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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, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0140269
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2525 SPEAKMAN DRIVE, MISSISSAUGA,
ONTARIO, CANADA L5K 1B1
(Address of principal executive offices) (Postal Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (905) 403-6500
Securities registered pursuant to Section 12(b) of the Act:
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 [_]
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 March 11, 1998 was $473,178,429
(17,364,346 common shares times $27.25). As of March 11, 1998, there were
29,414,634 Common Shares of the registrant outstanding.
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]
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Annual Report on Form 10-K
DECEMBER 31, 1997
Table of Contents
<TABLE>
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Page
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PART I
<S> <C> <C>
Item 1 -- Business.................................................................................. 4
Item 2 -- Properties................................................................................ 12
Item 3 -- Legal Proceedings......................................................................... 12
Item 4 -- Submission of Matters to a Vote of Security Holders....................................... 13
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder Matters..................... 14
Item 6 -- Selected Financial Data................................................................... 15
Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations..... 18
Item 8 -- Financial Statements and Supplementary Data............................................... 27
Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 50
PART III
Item 10 -- Directors and Executive Officers of the Registrant........................................ 50
Item 11 -- Executive Compensation.................................................................... 53
Item 12 -- Security Ownership of Certain Beneficial Owners and Management............................ 58
Item 13 -- Certain Relationships and Related Transactions............................................ 60
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 62
Signatures............................................................................................. 65
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EXCHANGE RATE DATA
Unless otherwise indicated, all dollar amounts in this document are expressed
in United States 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, 1997 was U.S. $0.6999.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of period U.S. $0.7544 U.S. $0.7134 U.S. $0.7325 U.S. $0.7301 U.S. $0.6999
Average exchange rate
during period.................... 0.7751 0.7299 0.7312 0.7329 0.7220
High exchange rate during
period........................... 0.8046 0.7644 0.7533 0.7513 0.7471
Low exchange rate during
period........................... 0.7439 0.7098 0.7008 0.7235 0.6945
</TABLE>
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. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
- --------------------------------------------------------------------------------
IMAX(R), IMAX(R) Dome, IMAX(R) Ridefilm/TM/, IMAX(R) Solido(R), OMNIMAX(R),
IMAX(R) 3D, Personal Sound Environment(R), and The IMAX(R) Experience(TM) are
trademarks and trade names of the Company or its subsidiaries that are
registered or otherwise protected under laws of various jurisdictions.
3
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PART I
Item 1. Business
GENERAL
Imax Corporation and its subsidiaries (the "Company") designs and manufactures
projection and sound systems for giant-screen ("15/70-format") theaters based on
proprietary and patented technology and is the largest producer and distributor
of films for giant-screen theaters. The Company also designs and supplies custom
attractions including motion simulation theaters for both large-scale
attractions and smaller venues. The Company generally does not own IMAX theaters
but leases its projection and sound systems and licenses the use of its
trademarks. The IMAX brand name enjoys widespread recognition with more than
500 million viewers throughout the world having experienced the Company's high-
quality, giant-screen theater attractions since 1970 including over 60 million
viewers in 1997.
The Company has experienced substantial growth recently as a result of the
increased demand for both IMAX theaters in commercial locations and IMAX 3D
theater systems. In 1997, the Company signed agreements for 60 IMAX theater
systems valued at $132.3 million representing a 107% increase in the number and
48% increase in the value of theater systems signed versus the 29 theater
systems valued at $89.6 million signed during 1996. As a result of the record
signings activity, the Company's sales backlog increased by a record $43.6
million in 1997 to $175.4 million (representing the value of contracts for 77
theater systems including three system upgrades), an increase of 33% versus
$131.8 million (representing the value of contracts for 45 theater systems) in
1996. In 1997, 88% of the Company's theater system signings were for commercial
locations versus only 26% of the Company's existing theaters being in commercial
locations. In 1997, 93% of the Company's theater signings were for IMAX 3D
theater systems versus only 22% of the Company's existing theaters being IMAX
3D.
The IMAX system network is the most extensive giant-screen theater
network in the world with 159 theaters operating in 22 countries and a backlog
of 77 theater systems under signed contracts as of December 31, 1997. 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 highly realistic
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.
IMAX theater systems are often a featured attraction at high profile and
prestigious locations such as the Smithsonian Institution, the Kennedy Space
Center in Florida, Lincoln Square in New York, Port Vell in Barcelona, Spain,
the Museum of Science and Industry in Chicago, the theater adjacent to Grand
Canyon National Park and the Luxor Hotel and Casino in Las Vegas, Nevada.
Additionally, IMAX theaters and films have been showcased by major entertainment
companies such as Universal Studios, The Walt Disney Company and Caesars Palace,
Inc.
The library of 15/70-format films available for IMAX theaters includes 133
films at the end of 1997, of which the Company has the distribution rights to 47
such films. 15-perforation, 70 mm ("15/70") is the size of the film frame used
in IMAX projection systems and is the largest commercially available film
size. By utilizing 15/70-format film, IMAX theaters can project images which are
larger and clearer than other film formats. 15/70-format films cover a variety
of entertaining and educational subjects, including space (The Dream Is Alive
which was filmed from NASA's space shuttles and has grossed over $140 million
since its release in 1985), rock concerts (Rolling Stones "At the Max"), and
historical events (Fires of Kuwait, which was nominated for an Academy Award(R))
as well as commercial films (Across the Sea of Time which was produced by Sony
Corporation and The IMAX Nutcracker which was produced by the Company).
The Company also utilizes its proprietary and immersive sight, sound and
motion technologies to create unique entertainment attractions including motion
simulation theaters. The Company offers motion simulation theaters both for
large-scale attractions through its IMAX Simulator Ride ("ISR") technology and
for more compact venues through its IMAX Ridefilm technology.
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.
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PRODUCT LINES
The Company is the largest designer and supplier of projection and sound
systems and the largest producer and distributor of 15/70-format films for
giant-screen theaters. Additionally, both directly and through Ridefilm
Corporation, a wholly-owned subsidiary, the Company designs and manufactures
motion simulation theaters and produces films for movie rides. The Company's
theater systems include specialized projection equipment, advanced sound
systems, specialty screens, theater automation control systems and film handling
equipment. The Company's motion simulation theaters also include motion
platforms and control systems. Currently, the Company derives substantially all
of its revenues from giant-screen theaters and related film products and
services.
GIANT-SCREEN THEATERS
The Company is the pioneer and leader in the giant-screen, large-format
film industry. The IMAX theater system network has the largest installed base of
giant-screen theater systems, with systems located in 159 theaters in 22
countries, and a backlog of 77 theater systems under signed contracts as of
December 31, 1997. IMAX theaters have flat or dome shaped screens in 2D and 3D
which are many times larger than conventional theaters, which extend 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 300
to 500 people.
The Company's projection systems utilize the largest commercially available
film format (70mm, 15-perforation film frame), which is 10 times larger than
conventional film (35mm, 4-perforation film frame) 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 complement the film technology and viewing experience, IMAX theater systems
feature unique digital sound systems. The sound systems are among the most
advanced in the industry and help to heighten the sense of realism of a 15/70-
format film. IMAX sound systems are specifically designed for IMAX theaters and
are an important competitive advantage of IMAX systems.
The following chart shows the number of the Company's theater systems by
product, installed base and backlog as of December 31, 1997:
<TABLE>
<CAPTION>
2D 3D
----------------------------------------------- -------------------------------------------------
PRODUCT Installed Base Backlog(1) Product Installed Base Backlog(1)
---------------- --------------- ------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Flat Screen...... IMAX 61 8 IMAX 3D 32 33
IMAX 3D SR -- 30
Dome Screen...... IMAX Dome 63 6 IMAX Solido 3 --
</TABLE>
(1) Backlog includes three upgrades of systems.
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 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.
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IMAX 3D 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 glasses or electronic glasses that separate the left- and right-eye
images. The electronic glasses use liquid crystal shutter lenses controlled by
an infrared signal. Each lens "opens and closes" 48 times a second in
synchronization with the projector to produce full color stereoscopic viewing.
IMAX 3D systems represent an increasing portion of the Company's product mix.
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
nine theater systems and had two additional upgrades in backlog as of December
31, 1997.
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 SR theater system is designed to be located primarily in multiplexes.
The Company had 30 IMAX 3D SR systems in backlog at December 31, 1997.
IMAX SOLIDO SYSTEMS. IMAX Solido 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 Solido
projectors, like IMAX 3D projectors, can project both 2D and 3D films.
TEMPORARY THEATER SYSTEMS. The Company leases theater systems on a short-term
basis for world fairs, expositions or similar events. The Company has leased
theater systems for use at substantially all major world fairs since its
inception.
THEATER SYSTEM LEASES
The Company's system leases generally have 10 to 20-year initial terms and,
subject to certain conditions, are typically renewable by the customer for one
or more additional ten-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 to theater personnel and
ongoing maintenance to the system. Prospective theater owners are responsible
for providing the theater location, the design and construction of the theater
building 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 Company has experienced a minimal default rate and
has never removed a system for non-payment. 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 denominated in Canadian dollars and Japanese yen,
respectively.
The typical lease agreement provides for three major sources of revenue: (i)
upfront fees, (ii) ongoing royalty payments and (iii) ongoing maintenance fees.
Royalty 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.
The following is an overview of the theater system contract signings over the
past five years:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Permanent systems signed (1)................... 17 15 24 29 60
Temporary systems signed....................... -- 4 -- -- --
----- ----- ----- ----- ------
Total systems signed........................... 17 19 24 29 60
Value of systems signed (in millions) (2)...... $32.1 $46.0 $64.6 $89.6 $132.3
</TABLE>
6
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(1) Represents the number of the Company's theater systems which were the
subject of sale or long-term lease agreements signed by the Company. The
number of signings indicated for 1995, 1996 and 1997 include four, three
and three theater system upgrades, respectively. The number of signings
indicated for 1997 includes nine joint ventures and three wholly-owned
theaters. For 1996, theater signings include three wholly-owned theaters.
(2) Does not include the value of wholly-owned, partnership or joint venture
theaters.
THEATER OPERATIONS AND INVESTMENTS
In 1997, the Company signed contracts for nine joint ventures and three
wholly-owned theater locations. The Company has one wholly-owned and three
joint venture theaters in which it has a 50% equity interest. As of December
31, 1997 the Company's sales backlog includes nine joint ventures and four
wholly-owned theater locations.
In the case of joint ventures, the Company generally contributes the
projection and sound system to the theater in exchange for a percentage of the
theater revenues and/or profits. 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 joint venture.
ATTRACTIONS
The Company's attractions products utilize its proprietary and immersive
sight, sound and motion technologies to create unique entertainment attractions.
Currently the Company's primary attractions products are movie ride simulation
theaters which combine high-resolution projectors, engaging films and digital
sound technology with motion platforms to provide a unique entertainment
experience. A typical movie ride lasts approximately four minutes and new movie
rides can be shown by simply changing the film and the motion profile on the
computer software.
LARGE SCREEN MOTION SIMULATION THEATERS. Large scale IMAX Simulator Rides or
ISRs such as the Asteroid Adventure ride at Phantasialand in Bruhl, Germany,
which seats 256 passengers, combine an IMAX Dome projection system with several
multiple passenger vehicles. This design is similar to the design of Back To The
Future(R) . . . The Ride which seats 192 passengers and features a 15/70-format
film and IMAX Dome system. The Company entered into a joint venture with Caesars
World (an ITT Corporation subsidiary) and jointly developed and co-owns Race For
Atlantis, a 3D ISR in the Forum Shops at Caesars Palace in Las Vegas which seats
108 passengers and opened to the public in January 1998.
IMAX RIDEFILM THEATERS. IMAX Ridefilm theaters feature a compact, modular
design which maintains the ride quality of large-scale ISRs in a smaller space
allowing IMAX Ridefilm theaters to be located in smaller locations including
shopping malls, casinos, and location-based entertainment centers. The IMAX
Ridefilm theater design places a 180-degree spherically curved screen in front
of, and partially around, an 18-passenger vehicle. The members of the audience
have a large portion of their peripheral vision covered by the projected image
and front-row passengers sit as close as six feet from the screen. This enhances
the feeling of being in the movie as compared to competing simulation theaters
which are typically configured as conventional movie theaters with flat or
slightly curved screens located in front of rows of seats. As of December 31,
1997, the Company had delivered 26 IMAX Ridefilm systems and there was a backlog
of 18 systems, including six upgrades.
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SOUND SYSTEMS
The Company, through its 51% owned subsidiary, Sonics Associates Inc.
("Sonics"), manufactures the sound systems for the Company's theaters. IMAX
theaters feature six-channel 12,000 watt high-fidelity sound-systems with sub-
bass which places full range speakers both in front of and behind the audience
to provide a complete sound field with the ability to relate sounds to the
action on and off the screen. The Company custom designs the loudspeaker system
for each IMAX theater to eliminate variations in volume and sound quality over
the theater seating area to ensure that the members of the audience experience
superb sound quality regardless of where they are seated. The Company has
developed a patented digital audio technology with advanced circuit design
specifically to enhance sound clarity and depth of sound reproduction. Sonics is
51% owned by the Company and 49% owned by four executive officers of Sonics.
The Company and Sonics have developed a 3D "directional" sound technology
marketed under the trade name and trademark Personal Sound Environment ("PSE")
that can pinpoint sound placement so that sounds seem to be coming from a
particular direction and distance. This technology allows the realistic
reproduction of sounds such as a whisper over the listener's shoulder, a tennis
match being played 30 feet away, or an oncoming car veering away from the
listener at the last possible moment. The PSE system utilizes wireless headsets
with small speakers located in front of the listener's ear. The PSE system has
been installed in nine theaters.
FILM PRODUCTION AND DISTRIBUTION
The library of 15/70-format films available for IMAX theaters consists of 133
films at the end of 1997 on subjects such as space, wildlife, music, history and
natural wonders and commercial subjects. The Company has distribution rights to
47 such films. The majority of the 15/70-format films have been produced by
third parties, including several award-winning filmmakers. There are currently
more than twenty 15/70-format films in production, including one being produced
by the Company, which are expected to be released over the next three years.
15/70-format films can make audiences feel as though they have been
transported to places they have never been through the use of the largest,
clearest film images available today. In addition to their entertainment appeal,
15/70-format films often seek to educate the audience. 15/70-format films are
expected to be in distribution for five or more years, although many of the
films in the library have remained popular for 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 1997. In 1997 there were eight new
films released in the 15/70-format. 15/70-format films have been filmed from the
NASA space shuttles (The Dream Is Alive), documented rock concerts (Rolling
Stones "At the Max"), examined natural wonders (The Eruption of Mount St.
Helens), and recorded historic events (Fires of Kuwait, which was nominated for
an Academy Award(R)).
FILM PRODUCTION. The Company produces films financed either internally or,
partially or fully, financed by third parties. With respect to third party
productions, the third party generally pays for all production costs in advance
of the Company's expenditures. 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. In the case of films for IMAX
Ridefilm theaters, the Company primarily finances these films internally.
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).
FILM DISTRIBUTION. The Company generally distributes all the films produced by
the Company 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
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theater box office receipts. On a limited basis, the Company also markets video
cassette and laser disk souvenir copies of its films both at theaters and
through general retail chains.
CAMERAS. The Company rents 2D 15/70-format cameras and provides technical and
post-production services to third party producers for a fee. The Company
maintains 24 cameras and other film and lighting equipment to support third-
party producers and also offers production advice and technical assistance to
filmmakers.
The Company has developed a state-of-the-art patented dual filmstrip 3D
camera; which is among the most advanced motion picture cameras in the world and
is the only 3D camera of its kind. The IMAX 3D camera simultaneously shoots
left- and right-eye images and its compact size allows filmmakers access to a
variety of locations, such as underwater or aboard aircraft. The Company has two
such cameras in its inventory and is manufacturing a third camera.
MARKETING AND CUSTOMERS
The Company has experienced an increase in the number of commercial theater
signings since 1995. At December 31, 1997, the number of commercial theaters
installed and in backlog had increased 70% over 1996 and the segment is now the
largest with 41 theaters installed and 62 in backlog. 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. For a
breakdown of the installed theater base and backlog by market segment,
geographic segment and product as of December 31, 1997, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Company also markets IMAX attractions hardware and films, including motion
simulation products, to theme parks, entertainment centers and other high
traffic locations.
INDUSTRY AND COMPETITION
The Company faces competition in all of its business activities. There can be
no assurance that the Company's existing products will continue to compete
effectively. The commercial success of the Company's products is ultimately
dependent upon consumer preferences. There can be no assurance that changes in
consumer preferences will not make the Company's products less competitive.
The out-of-home entertainment industry in general is undergoing significant
changes, primarily due to technological developments and changing consumer
tastes. Numerous companies are developing 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 the
consumers and/or more cost effective than the Company's products and that may
make the Company's products less competitive. There can be no assurance that the
Company's existing products will continue to compete effectively and be
attractive to consumers or that its products under development will ever 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.
Large-Format Theater Industry
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
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of system, features, price and service. The Company believes that its
competitive strengths include the value and increasing awareness of the IMAX
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.
MOTION SIMULATION INDUSTRY
The Company competes with a large number of manufacturers of motion simulation
systems. The Company's IMAX Simulator Ride theater, which generally seats
approximately 100 or more persons, competes primarily with other large scale
attractions developed by theme parks. IMAX Ridefilm theaters compete primarily
with other motion simulation companies. A number of the Company's competitors in
the motion simulation industry have a larger number of existing theaters as well
as a larger film library than the Company. The Company believes that IMAX
Ridefilm theaters compete primarily on the quality of the entertainment
experience and additionally, the Company believes that the IMAX brand name and
reputation are important competitive advantages of the Company.
RESEARCH AND DEVELOPMENT
The Company has significant in-house proprietary expertise in projection
system design and camera and sound system design, engineering and technology. In
January 1997, the Company was awarded an Academy Award(R) for scientific and
technical achievement by the Academy of Motion Picture Arts and Sciences. In
addition, the Company has substantial proprietary knowledge in 15/70-format film
production. As of December 31, 1997, 30 of the Company's employees were
connected with research and development projects.
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.
Including contributions by third parties, the Company (excluding its
subsidiaries) has spent approximately $11.8 million on research and development
over the last five years, including approximately $3.1 million, $2.0 million and
$1.4 million in 1995, 1996 and 1997 respectively. In 1991, the Company received
a multi-year grant from the Ontario Technology Fund of the Government of Ontario
for research and development. The program is expected to cost approximately $8.6
million over seven years, with the Ontario Technology Fund contributing
approximately $4.2 million. The Company historically has retained the rights to
the intellectual property associated with new products and technologies
developed under arrangements with third parties. The Company plans to continue
to fund research and development activity in areas considered important to the
Company's continued commercial success.
MANUFACTURING AND SERVICE
Imax Manufacturing
The Company assembles its giant-screen projection systems at its Corporate
Headquarters and Technology Center in Mississauga, Ontario (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, the IMAX theater systems
have had an average in service time of over 99.8 %.
10
<PAGE>
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 OEM agreements with
outside vendors. These proprietary components include custom loudspeaker
enclosures and horns and specialized amplifiers, signal processing and control
equipment. Major elements of the signal processing and control equipment are
provided by a subsidiary of Sonics, Oxmoor Incorporated, which also fabricates
professional audio electronics equipment for a variety of applications. The
components for the complete sound system are assembled by Sonics at its facility
in Birmingham, Alabama. Sonics also offers individual system customization for
unique applications such as amusement park rides.
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 systems. Sonics personnel visit each system annually to service the
theater 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 training.
PATENTS AND TRADEMARKS
The Company's inventions cover various aspects of its proprietary technology
and many of such inventions are protected by Letters 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), a simulator theater system and the orthogonal motion base
mechanism, and a method for synchronizing digital data systems. The Company has
been diligent in the protection of its proprietary interests and is currently
challenging what it believes to be illegal use by others of its patented
proprietary technology. See Item 3--Legal Proceedings.
The Company and its subsidiaries currently holds 29 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 Solido and PSE systems expire between 1998 and 2016.
The Company and its subsidiaries own or otherwise have rights to trademarks
and trade names used in conjunction with the sale of their products, systems and
services. The following trademarks are considered significant in terms of the
current and contemplated operations of the Company: The IMAX(R) Experience(TM),
IMAX(R), IMAX(R) Dome, IMAX(R) Solido(R), IMAX(R) 3D, Personal Sound
Environment/ (R)/, OMNIMAX(R) and IMAX(R) Ridefilm(TM). These trademarks are
protected by registration or common law widely 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, 1997, the Company had 401 employees. The Company's
employees are not represented by a labor union. The Company has never
experienced an employee strike and believes that its employee relations are
excellent.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Mississauga, Ontario.
The Company's principal facilities are as follows:
<TABLE>
<CAPTION>
LOCATION OPERATION OWN/LEASE EXPIRATION
- --------------------------------- -------------------------------------------- --------------------- --------------------
<S> <C> <C> <C>
Mississauga, Ontario (1)......... Headquarters, Administrative, Assembly and Own N/A
Research and Development
Birmingham, Alabama.............. Sound Systems Design and Assembly Own N/A
Culver City, California.......... Film Post Production Lease 1998
Kempten, Germany................. Sales and Marketing Lease 1998
Los Angeles, California.......... Sales, Marketing and Administrative Lease 2001
New York, New York............... Administrative Lease 2004
Singapore........................ Sales and Marketing Lease 1999
Tokyo, Japan..................... Sales, Marketing, Maintenance and Theater
Design Lease 1998
</TABLE>
(1) This property is subject to a collateral secured charge in favour of The
Toronto-Dominion Bank in connection with the working capital facility.
ITEM 3. LEGAL PROCEEDINGS
In April 1994, Compagnie France Film Inc. filed a claim against the Company in
the Superior Court in the District of Montreal, in the Province of Quebec,
alleging breach of contract and bad faith in respect of an agreement which the
plaintiff claims it entered into with the Company for the establishment of an
IMAX theater in Quebec City, Quebec, Canada. Until December 1993, Predecessor
Imax was in negotiations with the plaintiff and another unrelated party for the
establishment of an IMAX theater in Quebec City. In December 1993, Predecessor
Imax executed a system lease agreement with the other party. During the
negotiations, both parties were aware of the other party's interest in also
establishing an IMAX theater in Quebec City. The plaintiffs are claiming
damages of Canadian $4.6 million, representing the amount of profit they claim
they were denied due to their inability to proceed with an IMAX theater in
Quebec City, together with expenses incurred in respect of this project and pre-
judgement interest. The Company disputed this claim and filed a defense in
response. Compagnie France Film had also incorporated a shell company, 3101-
8450 Quebec Inc. ("3101"). 3101 was to, among other things, enter into a lease
for the proposed IMAX theater site. In November 1993, while negotiations
between Compagnie France Film and the Company were still ongoing, 3101 entered
into a lease for the site. 3101 defaulted on the lease and the landlord sued
3101 in an unrelated action to which the Company was not a party. In February
1996, 3101 was found liable to pay the landlord damages in the amount of
Canadian $2.5 million. Subsequent to that judgment 3101 intervened in the
lawsuit between Compagnie France Film and the Company in order to claim from the
Company damages in the amount of Canadian $2.5 million. The Company has
disputed this claim and the suit went to trial in January 1998. The Court has
reserved its decision which must be released within six months of the trial.
Management is of the opinion that the ultimate loss, if any, will not have a
material impact on the financial position or results of operations of the
Company, although no assurance can be given with respect to the ultimate outcome
of this litigation.
The Company filed a complaint in August 1994 in the U.S. District Court for
the Northern District of California claiming that Neil Johnson, NJ Engineering
Inc. and Cinema Technologies Inc. have misappropriated the Company's trade
secrets in the design and manufacture of defendants' 70mm 15-perforation
projection systems. The Company is seeking an injunction against Cinema
Technologies Inc. to prevent shipment of projectors, which incorporate the
Company's trade secrets in addition to damages. The defendant brought two
motions for summary judgement, one of which was based on the defendant's statute
of limitations defense and the other based on, among others, the defendant's
contention that the trade secrets at issue were not trade secrets. The court
denied the motion based on the statute of limitations defense, granted the
motion based on the trade secret status issue, and entered a judgement for the
defendants. The Company filed an appeal of this decision to the U.S. Court of
Appeal for the Ninth Circuit. The appeal was heard in February, 1998. The
Court has reserved its decision. Iwerks Entertainment, Inc. filed a complaint
against the Company on February 26, 1996 in the U.S. District Court for the
Central District of California alleging
12
<PAGE>
violations under the Sherman Act, the Clayton Act, and tortious interference
with contracts and prospective economic advantage. Iwerks Entertainment, Inc. is
seeking unquantified damages, injunctive relief and restitution. The Company has
filed an answer denying the material allegations of the complaint and intends to
vigorously defend this action. The Company has filed a motion for summary
judgement, which motion will be heard on April 6, 1998.
In July 1997, Debra B. Altman filed a claim against the Company, and certain
unidentified individuals, in the Superior Court of the State of California for
the County of Los Angeles, alleging breach of contract, breach of implied
covenant of good faith and fair dealing, breach of implied-in-fact contract,
breach of confidence, constructive fraud, quantum meruit, unjust enrichment and
constructive trust with respect to a film project the plaintiff claims to have
pursued with the Company. The Plaintiff is seeking unquantified damages
exceeding $5 million. The Company disputes this claim and has removed it to the
U.S. District Court for the Central District of California, Western Division,
and intends to vigorously defend this action. The trial is scheduled for July
1998. The amount of the loss, if any, cannot be determined at this time.
On March 5, 1998, Rosalini Film Productions Inc. filed a claim against the
Company in the U.S. District Court for the Central District of California,
alleging breach of written agreement, breach of implied convenant of good faith
and fair dealing, fraud and deceit, negligent misrepresentation, unfair
competition, unjust enrichment, quantum meruit, constructive trust and
declaratory relief with respect to a film project the Plaintiff claims to have
pursued with the Company. The Plaintiff is seeking unquantified damages. The
Company disputes this claim and intends to vigorously defend this action. The
amount of loss, if any, cannot be determined at this time.
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
for 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, 1997.
13
<PAGE>
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
"IMAXF" 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, adjusted for the 2-for-1
stock split which became effective in May, 1997, for the periods indicated.
<TABLE>
<CAPTION>
U.S. DOLLARS
----------------------------------------------
HIGH Low
-------------------- --------------------
<S> <C> <C>
Nasdaq
Year ended December 31, 1997
Fourth quarter.................................. 26.625 20.000
Third quarter................................... 28.750 23.375
Second quarter.................................. 24.750 16.875
First quarter................................... 18.000 15.125
Year ended December 31, 1996
Fourth quarter.................................. 18.500 15.000
Third quarter................................... 18.500 13.313
Second quarter.................................. 19.875 14.625
First quarter................................... 15.938 11.125
<CAPTION>
CANADIAN DOLLARS
----------------------------------------------
HIGH Low
-------------------- --------------------
<S> <C> <C>
TSE
Year ended December 31, 1997
Fourth quarter.................................. 37.750 28.500
Third quarter................................... 39.000 32.000
Second quarter.................................. 34.000 23.250
First quarter................................... 25.000 20.500
Year ended December 31, 1996
Fourth quarter.................................. 25.000 20.500
Third quarter................................... 26.000 18.000
Second quarter.................................. 27.225 20.000
First quarter................................... 22.188 15.000
</TABLE>
As of December 31, 1997 the Company had 192 registered holders of record of
the Company's Common Shares.
The Company has not paid within the last three fiscal years, and has no
current plans to pay, 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 8 to the consolidated financial statements in
Item 8). 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.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars, except per share data and systems data)
The selected financial data set forth below is derived from the consolidated
financial statements of the Company and its subsidiaries and Predecessor Imax
and its subsidiaries. The financial statements have been prepared in accordance
with United States Generally Accepted Accounting Principles ("U.S. GAAP"). The
Company adopted the U.S. dollar as its reporting currency in 1995. Comparative
figures have been restated as if the U.S. dollar had been the reporting currency
in prior periods. Effective April 1, 1996, the Company adopted the U.S. dollar
as its functional currency. This change in accounting policy was applied
prospectively. All financial information referred to herein is expressed in
U.S. dollars unless otherwise noted.
On March 1, 1994, WGIM Acquisition Corp. was amalgamated with Predecessor Imax
to form the Company and merged the Trumbull Company, Inc. ("TCI") into a wholly-
owned subsidiary of the Company to form Ridefilm Corporation (collectively
referred to as the "Acquisitions"). The historical data of Predecessor Imax and
the Company are not comparable in all respects. The Acquisitions have been
accounted for as a purchase. Accounting for the Acquisitions has resulted in
material differences in the basis of assets and liabilities between Predecessor
Imax and the Company. The Company's results of operations have been affected by
an increase in interest expense and amortization of fair value increments on
assets acquired, intangibles and deferred financing costs.
15
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
Imax The Company
-------------- --------------------------------------------------------------
Pro Forma
1993 1994 (1) 1995 1996 1997
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue.......................................
Systems...................................... $37,653 $ 37,507 $ 51,968 $ 85,972 $ 97,539
Films........................................ 29,454 30,885 28,835 28,367 39,683
Other........................................ 5,591 6,617 7,694 15,499 21,237
------- -------- -------- -------- --------
Total revenue................................ 72,698 75,009 88,497 129,838 158,459
Costs and expenses (2)........................ 42,871 56,118 44,348 58,257 73,806
------- -------- -------- -------- --------
Gross margin.................................. 29,827 18,891 44,149 71,581 84,653
Selling, general and administrative
expenses (3)................................. 14,503 21,972 25,925 29,495 32,115
Research and development (4).................. 2,262 4,563 2,808 2,493 2,129
Amortization of intangibles................... 17 2,603 2,541 2,708 2,701
------- -------- -------- -------- --------
Earnings (loss) from operations............... 13,045 (10,247) 12,875 36,885 47,708
Interest income............................... 173 1,794 3,377 5,797 5,604
Interest expense.............................. (1,633) (7,400) (7,337) (11,765) (13,402)
Foreign exchange gain (loss).................. 72 (538) 193 (337) (623)
------- -------- -------- -------- --------
Earnings (loss) before taxes and minority
interest..................................... 11,657 (16,391) 9,108 30,580 39,287
(Provision for) recovery of taxes............. (5,223) 4,833 (5,458) (13,579) (17,265)
------- -------- -------- -------- --------
Earnings (loss) before minority interest...... 6,434 (11,558) 3,650 17,001 22,022
Minority interest............................. -- -- -- (1,593) (1,357)
------- -------- -------- -------- --------
Net earnings (loss)........................... $ 6,434 $(11,558) $ 3,650 $ 15,408 $ 20,665
======= ======== ======== ======== ========
Earnings (loss) per share (5)
Basic........................................ -- $(0.42) $0.12 $0.54 $0.71
Diluted...................................... -- (0.42) $0.11 $0.50 $0.68
SYSTEMS AND OTHER DATA:
Total systems signed (6)...................... 17 19 24 29 60
Value of systems signed (in millions)......... $32.1 $46.0 $64.6 $89.6 $132.3
New systems delivered (7)..................... 15 13 11 26 24
Total systems in operation.................... 107 120 130 149 159
Total systems in sales backlog (8)............ 31 36 44 45 77
Revenue in sales backlog (9).................. $63,465 $ 80,767 $107,238 $131,835 $175,394
</TABLE>
(1) The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1994 gives effect to the issuance and sale of senior
notes, the application of the net proceeds therefrom, the acquisition of
Predecessor Imax and TCI, the equity conversions and the issuance of common
shares (collectively "the Transactions") as if the transactions had occurred
on January 1, 1994.
