10-K 1 d339843d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file Number 001-35066

 

 

IMAX Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Canada   98-0140269

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2525 Speakman Drive,

Mississauga, Ontario, Canada L5K 1B1

(905) 403-6500

 

110 E. 59th Street, Suite 2100

New York, New York, USA 10022

(212) 821-0100

(Address of principal executive offices, zip code, telephone numbers)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common Shares, no par value   The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ☒

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      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting Company  

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, computed by reference to the last sale price of such shares as of the close of trading on June 30, 2016 was $1,700.7 million.

As of January 31, 2017, there were 66,313,034 common shares of the registrant outstanding.

Document Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement to be filed within 120 days of the close of IMAX Corporation’s fiscal year ended December 31, 2016, with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors and the annual meeting of the stockholders of the registrant (the “Proxy Statement”) are incorporated by reference in Part III of this Form 10-K to the extent described therein.

 

 

 


Table of Contents

IMAX CORPORATION

December 31, 2016

Table of Contents

 

         Page  
PART I  

Item 1.

 

Business

     4   

Item 1A.

 

Risk Factors

     19   

Item 1B.

 

Unresolved Staff Comments

     27   

Item 2.

 

Properties

     28   

Item 3.

 

Legal Proceedings

     29   

Item 4.

 

Mine Safety Disclosures

     30   
PART II  

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     31   

Item 6.

 

Selected Financial Data

     35   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

     77   

Item 8.

 

Financial Statements and Supplementary Data

     79   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     146   

Item 9A.

 

Controls and Procedures

     146   

Item 9B.

 

Other Information

     146   
PART III  

Item 10.

 

Directors, Executive Officers and Corporate Governance

     147   

Item 11.

 

Executive Compensation

     147   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     147   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     147   

Item 14.

 

Principal Accounting Fees and Services

     147   
PART IV  

Item 15.

 

Exhibits, Financial Statement Schedules

     147   

Item 16.

 

Form 10-K Summary

     151   

Signatures

     152   

 

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IMAX CORPORATION

EXCHANGE RATE DATA

Unless otherwise indicated, all dollar amounts in this document are expressed in United States (“U.S.”) dollars. The following table sets forth, for the periods indicated, certain exchange rates based on the noon buying rate in the City of New York for cable transfers in foreign currencies as certified for customs purposes by the Bank of Canada (the “Noon Buying Rate”). Such rates quoted are the number of U.S. dollars per one Canadian dollar and are the inverse of rates quoted by the Bank of Canada for Canadian dollars per U.S. $1.00. The average exchange rate is based on the average of the exchange rates on the last day of each month during such periods. The Noon Buying Rate on December 31, 2016 was U.S. $0.7448.

 

     Years Ended December 31,  
     2016      2015      2014      2013      2012  

Exchange rate at end of period

     0.7448        0.7225        0.8620        0.9402        1.0051  

Average exchange rate during period

     0.7558        0.7748        0.9022        0.9713        1.0006  

High exchange rate during period

     0.7972        0.8527        0.9422        1.0164        1.0299  

Low exchange rate during period

     0.6854        0.7148        0.8589        0.9348        0.9599  

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

Certain statements included in this annual report may constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, references to future capital expenditures (including the amount and nature thereof), business and technology strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of business, operations and technology, plans and references to the future success of IMAX Corporation together with its consolidated subsidiaries (the “Company”) and expectations regarding the Company’s future operating, financial and technological results. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the expectations and predictions of the Company is subject to a number of risks and uncertainties, including, but not limited to, risks associated with investments and operations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of local governments and laws and policies of the United States and Canada; risks related to the Company’s growth and operations in China; the performance of IMAX DMR films; the signing of theater system agreements; conditions, changes and developments in the commercial exhibition industry; risks related to currency fluctuations; the potential impact of increased competition in the markets within which the Company operates; competitive actions by other companies; the failure to respond to change and advancements in digital technology; the Company’s largest customer accounting for a significant portion of the Company’s revenue and backlog; risks related to new business initiatives; conditions in the in-home and out-of-home entertainment industries; the opportunities (or lack thereof) that may be presented to and pursued by the Company; risks related to cyber-security; risks related to the Company’s inability to protect the Company’s intellectual property; general economic, market or business conditions; the failure to convert theater system backlog into revenue; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements, and actual results or anticipated developments by the Company may not be realized, and even if substantially realized, may not have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

 

 

IMAX®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience It In IMAX®, The IMAX Experience®, An IMAX Experience®, An IMAX 3D Experience®, IMAX DMR®, DMR®, IMAX nXos®, IMAX think big®, think big® and IMAX Is Believing®, are trademarks and trade names of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions.

 

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PART I

 

Item 1. Business

The Company is a Canadian corporation that was formed in March 1994 as a result of an amalgamation between WGIM Acquisition Corp. and the former IMAX Corporation (“Predecessor IMAX”). Predecessor IMAX was incorporated in 1967.

GENERAL

The Company is one of the world’s leading entertainment technology companies, specializing in motion picture technologies and presentations. IMAX offers a unique end-to-end cinematic solution combining proprietary software, theater architecture and equipment to create the highest-quality, most immersive motion picture experience for which the IMAX® brand has become known globally. Top filmmakers and studios utilize IMAX theaters to connect with audiences in innovative ways, and as such, IMAX’s theater network is among the most important and successful theatrical distribution platforms for major event films around the world.

The Company’s principal businesses are:

 

    the design and manufacture of premium theater systems (“IMAX theater systems”) and the sale, lease or contribution of those systems to customers under theater system arrangements; and

 

    the Digital Re-Mastering of films into the IMAX format and the exhibition of those films in the IMAX theater network.

IMAX theater systems are based on proprietary and patented technology developed over the course of the Company’s 49-year history. The Company’s customers who purchase, lease or otherwise acquire the IMAX theater systems through joint revenue sharing arrangements are theater exhibitors that operate commercial theaters (particularly multiplexes), museums, science centers, or destination entertainment sites. The Company generally does not own IMAX theaters, but licenses the use of its trademarks along with the sale, lease or contribution of the IMAX theater system. The Company refers to all theaters using the IMAX theater system as “IMAX theaters”.

IMAX theater systems combine:

 

    IMAX DMR (Digital Re-Mastering) movie conversion technology, which results in higher image and sound fidelity than conventional cinema experiences;

 

    advanced, high-resolution projectors with specialized equipment and automated theater control systems, which generate significantly more contrast and brightness than conventional theater systems;

 

    large screens and proprietary theater geometry, which result in a substantially larger field of view so that the screen extends to the edge of a viewer’s peripheral vision and creates more realistic images;

 

    sound system components, which deliver more expansive sound imagery and pinpointed origination of sound to any specific spot in an IMAX theater; and

 

    specialized theater acoustics, which result in a four-fold reduction in background noise.

Together these components cause audiences in IMAX theaters to feel as if they are a part of the on-screen action, creating a more intense, immersive and exciting experience than a traditional theater.

As a result of the immersiveness and superior image and sound quality of The IMAX Experience, the Company’s exhibitor customers typically charge a premium for IMAX DMR films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box-office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX network. The incremental box-office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing platform for Hollywood blockbuster films.

The Company believes the IMAX theater network is one of the most extensive premium theater networks in the world with 1,215 theater systems (1,123 commercial, 92 institutional) operating in 75 countries as at December 31, 2016. This compares to 1,061 theater systems (962 commercial, 99 institutional) operating in 67 countries as at December 31, 2015. The success of the Company’s digital and joint revenue sharing strategies and the strength of its film slate have enabled the Company’s theater network to expand significantly since 2008, upon the introduction of the Company’s xenon-based digital projection system, with the Company’s overall network increasing by 306% and its commercial network increasing by 527% since such time. In 2016 and 2015, the Company signed theater agreements for 319 and 138 theater systems, respectively, which are expected to drive additional growth in the Company’s theater network in 2017 and thereafter.

 

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The Company believes that over time its commercial multiplex theater network could grow to approximately 2,450 IMAX theaters worldwide from the 1,107 commercial multiplex IMAX theaters in operation as of December 31, 2016. While the Company continues to grow in the United States and Canada, it believes that the majority of its future growth will come from international markets. As at December 31, 2016, 63.7% of IMAX theater systems in operation were located within international markets (defined as all countries other than the United States and Canada), up from 58.5% as at December 31, 2015, and approximately 87.8% of IMAX theater systems in backlog are scheduled to be installed in international markets, compared to 88.2% as at December 31, 2015. Revenues and gross box-office derived from outside the United States and Canada continue to exceed revenues and gross box-office from the United States and Canada.

Greater China continues to be the Company’s second-largest and fastest-growing market, measured by revenues. In recent years, the Company’s Greater China operations have accounted for an increasingly significant portion of its overall revenues, with approximately 31% of overall revenues generated from the Company’s China operations in 2016. As at December 31, 2016, the Company had 424 theaters operating in Greater China and an additional 334 theaters in backlog that are scheduled to be installed in Greater China by 2022. The Company’s backlog in Greater China represents 67.1% of the Company’s current backlog. The Company continues to invest in joint revenue sharing arrangements with select partners to ensure ongoing revenue in this key market. The Company’s largest single international partnership is in China with Wanda Cinema Line Corporation (“Wanda”). In 2016, the Company and Wanda signed an agreement for an additional 150 theater systems under a joint revenue sharing arrangement. This increases Wanda’s total commitment to the Company to 360 theater systems, of which 345 theater systems are under the parties’ joint revenue sharing arrangement. Furthermore, the Company has partnerships with CJ CGV Holdings, Ltd., for a commitment of 120 theater systems (of which 100 theater systems will be located in China), and with Guangzhou JinYi Media Corporation for a commitment of 60 theater systems (all of which are located in China).

In 2014, the Company completed the sale and issuance of 20% of the shares of the Company’s subsidiary, IMAX China Holding, Inc. (“IMAX China”), to entities owned and controlled by CMC Capital Partners (“CMC”), an investment fund that is focused on media and entertainment, and FountainVest Partners (“FountainVest”), a China-focused private equity firm. The sale price for the interest was $80.0 million (collectively, the “IMAX China Investment”). On October 8, 2015, IMAX China completed an initial public offering of its ordinary shares on the Main Board of the Hong Kong Stock Exchange Limited (the “IMAX China IPO”). Following the IMAX China IPO, the Company continues to indirectly own approximately 68.2% of IMAX China, which remains a consolidated subsidiary of the Company.

The Company believes that there have been a number of financial, strategic and operating benefits resulting from both the IMAX China Investment and the IMAX China IPO. With respect to the IMAX China Investment, the Company believes that the investors’ knowledge of, and influence in, the Chinese media and entertainment industry has contributed to the continued expansion of IMAX’s theater network in China and the further strengthening of the Company’s government and industry relationships. In addition, the Company believes that the IMAX China IPO provides investors the ability to directly access and evaluate the IMAX China business, and provides greater clarity into the business’s performance in the fastest-growing entertainment market in the world.

