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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
| | 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
2525 SPEAKMAN DRIVE, L5K 1B1
MISSISSAUGA, ONTARIO, CANADA (Postal Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (905) 403-6500
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the common shares of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on February 28, 2002 was $68.1 million
(19,396,174 common shares times $3.51). As of February 28, 2002, there were
32,915,858 common shares of the registrant outstanding.
DOCUMENT INCORPORATED BY REFERENCE*
Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors and the annual meeting or the stockholders of the
registrant scheduled to be held on or about June 5, 2002 (the "Proxy Statement")
are incorporated by reference in Part III of this Form 10-K.
----------
* As stated under various Items of this Report, only certain specified portions
of such document are incorporated by reference in this Report.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business................................................................................... 4
Item 2 Properties................................................................................. 11
Item 3 Legal Proceedings.......................................................................... 11
Item 4 Submission of Matters to a Vote of Security Holders........................................ 12
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters...................... 13
Item 6 Selected Financial Data.................................................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 7a Quantitative and Qualitative Disclosures about Market Risk................................. 26
Item 8 Financial Statements and Supplementary Data................................................ 27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 59
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 59
Item 11 Executive Compensation..................................................................... 62
Item 12 Security Ownership of Certain Beneficial Owners and Management............................. 63
Item 13 Certain Relationships and Related Transactions............................................. 67
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 67
Signatures............................................................................................. 70
Page 2
IMAX CORPORATION
EXCHANGE RATE DATA
Unless otherwise indicated, all dollar amounts in this document are
expressed in United States ("U.S.") dollars. The following table sets forth, for
the periods indicated, certain exchange rates based on the noon buying rate in
the City of New York for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"). Such rates quoted are the number of U.S. dollars per one Canadian dollar
and are the inverse of rates quoted by the Federal Reserve Bank of New York for
Canadian dollars per U.S. $1.00. The average exchange rate is based on the
average of the exchange rates on the last day of each month during such periods.
The Noon Buying Rate on December 31, 2001 was U.S. $0.6267.
YEARS ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
------------ ------------ ------------- ------------- ---------------
Exchange rate at end of
period.................... U.S. $0.6267 U.S. $0.6669 U.S. $0.6925 U.S. $0.6522 U.S. $0.6999
Average exchange rate
during period.............. 0.6457 0.6732 0.6730 0.6740 0.7220
High exchange rate during
period..................... 0.6697 0.6944 0.6925 0.7105 0.7471
Low exchange rate during
period..................... 0.6241 0.6410 0.6535 0.6341 0.6945
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included herein may constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, references to future capital expenditures (including the amount
and nature thereof), business strategies and measures to implement strategies,
competitive strengths, goals, expansion and growth of its business and
operations, plans and references to the future success of IMAX Corporation
together with its wholly owned subsidiaries (the "Company"). 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; 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 herein are
qualified by these cautionary statements, and actual results or developments
anticipated by the Company may not be realized, and even if substantially
realized, may not have the expected consequences to, or effects on, the Company.
The Company undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future
events or otherwise.
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IMAX(R), IMAX(R) Dome, OMNIMAX(R), IMAX(R) 3D, IMAX(R) 3D Dome, Personal
Sound Environment(R), The IMAX Experience(R), An IMAX Experience(R) and IMAX(R)
DMR(TM) are trademarks and trade names of the Company or its subsidiaries that
are registered or otherwise protected under laws of various jurisdictions.
Page 3
IMAX CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
IMAX Corporation together with its wholly owned subsidiaries (the
"Company") is one of the world's leading entertainment technology companies,
with particular emphasis on film and digital imaging technologies including
giant-screen images, three-dimensional ("3D") presentations, and
post-production. The Company designs, manufactures and leases projection and
sound systems for giant-screen, 15-perforation film frame, 70mm format
("15/70-format") theaters based on proprietary and patented technology and is a
major distributor of films for giant-screen theaters.
The Company believes the IMAX theater network is the most extensive
giant-screen theater network in the world with 227 theaters operating in 30
countries as of December 31, 2001. In addition to the existing library of
general entertainment and educational 15/70-format films, the increased number
of commercial IMAX theaters in operation has attracted more commercial films to
the medium including films produced by major Hollywood studios. In 2000, Buena
Vista Pictures Distribution, a unit of The Walt Disney Company, released
Disney's animated feature Fantasia 2000: The IMAX Experience(R) to 75 IMAX
theaters around the world. Fantasia 2000 was the first theatrical full-length
feature film to be reformatted into 15/70-format film and became the fastest
grossing large-format film in history. In January 2002, Disney released Beauty
and the Beast to 77 IMAX theaters around the world and has stated that it will
release an additional three films over the next 12 months. The Company recently
perfected a proprietary process whereby it can take a 35mm negative and convert
it into 15/70-format. The Company believes that this process which will allow
live-action 35mm films to be converted for exhibit in IMAX theaters, will have a
significant impact on the number and quality of films that are made available to
IMAX theaters. The Company believes that the commercial success of Fantasia 2000
and Beauty and the Beast coupled with its new digital re-mastering technology
has the potential to lead to additional Hollywood films being released to IMAX
theaters which, could create further demand worldwide for commercial IMAX
theaters.
The Company generally does not own IMAX theaters but leases its projection
and sound systems, and licenses the use of its trademarks. IMAX theater systems
combine advanced, high-resolution projection systems, sound systems and screens
as large as eight stories high (approximately 80 feet) that extend to the edge
of a viewer's peripheral vision to create immersive audio-visual experiences. As
a result, audiences feel as if they are a part of the on-screen action in a way
that is more intense and exciting than in traditional theaters. In addition, the
Company's IMAX 3D theater systems combine the same projection and sound systems
and up to eight story screens with 3D images that further increase the
audience's feeling of immersion in the film. The Company believes that the
network of IMAX 3D theaters is the largest out-of-home, 3D-distribution network
in the world.
The Company was formed in March 1994 as a result of an amalgamation between
WGIM Acquisition Corp. and the former IMAX Corporation ("Predecessor IMAX").
Predecessor IMAX was incorporated in 1967.
PRODUCT LINES
The Company believes it is the largest designer and supplier of specialty
projection and sound systems and a significant producer and distributor of
15/70-format films for giant-screen theaters. The Company's theater systems
include specialized projection equipment, advanced sound systems, specialty
screens, theater automation control systems and film handling equipment. The
Company derives a significant portion of its revenues from the sale and lease of
its theater systems to giant-screen theaters and related film products and
services. Segmented information is provided in note 18 to the audited financial
statements contained in Item 8.
Page 4
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS
IMAX THEATERS
The Company is the pioneer and leader in the giant-screen, large-format
film industry. The IMAX theater network has the largest installed base of
giant-screen theater systems, with systems located in 227 theaters in 30
countries as of December 31, 2001. IMAX theaters have flat or dome shaped
screens for two-dimensional ("2D") and 3D presentations which are many times
larger than conventional theaters, extending to the edge of the viewer's
peripheral vision. The theaters have a steeply inclined floor to provide all
audience members a clear view of the screen and typically seat 250 to 500
people.
The Company's projection systems utilize the largest commercially available
film format (15-perforation film frame, 70mm), which is 10 times larger than
conventional film (4-perforation film frame, 35mm) and therefore are able to
project significantly more detail on a larger screen. The Company believes its
projectors, which utilize the Company's Rolling Loop technology, are unsurpassed
in their ability to project film with maximum steadiness and clarity with
minimal film wear, and substantially enhance the quality of the projected image.
As a result, the Company's projection systems deliver a higher level of clarity,
detail and brightness compared to conventional movies and competing systems.
To compliment the film technology and viewing experience, IMAX theater
systems feature unique digital sound systems. The sound systems are among the
most advanced in the industry and help to heighten the sense of realism of a
15/70-format film. IMAX sound systems are specifically designed for IMAX
theaters and are an important competitive advantage of IMAX systems.
The following chart shows the number of the Company's theater systems by
product, installed base and backlog as of December 31, 2001:
2D 3D
-------------------------------------- --------------------------------------
INSTALLED INSTALLED
PRODUCT BASE BACKLOG PRODUCT BASE BACKLOG
------- --------- ------- ------- ---------- -------
Flat Screen.............. IMAX(R) 59 3 IMAX(R)3D 75 28
IMAX(R)3D SR 26 25
Dome Screen.............. IMAX(R) Dome 63 3 IMAX(R)3D Dome 4 1
IMAX AND IMAX DOME SYSTEMS. IMAX and IMAX Dome systems make up the largest
component of the Company's installed theater base. IMAX theaters, with a flat
screen, were introduced in 1970, while IMAX Dome theaters, previously known as
OMNIMAX(R) theaters, are designed for tilted dome screens and were introduced in
1973. There have been several significant proprietary and patented enhancements
to these systems since their introduction.
IMAX 3D AND IMAX 3D SR SYSTEMS. IMAX 3D systems make up the largest
component of the Company's backlog. IMAX 3D theaters utilize a flat screen 3D
system which produces realistic three-dimensional images on a giant IMAX screen.
The Company believes that the IMAX 3D system offers consumers one of the most
realistic 3D experiences available today. To create the 3D effect, the audience
uses either polarized or electronic glasses that separate the left-eye and
right-eye images. The IMAX 3D projectors can project both 2D and 3D films,
allowing theater owners the flexibility to exhibit either type of film. The
Company offers upgrades to existing theaters which have 2D IMAX projection
systems to IMAX 3D projection systems. Since the introduction of IMAX 3D
technology, the Company has upgraded 13 theater systems.
In 1997, the Company launched a smaller IMAX 3D system called IMAX 3D SR, a
patented theater system that combines a proprietary theater design, a more
automated projection system and specialized sound system to replicate the
experience of a larger IMAX 3D theater in a smaller space (up to 270 seats). The
IMAX 3D SR theater system is designed to be located primarily in multiplexes in
smaller cities and to operate at lower costs than the larger IMAX 3D theater
system.
IMAX 3D DOME SYSTEMS. IMAX 3D Dome theaters comprise a dome screen 3D
system that projects the film onto a tilted dome such that objects not only
appear to "come out" from the screen but also to envelop the viewer. IMAX 3D
Dome projectors, like IMAX 3D projectors, can project both 2D and 3D films.
Page 5
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
IMAX SYSTEMS (cont'd)
IMAX THEATERS (cont'd)
SALES BACKLOG. Signed contracts for theater system installations are listed
as sales backlog prior to the time of revenue recognition. Sales backlog
represents the total value of all signed system sales and lease agreements that
are expected to be recognized as revenue in the future. Sales backlog includes
initial rental fees along with the present value of contractual minimum rents
due over the lease term, but excludes maintenance revenues as well as rents in
excess of contractual minimums that might be received in the future. Sales
backlog does not include revenues from theaters in which the Company has an
equity-interest, agreements covered by letters of intent or conditional theater
commitments.
THEATER SYSTEM LEASES
The Company's system leases generally have 10 to 20-year initial terms and
are typically renewable by the customer for one or more additional 10-year
terms. As part of the lease agreement, the Company advises the customer on
theater design, custom assembles and supervises the installation of the theater
system, provides training in using the equipment to theater personnel and for a
separate fee provides ongoing maintenance to the system. Prospective theater
owners are responsible for providing the theater location, the design and
construction of the theater building, the installation of the system and any
other necessary improvements. Under the terms of the typical lease agreement,
the title to all theater system equipment (including the projection screen, the
projector and the sound system) remains with the Company. The Company has the
right to remove the equipment for non-payment or other defaults by the customer.
The contracts are generally not cancelable by the customer unless the Company
fails to perform its obligations. The contracts are generally denominated in
U.S. dollars, except in Canada and Japan, where contracts are generally
denominated in Canadian dollars and Japanese Yen, respectively.
The typical lease agreement provides for three major sources of revenue:
(i) initial rental fees, (ii) ongoing additional rental payments and (iii)
ongoing maintenance fees. Rental payments and maintenance fees are generally
received over the life of the contract and are usually adjusted annually based
on changes in the local consumer price index. The terms of each lease agreement
vary according to the system technology provided and the geographic location of
the customer.
SOUND SYSTEMS
Sonics Associates, Inc. ("Sonics"), the Company's 100% owned subsidiary, is
a world leader in the development and manufacture of sound systems for all
applications including traditional movie theaters, auditoriums and specialized
uses including the development of 3D sound capabilities, and manufactures the
sound systems for IMAX theaters. Prior to October 1, 1999, Sonics was 51% owned
by the Company and 49% owned by four executive officers of Sonics. On October 1,
1999, the Company purchased the remaining 49% of Sonics that it did not own (see
note 23 to the audited financial statements contained in Item 8). In February
2001, the Company decided to relocate the manufacture of sound systems from
Birmingham, Alabama to the Company's headquarters near Toronto, Canada.
Page 6
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
FILMS
FILM PRODUCTION, DISTRIBUTION AND POST-PRODUCTION
The Company produces films financed either internally or partially or fully
financed by third parties. With respect to films financed by third parties, the
Company generally receives a film production fee in exchange for producing the
films and is appointed the exclusive distributor of the film. When the Company
produces films, it typically hires production talent and specialists on a
project-by-project basis, similar to a movie studio, allowing the Company to
retain creative and quality control without the burden of significant ongoing
overhead expenses. Typically, the ownership rights to films produced for third
parties are held by the film sponsors, the film investors and the Company.
The Company is a significant distributor of 15/70-format films. The Company
generally distributes films which it produces and has acquired distribution
rights to films produced by independent producers. The Company has distribution
rights to more 15/70-format films than any competing distributor. As
distributor, the Company generally receives a percentage of the theater box
office receipts.
The library of 15/70-format films includes general entertainment and
educational films on subjects such as space, wildlife, music, history and
natural wonders, and consisted of 179 films at the end of 2001, of which the
Company had distribution rights to 54 such films. In recent years, several
15/70-format commercial films have been successfully released, including T-REX:
Back to the Cretaceous, which was released by the Company in 1998 and has
grossed over $63.7 million to date, Everest, which was released by MacGillivray
Freeman Films in 1998 and has grossed over $114.0 million to date and Fantasia
2000: The IMAX Experience(R) which was released by the Company and Buena Vista
Pictures Distribution, a unit of The Walt Disney Company in 2000. This was the
first theatrical full-length feature film to be reformatted into 15/70-format
film and it became the fastest grossing large-format film in history and has
grossed over $91.5 million to date. 15/70-format films have significantly longer
exhibition periods than conventional 35mm films and many of the films in the
library have remained popular for significantly longer periods including the
films To Fly! (1976), Grand Canyon - The Hidden Secrets (1984) and The Dream Is
Alive (1985), which were all exhibited during 2001. In 2001, there were 12 new
films released in the 15/70-format.
David Keighley Productions 70MM Inc., a wholly-owned subsidiary of the
Company, provides film post-production and quality control services for
15/70-format films (whether produced internally or externally), and digital
post-production services.
DIGITAL RE-MASTERING ("IMAX(R) DMR(TM)")
The Company has developed a proprietary, patent-pending technology to
digitally re-master 35mm live-action films into 15/70-format film for exhibition
in IMAX theaters. This system, known as IMAX(R) DMR(TM), digitally enhances
image resolution quality of 35mm motion picture films for projection on screens
up to eight stories high and up to 120 feet wide, while maintaining the visual
clarity and sound quality for which IMAX films are known. The Company believes
that this technology could open the IMAX theater network up to releases of
Hollywood films including both library titles and simultaneous new releases. The
Company believes that the development of this new technology is key to helping
it execute on its strategy of becoming a new release window for Hollywood films.
Page 7
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
PRODUCT LINES (cont'd)
OTHER
THEATER OPERATIONS AND INVESTMENTS
The Company has six owned and operated theaters and two theaters which the
Company shares in profits and losses.
In the case of theaters which the Company shares in profits and losses, the
Company generally contributes the projection and sound system to the theater in
exchange for a percentage of the theater revenues and/or profits and losses. The
Company's partner is generally responsible for constructing and outfitting the
theater. The Company may also provide management services in return for a fee or
a percentage of theater revenues as part of the equity interest.
CAMERAS. The Company rents 2D and 3D 15/70-format cameras and provides
technical and post-production services to third-party producers for a fee. The
Company maintains 13 cameras and other film equipment to support third-party
producers and also offers production advice and technical assistance to
filmmakers.
The Company has developed state-of-the-art patented dual and single
filmstrip 3D cameras which are among the most advanced motion pictures cameras
in the world and are the only 3D cameras of their kind. The IMAX 3D camera
simultaneously shoots left-eye and right-eye images and its compact size allows
filmmakers access to a variety of locations, such as underwater or aboard
aircrafts. The Company has three dual filmstrip cameras available for rent.
MARKETING AND CUSTOMERS
The Company markets its theater systems through a direct sales force and
marketing staff located in offices in Canada, the United States, Europe,
Singapore and Japan. In addition, the Company has agreements with consultants,
business brokers and real estate professionals to locate potential customers and
theater sites for the Company on a commission basis.
The Company has experienced an increase in the number of commercial theater
signings and international signings since 1995. The commercial theater segment
of the Company's theater network is now its largest segment with a total of 142
theaters opened or in backlog. At December 31, 2001, 43.9% of all opened and in
backlog theaters are for locations outside of North America. The Company's
institutional customers include science and natural history museums, zoos,
aquaria and other educational and cultural centers. The Company also leases its
systems to theme parks, tourist destination sites, fairs and expositions.
The Company's 2001 financial results were adversely affected by the
significant number of bankruptcies in the North American exhibition industry.
The Company believes that the majority of this restructuring process is now
complete and expects the North American commercial exhibition market will again
be a significant source of clients for the Company.
INDUSTRY AND COMPETITION
The Company competes with a number of manufacturers of large-format film
projection systems; however, the IMAX theater network and the number of
15/70-format films to which the Company has distribution rights are
substantially larger than those of its 15/70-format competitors. The Company's
customers generally consider a number of criteria when selecting a large-format
theater including quality, reputation, brand name recognition, type of system,
features, price and service. The Company believes that its competitive strengths
include the value of the IMAX(R) brand name, the quality and historic up-time of
IMAX theater systems, the number and quality of 15/70-format films that it
distributes, the quality of the sound system included with the IMAX theater and
the level of the Company's service and maintenance efforts.
Page 8
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
INDUSTRY AND COMPETITION (cont'd)
The commercial success of the Company's products is ultimately dependent
upon consumer preferences. The out-of-home entertainment industry in general
continues to go through significant changes, primarily due to technological
developments and changing consumer tastes. Numerous companies are developing new
entertainment products for the out-of-home entertainment industry in response to
these changes, and some of these new products are or may be directly competitive
with the Company's products. Competitors may design products which are more
attractive to consumers and/or more cost effective than the Company's products
and that may make the Company's products less competitive. The Company's
existing products may not continue to compete effectively and be attractive to
consumers and products under development may never be attractive to consumers or
be competitive. The Company may also face competition from companies in the
entertainment industry with substantially greater financial and other resources
than the Company.
RESEARCH AND DEVELOPMENT
The Company believes that it is one of the world's leading entertainment
technology companies with significant in-house proprietary expertise in
projection system, camera and sound system design, engineering and technology.
The Company believes that the motion picture industry will be affected by the
development of digital technologies, particularly in the areas of content
creation (image capture), post-production (editing and special effects), digital
re-mastering (such as IMAX(R) DMR(TM)), distribution and display. The Company
has made significant investments in digital technologies, including the
development of a proprietary, patent-pending technology to digitally enhance
image resolution and quality of 35mm motion picture films and has a number of
patents pending and intellectual property rights in these areas.
The IMAX(R) DMR(TM) technology converts a 35mm frame into digital form at
very high resolution. The proprietary system recreates a pristine form of the
original photography. A proprietary computer process makes the images sharper
than the original and the completed re-mastered film, now 10 times larger than
the original, is transferred onto the world's largest film format, 15/70-format.
In addition, each film's original soundtrack is also recreated adding another
sonic dimension to upgrade the original movie soundtrack to Company standards.
In addition, the Company has substantial proprietary knowledge in
15/70-format film production.
Several of the underlying technologies and resulting products and systems
of the Company are covered by patents or patent applications. Other underlying
technologies are available to competitors, in part because of the expiration of
certain patents owned by the Company. The Company, however, has successfully
obtained patent protection covering several of its significant improvements made
to such technologies. The Company plans to continue to fund research and
development activity in areas considered important to the Company's continued
commercial success.
As of December 31, 2001, 25 of the Company's employees were connected with
research and development projects.
MANUFACTURING AND SERVICE
IMAX MANUFACTURING
The Company assembles its giant-screen projection systems at its Corporate
Headquarters and Technology Center in Mississauga, Canada (near Toronto). A
majority of the components for the Company's systems are purchased from outside
vendors. The Company develops and designs all the key elements for the
proprietary technology involved in its projector and camera systems. Fabrication
of these components is then subcontracted to a group of carefully pre-qualified
suppliers. Manufacture and supply contracts are signed for the delivery of
components on an order-by-order basis. The Company has developed long-term
relationships with a number of significant suppliers, and the Company believes
its existing suppliers will continue to supply quality products in quantities
sufficient to satisfy its needs. The Company inspects all components and
sub-assemblies, completes the final assembly and then subjects the systems to
comprehensive testing prior to shipment. Since 1980, IMAX theater systems have
had an average in-service time of over 99.9%.
Page 9
IMAX CORPORATION
ITEM 1. BUSINESS (cont'd)
MANUFACTURING AND SERVICE (cont'd)
SONICS MANUFACTURING
Sonics develops, designs and assembles the key elements of its theater
sound systems. The standard IMAX theater sound system comprises components from
a variety of sources with approximately 50% of the materials cost of each system
attributable to proprietary components provided under Original Equipment
Manufacturers agreements with outside vendors. These proprietary components
include custom loudspeaker enclosures and horns and specialized amplifiers,
signal processing and control equipment. In February 2001, the Company decided
to relocate the manufacture of sound systems from Birmingham, Alabama to the
Company's headquarters near Toronto, Canada.
SERVICE AND MAINTENANCE
The Company provides key services and support functions for the IMAX
theater network and for filmmakers. To support the IMAX theater network, the
Company has personnel stationed in major markets who provide periodic and
emergency service and maintenance on existing systems throughout the world. The
Company's personnel typically visit each theater every three months to service
the projection and sound systems. The Company also provides theater design
expertise for both the visual and audio aspects of the theater, as well as
system installation and equipment training.
PATENTS AND TRADEMARKS
The Company's inventions cover various aspects of its proprietary
technology and many of such inventions are protected by Letters of Patent or
applications filed throughout the world, most significantly in the United
States, Canada, Japan, Korea, France, Germany and the United Kingdom. The
subject matter covered by these patents and applications encompasses electronic
circuitry and mechanisms employed in film projectors and projection systems
(including 3D projection systems) and a method for synchronizing digital data
systems. The Company has been diligent in the protection of its proprietary
interests.