(2) The costs and expenses for the years ended December 31, 1994, 1995, 1996 and
1997 include $9.3 million, $2.5 million, $1.9 million and $1.4 million
respectively, of charges for the amortization of purchase accounting
adjustments.
(3) The selling, general and administrative expenses for the year ended December
31, 1994 include $1.1 million of non-recurring charges as a result of the
Transactions.
(4) The research and development expenses for the year ended December 31, 1994
include a non-recurring charge of $2.4 million to reflect the write-off of
purchased in-process research and development in connection with the
acquisition of Ridefilm.
16
<PAGE>
(5) Earnings (loss) per share in the current and prior periods give retroactive
effect to (a) the 2-for-1 stock split which became effective by May 27,
1997 and (b) the adoption of FASB Statement of Standards No. 128 which
became effective by December 31, 1997.
(6) Represents the number of theater systems which were the subject of sale or
lease agreements and agreements for owned and operated theaters (including
joint ventures) entered into by the Company in the years indicated. The
number of signings indicated for 1995, 1996 and 1997 include four, three and
three theater systems upgrades, respectively; 1996 signings include
three wholly-owned theaters; 1997 signings include nine joint ventures
and three wholly-owned theaters.
(7) 1993, 1994, 1996 and 1997 systems deliveries include four, one, three and
two systems upgrades, respectively.
(8) 1995, 1996 and 1997 systems in backlog include four, four and three theater
systems upgrades, respectively.
(9) Represents the minimum revenue on signed system sale and lease agreements
that will be recognized as revenue as the associated theater systems are
delivered. Does not include revenues from wholly-owned, partnership or
joint venture theaters.
<TABLE>
<CAPTION>
PREDECESSOR IMAX The Company
TWO MONTHS ENDED TEN MONTHS ENDED
February 28, 1994 December 31, 1994
---------------------- ----------------------
Operating Statement Data:
Revenue
<S> <C> <C>
Systems.............................................................. $ 1,454 $ 35,927
Films................................................................ 1,886 28,914
Other................................................................ 800 5,810
------- --------
Total Revenue........................................................ 4,140 70,651
Costs and expenses.................................................... 3,169 52,788
------- --------
Gross margin.......................................................... 971 17,863
Selling, general and administrative expenses.......................... 2,245 19,690
Research and development.............................................. 219 4,331
Amortization of intangibles........................................... 3 2,154
------- --------
Loss from operations.................................................. (1,496) (8,312)
Interest income....................................................... 19 1,767
Interest expense...................................................... (157) (6,091)
Foreign exchange gain (loss).......................................... (161) (675)
------- --------
Loss before taxes..................................................... (1,795) (13,311)
Recovery of taxes..................................................... 802 3,634
------- --------
Net loss.............................................................. $ (993) $ (9,677)
======= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR IMAX The Company
------------------- ------------------------------------------------------
Balance Sheet Data: 1993 1994 1995 1996 1997
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable
securities............................... $ 4,004 $ 56,949 $ 50,747 $120,688 $ 90,530
Total assets............................... 64,987 184,736 194,515 308,744 344,359
Total long-term indebtedness............... 14,535 70,294 70,810 167,023 165,000
Total shareholders' equity (deficit)....... (1,116) 52,926 57,486 54,841 81,117
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company derives revenue principally from long-term theater system lease
agreements, maintenance agreements, film production agreements, from the
distribution of films and from the sale of motion simulators and other
attractions products.
THEATER SYSTEMS
The Company generally provides its theater systems on a long-term lease basis
to customers with initial lease terms of typically 10 to 20 years. Lease
agreements typically provide for three major sources of revenue: (i) upfront
fees, (ii) ongoing royalty payments, and (iii) maintenance fees. The amount of
upfront 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
and continuing through the delivery of the theater system. Ongoing royalty
payments are paid monthly over the term of the contract, commencing after
delivery. These payments 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 royalty payments and maintenance fees are typically indexed to the
local consumer price index.
SALES AND SALES-TYPE LEASES. Revenues from the Company's theater system sale
agreements and from theater system lease agreements which transfer substantially
all of the benefits and risks of ownership ("sales-type leases") are recognized
on the completed contract method (that is, upon delivery of the system).
Revenues recognized at the time of the theater system delivery consist of
upfront fees and the present value of minimum royalties on sales-type leases
over the initial term of the lease. For leases with initial terms greater than
10 years, the Company's practice is to reserve the revenue related to the
present value of minimum royalties beyond the initial 10 years. The timing of
theater system delivery is largely dependent on the timing of the construction
of the customer's theater. Revenues recognized at the time of the theater system
delivery generally are derived from contracts signed 18 to 24 months prior to
the date of recognition. Such revenue is shown as sales backlog until it is
recognized upon delivery. Therefore, revenue for theater systems is generally
predictable on a long-term basis given the relationship to projected theater
system deliveries. However, systems revenue in any given quarter may vary
significantly depending on the nature and timing of the delivery of systems.
Cash receipts under upfront fees are generally received in advance of
deliveries over the average of 12 to 24 months from initial contract signing to
final delivery and are recorded as deferred revenue. The associated costs of
manufacturing the theater system are recorded as inventory and systems under
construction. Upon delivery, the deferred revenue and inventory costs are
recognized in income.
Cash receipts under royalty payments are received after delivery. Typically,
ongoing royalties are received over the 10 to 20 year life of the system
agreements and under any renewal periods. The Company recognizes the present
value of the minimum royalties on sales-type leases upon delivery of the theater
system. The discounted minimum royalties are recorded on the Company's balance
sheet as an increase in net investment in leases. For financial reporting
purposes, the actual cash received for minimum royalties in each year are
divided into two components representing both a repayment of the net investment
in leases (which has no income effect but reduces net investment in leases) and
finance income on the net investment in leases balance (which is recorded as
royalty revenue as earned). In the event of default of payment of minimum
contracted royalties, the Company may repossess the system and refurbish it for
resale. Royalties in excess of minimums are recorded as revenue when due under
the terms of the lease agreement.
18
<PAGE>
SALES BACKLOG. Sales backlog represents the minimum revenues on signed system
sale and lease agreements that will be recognized as revenue as the associated
theater systems are delivered. The minimum revenue comprises the upfront fees
plus the present value of the minimum royalties due under sales-type lease
agreements for the first ten years of the initial lease term. The value of
sales backlog does not include revenues from wholly-owned partnership or joint
venture theaters, letters of intent, IMAX Ridefilm system contracts, or long-
term conditional theater commitments.
FILM PRODUCTION
Revenue from films produced for third parties is recognized when the film is
completed and delivered to the sponsor. The associated production costs are
deferred and charged against the associated revenue when the revenue is
recognized. The completion of films for third parties depends upon the
contracted delivery dates with film sponsors. Thus, both film revenues and film
income in any given period will vary significantly depending upon the timing of
the completion of films. Film revenues and film income typically will be
particularly high in a year when the Company provides films for world's fairs.
When the Company invests in films, costs incurred are deferred and shown on the
balance sheet as film assets. Cash received from sales of the film in advance of
delivery is shown as deferred revenue until the film is complete and delivered
to the exhibitor. The film assets are amortized against revenues using the
individual-film-forecast method in accordance with the Financial Accounting
Standards Board Statement No. 53 ("FAS 53").
FILM DISTRIBUTION
Revenues from the distribution of films are recognized when films are
exhibited by theaters. The cost of films are charged as expenses using the
individual-film-forecast method in accordance with FAS 53. The individual-film-
forecast method amortizes film costs (reflected on the balance sheet as film
assets) in the same ratio that current gross revenues bear to anticipated total
gross revenues. The cost of distribution of films are charged against the
specific license to which they relate. Estimates of anticipated total gross
revenues are reviewed quarterly by the Company and revised where necessary to
reflect more current information.
RECURRING REVENUES
The Company's sources of revenue which are independent from the delivery of
theater systems and the completion of films for third parties include: royalties
not subject to minimums, royalties in excess of minimum royalties and finance
income on sales-type leases (collectively shown as "royalty revenue"),
maintenance fees on systems, film distribution fees, film post-production fees,
revenue from Company-operated and joint venture theaters, and camera rentals.
Royalty revenue, systems maintenance revenue and film distribution fees
generally increase with the growth in the installed base of IMAX theaters. Film
distribution revenue is also dependent on the acquisition of new film titles for
distribution. Revenues from Company-owned and joint venture theaters are
dependent on the Company developing further theaters which it owns or has a
participating interest in the theater's revenue and/or profits. Revenues from
post-production services are dependent on the number of theaters and the number
of films in production. Camera rental revenue is dependent on the number of
films in production.
The Company's recurring revenues have increased by 38% in 1997 to $60.4
million from $43.8 million in 1996 as royalties, maintenance fees, film
distribution fees and post-production revenues have all increased primarily due
to the growth in the IMAX theatre network.
19
<PAGE>
INTERNATIONAL OPERATIONS
A significant portion of the Company's sales are made to customers located
outside of the United States and Canada, primarily in Europe and Japan. During
1995, 1996 and 1997 approximately 48.9%, 39.5% and 47.6% respectively, of the
Company's revenues were derived from sales 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 royalty payments
and maintenance fees follow a similar currency policy.
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. 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 French francs which are converted to U.S. dollars generally through forward
contracts to minimize currency exposure.
ACCOUNTING POLICIES
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.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for each of the
items set forth below:
<TABLE>
<CAPTION>
PREDECESSOR IMAX The Company
------------------- ----------------------------------------------------------
Pro Forma
1993 1994 (1) 1995 1996 1997
------------------- ------------- ------------- ------------- -------------
% % % % %
<S> <C> <C> <C> <C> <C>
Revenue
Systems................................... 51.8 50.0 58.7 66.2 61.6
Films..................................... 40.5 41.2 32.6 21.9 25.0
Other..................................... 7.7 8.8 8.7 11.9 13.4
----- ------- ----- ----- -----
Total...................................... 100.0 100.0 100.0 100.0 100.0
Costs and expenses (2)..................... 59.0 74.8 50.1 44.9 46.6
----- ------- ----- ----- -----
Gross margin............................... 41.0 25.2 49.9 55.1 53.4
Selling, general and administrative
expenses.................................. 20.0 29.3 29.3 22.7 20.3
Research and development (3)............... 3.1 6.1 3.2 1.9 1.3
Amortization of intangibles................ -- 3.5 2.9 2.1 1.7
----- ------- ----- ----- -----
Earnings (loss) from operations............ 17.9 (13.7) 14.5 28.4 30.1
===== ======= ===== ===== =====
Net earnings (loss)........................ 8.9 (15.4) 4.1 11.9 13.0
===== ======= ===== ===== =====
</TABLE>
(1) See Note 1 to table in Item 6. Selected Financial Data.
(2) The costs and expenses include 12.4%, 2.8%, 1.4% and 0.9% of charges for
the amortization of purchase accounting adjustments for the years ended
December 31, 1994, 1995, 1996 and 1997 respectively, which are not
reflected in the comparative results of Predecessor Imax.
(3) Research and development costs for the year ended December 31, 1994 include
a non-recurring charge of 3.2% to reflect the write-off of purchased in-
process research and development in connection with the acquisition of
Ridefilm.
20
<PAGE>
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
In 1997 the Company had revenues of $158.5 million and net earnings of $20.7
million ($0.68 per share on a diluted basis) compared to revenues of $129.8
million and net earnings of $15.4 million ($0.50 per share on a diluted basis)
in 1996. The increase in revenues of 22% is due to higher revenue in all three
business segments. The substantial improvement in net earnings is principally
due to higher systems revenue.
THEATER NETWORK AND SALES BACKLOG
The Company signed agreements for 60 theater systems in 1997 which represents
future minimum revenues of $132.3 million, a 107% increase in the number and a
48% increase in the value of permanent theater signings versus the 29 theater
systems valued at $89.6 million signed during 1996. During 1997, the Company
established relationships with Cinemark USA Inc., Edwards Theaters Circuit,
Empire Theaters, Krikorian Premiere Theaters, Marcus Theater Corporation and
Regal Cinemas who contracted for a total of 36 IMAX theater systems.
Approximately 93% of the Company's theater signings were for IMAX 3D systems
compared to 75% in 1996. In addition, 88% of the Company's signings were for
commercial locations versus 65% in 1996. As a result of the strong theater
signings, the Company's sales backlog increased by $43.6 million in 1997 to
$175.4 million, a 33% increase from $131.8 million at December 31, 1996
and the largest dollar value increase in the Company's history.
The IMAX theater network increased to 159 theaters in operation at December
31, 1997 from 149 theaters at the beginning of the year. The following is a
geographic, market and product breakdown of the IMAX theaters in operation and
theaters in backlog at December 31, 1997:
<TABLE>
<CAPTION>
EXISTING THEATRES Backlog(1)
--------------------------- ---------------------------
THEATERS % Theaters %
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Geographic:
United States............................ 76 48% 54 73%
Europe................................... 27 17 8 11
Japan.................................... 17 11 -- --
Canada................................... 15 9 2 3
Asia (excluding Japan)................... 11 7 4 5
Mexico................................... 8 5 -- --
Australia................................ 4 2 3 4
South Africa............................. 1 1 1 1
Middle East.............................. -- -- 2 3
--- --- -- ---
Total.................................... 159 100% 74 100%
=== === == ===
Market:
Science and Natural History.............. 86 54% 12 16%
Commercial............................... 41 26 62 84
Theme Parks.............................. 21 13 -- --
Destination Sites........................ 5 3 -- --
Zoos and Aquaria......................... 6 4 -- --
--- --- -- ---
Total.................................... 159 100% 74 100%
=== === == ===
Product:
2D....................................... 124 78% 13 18%
3D....................................... 35 22 61 82
--- --- -- ---
Total.................................... 159 100% 74 100%
=== === == ===
</TABLE>
(1) Backlog excludes two upgrades from IMAX to IMAX 3D and one replacement of a
2D system.
21
<PAGE>
FILM LIBRARY
There were eight new films released in the 15/70-format in 1997, bringing the
total number of available films to 133 at the end of the year. The Company has
the distribution rights to 47 of those films. In 1997, the Company released
three new films: Mission to Mir (2D), The IMAX Nutcracker (3D) and The Hidden
Dimension (3D). In 1997, the Company completed two films for IMAX Ridefilm
theaters and began production on one film which is scheduled to be completed in
1998.
The Company currently has one film in production, T.rex: Back To The
Cretaceous, which will feature eight story high 3D digital dinosaurs and is
scheduled for release in the fall of 1998, and nine films in development and
pre-production. The Company also has a number of projects in development. As of
December 31, 1997 there were more than 20 films in the 15/70-format in
production, including the one being produced by the Company.
REVENUES
The Company's revenues in 1997 were $158.5 million, compared to $129.8 million
in 1996, an increase of 22%. The following table sets forth the breakdown of
revenue by category in thousands of dollars:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Systems Revenue
Sales and leases...................................... $39,389 $ 70,671 $ 78,672
Royalties (1)......................................... 6,009 7,949 10,285
Maintenance........................................... 6,570 7,352 8,582
------- -------- --------
51,968 85,972 97,539
------- -------- --------
Film Revenue
Production............................................ 8,601 8,298 6,459
Distribution.......................................... 15,332 13,422 21,953
Post-production....................................... 4,902 6,647 11,271
------- -------- --------
28,835 28,367 39,683
------- -------- --------
Other Revenue 7,694 15,499 21,237
------- -------- --------
$88,497 $129,838 $158,459
======= ======== ========
</TABLE>
(1) Includes finance income.
SYSTEMS REVENUES. Systems revenue increased from $86.0 million in 1996 to
$97.5 million in 1997, an increase of 13%. Revenue from sales and leases
increased from $70.7 million to $78.7 million, an increase of 11%. The Company
recognized revenues on the delivery of 24 theater systems under sales and sales-
type leases in 1997 as compared to 26 theater systems in 1996. The theater
systems deliveries in 1997 included two upgrades from IMAX to IMAX 3D compared
to three upgrades in 1996. Royalty revenue and maintenance revenue increased 29%
and 17%, respectively, over the prior year principally due to the increased
number of theater systems in the network.
FILM REVENUES. Film revenues increased from $28.4 million in 1996 to $39.7
million in 1997. Film distribution revenues increased from $13.4 million in 1996
to $22.0 million in 1997, an increase of 64%. Film distribution revenues
increased in 1997 over 1996 due to strong results of films which were released
in the latter half of 1996 and in 1997 and also due to growth in the IMAX
theater network. Film post-production activities generated revenues of $11.3
million in 1997 versus $6.6 million in 1996, an increase of 70%. The growth in
revenues was due to an increase in the number of post-production projects, an
increase in the number of prints released and extensions of related products and
services.
OTHER REVENUES. Other revenues of $21.2 million in 1997 represented an
increase of 37% over 1996. The growth in other revenues is primarily due to the
delivery of 15 IMAX Ridefilm systems in 1997 versus seven in 1996. Theater
operations revenue also increased 17% in 1997 over 1996 due to the opening of a
new joint venture theater at the end of 1996.
22
<PAGE>
GROSS MARGIN
Gross margin in 1997 was $84.7 million versus $71.6 million in 1996. Gross
margin improved in 1997 over 1996 principally due to the higher average value of
systems deliveries, increased royalty revenue and the increase in film revenues
in 1997. The increase in the average value of systems deliveries increased in
1997 due to a higher number of IMAX 3D and international theater systems
delivered compared to 1996. In 1997 gross margin as a percentage of revenue was
53.4 % versus 55.1% in 1996. The decline in gross margin as a percentage of
total revenues in 1997 from 1996 was due to the higher proportion of film and
other revenues which are generally lower margin revenue sources than systems
revenue.
OTHER
Selling, general and administrative expenses were $32.1 million in 1997 versus
$29.5 million in 1996. The increase in selling, general and administrative costs
in 1997 over 1996 resulted primarily from an increase in performance based
compensation expenses, marketing, branding and affiliate relations initiatives
and litigation costs, offset by a decrease in costs associated with the
Company's Ridefilm division.
Research and development expenses were $2.1 million in 1997 versus $2.5
million in 1996. The Company's technical staff were engaged, earlier in 1997,
in the design and production of the new IMAX 3D SR system and not in the typical
research and development activities. Research and development expenses returned
to historical levels in the latter half of 1997.
Interest expense included a full year's debt service in 1997 related to the 5
3/4 % of Convertible Subordinated Notes which were issued in April 1996
resulting in a $1.6 million increase in interest expense in 1997 compared to the
prior year.
The Company experienced a foreign exchange loss of $0.6 million in 1997
compared to a loss of $0.3 million in 1996. The foreign exchange loss in 1997
and 1996 resulted primarily from fluctuations in exchange rates on Canadian
dollar, Japanese yen and French franc denominated cash balances and net
investments 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, manufacturing and
processing profits deduction and the provision of income taxes at different
rates in foreign and other provincial jurisdictions.
Minority interest expense of $1.4 million and $1.6 million in 1997 and 1996,
respectively, represents a 49% minority interest in the earnings of the
Company's subsidiary, Sonics Associates Inc.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
REVENUES
The Company's revenues in 1996 were $129.8 million compared to $88.5 million
in 1995, an increase of 47%.
Systems revenue increased from $52.0 million in 1995 to $86.0 million in 1996,
an increase of 65%. Revenue from sales and leases increased from $39.4 million
to $70.7 million, an increase of 79%. The Company recognized revenues on the
delivery of 26 theater systems under sales and sales-type leases in 1996 as
compared to 11 theater systems in 1995. The deliveries recognized in 1996
included three upgrades of theater systems from IMAX to IMAX 3D and one
settlement of a canceled contract for a system for EXPO '96. In 1995, the
Company recognized revenues on the settlement of three canceled contracts for
systems for EXPO '96. Royalty revenue and maintenance revenue increased 32% and
12%, respectively, over the prior year principally due to the increased number
of theater systems in the network.
23
<PAGE>
Film revenues decreased from $28.8 million in 1995 to $28.4 million in 1996.
Decreases in film production and film distribution revenue were partially offset
by an increase in film post-production revenue. One film was produced and
released in each of 1996 and 1995. Film production revenue in 1995 also
included settlements reached on two films to be produced for sponsors at EXPO
'96 that were canceled. Film distribution revenues were $13.4 million in 1996
compared to $15.3 million in 1995, a decrease of 13%. The decrease in revenue
was principally due to the timing of release of new films later in the year in
1996. Film post-production activities generated revenues of $6.6 million in
1996 versus $4.9 million in 1995, an increase of 36%. The growth in revenues
was due to an increase in the number of post-production projects, an increase in
the number of prints released and extensions of related products and services.
Other revenues of $15.5 million in 1996 represented an increase of 101% over
1995. The growth in other revenues was primarily due to the delivery of seven
IMAX Ridefilm systems in 1996 versus two in 1995. Camera rentals also increased
in 1996 over the prior year due to the greater number of films in production.
GROSS MARGIN
Gross margin in 1996 was $71.6 million versus $44.1 million in 1995. In 1996
gross margin as a percentage of sales was 55% versus 50% in 1995. Gross margin
improved in 1996 over 1995 principally due to the higher number of systems
deliveries and the higher proportion of systems revenue in 1996 (which is a
higher margin revenue source than film and other revenues).
OTHER
Selling, general and administrative expenses were $29.5 million in 1996 versus
$25.9 million in 1995. The increase in selling, general and administrative
costs in 1996 over 1995 resulted primarily from an increase in marketing and
sales efforts in response to growing demand, the establishment of the owned and
operated theater business and litigation costs.
Research and development expenses were $2.5 million in 1996 versus $2.8
million in 1995. The decline in research and development expenses is the result
of redirecting a portion of the Company's technical resources to capital
projects.
Interest income and interest expense increased by $2.4 million and $4.4
million over the prior year due to the issuance of $100 million of 5 3/4%
Convertible Subordinated Notes in April 1996, a significant portion of the
proceeds of which remained invested in cash and cash equivalents and marketable
securities at year-end.
Due to the continued growth of the Company's business outside of Canada and the
additional U.S. dollar denominated financing raised by the Company in April
1996, the Company adopted the U.S. dollar as its functional currency commencing
April 1, 1996. The Company experienced a foreign exchange loss of $0.3 million
in 1996 principally due to fluctuations in the exchange rates on Japanese Yen
and French Franc denominated cash balances and net investment in leases.
24
<PAGE>
QUARTERLY RESULTS
The following table sets forth unaudited data regarding operations for each
quarter of 1996 and 1997. The quarterly information has been prepared on the
same basis as the annual consolidated financial statements and, in management's
opinion, contains all normal recurring adjustments necessary to fairly state the
information set forth herein. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
1996 1997
------------------------------------------------ ------------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands of dollars except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue
Systems................. $14,734 $21,197 $24,355 $25,686 $ 85,972 $17,918 $20,061 $22,477 $37,083 $ 97,539
Films................... 10,844 4,890 5,907 6,726 28,637 12,299 10,648 10,521 6,215 39,683
Other................... 4,747 2,606 2,824 5,322 15,499 2,325 4,731 2,893 11,288 21,237
------- ------- ------- ------- -------- ------- ------- ------- ------- --------
Total................... 30,325 28,693 33,086 37,734 129,838 32,542 35,440 35,891 54,586 158,459
Gross margin............. 14,071 17,412 19,098 21,000 71,581 17,877 17,714 20,333 28,729 84,653
Earnings from operations. 6,499 9,011 10,719 10,656 36,885 9,377 9,441 12,201 16,689 47,708
Net earnings............. 2,944 3,318 4,244 4,902 15,408 3,698 4,148 5,485 7,334 20,665
PER SHARE DATA (1):
Net earnings
Basic................... $ 0.10 $ 0.12 $ 0.15 $ 0.17 $ 0.54 $ 0.13 $ 0.14 $ 0.19 $ 0.25 $ 0.71
Diluted................. $ 0.09 $ 0.11 $ 0.14 $ 0.16 $ 0.50 $ 0.12 $ 0.14 $ 0.18 $ 0.24 $ 0.68
</TABLE>
(1) Retroactively adjusted for the 2-for-1 stock split which became effective by
May, 1997 and the adoption of FASB Statement of Standards No. 128 which
became effective by December 31, 1997.
The Company's operating results can fluctuate significantly from quarter to
quarter. This fluctuation is due primarily to the timing of theater system
deliveries, the mix of theater systems shipped, and the timing of recognition of
revenues on film production agreements. The timing of theater system deliveries
is largely dependent on the timing of the construction of the customer's
theater. The completion of films produced for third parties depends upon the
contracted delivery dates with the film sponsors. The associated costs and
expenses follow the recognition of revenue. Other expenses vary less
significantly and are influenced by the timing of marketing initiatives and
research and development projects.
In 1997, revenues fluctuated by quarter largely due to the delivery of systems
and films. In the fourth quarter of 1997, the Company recorded $54.6 million of
revenue (34% of full-year revenue) due to the delivery of 10 IMAX theater
systems and ten IMAX Ridefilm systems. Gross margin fluctuated significantly by
quarter due to both the fluctuation in revenue and also the different revenue
mix between systems, film and other. Earnings from operations varied by quarter
due to the fluctuation in gross margin and were impacted by other expenses,
which were proportionately higher in the last quarter due to performance based
compensation expenses, litigation costs and marketing and affiliation relations
initiatives.
In 1996, revenues also fluctuated by quarter largely due to the timing of
delivery of systems and films. Systems revenue in the first quarter of 1996 was
$14.7 million with only three deliveries due to higher average contract value of
deliveries in the quarter versus other quarters in 1996 and the settlement of
one canceled system contract for EXPO `96. Film revenue in the first quarter
included the completion of one film, L5: First City In Space. Other revenue was
comparatively higher in the first and fourth quarters of 1996 due to the
recognition of revenue from the delivery of three and four IMAX Ridefilm
systems, respectively. Gross margin fluctuated significantly by quarter both due
to the fluctuation in revenue and also the different revenue mix between
systems, film and other. Earnings from operations fluctuated significantly by
quarter due to the fluctuation in gross margin and, in the last quarter, were
impacted by higher selling, general and administrative expenses.
The Company expects quarterly results to continue to fluctuate in the future.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's principal source of liquidity included
cash and cash equivalents of $64.1 million, trade accounts receivable of $32.4
million, net investments in leases of $6.0 million due within one year,
marketable securities of $26.5 million and the amounts receivable under
contracts in backlog which are not yet reflected on the balance sheet.
In addition, the Company is party to an agreement with The Toronto-Dominion
Bank with respect to a working capital facility. The Bank has made available to
the Company a revolving loan in an aggregate amount up to Canadian $10 million
or its U.S. dollar equivalent based on accounts receivable balances and levels
of minimum contractual royalty payments. Loans made under the working capital
facility bear interest at the prime rate of interest plus 1/4% per annum for
Canadian dollar denominated loans and, for U.S. dollar denominated loans, at the
U.S. base rate of interest established by the Bank plus 1/4%. These loans are
repayable upon demand. At December 31, 1997, $6.3 million was available for use
under this facility.
The Senior Notes due March 1, 2001 are subject to redemption by the Company,
in whole or in part, at any time on or after March 1, 1998 at redemption prices
expressed as percentages of the principal amount (1998 104.29%; 1999 102.86%;
2000 101.43%) together with interest accrued thereon to the redemption date.
Subject to market conditions, the Company may elect to redeem some or all of the
Senior Notes prior to their maturity as part of a refinancing of its capital
structure.
In April 1996, the Company completed a private placement of a $100 million
offering of 5 3/4% Convertible Subordinated Notes (the "Subordinated Notes") due
2003. These 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 Notes) at any
time prior to maturity. The 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 (1999 103.286%; 2000 102.464%; 2001 101.643%; 2002
100.821%) plus accrued interest. The Subordinated Notes may only be redeemed
by the Company between April 1, 1999 and April 1, 2001 if the last reported
market price of the Company's common shares is equal to or greater than $30 per
share for any 20 of the 30 consecutive trading days prior to the notice of
redemption. The Subordinated Notes may be redeemed at any time on or after
April 1, 2001 without limitation.
The Company partially funds its operations through cash flow from operations.
Under the terms of the Company's typical theater system lease agreement, the
Company receives substantial cash payments before it completes the performance
of its obligations. Similarly, the Company typically receives cash payments for
film productions in advance of related cash expenditures. These cash flows have
generally been adequate to finance the ongoing operations of the Company.
Cash provided by operating activities amounted to $11.6 million for the year
ended December 31, 1997 after the payment of $11.4 million of interest, $5.1
million of income taxes and working capital requirements. Working capital
requirements included an increase of $15.1 million in accounts receivable,
primarily related to an increase in upfront fees billed in connection with the
higher signings activity and the growth in the number of systems in backlog, and
an increase of $18.7 million in net investment in leases due to the theater
systems delivered under sales-type leases in 1997. Cash used in investing
activities in 1997 amounted to $53.5 million. Of this amount, $28.1 million was
invested in film assets, principally The IMAX Nutcracker, T.rex: Back To The
Cretaceous, The Hidden Dimension and the IMAX Ridefilm film library, $12.7
million was invested in capital assets, $8.3 million was invested in marketable
securities and $4.5 million was invested in other assets, principally
investments in a joint ventured theater, IMAX Attractions and IMAX Ridefilm
operations. Cash provided by financing activities included proceeds of $5.8
million from the issuance of common shares pursuant to the Company's stock
option plan and repayment of the Company's long-term debt totaling $2.3 million.
26
<PAGE>
Cash provided by operating activities amounted to $26.8 million for the year
ended December 31, 1996 after the payment of $7.9 million of interest, $2.4
million of income taxes, and working capital requirements. Working capital
requirements in 1996 included an increase of $15.5 million in net investment in
leases due to the increased number of theater systems deliveries under sale-type
lease contracts and a $3.8 million increase in inventories due to
manufacturing activity related to systems in backlog scheduled for delivery in
1997 and IMAX Ridefilm systems. The increase in accounts receivable in 1996 was
offset by a similar increase in accounts payable and accrued liabilities. Cash
used in investing activities in 1996 was $48.5 million. Of this amount, $15.5
million was used to acquire capital assets, principally camera assets, motion
simulation equipment and the Company's investment in an owned and operated
theater, $14.8 million was invested in film assets and $18.2 million was
invested in marketable securities.
The Company believes that cash flow from operations together with existing
cash balances and the working capital facility will be sufficient to meet cash
requirements of its existing level of operations for the foreseeable future.
IMPACT OF YEAR 2000
The Company has assessed, and continues to assess, the impact of the Year 2000
issue on its operations, including the development of preliminary cost estimates
for and the extent of computer systems changes required to address this issue.
The Company has decided to replace its key manufacturing and financial software
systems and believes that with conversions to new software, the Year 2000 issue
will not pose significant operational problems for its computer systems.
Although final cost estimates have yet to be determined, it is expected that
modifying or replacing these systems will not have a material effect on the
Company's financial position or its results of operations in 1998 and 1999.
The impact of Year 2000 issues on the Company will also be affected by the
Year 2000 readiness of its customers as well as of its suppliers of raw
materials, components and software and its providers of facilities, equipment
and services and any failure on their part to achieve readiness in their own
operations or with respect to the items they supply or otherwise provide to the
Company. While the Company is beginning to consider what inquiries might be
appropriate to make of such other parties (principally of its suppliers and
other providers) in these regards, there can be no assurance that the Year 2000
issues confronting such other parties and any failure on their part to timely
address them will not have a material adverse effect on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are filed as part of this
Report.
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Auditors' Report to Shareholders........................................................................... 28
Consolidated Balance Sheets as at December 31, 1997 and 1996............................................... 29
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995................. 30
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................. 31
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995....... 32
Notes to Consolidated Financial Statements................................................................. 33
</TABLE>
27
<PAGE>
AUDITORS' REPORT TO SHAREHOLDERS
We have audited the consolidated balance sheets of Imax Corporation as at
December 31, 1997 and 1996 and the consolidated statements of operations,
shareholders' equity and cash flow for each year in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatements. 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and 1996 and the results of its operations and cash flows for each year in
the three-year period ended December 31, 1997 in accordance with United States
generally accepted accounting principles.