Over the years, several technological breakthroughs have established IMAX as an important distribution platform for Hollywood’s biggest event films. These include:

 

  DMR — IMAX’s proprietary DMR technology digitally converts live-action digital films or 35mm to its large-format, while meeting the Company’s high standards of image and sound quality. In a typical IMAX DMR film arrangement, the Company receives a percentage, which in recent years has averaged approximately 12.5%, of box-office receipts, net of sales tax, of any commercial films released in the IMAX theater network outside of Greater China from the applicable film studio for the conversion of the film to the IMAX DMR format and for access to the Company’s premium distribution platform. Within Greater China, the Company receives a lower percentage of box-office receipts for certain films. At December 31, 2016, the Company had released 294 IMAX DMR films since the introduction of IMAX DMR in 2002. The number of films released on an annual basis that have been converted through the DMR process has increased significantly in recent years with the advent of digital technology that has reduced the DMR conversion time and with the strengthening of the Company’s relationships with major Hollywood studios, as well as international studios. Accordingly, 51 films converted through the IMAX DMR process were released in 2016, as compared to six in 2007.

 

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  IMAX Xenon-Based Digital Projection System — The Company introduced its xenon-based digital projection system in 2008. Prior to 2008, all of IMAX’s large format projectors were film-based and required analog film prints. The IMAX xenon-based digital projection system, which operates without the need for such film prints, was designed specifically for use by commercial multiplex operators and allows operators to reduce the capital and operating costs required to run an IMAX theater without sacrificing the image and sound quality of The IMAX Experience. By making The IMAX Experience more accessible for commercial multiplex operators, the introduction of the IMAX xenon-based digital projection system paved the way for a number of important joint revenue sharing arrangements which have allowed the Company to rapidly expand its theater network. Since announcing that the Company was developing xenon-based digital projection technology, the vast majority of the Company’s theater system signings have been for xenon-based digital systems. As at December 31, 2016, the Company has signed agreements for 1,571 xenon-based digital systems since 2007, 303 of which were signed in 2016 alone. As at December 31, 2016, 1,093 IMAX xenon-based digital projection systems were in operation, an increase of 16.4% over the 939 xenon-based digital projection systems in operation as at December 31, 2015 and 478 IMAX xenon-based digital projection systems were in backlog as compared to 348 xenon-based digital systems in backlog as at December 31, 2015.

 

  IMAX Laser-Based Digital Projection System — As one of the world’s leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema technology. To that end, the Company introduced its next-generation laser-based digital projection system at the end of 2014, which was co-developed with Barco N.V. and incorporates exclusive technology developed or otherwise obtained by the Company. The Company believes that the IMAX laser-based digital projectors present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology. The laser projection solution is the first IMAX digital projection system capable of illuminating the largest screens in its network. As of December 31, 2016, 39 laser-based digital theater systems were operational. The Company is in the process of developing a commercial laser-based digital projection system designed for IMAX theaters in multiplexes.

In addition to the design and manufacture of premium theater systems, the Company is also engaged in the production and distribution of original large-format films, the provision of services in support of the IMAX theater network, the provision of post-production services for large-format films, the operation of three IMAX theaters and, from time-to-time the conversion of two-dimensional (“2D”) and three-dimensional (“3D”) Hollywood feature films for exhibition on IMAX theater systems around the world.

NEW BUSINESS INITIATIVES

The Company is exploring new lines of business, with a focus on location-based experiences, alternative forms of in-cinema entertainment and in-home entertainment. In the second quarter of 2016, the Company announced its comprehensive virtual reality (“VR”) strategy to develop a premium, location-based VR offering that will deliver immersive, multi-dimensional experiences, including entertainment content and games, to branded VR centers (“IMAX VR Centers”). IMAX VR Centers are expected to be located in both stand-alone venues as well as multiplexes, malls and other commercial destinations, and will be retrofitted with proprietary VR pods that permit interactive, moveable VR experiences. The Company’s VR initiative is premised on a unique combination of premium content, proprietary design and best-in-class technology.

In order to deliver high quality content to the IMAX VR Centers, the Company has partnered with Google to design and develop a cinema-grade IMAX VR camera, which will enable filmmakers and content creators to capture and deliver high-quality, 360-degree content experiences to audiences. In addition, the Company recently announced the creation of an approximately $50.0 million virtual reality fund (the “VR Fund”) among the Company, its subsidiary IMAX China and other strategic investors. The VR Fund will help finance the creation of an estimated 25-30 interactive VR content experiences over the next three years for use across all VR platforms, including in the IMAX VR Centers. The VR Fund will target premium productions with its Hollywood studio and filmmaker partners, as well as gaming publishers and other leading content developers.

In January 2017, the Company launched its flagship pilot IMAX VR Center in Los Angeles and has signed agreements for additional IMAX VR center pilots in China, the U.S. and the United Kingdom, which are scheduled to open in the coming months. The Company plans to use these pilot locations to test several factors including the overall customer experience, pricing models, throughput, types of content featured and differences in geographic areas. If successful, the Company’s intent is to roll out IMAX VR Centers globally.

Through its VR initiative, the Company sees a unique opportunity to combine premium equipment, more robust computing power, and specially designed spaces to create a highly differentiated, destination-based VR experience that will draw consumers out of their homes, similar to the strategy it has successfully employed in the cinema space.

 

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The Company is also focusing on alternative forms of in-cinema entertainment, including original content. In November 2016, the Company announced an agreement with Marvel Television Inc. (“Marvel”) and Disney|ABC Television Group to co-produce and exclusively premiere the new ABC series “Marvel’s Inhumans” in IMAX theaters. Under the agreement, the first two episodes of the series are expected to run worldwide exclusively in IMAX theaters for two weeks in September 2017. Several weeks later, the series will premiere on the ABC network in the U.S. and across other networks internationally. As a result of the Company’s significant financing commitment, the Company will have an equity participation both in the pilot and in the television series. This agreement marks the first time a live-action television series has debuted in this manner, and the first time the Company has an economic interest in a television property.

In 2015, the Company announced the creation of the IMAX China Film Fund (the “China Film Fund”) with its subsidiary IMAX China, its partner CMC and several other larger investors to help fund Mandarin language commercial films. The China Film Fund, which is expected initially to be capitalized with over $100.0 million, will target productions that can leverage the Company’s brand, relationships, technology and release windows in China. The China Film Fund is expected to co-finance approximately 15 Mandarin-language tent-pole films over three years, and will target contributions of between $3.0 million and $7.0 million per film. The China Film Fund will operate under an IMAX China-CMC controlled greenlight committee.

Also, in 2014, the Company announced the creation of the IMAX Original Film Fund (the “Film Fund”) to co-finance a portfolio of 10 original large format films. The Film Fund, which is intended to be capitalized with up to $50.0 million, will finance an ongoing supply of original films that the Company believes will be more exciting and compelling than traditional documentaries. The initial investment in the Film Fund was committed to by a third party in the amount of $25.0 million, with the possibility of contributing additional funds. The Company agreed to contribute $9.0 million to the Film Fund over five years starting in 2014 and sees the Film Fund as a self-perpetuating vehicle designed to generate a continuous flow of high-quality documentary content. As at December 31, 2016, the Film Fund has invested $13.4 million toward the development of original films.

The Company has also made inroads in the realm of in-home entertainment. To that end, the Company has announced home theater initiatives, including a joint venture with TCL Multimedia Technology Holding Limited (“TCL”) to design, develop, manufacture and sell a premium home theater system. Since 2013, the joint venture has signed agreements with end users for the sale of more than 140 premium home theater systems, and has signed agreements with distributors for the sale of more than 500 home theater systems. Beyond its premium home theater, the Company is also currently developing other components of broader home entertainment platform designed to allow consumers to experience elements of The IMAX Experience® in their homes.

PRODUCT LINES

The Company believes it is the world’s largest designer and manufacturer of specialty premium projection and sound system components for large-format theaters around the world, as well as a significant producer and distributor of large-format films. The Company’s theater systems include specialized IMAX projectors, advanced sound systems and specialty screens. The Company derives its revenues from:

 

    IMAX theater systems (design, manufacture, sale or lease of, and provision of services related to, its theater systems);

 

    Films (production and digital re-mastering of films, the distribution of film products to the IMAX theater network, post-production and print services for films);

 

    Joint revenue sharing arrangements (the provision of its theater system to an exhibitor in exchange for a certain percentage of theater revenue and, in some cases, a small upfront or initial payment);

 

    Theater system maintenance (the use of maintenance services related to its theater systems); and

 

    Other activities, which include theater operations (owning equipment, operating, managing or participating in the revenues of IMAX theaters), the sale of after-market parts and camera rentals.

Segmented information is provided in note 18 to the accompanying audited consolidated financial statements in Item 8.

IMAX Theater Systems, Theater System Maintenance and Joint Revenue Sharing Arrangements

The Company’s primary products are its theater systems. The Company’s digital projection systems include a projector that offers superior image quality and stability and a digital theater control system; a digital audio system delivering up to 12,000 watts of sound; a screen with a proprietary coating technology, and, if applicable, 3D glasses cleaning equipment. IMAX’s digital projection system also operates without the need for analog film prints. Traditional IMAX film-based theater systems contain the same components as the digital projection systems but include a rolling loop 15/70-format projector and require the use of analog film prints. Since its introduction in 2008, the vast majority of the Company’s theater sales have been digital systems. Furthermore, a majority of the

 

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Company’s existing film-based theater systems have been upgraded, at a cost to the exhibitor, to an IMAX digital system. As part of the arrangement to sell or lease its theater systems, the Company provides extensive advice on theater planning and design and supervision of installation services. Theater systems are also leased or sold with a license for the use of the world-famous IMAX brand.

The Company’s digital projection system provides a premium and differentiated experience to moviegoers that is consistent with what they have come to expect from the IMAX brand, while providing for the compelling economics and flexibility that digital technology affords. The relatively low cost of a digital file delivery (approximately $100 per movie per system compared to $30 thousand per 2D print and $60 thousand per 3D print for an IMAX analog film print) ensures programming flexibility, which in turn allows theaters to program significantly more IMAX DMR films per year. More programming increases customer choice and potentially increases total box-office revenue. In 2016, 51 films converted through the IMAX DMR process were released to the IMAX theater network as compared to six films in 2007. To date, the Company has contracted for the release of 26 DMR titles to its theater network for 2017; however, the Company expects a similar number of films to be released to the network in 2017 as experienced in 2016. The Company remains in active discussions with all the major studios regarding future titles for 2017 and beyond. Furthermore, the Company expects to announce both additional local language IMAX DMR films and original and alternative content to be released to the IMAX theater network in 2017 and beyond. Supplementing the Company’s film slate of Hollywood DMR titles with appealing local DMR titles is an important component of the Company’s international film strategy.

To complement its viewing experience, the Company provides digital sound system components which are specifically designed for IMAX theaters. These components are among the most advanced in the industry and help to heighten the realistic feeling of an IMAX presentation, thereby providing IMAX theater systems with an important competitive edge over other theater systems. The Company believes it is a world leader in the design and manufacture of digital sound system components for applications including traditional movie theaters, auditoriums and IMAX theaters.

The film-based GT and SR systems and the IMAX digital systems are “flat” screens that have a minimum of curvature and tilt and can exhibit both 2D and 3D films, while the screen components in dome shaped theaters are 2D only and are popular with the Company’s institutional clients. All IMAX theaters, with the exception of dome configurations, feature a steeply inclined floor to provide each audience member with a clear view of the screen. The Company holds patents on the geometrical design of IMAX theaters.

