S-1/A 1 a2199426zs-1a.htm S-1/A

Use these links to rapidly review the document
Table of contents
Index to financial statements

Table of Contents

As filed with the Securities and Exchange Commission on July 15, 2010

Registration No. 333-165988

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Amendment No. 7
to

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



RealD Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  3663, 3861, 6794
(Primary Standard Industrial
Classification Code Number)
  77-0620426
(I.R.S. Employer
Identification Number)

100 N. Crescent Drive, Suite 120
Beverly Hills, California 90210
(310) 385-4000

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Michael V. Lewis
Chief Executive Officer
RealD Inc.
100 N. Crescent Drive, Suite 120
Beverly Hills, California 90210
(310) 385-4000
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

C. Thomas Hopkins, Esq.
Linda Michaelson, Esq.
Louis P. A. Lehot, Esq.
Sheppard, Mullin, Richter & Hampton LLP
1901 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
(310) 228-3700

 

Andrew A. Skarupa
Chief Financial Officer and
Chief Operating Officer
Craig Gatarz, Esq.
Executive Vice President
and General Counsel
RealD Inc.
100 N. Crescent Drive, Suite 120
Beverly Hills, California 90210
(310) 385-4000

 

Steven B. Stokdyk, Esq.
Latham & Watkins LLP
355 South Grand Avenue
Los Angeles, California 90071
(213) 485-1234



Approximate date of commencement of proposed sale to public:    As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

Subject to completion, dated July 15, 2010

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we and the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

Prospectus

10,750,000 shares

GRAPHIC

Common stock

This is an initial public offering of common stock by RealD Inc. RealD is offering 6,000,000 shares, and the selling stockholders identified in this prospectus, including members of management, are offering an additional 4,750,000 shares. The estimated initial public offering price is between $13.00 and $15.00 per share.

Our common stock has been approved for listing on the New York Stock Exchange under the symbol "RLD."

   

    Per share     Total  
   

Initial public offering price

  $                 $                

Underwriting discounts and commissions

  $                 $                

Proceeds to the selling stockholders, before expenses

  $                 $                

Proceeds to us, before expenses

  $                 $                
   

The selling stockholders, including members of management, have granted the underwriters an option for a period of 30 days to purchase up to an additional 1,612,500 shares from them at the initial public offering price less underwriting discounts and commissions. We will not receive any proceeds from the sale of shares being sold by the selling stockholders.

Investing in our common stock involves a high degree of risk. See "Risk factors" beginning on page 12.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                           , 2010.

Joint Book-Running Managers
J.P. Morgan   Piper Jaffray

Co-Lead Manager
William Blair & Company

Co-Managers
Stifel Nicolaus Weisel   BMO Capital Markets

                           , 2010



Table of Contents


Table of contents

Prospectus summary

    1  

Risk factors

    12  

Forward-looking statements and other industry data

    29  

Use of proceeds

    31  

Dividend policy

    31  

Capitalization

    32  

Dilution

    34  

Selected consolidated financial and other data

    36  

Management's discussion and analysis of financial condition and results of operations

    38  

Business

    77  

Management

    94  

Compensation discussion and analysis

    103  

Certain relationships and related transactions

    135  

Principal and selling stockholders

    138  

Description of capital stock

    142  

Shares eligible for future sale

    148  

Material United States federal tax considerations

    150  

Underwriting

    156  

Legal matters

    165  

Experts

    165  

Where you can find additional information

    165  

Index to financial statements

    F-1  

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, prospects, financial condition and results of operations may have changed since that date.

RealD and the RealD logo are trademarks of RealD Inc. All other trademarks and service marks appearing in this prospectus are the property of their respective holders. All rights reserved.

i


Table of Contents


Prospectus summary

This summary highlights information contained elsewhere in this prospectus but does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk factors," and our consolidated financial statements and the accompanying notes, before making an investment decision. Except where the context otherwise requires or where otherwise indicated, the terms "we," "us," "our" and "RealD" refer to RealD Inc. and its consolidated subsidiaries.

Overview

We are a leading global licensor of stereoscopic (three-dimensional), or 3D, technologies. Our extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere. We license our RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. We also provide our RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content producers and distributors to enable the delivery and viewing of 3D content on high definition televisions, laptops and other displays. Our cutting-edge 3D technologies have been used for applications such as piloting the Mars Rover, heads-up displays for military jets and robotic medical procedures.

Competitive strengths

Our competitive strengths include the following:

Innovative technology

Our expertise in polarization control, photonics, optics, liquid crystal physics and digital image processing has allowed us to develop new and innovative technologies for the motion picture industry, the emerging 3D consumer electronics market and other markets. Working with The Walt Disney Company, or Disney, to release Chicken Little in 3D in 2005, we became the first company to commercially enable 3D theater screens using digital projection. Our patented RealD Cinema Systems deliver superior light output, providing for a high quality, brighter image and enabling display on larger theater screens than most competing technologies. Our licensees American Multi-Cinema, Inc., or AMC, Cinemark USA, Inc., or Cinemark, and Regal Cinemas, Inc., or Regal, deploy our RealD Cinema Systems on their own premium-branded large-screen formats. Our RealD Format, active and passive eyewear, and display and gaming technologies provide our consumer electronics licensees the ability to display high quality 3D content that can be delivered through the current cable, satellite and broadcast infrastructure. Our RealD Format is also highly scalable and can meet the future needs of our licensees as the infrastructure for 3D content production, distribution and viewing grows and evolves.

Global market leader in 3D-enabled theater screens

As of June 1, 2010, our RealD Cinema Systems were deployed on 5,966 theater screens in 51 countries, which we believe are more 3D screens than all of our competitors combined. Seventeen of the world's top 18 motion picture exhibitors, including all of the top 10, utilize RealD Cinema Systems in their theaters, including AMC, Cinemark, ODEON Cinemas Holdings Limited, or ODEON, Regal, and Warner Mycal Corporation, or Warner Mycal. Domestic (United

1


Table of Contents


States and Canada) box office on RealD-enabled screens represented over 75% of total domestic 3D box office in 2009. As of June 1, 2010, we were working with our motion picture exhibitor licensees to deploy our RealD Cinema Systems on up to approximately 5,100 additional screens under our existing agreements with them, and we are actively engaged with other motion picture exhibitors regarding potential new license agreements.

Pioneer in the emerging 3D consumer electronics market

Although the 3D consumer electronics market is new and developing, we have already entered into agreements to provide our RealD Format, active and passive eyewear, and display and gaming technologies to leading consumer electronics manufacturers, including Panasonic Corporation, or Panasonic, Samsung Electronics Company Limited, or Samsung, Sony Electronics, Inc., or Sony Electronics, Toshiba Corporation, or Toshiba, and Victor Company of Japan, Limited, or JVC.

Premium brand

We believe our brand is well-recognized among licensees and consumers as a result of motion picture studios and exhibitors co-branding with us and consumers having worn our branded RealD eyewear over 200 million times. We believe the prominence of our brand in the motion picture industry will enhance our marketing efforts in the 3D consumer electronics market.

Scalable licensing model

We license our 3D technologies under a highly scalable business model with recurring revenue from those licenses. As an example, our multi-year (typically five years or longer), generally exclusive agreements with motion picture exhibitors generate revenue on a per-admission, periodic fixed-fee or per-motion picture basis at limited incremental direct cost to us. Although we have a history of net losses, incurred a net loss of $39.7 million for the year ended March 26, 2010 and expect to experience a decrease in gross revenue for the three months ended June 25, 2010 compared to the three months ended March 26, 2010, we believe our licensing revenue will increase at a faster rate than our operating expenses.

Extensive industry relationships and strong technical expertise

Our experienced management team has extensive, long-term relationships with content producers and distributors, major motion picture studios and exhibitors, and consumer electronics manufacturers that help us drive the proliferation of 3D content, delivery and viewing in theaters, the home and elsewhere. Our research and development team is comprised of leaders in the invention, development and commercialization of innovative 3D technologies.

Strategy

Key elements of our strategy include:

Continue to innovate and develop new technologies

We will continue to develop proprietary 3D technologies to enhance the 3D viewing experience and create additional revenue opportunities. Our patented technologies enable 3D viewing in theaters, the home and elsewhere, including technologies that can allow 3D content to be viewed without eyewear. We will also selectively pursue technology acquisitions to expand and enhance our intellectual property portfolio in areas that complement our existing and new market opportunities and to supplement our internal research and development efforts.

2


Table of Contents

Increase our leading global market share in 3D-enabled theater screens

We will work with our existing motion picture exhibitor licensees to deploy additional RealD Cinema Systems. We also plan to enter into agreements with new motion picture exhibitor licensees to increase the number of deployed RealD Cinema Systems worldwide.

Expand our emerging 3D consumer electronics business

We will continue to work with consumer electronics manufacturers and content producers and distributors to enable a premium 3D viewing experience in the home and elsewhere using our 3D technologies.

Build upon the strength of our RealD brand

We will further leverage the strength of our brand in the motion picture industry to generate stronger licensee and consumer preference for the RealD brand in the 3D consumer electronics and other markets. We will continue to actively encourage motion picture studios and exhibitors to prominently feature our brand in their motion picture advertising and marketing, at theater locations, online and on consumer electronics products and packaging.

Market opportunity

Our 3D technologies can be utilized in many different markets, including entertainment, consumer electronics, education, aerospace, defense and healthcare. Our 3D technologies are primarily used in the motion picture, consumer electronics and professional markets.

The shift in the motion picture industry from analog to digital over the past decade has created an opportunity for new and transformative 3D technologies. As of December 25, 2009, there were approximately 16,000 theater screens using digital cinema projectors out of approximately 149,000 total theater screens worldwide, of which 4,286 were RealD-enabled (increasing to 5,966 RealD-enabled screens as of June 1, 2010). In 2009, motion picture exhibitors installed approximately 7,500 digital cinema projectors, an approximately 86% growth rate from 2008, and in 2008, motion picture exhibitors installed approximately 2,300 digital cinema projectors, an approximately 36% growth rate from 2007. Digital Cinema Implementation Partners, or DCIP, recently completed its financing that is providing funding for the digital conversion of up to approximately 14,000 additional domestic theater screens operated by our licensees AMC, Cinemark and Regal. We believe the increasing number of theater screens to be financed by DCIP provides us with a significant opportunity to deploy additional RealD Cinema Systems and further our penetration of the domestic market.

Since the release of Chicken Little in 2005 through the end of 2009, 27 3D motion pictures have been released. Based on the slate announcements by motion picture studios, we anticipate that 23 3D motion pictures will be released worldwide during 2010, including sequels to successful major motion picture franchises such as Harry Potter, Shrek and Toy Story, and 33 3D motion pictures will be released worldwide in 2011. As the number of RealD-enabled screens and 3D motion pictures released increases, we expect that our revenue will continue to grow.

We believe that the recent success of major 3D motion pictures, including Avatar,Alice in Wonderland,Shrek Forever After and Toy Story 3, is leading to the creation and distribution of new 3D content for the consumer electronics market. Although we have not yet generated material revenue in the consumer electronics market, the development of this market represents a significant opportunity for new revenue arising from improved 3D technologies,

3


Table of Contents


the release of 3D-enabled consumer electronics products and the increased availability of 3D content for the home and elsewhere. According to International Data Corporation, or IDC, 2009 worldwide shipments for plasma and LCD televisions were approximately 123 million, digital pay TV set-top boxes were 89 million, digital video recorders were 32 million, interactive gaming consoles were 93 million, laptop computers were 169 million, desktop computers were 127 million and mobile devices (capable of displaying robust visual content) were 174 million. We believe our 3D technologies can be used in future versions of these consumer electronics products.

Our history

RealD was founded by Michael V. Lewis and Joshua Greer in 2003 with the goal of bringing a premium 3D viewing experience to audiences everywhere. In 2005, we acquired Stereographics Corporation, or Stereographics, a company founded in 1980 and one of the largest providers of 3D technologies at the time of the acquisition. In 2007, we acquired ColorLink, Inc., or ColorLink, a polarization control, photonics and optics company with an extensive patent portfolio. The 3D technologies that we acquired were used in piloting the Mars Rover in 1997. In March 2005, we demonstrated our initial RealD Cinema System to motion picture exhibitors and studios. In November 2005, Disney released Chicken Little, including on approximately 100 RealD-enabled screens. In December 2009, 20th Century Fox, or Fox, released Avatar worldwide, including on approximately 4,200 RealD-enabled screens. In 2008, we entered the 3D consumer electronics market with a number of 3D technologies for the home and elsewhere and the first consumer electronics products utilizing our 3D technologies are now available to consumers.

Recent developments

Although our unaudited consolidated interim financial statements for the three months ended June 25, 2010 are not yet complete, for the three months ended June 25, 2010, we currently anticipate reporting gross revenue of between approximately $60 million and $65 million as compared to gross revenue of $76.7 million for the three months ended March 26, 2010. We believe our estimated gross revenue decreased as a result of the period-to-period decline in the 3D motion picture box office. The period-to-period variance is primarily attributable to the seasonal release patterns of 3D motion pictures and the performance of Avatar (the highest grossing motion picture of all time) during the three months ended March 26, 2010, which was not replicated during the three months ended June 25, 2010. We currently anticipate reporting an increase in our net revenue for the three months ended June 25, 2010, as compared to net revenue of $55.4 million (after adjustment to revenue of $21.3 million relating to motion picture exhibitor options) for the three months ended March 26, 2010. We believe our net revenue will increase primarily as a result of a significant decrease in our estimated adjustment to revenue relating to motion picture exhibitor options in the three months ended June 25, 2010, attributable to a decrease in the estimated stock price and an increase in screen installation targets. See "Management's discussion and analysis of financial condition and results of operations—Key components of our results of operations—Revenue—Motion picture exhibitor stock options."

For the three months ended June 25, 2010, although all expense items for the three months ended June 25, 2010 are not reasonably available at this time, we currently anticipate reporting positive net income, as compared to the net loss of $17.9 million reported for the three months ended March 26, 2010. We believe this anticipated improvement is primarily

4


Table of Contents


attributable to the anticipated increase in net revenue discussed above, as well as an estimated increase in other income, primarily attributable to the sale of digital projectors to motion picture exhibitors. Although all line items to reconcile Adjusted EBITDA to net income (loss) for the three months ended June 25, 2010 are not reasonably available at this time, we currently anticipate reporting positive Adjusted EBITDA for the three months ended June 25, 2010 in an amount less than the $11.2 million reported in the three months ended March 26, 2010. Adjusted EBITDA is a Non-U.S. GAAP financial measure. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see "Management's discussion and analysis of financial condition and results of operations—Non-U.S. GAAP discussion."

We have prepared the above estimate of our anticipated results in good faith based on our internal reporting for the three months ended June 25, 2010. We are currently performing our quarterly closing procedures for the three months ended June 25, 2010, and as such, these estimates represent the most current information available to management but are not yet final, are subject to further review and could change materially. As a result, the anticipated results are not statements of historical fact, and are forward-looking statements that are subject to known and unknown risks and uncertainties. See "Forward-looking statements and other industry data." Our financial statements for the three months ended June 25, 2010 are not expected to be filed with the SEC until after this offering is completed. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the estimated financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information, and assume no responsibility for such estimated financial information.

Corporate information

We were incorporated in California in July 2003 under the name "Real D" and reincorporated in Delaware in April 2010 as "RealD Inc." Our principal executive office and headquarters are located at 100 N. Crescent Drive, Suite 120, Beverly Hills, California 90210, and our telephone number is (310) 385-4000. Our website is located at www.reald.com. The information on, or accessible through, our website does not constitute part of, and is not incorporated into, this prospectus.

Forward stock split

On June 28, 2010, we effected a forward split of our common stock, which resulted in each share of our common stock splitting into one and one-half shares (or a 1-for-1.5 forward split) of our common stock. We will issue cash in lieu of fractional shares in connection with this forward split. Concurrently with and as a result of the forward split of our common stock, we increased the number of shares of common stock we are authorized to issue from 35,133,333 to 150,000,000 shares, and did not change the par value of the common stock. All references to common stock, options and warrants to purchase common stock, share and per share data have been retroactively restated in this prospectus to reflect the forward split of our common stock as if it had occurred at the beginning of the earliest period presented.

5


Table of Contents


The offering

Common stock offered by us   6,000,000 shares

Common stock offered by the selling stockholders

 

4,750,000 shares

Total

 

10,750,000 shares

Common stock outstanding immediately after this offering

 

47,590,021 shares

Over-allotment option

 

Certain of the selling stockholders have granted the underwriters a 30-day option to purchase up to 1,612,500 additional shares of our common stock.

Use of proceeds

 

We estimate the net proceeds to us from this offering will be approximately $71.9 million, after deducting estimated underwriting discounts and commissions (based on an underwriting discount of 6.5% but assuming no payment of a discretionary incentive fee of up to 0.5% of the initial public offering price) and estimated offering expenses payable by us, assuming the shares are offered at $14.00 per share, which is the midpoint of the estimated offering price range shown on the front cover of this prospectus. We intend to use the net proceeds to us from this offering:

 

•       to repay $25.1 million of indebtedness under our term loan and revolving credit facilities, which will become due and payable upon the completion of this offering; and

 

•       the remainder for general corporate purposes, including investments in technology.


 

 

We may also use a portion of the net proceeds to acquire complementary businesses and technologies.

 

 

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See "Use of proceeds."

Proposed symbol on the New York Stock Exchange

 

RLD

The number of shares of common stock to be outstanding immediately after this offering includes 24,690,954 shares of common stock outstanding on June 18, 2010 and also the following shares:

16,835,714 shares of common stock to be issued upon the automatic conversion of all outstanding shares of convertible preferred stock as of March 26, 2010; and

6


Table of Contents

the exercise by selling stockholders of options to purchase an aggregate of 63,353 shares of common stock at a weighted average exercise price of approximately $2.42 per share, for total proceeds to us of $153,223.

The number of shares of common stock outstanding immediately after this offering excludes:

1,089,000 shares of common stock issuable upon the exercise of warrants outstanding as of March 26, 2010 with a weighted average exercise price of approximately $0.83 per share;

5,450,516 shares of common stock issuable upon the exercise of options outstanding as of the closing of this offering with a weighted average exercise price of $3.77 per share;

3,668,340 shares of common stock issuable upon the exercise of motion picture exhibitor options outstanding as of March 26, 2010 with an exercise price of approximately $0.00667 per share;

an aggregate of 407,404 shares of common stock reserved for future issuance under our 2004 equity incentive plan as of March 26, 2010; and

an aggregate of 3,750,000 shares of common stock reserved for future issuance under our 2010 equity incentive plan as of June 18, 2010.

Unless otherwise stated, all information in this prospectus assumes:

the forward split of shares of our common stock we effected on June 28, 2010, which resulted in each share of our common stock splitting into one and one-half shares (or a 1-for-1.5 forward split) of our common stock, with cash issued in lieu of fractional shares;

the effectiveness upon the completion of this offering of our amended and restated certificate of incorporation and our amended and restated bylaws, as more fully described below under "Description of our capital stock;"

no exercise of the option granted to the underwriters to purchase additional shares;

an initial public offering price of $14.00 per share of common stock, which is the mid-point of the estimated offering price range set forth on the front cover of this prospectus; and

no exercise of outstanding options after March 26, 2010, except for exercises by certain members of management who are exercising options and selling the underlying option shares in this offering. See "Principal and selling stockholders".

7


Table of Contents


Summary consolidated financial and other data

The following tables present our summary consolidated financial and other data as of and for the periods indicated. You should read this information together with the more detailed information contained in "Selected consolidated financial and other data," "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The summary consolidated statement of operations data for the years ended March 31, 2008, March 27, 2009 and March 26, 2010, and the summary consolidated balance sheet data as of March 27, 2009 and March 26, 2010, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods.

