================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-24216 IMAX CORPORATION (Exact name of registrant as specified in its charter) Canada 98-0140269 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1 ------------------------------------------------- ------------ (Address of principal executive offices) (Postal Code) Registrant's telephone number, including area code (905) 403-6500 -------------- N/A ------------------------------------------------------------- (Former name or former address, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of October 15, 2004 - -------------------------- ---------------------------------- Common stock, no par value 39,315,491 ================================================================================ Page 1
IMAX CORPORATION TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements........................................................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 31 Item 3. Quantitative and Qualitative Factors about Market Risk......................................... 43 Item 4. Controls and Procedures........................................................................ 43 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................................. 44 Item 6. Exhibits....................................................................................... 46 Signatures.............................................................................................. 47 SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION Certain statements included in this quarterly report may constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, references to future capital expenditures (including the amount and nature thereof), business strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of business and operations, plans and references to the future success of IMAX Corporation together with its wholly-owned subsidiaries (the "Company") and expectations regarding the Company's future operating results. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the expectations and predictions of the Company is subject to a number of risks and uncertainties, including, but not limited to, general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; conditions in the out-of-home entertainment industry; changes in laws or regulations; conditions in the commercial exhibition industry; the acceptance of the Company's new technologies; risks associated with investments and operations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of local governments and laws and policies of the United States and Canada; the potential impact of increased competition in the markets the Company operates within; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this quarterly report are qualified by these cautionary statements, and actual results or 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. Page 2
IMAX CORPORATION PAGE ---- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following Condensed Consolidated Financial Statements are filed as part of this Report: Condensed Consolidated Balance Sheets as at September 30, 2004 and December 31, 2003................................................. 4 Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2004 and 2003.............. 5 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2004 and 2003......................... 6 Notes to Condensed Consolidated Financial Statements.............. 7 Page 3
IMAX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (in thousands of U.S. dollars) SEPTEMBER 30, 2004 DECEMBER 31, (UNAUDITED) 2003 ---------------- --------------- ASSETS Cash and cash equivalents $ 20,664 $ 47,282 Restricted cash (note 7(b)) -- 4,961 Accounts receivable, net of allowance for doubtful accounts of $7,902 (2003 - $7,278) 17,574 13,887 Financing receivables (note 3) 60,774 56,742 Inventories (note 4) 27,374 28,218 Prepaid expenses 3,480 1,902 Film assets 734 1,568 Fixed assets 31,357 35,818 Other assets 13,275 13,827 Deferred income taxes (note 11) 4,545 3,756 Goodwill 39,027 39,027 Other intangible assets 3,116 3,388 ---------------- --------------- Total assets $ 221,920 $ 250,376 ================ =============== LIABILITIES Accounts payable $ 6,633 $ 5,780 Accrued liabilities (note 7(c)) 53,792 43,794 Deferred revenue 50,640 63,344 New Senior Notes due 2010 (note 5) 160,000 160,000 Old Senior Notes due 2005 (note 6) -- 29,234 ---------------- --------------- Total liabilities 271,065 302,152 ---------------- --------------- COMMITMENTS AND CONTINGENCIES (notes 7 and 8) SHAREHOLDERS' EQUITY (DEFICIT) Capital stock - no par value. Authorized - unlimited number. Issued and outstanding - 39,315,491 (2003 - 39,301,758) 115,653 115,609 Other equity 3,290 3,159 Deficit (168,733) (171,189) Accumulated other comprehensive income 645 645 ---------------- --------------- Total shareholders' deficit (49,145) (51,776) ---------------- --------------- Total liabilities and shareholders' equity (deficit) $ 221,920 $ 250,376 ================ =============== (the accompanying notes are an integral part of these condensed consolidated financial statements) Page 4
IMAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (in thousands of U.S. dollars, except per share amounts) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ---------------------------- SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ---------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUE IMAX systems (note 9(a)) $ 21,309 $ 11,455 $ 57,811 $ 55,913 Films 6,076 5,275 17,166 19,570 Theater operations 3,689 3,367 11,203 10,142 Other 753 1,131 2,276 3,702 ------------- ------------- ------------- ------------- 31,827 21,228 88,456 89,327 COSTS OF GOODS AND SERVICES 17,356 11,538 47,014 49,352 ------------- ------------- ------------- ------------- GROSS MARGIN 14,471 9,690 41,442 39,975 Selling, general and administrative expenses (note 9(b)) 7,587 8,265 24,541 24,864 Research and development 1,019 952 3,034 2,833 Amortization of intangibles 240 181 545 473 Income from equity-accounted investees -- (228) -- (501) Receivable provisions, net of (recoveries) (note 10) 2 (425) (965) 264 ------------- ------------- ------------- ------------- EARNINGS FROM OPERATIONS 5,623 945 14,287 12,042 Interest income 439 105 664 515 Interest expense (4,378) (3,606) (12,566) (11,949) Loss on retirement of notes (note 6) -- (146) (784) (333) Recovery on long-term investments (note 9(c)) -- 355 -- 355 ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,684 (2,347) 1,601 630 Recovery of (provision for) income taxes (note 11) (84) (163) 255 400 ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 1,600 (2,510) 1,856 1,030 Net earnings (loss) from discontinued operations (note 15) 200 (144) 600 (292) ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) $ 1,800 $ (2,654) $ 2,456 $ 738 ============= ============= ============= ============= EARNINGS PER SHARE (note 12(b)): Earnings per share - basic and diluted: Net earnings (loss) from continuing operations $ 0.04 $ (0.07) $ 0.05 $ 0.03 Net earnings (loss) from discontinued operations $ 0.01 $ -- $ 0.01 $ (0.01) ------------- ------------- ------------- ------------- Net earnings (loss) $ 0.05 $ (0.07) $ 0.06 $ 0.02 ============= ============= ============= ============= (the accompanying notes are an integral part of these condensed consolidated financial statements) Page 5
IMAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (in thousands of U.S. dollars) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 ------------- ------------- CASH PROVIDED BY (USED IN): OPERATING ACTIVITIES Net earnings from continuing operations $ 1,856 $ 1,030 Items not involving cash: Depreciation and amortization 10,537 8,243 Write-downs (recoveries) (963) 260 Income from equity-accounted investees -- (501) Deferred income taxes (788) -- Loss on retirement of notes 784 333 Stock and other non-cash compensation 2,264 4,103 Non-cash foreign exchange gain (12) (685) Premium on repayment of notes (576) -- Payment under certain employment agreements -- (1,550) Investment in film assets (2,782) (1,108) Changes in restricted cash 4,961 (142) Changes in other non-cash operating assets and liabilities (10,606) (14,111) Net cash used in operating activities from discontinued operations -- (573) ------------- ------------- Net cash provided by (used in) operating activities 4,675 (4,701) ------------- ------------- INVESTING ACTIVITIES Purchase of fixed assets (693) (1,147) Increase in other assets (857) (794) Increase in other intangible assets (271) (435) Recovery on long-term investments -- 355 Net cash used in investing activities from discontinued operations -- (11) ------------- ------------- Net cash used in investing activities (1,821) (2,032) ------------- ------------- FINANCING ACTIVITIES Repayment of Old Senior Notes due 2005 (29,234) -- Repayment of Subordinated Notes -- (9,143) Financing costs related to New Senior Notes due 2010 (681) -- Common shares issued 44 1,410 Net cash provided by financing activities from discontinued operations 400 599 ------------- ------------- Net cash used in financing activities (29,471) (7,134) ------------- ------------- Effects of exchange rate changes on cash (1) 184 ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (27,018) (13,698) Increase in cash and cash equivalents from discontinued operations 400 15 ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (26,618) (13,683) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47,282 33,801 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,664 $ 20,118 ============= ============= (the accompanying notes are an integral part of these condensed consolidated financial statements) Page 6
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 1. BASIS OF PRESENTATION The Condensed Consolidated Financial Statements include the accounts of IMAX Corporation together with its wholly-owned subsidiaries (the "Company"). The nature of the Company's business is such that the results of operations for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. 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 19. These financial statements should be read in conjunction with the Company's most recent annual report on Form 10-K/A (amendment No. 2) for the year ended December 31, 2003 which should be consulted for a summary of the significant accounting policies utilized by the Company. These interim financial statements are prepared following accounting policies consistent with the Company's financial statements for the year ended December 31, 2003, except as described in note 2. EMPLOYEE STOCK-BASED COMPENSATION The Company currently follows the intrinsic value method of accounting for employee stock options as prescribed by APB 25. If the fair value methodology prescribed by FASB Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") had been adopted by the Company, pro forma results for the three and nine months ended September 30, would have been as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- --------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------ Net earnings (loss) as reported $ 1,800 $ (2,654) $ 2,456 $ 738 Stock based compensation expense, if the methodology prescribed by FAS 123 had been adopted (1,930) (2,323) (5,292) (6,904) ------------- -------------- ------------- ------------ Adjusted net loss $ (130) $ (4,977) $ (2,836) $ (6,166) ============= ============= ============= ============ Earnings (loss) per share - basic and diluted: Net earnings as reported $ 0.05 $ (0.07) $ 0.06 $ 0.02 FAS 123 stock based compensation expense (0.05) $ (0.06) $ (0.13) $ (0.20) ------------- ------------- ------------- ------------- Adjusted net loss $ -- $ (0.13) $ (0.07) $ (0.18) ============= ============= ============= ============= Of the total stock based compensation expense under FAS 123 for the three and nine months ended September 30, 2004, $1,206 and $3,616, respectively relate to stock grants made in 2000 at an average exercise price of $24.25. In accordance with FAS 123, this expense represents amortization of stock option charges that were valued at the grant date using an option-pricing model with assumptions that were valid at the time with no further update of current stock trends and assumptions. Page 7
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) EMPLOYEE STOCK-BASED COMPENSATION (cont'd) The weighted average fair value of common share options granted to employees for the three and nine months ended September 30, 2004 at the time of grant was $2.11 and $2.07 per share, respectively (2003 - $2.85 and $2.70 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 three and nine months ended September 30, 2004, the following assumptions were used: dividend yield of 0%. (three and six months ended September 30, 2003 - 0%); an average risk free interest rate of 4.1% and 4.8% (three and six months ended September 30, 2003 - 4.1% and 3.0%); an equity risk premium between 5.5% and 6.3% and between 3.8% and 6.3% (three and six months ended September 30, 2003 - between 4.7% and 6.3% and between 4.7% and 10.7%); a beta between 1.04 and 1.11 and between 0.95 and 1.11 (three and six months ended September 30, 2003 - between 0.85 and 1.03); expected option life between 4.4 and 5.4 years and between 2.6 and 5.4 years (three and six months ended September 30, 2003 - between 2.6 and 4.4 years and between 2.6 and 5.1 years); an average expected volatility of 62% (three and six months ended September 30, 2003 - 62%); and an annual termination probability of between 8.1% and 9.6% (three and six months ended September 30, 2003 - 8.1% and 9.6%). Had the Company changed from using the Black-Scholes option pricing model to a Binomial option pricing model effective January 1, 2003 rather than April 1, 2003, the impact would not have been significant. 2. ACCOUNTING CHANGES As of January 1, 2004, the Company adopted FIN 46 (revised 2003 by FIN 46R) which requires a variable interest entity ("VIE") to be consolidated by its primary beneficiary ("PB"). The PB is the party that absorbs a majority of the VIE's expected losses and/or receives a majority of the expected residual returns. 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 one of its film production companies is a VIE with total assets of $0.1 million and total liabilities of $0.1 million as at September 30, 2004. Since the Company absorbs a majority of the VIE's losses, the Company has determined that it is the PB of the entity. The Company continues to consolidate this entity with no material impact on the operating results or financial condition of the Company. The Company also has interests in three other film production companies which are VIE's, however the Company did not consolidate these film entities since it did not bear the majority of the expected losses or expected residual returns. Page 8