The Company’s arrangements for theater system equipment involve a sale, sales-type lease or joint revenue sharing arrangement. As part of the purchase, lease or other acquisition of an IMAX theater system, the Company also advises the customer on theater design, supervises the installation of the theater systems and provides projectionists with training in using the equipment. The supervision of installation requires that the equipment also be put through a complete functional start-up and test procedure to ensure proper operation. Theater owners or operators are responsible for providing the theater location, the design and construction of the theater building, the installation of the system components and any other necessary improvements, as well as the theater’s marketing and programming. The Company’s typical arrangement also includes trademark license rights whose term tracks the term of the underlying agreement. The theater system equipment components (including the projector, sound system, screen system, and, if applicable, 3D glasses cleaning machine), theater design support, supervision of installation, projectionist training and trademark rights are all elements of what the Company considers the system deliverable (the “System Deliverable”). For a separate fee, the Company provides ongoing maintenance and extended warranty services for the theater system. The Company’s contracts are generally denominated in U.S. dollars, except in Canada, China, Japan and parts of Europe, where contracts are sometimes denominated in local currency.

Sales-type leases typically have an initial 10-year term and are typically renewable by the customer for one or more additional 5 to 10-year terms. Under the terms of the typical lease agreement, the title to the theater system equipment (including the projector, the sound system and the projection screen) remains with the Company. The Company has the right to remove the equipment for non-payment or other defaults by the customer. The contracts are generally not cancelable by the customer unless the Company fails to perform its obligations.

Under a sales agreement, by contrast, the title to the theater system equipment components passes to the customer. In certain instances, however, the Company retains title or a security interest in the equipment until the customer has made all payments required under the agreement.

The typical sales-type lease or sales arrangement provides for three major sources of cash flows for the Company: (i) initial fees; (ii) ongoing minimum fixed and contingent fees; and (iii) ongoing maintenance and extended warranty fees. Initial fees generally are received over the period of time from the date the arrangement is executed to the date the equipment is installed and customer

 

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acceptance has been received. However, in certain cases, the payments of the initial fee may be scheduled over a period of time after the equipment is installed and customer acceptance has been received. Ongoing minimum fixed and contingent fees and ongoing maintenance and extended warranty fees are generally received over the life of the arrangement and are usually adjusted annually based on changes in the local consumer price index. The ongoing minimum fixed and contingent fees generally provide for a fee which is the greater of a fixed amount or a certain percentage of the theater box-office. The terms of each arrangement vary according to the configuration of the theater system provided, the cinema market and the film distribution market relevant to the geographic location of the customer.

The Company also offers certain commercial clients IMAX theater systems under joint revenue sharing arrangements. The Company has two basic types of joint revenue sharing arrangements: traditional and hybrid. Under a traditional joint revenue sharing arrangement, the Company provides the IMAX theater system in return for a portion of the customer’s IMAX box-office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront payment or annual minimum payments. Payments, which are based on box-office receipts, are required throughout the term of the arrangement and are due either monthly or quarterly. Certain maintenance and extended warranty services are provided to the customer for a separate fixed annual fee. The Company retains title to the theater system equipment components, and the equipment is returned to the Company at the conclusion of the arrangement.

Under a hybrid joint revenue sharing arrangement, by contrast, the customer is responsible for making upfront payments prior to the delivery and installation of the IMAX theater system in an amount that is typically half of what the Company would receive from a straight sale transaction. As with a traditional joint revenue sharing arrangement, the customer also pays the Company a portion of the customer’s IMAX box-office receipts over the term of the arrangement, although the percentage of box-office receipts owing to the Company is typically half that of a traditional joint revenue sharing arrangement. The Company generally retains title to the theater system equipment components, and the equipment is returned to the Company at the conclusion of the arrangement. In limited instances, however, title to the theater system equipment components passes to the customer.

Under the significant majority of joint revenue sharing arrangements (both traditional and hybrid), the initial non-cancellable term of IMAX theater systems is 10 years or longer, and is renewable by the customer for one to two additional terms of between three to five years. The Company has the right to remove the equipment for non-payment or other defaults by the customer. The contracts are non-cancellable by the customer unless the Company fails to perform its obligations. In rare cases, the contract provides certain performance thresholds that, if not met by either party, allow the other party to terminate the agreement. By offering arrangements in which exhibitors do not need to invest the significant initial capital required of a sales-type lease or a sale arrangement, the Company has been able to expand its theater network at a significantly faster pace than it had previously. As at December 31, 2016, the Company has entered into joint revenue sharing arrangements for 995 systems with 48 partners, 640 of which were in operation as at December 31, 2016.

In 2012, Dalian Wanda Group Co., Ltd. (“Dalian Wanda”), the parent company of Wanda, acquired AMC Entertainment Holdings, Inc. (“AMC”). Under common ownership, Wanda and AMC together is the Company’s largest customer, representing approximately 13.5%, 16.0% and 14.5% of the Company’s total revenue in 2016, 2015 and 2014, respectively. In addition, Wanda and AMC together represented approximately 40.3% of the commercial network and 39.8% of the Company’s backlog as of December 31, 2016. See Risk Factors – “Under common ownership, Wanda and AMC together account for a significant and growing portion of the Company’s revenue and backlog. A deterioration in the Company’s relationship with Wanda and/or AMC could materially, adversely affect the Company’s business, financial condition or results of operations.” in Item 1A.

 

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Sales Backlog

The Company’s sales backlog is as follows:

 

     December 31, 2016     December 31, 2015  
    Number of 
 Systems 
    Fixed
Contractual
Dollar Value
(in thousands)
     Number of 
 Systems 
    Fixed
Contractual
Dollar Value
(in thousands)
 
        
        
        

Sales and sales-type lease arrangements

     143     $ 175,331       160     $ 207,858  

Joint revenue sharing arrangements

        

Hybrid arrangements

     92       48,658 (1)      117       62,606 (1) 

Traditional arrangements

     263       3,680 (2)      95       450 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

 
     498 (3)    $ 227,669       372 (4)    $ 270,914  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Reflects contractual upfront payments. Future contingent payments are not reflected as these are based on negotiated shares of box-office results.
(2) No fixed upfront or annual minimum payments. Future contingent payments are not reflected as these are based on negotiated shares of box-office results.
(3) Includes 20 laser-based digital theater system configurations, including three upgrades. The Company continues to develop and roll out its laser-based digital projection system. See “Research and Development” in this Part I for additional information.
(4) Includes 24 laser-based digital theater system configurations, including 13 upgrades.

The number of theater systems in the backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new theater system arrangements signed from year to year, which adds to backlog and the installation and acceptance of theater systems and the settlement of contracts, both of which reduce backlog. Sales backlog typically represents the fixed contracted revenue under signed theater system sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated theater. Sales backlog includes initial fees along with the estimated present value of contractual ongoing fees due over the term, however it excludes amounts allocated to maintenance and extended warranty revenues as well as fees in excess of contractual ongoing fees that may be received in the future. The value of sales backlog does not include revenue from theaters in which the Company has an equity interest, operating leases, letters of intent or long-term conditional theater commitments. The value of theaters under joint revenue sharing arrangements is excluded from the dollar value of sales backlog, although certain theater systems under joint revenue sharing arrangements provide for contracted upfront payments and therefore carry a backlog value based on those payments. The Company believes that the contractual obligations for theater system installations that are listed in sales backlog are valid and binding commitments.

The following chart shows the number of the Company’s theater systems by configuration, opened theater network base and backlog as at December 31:

 

     2016     2015  
   Theater
Network
Base
     Backlog     Theater
Network
Base
     Backlog  
          
          

Flat Screen (2D)

     9        —         12        —    

Dome Screen (2D)

     45        —         53        —    

IMAX 3D Dome (3D)

     2        —         2        —    

IMAX 3D GT (3D)

     18        —         24        —    

IMAX 3D SR (3D)

     9        —         13        —    

IMAX Digital: Xenon (3D)

     1,093        478       939        348 (2) 

IMAX Digital: Laser (3D)

     39        20 (1)      18        24 (3) 
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     1,215        498       1,061        372  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Backlog includes three upgrades to laser-based digital theater systems from xenon-based digital theater systems in existing IMAX theater locations (all institutional).

 

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(2) Includes two upgrades from film-based theater systems to xenon-based digital theater systems in existing IMAX theater locations (one commercial and one institutional).
(3) Backlog includes 13 upgrades to laser-based digital theater systems from xenon-based digital theater systems in existing IMAX theater locations (three commercial and 10 institutional).

The Company estimates that it will install approximately 150 -155 new theater systems (excluding upgrades) in 2017. The Company’s installation estimates includes scheduled systems from backlog, as well as the Company’s estimate of installations from arrangements that will sign and install in the same calendar year. The Company cautions, however, that theater system installations may slip from period to period over the course of the Company’s business, usually for reasons beyond its control.

IMAX theater systems consist of the following configurations:

IMAX Digital: Xenon Theater Systems. In July 2008, the Company introduced a proprietary IMAX xenon-based digital projection system that it believes delivers higher quality imagery compared with other digital systems and that is consistent with the Company’s brand. As at December 31, 2016, the Company had installed 1,093 xenon-based digital theater systems and has an additional 478 xenon-based digital theater systems in its backlog.

IMAX Digital: Laser Theater Systems. The Company introduced its next-generation laser-based digital projection system at the end of 2014. The Company believes the IMAX laser-based digital projectors present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology, capable of illuminating the largest screens in the IMAX theater network. As at December 31, 2016, the Company had installed 39 laser-based digital systems. The Company is in the process of developing a commercial laser-based digital projection system designed for IMAX theaters in multiplexes.

IMAX Flat Screen and IMAX Dome Theater Systems. IMAX flat screen and IMAX dome systems primarily have been installed in institutions such as museums and science centers. Flat screen IMAX theaters were introduced in 1970, while IMAX dome theaters, which are designed for tilted dome screens, were introduced in 1973. There have been several significant proprietary and patented enhancements to these systems since their introduction. As at December 31, 2016, there were 56 IMAX flat screen and IMAX dome theater systems in the IMAX network, as compared to 67 IMAX flat screen and IMAX dome theater systems as at December 31, 2015. With the introduction of the IMAX digital theater systems, there has been a decrease in the number of IMAX flat screen and IMAX dome theater systems in the network.

IMAX 3D GT and IMAX 3D SR Theater Systems. IMAX 3D theaters utilize a flat screen 3D system, which produces realistic 3D images on an IMAX screen. As at December 31, 2016, there were 27 IMAX 3D GT and IMAX 3D SR theater systems in operation compared to 37 IMAX 3D GT and IMAX 3D SR theater systems in operation as at December 31, 2015. The decrease in the number of 3D GT and 3D SR theater systems is largely attributable to the conversion of existing 3D GT and 3D SR theater systems to IMAX digital theater systems.

Films

Film Production and Digital Re-mastering (IMAX DMR)

In 2002, the Company developed a proprietary technology to digitally re-master Hollywood films into IMAX digital cinema package format or 15/70-format film for exhibition in IMAX theaters at a modest cost that is incurred by the Company. This system, known as IMAX DMR, digitally enhances the image resolution of motion picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known. This technology has enabled the IMAX theater network to release Hollywood films simultaneously with their broader domestic release. The development of this technology was critical in helping the Company execute its strategy of expanding its commercial theater network by establishing IMAX theaters as a key, premium distribution platform for Hollywood films. In a typical IMAX DMR film arrangement, the Company receives a percentage, which in recent years has averaged approximately 12.5%, of box-office receipts, net of sales tax, of any commercial films released in the IMAX theater network outside of Greater China from the applicable film studio for the conversion of the film to the IMAX DMR format and for access to the Company’s premium distribution platform. Within Greater China, the Company receives a lower percentage of box-office receipts for certain films.