   
 
  Year ended  
(dollars in thousands, except
share and per share data)

  March 31,
2008

  March 27,
2009

  March 26, 2010
 
   

Consolidated Statement of Operations Data:

                   

Gross revenue

  $ 23,378   $ 44,553   $ 189,080  
 

Motion picture exhibitor options

        (4,878 )   (39,234 )
       

Net revenue

  $ 23,378   $ 39,675   $ 149,846  

Cost of revenue

    13,500     27,107     140,603  
       

Gross margin

    9,878     12,568     9,243  

Operating expenses:

                   
 

Research and development

    11,166     8,915     11,021  
 

Selling and marketing

    7,311     11,009     16,811  
 

General and administrative

    8,006     7,940     15,638  
       
   

Total operating expenses

    26,483     27,864     43,470  
       

Operating loss

    (16,605 )   (15,296 )   (34,227 )

Interest expense

    (1,257 )   (949 )   (1,730 )

Other income (loss)

    (7 )   100     (1,112 )
       

Loss from continuing operations before income taxes

    (17,869 )   (16,145 )   (37,069 )

Income tax expense

    20     219     2,680  
       

Loss from continuing operations

    (17,889 )   (16,364 )   (39,749 )

Discontinued operations, net of tax

    (11,796 )        
       

Net loss

    (29,685 )   (16,364 )   (39,749 )

Net loss attributable to noncontrolling interests

    421     727     896  

Accretion of preferred stock

    (8,001 )   (9,826 )   (12,372 )
       

Net loss attributable to RealD Inc. common stockholders

  $ (37,265 ) $ (25,463 ) $ (51,225 )
       

Basic and diluted loss per share of common stock(1)

                   
 

Continued operations

  $ (1.07 ) $ (1.06 ) $ (2.09 )
 

Discontinued operations

  $ (0.50 ) $   $  
       

Basic and diluted loss per share of common stock(1)

  $ (1.57 ) $ (1.06 ) $ (2.09 )

Shares used in computing basic and diluted loss per share of common stock(1)

    23,713,455     24,026,728     24,500,173  

Pro forma basic and diluted loss per share of common stock (unaudited)(2)

              $ (0.94 )

Shares used in computing pro forma basic and diluted loss per share of common stock (unaudited)(2)

                41,335,887  
   

8


Table of Contents


   
 
  As of   As of  
(dollars in thousands)
  March 27,
2009

  March 26,
2010

 
   

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

  $ 15,704   $ 13,134  

Total assets

    96,548     162,146  

Total indebtedness (including short-term indebtedness)

    14,863     31,396  

Mandatorily redeemable convertible preferred stock

    50,459     62,831  

Total equity (deficit)

  $ (31,945 ) $ (41,886 )
   

 

   
 
  Year ended  
(dollars in thousands)
  March 27,
2009

  March 26,
2010

 
   

Consolidated Other Data:

             

Capital expenditures

  $ 12,072   $ 30,161  

Depreciation and amortization

    5,598     7,952  

Adjusted EBITDA(3)

    1,072     22,727  

Cash flows provided by (used in):

             
 

Operating activities

    10,134     15,135  
 

Investing activities

    (12,107 )   (29,636 )
 

Financing activities

  $ 8,229   $ 11,931  
   

 

   
 
  As of  
 
  March 27,
2009

  March 26,
2010

 
   
 
  (unaudited)
 

Number of RealD-enabled screens

             
 

Total domestic RealD-enabled screens

    1,703     3,385  
 

Total international RealD-enabled screens

    405     1,936  
   

Total RealD-enabled screens

   
2,108
   
5,321
 

Number of locations with RealD-enabled screens

             
 

Total domestic locations with RealD-enabled screens

    1,147     1,837  
 

Total international locations with RealD-enabled screens

    376     1,197  
   

Total locations with RealD-enabled screens

    1,523     3,034  
   
(1)
All basic and diluted loss per share of common stock and average shares outstanding information for all periods presented have been adjusted to reflect the one-for-one and one-half (1-for-1.5) forward split of our common stock effected by us on June 28, 2010. For more information regarding loss per share calculations, see Note 2, "Net loss per share of common stock," to our consolidated financial statements, which are included elsewhere in this prospectus.

(2)
Pro forma basic and diluted loss per share has been calculated assuming the automatic conversion of all outstanding shares of our convertible preferred stock into shares of common stock, as of the beginning of the period, with each share of convertible preferred stock converting into 1.50 shares of common stock. See Note 8, "Mandatorily redeemable convertible preferred stock and equity (deficit)," to our consolidated financial statements, which are included elsewhere in this prospectus.

(3)
We present Adjusted EBITDA as a supplemental measure of our performance. However, Adjusted EBITDA is not a recognized measurement under accounting principles generally accepted in the United States (U.S. GAAP). In this prospectus, we define Adjusted EBITDA as net loss, plus interest expense, net, income taxes and depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-U.S. GAAP adjustments to our results prepared in accordance with U.S. GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them

9


Table of Contents

    appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Set forth below is a reconciliation of Adjusted EBITDA to net loss:

   
 
  Year ended  
(in thousands)
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Net loss

  $ (29,685 ) $ (16,364 ) $ (39,749 )
       

Add (deduct):

                   
 

Interest expense

    1,257     949     1,730  
 

Income tax expense

    20     219     2,680  
 

Depreciation and amortization

    5,296     5,598     7,952  
 

Other (income) loss(1)

    7     (100 )   1,112  
 

Discontinued operations(2)

    11,796          
 

Share-based compensation expense(3)

    1,507     1,932     2,909  
 

Exhibitor option expense(4)

        4,878     39,234  
 

Impairment of assets and intangibles(5)

    4,261     2,037     426  
 

Sales and use tax(6)

    1,007     910     5,478  
 

Property tax(7)

    416     663     605  
 

Management fee(8)

    350     350     350  
       

Adjusted EBITDA

  $ (3,768 ) $ 1,072   $ 22,727  
   
(1)
Includes amortization of debt issue costs, unrealized foreign currency exchange gains and losses and gain on sale of digital projectors.

(2)
Represents loss from discontinued operations, net of tax, primarily due to a loss on the sale of our 51.0% interest in ColorLink Japan in November 2007.

(3)
Represents share-based compensation expense of nonstatutory and incentive stock options to employees, officers, directors and consultants.

(4)
Represents stock options granted to some of our motion picture exhibitor licensees. The amounts are recorded as contra revenue in the consolidated financial statements.

(5)
Represents impairment of long-lived assets, such as fixed assets, theatrical equipment and identifiable intangibles.

(6)
Represents taxes incurred by us for cinema license and product revenue.

(7)
Represents property taxes on RealD Cinema Systems and digital projectors.

(8)
Represents payment of management fees to the holder of our Series C mandatorily redeemable convertible preferred stockholder (included in general and administrative expense, which will terminate upon the completion of this offering).

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies; to evaluate potential acquisitions; in making compensation decisions; in communications with our board of directors concerning our financial performance; and because our credit agreement uses Adjusted EBITDA to measure our compliance with certain covenants. Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

10


Table of Contents

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;

Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. Our consolidated financial statements and the notes to those statements included elsewhere in this prospectus are prepared in accordance with U.S. GAAP. See also "Management's discussion and analysis of financial condition and results of operations—Non-U.S. GAAP discussion" and "—Quarterly results and seasonality."

11


Table of Contents


Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks, as well as the other information contained in this prospectus, before deciding whether to invest in our common stock. The risks described below are those which we believe are the material risks we face. Any of the risks described below could significantly and adversely affect our business, prospects, financial condition and results of operations. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. Additional risks and uncertainties not presently known to us or not believed by us to be material could also impact us.

Risks relating to our business

If motion pictures that can be viewed with RealD Cinema Systems are not made or are not commercially successful, our revenue could decline.

Almost all of our revenue is currently dependent upon both the number of 3D motion pictures released and the commercial success of those 3D motion pictures. We have not developed any of our own 3D content and rely on motion picture studios producing and releasing 3D motion pictures compatible with our RealD Cinema Systems. There is no guarantee an increasing number of 3D motion pictures will be released or that motion picture studios will continue to produce 3D motion pictures at all. Motion picture studios may refrain from producing and releasing 3D motion pictures for any number of reasons, including their lack of commercial success. The commercial success of a 3D motion picture depends on a number of factors that are outside of our control, including whether it achieves critical acclaim, timing of the release, marketing efforts and promotional support for the release. In the past, consumer interest in 3D motion pictures was episodic and motion picture studios tended to use 3D motion pictures as a gimmick rather than as an artistic tool to enhance the experience. If consumers' recent renewed interest in the 3D viewing experience fails to grow or it declines for any reason, box office performance may suffer and motion picture studios may reduce the number of 3D motion pictures they produce. Poor box office performance of 3D motion pictures, disruption or reduction in 3D motion picture production, changes in release schedules, a reduction in marketing efforts for 3D motion pictures by motion picture studios or a lack of consumer demand for 3D motion pictures could result in lower 3D motion picture attendance, which could substantially reduce our revenue.

If motion picture exhibitors do not continue to use our RealD Cinema Systems or experience financial difficulties, our growth and results of operations could be adversely affected.

Our primary licensees in the motion picture industry are motion picture exhibitors. Our license agreements with motion picture exhibitors do not obligate these licensees to deploy a specific number of our RealD Cinema Systems. We cannot predict whether any of our existing motion picture exhibitor licensees will continue to perform under their license agreements with us, whether they will renew their license agreements with us at the end of their term or whether we may now or in the future be in breach of those agreements. If motion picture exhibitors reduce or eliminate the number of 3D motion pictures that are exhibited in theaters, then motion picture studios may not produce and release 3D motion pictures and our revenue could be adversely affected.

12


Table of Contents

In addition, net license revenue from AMC, Cinemark and Regal together comprised approximately 13% of our net consolidated revenue in the year ended March 31, 2008, 16% in the year ended March 27, 2009 and 18% in the year ended March 26, 2010. Any inability or failure by AMC, Cinemark or Regal to pay us amounts due in a timely fashion or at all could substantially reduce our cash flow and could materially and adversely impact our financial condition and results of operations.

A deterioration in our relationships with the major motion picture studios could adversely affect our business.

The six major motion picture studios accounted for approximately 83% of domestic box office revenue and 9 of the top 10 grossing 3D motion pictures in 2009. License fees generated from motion pictures released by these studios represented nearly 100% of our motion picture exhibitor license revenue. Total revenue generated for motion pictures released by these motion picture studios represented nearly 100% of our total revenue in the year ended March 26, 2010. In addition, for our domestic operations and in certain international markets, these major motion picture studios pay us a per use fee for our RealD eyewear. To the extent that our relationship with any of these major motion picture studios deteriorates or any of these studios stop making motion pictures that can be viewed at RealD-enabled theater screens, refuse to co-brand with us or stop using our RealD eyewear, our costs could increase and our revenue could decline, which could adversely affect our business and results of operations.

If motion picture exhibitors do not continue converting analog theaters to digital or the pace of conversions slows, our future prospects could be limited and our business could be adversely affected.

Our RealD Cinema Systems only work in theaters equipped with digital cinema projection systems, which enable 3D motion pictures to be delivered, stored and projected electronically, and our systems are not compatible with analog motion picture projectors. Motion picture exhibitors have been converting projectors to digital cinema over the last several years, giving us the opportunity to deploy our RealD Cinema Systems. After motion picture exhibitors convert their projectors to digital cinema, they must install a silver screen and our RealD Cinema System. The conversion by motion picture exhibitors of their projectors and screens from analog to digital cinema requires significant expense. In 2009, motion picture exhibitors installed approximately 7,500 digital cinema projectors, an approximately 86% growth rate from 2008, and in 2008, motion picture exhibitors installed approximately 2,300 digital cinema projectors, an approximately 36% growth rate from 2007. Although DCIP recently completed its financing that is providing funding for the digital conversion of approximately 14,000 additional domestic theater screens operated by our licensees AMC, Cinemark and Regal, we cannot predict the pace or success of this conversion. As of December 31, 2009, approximately 18% of domestic theater screens had converted to digital and a much smaller percentage of international theater screens had been converted. If the market for digital cinema develops more slowly than expected, the motion picture exhibitors we have agreements with, including AMC, Cinemark and Regal, delay or abandon the conversion of their theaters, our ability to grow our revenue and our business could be adversely affected.

13


Table of Contents

If the deployment of our RealD Cinema Systems is delayed or not realized, our future prospects could be limited and our business could be adversely affected.

We have license agreements with motion picture exhibitors that give us the right, subject to certain exceptions, to deploy our RealD Cinema Systems if a location under contract is already equipped with our systems and they choose to install additional 3D digital projector systems. As of June 1, 2010, we were working with our motion picture exhibitor licensees to deploy our RealD Cinema Systems on up to approximately 5,100 additional screens under our existing agreements with them. However, our license agreements do not obligate our licensees to deploy a specific number of our RealD Cinema Systems. Numerous factors beyond our control could influence when and whether our RealD Cinema Systems will be deployed, including motion picture exhibitors' ability to fund capital expenditures, or their decision to delay or abandon the conversion of their theaters to digital projection or reduce the number of 3D motions pictures exhibited in their theaters. If motion picture exhibitors delay, postpone or decide not to deploy RealD Cinema Systems at the number of screens they have announced, or we are unable to deploy our RealD Cinema Systems in a timely manner, our future prospects could be limited and our business could be adversely affected.

We have a history of net losses and may continue to suffer losses in the future.

We have incurred net losses in each of our last five fiscal years, and incurred a net loss of approximately $39.7 million for the year ended March 26, 2010. If we cannot become profitable, our financial condition will deteriorate, and we may be unable to achieve our business objectives.

Any inability to protect our intellectual property rights could reduce the value of our 3D technologies and brand, which could adversely affect our financial condition, results of operations and business.

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available under the laws of every country in which we and our licensees operate, such as China. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time consuming. It may not be practicable or cost effective for us to fully protect our intellectual property rights in some countries or jurisdictions. If we are unable to successfully identify and stop unauthorized use of our intellectual property, we could lose potential revenue and experience increased operational and enforcement costs, which could adversely affect our financial condition, results of operations and business.

It is possible that some of our 3D technologies may not be protectable by patents. In addition, given the costs of obtaining patent protection, we may choose not to protect particular innovations that later turn out to be important. Even where we do have patent protection, the scope of such protection may be insufficient to prevent third parties from designing around our particular patent claims or otherwise avoiding infringement. Furthermore, there is always the possibility that an issued patent may later be found to be invalid or unenforceable, or a competitor may attempt to engineer around our issued patent. Additionally, patents only offer a limited term of protection. Moreover, the intellectual property we maintain as trade secrets could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from them.

14


Table of Contents

Our RealD Cinema Systems and other technologies are generally designed for use with third-party technologies and hardware, and if we are unable to maintain the ability of our RealD Cinema Systems and other technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.

Our RealD Cinema Systems and other technologies are generally designed for use with third-party technologies and hardware, such as Christie projectors, Doremi servers, Harkness Hall screens and Sony Electronics 4K SXRD® digital cinema projectors. Third-party technologies and hardware may be modified, re-engineered or removed altogether from the marketplace. In addition, third-party technologies used to interact with our RealD Cinema Systems, RealD Format and other 3D technologies can change without prior notice to us, which could result in increased costs or our inability to provide our 3D technologies to our licensees. If we are unable to maintain the ability of our RealD Cinema Systems, RealD Format and other 3D technologies to work with these third-party technologies and hardware, our business and operating results could be adversely affected.

We may in the future be subject to intellectual property rights claims that are costly to defend, could require us to pay damages and could limit our ability to use particular 3D technologies in the future.

We may be exposed to, or threatened with, future litigation by other parties alleging that our 3D technologies infringe their intellectual property rights. Any intellectual property claims, regardless of their merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. An adverse determination in any intellectual property claim could require us to pay damages and/or stop using our 3D technologies, trademarks, copyrighted works and other material found to be in violation of another party's rights and could prevent us from licensing our 3D technologies to others. In order to avoid these restrictions, we may have to seek a license. This license may not be available on reasonable terms, could require us to pay significant license fees and may significantly increase our operating expenses. A license also may not be available to us at all. As a result, we may be required to use and/or develop non-infringing alternatives, which could require significant effort and expense. If we cannot obtain a license or develop alternatives for any infringing aspects of our business, we may be forced to limit our 3D technologies and may be unable to compete effectively. In certain instances, we have contractually agreed to provide indemnification to licensees relating to our intellectual property. This may require us to defend or hold harmless motion picture exhibitors, consumer electronics manufacturers or other licensees. We have from time to time corresponded with one or more third parties regarding patent enforcement issues and in-bound and out-bound patent licensing opportunities. In addition, from time to time we may be engaged in disputes regarding the licensing of our intellectual property rights, including matters related to our license fee rates and other terms of our licensing arrangements. These types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief or in regulatory actions. Requests for monetary and injunctive remedies asserted in claims like these could be material and could have a significant impact on our business. Any disputes with our licensees, potential licensees or other third parties could adversely affect our business, results of operations and prospects.

15


Table of Contents

If we are unable to maintain our brand and reputation for providing high quality 3D technologies, our business and prospects could be materially harmed.

Our business and prospects depend, in part, on maintaining and strengthening our brand and reputation for providing high quality 3D technologies in the markets we serve. If problems with our 3D technologies cause motion picture exhibitors, consumer electronics manufacturers or other licensees to experience operational disruption or failure or delays in the delivery of their products and services to their customers, our brand and reputation could be diminished. Maintaining and strengthening our brand and reputation may be particularly challenging as we enter markets in which we have limited experience, such as the 3D consumer electronics market. If we fail to promote and maintain our brand and reputation successfully, our business and prospects could be materially harmed.

Competition from other providers of 3D technologies to the motion picture industry could adversely affect our business.

The motion picture industry is highly competitive, particularly among providers of 3D technologies. Our primary competitors include Dolby, Laboratories, Inc., or Dolby, IMAX Corporation, or IMAX, MasterImage 3D, LLC, or MasterImage, and X6D Limited, or Xpand. In addition, other companies, including motion picture exhibitors and studios, may develop their own 3D technologies in the future. Consumers may also perceive the quality of 3D technologies delivered by some of our competitors to be equivalent or superior to our 3D technologies. In addition, some of our current or future competitors may have significantly greater financial, technical, marketing and other resources than we do or may have more experience or advantages in the markets in which we compete that will allow them to offer lower prices or higher quality technologies, products or services. If we do not successfully compete with these providers, we could lose market share and our business could be adversely affected.

We face potential competition from companies with greater brand recognition and resources in the consumer electronics industry.

The 3D consumer electronics market is new and rapidly developing, and we must compete with companies that enjoy competitive advantages, including:

more developed distribution channels and deeper relationships with consumer electronics manufacturers;

a more extensive customer base;

technologies that may be better suited for 3D consumer electronics products;

broader technology, product and service offerings; and

greater resources for competitive activities, such as research and development, strategic acquisitions, alliances, joint ventures, sales and marketing, and lobbying industry and government standards.

As a result, these current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, products, technologies or standards in the 3D consumer electronics market.

We also face competition where existing licensees relying on our RealD Cinema Systems in the motion picture industry may become current or potential competitors in the 3D consumer

16


Table of Contents


electronics market, or vice versa. For example, Sony Pictures Entertainment, Inc., or Sony Pictures, is a major motion picture studio, but certain of its affiliates also design, manufacture and market consumer electronics products and components and are entering the 3D consumer electronics market. In 2009, we signed an agreement with Sony Electronics making available to it some of our 3D technologies for potential use with their consumer electronics products. To the extent that Sony Electronics or our other licensees choose to utilize competing 3D technologies that they have developed or in which they have an interest, rather than use our 3D technologies, our growth prospects could be adversely affected.

The introduction of new 3D technologies and changes in the way that our competitors operate could harm our business. If we fail to keep up with rapidly changing 3D technologies or the growth of new and existing markets, our 3D technologies could become less competitive or obsolete.

The motion picture and consumer electronics industries in general are undergoing significant changes. Due to technological advances and changing consumer tastes, numerous companies have developed, and are expected to continue to develop, new 3D technologies that may compete directly with our 3D technologies. Competitors may develop alternative 3D technologies that are more attractive to consumers, content producers and distributors, motion picture exhibitors, consumer electronics manufacturers and others, or more cost effective than our technologies, and which make our 3D technologies less competitive. As a result of this competition, we could lose market share, which could harm our business and operating results. We expect to expend considerable resources on research and development in response to changes in the motion picture and consumer electronics industries. However, we may not be able to develop and effectively market new 3D technologies that adequately or competitively address the needs of these changing industries, which could have an adverse effect on our business and prospects.

If our 3D technologies fail to be widely adopted by or are not compatible with the needs of our licensees, our business prospects could be limited and our operating results could be adversely affected.

Our motion picture and consumer electronics licensees depend upon our 3D technologies being compatible with a wide variety of motion picture and consumer electronics systems, products and infrastructure. We make significant efforts to design our 3D technologies to address capability, quality and cost considerations so that they either meet or, where possible, exceed the needs of our licensees in the motion picture and consumer electronics industries. To have our 3D technologies widely adopted in the motion picture and consumer electronics industries, we must convince a broad spectrum of professional organizations worldwide, as well as motion picture studios and exhibitors and consumer electronics manufacturers who are members of such organizations, to adopt them and to ensure that our 3D technologies are compatible with their systems, products and infrastructure.

If our 3D technologies are not widely adopted or retained or if we fail to conform our 3D technologies to the expectations of, or standards set by, industry participants, they may not be compatible with other products and our business, operating results and prospects could be adversely affected. We expect that meeting and maintaining the needs of our licensees for compatibility with them will be significant to our business in the future. In addition, the market for broadcast technologies has traditionally been heavily regulated by governments or other regulatory bodies, and we expect this to continue to be the case in the future. If our 3D

17


Table of Contents


technologies are not compatible with the broadcasting infrastructure in particular geographic areas, our ability to compete in these markets could be adversely affected.

Other forms of entertainment may be more attractive to consumers than those using our 3D technologies, which could harm our growth and operating results.

We face competition for consumer attention from other forms of entertainment that may drive down motion picture box office and license revenue from motion picture exhibitors. We compete with a number of alternative motion picture distribution channels, such as cable, satellite, broadcast, packaged media and the Internet. There are also other forms of entertainment competing for consumers' leisure time and disposable income such as concerts, amusement parks and sporting events. A significant increase in the popularity of these alternative motion picture channels and competing forms of entertainment could reduce the demand for theatrical exhibition of 3D motion pictures, including those viewed with our RealD Cinema Systems, and have an adverse effect on our business and operating results.

Motion picture exhibitor stock options, our share price and the pace of theater conversions to RealD-enabled screens could create volatility in our reported revenue and earnings.

In connection with some of our motion picture exhibitor licensing agreements, we issued to the motion picture exhibitors a 10-year option to purchase shares of our common stock at approximately $0.00667 per share. The stock options vest upon the achievement of screen installation targets. Motion picture exhibitor stock options are valued at the underlying stock price at each reporting period until the targets are met. Amounts recognized are based on the number of screens installed as a percentage of total screen installation targets. We record revenue net of motion picture exhibitor stock options, the amount of which is determined by changes in our share price and the number of RealD-enabled screens relative to certain targets. If our share price were to increase or decrease significantly during a reporting period, it could impact our reported revenue and earnings including potentially leading us to report negative revenue under certain circumstances.