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 3. FINANCING RECEIVABLES The Company generally provides its theater systems to customers on a long-term lease basis, typically with initial lease terms of 10 to 20 years. Financing receivables consisting of net investment in leases and long term receivables are comprised of the following: SEPTEMBER 30, DECEMBER 31, 2004 2003 --------------- ---------------- NET INVESTMENT IN LEASES Gross minimum lease amounts receivable $ 103,016 $ 97,408 Residual value of equipment 787 824 Unearned finance income (41,255) (38,847) --------------- ---------------- Present value of minimum lease amounts receivable 62,548 59,385 Accumulated allowance for uncollectible amounts (5,116) (5,840) --------------- ---------------- Net investment in leases 57,432 53,545 --------------- ---------------- Long-term receivables 3,342 3,197 --------------- ---------------- Total financing receivables $ 60,774 $ 56,742 =============== ================ 4. INVENTORIES SEPTEMBER 30, DECEMBER 31, 2004 2003 ---------------- ---------------- Raw materials $ 6,831 $ 5,868 Work-in-process 6,695 4,327 Finished goods 13,848 18,023 --------------- ---------------- $ 27,374 $ 28,218 =============== ================ 5. NEW SENIOR NOTES DUE 2010 As at September 30, 2004, the Company has $160.0 million aggregate principal of 9.625% senior notes due December 1, 2010 (the "New Senior Notes"). On October 6, 2004, the Company commenced an offer to exchange up to US$160,000,000 aggregate principal amount of its outstanding New Senior Notes for a like principal amount of its 9.625% Senior Notes due 2010 (the "Registered Notes"). The Company's registration statement on Form S-4 relating to the Registered Notes was declared effective by the Securities and Exchange Commission on September 30, 2004. The Registered Notes are unconditionally guaranteed, jointly and severally, by certain of the Company's wholly-owned subsidiaries. The terms of the Registered Notes are substantially identical to the terms of the New Senior Notes, and evidence the same indebtedness as the New Senior Notes, except that the Registered Notes are registered under U.S. securities laws, do not contain restrictions on transfer or provisions relating to special interest under circumstances related to the timing of the exchange offer, bear a different CUSIP number from the New Senior Notes and do not entitle their holders to registration rights. Page 9
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 6. OLD SENIOR NOTES DUE 2005 In December 2003, the Company completed a tender offer and consent solicitation for the remaining $152.8 million of principal of senior notes due December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old Senior Notes") that were not retired previously. In December 2003, $123.6 million in principal of the Old Senior Notes were redeemed pursuant to a 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 using proceeds from its New Senior Notes (see note 5). In January 2004, the Company recorded a loss of $0.8 million related to the retirement of the Company's Old Senior Notes. During the first nine months of 2003, the Company recorded a loss of $0.3 million from the retirement of $31.5 million of the Company's Old Senior Notes. 7. COMMITMENTS (a) The Company's total minimum annual rental payments to be made under operating leases for premises as of September 30, 2004 for each of the years ended December 31 are as follows: 2004 (three months remaining) $ 1,385 2005 5,956 2006 5,765 2007 5,551 2008 5,334 Thereafter 37,171 ---------- $ 61,162 ========== (b) As at September 30, 2004, the Company has letters of credit of $5.2 million outstanding under the Company's credit facility arrangement (see note 17). As at December 31, 2003, the Company had letters of credit of $5.0 million outstanding, which had been collateralized by cash deposits. (c) In March 2004, the Company received $5.0 million in cash under a film financing arrangement which is included in accrued liabilities. The Company is required to expend these funds towards the production of a motion picture title. The Company has expended $0.3 million of these funds as at September 30, 2004. 8. CONTINGENCIES (a) In March 2001, a complaint was filed against the Company by Muvico Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking rescission in respect of the system lease agreements between the Company and Muvico. The complaint was subsequently amended to add claims for fraud based upon the same factual allegations underlying its prior claims. The Company filed counterclaims against Muvico for breach of contract, unjust enrichment, unfair competition and/or deceptive trade practices and theft of trade secrets, and brought claims against MegaSystems, Inc. ("MegaSystems"), a large-format theater system manufacturer, for tortious interference and unfair competition and/or deceptive trade practices and to enjoin Muvico and MegaSystems from using the Company's confidential and proprietary information. The case is being heard in the U.S. District Court, Southern District of Florida, Miami Division. On September 27, 2004, the Court granted the Company's motion for summary judgment, awarding the Company judgment as a matter of law on all of the substantive claims asserted by Muvico in the complaint. The Company is awaiting final decision from the Court with regard to its damages claims. Page 10
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 8. CONTINGENCIES (cont'd) (b) In May 2003, the Company filed a Statement of Claim in the Ontario Superior Court of Justice against United Cinemas International Multiplex B.V. ("UCI") for specific performance, or alternatively, damages of $25.0 million with respect to the breach of a 1999 agreement between the Company and UCI whereby UCI committed to purchase IMAX theater systems from the Company. In August 2003, UCI filed a Statement of Defence denying it is in breach. On December 10, 2003, UCI and its two subsidiaries in the United Kingdom and Japan filed a claim against the Company claiming alleged breaches of the 1999 agreement referred to in the Company's claim against UCI, and repeating allegations contained in UCI's Statement of Defence to the Company's action. The Company believes that the allegations made by UCI in its complaint are entirely without merit and will accordingly defend the claims vigorously. The Company believes that the amount of loss, if any, suffered in connection with this lawsuit would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. (c) In November 2001, the Company filed a complaint with the District Court of Munich against Big Screen, a German large-screen cinema owner in Berlin ("Big Screen"), demanding payment of rental payments and certain other amounts owed to the Company. Big Screen has raised a defense based on alleged infringement of German antitrust rules, relating mainly to an allegation of excessive pricing. Big Screen had brought a number of motions for restraining orders in this matter relating to the Company's provision of films and maintenance, all of which have been rejected by the courts, including the Berlin Court of Appeals, and for which all appeals have been exhausted. The Company believes that all of the allegations in Big Screen's individual defense are entirely without merit and will accordingly continue to prosecute this matter vigorously. The Company believes that the amount of the loss, if any, suffered in connection with this dispute would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. (d) In May, 2002, the Company filed a complaint with the District Court of Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"), demanding payment of rental obligations and other amounts owed to the Company. Siewert raised a defense based on alleged infringement of German antitrust rules. By judgement of December 20, 2002, the District Court rejected the defense 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, in large part repeating the claims rejected in the documentary proceeding. On September 30, 2004, Siewert filed for insolvency with the Local Court in Wuerzburg. To the extent the lawsuit will be continued following the commencement of the insolvency proceedings, the Company will continue to vigorously pursue its claims and believes that the amount of loss, if any, suffered in connection with these proceedings would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. Page 11
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 8. CONTINGENCIES (cont'd) (e) In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages of approximately $3.7 million before the International Court of Arbitration of the International Chambers of Commerce (the "ICC") with respect to the breach by Electronic Media Limited ("EML") of its December 2000 agreement with the Company. In April 2004, EML filed an answer and counterclaim seeking the return of funds EML has paid to the Company, incidental expenses and punitive damages. In June 2004, the Company commenced a related arbitration before the ICC against EML's affiliate, E-CITI Entertainment (I) PVT Limited ("E-Citi"), seeking $17,777,950 as a result of E-Citi's breach of a September 2000 lease agreement. E-Citi has responded to the arbitration demand and has asserted several defenses, including that the ICC does not have jurisdiction for the arbitration. The Company believes that the allegations made by EML in its counterclaim are entirely without merit and has requested that the counterclaim be dismissed on the basis that EML has recently advised the ICC that it has insufficient funds to pay its share of the arbitration costs. The Company believes that the amount of loss, if any, suffered in connection with the arbitration would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. (f) 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. 9. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION (a) 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 by the Company. Upon the customer and the Company being released from their future obligations under the agreement, the initial lease payments that the customer previously made to the Company are recognized as revenue. Included in systems revenue for the three and nine months ended September 30, 2004 are $2.9 million and $9.5 million, respectively (2003 - $3.4 million, $7.6 million) for amounts recognized under terminated lease agreements. (b) Included in selling, general and administrative expenses for the three and nine months ended September 30, 2004 are $0.3 million gain and $0.1 million loss, respectively (2003 - $0.2 million gain, $1.2 million gain) for net foreign exchange related to the translation of foreign currency denominated monetary assets, liabilities and integrated subsidiaries. (c) In August 2003, the Company agreed to restructure its 6% Senior Secured Convertible Debenture (the "Debenture") due from Mainframe Entertainment, Inc. ("Mainframe"). Under the terms of the restructuring agreement, the payment terms of the Debenture were revised, while the Company retained its security over all of Mainframe's property and assets for the balance of the payments due. The Company recorded $0.4 million in income for the three and nine month periods ended September 30, 2003 related to cash received under the debt restructuring agreement. Page 12
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 10. RECEIVABLE PROVISIONS (RECOVERIES), NET THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ---------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------ Accounts receivable provisions (recoveries), net $ 2 $ 93 $ (240) $ 515 Financing receivables provisions (recoveries), net(1) $ -- $ (518) $ (725) $ (251) ------------- ------------- ------------- ------------ Receivable provisions (recoveries), net $ 2 $ (425) $ (965) $ 264 ============= ============= ============= ============ (1) For the three and nine months ended September 30, 2004, the Company recorded a recovery of previously provided amounts of $nil and $0.7 million, respectively (2003 - $0.5 million, $0.3 million) as the collectibility uncertainty associated with certain leases was resolved by amendment or settlement of the leases. 11. INCOME TAXES The effective tax rate on earnings differs significantly from the Canadian statutory rate due to the effect of permanent differences, income taxed at differing rates in foreign and other provincial jurisdictions, tax recoveries and charges relating to favourable or unfavourable tax examinations, and changes in the Company's valuation allowance on deferred tax assets. The income tax (expense) recovery for the quarter is calculated by applying the estimated average annual effective tax rate to quarterly pre-tax income. The Company recorded within the tax provision in the current quarter a tax recovery of $0.4 million related to refunds resulting from favourable conclusions to two separate tax examinations and the utilization of previously recorded income tax credits. As at September 30, 2004, the Company has recognized net deferred income tax assets of $4.5 million, comprised of tax credit carryforwards, net operating loss and capital loss carryforwards and other deductible temporary differences, which can be utilized to reduce either taxable income or taxes otherwise payable in future years. As of September 30, 2004, the Company had a gross deferred income tax asset of $50.6 million, against which the Company is carrying a $46.1 million valuation allowance. Page 13
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 12. CAPITAL STOCK (a) STOCK BASED COMPENSATION In the three and nine months ended September 30, 2004, an aggregate of 13,335 and 40,005 options (2003 - 13,335 and 125,059) with an average exercise price of $5.27 and $5.96 (2003 - $8.20 and $6.22) to purchase the Company's common stock were issued to certain advisors and strategic partners of the Company, respectively. The Company has calculated the fair value of these options on the date of grant for the three and nine months ended September 30, 2004 to be $0.04 million and $0.1 million (2003 - $0.1 million and $0.4 million), respectively, using a Binomial option-pricing model with the following underlying assumptions: dividend yield of 0%; an average risk free interest rate of 3.49% and 3.37% (2003 - 3.09% and 2.45%), expected option life of 5 years; and an average expected volatility of 62.0%. The Company has recorded a charge of $0.04 million and $0.1 million to costs of goods and services related to the non-employee stock options granted in the three and nine months ended September 30, 2004 (2003 - $0.1 million, $0.4 million). There were no warrants issued in the three and nine months ended September 30, 2004 (2003 - nil and 550,000). 450,000 warrants remain outstanding of the 550,000 warrants issued in 2003, which vest when certain film related milestones are met, and have an exercise price of $6.06. The warrants generally expire 5 years after the date of grant or vesting. At September 30, 2004, 200,000 warrants were vested and exercisable. The Company believes that no additional warrants will ultimately vest. (b) EARNINGS (LOSS) PER SHARE Reconciliations of the numerators and denominators of the basic and diluted per-share computations, are comprised of the following: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net earnings applicable to common shareholders: Net earnings (loss) $ 1,800 $ (2,654) $ 2,456 $ 738 ============= ============= ============= ============= Weighted average number of common shares (000's): Issued and outstanding, beginning of period 39,316 36,426 39,302 32,973 Weighted average number of shares issued during the period -- 665 8 1,619 ------------- ------------- ------------- ------------- Weighted average number of shares used in computing basic earnings per share 39,316 37,091 39,310 34,592 Assumed exercise of stock options, net of shares assumed repurchased 576 -- 401 532 ------------- ------------- ------------- ------------- Weighted average number of shares used in computing diluted earnings per share 39,892 37,091 39,711 35,124 ============= ============= ============= ============= Page 14
