IMAX

IMAX Corporation 10-Q Summary: Period Ended June 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, and the six-month period ended on that date. IMAX Corporation designs, manufactures, and leases projector systems for giant screen theaters, produces large-format films, and operates theaters globally. As of June 30, 2003, over 235 IMAX theaters were operating in more than 30 countries. The company is incorporated in Canada and listed on the TSX and NASDAQ.

Key Financial Metrics

Note: Convertible Subordinated Notes were fully repaid in April 2003. Senior Notes outstanding were reduced to $175.0 million following a debt-for-equity exchange in June 2003.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 10.5% in Q2 2003 compared to Q2 2002, and 2.0% for the six-month period. This was primarily driven by a 43.5% drop in film revenue due to the lack of a major release comparable to "Space Station" in the prior year.
• Systems Growth: IMAX systems revenue increased 6.9% in Q2 and 8.2% for the six months, supported by the installation of 6 systems in Q2 and 14 systems in the first half of 2003.
• Margin Compression: Gross margin percentage declined from 48.1% to 40.3% in Q2, largely attributed to the absence of high-margin film revenue from the prior year's blockbuster release.
• Expense Management: Selling, general, and administrative (SG&A) expenses decreased significantly (15.3% in Q2) due to reduced legal fees following the resolution of several litigation matters. However, Research and Development (R&D) expenses nearly doubled in Q2 to $1.2 million, focused on the new IMAX MPX system.
• Debt Reduction: The company retired $25.0 million of Senior Notes in June 2003 via a share exchange and fully repaid $9.1 million of Subordinated Notes in April 2003.

Guidance, Outlook, and Risks

Outlook and Commentary: Management expects the effective annual tax rate to be approximately 10% due to tax loss carrybacks and valuation allowance releases. The company is investing in R&D for the IMAX MPX system to lower entry costs for multiplex clients. Management believes existing cash and operating cash flows will be sufficient to meet needs for the next several years.

Risks and Contingencies:

• Litigation: Active proceedings include a counterclaim against Muvico Entertainment regarding lease rescission and a claim against United Cinemas International for $25.0 million. A dispute with Big Screen in Germany regarding antitrust rules is ongoing. Management believes these will not materially impact financial position.
• Guarantees: The company has provided guarantees up to $5.2 million related to debt and lease obligations of theaters in which it holds minority equity interests.
• Market Risk: Significant exposure to foreign currency fluctuations (CAD, JPY, EUR) as revenues are largely USD-denominated while costs are mixed.
• Valuation Allowance: A $46.1 million valuation allowance exists against $49.9 million in gross deferred tax assets, contingent on future earnings projections.

Investor Verification Checklist

• Debt-for-Equity Impact: Verify the dilution effect of the 3.8 million shares issued in June/July 2003 to retire $30 million of Senior Notes.
• Film Revenue Volatility: Assess the pipeline of upcoming film releases to determine if the 43.5% revenue drop in Q2 is a temporary anomaly or a structural shift.
• Cash Burn Rate: Review the $6.2 million cash outflow from operations in the first half of 2003 against the $21.4 million cash balance to evaluate runway without new financing.
• MPX System Viability: Monitor the commercial adoption of the new IMAX MPX system, which is driving increased R&D spend.
• Legal Exposure: Track the status of the Muvico and United Cinemas International lawsuits, specifically the potential $25 million claim.