Other factors beyond the IMAX DMR format, and IMAX’s proprietary projection and sound technology, further differentiate IMAX content from other film content. Filmmakers choose IMAX cameras to shoot selected scenes to increase the audience’s immersion in the film and take advantage of the unique dimensions of the IMAX screen by shooting the film in a larger aspect ratio. Certain films also enjoy early release windows in IMAX, including Everest: An IMAX 3D Experience and The Walk: The IMAX

 

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Experience, which were released one week early in IMAX theaters in 2015. Several recent films have featured select sequences shot with IMAX cameras including Captain America: Civil War: An IMAX 3D Experience, released in May 2016; Batman v Superman: Dawn of Justice: An IMAX 3D Experience, released in March 2016; Star Wars: The Force Awakens: An IMAX 3D Experience, released in December 2015; Interstellar: The IMAX Experience, released in November 2014; and Transformers Age of Extinction: An IMAX 3D Experience, released in June 2014 among others. In addition, Marvel’s Avengers: Infinity War Part 1: An IMAX 3D Experience and Avengers: Infinity War Part 2: An IMAX 3D Experience are expected to be shot in their entireties using the IMAX camera, which is the second time a full feature length movie will be filmed with the IMAX cameras. Sully: The IMAX Experience, released in August 2016, was shot with IMAX cameras for a majority of the film. IMAX theaters therefore serve as an additional distribution platform for Hollywood films, just as home video and pay-per-view are ancillary distribution platforms. In some cases, the Company may also have certain distribution rights to the films produced using its IMAX DMR technology.

The IMAX DMR process involves the following:

 

    in certain instances, scanning, at the highest possible resolution, each individual frame of the movie and converting it into a digital image;

 

    optimizing the image using proprietary image enhancement tools;

 

    enhancing the digital image using techniques such as sharpening, color correction, grain and noise removal and the elimination of unsteadiness and removal of unwanted artifacts;

 

    recording the enhanced digital image onto IMAX 15/70-format film or IMAX digital cinema package (“DCP”) format; and

 

    specially re-mastering the sound track to take full advantage of the unique sound system of IMAX theater systems.

The first IMAX DMR film, Apollo 13: The IMAX Experience, produced in conjunction with Universal Pictures and Imagine Entertainment, was released in September 2002 to 48 IMAX theaters. One of the more recent IMAX DMR films, Fantastic Beasts and Where to Find Them: An IMAX 3D Experience was released in November 2016 to 1,108 IMAX theaters. Since the release of Apollo 13: The IMAX Experience, to December 31, 2016, an additional 293 IMAX DMR films have been released to the IMAX theater network.

Advances in the IMAX DMR process allow the re-mastering process to meet aggressive film production schedules. The Company has decreased the length of time it takes to reformat a film with its IMAX DMR technology. Apollo 13: The IMAX Experience, released in September 2002, was re-mastered in 16 weeks, while certain current films can be re-mastered in less than one week. The IMAX DMR conversion of simultaneous, or “day-and-date” releases are done in parallel with the movie’s filming and editing, which is necessary for the simultaneous release of an IMAX DMR film with the domestic release to conventional theaters.

The original soundtrack of a film to be released to the IMAX network is re-mastered for the IMAX six or twelve-channel digital sound systems in connection with the IMAX DMR release. Unlike the soundtracks played in conventional theaters, IMAX re-mastered soundtracks are uncompressed and full fidelity. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in a good listening position.

The Company believes that the growth in international box-office will continue to be an important driver of future growth for the Company. In fact, during the year ended December 31, 2016, 61.8% of the Company’s gross box-office from IMAX DMR films was generated in international markets. To support growth in international markets, the Company has sought to bolster its international film strategy, supplementing the Company’s film slate of Hollywood DMR titles with appealing local IMAX DMR releases in select markets. In 2016, the Company released 12 local language IMAX DMR films, including nine in China, two in Russia and one in Japan, and in 2015, the Company released 11 local language IMAX DMR films, including eight in China and three in Japan.

In 2016, 51 films were converted through the IMAX DMR process and released to theaters in the IMAX network by film studios as compared to 44 films in 2015.

 

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To date, the Company has announced the following 26 DMR titles to be released in 2017 to the IMAX theater network:

 

    Your Name: The IMAX Experience (Toho Co., Ltd., January 2017);

 

    xXx: Return of Xander Cage: The IMAX Experience (Paramount Pictures, January 2017);

 

    Resident Evil: The Final Chapter: The IMAX Experience (Sony Pictures, January 2017);

 

    Attraction: The IMAX Experience (Art Pictures Studio, January 2017, Russia only);

 

    Journey to The West: The Demons Strike Back: The IMAX Experience (Alibaba Pictures Group, January 2017);

 

    The Lego Batman Movie: The IMAX Experience (Warner Bros. Pictures, February 2017);

 

    Sing: The IMAX Experience (Universal Pictures, February 2017, China and Japan only);

 

    Logan: The IMAX Experience (20th Century Fox, March 2017);

 

    Kong: Skull Island: The IMAX Experience (Warner Bros. Pictures, March 2017);

 

    Beauty and The Beast: The IMAX Experience (Walt Disney Studios, March 2017);

 

    Ghost in the Shell: The IMAX Experience (Paramount Pictures, March 2017);

 

    The Fate of the Furious: The IMAX Experience (Universal Pictures, April 2017);

 

    Guardians of the Galaxy Vol. 2: The IMAX Experience (Walt Disney Studios, May 2017);

 

    Pirates of the Caribbean: Dead Men Tell No Tales: The IMAX Experience (Walt Disney Studios, May 2017);

 

    Wonder Woman: The IMAX Experience (Warner Bros. Pictures, June 2017);

 

    The Mummy: The IMAX Experience (Universal Pictures, June 2017);

 

    Transformers: The Last Knight: The IMAX Experience (Paramount Pictures, June 2017);

 

    Spider-Man: Homecoming: The IMAX Experience (Sony Pictures-distributed and Marvel Studios and Sony Pictures-produced, July 2017);

 

    Dunkirk: The IMAX Experience (Warner Bros. Pictures, July 2017);

 

    The Solutrean: The IMAX Experience (Sony Pictures, September 2017);

 

    The Lego Ninjago Movie: The IMAX Experience (Warner Bros. Pictures, September 2017);

 

    Blade Runner 2049: The IMAX Experience (Warner Bros. Pictures, October 2017);

 

    Geostorm: The IMAX Experience (Warner Bros. Pictures, October 2017);

 

    Thor: Ragnarök: The IMAX Experience (Walt Disney Studios, November 2017);

 

    Justice League: The IMAX Experience (Warner Bros. Pictures, November 2017); and

 

    Star Wars: The Last Jedi: The IMAX Experience (Walt Disney Studios, December 2017).

In addition, in conjunction with Marvel and Disney|ABC Television Group, the Company will be co-producing and exclusively premiering the new ABC series “Marvel’s Inhumans” in IMAX theaters. The first two episodes of the series are expected to run worldwide exclusively in IMAX theaters for two weeks in September 2017, and several weeks later, the series will premiere on the ABC network. The Company will have an equity participation both in the pilot and in the television series, representing the first time the Company will have an economic interest in a television property.

The Company remains in active negotiations with all of the major Hollywood studios, as well as international studios, for additional films to fill out its short and long-term film slate, and anticipates that a similar number of IMAX DMR films will be released to the IMAX theater network in 2017 to the films that were released to the IMAX theater network in 2016.

The Company also expects to announce both additional local language IMAX DMR films and original and alternative content to be released to the IMAX theater network in 2017 and beyond. Supplementing the Company’s film slate of Hollywood DMR titles with appealing local DMR titles is an important component of the Company’s international film strategy.

Film Distribution

The Company is also a distributor of large-format films, primarily for its institutional theater partners. The Company generally distributes films which it produces or for which it has acquired distribution rights from independent producers. The Company receives either a percentage of the theater box-office receipts or a fixed amount as a distribution fee.

Films produced by the Company are typically financed through third parties, whereby the Company will generally receive a film production fee in exchange for producing the film and a distribution fee for distributing the film. The ownership rights to such films may be held by the film sponsors, the film investors and/or the Company. As at December 31, 2016, the Company currently has distribution rights with respect to 46 of such films, which cover such subjects such as space, wildlife, music, history and natural wonders. Several more recent large-format films that have been distributed by the Company include: A Beautiful Planet, which was

 

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released in April 2016 and has grossed over $10.1 million as at the end of 2016; Voyage of Time, which was released in October 2016 and has grossed over $0.3 million as at the end of 2016; Island of Lemurs: Madagascar, which was released in April 2014 and has grossed over $13.2 million as at the end of 2016; Journey to the South Pacific, which had a limited release in November 2013 and a broader release in 2014 and has grossed $12.6 million as at the end of 2016. Large-format films have significantly longer exhibition periods than conventional commercial films and many of the films in the large-format library have remained popular for many decades, including the films SPACE STATION, Hubble 3D and T-REX: Back to the Cretaceous.

Film Post-Production

The Company also provides film post-production and quality control services for large-format films (whether produced internally or externally), and digital post-production services.

Other

Theater Operations

As at December 31, 2016 and 2015, the Company had two and three owned and operated theaters on leased premises, respectively. In addition, the Company has a commercial arrangement with one theater resulting in the sharing of profits and losses. The Company also provides management services to two theaters.

Cameras

The Company rents its 2D and 3D large-format film and digital cameras to third party production companies. The Company also provides production technical support and post-production services for a fee. All IMAX 2D and 3D film cameras run 65mm negative film, exposing 15 perforations per frame and resulting in an image area nearly 10x larger than standard 35mm film. The Company believes that its film-based 3D camera, which is a patented, state-of-the-art dual and single filmstrip 3D camera, is among the most advanced motion picture cameras in the world and is the only 3D camera of its kind. The IMAX 3D camera simultaneously shoots left-eye and right-eye images and enables filmmakers to access a variety of locations, such as underwater or aboard aircraft. The Company has also developed a high speed 3D digital camera which utilizes a pair of the world’s largest digital sensors.

The Company maintains cameras and other film equipment and also offers production advice and technical assistance to both documentary and Hollywood filmmakers.

MARKETING AND CUSTOMERS

The Company markets its theater systems through a direct sales force and marketing staff located in offices in Canada, the United States, Greater China, Europe and Asia. In addition, the Company has agreements with consultants, business brokers and real estate professionals to locate potential customers and theater sites for the Company on a commission basis.

The commercial multiplex theater segment of the Company’s theater network is now its largest segment, comprising 1,107 IMAX theaters, or 91.1%, of the 1,215 IMAX theaters open as at December 31, 2016. The Company’s institutional customers include science and natural history museums, zoos, aquaria and other educational and cultural centers. Over the last several years the Company has not been able to digitally upgrade many of the institutional locations due to the size of the screens. The development of the IMAX digital laser-based system, which was rolled out at the end of 2014, together with the completion of the Film Fund should assist in supporting this segment of the Company’s customer base. The Company also sells or leases its theater systems to theme parks, private home theaters, tourist destination sites, fairs and expositions (the Commercial Destination segment). At December 31, 2016, approximately 63.7% of all opened IMAX theaters were in locations outside of the United States and Canada.