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 13. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Interest paid $ 65 $ 174 $ 7,961 $ 8,438 Income taxes paid $ 352 $ 313 $ 1,280 $ 2,089 14. SEGMENTED INFORMATION The Company has four reportable segments: IMAX systems, films, theater operations and other. There has been no change in the basis of measurement of segment profit or loss from the Company's most recent annual report on form 10-K/A for the year ended December 31, 2003. Inter-segment transactions are not significant. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUE IMAX systems $ 21,309 $ 11,455 $ 57,811 $ 55,913 Films 6,076 5,275 17,166 19,570 Theater operations 3,689 3,367 11,203 10,142 Other 753 1,131 2,276 3,702 ------------- ------------- ------------- ------------- TOTAL $ 31,827 $ 21,228 $ 88,456 $ 89,327 ============= ============= ============= ============= EARNINGS FROM OPERATIONS IMAX systems $ 11,725 $ 6,008 $ 33,271 $ 26,824 Films (1,653) (283) (4,060) 506 Theater operations (8) (466) 886 (1,346) Other (58) 635 (670) 1,687 Corporate overhead (4,383) (4,949) (15,140) (15,629) ------------- ------------- ------------- ------------- TOTAL $ 5,623 $ 945 $ 14,287 $ 12,042 ============= ============= ============= ============= 15. 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 an arbitration 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 at 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. Page 15
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 15. DISCONTINUED OPERATIONS (cont'd) (b) DIGITAL PROJECTION INTERNATIONAL Effective December 11, 2001, the Company completed the sale of its wholly-owned subsidiary, Digital Projection International, including its subsidiaries (collectively "DPI"), to a company owned by members of DPI management. As part of the transaction, the Company restructured its advances to DPI, releasing DPI from obligations to repay any amounts in excess of $12.7 million previously advanced by the Company, and reorganized the remaining $12.7 million of debt owing to the Company into two separate loan agreements. During the three and nine months ended September 30, 2004, the Company recognized $0.2 million and $0.6 million in income from discontinued operations for cash ultimately received (2003 - $0.2 million, $0.6 million). As of September 30, 2004, the remaining loan receivable balance is $11.3 million, which has been fully provided for. (c) CONSOLIDATED STATEMENT OF OPERATIONS FOR MIAMI THEATER AND DPI The net earnings (loss) from discontinued operations summarized in the Consolidated Statements of Operations, for the periods ended September 30, was comprised of the following: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2004 2003 2004 2003 ------------- ------------ ------------- ------------ Net earnings (loss) from discontinued operations $ 200 $ (144) $ 600 $ (292) ============= ============ ============= ============ 16. DEFINED BENEFIT PLAN The Company has a defined benefit pension plan covering its two Co-Chief Executive Officers. The plan provides for a lifetime retirement benefit from age 55 determined as 75% of the member's best average 60 consecutive months of earnings during the 120 months proceeding retirement. Once benefit payments begin, the benefit is indexed annually to the cost of living and further provides for 100% continuance for life to the surviving spouse. The benefits were 50% vested as at July 12, 2000, the plan initiation date. The vesting percentage increases on a straight-line basis from inception until age 55. The vesting percentage of a member whose employment terminates other than by voluntary retirement shall be 100%. Also, upon the occurrence of a change in control of the Company prior to termination of a member's employment, the vesting percentage shall become 100%. As the plan is unfunded, the Company had not paid any contributions in the period ended September 30, 2004 and does not expect to pay any contributions in the remainder of the year. The following table provides disclosure of pension expense for the defined benefit plan for the periods ended September 30: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ------------- ------------ ------------ Service cost $ 516 $ 489 $ 1,548 $ 1,467 Interest cost 317 272 951 816 Amortization of prior service cost 349 349 1,047 1,048 ------------ ------------- ------------ ------------ Pension expense $ 1,182 $ 1,110 $ 3,546 $ 3,331 ============ ============= ============ ============ Page 16
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 17. CREDIT FACILITY On February 6, 2004, the Company entered into a loan agreement for a secured revolving credit facility with Congress Financial Corporation (Canada) (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. The Credit Facility bears interest at Prime + 0.25% per annum or Libor + 2.0% per annum and is collateralized by a first priority security interest in all of the current and future assets of the Company. The Credit Facility contains typical affirmative and negative covenants, including covenants that restrict the Company's ability to: incur certain additional indebtedness; make certain loans, investments or guarantees; pay dividends; make certain asset sales; incur certain liens or other encumbrances; conduct certain transactions with affiliates and enter into certain corporate transactions or dissolve. In addition, the Credit Facility contains customary events of default, including upon an acquisition or a change of control that has a material adverse effect on the Company's financial condition. The Credit Facility also requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization, and cash collections. As at September 30, 2004, the Company has not drawn down on the Credit Facility, however, it has issued letters of credit for $5.2 million under the Credit Facility arrangement. 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION The Company's New Senior Notes and Registered Notes 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., IMAX B.V., and IMAX Entertainment Pte. Inc., (the "Non-Guarantor Subsidiaries") which have not provided any guarantees of the New Senior Notes nor the Registered Notes. Investments in subsidiaries are accounted for by the equity method for purposes of the supplemental consolidating financial data. Some subsidiaries may be unable to pay dividends due to negative working capital. Page 17
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Balance Sheets as at September 30, 2004: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- ASSETS Cash and cash equivalents $ 16,181 $ 4,412 $ 71 $ -- $ 20,664 Restricted cash -- -- -- -- -- Accounts receivable 13,570 3,610 394 -- 17,574 Financing receivables 59,385 1,389 -- -- 60,774 Inventories 27,065 242 67 -- 27,374 Prepaid expenses 3,168 183 129 -- 3,480 Intercompany receivables 12,426 28,970 11,355 (52,751) -- Film assets 714 20 -- -- 734 Fixed assets 29,770 1,585 2 -- 31,357 Other assets 13,275 -- -- -- 13,275 Deferred income taxes 4,482 63 -- -- 4,545 Goodwill 39,027 -- -- -- 39,027 Other intangible assets 3,116 -- -- -- 3,116 Investments in subsidiaries 30,392 -- -- (30,392) -- ------------- ------------- ------------- ------------- ------------- Total assets $ 252,571 $ 40,474 $ 12,018 $ (83,143) $ 221,920 ============= ============= ============= ============= ============= LIABILITIES Accounts payable 2,769 3,864 -- -- 6,633 Accrued liabilities 52,188 1,432 172 -- 53,792 Intercompany payables 42,062 33,952 6,935 (82,949) -- Deferred revenue 45,615 4,867 158 -- 50,640 New Senior Notes due 2010 160,000 -- -- -- 160,000 ------------- ------------- ------------- ------------- ------------- Total liabilities 302,634 44,115 7,265 (82,949) 271,065 ------------- ------------- ------------- ------------- ------------- SHAREHOLDER'S DEFICIT Common stock 115,653 -- 117 (117) 115,653 Other equity/Additional paid in capital/Contributed surplus 2,256 46,960 -- (45,926) 3,290 Deficit (169,231) (49,987) 4,636 45,849 (168,733) Accumulated other comprehensive income (loss) 1,259 (614) -- -- 645 ------------- ------------- ------------- ------------- ------------- Total shareholders' equity (deficit) $ (50,063) $ (3,641) $ 4,753 $ (194) $ (49,145) ------------- ------------- ------------- ------------- ------------- Total liabilities & shareholders' equity (deficit) $ 252,571 $ 40,474 $ 12,018 $ (83,143) $ 221,920 ============= ============= ============= ============= ============= In certain Guarantor Subsidiaries, accumulated losses have exceeded the original investment balance. As a result of applying equity accounting, the parent company has consequently reduced intercompany receivable balances with respect to these Guarantor Subsidiaries in the amounts of $30.3 million as at September 30, 2004. Page 18
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Balance Sheets as at December 31, 2003: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- ASSETS Cash and cash equivalents $ 41,311 $ 5,696 $ 275 $ -- $ 47,282 Restricted cash 4,961 -- -- -- 4,961 Accounts receivable 9,924 3,468 495 -- 13,887 Financing receivables 55,294 1,407 41 -- 56,742 Inventories 29,775 620 69 (2,246) 28,218 Prepaid expenses 1,098 523 281 -- 1,902 Inter-company receivables 21,203 21,745 15,184 (58,132) -- Film assets 361 1,207 -- -- 1,568 Fixed assets 33,897 1,918 3 -- 35,818 Other assets 13,827 -- -- -- 13,827 Deferred income taxes 3,705 51 -- -- 3,756 Goodwill 39,027 -- -- -- 39,027 Other intangible assets 3,388 -- -- -- 3,388 Investments in subsidiaries 26,196 -- -- (26,196) -- ------------- ------------- ------------- ------------- ------------- Total assets $ 283,967 $ 36,635 $ 16,348 $ (86,574) $ 250,376 ============= ============= ============= ============= ============= LIABILITIES Accounts payable 3,605 2,175 -- -- $ 5,780 Accrued liabilities 41,618 1,803 373 -- 43,794 Inter-company payables 43,885 31,640 11,065 (86,590) -- Deferred revenue 58,319 4,889 136 -- 63,344 New Senior Notes due 2010 160,000 -- -- -- 160,000 Old Senior Notes due 2005 29,234 -- -- -- 29,234 ------------- ------------- ------------- ------------- ------------- Total liabilities 336,661 40,507 11,574 (86,590) 302,152 ------------- ------------- ------------- ------------- ------------- SHAREHOLDER'S DEFICIT Common stock 115,609 -- 117 (117) 115,609 Other equity/Additional paid in capital/Contributed surplus 2,125 46,960 -- (45,926) 3,159 Deficit (171,687) (50,218) 4,657 46,059 (171,189) Accumulated other comprehensive income (loss) 1,259 (614) -- -- 645 ------------- ------------- ------------- ------------- ------------- Total shareholders' (deficit) $ (52,694) $ (3,872) $ 4,774 $ 16 (51,776) ------------- ------------- ------------- ------------- ------------- Total liabilities & shareholders' equity (deficit) $ 283,967 $ 36,635 $ 16,348 $ (86,574) $ 250,376 ============= ============= ============= ============= ============= In certain Guarantor Subsidiaries, accumulated losses have exceeded the original investment balance. As a result of applying equity accounting, the parent company has consequently reduced inter-company receivable balances with respect to these Guarantor Subsidiaries in the amounts of $26.5 million as at December 31, 2003. Page 19
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Statements of Operations for the three months ended September 30, 2004: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- REVENUE IMAX systems $ 21,001 $ 168 $ 222 $ (82) $ 21,309 Films 5,159 1,399 3 (485) 6,076 Theater operations 136 3,578 -- (25) 3,689 Other 753 -- -- -- 753 ------------- ------------- ------------- ------------- ------------- 27,049 5,145 225 (592) 31,827 COST OF GOODS AND SERVICES 13,089 4,710 149 (592) 17,356 ------------- ------------- ------------- ------------- ------------- GROSS MARGIN 13,960 435 76 -- 14,471 Selling, general and administrative expenses 7,219 221 147 -- 7,587 Research and development 1,019 -- -- -- 1,019 Amortization of intangibles 240 -- -- -- 240 Loss (income) from equity-accounted investees (68) -- -- 68 -- Receivable provisions (recoveries), net 2 -- -- -- 2 ------------- ------------- ------------- ------------- ------------- EARNINGS (LOSS) FROM OPERATIONS 5,548 214 (71) (68) 5,623 Interest income 439 -- -- -- 439 Interest expense (4,372) (6) -- -- (4,378) Loss on retirement of notes -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,615 208 (71) (68) 1,684 Provision for income taxes (17) -- (67) -- (84) ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 1,598 208 (138) (68) 1,600 Net earnings from discontinued operations 200 -- -- -- 200 ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) $ 1,798 $ 208 $ (138) $ (68) $ 1,800 ============= ============= ============= ============== ============= Page 20
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Statements of Operations for the three months ended September 30, 2003: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- REVENUE IMAX systems $ 11,118 $ 221 $ 328 $ (212) $ 11,455 Films 3,245 2,799 28 (797) 5,275 Theater Operations 380 3,025 -- (38) 3,367 Other 1,124 -- 7 -- 1,131 ------------- ------------- ------------- ------------- ------------- 15,867 6,045 363 (1,047) 21,228 COST OF GOODS AND SERVICES 7,051 6,713 120 (2,346) 11,538 ------------- ------------- ------------- ------------- ------------- GROSS MARGIN 8,816 (668) 243 1,299 9,690 Selling, general and administrative expenses 8,199 129 (63) -- 8,265 Research and development 952 -- -- -- 952 Amortization of intangibles 181 -- -- -- 181 Loss (income) from equity-accounted investees 670 82 -- (980) (228) Receivable provisions (recoveries), net (426) 1 -- (425) ------------- ------------- ------------- ------------- ------------- EARNINGS (LOSS) FROM OPERATIONS (760) (880) 306 2,279 945 Interest income 105 -- -- -- 105 Interest expense (3,592) (14) -- -- (3,606) Loss on retirement of notes (146) -- -- -- (146) Recovery on long-term investments 355 -- -- -- 355 ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (4,038) (894) 306 2,279 (2,347) Recovery of (provision for) income taxes (125) 15 (53) -- (163) ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (4,163) (879) 253 2,279 (2,510) Net earnings from discontinued operations 200 (344) -- -- (144) ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) $ (3,963) $ (1,223) $ 253 $ 2,279 $ (2,654) ============= ============= ============= ============= ============= Page 21
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Statements of Operations for the nine months ended September 30, 2004: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- REVENUE IMAX systems $ 56,408 $ 793 $ 881 $ (271) $ 57,811 Films 15,209 4,183 18 (2,244) 17,166 Theater operations 456 10,823 -- (76) 11,203 Other 2,275 -- 1 -- 2,276 ------------- ------------- ------------- ------------- ------------- 74,348 15,799 900 (2,591) 88,456 COST OF GOODS AND SERVICES 34,144 15,087 374 (2,591) 47,014 ------------- ------------- ------------- ------------- ------------- GROSS MARGIN 40,204 712 526 -- 41,442 Selling, general and administrative expenses 23,554 537 450 -- 25,541 Research and development 3,034 -- -- -- 3,034 Amortization of intangibles 545 -- -- -- 545 Loss (income) from equity-accounted investees (210) -- -- 210 -- Receivable provisions (recoveries), net (889) (76) -- -- (965) ------------- ------------- ------------- ------------- ------------- EARNINGS (LOSS) FROM OPERATIONS 14,170 251 76 (210) 14,287 Interest income 664 -- -- -- 664 Interest expense (12,516) (20) (30) -- (12,566) Loss on retirement of notes (784) -- -- -- (784) ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,534 231 46 (210) 1,601 Recovery of (provision for) income taxes 322 -- (67) -- 255 ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 1,856 231 (21) (210) 1,856 Net earnings from discontinued operations 600 -- -- -- 600 ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) $ 2,456 $ 231 $ (21) $ (210) $ 2,456 ============= ============= ============= ============== ============= Page 22
