-Q for the
quarter ended June 30, 2004 (File No. 000-24216).
4.1 Shareholders' Agreement, dated as of January 3, 1994, among WGIM
Acquisition Corporation, the Selling Shareholders as defined
therein, Wasserstein Perella Partners, L.P., Wasserstein Perella
Offshore Partners, L.P., Bradley J. Wechsler, Richard L. Gelfond
and Douglas Trumbull (the "Selling Shareholders' Agreement").
Incorporated by reference to Exhibit 4.2 to Form 10-K for the
year ended December 31, 2000 (File No. 000-24216).
4.2 Amendment, dated as of March 1, 1994, to the Selling
Shareholders' Agreement. Incorporated by reference to Exhibit
4.3 to Form 10-K for the year ended December 31, 2000 (File No.
000-24216).
4.3 Registration Rights Agreement, dated as of February 9, 1999, by
and among IMAX Corporation, Wasserstein Perella Partners, L.P.,
Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard
L. Gelfond. Incorporated by reference to Exhibit 4.12 to Form
10-K for the year ended December 31, 1998 (File No. 000-24216).
4.4 Indenture, dated as of April 9, 1996, between IMAX Corporation
and Chemical Bank, as Trustee, related to the issue of the 5.75%
Convertible Subordinated Notes due April 1, 2003. Incorporated
by reference to Exhibit 4.3 to Amendment No.1 to the Company's
Registration Statement on Form F-3 (File No. 333-5212).
4.5 Indenture, dated as of December 4, 1998 between IMAX Corporation
and U.S. Bank Trust, N.A., as Trustee, related to the issue of
the 7.875% Senior Notes due December 1, 2005. Incorporated by
reference to Exhibit 4.9 to Form 10-K for the year ended
December 31, 1998 (File No. 000-24216).
4.6 Registration Rights Agreement, dated as of December 4, 2003, by
and among IMAX Corporation, the Guarantors (as defined therein),
Credit Suisse First Boston LLC, Jefferies & Company, Inc.,
Wachovia Capital Markets, LLC and U.S. Bancorp Piper Jaffray
Inc., relating to the issuance of 9.625% Senior Notes due 2010.
Incorporated by reference to Exhibit 4.2 to Registration
Statement on Form S-4 (File No. 333-113141).
4.7 Indenture, dated as of December 4, 2003, by and among IMAX
Corporation, the Guarantors (as defined therein) and U.S. Bank
National Association, as Trustee, related to the issue of the
9.625% Senior Notes due December 1, 2010. Incorporated by
reference to Exhibit 4.3 to Registration Statement on Form S-4
(File No. 333-113141).
Page 102
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------
*4.8 Supplemental Indenture, dated as of April 1, 2004, among IMAX
Corporation, the Existing Guarantors (as defined therein), the
Guaranteeing Subsidiaries (as defined therein) and U.S. Bank
National Association, as trustee under the Indenture.
*4.9 Second Supplemental Indenture, dated as of July 14, 2004 among
IMAX Corporation, the Existing Guarantors (as defined therein),
the First Supplemental Guarantors named in the Supplemental
Indenture, the Guaranteeing Subsidiary (as defined therein) and
U.S. Bank National Association, as trustee under the Indenture.
*4.10 Third Supplemental Indenture, dated as of February 2, 2005 among
IMAX Corporation, the Existing Guarantors (as defined therein),
the First Supplemental Guarantors named in the Supplemental
Indenture, the Second Supplemental Guarantors named in the
Second Supplemental Indenture, the Guaranteeing Subsidiary (as
defined therein) and U.S. Bank National Association, as trustee
under the Indenture.
10.1 Stock Option Plan of IMAX Corporation, dated August 12, 2004.
Incorporated by reference to Exhibit 10.1 to IMAX Corporation's
Form 10-Q for the quarter ended September 30, 2004 (File No.
000-24216).
10.2 Employment Agreement, dated as of July 15, 1997 between David
Keighley Productions 70MM Inc. and David B. Keighley.
Incorporated by reference to Exhibit 10.2 to IMAX Corporation's
Form 10-K for the year ended December 31, 2002 (File No.
000-24216).
10.3 Employment Agreement, dated July 1, 1998 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference
to Exhibit 10.2 to Form 10-Q for the quarter ended September 30,
1998 (File No. 000-24216).