/s/ Coopers & Lybrand
Chartered Accountants
Toronto, Ontario
February 10, 1998
(Except for Note 19 which is at March 5, 1998)
28
<PAGE>
IMAX CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
As at December 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 64,069 $102,589
Short-term marketable securities 10,184 -
Accounts receivable 32,401 17,995
Current portion of net investment in leases (note 3) 6,007 4,218
Inventories and systems under construction (note 4) 21,922 21,292
Prepaid expenses 2,474 2,109
-------- --------
Total current assets 137,057 148,203
Long-term marketable securities 16,277 18,099
Net investment in leases (note 3) 51,825 34,494
Film assets (note 5) 42,036 19,050
Capital assets (note 6) 41,360 34,153
Goodwill (note 6) 43,915 46,454
Other assets (note 7) 11,889 8,291
-------- --------
Total assets $344,359 $308,744
======== ========
Liabilities
Current liabilities
Accounts payable $ 7,129 $ 4,530
Accrued liabilities 24,220 16,677
Current portion of deferred revenue 29,067 40,485
Current portion of long-term debt - 1,156
Income taxes payable 318 2,213
-------- --------
Total current liabilities 60,734 65,061
Deferred revenue 13,618 14,117
Long-term debt - 1,178
Senior notes (note 8) 65,000 64,689
Convertible subordinated notes (note 9) 100,000 100,000
Deferred income taxes (note 13) 19,596 6,081
-------- --------
Total liabilities 258,948 251,126
-------- --------
Minority interest 2,950 1,593
-------- --------
Redeemable preferred shares (note 10) 1,344 1,184
-------- --------
Commitments and contingencies (notes 11, 16, 17 and 19)
Shareholders' equity
Capital stock (note 10) 52,604 46,810
Retained earnings 28,642 8,307
Cumulative translation adjustment (129) (276)
-------- --------
Total shareholders' equity 81,117 54,841
-------- --------
Total liabilities and shareholders' equity $344,359 $308,744
======== ========
</TABLE>
(the accompanying notes are an integral part of these consolidated
financial statements)
29
<PAGE>
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Systems $ 97,539 $ 85,972 $51,968
Films 39,683 28,367 28,835
Other 21,237 15,499 7,694
-------- -------- -------
158,459 129,838 88,497
Costs and expenses 73,806 58,257 44,348
-------- -------- -------
Gross margin 84,653 71,581 44,149
Selling, general and administrative expenses 32,115 29,495 25,925
Research and development 2,129 2,493 2,808
Amortization of intangibles 2,701 2,708 2,541
-------- -------- -------
Earnings from operations 47,708 36,885 12,875
Interest income 5,604 5,797 3,377
Interest expense (13,402) (11,765) (7,337)
Foreign exchange (loss) gain (623) (337) 193
-------- -------- -------
Earnings before income taxes and minority interest 39,287 30,580 9,108
Provision for income taxes (note 13) (17,265) (13,579) (5,458)
-------- -------- -------
Earnings before minority interest 22,022 17,001 3,650
Minority interest (1,357) (1,593) -
-------- -------- -------
Net earnings $ 20,665 $ 15,408 $ 3,650
======== ======== =======
Earnings per share (note 10)
Basic $0.71 $0.54 $0.12
Diluted $0.68 $0.50 $0.11
</TABLE>
(the accompanying notes are an integral part of these consolidated
financial statements)
30
<PAGE>
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Cash provided by (used in):
OPERATING ACTIVITIES
Net earnings $ 20,665 $ 15,408 $ 3,650
Items not involving cash:
Depreciation and amortization (note 14) 15,075 12,685 13,565
Deferred income taxes 14,015 8,961 3,817
Minority interest 1,357 1,593 -
Amortization of discount on senior notes 311 1,863 1,743
Other 259 145 381
Changes in deferred revenue on film production (5,840) 3,331 (4,499)
Changes in other operating assets and liabilities (note 14) (34,254) (17,211) (14,706)
-------- -------- --------
Net cash provided by operating activities 11,588 26,775 3,951
-------- -------- --------
Investing Activities
Increase in marketable securities (8,250) (18,164) -
Increase in film assets (28,056) (14,822) (3,673)
Purchase of capital assets (12,654) (11,905) (4,968)
Increase in other assets (4,502) (3,638) -
-------- -------- --------
Net cash used in investing activities (53,462) (48,529) (8,641)
-------- -------- --------
Financing Activities
Repayment of long-term debt (2,326) (729) (1,266)
Repurchase of senior notes - (4,919) -
Issue of convertible subordinated notes - 100,000 -
Deferred charges on debt financing - (3,301) -
Common shares issued 5,758 2,038 18
Common shares and warrants repurchased - (19,508) (84)
-------- -------- --------
Net cash provided by (used in) financing activities 3,432 73,581 (1,332)
-------- -------- --------
Effect of exchange rate changes on cash (78) 15 (180)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR (38,520) 51,842 (6,202)
Cash and cash equivalents, beginning of year 102,589 50,747 56,949
-------- -------- --------
Cash and cash equivalents, end of year $ 64,069 $102,589 $ 50,747
======== ======== ========
</TABLE>
(the accompanying notes are an integral part of these consolidated
financial statements)
31
<PAGE>
IMAX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Number of
Common Shares Retained Cumulative Total
Issued and Earnings Translation Shareholders'
Outstanding Capital Stock (Deficit) Adjustment Equity
------------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 28,173,856 $ 63,759 $(10,148) $ (685) $ 52,926
Issuance of common stock 7,402 18 - - 18
Common stock acquired and canceled (28,000) (84) - - (84)
Accrual of stock compensation benefit - 353 - - 353
Accrual of preferred dividends - - (169) - (169)
Accretion of discount on preferred - - (125) - (125)
shares
Net earnings - - 3,650 - 3,650
Foreign currency translation adjustments - - - 917 917
---------- -------- -------- ----- --------
Balance at December 31, 1995 28,153,258 64,046 (6,792) 232 57,486
Issuance of common stock 391,960 2,038 - - 2,038
Common shares and warrants repurchased (660,000) (19,508) - - (19,508)
Accrual of stock compensation benefit - 234 - - 234
Accrual of preferred dividends - - (169) - (169)
Accretion of discount on preferred - - (140) - (140)
shares
Net earnings - - 15,408 - 15,408
Foreign currency translation adjustments - - - (508) (508)
---------- -------- -------- ----- --------
Balance at December 31, 1996 27,885,218 46,810 8,307 (276) 54,841
Issuance of common stock 1,230,200 5,758 - - 5,758
Accrual of stock compensation benefit - 36 - - 36
Accrual of preferred dividends - - (170) - (170)
Accretion of discount of preferred - - (160) - (160)
shares
Net earnings - - 20,665 - 20,665
Foreign currency translation adjustments - - - 147 147
---------- -------- -------- ----- --------
Balance at December 31, 1997 29,115,418 $ 52,604 $ 28,642 $(129) $ 81,117
========== ======== ======== ===== ========
</TABLE>
(the accompanying notes are an integral part of these consolidated
financial statements)
32
<PAGE>
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)
For the years ended December 31, 1997, 1996 and 1995.
1. DESCRIPTION OF THE BUSINESS
Imax Corporation provides a wide range of products and services to the
network of IMAX theaters. The principal activities of the Company are:
- the design, manufacture and marketing of proprietary projection and sound
systems for IMAX theaters;
- the development, production and distribution of films shown in the IMAX
theater network;
- the design and supply of IMAX attractions hardware and films including
motion simulation products; and
- the provision of other services to the IMAX theater network including
designing and manufacturing IMAX camera equipment for rental to
filmmakers, providing film post-production image quality assurance 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 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. The most significant estimates are related to the
recoverability of film assets, capital assets, goodwill and the measurement
of contingencies. Actual results could be materially different from these
estimates. Significant accounting policies are summarized as follows:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries.
(b) INVESTMENTS
Investments in marketable securities categorized as available-for-sale
securities are carried at fair value with unrealized gains or losses
included in a separate component of shareholders' equity. Investments in
marketable securities categorized as held-to-maturity securities are
carried at amortized cost.
Investments in joint ventures are accounted for by the equity method of
accounting under which consolidated net earnings include the Company's
share of earnings or losses of the investees. The carrying values of the
investments are adjusted for the Company's share of undistributed income or
losses since acquisition and dividends received are recorded as a reduction
in the investments. Writedowns are only made for declines in value which
are other than temporary.
(c) INVENTORIES
Inventories are carried at the lower of cost, determined on a first-in,
first-out basis, or net realizable value. Finished goods and work-in-
process include the cost of raw materials, direct labor and manufacturing
overhead costs.
33
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
(d) FILM ASSETS
Film assets represent costs incurred in producing and distributing films
net of accumulated amortization. The film costs are charged as expenses
using the individual-film forecast method as prescribed by Statement of
Financial Accounting Standards No. 53 whereby film costs are amortized in
the same ratio that current gross revenues bear to anticipated total gross
revenues. Estimates of anticipated total gross revenues are reviewed
quarterly by management and revised where necessary to reflect more current
information.
The recoverability of film costs is dependent upon commercial acceptance of
the films. Any capitalized costs of a film that are determined to be
unrecoverable are charged to operations in the period that determination is
made.
(e) CAPITAL ASSETS
Capital assets are stated at cost and are depreciated on a straight-
line basis over their estimated useful lives as follows:
Projection equipment -- 10 to 15 years
Motion simulation equipment -- 5 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
(f) GOODWILL
Goodwill represents the excess 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 10 to 25 years. The
carrying value of goodwill is periodically reviewed by the Company and
impairments are recognized in earnings when the expected future operating
cash flows derived from the acquired businesses are less than the carrying
value.
(g) DEFERRED REVENUE
Deferred revenue comprises receipts under systems sales and lease
contracts, film production contracts and film exhibition contracts not yet
recognized as revenue. The current portion of deferred revenue represents
the estimated amount to be recognized in earnings during the following 12
month period.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been recognized in the financial
statements or tax returns. Deferred 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 tax assets and liabilities of a change in tax rates is
recognized in earnings in the period in which the change occurs.
34
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
(i) REVENUE AND COST RECOGNITION
Sales and sales-type leases
Revenues from theater system sales and leases which transfer substantially
all of the benefits and risks of ownership to the customer ("sales-type
leases") are recognized on the completed contract method (that is upon
delivery of the system). Revenues include initial advance payments and
contracted minimum rental payments discounted to their present value.
Cash receipts under initial advance payments are generally received in
advance of deliveries and are recorded as deferred revenue. The associated
costs are recorded as inventories and systems under construction. Upon
delivery of the theater system, the deferred revenue and deferred costs,
net of residual value at the end of the lease term, are recognized in
earnings.
The Company recognizes the present value of the minimum rentals on sales-
type leases upon delivery of the theater system. Cash receipts under
minimum rental payments are received after delivery. Typically, ongoing
rentals are received over the life of the system agreement and under any
renewal periods. In the event of default of payment of minimum contracted
rentals, the Company may repossess the system and refurbish it for resale.
Royalties in excess of minimum rentals are recorded as revenue when due
under the terms of the lease agreement.
Operating leases
Revenues from leases which do not transfer substantially all of the
benefits and risks of ownership to the customer are treated as operating
leases where revenues and direct expenses are recognized over the term of
the lease and costs of leased assets are amortized over their estimated
useful lives.
Film production revenues
Revenues from films produced for third parties are recognized when the film
is completed and delivered to the sponsor. The associated production costs
are deferred and subsequently charged to earnings when the film is
delivered and the revenue is recognized.
(j) RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
(k) FOREIGN CURRENCY TRANSLATION
Effective April 1, 1996, the U.S. dollar was adopted as the Company's
functional currency as a result of the continued growth of the Company's
business outside of Canada and the additional U.S. dollar denominated
financing raised by the Company in April 1996. Monetary assets and
liabilities of the Company's operations which are denominated in currencies
other than the U.S. dollar are translated into U.S. dollars at the exchange
rates prevailing at year end. Non-monetary items are translated at
historical exchange rates. Revenue and expense transactions are translated
at exchange rates prevalent at the transaction date. All exchange gains and
losses are included in the determination of net earnings in the period in
which they arise.
(l) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, became effective for the Company for the year ended
December 31, 1996. This statement allows enterprises to continue to measure
compensation cost for employee stock option plans using the methodology
currently prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company elected to remain with the accounting in Opinion No.
25 and has made pro forma disclosures of net earnings and earnings per
share in Note 10 as if the methodology prescribed by Statement No. 123 had
been adopted.
35
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
3. NET INVESTMENT IN LEASES AND LEASE PAYMENTS RECEIVABLE
The Company enters into sales-type leases which have initial advance payments
and annual rental payments with contracted minimums which are generally
indexed with inflation. The Company's net investment in sales-type leases
comprises:
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Total minimum lease payments receivable $109,036 $ 58,638
Residual value of equipment 3,157 2,081
Unearned finance income (51,014) (21,560)
-------- --------
Present value of minimum lease payments receivable 61,179 39,159
Valuation allowance (3,347) (447)
-------- --------
57,832 38,712
Less current portion 6,007 4,218
-------- --------
$ 51,825 $ 34,494
======== ========
</TABLE>
Income recognized on systems from annual rental payments comprised the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ------------- --------------
<S> <C> <C> <C>
Minimum rental payments on operating leases $ 1,273 $1,178 $1,230
Contingent rentals 4,971 3,892 2,982
Finance income 4,041 2,878 1,797
------- ------ ------
Total $10,285 $7,948 $6,009
======= ====== ======
</TABLE>
The estimated amount of minimum rental payments receivable from all signed
leases, excluding those in sales backlog at December 31, 1997, for each of the
next five years is as follows:
1998 $7,826
1999 8,693
2000 9,270
2001 9,599
2002 9,897
4. INVENTORIES AND SYSTEMS UNDER CONSTRUCTION
1997 1996
------------------ -----------------
Raw materials $ 6,943 $ 4,840
Work-in-process 14,508 15,008
Finished goods 471 417
Acquired contracts in process - 1,027
------------ -------
$ 21,922 $21,292
============ =======
36
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
5. FILM ASSETS
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Completed films, net of amortization $30,396 $12,730
Films in production 11,313 5,699
Acquired film rights, net of amortization 327 621
------- -------
$42,036 $19,050
======= =======
</TABLE>
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Accumulated
COST depreciation NET BOOK VALUE
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Equipment held for lease
Projection equipment $ 9,964 $ 4,052 $ 5,912
Motion simulation equipment 3,403 1,090 2,313
Camera equipment 9,466 2,440 7,026
------- ------- -------
22,833 7,582 15,251
------- ------- -------
Assets under construction 3,634 - 3,634
------- ------- -------
Other capital assets
Land 2,431 - 2,431
Buildings 14,557 1,793 12,764
Office and production equipment 14,297 7,150 7,147
Leasehold improvements 398 265 133
------- ------- -------
31,683 9,208 22,475
------- ------- -------
$58,150 $16,790 $41,360
======= ======= =======
1996
-------------------------------------------------------------------
Accumulated
COST depreciation NET BOOK VALUE
--------------------- --------------------- ---------------------
Equipment held for lease
Projection equipment $11,305 $ 3,859 $ 7,446
Motion simulation equipment 3,378 414 2,964
Camera equipment 7,239 1,739 5,500
------- ------- -------
21,922 6,012 15,910
------- ------- -------
Other capital assets
Land 2,431 - 2,431
Buildings 11,500 1,331 10,169
Office and production equipment 9,911 4,351 5,560
Leasehold improvements 314 231 83
------- ------- -------
24,156 5,913 18,243
------- ------- -------
$46,078 $11,925 $34,153
======= ======= =======
</TABLE>
The accumulated amortization of goodwill was $ 9,869,000 and $7,330,000 at
December 31, 1997 and 1996, respectively.
37
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
7. Other Assets
1997 1996
------- -------
Investments in joint ventures accounted
for under the equity method $ 6,915 $3,355
Deferred charges on debt financing 3,771 4,653
Other assets 1,203 283
------- ------
$11,889 $8,291
======= ======
8. SENIOR NOTES
The Senior Notes due March 1, 2001 were issued in 1994 at a discount from
their principal amount and bear interest at 10 % per annum (7 % prior to
March 1, 1997) with interest payable in arrears on March 1 and September 1.
The Senior Notes are the senior obligations of the Company, ranking senior
in right of payment to all subordinated indebtedness of the Company, and
pari passu in right of payment to all senior indebtedness of the Company.
Interest expense related to the Senior Notes was $6,175,000 during the year
ended December 31, 1997 (1996 - $6,621,000; 1995 - $6,642,000).
The Senior Notes are subject to redemption by the Company, in whole or in
part, at any time on or after March 1, 1998 at redemption prices expressed
as percentages of the principal amount (1998 104.29%; 1999 102.86%; 2000
101.43%), together with interest accrued thereon to the redemption date.
The Senior Notes indenture contains covenants that, among other things,
limit the ability of the Company and certain subsidiaries to incur
additional indebtedness, pay dividends or make other distributions, make
certain loans and investments, enter into asset sales, create liens, enter
into certain sale-leaseback transactions, enter into certain transactions
with affiliates, liquidate, or merge, consolidate or transfer substantially
all their respective assets.
9. CONVERTIBLE SUBORDINATED NOTES
In April 1996, the Company issued $100 million of Convertible Subordinated
Notes due April 1, 2003 bearing interest at 5.75 % payable in arrears on
April 1 and October 1. The 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 Notes) at any time prior to maturity.
Interest expense related to the Convertible Subordinated Notes was
$5,750,000 during the year ended December 31, 1997 (1996 - $4,159,000;
1995 - nil).
The 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
(1999 103.286%; 2000 102.464%; 2001 101.643%; 2002 100.821%) plus accrued
interest. The notes may only be redeemed by the Company between April 1,
1999 and April 1, 2001 if the last reported market price of the Company's
common shares is equal to or greater than $30 per share for any 20 of the 30
consecutive trading days prior to the notice of redemption. The notes may be
redeemed at any time on or after April 1, 2001 without limitation.
38
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
10. CAPITAL STOCK AND REDEEMABLE PREFERRED SHARES
(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.
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.
Redeemable Class C preferred shares, Series 1
The holders of Class C shares are entitled to a cumulative dividend at the
rate of 7 % per annum on the Class C issue price of Canadian $100 per
share. These dividends shall accrue from the issue date but shall not be
declared or paid prior to the third anniversary date of the issue date.
Dividends on the Class C shares are to be paid in priority to dividends
payable to the holders of the common shares.
If on any anniversary date of the issue date after the third such
anniversary date the Class C cumulative dividends to be paid on such date
are not paid and such dividends were required to have been paid pursuant to
certain conditions, then the rate at which Class C cumulative dividends
shall accrue thereafter will increase by 1 % per annum to a maximum
dividend rate of 10 % per annum until all Class C cumulative dividends have
been paid as required, at which time the dividend rate will revert to 7 %
per annum.
The Class C shares are redeemable at the option of the Company at any time
in whole, or from time to time in part, in each case for an amount equal to
the Class C issue price plus all accrued and unpaid dividends to, but not
including, the date of such redemption. The Class C shares are to be
redeemed in whole on September 1, 2002.
Except as otherwise required by law, the holders of Class C shares Series 1
are not entitled to vote at any meeting of the shareholders.
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 Series 2 shares shall be identical
to the Series 1 shares except that the holders of Series 2 shares will be
entitled to such number of votes as the directors determine subject to a
maximum of six % of the votes attaching to all voting shares of the Company
outstanding immediately following the conversion.
39
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
10. CAPITAL STOCK AND REDEEMABLE PREFERRED SHARES- (CONTINUED)
(b) Changes during the period
Pursuant to shareholders' approval at the Annual and Special Meeting held
on May 6, 1997, the Company's shares were split on a 2-for-1 basis in May
1997. Common share, stock option and earnings per share data for the
current and comparative periods give retroactive effect to the stock split
as if it had taken place at the beginning of the period.
In 1997, the Company issued 778,200 common shares pursuant to the exercise
of stock options for cash proceeds of $5,616,000 and 5,000 shares were
issued under the terms of an employment contract with an ascribed value of
$37,000.
In 1996, the Company issued 386,960 common shares pursuant to the exercise
of stock options for cash proceeds of $2,001,000 and 5,000 shares were
issued under the terms of an employment contract with an ascribed value of
$37,000. The Company repurchased 660,000 common shares and all of the
outstanding warrants of the Company from certain officers and directors of
the Company for $19,508,000 in cash.
In 1995, the Company issued 7,402 common shares pursuant to the exercise of
stock options for cash proceeds of $18,000 and acquired 28,000 common
shares for cancellation at a cash cost of $84,000.
(c) SHARES HELD FOR OTHER THAN RETIREMENT
As at December 31, 1997, 213,000 (1996 - 660,000) issued common shares are
held by a subsidiary of the Company for other than retirement. During 1997,
447,000 common shares held by a subsidiary of the Company were sold to a
former employee of the Company in connection with the exercise of a stock
option grant for cash proceeds of $105,000.
(d) STOCK OPTIONS AND WARRANTS
The Company has reserved a total of 4,644,188 common shares for future
issuance as follows:
(i) 381,744 common shares have been reserved for issuance pursuant to stock
options granted in connection with the employment of Douglas Trumbull,
former Vice Chairman of the Company, at an exercise price equivalent to
Canadian $0.32 per share and expire on September 1, 2002. These options are
fully vested.
(ii) 51,608 common shares have been reserved for issuance pursuant to stock
options granted at an exercise price equivalent to Canadian $1.59 per share
which vest over a five year period and expire on April 8, 2004. At December
31, 1997, options in respect of 7,200 common shares were vested and
exercisable.
(iii) 4,210,836 common shares have been reserved for issuance under the
Employee Stock Option Plan, of which options in respect of 2,005,600 common
shares are outstanding at December 31, 1997. The options granted under the
Employee Stock Option Plan generally vest over a five-year period and
expire 10 years from the date granted. As at December 31, 1997, options in
respect of 636,800 common shares were vested and exercisable.
40
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
10. CAPITAL STOCK AND REDEEMABLE PREFERRED SHARES- (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF SHARES AVERAGE EXERCISE PRICE PER SHARE
---------------------------------- --------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,beginning of
year 2,126,800 2,009,800 1,115,000 $ 8.99 $ 6.86 $6.37
Granted 711,000 481,000 1,107,000 23.10 15.47 7.33
Exercised (749,200) (350,800) (1,200) 7.45 6.49 6.75
Canceled or expired (83,000) (13,200) (211,000) 9.36 6.77 6.75
--------- --------- ---------
Options outstanding, end of year 2,005,600 2,126,800 2,009,800 $14.55 $ 8.99 $6.86
========= ========= =========
</TABLE>
The weighted average fair value of common share options granted in 1997 is
$5,604,000 (1996 - $2,622,000). 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 %, a
riskfree interest rate of 6 %, expected life of the options ranging from two
to five years and expected volatility of 40 %.
The following table summarizes certain information in respect of options
outstanding under the Employee Stock Option Plan as at December 31, 1997:
<TABLE>
<CAPTION>
Number of Shares
---------------------------
Range of exercise prices Average exercise Average remaining
per share Outstanding Vested price per share term
- ------------------------ -------------- ----------- --------------------- -----------------
<S> <C> <C> <C> <C>
$ 4.62 - $ 9.99 822,600 355,200 $ 6.80 6 1/2 years
$ 10.00 - $ 14.99 108,000 22,000 11.22 8 years
$ 15.00 - $ 19.99 598,000 259,600 16.34 8 years
$ 20.00 - $ 27.00 477,000 - 26.44 9 3/4 years
--------- -------
Total 2,005,600 636,800 $14.55 8 years
========= =======
</TABLE>
(e) REDEEMABLE PREFERRED SHARES
As at December 31, 1997 and 1996, there were 33,333 Class C Series 1
redeemable preferred shares issued and outstanding. Cumulative dividends
payable on the Class C Series 1 redeemable preferred shares amounted to
$653,000 at December 31, 1997 (December 31, 1996 - $483,000).
41
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
10. CAPITAL STOCK AND REDEEMABLE PREFERRED SHARES - (CONTINUED)
(f) EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Net earnings available to common
shareholders:
Net earnings $ 20,665 $ 15,408 $ 3,650
less: accrual of preferred dividends (170) (169) (169)
accretion of discount of preferred shares (160) (140) (125)
----------- ----------- -----------
$ 20,335 $ 15,099 $ 3,356
=========== =========== ===========
Weighted average number of common shares:
Issued and outstanding at beginning of year 27,885,218 28,153,258 28,173,856
Weighted average shares
Issued in the year 659,065 172,546 5,402
Repurchased in the year - (476,686) (25,666)
----------- ----------- -----------
Weighted average used in computing basic
earnings per share 28,544,283 27,849,118 28,153,592
Assumed exercise of stock options, net of
shares assumed acquired under the Treasury
Stock Method 1,575,410 2,075,780 1,239,584
----------- ----------- -----------
Weighted average used in computing diluted
earnings per share 30,119,693 29,924,898 29,393,176
=========== =========== ===========
</TABLE>
Common shares potentially issuable pursuant to the Convertible Subordinated
Notes would have an antidilutive effect on earnings per share and have not
been included in the above computations.
If the methodology prescribed by Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, had been adopted by the Company, pro
forma results would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- -------------
<S> <C> <C> <C>
Net earnings $19,499 $15,059 $2,872
Earnings per share
Basic $ 0.67 $ 0.53 $ 0.09
Diluted $ 0.64 $ 0.49 $ 0.09
</TABLE>
42
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
11. COMMITMENTS
(a) Total minimum annual rental payments under operating leases for premises
are as follows:
1998 $1,438
1999 1,910
2000 2,183
2001 2,441
2002 2,476
Rent expense was $1,033,000 for the year ended December 31, 1997 (1996 -
$1,161,000; 1995 - $944,000).
(b) The Company has unused lines of credit amounting to Canadian $6.3 million,
or the equivalent in U.S. dollars. No commitment fees are payable on these
lines of credit.
(c) The Company has guaranteed up to $5.75 million of a term loan undertaken by
a joint venture to which it is a party in connection with the development
and construction of an IMAX attraction in Las Vegas. The term loan, which
matures in January 2009, bears interest at LIBOR plus 3 % and is
collateralized by the assets of the joint venture.
12. GOVERNMENT ASSISTANCE
A portion of the Company's research activities which relate to 3D motion
pictures is eligible for government grants. Government grants have been
credited against research and development expense in the amount of $100,000
during the year ended December 31, 1997 (1996 - $324,000; 1995 - $302,000).
13. INCOME TAXES
(a) Earnings before income taxes and minority interest by tax jurisdiction
comprise the following:
1997 1996 1995
------------- ------------ ------------
Canada $31,872 $32,461 $ 9,239
United States 6,512 3,308 (3,346)
Japan 1,424 (5,351) 3,547
Other (521) 162 (332)
------- ------- -------
Total $39,287 $30,580 $ 9,108
======= ======= =======
(b) The provision for income taxes comprises the following:
1997 1996 1995
------------ ----------- -----------
Current $ (3,250) $ (4,618) $(1,641)
Deferred (14,015) (8,961) (3,817)
-------- -------- -------
Total $(17,265) $(13,579) $(5,458)
======== ======== =======
43
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
13. INCOME TAXES -- (CONTINUED)
(c) The provision for income taxes differs from the amount that would have
resulted by applying the combined Canadian federal and Ontario provincial
statutory income tax rates (44.62 %) to earnings as described below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Income tax expense at combined statutory rates $(17,530) $(13,644) $(4,039)
(Increase) decrease resulting from:
Non-deductible expenses, including amortization of goodwill (985) (1,519) (929)
Manufacturing and processing profits deduction 684 977 -
Large corporations tax (335) (275) (146)
Income tax at different rates in foreign and other provincial
jurisdictions 292 701 (785)
Investment tax credits and other 609 181 441
-------- -------- -------
Provision for income taxes as reported $(17,265) $(13,579) $(5,458)
======== ======== =======
</TABLE>
(d) The deferred income tax liability consists of:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Net operating loss carry forwards $ 2,349 $ 4,318
Investment tax credit carry forwards 5,015 4,529
Asset write downs 800 800
Income recognition on systems deliveries (52,374) (31,827)
Excess book over tax depreciation and amortization 26,740 17,507
Other (145) 864
-------- --------
(17,615) (3,809)
Valuation allowance (1,981) (2,272)
-------- --------
$(19,596) $ (6,081)
======== ========
</TABLE>
44
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
14. Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
(a) Changes in other operating assets and
liabilities were as follows:
Decrease (increase) in:
Accounts receivable $(15,081) $ (7,940) $ (4,007)
Net investment in leases (18,674) (15,499) (10,791)
Inventories and systems under construction (1,365) (3,761) (6,543)
Prepaid expenses (604) 420 (537)
Increase (decrease) in:
Accounts payable 2,428 1,446 (148)
Accrued liabilities 7,543 5,633 (251)
Income taxes payable (2,423) 1,964 (232)
Other deferred revenue (6,078) 526 7,803
-------- -------- --------
$(34,254) $(17,211) $(14,706)
======== ======== ========
(b) Cash payments made during the year on account of:
Income taxes $ 5,145 $ 2,395 $ 1,863
======== ======== ========
Interest $ 11,402 $ 7,872 $ 5,261
======== ======== ========
(c) Depreciation and amortization comprise the following:
Acquired systems contracts in process $ 1,027 $ 1,337 $ 1,745
Film assets 4,905 2,850 5,111
Capital assets 5,560 5,020 3,755
Intangibles 2,701 2,708 2,541
Deferred financing costs 882 770 413
-------- -------- --------
$ 15,075 $ 12,685 $ 13,565
======== ======== ========
</TABLE>
45
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
15. Segmented Information
The Company operates primarily in two industries: the design,
manufacture and sale or lease of projection systems and the production,
distribution and post-production of films. Inter-segment transactions are not
significant.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue
Systems $ 97,539 $ 85,972 $ 51,968
Films 39,683 28,367 28,835
Other 21,237 15,499 7,694
-------- -------- --------
$158,459 $129,838 $ 88,497
======== ======== ========
EARNINGS FROM OPERATIONS
Systems $ 52,594 $ 45,224 $ 23,193
Films 11,452 7,965 7,226
Other 1,000 (1,101) (5,759)
Corporate overhead and research and development (17,338) (15,203) (11,785)
-------- -------- --------
$ 47,708 $ 36,885 $ 12,875
======== ======== ========
DEPRECIATION AND AMORTIZATION
Systems $ 6,741 $ 6,781 $ 7,192
Films 5,100 2,954 5,205
Other 3,234 2,950 1,168
-------- -------- --------
$ 15,075 $ 12,685 $ 13,565
======== ======== ========
CAPITAL EXPENDITURES
Systems $ 6,103 $ 3,406 $ 3,942
Films 206 76 254
Other 6,345 8,423 772
-------- -------- --------
$ 12,654 $ 11,905 $ 4,968
======== ======== ========
IDENTIFIABLE ASSETS
Systems $167,926 $146,835 $121,853
Films 52,199 23,729 11,382
Corporate and Other 124,234 138,180 61,280
-------- -------- --------
$344,359 $308,744 $194,515
======== ======== ========
</TABLE>
46
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
15. SEGMENTED INFORMATION -- (CONTINUED)
Revenue by geographic area comprises:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Canada $ 12,890 $ 27,740 $13,705
United States 70,070 50,852 31,491
Europe 38,238 25,567 11,999
Japan 11,986 17,350 26,808
Other 25,275 8,329 4,494
-------- -------- -------
$158,459 $129,838 $88,497
======== ======== =======
</TABLE>
16. 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 credit risk exposure associated with these activities
would be limited to all unrealized gains on contracts based on current market
prices. The Company believes that this credit risk has been minimized by
dealing with highly-rated institutions.