Our limited operating history in the 3D consumer electronics market presents risk to our ability to achieve success in this area.

Our 3D technologies have only recently been made available to consumer electronics manufacturers, including JVC, Panasonic, Samsung, Sony Electronics and Toshiba, to enable 3D viewing on high definition televisions, laptops and other displays. To date, we have not generated revenue of any material significance from our arrangements with these and other consumer electronics manufacturers. The 3D consumer electronics market is rapidly developing, as manufacturers are working to set standards and content producers and distributors are working on increasing the availability of new 3D content. However, the demand for our 3D technologies and the income potential from the 3D consumer electronics market are unproven. In addition, because the 3D consumer electronics market is new and quickly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends. We also may not be able to successfully address these risks on a timely basis or at all.

18


Table of Contents

If consumer electronics manufacturers limit their use of our 3D technologies in high definition televisions, laptops and other displays or such products are not accepted by consumers, our potential growth in this market will be significantly reduced.

We are dependent on consumer electronics manufacturers to use our RealD Format, active and passive eyewear, and display and gaming technologies with their high definition televisions, laptops and other displays, and for content distributors to deliver 3D content via cable, satellite, broadcast, packaged media and the Internet. While we have entered into agreements with some consumer electronics manufacturers regarding the use of our 3D technologies in various consumer electronics products, these agreements are not exclusive, and we can give no assurances that these consumer electronics manufacturers will utilize our 3D technologies or that there will be sufficient consumer demand for 3D electronics products. In addition, since the 3D consumer electronics market is emerging, it is unclear if consumers will accept viewing 3D content in the home and elsewhere. The lack of consumer interest in 3D technologies may cause consumer electronics manufacturers to limit their use of our 3D technologies. As a result, our future prospects could be adversely affected if consumer electronics manufacturers choose not to use our 3D technologies.

Acquisition activities could result in operating difficulties, dilution to our stockholders and other harmful consequences.

We have built our business, in part, through acquisitions of intellectual property and other assets. We may selectively pursue strategic acquisitions in the future. Future acquisitions could divert management's time and focus from operating our business. In addition, integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures. Foreign acquisitions also involve unique risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

We may not accurately assess the value or prospects of acquisition candidates, and the anticipated benefits from our future acquisitions may not materialize. In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, contingent liabilities or amortization expenses, or writeoffs of goodwill, any of which could harm our financial condition.

Our growth may place a strain on our resources, which could harm our operations or increase our costs.

We have experienced significant growth since we acquired ColorLink in 2007. The growth that we have experienced in the past, as well as any further growth that we experience, may place a significant strain on our resources and increase demands on our management, our information and reporting systems and our internal controls over financial reporting. After this offering, we will incur additional general and administrative expenses to comply with the U.S. Securities and Exchange Commission, or SEC, reporting requirements, the listing standards of the New York Stock Exchange, or NYSE, and provisions of the Sarbanes-Oxley Act of 2002, and will continue to incur additional research and development expenses. If we are unable to manage our growth effectively while maintaining appropriate internal controls, we may experience operating inefficiencies that could increase our costs.

19


Table of Contents

We face risks from doing business internationally that could harm our business, financial condition and results of operations.

We are dependent on international business for a portion of our total revenue. International gross revenue accounted for approximately 27% of our total gross revenue in fiscal 2008, 27% in fiscal 2009 and 46% in fiscal 2010. We expect that our international business will continue to represent a significant portion of our revenue for the foreseeable future. This future revenue will depend to a large extent on the continued use and expansion of our 3D technologies in the motion picture and consumer electronics industries worldwide. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:

fluctuating foreign exchange rates;

laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes and changes in these laws;

changes in local regulatory requirements, including restrictions on content;

differing cultural tastes and attitudes;

differing degrees of protection for intellectual property;

the need to adapt our business model to local requirements;

the instability of foreign economies and governments; and

political instability, natural disaster, war or acts of terrorism.

Events or developments related to these and other risks associated with international business could adversely affect our revenue from those sources, which could have a material adverse effect on our business, financial condition and results of operations.

Our operating results may fluctuate substantially from quarter to quarter, which may be different from analysts' expectations and adversely affect our stock price.

Our operating results may fluctuate from quarter to quarter. Factors that have affected our operating results in the past, and are likely to affect our operating results in the future, include, among other things:

the timing of when a 3D motion picture is released. These motion pictures tend to be released based on specific consumer entertainment dynamics, which results in seasonal patterns, with the largest number of motion pictures being released in summer and early winter;

the rate of installation of new RealD Cinema Systems. In connection with some of our motion picture exhibitor license agreements, we issued to three motion picture exhibitors 10-year options to purchase an aggregate of 3,668,340 shares of our common stock at an exercise price of approximately $0.00667 per share, which vests upon the achievement of screen installation targets. Reductions to revenue resulting from motion picture exhibitor stock options may increase as the estimated fair value of our common stock and number of RealD-enabled screen installations increase.

20


Table of Contents

the timing of expenses. Our expenses, including depreciation expense of our RealD Cinema Systems deployed at a motion picture exhibitor's premises, digital projector depreciation expenses, RealD eyewear costs (including shipping, handling and recycling costs) and occupancy costs, have in the past, and may in the future, increase significantly, including in quarters when we do not experience a similar growth in revenue; and

the timing and accuracy of license fee reports. It is not uncommon for license fee reports to include positive or negative corrective or retroactive license fees that cover extended periods of time.

In addition, variances in our operating results from analysts' expectations could adversely affect our stock price. See also "Management's discussion and analysis of financial condition and results of operations—Quarterly results and seasonality."

Our RealD eyewear may, in the future, be regulated by the Food and Drug Administration, or FDA, or by state or foreign agencies, which could increase our costs and adversely impact our profitability.

Currently, polarized eyewear, including our RealD eyewear, is not regulated by the FDA, or by state or foreign agencies. However, certain eyewear, such as non-prescription reading glasses and sunglasses, are considered to be medical devices by the FDA and are subject to regulations imposed by the FDA and various state and foreign agencies. With the rising popularity of polarized 3D eyewear, there has been an increasing level of public scrutiny examining its potential health risks. Polarized 3D eyewear, including our RealD eyewear, may at some point be subject to federal, state or foreign regulations that could potentially restrict how our RealD eyewear is produced, used or marketed, and the cost of complying with those regulations may adversely affect our profitability.

If 3D viewing with active or passive eyewear is found to cause health risks or consumers believe that it does, demand for the 3D viewing experience may decrease or we may become subject to liability, which could adversely affect our results of operations, financial condition, business and prospects.

Research conducted by institutions unrelated to us has suggested that 3D viewing with active or passive eyewear may cause vision fatigue, eye strain, discomfort, headaches, motion sickness, dizziness, nausea, epileptic seizures, strokes, disorientation, perceptual after-effects, decreased postural stability or other health risks in some consumers. If these potential health risks are substantiated or consumers believe in their validity, demand for the 3D viewing experience in the theater, the home and elsewhere may decline. As a result, major motion picture studios and other content producers and distributors may refrain from developing 3D content, motion picture exhibitors may reduce the number of 3D-enabled screens (including RealD-enabled screens) they currently deploy or plan to deploy, or they may reduce the number of 3D motion pictures exhibited in their theaters, which would adversely affect our results of operations, financial condition and prospects. A decline in consumer demand may also lead consumer electronics manufacturers and content distributors to reduce or abandon the production of 3D products, which could adversely affect our prospects.

In addition, if health risks associated with our RealD eyewear materialize, we may become subject to governmental regulation or product liability claims, including claims for personal injury. Successful assertion against us of one or a series of large claims could materially harm

21


Table of Contents


our business. Also, if our RealD eyewear is found to be defective, we may be required to recall it, which may result in substantial expense and adverse publicity that could adversely impact our sales, operating results and reputation. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded under the terms of the policy, which could adversely affect our financial condition. In addition, we may also be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage in the future, which could adversely affect our results of operations, financial condition and business.

Our agreements with motion picture studios domestically and motion picture exhibitors internationally require us to manage the supply chain of our RealD eyewear, and any interruption to the supply chain for our RealD eyewear components could adversely affect our results of operations, financial condition, business and prospects.

Our RealD eyewear is an integral part of our RealD Cinema Systems. We have entered into non-exclusive agreements with several manufacturers to produce RealD eyewear. We manage manufacturing, distribution and recycling of RealD eyewear for motion picture studios and exhibitors worldwide. Domestically, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors' consumers. Most international motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of their admission or as a concession item. Any interruption in the supply of RealD eyewear from manufacturers, increase in shipping cost, logistics or recycling interruption or other disruption to our global supply chain could adversely affect our results of operations, financial condition, business and prospects. For example, in connection with recent major 3D motion picture releases and increased consumer demand, we exhausted our inventory of RealD eyewear and have incurred increased shipping costs to accelerate delivery.

Economic conditions beyond our control could reduce consumer demand for motion pictures and consumer electronics using our 3D technologies and, as a result, adversely affect our business, revenue and growth prospects.

The global economic environment in late 2008 and 2009 was volatile and continues to pose risks. The economy could remain significantly challenged for an indeterminate period of time. Present economic conditions could lead to a decrease in discretionary consumer spending, resulting in lower motion picture box office. In the event of declining box office revenue, motion picture studios may be less willing to release 3D motion pictures and motion picture exhibitors may be less willing to license our RealD Cinema Systems. Further, a decrease in discretionary consumer spending may adversely affect future demand for 3D consumer electronics products that may use our 3D technologies, which could cause our business, revenue and growth prospects to suffer.

The loss of members of our management or research and development teams could substantially disrupt our business operations.

Our success depends to a significant degree upon the continued individual and collective contributions of our management and research and development teams. A limited number of individuals have primary responsibility for managing our business, including our relationships with motion picture studios and exhibitors and consumer electronics manufacturers and the research and development of our 3D technologies. The loss of any of these individuals,

22


Table of Contents


including Michael V. Lewis, our Chairman and Chief Executive Officer, or Joshua Greer, our President, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could impair our ability to sustain and grow our business. In addition, because we operate in a highly competitive industry, our hiring of qualified executives, scientists, engineers or other personnel may cause us or those persons to be subject to lawsuits alleging misappropriation of trade secrets, improper solicitation of employees or other claims.

Our ability to use our net operating loss carryforwards could be subject to additional limitation if our ownership has changed or will change by more than 50%, which could potentially result in increased future tax liability.

While currently subject to a full valuation allowance for purposes of preparing our consolidated financial statements (see the discussion below under the heading "Management's discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Deferred tax asset valuation and tax exposures"), we intend to use our U.S. net operating loss carryforwards to reduce any future U.S. corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We have not determined whether such ownership change has previously occurred. It is possible that this offering, either on a standalone basis or when combined with past or future transactions (including, but not limited to, significant increases during the applicable testing period in the percentage of our stock owned directly or constructively by (i) any stockholder who owns 5% or more of our stock or (ii) some or all of the group of stockholders who individually own less than 5% of our stock), will cause us to undergo one or more ownership changes. In that event, our ability to use our net operating loss carryforwards could be adversely affected. To the extent our use of net operating loss carryforwards is significantly limited under the rules of Section 382 (as a result of this offering or otherwise), our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

Risks related to the offering

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity to sell your shares at a price above the initial public offering price or at all.

Prior to this offering, there has been no public market for our common stock. An active and liquid public market for our common stock may not develop or be sustained after this offering. The price of our common stock in any such market may be higher or lower than the price you pay. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we and the selling stockholders negotiated with the representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering, and our common stock could easily trade below the initial public offering price.

23


Table of Contents

The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The market price of our common stock could fluctuate significantly for various reasons, which include:

our quarterly or annual earnings or those of our competitors;

the public's reaction to our press releases, our other public announcements and our filings with the SEC;

changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks of our competitors;

new laws or regulations or new interpretations of laws or regulations applicable to our business;

changes in accounting standards, policies, guidance, interpretations or principles;

changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

litigation involving our company or investigations or audits by regulators into the operations of our company or our competitors; and

sales of common stock by our directors, executive officers and significant stockholders.

In addition, the stock market in general, and the market for technology and media companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our common stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management's attention and resources.

As a public company, we will become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy, will increase our costs and may divert management attention from our business.

We have historically operated as a private company. After this offering, we will be required to file with the SEC annual and quarterly information and other reports. We will be required to ensure that we have the ability to prepare financial statements that comply with SEC reporting requirements on a timely basis. We will also become subject to other reporting and corporate governance requirements, including the listing standards of NYSE and applicable provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which will impose significant compliance obligations and costs upon us.

The changes required by becoming a public company will require a significant commitment of additional resources and management oversight that will cause us to incur increased costs and

24


Table of Contents


which might place a strain on our systems and resources. As a result, our management's attention might be diverted from other business concerns. In addition, we may be unable to accurately predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management's attention to these matters will have on our business.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors' and officers' liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

After we become a public company, we will be required to assess our internal control over financial reporting on an annual basis, and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

After we become a public company, the Sarbanes-Oxley Act will require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we will need to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

Our internal control over financial reporting does not currently meet the standards set forth in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The adequacy of our internal control over financial reporting must be assessed by our management for each fiscal year. We do not currently have comprehensive documentation of our internal control over financial reporting, nor do we document or test our compliance with these controls on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act.

Sales of outstanding shares of our stock into the market in the future could cause the market price of our stock to drop significantly, even if our business is doing well.

After this offering, 47,590,021 shares of our common stock will be outstanding. Of these shares, the 10,750,000 shares sold in this offering, or 12,362,500 shares if the underwriters' over-allotment option exercised in full, will be freely tradable, without restriction, in the public market. In addition, approximately 1,509,165 shares will also be freely tradeable, without restriction, in the public market. Our directors, executive officers and security holders have

25


Table of Contents


agreed to enter into "lock-up" agreements with the underwriters, in which they will agree to refrain from selling their shares for a period of 180 days after this offering, subject to certain extensions. After the lock-up period expires, 12,732,558 currently outstanding shares will be eligible for sale in the public market without restriction and 22,673,298 currently outstanding shares held by directors, executive officers and other affiliates will be eligible for sale in the public market subject to volume and other limitations under Rule 144 under the Securities Act. If our existing security holders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up period expires, the trading price of our common stock could decline. J.P. Morgan Securities Inc. and Piper Jaffray & Co. may, in their sole discretion, permit our directors, officers, employees and other security holders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

In addition, as of the closing of this offering, there will be 5,450,516 shares underlying options, excluding the exercise by selling stockholders of options to purchase an aggregate of 63,353 shares of common stock, 1,089,000 shares underlying warrants that were issued and outstanding and 3,668,340 shares underlying motion picture exhibitor stock options, and we have an aggregate of 4,157,404 shares of common stock reserved for future issuance under our equity incentive plans. These shares will become eligible for sale in the public market to the extent permitted by the provisions of various option and warrant agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our stock could decline.

Shortly after the effectiveness of this offering, we also intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our equity incentive plans. Upon filing the Form S-8, shares of common stock issued upon the exercise of options or otherwise under our equity incentive plans will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates, and subject to the lock-up agreements described above.

You will suffer immediate and substantial dilution as a result of this offering, and may experience additional dilution in the future.

If you purchase common stock in this offering, you will experience immediate and substantial dilution of $12.36 per share as the public offering price will be substantially greater than the tangible book value per share of our outstanding common stock after giving effect to this offering. The exercise of outstanding options and warrants, which have a weighted average exercise price of $2.10 per share, and any future equity issuances by us will result in further dilution to investors.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Following the completion of this offering, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our obligations under our equity incentive plans or shares of our authorized but unissued preferred stock. Issuances of common stock or preferred voting stock could reduce your influence over matters on which our stockholders vote and, in the case of

26


Table of Contents


issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock.

We will have broad discretion in how we use a portion of the proceeds of this offering, and we may apply the proceeds to uses that will create losses.

We anticipate using proceeds of this offering for repayment of indebtedness and general corporate purposes, which may include investments in technology. We may also use a portion of the proceeds to acquire complementary businesses and technologies. Our management will have significant discretion in the use of our capital, and you may disagree with the way our funds are utilized. These proceeds may not be invested to yield a significant return, or any return at all, and we may incur substantial losses. As part of your investment decision, you will not be able to assess or direct how we apply the net proceeds of this offering.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We do not expect to pay dividends on shares of our common stock in the foreseeable future, and we intend to use cash to grow our business. Consequently, your only opportunity to achieve a positive return on your investment in us will be if the market price of our common stock appreciates.

Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock.

Our certificate of incorporation and bylaws will contain provisions that could depress the trading price of our stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

authorize the issuance of "blank check" preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

provide for a classified board of directors (three classes);

provide that stockholders may only remove directors for cause;

provide that stockholders may only remove directors prior to the expiration of their term upon a supermajority vote of at least 80% of our outstanding common stock;

provide that any vacancy on our board of directors, including a vacancy resulting from an increase in the size of the board, may only be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum;

provide that a special meeting of stockholders may only be called by our board of directors or by our chief executive officer;

provide that action by written consent of the stockholders may be taken only if the board of directors first approves such action; provided that, notwithstanding the foregoing, we will hold an annual meeting of stockholders in accordance with NYSE rules, for so long as our shares are listed on NYSE, and as otherwise required by the bylaws;

27


Table of Contents

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we will be subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested" stockholder for a period of three years following the date on which the stockholder became an "interested" stockholder.

28


Table of Contents


Forward-looking statements and other industry data

This prospectus, including the sections titled "Prospectus summary," "Risk factors," "Management's discussion and analysis of financial condition and results of operations" and "Business," contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this prospectus, other than statements of historical fact, are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words "may," "continue," "estimate," "intend," "plan," "will," "believe," "expect," "seek," "anticipate" and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about:

our ability to continue to derive substantial revenue from the licensing of our 3D technologies for use in the motion picture industry, and our ability to generate substantial revenue from the licensing of our 3D technologies for use in the 3D consumer electronics market;

the progress, timing and amount of expenses associated with our research and development activities;

the anticipated conversion by motion picture exhibitors of their theaters from analog to digital;

the deployment of additional RealD Cinema Systems by our motion picture exhibitor licensees;

market and industry trends, including (i) the timing, number and box office performance of 3D motion pictures, (ii) the growth in alternative 3D content for the theatrical market and (iii) the growth in 3D content for the consumer electronics market;

our ability to successfully implement our business plan;

our business strategy;

our market position;

our projected operating results;

the integration of acquired businesses;

our ability to adapt to rapidly changing technology and evolving industry standards, and our ability to introduce new products and services;

our ability to compete with other companies that are or may be developing or marketing technologies that are competitive with our technologies;

our ability to attract and motivate key personnel; and

other factors discussed elsewhere in this prospectus.

29


Table of Contents

Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions described in "Risk factors." In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See "Where you can find additional information."

This prospectus also contains estimates and other information concerning our industry, including market size and growth rates, that we obtained from industry publications, surveys and forecasts. Unless we otherwise specify, industry and market data is given on a calendar year basis and is current as of December 31, 2009. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we believe the information in these industry publications, surveys and forecasts is reliable, we have not independently verified the accuracy or completeness of the information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled "Risk factors."

30


Table of Contents


Use of proceeds

We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $71.9 million, assuming an initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range listed on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions (based on an underwriting discount of 6.5% but assuming no payment of a discretionary incentive fee of up to 0.5% of the initial public offering price) and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $5.6 million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds to us from this offering to repay $25.1 million indebtedness outstanding under our term loan and revolving credit facilities, which will become due and payable upon the completion of this offering, and for general corporate purposes, including investments in technology. As of March 26, 2010, borrowings under our term loan totaled $10.0 million at an interest rate of 8.625%, and borrowings under our revolving credit facility totaled $10.2 million at interest rates ranging from 5.0% to 6.25%. Each of the foregoing term loan and revolving credit facility mature on the earlier of December 31, 2010 or the date that this offering is completed. We may also use a portion of the net proceeds to acquire complementary businesses.

Although we currently anticipate that we will use the net proceeds of this offering as described above, there may be circumstances where a reallocation of funds may be necessary. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our development efforts and our operating costs and expenditures. Accordingly, our management will have significant flexibility in the expenditure of the net proceeds of this offering.

Pending use of the proceeds from this offering, we intend to invest the net proceeds in short-term interest-bearing, investment-grade securities.

We will not receive any of the proceeds from any sale of shares by the selling stockholders.


Dividend policy

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Instead, we expect that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon various factors, including our financial condition, results of operations, capital requirements, any restrictions that may be imposed by applicable law and our contracts and such other factors as are deemed relevant by our board of directors.

31


Table of Contents


Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of March 26, 2010:

on an actual basis;

on a pro forma as adjusted basis to reflect:

(i)
the automatic conversion of all outstanding shares of convertible preferred stock into 16,835,714 shares of common stock;

(ii)
the exercise by certain members of manaqement of options to purchase an aggregate of 63,353 shares of common stock at a weighted average exercise price of approximately $2.42 per share, for total proceeds to us of $153,223;

(iii)
the amendment and restatement of our certificate of incorporation in connection with the completion of this offering, which will increase our authorized capital stock;

(iv)
the sale by us of 6,000,000 shares of common stock in this offering at an initial public offering price of $14.00 per share, the midpoint of the estimated price range shown on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions (based on an underwriting discount of 6.5% but assuming no payment of a discretionary incentive fee of up to 0.5% of the initial public offering price) and estimated offering expenses payable by us of approximately $12.1 million; and

(v)
the repayment of the indebtness outstanding of approximately $25.1 million under our term loan and revolving credit facilities, which will become due and payable upon the completion of this offering.