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Statements of Operations for the nine months ended September 30, 2003: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- REVENUE IMAX systems $ 54,693 $ 2,259 $ 1,061 $ (2,100) $ 55,913 Films 10,741 11,011 48 (2,230) 19,570 Theater Operations 575 9,677 -- (110) 10,142 Other 3,642 -- 125 (65) 3,702 ------------- ------------- ------------- -------------- ------------- 69,651 22,947 1,234 (4,505) 89,327 COST OF GOODS AND SERVICES 31,437 23,231 496 (5,812) 49,352 ------------- ------------- ------------- ------------- ------------- GROSS MARGIN 38,214 (284) 738 1,307 39,975 Selling, general and administrative expenses 24,125 530 209 -- 24,864 Research and development 2,833 -- -- -- 2,833 Amortization of intangibles 473 -- -- -- 473 Loss (income) from equity-accounted investees (539) 101 -- (63) (501) Receivable provisions (recoveries), net 486 (178) (44) -- 264 ------------- ------------- ------------- ------------- ------------- EARNINGS (LOSS) FROM OPERATIONS 10,836 (737) 573 1,370 12,042 Interest income 515 -- -- -- 515 Interest expense (11,919) (30) -- -- (11,949) Loss on retirement of notes (333) -- -- -- (333) Recovery of long-term investments 355 -- -- -- 355 ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (546) (767) 573 1,370 630 Recovery of (provision for) income taxes (632) 1,077 (45) -- 400 ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (1,178) 310 528 1,370 1,030 Net earnings (loss) from discontinued operations 599 (891) -- -- (292) ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) $ (579) $ (581) $ 528 $ 1,370 $ 738 ============= ============= ============= ============= ============= Page 23
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Statements of Cash Flows for the nine months ended September 30, 2004: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- CASH PROVIDED BY (USED IN): OPERATING ACTIVITIES Net earnings (loss) from continuing operations $ 1,856 $ 231 $ (21) $ (210) $ 1,856 Items not involving cash: Depreciation and amortization 10,133 403 1 -- 10,537 Write-downs (recoveries) (887) (76) -- -- (963) Loss (income) from equity-accounted investees (210) -- -- 210 -- Deferred income taxes (776) (12) -- -- (788) Loss on retirement of notes 784 -- -- -- 784 Stock and other non-cash compensation 2,264 -- -- -- 2,264 Non-cash foreign exchange gain (12) -- -- -- (12) Premium on repayment of notes (576) -- -- -- (576) Investment in film assets (3,969) 1,187 -- -- (2,782) Changes in restricted cash 4,961 -- -- -- 4,961 Changes in other non-cash operating assets and liabilities (7,497) (2,931) (178) -- (10,606) ------------- ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities 6,071 (1,198) (198) -- 4,675 ------------- ------------- ------------- ------------- ------------- INVESTING ACTIVITIES Purchase of fixed assets (623) (70) -- -- (693) Increase in other assets (857) -- -- -- (857) Increase in other intangible assets (271) -- -- -- (271) ------------- ------------- ------------- ------------- ------------- Net cash used in investing activities (1,751) (70) -- -- (1,821) ------------- ------------- ------------- ------------- ------------- FINANCING ACTIVITIES Repayment of Old Senior Notes due 2005 (29,234) -- -- -- (29,234) Financing costs related to New Senior Notes due 2010 (681) -- -- -- (681) Common shares issued 44 -- -- -- 44 Net cash provided by financing activities from discontinued operations 400 -- -- -- 400 ------------- ------------- ------------- ------------- ------------- Net cash used in financing activities (29,471) -- -- -- (29,471) ------------- ------------- ------------- ---------------------------- Effects of exchange rate changes on cash 21 (16) (6) -- (1) ------------- ------------- ------------- ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (25,530) (1,284) (204) -- (27,018) Increase in cash and cash equivalents from discontinued operations 400 -- -- -- 400 ------------- ------------- ------------- ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (25,130) (1,284) (204) -- (26,618) Cash and cash equivalents, beginning of period 41,311 5,696 275 -- 47,282 ------------- ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,181 $ 4,412 $ 71 $ -- $ 20,664 ============= ============= ============= ============= ============= Page 24
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd) Supplemental Consolidating Statements of Cash Flows for the nine months ended September 30, 2003: ADJUSTMENTS IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------- ------------- ------------- ------------- ------------- CASH PROVIDED BY (USED IN): OPERATING ACTIVITIES Net earnings (loss) from continuing operations $ (1,178) $ 310 $ 528 $ 1,370 $ 1,030 Items not involving cash: Depreciation and amortization 7,549 691 3 -- 8,243 Write-downs (recoveries) 348 (44) (44) -- 260 Loss (income) from equity-accounted investees (539) 101 -- (63) (501) Loss on retirement of notes 333 -- -- -- 333 Stock and other non-cash compensation 4,103 -- -- -- 4,103 Non-cash foreign exchange gain (685) -- -- (685) Payment under certain employment agreements (1,550) -- -- -- (1,550) Investment in film assets (840) (268) -- -- (1,108) Changes in restricted cash (142) -- -- -- (142) Changes in other non-cash operating assets and liabilities (10,140) (2,159) (568) (1,244) (14,111) Net cash used in operating activities from discontinued operations (503) (70) -- -- (573) ------------- ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities (3,244) (1,439) (81) 63 (4,701) ------------- ------------- ------------- ------------- ------------- INVESTING ACTIVITIES Purchase of fixed assets (453) (631) -- (63) (1,147) Increase in other assets (794) -- -- -- (794) Increase in other intangible assets (435) -- -- -- (435) Recovery on long-term investments 355 -- -- -- 355 Net cash used in investing activities from discontinued operations -- (11) -- -- (11) ------------- -------------- ------------- ------------- ------------- Net cash used in investing activities (1,327) (642) -- (63) (2,032) ------------- -------------- ------------- ------------- ------------- FINANCING ACTIVITIES Repayment of Subordinated Notes (9,143) -- -- -- (9,143) Common shares issued 1,410 -- -- -- 1,410 Net cash used in financing activities from discontinued operations 599 -- -- -- 599 ------------- ------------- ------------- ------------- ------------- Net cash used in financing activities (7,134) -- -- -- (7,134) ------------- ------------- ------------- ------------- ------------- Effects of exchange rate changes on cash 163 4 17 -- 184 ------------- ------------- ------------- ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (11,638) (1,996) (64) -- (13,698) Increase (decrease) in cash and cash equivalents from discontinued operations 96 (81) -- -- 15 ------------- ------------- ------------- ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (11,542) (2,077) (64) -- (13,683) Cash and cash equivalents, beginning of period 27,756 5,695 350 -- 33,801 ------------- ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,214 $ 3,618 $ 286 $ -- $ 20,118 ============= ============= ============= ============= ============= Page 25
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 19. 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 described below. (a) EQUITY ACCOUNTED INVESTEES Canadian GAAP requires the accounts of jointly controlled enterprises to be proportionately consolidated. Under U.S. GAAP, investments in jointly controlled entities are accounted as equity investments. During the three and nine month periods ended September 30, 2004, the Company did not have any investments in jointly controlled entities. (b) 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. (c) STOCK-BASED COMPENSATION Under U.S GAAP, the Company accounts for stock-based compensation under the intrinsic value method set out in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and its related interpretations, and has made pro forma disclosures of net earnings (loss) and earnings (loss) per share 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. (d) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In the three and nine month periods ended September 30, 2003, the U.S. GAAP financial statements included an additional $nil and $0.5 million in selling, general and administrative expenses which were recorded in the December 31, 2002 Canadian GAAP financial statements due to the timing of finalization of certain compensation awards. (e) INTEREST ON CONVERTIBLE SUBORDINATED NOTES Convertible subordinated notes are carried at face value as a liability under U.S. GAAP. Under Canadian GAAP, the carrying value of the convertible subordinated notes is allocated between debt and equity elements and classified separately in the balance sheet. The debt element was calculated by discounting the stream of future payments of interest and principal at the prevailing market rate for a similar liability that does not have an associated conversion feature. The accretion of the liability component of the notes is recorded as interest expense in the statement of operations. The debt associated with this interest was settled in April 2003. (f) PENSION ASSET AND LIABILITIES Under U.S. GAAP, included in accrued liabilities, is a minimum pension liability of $4.5 million as at September 30, 2004 and $5.5 million as at December 31, 2003, representing unrecognized prior service costs. There is an equal amount recorded in other assets. Under Canadian GAAP, a minimum pension liability and corresponding asset are not recorded. Page 26
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd) 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: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net earnings (loss) in accordance with U.S. GAAP $ 1,800 $(2,654) $ 2,456 $ 738 Equity accounted investees(a) -- (499) -- (1,246) Depreciation of Fixed assets(b) (40) (40) (122) (122) Stock-based compensation(c) (742) (102) (920) (241) Timing differences - Selling, general and administrative expenses(d) -- -- -- 500 Interest accretion on Subordinated Notes(e) -- -- -- (48) ------- ------- ------- ------- Net earnings (loss) in accordance with Canadian GAAP $ 1,018 $(3,295) $ 1,414 $ (419) ======= ======= ======= ======= Earnings (loss) per share (note 12): Earnings (loss) per share - basic and diluted: Net earnings (loss) from continuing operations $ 0.02 $ (0.09) $ 0.02 $ -- Net earnings (loss) from discontinued operations $ 0.01 $ -- $ 0.02 $ (0.01) ------- ------- ------- ------- Net earnings (loss) $ 0.03 $ (0.09) $ 0.04 $ (0.01) ======= ======= ======= ======= CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT) The following is a reconciliation of shareholders' equity (deficit) reflecting the difference between Canadian and U.S. GAAP: SEPTEMBER 30, DECEMBER 31, 2004 2003 ---- ---- Shareholders' equity (deficit) in accordance with U.S. GAAP $(49,145) $(51,776) Fixed asset impairments(b) 730 852 -------- -------- Shareholders' equity (deficit) in accordance with Canadian GAAP $(48,415) $(50,924) ======== ======== Page 27
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd) CONSOLIDATED BALANCE SHEET The following is the Canadian GAAP Consolidated Balance Sheet as at December 31, 2003: AS AT DECEMBER 31, 2003 ---- ASSETS Cash and cash equivalents $ 47,282 Restricted cash 4,961 Accounts receivable 13,887 Financing receivable 56,742 Inventories 28,218 Prepaid expenses 1,902 Film assets 1,568 Property, plant and equipment 36,670 Other assets 8,297 Future income taxes 3,756 Goodwill 39,027 Other intangible assets 3,388 --------- Total assets $ 245,698 ========= LIABILITIES Accounts payable $ 5,780 Accrued liabilities 38,264 Deferred revenue 63,344 New Senior Notes due 2010 160,000 Old Senior Notes due 2005 29,234 --------- Total liabilities 296,622 --------- SHAREHOLDERS' EQUITY (DEFICIT) Capital stock Common shares. Authorized - unlimited number Issued and outstanding - 39,301,758 114,153 Other equity 3,536 Contributed surplus 11,857 Deficit (182,297) Cumulative foreign currency translation adjustments 1,827 --------- Total shareholders' equity (deficit) (50,924) --------- Total liabilities and shareholders' equity (deficit) $ 245,698 ========= Page 28
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd) CONSOLIDATED STATEMENT OF OPERATIONS The following are the Canadian GAAP Consolidated Statements of Operations for the three and nine months ended September 30, 2003: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 ------------------ ------------------ REVENUE IMAX systems $ 11,454 $ 55,913 Films 5,276 19,570 Theater operations 3,367 10,142 Other 1,955 6,135 -------- -------- 22,052 91,760 COSTS OF GOODS AND SERVICES 12,589 52,389 -------- -------- GROSS MARGIN 9,463 39,371 Selling, general and administrative expenses 8,366 24,605 Research and development 952 2,833 Amortization of intangibles 182 473 Receivable provisions, net of (recoveries) (425) 264 -------- -------- EARNINGS FROM OPERATIONS 388 11,196 Interest income 105 515 Interest expense (3,691) (12,260) Loss on retirement of notes (146) (333) Recovery on long-term investments 355 355 -------- -------- NET LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,989) (527) Recovery of (provision for) income taxes (163) 400 -------- -------- NET LOSS FROM CONTINUING OPERATIONS (3,152) (127) Net loss from discontinued operations (143) (292) -------- -------- NET LOSS (3,295) (419) ======== ======== Page 29
IMAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Tabular amounts in thousands of U.S. dollars unless otherwise stated) (UNAUDITED) 19. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd) CONSOLIDATED STATEMENT OF CASH FLOWS The following is the Canadian GAAP Consolidated Statement of Cash Flows for the nine months ended September 30, 2003: NINE MONTHS ENDED SEPTEMBER 30, 2003 ---- CASH PROVIDED BY (USED IN): OPERATING ACTIVITIES Net earnings from continuing operations $ (127) Items not involving cash: Depreciation and amortization 9,255 Write-downs 260 Loss on retirement of notes 333 Stock and other non-cash compensation 4,344 Interest related to accretion on Subordinated Notes 48 Non-cash foreign exchange gain (685) Payment under certain employment agreements (1,550) Investment in film assets (1,108) Changes in restricted cash (142) Changes in other non-cash operating assets and liabilities (14,461) Net cash used in operating activities from discontinued operations (573) -------- Net cash used in operating activities (4,406) -------- INVESTING ACTIVITIES Purchase of fixed assets (1,169) Increase in other assets (794) Increase in other intangible assets (435) Recovery on long-term investments 355 Net cash used in investing activities from discontinued operations (11) -------- Net cash used in investing activities (2,054) -------- FINANCING ACTIVITIES Repayment of Subordinated Notes (9,143) Common shares issued 1,410 Repayment of long-term debt (576) Net cash provided by financing activities from discontinued operations 599 -------- Net cash used in financing activities (7,710) -------- Effects of exchange rate changes on cash 184 -------- DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (14,001) Increase in cash and cash equivalents from discontinued operations 15 -------- DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (13,986) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,380 -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,394 ======== Page 30