To fund Canadian dollar costs in 1998, the Company had entered into
forward exchange contracts as at December 31, 1997 to hedge the conversion of
$30 million of its cash flow into Canadian dollars at an average exchange rate
of Canadian $1.36 per U.S. dollar.
The Company has also entered into foreign currency swap transactions
to hedge minimum lease payments receivable under sales-type lease contracts
denominated in Japanese Yen and French Francs. These swap transactions fix
the foreign exchange rates on conversion of 168 million Yen at 98 Yen per U.S.
dollar through September 2004 and on 17.4 million Francs at 5.1 Francs per
U.S. dollar through September 2005.
The estimated fair values of the Company's financial instruments at
December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED FAIR
AMOUNT VALUE
----------- -------------
<S> <C> <C>
Cash and cash equivalents $ 64,069 $ 64,069
Marketable securities 26,461 26,461
Senior notes 65,000 67,860
Convertible subordinated notes 100,000 121,250
Foreign currency contracts 973 (719)
</TABLE>
The carrying amount of cash and cash equivalents approximates fair
value due to the short maturity of these instruments. Marketable securities,
which principally represent investments in corporate bonds maturing through
October 1999, have been categorized as available-for-sale securities and are
carried at estimated fair value. The fair values of the Company's Senior
Notes and Convertible 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 or
pay to terminate the agreements, taking into consideration current exchange
rates and the credit worthiness of the counterparties.
17. CONTINGENCIES
(a) In April 1994, Compagnie France Film Inc. filed a claim against the Company
in the Superior Court in the District of Montreal, in the Province of Quebec,
alleging breach of contract and bad faith in respect of an agreement which the
Plaintiff claims it entered into with the Company for the establishment of an
IMAX theater in Quebec City, Quebec, Canada. Until December 1993, Predecessor
Imax was in negotiations with
47
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
17. CONTINGENCIES -- (CONTINUED)
the Plaintiff and another unrelated party for the establishment of
an IMAX theater in Quebec City. In December 1993, Predecessor Imax executed
a system lease agreement with the other party. During the negotiations,
both parties were aware of the other party's interest in also establishing
an IMAX theater in Quebec City. The Plaintiffs are claiming damages of
Canadian $4.6 million, representing the amount of profit they claim they
are denied due to their inability to proceed with an IMAX theater in Quebec
City, together with expenses incurred in respect of this project and pre-
judgment interest. The Company has disputed this claim and it went to trial
in January 1998. The Court has reserved its decision, which must be
released within six months of the trial.
Compagnie France Film had also incorporated a shell company, 3101-8450
Quebec Inc. ("3101"). 3101 was to, among other things, enter into a lease
for the proposed IMAX theater site. In November 1993, while negotiations
between Compagnie France Film and the Company were still ongoing, 3101
entered into a lease for the site. 3101 defaulted on the lease and the
landlord sued 3101 in an unrelated action to which the Company was not a
party. In February 1996, 3101 was found liable to pay the landlord damages
in the amount of Canadian $2.5 million. Subsequent to that judgment 3101
intervened in the lawsuit between Compagnie France Film and the Company in
order to claim from the Company damages in the amount of Canadian $2.5
million.
The Company believes that it will be successful in its defense of
these claims and the ultimate loss, if any, will not have a material impact
on the financial position or results of operations of the Company, although
no assurance can be given with respect to the ultimate outcome of this
litigation.
(b) On February 26, 1996, Iwerks Entertainment Inc. filed a complaint against
the Company alleging violations under the Sherman Act, the Clayton Act,
tortious interference with contracts and prospective economic advantage,
and unfair competition. The plaintiff is seeking unquantified damages,
injunctive relief and restitution. The Company has filed an answer denying
the material allegations of the complaint and intends to vigorously defend
this action. The amount of the loss, if any, cannot be determined at this
time.
(c) In July 1997, Debra B. Altman filed a claim against the Company, and
certain unidentified individuals, in the Superior Court of the State of
California for the County of Los Angeles, alleging breach of contract,
breach of implied covenant of good faith and fair dealing, breach of
implied-in-fact contract, breach of confidence, constructive fraud, quantum
meruit, unjust enrichment and constructive trust with respect to a film
project the Plaintiff claims to have pursued with the Company. The
Plaintiff is seeking unquantified damages exceeding $5 million. The Company
disputes this claim and has removed it to the U.S. District Court for the
Central District of California, Western Division, and intends to vigorously
defend this action. The trial is scheduled for July 1998. The amount of
loss, if any, cannot be determined at this time.
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 for any such litigation.
48
<PAGE>
IMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
For the years ended December 31, 1997, 1996 and 1995.
18. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, and Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information, will become
effective for the Company's 1998 fiscal year and may require additional
financial statement disclosures or alternative presentation of existing
disclosures.
New accounting standards issued but not effective would not have a material
impact on the Company's financial statements.
19. SUBSEQUENT EVENT
On March 5, 1998, Rosalini Film Productions Inc. filed a claim against the
Company in the U.S. District Court for the Central District of California,
alleging breach of written agreement, breach of implied covenant of good
faith and fair dealing, fraud and deceit, negligent misrepresentation,
unfair competition, unjust enrichment, quantum meruit, constructive trust
and declaratory relief with respect to a film project the Plaintiff claims
to have pursued with the Company. The Plaintiff is seeking unquantified
damages. The Company disputes this claim and intends to vigorously defend
this action. The amount of loss, if any, cannot be determined at this time.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME Age Position
- ---- --- --------
<S> <C> <C>
Bradley J. Wechsler................. 46 Chairman, Co-Chief Executive Officer and Director
Richard L. Gelfond.................. 42 Vice Chairman, Co-Chief Executive Officer and Director
John M. Davison..................... 39 Executive Vice President, Operations and Chief Financial Officer
and Director
Peter J. Chilibeck.................. 38 Senior Vice President, Legal Affairs and General Counsel
Andrew Gellis....................... 43 Senior Vice President, Film
Michael A. Gibbon................... 54 Senior Vice President, Technology
Christian H. Jorg................... 34 Senior Vice President, IMAX Attractions and Chief Operating
Officer of Ridefilm Corporation
David B. Keighley................... 50 Senior Vice President and President of David Keighley
Productions 70MM Inc.
Michael M. Davies................... 37 Vice President and Corporate Controller
Jennifer H. Rae..................... 54 Vice President, Affiliate Relations
G. Mary Ruby........................ 40 Vice President, Legal Affairs and Corporate Secretary
I. Graeme Ferguson.................. 68 Director
Michael Fuchs....................... 52 Director
Garth M. Girvan..................... 48 Director
Murray B. Koffler................... 74 Director
Philip C. Moore..................... 44 Director and Assistant Secretary
Miles S. Nadal...................... 40 Director
Marc A. Utay........................ 38 Director
</TABLE>
Under the Articles of the Company, the Board of Directors is divided into
three classes, each of which serves for a three year term. The initial term of
Class III directors, currently composed of Richard L. Gelfond, Miles S. Nadal
and Bradley J. Wechsler expires at the Annual Meeting of Shareholders to be held
on June 22, 1998. The term of Class I directors, currently composed of John M.
Davison, I. Graeme Ferguson, Michael Fuchs and Philip C. Moore, expires in 2000.
The term of Class II directors, currently composed of Garth M. Girvan, Murray B.
Koffler and Marc A. Utay, expires in 1999.
BRADLEY J. WECHSLER has been Chairman of the Company since March 1994 and Co-
Chief Executive Officer since May 1996. From March 1, 1994 to September 12,
1994, Mr. Wechsler also served as Interim Chief Executive Officer. Since 1987,
Mr. Wechsler has served as President of Entertainment Finance Services, Inc.
and, since 1992, has served as President of Bedford Capital Advisors, Inc. which
provides financial and advisory services to media and entertainment companies.
RICHARD L. GELFOND has been Vice Chairman of the Company since March 1994 and
Co-Chief Executive Officer since May 1996. In 1991 Mr. Gelfond founded Cheviot
Capital Advisors Inc., a financial advisory and merchant banking firm that
specializes in acquisitions and venture capital investments. In addition, Mr.
Gelfond is Vice Chairman of the Board of Directors of Envirotest Systems Corp.,
a public company which is the largest provider of vehicle emissions testing
services in North America.
JOHN M. DAVISON joined the Company in 1987 and was appointed Vice President,
Finance in 1991. In 1995 Mr. Davison became Senior Vice President, Finance and
Administration, responsible for the financial affairs and administrative
operations of the Company, and in February 1997 was appointed Executive Vice
President, Operations and Chief Financial Officer. He became a Director of the
Company in May 1994. Mr. Davison is a Chartered Accountant and Chartered
Business Valuator. Mr. Davison is a Canadian citizen.
50
<PAGE>
PETER J. CHILIBECK joined the Company as Senior Vice President, Legal Affairs
and General Counsel in February 1997. He is responsible for advising the Board
of Directors and senior management on all of the Company's legal affairs. Prior
to joining the Company, Mr. Chilibeck was Corporate Secretary and Assistant
General Counsel of Northern Telecom Limited, a leading global supplier of
telecommunications equipment products, from December 1994, and Assistant General
Counsel and Assistant Secretary of Northern Telecom Limited prior thereto. Mr.
Chilibeck is a member of the Ontario Bar and a Canadian Citizen.
ANDREW GELLIS joined the Company as Senior Vice President, Film in January
1996 responsible for supervising the production and distribution of the
Company's films for both the institutional and commercial markets. Prior to
joining the Company, Mr. Gellis was affiliated with Sony Corporation and its
numerous entertainment/technology divisions, where he helped pioneer and advance
Sony's entrance into the large-format filmmaking arena. Mr. Gellis also wrote
and produced Sony's highly-acclaimed 15/70-format 3D film Across The Sea of
Time. Mr. Gellis began his career at the J. Michael Bloom Agency, where he
founded the literary department on both coasts, served as a production executive
at CBS Film, Inc., was a studio-based producer at Twentieth-Century Fox and was
the head of his own film production company.
MICHAEL A. GIBBON joined the Company in 1988 and became Vice President,
Technology in 1989 and Senior Vice President, Technology in 1995. Mr. Gibbon is
responsible for technology, manufacturing and client support, for both the
making of films and for theaters and projection systems. Mr. Gibbon is
registered as a professional engineer by the Association of Professional
Engineers of Ontario. Mr. Gibbon is a Canadian citizen.
CHRISTIAN H. JORG joined the Company in 1995 as Vice President, Business
Affairs and Business Development and was promoted to Senior Vice President,
Business Affairs and Development in December 1995. In July 1996, Mr. Jorg was
given the functional title of Chief Operating Officer of Ridefilm Corporation
and is responsible for the Company's attractions businesses, product development
and marketing for theme parks and investment opportunities in specialty
attractions. Prior to joining the Company, Mr. Jorg was Vice President, New
Technologies for BMG Entertainment (formerly Bertelsmann Music Group). Mr. Jorg
is a Director of Sonics Associates, Inc.
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. Mr. Keighley is
responsible for motion picture post-production and image quality assurance for
15/70-format films and has been involved in the production and post-production
of 15/70-format films for more than two decades. Mr. Keighley was recognized by
the Board of Governors of the Society of Motion Picture and Television Engineers
(SMPTE) as the winner of the 1993 Herbert T. Kalmus Gold Medal Award for his
outstanding contributions to 15/70mm print quality control and pioneering
efforts in making high-quality 15/70mm release prints through the
interpositive/internegative system. Mr. Keighley is a Canadian citizen.
MICHAEL M. DAVIES has been Corporate Controller of the Company since October
1994 and was appointed Vice President and Corporate Controller in November 1996.
From April to October 1994, Mr. Davies was Vice President and Controller of Lac
Minerals Ltd., a publicly held international mining company. Prior thereto, Mr.
Davies held several controllership positions with Lac Minerals Ltd. Mr. Davies
is a Chartered Accountant and a Canadian citizen.
JENNIFER H. RAE, Vice President, Affiliate Relations, joined the Company in
1986 and was appointed Vice President, Corporate Communications in 1994 and Vice
President, Affiliate Relations in September 1996. Ms. Rae is responsible for
evaluating and co-ordinating all aspects of the Company's relationships with its
theater network. Ms. Rae has worked for more than 25 years as a communications
consultant and writer/editor, primarily in broadcasting, politics and the
voluntary sector. Ms. Rae is a Canadian citizen.
G. MARY RUBY joined the Company in 1987 and was appointed Vice President,
Legal Affairs and Corporate Secretary in 1991. Ms Ruby acts as Corporate
Secretary to the Board of Directors and provides advice with respect to the
Company's legal affairs. Ms. Ruby is a member of the Ontario Bar and is a
Canadian citizen.
51
<PAGE>
I. GRAEME FERGUSON, a Director of the Company since May 1996, was a co-founder
and past President of the Company. Since 1994, Mr. Ferguson has been a
consultant to the Company on various film productions. He has produced or co-
produced such 15/70-format films as North Of Superior, Man Belongs To The Earth,
Snow Job, Ocean, Hail Columbia!, The Dream Is Alive, Blue Planet, Journey To The
Planets, Destiny In Space, Into The Deep, L5-First City In Space, and Mission To
Mir. Mr. Ferguson is a Canadian citizen and is a Member of the Order of Canada.
MICHAEL FUCHS, a Director of the Company since May 1996, held the position of
Chairman and Chief Executive Officer of Home Box Office from October 1984 until
November 1995. Under his leadership, HBO became the largest and most successful
pay-television company in the world. In May, 1995 Mr. Fuchs added the
chairmanship of Warner Music Group to his portfolio, becoming responsible for
the overall management of the two divisions for the world's leading
entertainment conglomerate, Time Warner Inc. Mr. Fuchs left Time Warner in
November, 1995. Mr. Fuchs has received many honors, including induction into
the Broadcasting & Cable Magazine Hall of Fame (1994), The National Academy of
Cable Programming Governors Award (1994), The Milton Petrie Award from The
National Victim Center (1992), The Simon Wiesenthal Center's Distinguished
Service Award (1989), The National Cable Television Association's Vanguard Award
for Programming Excellence (1988), The Simon Wiesenthal Center's Humanitarian
Award (1996), Union College's Nott Medal for Distinguished Alumni (1995), and
People For the American Way's Spirit of Liberty Award (1996). Mr. Fuchs holds
numerous other directorships.
GARTH M. GIRVAN, a Director of the Company since 1994, is a partner of
McCarthy Tetrault, special Canadian counsel to the Company. Mr. Girvan 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 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.
PHILIP C. MOORE, a Director of the Company since 1994, is a partner of
McCarthy Tetrault, special Canadian counsel to the Company. Mr. Moore is a
Canadian citizen.
MILES S. NADAL, a Director of the Company since 1994, has been President and
Chief Executive Officer, and a director, of MDC Corporation since 1986. MDC
Corporation is a multi-disciplined communications and marketing organization
providing a broad range of consulting, production and manufacturing services in
the communications industry. Mr. Nadal is a Canadian citizen.
MARC A. UTAY, a Director of the Company since May 1996, has been Managing
Director of Wasserstein Perella & Co. Inc. and head of the firm's High Yield
Investment Banking Capital Markets Group since 1993. 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.
52
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the periods indicated, the compensation
paid or granted by the Company and its subsidiaries to the individuals who
served during 1997 as Chief Executive Officers and the four most highly
compensated executive officers of the Company, other than the Chief Executive
Officer, who were serving as executive officers at December 31, 1997
(collectively, the "Named Executive Officers"). As noted in Item 13 under
"Standstill Agreement", the Articles of the Company provide that the entering
into or changing the terms of any agreement with the Co-Chief Executive Officers
is an "Extraordinary Matter" requiring unanimous approval by the "CEO Advisors"
(who currently comprise a representative of Wasserstein Perella and the Co-Chief
Executive Officers), failing which unanimous approval of the Board of Directors
is required. The compensation for the Co-Chief Executive Officers for 1997 was
determined in accordance with their renewal employment agreements effective
January 1, 1997, the terms of which agreements were approved by the Board of
Directors upon the recommendation of the Compensation Committee, which is
composed of three directors independent of management, after receiving the
unanimous recommendation of the CEO Advisers. The table also includes an
additional individual for whom disclosure would have been required but for the
fact that the individual was not serving as an executive officer of the
registrant at December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------------
Other
Annual
Name and Principal Position of Year Ended Compensation
Named Executive Officer December 31 Salary Bonus (2) (3)
- ------------------------------ ----------- --------- --------- ----------------
($) ($) ($)
<S> <C> <C> <C> <C>
Bradley J. Wechsler 1997 710,000 1,300,000 --
Chairman and Co-Chief 1996 650,000 650,000 --
Executive Officer 1995 500,000 250,000 --
Richard L. Gelfond 1997 710,000 1,300,000 --
Vice Chairman and Co-Chief 1996 650,000 650,000 --
Executive Officer 1995 500,000 250,000 --
David B. Keighley, Senior Vice 1997 178,849 220,597 --
President and President, 1996 150,078 149,438 --
David Keighley 1995 145,317 98,459 --
Productions 70MM Inc.
Christian Jorg 1997 208,692 40,000 136,875(6)
Senior Vice President, IMAX 1996 198,731 44,324 77,500(6)
Attractions and Chief 1995 78,500(1) 25,000 --
Operating Officer of Ridefilm
Corporation
Andrew Gellis 1997 210,000 55,000 50,000(8)
Senior Vice President, Film 1996 210,000 55,125 50,000(8)
John Davison 1997 193,025 73,455 --
Executive Vice President, 1996 146,580 45,631 --
Operations and Chief Financial 1995 136,678 36,625 --
Officer
Douglas Trumbull 1997 288,462(10) 207,765 --
Vice Chairman and Chief 1996 1,229,167 -- --
Executive Officer of 1995 1,104,167 -- --
Ridefilm Corporation
</TABLE>
<TABLE>
Long-Term
Compensation
-----------------------------------
NAME AND PRINCIPAL POSITION OF Restricted Securities Under All Other
Named Executive Officer Stock Awards(4) Options Granted(5) Compensation(9)
- ------------------------------ --------------- ---------------- ---------------
($) (#) ($)
<S> <C> <C> <C>
Bradley J. Wechsler 465,000 80,000 8,614
Chairman and Co-Chief -- -- 8,022
Executive
Officer -- 300,000 7,806
Richard L. Gelfond 465,000 80,000 8,614
Vice Chairman and Co-Chief -- -- 7,806
Executive Officer -- 300,000 7,806
David B. Keighley, Senior Vice -- 15,000 11,019
President and President, -- 10,000 8,189
David Keighley -- 15,000 8,217
Productions 70MM Inc.
Christian Jorg -- 12,500 8,614
Senior Vice President, IMAX -- 25,000 162
Attractions and Chief -- 50,000 54
Operating Officer of Ridefilm 62,500(7)
Corporation
Andrew Gellis -- 12,500 8,614
Senior Vice President, Film -- 62,000 306
John Davison -- 35,000 10,273
Executive Vice President, -- 20,000 8,006
Operations and Chief Financial -- 20,000 7,718
Officer
Douglas Trumbull -- -- 3,302
Vice Chairman and Chief -- -- 8,364
Executive Officer of -- -- 8,364
Ridefilm Corporation
</TABLE>
(1) This amount was paid to Mr. Jorg in 1995 based on his annual salary of
$195,000.
(2) These amounts are paid under annual incentive arrangements that the Company
has with each of the Named Executive Officers, as detailed under "Employment
Contracts."
(3) The value of perquisites and other personal benefits for each Named
Executive Officer does not exceed the lesser of $50,000 and 10% of his
annual salary and bonus.
(4) These amounts represent the dollar value of the grant of 30,000 synthetic
restricted shares ("phantom stock") on January 1, 1997 to each of Messrs.
Wechsler and Gelfond as detailed under "Employment Contracts". The value of
this phantom stock grant to each of the Named Executives as at December 31,
1997 was $660,000.
(5) 1995 and 1996 amounts have been restated to reflect the 2-for-1 stock split
which became effective by May 27, 1997.
53
<PAGE>
(6) This amount represents the taxable benefit in respect of 5,000 fully paid-up
shares issued to Mr. Jorg pursuant to his employment contract.
(7) This amount represents one-time signing and relocation payments of $17,500
and $45,000, respectively, made to Mr. Jorg in 1995 pursuant to his
employment contract.
(8) This amount was paid on account of certain script writing services provided
by Mr. Gellis.
(9) Except as noted, these amounts reflect (i) the payment by the Company of
life insurance premiums on the lives of the Named Executive Officers, and
(ii) contributions to the Company's defined contribution pension plans.
(10) This amount was paid to Mr. Trumbull in 1997 based on his annual salary of
$1,250,000. Mr. Trumbull's contract with the Company expired on March 1,
1997.
OPTIONS GRANTED
The Company has a Stock Option Plan under which the Company may grant options
to purchase common shares on terms that may be determined, within the
limitations of the Stock Option Plan. The aggregate number of common shares
reserved for issuance under the Plan is 4,210,836 common shares. Options to
purchase 2,005,600 common shares have been granted and are outstanding under
the Plan as at December 31, 1997. The exercise price for options issued under
the Plan, is not to be less than the market price of the common shares on the
date of grant. An option will be exercisable for a maximum period of ten years
from the date of grant, subject to earlier termination if the option holder
ceases to be employed by the Company. The Board of Directors determines vesting
requirements. If a Participant's employment with the Company terminates for any
reason, any Options which have not vested will be surrendered for cancellation
without any consideration being paid therefor. If the Participant's employment
is terminated without "cause" or by reason of such Participant's resignation,
death or permanent disability, the Participant (or the Participant's estate)
will be entitled to exercise the Participant's vested Options for a period of 30
days. If the Participant's employment is terminated for cause, such
Participant's vested Options will be surrendered for cancellation without any
consideration being paid therefor. If the Participant is a party to an
employment agreement with the Company or any of its subsidiaries and breaches
any of the restrictive covenants in such agreement, such Participant will be
required to surrender all unexercised Options for cancellation without any
consideration being paid therefor and will be obligated to pay to the Company an
amount equal to the aggregate profit realized by such Participant with respect
to any prior Option exercises.
The following table sets forth information relating to individual grants of
options to purchase common shares of the Company to Named Executive Officers
under the Stock Option Plan during the financial year ended December 31, 1997 in
respect of services rendered or to be rendered to the Company:
OPTION GRANTS IN FINANCIAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDER EMPLOYEES OPTION TERM
OPTIONS IN FINANCIAL EXERCISE EXPIRATION ----------------------
NAME GRANTED YEAR PRICE DATE 5% 10%
- ------------------------------ ---------- ------------ --------------- ---------- ------- ---------
(#) ($/COMMON SHARE) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Bradley J. Wechsler (1) 80,000 11.3 15.70 01-Jan-04 514,960 1,193,200
Richard L. Gelfond (1) 80,000 11.3 15.70 01-Jan-04 514,960 1,193,200
David Keighley (2) 15,000 2.1 26.94 11-Aug-07 254,583 642,519
Christian Jorg (2) 12,500 1.8 26.94 11-Aug-07 212,153 535,433
Andrew Gellis (2) 12,500 1.8 26.94 11-Aug-07 212,153 535,433
John Davison (2) 35,000 4.9 26.94 11-Aug-07 594,027 1,499,211
</TABLE>
(1) These options vested immediately upon the grant date and entitle the Named
Executive Officer to purchase one common share for each option. The market
value of the common shares underlying the options was equal to the exercise
price on the date of the grant.
(2) These options vest over five years at the rate of 20% per year and entitle
the Named Executive Officer to purchase one common share for each option.
The market value of the common shares underlying the options was equal to
the exercise price on the date of the grant.
54
<PAGE>
AGGREGATED OPTION EXERCISES DURING THE FINANCIAL YEAR
ENDED DECEMBER 31, 1997 AND FINANCIAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED
SECURITIES AGGREGATE FINANCIAL YEAR-END IN-THE-MONEY OPTIONS
ACQUIRED VALUE EXERCISABLE/ AT FINANCIAL YEAR-END
NAME ON EXERCISE REALIZED UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
- ---------------------------- ------------ ---------- ----------------------- ------------------------------
(#) ($) (#) ($)
<S> <C> <C> <C> <C>
Bradley J. Wechsler 277,000 3,233,307 80,000/Nil 504,000/Nil
Richard L. Gelfond 277,000 3,233,307 80,000/Nil 504,000/Nil
David Keighley Nil Nil 38,000/52,000 563,320/491,980
Christian Jorg Nil Nil 25,000/62,500 310,575/517,300
Andrew Gellis Nil Nil 12,400/62,100 121,250/485,000
John Davison 59,000 1,184,105 7,000/98,000 70,660/900,903
Douglas Trumbull 447,000 9,730,117 385,744/Nil 8,326,462/Nil
</TABLE>
(1) Calculated based on the December 31, 1997 closing price of the common shares
on NASDAQ of $22.00.
PENSION PLANS
The Company 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 the financial year ended December
31, 1997, the Company contributed an aggregate of $13,937 to the Canadian plan
on behalf of Messrs. Keighley and Davison and $41,194 to the Company's defined
contribution employee pension plan qualified under Section 401(k) of the U.S.
Internal Revenue Code on behalf of each of Messrs. Wechsler, Gelfond, Keighley,
Jorg, Gellis and Trumbull. The Company does not have any other pension plans for
its employees.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with each of Messrs.
Wechsler and Gelfond (the "Executives") with effect from January 1, 1997 for a
two-year term. Under the Company's governance process as set forth in its
Articles and By-laws, the "CEO Advisors" unanimously recommended to the
Compensation Committee, which is composed of three directors independent of
management, the approval of these agreements, which were approved by the Board
of Directors upon the recommendation of the Compensation Committee. The CEO
Advisors include a representative of Wasserstein Perella, the largest
shareholders of the Company. The employment agreements provide that each of the
Executives will receive a salary of US$ 710,000 in each year of the term. These
agreements also provide that each of the Executives will receive a discretionary
bonus in each year tied to the performance of the Company and certain
qualitative and quantitative measures determined by the CEO Advisors (as such
term is described below under "Standstill Agreement") and the Compensation
Committee of the Board. The bonus paid to each of Messrs. Wechsler and Gelfond
in respect of 1997 was $1,300,000. In addition, at the beginning of each year of
the term each Executive is granted the right to receive 30,000 synthetic
restricted shares ("phantom stock"). At any time after January 1, 1998 and
January 1, 1999 each Executive has the right to exercise the right to receive
the phantom stock, by being paid an amount equal to the fair market value of an
equal number of common shares of the Company on the date on which the Executive
makes the request. Each Executive is also granted 80,000 options to purchase
common shares in accordance with the Stock Option Plan on each of January 2,
1997 and 1998, which options expire on January 1, 2004 and January 1, 2005,
respectively. Under the agreements, each of the Executives is to perform such
services with respect to the Company's business as may be reasonably requested
from time to time by the Board of Directors and which are consistent with his
position as Co-Chief Executive Officer. In addition, the Company is to use its
best efforts to cause the Executives to be elected to the Board of Directors and
to the designation of a CEO Advisor. In addition, a provision contained in their
original employment agreements is continued, whereby each of the Executives is
also entitled to receive, upon a sale of the Company or the exercise after March
1, 1999 by the Executives of their rights to require the Company to take action
to liquidate their common shares under a Shareholders' Agreement among
Wasserstein Perella Partners, L.P., Mr. Wechsler, Mr. Gelfond and certain other
investors dated as of June 16, 1994, a cash bonus in an amount equal to the
product of (a) 0.375% and (b) the amount by which the sale or liquidation
transaction imputes an equity value in excess of Cdn. $150,000,000 to the common
shares originally issued by the Company (on a fully diluted basis but excluding
the common shares issued upon the conversion of the Class B convertible
preferred shares of the Company formerly outstanding which were converted into
common shares on June 16, 1994 and the common shares issued upon the
55
<PAGE>
exercise of warrants owned by each of Messrs. Wechsler and Gelfond). Under the
employment agreements, the Company is to equalize the Executives to the taxes
which each of the Executives would have paid had he earned his employment
compensation and paid taxes thereon solely in the United States. The employment
agreements also contain non-competition provisions.
The three-year employment agreement entered into between the Company and Mr.
Trumbull expired on March 1, 1997. During the term of this agreement, Mr.
Trumbull received a base salary, payable at the annual rate of $1,000,000 for
the first year and increasing to $1,125,000 for the second year and $1,250,000
for the third year. Under the agreement, Mr. Trumbull received as a bonus,
options to purchase 414,372 common shares at an exercise price of Cdn. $0.65.
Mr. Trumbull was also entitled under the agreement to receive bonuses payable in
cash. The amount of any such cash bonuses were to be based on the aggregate
price paid by Mr. Trumbull to exercise the options. In 1997, Mr. Trumbull
received a bonus of Cdn. $288,315 (US$207,765). Mr. Trumbull was also eligible
to receive additional compensation (payable in additional options to purchase
common shares or a combination of common shares and cash) in connection with new
technology devised by Mr. Trumbull or if Mr. Trumbull personally produced or
directed any film project. Mr. Trumbull's employment agreement also contained a
non-competition provision.
The Company and David Keighley Productions 70 MM Inc. (formerly David Keighley
Productions Ltd.) ("DKPL/70MM"), a wholly-owned subsidiary of the Company,
entered into an employment agreement on November 24, 1993 (the "1993 Agreement")
under which David Keighley was employed as President of DKPL/70MM. The agreement
was for a five-year term commencing February 1, 1993. Under this agreement, Mr.
Keighley received an annual base salary of Cdn. $187,795 in the year ended
January 31, 1994 and an annual base salary in each of the next four years
thereafter equal to 103% of the previous year's base salary. Mr. Keighley was
entitled to receive an annual bonus of one-third of his annual base salary if
DKPL/70MM met its pre-tax profit threshold as provided in the agreement for each
of the five years ended December 31. Mr. Keighley was also entitled to receive a
further bonus of 10% of any excess of DKPL/70MM's audited profit before taxes
over DKPL/70MM's pre-tax profit threshold. On July 15, 1997, DKPL/70MM entered
into a new employment agreement with Mr. Keighley. The new agreement is for a
five-year term. Under this agreement, Mr. Keighley is to receive an annual base
salary of $212,405 in the year ended July 15, 1998 and will receive an annual
base salary of 105% of the previous year's base salary in each of the next four
years during the term of the agreement. Mr. Keighley is entitled to receive an
annual bonus and further profit-based bonus on the same basis as in the 1993
Agreement. Mr. Keighley's bonus in respect of DKP/70MM's year ended December 31,
1997 was U.S. $220,597. Under the new agreement, Mr. Keighley has also given
covenants regarding confidentiality and non-competition. The agreement provides
that the employment of Mr. Keighley may be terminated at any time for cause or,
after not less than 30 days notice, without cause. If Mr. Keighley's employment
is terminated without cause, DKPL/70MM must continue to pay Mr. Keighley his
annual base salary for a maximum period of 12 months. In addition to the above,
the Company provided Mr. Keighley with a temporary housing loan in the amount of
U.S. $75,000 plus interest (which was repaid in 1997) to be used in connection
with his relocation to Los Angeles at the Company's request.
Mr. Jorg entered into an employment agreement on August 8, 1995 under which he
was employed as Vice President, Business Affairs and Business Development.