You should read this table together with "Use of proceeds," "Management's discussion and analysis of financial condition and results of operations," "Description of capital stock" and our

32


Table of Contents


consolidated financial statements and accompanying notes included elsewhere in this prospectus.

   
 
  As of March 26, 2010  
(dollars in thousands, except share data)
  Actual
  Pro forma
as adjusted

 
   
 
  (unaudited)
 

Cash and cash equivalents

  $ 13,134   $ 60,103  
       

Total indebtedness (including short-term indebtedness)

  $ 31,396   $ 6,296  

Series C mandatorily redeemable convertible preferred stock

    62,831      

Stockholders' deficit:

             
 

Series A convertible preferred stock

    1,978      
 

Series B convertible preferred stock

    2,970      
 

Series D convertible preferred stock

    19,952      
 

Common stock: no par value; 52,699,999 shares authorized, 24,690,954 shares issued and outstanding, actual; 150,000,000 shares authorized, 47,590,021 shares issued and outstanding, pro forma as adjusted

    68,371     228,171  

Accumulated deficit

    (137,291 )   (137,291 )

Noncontrolling interest

    2,134     2,134  

Total equity (deficit)

    (41,886 )   93,014  
       
 

Total capitalization

  $ 52,341   $ 99,310  
   

The table above excludes the following shares:

1,089,000 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of approximately $0.83 per share, on a pro forma as adjusted basis;

5,513,869 and 5,450,516 shares of common stock issuable upon the exercise of options outstanding at a weighted average exercise price of $3.75 and $3.77 per share, on an actual and pro forma as adjusted basis, respectively;

3,668,340 shares of common stock issuable upon the exercise of motion picture exhibitor options outstanding at an exercise price of approximately $0.00667 per share, on an actual and pro forma as adjusted basis;

an aggregate of 407,404 shares of common stock reserved for future issuance under our 2004 equity incentive plan, on an actual and pro forma as adjusted basis; and

an aggregate of 3,750,000 shares of common stock reserved for future issuance under our 2010 equity incentive plan, on an actual and pro forma as adjusted basis.

33


Table of Contents


Dilution

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately upon completion of this offering. Net tangible book value per share represents the amount of our total assets less intangible assets, total liabilities and noncontrolling interest divided by the number of shares of common stock outstanding as of March 26, 2010 after giving effect to the conversion of all of our outstanding convertible preferred stock into an aggregate of 16,835,714 shares of our common stock, which will occur immediately upon the completion of this offering.

New investors participating in this offering will incur immediate, substantial dilution. As of March 26, 2010, our net tangible book value was approximately $6.1 million, or $0.15 per share of common stock. After giving effect to (i) the sale of 6,000,000 shares of common stock by us in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the estimated offering price range shown on the front cover of this prospectus, (ii) the exercise by certain members of management of options to purchase an aggregate of 63,353 shares of common stock at a weighted average exercise price of approximately $2.42 per share for total proceeds to us of $153,223 and (iii) the deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 26, 2010 would have been $78.2 million, or $1.64 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.49 per share of common stock to our existing stockholders and an immediate dilution of $12.36 per share to new investors. The following table illustrates the per share dilution without giving effect to the exercise by certain selling stockholders of options and warrants in connection with this offering and the option granted to the underwriters to purchase additional shares:

   

Assumed initial public offering price per share

        $ 14.00  
 

Net tangible book value per share as of March 26, 2010

  $ 0.15        
 

Increase per share attributable to this offering from new investors

  $ 1.49        
             

Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering

        $ 1.64  
             

Dilution per share to new investors in this offering

        $ 12.36  
   

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, the midpoint of the estimated offering price range shown on the front cover of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $0.12 per share and the dilution in net tangible book value to new investors by $0.88 per share, assuming the number of shares of common stock offered by us, as set forth on the front cover of this prospectus, remains the same.

The following table summarizes as of March 26, 2010 the number of our shares purchased, the total consideration and the average price per share, after giving effect to (i) the conversion of all outstanding shares of convertible preferred stock into common stock, (ii) the exercise of options by the selling stockholders in this offering, (iii) the differences between the number of shares of common stock purchased from us, and (iv) the aggregate cash consideration paid and

34


Table of Contents


the average price per share paid by existing stockholders and purchasers of common stock in this offering. The calculation below is based on an assumed initial public offering price of $14.00 per share, the midpoint of the estimated offering price range shown on the front cover of this prospectus, before the deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us:

   
 
  Shares purchased   Total consideration   Average
price per
share

 
(dollars in thousands, except share and per share data)
 
  Number
  Percent
  Amount
  Percent
 
   

Existing stockholders(1)

    41,590,021     87 % $ 71,897     46 % $ 1.73  

New investors

    6,000,000     13     84,000     54     14.00  
       

Total

    47,590,021     100 % $ 155,897     100 % $ 3.28  
   
(1)
Includes the exercise by certain members of management of options to purchase an aggregate of 63,353 shares of common stock.

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, the midpoint of the estimated offering price range shown on the front cover of this prospectus, would increase (decrease) total consideration paid by new investors to us by $5.6 million and would increase (decrease) the average price per share to new investors by $1.00, assuming the number of shares of common stock offered by us, as set forth on the front cover of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

35


Table of Contents


Selected consolidated financial and other data

The following selected consolidated financial and other data should be read together with the more detailed information contained in "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended March 31, 2008, March 27, 2009 and March 26, 2010, and the selected consolidated balance sheet data as of March 27, 2009 and March 26, 2010, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the year ended March 31, 2007, and the selected consolidated balance sheet data as of March 31, 2007 and March 31, 2008, have been derived from our audited consolidated financial statements, which are not included in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2006 and the year ended December 31, 2005, and the selected consolidated balance sheet data as of December 31, 2005 and March 31, 2006 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus. The unaudited consolidated financial statements include, in our opinion, all adjustments consisting only of normal, recurring adjustments that we consider necessary for the fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to be expected for future periods.

   
 
  Year ended   Three
months
ended
  Year ended  
(dollars in thousands, except share and per share data)
  December 31,
2005

  March 31,
2006

  March 31,
2007

  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

    (unaudited)                          

Consolidated Statement of Operations Data:

                                     

Revenue

  $ 6,960   $ 2,164   $ 15,885   $ 23,378   $ 39,675   $ 149,846  

Cost of revenue

    5,937     693     13,985     13,500     27,107     140,603  

Gross margin

    1,023     1,471     1,900     9,878     12,568     9,243  

Operating expenses:

                                     
 

Research and development

    3,514     929     4,677     11,166     8,915     11,021  
 

Selling and marketing

    1,776     358     2,521     7,311     11,009     16,811  
 

General and administrative

    2,188     904     4,294     8,006     7,940     15,638  
   

Total operating expenses

    7,478     2,191     11,492     26,483     27,864     43,470  

Operating loss

    (6,455 )   (720 )   (9,592 )   (16,605 )   (15,296 )   (34,227 )

Interest expense

    (191 )   (769 )   (3,045 )   (1,257 )   (949 )   (1,730 )

Other income (loss)

    25     63     45     (7 )   100     (1,112 )

Income tax expense

            116     20     219     2,680  

Net loss

    (6,621 )   (1,426 )   (12,734 )   (29,685 )   (16,364 )   (39,749 )

Accretion of preferred stock

            (789 )   (8,001 )   (9,826 )   (12,372 )

Net loss attributable to common stockholders

  $ (6,621 ) $ (1,426 ) $ (13,504 ) $ (37,265 ) $ (25,463 ) $ (51,225 )

Basic and diluted loss per share of common stock

  $ (0.37 ) $ (0.07 ) $ (0.68 ) $ (1.57 ) $ (1.06 ) $ (2.09 )

Shares used in computing basic and diluted loss per share of common stock

    18,041,458     19,571,811     19,973,737     23,713,455     24,026,728     24,500,173  

Pro forma basic and diluted loss per share of common stock (unaudited)(1)(2)

                                $ (0.94 )

Shares used in computing pro forma basic and diluted loss per share of common stock (unaudited)(1)(2)

                                  41,335,887  
   

36


Table of Contents


   
 
  As of  
(dollars in thousands)
  December 31,
2005

  March 31,
2006

  March 31,
2007

  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

    (unaudited)                          

Consolidated Balance Sheet Data:

                                     

Cash and cash equivalents

  $ 913   $ 944   $ 7,628   $ 9,448   $ 15,704   $ 13,134  

Total assets

    9,903     8,174     90,133     70,811     96,548     162,146  

Total indebtedness (including short-term indebtedness)

    6,033     4,561     17,714     7,966     14,863     31,396  

Mandatorily redeemable convertible preferred stock

            32,632     40,633     50,459     62,831  

Total equity (deficit)

    (2,549 )   (2,191 )   1,209     (14,565 )   (31,945 )   (41,886 )
   

 

   
 
  Year ended  
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Consolidated Other Data:

                   

Capital expenditures

  $ 12,898   $ 12,072   $ 30,161  

Depreciation and amortization

    5,296     5,598     7,952  

Adjusted EBITDA(3)

    (3,768 )   1,072     22,727  

Cash flows provided by (used in):

                   
 

Operating activities

    (1,583 )   10,134     15,135  
 

Investing activities

    (9,988 )   (12,107 )   (29,636 )
 

Financing activities

    13,391     8,229     11,931  
   

 

   
 
  As of  
 
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

          (unaudited)        

Number of RealD-enabled screens

                   
 

Total domestic RealD-enabled screens

    997     1,703     3,385  
 

Total international RealD-enabled screens

    176     405     1,936  
   

Total RealD-enabled screens

   
1,173
   
2,108
   
5,321
 

Number of locations with RealD-enabled screens

                   
 

Total domestic locations with RealD-enabled screens

    673     1,147     1,837  
 

Total international locations with RealD-enabled screens

    172     376     1,197  
   

Total locations with RealD-enabled screens

    845     1,523     3,034  
   
(1)
All basic and diluted loss per share of common stock and average shares outstanding information for all periods presented have been adjusted to reflect the one-for-one and one-half (1 for 1.5) forward split of our common stock. For more information regarding loss per share calculations, see Note 2, "Net loss per common share," to our consolidated financial statements, which are included elsewhere in this prospectus.

(2)
Pro forma basic and diluted loss per share has been calculated assuming the automatic conversion of all outstanding shares of our convertible preferred stock into shares of common stock, as of the beginning of the period, with each share of convertible preferred stock converting into 1.50 share of common stock. See Note 8, "Mandatorily redeemable convertible preferred stock and equity (deficit)," to our consolidated financial statements, which are included elsewhere in this prospectus.

(3)
Adjusted EBITDA is a Non-U.S. GAAP financial measure. For a definition of Adjusted EBITDA on reconciliation to net loss, the most comparable U.S. GAAP item, see "Management's discussion and analysis of financial condition and results of operations—Non-U.S. GAAP discussion." See also "—Quarterly results and seasonality."

37


Table of Contents


Management's discussion and analysis of
financial condition and results of operations

The following discussion should be read together with our consolidated financial statements and accompanying notes, which are included elsewhere in this prospectus. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions which could cause actual results to differ materially from management's expectations. See "Risk factors" and "Forward-looking statements and other industry data."

Overview

We are a leading global licensor of 3D technologies. Our extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere. We license our RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. We also provide our RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content providers and distributors to enable the delivery and viewing of 3D content on high definition televisions, laptops and other displays. Our cutting-edge 3D technologies have been used for applications such as piloting the Mars Rover, heads-up displays for military jets and robotic medical procedures.

For financial reporting purposes, we currently have one reportable segment. We have three operating segments: cinema, consumer electronics and professional within which we market our various applications. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We aggregate our three operating segments into one reportable segment based on qualitative factors, including similar economic characteristics and the nature of the products and services. Our product portfolio is used in applications that enable a premium 3D viewing experience across these segments. We currently generate substantially all of our revenue from the license of our RealD Cinema Systems and the use and sale of our eyewear.

Key business metrics

Our management regularly reviews a number of business metrics, including the following key metrics to evaluate our business, monitor the performance of our business model, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate forward-looking projections. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows:

Number of screens. Domestic screens are motion picture theater screens in the United States or Canada enabled with our RealD Cinema Systems. International screens are motion picture theater screens outside the United States and Canada enabled with our RealD Cinema Systems.

Number of locations. Domestic locations are motion picture exhibition complexes in the United States or Canada with one or more screens enabled with our RealD Cinema Systems.

38


Table of Contents

    International locations are motion picture exhibition complexes outside the United States and Canada with one or more screens enabled with our RealD Cinema Systems.

Number of 3D motion pictures. Total 3D motion pictures are the number of 3D motion pictures that are exhibited for more than three showings per day and for a period in excess of one week and for which we receive a license fee from the motion picture exhibitor during the relevant period.

Adjusted EBITDA. We use Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net loss, plus interest expense, net, income taxes and depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. We consider our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. For further discussion regarding Adjusted EBITDA, see "—Non-U.S. GAAP discussion."

The following table sets forth additional performance highlights of key business metrics for the periods presented:

 
 
  Year ended
 
  March 31,
2008

  March 27,
2009

  March 26,
2010

 

  (unaudited)

Number of RealD-enabled screens (at period end)

           
 

Total domestic RealD-enabled screens

  997   1,703   3,385
 

Total international RealD-enabled screens

  176   405   1,936
   

Total RealD-enabled screens

 
1,173
 
2,108
 
5,321

Number of locations with RealD-enabled screens (at period end)

           
 

Total domestic locations with RealD-enabled screens

  673   1,147   1,837
 

Total international locations with RealD-enabled screens

  172   376   1,197
   

Total locations with RealD-enabled screens

  845   1,523   3,034

Number of 3D motion pictures (released during period)

  5   8   13
 

In addition, as of June 1, 2010, the total number of Real-enabled screens increased from 5,321 to 5,966, and the total number of locations with RealD-enabled screens increased from 3,034 to 3,192.

Performance highlights for Adjusted EBITDA, another key business metric and a Non-U.S. GAAP financial measure, is presented below under the caption "—Non-U.S. GAAP discussion."

If we are successful in expanding our business with consumer electronics manufacturers and content producers and distributors to incorporate our RealD Format and display and gaming technologies into their products and platforms, our key business metrics in our fiscal year ending March 25, 2011 may include the number of units of 3D-enabled plasma and LCD televisions, interactive gaming consoles and laptop computers shipped in that period.

39


Table of Contents

Opportunities, trends and factors affecting comparability

We have rapidly evolved and expanded our business since we acquired ColorLink in March 2007. This expansion has included hiring most of our senior management team, acquiring and growing our research and development facilities in Boulder, Colorado, and building infrastructure to support our business. These investments in and changes to our business have allowed us to significantly increase our revenue and key business metrics. We expect to continue to invest for the foreseeable future in expanding our business as we increase our direct sales and marketing presence in the United States, Europe, Asia and other geographic regions, enhance and expand our technology and product offerings and pursue strategic acquisitions.

Cinema

The shift in the motion picture industry from analog to digital over the past decade has created an opportunity for new and transformative 3D technologies. As of December 25, 2009, there were approximately 16,000 theater screens using digital cinema projectors out of approximately 149,000 total theater screens worldwide, of which 4,286 were RealD-enabled (increasing to 5,966 RealD-enabled screens as of June 1, 2010). In 2009, motion picture exhibitors installed approximately 7,500 digital cinema projectors, an approximately 86% growth rate from 2008, and in 2008, motion picture exhibitors installed approximately 2,300 digital cinema projectors, an approximately 36% growth rate from 2007. DCIP recently completed its financing and is expected to fund the digital conversion of approximately 14,000 additional domestic theater screens operated by our licensees AMC, Cinemark and Regal. We believe the increasing number of theater screens to be financed by DCIP provides us with significant opportunity to deploy additional RealD Cinema Systems and furthers our penetration of the domestic market. Since the release of Chicken Little in 2005 through the end of 2009, 27 3D motion pictures have been released. Based on the slate announcements by motion picture studios, we anticipate that 23 3D motion pictures will be released worldwide during 2010, including sequels to successful major motion picture franchises such as Harry Potter, Shrek and Toy Story, and 33 3D motion pictures will be released worldwide in 2011. As the number of RealD-enabled screens and 3D motion pictures released increases, we expect that our revenue and capital needs will continue to grow.

Consumer electronics

We have recently made available our RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content distributors to enable 3D in high definition televisions, laptops and other displays in the home and elsewhere. We believe that the recent success of major 3D motion pictures, including Avatar,Alice in Wonderland,Shrek Forever After and Toy Story 3 is leading to the creation and distribution of 3D content for the consumer electronics market. The development of this market represents a significant opportunity for new revenue.

Motion picture exhibitor stock options

We expect to incur variability in our license revenue in connection with stock options issued to some of our motion picture exhibitor licensees that vest upon the achievement of screen installation targets. For further discussion regarding exhibitor stock options, see "Key components of our results of operations—Revenue—Motion picture exhibitor stock options" and "Critical accounting policies and estimates."

40


Table of Contents

RealD eyewear shipping expenses

We anticipate incurring approximately $3.5 million to $5.0 million of expedited shipping expenses in the three months ending June 25, 2010 and approximately $0.5 million to $2.0 million of expedited shipping expenses in the three months ending September 24, 2010 to satisfy anticipated demand and build sufficient eyewear inventory to mitigate the risk of future inventory shortages.

Public company expenses

We have historically operated as a private company. We determined to become a public company for several reasons:

using the proceeds from this offering to grow and operate our business;

having access to the public market for future financings;

furthering the development of our business reputation, brand name awareness and credibility among our licensees, the public and in the markets in which we participate; and

creating a public market for our common stock so that investors and employees can sell the common stock they have received in connection with equity incentive awards or otherwise.

After this offering, we will incur additional general and administrative expenses to comply with SEC reporting requirements, the listing standards of the NYSE and provisions of the Sarbanes-Oxley Act of 2002. As a public company, we will be required to:

prepare and distribute periodic reports and other shareholder communications in compliance with our obligations under the federal securities laws and NYSE rules;

create or expand the roles and duties of our board of directors and committees of the board;

institute compliance and internal audit functions that are more comprehensive;

evaluate and maintain our system of internal control over financial reporting, and report on management's assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;

involve and retain outside legal counsel and accountants in connection with the activities listed above;

enhance our investor relations function; and

establish new internal policies, including those related to disclosure controls and procedures.

We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming. We also expect that these applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance. We estimate that we will incur between $2.0 million and $4.0 million of additional costs annually as a result of being a public company, including, among other things, the costs of auditing and reviewing our financial statements for our annual and quarterly reports under the Exchange Act, for legal fees for corporate and securities legal work to comply with rules and regulations implemented by the SEC and NYSE,

41


Table of Contents

for director and officer liability insurance, investor relations services, and retaining a transfer agent.

Other

We expect the accretion of preferred stock to be eliminated after this offering when the preferred stock is converted into common stock. Beginning upon the completion of this offering, we will no longer incur management fees to the holder of our Series C mandatorily redeemable convertible preferred stock.

Key components of our results of operations

Revenue

We derive substantially all of our revenue from the license of our RealD Cinema Systems and the use and sale of our RealD eyewear.

We license our RealD Cinema Systems in multi-year (typically five years or longer) agreements that are generally exclusive with our motion picture exhibitor licensees in both the domestic and international markets. Our license agreements for our RealD Cinema Systems are typically structured on a per-admission, periodic fixed-fee, or per-motion picture basis. Currently, our license revenue is derived principally on a per-admission basis.

We generate product revenue from the distribution of RealD eyewear to motion picture studios and exhibitors worldwide. Domestically, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors' consumers. Most international motion picture exhibitors purchase RealD eyewear directly from us and sell them to consumers as part of their admission or as a concession item. Product revenue is principally derived from the use and sale of RealD eyewear. International revenue is primarily earned in Europe, Asia and Australia.

Our cinema business is strongly tied to the release of 3D motion pictures. These motion pictures tend to be released based on specific consumer entertainment dynamics, which results in seasonal patterns, with the largest number of motion pictures being released in summer and early winter. Although we have not yet generated material revenue in the 3D consumer electronics market, we expect to derive revenue from the licensing of our RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content producers and distributors. As a result, we expect a portion of our revenue growth in the future to be affected by the consumer electronics market, including the impact of supply chain timelines of the major consumer electronics manufacturers.

We record revenue net of motion picture exhibitor stock options and estimated revenue allowances. Historically, allowances, which include accruals for product returns, have been insignificant.

Upfront payments for the purchase of RealD eyewear and license fees associated with certain motion picture exhibitor license agreements are recorded as deferred revenue until the applicable revenue recognition criteria are met.