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's principal business is the design, manufacture, sale and lease of projector systems for giant screen theaters for customers including commercial theaters, museums and science centers, and destination entertainment sites. In addition, the Company designs and manufactures high-end sound systems and produces and distributes large format films. There are more than 235 IMAX theaters operating in 35 countries worldwide as of September 30, 2004. IMAX Corporation is a publicly traded company listed on both the TSX and NASDAQ. ACCOUNTING POLICIES AND ESTIMATES 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 19 of the Consolidated financial statements. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to accounts receivable, net investment in leases, inventories, fixed and film assets, investments, intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, future expectations and other assumptions that are believed to be reasonable at the date of the financial statements. Actual results may differ from these estimates due to uncertainty involved in measuring, at a specific point in time, events which are continuous in nature. The Company's significant accounting policies are discussed in note 2 of the Consolidated Financial Statements in the Company's most recent annual report on Form 10-K/A (amendment No. 2) for the year ended December 31, 2003 and are summarized below. SIGNIFICANT ACCOUNTING POLICIES Management considers the following critical accounting policies to have the most significant effect on its estimates, assumptions and judgements: REVENUE RECOGNITION SALES-TYPE LEASES OF THEATER SYSTEMS Theater system leases that transfer substantially all of the benefits and risks of ownership to customers are classified as sales-type leases as a result of meeting the criteria established by FASB Statement of Financial Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is recognized, the initial rental fees due under the contract, along with the present value of minimum ongoing rental payments, are recorded as revenues for the period, and the related theater system costs including installation expenses are recorded as cost of goods and services. Additional ongoing rentals in excess of minimums are recognized as revenue when reported by the theater operator, provided that collection is reasonably assured. The Company recognizes revenues from sales-type leases generally upon installation of the theater system. Revenue associated with a sales-type lease is recognized when all of the following criteria are met: persuasive evidence of an agreement exists; the price is fixed or determinable; and collection is reasonably assured. The timing of installation of the theater system is largely dependent on the timing of the construction of the customer's theater. Therefore, while revenue for theater systems is generally predictable on a long-term basis, it can vary from quarter to quarter or year to year depending on the timing of installation. Page 31
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) SIGNIFICANT ACCOUNTING POLICIES (cont'd) REVENUE RECOGNITION (cont'd) SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd) The Company monitors the performance of the theaters to which it has leased equipment. When facts and circumstances indicate that it may need to change the terms of a lease, which had previously been recorded as a sales-type lease, the Company evaluates the likely outcome of such negotiations. A provision is recorded against the net investment in leases if the Company believes that it is probable that the negotiation will result in a reduction in the minimum lease payments such that the lease will be reclassified as an operating lease. The provision is equal to the excess of the carrying value of the net investment in lease over the fair value of the equipment. 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 ordinary 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. 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 initial lease payments are recognized as revenue when the Company exercises its rights to terminate the lease and the Company is released legally and/or by virtue of an agreement with the customer from its obligations under the lease arrangement. When settlements are received, the Company will allocate the total settlement to each of the elements based on their relative fair value. OPERATING LEASES OF THEATER SYSTEMS Leases that do not transfer substantially all of the benefits and risks of ownership to the customer are classified as operating leases. For these leases, initial rental fees and minimum lease payments are recognized as revenue on a straight-line basis over the lease term. Additional rentals in excess of minimum annual amounts are recognized as revenue when reported by theater operators, provided that collection is reasonably assured. ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES The allowance for doubtful accounts 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. 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. Page 32
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) SIGNIFICANT ACCOUNTING POLICIES (cont'd) GOODWILL The Company performs an impairment test on at least an annual basis and additionally, whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a discounted cash flows approach. If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any. Any impairment loss would be expensed in the statement of operations. FIXED ASSETS Management reviews the carrying values of its fixed assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In performing its review for recoverability, management estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of impairment losses is based on the excess of the carrying amount of the asset over the fair value calculated using discounted expected future cash flows. If the actual future cash flows are less than the Company's estimates, future earnings could be adversely affected. TAX ASSET VALUATION As at September 30, 2004, the Company had net deferred income tax assets of $4.5 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 September 30, 2004, and the ability to realize certain deferred income tax assets through loss and tax credit carryback strategies. If and when the Company's operations in some jurisdictions were to reach a requisite level of profitability or where the Company's future profitability estimates increase due to changes in positive evidence, the Company would reduce all or a portion of the applicable valuation allowance in the period when such determination is made. This would result in an increase to reported earnings and a decrease to the Company's effective tax rate in such period. However, if the Company's projected future earnings do not materialize, or if the Company operates at a loss in certain jurisdictions, or if there is a material change in actual effective tax rates or time period within which the Company's underlying temporary differences become taxable or deductible, the Company could be required to increase the valuation allowance against all or a significant portion of the Company's deferred tax assets resulting in a substantial increase to the Company's effective tax rate for the period of the change and a material adverse impact on its operating results for the period. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company adjusts tax expense to reflect both favorable and unfavorable examination results. The Company's ongoing assessments of the probable outcomes of examinations and related tax positions require judgement and can materially increase or decrease its effective rate as well as impact operating results. Page 33
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2003 The Company reported net earnings from continuing operations of $1.6 million or $0.04 per share on a diluted basis for the third quarter of 2004, compared to net loss from continuing operations of $2.5 million or $0.07 per share on a diluted basis for the third quarter of 2003. REVENUE The Company's revenues for the third quarter of 2004 increased 49.9% to $31.8 million from $21.2 million in the same period last year. IMAX systems revenue increased approximately 86.0% to $21.3 million in the third quarter of 2004 from $11.5 million in the same period last year. The Company recognized revenue on 6 theater systems in the third quarter of 2004, versus 1 theater system in the third quarter of 2003. The increase in systems revenue from installations over the same period last year was partially offset by lower settlement revenue in the period. 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. Upon the Company being released from its future obligations under the agreement, the initial lease payments that the customer previously made to the Company are recognized as revenue. Settlements relating to terminated lease agreements with customers who were unable to proceed with their theater lease arrangement included in revenue for the third quarter of 2004 total $2.9 million compared to $3.4 million in the corresponding period last year. A significant portion of such revenue in the third quarter of 2004 related to existing customers that restructured their lease agreements and obtained an option to order the Company's new IMAX(R) MPX(TM) projection system. Films revenue increased 15.2% to $6.1 million in the third quarter of 2004 from $5.3 million in the same period last year. There was an increase in film revenue primarily due to the release of Spider-Man 2 in July 2004 and due to the release of Harry Potter and the Prisoner of Azkaban: The IMAX Experience in June 2004. The increase was partially offset by a decline in the third party business at the Company's post production unit. Theater operations revenue increased to $3.7 million in the third quarter of 2004 from $3.4 million in the same period last year primarily due to the consolidation of the Company's Tempe theater in 2004 compared to equity-accounting treatment in same period last year when the theater was only 50% owned. Other revenues decreased 33.4% to $0.8 million in the third quarter of 2004 from $1.1 million in the same period last year primarily due to a decline in camera rentals. Page 34
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS (cont'd) THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2003 (cont'd) GROSS MARGIN Gross margin for the third quarter of 2004 was $14.5 million, or 45.5% of total revenue, compared to $9.7 million, or 45.6% of total revenue, in the same period last year. The increase in gross margin in dollar terms is due to the installation of 6 theater systems in the third quarter of 2004, compared to 1 theater system installation in the third quarter of 2003. Included in gross margin is $2.9 million of settlement revenues for the third quarter of 2004 (compared to $3.4 million of settlement revenue in the corresponding period last year) for terminated lease agreements with customers, a significant portion of which related to existing customers that restructured their lease agreements in order to obtain the Company's new IMAX MPX projection system. Further offsetting the increase in systems gross margin was a decline in film distribution gross margin primarily from costs related to the release of Spider-Man 2. Camera margins have also decreased significantly, primarily due to the decrease of camera rentals in 2004. The Company improved its gross margin in its owned and operated theater segment due to increased cost efficiencies over the same period last year. OTHER Selling, general and administrative expenses were $7.6 million in the third quarter of 2004 compared to $8.3 million in the corresponding period last year. The Company incurred lower legal fees and miscellaneous expenses in the amount of $1.6 million in the third quarter of 2004 versus $2.4 million in the third quarter of 2003. Partially offsetting the decline was an increase in professional fees relating to the implementation of certain policies and procedures in connection with the Sarbanes-Oxley Act of 2002. The Company also recorded a recovery of $0.2 million in its phantom stock plan expense in the third quarter of 2003 compared to $nil in the third quarter of 2004. The Company no longer has any interests in equity-accounted investees as of December 31, 2003. Receivable provisions net of recoveries amounted to $nil in the third quarter of 2004 compared to a net recovery of $0.4 million in the same period last year. Interest income increased to $0.4 million in the third quarter of 2004 from $0.1 million in the same period last year primarily due to interest received relating to tax refunds from favourable tax examinations paid to the Company in the third quarter. This was partially offset by a slight decrease in the average balance of cash and cash equivalents held. Interest expense increased to $4.4 million in the third quarter of 2004 compared to $3.6 million in the corresponding period last year due to a higher effective interest rate in the current period. The Company retired and repaid an aggregate of $170.8 million of the Company's Old Senior Notes and $9.1 million of 5.75% convertible subordinated notes due April 1, 2003 (the "Subordinated Notes") throughout 2003. As at September 30, 2004, the Company had outstanding $160.0 million aggregate principal of 9.625% senior notes due December 1, 2010 (the "New Senior Notes"). Included in interest expense is the amortization of deferred finance costs in the amount $ 0.3 million in the third quarter of 2004 relating to the New Senior Notes and the Credit Facility and $0.2 million for the third quarter of 2003 relating to the Old Senior Notes. The Company's policy is to defer and amortize all the costs relating to a debt financing over the life of the debt instrument. Page 35
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS (cont'd) THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2003 (cont'd) OTHER (cont'd) In August 2003, the Company agreed to restructure its 6% Senior Secured Convertible Debenture (the "Debenture") due from Mainframe Entertainment, Inc. ("Mainframe"). Under the terms of the restructuring agreement, the payment terms of the Debenture were revised, while the Company retained its security over all of Mainframe's property and assets for the balance of the payments due. The Company recorded $0.4 million in income for the three month period ended September 30, 2003 related to cash received under the debt restructuring agreement. The effective tax rate on earnings differs significantly from the statutory rate due to the effect of permanent differences, income taxed at differing rates in foreign and other provincial jurisdictions, tax recoveries and charges relating to favourable or unfavourable tax examinations, and changes in the Company's valuation allowance on deferred tax assets. The income tax (expense) recovery for the quarter is calculated by applying the estimated average annual effective tax rate to quarterly pre-tax income. Included within the tax provision in the current quarter the Company recorded a tax recovery of $0.4 million related to refunds resulting from favourable conclusions to two separate tax examinations and the utilization of previously recorded income tax credits. As at September 30, 2004, the Company had a gross deferred tax asset of $50.6 million, against which the Company is carrying a $46.1 million valuation allowance. RESEARCH AND DEVELOPMENT Research and development expenses were $1.0 million in both the third quarter of 2004 and 2003. The expenses primarily reflect 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 and software to enhance its product offering. The Company believes that the motion picture industry will be affected by the development of digital technologies, particularly in the areas of content creation (image capture), post-production (editing and special effects), digital re-mastering distribution and display. Consequently, the Company has made significant investments in digital technologies, including the development of a proprietary, patent-pending technology to digitally enhance image resolution and quality of 35mm motion picture films, and has a number of patents pending and intellectual property rights in these areas. However, there can be no assurance that the Company will be awarded patents covering this technology or that competitors will not develop similar technologies. LOSS ON RETIREMENT OF NOTES During the third quarter of 2003, the Company recorded a loss of $0.1 million from the retirement of $6.5 million of the Company's Old Senior Notes. DISCONTINUED OPERATIONS 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 an arbitration 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 at 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 the three months ended September 30, 2004 compared to a loss of $0.3 million in the same period for 2003. Page 36