The Company currently holds 10 patents, has 13 patents pending in the
United States and has corresponding patents or filed applications in many
countries throughout the world. While the Company considers its patents to be
important to the overall conduct of its business, it does not consider any
particular patent essential to its operations. Certain of the Company's patents
in the United States, Canada and Japan for improvements to the IMAX projector,
IMAX 3D Dome and sound systems expire between 2008 and 2018.
The Company owns or otherwise has rights to trademarks and trade names used
in conjunction with the sale of its products, systems and services. The
following trademarks are considered significant in terms of the current and
contemplated operations of the Company: IMAX(R), The IMAX Experience(R), An IMAX
Experience(R), IMAX(R) DMR(TM), IMAX(R) 3D, IMAX(R) Dome, IMAX(R) 3D Dome,
Personal Sound Environment(R) and OMNIMAX(R). These trademarks are widely
protected by registration or common law throughout the world. The Company also
owns the service mark IMAX THEATRE(TM). The Company vigorously enforces its
trademarks and trade names against whomever it believes is infringing upon its
rights.
EMPLOYEES
As of December 31, 2001, the Company had 345 employees not including hourly
employees at Company owned and operated theaters.
Page 10
IMAX CORPORATION
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Mississauga,
Ontario, Canada and New York, New York. The Company's principal facilities are
as follows:
OPERATION OWN/LEASE EXPIRATION
----------- --------- ----------
Mississauga, Ontario(1)..... Headquarters, Administrative, Assembly and Own N/A
Research and Development
New York, New York.......... Executive Lease 2004
Birmingham, Alabama ........ Sound Systems Design and Assembly Own N/A
Kempten, Germany(2)......... Sales and Marketing Lease 2002
Santa Monica, California.... Sales, Marketing, Film Production and Post- Lease 2012
Production
Singapore................... Sales and Marketing Lease 2002
Tokyo, Japan................ Sales, Marketing, Maintenance and Theater Design Lease 2002
(1) This facility is subject to a collateral secured charge in favor of
Technicolor Inc. in connection with an upfront discount payment received in
February 2002 (see note 22 to the audited financial statements contained in
Item 8).
(2) This facility was closed as a business office in March 2002.
ITEM 3. LEGAL PROCEEDINGS
In November 2001, the Company filed a complaint with the High Court of
Munich (the "Court") against Big Screen, a German large-screen cinema owner in
Berlin (the "Big Screen") demanding payment of outstanding Additional Rent 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. The Big Screen is also a member of Euromax, an
association of European large-screen cinema owners that filed a complaint in
2000 with the European Commission based on European Community ("EC") competition
rules, addressing broadly similar allegations against the Company. In mid-2001,
the European Commission sent a preliminary letter to Euromax proposing to reject
the complaint based on EC competition rules. The European Commission has not yet
taken a final decision. Although the Court has the power to reject or reduce the
Company's demands for payment, and the European Commission has the power to
impose fines and order cessation of any infringements of EC competition rules,
the Company believes that on the basis of currently available information,
including the Commission's rejection letter and an initial review of the facts
and law, that such results are not likely. The Company believes that all of the
allegations in the complaint as well as the allegations in Big Screen's
individual defense are meritless and will accordingly continue to defend these
matters vigorously. The Company believes that the amount of the loss, if any,
suffered in connection with this dispute would not have a material impact on the
financial position or results of operations of the Company, although no
assurance can be given with respect to the ultimate outcome of any such
litigation.
In June 2000, a complaint was filed against the Company and a third party
by Mandalay Resort Group f/k/a Circus Circus Enterprises, Inc., alleging breach
of contract and express warranty, fraud and misrepresentation in connection with
the installation of certain motion simulation bases in Nevada. The case is being
heard in the U.S. District Court for the District of Nevada. The complaint
alleges damages in excess of $4.1 million. The Company believes that the
allegations made against it in the complaint are meritless and will accordingly
defend the matter vigorously. The Company further believes that the amount of
loss, if any, suffered in connection with this lawsuit would not have a material
impact on the financial position or results of operations of the Company,
although no assurance can be given with respect to the ultimate outcome of any
such litigation.
In December 2000, the Company filed a complaint against George Krikorian
Premiere Theaters LLC and certain other related parties (collectively
"Krikorian") in the U.S. District of California, alleging breach of contract and
fraud resulting in damages to the Company in excess of $6.0 million. In February
2001, Krikorian filed counterclaims against the Company alleging, among other
things, fraudulent inducement and negligent misrepresentation, which
counterclaims were subsequently dismissed and then amended. Further
counterclaims were filed in May 2001. The Company believes that the allegations
made against it in the counterclaims are meritless and will defend against them
vigorously. The Company believes that the amount of loss, if any, suffered in
connection with any such claims 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
ITEM 3. LEGAL PROCEEDINGS (cont'd)
In March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking
rescission in respect of the system lease agreements between the Company and
Muvico. The Company filed counterclaims against Muvico for breach of contract,
unjust enrichment and theft of trade secrets, and brought claims against Muvico
and MegaSystems, Inc. ("MegaSystems"), a large-format theater system
manufacturer, for tortious interference, unfair competition and/or deceptive
trade practices, violations of the U.S. Lanham Act, and to enjoin Muvico and
MegaSystems from using the Company's confidential and proprietary information.
The case is being heard in the U.S. District Court, Southern District of
Florida, Miami Division. The Company believes that the allegations made by
Muvico in its complaint are entirely without merit and will accordingly defend
the claims vigorously. The Company further believes that the amount of loss, if
any, suffered in connection with this lawsuit would not have a material impact
on the financial position or results of operation of the Company, although no
assurance can be given with respect to the ultimate outcome of any such
litigation.
In August 2000, Edwards Theaters Circuit, Inc. and related companies
("Edwards") filed for protection under Chapter 11 of the United States
bankruptcy code in the U.S. Bankruptcy Court for the Central District of
California, Santa Ana Division. Pursuant to a stipulation reached among Edwards
and the Company and approved by the court, Edwards' leases of Company theater
system equipment were deemed rejected as of August 1, 2001. On August 2, 2001,
the Company filed a proof of claim in the amount of $28.9 million for amounts
due and owing to the Company at the time of the commencement of the bankruptcy
and for damages arising from Edwards' rejection of the leases pursuant to
section 365 of the Bankruptcy Code. In addition, on August 1, 2001, the Company
brought an adversary action in the bankruptcy court against Edwards for
violations of the Lanham Act for unfair competition and false advertising,
trademark dilutions under federal and state law, common law trademark
infringement and unfair competition, unfair business practices under state law
and misappropriation of trade secrets. Edwards has objected to the Company's
claim and moved to disallow it and, on September 4, 2001, Edwards answered the
Company's complaint and asserted counterclaims against the Company, alleging
non-compliance with the California Franchise Investment Law and negligent
misrepresentation. By stipulation of the Company and Edwards, the motion to
disallow the Company's claim, and the adversary action filed by the Company
including Edwards' counterclaims have been consolidated. In March 2002, Edwards
amended its counterclaim to add additional counts, including fraudulent
concealment and intentional misrepresentation. The Company intends to move for
summary judgement on all claims in the action immediately upon the conclusion of
discovery in May 2002. The Company believes that the allegations made by Edwards
in its objection to the Company's claim and Edwards' counterclaims are entirely
without merit and the Company has and will accordingly defend the matter
vigorously. The Company believes that the amount of loss, if any, suffered in
connection with such counterclaims would not have a material impact on the
financial position or results of operations of the Company, although no
assurance can be given with respect to the ultimate outcome of any such
litigation.
In addition to the litigation described above, the Company is currently
involved in other litigation which, in the opinion of the Company's management,
will not materially affect the Company's financial position or future operating
results, although no assurance can be given with respect to the ultimate outcome
of any such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the quarter ended December 31, 2001.
Page 12
IMAX CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares are listed for trading under the trading symbol
"IMAX" on the Nasdaq National Market System ("Nasdaq"). The common shares are
also listed on The Toronto Stock Exchange ("TSE") under the trading symbol
"IMX". The following table sets forth the range of high and low sales prices per
share for the common shares on Nasdaq and the TSE.
U.S. DOLLARS
-------------------
HIGH LOW
------ -----
NASDAQ
Year ended December 31, 2001
Fourth quarter......................................... 2.650 0.760
Third quarter.......................................... 2.470 0.550
Second quarter......................................... 3.219 1.450
First quarter.......................................... 7.188 2.750
Year ended December 31, 2000
Fourth quarter......................................... 16.938 2.500
Third quarter.......................................... 29.438 13.188
Second quarter......................................... 24.125 18.000
First quarter.......................................... 28.500 19.500
CANADIAN DOLLARS
-------------------
HIGH LOW
------ -----
TSE
Year ended December 31, 2001
Fourth quarter......................................... 4.100 1.150
Third quarter.......................................... 3.700 0.800
Second quarter......................................... 5.100 2.250
First quarter.......................................... 10.900 4.200
Year ended December 31, 2000
Fourth quarter......................................... 25.650 3.800
Third quarter.......................................... 42.500 20.000
Second quarter......................................... 35.000 27.550
First quarter.......................................... 40.500 29.000
As of December 31, 2001 the Company had 271 registered holders of record on
the Company's common shares.
The Company has not paid within the last three fiscal years, and has no
current plans to pay, dividends on its common shares. The payment of dividends
by the Company is subject to certain restrictions under the terms of the
Company's indebtedness (see note 10 to the audited financial statements in Item
8 and the discussion of liquidity and capital resources in Item 7). The payment
of any future dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in financing agreements, business
conditions and other factors deemed relevant by the Board of Directors.
CERTAIN INCOME TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax consequences of the ownership and disposition of the common shares by
a U.S. Holder. A "U.S. Holder" generally means a holder of common shares that is
an individual resident of the United States or a United States corporation. This
discussion does not discuss all aspects of U.S. federal income taxation that may
be relevant to investors subject to special treatment under U.S. federal income
tax law (including, for example, owners of 10.0% or more of the voting shares of
the Company).
Page 13
IMAX CORPORATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(cont'd)
CERTAIN INCOME TAX CONSIDERATIONS (cont'd)
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS (cont'd)
DISTRIBUTIONS ON COMMON SHARES
In general, distributions (without reduction for Canadian withholding
taxes) paid by the Company with respect to the common shares will be taxed to a
U.S. Holder as ordinary income to the extent that such distributions do not
exceed the current and accumulated earnings and profits of the Company (as
determined for U.S. federal income tax purposes). The amount of a distribution
that exceeds the earnings and profits of the Company will be treated first as a
non-taxable return of capital to the extent of the U.S. Holder's tax basis in
the common shares and thereafter as taxable capital gain. Corporate holders
generally will not be allowed a deduction for dividends received in respect of
distributions on common shares. Subject to the limitations set forth in the U.S.
Internal Revenue Code, as modified by the United States-Canada income tax
treaty, U.S. Holders may elect to claim a foreign tax credit against their U.S.
federal income tax liability for Canadian income tax withheld from dividends.
DISPOSITION OF COMMON SHARES
Upon the sale or other disposition of common shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the sale and such holder's tax basis in the common
shares. Gain or loss upon the disposition of the common shares will be long-term
if, at the time of the disposition, the common shares have been held for more
than one year. The deduction of capital losses is subject to limitations for
U.S. federal income tax purposes.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
This summary is of a general nature only and it is not intended to be, nor
should it be construed to be, legal or tax advice to any holder of the common
shares and no representation with respect to Canadian federal income tax
consequences to any holder of common shares is made herein. Accordingly,
prospective purchasers and holders of the common shares should consult their own
tax advisers with respect to their individual circumstances.
DIVIDENDS ON COMMON SHARES
Canadian withholding tax at a rate of 25.0% (subject to reduction under the
provisions of any relevant tax treaty) will be payable on dividends paid or
credited to a holder of common shares. Under the Canada-U.S. income tax treaty,
the withholding tax rate is generally reduced to 15.0% for a holder entitled to
the benefits of the treaty (or 5.0% if the holder is a corporation that owns at
least 10.0% of the common shares).
CAPITAL GAINS AND LOSSES
Subject to the provisions of a relevant tax treaty, capital gains realized
by a holder on the disposition or deemed disposition of common shares held as
capital property will not be subject to Canadian tax unless the common shares
are taxable Canadian property (as defined in the Income Tax Act (Canada)), in
which case the capital gains will be subject to Canadian tax at rates which will
approximate those payable by a Canadian resident. Common shares will not be
taxable Canadian property to a holder provided that, at the time of the
disposition or deemed disposition, the common shares are listed on a prescribed
stock exchange (which currently includes The Toronto Stock Exchange) unless such
holder, persons with whom such holder did not deal at arm's length or such
holder together with all such persons, owned 25.0% or more of the issued shares
of any class or series of shares of the Company at any time within the 60 month
period immediately preceding such time.
Under the Canada-United States income tax treaty, a holder who is a
resident of the United States for purposes of such treaty and to whom the common
shares are taxable Canadian property will not be subject to Canadian tax on the
disposition or deemed disposition of the common shares unless at the time of
disposition or deemed disposition, the value of the common shares is derived
principally from real property situated in Canada.
Page 14
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
(In thousands of U.S. dollars, except per share amounts)
The selected financial data set forth below is derived from the audited
consolidated financial statements of the Company. The financial statements have
been prepared in accordance with United States Generally Accepted Accounting
Principles. All financial information referred to herein is expressed in U.S.
dollars unless otherwise noted.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
REVENUE
IMAX systems................................................ $ 76,582 $ 113,226 $ 126,826 $ 140,874 $ 97,539
Films....................................................... 29,923 41,711 47,227 30,824 39,683
Other....................................................... 12,154 18,179 18,783 18,657 21,259
---------- ---------- ---------- ---------- ----------
Total revenue............................................... 118,659 173,116 192,836 190,355 158,481
COSTS OF GOODS AND SERVICES(1)................................. 97,391 112,655 97,973 111,784 73,806
---------- ---------- ---------- ---------- ----------
GROSS MARGIN................................................... 21,268 60,461 94,863 78,571 84,675
Selling, general and administrative expenses(2)................ 48,962 53,384 34,450 38,777 32,115
Research and development....................................... 3,385 6,497 3,136 2,745 2,129
Amortization of intangibles(3)................................. 3,005 2,948 2,159 5,948 2,701
Loss (income) from equity-accounted investees(4)............... (73) 4,811 683 6,763 22
Restructuring costs and asset impairments(5)................... 59,868 11,152 - - -
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS................................ (93,879) (18,331) 54,435 24,338 47,708
Interest income................................................ 847 3,285 9,977 5,320 5,604
Interest expense............................................... (22,020) (21,961) (21,860) (14,646) (13,402)
Impairment of long-term investments(6)......................... (5,584) (4,133) - - -
Foreign exchange gain (loss)................................... (1,357) (1,781) 977 588 (623)
---------- ---------- ---------- --------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST....................................... (121,993) (42,921) 43,529 15,600 39,287
Recovery of (provision for) income taxes(7).................... (11,005) 13,139 (16,642) (9,810) (17,265)
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST.................................................... (132,998) (29,782) 26,887 5,790 22,022
Minority interest.............................................. - - (1,207) (1,895) (1,357)
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS................. (132,998) (29,782) 25,680 3,895 20,665
Net loss from discontinued operations.......................... (50,850) (2,055) (447) - -
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES AND EXTRAORDINARY ITEMS............... (183,848) (31,837) 25,233 3,895 20,665
Cumulative effect of changes in accounting principles,
net of income tax benefit of $37,286(8).................... - (61,110) - - -
Extraordinary loss on early retirement of debt, net of income
tax benefit of $1,588(9).................................... - - - (2,095) -
Extraordinary gain on repurchase of convertible subordinated
notes, net of income tax expense of $16,843(10)............. 38,734 - - - -
---------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS)............................................ $ (145,114) $ (92,947) $ 25,233 $ 1,800 $ 20,665
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations.............. $ (4.30) $ (1.00) $ 0.86 $ 0.10 $ 0.71
Net loss from discontinued operations....................... $ (1.64) $ (0.07) $ (0.01) $ - $ -
----------- ---------- ----------- ----------- ----------
Net earnings (loss) before cumulative effect of changes in
accounting principles and extraordinary items.............. $ (5.94) $ (1.07) $ 0.85 $ 0.10 $ 0.71
Cumulative effect of changes in accounting principles....... $ - $ (2.04) $ - $ - $ -
Extraordinary items......................................... $ 1.25 $ - $ - $ (0.07) $ -
----------- ---------- ---------- ----------- ----------
Net earnings (loss)......................................... $ (4.69) $ (3.11) $ 0.85 $ 0.03 $ 0.71
=========== ========== =========== =========== ===========
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations.............. $ (4.30) $ (1.00) $ 0.84 $ 0.09 $ 0.68
Net loss from discontinued operations....................... $ (1.64) $ (0.07) $ (0.01) $ - $ -
----------- ---------- ----------- ----------- ----------
Net earnings (loss) before cumulative effect of changes in
accounting principles and extraordinary items.............. $ (5.94) $ (1.07) $ 0.83 $ 0.09 $ 0.68
Cumulative effect of changes in accounting principles....... $ - $ (2.04) $ - $ - $ -
Extraordinary items......................................... $ 1.25 $ - $ - $ (0.06) $ -
----------- ---------- ---------- ----------- ----------
Net earnings (loss)......................................... $ (4.69) $ (3.11) $ 0.83 $ 0.03 $ 0.68
=========== ========== =========== =========== ===========
Page 15
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(1) The year ended December 31, 2001 costs of goods and services includes a
$4.1 million and a $16.5 million charge relating to a reduced realizable
value of the Company's inventories and reduced fair values of the
Company's film assets, respectively. The year ended December 31, 2000
included a $8.6 million charge which relates to the write-down of certain
films in distribution. The year ended December 31, 1998 included a $7.9
million charge related to rationalization of the Company's motion
simulation division and $19.1 million related to the write-down of the
value of some of the Company's films.
(2) The year ended December 31, 2001 selling, general and administrative
expenses includes a $2.6 million non-cash charge for incurred compensation
resulting from a stock grant issuance and $4.5 million relating to the
Company's accounts receivable, as collectibility on certain accounts was
considered uncertain. The year ended December 31, 2000 included an $13.1
million charge for estimated uncollectible accounts receivable.
(3) Amortization of intangibles in 1998 included a $3.3 million charge related
to the write-off of goodwill associated with the Ridefilm business.
(4) In 2000, loss (income) from equity-accounted investees included a $4.0
million provision related to the guarantee of a term loan undertaken by
the Forum Ride Associates joint venture. In 1998, it included the
Company's 50% share of the loss of Forum Ride Associates and a provision
against the remaining carrying value of the Company's equity investment in
Forum Ride Associates totaling $6.1 million and a $0.5 million provision
against an equity investment in a motion simulation ride.
(5) In 2001, restructuring costs and asset impairments includes $16.3 million
related to efforts to stabilize and rationalize the business by reducing
its overall corporate workforce and consolidation of its operations, which
included relocating its sound-system facility to near Toronto, Canada. In
the assessment of the assets, the Company recorded charges of $13.6
million relating to net investment in leases, $26.7 million of fixed
assets, and $3.3 million of other assets. In 2000, asset impairments
included charges of $11.2 million relating to fixed assets.
(6) Impairment of long-term investments represents a charge of $5.6 million
and $4.1 million relating to the impairment of certain of the Company's
long-term investments, for the years ended December 31, 2001 and 2000,
respectively.
(7) In 2001, deferred income tax expense includes a $41.2 million increase in
the valuation allowance to reflect uncertainty associated with realization
of the Company's deferred income tax asset.
(8) The year ended December 31, 2000, the Company recognized an after-tax
charge of $54.5 million in accordance with the interpretive guidance of
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). In fiscal 2000, the Company also adopted AICPA
Statement of Position 00-2, "Accounting by Producers or Distributors of
Film" (SOP 00-2") and recorded an after-tax charge of $6.6 million to
reflect the adoption of this new principle.
(9) In 1998, all of the 10% Senior Notes due 2001 were redeemed. The excess of
the redemption price over the principal amount of $2.8 million and the
write-off of the unamortized deferred financing costs of $0.9 million
resulted in an extraordinary pre-tax loss of $3.7 million.
(10) During 2001, the Company and a wholly owned subsidiary of the Company
purchased and cancelled an aggregate of $70.4 million of the Company's
convertible subordinated notes for $13.7 million, represented by $12.5
million in cash by the subsidiary and $1.2 million in common shares by the
Company.
AS AT DECEMBER 31,
------------------------------------------------------------------
BALANCE SHEETS DATA: 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ---------
Cash, cash equivalents and investments in marketable
debt securities...................................... $ 26,388 $ 34,310 $121,502 $202,941 $ 90,530
Total assets(1)........................................ 261,512 492,100 538,237 490,091 344,359
Total long-term indebtedness........................... 229,643 300,000 300,000 300,000 165,000
Total shareholders' equity (deficit)................... (118,448) 22,263 111,065 84,446 81,117
(1) includes the assets of discontinued operations.
Page 16
IMAX CORPORATION
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
PRO FORMA AMOUNTS IN ACCORDANCE WITH SAB 101:
1999
--------
Pro forma amounts for the year ended December 31, 1999 as if SAB 101 had been applied during all years
presented:
Revenue.................................................................................................... $166,617
Net earnings .............................................................................................. $ 7,655
Basic earnings per share................................................................................ $ 0.26
Diluted earnings per share.............................................................................. $ 0.25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is one of the world's leading entertainment technology
companies and is known for presenting the world's best cinematic presentations
together with IMAX and IMAX 3D. The IMAX(R) brand is recognized throughout the
world for extraordinary and immersive family experiences. As of December 2001,
there were 227 theaters operating in 30 countries. It is estimated that more
than 700 million people have seen an IMAX presentation since the medium
premiered in 1970.
The Company derives revenue principally from long-term theater system lease
agreements, maintenance agreements, the distribution of films and film
production agreements. The Company also derives revenue from the operation of
theaters in which the Company owns, camera rentals and post-production services.
THEATER SYSTEMS
The Company generally provides its theater systems to customers on a
long-term lease basis with initial lease terms of typically 10 to 20 years.
Lease agreements typically provide for three major sources of revenue: (i)
initial rental fees; (ii) ongoing rental payments which include annual
contractual minimum payments; and (iii) maintenance fees. The initial rental
fees vary depending on the type of system and location and generally are paid to
the Company in installments commencing upon the signing of the agreement.
Ongoing rental payments are paid monthly over the term of the contract,
commencing after system installation and are generally equal to the greater of a
fixed minimum amount per annum and a percentage of box office receipts. An
annual maintenance fee is generally payable commencing in the second year of
theater operations. Both minimum rental payments and maintenance fees are
typically indexed to the consumer price index.
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a result
of meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13 "Accounting for Leases". All other leases are treated as
operating leases. Revenue from sales-type leases is recorded at the time the
installation process is complete; persuasive evidence of an agreement exists;
the price is fixed or determinable and collection is reasonably assured. Upon
revenue recognition, the initial rental fees due under the contract, along with
the present value of minimum ongoing rental payments are recorded as revenues
and the related projector costs including installation expenses are recorded in
cost of goods and services. In accordance with the interpretive guidance of SAB
101 (see note 24 of the audited financial statements in Item 8), effective
January 1, 2000, the Company recognizes revenue on theater systems, sales-type
leases and sales, at the time that installation is complete. Prior to January 1,
2000, the Company recognized revenue from sales-type leases and sales of theater
systems at the time of delivery. The Company in certain circumstances sells
theater systems.