Motion picture exhibitor stock options.    In connection with some of our motion picture exhibitor license agreements, we issued to three motion picture exhibitors 10-year options to

42


Table of Contents


purchase an aggregate of 3,668,340 shares of our common stock at an exercise price of approximately $0.00667 per share. The stock options vest upon the achievement of screen installation targets. As of March 26, 2010, 407,593 of the motion picture exhibitor stock options had vested. Motion picture exhibitor stock options are valued at the underlying stock price at each reporting period until the targets are met. Accordingly, the value and impact on our revenue after this offering will fluctuate based on the trading price of our stock on the NYSE. Amounts recognized are based on the number of RealD-enabled screens as a percentage of total screen targets. The stock options do not have net cash settlement features. Amounts recorded as a revenue reduction totaled $4.9 million for the year ended March 27, 2009 and $39.2 million for the year ended March 26, 2010. As of March 26, 2010, unrecognized motion picture exhibitor stock options reductions to revenue totaled $40.5 million based upon an estimated fair value of our common stock of $23.07 per share and 100% achievement of screen installation targets. Reductions to revenue resulting from motion picture exhibitor stock options may increase as compared to a previous period as the estimated fair value of our common stock and number of RealD-enabled screen installations increase. We did not issue stock options to our motion picture exhibitor licensees prior to our fiscal year 2009.

Cost of revenue and operating expenses

Cost of revenue principally consists of depreciation expense of our RealD Cinema Systems deployed at a motion picture exhibitor's premises, digital projector depreciation expenses, RealD eyewear costs (including shipping, handling and recycling costs) and occupancy costs.

We classify our operating expenses into three categories: research and development, selling and marketing and general and administrative. Personnel costs include salaries, bonuses, benefits and share-based compensation. We allocate share-based compensation expense resulting from the amortization of the fair value of stock options granted based on how we categorize the department in which the stock option holder works.

Research and development.    Research and development costs principally consist of personnel costs related to our research and development staff, depreciation and amortization of research and development assets, prototype and materials costs, the cost of third-party service providers supporting our research and development efforts and occupancy costs.

Selling and marketing.    Selling and marketing costs principally consist of personnel costs related to our selling and marketing staff, advertising costs, including promotional events and other brand building initiatives and product marketing expenses, corporate communications, professional fees, occupancy costs and travel expenses.

General and administrative.    General and administrative costs principally consist of personnel costs related to our executive, legal, finance, and human resources staff, professional fees including legal and accounting costs, occupancy costs and internal costs in preparation to become a public company. Additionally, general and administrative costs include sales, use, goods and services tax, and property taxes and management fees payable to a stockholder, which will terminate upon consummation of this offering. For our U.S. cinema license and product revenue, we absorb the majority of sales and use taxes and do not pass such costs on to our customers.

43


Table of Contents

Results of operations

The following table sets forth our consolidated statements of operations and other data for each of the periods indicated:

   
 
  Year ended  
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Consolidated statements of operations data:

                   

Gross revenue

  $ 23,378   $ 44,553   $ 189,080  
 

Motion picture exhibitor options

        (4,878 )   (39,234 )
       

Net revenue

    23,378     39,675     149,846  

Cost of revenue

    13,500     27,107     140,603  
       

Gross margin

    9,878     12,568     9,243  

Operating expenses:

                   
 

Research and development

    11,166     8,915     11,021  
 

Selling and marketing

    7,311     11,009     16,811  
 

General and administrative

    8,006     7,940     15,638  
       
   

Total operating expenses

    26,483     27,864     43,470  
       

Operating loss

    (16,605 )   (15,296 )   (34,227 )

Interest expense

    (1,257 )   (949 )   (1,730 )

Other income (loss)

    (7 )   100     (1,112 )
       

Loss from continuing operations before income taxes

    (17,869 )   (16,145 )   (37,069 )

Income tax expense

    20     219     2,680  
       

Loss from continuing operations

    (17,889 )   (16,364 )   (39,749 )

Discontinued operations, net of tax

    (11,796 )        
       

Net loss

    (29,685 )   (16,364 )   (39,749 )

Net loss attributable to noncontrolling interests

    421     727     896  

Accretion of preferred stock

    (8,001 )   (9,826 )   (12,372 )
       

Net loss attributable to RealD Inc. common stockholders

  $ (37,265 ) $ (25,463 ) $ (51,225 )
       

Other data:

                   
 

Adjusted EBITDA(1)

  $ (3,768 ) $ 1,072   $ 22,727  
   
(1)
Adjusted EBITDA is a Non-U.S. GAAP financial measure. For a definition of Adjusted EBITDA and reconciliation to net loss, the most comparable U.S. GAAP item, see "—Non-U.S. GAAP discussion."

44


Table of Contents

The following table sets forth our consolidated statements of operations and other data as a percentage of net revenue for each of the periods indicated:

   
 
  Year ended  
 
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Consolidated statements of operations data:

                   

Net revenue

    100%     100%     100%  

Cost of revenue

    57.7     68.3     93.8  

Gross margin

    42.3     31.7     6.2  

Operating expenses:

                   
 

Research and development

    47.8     22.5     7.4  
 

Selling and marketing

    31.3     27.7     11.2  
 

General and administrative

    34.2     20.0     10.4  
       
   

Total operating expenses

    113.3     70.2     29.0  
       

Operating loss

    (71.0 )   (38.6 )   (22.8 )

Interest expense

    (5.4 )   (2.4 )   (1.2 )

Other income (loss)

    (0.0 )   0.3     (0.7 )
       

Loss from continuing operations before income taxes

    (76.4 )   (40.7 )   (24.7 )

Income tax expense

    0.1     0.6     1.8  
       

Loss from continuing operations

    (76.5 )   (41.2 )   (26.5 )

Net loss

    (127.0 )%   (41.2 )%   (26.5 )%
       

Other data:

                   
 

Adjusted EBITDA(1)

    (16.1 )%   2.7 %   15.2 %
   
(1)
For a definition of Adjusted EBITDA and reconciliation to net loss, the most comparable U.S. GAAP item, see "—Non-U.S. GAAP discussion."

45


Table of Contents

The following table sets forth share-based compensation and depreciation and amortization included in the above line items:

   
 
  Year ended  
Share-based compensation
(dollars in thousands)

  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Cost of revenue

  $ 88   $ 46   $ 60  

Research and development

    809     866     985  

Selling and marketing

    441     744     1,589  

General and administrative

    169     276     275  
       
 

Total

  $ 1,507   $ 1,932   $ 2,909  
   

 

   
 
  Year ended  
Depreciation and amortization
(dollars in thousands)

  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Cost of revenue

  $ 3,772   $ 4,655   $ 7,426  

Research and development

    991     745     452  

Selling and marketing

    406     114      

General and administrative

    127     84     74  
       
 

Total

  $ 5,296   $ 5,598   $ 7,952  
   

46


Table of Contents

In the period to period comparative discussion below, we describe our net revenue, license revenue (composed principally of revenue from our RealD Cinema Systems), and product and other revenue (principally composed of our RealD eyewear and, to a much lesser extent, professional product revenue).

Year ended March 26, 2010 compared to year ended March 27, 2009

Revenue

For the year ended March 26, 2010, net revenue increased $110.1 million to $149.8 million compared to $39.7 million for the year ended March 27, 2009.

   
 
  Year ended    
   
 
(dollars in thousands)
  March 27,
2009

  March 26,
2010

  Amount
change

  Percentage
change

 
   

Revenue:

                         

Gross license

  $ 17,620   $ 80,148   $ 62,528     354.9%  

Motion picture exhibitor options

    (4,878 )   (39,234 )   (34,356 )   704.3%  
       
 

Net license

    12,742     40,914     28,172     221.1%  
       

Product and other

    26,933     108,932     81,999     304.5%  
       
 

Total net revenue

  $ 39,675   $ 149,846   $ 110,171     277.7%  
       

Other data:

                         

Number of RealD-enabled screens (at period end)

                         
 

Total domestic RealD-enabled screens

    1,703     3,385     1,682     98.8%  
 

Total international RealD-enabled screens

    405     1,936     1,531     378.0%  
 

Total RealD-enabled screens

   
2,108
   
5,321
   
3,213
   
152.4%
 

Number of locations with RealD-enabled screens (at period end)

                         
 

Total domestic locations with RealD-enabled screens

    1,147     1,837     690     60.2%  
 

Total international locations with RealD-enabled screens

    376     1,197     821     218.4%  
 

Total locations with RealD-enabled screens

    1,523     3,034     1,511     99.2%  

Number of 3D motion pictures (released during period)

    8     13     5     62.5%  
   

This significant increase in net revenue was primarily due to an increase in the number of RealD-enabled screens, an increase in the number of 3D motion pictures released and the resulting increase in the box office of 3D motion pictures on RealD-enabled screens.

Net license revenue for the year ended March 26, 2010 includes admission-based fees related to the following motion pictures: Avatar ($27.9 million), Up ($8.5 million), Alice in Wonderland ($7.2 million), Monsters vs. Aliens ($4.9 million), Ice Age 3 ($6.2 million), GForce ($3.7 million) and Christmas Carol ($4.2 million). Net license revenue for the year ended March 27, 2009 includes admission-based fees related to the following motion pictures: Bolt ($2.0 million), Journey to the Center of the Earth ($2.1 million), My Bloody Valentine ($1.5 million) and

47


Table of Contents


Coraline ($1.6 million). Both domestically and internationally, our net license revenue increased during the period as a result of the increased number of RealD-enabled screens and the number of 3D motion pictures increasing the box office. The significant increase in gross license revenue was partially offset by higher reductions to gross license revenue relating to motion picture exhibitor stock options. Reduction to revenue resulting from motion picture exhibitor stock options increased $34.4 million based upon the change in the estimated fair value of our common stock and the number of RealD-enabled screens of the related exhibitor. The reduction to revenue resulting from motion picture exhibitor stock options in the year ended March 26, 2010 reflects an estimated fair value of our common stock of $23.07 per share and 1,374 deployed RealD Cinema Systems out of 4,500 RealD Cinema Systems set forth in the performance vesting targets. As of March 26, 2010, unrecognized motion picture exhibitor stock options reductions to revenue totaled $40.5 million based upon an estimated fair value of our common stock of $23.07 per share and 100% achievement of screen installation targets. Reductions to revenue resulting from motion picture exhibitor stock options may increase as compared to a previous period as the estimated fair value of our common stock and number of RealD-enabled screen installations increase.

The increase in our net product revenue in the year ended March 26, 2010, as compared to the year ended March 27, 2009, was primarily a result of an increase in the number of consumers attending 3D motion pictures using our RealD eyewear. The growth in our product revenue was partially offset by a continued decline in our 3D professional revenue.

We expect our future revenue, particularly in our license business, will be driven by the number of RealD-enabled screens and motion pictures released in 3D. During the year ended March 26, 2010, our product revenue experienced price pressures. As the volume of RealD eyewear usage increases as a result of an expanding 3D motion picture slate and box office, we anticipate additional price pressure from our customers. As a result, we expect our net revenues will increase at a slower rate in future periods.

Cost of revenue

   
 
  Year ended    
   
 
(dollars in thousands)
  March 27,
2009

  March 26,
2010

  Amount
change

  Percentage
change

 
   

Revenue

  $ 39,675   $ 149,846   $ 110,171     277.7%  
       

Cost of revenue:

                         

License

  $ 4,944   $ 9,452   $ 4,508     91.2%  

Product and other

    22,163     131,151     108,988     491.8  
       
 

Total cost of revenue

  $ 27,107   $ 140,603   $ 113,496     418.7%  
       

Gross profit

  $ 12,568   $ 9,243   $ (3,325 )   (26.5% )

Gross margin

    31.7%     6.2%              
   

Our cost of revenue increased primarily due to increased RealD eyewear sales. Cost of revenue increased, as a percentage of revenue, to 93.8% for the year ended March 26, 2010, as compared to 68.3% for the year ended March 27, 2009. The decrease in gross margin was primarily due to the increased use of RealD eyewear which generates lower gross margin as well as an increase in the reduction to revenue resulting from motion picture exhibitor stock

48


Table of Contents


options. The increased use of RealD eyewear was driven by increased attendance. The $34.4 million increase in reduction to revenue resulting from motion picture exhibitor stock options directly contributed to a $34.4 million decline in gross profit. Excluding the impact of motion picture stock options, gross profit would have increased $31.1 million from $17.4 million for fiscal 2009 to $48.5 million for fiscal 2010 and gross margin would have been 25.6% for fiscal 2010. We expect our gross margins to increase in the future as licensing revenue becomes a larger portion of our total revenue.

License cost of revenue increased primarily as a result of a $2.5 million increase in depreciation expense and a $1.0 million increase in cinema installation costs, in each case, resulting from an increase in RealD-enabled screens.

We had a negative product and other gross profit of $22.2 million for the year ended March 26, 2010 primarily due to RealD eyewear. The increase in our cost of product revenue and negative gross margins are a result of the increase in the volume of RealD eyewear. In the year ended March 26, 2010, we began to fully assume the logistics costs for domestic distribution of RealD eyewear and commenced a domestic recycling program. Inbound and outbound freight expense increased an aggregate of $16.4 million as a result of assuming logistical responsibilities for RealD eyewear. In addition, included in this $16.4 million increase is $8.5 million of expedited shipping expenses we incurred in the three months ended March 26, 2010 to satisfy a significant increase in demand. Significant costs associated with the establishment and expansion of the recycling program have been expensed in the period incurred, which further reduced gross margin. Recycling costs totaled $6.6 million during the year ended March 26, 2010, and include program start up costs, the cost to transport RealD eyewear between theaters and the recycling production facility and costs to process the RealD eyewear for reuse. As we improve and expand our recycling to achieve a lower average unit cost, we may continue to incur a negative product gross profit.

Our cost of revenue as a percentage of net revenue will be affected in the future by the relative mix of net license and net product revenue and the impact of motion picture exhibitor options. As the number of RealD-enabled screens and the number of 3D motion pictures and attendance increase, we expect our total cost of revenue will continue to increase. In particular, we are incurring significant air shipping costs to meet the demand for our RealD eyewear. We expect this increase to be partially offset by the benefits of the full implementation of cost reduction efforts and increased recycling of our RealD eyewear.

Operating expenses

   
 
  Year ended    
   
 
(dollars in thousands)
  March 27,
2009

  March 26,
2010

  Amount
change

  Percentage
change

 
   

Research and development

  $ 8,915   $ 11,021   $ 2,106     23.6%  

Selling and marketing

    11,009     16,811     5,802     52.7%  

General and administrative

    7,940     15,638     7,698     97.0%  
       
 

Total operating expenses

  $ 27,864   $ 43,470   $ 15,606     56.0%  
   

Research and development.    Our research and development expenses increased primarily due to a $1.6 million increase in personnel costs, as we increased the number of research and

49


Table of Contents


development personnel to 25 at March 26, 2010 from 22 at March 27, 2009 to increase our product development and engineering capabilities. We expect to increase our research and development expenses to support our anticipated growth in consumer electronics projects and initiatives, primarily for additional personnel, consultants and prototype and materials costs, as well as for continued investment in our cinema business.

Selling and marketing.    Our selling and marketing expenses increased primarily due to our expansion into Europe, additional advertising and marketing initiatives, and higher personnel costs. As a result of the establishment of our European office, our selling and marketing expenses increased $1.0 million. Personnel costs increased $3.4 million, or 131.9%, driven primarily by our expansion of marketing efforts worldwide, including new employees in our European office, executive bonuses and share-based compensation. The total number of selling and marketing personnel increased to 18 at March 26, 2010 from 13 at March 27, 2009. The remainder of the increase was due to additional spending on advertising, marketing programs and sales promotions. Personnel costs and advertising spending are expected to continue to increase in order to drive revenue growth. We expect to incur additional selling and marketing expenses in fiscal year 2011 as we increase our international marketing efforts, particularly in Asia, and build our consumer electronics business worldwide.

General and administrative.    Our general and administrative expenses increased primarily due to a $4.6 million increase in sales and use taxes as a result of increased revenue. We absorb the majority of all sales and use taxes in the United States and do not pass such costs on to our customers. Personnel costs increased $2.0 million, or 94.6%, as we increased the number of general and administrative employees to 15 at March 26, 2010 from 11 at March 27, 2009 to support our overall growth. We expect to incur additional general and administrative expenses for sales and use taxes as our revenue in the United States grows, as well as to comply with SEC reporting requirements, stock exchange listing standards and provisions of the Sarbanes-Oxley Act of 2002.

Other

Interest expense.    Our interest expense increased primarily due to increases in borrowings under our credit facility. Our borrowings under the credit facility increased to $20.1 million at March 26, 2010 from $5.0 million at March 27, 2009. With the use of proceeds of this offering, we expect to pay down indebtedness, which would decrease our interest expense.

Income tax.    Our income tax expense increased $2.5 million primarily due to a $2.4 million increase in our foreign tax expense. We have net operating losses that may potentially be offset against future earnings. As of March 26, 2010, we had net operating loss carryforwards of approximately $48.2 million for federal and $41.5 million for state purposes. We expect to incur an increasing amount of income tax expenses that relate primarily to state income tax and international operations. We file federal income tax returns and income tax returns in various state and foreign jurisdictions. Due to the net operating loss carryforwards, our United States federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

Noncontrolling interest.    Noncontrolling interest represents a 44.4% interest in our subsidiary, Digital Link II, LLC, or Digital Link II. Digital Link II was formed for purposes of funding the deployment of digital projector systems and servers to our motion picture exhibitor licensees.

50


Table of Contents


The increase in the loss attributable to noncontrolling interest was primarily due to depreciation and property taxes on additional digital projectors leased by that subsidiary.

Year ended March 27, 2009 compared to year ended March 31, 2008

Revenue

For the year ended March 27, 2009, net revenue increased $16.3 million to $39.7 million compared to $23.4 million for the year ended March 31, 2008.

   
 
  Year ended    
   
 
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  Amount
change

  Percentage
change

 
   

Revenue:

                         

Gross license

  $ 10,646   $ 17,620   $ 6,974     65.5%   

Motion picture exhibitor options

        (4,878 )   (4,878 )   *(1)  
       
 

Net license

    10,646     12,742     2,096     19.7%   
       

Product and other

    12,732     26,933     14,201     111.5%   
       
 

Total net revenue

  $ 23,378   $ 39,675   $ 16,297     69.7%   
       

Other data:

                         

Number of RealD-enabled screens (at period end)

                         
 

Total domestic RealD-enabled screens

    997     1,703     706     70.8%   
 

Total international RealD-enabled screens

    176     405     229     130.1%   
       
   

Total RealD-enabled screens

    1,173     2,108     935     79.7%   

Number of locations with RealD-enabled screens (at period end)

                         
 

Total domestic locations with RealD-enabled screens

    673     1,147     474     70.4%   
 

Total international locations with RealD-enabled screens

    172     376     204     118.6%   
       
   

Total locations with RealD-enabled screens

    845     1,523     678     80.2%   

Number of 3D motion pictures (released during period)

    5     8     3     60.0%  
   
(1)
Not meaningful.

This significant increase in net revenue was primarily due to an increase in the number of 3D motion pictures released and RealD-enabled screens, and an increase in the box office of 3D motion pictures on our RealD Cinema Systems.

Net license revenue for the year ended March 27, 2009 includes admission-based fees related to the following motion pictures: Bolt ($2.0 million), Journey to the Center of the Earth ($2.1 million), My Bloody Valentine ($1.5 million), and Coraline ($1.6 million). The majority of the net license revenue (approximately 84%) for the year ended March 31, 2008 was generated under fixed annual fee arrangements. Both domestically and internationally, our net license revenue increased during the period as a result of the increased number of RealD-enabled screens, the number of 3D motion pictures released and box office on RealD-enabled screens.

51


Table of Contents

Our revenue was reduced by $4.9 million due to motion picture exhibitor stock options in the year ended March 27, 2009. Calculation of reduction to revenue assumes an estimated fair value of our common stock of $10.00 per share and 350 deployed RealD Cinema Systems out of 3,000 RealD Cinema Systems set forth in the performance targets.

The increase in our net product revenue in the year ended March 27, 2009, compared to the year ended March 31, 2008, was primarily a result of an increase in the number of consumers attending 3D motion pictures using our RealD eyewear.

Cost of revenue

   
 
  Year ended    
   
 
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  Amount
change

  Percentage
change

 
   

Revenue

  $ 23,378   $ 39,675   $ 16,297     69.7%  
       

Cost of revenue:

                         

License

  $ 4,544   $ 4,944   $ 400     8.8%  

Product and other

    8,956     22,163     13,207     147.5%  
       
 

Total cost of revenue

  $ 13,500   $ 27,107   $ 13,607     100.8%  
       

Gross margin

  $ 9,878   $ 12,568   $ 2,690     27.2%  

Gross margin percentage

    42.3%     31.7%              
   

Our cost of revenue increased primarily due to an increase in RealD eyewear costs. Cost of revenue increased, as a percentage of net revenue, to 68.3% for the year ended March 27, 2009, as compared to 57.7% for the year ended March 31, 2008. The decrease in gross margin was primarily due to the increased use of RealD eyewear which generates lower gross margin. The increased use of RealD eyewear was driven by increased attendance.

License cost of revenue increased primarily as a result of a $1.0 million increase in depreciation expense resulting from an increase in digital projectors and RealD-enabled screens and $0.6 million increase in repairs and maintenance partially offset by reduced production costs. The increase in product and other cost of revenue is due primarily to increased use of RealD eyewear.