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS (cont'd) THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2003 (cont'd) DISCONTINUED OPERATIONS (cont'd) Effective December 11, 2001, the Company completed the sale of its wholly-owned subsidiary, Digital Projection International, including its subsidiaries (collectively "DPI"), to a company owned by members of DPI management. As part of the transaction, the Company restructured its advances to DPI, releasing DPI from obligations to repay any amounts in excess of $12.7 million previously advanced by the Company, and reorganized the remaining $12.7 million of debt owing to the Company into two separate loan agreements. During both the third quarters of 2003 and 2004, the Company recognized $0.2 million in income from discontinued operations for cash ultimately received. As of September 30, 2004, the remaining loan receivable balance is $11.3 million, which has been fully provided for. NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003 The Company reported net earnings from continuing operations of $1.9 million or $0.05 per share on a diluted basis for the first nine months of 2004, compared to net earnings from continuing operations of $1.0 million or $0.03 per share on a diluted basis for the first nine months of 2003. REVENUE The Company's revenues for the first nine months of 2004 decreased 1.0% to $88.5 million from $89.3 million in the same period last year. IMAX systems revenue increased approximately 3.4% to $57.8 million in the first nine months of 2004 from $55.9 million in the same period last year. The increase in systems revenue was due in part to higher average revenue per system and higher settlement revenue in the period. In addition, the Company recognized revenue on 13 theater systems in the first nine months of 2004, versus 15 theater systems in the first nine months of 2003, one of which was an operating lease. Average sales and lease revenue increased in 2004 versus 2003 due to the mix of projector systems installed during the year. 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. Upon the Company being released from its future obligations under the agreement, the initial lease payments that the customer previously made to the Company are recognized as revenue. Settlements relating to terminated lease agreements with customers who were unable to proceed with their theater lease arrangement included in revenue for the first nine months of 2004 total $9.5 million compared to $7.6 million in the corresponding period last year. A significant portion of such revenue in the first nine months of 2004 related to existing customers that restructured their lease agreements in order to obtain the Company's new IMAX(R) MPX(TM) projection system. Films revenue decreased 12.3% to $17.2 million in the first nine months of 2004 from $19.6 million in the same period last year. There was a decline in the Company's film post production revenue due to lower third party activity. This was partially offset by an increase in film revenue due to the releases of Spider-Man 2 in July 2004, Harry Potter and the Prisoner of Azkaban: The IMAX Experience in June 2004 and due to the release of NASCAR 3D: The IMAX Experience in March 2004. Theater operations revenue increased to $11.2 million in the first nine months of 2004 from $10.1 million in the same period last year, primarily due to the consolidation of the Company's Tempe theater in 2004 compared to equity-accounting treatment in same period last year when the theater was only 50% owned. Page 37
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS (cont'd) NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003 (cont'd) REVENUE (cont'd) Other revenues decreased 38.5% to $2.3 million in the first nine months of 2004 from $3.7 million in the same period last year primarily due to the decrease of camera rentals in 2004. GROSS MARGIN Gross margin for the first nine months of 2004 was $41.4 million, or 46.9% of total revenue, compared to $40.0 million, or 44.8% of total revenue, in the same period last year. The increase in gross margin in dollar terms is due primarily to increased settlement revenues for the first nine months of 2004 for terminated lease agreements with customers, a significant portion of which related to existing customers that restructured their lease agreements in order to obtain the Company's new IMAX MPX projection system. Partially offsetting the increase in systems gross margin was a decline in film distribution gross margin due largely to the decline in the performance of the Company's film library and expenses incurred in connection with the release of Spider-Man 2. Camera margins have also decreased significantly, primarily due to the decrease of camera rentals in 2004. The Company significantly improved its gross margin in dollar and percentage terms in its owned and operated theater segment due to increased cost efficiencies over the same period last year. OTHER Selling, general and administrative expenses were $24.5 million in the first nine months of 2004 compared to $24.9 million in the corresponding period last year. The Company recorded a recovery in its phantom stock plan expense of $0.4 million in the first nine months of 2004 due the decrease in the Company's share price compared to an expense of $1.4 million in the first nine months of 2003. The Company incurred lower legal fees and miscellaneous expenses in the amount of $5.4 million in the first nine months of 2004 compared to $6.2 million in the first nine months of 2003. Partially offsetting the above was an increase professional fees in the amount of $0.5 million in the period primarily relating to the implementation of certain policies and procedures in connection with the Sarbanes-Oxley Act of 2002. The Company expensed $0.5 million for capital taxes paid in the first nine months of 2004 compared to a recovery of $0.1 million for refunds received in 2003. The Company no longer has any interests in equity-accounted investees as of December 31, 2003. Receivable provisions net of recoveries amounted to as a net recovery of $1.0 million in the first nine months of 2004 compared to a net provision of $0.3 million in the same period last year. The Company recorded an accounts receivable recovery of $0.3 million as compared to a provision of $0.5 million in the same period last year. There was a net recovery of $0.7 million in the first nine months of 2004 on financing receivables as compared to a net recovery of $0.3 million in the same period last year due to a favorable outcome on lease amendments. Interest income increased to $0.7 million in the first nine months of 2004 from $0.5 million in the same period last year primarily due to interest received relating to tax refunds received by the Company. This was partially offset by a decrease in the average balance of cash and cash equivalents held. Interest expense increased slightly to $12.6 million in the first nine months of 2004 from $11.9 million in the same period last year due to a higher effective interest rate in the current period. The Company retired and repaid an aggregate of $170.8 million of the Company's Old Senior Notes throughout 2003 and $9.1 million of Subordinated Notes on April 1, 2003. As at September 30, 2004, the Company had $160.0 million aggregate principal of the New Senior Notes outstanding. Included in interest expense is the amortization of deferred finance costs in the amount $0.8 million in the first nine months of 2004 and $0.5 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. Page 38
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS (cont'd) NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003 (cont'd) OTHER (cont'd) In August 2003, the Company agreed to restructure its 6% Senior Secured Convertible Debenture (the "Debenture") due from Mainframe Entertainment, Inc. ("Mainframe"). Under the terms of the restructuring agreement, the payment terms of the Debenture were revised, while the Company retained its security over all of Mainframe's property and assets for the balance of the payments due. The Company recorded $0.4 million in income for the nine month period ended September 30, 2003 related to cash received under the debt restructuring agreement. The effective tax rate on earnings differs significantly from the statutory rate due to the effect of permanent differences, income taxed at differing rates in foreign and other provincial jurisdictions and changes in the Company's valuation allowance on deferred tax assets. The income tax expense (recovery) for the period is calculated by applying the estimated average annual effective tax rate to the period pre-tax income. Included within the tax provision, the Company recorded income tax refunds of $0.8 million in the first nine months of 2004 from $1.5 million in the same period last year. RESEARCH AND DEVELOPMENT Research and development expenses were $3.0 million in the first nine months of 2004 versus $2.8 million in the same period last year. 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 and software to enhance its product offering. The Company believes that the motion picture industry will be affected by the development of digital technologies, particularly in the areas of content creation (image capture), post-production (editing and special effects), digital re-mastering distribution and display. Consequently, the Company has made significant investments in digital technologies, including the development of a proprietary, patent-pending technology to digitally enhance image resolution and quality of 35mm motion picture films, and has a number of patents pending and intellectual property rights in these areas. However, there can be no assurance that the Company will be awarded patents covering this technology or that competitors will not develop similar technologies. LOSS ON RETIREMENT OF NOTES During the first nine months of 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 the first nine months of 2003, the Company recorded a loss of $0.3 million from the retirement of $31.5 million of the Company's Old Senior Notes. 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 an arbitration 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 at between $0.8 million and $2.3 million, of which the Company had accrued $0.8 million as at December 30, 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 the nine months ended September 30, 2004 compared to a loss of $0.9 million in the same period for 2003. Page 39
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) RESULTS OF OPERATIONS (cont'd) NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2003 (cont'd) DISCONTINUED OPERATIONS (cont'd) Effective December 11, 2001, the Company completed the sale of its wholly-owned subsidiary, Digital Projection International, including its subsidiaries (collectively "DPI"), to a company owned by members of DPI management. As part of the transaction, the Company restructured its advances to DPI, releasing DPI from obligations to repay any amounts in excess of $12.7 million previously advanced by the Company, and reorganized the remaining $12.7 million of debt owing to the Company into two separate loan agreements. During the first nine months of 2003 and 2004, the Company recognized $0.6 million in income from discontinued operations for cash ultimately received. As of September 30, 2004, the remaining loan receivable balance is $11.3 million, which has been fully provided for. LIQUIDITY AND CAPITAL RESOURCES CREDIT FACILITY On February 6, 2004, the Company entered into a loan agreement for a secured revolving credit facility with Congress Financial Corporation (Canada) (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. The Credit Facility bears interest at Prime + 0.25% per annum or Libor + 2.0% per annum and is collateralized by a first priority security interest in all of the current and future assets of the Company. The Credit Facility contains typical affirmative and negative covenants, including covenants that restrict the Company's ability to: incur certain additional indebtedness; make certain loans, investments or guarantees; pay dividends; make certain asset sales; incur certain liens or other encumbrances; conduct certain transactions with affiliates and enter into certain corporate transactions or dissolve. In addition, the Credit Facility contains customary events of default, including upon an acquisition or a change of control that has a material adverse effect on the Company's financial condition. The Credit Facility also requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization, and cash collections. As at September 30, 2004, the Company has not drawn down on the Credit Facility, however, it has issued letters of credit for $5.2 million under the Credit Facility arrangement. CASH AND CASH EQUIVALENTS As at September 30, 2004, the Company's principal sources of liquidity included cash and cash equivalents of $20.7 million, trade accounts receivable of $17.6 million and net investment in leases due within one year of $5.9 million. As at September 30, 2004, the Company had not drawn down any amounts under the Credit Facility. In January 2004, the Company retired the remaining $29.2 million in Old Senior Notes using existing cash balances. 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, if management's projections of future signings and installations are not realized, there is no guarantee the Company will continue to be able to fund its operations through cash flows from operations. Under the terms of the Company's typical theater system lease agreement, the Company receives substantial cash payments before the Company completes the performance of its obligations. Similarly, the Company receives cash payments for some of its film productions in advance of related cash expenditures. Page 40