 

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The following table outlines the breakdown of the theater network by type and geographic location as at December 31:

 

     2016 Theater Network Base      2015 Theater Network Base  
     Commercial
Multiplex
     Commercial
Destination
     Institutional      Total      Commercial
Multiplex
     Commercial
Destination
     Institutional      Total  

United States

     349        5        41        395        342        6        45        393  

Canada

     37        2        7        46        37        2        8        47  

Greater China(1)

     407        —          17        424        290        —          17        307  

Asia (excluding Greater China)

     93        2        3        98        81        3        6        90  

Western Europe

     76        6        10        92        69        7        10        86  

Russia & the CIS

     56        —          —          56        49        —          —          49  

Latin America(2)

     38        —          12        50        35        —          11        46  

Rest of the World

     51        1        2        54        40        1        2        43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,107        16        92        1,215        943        19        99        1,061  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Greater China includes the People’s Republic of China, Hong Kong, Taiwan and Macau.
(2) Latin America includes South America, Central America and Mexico.

For information on revenue breakdown by geographic area, see note 18 to the accompanying audited consolidated financial statements in Item 8. The Company’s foreign operations are subject to certain risks. See “Risk Factors – The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations sales and future growth prospects” and “Risk Factors – The Company faces risks in connection with the continued expansion of its business in China” in Item 1A. The Company’s two largest customers as at December 31, 2016, collectively represent 40.3% of the Company’s network base of theaters, 39.8% of the Company’s theater system backlog and 17.0% of revenues.

INDUSTRY AND COMPETITION

Within the past decade, as the motion picture industry has transitioned from film projection to digital projection, a number of companies have introduced digital 3D projection technology and an increasing number of Hollywood features have been exhibited using these technologies. As part of this digital transition, a number of commercial exhibitors have introduced their own large screen branded theaters, while certain projection manufacturers and entertainment technology companies have also announced their own proprietary theater systems, some of which include laser-based projectors. The Company believes that all of these alternative film formats deliver images and experiences that are inferior to The IMAX Experience. In 2008, the Company introduced its proprietary digitally-based projector which is capable of 2D and 3D presentations on large screens and which comprises the majority of its current theater system sales. The Company is in the process of developing a commercial laser-based digital projection system designed for IMAX theaters in multiplexes.

The Company may also face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capital resources to develop and support them. The Company also faces in-home competition from a number of alternative motion picture distribution channels such as home video, pay-per-view, video-on-demand, DVD, Internet and syndicated and broadcast television. The Company further competes for the public’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater, social media and restaurants.

The Company believes that its competitive strengths include the value of the IMAX brand name, the premium IMAX consumer experience, the design, quality and historic reliability rate of IMAX theater systems, the return on investment of an IMAX theater, the number and quality of IMAX films that it distributes, the relationships the Company maintains with prominent Hollywood and international filmmakers, a number of whom desire to film portions of their movies with IMAX cameras, the quality of the sound system components included with the IMAX theater, the availability of Hollywood and international event films to IMAX theaters through IMAX DMR technology, consumer loyalty and the level of the Company’s service and maintenance and extended warranty efforts. The Company believes that its next-generation laser-based projection system increases further the technological superiority of the consumer experience it delivers. As a result, the Company believes that all of the best performing premium theaters in the world are IMAX theaters.

 

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THE IMAX BRAND

IMAX is a world leader in entertainment technology. The Company relies on its brand to communicate its leadership and singular goal of creating entertainment experiences that exceed all expectations. Top filmmakers and studios use the IMAX brand to message that a film will connect with audiences in unique and extraordinary ways. The IMAX brand is a promise to deliver what today’s movie audiences crave — a memorable, more emotionally engaging, more thrilling and shareable experience. Consumer research conducted in six countries worldwide by a leading third-party research firm shows that the IMAX brand has near universal awareness, creates a special experience and is by far the most differentiated movie-going brand. On a standardized measure of brand equity, the IMAX brand ranged from two to 10 times more powerful than other exhibition and entertainment technology brands. The Company believes that its strong brand equity supports consumers’ predisposition to choose IMAX over competing brands and to pay a premium for The IMAX Experience now and into the future. IMAX brand strength is evidenced by growing market share, high average ticket prices and per screen averages that outperform the industry.

RESEARCH AND DEVELOPMENT

The Company believes that it is one of the world’s leading entertainment technology companies with significant proprietary expertise in digital and film-based projection and sound system component design, engineering and imaging technology, particularly in laser-based technology. In recent years, the Company has increased its level of research and development in order to develop its next-generation laser-based projection system. The laser-based projection system provides greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, while consuming less power and lasting longer than existing digital technology, to ensure that the Company continues to provide the highest quality, premier movie going experience available to consumers. Currently, the Company experiences lower than expected margins from the installation of these laser-based projection systems. As a result, in 2016, the Company focused its research and development efforts on a new commercial laser-based projection system in order to create a more cost-effective solution. The Company intends for additional research and development to continue in 2017 to support the further development of the laser-based digital projection system. In 2016, the Company also began research and development in connection with its exploration of a comprehensive VR strategy to deliver immersive and interactive experiences to consumers through pilot IMAX VR Centers. In addition, the Company plans to continue research and development activity in the future in other areas considered important to the Company’s continued commercial success, including further improving the reliability of its projectors; enhancing the Company’s 2D and 3D image quality; expanding the applicability of the Company’s digital technology, and using such technology to help expand the Company’s home entertainment platform; developing IMAX theater systems’ capabilities in both home and live entertainment; and improving the Company’s proprietary tuning system and mastering processes.

The Company has also made significant investments in other areas of digital technologies, including the development of a proprietary technology to digitally enhance image resolution and quality of motion picture films including High Dynamic Range content, the creation of an IMAX digital projector and the licensing of prominent laser illumination technology. Accordingly, the Company holds a number of patents, patents pending and other intellectual property rights in these areas. In addition, the Company holds numerous digital patents and relationships with key manufacturers and suppliers in digital technology.

In 2009, the Company developed its first 3D digital camera primarily for use in IMAX documentary productions. Portions of Born to Be Wild 3D and Island of Lemurs: Madagascar were filmed with the IMAX 3D digital camera and the camera has subsequently been used to film footage for Transformers: Age of Extinction: An IMAX 3D Experience, released in June 2014 and Star Wars: The Force Awakens: An IMAX 3D Experience, released in December 2015. Several recent films have featured select sequences shot with IMAX cameras including Batman v Superman: Dawn of Justice: An IMAX 3D Experience, released in March 2016; Captain America: Civil War: An IMAX 3D Experience, released in May 2016; and Transformers Age of Extinction: An IMAX 3D Experience, released in June 2014. In addition, Marvel’s Avengers: Infinity War Part 1: An IMAX 3D Experience and Avengers: Infinity War Part 2: An IMAX 3D Experience are expected to be shot in their entireties using the IMAX camera, which is the second time a full feature length movie will be filmed with the IMAX cameras. Due to the increasing success major Hollywood filmmakers have experienced with IMAX cameras, the Company has identified the development and manufacture of additional IMAX cameras as an important research and development initiative.

The Company also has made progress deploying its proprietary expertise in image technology and 3D technology, as well as its proprietary film content and the IMAX brand, for applications in its in-home entertainment technology initiatives, including its premium home theater system with TCL. The premium home theater system incorporates 4K projection technology, together with security and delivery technology to enable the viewing of current theatrical releases that have been digitally re-mastered with IMAX enhancement technology. To date, the Company’s joint venture with TCL has signed agreements with end users for the sale of more than 140 theater systems, and has signed agreements with distributors for the sale of more than 500 home theater systems.

 

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For the years ended December 31, 2016, 2015, and 2014, the Company recorded research and development expenses of $16.3 million, $12.7 million and $16.1 million, respectively. As at December 31, 2016, 88 of the Company’s employees were connected with research and development projects.

MANUFACTURING AND SERVICE

Projector Component Manufacturing

The Company assembles the projector of its theater systems at its office in Mississauga, Ontario, Canada (near Toronto). The Company develops and designs all of the key elements of the proprietary technology involved in this component. Fabrication of a majority of parts and sub-assemblies is subcontracted to a group of carefully pre-qualified third-party suppliers. Manufacture and supply contracts are signed for the delivery of the component on an order-by-order basis. The Company believes its significant suppliers will continue to supply quality products in quantities sufficient to satisfy its needs. The Company inspects all parts and sub-assemblies, completes the final assembly and then subjects the projector to comprehensive testing individually and as a system prior to shipment. In 2016, these projectors, including both the Company’s xenon and laser-based projection systems, had reliability rates based on scheduled shows of approximately 99.9%.

Sound System Component Manufacturing

The Company develops, designs and assembles the key elements of its theater sound system component. The standard IMAX theater sound system component comprises parts from a variety of sources, with approximately 50% of the materials of each sound system attributable to proprietary parts provided under original equipment manufacturers agreements with outside vendors. These proprietary parts include custom loudspeaker enclosures and horns, specialized amplifiers, and signal processing and control equipment. The Company inspects all parts and sub-assemblies, completes the final assembly and then subjects the sound system component to comprehensive testing individually and as a system prior to shipment.

Screen and Other Components

The Company purchases its screen component and glasses cleaning equipment from third parties. The standard screen system component is comprised of a projection screen manufactured to IMAX specifications and a frame to hang the projection screen. The proprietary glasses cleaning machine is a stand-alone unit that is connected to the theater’s water and electrical supply to automate the cleaning of 3D glasses.

Maintenance and Extended Warranty Services

The Company also provides ongoing maintenance and extended warranty services to IMAX theater systems. These arrangements are usually for a separate fee, although the Company often includes free service in the initial year of an arrangement. The maintenance and extended warranty arrangements include service, maintenance and replacement parts for theater systems.

To support the IMAX theater network, the Company has personnel stationed in major markets throughout the world who provide periodic and emergency maintenance and extended warranty services on existing theater systems. The Company provides various levels of maintenance and warranty services, which are priced accordingly. Under full service programs, Company personnel typically visit each theater every six months to provide preventative maintenance, cleaning and inspection services and emergency visits to resolve problems and issues with the theater system. Under some arrangements, customers can elect to participate in a service partnership program whereby the Company trains a customer’s technician to carry out certain aspects of maintenance. Under such shared maintenance arrangements, the Company participates in certain of the customer’s maintenance checks each year, provides a specified number of emergency visits and provides spare parts, as necessary. For both xenon and laser-based digital systems, the Company provides pre-emptive maintenance, remote system monitoring and a network operations center that provides continuous access to product experts.

 

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PATENTS AND TRADEMARKS

The Company’s inventions cover various aspects of its proprietary technology and many of these inventions are protected by Letters of Patent or applications filed throughout the world, most significantly in the United States, Canada, China, Belgium, Japan, France, Germany and the United Kingdom. The subject matter covered by these patents, applications and other licenses encompasses theater design and geometry, electronic circuitry and mechanisms employed in projectors and projection equipment (including 3D projection equipment), a method for synchronizing digital data, a method of generating stereoscopic (3D) imaging data from a monoscopic (2D) source, a process for digitally re-mastering 35mm films into large-format, a method for increasing the dynamic range and contrast of projectors, a method for visibly seaming or superimposing images from multiple projectors and other inventions relating to digital projectors. In 2011, the Company entered into a deal in which it secured the exclusive license rights from Kodak to a portfolio of more than 50 patent families covering laser projection technology as well as certain exclusive rights to a broad range of Kodak patents in the field of digital cinema. The Company has been and will continue to be diligent in the protection of its proprietary interests.

As at December 31, 2016, the Company holds or licenses 109 patents, has 15 patents pending in the United States and has corresponding patents or filed applications in many countries throughout the world. While the Company considers its patents to be important to the overall conduct of its business, it does not consider any particular patent essential to its operations. Certain of the Company’s patents for improvements to the IMAX projection system components expire between 2021 and 2034.