Cash received in advance of installation is recorded as deferred revenue.
The associated costs of manufacturing the theater system are recorded as
inventory. At the time of installation, the deferred revenue is recognized in
income, and the inventory costs are fully expensed.
The 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 depending on the timing of installation.
The Company is dependent in part on the viability of the North American
commercial exhibitor market for collections under long-term leases and for
future system contracts. In the last few years, many of the North American
commercial exhibitor chains faced financial difficulties due to over-expansion,
which in some cases led to bankruptcy proceedings and/or consolidations.
Recently, many of these exhibitors have emerged from those proceedings with new
capital. Some have raised capital in the public markets, while others have plans
to do so. While the Company views these recent developments in the North
American commercial exhibitor market as positive, there is no guarantee that
they will continue.
Page 17
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
FILM PRODUCTION AND DISTRIBUTION
The Company adopted SOP 00-2, (see note 24 of the audited financial
statements in Item 8) effective January 1, 2000. Prior to January 1, 2000,
revenues associated with the licensing of exhibition rights to motion pictures
distributed by the Company were recognized in accordance with FASB Statement of
Financial Accounting Standard No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films". In accordance with SOP 00-2, the Company
recognizes revenue from such licensing arrangements when the film is complete
and has been delivered, the license period has begun, the fee is fixed or
determinable and collection is reasonably assured. Where the license fees are
based on a share of the customer's revenue, and all other revenue recognition
criteria are met, the Company recognizes revenue as the customer exhibits the
film. Costs of producing film and acquiring film distribution rights are
capitalized and amortized using the individual film-forecast-computation method,
which amortizes such costs in the same ratio that current period actual revenue
bears to estimated remaining unrecognized ultimate revenue as of the beginning
of the fiscal year. All advertising, exploitation costs and marketing costs are
expensed as incurred. The cumulative effect of the change in accounting
principle was recorded as a one time, non-cash after-tax charge of $6.6 million
in the consolidated statement of operations for the year ended December 31,
2000.
The Company has developed a proprietary, patent-pending technology to
digitally re-master 35mm live-action films into 15/70-format film for exhibition
in IMAX theaters. This system, known as IMAX(R) DMR(TM), digitally enhances
image resolution quality of 35mm motion picture films for projection on screens
up to eight stories high and up to 120 feet wide, while maintaining the visual
clarity and sound quality for which IMAX films are known. The Company believes
that this technology could open the IMAX theater network up to releases of
Hollywood films including both library titles and simultaneous new releases. The
Company believes that the development of this new technology is key to helping
it execute on its strategy of becoming a new release window for Hollywood films.
While the Company is optimistic about the IMAX(R) DMR(TM) technology, there is
no guarantee that it will be commercially successful.
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are made to customers located
outside of the United States and Canada. During 2001, 2000 and 1999, 35.2%,
47.2% and 40.6%, respectively, of the Company's revenues were derived outside
the United States and Canada. The Company expects that international operations
will continue to account for a substantial portion of its revenues in the
future. In order to minimize exposure to exchange rate risk, the Company prices
theater systems (the largest component of revenues) in U.S. dollars except in
Canada and Japan where they are priced in Canadian dollars and Japanese Yen,
respectively. Annual minimum rental payments and maintenance fees follow a
similar currency policy.
ACCOUNTING POLICIES AND ESTIMATES
The Company reports its results under both United States Generally Accepted
Accounting Principles ("U.S. GAAP") and Canadian Generally Accepted Accounting
Principles. The financial statements and results referred to herein are reported
under U.S. GAAP.
The preparation of these financial statements requires management to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
its estimates, including those related to accounts receivable, net investment in
leases, inventories, fixed and film assets, investments, intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, future expectations and other assumptions that are
believed to be reasonable at the date of the financial statements. Actual
results may differ from these estimates due to uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
audited financial statements in Item 8.
Page 18
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
GENERAL (cont'd)
SUBSEQUENT EVENTS
On January 7, 2002 and January 9, 2002, the Company and a wholly owned
subsidiary of the Company purchased an additional $19.5 million in the aggregate
of the Company's 5.75% Convertible Subordinated Notes due April 1, 2003 (the
"Subordinated Notes") for $7.3 million represented by $5.2 million in cash by
the subsidiary and common shares by the Company valued at $2.1 million. The
Company will record an additional extraordinary pre-tax gain of $12.2 million as
a result of this transaction in the first quarter of 2002. These transactions
had the effect of reducing the principal of the Company's outstanding
Subordinated Notes to $10.1 million.
On January 1, 2002, the Company entered into an agreement with its print
supplier, Technicolor Inc. ("Technicolor"), under which the Company receives
certain favorable discounts on its, its affiliates' and its customers' film
processing costs. Such discounts, which are based on, among other things,
footage of work provided to Technicolor by the Company on an annual basis, are
to be credited against an upfront payment provided by Technicolor to the Company
in February 2002. As collateral, a priority mortgage on the Company's
Mississauga facility was registered in favor of Technicolor, which mortgage will
be released after a portion of the upfront payment is recouped by Technicolor,
or upon the occurrence of certain other conditions. The agreement with
Technicolor, which requires the Company to use only Technicolor or Technicolor
affiliates for its large-format film processing, expires September 30, 2006.
On February 14, 2002, the Company and Regal Cinemas, Inc. ("Regal") signed
an agreement pursuant to which Regal agreed to assume its master system lease
agreement with the Company dated June 23, 1997, as modified by the parties, in
connection with Regal's bankruptcy proceeding, resulting in Regal's six existing
IMAX theaters remaining in operation. As part of the agreement, pursuant to
Regal's Motion for Entry of Agreed Order Authorizing Assumption of Executory
Contract with IMAX Corporation filed in the United States Bankruptcy Court,
Middle District of Tennessee, Regal paid the Company $6.45 million in
satisfaction of all of the Company's claims against Regal in its bankruptcy.
RESTRUCTURING COSTS AND OTHER SIGNIFICANT CHARGES
(In thousands of U.S. dollars, except per share amounts) YEARS ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ------------ --------
Restructuring costs $16,292 $ - $ -
Asset impairments:
Net investment in leases 13,633 - -
Fixed assets 26,660 11,152 -
Other assets 3,283 - -
Other significant charges:
Accounts receivable 4,469 13,086 949
Inventories 4,053 - -
Film assets 16,514 8,602 -
Long-term investments 5,584 4,133 -
------- ------- ----
$90,488 $36,973 $949
======= ======= ====
(In thousands of U.S. dollars, except per share amounts) YEARS ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ------------ --------
PER SHARE IMPACT-DILUTED:
Restructuring costs $0.53 $ - $ -
Asset impairments:
Net investment in leases $0.44 $ - $ -
Fixed assets $0.86 $0.37 $ -
Other assets $0.11 $ - $ -
Other significant charges:
Accounts receivable $0.15 $0.44 $0.03
Inventories $0.13 $ - $ -
Film assets $0.53 $0.29 $ -
Long-term investments $0.18 $0.14 $ -
----- ----- -----
$2.93 $1.24 $0.03
===== ===== =====
Page 19
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESTRUCTURING COSTS AND OTHER SIGNIFICANT CHARGES (cont'd)
RESTRUCTURING COSTS AND ASSET IMPAIRMENTS
Consistent with the Company's announcement in the first quarter of 2001 to
rationalize its operations, reduce staffing levels and write-down certain assets
to be disposed of, the Company has recorded a restructuring charge of $16.3
million in 2001 (2000 - $nil, 1999 - $nil). In 2001, the Company also recorded
asset impairment charges of $43.6 million (2001 - $11.2 million, 1999 - $nil)
after assessing the carrying value of certain of the Company's assets. The 2001
asset impairment charge consisted of $13.6 million (2000 - $nil, 1999 - $nil)
against net investment in leases, as collectibility associated with certain
leases was considered uncertain, and $26.7 million (2000 - $11.2 million, 1999 -
$nil) and $3.3 million (2000 - $nil, 1999 - $nil) of fixed and other assets,
respectively, as the carrying values for the assets exceeded the discontinued
future cash flows expected from the assets.
The Company believes its restructuring plan and related write-downs were
necessary in light of market trends, industry-wide economic and financial
conditions, and are consistent with the Company's focus on rationalizing and
stabilizing its business and returning to profitability. As of December 31,
2001, the restructuring plan was complete. Of the $16.3 million for
restructuring, $11.2 million has been spent as of December 31, 2001, and $5.1
million, representing costs for severed employees to be paid out to employees
over the next 36 months.
OTHER SIGNIFICANT CHARGES
Due to industry-wide economic and financial difficulties faced by many of
the Company's customers, the Company also recorded the following charges as part
of its ongoing review of the carrying value of the Company's assets.
Included in selling, general and administrative expenses, the Company
recorded a charge of $4.5 million in 2001 (2000 - $13.1 million, 1999 - $0.9
million) relating to the Company's accounts receivable, as collectibility on
certain accounts was considered uncertain.
Within costs of goods and services, the Company recorded a charge of $16.5
million in 2001 (2000 - $8.6 million, 1999 - $nil) based on the reduced fair
values of the Company's film assets. In 2001, the Company also recorded a charge
of $4.1 million for inventories (2000 - $nil, 1999 - $nil), due to a reduced net
realizable value.
Included in selling, general and administrative expenses, the Company
recorded a charge of $4.5 million in 2001 (2000 - $13.1 million, 1999 - $1.0
million) relating to the Company's accounts receivable, as collectibility on
certain accounts was considered uncertain.
In performing its assessment of the carrying value of long-term
investments, the Company recorded $5.6 million in 2001 (2000 - $4.1 million,
1999 - $nil) in charges for declines in the value that are considered to be
other than temporary.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed at least annually for impairment. The Company is required to adopt FAS
142 effective January 1, 2002. Application of the non-amortization provisions of
FAS 142 for goodwill is expected to result in an increase in operating income of
approximately $2.3 million in 2002. At December 31, 2001, the Company had
goodwill of approximately $39.0 million. Pursuant to FAS 142, the Company will
test its goodwill for impairment under the new methodology upon adoption and, if
impairment is indicated, record such impairment as a cumulative effect of
changes in accounting principles. The Company is currently evaluating the effect
of adopting this pronouncement.
In 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
supercedes FASB Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for segments of a business to be disposed of.
The pronouncement is effective January 1, 2002, and will be adopted by the
Company at that time. The Company is currently evaluating the effect of adopting
this pronouncement.
Page 20
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for each of
the items set forth below:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
% % % % %
Revenue
IMAX systems........................................ 64.5 65.4 65.8 74.0 61.6
Films............................................... 25.2 24.1 24.5 16.2 25.0
Other............................................... 10.3 10.5 9.7 9.8 13.4
------ ------ ----- ----- -----
Total revenue........................................ 100.0 100.0 100.0 100.0 100.0
Costs and goods and services......................... 82.1 65.1 50.8 58.7 46.6
------ ------ ----- ----- -----
Gross margin......................................... 17.9 34.9 49.2 41.3 53.4
Selling, general and administrative expenses......... 41.3 30.8 17.9 20.4 20.3
Research and development............................. 2.8 3.8 1.6 1.4 1.3
Amortization of intangibles.......................... 2.5 1.7 1.1 3.1 1.7
Loss (income) from equity-accounted investees........ (0.0) 2.8 0.4 3.6 0.0
Restructuring costs and asset impairments............ 50.4 6.4 - - -
------ ----- ----- ----- -----
Earnings (loss) from operations...................... (79.1) (10.6) 28.2 12.8 30.1
====== ===== ===== ===== =====
Net earnings (loss) before cumulative effect of
changes in accounting principles and
extraordinary items................................ (154.9) (18.4) 13.1 2.0 13.0
====== ====== ===== ===== =====
Net earnings (loss).................................. (122.3) (53.7) 13.1 0.9 13.0
====== ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000
REVENUES
The Company's revenues in 2001 were $118.7 million, compared to $173.1
million in 2000, a decrease of 31.5%. The following table sets forth the
breakdown of revenue by category:
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ---------- ---------
IMAX SYSTEMS REVENUE
Sales and leases ............... $ 53,409 $ 87,384 $103,414
Ongoing rent(1) ................ 8,969 12,097 11,747
Maintenance .................... 14,204 13,745 11,665
-------- -------- --------
76,582 113,226 126,826
-------- -------- --------
FILMS REVENUE
Distribution ................... 16,645 21,221 23,224
Post-production ................ 13,278 20,490 24,003
-------- -------- --------
29,923 41,711 47,227
-------- -------- --------
OTHER REVENUE .................. 12,154 18,179 18,783
-------- -------- --------
$118,659 $173,116 $192,836
======== ======== ========
(1) Includes finance income.
Systems revenue decreased to $76.6 million in 2001 from $113.2 million in
2000, a decrease of 32.4%. Revenue from sales and leases decreased to $53.4
million in 2001 from $87.4 million in 2000, a decrease of 38.9%. In 2001, 15
theater systems were installed, of which one was an operating lease, as compared
to 24 theater systems installed in 2000. Ongoing rental revenue decreased 25.9%
from 2000 primarily due to lower ongoing rents in excess of minimums received in
the current year. Maintenance revenue increased 3.3% over the prior year
principally due to the increased number of theater systems in the network.
Films revenues decreased to $29.9 million in 2001 from $41.7 million in
2000. Film distribution revenues decreased to $16.6 million in 2001 from $21.2
million in 2000, a decrease of 21.6%, and film post-production activities
decreased to $13.3 million in 2001 from $20.5 million in 2000, a decrease of
35.2%. The decrease in film post-production revenues was due to a decline in the
number of films in release in 2001 versus 2000, while the decrease in film
distribution revenues was primarily due to both a smaller number of films in
release and poorer performance of films distributed by the Company in 2001.
Page 21
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont')
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000 (cont')
Other revenue decreased to $12.2 million in 2001 from $18.2 million in
2000, a decrease of 33.1%, primarily related to decreased owned and operated
theater operations revenue in 2001 versus 2000 which included the strong
performance of Fantasia 2000.
The Company does not expect the revenue decline to continue in 2002. The
Company is expecting higher revenues in 2002 due to a combination of higher
system installations, greater commercial appeal of the films the Company
produces and distributes, and higher attendance throughout the IMAX theater
network including its owned and operated theaters.
GROSS MARGIN
Gross margin in 2001 was $21.3 million versus $60.5 million in 2000. Gross
margin in 2001 was reduced by $16.5 million associated with the write-down of
the value of certain films in the Company's library as compared to a write-down
of $8.6 million in 2000, and a $4.1 million write-down due to the reduced net
realizable value of the Company's inventories.
The decline in the gross margin in 2001 over 2000, is primarily due to
lower system revenues on 15 theater systems, of which one was an operating lease
in 2001 versus 24 theater systems in 2000, and the provisions noted above. Gross
margin as a percentage of total revenues was 17.9% in 2001 compared to 34.9% in
2000.
The Company does not expect the gross margin decline to continue in 2002.
The Company is expecting higher gross margin in 2002 due to a combination of
higher system installations, greater commercial appeal of the films the Company
produces and distributes, and higher attendance throughout the IMAX theater
network including its owned and operated theaters.
OTHER
Selling, general and administrative expenses were $49.0 million in 2001
versus $53.4 million in 2000. The selling, general and administrative expenses
in 2001 include a charge of $4.5 million related to the provision for impairment
in accounts receivable from theaters as compared to a charge of $13.1 million in
2000. The 2001 expense also includes a non-cash item of $2.6 million in
connection with a stock compensation grant. The Company anticipates that
selling, general and administrative expenses will decline in 2002 due to the
reductions in staff costs and other expenses that were implemented in 2001.
Interest income decreased to $0.8 million in 2001 from $3.3 million in 2000
due mainly to a decline in the average balance of cash, cash equivalents and
investments in marketable debt securities held.
In performing its assessment of the carrying value of long-term
investments, the Company recorded a $5.6 million in 2001, as compared to $4.1
million in 2000 for declines in the value of these investments that are
considered to be other than temporary.
The Company experienced a foreign exchange loss of $1.4 million in 2001
compared to a loss of $1.8 million in 2000. The foreign exchange losses resulted
primarily from fluctuations in exchange rates on Canadian dollar cash balances
and Canadian dollar and Japanese Yen denominated net investment in leases.
The effective tax rate on earnings before tax differs from the statutory
tax rate and will vary from year to year primarily as a result of the
amortization of goodwill, which is not deductible for tax purposes, the Canadian
manufacturing and processing profits deduction, the provision for income taxes
at different rates in foreign and other provincial jurisdictions, enacted
statutory tax rate reductions in the year, and movements in the Company's
valuation allowance. The 2001 deferred income tax expense includes a $41.2
million increase in the valuation allowance to reflect uncertainties associated
with the realization of the Company's deferred income tax asset. As of December
31, 2001, the Company has a deferred income tax asset of $45.5 million which has
been fully provided against through the Company's valuation allowance.
Page 22
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000 (cont'd)
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.4 million in 2001 versus $6.5
million in 2000. The lower level of expenses in 2001 reflects the reduction of
general research and development activities due to significant staff reductions
and management's decision to focus on projects with a high potential of success
and minimal capital outlay. The Company believes that the motion picture
industry will be affected by the development of digital technologies,
particularly in the areas of content creation (image capture), post-production
(editing and special effects), digital re-mastering distribution and display.
Consequently, the Company has made significant investments in digital
technologies, including the development of a proprietary, patent-pending
technology to digitally enhance image resolution and quality of 35mm motion
picture films and has a number of patents pending and intellectual property
rights in these areas.
DISCONTINUED OPERATIONS
The Company's 2001 discontinuance of its digital projection systems
operations was completed December 11, 2001 through the sale of its wholly owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company restructured its advances to DPI, releasing DPI
from obligations to repay any amounts in excess of $12.7 million previously
advanced by the Company, and reorganized the remaining $12.7 million of debt
owing to the Company into two separate loan agreements. The loans receivable are
collateralized by fixed and floating charges over all DPI assets including
intellectual properties. One of the loans is convertible, upon the occurrence of
certain events into shares representing 49% of the total share capital of DPI.
DPI also agreed to release the Company from its ongoing obligations to DPI.
The Company recorded an after-tax charge of $50.9 million in 2001, relating
to operational losses of $8.5 million and a loss of $42.3 million on disposal of
DPI's net assets. Included in the loss on disposal is a provision of $12.7
million to reflect the uncertainty associated with the collectibility of the
loans receivable. In 2000, the Company recorded digital projection systems
operating losses of $2.1 million. The Company has restated the financial
statements to segregate the discontinued operations for all comparative years
presented.
EXTRAORDINARY GAIN
During 2001, the Company and a wholly owned subsidiary of the Company
purchased an aggregate of $70.4 million of the Company's $100.0 million
aggregate principal amount of Subordinated Notes for $13.7 million, consisting
of $12.5 million in cash by the subsidiary and common shares by the Company
valued at $1.2 million. The Company cancelled the purchased Subordinated Notes
and recorded an extraordinary gain of $38.7 million, net of income tax expense
of $16.8 million.
Subsequent to year-end, the Company and a wholly owned subsidiary purchased
an additional $19.5 million in the aggregate of the Company's Subordinated Notes
for $7.3 million, consisting of $5.2 million in cash by the subsidiary and
common shares by the Company valued at $2.1 million. The Company cancelled the
purchased Subordinated Notes, and will record an additional extraordinary
pre-tax gain of $12.2 million as a result of this transaction in the first
quarter of 2002. These transactions had the effect of reducing the principal of
the Company's outstanding Subordinated Notes to $10.1 million.
YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999
In 2000, the Company had revenues of $173.1 million and net loss, before
the cumulative effect of changes in accounting principles and extraordinary
items of $31.8 million ($1.07 per share on a diluted basis) compared to revenues
of $192.8 million and net earnings before the cumulative effect of changes in
accounting principles and extraordinary items of $25.2 million ($0.83 per share
on a diluted basis) in 1999. The decrease in revenues of 10.2% is due primarily
to a decline in systems revenue.
Page 23
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999 (cont'd)
REVENUES
Systems revenue decreased to $113.2 million in 2000 from $126.8 million in
1999, a decrease of 10.7%. Revenue from sales and leases decreased to $87.4
million in 2000 from $103.4 million in 1999, a decrease of 15.5%. The Company
installed 24 theater systems under sales and sales-type leases in 2000 as
compared to 35 theater system deliveries in 1999. Ongoing rental and maintenance
revenues increased 3.0% and 17.8%, respectively, over the prior year principally
due to the increased number of theater systems in the network.
Films revenues decreased to $41.7 million in 2000 from $47.2 million in
1999, a decrease of 11.7%. Film distribution revenues decreased to $21.2 million
in 2000 from $23.2 million in 1999, a decrease of 8.6% due to the timing of the
release of films. Film post-production activities decreased to $20.5 million in
2000 from $24.0 million in 1999, a decrease of 14.6%, primarily due to a
decrease in the number of prints released, post-production activities and
extensions of products and services.
Other revenues decreased slightly to $18.2 million in 2000 from $18.8
million in 1999, a decrease of 3.2%.
GROSS MARGIN
Gross margin in 2000 was $60.5 million versus $94.9 million in 1999. In
2000, the gross margin was reduced by $8.6 million with the write-down of the
value of certain films in the Company's library.
The decline in the gross margin in 2000 over 1999, exclusive of these
write-downs, is due mainly to the decline in system installations to 24 in 2000
from 35 deliveries in 1999.
Gross margin as a percentage of total revenues was 34.9% in 2000 compared
to 49.2% in 1999. The write-downs described above reduced the gross margin in
2000 by 5.0%. The decline in the gross margin in 2000 over 1999, exclusive of
these write-downs, is due to the higher proportion of film and other revenues
which generally have lower margins than IMAX systems revenue.
OTHER
Selling, general and administrative expenses were $53.4 million in 2000
versus $34.5 million in 1999. The increase in selling, general and
administrative costs in 2000 over 1999 resulted primarily from a $13.1 million
charge in 2000 principally related to provisions against uncollectible accounts
receivable amounts.
Interest income decreased to $3.3 million in 2000 from $10.0 million in
1999 due to lower average cash, cash equivalents and investments in marketable
debt securities balances held.
The Company experienced a foreign exchange loss of $1.8 million in 2000
compared to a gain of $1.0 million in 1999. The foreign exchange loss in 2000
resulted primarily from fluctuations in exchange rates on Canadian dollar cash
balances and Canadian dollar and Japanese Yen denominated net investment in
leases. The gain in 1999 resulted primarily from fluctuations in exchange rates
on the Japanese Yen denominated net investment in leases.
RESEARCH AND DEVELOPMENT
Research and development expenses were $6.5 million in 2000 versus $3.1
million in 1999. The increase is due mainly to increased internal activities in
developing digital technologies.