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) LIQUIDITY AND CAPITAL RESOURCES (cont'd) CASH AND CASH EQUIVALENTS (cont'd) The Company's net cash provided by (used in) operating activities is impacted by a number of factors, including the proceeds associated with new signings of theater system lease and sale agreements in the year, the box office performance of large format films distributed by the Company and/or exhibited in the Company's theaters, increases or decreases in the Company's operating expenses, and the level of cash collections received from its customers. Cash provided by operating activities amounted to $4.7 million for the period ended September 30, 2004. Changes in other non-cash operating assets as compared to December 31, 2003 include a decrease of $1.3 million in inventories, an increase of $3.3 million in financing receivables, a $3.0 million increase in accounts receivable and a $1.6 million increase in prepaid expenses which relates to prepaid film print costs which will be expensed over the period to be benefited. Changes in other non-cash operating liabilities as compared to December 31, 2003 include a decrease in deferred revenue of $12.7 million, an increase in accounts payable of $0.9 million and an increase of $7.9 million in accrued liabilities. Included in operating activities for the first nine months of 2004 were $4.7 million in film finance proceeds which are required to be spent on a specific film project, and $0.6 million in premiums paid to retire $29.2 million of principal of the Company's remaining Old Senior Notes. Net cash provided by operating activities increased by $5.0 million in the first nine months of 2004 primarily due to the elimination of the Company's restricted cash balances, which were used as collateral for letters of credit. The Company now secures letters of credit through the Credit Facility, which was entered into in February 2004. Cash used in investing activities amounted to $1.8 million in the first nine months of 2004, which includes purchases of $0.7 million in fixed assets, an increase in other assets of $0.9 million and an increase in other intangible assets of $0.3 million. Cash used in financing activities in the first nine months of 2004 amounted to $29.5 million. The Company retired $29.2 million of principal of the Company's Old Senior Notes. Financing costs related to the New Senior Notes amounted to $0.7 million. The Company also received $0.4 million in cash on a note receivable from a discontinued operation. Capital expenditures including the purchase of fixed assets and investments in film assets were $3.5 million for the first nine months of 2004. Cash used in operating activities amounted to $4.7 million in the first nine months of 2003. Changes in other non-cash operating assets and liabilities included a decrease in deferred revenue of $18.7 million, and a decrease of $6.1 million in inventories. Cash used by investing activities in the first nine months of 2003 amounted to $2.0 million, primarily consisting of $1.1 million invested in fixed assets. The Company has also recorded $0.4 million in income related to cash received under a restructuring agreement with Mainframe Entertainment, Inc. Cash used in financing activities in the first nine months of 2003 amounted to $7.1 million which included a $9.1 million repayment of the Company's remaining outstanding Subordinated Notes and $0.6 million from the receipt of a note receivable from a discontinued operation. Capital expenditures including the purchase of fixed assets and investments in film assets were $2.3 million in the first nine months of 2003. LETTERS OF CREDIT AND OTHER COMMITMENTS As at September 30, 2004, the Company has letters of credit of $5.2 million outstanding of which the entire balance has been secured by the Credit Facility. In addition, the Company is required to expend $5.0 million towards the production of a future motion picture title. The Company has expended $0.3 million of these funds as at September 30, 2004. Page 41
IMAX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd) LIQUIDITY AND CAPITAL RESOURCES (cont'd) NEW SENIOR NOTES DUE 2010 As at September 30, 2004, the Company has $160.0 million aggregate principal of 9.625% senior notes due December 1, 2010 (the "New Senior Notes"). On October 6, 2004, the Company commenced an offer to exchange up to US$160,000,000 aggregate principal amount of its outstanding New Senior Notes for a like principal amount of its 9.625% Senior Notes due 2010 (the "Registered Notes"). The Company's registration statement on Form S-4 relating to the Registered Notes was declared effective by the Securities and Exchange Commission on September 30, 2004. The Registered Notes are unconditionally guaranteed, jointly and severally, by certain of the Company's wholly-owned subsidiaries. The terms of the Registered Notes are substantially identical to the terms of the New Senior Notes, and evidence the same indebtedness as the New Senior Notes, except that the Registered Notes are registered under U.S. securities laws, do not contain restrictions on transfer or provisions relating to special interest under circumstances related to the timing of the exchange offer, bear a different CUSIP number from the New Senior Notes and do not entitle their holders to registration rights. The terms of the Company's New Senior Notes impose certain restrictions on its operating and financing activities, including certain restrictions on the Company's ability to: incur additional indebtedness; make distributions or certain other restricted payments; grant liens; create dividend and other payment restrictions affecting the Company's subsidiaries; sell certain assets or merge with or into other companies; and enter into transactions with affiliates. The Company believes these restrictions will not have a material impact on its financial condition or results of operations. OLD SENIOR NOTES DUE 2005 In December 2003, the Company completed a tender offer and consent solicitation for its remaining $152.8 million of principal of senior notes due December 1, 2005 bearing interest at a rate of 7.875% per annum (the "Old Senior Notes") that were not retired previously. In December 2003, $123.6 million in principal of the Old Senior Notes were redeemed pursuant to a 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 using proceeds from the Company's New Senior Notes. In January 2004, the Company recorded a loss of $0.8 million related to the retirement of the Company's Old Senior Notes. During the first nine months of 2003, the Company recorded a loss of $0.3 million from the retirement of $31.5 million of the Company's Old Senior Notes. PENSION OBLIGATIONS The Company has a defined benefit pension plan covering its two Co-Chief Executive Officers. As September 30, 2004, the Company had an unfunded and accrued projected benefit obligation of approximately $22.6 million (December 31, 2003 - $20.1 million) in respect of this defined benefit pension plan. The Company intends to use the proceeds of life insurance policies taken on its Co-Chief Executive Officers to satisfy, in whole or in part, certain of the benefits due and payable under the plan, although there can be no assurance that the Company will ultimately do so. OFF-BALANCE SHEET ARRANGEMENTS There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company's financial condition. Page 42
IMAX CORPORATION ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK The Company is exposed to market risk from changes in foreign currency rates. The Company does not use financial instruments for trading or other speculative purposes. A 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. 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. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's Co-Chief Executive Officers and Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d- 15(e)) as of the end of the period covered by this report, have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were adequate and effective. 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. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING As of the end of the period covered by this report there was no change in the Company's internal control over financial reporting that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 43
IMAX CORPORATION PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (a) In March 2001, a complaint was filed against the Company by Muvico Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking rescission in respect of the system lease agreements between the Company and Muvico. The complaint was subsequently amended to add claims for fraud based upon the same factual allegations underlying its prior claims. The Company filed counterclaims against Muvico for breach of contract, unjust enrichment, unfair competition and/or deceptive trade practices and theft of trade secrets, and brought claims against MegaSystems, Inc. ("MegaSystems"), a large-format theater system manufacturer, for tortious interference and unfair competition and/or deceptive trade practices and to enjoin Muvico and MegaSystems from using the Company's confidential and proprietary information. The case is being heard in the U.S. District Court, Southern District of Florida, Miami Division. On September 27, 2004, the Court granted the Company's motion for summary judgment, awarding the Company judgment as a matter of law on all of the substantive claims asserted by Muvico in the complaint. The Company is awaiting final decision from the Court with regard to its damages claims. (b) In May 2003, the Company filed a Statement of Claim in the Ontario Superior Court of Justice against United Cinemas International Multiplex B.V. ("UCI") for specific performance, or alternatively, damages of $25.0 million with respect to the breach of a 1999 agreement between the Company and UCI whereby UCI committed to purchase IMAX theater systems from the Company. In August 2003, UCI filed a Statement of Defence denying it is in breach. On December 10, 2003, UCI and its two subsidiaries in the United Kingdom and Japan filed a claim against the Company claiming alleged breaches of the 1999 agreement referred to in the Company's claim against UCI, and repeating allegations contained in UCI's Statement of Defence to the Company's action. The Company believes that the allegations made by UCI in its complaint are entirely without merit and will accordingly defend the claims vigorously. The Company believes that the amount of loss, if any, suffered in connection with this lawsuit would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. (c) In November 2001, the Company filed a complaint with the District Court of Munich against Big Screen, a German large-screen cinema owner in Berlin ("Big Screen"), demanding payment of rental payments and certain other amounts owed to the Company. Big Screen has raised a defense based on alleged infringement of German antitrust rules, relating mainly to an allegation of excessive pricing. Big Screen had brought a number of motions for restraining orders in this matter relating to the Company's provision of films and maintenance, all of which have been rejected by the courts, including the Berlin Court of Appeals, and for which all appeals have been exhausted. The Company believes that all of the allegations in Big Screen's individual defense are entirely without merit and will accordingly continue to prosecute this matter vigorously. The Company believes that the amount of the loss, if any, suffered in connection with this dispute would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. Page 44
IMAX CORPORATION PART II OTHER INFORMATION (cont'd) ITEM 1. LEGAL PROCEEDINGS (cont'd) (d) In May, 2002, the Company filed a complaint with the District Court of Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"), demanding payment of rental obligations and other amounts owed to the Company. Siewert raised a defense based on alleged infringement of German antitrust rules. By judgement of December 20, 2002, the District Court rejected the defense 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. To the extent the lawsuit will be continued following the commencement of the insolvency proceedings, the Company will continue to vigorously pursue its claims and believes that the amount of loss, if any, suffered in connection with these proceedings would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. (e) In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages of approximately $3.7 million before the International Court of Arbitration of the International Chambers of Commerce (the "ICC") with respect to the breach by Electronic Media Limited ("EML") of its December 2000 agreement with the Company. In April 2004, EML filed an answer and counterclaim seeking the return of funds EML has paid to the Company, incidental expenses and punitive damages. In June 2004, the Company commenced a related arbitration before the ICC against EML's affiliate, E-CITI Entertainment (I) PVT Limited ("E-Citi"), seeking $17,777,950 as a result of E-Citi's breach of a September 2000 lease agreement. E-Citi has responded to the arbitration demand and has asserted several defenses, including that the ICC does not have jurisdiction for the arbitration. The Company believes that the allegations made by EML in its counterclaim are entirely without merit and has requested that the counterclaim be dismissed on the basis that EML has recently advised the ICC that it has insufficient funds to pay its share of the arbitration costs. The Company believes that the amount of loss, if any, suffered in connection with the arbitration would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of any such litigation. (f) In addition to the matters described above, the Company is currently involved in other legal proceedings which, in the opinion of the Company's management, will not materially affect the Company's financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings. Page 45
IMAX CORPORATION PART II OTHER INFORMATION (cont'd) ITEM 6. EXHIBITS (A) EXHIBITS 10.1 Stock Option Plan of IMAX Corporation, dated August 12, 2004. 31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated October 28, 2004, by Bradley J. Wechsler. 31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated October 28, 2004, by Richard L. Gelfond. 31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002, dated October 28, 2004, by Francis T. Joyce. 32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated October 28, 2004, by Bradley J. Wechsler. 32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated October 28, 2004, by Richard L. Gelfond. 32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, dated October 28, 2004, by Francis T. Joyce Page 46
IMAX CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMAX CORPORATION Date: October 28, 2004 By: /s/ Francis T. Joyce ------------------------------------- Francis T. Joyce Chief Financial Officer (Principal Financial Officer) Date: October 28, 2004 By: /s/ Kathryn A. Gamble ------------------------------------- Kathryn A. Gamble Vice President, Finance, Controller (Principal Accounting Officer) Page 47
IMAX CORPORATION EXHIBIT 10.1 IMAX CORPORATION STOCK OPTION PLAN AUGUST 12, 2004
IMAX CORPORATION STOCK OPTION PLAN 1. PURPOSE The purposes of the IMAX Stock Option Plan (the "Plan") are to attract, retain and motivate directors, officers, key employees and consultants of the Company and its Subsidiaries and to provide to such persons incentives and awards for superior performance. 2. DEFINITIONS As used in this Plan the following terms have the following meanings: (a) "Agreement" has the meaning set forth in Section 6 below. (b) "Award" means an Option. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means a termination of the Participant's employment with the Company or one of its Subsidiaries (a) for "cause" as defined in an employment agreement applicable to the Participant, or (b) in the case of a Participant who does not have an employment agreement that defines "cause", because of: (i) any act or omission that constitutes a material breach by the participant of any of his obligations under his employment agreement with the Company or one of its Subsidiaries or the applicable Agreement; (ii) the continued failure or refusal of the Participant to substantially perform the duties reasonably required of him as an employee of the Company or one of its Subsidiaries; (iii) any wilful and material violation by the Participant of any law or regulation applicable to the business of the Company or one of its Subsidiaries, or the Participant's conviction of a felony, or any wilful perpetration by the Participant of a common law fraud; or (iv) any other wilful misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or any of its Subsidiaries. (e) "Change of Control" means an event or series of events where any person, or group of persons acting in concert, other than Bradley J. Wechsler and Richard L. Gelfond, acquire greater than fifty percent (50%) of the outstanding common shares of the Company whether by direct or indirect acquisition or as a result of a merger, reorganization or sale of substantially all of the assets of the Company. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means a committee of the Board comprised of at least two directors selected by the Board to administer the Plan. (h) "Common Share" means a share of common stock, no par value, of the Company. (i) "Company" means IMAX Corporation, a corporation organized under the laws of Canada.