The Company owns or otherwise has rights to trademarks and trade names used in conjunction with the sale of its products, systems and services. The following trademarks are considered significant in terms of the current and contemplated operations of the Company: IMAX®, IMAX® Dome, IMAX® 3D, IMAX® 3D Dome, Experience It in IMAX®, The IMAX Experience®, An IMAX Experience®, An IMAX 3DExperience®, IMAX DMR®, DMR®, IMAX nXos®, IMAX think big®, think big® and IMAX Is Believing®. These trademarks are widely protected by registration or common law throughout the world. The Company also owns the service mark IMAX THEATRE.

EMPLOYEES

The Company had 703 employees as at December 31, 2016, compared to 646 employees as at December 31, 2015. Both employee counts exclude hourly employees at the Company’s owned and operated theaters, virtual reality centers and certain other new business initiatives.

AVAILABLE INFORMATION

The Company makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after such filings have been made with the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, as well as obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Reports may be obtained free of charge through the SEC’s website at www.sec.gov and through the Company’s website at www.imax.com or by calling the Company’s Investor Relations Department at 212-821-0100. No information included on the Company’s website shall be deemed included or otherwise incorporated into this Annual Report on Form 10-K for the Fiscal Year ended December 31, 2016 (this “2016 Form 10-K”), except where expressly indicated.

 

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Item 1A. Risk Factors

If any of the risks described below occurs, the Company’s business, operating results and financial condition could be materially adversely affected.

The risks described below are not the only ones the Company faces. Additional risks not presently known to the Company or that it deems immaterial, may also impair its business or operations.

The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects.

A significant portion of the Company’s revenues and gross box-office are generated by customers located outside the United States and Canada. Approximately 62%, 60% and 60% of the Company’s revenues were derived outside of the United States and Canada in 2016, 2015 and 2014, respectively. As at December 31, 2016, approximately 87.8% of IMAX theater systems arrangements in backlog are scheduled to be installed in international markets. Accordingly, the Company expects its international operations to continue to account for an increasingly significant portion of its revenues in the future. There are a number of risks associated with operating in international markets that could negatively affect the Company’s operations, sales and future growth prospects. These risks include:

 

    new restrictions on access to markets, both for theater systems and films;

 

    unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;

 

    fluctuations in the value of foreign currency versus the U.S. dollar and potential currency devaluations;

 

    new tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers;

 

    imposition of foreign exchange controls in such foreign jurisdictions;

 

    dependence on foreign distributors and their sales channels;

 

    difficulties in staffing and managing foreign operations;

 

    local business practices that can present challenges to compliance with applicable anti-corruption and bribery laws;

 

    difficulties in establishing market-appropriate pricing;

 

    less accurate and/or less reliable box-office reporting;

 

    adverse changes in monetary and/or tax policies, and/or difficulties in repatriating cash from foreign jurisdictions (including with respect to China, where approval of the State Administration of Foreign Exchange is required);

 

    poor recognition of intellectual property rights;

 

    difficulties in enforcing contractual rights;

 

    inflation;

 

    requirements to provide performance bonds and letters of credit to international customers to secure system component deliveries; and

 

    political, economic and social instability.

In addition, the change in administrations in the United States could lead to changes in international policy, which could present new risks and uncertainties as the Company continues to expand its international operations.

 

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The Company faces risks in connection with the continued expansion of its business in China.

At present, Greater China is the Company’s second largest and fastest-growing market, by revenue. In recent years, the Company’s Greater China operations have accounted for an increasingly significant portion of its overall revenues, with nearly 31% of overall revenues generated from the Company’s China operations in 2016. As at December 31, 2016, the Company had 424 theaters operating in Greater China with an additional 334 theaters in backlog, which represent 67.1% of the Company’s current backlog and which are scheduled to be installed in Greater China by 2022.

The China market faces a number of risks, including changes in laws and regulations, currency fluctuations, increased competition and changes in economic conditions, including the risk of an economic downturn or recession, as well as other conditions that may impact consumer spending. Adverse developments in any of these areas could impact the Company’s future revenues and cash flows and could cause the Company to fail to achieve anticipated growth.

Moreover, certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates both the scope of the Company’s continued expansion in China and the business conducted by it within China. For instance, the Chinese government regulates both the number and timing or terms of Hollywood films released to the China market. The Company cannot provide assurance that the Chinese government will continue to permit the release of IMAX films in China or that the timing of IMAX releases will be favorable to the Company. There are also uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China. If the Company were unable to navigate China’s regulatory environment, including with respect to its current customs inquiry, or if the Company were unable to enforce its intellectual property or contract rights in China, the Company’s business could be adversely impacted.

The success of the IMAX theater network is directly related to the availability and success of IMAX DMR films for which there can be no guarantee.

An important factor affecting the growth and success of the IMAX theater network is the availability and strategic selection of films for IMAX theaters and the box-office performance of such films. The Company itself produces only a small number of such films and, as a result, the Company relies principally on films produced by third party filmmakers and studios, including both Hollywood and local language features converted into the Company’s large format using the Company’s IMAX DMR technology. In 2016, 51 IMAX DMR films were released by studios to the worldwide IMAX theater network. There is no guarantee that filmmakers and studios will continue to release films to the IMAX theater network, or that the films selected for release to the IMAX theater network will be commercially successful. The Company is directly impacted by the box-office results for the films released to the IMAX network through its joint revenue sharing arrangements as well as through the percentage of the box-office receipts the Company receives from the studios releasing IMAX DMR films, and the Company’s continued ability to secure films, find suitable partners for joint revenue share arrangements and to sell IMAX theater systems also depends on the number and commercial success of films released to its network. The commercial success of films released to IMAX theaters depends on a number of factors outside of the Company’s control, including whether the film receives critical acclaim, the timing of its release, the success of the marketing efforts of the studio releasing the film, consumer preferences and trends in cinema attendance. Moreover, films can be subject to delays in production or changes in release schedule, which can negatively impact the number, timing and quality of IMAX DMR and IMAX original films released to the IMAX theater network.

In addition, as the Company’s international network has expanded, the Company has signed deals with studios in other countries to convert their films to the Company’s large format and release them to IMAX theaters. The Company may be unable to select films which will be successful in international markets or may be unsuccessful in selecting the right mix of Hollywood and local DMR films for a particular country or region. Also, conflicts in international release schedules may make it difficult to release every IMAX film in certain markets.

The Company depends principally on commercial movie exhibitors to purchase or lease IMAX theater systems, to supply box-office revenue under joint revenue sharing arrangements and under its sales and sales-type lease agreements and to supply venues in which to exhibit IMAX DMR films. The Company can make no assurances that exhibitors will continue to do any of these things.

The Company’s primary customers are commercial multiplex exhibitors, whose systems represent 99.0% of the 498 theater systems in the Company’s backlog as at December 31, 2016. The Company is unable to predict if, or when, they or other exhibitors will purchase or lease IMAX theater systems or enter into joint revenue sharing arrangements with the Company, or whether any of the Company’s existing customers will continue to do any of the foregoing. If exhibitors choose to reduce their levels of expansion or decide not to purchase or lease IMAX theater systems or enter into joint revenue sharing arrangements with the Company, the

 

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Company’s revenues would not increase at an anticipated rate and motion picture studios may be less willing to convert their films into the Company’s format for exhibition in commercial IMAX theaters. As a result, the Company’s future revenues and cash flows could be adversely affected.

The Company may experience adverse effects due to exchange rate fluctuations.

A substantial portion of the Company’s revenues are denominated in U.S. dollars, while a substantial portion of its expenses are denominated in Canadian dollars. The Company also generates revenues in Chinese Yuan Renminbi, Euros and Japanese Yen. While the Company periodically enters into forward contracts to hedge its exposure to exchange rate fluctuations between the U.S. and the Canadian dollar, the Company may not be successful in reducing its exposure to these fluctuations. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. Even in jurisdictions in which the Company does not accept local currency, significant local currency issues may impact the profitability of the Company’s arrangements for the Company’s customers, which ultimately affect the Company’s ability to negotiate cost-effective arrangements and, therefore, the Company’s results of operations. In addition, because IMAX films generate box-office in 74 different countries, unfavourable exchange rates between applicable local currencies, and the U.S. dollar could affect the Company’s reported gross box-office and revenues, further impacting the Company’s results of operations.

The introduction of new, competing products and technologies could harm the Company’s business.

The out-of-home entertainment industry is very competitive, and the Company faces a number of competitive challenges. According to the National Association of Theater Owners, as at December 31, 2016, there were approximately 16,481 conventional-sized screens in North American multiplexes equipped with digital 3D systems. In addition, some commercial exhibitors, projection manufacturers and entertainment technology companies have announced or introduced their own branded, large-screen 3D auditoriums or other proprietary theater systems, some of which include laser-based projectors, and in many cases have marketed those auditoriums or theater systems as having the same quality or attributes as an IMAX theater. The Company also may face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capital resources to develop and support them. If the Company is unable to continue to deliver a premium movie-going experience, or if other technologies surpass those of the Company, the Company may be unable to continue to produce theater systems which are premium to, or differentiated from, other theater systems. If the Company is unable to produce a differentiated theater experience, consumers may be unwilling to pay the price premiums associated with the cost of IMAX theater tickets and box-office performance of IMAX films may decline. Declining box-office performance of IMAX films would materially and adversely harm the Company’s business and prospects. The Company also faces in-home competition from a number of alternative motion picture distribution channels such as home video, pay-per-view, video-on-demand, DVD, Internet and syndicated and broadcast television. The Company further competes for the public’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater, social media and restaurants.

Failure to respond adequately or in a timely fashion to changes and advancements in digital technology could negatively affect the Company’s business.

There have been a number of advancements in the digital cinema field in recent years. In order to keep pace with these changes and in order to continue to provide an experience which is premium to and differentiated from conventional cinema experiences, the Company has made, and expects to continue to make, significant investments in digital technology in the form of research and development and the acquisition of third party intellectual property and/or proprietary technology. Recently, the Company has made significant investments in laser technology as part of the development of its next-generation laser-based digital projection system, which it began rolling out to the largest theaters in the IMAX network at the end of 2014. The Company intends to continue to invest in the development of its commercial laser-based digital projection system. The process of developing new technologies is inherently uncertain and subject to certain factors that are outside of the Company’s control, including reliance on third party partners and suppliers, and the Company can provide no assurance its investments will result in commercially viable advancements to the Company’s existing products or in commercially successful new products, or that any such advancements or products will improve upon existing technology or will be developed within the timeframe expected.

 

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Under common ownership, Wanda and AMC together account for a significant and growing portion of the Company’s revenue and backlog. A deterioration in the Company’s relationship with Wanda and/or AMC could materially, adversely affect the Company’s business, financial condition or results of operation.