Page 24
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company's principal source of liquidity included
cash and cash equivalents of $26.4 million, trade accounts receivable of $18.3
million and net investment in leases due within one year of $4.7 million.
On September 26, 2001, the Company's demand facility with Toronto Dominion
Bank Financial Group matured. At the time of maturity, the Company had no cash
advances outstanding under the facility, which had been used in the past to
facilitate U.S. and Canadian letters of credit and cross currency swaps. This
line was secured by the Company's accounts receivable, inventory, certain real
estate and other assets of the Company. As of December 31, 2001, the Company has
letters of credit of $5.9 million outstanding, which have been collateralized by
cash deposits. The Company expects these commitments to be reduced to
approximately $3.0 million by April 2002. The Company is currently in discussion
with other financial institutions to replace this facility with a similar
facility utilizing its net investment in leases, accounts receivable and
inventory as collateral. There is no guarantee that the Company will be
successful in these efforts.
In December 1998, the Company issued $200 million of Senior Notes (the
"Senior Notes") due December 1, 2005. The Senior Notes bear interest at 7.875%
per annum and are subject to redemption by the Company, in whole or in part, at
any time on or after December 1, 2002, at redemption prices expressed as
percentages of the principal amount for each 12-month period commencing December
1 of the years indicated: 2002 - 103.938%, 2003 - 101.969%, 2004 and thereafter
- 100.000% together with interest accrued thereon to the redemption date. The
Company may also redeem the Senior Notes, in whole or in part, at any time prior
to December 1, 2002, at a redemption price equal to 100% of the principal amount
plus a "make-whole premium" calculated in reference to the redemption price on
the first date that the Senior Notes may be redeemed by the Company plus accrued
interest to but excluding the redemption date. If certain changes result in the
imposition of withholding taxes under Canadian law, the Senior Notes are subject
to redemption at the option of the Company, in whole but not in part, at a
redemption price of 100% of the principal amount thereof plus accrued interest
to the date of redemption. In the event of a change in control, holders of the
Senior Notes may require the Company to repurchase all or part of the Senior
Notes at a price equal to 101% of the principal amount thereof plus accrued
interest to the date of repurchase.
In April 1996, the Company completed a private placement of $100.0 million
of 5.75% Convertible Subordinated Notes (the "Subordinated Notes") due April 1,
2003. These Subordinated Notes are convertible into common shares of the Company
at the option of the holder at a conversion price of $21.406 per share
(equivalent to a conversion rate of 46.7154 shares per $1,000 principal amount
of Subordinated Notes) at any time prior to maturity. The Subordinated Notes are
redeemable at the option of the Company on or after April 1, 1999 at redemption
prices expressed as percentages of the principal amount (2002 - 100.821%) plus
accrued interest. The Subordinated Notes may be redeemed at any time on or after
April 1, 2001 without limitation. During 2001, the Company and a wholly owned
subsidiary of the Company purchased an aggregate of $70.4 million of the
Company's Subordinated Notes for $13.7 million consisting of $12.5 million in
cash by the subsidiary and common shares by the Company valued at $1.2 million.
The Company cancelled the purchased Subordinated Notes and recorded an
extraordinary gain of $38.7 million, net of income tax expense of $16.8 million.
Subsequent to December 31, 2001, the Company and the subsidiary of the Company
purchased an additional $19.5 million in the aggregate of the Company's
Subordinated Notes for $7.3 million consisting of $5.2 million in cash by the
subsidiary and common shares by the Company valued at $2.1 million. These
transactions had the effect of reducing the principal amount of the Company's
Subordinated outstanding Notes to $10.1 million.
The Company's net cash provided by operating activities is significantly
impacted by, among other things, the number of theater system contracts signed
during the year as well as the number of system installations completed during
the year. Under the terms of the Company's typical theater system lease
agreement, the Company receives substantial cash payments before it completes
the performance of its obligations. The Company depends on cash flow from these
sources to finance its ongoing operations.
Cash provided by operating activities amounted to $2.7 million for the year
ended December 31, 2001 after the payment of $21.9 million of interest and other
working capital requirements. Changes in other non-cash operating assets and
liabilities include $8.3 million that was invested in film assets, a decrease of
$1.3 million in accounts receivable and a decrease of $5.7 million in net
investment in leases in 2001. Cash provided by investing activities in 2001
amounted to $5.7 million. Of this amount, $7.5 million was received from the
sale of investments in marketable debt securities, and $1.1 million was invested
in fixed assets. Cash used in financing activities amounted to $12.5 million
related to the repurchase by subsidiary, of a portion of the Company's
Subordinated Notes.
Page 25
IMAX CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
Cash used in operating activities amounted to $54.1 million for the year
ended December 31, 2000 after the payment of $21.5 million of interest, $33.6
million of income taxes and working capital requirements. Changes in other
non-cash operating assets and liabilities include $19.7 million that was
invested in film assets, an increase of $0.1 million in accounts receivable, an
increase of $9.3 million in net investment in leases in 2000 and a decrease of
$42.6 million in current taxes payable due to tax payments in connection with
the reorganization of the Company's lines of business in 1999. Cash provided by
investing activities in 2000 amounted to $45.3 million. Of this amount, $81.5
million was received from the sale of investments in marketable debt securities,
$27.6 million was invested in fixed assets, principally for owned and operated
theaters and theater systems contributed to joint ventured theaters, and
facilities, and $6.2 million was invested in other assets including patents,
trademarks and software. Cash provided by financing activities amounted to $2.5
million, which included proceeds of $1.4 million from the issuance of common
shares pursuant to the Company's stock option plan.
The Company believes that cash flow from operations together with existing
cash will be sufficient to meet cash requirements for the foreseeable future. In
addition, the Company believes it has access to other sources of liquidity
including accessing the capital markets, or securing an operating line facility
with a financial institution. The Company's accounts receivable, inventory,
certain fixed assets and net investment in leases are currently unsecured and
available as collateral. However, there can be no assurance that the Company
will be successful in securing additional financing.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
rates. The Company does not use financial instruments for trading or other
speculative purposes.
A substantial portion of the Company's revenues are denominated in U.S.
dollars while a substantial portion of its costs and expenses are denominated in
Canadian dollars. A portion of the net U.S. dollar flows of the Company are
converted to Canadian dollars to fund Canadian dollar expenses, either through
the spot market or through forward contracts. Existing foreign exchange
contracts expired on October 16, 2001 and the Company recorded a loss of $0.1
million. The Company plans to convert Canadian dollar expenses to U.S. dollars
through the spot and forward markets on a go-forward basis. In Japan, the
Company has ongoing operating expenses related to its operations. Net Japanese
Yen flows are converted to U.S. dollars generally through forward contracts to
minimize currency exposure. The Company also has cash receipts under leases
denominated in Japanese Yen and French francs which were converted to U.S.
dollars generally through forward contracts to minimize currency exposure. These
contracts were sold on August 9, 2001 for proceeds of $0.7 million. The Company
plans to convert Japanese Yen and French franc lease cash flows to U.S. dollars
through the spot and forward markets on a go-forward basis.
Page 26
IMAX CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are filed as part
of this Report:
PAGE
----
Report of Independent Accountants to the Shareholders of IMAX Corporation......................................... 28
Consolidated Balance Sheets as at December 31, 2001 and 2000...................................................... 29
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999........................ 30
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999........................ 31
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2001, 2000 and 1999.... 32
Notes to Consolidated Financial Statements........................................................................ 33
Page 27
IMAX CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS OF IMAX CORPORATION
We have audited the accompanying consolidated balance sheets of IMAX
Corporation (the "Company") as at December 31, 2001 and 2000 and the related
consolidated statements of operations, cash flows and shareholders' equity
(deficit) for each year in the three-year period ended December 31, 2001. These
financial statements and the financial statement schedule listed in the index
appearing under Item 14(a)(2) of this Form 10-K are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as at December 31, 2001 and 2000 and the results of its operations and cash
flows for each year in the three-year period ended December 31, 2001 in
accordance with accounting principles generally accepted in the United States.
As described in note 24 to the consolidated financial statements, the
Company changed its accounting policies for revenue recognition and film assets
effective January 1, 2000.
In addition, in our opinion, the financial statement schedule referred to
above presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements .
/s/ PricewaterhouseCoopers LLP
-------------------------------------------------
Chartered Accountants
Toronto, Canada
February 25, 2002
Page 28
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
AS AT DECEMBER 31,
----------------------
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents (note 12) .................................. $ 26,388 $ 26,781
Investments in marketable debt securities ............................ -- 7,529
Accounts receivable, net of allowance for doubtful accounts of $18,060
(2000 - $19,168) ................................................... 18,296 23,621
Net investment in leases (note 4) .................................... 51,644 77,093
Inventories (note 5) ................................................. 42,723 51,017
Income taxes recoverable ............................................. -- 8,830
Prepaid expenses ..................................................... 1,845 3,650
Film assets (note 6) ................................................. 10,513 29,749
Fixed assets (note 7) ................................................ 52,652 87,056
Other assets (note 8) ................................................ 15,402 29,640
Deferred income taxes (note 9) ....................................... 3,022 44,433
Goodwill, net of accumulated amortization of $15,807 (2000 - $13,497) 39,027 40,810
Assets of discontinued operations (note 3) ........................... -- 61,891
--------- ---------
Total assets ...................................................... $ 261,512 $ 492,100
========= =========
LIABILITIES
Accounts payable ..................................................... $ 6,735 $ 11,741
Accrued liabilities (note 20) ........................................ 45,041 33,891
Deferred revenue ..................................................... 95,082 106,427
Income taxes payable ................................................. 1,356 --
Senior notes due 2005 (note 10) ...................................... 200,000 200,000
Convertible subordinated notes due 2003 (note 11) .................... 29,643 100,000
Liabilities of discontinued operations (note 3) ...................... 2,103 17,778
--------- ---------
Total liabilities ................................................. 379,960 469,837
--------- ---------
COMMITMENTS AND CONTINGENCIES (notes 12 and 13)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 14) - no par value. Authorized - unlimited number
Issued and outstanding - 31,899,114 (2000 - 30,051,514) ............ 64,356 60,136
Deficit .............................................................. (183,392) (38,278)
Accumulated other comprehensive income ............................... 588 405
--------- ---------
Total shareholders' equity (deficit) .............................. (118,448) 22,263
--------- ---------
Total liabilities and shareholders' equity (deficit) .............. $ 261,512 $ 492,100
========= =========
(the accompanying notes are an integral part of these consolidated financial
statements)
Page 29
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars, except per share amounts)
YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
REVENUE
IMAX systems ........................................................... $ 76,582 $ 113,226 $ 126,826
Films .................................................................. 29,923 41,711 47,227
Other .................................................................. 12,154 18,179 18,783
--------- --------- ---------
118,659 173,116 192,836
COSTS OF GOODS AND SERVICES (note 15) .................................. 97,391 112,655 97,973
--------- --------- ---------
GROSS MARGIN ........................................................... 21,268 60,461 94,863
Selling, general and administrative expenses (note 15) ................. 48,962 53,384 34,450
Research and development ............................................... 3,385 6,497 3,136
Amortization of intangibles ............................................ 3,005 2,948 2,159
Loss (income) from equity-accounted investees .......................... (73) 4,811 683
Restructuring costs and asset impairments (note 16) .................... 59,868 11,152 --
--------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS ........................................ (93,879) (18,331) 54,435
Interest income ........................................................ 847 3,285 9,977
Interest expense, net of interest capitalized of $511
(2000 - $1,393, 1999 - $754).......................................... (22,020) (21,961) (21,860)
Impairment of long-term investments (note 15) .......................... (5,584) (4,133) --
Foreign exchange gain (loss) ........................................... (1,357) (1,781) 977
--------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST .................................................... (121,993) (42,921) 43,529
Recovery of (provision for) income taxes (note 9) ...................... (11,005) 13,139 (16,642)
--------- --------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST .... (132,998) (29,782) 26,887
Minority interest ...................................................... -- -- (1,207)
--------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS ......................... (132,998) (29,782) 25,680
Net loss from discontinued operations (note 3) ......................... (50,850) (2,055) (447)
--------- --------- ---------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES AND EXTRAORDINARY ITEMS ........................ (183,848) (31,837) 25,233
Cumulative effect of changes in accounting principles, net of
income tax benefit of $37,286 (note 24) .............................. -- (61,110) --
Extraordinary gain on repurchase of convertible subordinated notes,
net of income tax expense of $16,843 (note 11) ....................... 38,734 -- --
--------- --------- ---------
NET EARNINGS (LOSS) .................................................... $(145,114) $ (92,947) $ 25,233
========= ========= =========
EARNINGS (LOSS) PER SHARE (note 14):
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations ....................... $ (4.30) $ (1.00) $ 0.86
Net loss from discontinued operations ................................ $ (1.64) $ (0.07) $ (0.01)
--------- --------- ---------
Net earnings (loss) before cumulative effect of changes in
accounting principles and extraordinary items ...................... $ (5.94) $ (1.07) $ 0.85
Cumulative effect of changes in accounting principles ................ $ -- $ (2.04) $ --
Extraordinary items .................................................. $ 1.25 $ -- $ --
--------- --------- ---------
Net earnings (loss) .................................................. $ (4.69) $ (3.11) $ 0.85
========= ========= =========
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations ....................... $ (4.30) $ (1.00) $ 0.84
Net loss from discontinued operations ................................ $ (1.64) $ (0.07) $ (0.01)
--------- --------- ---------
Net earnings (loss) before cumulative effect of changes in
accounting principles and extraordinary items ...................... $ (5.94) $ (1.07) $ 0.83
Cumulative effect of changes in accounting principles ............... $ -- $ (2.04) $ --
Extraordinary items .................................................. $ 1.25 $ -- $ --
--------- --------- ---------
Net earnings (loss) .................................................. $ (4.69) $ (3.11) $ 0.83
========= ========= =========
(the accompanying notes are an integral part of these consolidated financial
statements)
Page 30
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) from continuing operations ..................... $(132,998) $ (29,782) $ 25,680
Items not involving cash:
Depreciation, amortization and write-downs (note 17) ............ 99,801 61,626 25,228
Loss (income) from equity-accounted investees ................... (73) 4,811 683
Deferred income taxes ........................................... 24,568 (5,201) (24,142)
Impairment of long-term investments ............................. 5,584 4,133 --
Stock and other non-cash compensation ........................... 5,182 1,242 --
Minority interest and other ..................................... -- -- 1,217
Investment in film assets .......................................... (8,297) (19,665) (18,051)
Changes in other non-cash operating assets and liabilities (note 17) 14,520 (73,929) (15,398)
Net cash provided by (used in) operating activities from
discontinued operations ......................................... (5,607) 2,676 2,194
--------- --------- ---------
Net cash provided by (used in) operating activities ................ 2,680 (54,089) (2,589)
--------- --------- ---------
INVESTING ACTIVITIES
Net sale (purchase) of investments in marketable debt securities ... 7,529 81,503 (29,639)
Acquisition of Digital Projection International, net of cash
acquired ........................................................ -- (900) (25,724)
Acquisition of minority interest in Sonics Associates, Inc. ........ (1,041) (295) (12,740)
Purchase of fixed assets ........................................... (1,091) (27,643) (22,465)
Decrease (increase) in other assets ................................ 498 (6,190) (17,402)
Net cash used in investing activities from discontinued operations . (217) (1,139) (243)
--------- --------- ---------
Net cash provided by (used in) investing activities ................ 5,678 45,336 (108,213)
--------- --------- ---------
FINANCING ACTIVITIES
Repurchase of convertible subordinated notes ....................... (12,540) -- --
Common shares issued ............................................... 31 1,442 2,235
Paid-in-capital on stock options exercised ......................... -- 1,034 --
Class C preferred shares dividends paid ............................ -- -- (365)
--------- --------- ---------
Net cash provided by (used in) financing activities ................ (12,509) 2,476 1,870
--------- --------- ---------
Effects of exchange rate changes on cash from continuing
operations ...................................................... (2,066) 2,125 (213)
Effects of exchange rate changes on cash from discontinued
operations ...................................................... 1,697 487 152
--------- --------- ---------
Effects of exchange rate changes on cash ........................... (369) 2,612 (61)
--------- --------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS ...................................................... (393) (5,689) (111,096)
Decrease (increase) in cash and cash equivalents from discontinued
operations ...................................................... (4,127) 2,024 2,103
--------- --------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE YEAR ............. (4,520) (3,665) (108,993)
Cash and cash equivalents, beginning of year ....................... 30,908 34,573 143,566
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 26,388 $ 30,908 $ 34,573
========= ========= =========
(the accompanying notes are an integral part of these consolidated financial
statements)
Page 31
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
NUMBER OF ACCUMULATED
COMMON OTHER TOTAL
SHARES RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
ISSUED AND CAPITAL EARNINGS INCOME EQUITY INCOME
OUTSTANDING STOCK (DEFICIT) (LOSS)(1) (DEFICIT) (LOSS)
----------- ---------- ---------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 ........... 29,478,384 $ 55,236 $ 29,436 $ (226) $ 84,446 $ --
Issuance of common stock ............... 279,504 2,235 -- -- 2,235 --
Net earnings ........................... -- -- 25,233 -- 25,233 25,233
Net adjustment on available-for-sale
securities............................. -- -- -- (867) (867) (867)
Foreign currency translation adjustments -- -- -- 18 18 18
---------- ---------- ---------- ---------- ---------- ----------
$ 24,384
==========
BALANCE AT DECEMBER 31, 1999 ........... 29,757,888 57,471 54,669 (1,075) 111,065 $ --
Issuance of common stock ............... 293,626 1,631 -- -- 1,631 --
Adjustment in paid-in-capital for stock
options exercised .................... -- 1,034 -- -- 1,034 --
Net loss ............................... -- -- (92,947) -- (92,947) (92,947)
Net adjustment on available-for-sale
securities ............................ -- -- -- 586 586 586
Foreign currency translation adjustments -- -- -- 894 894 894
---------- ---------- ---------- ---------- ---------- ----------
$ (91,467)
==========
BALANCE AT DECEMBER 31, 2000 ........... 30,051,514 60,136 (38,278) 405 22,263 $ --
Issuance of common stock ............... 1,847,600 4,220 -- -- 4,220 --
Net loss ............................... -- -- (145,114) -- (145,114) (145,114)
Net adjustment on available-for-sale
securities............................. -- -- -- 281 281 281
Foreign currency translation adjustments -- -- -- (98) (98) (98)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2001 ........... 31,899,114 $ 64,356 $ (183,392) $ 588 $ (118,448) $ (144,931)
========== ========== ========== ========== ========== ==========
(1) Components of accumulated other comprehensive income (loss) consist of:
AS AT DECEMBER 31,
----------------------------------------
2001 2000 1999
------- ------- -------
Foreign currency translation adjustments ......... $ 588 $ 686 $ (208)
Unrealized loss on available-for-sale security.... -- (281) (867)
------- ------- -------
Accumulated other comprehensive income (loss) .... $ 588 $ 405 $(1,075)
======= ======= =======
(the accompanying notes are an integral part of these consolidated financial
statements)
Page 32
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
1. DESCRIPTION OF THE BUSINESS
IMAX Corporation together with its wholly owned subsidiaries (the
"Company") provides a wide range of products and services to the network
of IMAX theaters. The principal activities of the Company are:
o the design, manufacture and marketing and leasing of proprietary
projection and sound systems for IMAX theaters principally owned
and operated by institutional and commercial customers located in
30 countries as of December 31, 2001;
o the development, production, post-production and distribution of
certain films shown in the IMAX theater network;
o the operation of certain IMAX theaters located primarily in the
United States and Canada; and
o the provision of other services to the IMAX theater network
including designing and manufacturing IMAX camera equipment for
rental to filmmakers and providing ongoing maintenance services
for the IMAX projection and sound systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the financial statements in conformity with United
States Generally Accepted Accounting Principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could be materially
different from these estimates. Significant estimates made by management
include allowances for potential uncollectability of accounts and loans
receivable and net investment in leases, provisions for inventory
obsolescence, ultimate revenues for film assets, estimates of future cash
flows associated with long-lived assets, accruals for contingencies and
valuation allowances for deferred income tax assets. Significant accounting
policies are summarized as follows:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
together with its wholly owned subsidiaries.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) INVENTORIES
Inventories are carried at the lower of cost, and net realizable value.
Finished goods and work-in-process include the cost of raw materials,
direct labor and an applicable share of manufacturing overhead costs.
Page 33
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(d) FILM ASSETS
Costs of producing films, including capitalized interest, and costs of
acquiring film rights are recorded as film assets. The film assets are
amortized using the individual-film-forecast method as prescribed by AICPA
Statement of Position 00-2, "Accounting by Producers or Distributors of
Films" ("SOP 00-2") whereby film costs are amortized in the same ratio that
current gross revenues bear to anticipated total ultimate revenues.
Estimates of ultimate revenues are reviewed regularly by management and
revised where necessary to reflect more current information.
Film exploitation costs, including advertising costs, are expensed as
incurred. Costs of film prints are capitalized and expensed over a period
of three months.
The recoverability of film costs is dependent upon commercial acceptance of
the films. If events or circumstances indicate that the fair value of a
film is less than the unamortized film costs, the film is written down to
fair value by a charge to consolidated net earnings (loss). The Company
determines the fair value of its films using a discounted cash flow model.
(e) FIXED ASSETS
Fixed assets are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives as follows:
Projection equipment - 10 to 15 years
Camera equipment - 5 to 10 years
Buildings - 20 to 25 years
Office and production equipment - 3 to 5 years
Leasehold improvements - Over the term of the underlying leases
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.
(f) OTHER ASSETS
Other assets include patents, trademarks and other intangibles,
investments, defined benefit pension plan intangibles and deferred charges
on debt financing.
Patents, trademarks and other intangibles are recorded at cost and are
amortized on a straight-line basis over estimated useful lives ranging from
10 to 13 years.
Costs of debt financing are deferred and amortized over the term of the
debt.
Investments in marketable debt securities categorized as available-for-sale
securities are carried at fair value with unrealized gains or losses
included in accumulated other comprehensive income. Investments in
marketable debt securities categorized as held-to-maturity securities are
carried at amortized cost. Investments in joint ventures are accounted for
by the equity method of accounting under which consolidated net earnings
(loss) include the Company's share of earnings or losses of the investees.
A loss in value of an investment, which is other than a temporary decline,
is recognized as a charge to consolidated net earnings (loss).
Page 34
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(g) GOODWILL
Goodwill represents the excess of the purchase price of acquired businesses
over the fair value of net assets acquired. Goodwill is amortized on a
straight-line basis over its estimated life ranging from 20 years to 25
years. The carrying value of goodwill is periodically reviewed by the
Company and impairments are recognized in earnings when the undiscounted
expected future operating cash flows derived from the acquired businesses
are less than the carrying value.
(h) DEFERRED REVENUE
Deferred revenue comprises cash received under theater system contracts,
film production contracts, film exhibition contracts and other contracts
not yet recognized as revenue.