Effective March 1, 1997 Mr. Jorg was promoted to the position of Senior Vice
President and Chief Operating Officer, IMAX Attractions and Chief Operating
Officer of Ridefilm Corporation. The agreement is for a three-year term. Under
his agreement Mr. Jorg receives an annual base salary of $195,000 in the first
year of the employment term, $205,000 in the second year and $215,000 in the
third year plus an annual performance bonus (with a minimum guaranteed bonus of
$20,000 for 1997). Pursuant to the agreement, Mr. Jorg has received 10,000
fully paid common shares of the Company and was granted options to purchase
50,000 common shares under the Stock Option Plan. Mr. Jorg has given covenants
regarding confidentiality and non-competition. The agreement provides that the
employment of Mr. Jorg may be terminated at any time for cause. If Mr. Jorg's
employment is terminated without cause, the Company must pay Mr. Jorg his annual
base salary and guaranteed bonus for the balance of the term.
56
<PAGE>
Mr. Gellis entered into an employment agreement on December 13, 1995 under which
he was employed as Senior Vice President, Film of the Company. The agreement was
for a two-year term commencing January 1, 1996. Under this agreement Mr. Gellis
received an annual base salary of $210,000 plus an annual performance bonus at a
target of 30% of salary, with a guaranteed minimum annual bonus of $40,000. Mr.
Gellis was also entitled to receive a minimum of $50,000 in each year of the
term in respect of script writing services performed by Mr. Gellis for the
Company. Pursuant to the agreement Mr. Gellis was granted options to purchase
50,000 common shares under the Stock Option Plan. Mr. Gellis has given covenants
regarding confidentiality and non-competition. The agreement provides that the
employment of Mr. Gellis may be terminated at any time for cause. If Mr. Gellis'
employment is terminated without cause, the Corporation must pay Mr. Gellis his
annual salary and guaranteed bonus for the greater of the balance of the term
and six months. Mr. Gellis' employment agreement with the Company expired on
January 1, 1998. A new agreement is currently in negotiation.
Mr. Davison entered into an employment agreement with the Company on January
16, 1991, as amended by a letter dated August 31, 1992, under which he was
employed as Director, Corporate Development and then promoted to Vice President,
Finance. The agreement is for an indefinite term and contains covenants
regarding confidentiality and non-competition. The agreement provides that the
employment of Mr. Davison may be terminated at any time for cause. If Mr.
Davison's employment is terminated without cause, the Corporation must pay Mr.
Davison his annual salary for 12 months. Mr. Davison and the Company entered
into a share option agreement dated as of April 8, 1994. Under this agreement
Mr. Davison is granted options to purchase 75,016 common shares of the Company
at Cdn. $1.595 per share. The options vest over a five year period with 50%
vesting on the attainment of certain performance criteria to be determined by
the Company and the remaining vesting as to 20% each year. Any unvested options
on the date of any termination of Mr. Davison's employment are forfeited.
Compensation Committee
The Board of Directors constituted a Compensation Committee in December 1996.
The members of the Compensation Committee are Messrs. Girvan, Nadal and Utay.
Mr. Fuchs is an unofficial member of the Committee. As the Compensation
Committee did not participate in executive compensation decisions in respect of
1997, other than the employment agreement entered into by the Co-Chief Executive
Officers, the compensation of the Company's employees was established through
guidelines set by the Board of Directors.
Compensation for all the Company's employees, including its Named Executive
Officers, is based on each employee's job responsibilities and on his or her
individual performance over time. The Company's executive compensation program
has three principal components: base salary, annual variable incentive
compensation and stock options. The Company believes these components
collectively provide a fair and competitive pay package and an appropriate
relationship between an executive's compensation, the executive's performance,
and the Company's performance.
DIRECTORS' COMPENSATION
Directors are reimbursed for the expenses of attending meetings of the Board
of Directors. In addition, members of the Board of Directors who are not also
employees of the Company receive Cdn. $20,000 per year plus Cdn. $1,500 for each
meeting of the Board attended in person and Cdn. $750 for each telephone meeting
of the Board or meeting of any committee of the Board, whether participating in
person or by telephone. In addition, each of the directors who are not also
employees of the Company are granted options to purchase 4,000 common shares at
an exercise price equal to the market value of the common shares of the Company
on the date of grant which vest on the date of grant and expire on the date
which is 10 years after the date of grant.
57
<PAGE>
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, 1997
including (i) all beneficial owners of more than five % 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------
TITLE OF CLASS BENEFICIAL OWNERS NUMBER OF SHARES % OF
-------------- ----------------- -------------------- CLASS
---------
<S> <C> <C> <C>
Common Shares Wasserstein Perella Group:
Wasserstein Perella Partners, L.P.......................... 8,254,567 27.2
Wasserstein Perella Offshore Partners, L.P................. 877,694 2.9
WPPN, Inc.................................................. 1,084,311 3.6
------------- ----
10,216,572 33.7
Bradley J. Wechsler........................................ 900,300 (1) 3.0
Richard L. Gelfond......................................... 870,300 (2) 2.9
Douglas M. Trumbull........................................ 808,860 (3) 2.7
I.Graeme Ferguson.......................................... 65,268 (4) *
John M. Davison............................................ 17,000 (5) *
Michael Fuchs.............................................. 55,496 (4) *
Garth M. Girvan............................................ 33,898 (4) *
David B. Keighley.......................................... 38,000 (6) *
Christian H. Jorg.......................................... 35,000 (8) *
Andrew Gellis.............................................. 22,400 (9) *
Miles S. Nadal............................................. 12,000 (7) *
Murray B. Koffler.......................................... 12,200 (4) *
Philip C. Moore............................................ 8,000 (4) *
Marc A. Utay............................................... 8,000 (4) *
All directors and executive officers as a group (19 2,956,372 (10) 9.7
persons)...................................................
Class C
Preferred Shares John M. Davison............................................ 217 *
David B. Keighley.......................................... 83 *
All directors and executive officers as a group (19 662 2.0
persons)...................................................
</TABLE>
* less than one %.
(1) Included in the amount shown are 80,000 common shares as to which Mr.
Wechsler had, at December 31, 1997, the right to acquire beneficial
ownership through the exercise of options.
(2) Included in the amount shown are 80,000 common shares as to which Mr.
Gelfond had, at December 31, 1997, the right to acquire beneficial
ownership through the exercise of options.
(3) Included in the amount shown are 385,744 common shares as to which Mr.
Trumbull had, at December 31, 1997, the right to acquire beneficial
ownership through the exercise of options.
(4) Included in the amount shown are 8,000 common shares as to which Messrs.
Ferguson, Fuchs, Girvan, Koffler, Moore and Utay had, at December 31, 1997,
the right to acquire beneficial ownership through the exercise of options.
(5) Included in the amount shown are 7,000 common shares as to which Mr.
Davison had, at December 31, 1997, the right to acquire beneficial
ownership through the exercise of options.
(6) Included in the amount shown are 38,000 common shares as to which
Mr.Keighley had, at December 31, 1997, the right to acquire beneficial
ownership through the exercise of options.
58
<PAGE>
(7) Included in the amount shown are 12,000 common shares as to which Mr. Nadal
had, at December 31, 1997, the right to acquire beneficial ownership
through the exercise of options.
(8) Included in the amount shown are 25,000 common shares as to which Mr. Jorg
had, at December 31, 1997, the right to acquire beneficial ownership
through the exercise of options.
(9) Included in the amount shown are 22,400 common shares as to which Mr.
Gellis had, at December 31, 1997, the right to acquire beneficial ownership
through the exercise of options.
(10) Included in the amount shown are 743,144 common shares as to which all
directors and executive officers as a group had, at December 31, 1997, the
right to acquire beneficial ownership through the exercise of options.
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.
SHAREHOLDERS' AGREEMENTS
The Company, Wasserstein Perella Partners, L.P. and Wasserstein Perella
Offshore Partners, L.P. (collectively "WP"), Messrs. Wechsler and Gelfond and
certain other investors are parties to a Shareholders' Agreement (the
"Shareholders Agreement") made as of June 16, 1994, which includes, among other
things, rights of first refusal, registration rights, tag along rights, drag
along rights and liquidation rights. The Shareholders Agreement requires that if
prior to 1999 either WP, Messrs. Gelfond or Wechsler has received an offer to
sell (other than pursuant to an effective registration statement under the U.S.
Securities Act of 1933 (the "U.S. Securities Act") or in accordance with Rule
144 under that Act) securities equal to 5% or more of the outstanding common
stock of the Company on a fully diluted basis, the selling shareholder must
first offer the other parties the option to purchase such securities on the
terms of such offer. In addition, Messrs. Gelfond and Wechsler each have the
right to sell their pro rata share of securities if at any time prior to 2004,
WP owns at least 10% of their original holdings and proposes to sell 50% or more
of their holdings. If, beginning in 1999, 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. Messrs. Gelfond and Wechsler will have the
right from March 1 to March 31 in any, but only one, of 1999, 2000 and 2001, to
notify the Company of their decision to require the Company to take action to
liquidate their shares. The Company is required to use its best efforts to cause
at its option either (i) the sale of the Company 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 Company 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
Company to take such action, they may be entitled to certain cash bonus payments
as described above under "Executive Compensation -- Employment Contracts". If
after March 1, 1999, Messrs. Gelfond and Wechsler own 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 Company, 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 Company to a third party.
WP and Messrs. Gelfond and Wechsler each have certain rights under the
Shareholders Agreement to cause the Company to use its best efforts to register
their securities under the U.S. Securities Act. Currently, WP is entitled to
effect up to four demand registrations and Messrs. Gelfond and Wechsler are
entitled to make two such demand registrations. WP, Messrs. Gelfond and Wechsler
and the Co-investors (as defined in the Shareholders Agreement) also have
unlimited piggy-back rights to register their securities under the Shareholders
Agreement whenever the Company 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 Company's existing shareholders.
59
<PAGE>
Mr. Trumbull and the former shareholders of the Company have substantially
similar piggy-back registration rights that commenced on March 1, 1996 pursuant
to the terms of the Selling Shareholders' Agreement (as defined below).
WP, Messrs. Gelfond, Wechsler and Trumbull, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STANDSTILL AGREEMENT
Under the terms of the Standstill Agreement (the "Standstill Agreement")
between WP and the Company, WP is entitled to designate three persons for
nomination to the Board of Directors, two of whom must be Canadian citizens. To
date, WP has designated Miles Nadal, Murray Koffler and Marc Utay. The
Standstill Agreement also provides that through 1999, WP will not vote in any
election for directors for any person who is not nominated by the then current
Board of Directors, participate in or facilitate proxy contests, participate in
a "group" as defined pursuant to Section 13(d) of the U.S. Securities Exchange
Act of 1934, or attempt to influence the Company except through normal Board of
Directors' processes. If the Company fails to exceed specified targets which
escalate in each of the years 1994 through 1998, the provisions of the
Standstill Agreement described above will terminate, the size of the Board will
be expanded to fifteen directors and WP will have the right to designate three
of the five individuals to be advisors ("CEO Advisors") to the CEO and the Board
of Directors. The specified targets of the Company are based upon, among other
things, revenues derived from new theater system leases and films commenced
after the initial public offering of common shares of the Company and selling,
general and administrative and research and development costs (excluding those
associated with Ridefilm Corporation).
The Articles of the Company provide that if the Board of Directors appoints
CEO Advisors to the CEO and the Board of Directors with respect to the
extraordinary matters set forth below (the "Extraordinary Matters"), then any
action of the Board of Directors with respect to an Extraordinary Matter
requires the unanimous approval of the directors unless the CEO Advisors have
unanimously recommended that the Board of Directors approve the action, in which
case a simple majority of the Board of Directors is required to approve the
action. The By-laws of the Company provide that (A) the CEO Advisors are
comprised of three or five individuals; (B) the CEO Advisors have the
responsibility of being available to the CEO to consult with him on the
Extraordinary Matters prior to the implementation of any decisions related to
such matters, and prior to any request that the Board of Directors consider any
such matters; (C) the CEO is required to consult with the CEO Advisors on the
Extraordinary Matters prior to the implementation of any decisions related to
such matters, and prior to any request that the Board of Directors consider any
such matters; (D) the CEO Advisors have the responsibility of being available to
consult with the Board of Directors on any Extraordinary Matters and they may
provide the Board of Directors with their views on any such matters, and (E) the
CEO Advisors have no power to make any decisions on any matters and are not a
committee of the Board of Directors for any purpose. Messrs. Wechsler and
Gelfond and Mr. Townsend Ziebold, the designee of WP, currently serve as the CEO
Advisors. Upon the Company's failure to meet the specified targets described
above, WP would have the right under the Standstill Agreement to designate two
additional individuals as CEO Advisors. Pursuant to the employment agreements
described above under "Employment Agreements" each of Messrs. Wechsler and
Gelfond are to be designated as CEO Advisors. Under the Standstill Agreement, WP
has the right to designate one CEO Advisor and has so designated Mr. Ziebold.
Under the Company's By-laws, the Board of Directors has the power to terminate a
CEO Advisor, subject to the contractual obligations of the employment agreements
and the Standstill Agreement.
60
<PAGE>
The following decisions of the Board of Directors are considered
"Extraordinary Matters": (a) hiring or firing the CEO or the Company's primary
external lawyers or accountants; (b) incurring any capital expenditure in excess
of Cdn. $5 million; (c) incurring indebtedness in amount of Cdn. $10 million or
lending money to, or guaranteeing obligations of, others; (d) commencing or
settling litigation other than in the ordinary course or that is likely to have
material impact on the Company; (e) entering into contracts or transactions
outside of the ordinary course of business providing for payments in any fiscal
year in excess of Cdn. $5 million; (f) disposing of any material single asset,
or all or substantially all of the assets of the Company; (g) acquiring a
substantial interest in any other entity (other than joint ventures under Cdn.
$10 million) or entering into any major strategic alliance; (h) changing the
nature of the Company's business or entering into new line of business; (i)
entering into or changing terms of any agreements or transactions with WP,
Messrs. Gelfond or Wechsler; (j) issuing any shares of capital stock; (k) doing
or permitting any act whereby the Company would be bankrupt; (l) approving
annual budgets and operating targets; and (m) hiring or firing any officer or
employee of the Company paid more than Cdn. $175,000 per annum (increased by 6%
per annum beginning with the end of the financial year ended December 31, 1994).
61
<PAGE>
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 in Part II.
(a)(2) Financial Statement Schedules
No financial statement schedules are required to be filed as part of this
Report.
(a)(3) Exhibits
The Items listed as Exhibits 10.1 to 10.11 relate to management contracts or
compensatory plans or arrangements.
<TABLE>
<CAPTION>
EXHIBIT
No. DESCRIPTION
- --------- -----------
<S> <C>
2.1 Share Purchase Agreement, dated as of January 3, 1994 (the "Share Purchase Agreement") among
WGIM Acquisition Corporation, and the Sellers (as defined therein). Incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form F-1 (File No. 33-77536) (the
"Registration Statement").
2.2 Amendment, dated as of February 2, 1994, to the Share Purchase Agreement, dated as of January 3,
1994, among WGIM Acquisition Corporation, and the Sellers. Incorporated by reference to Exhibit
2.2 to the Registration Statement.
2.3 Agreement, dated as of December 3, 1993, among Douglas Trumbull, The Trumbull Company, Inc.,
and WGIM Acquisition Corporation. Incorporated by reference to Exhibit 2.3 to the Registration
Statement.
2.4 Agreement and Plan of Merger and Reorganization, dated as of March 1, 1994, among WGIM
Acquisition Corporation, Gelfco Inc., The Trumbull Company, Inc. and Douglas Trumbull.
Incorporated by reference to Exhibit 2.4 to the Registration Statement.
2.5 Purchase Agreement, dated as of December 30, 1993, between Tyringham and WGIM Acquisition
Corporation. Incorporated by reference to Exhibit 2.5 to the Registration Statement.
3.1 Articles of Incorporation of Imax Corporation. Incorporated by reference to Exhibit 3.1 to the
Registration Statement.
3.2 Bylaw No. 1 of Imax Corporation. Incorporated by reference to Exhibit 3.2 to the Registration
Statement.
4.1 Amended and Restated Subscription Agreement, dated as of January 3, 1994, between WGIM
Acquisition Corporation and Bradley J. Wechsler. Incorporated by reference to Exhibit 4.1 to the
Registration Statement.
4.2 Warrant Agreement, dated as of March 1, 1994, between WGIM Acquisition Corporation and Bradley
J. Wechsler. Incorporated by reference to Exhibit 4.2 to the Registration Statement.
4.3 Amended and Restated Preferred Stock and Warrant Purchase Agreement, dated as of January 3,
1994, by and among WGIM Acquisition Corporation, Wasserstein Perella Partners, L.P. and
Wasserstein Perella Offshore Partners, L.P. Incorporated by reference to Exhibit 4.3 to the
Registration Statement.
4.4 Warrant Agreement, dated as of March 1,1994, between WGIM Acquisition Corporation, Wasserstein
Perella Partners, L.P. and Wasserstein Perella Offshore Partners, L.P. Incorporated by reference to
Exhibit 4.4 to the Registration Statement.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
No. DESCRIPTION
- ----------- -----------
<S> <C>
4.5 Subscription Agreement, dated as of March 1, 1994, by and among WPPN, Wasserstein Perella
Management Partners, Inc., Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore
Partners,L.P. and WGIM Acquisition Corporation. Incorporated by reference to Exhibit 4.5 to the
Registration Statement.
4.6 Share Option Agreement, dated as of March 1, 1994, between WGIM Acquisition Corporation and
Douglas Trumbull. Incorporated by reference to Exhibit 4.6 to the Registration Statement.
4.7 Amended and Restated Shareholders' Agreement, dated as of June 16, 1994 (the "Shareholders'
Agreement"), by and among Imax Corporation, Wasserstein Perella Partners, L.P., Wasserstein
Perella Offshore Partners, L.P., WPPN, Inc., Richard L. Gelfond and Bradley J. Wechsler, Revere
Equity Corp. and Chemical Equity Associates. Incorporated by reference to Exhibit 4.7 to Form 10-
K/A for the year ended December 31, 1994.
4.8 Standstill Agreement, dated as of June 16, 1994, among Imax Corporation, Wasserstein Perella
Partners, L.P., Wasserstein Perella Offshore Partners, L.P. and WPPN, Inc. Incorporated by
reference to Exhibit 4.8 to Form 10-K/A for the year ended December 31, 1994.
4.9 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 4.9 to the Registration Statement.
4.10 Amendment, dated as of March 1, 1994, to the Selling Shareholders' Agreement. Incorporated by
reference to Exhibit 4.10 to the Registration Statement.
4.11 Letter, dated as of January 3, 1994, from WP and GW Shareholders (as defined in the Selling
Shareholders' Agreement) to Douglas Trumbull. Incorporated by reference to Exhibit 4.11 to the
Registration Statement.
4.12 Note Purchase Agreement, dated February 22, 1994, between WGIM Acquisition Corporation and
Wasserstein Perella Securities, Inc. Incorporated by reference to Exhibit 10.1 to the Registration
Statement.
4.13 Indenture, dated as of March 1, 1994, between WGIM Acquisition Corporation and Continental Bank,
National Association, as Trustee. Incorporated by reference to Exhibit 10.2 to the Registration
Statement.
4.14 Exchange and Registration Rights Agreement, dated as of March 1, 1994, by and between WGIM
Acquisition Corporation and Wasserstein Perella Securities, Inc. Incorporated by reference to
Exhibit 10.3 to the Registration Statement.
4.15 Indenture, dated as of April 9, 1996, between Imax Corporation and Chemical Bank, as Trustee,
related to the issue of the 5 3/4% 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).
Registrant agrees to provide copies of instruments with respect to long-term debt and its working
capital facility, which do not exceed 10 % of the total assets of the registrant and its
subsidiaries on a consolidated basis, to the Commission upon request.
10.1 Restated Employment Agreement, dated as of March 1, 1994, between Ridefilm Theaters Corporation
and Douglas Trumbull. Incorporated by reference to Exhibit 10.5 to the Registration Statement.
10.2 Consulting Agreement, dated as of March 1, 1994, between Berkshire Motion Picture Inc., and
WGIM Acquisition Corporation. Incorporated by reference to Exhibit 10.6 to the Registration
Statement.
*10.3 Consulting Agreement, dated as of June 11, 1997, between Imax Corporation and I. Graeme
Ferguson.
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
No. DESCRIPTION
- ------------ -----------
<S> <C>
*10.4 Employment Agreement, dated as of January 1, 1997, between Imax Corporation and Bradley J.
Wechsler.
*10.5 Employment Agreement, dated as of January 1, 1997, between Imax Corporation and Richard L.
Gelfond.
*10.6 Employment Agreement, dated as of January 16, 1991, and amending letter of August 31, 1992
between Imax Corporation and John M. Davison.
*10.7 Employment Agreement, dated as of July 15, 1997 between David Keighley Productions 70MM Inc.
and David B. Keighley.
10.8 Form of Imax Corporation Amended and Restated Share Option Plan. Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File No.333-5720).
10.9 Share Option Agreement, dated as of April 8, 1994 between Imax Corporation and John M. Davison.
Incorporated by reference to Exhibit 10.15 to the Registration Statement.
10.10 Employment Agreement, dated August 8, 1995, between Imax Corporation and Christian Jorg.
Incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended December 31, 1996.
10.11 Employment Agreement, dated December 13, 1995, between Imax Corporation and Andrew Gellis.
Incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended December 31, 1996.
*21 Subsidiaries of Imax Corporation.
*23 Consent of Coopers & Lybrand.
*24 Power of Attorney of certain directors.
</TABLE>
* Filed herewith
(b) No reports on Form 8-K were filed by the registrant during the quarter
ended December 31, 1997.
64
<PAGE>
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/ John M. Davison
--------------------------------------
John M. Davison
Executive Vice President, Operations and
Chief Financial Officer
Date: March 27, 1998
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 27, 1998.
/s/ Bradley J. Wechsler /s/ Richard L. Gelfond
- ----------------------------- -----------------------------
Bradley J. Wechsler Richard L. Gelfond
Director and Director and
Co-Chief Executive Officer Co-Chief Executive Officer
(Principal Executive Officer) (Principal Executive Officer)
<TABLE>
<S> <C> <C>
/s/ John M. Davison Garth M. Girvan* I. Graeme Ferguson*
- ----------------------------- ----------------------------- ---------------------------
John M. Davison Garth M. Girvan I. Graeme Ferguson
Director and Director Director
Executive Vice President,
Operations and Chief
Financial Officer
(Principal Financial Officer)
/s/ Michael M. Davies Philip C. Moore* Miles Nadal*
- ----------------------------- ---------------------------- ----------------------------
Michael M. Davies Philip C. Moore Miles Nadal
Vice President and Corporate Director Director
Controller (Principal
Accounting Officer)
Michael Fuchs* Murray B. Koffler* Marc A. Utay*
- ----------------------------- ----------------------------- ---------------------------
Michael Fuchs Murray B. Koffler Marc A. Utay
Director Director Director
</TABLE>
By: * /s/ John M. Davison
--------------------------
John M. Davison
(as attorney-in-fact)
65
<PAGE>
EXHIBIT INDEX
The Items listed as Exhibits 10.1 to 10.14 relate to management contracts or
compensatory plans or arrangements.
Exhibit
No. Description
- --- -----------
2.1 Share Purchase Agreement, dated as of January 3, 1994 (the
"Share Purchase Agreement") among WGIM Acquisition Corporation,
and the Sellers (as defined therein). Incorporated by reference
to Exhibit 2.1 to the Company's Registration Statement on Form
F-1 (File No. 33-77536) (the "Registration Statement").
2.2 Amendment, dated as of February 2, 1994, to the Share Purchase
Agreement, dated as of January 3, 1994, among WGIM Acquisition
Corporation, and the Sellers. Incorporated by reference to
Exhibit 2.2 to the Registration Statement.
2.3 Agreement, dated as of December 3, 1993, among Douglas Trumbull,
The Trumbull Company, Inc., and WGIM Acquisition Corporation.
Incorporated by reference to Exhibit 2.3 to the Registration
Statement.
2.4 Agreement and Plan of Merger and Reorganization, dated as of
March 1, 1994, among WGIM Acquisition Corporation, Gelfco Inc.,
The Trumbull Company, Inc. and Douglas Trumbull. Incorporated by
reference to Exhibit 2.4 to the Registration Statement.
2.5 Purchase Agreement, dated as of December 30, 1993, between
Tyringham and WGIM Acquisition Corporation. Incorporated by
reference to Exhibit 2.5 to the Registration Statement.
3.1 Articles of Incorporation of Imax Corporation. Incorporated by
reference to Exhibit 3.1 to the Registration Statement.
3.2 Bylaw No. 1 of Imax Corporation. Incorporated by reference to
Exhibit 3.2 to the Registration Statement.
4.1 Amended and Restated Subscription Agreement, dated as of January
3, 1994, between WGIM Acquisition Corporation and Bradley J.
Wechsler. Incorporated by reference to Exhibit 4.1 to the
Registration Statement.
4.2 Warrant Agreement, dated as of March 1, 1994, between WGIM
Acquisition Corporation and Bradley J. Wechsler. Incorporated by
reference to Exhibit 4.2 to the Registration Statement.
4.3 Amended and Restated Preferred Stock and Warrant Purchase
Agreement, dated as of January 3, 1994, by and among WGIM
Acquisition Corporation, Wasserstein Perella Partners, L.P. and
Wasserstein Perella Offshore Partners, L.P. Incorporated by
reference to Exhibit 4.3 to the Registration Statement.
4.4 Warrant Agreement, dated as of March 1,1994, between WGIM
Acquisition Corporation, Wasserstein Perella Partners, L.P. and
Wasserstein Perella Offshore Partners, L.P. Incorporated by
reference to Exhibit 4.4 to the Registration Statement.
<PAGE>
Exhibit
No. Description
- --- -----------
4.5 Subscription Agreement, dated as of March 1, 1994, by and among
WPPN, Wasserstein Perella Management Partners, Inc., Wasserstein
Perella Partners, L.P., Wasserstein Perella Offshore
Partners,L.P. and WGIM Acquisition Corporation. Incorporated by
reference to Exhibit 4.5 to the Registration Statement.
4.6 Share Option Agreement, dated as of March 1, 1994, between WGIM
Acquisition Corporation and Douglas Trumbull. Incorporated by
reference to Exhibit 4.6 to the Registration Statement.
4.7 Amended and Restated Shareholders' Agreement, dated as of June
16, 1994 (the "Shareholders' Agreement"), by and among Imax
Corporation, Wasserstein Perella Partners, L.P., Wasserstein
Perella Offshore Partners, L.P., WPPN, Inc., Richard L. Gelfond
and Bradley J. Wechsler, Revere Equity Corp. and Chemical Equity
Associates. Incorporated by reference to Exhibit 4.7 to Form
10-K/A for the year ended December 31, 1994.
4.8 Standstill Agreement, dated as of June 16, 1994, among Imax
Corporation, Wasserstein Perella Partners, L.P., Wasserstein
Perella Offshore Partners, L.P. and WPPN, Inc. Incorporated by
reference to Exhibit 4.8 to Form 10-K/A for the year ended
December 31, 1994.
4.9 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 4.9 to the Registration
Statement.
4.10 Amendment, dated as of March 1, 1994, to the Selling
Shareholders' Agreement. Incorporated by reference to Exhibit
4.10 to the Registration Statement.
4.11 Letter, dated as of January 3, 1994, from WP and GW Shareholders
(as defined in the Selling Shareholders' Agreement) to Douglas
Trumbull. Incorporated by reference to Exhibit 4.11 to the
Registration Statement.
4.12 Note Purchase Agreement, dated February 22, 1994, between WGIM
Acquisition Corporation and Wasserstein Perella Securities, Inc.
Incorporated by reference to Exhibit 10.1 to the Registration
Statement.
4.13 Indenture, dated as of March 1, 1994, between WGIM Acquisition
Corporation and Continental Bank, National Association, as
Trustee. Incorporated by reference to Exhibit 10.2 to the
Registration Statement.
4.14 Exchange and Registration Rights Agreement, dated as of March 1,
1994, by and between WGIM Acquisition Corporation and
Wasserstein Perella Securities, Inc. Incorporated by reference
to Exhibit 10.3 to the Registration Statement.
4.15 Indenture, dated as of April 9, 1996, between Imax Corporation
and Chemical Bank, as Trustee, related to the issue of the 5
3/4% 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).
Registrant agrees to provide copies of instruments with respect
to long-term debt and its working capital facility, which do not
exceed 10 % of the total assets of the registrant and its
subsidiaries on a consolidated basis, to the Commission upon
request.
10.1 Restated Employment Agreement, dated as of March 1, 1994,
between Ridefilm Theaters Corporation and Douglas Trumbull.
Incorporated by reference to Exhibit 10.5 to the Registration
Statement.
10.2 Consulting Agreement, dated as of March 1, 1994, between
Berkshire Motion Picture Inc., and WGIM Acquisition Corporation.
Incorporated by reference to Exhibit 10.6 to the Registration
Statement.
*10.3 Consulting Agreement, dated as of June 11, 1997, between Imax
Corporation and I. Graeme Ferguson.
<PAGE>
Exhibit
No. Description
- --- -----------
*10.4 Employment Agreement, dated as of January 1, 1997, between Imax
Corporation and Bradley J. Wechsler.
*10.5 Employment Agreement, dated as of January 1, 1997, between Imax
Corporation and Richard L. Gelfond.
*10.6 Employment Agreement, dated as of January 16, 1991, and amending
letter of August 31, 1992 between Imax Corporation and John M.
Davison.
*10.7 Employment Agreement, dated as of July 15, 1997 between David
Keighley Productions 70MM Inc. and David B. Keighley.
10.8 Form of Imax Corporation Amended and Restated Share Option Plan.
Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (File No.333-5720).
10.9 Share Option Agreement, dated as of April 8, 1994 between Imax
Corporation and John M. Davison. Incorporated by reference to
Exhibit 10.15 to the Registration Statement.
10.10 Employment Agreement, dated August 8, 1995, between Imax
Corporation and Christian Jorg. Incorporated by reference to
Exhibit 10.13 to Form 10-K for the year ended December 31, 1996.
10.11 Employment Agreement, dated December 13, 1995, between Imax
Corporation and Andrew Gellis. Incorporated by reference to
Exhibit 10.14 to Form 10-K for the year ended December 31,
1996.
*21 Subsidiaries of Imax Corporation.
*23 Consent of Coopers & Lybrand.
*24 Power of Attorney of certain directors.
* Filed herewith
<PAGE>
EXHIBIT 10.3
June 11, 1997
Graeme Ferguson
RR # 1
Baysville, Ontario
P0B 1A0 Canada
Dear Graeme:
Re: Consulting Agreement
--------------------
The letter will confirm the agreement between you (the "Consultant") and
Imax Corporation (the "Corporation") relating to your services as consultant and
filmmaker to the Corporation.
1. Consulting Services The Corporation shall retain the Consultant to
-------------------
render the following services as consultant and filmmaker to the Corporation,
under the guidance and direction of the Corporation's Chief Executive
Officer(s): (a) producing film projects for the Corporation; (b) overseeing the
production and post-production activities on film projects developed by the
Consultant; (c) meeting with the Corporation's employees and/or with third
parties to discuss IMAX production and/or direction techniques; (d) providing
general business advice and counsel to the Corporation; (e) making appropriate
introductions to boards, institutions and individuals necessary or useful in the
furtherance of the Corporation's businesses; and (f) such other consultative and
independent producer services as may from time to time be agreed upon between
the parties.
2. Previous Film Projects During the term of a Consulting Agreement between
----------------------
the Consultant and the Corporation dated December 31, 1993 (the "1993
Agreement"), the Consultant produced or co-produced two "Designated Pictures":
"Destiny in Space" and "Into the Deep" (The Last Wilderness) as well as the
"Subsequent Pictures": "Cosmic City", "L-5 - First City in Space", and "Mission
to Mir" (released in May 1997).