In 2012, Dalian Wanda, the parent company of Wanda, acquired AMC. In December 2013, AMC completed an initial public offering of approximately 20% of its outstanding shares, with Dalian Wanda retaining the approximately 80% remaining. Under common ownership, Wanda and AMC together represent approximately 13.5%, 16.0% and 14.5% of the Company’s total revenue in 2016, 2015 and 2014, respectively. On August 2, 2016, Wanda entered into an agreement with the Company for an additional 150 IMAX theater systems to be built over six years, bringing Wanda’s total commitment to 360 IMAX theater systems. With the latest expansion of the Company’s joint revenue sharing arrangement with Wanda, Wanda and AMC together represented approximately 40.3% of the commercial network and 39.8% of the Company’s backlog as of December 31, 2016. The share of the Company’s revenue that is generated by Wanda and AMC is expected to continue to grow as the significant number of Wanda theater systems currently in backlog are opened. No assurance can be given that either Wanda and/or AMC will continue to purchase theater systems and/or enter into joint revenue sharing arrangements with the Company and if so, whether contractual terms will be affected. If the Company does business with either Wanda and/or AMC less frequently or on less favorable terms than currently, the Company’s business, financial condition or results of operations may be adversely affected. Recent consolidation in the industry, including AMC’s acquisition of Carmike Cinemas and Odeon/UCI Cinemas Group, further augments this risk.

The Company is undertaking new lines of business and these new business initiatives may not be successful.

The Company is undertaking new lines of business. These initiatives represent new areas of growth for the Company and could include the offering of new products and services that may not be accepted by the market. Some areas of potential growth for the Company are in the fields of location-based virtual reality, original content and in-home entertainment technology, all of which are intensively competitive businesses and which are dependent on consumer demand, over which the Company has no control. If any new business in which the Company invests or attempts to develop does not progress as planned, the Company may be adversely affected by investment expenses that have not led to the anticipated results, by write-downs of its equity investments, by the distraction of management from its core business or by damage to its brand or reputation.

In addition, these initiatives may involve the formation of joint ventures and business alliances. While the Company seeks to employ the optimal structure for each such business alliance, the alliance may require a high level of cooperation with and reliance on the Company’s partners and there is a possibility that the Company may have disagreements with its relevant partner with respect to financing, technological management, product development, management strategies or otherwise. Any such disagreement may cause the joint venture or business alliance to be terminated.

The Company may not be able to adequately protect its intellectual property, and competitors could misappropriate its technology or brand, which could weaken its competitive position.

The Company depends on its proprietary knowledge regarding IMAX theater systems and digital and film technology. The Company relies principally upon a combination of copyright, trademark, patent and trade secret laws, restrictions on disclosures and contractual provisions to protect its proprietary and intellectual property rights. These laws and procedures may not be adequate to prevent unauthorized parties from attempting to copy or otherwise obtain the Company’s processes and technology or deter others from developing similar processes or technology, which could weaken the Company’s competitive position and require the Company to incur costs to secure enforcement of its intellectual property rights. The protection provided to the Company’s proprietary technology by the laws of foreign jurisdictions may not protect it as fully as the laws of Canada or the United States. The lack of protection afforded to intellectual property rights in certain international jurisdictions may be increasingly problematic given the extent to which future growth of the Company is anticipated to come from foreign jurisdictions. Finally, some of the underlying technologies of the Company’s products and system components are not covered by patents or patent applications.

The Company owns or licenses patents issued and patent applications pending, including those covering its digital projector, digital conversion technology and laser illumination technology. The Company’s patents are filed in the United States, often with corresponding patents or filed applications in other jurisdictions, such as Canada, China, Belgium, Japan, France, Germany and the United Kingdom. The patent applications pending may not be issued or the patents may not provide the Company with any competitive advantage. The patent applications may also be challenged by third parties. Several of the Company’s issued patents for improvements to IMAX projectors, IMAX 3D Dome and sound system components expire between 2021 and 2034. Any claims or litigation initiated by the Company to protect its proprietary technology could be time consuming, costly and divert the attention of its technical and management resources.

 

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The IMAX brand stands for the highest quality and most immersive motion picture entertainment. Protecting the IMAX brand is a critical element in maintaining the Company’s relationships with studios and its exhibitor clients. Though the Company relies on a combination of trademark and copyright law as well as its contractual provisions to protect the IMAX brand, those protections may not be adequate to prevent erosion of the brand over time, particularly in foreign jurisdictions. Erosion of the brand could threaten the demand for the Company’s products and services and impair its ability to grow future revenue streams.

The Company faces cyber-security and similar risks, which could result in the disclosure, theft or loss of confidential or other proprietary information, including intellectual property; damage to the Company’s brand and reputation; legal exposure and financial losses.

The nature of the Company’s business involves access to and storage of confidential and proprietary content and other information, including intellectual property, as well as information regarding the Company’s customers, employees, licensees and suppliers. Although the Company maintains robust procedures to safeguard such content and information, as well as a cyber-security insurance policy, the Company’s information technology systems could be penetrated by internal or external parties’ intent on extracting information, corrupting information, stealing intellectual property or trade secrets, or disrupting business processes. Information security risks have increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. It is possible that computer hackers could compromise the Company’s security measures or the security measures of parties with whom the Company does business, and thereby obtain the confidential or proprietary information of the Company or its customers, employees, licensees and suppliers. Any such breach or unauthorized access could result in a disruption of the Company’s operations, the theft, unauthorized use or publication of the Company’s intellectual property and other proprietary information, a reduction of the revenues the Company is able to generate from its operations, damage to the Company’s brand and reputation, a loss of confidence in the security of the Company’s business and products, and significant legal and financial exposure, each of which could potentially have an adverse effect on the Company’s business.

General political, social and economic conditions can affect the Company’s business by reducing both revenue generated from existing IMAX theater systems and the demand for new IMAX theater systems.

The Company’s success depends in part on general political, social and economic conditions and the willingness of consumers to purchase tickets to IMAX movies. If going to the movies becomes less popular, the Company’s business could be adversely affected. In addition, the Company’s operations could be adversely affected if consumers’ discretionary income falls as a result of an economic downturn. In recent years, the majority of the Company’s revenue has been directly derived from the box-office revenues of its films. Accordingly, any decline in attendance at commercial IMAX theaters could materially and adversely affect several sources of key revenue streams for the Company.

The Company also depends on the sale and lease of IMAX theater systems to commercial movie exhibitors to generate revenue. Commercial movie exhibitors generate revenues from consumer attendance at their theaters, which depends on the willingness of consumers to visit movie theaters and spend discretionary income at movie theaters. In the event of declining box-office and concession revenues, commercial exhibitors may be less willing to invest capital in new IMAX theaters.

 

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The Company’s revenues from existing customers are derived in part from financial reporting provided by its customers, which may be inaccurate or incomplete, resulting in lost or delayed revenues.

The Company’s revenue under its joint revenue sharing arrangements, a portion of the Company’s payments under lease or sales arrangements and its film distribution fees are based upon financial reporting provided by its customers. If such reporting is inaccurate, incomplete or withheld, the Company’s ability to receive the appropriate payments in a timely fashion that are due to it may be impaired. The Company’s contractual ability to audit IMAX theaters may not rectify payments lost or delayed as a result of customers not fulfilling their contractual obligations with respect to financial reporting.

There is collection risk associated with payments to be received over the terms of the Company’s theater system agreements.

The Company is dependent in part on the viability of its exhibitors for collections under long-term leases, sales financing agreements and joint revenue sharing arrangements. Exhibitors or other operators may experience financial difficulties that could cause them to be unable to fulfill their contractual payment obligations to the Company. As a result, the Company’s future revenues and cash flows could be adversely affected.

The Company may not convert all of its backlog into revenue and cash flows.

At December 31, 2016, the Company’s sales backlog included 498 theater systems, consisting of 143 systems under sales arrangements and 355 theater systems under joint revenue sharing arrangements. The Company lists signed contracts for theater systems for which revenue has not been recognized as sales backlog prior to the time of revenue recognition. The total value of the sales backlog represents all signed theater system sale or lease agreements that are expected to be recognized as revenue in the future and includes initial fees along with the present value of fixed minimum ongoing fees due over the term, but excludes contingent fees in excess of fixed minimum ongoing fees that might be received in the future and maintenance and extended warranty fees. Notwithstanding the legal obligation to do so, not all of the Company’s customers with which it has signed contracts may accept delivery of theater systems that are included in the Company’s backlog. This could adversely affect the Company’s future revenues and cash flows. In addition, customers with theater system obligations in backlog sometimes request that the Company agree to modify or reduce such obligations, which the Company has agreed to in the past under certain circumstances. Customer requested delays in the installation of theater systems in backlog remain a recurring and unpredictable part of the Company’s business.

The Company’s operating results and cash flow can vary substantially from period to period and could increase the volatility of its share price.

The Company’s operating results and cash flow can fluctuate substantially from period to period. In particular, fluctuations in theater system installations and gross box-office performance of IMAX DMR content can materially affect operating results. Factors that have affected the Company’s operating results and cash flow in the past, and are likely to affect its operating results and cash flow in the future, include, among other things:

 

    the timing of signing and installation of new theater systems (particularly for installations in newly-built multiplexes, which can result in delays that are beyond the Company’s control);

 

    the timing and commercial success of films distributed to the Company’s theater network;

 

    the demand for, and acceptance of, its products and services;

 

    the recognition of revenue of sales and sales-type leases;

 

    the classification of leases as sales-type versus operating leases;

 

    the volume of orders received and that can be filled in the quarter;

 

    the level of its sales backlog;

 

    the signing of film distribution agreements;

 

    the financial performance of IMAX theaters operated by the Company’s customers and by the Company;

 

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    financial difficulties faced by customers, particularly customers in the commercial exhibition industry;

 

    the magnitude and timing of spending in relation to the Company’s research and development efforts and related investments as well as new business initiatives; and

 

    the number and timing of joint revenue sharing arrangement installations, related capital expenditures and timing of related cash receipts.

Most of the Company’s operating expenses are fixed in the short term. The Company may be unable to rapidly adjust its spending to compensate for any unexpected shortfall in sales, joint revenue sharing arrangements revenue or IMAX DMR revenue which would harm operating results for a particular period, although the results of any particular period are not necessarily indicative of its results for any period.

The Company’s theater system revenue can vary significantly from its cash flows under theater system sales or lease agreements.

The Company’s theater systems revenue can vary significantly from the associated cash flows. The Company often provides financing to customers for theater systems on a long-term basis through long-term leases or notes receivables. The terms of leases or notes receivable are typically 10 years. The Company’s sale and lease-type agreements typically provide for three major sources of cash flow related to theater systems:

 

    initial fees, which are paid in installments generally commencing upon the signing of the agreement until installation of the theater systems;

 

    ongoing fees, which are paid monthly after all theater systems have been installed and are generally equal to the greater of a fixed minimum amount per annum and a percentage of box-office receipts; and

 

    ongoing annual maintenance and extended warranty fees, which are generally payable commencing in the second year of theater operations.

Initial fees generally make up the vast majority of cash received under theater system sales or lease agreements for a theater arrangement.

For sales and sales-type leases, the revenue recorded is generally equal to the sum of initial fees and the present value of minimum ongoing fees due under the agreement. Cash received from initial fees in advance of meeting the revenue recognition criteria for the theater systems is recorded as deferred revenue. Contingent fees are recognized as they are reported by the theaters after annual minimum fixed fees are exceeded.

Leases that do not transfer substantially all of the benefits and risks of ownership to the customer are classified as operating leases. For these leases, initial fees and minimum fixed ongoing fees are recognized as revenue on a straight-line basis over the lease term. Contingent fees are recognized as they are reported by the theaters after annual minimum fixed fees are exceeded.

As a result of the above, the revenue set forth in the Company’s financial statements does not necessarily correlate with the Company’s cash flow or cash position. Revenues include the present value of future contracted cash payments and there is no guarantee that the Company will receive such payments under its lease and sale agreements if its customers default on their payment obligations.