(i) INCOME TAXES
Income taxes are accounted for under the liability method whereby deferred
income tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the accounting and tax
bases of assets and liabilities. Deferred income tax assets and liabilities
are measured using tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in earnings in the period in which the
change occurs. Valuation allowances are recorded where there is uncertainty
of realization of a deferred income tax asset. Investment tax credits are
recognized as a reduction of income tax expense in the year the credit is
earned.
(j) REVENUE RECOGNITION
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and
risks of ownership to customers are classified as sales-type leases as a
result of meeting the criteria established by FASB Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" ("FAS 13"). When
revenue is recognized, the initial rental fees due under the contract,
along with the present value of minimum ongoing rental payments are
recorded as revenues for the period, and the related projector costs
including installation expenses are recorded in 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.
From time to time, if the Company and a lessee agree to change the terms of
the lease, other than renewing the lease or extending its terms, management
evaluates whether the new agreement would be classified as sales-type lease
or an operating lease under the provisions of FAS 13. Any adjustments which
result from a change in classification from a sales-type lease to an
operating lease are reported in income during the period the change occurs.
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; collection is reasonably assured; and, as
described in note 24, effective January 1, 2000, installation of the
theater system is complete. Prior to January 1, 2000, the Company
recognized revenue on the same basis, except that the time of delivery was
used rather than completion of installation.
Cash installments of initial rents received in advance of the time at which
revenue is recognized are recorded as deferred revenue. The associated
costs of constructing the theater systems not yet recognized as revenue are
included in inventories.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these
leases, initial rental fees and minimum lease payments are recognized as
revenue on a straight-line basis over the lease term. Additional rentals in
excess of minimum annual amounts are recognized as revenue when the
contracted portions of theater admissions due to the Company reported by
theater operators exceed the minimum amounts, provided that collection is
reasonably assured.
Page 35
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(j) REVENUE RECOGNITION (cont'd)
SALES OF THEATER SYSTEMS
Revenue from sales of theater systems is recognized when all of the
following criteria are met: persuasive evidence of an agreement exists; the
price is fixed or determinable; title passes to the customer; installation
of the system is complete; and collection is reasonably assured. Prior to
January 1, 2000, the Company recognized such revenue on the same basis,
except that the time of delivery was used rather than completion of
installation.
MAINTENANCE AND OTHER SERVICES
Maintenance revenues are recognized on a straight-line basis over the
maintenance period. Revenues from post-production film services are
recognized when the service has been completed. Revenues on camera rentals
are recognized over the period the camera is used. Theater admission
revenues are recognized on the date of the exhibition. Other service
revenues are recognized when the services are performed.
FILM PRODUCTION AND DISTRIBUTION
Revenue from licensing of films is recognized when a licensing arrangement
exists, the film is complete and has been delivered, the license period has
begun, the fee is fixed or determinable and collection is reasonably
assured. Where the license fees are based on a share of the customer's
revenue, and all other revenue recognition criteria mentioned in the
preceding sentence are met, the Company recognizes revenue as the customer
exhibits the film.
(k) RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
(l) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of the Company's operations, which are
denominated in currencies other than the functional currency, are
translated into the functional currency at the exchange rates prevailing at
the end of the period. Non-monetary items are translated at historical
exchange rates. Revenue and expense transactions are translated at exchange
rates prevalent at the transaction date. Such exchange gains and losses are
included in the determination of net earnings (loss) in the period in which
they arise. For foreign subsidiaries with functional currencies other than
the U.S. dollar, all assets and liabilities are translated at the year-end
exchange rates and all revenue and expense items are translated at the
average rate for the period, with exchange differences arising on
translation accumulated in other comprehensive income.
(m) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the intrinsic value
method set out in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and its related interpretations and has made
pro forma disclosures of net earnings (loss) and earnings (loss) per share
in note 14 as if the methodology prescribed by FASB Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"), had been adopted.
(n) PENSION PLANS
Defined benefit pension plan liabilities are recorded as the excess of the
accumulated benefit obligation over the fair value of plan assets.
Assumptions used in computing defined benefit obligations are regularly
reviewed by management in consultation with its actuaries and adjusted to
market conditions. Prior service costs resulting from plan inception or
amendments are amortized over the expected future service of the employees
while current service costs are expensed when earned.
For defined contribution pension plans, amounts contributed by the Company
are recorded as an expense.
Page 36
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
3. DISCONTINUED OPERATIONS
Effective December 11, 2001, the Company completed the sale of its wholly
owned subsidiary, Digital Projection International, including its
subsidiaries (collectively "DPI"), to a company owned by members of DPI
management. As part of the transaction, the Company restructured its
advances to DPI, releasing DPI from obligations to repay amounts in excess
of $12.7 million previously advanced by the Company, and reorganized the
remaining debt owing to the Company into two separate loan agreements, a
$2.7 million, three-year term loan, and a $10.0 million, seven-year
convertible term loan. DPI also agreed to release the Company from its
ongoing obligations to DPI.
The loans receivable are collateralized by fixed and floating charges over
all DPI assets including intellectual properties. The $2.7 million,
three-year loan, is repayable in quarterly increments and bears interest at
10% per annum. The $10.0 million, seven-year loan bears interest at 10% per
annum and is repayable in its entirety at maturity or convertible, upon the
occurrence of certain events, into shares representing 49% of the total
share capital of DPI.
The Company has recorded an allowance of $12.7 million to reflect
uncertainty associated with the collectibility of the loans receivable.
The Company has retained the rights and technology to develop high-end
digital cinema, including the use of Texas Instruments Inc.'s DLP
Cinema(TM) technology for large-format and other high-end uses as well as
key patents and intellectual property related to the conversion of film to
digital images.
In accordance with Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions" ("APB 30"), the Company has restated the financial
statements to segregate the discontinued operations for all comparative
years presented.
The assets and liabilities of discontinued operations, summarized in the
Consolidated Balance Sheets, at December 31, comprise of the following:
2001 2000
------ -------
ASSETS
Cash and cash equivalents $ -- $ 4,127
Accounts receivable, net of allowance for doubtful accounts of
$nil (2000 - $606) -- 11,214
Inventories -- 18,893
Fixed assets -- 2,823
Other assets -- 3,219
Deferred income tax assets -- 1,912
Goodwill, net of accumulated amortization of $nil (2000 - $1,321) -- 19,703
------- -------
Total assets of discontinued operations $ -- $61,891
======= =======
LIABILITIES
Accounts payable $ -- $11,509
Accrued liabilities 2,103 6,269
------- -------
Total liabilities of discontinued operations $ 2,103 17,778
======= =======
Page 37
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
3. DISCONTINUED OPERATIONS (cont'd)
The net loss from discontinued operations, summarized in the Consolidated
Statements of Operations, for the years ended December 31, comprise of the
following:
2001 2000 1999
-------- ------- -------
Revenue $ 21,965 $46,356 $10,999
======== ======= =======
Net loss from discontinued operations(1) $ (8,508) $(2,055) $ (447)
Net loss on disposal of discontinued operations(2) (42,342) -- --
======== ======= -------
Net loss from discontinued operations $(50,850) $(2,055) $ (447)
======== ======= =======
(1) Net of income tax recovery of $2,422 in 2001 (2000 - $99, 1999 - $107).
(2) Net of income tax recovery of $nil in 2001; includes $12.7 million
in allowances for uncollectibility of loans receivable. Any
recoveries on these loans will be included in the results from
discontinued operations as cash is received.
4. LEASES
(a) NET INVESTMENT IN LEASES
The Company enters into sales-type leases, for which the customer makes
initial rental payments and additional rental payments with contracted
minimums, which are generally indexed with inflation. The Company's net
investment in sales-type leases, at December 31, comprise of the following:
2001 2000
------------ ------------
Gross minimum lease amounts receivable $ 105,379 $ 174,124
Accumulated allowance for uncollectible amounts (11,745) (6,813)
------------ ------------
Gross minimum lease amounts receivable, net of allowance 93,634 167,311
Residual value of equipment 898 2,223
Unearned finance income (42,888) (92,441)
------------ ------------
Present value of net minimum lease amounts receivable $ 51,644 $ 77,093
============ ============
Page 38
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
4. LEASES (cont'd)
(b) RENTAL AMOUNTS
Revenue includes annual rental amounts, for the years ended December 31,
comprise of the following:
2001 2000 1999
-------------- -------------- --------------
Ongoing minimum rental amounts on operating leases $ 562 $ 879 $ 875
Additional rentals in excess of minimum amounts, on
operating and sales-type leases 3,255 4,611 5,644
Finance income on sales-type leases 5,152 6,607 5,228
-------------- -------------- --------------
$ 8,969 $ 12,097 $ 11,747
============== ============== ==============
The estimated amount of gross minimum rental amounts receivable from
operating and sales-type leases at December 31, 2001, for each of the next
five years is as follows:
2002 $ 10,012
2003 9,932
2004 10,046
2005 8,887
2006 8,067
Thereafter 62,749
----------
$ 109,693
==========
5. INVENTORIES
AT DECEMBER 31,
----------------------------------
2001 2000
--------------- ---------------
Raw materials $ 6,559 $ 8,629
Work-in-process 11,537 11,963
Finished goods 24,627 30,425
--------------- ---------------
$ 42,723 $ 51,017
=============== ===============
6. FILM ASSETS
AT DECEMBER 31,
----------------------------------
2001 2000
--------------- ---------------
Completed and released films, net of accumulated amortization $ 1,682 $ 12,884
Films in production 8,597 15,413
Development costs 234 1,452
--------------- ---------------
$ 10,513 $ 29,749
=============== ===============
Included in costs of goods and services for 2001 are charges of $16.5
million (2000 - $8.6 million, 1999 - $nil) to reflect write-downs of
unamortized film costs.
All unamortized film costs for released films are expected to be amortized
within three years from December 31, 2001. The amount of accrued
participation liabilities that the Company expects to pay during 2002 is
$2.7 million.
Film assets include $0.5 million of interest capitalized in 2001 (2000 -
$0.8 million, 1999 - $0.2 million).
Page 39
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
7. FIXED ASSETS
AT DECEMBER 31, 2001
-------------------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
----------------- ----------------- -----------------
Equipment leased or held for use
Projection equipment $ 40,497 $ 18,099 $ 22,398
Camera equipment 9,442 7,239 2,203
----------------- ----------------- -----------------
49,939 25,338 24,601
----------------- ----------------- -----------------
Assets under construction 1,452 -- 1,452
----------------- ----------------- -----------------
Other fixed assets
Land 1,949 -- 1,949
Buildings 16,192 5,052 11,140
Office and production equipment 22,404 16,875 5,529
Leasehold improvements 8,893 912 7,981
----------------- ----------------- -----------------
49,438 22,839 26,599
----------------- ----------------- -----------------
$ 100,829 $ 48,177 $ 52,652
================= ================= =================
\
AT DECEMBER 31, 2000
-------------------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET BOOK VALUE
----------------- ----------------- -----------------
Equipment leased or held for use
Projection equipment $ 44,375 $ 12,547 $ 31,828
Camera equipment 10,447 7,388 3,059
----------------- ----------------- -----------------
54,822 19,935 34,887
----------------- ----------------- -----------------
Assets under construction 3,936 -- 3,936
----------------- ----------------- -----------------
Other fixed assets
Land 1,949 -- 1,949
Buildings 16,653 3,571 13,082
Office and production equipment 29,588 19,173 10,415
Leasehold improvements 30,712 7,925 22,787
----------------- ----------------- -----------------
78,902 30,669 48,233
----------------- ----------------- -----------------
$ 137,660 $ 50,604 $ 87,056
================= ================= =================
Interest capitalized in 2001 to fixed assets amounted to $nil (2000 - $0.6
million, 1999 - $0.6 million).
Page 40
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
8. OTHER ASSETS
AT DECEMBER 31,
--------------------
2001 2000
------- -------
Patents, trademarks and other intangibles $ 4,107 $ 3,886
Investments in equity-accounted investees 314 1,462
Other investments -- 7,679
Deferred charges on debt financing 3,092 4,717
Pension asset, representing unrecognized prior service costs 6,647 8,489
Other assets 1,242 3,407
------- -------
$15,402 $29,640
======= =======
9. INCOME TAXES
(a) Earnings (loss) from continuing operations before income taxes and minority
interest by tax jurisdiction, for the years ended December 31, comprise of
the following:
2001 2000 1999
--------- --------- ---------
Canada $ (91,414) $ (31,884) $ 36,774
United States (29,368) (8,008) 6,693
Japan 291 338 498
Other (1,502) (3,367) (436)
--------- --------- ---------
$(121,993) $ (42,921) $ 43,529
========= ========= =========
(b) The recovery of (provision for) income taxes related to income before the
cumulative effect of changes in accounting principles and extraordinary
items, for the year ended December 31, comprise of the following:
2001 2000 1999
-------- -------- --------
Current:
Canada $ 13,598 $ 8,167 $(38,719)
Foreign (35) (229) (2,065)
-------- -------- --------
13,563 7,938 (40,784)
-------- -------- --------
Deferred:
Canada (16,111) 1,915 24,874
Foreign (8,457) 3,286 (732)
-------- -------- --------
(24,568) 5,201 24,142
-------- -------- --------
$(11,005) $ 13,139 $(16,642)
======== ======== ========
Page 41
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
9. INCOME TAXES (cont'd)
(c) The recovery of (provision for) income taxes before the cumulative effect
of changes in accounting principles and extraordinary items differs from
the amount that would have resulted by applying the combined Canadian
federal and provincial statutory income tax rates to earnings, for the
years ended December 31, comprise of the following:
2001 2000 1999
-------- -------- --------
Income tax recovery (provision) at combined statutory rates $ 50,773 $ 18,863 $(18,980)
Increase (decrease) resulting from:
Non-deductible expenses, including amortization
of goodwill (3,434) (3,113) (1,925)
Manufacturing and processing credits deduction (1,704) (2,841) 3,832
Increase in valuation allowance (41,239) (1,338) (116)
Large corporations tax (402) (405) (404)
Income tax at different rates in foreign and other
provincial jurisdictions (1,156) (353) 620
Investment tax credits and other (903) 2,326 331
Effect of legislated tax rate reductions (12,940) -- --
-------- -------- --------
Recovery of (provision for) income taxes, as reported $(11,005) $ 13,139 $(16,642)
======== ======== ========
(d) The deferred income tax asset, at December 31, comprise of the following:
2001 2000
-------- --------
Net operating loss and capital loss carryforwards $ 16,959 $ 3,669
Investment tax credit and other tax credit carryforwards 1,944 1,353
Write-downs of other assets 5,085 2,590
Excess tax over accounting basis in fixed assets and inventories 37,920 43,400
Accrued reserves 9,628 540
Other 3,135 4,186
-------- --------
Total deferred income tax assets 74,671 55,738
Valuation allowance (45,504) (4,265)
-------- --------
29,167 51,473
Income recognition on net investment in leases (26,145) (7,040)
-------- --------
Net deferred income tax asset $ 3,022 $ 44,433
======== ========
Net operating loss carryforwards amounting to $22.2 million can be carried
forward to reduce taxable income through to 2016. Net capital loss
carryforwards amounting to $39.7 million can be carried forward
indefinitely to reduce capital gains. Investment tax credits of $2.0
million can be carried forward to reduce income taxes payable through to
2011.
10. SENIOR NOTES DUE 2005
In December 1998, the Company issued $200.0 million of Senior Notes (the
"Senior Notes") due December 1, 2005 bearing interest at 7.875% per annum
with interest payable in arrears on June 1 and December 1 of each year,
commencing June 1, 1999. The Senior Notes are the senior unsecured
obligation of the Company, ranking pari passu in right of payment to all
existing and future senior unsecured and unsubordinated indebtedness of the
Company and senior in right of payment to any subordinated indebtedness of
the Company.
Page 42
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
10. SENIOR NOTES DUE 2005 (cont'd)
The Senior Notes contains covenants that, among other things, limit the
ability of the Company to incur additional indebtedness, pay dividends or
make other distributions, make certain investments, create certain liens,
engage in certain transactions with affiliates, engage in certain sale and
leaseback transaction or engage in mergers, consolidations or the transfer
of all or substantially all of the assets of the Company. The Senior Notes
are subject to redemption by the Company, in whole or in part, at any time
on or after December 1, 2002, at redemption prices expressed as percentages
of the principal amount for each 12-month period commencing December 1 of
the years indicated: 2002 - 103.938%, 2003 - 101.969%, 2004 and thereafter
- 100.000% together with interest accrued thereon to the redemption date.
The Company may redeem the Senior Notes, in whole or in part, at any time
prior to December 1, 2002, at a redemption price equal to 100% of the
principal amount plus a "make-whole premium" calculated in reference to the
redemption price on the first date that the Senior Notes may be redeemed by
the Company plus accrued interest to, but excluding, the redemption date.
If certain changes result in the imposition of withholding taxes under
Canadian law, the Senior Notes are subject to redemption at the option of
the Company, in whole but not in part, at a redemption price of 100% of the
principal amount thereof plus accrued interest to the date of redemption.
In the event of a change in control, holders of the Senior Notes may
require the Company to repurchase all or part of the Senior Notes at a
price equal to 101% of the principal amount thereof plus accrued interest
to the date of repurchase.
Interest expense on the Senior Notes amounted to $15.8 million in 2001
(2000 - $15.8 million, 1999 - $15.8 million).
11. CONVERTIBLE SUBORDINATED NOTES DUE 2003
In April 1996, the Company issued $100.0 million of Convertible
Subordinated Notes (the "Subordinated Notes") due April 1, 2003 bearing
interest at 5.75% payable in arrears on April 1 and October 1. The
Subordinated Notes, subordinate to present and future senior indebtedness
of the Company, are convertible into common shares of the Company at the
option of the holder at a conversion price of $21.406 per share (equivalent
to a conversion rate of 46.7154 shares per $1,000 principal amount of
Subordinated Notes) at any time prior to maturity.
The Subordinated Notes are redeemable at the option of the Company on or
after April 1, 1999 at redemption prices expressed as percentages of the
principal amount (2002 - 100.821%) plus accrued interest. The Subordinated
Notes may be redeemed at any time on or after April 1, 2001 without
limitation.
Interest expense on the Subordinated Notes amounted to $5.0 million in 2001
(2000 - $5.8 million, 1999 - $5.8 million).
During 2001, the Company and a wholly owned subsidiary of the Company
purchased an aggregate of $70.4 million of the Company's Subordinated Notes
for $13.7 million, consisting of $12.5 million in cash by the subsidiary
and common shares by the Company valued at $1.2 million. The Company
recorded an extraordinary gain of $38.7 million, net of income tax expense
of $16.8 million.
On January 7, 2002 and January 9, 2002, the Company and a wholly owned
subsidiary of the Company purchased an additional $19.5 million in the
aggregate of the Company's Subordinated Notes for $7.3 million consisting
of $5.2 million in cash by the subsidiary and common shares by the Company
valued at $2.1 million (see note 22). The Company will record an additional
extraordinary gain of $12.2 million as a result of this transaction in the
first quarter 2002. These transactions had the effect of reducing the
principal of the Company's outstanding Subordinated Notes to $10.1 million.
Page 43
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
12. COMMITMENTS
(a) Total minimum annual rental payments to be made by the Company under
operating leases for premises are as follows:
2002 $ 4,747
2003 4,653
2004 4,432
2005 4,380
2006 4,402
Thereafter 41,044
-------
$63,658
=======
Rent expense was $5.6 million for 2001 (2000 - $5.5 million, 1999 - $2.9
million). In addition, in 2001 an accrual of $4.2 million (2000 - $nil,
1999 - $nil) was charged to selling, general and administrative expenses
for exit costs associated with a plan to vacate and sub-lease one of the
Company's premises.
(b) On September 26, 2001, the Company's demand facility with Toronto Dominion
Bank Financial Group matured. At the time of maturity, the Company had no
cash advances outstanding under the facility, which had been used in the
past to facilitate U.S. and Canadian letters of credit and cross currency
swaps. This line was secured by the Company's receivables, inventories,
certain real estate and other assets of the Company. As of December 31,
2001, the Company has letters of credit of $5.9 million outstanding, which
have been collateralized by cash deposits.
13. CONTINGENCIES
(a) In November 2001, the Company filed a complaint with the High Court of
Munich (the "Court") against Big Screen, a German large-screen cinema owner
in Berlin (the "Big Screen") demanding payment of outstanding Additional
Rent 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. The Big Screen is also a
member of Euromax, an association of European large-screen cinema owners
that filed a complaint in 2000 with the European Commission based on
European Community ("EC") competition rules, addressing broadly similar
allegations against the Company. In mid-2001, the European Commission sent
a preliminary letter to Euromax proposing to reject the complaint based on
EC competition rules. The European Commission has not yet taken a final
decision. Although the Court has the power to reject or reduce the
Company's demands for payment, and the European Commission has the power to
impose fines and order cessation of any infringements of EC competition
rules, the Company believes that on the basis of currently available
information, including the Commission's rejection letter and an initial
review of the facts and law, that such results are not likely. The Company
believes that all of the allegations in the complaint as well as these
allegations in the Big Screen's individual defense are meritless and will
accordingly continue to defend the matter vigorously. The Company believes
that the amount of the loss, if any, suffered in connection with this
dispute would not have a material impact on the financial position or
results of operations of the Company, although no assurance can be given
with respect to the ultimate outcome of any such litigation.
(b) In June 2000, a complaint was filed against the Company and a third party
by Mandalay Resort Group f/k/a Circus Circus Enterprises, Inc., alleging
breach of contract and express warranty, fraud and misrepresentation in
connection with the installation of certain motion simulation bases in
Nevada. The case is being heard in the U.S. District Court for the District
of Nevada. The complaint alleges damages in excess of $4.1 million. The
Company believes that the allegations made against it in the complaint are
meritless and will accordingly defend the matter vigorously. The Company
further believes that the amount of loss, if any, suffered in connection
with this lawsuit would not have a material impact on the financial
position or results of operations of the Company, although no assurance can
be given with respect to the ultimate outcome of any such litigation.
Page 44
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
13. CONTINGENCIES (cont'd)
(c) In December 2000, the Company filed a complaint against George Krikorian
Premiere Theaters LLC and certain other related parties (collectively
"Krikorian") in the U.S. District of California, alleging breach of
contract and fraud resulting in damages to the Company in excess of $6.0
million. In February 2001, Krikorian filed counterclaims against the
Company alleging, among other things, fraudulent inducement and negligent
misrepresentation, which counterclaims were subsequently dismissed and then
amended. Further counterclaims were filed in May 2001. The Company believes
that the allegations made against it in the counterclaims are meritless and
will defend against them vigorously. The Company believes that the amount
of loss, if any, suffered in connection with any such claims 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 March 2001, a complaint was filed against the Company by Muvico
Entertainment, L.L.C. ("Muvico"), alleging misrepresentation and seeking
rescission in respect of the system lease agreements between the Company
and Muvico. The Company filed counterclaims against Muvico for breach of
contract, unjust enrichment and theft of trade secrets, and brought claims
against Muvico and MegaSystems, Inc. ("MegaSystems"), a large-format
theater system manufacturer, for tortious interference, unfair competition
and/or deceptive trade practices, violations of the U.S. Lanham Act, and to
enjoin Muvico and MegaSystems from using the Company's confidential and
proprietary information. The case is being heard in the U.S. District
Court, Southern District of Florida, Miami Division. The Company believes
that the allegations made by Muvico in its complaint are entirely without
merit and will accordingly defend the claims vigorously. The Company
further believes that the amount of loss, if any, suffered in connection
with this lawsuit would not have a material impact on the financial
position or results of operation of the Company, although no assurance can
be given with respect to the ultimate outcome of any such litigation.