<PAGE>
-2-
3. Performance The Consultant shall render performance of the services
-----------
hereunder to the best of his ability and in a competent and professional manner.
The Consultant shall devote one half of his time, attention and ability to the
businesses of the Corporation, and in particular all services of the Consultant
relating to film-making shall be exclusively rendered to the Corporation during
the term of this Agreement; provided that the parties contemplate that they may
in good faith agree in the future that the Consultant will spend either more or
less than 50% of his time on the businesses of the Corporation, in which event
the fees payable to the Consultant under this Agreement shall be renegotiated in
good faith, but in any event the Consultant's services relating to film-making
shall continue to be rendered exclusively to the Corporation.
4. Term The provision of services by the Consultant to the Corporation
----
hereunder shall commence on the date hereof and shall continue until 1 year from
such date; provided that the term of this Agreement shall be renewable by the
parties by mutual written consent. Upon completion of this contract, the terms
of Paragraph 6 "Incentive Compensation", shall survive.
5. Fee for Services The Corporation shall pay to the Consultant for all
----------------
services provided by the Consultant under this Agreement a fee at the rate of
Cdn$137,500 per year. The Consultant specifically acknowledges that the
Corporation shall be entitled to receive or retain all amounts payable pursuant
to the production budgets for the Designated Pictures (as defined in Paragraph 2
above), or the Subsequent Pictures (as defined in Paragraph 2 above), or any
future film projects that are set up during the term of this Agreement, in
respect of the services or expenses of the Consultant, as well as an overhead
and profit allowance.
6. Incentive Compensation In addition to the basic fee set out in
----------------------
Paragraph 5, the Corporation shall have an ongoing obligation to pay to the
Consultant 7-1/2% of the "Sponsor Overages" of the Subsequent Pictures (as
defined in Paragraph 2 above) and 12- 1/2% of the "Imax Distribution Profits" of
the Designated Pictures and the Subsequent Pictures. In addition, the
Corporation shall pay to the Consultant 7 1/2% of the "Sponsor Overages" and 12
1/2% of the "Imax Distribution Profits" of any future film projects developed
and produced by the Consultant pursuant to this Agreement. "Sponsor Overages"
means the amount, if any, by which contributions by third party sponsors to a
particular film project exceed the production costs of the film project
(including overhead and interest as described in (iv) below); and "Imax
Distribution Profits" means all revenue received by the Corporation, other than
Sponsor Overages (and, with respect to the Designated Pictures and the
Subsequent Pictures, excluding merchandising receipts), derived from the
distribution and exploitation of the respective film project, after deduction
and repayment of (i) all distribution, promotion and marketing fees and
expenses, including but not limited to a 15% distribution fee to the
Corporation; (ii) all taxes deducted at source; (iii) all residual and royalty
payments required pursuant to any collective agreements or otherwise; (iv) the
audited costs of production of the film project plus an overhead allowance of
10%, together with interest on the amount of the foregoing covered by the
Corporation at the greater of (1) the prime commercial lending rate set from
time to time by the Corporation's principal bankers for Canadian dollar loans in
Canada, or (2) the actual borrowing rate payable by the Corporation for covering
such amount;
<PAGE>
-3-
and (v) all shares of revenue payable to third parties advancing funds or
deferring fees or providing services in connection with the respective film
project; provided that, notwithstanding the foregoing, the Consultant's share of
Imax Distribution Profits from (A) any one of the Designated Pictures and the
Subsequent Pictures will first offset (a) losses, if any, from any other of the
Designated Pictures or the Subsequent Pictures where Imax Distribution Profits
would otherwise be payable, and (b) amounts, if any, that film funding payments
have not been sufficient for the Corporation to recover payments made by it
pursuant to Paragraphs 2, 6, 7 and Schedule A of the 1993 Agreement; and (B) any
one of the future film projects developed pursuant to this Agreement will first
offset (a) losses, if any, from any other of such future films where Imax
Distribution Profits would otherwise be payable, and (b) amounts, if any, that
film funding payments have not been sufficient for the Corporation to recover
payments made by it pursuant to Paragraphs 5 and 7 (and, to the extent any such
future films are produced in conjunction with the Corporation's subsidiary, Imax
Space Ltd., a reasonable allocation of the general expenses and overhead of Imax
Space Ltd. attributed to such films, as determined after consultation with the
Consultant) provided further that in the case of any particular future film
project which is produced with the primary intention of generating profits in
the projection division of the Corporation rather than the film-making division,
the parties agree to discuss in good faith the extent to which losses from such
film project will be subject to the foregoing proviso. The Corporation shall
provide quarterly reports to the Consultant commencing with the quarter ended
June 30, 1997 and make payments when due. The Consultant shall have the right to
a reasonable audit annually.
7. General Expenses and Overhead The Corporation shall reimburse the
-----------------------------
Consultant for all reasonable expenses actually and properly incurred by the
Consultant (including continuing one half the current auto allowance) in the
performance of the services hereunder, to a maximum amount mutually agreed upon
by the Corporation and the Consultant in advance of each year, provided that all
such expenses shall be paid in accordance with the normal practices of the
Corporation in force from time to time. In addition, the Corporation agrees to
reimburse the Consultant for up to Cdn$3,750.00 annually in direct out-of-pocket
expenses actually incurred by the Consultant for the Consultant's personal
business and tax planning advice. The Consultant's principal office shall be at
his home. In addition, the Corporation shall provide the Consultant with a
private office in Toronto or at its Sheridan Park offices in Mississauga. The
Consultant shall be entitled to at least business class air travel, subject to
availability.
8. Development Expenses With respect to new film projects developed for
--------------------
the Corporation by the Consultant, the Consultant agrees to seek approval for
the development of each such project from the Corporation's Chief Executive
Officer(s). The Corporation shall reimburse the Consultant for reasonable,
direct, out-of-pocket expenses actually expended by the Consultant for the
development of such approved film projects under this Agreement, provided that
such expenses receive the prior approval of the Corporation. Reimbursement shall
be made either (a) to the Consultant monthly following receipt by the
Corporation of proper invoices and vouchers together with reasonably detailed
report setting out the progress of the various film projects and the application
of expenses, or (b) directly to the third parties respectively entitled to
payment, upon approval by the Consultant. There are no projects currently in
development for which the Consultant is responsible.
<PAGE>
-4-
9. Benefits The Corporation shall use all reasonable efforts to ensure
--------
that the Consultant shall be entitled to participate in all of the Corporation's
insured benefit plans generally available to its employees from time to time, in
accordance with the terms thereof. The Consultant acknowledges receiving a
written summary of the terms of such benefit plans. In addition, the
Corporation shall use all reasonable efforts to ensure that the Consultant shall
be entitled to participate in the Corporation's existing retirement benefits, as
set out in Schedule A, upon ceasing to be a consultant.
10. Vacation During the period that the Consultant is rendering services
--------
under this Agreement, the Corporation acknowledges that the Consultant shall be
entitled to 5 weeks vacation per annum, on a one-half time basis. Such vacation
shall be taken at a time or times acceptable to the Corporation having regard to
its operations.
11. Funding Film Projects All financing arrangements for film projects are
---------------------
expressly subject to the Corporation's approval. Nothing in this Agreement
shall obligate the Corporation to produce, raise production financing for, or
otherwise use or exploit any film project developed or otherwise contributed to
by the Consultant under this Agreement.
12. Termination Rights If:
------------------
(a) the Corporation is sold or merged, or if control of the Corporation
changes, or
(b) the Corporation has approved a particular film project or course of
action with respect to a film project, and the Consultant and third parties
with whom the Consultant has interacted on behalf of the Corporation have
relied upon such approval or course of action, but the Corporation
subsequently rescinds such approval or materially changes its course of action
with respect to such project,
the Consultant shall have the right within 30 days following the occurrence of
either such event to terminate the term of this Agreement by 90 days written
notice to the Corporation, subject to his ongoing obligations to deliver, in a
professional and workmanlike fashion, projects then currently underway other
than the disputed project, so long as the Corporation continues to duly provide
production funding for such projects. Upon such termination, all obligations of
the parties, except those set out in Paragraph 6 and Paragraphs 13 to 17
inclusive, shall cease; provided that so long as the Consultant is duly
providing services with respect to projects then currently underway other than
the disputed project, the Consultant shall be entitled to compensation for such
services to be negotiated in good faith by the parties as a pro-rated percentage
of the basic fee set out in Paragraph 5.
13. Indemnity The Consultant shall indemnify and save the Corporation
---------
harmless from and against all claims, actions, losses, expenses, costs or
damages of every nature and kind whatsoever which the Corporation or its
officers, employees or agents may suffer as a result of the breach by the
Consultant of the provisions of Paragraph 16 of this Agreement. As and from the
date of commencement of the term of the Agreement, except as otherwise
specifically provided in this Agreement, the Consultant waives all rights to
future
<PAGE>
-5-
compensation from the Corporation and its subsidiaries and associate companies,
and releases and forever discharges the Corporation from any and all liability
in connection therewith.
14. Non-disclosure The Consultant undertakes that the Consultant shall not
--------------
(either during the term of this Agreement or at any time thereafter) use or
disclose to any third party any information relating to the private or
confidential affairs of the Corporation or relating to any secrets of the
Corporation, other than for the Corporation's purposes.
15. Grant of Rights The Consultant hereby: (a) grants to the Corporation all
---------------
copyrights, patent rights and other rights in all work furnished or created by
the Consultant pursuant to this Agreement; (b) agrees to sign all documents
which may be required to confirm the Corporation's absolute ownership of such
work; (c) waives the moral rights associated with such work within the meaning
of the Canadian Copyright Act; and (d) grants to the Corporation the rights to
and to license others to use the name, likeness, biography and other
identifications of the Consultant in connection with any and all uses and
promotions of such work and derivatives thereof. Without limiting the
generality of the foregoing, all rights of whatsoever nature and kind (now or
hereafter known) in the Designated Pictures, the Subsequent Pictures, and any
and all other film projects developed or contributed to by the Consultant
pursuant to this Agreement shall be, from the inception of the creation thereof,
the exclusive property of the Corporation, and for the purposes of the United
States Copyright Act same shall be deemed to constitute "works-made-for-hire";
provided that in the event that for whatever reason the Consultant retains any
rights in any such film projects, the Consultant hereby assigns same exclusively
to the Corporation and free, clear and unencumbered.
16. Not Employee The Consultant will receive payments under this Agreement
------------
on the basis of a consultant on payroll, but the Consultant warrants and
represents to the Corporation and agrees that he is not an employee of the
Corporation.
17. Non-Competition and Confidentiality The Consultant shall not, without
-----------------------------------
the prior written consent of the Corporation, within North America at any time
for a period of 18 months following the date of termination of this Agreement,
for whatever reason and with or without cause, either directly or indirectly
carry on or be engaged in the business of (i) creating, distributing or
exhibiting large-screen large format audio-visual and related sound systems, or
(ii) directing, producing or distributing large format films, unless the
Corporationhas been provided with the opportunity to participate in such project
and declined, and such films are not being produced for or on behalf of direct
competitors of the Corporation in the large format theatre business ("direct
competitors"). Nothing herein shall be construed as preventing the Consultant
from producing or directing large format films where the Corporation has
declined to participate and the film is not being produced for or on behalf of a
direct competitor, or from producing or directing 35mm format films, following
the end of the term of this Agreement.
The Consultant shall not, without the prior written consent of the
Corporation, directly or indirectly, disclose or use any secret or confidential
information that he may learn or has learned by reason of his association with
the Corporation or any of its subsidiaries or affiliates.
<PAGE>
-6-
18. Severability If any provision of this Agreement is determined to be
------------
invalid or unenforceable in whole or in part, such invalidity or
unenforceability shall attach only to such provisions or part thereof and the
remaining part of such provision and all other provisions hereof shall continue
in full force and effect.
19. General This Agreement shall enure to the benefit of and be binding
-------
upon the heirs, executors, administrators and legal personal representatives of
the Consultant and the successors and assigns of the Corporation, respectively.
This Agreement constitutes the entire agreement between the parties with respect
to the subject matter hereof and cancels and supersedes any prior understandings
and agreement between the parties hereto with respect thereto, including the
1993 Agreement (which is agreed to have been extended from its original term to
and until the date of this Agreement), except that this Agreement does not
cancel Paragraph 6A, in the 1993 Agreement: "Incentive Compensation" with
respect to the Designated Pictures and the Subsequent Pictures which are
specifically carried forward in Paragraph 6 hereof. There are no
representations, warranties, forms, conditions, undertakings or collateral
agreements, express implied or statutory between the parties other than as
expressly set forth in this Agreement. No amendment to this Agreement shall be
valid or binding unless set forth in writing and duly executed by both of the
parties hereto. No waiver of any breach of any term or provision of this
Agreement shall be effective or binding unless made in writing and signed by the
party purporting to give the same and, unless otherwise provided in the written
waiver, shall be limited to the specific breach waived.
20. Governing Law This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
If the foregoing correctly sets forth your understanding of the
agreement, kindly so confirm by signing in the appropriate space below, so as to
make this letter a valid, binding and enforceable agreement between us.
Yours sincerely,
Imax Corporation
Per: /s/ Bradley J. Wechsler
-------------------------------
Agreed and Accepted:
/s/ I. Graeme Ferguson Date: 6/18/97
- --------------------------- ------------------------------
I. Graeme Ferguson
<PAGE>
-7-
SCHEDULE A
----------
RETIREMENT PLAN II
ELIGIBILITY
. Employees age 60 years or older with 12 years continuous service whose final
position was that of Founder, Principal, CEO, Vice President, or member of
the Management Group (or comparable position), are eligible for this plan.
. All employees who were members of the Management Group on September 1, 1993,
will remain eligible for this plan when they retire, regardless of a change
in their position or role.
LIFE INSURANCE
. AMOUNT - $8,000
DENTAL
. Retirement dental benefits are the same as dental benefits for non-retired
employees.
EXTENDED HEALTH
. Lifetime coverage is provided for eligible retirees and their dependents
subject to an annual maximum of $10,000 per person.
. Travel Assistance benefits are not included.
. The vision and hearing care and professional services are the same as for
non-retired employees subject to the $10K annual maximum.
LONG TERM DISABILITY
. Long term disability benefits are not available to retired employees.
ACCIDENTAL DEATH AND DISMEMBERMENT
. Accidental Death and Dismemberment benefits are not available to retired
employees.
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT dated and effective as of January 1, 1997 (the
"Agreement"), between IMAX CORPORATION, a corporation organized under the laws
of Canada ("Imax"), and BRADLEY J. WECHSLER (the "Executive").
WHEREAS, the Executive is currently the Chairman and Co-Chief Executive
Officer of Imax and is employed pursuant to an Employment Agreement dated as of
March 1, 1994, as amended by a resolution of the Imax Board of Directors (the
"Board") dated January 31, 1995 and by a letter agreement dated September 14,
1995; and
WHEREAS, the Board has approved revised terms of employment, effective
January 1, 1997, on February 13, 1997 and on May 6, 1997; and
WHEREAS, Imax wishes to enter into this Agreement to engage the Executive
to provide services to Imax, and the Executive wishes to be so engaged, pursuant
to the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Employment. (a) Imax hereby employs the Executive, and the Executive
----------
hereby agrees to serve, in accordance with the terms and conditions hereof.
(b) The Executive's compensation as Co-Chief Executive Officer under this
Agreement shall commence on the effective date hereof (the "Commencement Date"),
and shall continue until the second anniversary of the Commencement Date (the
"Employment Term"). Nine months prior to such second anniversary, Imax shall
inform the Executive of its intent to extend the Employment Term. Imax shall so
inform the Executive after receiving the recommendation of the CEO Advisors (as
defined in Imax's Articles of Incorporation). If Imax notifies the Executive
that it does not intend to extend the Employment Term, then Imax, with the CEO
Advisors and a non-management committee of the Board, shall initiate an
executive search process. Subject to the immediately preceding sentence, upon
such second anniversary and thereafter upon each successive anniversary of the
Commencement Date, the Employment Term may be extended by written agreement of
the parties for additional one-year periods.
(c) During the Employment Term, the Executive shall perform such services
with respect to Imax's business as may be reasonably requested from time to time
by the Board and which are consistent with the Executive's status and the
function
<PAGE>
-2-
performed by individuals holding a similar position with similarly situated
companies, and agrees to act in accordance with the written instructions of the
Board. Such services shall be performed primarily within the United States.
(d) The Executive shall devote that portion of his business time that is
necessary to perform the services reasonably required of him hereunder, subject
to any conflicting engagements the Executive may have. The Executive agrees
that during the Employment Term (i) he will use reasonable efforts to resolve
any conflicting engagements and (ii) he will remain actively involved in Imax's
business.
(e) As compensation for the services to be performed by the Executive
hereunder during the Employment Term, the Executive shall be entitled to receive
a base salary ("Base Salary") of U.S. $710,000 per annum, payable no less
-----------
frequently than monthly in accordance with Imax's payroll practices.
(f) In addition to the Base Salary, the Executive shall be eligible to
participate during the Employment Term in the annual incentive bonus plan
adopted by the Board. The Executive shall be paid a bonus in respect of each of
1997 and 1998 at a standardized level of U.S. $710,000 per year (the
"Standard"). Based on certain qualitative and quantitative measures determined
by the CEO Advisors and the Compensation Committee (the "Committee") of the
Board, as set forth below, the Committee shall determine the actual bonus paid,
which shall be a multiple of the Standard ranging from 0.0x - 2.0 x, provided,
however, that the multiple shall be at least 1.0x if Imax's reported earnings
per share (EPS) for the year meet the approved budget target (except that, if in
the sole discretion of the Committee, the achievement EPS target was at the
expense of, or to the material detriment of, other(s) of the qualitative and
quantitative measures set forth below, then such minimum shall not apply). The
bonus shall be paid within 50 days of the applicable year end.
The determination by the Committee of the Executive's actual bonus for
1997 and for 1998 shall be consistent with the determination of the Executive's
bonus for 1996, and shall consider the overall performance of Imax, taken as a
whole.
Among the various factors the Committee shall consider in determining the
bonus to be paid are: (i) the actual financial performance of Imax versus the
approved budget for EBITDA, EPS, revenue growth, and/or other financial targets;
and (ii) the Committee shall also take into account other qualitative factors
including (in no order of importance): progress in theater signings,
development of an enhanced management team, improved performance of the Ridefilm
division, further advancement of Imax's film strategy, progress in "owned and
operated" strategy, brand development, continued growth of the business, and
other performance related issues including, but not limited to, other goals
established in the budget process approved by the Board.
<PAGE>
-3-
(g) At the beginning of each of 1997 and 1998, Imax shall grant the
Executive the right to receive 15,000 common shares of Imax (the "Restricted
Stock"). If such Restricted Stock may not be issued without shareholder
approval, it shall be issued as "phantom stock". The Executive shall have the
right to request the Restricted Stock be issued to him (or, if "phantom stock"
is utilized, have payment made to him in an amount equal to the fair market
value of such number of common shares of Imax on the date of such request), at
any time after January 1, 1998 and January 1, 1999, respectively. The
Restricted Stock shall be adjusted for stock splits and other similar events
after the effective date hereof. The provisions of this Section 1(g) shall
survive any termination of thisImax agrees to indemnify the Executive, on an
after-tax basis, for any income taxes imposed by any taxing authority and
resulting from any taxable benefit to the Executive with respect to the
Restricted Stock (or "phantom stock") arising prior to the date of any such
request. which arises prior to the date of any such request. The provisions of
this Section 1(g) shall survive any termination of this Agreement.
(h) The Executive has been granted effective January 2, 1997, in
accordance with the terms of the Imax Stock Option Plan, 40,000 options to
purchase common shares, which options were exercisable immediately upon grant
and expire on January 1, 2004. The exercise price of such options in accordance
with the Stock Option Plan is U.S. $31.50. Effective January 2, 1998, the
Executive shall be granted a further 40,000 options, exercisable immediately
upon grant and expiring January 1, 2005. The exercise price of such options
shall be determined in accordance with the Stock Option Plan.
All of the Executive's stock options shall be adjusted for stock splits and
other similar events after the effective date hereof and shall contain other
terms no less favorable to the Executive than the management stock options of
Imax's other senior level executives. If the Executive shall voluntarily resign
prior to the end of the Employment Term, all of the options granted in 1997 and
1998 shall be exercised by the Executive within 30 days of such resignation.
(i) The Executive shall, during the Employment Term, be eligible to receive
employee benefits at a level not less than those established by Imax for, or
made available to, its other key employees.
(j) Imax agrees to reimburse the Executive for all reasonable out-of-pocket
expenses incurred by the Executive in the performance of his obligations under
this Agreement for which documentation reasonably satisfactory to Imax is
provided, including expenses relating to the Executive's travel to, and
performance of duties in, Toronto, Canada.
<PAGE>
-4-
(k) Any amounts payable to the Executive under this Agreement shall be
subject to applicable withholding taxes, and such other deductions as may be
required under applicable law.
2. Restrictions on Competitive Employment. During the Employment Term,
--------------------------------------
absent Imax's prior written approval, the Executive shall not (as principal,
agent, employee, consultant or otherwise), directly or indirectly, engage in
activities with, or render services to, any business engaged or about to become
engaged in the business of producing or distributing projection and sound
systems or films for large screen theaters or designing or supplying motion
simulation theaters or producing or distributing films or movie rides
(collectively, "Competitive Business"); provided, however, that, notwithstanding
-------------------- -------- -------
the foregoing, the Executive may (i) have equity interests in companies engaged
in a Competitive Business so long as he is not employed by and does not consult
with such companies in areas related to the Competitive Business, (ii) render
consulting services to or be employed by a company engaged in a Competitive
Business so long as he is not employed in, or rendering services related to, the
Competitive Business of such company or (iii) perform usual investment banking
services for a company engaged in a Competitive Business.
3. Confidentiality. The Executive covenants and agrees with Imax that,
---------------
subject to Section 2 above, he will not at any time, except in performance of
his obligations to Imax hereunder or with the prior written consent of Imax,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with Imax or any of its
subsidiaries. The term "confidential information" includes information not
previously disclosed to the public or to the trade by Imax's management, or
otherwise in the public domain, with respect to Imax's or any of its
subsidiaries' products, facilities, applications and methods, trade secrets and
other intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information, business plans, prospects or opportunities, but shall exclude any
information which (i) is or becomes available to the public or is generally
known in the industry or industries in which Imax operates other than as a
result of disclosure by the Executive in violation of his agreements under this
Section 3 or (ii) the Executive is required to disclose under any applicable
laws, regulations or directives of any government agency, tribunal or authority
having jurisdiction in the manner or under the subpoena or other process of law.
4. Assignment. Neither this Agreement nor any right, interest or
----------
obligation hereunder shall be assignable by the Executive without the prior
written consent of Imax. Neither this Agreement nor any right, interest or
obligation hereunder shall be assignable by Imax without the prior written
consent of the Executive, except that Imax may assign this Agreement or any such
right, interest or obligation to an affiliate of
<PAGE>
-5-
Imax without consent of the Executive; provided, however, that no such
-------- -------
assignment shall relieve Imax of any of its obligations hereunder.
5. Indemnification. (a) Imax shall hold the Executive harmless and
---------------
indemnify the Executive, to the fullest extent permitted by applicable law,
against any and all liabilities (and all expenses related thereto) incurred by
the Executive as a result of, or in connection with, the services provided under
this Agreement; provided, however, that such indemnification shall not apply
-------- -------
with respect to any action taken by the Executive that (i) is contrary to the
written instructions of the Board or (ii) constitutes gross negligence or
willful misconduct. Imax shall maintain a director and officer's liability
insurance policy covering the Executive and containing customary terms and
conditions.
(b) Imax shall hold the Executive harmless and indemnify the Executive, on
an after-tax basis, against the amount of any income taxes imposed by Revenue
Canada, the United States Federal government or any state or local taxing
authority in Canada or the United States (collectively, "Taxes") with respect to
any amounts payable to the Executive under Section 1 of this Agreement, to the
extent such Taxes exceed the amount of Taxes that would have been imposed on
such amounts had all of the services performed by the Executive under this
Agreement been performed within the United States. Imax shall hold the
Executive harmless and indemnify the Executive, on an after-tax basis, against
the amount of any penalties or interest that are imposed on the Executive by
Revenue Canada, the United States Federal government or any state or local
taxing authority in Canada or the United States as a result of Imax's failure to
properly withhold any tax with respect to any amounts payable to the Executive
under Section 1 of this Agreement, to the extent such penalties or interest are
not attributable to the failure of the Executive to file any required tax
returns or pay any required taxes or any other willful act or omission of the
Executive.
6. Binding Effect. This Agreement shall inure to the benefit of, and be
--------------
binding upon, the parties hereto, any successors to or permitted assigns of the
parties hereto.
7. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and either delivered in person or
sent by first class certified or registered mail, postage prepaid, to the
parties at the following address (or to such other address or addresses as
either party shall have designated in writing to the other party hereto:)
(a) if to Imax:
2525 Speakman Drive
<PAGE>
-6-
Mississauga, Ontario, Canada
L5K 1B1
Attention: General Counsel
(b) if to the Executive:
975 Park Avenue, Apt 6B
New York, NY, 10028
8. Severability; Waiver. If any provision of this Agreement shall be
--------------------
determined to be invalid, illegal or unenforceable in whole or in part, neither
the validity of the remaining part of such provision nor the validity of any
other provision of this Agreement shall in any way be affected thereby. Failure
to insist upon strict compliance with any term, covenant or condition hereof
shall not be deemed a waiver of such term, covenant or condition, nor shall any
waiver or relinquishment of such right or power at any other time or times.
9. Injunctive Relief. Without intending to limit the remedies available
-----------------
to Imax or the Executive, as the case may be, in the event of a breach or
threatened breach of any of the covenants contained in this Agreement, Imax or
the Executive, as the case my be, shall be entitled to seek such injunctive
relief as may be required specifically to enforce any such covenant.
10. Miscellaneous. This Agreement constitutes the entire agreement of the
-------------
parties with respect to the subject matter hereof and supersedes and terminates
all prior agreements, oral and written, between the parties hereto with respect
to the subject matter hereof. Notwithstanding the preceding sentence, nothing
in this Agreement shall abrogate the Executive's entitlement to the Special
Bonus payable after a sale of Imax or the exercise of the Executive's
liquidation rights. Further, Imax shall continue to use its best efforts to
cause the Executive to be elected to the Board and to the designation as a CEO
Advisor under Imax's by-laws. This Agreement may be modified or amended only by
an instrument in writing signed by both parties hereto. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
<PAGE>
-7-
11. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, Imax and the Executive have duly executed and delivered
this Agreement, as of the day and year first above written, on this 16th day of
----
May, 1997.
IMAX CORPORATION
By: /s/ John M. Davison
-------------------
John M. Davison
Executive Vice President, Operations
and Chief Financial Officer
By: /s/ Michael M. Davies
---------------------
Michael M. Davies
Vice President and Corporate Controller
EXECUTIVE
/s/ Bradley J. Wechsler
------------------------------------------ l.s.
BRADLEY J. WECHSLER
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT dated and effective as of January 1, 1997 (the
"Agreement"), between IMAX CORPORATION, a corporation organized under the laws
of Canada ("Imax"), and RICHARD L. GELFOND (the "Executive").
WHEREAS, the Executive is currently the Vice-Chairman and Co-Chief
Executive Officer of Imax and is employed pursuant to an Employment Agreement
dated as of March 1, 1994, as amended by a resolution of the Imax Board of
Directors (the "Board") dated January 31, 1995 and by a letter agreement dated
September 14, 1995; and
WHEREAS, the Board has approved revised terms of employment, effective
January 1, 1997, on February 13, 1997 and on May 6, 1997; and
WHEREAS, Imax wishes to enter into this Agreement to engage the Executive
to provide services to Imax, and the Executive wishes to be so engaged, pursuant
to the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Employment. (a) Imax hereby employs the Executive, and the Executive
hereby agrees to serve, in accordance with the terms and conditions hereof.
(b) The Executive's compensation as Co-Chief Executive Officer under this
Agreement shall commence on the effective date hereof (the "Commencement Date"),
and shall continue until the second anniversary of the Commencement Date (the
"Employment Term"). Nine months prior to such second anniversary, Imax shall
inform the Executive of its intent to extend the Employment Term. Imax shall so
inform the Executive after receiving the recommendation of the CEO Advisors (as
defined in Imax's Articles of Incorporation). If Imax notifies the Executive
that it does not intend to extend the Employment Term, then Imax, with the CEO
Advisors and a non-management committee of the Board, shall initiate an
executive search process. Subject to the immediately preceding sentence, upon
such second anniversary and thereafter upon each successive anniversary of the
Commencement Date, the Employment Term may be extended by written agreement of
the parties for additional one-year periods.
(c) During the Employment Term, the Executive shall perform such services
with respect to Imax's business as may be reasonably requested from time to time
by the Board and which are consistent with the Executive's status and the
function
<PAGE>
-2-
performed by individuals holding a similar position with similarly situated
companies, and agrees to act in accordance with the written instructions of the
Board. Such services shall be performed primarily within the United States.
(d) The Executive shall devote that portion of his business time that is
necessary to perform the services reasonably required of him hereunder, subject
to any conflicting engagements the Executive may have. The Executive agrees
that during the Employment Term (i) he will use reasonable efforts to resolve
any conflicting engagements and (ii) he will remain actively involved in Imax's
business.
(e) As compensation for the services to be performed by the Executive
hereunder during the Employment Term, the Executive shall be entitled to receive
a base salary ("Base Salary") of U.S. $710,000 per annum, payable no less
-----------
frequently than monthly in accordance with Imax's payroll practices.
(f) In addition to the Base Salary, the Executive shall be eligible to
participate during the Employment Term in the annual incentive bonus plan
adopted by the Board. The Executive shall be paid a bonus in respect of each of
1997 and 1998 at a standardized level of U.S. $710,000 per year (the
"Standard"). Based on certain qualitative and quantitative measures determined
by the CEO Advisors and the Compensation Committee (the "Committee") of the
Board, as set forth below, the Committee shall determine the actual bonus paid,
which shall be a multiple of the Standard ranging from 0.0x - 2.0 x, provided,
however, that the multiple shall be at least 1.0x if Imax's reported earnings
per share (EPS) for the year meet the approved budget target (except that, if in
the sole discretion of the Committee, the achievement EPS target was at the
expense of, or to the material detriment of, other(s) of the qualitative and
quantitative measures set forth below, then such minimum shall not apply). The
bonus shall be paid within 50 days of the applicable year end.
The determination by the Committee of the Executive's actual bonus for
1997 and for 1998 shall be consistent with the determination of the Executive's
bonus for 1996, and shall consider the overall performance of Imax, taken as a
whole.
Among the various factors the Committee shall consider in determining the
bonus to be paid are: (i) the actual financial performance of Imax versus the
approved budget for EBITDA, EPS, revenue growth, and/or other financial targets;
and (ii) the Committee shall also take into account other qualitative factors
including (in no order of importance): progress in theater signings,
development of an enhanced management team, improved performance of the Ridefilm
division, further advancement of Imax's film strategy, progress in "owned and
operated" strategy, brand development, continued growth of the business, and
other performance related issues including, but not limited to, other goals
established in the budget process approved by the Board.