10.4 Amended Employment Agreement, dated July 12, 2000 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference
to Exhibit 10.10 to Form 10-Q for the quarter ended September
30, 2000 (File No. 000-24216).
10.5 Amended Employment Agreement, dated April 3, 2001 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference
to Exhibit 10.15 to Form 10-Q for the quarter ended March 31,
2001 (File No. 000-24216).
10.6 Amended Employment Agreement, dated April 23, 2002 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference
to Exhibit 10.14 to Form 10-Q for the quarter ended June 30,
2002 (File No. 000-24216).
10.7 Amended Employment Agreement, dated June 3, 2004 between IMAX
Corporation and Bradley J. Wechsler. Incorporated by reference
to Exhibit 10.18 to IMAX Corporation's Form 10-Q for the quarter
ended June 30, 2004 (File No. 000-24216).
*10.8 Amended Employment Agreement, dated March 8, 2006 between IMAX
Corporation and Bradley J. Wechsler.
10.9 Employment Agreement, dated July 1, 1998 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended September 30,
1998 (File No. 000-24216).
10.10 Amended Employment Agreement, dated July 12, 2000 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.9 to Form 10-Q for the quarter ended September 30,
2000 (File No. 000-24216).
10.11 Amended Employment Agreement, dated April 3, 2001 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.16 to Form 10-Q for the quarter ended March 31, 2001
(File No. 000-24216).
10.12 Amended Employment Agreement, dated April 23, 2002 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.13 to Form 10-Q for the quarter ended June 30, 2002
(File No. 000-24216).
Page 103
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------
10.13 Amended Employment Agreement, dated June 3, 2004 between IMAX
Corporation and Richard L. Gelfond. Incorporated by reference to
Exhibit 10.19 to IMAX Corporation's Form 10-Q for the quarter
ended June 30, 2004 (File No. 000-2426).
*10.14 Amended Employment Agreement, dated March 8, 2006 between IMAX
Corporation and Richard L. Gelfond.
10.15 Employment Agreement, dated March 9, 2001 between IMAX
Corporation and Greg Foster. Incorporated by reference to
Exhibit 10.9 to Form 10-K for the year ended December 31, 2001
(File No. 000-24216).
10.16 Amending Agreement, dated August 8, 2002 between IMAX
Corporation and Greg Foster. Incorporated by reference to
Exhibit 10.12 to IMAX Corporation's Form 10-K for the year ended
December 31, 2002 (File No. 000-24216).
10.17 Amending Agreement, dated October 28, 2004 between IMAX
Corporation and Greg Foster. Incorporated by reference to
Exhibit 10.15 to IMAX Corporation's Form 10-K for the year ended
December 31, 2004 (File No. 000-24216).
*10.18 Employment Agreement, dated March 9, 2006 between IMAX
Corporation and Greg Foster.
10.19 Employment Agreement, dated May 9, 2001 between IMAX Corporation
and Francis T. Joyce. Incorporated by reference to Exhibit 10.3
to IMAX Corporation's Form 10-K for the year ended December 31,
2002 (File No. 000-24216).
10.20 Amended Employment Agreement, dated May 14, 2003 between IMAX
Corporation and Francis T. Joyce. Incorporated by reference to
Exhibit 10.16 to IMAX Corporation's Form 10-Q for the quarter
ended June 30, 2003 (File No. 000-24216).
10.21 Employment Agreement, dated May 17, 1999 between IMAX
Corporation and Robert D. Lister. Incorporated by reference to
Exhibit 10.14 to IMAX Corporation's Form 10-K for the year ended
December 31, 2002 (File No. 000-24216).
10.22 Amended Employment Agreement, dated January 1, 2004 between IMAX
Corporation and Robert D. Lister. Incorporated by reference to
Exhibit 10.17 to Registration Statement on Form S-4 (File No.
333-113141).
10.23 Third Amending Agreement, dated February 14, 2006 between IMAX
Corporation and Robert D. Lister. Incorporated by reference to
Exhibit 10.21 to IMAX Corporation's Form 8-K dated February 20,
2006 (File No. 000-24216).
10.24 Statement of Directors' Compensation, dated August 11, 2005.
Incorporated by reference to Exhibit 10.20 to IMAX Corporation's
Form 10-Q for the quarter ended September 30, 2005 (File No.