(e) In August 2000, Edwards Theaters Circuit, Inc. and related companies
("Edwards") filed for protection under Chapter 11 of the United States
bankruptcy code in the U.S. Bankruptcy Court for the Central District of
California, Santa Ana Division. Pursuant to a stipulation reached among
Edwards and the Company and approved by the court, Edwards' leases of
Company theater system equipment were deemed rejected as of August 1, 2001.
On August 2, 2001, the Company filed a proof of claim in the amount of
$28.9 million for amounts due and owing to the Company at the time of the
commencement of the bankruptcy and for damages arising from Edwards'
rejection of the leases pursuant to section 365 of the Bankruptcy Code. In
addition, on August 1, 2001, the Company brought an adversary action in the
bankruptcy court against Edwards for violations of the Lanham Act for
unfair competition and false advertising, trademark dilutions under federal
and state law, common law trademark infringement and unfair competition,
unfair business practices under state law and misappropriation of trade
secrets. Edwards has objected to the Company's claim and moved to disallow
it and, on September 4, 2001, Edwards answered the Company's complaint and
asserted counterclaims against the Company, alleging non-compliance with
the California Franchise Investment Law and negligent misrepresentation. By
stipulation of the Company and Edwards, the motion to disallow the
Company's claim, and the adversary action filed by the Company including
Edwards' counterclaims have been consolidated. In March 2002, Edwards
amended its counterclaim to add additional counts, including fraudulent
concealment and intentional misrepresentation. The Company intends to move
for summary judgement on all claims in the action immediately upon the
conclusion of discovery in May 2002. The Company believes that the
allegations made by Edwards in its objection to the Company's claim and
Edwards' counterclaims are entirely without merit and the Company has and
will accordingly defend the matter vigorously. The Company believes that
the amount of loss, if any, suffered in connection with such counterclaims
would not have a material impact on the financial position or results of
operations of the Company, although no assurance can be given with respect
to the ultimate outcome of any such litigation.
(f) In addition to the litigation described above, the Company is currently
involved in other litigation which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect
to the ultimate outcome of any such litigation.
Page 45
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
14. CAPITAL STOCK
(a) AUTHORIZED
The authorized capital of the Company consists of an unlimited number of
common shares and an unlimited number of Class C preferred shares issuable
in two series.
The following is a summary of the rights, privileges, restrictions and
conditions of each of the classes of shares.
REDEEMABLE CLASS C PREFERRED SHARES, SERIES 1
The holders of Class C Series 1 preferred shares are entitled to a
cumulative dividend at the rate of 7% to 10% per annum under certain
conditions on the issue price of Canadian $100 per share.
Except as otherwise required by law, the holders of Class C Series 1
preferred shares are not entitled to vote at any meeting of the
shareholders.
Notice of redemption for all outstanding Class C Series 1 preferred shares
was delivered on December 29, 1998 and all outstanding shares were redeemed
on January 21, 1999.
REDEEMABLE CLASS C PREFERRED SHARES, SERIES 2
The Class C Series 1 preferred shares may be converted at any time in whole
upon a resolution of the directors of the Company into the same number of
Class C Series 2 preferred shares. The terms of the Series 2 shares shall
be identical to the Class C Series 1 shares except that the holders of
Class C Series 2 shares will be entitled to such number of votes as the
directors determine subject to a maximum of six percent of the votes
attaching to all voting shares of the Company outstanding immediately
following the conversion.
COMMON SHARES
The holders of common shares are entitled to receive dividends if, as and
when declared by the directors of the Company, subject to the rights of the
holders of any other class of shares of the Company entitled to receive
dividends in priority to the common shares.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of the shareholders.
(b) CHANGES DURING THE PERIOD
In 2001, the Company issued 150,000 common shares pursuant to the exercise
of stock options for cash proceeds of $0.03 million, 20,000 common shares
with a value of $0.4 million relating to additional consideration in
acquiring DPI under the terms of DPI employment contracts, 1,000,000 common
shares under terms of the Company's employment contracts with an ascribed
value of $2.6 million and 677,600 common shares with an ascribed value of
$1.2 million as partial payment for the repurchase of the Subordinated
Notes (see note 11).
In 2000, the Company issued 281,300 common shares pursuant to the exercise
of stock options for cash proceeds of $1.4 million, 10,658 common shares
with a value of $0.2 million related to additional consideration in
acquiring DPI under the terms of DPI employment contracts and 1,668 common
shares under the terms of an employment contract with an ascribed value of
$0.03 million.
In 1999, the Company issued 277,838 common shares pursuant to the exercise
of stock options for cash proceeds of $2.2 million and 1,666 common shares
were issued under the terms of an employment contract with an ascribed
value of $0.03 million.
(c) SHARES HELD BY A SUBSIDIARY
Issued common shares held by a subsidiary of the Company amounted to nil at
December 31, 2001 (2000 - nil, 1999 - 148,000). During 2000, 148,000 (1999
- 65,000) common shares held by this subsidiary were sold to a former
employee of the Company in connection with the exercise of a stock option
grant for cash proceeds of $0.03 million (1999 - $0.01 million).
Page 46
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
14. CAPITAL STOCK (cont'd)
(d) STOCK BASED COMPENSATION
As at December 31, 2001, the Company has reserved a total of 8,372,550
(2000 - 8,522,550) common shares for future issuance as follows:
(i) 166,744 common shares were reserved for issuance pursuant to stock
options granted to a former officer of the Company, of which 150,000
were exercised in 2001. These options have an exercise price
equivalent to Canadian $0.32 per share and expire on September 1,
2002. These options are fully vested.
(ii) 15,008 common shares have been reserved for issuance pursuant to stock
options granted at an exercise price equivalent to Canadian $1.59 per
share, which options are fully vested and expire on January 30, 2003.
(iii)8,340,798 common shares remain reserved for issuance under the Stock
Option Plan, of which options in respect of 4,609,086 common shares
are outstanding at December 31, 2001. The options granted under the
Stock Option Plan generally vest between one and five years and expire
10 years or less from the date granted. At December 31, 2001, options
in respect of 2,549,182 common shares were vested and exercisable.
Under the terms of certain employment agreements, the Company is required
to issue 360,000 restricted common shares or pay their cash equivalent. The
restricted shares or the related cash obligation vest one-third on each of
January 1 and July 1, 2001, and July 1, 2002. The Company has recorded an
expense of $0.6 million in 2001 (2000 - $0.2 million, 1999 - $nil) under
this agreement.
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
---------------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- ---------- ------- ------- -------
Options outstanding, beginning of year 8,071,072 5,157,400 3,327,300 $ 21.91 $ 20.18 $ 19.38
Granted 1,395,128 3,224,972 2,225,000 2.95 24.25 20.32
Exercised - (131,300) (201,638) - 9.06 10.82
Cancelled(1) (2,867,100) - - 21.42 - -
Forfeited (1,990,014) (180,000) (193,262) 21.94 26.17 18.09
---------- ---------- ----------
Options outstanding, end of year 4,609,086 8,071,072 5,157,400 16.98 21.91 20.18
========== ========== ==========
Options exercisable, end of year 2,549,182 3,269,728 2,514,634
========== ========== ==========
(1) Included in 2001 are stock options for 2,600,000 common shares
cancelled for $nil consideration in conjunction with the issuance of
650,000 common shares under the terms of certain employment
agreements. The cancellation of the remaining balance of stock options
was done for $nil consideration.
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at December 31, 2001:
NUMBER OF SHARES
-----------------------
WEIGHTED
RANGE OF EXERCISE AVERAGE EXERCISE AVERAGE
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE REMAINING TERM
-------------------- ----------- --------- ---------------- --------------
$ 0.00 - $ 4.99 1,193,128 97,657 $ 2.96 6.6 Years
$ 5.00 - $ 9.99 191,100 191,100 6.75 3.0 Years
$10.00 - $14.99 41,000 41,000 11.94 4.1 Years
$15.00 - $19.99 324,320 318,820 16.41 6.0 Years
$20.00 - $24.99 1,974,972 1,403,672 22.15 7.1 Years
$25.00 - $28.99 884,566 496,933 27.02 7.8 Years
---------- ---------
Total 4,609,086 2,549,182 16.98 6.7 Years
========== =========
Page 47
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
14. CAPITAL STOCK (cont'd)
(e) EARNINGS (LOSS) PER SHARE
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net earnings (loss) applicable to common shareholders:
Earnings (loss) before cumulative effect of changes in
accounting principles and extraordinary items $ (183,848) $ (31,837) $ 25,233
Cumulative effect of changes in accounting principles,
net of income tax benefit of $37,286 -- (61,110) --
Extraordinary gain on repurchase of convertible
subordinated notes, net of income tax expense
of $16,843 38,734 -- --
------------ ------------ ------------
$ (145,114) $ (92,947) $ 25,233
============ ============ ============
Weighted average number of common shares:
Issued and outstanding, beginning of year 30,051,514 29,757,888 29,478,384
Weighted average number of shares
issued during the year 864,167 116,227 137,404
------------ ------------ ------------
Weighted average number of shares used in computing
basic earnings (loss) per share 30,915,681 29,874,115 29,615,788
Assumed exercise of stock options, net of
shares assumed -- -- 897,590
Assumed conversion of Subordinated Notes -- -- 1,167,855
------------ ------------ ------------
Weighted average number of shares used in computing
diluted earnings (loss) per share 30,915,681 29,874,115 31,681,233
============ ============ ============
The calculation of diluted loss per share for 2001 and 2000 excludes
options to purchase common shares of stock which were outstanding, and
common shares issuable upon conversion of the Subordinated Notes, as the
impact of these exercises and conversions would be anti-dilutive.
If the methodology prescribed by FAS 123, had been adopted by the Company,
pro forma results for the year ended December 31, would have been as
follows:
2001 2000 1999
---------- --------- -------
Net earnings (loss) $(155,404) $(99,314) $20,362
Earnings (loss) per share:
Basic $ (5.03) $ (3.32) $ 0.69
Diluted $ (5.03) $ (3.32) $ 0.64
The weighted average fair value of common share options granted in 2001 at
the time of grant was $3.2 million (2000 - $24.1 million, 1999 - $14.7
million). The fair value of common share options granted is estimated at
the grant date using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, an average risk free interest
rate of 4.5% (2000 - 6.0%, 1999 - 6.0%), 20% forfeiture of options vesting
greater than two years, expected life of one to five years and expected
volatility of 200% due to the potential significant fluctuations in the
Company's stock price.
Page 48
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
15. CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
The Company, as part of its review of financial results and ongoing
assessment of the carrying value of the Company's assets, primarily due to
industry-wide economic and financial difficulties faced by many of the
Company's customers, recorded the following charges:
(a) Within costs of goods and services, the Company recorded a charge of $16.5
million in 2001 (2000 - $8.6 million, 1999 - $nil) based on the reduced
fair values of the Company's film assets. In 2001, the Company also
recorded a charge of $4.1 million for inventories (2000 - $nil, 1999 -
$nil), due to a reduced net realizable value.
(b) The Company recorded a charge of $4.5 million to selling, general and
administrative expenses in 2001 (2000 - $13.1 million, 1999 - $0.9 million)
relating to the Company's accounts receivable, as collectibility on certain
accounts was considered uncertain.
(c) In performing its assessment of the carrying value of long-term
investments, the Company recorded $5.6 million in 2001 (2000 - $4.1
million, 1999 - $nil) in charges for declines in the value that are
considered to be other than temporary.
16. RESTRUCTURING COSTS AND ASSET IMPAIRMENTS
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
------- ------- ------
Restructuring costs(1) $16,292 $ -- $ --
Asset impairments
Net investment in leases(2) 13,633 -- --
Fixed assets(3) 26,660 11,152 --
Other assets 3,283 -- --
------- ------- ------
Total $59,868 $11,152 $ --
======= ======= ======
(1) In its efforts to stabilize and rationalize its business, the Company
has been focused on reducing expenses and changing its corporate
structure to reflect industry-wide economic and financial difficulties
faced by many of the Company's customers. The Company has relocated its
Sonics sound-system facility in Birmingham, Alabama to near Toronto,
Canada, and has reduced its overall corporate workforce by 208
employees. In 2001, the Company recorded expenses of $12.6 million for
staff severances and $3.7 million for premises relocation charges. As
at December 31, 2001 the Company had accrued liabilities of $5.1
million (2000 - $nil) for costs of severed employees to be paid to
employees over the next three years.
(2) In its assessment of the carrying value of the Company's net investment
in leases for the year ended December 31, 2001, the Company recorded a
charge of $13.6 million (2000 - $nil, 1999 - $nil), as collectibility
associated with certain leases was considered uncertain.
(3) The Company, in assessing the carrying value of its fixed and other
assets pursuant to FASB Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121"), recorded charges of
$26.7 million in 2001 (2000 - $11.2 million, 1999 - $nil) relating to
fixed assets.
Page 49
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
17. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
(a) Changes in other non-cash operating assets and liabilities
comprise of the following:
Decrease (increase) in:
Accounts receivable $ 1,331 $ (111) $ (1,499)
Net investment in leases 5,687 (9,258) (34,097)
Inventories 6,852 (6,657) 2,882
Prepaid expenses (33) (1,939) 1,145
Increase (decrease) in:
Accounts payable (9,862) (7,127) (3,165)
Accrued liabilities 9,251 2,361 (16,539)
Deferred revenue (9,335) (8,613) 3,079
Income taxes payable (recoverable) 10,629 (42,585) 32,796
-------- -------- --------
$ 14,520 $(73,929) $(15,398)
======== ======== ========
(b) Cash payments made during the year on account of:
Income taxes $ 1,107 $ 33,613 $ 7,464
======== ======== ========
Interest $ 21,910 $ 21,500 $ 21,369
======== ======== ========
(c) Depreciation, amortization and write-downs comprise of the
following:
Depreciation and amortization:
Film assets $ 10,544 $ 9,346 $ 13,595
Fixed assets 8,652 11,131 5,038
Other assets 3,075 4,982 2,268
Goodwill and intangibles 3,005 2,114 2,159
Deferred financing costs 1,149 1,213 1,219
-------- -------- --------
26,425 28,786 24,279
Write-downs:
Accounts receivable 4,469 13,086 949
Net investment in leases 13,633 -- --
Inventories 4,053 -- --
Film assets 16,514 8,602 --
Fixed assets 26,660 11,152 --
Other assets 8,047 -- --
-------- -------- --------
73,376 32,840 949
-------- -------- --------
$ 99,801 $ 61,626 $ 25,228
======== ======== ========
Page 50
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
18. SEGMENTED AND OTHER INFORMATION
As of December 31, 2001, the Company has three reportable segments: IMAX
systems, films and other. The Company's digital projection systems
operating segment was disposed of effective December 11, 2001 and has been
reflected as discontinued operations (see note 3). The IMAX systems segment
designs, manufactures, sells or leases and maintains IMAX theater
projection systems. The films segment produces and distributes films, and
performs film post-production services. The other segment includes camera
rentals and theater operations. The accounting policies of the segments are
the same as those described in note 2. Segment performance is evaluated
based on gross margin less selling, general and administrative expenses,
research and development expenses, amortization, income (loss) from
equity-accounted investees and restructuring costs and asset impairments.
Inter-segment transactions are not significant.
(a) OPERATING SEGMENTS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
REVENUE
IMAX systems $ 76,582 $ 113,226 $ 126,826
Films 29,923 41,711 47,227
Other 12,154 18,179 18,783
--------- --------- ---------
Total $ 118,659 $ 173,116 $ 192,836
========= ========= =========
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 4,226 $ 38,660 $ 70,403
Films (33,022) (13,734) 244
Other (21,850) (23,321) (1,980)
Corporate overhead (43,233) (19,936) (14,232)
--------- --------- ---------
Total $ (93,879) $ (18,331) $ 54,435
========= ========= =========
DEPRECIATION, AMORTIZATION AND WRITE-DOWNS
Depreciation and amortization:
IMAX systems $ 12,548 $ 8,187 $ 5,741
Films 8,725 11,208 14,044
Other and corporate 5,152 9,391 4,494
--------- --------- ---------
26,425 28,786 24,279
--------- --------- ---------
Write-downs:
IMAX systems 24,421 13,086 949
Films 30,901 8,602 --
Other and corporate 18,054 11,152 --
--------- --------- ---------
73,376 32,840 949
--------- --------- ---------
Total $ 99,801 $ 61,626 $ 25,228
========= ========= =========
PURCHASE OF FIXED ASSETS
IMAX systems $ 173 $ 3,600 $ 9,934
Films 3 15,147 5,778
Other 915 8,896 6,753
--------- --------- ---------
Total $ 1,091 $ 27,643 $ 22,465
========= ========= =========
AT DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
ASSETS
IMAX systems $182,319 $222,119 $254,940
Films 30,372 68,609 65,149
Other 9,014 38,262 47,099
Corporate 39,807 101,219 130,371
Discontinued operations -- 61,891 40,678
-------- -------- --------
Total $261,512 $492,100 $538,237
======== ======== ========
Page 51
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
18. SEGMENTED AND OTHER INFORMATION (cont'd)
(b) GEOGRAPHIC INFORMATION
Theater system revenue, maintenance, film distribution and film
post-production revenue by geographic area are based on the location of the
theater, while the location of the customer determines the geographic
allocation of other revenue:
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
REVENUE
Canada $ 5,524 $ 8,454 $ 15,289
United States 71,357 82,987 99,184
Europe 21,880 43,141 34,953
Japan 3,971 4,512 10,835
Rest of World 15,927 34,022 32,575
-------- -------- --------
Total $118,659 $173,116 $192,836
======== ======== ========
AT DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
LONG-LIVED ASSETS
Canada $ 52,654 $ 61,427 $ 73,278
United States 33,802 53,246 33,089
Europe 1,126 3,773 350
Japan 40 840 131
Rest of World 4,057 8,580 1,847
-------- -------- --------
Total $ 91,679 $127,866 $108,695
======== ======== ========
(c) REVENUE AND COST OF GOODS AND SERVICES
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Revenue:
Products $ 80,403 $121,478 $141,816
Services 38,256 51,638 51,020
-------- -------- --------
Total revenue $118,659 $173,116 $192,836
======== ======== ========
Costs of goods and services:
Products $ 63,270 $ 66,321 $ 58,272
Services 34,121 46,334 39,701
-------- -------- --------
Total costs of goods and services $ 97,391 $112,655 $ 97,973
======== ======== ========
Product revenue includes sales and sales-type leases of theater systems,
revenue from film distribution and the sales of other products. Service
revenue includes rentals from operating leases, maintenance,
post-production services, camera rentals, theater operations and other
services.
Page 52
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
19. FINANCIAL INSTRUMENTS
From time to time the Company engages in hedging activities to reduce the
impact of fluctuations in foreign currencies on its profitability and cash
flow. The Company is exposed to market risk from changes in foreign
currency rates. The Company does not use financial instruments for trading
or other speculative purposes.
A substantial portion of the Company's revenues are denominated in U.S.
dollars while a substantial portion of its costs and expenses are
denominated in Canadian dollars. A portion of the net U.S. dollar flows of
the Company are converted to Canadian dollars to fund Canadian dollar
expenses, either through the spot market or through forward contracts.
Existing foreign exchange contracts expired on October 16, 2001 and the
Company recorded a loss of $0.1 million. The Company plans to convert
Canadian dollar expenses to U.S. dollars through the spot and forward
markets on a go-forward basis. In Japan, the Company has ongoing operating
expenses related to its operations. Net Japanese Yen flows are converted to
U.S. dollars generally through forward contracts to minimize currency
exposure. The Company also has cash receipts under leases denominated in
Japanese Yen and French francs which were converted to U.S. dollars
generally through forward contracts to minimize currency exposure. These
contracts were sold on August 9, 2001 for proceeds of $0.7 million. The
Company plans to convert Japanese Yen and French franc lease cash flows to
U.S. dollars through the spot and forward markets on a go-forward basis.
The Company entered into an interest rate swap transaction in May 1999 for
a term commencing June 1, 1999 and terminating on December 1, 2002. The
Company had agreed to pay a floating rate of LIBOR plus 1.49% to June 1,
2000 and LIBOR plus 2.09% for the remainder of the term and the
counterparty had agreed to pay a fixed rate of 7.875% on notional principal
of $65.0 million. The floating rate was revised every 1st of December,
March, June and September. The Company adjusted interest expense over each
three-month period for the net amount it was to receive from, or pay to,
the counterparty. The Company sold its entire position in the swap to a
third party on January 10, 2001 for net proceeds of $0.2 million.
The Company's adoption of FASB Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
effective January 1, 2001 did not have a significant impact on the
accounts.
The carrying values of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair
values due to the short-term maturity of these instruments. The Company's
other financial instruments at December 31, comprise of the following:
2001 2000
------------------------------ --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------ ------------ -----------
Investments in marketable debt securities $ -- $ -- $ 7,529 $ 7,529
Other investments -- -- 7,679 7,679
Senior Notes 200,000 80,000 200,000 110,000
Subordinated Notes 29,643 9,189 100,000 38,500
Foreign currency contracts -- -- 731 363
Interest rate swap contracts -- -- -- (209)
The fair value of investments in marketable debt securities approximates
carrying value due to the short-term maturity of the investments. The fair
value of other investments is based on quoted market prices or dealer
quotes. The fair values of the Company's Senior Notes and Subordinated
Notes are estimated based on quoted market prices for the Company's debt.
The fair value of foreign currency contracts held for hedging purposes
represents the estimated amount the Company would receive upon termination
of the agreements, taking into consideration current exchange rates and the
credit worthiness of the counterparties. The fair value of the interest
rate swap contracts represents the estimated amount the Company would pay
to the counterparty to terminate the agreement, taking into account the
interest rate at year end.
Page 53
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
19. FINANCIAL INSTRUMENTS (cont'd)
Financial instruments consist primarily of cash, cash equivalents and those
which potentially subject the Company to credit risk such as investments in
marketable debt securities, accounts receivable and financial instruments
used for hedging purposes. The Company maintains cash and cash equivalents
with various major financial institutions. Cash equivalents and investments
in marketable debt securities include investments in commercial paper of
companies with high credit rating and investment in money market
securities. The credit risk associated with financial instruments held for
hedging purposes would be limited to all unrealized gains on contracts
based on current market prices. The Company believes that dealing with
highly rated institutions has minimized this credit risk.