<PAGE>
-3-
(g) At the beginning of each of 1997 and 1998, Imax shall grant the
Executive the right to receive 15,000 common shares of Imax (the "Restricted
Stock"). If such Restricted Stock may not be issued without shareholder
approval, it shall be issued as "phantom stock". The Executive shall have the
right to request the Restricted Stock be issued to him (or, if "phantom stock"
is utilized, have payment made to him in an amount equal to the fair market
value of such number of common shares of Imax on the date of such request), at
any time after January 1, 1998 and January 1, 1999, respectively. The Restricted
Stock shall be adjusted for stock splits and other similar events after the
effective date hereof. The provisions of this Section 1(g) shall survive any
termination of thisImax agrees to indemnify the Executive, on an after-tax
basis, for any income taxes imposed by any taxing authority and resulting from
any taxable benefit to the Executive with respect to the Restricted Stock (or
"phantom stock") arising prior to the date of any such request. which arises
prior to the date of any such request. The provisions of this Section 1(g) shall
survive any termination of this Agreement.
(h) The Executive has been granted effective January 2, 1997, in
accordance with the terms of the Imax Stock Option Plan, 40,000 options to
purchase common shares, which options were exercisable immediately upon grant
and expire on January 1, 2004. The exercise price of such options in accordance
with the Stock Option Plan is U.S. $31.50. Effective January 2, 1998, the
Executive shall be granted a further 40,000 options, exercisable immediately
upon grant and expiring January 1, 2005. The exercise price of such options
shall be determined in accordance with the Stock Option Plan.
All of the Executive's stock options shall be adjusted for stock splits and
other similar events after the effective date hereof and shall contain other
terms no less favorable to the Executive than the management stock options of
Imax's other senior level executives. If the Executive shall voluntarily resign
prior to the end of the Employment Term, all of the options granted in 1997 and
1998 shall be exercised by the Executive within 30 days of such resignation.
(i) The Executive shall, during the Employment Term, be eligible to receive
employee benefits at a level not less than those established by Imax for, or
made available to, its other key employees.
(j) Imax agrees to reimburse the Executive for all reasonable out-of-pocket
expenses incurred by the Executive in the performance of his obligations under
this Agreement for which documentation reasonably satisfactory to Imax is
provided, including expenses relating to the Executive's travel to, and
performance of duties in, Toronto, Canada.
<PAGE>
-4-
(k) Any amounts payable to the Executive under this Agreement shall be
subject to applicable withholding taxes, and such other deductions as may be
required under applicable law.
2. Restrictions on Competitive Employment. During the Employment Term,
--------------------------------------
absent Imax's prior written approval, the Executive shall not (as principal,
agent, employee, consultant or otherwise), directly or indirectly, engage in
activities with, or render services to, any business engaged or about to become
engaged in the business of producing or distributing projection and sound
systems or films for large screen theaters or designing or supplying motion
simulation theaters or producing or distributing films or movie rides
(collectively, "Competitive Business"); provided, however, that, notwithstanding
-------------------- -------- -------
the foregoing, the Executive may (i) have equity interests in companies engaged
in a Competitive Business so long as he is not employed by and does not consult
with such companies in areas related to the Competitive Business, (ii) render
consulting services to or be employed by a company engaged in a Competitive
Business so long as he is not employed in, or rendering services related to, the
Competitive Business of such company or (iii) perform usual investment banking
services for a company engaged in a Competitive Business.
3. Confidentiality. The Executive covenants and agrees with Imax that,
---------------
subject to Section 2 above, he will not at any time, except in performance of
his obligations to Imax hereunder or with the prior written consent of Imax,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with Imax or any of its
subsidiaries. The term "confidential information" includes information not
previously disclosed to the public or to the trade by Imax's management, or
otherwise in the public domain, with respect to Imax's or any of its
subsidiaries' products, facilities, applications and methods, trade secrets and
other intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information, business plans, prospects or opportunities, but shall exclude any
information which (i) is or becomes available to the public or is generally
known in the industry or industries in which Imax operates other than as a
result of disclosure by the Executive in violation of his agreements under this
Section 3 or (ii) the Executive is required to disclose under any applicable
laws, regulations or directives of any government agency, tribunal or authority
having jurisdiction in the manner or under the subpoena or other process of law.
4. Assignment. Neither this Agreement nor any right, interest or
----------
obligation hereunder shall be assignable by the Executive without the prior
written consent of Imax. Neither this Agreement nor any right, interest or
obligation hereunder shall be assignable by Imax without the prior written
consent of the Executive, except that Imax may assign this Agreement or any such
right, interest or obligation to an affiliate of
<PAGE>
-5-
Imax without consent of the Executive; provided, however, that no such
-------- -------
assignment shall relieve Imax of any of its obligations hereunder.
5. Indemnification. (a) Imax shall hold the Executive harmless and
---------------
indemnify the Executive, to the fullest extent permitted by applicable law,
against any and all liabilities (and all expenses related thereto) incurred by
the Executive as a result of, or in connection with, the services provided under
this Agreement; provided, however, that such indemnification shall not apply
-------- -------
with respect to any action taken by the Executive that (i) is contrary to the
written instructions of the Board or (ii) constitutes gross negligence or
willful misconduct. Imax shall maintain a director and officer's liability
insurance policy covering the Executive and containing customary terms and
conditions.
(b) Imax shall hold the Executive harmless and indemnify the Executive, on
an after-tax basis, against the amount of any income taxes imposed by Revenue
Canada, the United States Federal government or any state or local taxing
authority in Canada or the United States (collectively, "Taxes") with respect to
any amounts payable to the Executive under Section 1 of this Agreement, to the
extent such Taxes exceed the amount of Taxes that would have been imposed on
such amounts had all of the services performed by the Executive under this
Agreement been performed within the United States. Imax shall hold the
Executive harmless and indemnify the Executive, on an after-tax basis, against
the amount of any penalties or interest that are imposed on the Executive by
Revenue Canada, the United States Federal government or any state or local
taxing authority in Canada or the United States as a result of Imax's failure to
properly withhold any tax with respect to any amounts payable to the Executive
under Section 1 of this Agreement, to the extent such penalties or interest are
not attributable to the failure of the Executive to file any required tax
returns or pay any required taxes or any other willful act or omission of the
Executive.
6. Binding Effect. This Agreement shall inure to the benefit of, and be
--------------
binding upon, the parties hereto, any successors to or permitted assigns of the
parties hereto.
7. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and either delivered in person or
sent by first class certified or registered mail, postage prepaid, to the
parties at the following address (or to such other address or addresses as
either party shall have designated in writing to the other party hereto:)
(a) if to Imax:
2525 Speakman Drive
<PAGE>
-6-
Mississauga, Ontario, Canada
L5K 1B1
Attention: General Counsel
(b) if to the Executive:
975 Park Avenue, Apt 6B
New York, NY, 10028
8. Severability; Waiver. If any provision of this Agreement shall be
--------------------
determined to be invalid, illegal or unenforceable in whole or in part, neither
the validity of the remaining part of such provision nor the validity of any
other provision of this Agreement shall in any way be affected thereby. Failure
to insist upon strict compliance with any term, covenant or condition hereof
shall not be deemed a waiver of such term, covenant or condition, nor shall any
waiver or relinquishment of such right or power at any other time or times.
9. Injunctive Relief. Without intending to limit the remedies available
-----------------
to Imax or the Executive, as the case may be, in the event of a breach or
threatened breach of any of the covenants contained in this Agreement, Imax or
the Executive, as the case my be, shall be entitled to seek such injunctive
relief as may be required specifically to enforce any such covenant.
10. Miscellaneous. This Agreement constitutes the entire agreement of the
-------------
parties with respect to the subject matter hereof and supersedes and terminates
all prior agreements, oral and written, between the parties hereto with respect
to the subject matter hereof. Notwithstanding the preceding sentence, nothing in
this Agreement shall abrogate the Executive's entitlement to the Special Bonus
payable after a sale of Imax or the exercise of the Executive's liquidation
rights. Further, Imax shall continue to use its best efforts to cause the
Executive to be elected to the Board and to the designation as a CEO Advisor
under Imax's by-laws. This Agreement may be modified or amended only by an
instrument in writing signed by both parties hereto. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
<PAGE>
-7-
11. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, Imax and the Executive have duly executed and delivered
this Agreement, as of the day and year first above written, on this 16th day of
----
May, 1997.
IMAX CORPORATION
By: /s/ John M. Davison
-------------------------------------
John M. Davison
Executive Vice President, Operations
and Chief Financial Officer
By: /s/ Michael M. Davies
-------------------------------------
Michael M. Davies
Vice President and Corporate Controller
EXECUTIVE
/s/ Richard L. Gelfond
------------------------------------------ l.s.
RICHARD L. GELFOND
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
--------------------
MEMORANDUM OF AGREEMENT made the 16th day of January, 1991
B E T W E E N :
JOHN M. DAVISON, of the City of Toronto, in the Province of
Ontario,
(hereinafter called the "Executive"),
OF THE FIRST PART,
- -and-
IMAX SYSTEMS CORPORATION, a corporation incorporated
under the laws of Canada,
(hereinafter called the "Corporation"),
OF THE SECOND PART.
WHEREAS the Corporation is desirous of employing the Executive to
provide services in connection with the business (the "Business") carried on by
the Corporation, consisting principally of the design, production, marketing and
leasing of high fidelity 70mm large format motion picture systems and the
development, production and distribution of 70mm large format films, and
including certain other business activities relating thereto;
AND WHEREAS the Executive is desirous of providing such services to the
Corporation, on the terms and subject to the conditions herein set out;
AND WHEREAS the Executive may from time to time be granted rights to
purchase common shares of the Corporation and may be advanced one or more loans
by the Corporation for the purpose of purchasing such shares;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
premises, the mutual covenants and agreements herein contained and for other
good and valuable consideration (the receipt and sufficiency of which are hereby
acknowledged by the parties), the parties hereby covenant and agree as follows:
<PAGE>
-2-
1. DUTIES AND TERM OF EMPLOYMENT
The Executive shall serve the Corporation in the capacity of Director,
Corporate Development, and may be appointed as a member of such senior
management committee or similar body as may be designated by the Board of
Directors or the President and Chief Executive Officer of the Corporation from
time to time, and shall perform such duties and exercise such powers as are
normally associated with such a position and such other duties and powers in
connection with the Business as may from time to time be assigned to him. The
Executive shall report to such executive officer of the Corporation as shall be
designated by the Board of Directors or the President and Chief Executive
Officer of the Corporation from time to time and be subject to the general
direction and control of such officer.
1.2 The Executive shall devote such time, attention and ability on a full-
time basis as are reasonably necessary in connection with the conduct of the
Business and the Executive shall well and faithfully serve the Corporation in
providing services hereunder and shall use his best efforts to promote the
interests of the Corporation in respect of the Business.
1.3 Subject to earlier termination of the employment of the Executive in
accordance with Article 4 of this Agreement, the employment of the Executive
hereunder shall be for an indefinite term.
2. REMUNERATION
2.1 The salary payable to the Executive in the 1990 calendar year shall be
$130,000. In respect of each calendar year, the salary payable to the Executive
shall be as agreed by the parties from time to time. The salary payable to the
Executive pursuant hereto is herein referred to as "Salary". If the Executive is
employed during less than the entirety of any calendar year, his Salary for such
part of a year shall be the appropriate prorated portion of his Salary in
respect of the whole calendar year. The Salary of the Executive shall be paid in
arrears in equal bi-weekly instalments.
2.2 The Executive shall be reimbursed for all reasonable out-of-pocket
expenses actually and properly incurred in connection with the services
performed hereunder. For all such expenses, the Executive shall furnish to the
Corporation statements and vouchers as and when required by it.
3. BENEFITS
3.1 The terms and conditions of the employment of the Executive hereunder
respecting participation by the Executive in the Imax Registered Pension
Investment Plan (the "Pension Plan"), participation by the Executive in all
group life, medical, disability and other insurance plans of the Corporation
(collectively the "Insurance Plans") shall be such
<PAGE>
-3-
terms and conditions as are applicable from time to time to other senior
executives of the Corporation in comparable positions to that of the Executive.
3.2 The Executive shall be entitled to four (4) weeks' vacation with pay in
each calendar year, to be taken in accordance with the Corporation's vacation
policy in effect from time to time.
4. TERMINATION
4.1 The employment of the Executive may be terminated only in the following
manner:
(a) at any time, by notice in writing from the Corporation to the Executive,
for just cause. For the purposes of this Agreement, just cause shall
include any one or more of the following events:
(i) if the Executive breaches any of the material terms or
provisions of his employment and such breach has not been
remedied within 30 days after written notice specifying such
breach has been given to the Executive by the Corporation; or
(ii) if the Executive has been guilty of wilful misconduct or wilful
neglect of duty, or has been materially negligent in the
performance of the duties provided for herein; or
(iii) if the Executive has wilfully and knowingly disobeyed any
reasonable order or instruction communicated in writing by the
Board of Directors or the President and CEO of the Corporation;
or
(iv) if the Executive has committed any act of dishonesty affecting
the Corporation; or
(b) by three months' notice in writing from the Corporation to the
Executive, in the event that the Executive is missing and presumed dead
or fails, by reason of illness or mental or physical disability or
incapacity, for any six consecutive calendar months in any 12-month
period or for 12 months in the aggregate in any 24-month period, to
provide the services required hereunder; or
(c) if the Executive has died, automatically upon his death; or
(d) at any time, by notice in writing from the Executive to the Corporation,
if the Corporation breaches any of the material terms or provisions of
this Agreement and such breach is not remedied within 30 days after
written notice specifying such breach has been given to the Corporation
by the Executive; or
<PAGE>
-4-
(e) at any time, for any reason (including, without limitation, by reason of
circumstances constituting constructive dismissal of the Executive), by
notice in writing given to the Corporation by the Executive, effective
at such time as shall be stated in such notice, which (except in the
case of constructive dismissal of the Executive) shall be not less than
30 days following the date of such notice or, if no such time is
specified therein, as is 30 days following the date of such notice; or
(f) at any time, for any reason, by notice in writing given to the Executive
by the Corporation, effective at such time as shall be stated in such
notice.
The effective date of any termination of the employment of the Executive is
referred to herein as the "Termination Date".
4.2 Upon any termination of the employment of the Executive pursuant to
subclauses 4.1(a), (b), (c) or (e) (other than termination pursuant to subclause
4.1(e) in the circumstances referred to in clause 4.3), the Corporation shall
pay to the Executive or his legal personal representatives, as soon as is
reasonably practicable, Salary calculated to the Termination Date, together with
such other amounts (if any) as are owing to the Executive as at the Termination
Date in respect of his employment. The Executive acknowledges that upon any such
termination of his employment, he or his legal personal representatives shall
have no claim for the payment of any further or other Salary, compensation or
other remuneration whatsoever in respect of such termination.
4.3 Following any termination of the employment of the Executive pursuant to
subclauses 4.1(d) or (f), or pursuant to subclause 4.1(e) in circumstances
constituting constructive dismissal of the Executive or at any time within one
year following a Change of Control (as defined in clause 6.1) the Corporation,
in addition to paying Salary to the Executive calculated to the Termination
Date, together with such other amounts (if any) as are owing to the Executive as
at the Termination Date, shall continue to pay Salary to the Executive until the
earlier to occur of: (i) the Executive securing reasonably comparable
alternative employment; and (ii) the date (the "Final Payment Date") which is 9
months following the Termination Date. The Executive agrees to use his best
efforts to secure reasonably comparable alternative employment upon any such
termination of his employment hereunder and shall forthwith give notice to the
Corporation in writing when he has secured such reasonably comparable
alternative employment. Upon the Executive securing such reasonably comparable
alternative employment prior to the Final Payment Date, the Corporation shall
pay to the Executive an amount equal to one-half the amount which would
otherwise be payable by the Corporation to the Executive from such, date of
securing reasonably comparable alternative employment to the Final Payment
Date. During such period following the Termination Date as the Corporation
continues to pay Salary to the Executive in accordance herewith, it shall
continue coverage under the Insurance Plans (other than long-term disability)
for the benefit of the Executive, but all rights of the Executive to continued
contributions under the Pension Plan and long-term disability coverage shall
cease upon the Termination Date. The parties hereby acknowledge and
<PAGE>
-5-
confirm that the foregoing arrangements are reasonable compensation to the
Executive for any such termination of his employment hereunder by the
Corporation in lieu of notice thereof. Accordingly, upon any termination of his
employment in accordance with the provisions hereof, the Executive acknowledges
that he shall have no claim whatsoever arising out of the termination of his
employment hereunder for damages or other Salary, compensation or remuneration
whatsoever, except for payment of Salary to the extent specifically hereinbefore
provided for.
5. PURCHASE OF SHARES
5.1 Upon execution of this Agreement and upon the terms and conditions
hereof, the Executive may subscribe for and purchase up to 5,000 common shares
of the Corporation at a purchase price of $1.00 per share and up to 5,000 common
shares of the Corporation at a purchase price of $5.00 per share (herein
referred to as "Shares"). If so requested by the Executive, the Corporation
shall loan the full purchase price for the Shares to the Executive upon
execution of the Loan Agreement and the Trust Agreement attached as Schedules
"A" and B" hereto, respectively. In each of the six (6) calendar years
commencing on December 31, 1991, the Executive shall repay to the Corporation a
portion of the Loan equal to five percent (5%) of the principal amount thereof,
with the balance falling due and being repaid not later than December 31, 1997.
If the Corporation advances a Loan to the Executive, as aforesaid, he shall be
deemed to have directed the Corporation to apply the proceeds of such Loan to
the payment of the purchase price for the Shares and such purchase price shall
be paid and satisfied accordingly.
6. Sale of Shares
6.1 In this Article 6, the following terms shall have the following
respective meanings:
(a) "Change of Control" means either of the following events:
(i) the sale of all or substantially all of the assets of the
Corporation; or
(ii) any transaction whereby any person, together with affiliates and
associates of such person, or any group of persons acting in
concert, acquires more than 50% of the issued common shares of
the Corporation, or any transaction as a result of which common
shares constituting more than 50% in the aggregate of the issued
common shares of the Corporation cease to be held by persons
who are shareholders of the Corporation as at the date hereof,
or by affiliates or associates of such present shareholders;
(for the purposes of this definition, whether persons are affiliated or
associated shall be determined in accordance with the definitions of
"affiliate"
<PAGE>
-6-
and "associate" in the provisions of the Canada Business Corporations
Act, as such provisions may be amended, supplemented or replaced from
time to time);
(b) "Effective Date" shall have the meaning ascribed thereto in clause 6.4;
(c) "Fair Market Value" means the value per Share of the common shares of
the Corporation calculated as follows:
BOOK VALUE PER SHARE + (MULTIPLE X AVERAGE EARNINGS PER SHARE)
For the purposes of the above-mentioned calculation:
"Book Value per Share" means the book value of the net assets of the
Corporation (total common shareholders equity), divided by the number of
Shares of the Corporation outstanding, all as stated in the most recent
audited financial statements of the Corporation which number shall
always be greater than zero;
"Multiple" means the number used to capitalize earnings of the
Corporation and for the purpose of this calculation shall be as set out
in this table:
Prime Rate Multiple
---------- --------
6.00% - 7.99% 4.50
8.00% - 9.99% 4.17
10.00% - 11.99% 3.83
12.00% - 13.99% 3.50
14.00% - 15.99% 3.17
16.00% - 17.99% 2.83
18.00% - 19.99% 2.50
Therefore, for example, if the prime rate was 13.5%, the multiple would
be 3.50;
Such prime rate, for purposes of this formula, shall be the average
prime rate in Canada for the 12 months preceding the most current
valuation date. Such rate to be determined by an average of the rates
charged by three banks: The Toronto-Dominion Bank, The Bank of Montreal
and The Royal Bank of Canada: and
"Average Earnings per Share" means the amount determined by multiplying:
(A) the Earnings per Share for the most recently audited
year by three;
<PAGE>
-7-
(B) the Earnings per Share for the immediately preceding
year by two; and
(C) the Earnings per Share for the year immediately
preceding the year referred to in (B) above by one;
and dividing the aggregate of the amounts in (A), (B) and (C) above by
six, which amount shall always be greater than zero.
"Earnings per Share" means the Earnings of the Corporation for the
relevant year, divided by the average number of Shares outstanding
during the said year;
"Earnings" means the audited net income of the Corporation, before tax,
increased or decreased by the amount of research and development
expenses and any other extraordinary or non-recurring items as set out
in the financial statements for the applicable financial years;
Notwithstanding the foregoing, such other method of valuation as may be
determined by the President, from time to time, may be used to calculate
Fair Market Value for the purpose of this Agreement provided such other
method or formula yields a value per Share which is not less than the
value determined above;
(d) "Gone Public" means, in reference to the Corporation, that either (i)
the Corporation has made a distribution of its shares to the public or
(ii) shares of the Corporation are listed or traded on a published
market (as such term is defined in the Securities Act (Ontario);
(e) "Loan" means any loan which has been made by the Corporation to the
Executive pursuant to Article 5 for the purpose of purchasing Shares;
and
(f) "Price Per Share" means, in respect of any Shares purchased by the
Executive, a price per Share calculated on the basis of the following
respective proportions of the purchase price per Share paid by the
Executive for such Shares ("Purchase Price") and Fair Market Value
(provided that, if the purchase and sale of the Shares held by the
Executive pursuant to clause 6.4 occurs by reason of the termination of
the employment of the Executive pursuant to clause 4.3, the Price Per
Share shall be Fair Market Value in respect of all such Shares):
<PAGE>
-8-
Year Price Per Share
---- ---------------
Year 1 Purchase Price
Year 2 80% Purchase Price + 20% Fair Market Value
Year 3 60% Purchase Price + 40% Fair Market Value
Year 4 40% Purchase Price + 60% Fair Market Value
Year 5 20% Purchase Price + 80% Fair Market Value
All years after Year 5 Fair Market Value
(Years 1 through 5 shall be determined on the basis of Year 1 being
1990.)
6.2 At all times at which the Corporation has not Gone Public, except as
specifically provided in Article 5 and clause 6.4, the Executive shall not,
except with the prior consent of the Board of Directors or the President and CEO
of the Corporation, which consent shall not be unreasonably withheld, sell
transfer, mortgage, charge, pledge or assign all or any part of his right, title
or interest in or to any Shares to any person.
6.3 The Executive acknowledges and agrees that the Executive shall, upon
request by the Corporation, execute any shareholders' agreement in effect from
time to time between the shareholders of the Corporation, with respect to all
Shares held by the Executive. At all times at which the Corporation has not Gone
Public, any and all certificates representing Shares shall have conspicuously
typed or otherwise written thereon a legend substantially to the following
effect:
"The shares represented by this certificate are
subject to certain restrictions on the right to
transfer, sell, assign, or otherwise deal with
the shares of Imax Systems Corporation represented
by this certificate, pursuant to its articles of
incorporation and certain agreements to which the
holder of such shares is a party. Notice of the
terms and conditions of such articles is hereby
given. Copies of such agreements are available for
inspection upon application to the Secretary of
Imax Systems Corporation."
6.4 If (i) the employment of the Executive is terminated for any reason, or
(ii) any interest in any Shares is claimed by any person other than the
Executive or any interest in any Shares is transferred or purportedly
transferred to any person other than the Executive (other than pursuant to the
provisions of Article 5 or as otherwise agreed by the Corporation), whether by
an order of any court, by operation of law or otherwise and the Corporation
elects, in its sole discretion, to require the sale of such Shares as a result
of such event (the December 31 following the date of such termination or other
event is hereinafter referred to as the "Effective Date"), if the Corporation
has not Gone Public at the Effective Date, the Corporation shall cause to be
purchased, by such purchaser as it may designate, and the Executive or his legal
personal representatives shall sell, all Shares held by the Executive or such
legal personal representatives as at the Effective Date (the "Purchased Shares")
for a purchase price, payable in cash, equal to the
<PAGE>
-9-
product obtained when (A) the Price Per Share is multiplied by (B) the number of
Shares held by the Executive or such legal personal representatives as at the
Effective Date. The purchase price for the Shares shall be paid at the Time of
Closing in respect of the purchase and sale of the Shares. If any portion of any
Loan remains outstanding at the Time of Closing, a portion of such purchase
price equal to such unpaid balance of such Loan shall be applied to the
repayment of such Loan and the Executive hereby irrevocably authorizes and
directs the Corporation to apply such purchase price to the repayment of such
Loan. The completion of the sale and purchase of the Purchased Shares pursuant
to this clause 6.4 shall be in accordance with the provisions of clause 6.5.
Notwithstanding the foregoing, the Corporation shall be under no obligation to
cause the Shares to be purchased if, as of the Effective Date, the Corporation
has become bankrupt or if it has been put into receivership or a trustee
appointed for the benefit of creditors.
6.5 The following provisions shall apply in respect of any purchase and sale
of Purchased Shares pursuant to clause 6.4 and shall also apply, mutatis
mutandis, to any purchase and sale of the Executive's Shares pursuant to the
provisions of any shareholders' agreement referred to in clause 6.3 and to any
sale of Shares pursuant to Article 5 (in which case, the date at which
obligations to sell and purchase such Shares arise shall be the Effective Date
and such Shares shall be the Purchased Shares for purposes of this clause 6.5):
(a) Forthwith following any Effective Date, the purchaser(s) shall notify
the Executive or his legal personal representatives, as the case may be
(the "vendor") in writing of a date and time for closing of the purchase
and sale of the Purchased Shares, which date shall be not earlier than
30 days nor more than 60 days after the date upon which such notice is
required to be given. The purchase and sale of the Purchased Shares
shall take place on the date and at the time set out in such notice and
shall take place at the head office of the Corporation. If no notice is
given as aforesaid establishing such date and time of closing, such date
shall be the last day which could be designated hereunder as such date
of closing (or the first business day immediately following such day if
such day is not a business day) and the time of closing shall be 10:00
a.m. (local time) on such date, provided, however, that the purchaser(s)
and the vendor may otherwise mutually agree upon such date and time (the
date and time determined in accordance with the foregoing shall be the
"Date of Closing" and the "Time of Closing" respectively).
(b) At the Time of Closing on the Date of Closing, the vendor shall deliver
to the purchaser(s) a certificate or certificates representing the
Purchased Shares, duly endorsed in blank for transfer, and the
purchaser(s) shall pay to the vendor the portion of the purchase price
payable at the Time of Closing.
(c) If the vendor is not represented at the place of closing at the Time of
Closing or is represented but fails for any reason whatsoever to produce
and deliver
<PAGE>
-10-
to the purchaser(s) the said certificate or certificates duly endorsed
in blank for transfer then the portion of the purchase price payable at
the Time of Closing shall be deposited into a special account at the
branch of the Corporation's bankers customarily used by the Corporation
in the name of the vendor. Such deposit shall constitute valid and
effective payment of such portion of the purchase price to the vendor
even though the vendor has voluntarily encumbered or disposed of any of
the Purchased Shares, and notwithstanding the fact that a certificate or
certificates for any of the Purchased Shares may have been delivered to
any pledgee, transferee or other person. In the event that any of the
Purchased Shares have been pledged or otherwise encumbered to any person
to secure obligations or indebtedness of the vendor, the purchaser(s)
may, at the option of the purchaser(s), in lieu of depositing such
portion of the purchase price as aforesaid, pay all or any part of such
portion of the purchase price to such pledgee or encumbrancer to the
extent required to discharge such obligations or indebtedness and
receive the certificates representing the Purchased Shares from such
pledgee or encumbrancer and deposit the remainder, if any, of such
portion of the purchase price as aforesaid.
(d) If a deposit and/or payment is made pursuant to subclause (c), then from
and after the Date of Closing, and even though the certificates
representing the Purchased Shares have not been delivered to the
purchaser(s), the purchase of the Purchased Shares shall be deemed to
have been fully completed, and all right, title, benefit and interest,
both at law and in equity, in and to the Purchased Shares shall be
conclusively deemed to have been transferred and assigned to and become
vested in the purchaser(s) and all right, title, benefit and interest,
both at law and in equity, of the vendor or of any transferee, assignee,
or any other person having any interest, legal or equitable, therein or
thereto, whether as a shareholder or creditor of the Corporation or
otherwise, shall cease and determine.
(e) The vendor shall be entitled to receive the portion of the purchase
price deposited with the bankers of the Corporation upon delivery to the
purchaser(s) of certificates evidencing the Purchased Shares, duly
endorsed in blank for transfer, and the balance of the purchase price
when payable in accordance with the terms of the purchase and sale.
(f) The vendor hereby irrevocably constitutes and appoints the purchaser(s)
and each of them a true and lawful attorney-in-fact and agent for, in
the name and on behalf of the vendor to execute and deliver in the name
of the vendor all such assignments, transfers, deeds and instruments as
may be necessary effectively to transfer and assign the Purchased
Shares, or any part thereof, to the purchaser(s), on the books of the
Corporation. Such appointment and power of attorney, being coupled with
an interest, shall not be revocable and shall not be terminated by the
insolvency, bankruptcy, incapacity or death of the vendor or otherwise
by operation of law and the vendor hereby ratifies
<PAGE>
-11-
and confirms and agrees to ratify and confirm all that the attorney may
lawfully do or cause to be done by virtue of the provisions
hereof.
(g) The vendor hereby irrevocably consents to any transfer of the Purchased
Shares made pursuant to the provisions hereof.
7. NON-COMPETITION
7.1 The Executive acknowledges that he will be entrusted with detailed
confidential information and trade secrets concerning the present and
contemplated techniques and modes of merchandising evolved and used in
connection with the Business and concerning the customers and clients of the
Business, their names, addresses and requirements and concerning employees of
the Business, the disclosure of any of which detailed confidential information
and trade secrets to competitors of the Corporation or to the general public
would be highly detrimental to the best interests of the Corporation. The
Executive further acknowledges and agrees that the right to maintain
confidential such detailed confidential information and trade secrets
constitutes a proprietary right which the Corporation is entitled to protect.
Accordingly, the Executive covenants and agrees with the Corporation:
(a) that he will not, except with the prior written consent of the
Corporation or in the course of his employment for the purposes of the
Business, at any time during his employment with the Corporation or
during the period of two years from the date of any termination of his
employment, disclose any of such detailed confidential information and
trade secrets with respect to the Business to any person or use the same
for any purposes other than those of the Corporation;
(b) that he will not, except with the prior written consent of the
Corporation, at any time during his employment with the Corporation or
during the period of two years from the date of any termination of his
employment, either individually or in partnership or jointly or in
conjunction with any person as principal, agent, shareholder, creditor,
employee, partner or in any other manner whatsoever carry on or be
engaged in or be concerned with or interested in or advise, lend money
to, guarantee the debts or obligations of or permit his name or any part
thereof to be used or employed by any person engaged in or concerned
with or interested in any business directly competitive with the
Business or any portion of the Business, anywhere in any country of the
world in which the Business or any portion of the Business is carried on
or is proposed to be carried on at any time during his employment with
the Corporation; and
(c) that he will not, except with the prior written consent of the
Corporation, at any time during his employment with the Corporation or
at any time during the period of two years from the date of any
termination of his employment:
<PAGE>
-12-
(i) contact, for the purpose of solicitation in connection with a
similar business, any person, firm, corporation or governmental
agency who is a customer of the Corporation in connection with
the Business at such date of termination; or
(ii) contact any employee or executive of the Corporation employed by
the Corporation at such date of termination in connection with
the Business for the purpose of offering him or her employment
with any person other than the Corporation.
7.2 If any covenant or provision herein is determined to be void or
unenforceable in whole or in part, it shall not be deemed to affect or impair
the validity of any other covenant or provision and subclauses (a), (b) and (c)
and paragraphs (i) and (ii) of subclause (c) of clause 7.1 hereof are declared
to be separate and distinct covenants. The Executive hereby agrees that all
restrictions in clause 7.1 are reasonable and valid and all defences to the
strict enforcement thereof by the Corporation are hereby waived by the
Executive. The Executive acknowledges that a violation of any of the provisions
of clause 7.1 will result in immediate and irreparable damage to the Corporation
and agrees that in the event of such violation the Corporation shall, in
addition to any other right to relief, be entitled to equitable relief by way of
temporary or permanent injunction and to such other relief as any court of
competent jurisdiction may deem just and proper.