Operating expenses

   
 
  Year ended    
   
 
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  Amount
change

  Percentage
change

 
   

Research and development

  $ 11,166   $ 8,915   $ (2,251 )   (20.2)%  

Selling and marketing

    7,311     11,009     3,698     50.6%  

General and administrative

    8,006     7,940     (66 )   (0.8)%  
       
 

Total operating expenses

  $ 26,483   $ 27,864   $ 1,381     5.2%  
   

Research and development.    Our research and development expenses declined primarily as a result of a decline in impairment charges related to intangibles of $1.7 million from $2.8 million to $1.1 million and a $0.6 million decline in consulting fees during the year ended

52


Table of Contents


March 27, 2009. Research and development headcount decreased to 22 at March 27, 2009 from 25 at March 31, 2008.

Selling and marketing.    Our selling and marketing expenses increased primarily as a result of higher personnel costs and brand-building initiatives. An increase in personnel related costs contributed to $0.3 million of the increase, as the total number of sales and marketing personnel increased to 13 at March 27, 2009 from 9 at March 31, 2008. Marketing expenses increased $2.9 million as a result of our arrangements with motion picture studios relating to our brand awareness initiatives.

General and administrative.    Our general and administrative expenses decreased by $0.1 million. Consulting fees declined $0.4 million as a result of a one-time project that ended in 2008. Accounting fees increased $0.4 million as a result of increased work on tax and other accounting matters.

Other

Interest expense.    Our interest expense decreased primarily due to reductions in borrowings as we repaid notes totaling $3.6 million in March 2008.

Noncontrolling Interest.    Noncontrolling interest represents a 44.4% interest in Digital Link II. The increase in the noncontrolling interest in the year ended March 27, 2009 of $0.3 million as compared to the year ended March 31, 2008 is due primarily to depreciation and property taxes on additional digital projectors leased by the subsidiary.

Discontinued operations

For the year ended March 31, 2008, we incurred a loss from discontinued operations, net of tax, of approximately $11.8 million primarily due to a loss on the sale of our 51% interest in ColorLink Japan in November 2007.

53


Table of Contents

Quarterly results and seasonality

The following table sets forth unaudited quarterly consolidated statement of operations data for the four quarters of fiscal 2009 and fiscal 2010. We have prepared the statement of operations data for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of the management, the statement of operations data includes all adjustments, consisting solely of normal recurring adjustments necessary for the fair statement of the results of operations for these periods. This information should be read together with the audited consolidated financial statements and related notes. These quarterly results of operations are not necessarily indicative of our operating results for any future period.

   
 
  Three months ended  
(dollars in thousands)
  June 27,
2008

  September 26,
2008

  December 26,
2008

  March 27,
2009

  June 26,
2009

  September 25,
2009

  December 25,
2009

  March 26,
2010

 

 

 

                                                 
 
  (unaudited)
   
 

Gross revenue

  $ 3,227   $ 13,295   $ 7,405   $ 20,626   $ 30,642   $ 39,777   $ 41,989   $ 76,672  
 

Motion picture exhibitor options

            (2,287 )   (2,591 )   (5,078 )   (1,094 )   (11,794 )   (21,268 )
       

Net revenue

    3,227     13,295     5,118     18,035     25,564     38,683     30,195     55,404  
       

Cost of revenue

    1,928     6,748     4,904     13,527     22,701     30,357     31,627     55,918  
       

Gross margin

    1,299     6,547     214     4,508     2,863     8,326     (1,432 )   (514 )

Operating expenses:

                                                 
 

Research and development

    2,176     1,880     1,963     2,896     2,400     2,605     2,322     3,694  
 

Selling and marketing

    2,836     1,652     2,124     4,397     3,902     3,879     3,342     5,688  
 

General and administrative

    1,861     2,040     2,640     1,399     2,731     3,219     3,920     5,768  
       
   

Total operating expenses

    6,873     5,572     6,727     8,692     9,033     9,703     9,584     15,150  
       

Operating income (loss)

    (5,574 )   975     (6,513 )   (4,184 )   (6,170 )   (1,377 )   (11,016 )   (15,664 )

Interest expense

    (203 )   (216 )   (242 )   (288 )   (282 )   (292 )   (575 )   (581 )

Other income (loss)

    198     (15 )   (33 )   (50 )   (10 )   (450 )   (210 )   (442 )
       

Income (loss) before income taxes

    (5,579 )   744     (6,788 )   (4,522 )   (6,462 )   (2,119 )   (11,801 )   (16,687 )

Income tax expense

    33     52     53     81     527     426     478     1,249  
       

Net income (loss)

    (5,612 )   692     (6,841 )   (4,603 )   (6,989 )   (2,545 )   (12,279 )   (17,936 )

Net loss attributable to noncontrolling interests

    158     118     221     230     237     228     261     170  

Accretion of preferred stock

    (2,456 )   (2,456 )   (2,457 )   (2,457 )   (3,092 )   (3,093 )   (3,093 )   (3,094 )
       

Net loss attributable to RealD Inc. common stockholders

  $ (7,910 ) $ (1,646 ) $ (9,077 ) $ (6,830 ) $ (9,844 ) $ (5,410 ) $ (15,111 ) $ (20,860 )
   

54


Table of Contents


   
 
  Three months ended  
 
  June 27,
2008

  September 26,
2008

  December 26,
2008

  March 27,
2009

  June 26,
2009

  September 25,
2009

  December 25,
2009

  March 26,
2010

 
   

    (unaudited)        

Net revenue

    100%     100%     100%     100%     100%     100%     100%     100%  

Cost of revenue

    59.7     50.8     95.8     75.0     88.8     78.5     104.7     100.9  
       

Gross margin

    40.3     49.2     4.2     25.0     11.2     21.5     (4.7 )   (0.9 )

Operating expenses:

                                                 
 

Research and development

    67.4     14.1     38.4     16.1     9.4     6.7     7.7     6.7  
 

Selling and marketing

    87.9     12.4     41.5     24.4     15.3     10.0     11.1     10.3  
 

General and administrative

    57.7     15.3     51.6     7.8     10.7     8.3     13.0     10.4  
       
   

Total operating expenses

    213.0     41.9     131.4     48.2     35.3     25.1     31.7     27.3  
       

Operating income (loss)

    (172.7 )   7.3     (127.3 )   (23.2 )   (24.1 )   (3.6 )   (36.5 )   (28.3 )

Interest expense

    (6.3 )   (1.6 )   (4.7 )   (1.6 )   (1.1 )   (0.8 )   (1.9 )   (1.0 )

Other income (loss)

    6.1     (0.1 )   (0.6 )   (0.3 )   (0.0 )   (1.2 )   (0.7 )   (0.8 )
       

Income (loss) before income taxes

    (172.9 )   5.6     (132.6 )   (25.1 )   (25.3 )   (5.5 )   (39.1 )   (30.1 )

Income tax expense (benefit)

    1.0     0.4     1.0     0.4     2.1     1.1     1.6     2.3  
       

Net income (loss)

    (173.9 )   5.2     (133.7 )   (25.5 )   (27.3 )   (6.6 )   (40.7 )   32.4  

Net loss attributable to noncontrolling interests

    4.9     0.9     4.3     1.3     0.9     0.6     0.9     0.3  

Accretion of preferred stock

    (76.1 )   (18.5 )   (48.0 )   (13.6 )   (12.1 )   (8.0 )   (10.2 )   (5.6 )
       

Net loss attributable to RealD Inc. common stockholders

    (245.1)%     (12.4)%     (177.4)%     (37.9)%     (38.5)%     (14.0)%     (50.0)%     (37.7)%  
   

55


Table of Contents

The following tables set forth share-based compensation and depreciation and amortization included in the above line items:

   
 
  Three months ended  
Share-based compensation
(dollars in thousands)

  June 27,
2008

  September 26,
2008

  December 26,
2008

  March 27,
2009

  June 26,
2009

  September 25,
2009

  December 25,
2009

  March 26,
2010

 
   
 
  (unaudited)
 

Cost of revenue

  $ 10   $ 11   $ 11   $ 14   $ 20   $ 20   $ 20   $  

Research and development

    197     242     261     166     328     215     211     231  

Selling and marketing

    168     192     188     196     348     409     431     401  

General and administrative

    54     73     63     86     68     59     101     47  
       
 

Total

  $ 429   $ 518   $ 523   $ 462   $ 764   $ 703   $ 763   $ 679  
   

 

   
 
  Three months ended  
Depreciation and amortization
(dollars in thousands)

  June 27,
2008

  September 26,
2008

  December 26,
2008

  March 27,
2009

  June 26,
2009

  September 25,
2009

  December 25,
2009

  March 26,
2010

 
   
 
  (unaudited)
 

Cost of revenue

  $ 1,109   $ 1,136   $ 1,179   $ 1,231   $ 1,494   $ 1,640   $ 1,870   $ 2,422  

Research and development

    167     172     222     184     94     102     117     139  

Selling and marketing

    45     42     5     22     5     4     5     (14 )

General and administrative

    22     22     21     19     19     19     18     18  
       
 

Total

  $ 1,343   $ 1,372   $ 1,427   $ 1,456   $ 1,612   $ 1,765   $ 2,010   $ 2,565  
   

The following table sets forth key business metrics for each quarter during fiscal 2009 and 2010 year to date:

   
 
  Three months ended  
(dollars in thousands)
  June 27,
2008

  September 26,
2008

  December 26,
2008

  March 27,
2009

  June 26,
2009

  September 25,
2009

  December 25,
2009

  March 26,
2010

 
   
 
  (unaudited)
 

Number of RealD-enabled

                                                 
 

screens (at period end):

                                                 

Total domestic RealD-

                                                 
 

enabled screens

    1,136     1,196     1,323     1,703     2,090     2,277     2,803     3,385  

Total international

                                                 
 

RealD-enabled screens

    221     239     225     405     680     1,042     1,483     1,936  
       
 

Total RealD-enabled

                                                 
 

screens

    1,357     1,435     1,548     2,108     2,770     3,319     4,286     5,321  

Number of 3D motion pictures (released during period)

        2     2     4     2     5     4     2  
       

Adjusted EBITDA(1)

  $ (3,338 ) $ 3,322   $ (1,572 ) $ 2,660   $ 2,252   $ 3,859   $ 5,397   $ 11,219  
   
(1)
Adjusted EBITDA is a Non-U.S. GAAP financial measure. For a definition of Adjusted EBITDA and reconciliation to net loss, the most comparable U.S. GAAP item, see "—Non-U.S. GAAP discussion."

In addition, as of June 1, 2010, the total number of Real-enabled screens increased from 5,321 to 5,966, and the total number of locations with RealD-enabled screens increased from 3,034 to 3,192.

Although not apparent in our results of operations due to our rapid growth rate, our operations are generally subject to the number of 3D motion pictures released and the box office of those 3D motion pictures. We expect to experience seasonal fluctuations in results of operations as a result of changes in the number of 3D motion pictures released and the box

56


Table of Contents


office of those 3D motion pictures. Our quarterly financial results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control. Factors that may cause our operating results to vary or fluctuate include those discussed in the "Risk factors" section of this prospectus.

Although our unaudited consolidated interim financial statements for the three months ended June 25, 2010 are not yet complete, for the three months ended June 25, 2010, we currently anticipate reporting gross revenue of between approximately $60 million and $65 million as compared to gross revenue of $76.7 million for the three months ended March 26, 2010. We believe our estimated gross revenue decreased as a result of the period-to-period decline in the 3D motion picture box office. The period-to-period variance is primarily attributable to the seasonal release patterns of 3D motion pictures and the performance of Avatar (the highest grossing motion picture of all time) during the three months ended March 26, 2010, which was not replicated during the three months ended June 25, 2010. We currently anticipate reporting an increase in our net revenue for the three months ended June 25, 2010, as compared to net revenue of $55.4 million (after adjustment to revenue of $21.3 million relating to motion picture exhibitor options) for the three months ended March 26, 2010. We believe our net revenue will increase primarily as a result of a significant decrease in our estimated adjustment to revenue relating to motion picture exhibitor options in the three months ended June 25, 2010, attributable to a decrease in the estimated stock price and an increase in screen installation targets. See "—Key components of our results of operations—Revenue—Motion picture exhibitor stock options."

For the three months ended June 25, 2010, although all expense items for the three months ended June 25, 2010 are not reasonably available at this time, we currently anticipate reporting positive net income, as compared to the net loss of $17.9 million reported for the three months ended March 26, 2010. We believe this anticipated improvement is primarily attributable to the anticipated increase in net revenue discussed above, as well as an estimated increase in other income, primarily attributable to the sale of digital projectors to motion picture exhibitors. Although all line items to reconcile Adjusted EBITDA to net income (loss) for the three months ended June 25, 2010 are not reasonably available at this time, we currently anticipate reporting positive Adjusted EBITDA for the three months ended June 25, 2010 in an amount less than the $11.2 million reported in the three months ended March 26, 2010. Adjusted EBITDA is a Non-U.S. GAAP financial measure. For a definition of Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see "—Non-U.S. GAAP discussion."

We have prepared the above estimate of our anticipated results in good faith based on our internal reporting for the three months ended June 25, 2010. We are currently performing our quarterly closing procedures for the three months ended June 25, 2010, and as such, these estimates represent the most current information available to management but are not yet final, are subject to further review and could change materially. As a result, the anticipated results are not statements of historical fact, and are forward-looking statements that are subject to known and unknown risks and uncertainties. See "Forward-looking statements and other industry data." Our financial statements for the three months ended June 25, 2010 are not expected to be filed with the SEC until after this offering is completed. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the estimated financial information contained

57


Table of Contents


herein, nor have they expressed any opinion or any other form of assurance on such information, and assume no responsibility for such estimated financial information.

Liquidity and capital resources

Since our inception and through March 26, 2010, we have financed our operations through the sale of redeemable convertible preferred stock, borrowings under our credit facility with City National Bank and through the issuance of notes payable to stockholders and vendors, and net cash provided by operating activities during fiscal years 2009 and 2010. Our cash flow from operating activities has historically been significantly impacted by the contractual payment terms and patterns related to the license of our RealD Cinema Systems and use and sale of our RealD eyewear, as well as significant investments in research, development, selling and marketing activities and corporate infrastructure. Prior to fiscal 2010, many of our licensing and product sale contracts included terms that required upfront payments. During late fiscal 2009, many of our licensing agreements and domestic RealD eyewear arrangements were modified such that our revenue from licensing our RealD Cinema Systems and domestic sale of our RealD eyewear is earned and subsequently paid upon each admission and usage. Since a majority of our revenue recognized under our motion picture exhibitor licenses results in admission and usage fees being paid to us subsequent to such consumer attendance, we expect our deferred revenue balances to continue to decline over the next several years.

Cash provided by operating activities is expected to be a primary recurring source of funds in future periods and will be driven by increased revenue generated from the growing number of 3D motion pictures exhibited on our RealD Cinema Systems and an increase in the number of RealD-enabled screens, partially offset by increased working capital requirements associated with installing new RealD Cinema Systems as well as for building inventory, logistics and recycling costs for our RealD eyewear. Depending on our operating performance in any given period and the installation rate of additional RealD Cinema Systems, we expect to supplement our liquidity needs primarily with proceeds from this offering and borrowings under our new revolving credit facility with City National Bank.

At March 26, 2010, our primary sources of liquidity are our cash and cash equivalents of $13.1 million and our credit facility agreement with City National Bank providing for a revolving credit facility of $25 million, $14.8 million of which was available for borrowing. Our cash equivalents primarily consist of money market funds. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes.

During the period from March 26, 2010 through May 26, 2010, we received $15.4 million in cash from motion picture exhibitors from the sale of digital projectors, resulting in a gain of $6.7 million in other income. With the proceeds, we repaid an aggregate of $5.7 million of notes payable to the providers of those digital projectors. We also extended the maturity date of the foregoing revolving credit facility to December 31, 2010. We have entered into a new credit and security agreement with City National Bank, dated as of June 24, 2010, which provides for a revolving credit facility of up to $15.0 million and which will mature on June 30, 2012. This new credit and security agreement is expected to become effective on the date that this offering is completed and will replace our current credit and security agreement with City National Bank.

58


Table of Contents

Based on our current level of operations and anticipated growth, we believe that the proceeds from this offering, our new revolving credit facility, our cash inflow from operating activities, existing cash and cash equivalents and our ability to borrow on acceptable terms will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.

The following table sets forth our major sources and (uses) of cash for each period as set forth below.

   
 
  Year ended  
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Operating activities

  $ (1,583 ) $ 10,134   $ 15,135  

Investing activities

    (9,988 )   (12,107 )   (29,636 )

Financing activities

  $ 13,391   $ 8,229   $ 11,931  
   

Cash flow from operating activities

Net cash inflows from operating activities during the year ended March 26, 2010 primarily resulted from improved operating performance as RealD Cinema System installations and admissions increased. Net cash inflows from operating activities also benefited from increases in accounts payable and accrued expenses, partially offset by an increase in accounts receivable. Increases in accounts payable and accrued expenses were due to increased business activities at fiscal year end, resulting in significant amounts due to vendors and employees that were not paid until after the fiscal year end. Accounts receivable increased as a result of an increase in revenue.

Net cash inflows from operating activities during the year ended March 27, 2009 primarily resulted from a net loss and increases in accounts receivable and inventories more than offset by increases in accounts payable, deferred revenue and virtual print fees and customer deposits. Accounts receivable increased as a result of an increase in revenue. Inventories grew in order to support an increase in RealD Cinema System installations and admissions. Increases in accounts payables were the result of our deferring payments until after the end of the applicable fiscal period. Deferred revenue increased as a result of receiving payments in advance for motion picture releases. Virtual print fees and customer deposits that accumulated during the period increased primarily as a result of collections from studios based on the number of motion pictures exhibited using Digital Link and Digital Link II projectors.

Net cash outflows from operating activities during the year ended March 31, 2008 primarily resulted from a net loss, decreases in accounts payable offset by an increase in deferred revenue and decreases in accounts receivable. The decrease in accounts payable resulted from timely payment of vendors before fiscal year-end. Deferred revenue increased as a result of receiving payments in advance for motion picture releases. The decrease in accounts receivable was driven by large amounts invoiced for our RealD eyewear at the end of 2007.

Cash flow from investing activities and capital resources

For all periods presented, cash outflow for investing activities is primarily related to the establishment of our initial infrastructure and for the purchase of component parts for our RealD Cinema Systems, digital projectors, and other property, equipment and leasehold

59


Table of Contents


improvements. Capital expenditures were $30.2 million for fiscal year 2010, $12.1 million in fiscal year 2009 and $12.9 million in fiscal year 2008. We expect our capital expenditures to be approximately $40.0 million to $50.0 million for the fiscal year ending March 25, 2011. In the future, we will continue to invest in our business to grow sales and develop new products and support the related increasing employee headcount. We expect capital expenditures to represent a decreasing percentage of net revenue in the future.

On March 7, 2007, we acquired ColorLink for approximately $31.1 million, including $3.6 million in the form of a seller's note payable. Cash paid at acquisition net of cash acquired was $27.5 million. In November 2007, we sold our 51% interest in ColorLink Japan for approximately $2.9 million net of cash.

Cash flow from financing activities and IPO proceeds

From time to time, we enter into equipment purchase agreements with certain of our vendors for the purchase of digital projectors, digital servers, lenses and accessories. We pay a portion of the cost of the equipment upon delivery and finance a portion of the purchase price by issuing notes payable. Certain of these notes payable are non-interest bearing. In those cases, we record the net present value of the notes payable assuming an implied annual interest rate which is approximately 8%. Interest expense is based on annual interest rates ranging from 7.0% to 9.7%. The notes are secured by the underlying equipment. Notes payable totaled $11.3 million at March 26, 2010, $9.9 million at March 27, 2009 and $8.0 million at March 31, 2008.

As of March 26, 2010, we had $35.0 million of credit facilities pursuant to a credit facility agreement with City National Bank that provides for a maximum amount of borrowing under a revolving credit facility of $25.0 million and a term loan of $10.0 million. We have used amounts drawn under our credit facility agreement for working capital, capital expenditures and to finance operations. The revolving credit facility provides for, at our option, revolving LIBOR loans, which bear interest at the London Interbank Offered Rate (LIBOR) plus a margin of 4.25% and revolving prime loans which bear interest at the fluctuating Prime Rate plus a margin of 2.75%. The borrowings under the term loan currently bear interest at the LIBOR plus a margin of 7.5%. The credit facility agreement is collateralized by a first priority perfected security interest in certain assets, including substantially all of our tangible and intangible property.

Under the credit facility agreement, we are subject to limitations, including limitations on our ability to incur additional debt, make certain investments or acquisitions and enter into certain merger and consolidation transactions. We are also required to maintain compliance with certain financial covenants, including a minimum EBITDA target and minimum fixed charge coverage ratio. As of March 26, 2010, we were in compliance with all financial covenants in our credit facility agreement. If we fail to comply with any of the covenants, or if any other event of default, as defined in the agreement, occurs, the bank could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable. Additionally, upon the completion of this offering, all amounts outstanding under the credit facility agreement become due.

The credit facility agreement matures on the earlier of December 31, 2010 or the date upon which this offering is completed. Borrowings outstanding under the term loan totaled $10.0 million at March 26, 2010 and bear interest at 8.625%. Borrowings under the revolving

60


Table of Contents


loan credit facility totaled $10.2 million at March 26, 2010. The interest rates at March 26, 2010 related to our borrowings under the revolving loan credit facility ranged from 5.0% to 6.25%. As of March 26, 2010, there was $14.8 million available to borrow under the credit facility agreement.