A substantial proportion of the Company's revenues are generated from
customers in the commercial exhibition industry, which experienced
significant deterioration in financial condition in 2001 and 2000. To
minimize its credit risk in this area, the Company retains title to
underlying theater systems leased, registers theater systems sold as
collateral, performs initial and ongoing credit evaluations of its
customers and makes ongoing provisions for its estimate of potentially
uncollectible amounts.
20. EMPLOYEE PENSION PLANS
(A) DEFINED BENEFIT PLAN
On July 12, 2000, the Company established a defined benefit pension plan
covering its two Co-Chief Executive Officers. The plan provides for a
lifetime retirement benefit from age 55 determined as 75% of the member's
best average 60 consecutive months of earnings during the 120 months
preceeding 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 prior to
termination of a member's employment, the vesting percentage shall become
100%. The following assumptions were used in determining the unfunded
status of the Company's defined benefit pension plan at December 31:
2001 2000
---------------- --------------
Discount rate 7.0% 7.0%
Rate of increase in compensation levels 1.5% 1.5%
The amounts accrued for the plan are determined as follows:
Projected benefit obligation: 2001 2000
---------------- ---------------
Obligation, beginning of year $ 11,595 $ --
Obligation arising on initiation of plan -- 11,321
Service cost 1,701 831
Interest cost 871 411
Actuarial gain (348) (968)
---------------- ----------------
Obligation, end of year $ 13,819 $ 11,595
================ ================
Unfunded status:
Obligation, end of year $ 13,819 $ 11,595
Unrecognized prior service cost (9,224) $ (10,622)
Unrecognized actuarial gain 1,316 968
---------------- ----------------
Accrued pension liability $ 5,911 $ 1,941
================ ================
In addition, included in accrued liabilities, is a minimum pension
liability of $6.6 million (2000 - $8.5 million), representing unrecognized
prior service costs.
Page 54
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
20. EMPLOYEE PENSION PLANS (cont'd)
(a) DEFINED BENEFIT PLAN (cont'd)
The following table provides disclosure of pension expense for the defined
benefit plan for the year ended December 31:
2001 2000
--------------- ---------------
Service cost $ 1,701 $ 831
Interest cost 871 411
Amortization of prior service cost 1,398 699
--------------- ---------------
Pension expense $ 3,970 $ 1,941
=============== ===============
At the time the Company established the defined benefit pension plan, it
also took out life insurance policies on its two Co-Chief Executive
Officers. The Company intends to use the proceeds of such insurance
policies to satisfy, in whole or in part, the survival benefits due and
payable under the plan, although there can be no assurance that the Company
will elect to do so. At December 31, 2001, the cash surrender value of the
insurance policies is $0.4 million.
(b) DEFINED CONTRIBUTION PLANS
The Company also maintains defined contribution employee pension plans for
its employees, including its executive officers. The Company makes
contributions to these plans on behalf of employees in an amount equal to
5% of their base salary subject to certain prescribed maximums. During
2001, the Company contributed and expensed an aggregate of $0.5 million
(2000 - $0.6 million, 1999 - $0.6 million) to the Canadian plan and an
aggregate of $0.3 million (2000 - $0.4 million, 1999 - $0.2 million) to the
Company's defined contribution employee pension plan under Section 401(k)
of the U.S. Internal Revenue Code.
21. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(a) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS" ("FAS 142")
With the adoption of FAS 142, goodwill will no longer be subject to
amortization over its estimated useful life but instead will be subject to
at least an annual assessment for impairment by applying a fair-value-based
test. The Company must adopt the requirements of FAS 142 effective January
1, 2002.
As of December 31, 2001, the Company carried the following values for
goodwill and intangibles on its balance sheet, net of accumulated
amortization:
INTANGIBLES
Patents, trademarks and other intangibles $ 4,107
===========
GOODWILL
IMAX $ 32,457
Sonics Associates, Inc. 6,570
-----------
$ 39,027
===========
The amortization of goodwill for the year ended December 31, 2001 was $2.3
million. Prior to the implementation of FAS 142 goodwill amortization was
projected to be approximately $2.3 million per year for the years 2002,
2003 and 2004.
The Company is currently evaluating the effect of adopting this
pronouncement.
Page 55
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
21. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (cont'd)
(b) FASB STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 144, "ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("FAS 144")
FAS 144 supercedes FAS 121 and the accounting and reporting provisions of
APB 30 for segments of a business to be disposed of. The pronouncement is
effective January 1, 2002, and will be adopted by the Company at that time.
The Company is currently evaluating the effect of adopting this
pronouncement.
22. SUBSEQUENT EVENTS
On January 7, 2002 and January 9, 2002, the Company and a wholly owned
subsidiary of the Company purchased an additional $19.5 million in the
aggregate of the Company's Subordinated Notes for $7.3 million, consisting
of $5.2 million in cash by the subsidiary and common shares by the Company
valued at $2.1 million. The Company will record an additional extraordinary
pre-tax gain of $12.2 million as a result of this transaction in the first
quarter of 2002. These transactions had the effect of reducing the
principal of the Company's outstanding Subordinated Notes to $10.1 million.
On January 1, 2002, the Company entered into an agreement with its print
supplier, Technicolor Inc. ("Technicolor"), under which the Company
receives certain favorable discounts on its, its affiliates' and its
customers' film processing costs. Such discounts, which are based on, among
other things, footage of work provided to Technicolor by the Company on an
annual basis, are to be credited against an upfront payment provided by
Technicolor to the Company in February 2002. As collateral, a priority
mortgage on the Company's Mississauga facility was registered in favor of
Technicolor, which mortgage will be released after a portion of the upfront
payment is recouped by Technicolor, or upon the occurrence of certain other
conditions. The agreement with Technicolor, which requires the Company to
use only Technicolor or Technicolor affiliates for its large-format film
processing, expires September 30, 2006.
On February 14, 2002, the Company and Regal Cinemas, Inc. ("Regal") signed
an agreement pursuant to which Regal agreed to assume its master system
lease agreement with the Company dated June 23, 1997, as modified by the
parties, in connection with Regal's bankruptcy proceeding, resulting in
Regal's six existing IMAX theaters remaining in operation. As part of the
agreement, pursuant to Regal's Motion for Entry of Agreed Order Authorizing
Assumption of Executory Contract with IMAX Corporation filed in the United
States Bankruptcy Court, Middle District of Tennessee, Regal paid the
Company $6.45 million in satisfaction of all of the Company's claims
against Regal in its bankruptcy.
Page 56
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
23. ACQUISITIONS
(a) On September 3, 1999, the Company acquired all of the common and preferred
shares of DPI, a designer and manufacturer of digital image delivery
systems. The transaction was accounted for as a purchase and the assets
acquired and the liabilities assumed were recorded at their estimated fair
market value. The purchase price of $27.3 million was paid with $25.5
million of cash and 100,000 shares of the Company, valued at $1.8 million,
to be issued to former shareholders of DPI over a period of five years. In
addition, the purchase price was subject to a valuation adjustment with the
vendors to a maximum of an additional $1.5 million, for which funds were
placed in escrow by the Company.
The purchase price was allocated to assets and liabilities acquired to
record them at their estimated fair values at September 3, 1999 as follows:
Cash $ 1,526
Accounts receivable 3,867
Inventories 6,654
Fixed assets 3,056
Other assets 4,000
Accounts payable and accrued liabilities (12,013)
Deferred income tax 1,783
Goodwill 18,377
----------
$ 27,250
==========
In 2000, the Company recorded an increase of $0.9 million to goodwill in
finalizing the purchase allocation and the additional amounts arising under
the escrow arrangements.
As described in note 3, the Company disposed of DPI effective December 11,
2001.
(b) On October 1, 1999, the Company acquired the remaining 49% interest of
Sonics Associates, Inc. ("Sonics"), not owned by the Company. Sonics is the
provider of sound systems for the Company's theater systems. The purchase
price of $12.7 million in cash was paid to Sonics management to acquire its
minority interest which had a carrying value of $6.0 million and effecting
an increase in goodwill of $6.7 million. The purchase agreement also
provides for an additional earn out amount to be paid to the former
shareholders over the period 2000 to 2004.
The Company increased goodwill in 2001 by $1.0 million (2000 - $0.3
million) to account for the guaranteed earn-out amount paid to the former
shareholders.
Page 57
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)
24. CHANGES IN ACCOUNTING POLICIES
(a) SEC STAFF ACCOUNTING BULLETIN NO. 101, "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS" ("SAB 101")
In preparing its financial statements for the year ended December 31, 2000,
the Company reviewed its revenue recognition accounting policies in the
context of SAB 101. In accordance with the interpretive guidance of SAB
101, the Company, effective January 1, 2000, recognizes revenue on theater
systems, whether pursuant to sales-type leases or sales, at the time that
installation is complete. Prior to January 1, 2000, the Company recognized
revenue from sales-type leases and sales of theater systems at the time of
delivery. The effect of applying this change in accounting principle was a
fiscal 2000 non-cash charge of $54.5 million, net of income taxes of $33.4
million, or $1.82 per share, representing the cumulative impact on retained
earnings as at December 31, 1999.
The following are pro forma amounts for the year ended December 31, 1999 as
if SAB 101 had been applied during all years presented:
1999
------
Revenue $166,617
Net earnings $ 7,655
Basic earnings per share $ 0.26
Diluted earnings per share $ 0.25
(b) AICPA STATEMENT OF POSITION 00-2, "ACCOUNTING BY PRODUCERS OR DISTRIBUTORS
OF FILMS" ("SOP 00-2")
Effective January 1, 2000, the Company adopted SOP 00-2. Prior to January
1, 2000, revenues associated with the licensing of films were recognized in
accordance with FASB Statement of Financial Accounting Standard No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films"
and exploitation costs were capitalized and amortized. As a result of
adopting SOP 00-2, the Company recorded a non-cash charge of $6.6 million,
net of income taxes of $3.9 million, or $0.22 per share, to fiscal 2000
earnings, representing the cumulative impact on retained earnings as at
December 31, 1999.
25. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Page 58
IMAX CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Richard L. Gelfond............. 46 Co-Chairman and Co-Chief Executive Officer and Director
Bradley J. Wechsler............ 50 Co-Chairman and Co-Chief Executive Officer and Director
Kenneth G. Copland............. 64 Director
J. Trevor Eyton................ 67 Director
Garth M. Girvan................ 52 Director
Ellis B. Jones................. 48 Director
G. Edmund King................. 68 Director
Murray B. Koffler.............. 78 Director
Sam Reisman.................... 49 Director
Marc A. Utay................... 42 Director
W. Townsend Ziebold............ 40 Director
Francis T. Joyce............... 49 Chief Financial Officer
Greg Foster.................... 39 President, Filmed Entertainment
Robert D. Lister............... 33 Executive Vice President, Business & Legal Affairs and General Counsel
Mary Pat Ryan.................. 45 Executive Vice President, Worldwide Marketing
Brian Bonnick.................. 45 Senior Vice President, Technology
David B. Keighley.............. 53 Senior Vice President & President, David Keighley Productions 70MM Inc.
Larry O'Reilly................. 39 Senior Vice President, Theatre Development & Film Distribution
G. Mary Ruby................... 44 Deputy General Counsel, Senior Vice President, Legal Affairs
and Corporate Secretary
Mary C. Sullivan............... 38 Senior Vice President, Human Resources & Administration
Mark Welton.................... 38 Senior Vice President, Business Affairs
Kathryn A. Gamble.............. 34 Vice President, Finance and Controller
Edward MacNeil................. 37 Vice President, Finance, Special Projects
Under the Articles of IMAX Corporation, the Board of Directors is divided
into three classes, each of which serves for a three year term. The term of
Class II directors, currently composed of Kenneth G. Copland, Garth M. Girvan,
Murray B. Koffler and Marc A. Utay expires in 2002. The term of Class I
directors, currently composed of J. Trevor Eyton, O.C., G. Edmund King, Sam
Reisman and W. Townsend Ziebold expires in 2003. The term of Class III
directors, currently composed of Richard L. Gelfond, Ellis B. Jones and Bradley
J. Wechsler expires in 2004.
RICHARD L. GELFOND has been Co-Chairman of the Company since June 1999 and
Co-Chief Executive Officer since May 1996. From March 1994 to June 1999 Mr.
Gelfond served as Vice Chairman of the Company. In addition, Mr. Gelfond serves
on the boards of Mainframe Entertainment, Inc. and several private and
philanthropic entities.
BRADLEY J. WECHSLER has been Chairman or Co-Chairman of the Company since
March 1994 and Co-Chief Executive Officer with Mr. Gelfond since May, 1996. Mr.
Wechsler serves on the boards of Mainframe Entertainment, Inc., NYU Hospital,
the Kernochan Center for Law, Media and the Arts, and the American Museum of the
Moving Image.
Page 59
IMAX CORPORATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
KENNETH G. COPLAND, a Director of the Company since June 1999, is the
Chairman of KGC Ltd. Mr. Copland was the Vice-Chairman of BMO Nesbitt Burns Inc.
from 1994 to May 2001. He is Chairman of Humber College Foundation and HC
Educational Ventures Limited. Mr. Copland is a director of the Investment
Dealers Association of Canada. Mr. Copland is a Canadian citizen.
THE HONOURABLE J. TREVOR EYTON, a Director of the Company since June 1999,
is a senior director of Brascan Corporation, and prior to May 2000 was a senior
officer of Brascan Corporation in various capacities dating back to 1979 when he
was appointed President and Chief Executive Officer. He is also a director of
Noranda Inc., Coca-Cola Enterprises, General Motors of Canada, Limited and
Ivernia West Inc., as well as a member of the Advisory Board of Nestle Canada
Ltd. Senator Eyton, a Canadian citizen, has been a member of the Senate of
Canada since September 1990 and is an Officer of the Order of Canada.
GARTH M. GIRVAN, a Director of the Company since 1994, is a partner of
McCarthy Tetrault, Canadian counsel to the Company. Mr. Girvan is a Canadian
citizen.
ELLIS B. JONES, a Director of the Company since June 2001, has been the
Chief Executive Officer of Wasserstein & Co., LP, a merchant banking and venture
capital firm since January, 2001. Prior to that he was a Managing Director in
charge of merchant banking at Wasserstein Perella & Co., Inc. Mr. Jones serves
as a director for a number of privately held companies.
G. EDMUND KING, a Director of the Company since June 1999, has been Deputy
Chairman and a director of McCarvill Corporation since January, 1996. Mr. King
is also a director of Falconbridge Ltd., and Afton Food Group Ltd. From June
1994 to January 1998, Mr. King was Chairman of WIC Western International
Communications. Mr. King is a Canadian citizen.
MURRAY B. KOFFLER, a Director of the Company since May 1996, founded
Shoppers Drug Mart in 1968 and presently serves as its Honorary Chairman. Mr.
Koffler co-founded Four Seasons Hotels Limited and presently serves as a
Director. Since 1988, Mr. Koffler has been Chairman of the International Board
of Directors of the Weizmann Institute of Science in Israel. Mr. Koffler holds
numerous other directorships. Mr. Koffler is a Canadian citizen and is an
Officer of the Order of Canada.
SAM REISMAN, a Director of the Company since June 1999, has been the
principal shareholder, Chairman and Chief Executive Officer of The Rose
Corporation, a real estate finance and investment company which was previously a
real estate development company, since September 1986. Mr. Reisman is currently
the principal shareholder of Hayden Industrial Products of Corona, California,
formerly a division of The Equion Corporation. Mr. Reisman is a Canadian
citizen.
MARC A. UTAY, a Director of the Company since May 1996, has been a Managing
Member of Clarion Capital Partners since November 1999. Prior to joining
Clarion, Mr. Utay was a Managing Director of Wasserstein Perella & Co. Inc. and
a member of Wasserstein Perella's Policy Committee. Mr. Utay was co-head of
Wasserstein Perella's Leveraged Finance, Retailing and Media, Telecommunication
and Entertainment groups. Prior to his joining Wasserstein Perella, Mr. Utay was
Managing Director at Bankers Trust Company where he specialized in leveraged
finance and mergers and acquisitions. Mr. Utay is a director of P & F
Industries, Inc and FONS Corp.
W. TOWNSEND ZIEBOLD, a Director of the Company since June 1999 and has been
the Non-Executive Chairman of the Board since June 2001. Mr. Ziebold is
currently President of the Venture Capital Practice of Wasserstein & Co., L.P.,
formerly the private equity arm of Wasserstein Perella Group Inc. Previously,
Mr. Ziebold was a Managing Director of Wasserstein Perella & Co., Inc. and head
of its Venture Capital Practice. Mr. Ziebold was a director of Maybelline, Inc.
and Collins & Aikman Corporation and currently serves on several private company
boards in the media, entertainment and Internet industries.
Page 60
IMAX CORPORATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
FRANCIS T. JOYCE joined the Company in March, 2001, as Chief Financial
Officer. Prior to joining the Company Mr. Joyce held the position of Chief
Financial Officer of the Internet company theglobe.com from 1998 until his
employment with the Company. From 1997 to 1998, Mr. Joyce served as Chief
Financial Officer of Reed Travel Group, a division of Reed Elsevier PLC and from
1994 to 1997 served as Chief Financial Officer of the Alexander Consulting
Group, a division of Alexander and Alexander Services Inc., an international
professional services firm. Mr. Joyce is a member of Financial Executive
International and the American Institute of Certified Public Accountants.
GREG FOSTER joined the Company in March, 2001 as President, Filmed
Entertainment. Prior to joining the Company, Mr. Foster was Executive
Vice-President of Production at MGM/UA. Prior to that Mr. Foster held other
senior positions including Senior Vice-President of Motion Picture Marketing
Research during his 15 years at MGM/UA.
ROBERT D. LISTER joined the Company as Senior Vice President, Legal Affairs
and General Counsel in May 1999 and was appointed Executive Vice President,
Business & Legal Affairs in May 2001. Prior to joining the Company, Mr. Lister
was Vice President, General Counsel and Secretary of Clearview Cinemas, a film
exhibitor, from March 1998 until his employment with the Company. Prior to that,
Mr. Lister served as Associate General Counsel of Merit Behavioral Care
Corporation, a behavioral healthcare company, from March 1996 through March
1998. Mr. Lister is a member of the New York State Bar Association.
MARY PAT RYAN joined the Company in 1999 as Executive Vice President,. and
President, Network Group and was appointed Executive Vice President, Worldwide
Marketing in January 2001. Prior to joining the Company, Ms. Ryan was Senior
Vice President, Marketing and Creative Services of Lifetime Entertainment
Services, provider of one of the nations leading basic television networks
Lifetime, Television for Women, and Lifetime Movie Network, a movie network
targeted to women, from September 1998 to July 1999. Prior to that, Ms. Ryan was
Executive Vice President, Marketing and Programming of U.S. Satellite
Broadcasting, a national satellite television provider from February 1994 to
August, 1998.
BRIAN BONNICK joined the Company in 1999 as Vice President, Research &
Development and was appointed Senior Vice President, Technology in August 2001.
Prior to joining the Company, Mr. Bonnick was Vice President, Engineering and
Operations for Electrohome Corporation. Prior to that Mr. Bonnick was Vice
President and General Manager at TSB International Inc. a telecommunications
company. Mr. Bonnick is registered as a professional engineer by the Association
of Professional Engineers of Ontario. Mr. Bonnick is a Canadian citizen.
DAVID B. KEIGHLEY has been a Senior Vice President of the Company since
July 1997 and is President of David Keighley Productions 70MM Inc. From January
1995 to July 1997, Mr. Keighley was a Vice President of the Company. He is
responsible for motion picture and digital post-production and image quality
assurance for 15/70-format films. Mr. Keighley is a Canadian citizen.
LARRY O'REILLY joined the Company in 1994 as the Sales Manager, Film
Distribution and was appointed Senior Vice President, Theatre Development & Film
Distribution in January 2002. Mr. O'Reilly has held various positions within the
Company including Manager, Business Development: Film; Director, Strategic
Partnerships; Director, Commercial Marketing: The Americas and Vice President,
Sales, The Americas. Mr. O'Reilly is a Canadian citizen.
Page 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
G. MARY RUBY joined the Company in 1987 as Associate General Counsel and
was appointed Senior Vice President, Legal Affairs in 2001. Ms Ruby was General
Counsel from February 1989 to February 1997. Ms. Ruby is Deputy General Counsel
and acts as Corporate Secretary to the Board of Directors. Ms. Ruby is a member
of the Ontario Bar and is a Canadian citizen.
MARY C. SULLIVAN joined the Company in 1996 as Director, Human Resources
and was appointed Vice President, Human Resources and Administration in 1998 and
Senior Vice President, Human Resources and Administration in 2000. Prior to
joining the Company, Ms. Sullivan was Director, Human Resources of Central Park
Lodges. Ms. Sullivan is a Canadian citizen.
MARK WELTON joined the Company in July 1997 as Director, Business Affairs
and was appointed Senior Vice President, Business Affairs in September 2001.
Previous to that Mr. Welton was Vice President, Business Affairs, a position he
held since January, 2000. Prior to joining the Company Mr. Welton was an
Associate Lawyer at Stikeman, Elliot from 1994 until his employment with the
Company. Mr. Welton is a Canadian citizen.
KATHRYN A. GAMBLE joined the Company in July 2001 as Vice President,
Finance and Controller. Prior to joining the Company Ms. Gamble served as Vice
President, Finance and Chief Financial Officer of an Internet company,
Healthyconnect.com Inc. from 2000 until her employment with the Company. From
1996 to 2000, Ms. Gamble served as Vice President and Chief Financial Officer of
Med-emerg Inc. a Nasdaq listed healthcare company. Ms. Gamble is a member of the
Canadian Institute of Chartered Accountants and a Canadian citizen.
EDWARD MACNEIL joined the Company in April, 1994 as Director, Taxation &
Treasury and was appointed Vice President, Finance, Special Projects in
September 2001. From October 1999 to August 2001, Mr. MacNeil held the position
of Director and Senior Vice President, Digital Projection Limited, a former IMAX
subsidiary. Prior to joining the Company Mr. MacNeil was a Taxation Manager at
PricewaterhouseCoopers. Mr. MacNeil is a member of the Canadian Institute of
Chartered Accountants and a Canadian citizen.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information under the following captions in the Company's Proxy Statement:
"Summary Compensation Table", "Options Granted", "Pension Plans", "Employment
Contracts", "Compensation Committee" and "Directors' Compensation".
Page 62
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of each class of the Company's securities as at December 31, 2001 or
as otherwise indicated in the notes below, including (i) all beneficial owners
of more than 5% of the Company's voting capital stock, (ii) all directors and
Named Executive Officers individually, and (iii) all directors and executive
officers as a group.
SHARES BENEFICIALLY OWNED
----------------------------------------
TITLE OF CLASS BENEFICIAL OWNERS NUMBER OF SHARES(1) % OF CLASS(2)
----------------- --------------------------------------------------- ------------------- -------------
Common Shares WASSERSTEIN PERELLA GROUP: 10,195,384 (3) 30.33
Wasserstein Perella Partners, L.P.
Wasserstein Perella Offshore Partners, L.P.
WPPN, L.P.
Michael J. Biondi solely in his capacity as
Voting Trustee
Wasserstein Capital, L.P.