000-24216).
10.25 Loan Agreement, dated as of February 6, 2004 by and between
Congress Financial Corporation (Canada) and IMAX Corporation.
Incorporated by reference to Exhibit 10.22 to Registration
Statement on Form S-4 (File No. 333-113141).
10.26 First Amendment to the Loan Agreement dated June 30, 2005
between Congress Financial Corporation (Canada) and IMAX
Corporation. Incorporated by reference to Exhibit 10.22 to IMAX
Corporation's Form 10-Q for the quarter ended June 30, 2005
(File No. 000-24216).
*21 Subsidiaries of IMAX Corporation.
*23 Consent of PricewaterhouseCoopers LLP.
*24 Power of Attorney of certain directors.
*31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002, dated March 9, 2006, by Bradley J. Wechsler.
*31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002, dated March 9, 2006, by Richard L. Gelfond.
*31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002, dated March 9, 2006, by Francis T. Joyce.
*32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, dated March 9, 2006, by Bradley J. Wechsler.
Page 104
IMAX CORPORATION
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont'd)
(a)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------
*32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, dated March 9, 2006, by Richard L. Gelfond.
*32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, dated March 9, 2006, by Francis T. Joyce.
* Filed herewith
Page 105
IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMAX CORPORATION
By /s/ FRANCIS T. JOYCE
----------------------------------
Francis T. Joyce
Chief Financial Officer
Date: March 9, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 9, 2006.
/s/ BRADLEY J. WECHSLER /s/ RICHARD L. GELFOND /s/ FRANCIS T. JOYCE
-------------------------------------- ----------------------------- -----------------------------
Bradley J. Wechsler Richard L. Gelfond Francis T. Joyce
Director and Director and Chief Financial Officer
Co-Chief Executive Officer Co-Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer) (Principal Executive Officer)
/s/ KATHRYN A. GAMBLE NEIL S. BRAUN* KENNETH G. COPLAND*
-------------------------------------- ----------------------------- -----------------------------
Kathryn A. Gamble Neil S. Braun Kenneth G. Copland
Vice President, Finance and Controller Director Director
(Principal Accounting Officer)
MICHAEL FUCHS* GARTH M. GIRVAN* DAVID W. LEEBRON*
-------------------------------------- ----------------------------- -----------------------------
Michael Fuchs Garth M. Girvan David W. Leebron
Director Director Director
MARC A. UTAY*
--------------------------------------
Marc A. Utay
Director
By * /s/ FRANCIS T. JOYCE
--------------------------------------
Francis T. Joyce (as attorney-in-fact)
Page 106
IMAX CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of U.S. dollars)
ADDITIONS /
BALANCE AT (RECOVERIES) OTHER BALANCE
BEGINNING CHARGED TO ADDITIONS/ AT END OF
OF YEAR EXPENSES (DEDUCTIONS)(1) YEAR
---------- ----------- --------------- ---------
ALLOWANCE FOR NET INVESTMENT IN LEASES
Year ended December 31, 2003 8,938 (2,938) (159) 5,841
Year ended December 31, 2004 5,841 (1,406) -- 4,435
Year ended December 31, 2005 4,435 (1,400) (1,557) 1,478
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Year ended December 31, 2003 9,248 714 (2,684) 7,278
Year ended December 31, 2004 7,278 (82) 1,194 8,390
Year ended December 31, 2005 8,390 (96) (2,402) 5,892
DEFERRED INCOME TAX VALUATION ALLOWANCE
Year ended December 31, 2003 43,742 3,049 -- 46,791
Year ended December 31, 2004 46,791 (1,336) -- 45,455
Year ended December 31, 2005 45,455 (6,802) -- 38,653
PROVISION FOR LOANS RECEIVABLE
Year ended December 31, 2003 15,624 (2,693) (1,031) 11,900
Year ended December 31, 2004 11,900 (800) -- 11,100
Year ended December 31, 2005 11,100 (1,699) (9,401)(2) --
(1) Deduction amounts represent write-offs of amounts previously charged to
the provision. Additions represent allowances made against new accounts
receivable where revenue recognition has ceased.
(2) Loans were settled on December 29, 2005 in exchange for payments to be
received in the first quarter of 2006.