We have entered into a new credit and security agreement with City National Bank, dated as of June 24, 2010, which provides for a revolving credit facility of up to $15.0 million. The new credit and security agreement is expected to become effective on the date this offering is completed and is scheduled to mature on June 30, 2012. Our obligations under the new credit and security agreement are secured by a first priority security interest in substantially all of our tangible and intangible assets in favor of City National Bank and are guaranteed by our subsidiaries, ColorLink and Stereographics. Under the new credit and security agreement, our business will be subject to certain limitations, including limitations on our ability to incur additional debt, make certain investments or acquisitions, enter into certain merger and consolidation transactions, and sell our assets other than in the ordinary course of business. We will also be required to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. If we fail to comply with any of the covenants or if any other event of default, as defined in the agreement, should occur, the bank could elect to prevent us from borrowing and declare the indebtedness to be immediately due and payable.

In the future, we may continue to utilize commercial financing, lines of credit and term loans for general corporate purposes, including investing in technology.

In December 2007, we sold 1,666,667 shares of Series D convertible preferred stock, or Series D preferred stock, at $12.00 per share. Total proceeds received were $20.0 million. Issuance costs incurred were $48,000. All shares of our Series D preferred stock were outstanding as of March 26, 2010.

In February 2007, we sold 5,139,500 shares of Series C mandatorily redeemable convertible preferred stock at $6.81 per share. Total proceeds received were $35.0 million. Issuance costs incurred were $3.2 million. All shares of our Series C mandatorily redeemable convertible preferred stock were outstanding as of March 26, 2010.

Our Series C mandatorily redeemable convertible preferred stock is classified as temporary equity under the SEC's guidance provided in ASR 268 because the holders of our Series C mandatorily redeemable convertible preferred stock have the right to cause us to redeem the instrument for cash for a specified period.

Prior to April 1, 2006, we issued 2,000,000 shares of Series A convertible preferred stock for $2.0 million, or $1.00 per share and 2,417,644 shares of Series B convertible preferred stock for $3.0 million or $1.24 per share. Issuance costs totaled $52,000 in connection with the issuance of both Series A and B convertible preferred stock. All shares of our Series A and B convertible preferred stock were outstanding as of March 26, 2010.

Our outstanding Series A, B and D convertible preferred stock and common stock are classified as part of permanent equity within the consolidated balance sheets based on their rights and preferences set forth under the certificate of incorporation, California law and the accounting standards pertaining to classification within the consolidated balance sheet. We therefore have

61


Table of Contents


recorded the Series A, B and D preferred stock at their original issuance price net of applicable issuance costs.

Upon the completion of this offering, all of our outstanding preferred stock will be converted into 16,835,714 shares of our common stock.

In November 2008, we entered into a stock purchase agreement with our shareholder of Series D preferred stock. We sold 199,999 shares of our common stock at $10.00 per share. Total proceeds received were $2 million. Issuance costs were $14,000.

In April 2007, we sold 240,000 shares of common stock at approximately $3.33 per share to former shareholders of ColorLink for cash proceeds of $800,000.

During fiscal 2006, we borrowed $6 million from Ledor, LLC, and during fiscal 2007, we borrowed $5 million from shareholders of Series A and Series B convertible redeemable preferred stock pursuant to credit agreements. Amounts borrowed were converted into an aggregate of 3,300,000 shares of our common stock during March 2007.

The non-controlling interest partner in our majority owned subsidiary made capital contributions of $1.6 million in fiscal 2008. There were no non-controlling interest partner capital contributions during fiscal 2010 and non-controlling interest partner capital contributions during fiscal 2009 were not significant.

To date, proceeds from employee stock option exercises have not been significant. After the completion of this offering and from time to time, we expect to receive cash from the exercise of employee stock options and warrants in our common stock. Proceeds from the exercise of employee stock options and warrants outstanding will vary from period to period based upon, among other factors, fluctuations in the market value of our common stock relative to the exercise price of such stock options and warrants.

Contractual obligations and commitments

The following table sets forth our contractual obligations and commitments as of March 26, 2010:

   
 
  Payments due by period  
(dollars in thousands)
  Total
  Less
than
1 year

  Years
2-3

  Years
4-5

  More
than
5 years

 
   

Credit facility agreement(1)

  $ 20,150   $ 20,150   $   $   $  

Notes payable(2)

    11,345     9,301     2,044          

Operating lease obligations(3)

    10,973     1,781     2,510     2,683     3,999  

Purchase obligations(4)

    2,804     2,804              
       

Total

  $ 45,273   $ 34,036   $ 4,554   $ 2,683   $ 3,999  
   
(1)
See Note 6, "Borrowings—Revolving Credit Facility and Term Loan" and Note 14, "Subsequent Events" to our consolidated financial statements, which are included elsewhere in this prospectus.

(2)
Consists of equipment purchase agreements with certain of our vendors for the purchase of digital projectors, digital servers, lenses and accessories. See Note 6, "Borrowings—Notes Payable," to our consolidated financial statements, which are included elsewhere in this prospectus.

(3)
See Note 7, "Commitments and Contingencies," to our consolidated financial statements, which are included elsewhere in this prospectus.

(4)
Consists of minimum contractual purchase obligations with certain of our vendors that include revolving 90-day supply commitments.

62


Table of Contents

Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.

Non-U.S. GAAP discussion

In addition to our U.S. GAAP results, we present Adjusted EBITDA as a supplemental measure of our performance. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP. In this prospectus, we define Adjusted EBITDA as net loss, plus interest expense, net, income taxes and depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-U.S. GAAP adjustments to our results prepared in accordance with U.S. GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Set forth below is a reconciliation of Adjusted EBITDA to net loss for the following periods indicated:

   
 
  Year ended  
(dollars in thousands)
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Net loss

  $ (29,685 ) $ (16,364 ) $ (39,749 )
       

Add (deduct):

                   
 

Interest expense

    1,257     949     1,730  
 

Income tax expense

    20     219     2,680  
 

Depreciation and amortization

    5,296     5,598     7,952  
 

Other (income) loss(1)

    7     (100 )   1,112  
 

Discontinued operations(2)

    11,796          
 

Share-based compensation expense(3)

    1,507     1,932     2,909  
 

Exhibitor option expense(4)

        4,878     39,234  
 

Impairment of assets and intangibles(5)

    4,261     2,037     426  
 

Sales and use tax(6)

    1,007     910     5,478  
 

Property tax(7)

    416     663     605  
 

Management fee(8)

    350     350     350  
       

Adjusted EBITDA

  $ (3,768 ) $ 1,072   $ 22,727  
   

63


Table of Contents


   
 
  Three months ended  
(in thousands)
  June 27,
2008

  September 26,
2008

  December 26,
2008

  March 27,
2009

  June 26,
2009

  September 25,
2009

  December 25,
2009

  March 26,
2010

 
   
 
  (unaudited)
 

Net income (loss)

  $ (5,612 ) $ 692   $ (6,841 ) $ (4,603 ) $ (6,989 ) $ (2,545 ) $ (12,279 ) $ (17,936 )
       

Add (deduct):

                                                 
 

Interest expense

    203     216     242     288     282     292     575     581  
 

Income tax expense

    33     52     53     81     527     426     478     1,249  
 

Depreciation and amortization

    1,343     1,372     1,427     1,456     1,612     1,765     2,010     2,565  
 

Other (income) loss(1)

    (198 )   15     33     50     10     450     210     442  
 

Share-based compensation expense(3)

    429     518     523     462     764     703     763     679  
 

Exhibitor option expense(4)

            2,287     2,591     5,078     1,094     11,794     21,268  
 

Impairment of assets and intangibles(5)

    (16 )   30     129     1,894     48     245     115     18  
 

Sales and use tax(6)

    303     155     298     154     720     1,133     1,470     2,155  
 

Property tax(7)

    89     185     189     200     112     208     174     111  
 

Management fee(8)

    88     87     88     87     88     88     87     87  
       

Adjusted EBITDA

  $ (3,338 ) $ 3,322   $ (1,572 ) $ 2,660   $ 2,252   $ 3,859   $ 5,397   $ 11,219  
   
(1)
Includes amortization of debt issue costs and unrealized foreign currency exchange gains and losses and gain on sale of digital projectors.

(2)
Represents loss from discontinued operations, net of tax, primarily due to a loss on the sale of our 51% interest in ColorLink Japan in November 2007.

(3)
Represents share-based compensation expense of nonstatutory and incentive stock options to employees, officers, directors and consultants.

(4)
Represents stock options granted to some of our motion picture exhibitor licensees. The amounts are recorded as contra revenue in the consolidated financial statements.

(5)
Represents impairment of long-lived assets, such as fixed assets, theatrical equipment and identifiable intangibles.

(6)
Represents taxes incurred by us for cinema license and product revenue.

(7)
Represents property taxes on RealD Cinema Systems and digital projectors.

(8)
Represents payment of management fees to our Series C mandatorily redeemable convertible preferred stockholder (included in general and administrative expense, which will terminate upon the completion of this offering).

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies; to evaluate potential acquisitions; in making compensation decisions; in communications with our board of directors concerning our financial performance and because our credit agreement uses Adjusted EBITDA to measure our compliance with certain covenants. Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

64


Table of Contents

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;

Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. Our consolidated financial statements and the notes to those statements included elsewhere in this prospectus are prepared in accordance with U.S. GAAP.

Critical accounting policies and estimates

This discussion is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, revenue deductions, product returns, fair value of our common stock, share-based compensation, inventories, definite lived asset impairments, goodwill impairment and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition and revenue reductions

We derive substantially all of our revenue from the license of our RealD Cinema Systems and the product sale of our RealD eyewear. We evaluate revenue recognition for transactions using the criteria set forth by the SEC in Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104) and Accounting Standards Codification Topic 605, Revenue Recognition ASC 605. The revenue recognition guidance states that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services

65


Table of Contents

have been rendered, the seller's price to the buyer is fixed or determinable and collectibility is reasonably assured.

License revenue.    License revenue is accounted for as an operating lease. License revenue is primarily derived under per-admission, periodic fixed fee, or per-motion picture basis with motion picture exhibitors. Amounts received up front, less estimated allowances, are deferred and recognized over the lease term using the straight-line method. Additional lease payments that are contingent upon future events outside our control, including those related to admission and usage, are recognized as revenues when the contingency is resolved and we have no more obligations to our customers specific to the contingent payment received. Certain of our license revenue from leasing our RealD Cinema Systems is earned upon admission by the motion picture exhibitor's consumers. Our licensees, however, do not report and pay for such license revenue until after the admission has occurred, which may be received subsequent to our fiscal period end. We estimate and record licensing revenue related to motion picture exhibitor consumer admissions in the quarter in which the admission occurs, but only when reasonable estimates of such amounts can be made. We determine that there is persuasive evidence of an arrangement upon the execution of a license agreement or upon the receipt of a licensee's admissions report. Revenue is deemed fixed or determinable upon verification of a licensee's admissions report in accordance with the terms of the underlying executed agreement or, in certain circumstances, receipt of a licensee's admissions report. We determine collectibility based on an evaluation of the licensee's recent payment history.

Product revenue.    We recognize product revenue, net of allowances, when title and risk of loss have passed and when there is persuasive evidence of an arrangement, the payment is fixed or determinable, and collectability of payment is reasonably assured. In the United States and Canada, certain of our product revenue from the sale of our RealD eyewear is earned upon admission and usage by the motion picture exhibitor's consumers. Our customers, however, do not report admission or usage information until after the admission and usage has occurred, and such information may be received subsequent to our fiscal period end. We estimate and record such product revenue in the quarter in which the admission and usage occurs, but only when reasonable estimates of such amounts can be made.

Revenue reductions.    We record revenue net of motion picture exhibitor stock options and estimated revenue allowances. Historically, allowances, which include accruals for product returns, have been insignificant, amounting to less than approximately 2% of gross revenue. Actual results have not required significant adjustments to those estimates. In connection with certain exhibitor licensing agreements, we issued the motion picture exhibitors a 10-year option to purchase shares of our common stock at approximately $0.00667 per share. The stock options vest upon the achievement of screen installation targets. Motion picture exhibitor stock options are valued at the underlying stock price at each reporting period until the targets are met. Amounts recognized are based on the number of RealD-enabled screens as a percentage of total screen installation targets. The stock options do not have net cash settlement features. Amounts recorded as a revenue reduction totaled $4.9 million and $39.2 million for the years ended March 27, 2009 and March 26, 2010, respectively. We did not issue stock options to any motion picture exhibitor licensees prior to the year ended March 27, 2009.

Fair value of common stock

The fair values of our common stock were estimated by our board of directors. To date, we have not obtained an independent valuation of our common stock. In the absence of a public

66


Table of Contents

trading market and an independent valuation, our board of directors considered numerous, contemporaneous objective and subjective factors to determine its best estimate of the fair market value of our common stock, including but not limited to, the following factors:

third-party trading transactions in our common stock and preferred stock;

the rights, preferences and privileges of our preferred stock relative to the common stock;

the development and completion of our 3D technologies;

projected Adjusted EBITDA (See "—Non-U.S. GAAP discussion");

projected number of RealD-enabled domestic and international screens;

projected number of 3D motion picture releases;

the likelihood of achieving a liquidity event for shares of our common stock, such as an initial public offering or sale of our company, given prevailing market conditions; and

preliminary valuations from investment banks.

Our management and board of directors considered the methods outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. For each valuation date in which projected Adjusted EBITDA was considered the primary basis for estimating the fair value of our common stock, we prepared a financial forecast to be used in estimating our projected Adjusted EBITDA. The financial forecasts took into account our past experience and future expectations. Therefore, in those cases, our valuations have been heavily dependent on our estimates of revenue, costs and related cash flows. These estimates are highly subjective and subject to frequent change based on both new operating data as well as various macroeconomic conditions that impact our business. Each of our valuations was prepared using data that was consistent with our then-current operating plans that we were using to manage our business. The risks associated with achieving these financial forecasts were assessed and applied in determining our best estimates of our financial forecasts. As with all financial forecasts, there is inherent uncertainty in these estimates. Once we estimated our projected Adjusted EBITDA, we applied trading multiples of comparable companies to determine our enterprise value. For our estimated common stock fair value for the six months ended March 26, 2010, we did not apply a discount factor to the estimated enterprise value given our anticipated growth, this offering, and performance relative to other companies within our industry. The estimated enterprise value was then divided by the number of fully diluted common stock outstanding to arrive at the per share common stock value.

67


Table of Contents

During the year ended March 26, 2010, our board of directors estimated the fair value of our common stock as follows:

 
Period
  Estimated fair value of
common stock

  Primary basis for estimated
fair value of common stock

 
Three months ended June 26, 2009   $10.00   Most recent third-party trading transactions in our common stock; we were not a party to the negotiations
Three months ended September 25, 2009   $10.00   Most recent third-party trading transaction in our common stock; we were not a party to the negotiations
Three months ended December 25, 2009   $14.00   Multiple of projected Adjusted EBITDA(1)
Three months ended March 26, 2010   $23.07   Multiple of projected Adjusted EBITDA(1)
 
(1)
Calculated based on trading multiples of comparable companies. For a discussion regarding Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, see "—Non-U.S. GAAP discussion."

The substantial increase in value during fiscal 2010 was principally due to a significant increase in the number of RealD-enabled screens and in the number of projected 3D motion picture releases.

Share-based compensation

We account for stock options granted to employees and directors by recording compensation expense based on estimated fair values. Share-based awards to non-employees, including consultants, have been and are expected to be fully exercisable and nonforfeitable when granted and, therefore, the fair value of such stock options are expensed on the date of grant.

We estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. Compensation expense related to share-based awards has been reduced for estimated forfeitures. We estimate forfeitures based upon our historical experience, which has resulted in a small expected forfeiture rate. We review the estimated forfeiture rates each period end and make changes as factors affecting the forfeiture rate calculations and assumptions change.

We estimate the fair value of share-based awards granted using the Black-Scholes option-pricing model. Determining the fair value of share-based awards at the grant date under this model requires judgment, including estimating our value per share of common stock, volatility, expected term and risk-free interest rate. The assumptions used in calculating the fair value of share-based awards represent our best estimates based on management judgment and subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the Black-Scholes model significantly changes, share-based compensation for future awards may differ materially from the awards granted previously. For purposes of determining the expected term and in the absence of historical data relating to stock option exercises, we apply a simplified approach: the expected term of awards granted is presumed to be the mid-point between the vesting date and the end of the contractual term. We use the contractual term when valuing awards to consultants. We use the average volatility of similar, publicly traded companies as an estimate for expected volatility. The risk-free interest rate for periods within the expected or contractual life of the option, as applicable, is based on the

68


Table of Contents


United States Treasury yield curve in effect during the period the options were granted. Our expected dividend yield is zero.

Information related to our share-based compensation activity, including the weighted average grant date fair values and the associated Black-Scholes option-pricing model assumptions, are as follows:

   
 
  Years Ended  
 
  March 31,
2008

  March 27,
2009

  March 26,
2010

 
   

Stock options granted (in thousands)

  921   534   801  

Weighted average exercise price of stock options granted

  $5.13   $8.75   $10.00  

Weighted average fair value of stock options granted

  $3.04   $5.14   $6.05  

Weighted average assumptions:

             

Estimated fair value of common stock

  $5.13   $8.75   $10.00  

Expected volatility

  60 % 61 % 63 %

Expected dividends

  0 % 0 % 0 %

Expected term (years)

  6   6   6  

Risk-free rate

  4.4 % 2.8 % 2.9 %
   

Inventories

Domestically, we provide our RealD eyewear free of charge to motion picture exhibitors and then receive a fee from the motion picture studios for the usage of that RealD eyewear by the motion picture exhibitors' consumers.

As of March 26, 2010, there are 3,385 RealD-enabled screens domestically. The number of domestic RealD-enabled screens and related usage of RealD eyewear is expected to grow. Accordingly, for RealD eyewear located at a motion picture exhibitor, we believe that it is not operationally practical to perform physical counts or request the motion picture exhibitor to perform physical counts and confirm quantities held to ensure that losses due to damage, destruction, and shrinkage are specifically recognized in the period incurred. We believe that the cost to monitor shrinkage or usage significantly outweighs the financial reporting benefits of using a specific identification methodology of expensing. We believe that utilizing a composite method of expensing RealD eyewear inventory costs provides a rational and reasonable approach to ensuring that shrinkage is provided for in the period incurred and that inventory costs are expensed in the periods that reasonably reflect the periods in which the related revenue is recognized. In doing so, we believe the following methodology reasonably and generally reflects periodic income or loss under these facts and circumstances:

For an estimated period of time following shipment to domestic motion picture exhibitors, no expense is recognized between the time of shipment and until the delivery is made as the inventory unit is in transit and unused.

The inventory unit cost is expensed on a straight-line basis over an estimated usage period beginning when we believe usage of the inventory unit has started. In estimating the expensing start date and related expense period, we consider various factors including, but not limited to, those relating to a 3D motion picture's opening release date, a 3D motion picture's expected release period, the number of currently playing 3D motion pictures, the motion picture exhibitor's buying and stocking patterns and practices and the quantities shipped per inventory unit.

69


Table of Contents

We believe that the expensing methodology described above rationally and reasonably approximates the period the related usage occurs resulting in our RealD eyewear product revenue. The expensing start date following the date of shipment is meant to approximate the date at which usage begins. Additionally, as the expense recognition period has been and is expected to continue to be short, we believe it adequately recognizes inventory impairments due to loss and damage on a timely basis. We further believe that exposures due to loss or damage, if any, are considered normal shrinkage and a necessary and expected cost to generate the revenue per 3D motion picture earned through RealD eyewear usage. We continue to monitor the reasonableness of this methodology to ensure that it approximates the period over which the related RealD eyewear product revenue is earned and realizable. As of March 26, 2010, the usage period was estimated to be upon delivery due to the level of admissions for 3D motion pictures. RealD eyewear inventory costs that have not yet been expensed are reported as deferred costs-eyewear.

Long-lived asset impairments

We review long-lived assets, such as property, equipment, motion picture equipment and intangibles, for impairment, annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors or circumstances that could indicate the occurrence of such events include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing operating or cash flow losses, or incurring costs in excess of amounts originally expected to acquire or construct an asset. If the asset is not recoverable, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

Goodwill impairment

Goodwill is deemed to have an indefinite useful life and therefore is not amortized. We evaluate our goodwill for impairment using a two-step process that is performed at least annually during our fourth fiscal quarter, or whenever events or circumstances indicate that goodwill may be impaired. The first step is a comparison of the fair value of an internal reporting unit with its carrying amount, including goodwill. A reporting unit is an operating segment or one level below an operating segment. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment loss is recognized for the difference. We currently have one reporting unit in which goodwill resides and the reporting unit is not at risk of failing step one.

Deferred tax asset valuation and tax exposures

In preparing our consolidated financial statements, we are required to make estimates and judgments that affect our accounting for income taxes. This process includes estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences, including the timing of recognition of share-based compensation expense, result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We also assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we

70


Table of Contents

believe that recovery is not likely, we have established a valuation allowance. We assess realization of our deferred tax assets based on all available evidence in order to conclude whether it is more likely than not that the deferred tax assets will be realized. Available evidence considered by us includes, but is not limited to, our historic operating results, projected future operating results, reversing temporary differences, changing business circumstances, and the ability to realize certain deferred tax assets through loss and tax credit carry-back and carry-forward strategies. At March 26, 2010, we have determined based on the weight of the available evidence, both positive and negative, to provide for a valuation allowance against substantially all of the net deferred tax assets. The current deferred tax assets not reserved for by the valuation allowance are those in foreign jurisdictions or amounts that may be carried back in future years. If there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, we will adjust all or a portion of the applicable valuation allowance in the period when such change occurs.