(j) "Date of Grant" means the date specified by the Committee on which an Award shall become effective (which date shall not be earlier than the date on which the Committee takes action with respect thereto). (k) "Fair Market Value" of a Common Share on a given date means the higher of the closing price of a Common Share on such date (or the most recent trading date if such date is not a trading date) on the NASDAQ/National Market System, The Toronto Stock Exchange and such national exchange, if any, as may be designated by the Board. (l) "Option Price" means the purchase price per Common Share payable on exercise of an Option, as determined by the Committee in its sole discretion (subject to the terms of the Plan) and as set forth in the applicable Agreement. (m) "Option" means the right to purchase a Common Share upon exercise of a stock option granted pursuant to the Plan. (n) "Participant" means a person to whom an Award is to be made under the Plan and who is at the time of such Award an officer, employee or consultant of the Company, or any of its Subsidiaries, or a person who is a director of the Company or any of its Subsidiaries and who is not also an employee of the Company or any of its Subsidiaries at the Date of Grant, or a person who has agreed to commence serving in any such capacity within 90 days of the Date of Grant, or any personal holding corporation controlled by any such person, the shares of which are held directly or indirectly by such person or such person's spouse, minor children or minor grandchildren, or any registered retirement savings plan or registered educational savings plan for the sole benefit of any such person. (o) "Permanent Disability" means a physical or mental disability or infirmity of the Participant that prevents the normal performance of substantially all his duties as an employee of the Company or any Subsidiary, which disability or infirmity shall exist for any continuous period of 180 days within any twelve-month period. (p) "Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. (q) "Subsidiary" means any corporation or other entity in which the Company owns or controls, directly or indirectly, not less than 50% of the total combined voting power represented by all voting securities or other voting interests in such entity. (r) "Vested Options" means, as of any date, Options which by their terms are exercisable on such date. 3. ADMINISTRATION OF THE PLAN (a) The Plan shall be administered, and Awards shall be granted hereunder, by or under the authority of the Committee. A majority of the Committee shall constitute a quorum, and the action of the members of the Committee present at any meeting at which a quorum is present, or acts unanimously approved in writing, shall be the acts of the Committee. (b) The interpretation and construction by the Committee of any provision of the Plan or of any Agreement, and any determination by the Committee pursuant to any provision - 2 -
of this Plan or of any Agreement shall be final and conclusive. No member of the Committee shall be liable for any such action or determination made in good faith. 4. SHARES AVAILABLE UNDER PLAN The maximum number of Common Shares which may be issued upon the exercise of Options granted under the Plan is 10,210,836 Shares, subject to adjustment as provided in Paragraph 9. Such shares may be shares previously issued or treasury shares or a combination of the foregoing. Any Common Shares which are subject to Options which expire or which have been surrendered without being exercised in full shall again be available for issuance under this Plan. 5. OPTIONS The Committee may, from time to time and upon such terms and conditions as it may determine, authorize the granting to Participants of Options provided, however, that: (i) at no time shall the number of Common Shares reserved for issuance to any one Participant under the Plan or any other share compensation arrangement exceed 5% of the outstanding issue of Common Shares; (ii) at no time shall the number of Common Shares reserved for issuance pursuant to stock options granted to "insiders" (as that term is defined in Section 627 of The Toronto Stock Exchange Company Manual) exceed 10% of the outstanding issue of Common Shares; (iii) under no circumstances shall insiders be issued in excess of 10% of the outstanding issue of Common shares within any one-year period pursuant to the exercise of Options granted under the Plan or any other share compensation arrangement; and (iv) under no circumstances shall any one insider and that insider's associates be issued in excess of 5% of the outstanding issue of Common Shares within any one-year period pursuant to the exercise of Options granted under the Plan or any other share compensation arrangement. 6. AGREEMENT The terms and conditions of each Option shall be embodied in a written agreement (the "Agreement") in a form approved by the Committee which shall contain terms and conditions not inconsistent with the Plan and which shall incorporate the Plan by reference. Options granted under the Plan shall comply with the following terms and conditions: (i) Each Agreement shall specify the number of Common Shares for which Options have been granted. (ii) Each Agreement shall specify the Option Price, which shall not be less than 100% of the Fair Market Value per Common Share on the Date of Grant. (iii) Each Agreement shall specify that the Option Price shall be payable (a) in cash or by cheque acceptable to the Company, (b) by the transfer to the Company of Common Shares having an aggregate Fair Market Value per Common Share at the date of exercise equal to the aggregate Option Price or (c) by a combination of such methods of payment. (iv) Successive grants may be made to the same Participant whether or not any Options previously granted to such Participant remain unexercised. - 3 -
(v) Each Agreement shall specify the applicable vesting schedule and the effective term of the Option. In the event of a termination of a Participant's employment by reason of death or Permanent Disability, 50% of such Participant's Options shall become Vested Options if such Options were less than 50% vested at the time of such termination. (vi) Options granted under the Plan are not intended to qualify as "incentive stock options" within the meaning of Section 422A of the Code. (vii) No Option shall be exercisable more than ten years from the date of Grant. (viii) Each Option granted under the Plan shall be subject to such additional terms and conditions, not inconsistent with the Plan, which are prescribed by the Committee and set forth in the applicable Agreement. (ix) As soon as practicable following the exercise of any Options, a certificate evidencing the number of Common Shares issued in connection with such exercise shall be issued in the name of the Participant or as the Participant shall otherwise, in writing, direct. 7. TERMINATION OF EMPLOYMENT, CONSULTING AGREEMENT OR TERM OF OFFICE (a) In the event that a Participant's employment, consulting arrangement or term of office with the Company or one of its Subsidiaries terminates for any reason, unless the Committee or the Board determines otherwise, any Options which have not become Vested Options shall terminate and be cancelled without any consideration being paid therefor. (b) In the event that a Participant's employment with the Company or one of its Subsidiaries is terminated without Cause, or the Participant's employment is terminated by reason of the Participant's voluntary resignation (including by reason of retirement), death or Permanent Disability, or upon the termination of a Participants' consulting arrangement or term of office, the Participant (or the Participant's estate) shall be entitled to exercise the Participant's Options which have become Vested Options as of the date of termination for a period of 30 days, or such longer period as the Committee or the Board determines, following the date of termination. (c) In the event that a Participant's employment, consulting arrangement or term of office with the Company or one of its Subsidiaries is terminated for Cause, such Participant's Vested Options shall terminate and be cancelled without any consideration being paid therefor. 8. TRANSFERABILITY No Option shall be transferable by a Participant other than by will or the laws of descent and distribution, provided, however, that Options may be transferred if approved by the Committee or the Board and by any regulatory authority having jurisdiction or stock exchange on which the common shares subject to Options are listed. Options shall be exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. - 4 -
9. CHANGE OF CONTROL All Options granted under the Plan (or any predecessor of the Plan) shall immediately vest and become fully exercisable upon the occurrence of (a) a Change of Control; and (b) the occurrence of one or more of the following: (i) the Participant's employment or term of office with the Company, or one of its subsidiaries, is terminated without cause; (ii) the dimunition of the Participant's title and/or responsibilities; and (iii) the Participant is asked to relocate more than twenty-five (25) miles from his/her existing office. 10. ADJUSTMENTS The Committee may make or provide for such adjustments in the maximum number of Common Shares specified in Paragraph 4, in the number of Common Shares covered by outstanding Options granted hereunder, and/or in the Option Price applicable to such Options as the Committee in its sole discretion may determine is equitably required to prevent dilution or enlargement of the rights of Participants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. 11. FRACTIONAL SHARES The Company shall not be required to issue any fractional Common Shares pursuant to the Plan. The Committee may provide for the elimination of fractions or for the settlement of fractions in cash. 12. WITHHOLDING TAXES The Company and its Subsidiaries shall have the right to require any individual entitled to receive Common Shares pursuant to an Option to remit to the Company, prior to the delivery of any certificates evidencing such shares, any amount sufficient to satisfy any Canadian or United States federal, state, provincial or local tax withholding requirements. Prior to the Company's determination of such withholding liability, such individual may make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold Common Shares that would otherwise be received by such individual. Such election may be denied by the Committee in its discretion, or may be made subject to certain conditions specified by the Committee, including, without limitation, conditions intended to avoid the imposition of liability against the individual under Section 16(b) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 13. REGISTRATION RESTRICTIONS An Option shall not be exercisable unless and until (i) a registration statement under the Securities Act of 1933, as amended, has been duly filed and declared effective pertaining to the Common Shares subject to such Option, such Common Shares shall have been qualified under applicable state "blue sky" laws and the Company has been a "reporting issuer" for purposes of the Ontario Securities Act in good standing for not less than twelve months, or (ii) the Committee, in its sole discretion determines that such registration, qualification and status is not required as a result of the availability of an exemption from such registration, qualification, and status under such laws. - 5 -
14. SHAREHOLDER RIGHTS A Participant shall have no rights as a shareholder with respect to any Common Shares issuable upon exercise of an Option until a certificate or certificates evidencing such shares shall have been issued to such Participant, and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Participant shall become the holder of record thereof. 15. BREACH OF RESTRICTIVE COVENANTS If (i) a Participant is a party to an employment agreement with the Company or any of its Subsidiaries or affiliates and (ii) such Participant materially breaches any of the restrictive covenants set forth in such employment agreement (including, without limitation, any restrictive covenants relating to non-competition, non-solicitation or confidentiality), then all of such Participant's Options (whether or not Vested Options) shall terminate and be cancelled without consideration being paid therefor. 16. AMENDMENTS, ETC. (a) The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part, and the Committee may, subject to applicable legal requirements at any time and from time to time waive any provision of any Option or Agreement; provided, however, that no termination or amendment of the Plan or any waiver of any provision of any Option or Agreement may, without the consent of the Participant to whom any Award shall previously have been granted, adversely affect the rights of such Participant in such Award; provided further, however that amendments shall be subject to (x) the approval of a majority of the Common Shares entitled to vote if the Committee determines that such approval is necessary in order for the Company to rely on the exemptive relief provided under Rule 16b-3 and (y) all other approvals, whether regulatory, shareholder or otherwise, which are required by law, The Toronto Stock Exchange or any other applicable securities exchange. (b) The Plan shall not confer upon a Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate such Participant's employment or other service at any time. 17. EFFECTIVE DATE The Plan, as amended, shall be effective as of August 12, 2004. 18. GOVERNING LAW The Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the Province of Ontario and the laws of Canada applicable therein. - 6 -
IMAX CORPORATION Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002 I, Bradley J. Wechsler, Co- Chief Executive Officer of IMAX Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, IMAX Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: October 28, 2004 By: "Bradley J. Wechsler" --------------------------------- Name: Bradley J. Wechsler Title Co-Chief Executive Officer
IMAX CORPORATION Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002 I, Richard L. Gelfond, Co- Chief Executive Officer of IMAX Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, IMAX Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: October 28, 2004 By: "Richard L. Gelfond" --------------------------------- Name: Richard L. Gelfond Title Co-Chief Executive Officer
IMAX CORPORATION Exhibit 31.3 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002 I, Francis T. Joyce, Chief Financial Officer of IMAX Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, IMAX Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: October 28, 2004 By: "Francis T. Joyce" --------------------------------- Name: Francis T. Joyce Title Chief Financial Officer
IMAX CORPORATION Exhibit 32.1 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, Bradley J. Wechsler, Co-Chief Executive Officer of IMAX Corporation, a Canadian corporation (the "Company"), hereby certify, to my knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: October 28, 2004 "Bradley J. Wechsler" ------------------------------------- Bradley J. Wechsler Co-Chief Executive Officer
IMAX CORPORATION Exhibit 32.2 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, Richard L. Gelfond, Co-Chief Executive Officer of IMAX Corporation, a Canadian corporation (the "Company"), hereby certify, to my knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: October 28, 2004 "Richard L. Gelfond" ------------------------------------- Richard L. Gelfond Co-Chief Executive Officer
IMAX CORPORATION Exhibit 32.3 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, Francis T. Joyce, Chief Financial Officer of IMAX Corporation, a Canadian corporation (the "Company"), hereby certify, to my knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: October 28, 2004 "Francis T. Joyce" ------------------------------------- Francis T. Joyce Chief Financial Officer