8. GENERAL
8.1 The Executive acknowledges that he has obtained independent legal advice
in connection with the entering into of this Agreement.
8.2 Any notice in writing required or permitted to be given to the parties
hereunder shall be sufficiently given if delivered personally or mailed by
registered mail, postage prepaid, addressed:
To ISC: IMAX SYSTEMS CORPORATION
Attn: Legal Department
38 Isabella Street
Toronto, Ontario M4Y lN1
To Executive: MR. JOHN M DAVISON
57 Lawrence Ave. West
Toronto, Ontario, M5M 1A3
Either party hereto may change its address for the giving of notice from time to
time by notice given in accordance with the foregoing provisions.
<PAGE>
-13-
8.3 This Agreement shall be construed and interpreted in accordance with the
laws of the Province of Ontario and the federal laws of Canada applicable
therein. Each of the parties hereby irrevocably attorns to the jurisdiction of
the courts of the Province of Ontario.
8.4 In this Agreement, "person" means and includes an individual, a firm, a
corporation, a syndicate, a partnership, an association, a joint venture and
every other legal or business entity whatsoever. Where used herein, words
importing the singular number only shall include the plural and vice-versa and
words importing the use of any gender shall include all genders.
8.5 The headings of the subdivisions of this Agreement are inserted for
convenience of reference only and shall not affect the meaning or construction
hereof.
8.6 This Agreement constitutes the entire agreement between the parties
hereto pertaining to the subject-matter hereof. There are not and shall not be
any oral statements, representations, warranties, undertakings or agreements
between the parties and this Agreement may not be amended or modified in any
respect except by written instrument signed by the parties hereto.
8.7 The provisions of this Agreement shall enure to the benefit of and be
binding upon the parties hereto and their respective heirs, legal personal
representatives, successors and permitted assigns. The Executive may not assign,
whether voluntarily or involuntarily, any of his rights or benefits under this
Agreement or delegate any of his duties or obligations hereunder, except with
the prior written consent of the Corporation.
IN WITNESS WHEREOF this Agreement has been executed by the parties
hereto.
SIGNED, SEALED AND DELIVERED )
in the presence of: )
)
/s/ G. Mary Ruby ) /s/ John M. Davison
) ---------------------------------
JOHN M. DAVISON
IMAX SYSTEMS CORPORATION
By /s/ Fred Klinkhammer
-------------------------------
Fred Klinkhammer
<PAGE>
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<TABLE>
<S> <C>
HEAD OFFICE TECHNOLOGY CENTRE
38 Isabella St., Toronto, ONTARIO, Canada M4Y 1N1 2525 Speakman Drive, Sheridan Park
Telephone: (416) 960-8509 Mississauga, Ontario, Canada 15K 1B1
Fax: (416) 960-8596 Telephone: (416) 855-1379 Fax: (416) 855-2606
</TABLE>
IMAX CORPORATION
Mr. John Davison Toronto, Ontario
64 Hanna Road August 31, 1992
Toronto, Ontario
M4G 3N1
Dear John:
As you are aware, the Board of Directors confirmed your appointment as Vice
President, Finance, of Imax Corporation some time ago.
Effective January 1, 1992, your salary was increased to $140,000 per annum. In
addition, you are allowed to lease a company vehicle in the amount of $750 per
month, plus taxes and insurance. The company will pay all operating and
maintenance costs, based on expense account submissions.
I also confirm that the final payment date referred to in Paragraph 4.3 of your
Employment Agreement will be changed to "12 months following the termination
date".
In order to confirm the above, please sign below to indicate your acceptance and
the ongoing validity of your Employment Agreement.
Yours truly,
/s/ Robert Kerr
Robert Kerr
President & CEO
Accepted by:
/s/ John Davison September 2, 1992
- ----------------------------------- ----------------------
John Davison Date
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement dated and effective as of July 15, 1997 (the
"Agreement"), is made between
70 MM INC.,
a corporation incorporated
under the laws of the State
of Delaware
(hereinafter referred to as "70MM")
OF THE FIRST PART
and
DAVID BEDFORD KEIGHLEY
of the City of Markham in the
Province of Ontario
(hereinafter referred to as the "Executive")
OF THE SECOND PART
and
IMAX CORPORATION,
a corporation incorporated
under the laws of Canada
(hereinafter referred to as the "Imax Corporation")
(Imax Corporation, together with all its subsidiaries and affiliates are
hereinafter referred to as "Imax")
OF THE THIRD PART
WHEREAS, Imax Corporation and 70MM wish to enter into this Agreement to engage
the Executive to provide services to the 70MM, and the Executive wishes to be so
engaged, pursuant to the terms and conditions hereinafter set forth;
AND WHEREAS 70MM is an indirect wholly-owned subsidiary of Imax Corporation;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter
set forth, the parties hereto agree as follows:
<PAGE>
-2-
1. EMPLOYMENT AND DUTIES
---------------------
1.1. Employment. 70MM hereby employs the Executive, and the Executive hereby
-----------
agrees to serve, as President of 70MM and Senior Vice President of Imax
Corporation and the Executive hereby accepts the foregoing employment, all on
the terms and conditions contained in this Agreement.
The Executive agrees to serve 70MM faithfully and to the best of his ability
under the direction of the "Senior Operating Officer" of Imax Corporation. The
Executive shall report to the "Senior Operating Officer" of Imax Corporation.
Senior Operating Officer shall mean Chief Operating Officer, Chief Executive
Officer, Vice Chairman or Chairman.
1.2. Exclusive Services. Except as may otherwise be approved in advance by
-------------------
the President and/or the Senior Operating Officer of Imax Corporation, the
Executive shall devote his full working time throughout the Employment Term (as
defined in Section 1.3) to the services required of him hereunder. The
Executive shall render his services exclusively to 70MM during the Employment
Term, and shall use his best efforts, judgment and energy to improve and advance
the business and interests of Imax in a manner consistent with the duties of his
position.
1.3. Term of Employment. The Executive's employment under this Agreement
-------------------
shall commence on the date hereof (the "Commencement Date") and shall terminate
on the earlier of (i) the fifth anniversary of the Commencement Date, or (ii)
termination of the Executive's employment pursuant to this Agreement. The
period commencing as of the Commencement Date and ending on the fifth
anniversary of the Commencement Date or such later date to which the term of the
Executive's employment under this Agreement shall have been extended is
hereinafter referred to as the "Employment Term". Executive agrees to notify
Imax Corporation of his desire to renew this Agreement, on terms and conditions
to be negotiated, on or before December 31, 2001. Imax Corporation agrees to
advise Executive of its intention to renew this Agreement on or before December
31, 2001.
1.4. Place of Employment. During the Employment Term the Executive will
--------------------
principally work at 70MM's offices in Los Angeles and from time to time, as
requested or as required by circumstance, at Imax Corporation's main offices in
Mississauga and New York. It is anticipated that the Executive will spend some
portion of his time in Imax Corporation's Mississauga area offices, but in no
event will the Executive spend more than 180 days in Canada in any calendar year
during the Employment Term. The Executive shall spend the balance of his
working time in such location or locations as are necessary and appropriate for
the performance of the duties of the Executive, subject to the reasonable
direction of the Senior Operating Officer.
1.5. Reimbursement of Expenses. 70MM shall reimburse the Executive for
--------------------------
reasonable travel and other business expenses incurred by him in the fulfilment
of his duties hereunder in
<PAGE>
-3-
accordance with 70MM practices consistently applied. Without limitation, 70MM
shall pay, or reimburse the Executive for, reasonable accommodation costs for
the Executive in Toronto.
2. COMPENSATION
------------
2.1. Base Salary. During the Employment Term, the Executive shall be paid a
------------
base salary ("Base Salary") of US $ 212,405 in the first year of the Employment
Term, US $ 223,025 in the second year of the Employment Term, US $ 234,176 in
the third year of the Employment Term, US $ 245,885 in the fourth year of
the Employment Term and US $ 258,179 in the fifth year of the Employment Term,
payable no less frequently than monthly in accordance with 70MM's payroll
practices. In respect of any year in which the Executive is employed pursuant to
this Agreement less than the entirety of such year, the annual base salary of
the Executive for such part year as he is employed hereunder shall be reduced
proportionately based on the number of days he was actually employed hereunder.
2.2. Bonus. In addition to the Base Salary, for each year during the
------
Employment Term (excluding fiscal 2002), the Executive shall be entitled to be
paid and 70MM agrees to pay to the Executive a bonus of one-third of the
Executive's base salary for such year (pro-rated as necessary to reflect any
partial year worked) upon the attainment of the pre-tax profit threshold
established as detailed in paragraph 2.3 below. The Executive will be entitled
to be paid and 70MM agrees to pay to the Executive a further bonus for each year
(or portion thereof) during which the Executive has performed services
hereunder in an amount equal to 10% of the difference calculated by subtracting
the pre tax profit threshold established in Section 2.3 below from 70MM's profit
before taxes as confirmed by Imax's auditors for the financial year being
considered. This bonus will also be pro-rated as necessary to reflect a partial
year worked. Bonuses payable pursuant to these bonuses shall be calculated and
paid not later than April 30 of the following year.
2.3 Pre Tax Profit Threshold
------------------------
Pre tax profit threshold for purposes of determining bonuses to be paid pursuant
to 2.2 above shall be as follows:
Pre tax Profit Threshold Applicable to Bonus
for Financial Year Ending Payments Due
------------------------- ------------
December 31, 1997 US$ 229,629 April 30, 1998
December 31, 1998 US$ 241,110 April 30, 1999
December 31, 1999 US$ 253,166 April 30, 2000
December 31, 2000 US$ 265,824 April 30, 2001
December 31, 2001 US$ 279,115 April 30, 2002
<PAGE>
-4-
3. EMPLOYEE BENEFITS
-----------------
3.1. General. The Executive shall, during the Employment Term, receive
--------
employee benefits including vacation time, medical benefits, disability and life
insurance, all at least consistent with those established by Imax Corporation
for its other key employees at a level commensurate with that of the Executive.
Without limitation, however, the Executive shall be entitled to the following
benefits:
(i) no less than five (5) weeks' paid vacation in the first year of
the Employment Term and in accordance with Imax Corporation's
policy for senior executives thereafter but in any event no less
than 5 weeks in any year of the Employment Term;
(ii) business class air travel within North America and
internationally and the same class of travel enjoyed by
executives more senior than the Executive, when travelling with
these executives, subject to availability;
(iii) such audio/visual, computer, fax, cellular telephone, paging
services and other like equipment as may be necessary in
connection with the performance of the Executive's
responsibilities shall be made available to the Executive
including, without limitation, a personal computer and necessary
link-up equipment;
(iv) reimbursement for the expenses of obtaining or maintaining the
Executive's membership in the Society of Motion Picture and
Television Engineers and the expenses of any memberships which
in the reasonable opinion of the Executive are essential or
necessary to enable him to perform his duties hereunder; and
(iv) standard Imax benefits for U.S. resident employees.
3.2. Automobile. In addition to the Base Salary, 70MM shall pay the
-----------
Executive US $ 700 each month during the Employment Term as an allowance towards
the cost to the Executive of an automobile for business and personal use
(hereinafter referred to as the "Automobile Allowance"). In addition, the
Executive will be reimbursed in respect of all reasonable out-of-pocket
operating costs incurred in connection with such automobile.
<PAGE>
-5-
4. TERMINATION OF EMPLOYMENT
-------------------------
Definitions. As used in this Article 4, the following terms
------------
have the following meanings:
(a) "Termination Payment" means each of the following amounts to the
extent that such amounts are due to be paid to and including the date upon which
the Executive's employment is terminated (i) Base Salary, (ii) Automobile
Allowance, (iii) unreimbursed business expenses, (iv) any amounts to be paid
pursuant to the terms of any benefit plans of 70MM in which the Executive
participates or pursuant to any policies of 70MM applicable to the Executive,
and (vi) any outstanding vacation pay calculated up to and including such date.
(b) "Without Cause" means termination of the Executive's employment
by 70MM other than for Cause (as defined in Section 4.2), death or disability
(as set forth in Article 5).
4.1. Termination without Cause.
--------------------------
4.1.1. General. Subject to the provisions of Sections 4.1.2, 4.1.3 and
--------
Article 6, if, prior to the expiration of the Employment Term, the Executive's
employment is terminated by 70MM Without Cause, 70MM shall pay the Termination
Payment then due to be paid within 30 days of the date of termination and shall
continue to pay the Executive the Base Salary, and the Automobile Allowance for
the duration of the Employment Term then remaining to a maximum of three (3)
years, (such period being referred to hereinafter as the "Severance Period")
either at such intervals as the same would have been paid had the Executive
remained in the active service of 70MM, or, at the option of 70MM, by immediate
payment to the Executive of the remaining Base Salary and Automobile Allowance
which would be payable during the Severance Period. Upon such termination, the
Executive shall also be entitled to continue to receive his employment benefits
at 70MM's expense (to the extent paid for by 70MM as at the date of
termination), other than those set forth in clauses 3.1 (ii) and (iii).
The Executive agrees that 70MM may deduct from any payment of Base Salary to be
made during the Severance Period the benefit plan contributions which are to be
made by the Executive during the Severance Period in accordance with the terms
of all benefit plans for the minimum period prescribed by law. The Executive
shall have no further right to receive any other compensation or benefits after
such termination of employment except as are necessary under the terms of the
employee benefit plans or programs of 70MM or as required by applicable law.
Payment of Base Salary and the Automobile Allowance and the continuation of the
aforementioned employee benefits during the Severance Period as outlined above
shall be deemed to include all termination and severance pay to which the
Executive is entitled pursuant to applicable statute law and common law. The
date of termination of employment Without Cause shall be the date specified in a
written notice of termination to the Executive.
<PAGE>
-6-
4.1.2. Fair and Reasonable The parties confirm that notice and pay in lieu
-------------------
of notice provisions contained in Section 4.1.1 are fair and reasonable and the
parties agree that upon any termination of this Agreement Without Cause, the
Executive shall have no action, cause of action, claim or demand against 70MM or
Imax or any other person as a consequence of such termination other than to
enforce Section 4.1.1.
4.1.3. Conditions Applicable to the Severance Period. If, during the
----------------------------------------------
Severance Period, the Executive breaches his obligations under Article 7 of this
Agreement, 70MM may, upon written notice to the Executive, terminate the
Severance Period and cease to make any further payments described in Section
4.1.1.
4.2. Termination for Cause; Resignation. At any time prior to the
-----------------------------------
expiration of the Employment Term the Executive's employment may be terminated
by 70MM immediately upon notice for Cause. If, prior to the expiration of the
Employment Term, the Executive's employment is terminated by 70MM for Cause, or
the Executive resigns from his employment hereunder, other than circumstances
constituting constructive dismissal, the Executive shall only be paid, within 15
days of the date of such termination or resignation, the Termination Payment,
then due to be paid. The Executive shall have no further right to receive any
other compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the employee
benefit plans or programs of 70MM. The date of termination for Cause shall be
the date specified in a written notice of termination to the Executive. The
date of resignation shall be (i) the date specified in the written notice of
resignation from the Executive to 70MM, or if no date is specified therein, 10
days (not including a Saturday, Sunday or statutory holiday in Ontario, Canada)
after receipt by 70MM of such written notice or (ii) if no such notice is
delivered to 70MM, the date determined by the Senior Operating Officer of Imax
Corporation in good faith.
4.3. Cause. Termination for "Cause" shall mean termination of the
------
Executive's employment because of:
(i) the cessation of the Executive's ability to work legally in
Canada or the United States other than for reasons within the
Executive's reasonable control;
(ii) any act or omission that constitutes a material breach by the
Executive of any of his obligations under this Agreement;
(iii) the continued failure or refusal of the Executive to perform the
duties reasonably required of him as President of 70MM;
(iv) any material violation by the Executive of any Canadian or
United States Federal, provincial, state or local law or
regulation applicable to the business of 70MM or Imax, which
violation is injurious to the financial condition or business
reputation of 70MM or Imax, or the Executive's conviction of a
felony
<PAGE>
-7-
or commission of an indictable offense for which he is
not pardoned, or any perpetration by the Executive of a common
law fraud; or
(v) any other action by the Executive which is materially injurious
to the financial condition or business reputation of, or is
otherwise materially injurious to, 70MM or Imax, or which
results in a violation by 70MM or Imax of any Canadian or United
States Federal, provincial, state or local law or regulation
applicable to the business of 70MM or Imax, which violation is
injurious to the financial condition or business reputation of
70MM or Imax.
5. DEATH OR DISABILITY
-------------------
In the event of termination of employment by reason of death or
Permanent Disability (as hereinafter defined), the Executive (or his estate, as
applicable) shall be paid the Termination Payment then due to be paid within 30
days of the date of such termination of employment. Both the employment of the
Executive and the entitlement of the Executive to be paid amounts under Section
4.1.1, in respect of the Severance Period, shall terminate immediately and
without notice upon his death or upon his Permanent Disability (as hereinafter
defined). Any benefits thereafter shall be determined in accordance with the
benefit plans maintained by 70MM, and 70MM shall have no further obligation
hereunder. For purposes of this Agreement, "Permanent Disability" means a
physical or mental disability or infirmity of the Executive that prevents the
normal performance of substantially all his duties under this Agreement as an
employee of 70MM, which disability or infirmity shall exist for any continuous
period of 180 days.
6. MITIGATION
----------
Subject to Section 7.2, the Executive shall be required to
mitigate the amount of any payment provided for in Section 4.1.1 (other than the
Termination Payment) by seeking other employment or remunerative activity
reasonably comparable to his duties hereunder, and any payment to be made by
70MM under Section 4.1.1 (other than the Termination Payment) will be reduced by
the amount of the Executive's remuneration from such other employment or other
activity during the Severance Period (whether paid or not to the Executive
during such period). The Executive shall be required as a condition of any
payment under Section 4.1.1 (other than the Termination Payment) promptly to
disclose to 70MM any such mitigation compensation.
<PAGE>
-8-
7. NON-SOLICITATION, CONFIDENTIALITY, NON-COMPETITION, GRANT OF RIGHTS
-------------------------------------------------------------------
7.1. Non-solicitation. For so long as the Executive is employed by 70MM
-----------------
and continuing for one year thereafter, notwithstanding whether the Executive's
employment is terminated with or without Cause or whether the Executive resigns,
the Executive shall not, without the prior written consent of 70MM and Imax
Corporation, directly or indirectly, for the Executive's own benefit or the
benefit of any other person, whether as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
a trustee, employee, associate, consultant, principal or agent of any person,
partnership, corporation or other business organization or entity other than
Imax: (x) solicit or endeavour to entice away from Imax, any person or entity
who is, or, during the then most recent 12-month period, was employed by, or had
served as an agent or key consultant of, Imax; or (y) solicit, endeavour to
entice away or gain the custom of, canvass or interfere in Imax's relationship
with any person or entity who is, or was within the then most recent 12-month
period, a customer or client (or reasonably anticipated to become a customer or
client) of Imax and with whom the Executive had dealings during his employment
with 70MM. The Executive confirms that all restrictions in this Section are
reasonable and valid and waives all defences to the strict enforcement thereof.
7.2 Non-Competition For so long as the Executive is employed by 70MM and
---------------
continuing for the period of time during which 70MM is obliged to pay any
amounts to the Executive under Section 4.1.1 hereof (up to three years) after
the date of the termination of the employment of the Executive with 70MM,
notwithstanding whether the Executive's employment is terminated with or without
Cause or whether the Executive resigns, the Executive shall not, without the
prior written consent of Imax, directly or indirectly anywhere within Canada,
the United States, Europe or Asia, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
a trustee, employee, associate, consultant, principal or agent of any person,
partnership, corporation or other business organization or entity other than
Imax, render any service to or in any way be affiliated with a competitor (or
any person or entity that is, at the time the Executive would otherwise commence
rendering services to or become, affiliated with such person or entity,
reasonably anticipated to become a competitor) of Imax (a "Competitor"), which
is principally engaged or reasonably anticipated to become principally engaged
in designing or supplying large screen theatres, distributing projection and
sound systems for large screen theatres or designing or supplying motion
simulation theatres or producing or distributing films for motion simulation
theatres or, where such Competitor is not principally engaged in these
activities but carries on these activities as part of its business then the
Executive shall not directly or indirectly provide services to such Competitor
in connection with these activities. Subsequent to the period referenced above,
the Executive shall be free to create and work within a "post production"
business (whether or not incorporated), provided that, during the one year
period following the period referenced above, no such "post-production" business
shall be financed by, directly or indirectly, nor may the
<PAGE>
-9-
Executive be directly or indirectly employed by, a direct competitor of Imax
(including, without limiting the generality of the term "direct competitor",
Iwerks Entertainment, Inc. or Showscan Entertainment Inc. or their successors
and affiliates) in the large format film business. The Executive confirms that
all restrictions in this Section are reasonable and valid and waives all
defences to the strict enforcement thereof. "Post production" business is
defined to include post production services related to large format motion
pictures, including negative cutting, laboratory supervision, release print
assembly and preparation, print quality assurance, print coating and
rejuvenation, film storage and inventory control, supervision of optical
effects, film production consultation, 35mm daily printdowns, color timing
including V.I.S.T. timing, video mastering supervision and tape duplication and
supply of ancillary products. Nothing in this provision restricts the Executive
during the one year period referred to above from performing services for a
direct competitor of Imax as a customer of a post production business.
7.3 Confidentiality. The Executive covenants and agrees with Imax that he
----------------
will not at any time during employment hereunder or thereafter, except in
performance of his obligations to 70MM hereunder or with the prior written
consent of the President and/or Senior Operating Officer of Imax Corporation,
directly or indirectly, disclose or use any secret or confidential information
that he may learn or has learned by reason of his association with Imax. The
term "confidential information" includes information not previously disclosed to
the public or to the trade by Imax's management, or otherwise in the public
domain, with respect to Imax's products, facilities, applications and methods,
trade secrets and other intellectual property, systems, procedures, manuals,
confidential reports, product price lists, customer lists, technical
information, financial information, business plans, prospects or opportunities,
but shall exclude any information which (i) is or becomes available to the
public or is generally known in the industry or industries in which Imax
operates other than as a result of disclosure by the Executive in violation of
his agreements under this Section or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law. The Executive confirms that all restrictions in this
Section are reasonable and valid and waives all defences to the strict
enforcement thereof.
7.4 Exclusive Property. The Executive confirms that all confidential
-------------------
information is and shall remain the exclusive property of Imax. All business
records, papers and documents regardless of the form of their records kept or
made by Executive relating to the business of Imax shall be and remain the
property of Imax, and shall be promptly returned by the Executive to Imax upon
any termination of employment.
7.5 Injunctive Relief. Without intending to limit the remedies available to
------------------
Imax, the Executive acknowledges that a material breach of any of the covenants
contained in Article 7 will result in material and irreparable injury to Imax
for which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat thereof, Imax shall be entitled to seek a temporary
restraining order and/or a preliminary, interim or permanent injunction
restraining the Executive from
<PAGE>
-10-
engaging in activities prohibited by Article 7 or such other relief as may be
required specifically to enforce any of the covenants in Article 7. The
Executive waives any defences to the strict enforcement by Imax of the covenants
contained in Article 7. If for any reason it is held that the restrictions under
Article 7 are not reasonable or that consideration therefor is inadequate, such
restrictions shall be interpreted or modified to include as much of the duration
and scope identified in Article 7 as will render such restrictions valid and
enforceable.
7.6 Representation. The Executive represents and warrants that he is not
--------------
subject to any non-competition covenant or any other agreement with any party
which would in any manner restrict or limit his ability to render the services
required of him hereunder.
7.7. Grant of Rights. The Executive hereby: (a) grants to Imax Corporation
---------------
all copyrights, patent rights and other rights in all work furnished or created
by the Executive during the Employment Term; (b) agrees to sign all documents
which may be required to confirm Imax Corporation's absolute ownership of such
work; (c) waives the moral rights associated with such work, within the meaning
of the Canadian Copyright Act; and (d) grants the Corporation the rights to and
to license others to use of the name, likeness, biography and other
identifications of the Executive in connection with any and all uses and
promotions of such work and derivatives thereof. Without limiting the
generality of the foregoing, all rights of whatsoever nature and kind (now or
hereafter known) in any projects developed or contributed to by the Executive
pursuant to this Agreement shall be, from the inception of the creation thereof,
the exclusive property of the Corporation, and for the purposes of the United
States Copyright Act same shall be deemed to constitute "works-made-for-hire";
provided that in the event that for whatever reason the Executive retains any
rights in any projects, the Executive hereby assigns same exclusively to Imax
Corporation and free, clear and unencumbered.
8. MISCELLANEOUS
-------------
8.1. Notices. All notices or communications hereunder shall be in writing,
--------
addressed as follows:
To 70MM: c/o Imax Corporation
2525 Speakman Drive
Mississauga, Ontario
L5K 1B1
Telecopier No: 905-403-6468
<PAGE>
-11-
To Imax Corporation: Imax Corporation
2525 Speakman Drive
Mississauga, Ontario
L5K 1B1
Telecopier No.: (905) 403-6468
Attention: General Counsel
To the Executive: David Keighley
7 McCarty Crescent
Markham, Ontario
L3P 4R4
All such notices shall be conclusively deemed to be received and shall be
effective, (i) if sent by hand delivery, upon receipt or (ii) if sent by
registered or certified mail, on the fifth day after the day on which such
notice is mailed.
8.2. Severability. Each provision of this Agreement shall be interpreted
-------------
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement. The parties agree that Section 7
shall survive the termination of this Agreement.
8.3. Assignment. This Agreement shall be binding upon and inure to the
-----------
benefit of the heirs and representatives of the Executive and the assigns and
successors of 70MM and Imax Corporation, if any are permitted by law and
provided that 70MM and Imax Corporation and its assignee shall each remain
liable to the Executive in the event of any assignment, but neither this
Agreement nor any rights hereunder shall be assignable or otherwise subject to
hypothecation by the Executive.
8.4. Entire Agreement: Amendment. In addition to the letter between the
----------------------------
parties dated May 27, 1997, this Agreement represents the entire agreement of
the parties and shall supersede any and all previous contracts, arrangements or
understandings between 70 MM and Imax Corporation and the Executive. This
Agreement may only be amended at any time by mutual written agreement of the
parties hereto.
8.5. Withholding. The payment of any amount pursuant to this Agreement
------------
shall be subject to any applicable withholding and payroll taxes, and such other
deductions as may be required under applicable law or 70MM's employee benefit
plans, if any.
<PAGE>
-12-
8.6. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, 70MM, Imax Corporation and the Executive have duly
executed and delivered this Agreement as of the day and year first above
written.
IMAX CORPORATION:
By: /s/ John M. Davison
----------------------------------
Name: John M. Davison
Title: Executive Vice President,
Operations and CFO
By: /s/ G. Mary Ruby
----------------------------------
Name: G. Mary Ruby
Title: Vice President, Legal
Affairs and Corporate
Secretary
70 MM INC.
By: /s/ G. Mary Ruby
----------------------------------
Name: G. Mary Ruby
Title: Secretary
SIGNED, SEALED AND DELIVERED EXECUTIVE:
in the presence of:
/s/ Beverly Harrison /s/ David B. Keighley
- --------------------------- ---------------------------------------
Witness David Bedford Keighley
<PAGE>
EXHIBIT 21
IMAX CORPORATION
- --------------------------------------------------------------------------------
Significant and other major subsidiary companies of the Registrant at December
31, 1997 were:
Name of Subsidiary Jurisdiction of Percentage held
- ------------------ --------------- ---------------
Organization by Registrant
------------ -------------
David Keighley Productions 70MM Inc. Delaware 100%
Sonics Associates, Inc. Alabama 51%
Oxmoor Corporation Alabama 49%
Ridefilm Corporation Delaware 100%
1236627 Ontario Inc. Ontario 100%
Imax Japan Inc. Japan 100%
Imax Entertainment Pte.Ltd. Singapore 100%
Imax (Netherlands) B.V. Netherlands 100%
Imax U.S.A. Inc. Delaware 100%
<PAGE>
March 27, 1998
Consent of Independent Accountants
We consent to the use of our report dated February 10, 1998 (except for Note 19
which is at March 5, 1998), on our audits of the consolidated financial
statements of Imax Corporation as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995, which report is included in its
Annual Report on Form 10-K.
/s/Coopers & Lybrand
Chartered Accountants
Toronto, Ontario
<PAGE>
RESOLUTIONS OF THE BOARD OF DIRECTORS
OF
IMAX CORPORATION
The undersigned, being all of the directors of Imax Corporation (the
"Corporation"), hereby sign the following resolution:
RESOLVED THAT:
I. APPROVAL OF FILING OF THE ANNUAL REPORT ON FORM 10-K
(1) The 1997 Annual Report of the Corporation on Form 10-K in substantially the
form of the draft Form 10-K circulated to the Board of Directors of the
Corporation, together with the French language version thereof to be translated
by Quebec counsel to the Corporation, together with the documents incorporated
therein by reference as set out in the Form 10-K, (collectively, the "10-K"),
are hereby approved for filing with the Securities and Exchange Commission of
the United States of America, (the "SEC") and such other regulatory authorities
as may be required, subject to such amendments, variations, additions, deletions
and changes as may be authorized by a Co-Chief Executive Officer.
(2) Each of the Co-Chief Executive Officers, the Executive Vice President,
Operations, the Vice President and Corporate Controller and the directors of the
Corporation are authorized and directed to execute, either personally or by
power of attorney, and to file the 10-K, as finalized and approved by either of
the Co-Chief Executive Officers of the Corporation, with the SEC and with such
other regulatory authorities as may be required at such time as they deem
appropriate.
(3) The officers and directors of the Corporation referred to in paragraph (2)
are hereby authorized and directed to execute and file the French language
versions of the 10-K, subject to receipt of favourable opinions of counsel as to
the adequacy of the translation of such French language version of the 10-K.
(4) Each of the directors hereby constitutes and appoints John M. Davison and
Peter J. Chilibeck and each of them severally, as his true and lawful attorney
or attorneys with power of substitution and re-substitution to sign in his name,
place and stead in any and all such capacities the 10-K, including the French
language version thereof, and any and all amendments thereto and documents in
connection therewith, and to file the same with the SEC and such other
regulatory authorities as may be required, each of said attorneys to have power
to act with or without the other, and to have full power and authority to do and
perform, in the name and on behalf of each of the directors of the Corporation,
every act whatsoever which such attorneys, or either of them, may deem necessary
or desirable to be done in connection therewith as fully and to all intents and
purposes as such director of the Corporation might or could do in person.
<PAGE>
-2-
(5) The proper officers of the Corporation are hereby authorized and directed
to take all necessary and advisable steps to implement the foregoing.
Dated this 27th day of March, 1998.
/s/ Bradley J. Wechsler /s/ Richard L. Gelfond
- ------------------------------ ------------------------------
Bradley J. Wechler Richard L. Gelfond
/s/ John M. Davison /s/ I. Graeme Ferguson
- ------------------------------ ------------------------------
John M. Davison I. Graeme Ferguson
/s/ Michael Fuchs /s/ Garth M. Girvan
- ------------------------------ ------------------------------
Michael Fuchs Garth M. Girvan
/s/ Murray B. Koffler /s/ Philip C. Moore
- ----------------------------- ------------------------------
Murray B. Koffler Philip C. Moore
/s/ Miles S. Nadal /s/ Marc A. Utay
- ----------------------------- ------------------------------
Miles S. Nadal Marc A. Utay