PRUDENTIAL FINANCIAL, INC.: 3,094,054 (4) 9.21
Prudential Financial, Inc.
Jennison Associates LLC
Richard L. Gelfond ................................ 2,070,900 (5) 6.16
Bradley J. Wechsler ............................... 1,945,800 (6) 5.79
Kenneth G. Copland ................................ 31,836 (7) *
J. Trevor Eyton ................................... 17,934 (8) *
Garth M. Girvan ................................... 59,734 (9) *
Ellis B. Jones..................................... 11,902(10) *
G. Edmund King .................................... 21,836 (7) *
Murray B. Koffler ................................. 32,200(11) *
Sam Reisman ....................................... 96,865(12) *
Marc A. Utay ...................................... 273,836 (9) *
W. Townsend Ziebold ............................... 21,836 (7) *
Greg Foster........................................ 2,500 *
Andrew Gellis...................................... 64,500(13) *
Richard Intrator................................... 105,000(14) *
David B. Keighley.................................. 90,500.(15) *
All executive officers and directors as a group
(25 persons) ...................................... 5,007,381(16) 14.90
Statements as to securities beneficially owned by directors and by
executive officers, or as to securities over which they exercise control or
direction, are based upon information obtained from such directors and executive
officers and from records available to the Company.
* less than 1%
(1) Includes number of shares owned at December 31, 2001 and common shares as
to which each individual had at December 31, 2001 the right to acquire
beneficial ownership through the exercise of options plus options that
vested within 60 days of December 31, 2001 and shares issuable upon
conversion of 5.75% Subordinated Notes due April 1, 2003.
(2) Based on dividing the Number of Shares by the total shares outstanding as
of December 31, 2001 adjusted for shares issuable upon conversion of 5.75%
Subordinated Notes due April 1, 2003 adjusted for shares issuable through
the exercise of options to the Beneficial Owners.
(3) Based on information contained in a Schedule 13G/A dated February 14, 2002
filed by Wasserstein Management Partners LP, 1301 Avenue of the Americas,
New York, New York and information provided directly to the Company by
Wasserstein & Co. LP on March 12, 2002.
Page 63
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cont'd)
(4) Based on information contained in a Schedule 13G/A dated February 11, 2002
filed by Prudential Financial, Inc., 751 Broad Street, Newark, New Jersey
and information contained in a Schedule 13G dated February 8, 2002 filed by
Jennison Associates LLC, 466 Lexington Avenue, New York, New York.
(5) Included in the amount shown are 538,000 common shares as to which Mr.
Gelfond had the right to acquire beneficial ownership through the exercise
of options.
(6) Included in the amount shown are 538,000 common shares as to which Mr.
Wechsler had the right to acquire beneficial ownership through the exercise
of options.
(7) Included in the amount shown are 21,836 common shares as to which Messrs.
Copland, King and Ziebold had the right to acquire beneficial ownership
through the exercise of options.
(8) Included in the amount shown are 17,934 common shares as to which Mr. Eyton
had the right to acquire beneficial ownership through the exercise of
options.
(9) Included in the amount shown are 33,836 common shares as to which Messrs.
Girvan and Utay had the right to acquire beneficial ownership through the
exercise of options.
(10) Included in the amount shown are 11,902 common shares as to which Mr. Jones
had the right to acquire beneficial ownership through the exercise of
options.
(11) Included in the amount shown are 28,000 common shares as to which Mr.
Koffler had the right to acquire beneficial ownership through the exercise
of options.
(12) Included in the amount shown are 21,836 common shares as to which Mr.
Reisman had the right to acquire beneficial ownership through the exercise
of options and 28,029 common shares at to which Mr. Reisman had the right
to acquire upon conversion of the 5.75% Subordinated Notes due April 1,
2003.
(13) Included in the amount shown are 64,500 common shares as to which Mr.
Gellis had the right to acquire beneficial ownership through the exercise
of options.
(14) Included in the amount shown are 100,000 common shares as to which Mr.
Intrator had the right to acquire beneficial ownership through the exercise
of options.
(15) Included in the amount shown are 80,500 common shares as to which Mr.
Keighley had the right to acquire beneficial ownership through the exercise
of options.
(16) Included in the amount shown are 1,712,081 common shares as to which all
directors and executive officers as a group had the right to acquire
beneficial ownership through the exercise of options and the conversion of
the 5.75% Subordinated Notes due April 1, 2003.
Page 64
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cont'd)
SHAREHOLDERS' AGREEMENTS
IMAX Corporation (the "Corporation"), Wasserstein Perella Partners, L.P.,
Wasserstein Perella Offshore Partners, L.P., WPPN, Inc., and the Michael J.
Biondi Voting Trust (collectively "WP"), and each of Messrs. Wechsler and
Gelfond are parties to a Second Amended and Restated Shareholders Agreement (the
"Shareholders Agreement") dated as of February 9, 1999, which amends and
restates the previous amended and restated shareholders agreement among those
parties dated June 16, 1994. The Shareholders Agreement includes, among other
things, certain restrictions on transfers of common shares, take-along rights
and come-along rights. If WP holds at least 35% of their original holdings and
WP desires to transfer all of their securities in a transaction in which a
majority of the shares of outstanding common stock are to be sold, then Messrs.
Gelfond and Wechsler will be required to sell their securities on the same terms
as WP sells its securities.
The Shareholders Agreement also contains provisions related to the
composition of the Board of Directors and committees thereof. WP is entitled,
but not required, to designate individuals to be nominated for election as
directors as follows: so long as WP holds 3,685,759 or more common shares, it
may designate six nominees, of whom three may be employees of WP and its
affiliates (the "WP Employee Designees") and three shall be independent persons
and resident Canadians. If WP holds less than 3,685,759 common shares, but
1,842,879 or more common shares, it may designate four nominees, of whom two may
be WP Employee Designees and two shall be independent persons and resident
Canadians. If WP holds less than 1,842,879 common shares but 921,439 or more
common shares, it may designate two nominees, one of whom may be a WP Employee
Designee and the other of whom shall be an independent person and shall be a
resident Canadian. In addition to these provisions, each of Messrs. Wechsler and
Gelfond is entitled to be a director of the Corporation so long as he is either
a Co-Chief Executive Officer or is the Chief Executive Officer of the
Corporation or Messrs. Wechsler and Gelfond own more than 375,000 common shares.
In addition, Messrs. Wechsler and Gelfond are collectively entitled, but not
required, to designate individuals to be nominated for election as directors as
follows: so long as they hold 1,628,000 or more common shares, they may
designate three nominees, all of whom shall be independent persons and resident
Canadians. If they hold less than 1,628,000 common shares, but 1,075,000 or more
common shares, they may designate two nominees, both of whom shall be
independent and resident Canadians. If they hold less than 1,075,000 common
shares but 375,000 or more common shares, they may designate one nominee who
shall be an independent person and resident Canadian. If the requirement that
the Corporation have `resident Canadian' directors is changed, then neither WP
nor Messrs. Wechsler and Gelfond will be required to designate resident Canadian
nominees.
The Shareholders Agreement also provides that the Corporation, WP and each
of Messrs. Wechsler and Gelfond shall use their best efforts to cause the
Corporation to establish a nominating committee of the Board of Directors
consisting of two directors, one designated by WP and the other designated by
Messrs. Wechsler and Gelfond. In addition, WP has the right, subject to the
approval of Messrs. Wechsler and Gelfond, to designate a WP Employee Designee
for appointment by the Board of Directors of the Corporation as the
Non-Executive Chairman of the Board, as long as WP holds at least 2,948,607
common shares. W. Townsend Ziebold has been approved as such designee. If Mr.
Ziebold no longer holds that position, then WP is to propose three replacements
and Messrs. Wechsler and Gelfond shall select one of those proposed for
appointment by the Board as the Non-Executive Chairman. Each of Messrs. Wechsler
and Gelfond is entitled to be appointed as a Co-Chairman or Chairman of the
Corporation as long as he is a Co-Chief Executive Officer or the Chief Executive
Officer of the Corporation. The Agreement provides that the duties of the
Non-Executive Chairman and the Co-Chief Executive Officers shall be as set forth
in the Bylaws, including the requirement that the following actions be approved
by the Non-Executive Chairman and at least one of the Co-Chief Executive
Officers: setting the dates and times of meetings of the directors and
shareholders (other than normal quarterly Board of Directors, and annual
shareholders' meetings), setting the agenda of such meetings, and appointing
members of committees of the Board of Directors other than persons designated by
WP and Messrs. Wechsler and Gelfond as provided in the Shareholders' Agreement.
Each of WP and Messrs. Wechsler and Gelfond have the right to designate one
director to serve on each committee of the Board of Directors of the
Corporation, provided that each such person meets applicable regulatory
requirements.
Page 65
IMAX CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cont'd)
SHAREHOLDERS' AGREEMENTS (cont'd)
Each of WP and Messrs. Wechsler and Gelfond agreed to use their best
efforts to cause there no longer to be CEO Advisors as of the date upon which
all of the WP Employee Designees are elected as directors of the Corporation.
All of the WP Employee Designees were elected as directors at the Corporation's
annual and special meeting of shareholders held June 7, 1999 and the CEO
Advisors were disbanded in June, 1999.
REGISTRATION RIGHTS AGREEMENT
The Corporation, WP and Messrs. Wechsler and Gelfond also entered into a
registration rights agreement (the "Registration Rights Agreement") dated as of
February 9, 1999, which carried forward the corresponding provisions of the June
16, 1994 shareholders agreement, and pursuant to which each of WP and Messrs.
Wechsler and Gelfond have certain rights to cause the Corporation to use its
best efforts to register their securities under the U.S. Securities Act of 1933.
WP is entitled to effect up to four demand registrations and Messrs. Wechsler
and Gelfond are entitled to make two such demand registrations. WP and Messrs.
Wechsler and Gelfond also have unlimited piggy-back rights to register their
securities under the Registration Rights Agreement whenever the Corporation
proposes to register any securities under the U.S. Securities Act, other than
the registration of securities pursuant to an initial public offering or the
registration of securities upon Form S-4 or S-8 under the U.S. Securities Act or
filed in connection with an exchange offer or an offering of securities solely
to the Corporation's existing shareholders. In addition to these provisions, if
Messrs. Wechsler and Gelfond hold at least 25% of their original holdings, WP
has recouped its original investment plus a 30% compounded annual return on such
investment, and WP initiates the sale of the Corporation, then for 60 days
thereafter, WP will enter into exclusive negotiations with Messrs. Gelfond and
Wechsler, and for another 60 days thereafter WP may not enter into an agreement
for the sale of the Corporation to a third party. The Registration Rights
Agreement also provides that Messrs. Wechsler and Gelfond will have the right
from March 1 to March 31 in any, but only one, of 1999, 2000 and 2001, to notify
the Corporation of their decision to require the Corporation to take action to
liquidate their common shares. The Corporation is required to use its best
efforts to cause at its option either (i) the sale of the Corporation within a
period of 180 days from receipt of the notice to liquidate, (ii) the filing of a
registration statement pursuant to the U.S. Securities Act within a period of
120 days from its receipt of the notice to liquidate, or (iii) purchase the
securities owned by Messrs. Gelfond and Wechsler for cash at the fair market
value as agreed upon by the Corporation and Messrs. Gelfond and Wechsler within
20 days of the notice to liquidate, or in the event of their failure to reach an
agreement, as determined by a procedure utilizing nationally recognized
investment banking firms. In the event that Messrs. Gelfond and Wechsler
exercise their rights to require the Corporation to take such action, they may
be entitled to certain cash bonus payments as described in the Proxy Statement
under "Executive Compensation - Employment Contracts".
The former shareholders of the Corporation have substantially similar
piggyback registration rights that commenced on March 1, 1996 pursuant to the
terms of the Selling Shareholders' Agreement (as defined below).
WP, Messrs. Gelfond and Wechsler, and the former shareholders of
Predecessor IMAX have entered into another shareholders' agreement (the "Selling
Shareholders' Agreement") which includes, among other things, registration
rights, tag along rights and drag along rights.
STANDSTILL AGREEMENT
See Standstill Agreement in Item 13.
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IMAX CORPORATION
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STANDSTILL AGREEMENT
On July 9, 2001 pursuant to Section 3(c)(iv) of the Second Amended and
Restated Shareholders' Agreement dated as of February 9, 1999 entered into by
and among Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore
Partners, L.P., WPPN, Inc., and the Michael J. Biondi Voting Trust (the
preceeding entities together, "WP"), IMAX Corporation (the "Corporation"),
Richard L. Gelfond and Bradley J. Wechsler (the "Shareholders Agreement"), the
Corporation and each of Messrs. Gelfond and Wechsler entered into a Standstill
Agreement (the "GW Standstill Agreement"). Under the terms of the GW Standstill
Agreement, each of Messrs. Gelfond and Wechsler agreed to vote in any election
for directors in favour of each person nominated by the then current Board of
Directors, not to participate in or facilitate proxy contests, not to deposit
into a voting trust or subject voting securities to an agreement with respect to
voting such securities, not to acquire or affect or attempt to acquire or affect
control of the Corporation or to participate in a "group" as defined pursuant to
Section 13(d) of the U.S. Securities Exchange Act of 1934, which owns or seeks
to acquire beneficial ownership or control of the Corporation, and not to
attempt to influence the Corporation except through normal Board of Directors'
processes; provided, however, that the GW Standstill Agreement does not prevent
either of Messrs. Gelfond and Wechsler from taking any action in his capacity as
an officer or employee of the Corporation or any of its subsidiaries, including
as Co-Chief Executive Officer or Co-Chairman of the Corporation. As a result of
entering into the GW Standstill Agreement, in the event of the resignation,
death, disqualification under the Canada Business Corporations Act or the
removal or expiration of the term of any director designated by Messrs. Gelfond
and Wechsler pursuant to the Shareholders Agreement, Messrs. Gelfond and
Wechsler shall have the right to designate a replacement for such director
pursuant to the terms of the Shareholders Agreement, and WP shall use its best
efforts to cause each such designated director to be elected or appointed as a
director of the Corporation. The GW Standstill Agreement expires on July 8,
2002, and provides that Messrs. Gelfond and Wechsler may, from time to time,
extend the term of the GW Standstill Agreement for additional one year terms
thereafter (but in no event beyond March 1, 2004).
The Articles of the Corporation set forth the requirement that certain
matters be approved by 75% of the directors then in office. These matters are:
(i) hiring or terminating the employment of the Chief Executive Officer or any
Co-Chief Executive Officer of the Corporation; (ii) issuing any shares of
capital stock for a purchase price, or incurring indebtedness, in an amount of
$25.0 million or more; (iii) disposing of any material single asset, or all or
substantially all of the assets of the Corporation or approving the sale or
merger of the Corporation; (iv) acquiring a substantial interest in any other
entity or entering into any major strategic alliance; and (v) entering into or
changing the terms of any agreement or transaction with WP or Messrs. Wechsler
and Gelfond (other than agreements in the ordinary course of business, such as
employment agreements).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The consolidated financial statements filed as part of this Report are
included under Item 8 in Part II.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedule for each year in the three-year period
ended December 31, 2001
II. Valuation and Qualifying Accounts
Page 67
IMAX CORPORATION
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(cont'd)
(A)(3) EXHIBITS
The Items listed as Exhibits 10.1 to 10.12 relate to management contracts
or compensatory plans or arrangements.
EXHIBIT NO. DESCRIPTION
*3.1 Articles of Amalgamation of IMAX Corporation, dated January 1, 2002.
3.2 New By-Law No.1 of IMAX Corporation enacted on June 7, 1999. Incorporated by reference to Exhibit
3.2 to Form 10-Q for the quarter ended September 30, 1999.
4.1 Share Option Agreement, dated as of March 1, 1994, between WGIM Acquisition Corporation and
Douglas Trumbull. Incorporated by reference to Exhibit 4.1 to Form 10-K for the year ended
December 31, 2000.
4.2 Shareholders' Agreement, dated as of January 3, 1994, among WGIM Acquisition Corporation, the
Selling Shareholders as defined therein, Wasserstein Perella Partners, L.P., Wasserstein Perella
Offshore Partners, L.P., Bradley J. Wechsler, Richard L. Gelfond and Douglas Trumbull (the
"Selling Shareholders' Agreement"). Incorporated by reference to Exhibit 4.2 to Form 10-K for
the year ended December 31, 2000.
4.3 Amendment, dated as of March 1, 1994, to the Selling Shareholders' Agreement. Incorporated by
reference to Exhibit 4.3 to Form 10-K for the year ended December 31, 2000.
4.4 Amended and Restated Shareholders Agreement, dated as of February 9, 1999 by and among
Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L. Gelfond and IMAX Corporation.
Incorporated by reference to Exhibit 4.10 to Form 10-K for the year ended December 31, 1998.
4.5 Standstill Agreement, dated as of July 9, 2001 by and among IMAX Corporation, Richard L. Gelfond
and Bradley J. Wechsler. Incorporated by reference to Exhibit 4.9 to Form 10-Q for the period
ended June 30, 2001.
4.6 Registration Rights Agreement, dated as of February 9, 1999, by and among IMAX Corporation,
Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the
Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L. Gelfond. Incorporated by
reference to Exhibit 4.12 to Form 10-K for the year ended December 31, 1998.
4.7 Indenture, dated as of April 9, 1996, between IMAX Corporation and Chemical Bank, as Trustee,
related to the issue of the 5.75% Convertible Subordinated Notes due April 1, 2003. Incorporated
by reference to Exhibit 4.3 to Amendment No.1 to the Company's Registration Statement on Form F-3
(File No.333-5212).
4.8 Indenture, dated as of December 4, 1998 between IMAX Corporation and U.S. Bank Trust, N.A., as
Trustee, related to the issue of the 7.875% Senior Notes due December 1, 2005. Incorporated by
reference to Exhibit 4.9 to Form 10-K for the year ended December 31, 1998.
10.1 Stock Option Plan of IMAX Corporation, dated June 7, 1999. Incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended September 30, 1999.
10.2 Employment Agreement, dated as of July 15, 1997 between David Keighley Productions 70MM Inc. and
David B. Keighley. Incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended
December 31, 1997.
10.3 Employment Agreement, dated July 1, 1998 between IMAX Corporation and Bradley J. Wechsler.
Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1998.
10.4 Amended Employment Agreement, dated July 12, 2000 between IMAX Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 10.10 to Form 10-Q for the quarter ended September
30, 2000.
10.5 Amended Employment Agreement, dated April 3, 2001 between IMAX Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 10.15 to Form 10-Q for the quarter ended March 31,
2001.
Page 68
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(cont'd)
(A)(3) EXHIBITS (cont'd)
EXHIBIT NO. DESCRIPTION
10.6 Employment Agreement, dated July 1, 1998 between IMAX Corporation and Richard L. Gelfond.
Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1998.
10.7 Amended Employment Agreement, dated July 12, 2000 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.9 to Form 10-Q for the quarter ended September
30, 2000.
10.8 Amended Employment Agreement, dated April 3, 2001 between IMAX Corporation and Richard L.
Gelfond. Incorporated by reference to Exhibit 10.16 to Form 10-Q for the quarter ended March 31,
2001.
*10.9 Employment Agreement, dated March 9, 2001 between IMAX Corporation and Greg Foster.
10.10 Employment Agreement, dated October 8, 1998 between IMAX Corporation and Andrew Gellis.
Incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended December 31, 2000.
10.11 Amended Employment Agreement, dated August 17, 2000 between IMAX Corporation and Andrew Gellis.
Incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2000.
10.12 Employment Agreement, dated February 17, 2000 between IMAX Corporation and Richard Intrator.
Incorporated by reference to Exhibit 10.12 to Form 10-K for the year ended December 31, 2000.
*21 Subsidiaries of IMAX Corporation.
*23 Consent of PricewaterhouseCoopers LLP.
*24 Power of Attorney of certain directors.
* Filed herewith
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 25, 2001 under Item 5 -
Other events. The Company reported the purchase of approximately $48.0 million
in face value of the Company's 5.75% Subordinated Notes due April 1, 2003.
Page 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMAX CORPORATION
By /s/ FRANCIS T. JOYCE
---------------------------------------
Francis T. Joyce
Chief Financial Officer
Date: March 21, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 21, 2002.
/S/ BRADLEY J. WECHSLER /S/ RICHARD L. GELFOND /S/ FRANCIS T. JOYCE
---------------------------------------- --------------------------------------------- ----------------------------------
Bradley J. Wechsler Richard L. Gelfond Francis T. Joyce
Director and Director and Chief Financial Officer
Co-Chief Executive Officer Co-Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer) (Principal Executive Officer)
/s/ KATHRYN A. GAMBLE KENNETH G. COPLAND* J. TREVOR EYTON*
---------------------------------------- --------------------------------------------- ----------------------------------
Kathryn A. Gamble Kenneth G. Copland J. Trevor Eyton
Vice President, Finance and Controller Director Director
(Principal Accounting Officer)
GARTH M. GIRVAN* ELLIS B. JONES* G. EDMUND KING*
---------------------------------------- --------------------------------------------- ----------------------------------
Garth M. Girvan Ellis B. Jones G. Edmund King
Director Director Director
MURRAY B. KOFFLER* SAM REISMAN* MARC A. UTAY*
---------------------------------------- --------------------------------------------- ----------------------------------
Murray B. Koffler Sam Reisman Marc A. Utay
Director Director Director
W. TOWNSEND ZIEBOLD*
----------------------------------------
W. Townsend Ziebold
Director
By * /S/ FRANCIS T. JOYCE
--------------------------------------
Francis T. Joyce (as attorney-in-fact)
Page 70
IMAX CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of U.S. dollars)
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END OF
OF YEAR EXPENSES DEDUCTIONS(1) YEAR
-------------- ------------- ------------- ------------
ALLOWANCE FOR NET INVESTMENT IN LEASES
Year ended December 31, 1999(2)..................... $ 2,870 $ 45 $(2,613) $ 302
Year ended December 31, 2000........................ 302 6,511 -- 6,813
Year ended December 31, 2001........................ 6,813 11,257 (6,325) 11,745
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Year ended December 31, 1999(2)..................... $ 4,626 $ 949 $(1,081) $ 4,494
Year ended December 31, 2000(2)..................... 4,494 $15,870 (1,196) 19,168
Year ended December 31, 2001........................ 19,168 4,469 (5,577) 18,060
DEFERRED INCOME TAX VALUATION ALLOWANCE
Year ended December 31, 1999........................ $ 2,811 $ 116 $ -- $ 2,927
Year ended December 31, 2000........................ 2,927 1,388 -- 4,265
Year ended December 31, 2001........................ 4,265 41,239 -- 45,504
PROVISION FOR LOANS RECEIVABLE FROM
DISCONTINUED OPERATIONS
Year ended December 31, 1999........................ $ -- $ -- $ -- $ --
Year ended December 31, 2000........................ -- -- -- --
Year ended December 31, 2001........................ -- 12,700 -- 12,700
----------------
(1) Amounts represent write-offs of amounts previously charged to the provision.
(2) Revised from amounts reported in prior years to be consistent with current
year's presentation.