We are subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, we adjust tax expense to reflect our ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results.

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, the valuation allowance against our deferred tax assets and uncertainty in income tax positions. Our financial position and results of operations may be materially impacted if actual results significantly differ from these estimates or the estimates are adjusted in future periods.

Contingencies and assessments

We are subject to various loss contingencies and assessments arising in the course of our business, some of which relate to litigation, claims, property taxes and sales and use or goods and services tax assessments. We consider the likelihood of the loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss, contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on our business, consolidated results of operations, financial condition or cash flows.

Recent accounting pronouncements

Accounting Standards Codification Topic 105, Generally Accepted Accounting Principles (ASC 105) establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting

71


Table of Contents


literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of SFASs, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification. As the Codification was not intended to change or alter existing U.S. GAAP, it does not have a material impact on our consolidated financial statements. We adopted ASC 105 on July 1, 2009.

In July 2006, FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109 was issued. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with Accounting Standards Codification Topic 740. FIN 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation was to be effective for fiscal years beginning after December 15, 2006. On December 30, 2008, the FASB issued FASB Staff Position (FSP) FIN-48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises. The final FSP incorporates changes made to the original Exposure Draft and defers the effective date of FIN 48 for nonpublic enterprises and not-for-profit organizations to the annual financial statements for fiscal years beginning after December 15, 2008. We adopted the FSP and FIN 48 on March 28, 2009. Our adoption of FIN 48 did not have a material impact on our consolidated financial statements.

Accounting Standards Codification Topic 810, Consolidation (ASC 810) changes the accounting and reporting for non-controlling interests, which will be classified as a component of equity. This guidance is effective for us on a prospective basis beginning on March 28, 2009 except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. We have applied the presentation and disclosure requirements of ASC 810 for all periods presented. The presentation requirements resulted in the reclassification of our non-controlling interest from the mezzanine to the equity section of our consolidated balance sheets. We do not expect this guidance to have a material impact on our consolidated financial statements prospectively.

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820) defers the effective date for applying its provisions to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair values in the financial statements on a recurring basis (at least annually). We adopted ASC 820 on March 28, 2009. Our adoption of ASC 820 did not have a material impact on our consolidated financial statements.

Accounting Standards Codification Topic 805, Business Combinations (ASC 805) requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. Subsequent changes to the estimated fair value of contingent consideration will be reflected in earnings until the contingency is settled. ASC 805 also requires acquisition-related costs and restructuring costs to be expensed as incurred rather than treated as part of the purchase price. We adopted ASC 805 on March 28, 2009 and it will change our accounting treatment prospectively for business combinations initiated on or after the adoption date.

72


Table of Contents

Accounting Standards Codification Topic 855, Subsequent Events (ASC 855) establishes principles and requirements for reviewing and reporting subsequent events and requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements were available for issue (as defined) or were issued. In February 2010, the FASB issued ASU 2010-09, "Subsequent Events." ASU 2010-09 was issued to amend ASC 855 to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. This change is intended to alleviate potential conflicts with current SEC guidance. The provisions of ASU 2010-09 are effective upon issuance. We adopted ASC 855 on September 25, 2009. Our adoption of ASC 855 and ASU 2010-09 did not have a material impact on our consolidated financial statements.

Accounting Standards Codification Topic 350, Intangibles—Goodwill and Other (ASC 350) removes the requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. ASC 350 also requires expanded disclosures relating to the determination of useful lives of intangible assets. We adopted ASC 350 on March 28, 2009. Our adoption of ASC 350 did not have a material impact on our consolidated financial statements. The new provisions of ASC 350 may impact any intangible asset we acquire in future transactions.

Accounting Standards Codification Topic 815, Derivatives and Hedging (ASC 815) provides additional disclosure requirements for an entity's derivative and hedging activities. We adopted the additional disclosure provisions of ASC 815 March 28, 2009. Our adoption of ASC 815 did not have a material impact on our consolidated financial statements.

Accounting Standards Codification Topic 260-10, Earnings per Share (ASC 260-10) provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, companies are required to retrospectively adjust their earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to this pronouncement. We adopted ASC 260-10 on March 28, 2009. Our adoption of ASC 260-10 did not have a material impact on our consolidated financial statements.

In January 2010, Accounting Standards Update 2010-6, Fair Value Measurements and Disclosures: Improving Disclosures About Fair Value Measurements (ASU 2010-6) was issued which requires entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective for us beginning in the first quarter of fiscal 2010, except for Level 3 reconciliation disclosures which are effective for us beginning in the first quarter of fiscal 2011. We are currently evaluating the impact of the adoption of new guidance will have on consolidated financial statements.

Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements—a consensus of the Emerging Issues Task Force (ASU 2009-13) amends Accounting Standards Codification Subtopic 605-25, Revenue Recognition—Multiple-Element Arrangements (ASC 605-25). The amendments in ASU 2009-13

73


Table of Contents


enable vendors to account for products or services separately rather than as a combined unit upon meeting certain criteria and establish a hierarchy for determining the selling price of a deliverable. In addition, a vendor can determine a best estimate of selling price, in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis, if a vendor does not have vendor-specific objective evidence (VSOE) or third party evidence of selling price. ASC 605-25 is also amended to eliminate the use of the residual method and requires a vendor to allocate revenue using the relative selling price method. The amendments in ASU 2009-13 will be effective prospectively, with an option for retrospective restatement of the financial statements, for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted at the beginning of an entity's fiscal year. We expect to prospectively adopt the amendments in ASU 2009-13 beginning in the first quarter of fiscal 2012. We are currently evaluating the impact of the adoption of new guidance will have on consolidated financial statements.

Accounting Standards Codification Topic 808, Collaborative Arrangements (ASC 808) applies to participants in collaborative arrangements that are not primarily conducted with the creation of a separate legal entity for the arrangement. ASC 808 requires disclosure of payments to or from collaborators based on the nature of the arrangement (including its contractual terms), the nature of the business and whether the payments are within the scope of other accounting literature. ASC 808 requires an entity to report the effects of adopting ASC 808 as a change in accounting principle through retrospective application to all prior periods presented for all arrangements in place at the effective date unless it is impracticable. We adopted ASC 808 on March 29, 2009. Our adoption of ASC 808 did not have a material impact on our consolidated financial statements.

Quantitative and qualitative disclosure about market risk

We have operations outside the United States. We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks as well as changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting in advance and setting credit limits, as we deem appropriate. In addition, our investment strategy currently has been to invest in financial instruments that are highly liquid, readily convertible into cash and which mature within three months from the date of purchase. We also enter into foreign exchange derivative hedging transactions as part of our risk management program. For accounting purposes, we do not designate any of our derivative instruments as hedges and we do not use derivatives for speculating trading purposes and are not a party to leveraged derivatives.

Interest rate risk

We are exposed to market risk related to changes in interest rates.

Our investments are considered cash equivalents and primarily consist of money market funds. At March 26, 2010, we had cash equivalents of $13.1 million. The carrying amount of cash equivalents reasonably approximates fair value due to the short maturities of these instruments. The primary objective of our investment activities is preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk

74


Table of Contents


due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.

At March 26, 2010 we had borrowings outstanding with carrying values of $31.4 million. The carrying amount of borrowings approximates fair value based on borrowing rates currently available to us. Our outstanding borrowings consist of both fixed and variable interest rate financial instruments. Our variable rate borrowings are based on LIBOR plus 4.25%. Changes in interest rates do not affect operating results or cash flows on our fixed rate borrowings but would impact our variable rate borrowings. A hypothetical 10% increase or decrease in interest rates relative to interest rates at March 26, 2010 would not have a material impact on operating results and cash flows with respect to our variable rate borrowings. Changes in interest rates would, however, affect the fair values of all of our outstanding borrowings, including, to a lesser extent, our variable rate borrowings outstanding at March 26, 2010 for which the interest rate reset semi-annually. A hypothetical 10% decrease in interest rates relative to interest rates at March 26, 2010 would result in an increase of approximately $0.2 million in the aggregate fair value of our outstanding borrowings. A hypothetical 10.0% increase in interest rates relative to interest rates at March 26, 2010 would result in an decrease of approximately $0.2 million in the aggregate fair value of our outstanding borrowings.

Foreign currency risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the United States dollar. Our historical revenue has generally been denominated in United States dollars, and a significant portion of our current revenue continues to be denominated in United States dollars; however, we expect an increasing portion of our future revenue to be denominated in currencies other than the United States dollar, primarily the Euro, British pound sterling, Canadian dollar and Japanese yen. Our operating expenses are generally denominated in the currencies of the countries in which our operations are located, primarily the United States and United Kingdom. Increases and decreases in our international revenue from movements in foreign exchange rates are partially offset by the corresponding increases or decreases in our international operating expenses. To further reduce our net exposure to foreign exchange rate fluctuations on our results of operations, we have entered into foreign currency forward contracts.

At March 26, 2010, we had outstanding forward contracts based in British pound sterling, Canadian dollar and the Euro with notional amounts totaling $3.7 million. We do not designate any of our forward contracts as hedges for accounting purposes. We had no forward contracts outstanding during fiscal 2009. As of March 26, 2010, the net unrealized gain on

75


Table of Contents


these forward contracts was not material. Realized gains and losses for the year ended March 26, 2010 were also not material. With regard to these contracts, a hypothetical 10.0% adverse movement in foreign exchange rates compared with the U.S. dollar relative to exchange rates on March 26, 2010 would result in a reduction in fair value of these forward contracts and a corresponding foreign currency loss of approximately $0.4 million. This analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on anticipated transactions and assets and liabilities that these foreign currency sensitive instruments were designed to offset.

As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening United States dollar can increase the costs of our international expansion.

Inflation risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Counterparty risk

Our financial statements, including derivatives, are subject to counterparty credit risk which we consider as part of the overall fair value measurement. We attempt to mitigate this risk through credit monitoring procedures.

76


Table of Contents


Business

Overview

We are a leading global licensor of 3D technologies. Our extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere. We license our RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. We also provide our RealD Format, active and passive eyewear, and display and gaming technologies to consumer electronics manufacturers and content producers and distributors to enable the delivery and viewing of 3D content on high definition televisions, laptops and other displays. Our cutting-edge 3D technologies have been used for applications such as piloting the Mars Rover, heads-up displays for military jets and robotic medical procedures.

Competitive strengths

Our competitive strengths include the following:

Innovative technology

Our technical expertise has allowed us to develop new and innovative technologies for the motion picture industry, the 3D consumer electronics market and other markets. Working with Disney to release Chicken Little in 3D in 2005, we became the first company to commercially enable 3D theater screens using digital projection. Our patented RealD Cinema Systems deliver superior light output, providing for a high quality, brighter image and enabling display on larger theater screens than most competing technologies. Our licensees AMC, Cinemark and Regal deploy our RealD Cinema Systems on their own premium-branded large-screen formats. Our RealD Format, active and passive eyewear, and display and gaming technologies provide our consumer electronics licensees the ability to display high quality 3D content that can be delivered through the current cable, satellite and broadcast infrastructure. Our RealD Format is also highly scalable and can meet the future needs of our licensees as the infrastructure for content production, distribution and viewing grows and evolves. Content producers use our technologies to enhance and accelerate their production of 3D content. Our extensive intellectual property portfolio, which is based on years of research and development, contains approximately 109 individual issued patents and approximately 218 pending patent applications in approximately 15 jurisdictions worldwide. Our research, development and engineering teams have expertise in many disciplines, including:

polarization control (the manipulation of light);

photonics (the application of electromagnetic energy, incorporating laser technology, electrical engineering, materials science and information storage and processing);

optics (the branch of physics that deals with light and vision);

liquid crystal physics (the application of elements at the border between the solid and liquid phase to the creation of nanoscale devices); and

digital image processing (the use of computer algorithms to perform image processing on digital images).

Global market leader in 3D-enabled theater screens

As of June 1, 2010, our RealD Cinema Systems were deployed on 5,966 theater screens in 51 countries, which we believe are more 3D screens than all of our competitors combined.

77


Table of Contents


Seventeen of the world's top 18 motion picture exhibitors, including all of the top 10, utilize RealD Cinema Systems in their theaters, including AMC, Cinemark, ODEON, Regal and Warner Mycal. Our licensees include over 300 other motion picture exhibitors and RealD has the leading global market share of 3D-enabled theater screens, approximately 50% as of December 25, 2009. Domestic box office on RealD-enabled screens represented over 75% of total domestic 3D box office in 2009. As of June 1, 2010, we were working with our motion picture exhibitor licensees to deploy our RealD Cinema Systems on up to approximately 5,100 additional screens under our existing agreements with them, and we are actively engaged with other motion picture exhibitors regarding potential new license agreements.

Pioneer in the emerging 3D consumer electronics market

We believe that the recent success of major 3D motion pictures is leading to the creation and distribution of 3D content and products for the 3D consumer electronics market. Although the 3D consumer electronics market is new and developing, we have already entered into agreements to provide our RealD Format, active and passive eyewear, and display and gaming technologies to leading consumer electronics manufacturers, including JVC, Panasonic, Samsung, Sony Electronics and Toshiba. Our licensees also include content distributors, including cable television services such as Cablevision Systems Corp., or Cablevision, satellite television services such as DirecTV Enterprises, LLC, or DirecTV, and content producers, including publishers of interactive gaming content such as Ubisoft Divertissements, or Ubisoft, and NAMCO BANDAI Games Inc., or NAMCO.

Premium brand

We believe our brand is well-recognized among licensees and consumers as a result of motion picture studios and exhibitors co-branding with us and consumers having worn our branded RealD eyewear over 200 million times. We believe the prominence of our brand in the motion picture industry will enhance our marketing efforts in the 3D consumer electronics market.

Scalable licensing model

We license our 3D technologies under a highly scalable business model with recurring revenue from those licensees. As an example, our multi-year (typically five years or longer), generally exclusive agreements with motion picture exhibitors generate revenue on a per-admission, periodic fixed-fee or per-motion picture basis at limited incremental direct cost to us. We believe motion picture exhibitors prefer our licensing model, which includes technological upgrades and maintenance, because it reduces their capital expenditures and the risk they may purchase equipment that will become obsolete. We believe our motion picture exhibitor licensees also prefer our single-use RealD eyewear because it requires less personnel (no active collecting or washing by motion picture exhibitors) and reduces motion picture exhibitors' loss from theft and breakage. Although we have not yet generated material revenue in the 3D consumer electronics market, we anticipate that our relationships with consumer electronics manufacturers and others will generate future license fees on 3D technologies licensed for that market on a per unit basis. Although we have a history of net losses, incurred a net loss of $39.7 million for the year ended March 26, 2010 and expect to experience a decrease in gross revenue for the three months ended June 25, 2010 compared to the three months ended March 26, 2010, we believe our licensing revenue will increase at a faster rate than our operating expenses.

78


Table of Contents

Extensive industry relationships and strong technical expertise

Our experienced management team, including Michael V. Lewis, our Chairman and Chief Executive Officer, and Joshua Greer, our President, has extensive, long-term relationships with content producers and distributors, major motion picture studios and exhibitors, and consumer electronics manufacturers that help us drive the proliferation of 3D content, delivery and viewing in theaters, the home and elsewhere. Our research and development team, based in Boulder, Colorado, is comprised of leaders in the invention, development and commercialization of innovative 3D technologies.

Strategy

Key elements of our strategy include:

Continue to innovate and develop new technologies

We will continue to develop proprietary 3D technologies to enhance the 3D viewing experience and create additional revenue opportunities. We will endeavor to improve our RealD Cinema Systems to deliver an even better and more immersive 3D viewing experience to consumers in theaters. For the 3D consumer electronics market, we will also work to enhance our RealD Format, active and passive eyewear, and display and gaming technologies to enable consumers to enjoy 3D at home and elsewhere. We have patented technologies that we believe will in the future enable consumers to enjoy 3D content without eyewear. We believe our licensing of 3D technologies for the professional market will continue to provide a strong foundation for our development of new 3D technologies for the motion picture, consumer electronics and other markets. We will also selectively pursue technology acquisitions to expand and enhance our intellectual property portfolio in areas that complement our existing and new market opportunities and to supplement our internal research and development efforts.

Increase our leading global market share in 3D-enabled theater screens

We will work with our existing motion picture exhibitor licensees to deploy additional RealD Cinema Systems. We also plan to enter into agreements with new motion picture exhibitor licensees to increase the number of deployed RealD Cinema Systems worldwide. We believe there is a significant opportunity for us to continue to expand our business internationally and to license our 3D technologies to international motion picture exhibitors based on a licensing model that is similar to our domestic model.

Expand our emerging 3D consumer electronics business

We will continue to work with consumer electronics manufacturers and content producers and distributors to enable a premium 3D viewing experience in the home and elsewhere using our 3D technologies. We will endeavor to incorporate our RealD Format, active and passive eyewear, and display and gaming technologies in plasma and LCD televisions, set-top boxes, digital video recorders, interactive gaming consoles, laptop computers, desktop computers and mobile devices, and to enable the delivery of 3D content via cable, satellite, broadcast, packaged media and the Internet.

Build upon the strength of our RealD brand

It is our goal to make RealD the best known 3D technology brand in the world, associated with delivering the highest quality 3D viewing experience. We will further leverage the strength of our brand to generate stronger licensee and consumer preference for the RealD brand in the 3D consumer electronics and other markets. We will continue to actively encourage motion

79


Table of Contents


picture studios and exhibitors to prominently feature our brand in their motion picture advertising and marketing, at theater locations, online and on consumer electronics products and packaging. We will also continue our advertising efforts to strengthen our brand in the consumer electronics industry. We plan to use our brand to drive the continued adoption of our 3D technologies in existing and new markets.

Industry

History of 3D

First used commercially in a public theater in 1922, 3D technology has been used by content producers in an effort to enhance the viewing experience. 3D imagery is created using stereoscopic photography, which is a process that creates the illusion of 3D by using a pair of 2D images. Each image represents a different perspective of the same object, emulating the different perspectives that binocular vision captures. When the two images are viewed by each eye, the brain fuses the two images to form a single picture, creating the illusion of 3D. 3D technology has a wide range of applications including entertainment, research and development, scientific exploration and manufacturing.

Innovation in 3D technology has centered on optimizing the projection of stereoscopic images as well as the filtering of the image intended for each eye. Early 3D exhibition required the use of two projectors, one to project the reel for each eye to create the stereoscopic image, which required synchronization that was difficult to achieve due to the manual operation of projectors. To view a stereoscopic image, audiences utilized 3D eyewear that employed different filters that did not maintain the quality of a standard motion picture image and caused discomfort including eye strain and headaches.

Benefiting from the increased and continuing adoption of digital projection, the new wave of 3D projection utilizes digital technologies that address many of the limitations of previous methods of 3D projection. The use of high definition digital projectors, advances in the construction of silver screens and the use of polarization filters and polarized lenses have broadened the color spectrum, and reduced eyestrain and synchronization issues that caused headaches, which greatly improves the 3D viewing experience.

The launch of modern 3D digital projection for motion pictures was marked by the presentation of Chicken Little by Disney in November 2005, which debuted on approximately 100 RealD-enabled screens. Since the debut of Chicken Little in 2005 through the end of 2009, 27 3D motion pictures have been released on RealD-enabled screens including Avatar, which debuted in December 2009 and has grossed approximately $700 million domestically, approximately $580 million of which were domestic 3D box office receipts as of March 26, 2010.

Cutting-edge 3D technology has also been deployed in other applications including scientific research. For example, NASA has utilized 3D technology to analyze damage to the Space Shuttle and to navigate the Mars Rover. Industrial applications for 3D technology include the use of 3D visualization by biotech firms for the development of pharmaceuticals, by aircraft and motor vehicle manufacturers like McDonnell Douglas Corp., Caterpillar Inc. and Harley Davidson, Inc. for the design of new prototypes and by major energy companies such as Chevron who utilize 3D technology to reduce the cost of exploration by analyzing oil and gas fields in virtual 3D environments.

80


Table of Contents

Market opportunity

Our 3D technologies can be utilized in many different markets, including entertainment, consumer electronics, education, aerospace, defense and healthcare. Our 3D technologies are primarily used in applications in the motion picture, consumer electronics and professional markets.

The shift in the motion picture industry from analog to digital over the past decade has created an opportunity for new and transformative 3D technologies. With the commercial success of recent 3D motion pictures, adoption of 3D digital cinema is positioned for continued growth as we believe many of the approximately 133,000 worldwide non-digital theater screens as of the end of 2009 may convert to digital projection. As of December 25, 2009, only approximately 16,000 digital theater screens were deployed worldwide, representing approximately 11% of the worldwide installed base. However, 3D-enabled screens represented approximately 55% of digital theater screens deployed worldwide.

The following chart illustrates, as of December 25, 2009, the approximate total number of theater screens worldwide, the approximate number of theater screens that have been converted to digital and the approximate number of digital theater screens that are 3D-enabled, broken down by the providers who enabled those 3D screens.

GRAPHIC


(1)
Of the estimated 8,606 worldwide digital theater 3D-enabled screens as of December 25, 2009, 4,286 were RealD-enabled screens; approximately 1,960 were Dolby-enabled screens; approximately 1,560 were XpanD-enabled screens; approximately 500 were MasterImage-enabled screens; approximately 150 were IMAX-enabled screens; and approximately 150 were other 3D-enabled screens.

81