 

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The Company’s stock price has historically been volatile and declines in market price, including as a result a market downturn, may negatively affect its ability to raise capital, issue debt, secure customer business and retain employees.

The Company is listed on the New York Stock Exchange (“NYSE”) and its publicly traded shares have in the past experienced, and may continue to experience, significant price and volume fluctuations. This market volatility could reduce the market price of its common stock, regardless of the Company’s operating performance. A decline in the capital markets generally, or an adjustment in the market price or trading volumes of the Company’s publicly traded securities, may negatively affect its ability to raise capital, issue debt, secure customer business or retain employees. These factors, as well as general economic and geopolitical conditions, may have a material adverse effect on the market price of the Company’s publicly traded securities.

The credit agreement governing the Company’s senior secured credit facility contains significant restrictions that limit its operating and financial flexibility.

The credit agreement governing the Company’s senior secured credit facility contains certain restrictive covenants that, among other things, limit its ability to:

 

    incur additional indebtedness;

 

    pay dividends and make distributions;

 

    repurchase stock;

 

    make certain investments;

 

    transfer or sell assets;

 

    create liens;

 

    enter into transactions with affiliates;

 

    issue or sell stock of subsidiaries;

 

    create dividend or other payment restrictions affecting restricted subsidiaries; and

 

    merge, consolidate, amalgamate or sell all or substantially all of its assets to another person.

These restrictive covenants impose operating and financial restrictions on the Company that limit the Company’s ability to engage in acts that may be in the Company’s long-term best interests.

The Company is subject to impairment losses on its film assets.

The Company amortizes its film assets, including IMAX DMR costs capitalized using the individual film forecast method, whereby the costs of film assets are amortized and participation costs are accrued for each film in the ratio of revenues earned in the current period to management’s estimate of total revenues ultimately expected to be received for that title. Management regularly reviews, and revises when necessary, its estimates of ultimate revenues on a title-by-title basis, which may result in a change in the rate of amortization of the film assets and write-downs or impairments of film assets. Results of operations in future years include the amortization of the Company’s film assets and may be significantly affected by periodic adjustments in amortization rates.

The Company is subject to impairment losses on its inventories.

The Company records write-downs for excess and obsolete inventory based upon current estimates of future events and conditions, including the anticipated installation dates for the current backlog of theater system contracts, technological developments, signings in negotiation and anticipated market acceptance of the Company’s current and pending theater systems.

 

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If the Company’s goodwill or long lived assets become impaired the Company may be required to record a significant charge to earnings.

Under United States Generally Accepted Accounting Principles (“U.S. GAAP”), the Company reviews its long lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be qualitatively assessed at least annually and when events or changes in circumstances arise or can be quantitatively tested for impairment. Factors that may be considered a change in circumstances include (but are not limited to) a decline in stock price and market capitalization, declines in future cash flows, and slower growth rates in the Company’s industry. The Company may be required to record a significant charge to earnings in its financial statements during the period in which any impairment of its goodwill or long lived assets is determined.

Changes in accounting and changes in management’s estimates may affect the Company’s reported earnings and operating income.

U.S. GAAP and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of the Company’s business, such as revenue recognition, film accounting, accounting for pensions and other postretirement benefits, accounting for income taxes, and treatment of goodwill or long lived assets, are highly complex and involve many subjective judgments. Changes in these rules, their interpretation, management’s estimates, or changes in the Company’s products or business could significantly change its reported future earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations. See “Critical Accounting Policies” in Item 7.

The Company relies on its key personnel, and the loss of one or more of those personnel could harm its ability to carry out its business strategy.

The Company’s operations and prospects depend in large part on the performance and continued service of its senior management team. The Company may not find qualified replacements for any of these individuals if their services are no longer available. The loss of the services of one or more members of the Company’s senior management team could adversely affect its ability to effectively pursue its business strategy.

Because the Company is incorporated in Canada, it may be difficult for plaintiffs to enforce against the Company liabilities based solely upon U.S. federal securities laws.

The Company is incorporated under the federal laws of Canada, some of its directors and officers are residents of Canada and a substantial portion of its assets and the assets of such directors and officers are located outside the United States. As a result, it may be difficult for U.S. plaintiffs to effect service within the United States upon those directors or officers who are not residents of the United States, or to realize against them or the Company in the United States upon judgments of courts of the United States predicated upon the civil liability under the U.S. federal securities laws. In addition, it may be difficult for plaintiffs to bring an original action outside of the United States against the Company to enforce liabilities based solely on U.S. federal securities laws.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

The Company’s principal executive offices are located in Mississauga, Ontario, Canada, New York, New York, and Playa Vista, California. The Company’s principal facilities are as follows:

 

    

Operation

  

Own/Lease

  

Expiration

Mississauga, Ontario (1)

   Headquarters, Administrative, Assembly and Research and Development    Own    N/A

Playa Vista, California (2)

   Sales, Marketing, Film Production and Post-Production    Own    N/A

New York, New York

   Executive    Lease    2019

Beijing, China

   Sales    Lease    2018

Tokyo, Japan

   Sales, Marketing and Maintenance    Lease    2018

Shanghai, China

   Sales, Marketing, Maintenance and Administrative    Lease    2019

Dublin, Ireland

   Sales and Administrative    Lease    2026

Moscow, Russia

   Sales    Lease    2017

London, United Kingdom

   Sales    Lease    2017

 

(1) This facility is subject to a charge in favor of Wells Fargo Bank in connection with a secured term and revolving credit facility (see note 11 to the accompanying audited consolidated financial statements in Item 8).
(2) This facility is subject to a charge in favor of Wells Fargo Bank in connection with the Playa Vista Loan (as defined in note 11 to the accompanying audited consolidated financial statements in Item 8).

The Company believes that its existing facilities and equipment are in good operating condition and are suitable for the conduct of its business.

 

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Item 3. Legal Proceedings

On May 15, 2006, the Company initiated arbitration against Three-Dimensional Media Group, Ltd. (“3DMG”) before the International Centre for Dispute Resolution in New York (the “ICDR”), alleging breaches of the license and consulting agreements between the Company and 3DMG. On June 15, 2006, 3DMG filed an answer denying any breaches and asserting counterclaims that the Company breached the parties’ license agreement. On June 21, 2007, the ICDR unanimously denied 3DMG’s Motion for Summary Judgment filed on April 11, 2007 concerning the Company’s claims and 3DMG’s counterclaims. The proceeding was suspended on May 4, 2009 due to failure of 3DMG to pay fees associated with the proceeding. The proceeding was further suspended on October 11, 2010 pending resolution of re-examination proceedings involving one of 3DMG’s patents. Following a status conference on April 27, 2016 before the ICDR, the ICDR granted 3DMG leave to amend its answer and counterclaims, and subsequently lifted the stay in this matter. In its amended counterclaims, 3DMG seeks damages for alleged unpaid royalties and other fees under the license and consulting agreements. Discovery is currently ongoing and a final hearing before the ICDR has been scheduled for the week of July 10, 2017. Given the stage of discovery, the Company is unable to determine a range of potential damages in this matter. However, the Company believes that the amount of loss, if any, suffered in connection with the amended counterclaims would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given with respect to the ultimate outcome of the arbitration.

In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages before the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) with respect to the breach by Electronic Media Limited (“EML”) of its December 2000 agreement with the Company. In June 2004, the Company commenced a related arbitration before the ICC against EML’s affiliate, E-City Entertainment (I) PVT Limited (“E-City”). On March 27, 2008, the arbitration panel issued a final award in favor of the Company in the amount of $11.3 million, consisting of past and future rents owed to the Company, plus interest and costs, as well as an additional $2,512 each day in interest from October 1, 2007 until the date the award is paid. In July 2008, E-City commenced a proceeding in Mumbai, India seeking an order that the ICC award may not be recognized in India. The Company has opposed that application on a number of grounds and seeks to have the ICC award recognized in India. On June 13, 2013, the Bombay High Court ruled that it has jurisdiction over the proceeding but on November 19, 2013, the Supreme Court of India stayed proceedings in the High Court pending Supreme Court review of the High Court’s ruling. On June 24, 2011, the Company commenced a proceeding in the Ontario Superior Court of Justice for recognition of the ICC final award. On December 2, 2011, the Ontario Court issued an order recognizing the final award and requiring E-City to pay the Company $30,000 to cover the costs of the application. In January 2013, the Company filed an action in the New York Supreme Court seeking to collect the amount owed to the Company by certain entities and individuals affiliated with E-City. On October 16, 2015, the New York Supreme Court denied the Company’s petition, and the Company is appealing that decision. On July 29, 2014, the Company commenced a separate proceeding to have the Canadian judgment against E-City recognized in New York, and on October 2, 2015, the New York Supreme Court granted IMAX’s request, recognizing the Canadian judgment and entering it as a New York judgment. On November 26, 2014, E-City filed a motion in the Bombay High Court seeking to enjoin IMAX from continuing the New York legal proceedings. On February 2, 2015, the Bombay High Court denied E-City’s request for an injunction. On March 16, 2015, E-City filed an appeal of this Bombay High Court decision.

In March 2013, IMAX (Shanghai) Multimedia Technology Co., Ltd. (“IMAX Shanghai”), the Company’s majority-owned subsidiary in China, received notice from the Shanghai office of the General Administration of Customs (“Customs Authority”) that it had been selected for a customs audit (the “Audit”). A key issue raised by the Audit is the transfer pricing policy basis for the importation of IMAX theater systems by IMAX Shanghai into the People’s Republic of China and the applicability of customs duties and taxes to the trademark and technology license fees paid by IMAX Shanghai to the Company. In December 2016, the Customs Authority conclusively determined that any trademark, technology and warranty fees paid by IMAX Shanghai on systems revenue directly related to imported theater systems should be included as part of the tax cost base of these systems and subject to applicable duties and taxes. In connection with the conclusion, for the period beginning January 1, 2012 through October 31, 2016, IMAX Shanghai recorded $2.95 million in duties and taxes on the trademark, technology and warranty fees for applicable theater systems imported during that period and settled the payment in January 2017. In the course of the Audit, the Customs Authority discovered the underpayment by IMAX Shanghai of the freight and insurance portion of the customs duties and taxes applicable to the importation of certain IMAX theater systems during the period from October 2011 through March 2013 of approximately $0.1 million. Though IMAX Shanghai’s importation agent accepted responsibility for the error giving rise to the underpayment, the matter has been transferred to the Anti-Smuggling Bureau of the Customs Authority for further review. IMAX Shanghai is unable to assess the potential impact, if any, of this outstanding matter at this time.

On November 11, 2013, Giencourt Investments, S.A. (“Giencourt”) initiated arbitration before the International Centre for Dispute Resolution in Miami, Florida, based on alleged breaches by the Company of its theater agreement and related license agreement with Giencourt. Giencourt submitted its statement of claim in January 2015, the Company submitted its statement of defense and

 

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counterclaim in April 2015 and Giencourt submitted its arbitration reply paper in September 2015. An arbitration hearing for witness testimony was held during the week of December 14, 2015. At the hearing, Giencourt’s expert identified monetary damages of up to approximately $10.4 million, which Giencourt seeks to recover from the Company. The Company has asserted a counterclaim against Giencourt for breach of contract and seeks to recover lost profits in excess of $24.0 million under the agreements. In addition, on December 10, 2015, Giencourt made a motion to the panel seeking to enforce a purported settlement of the matter based on negotiations between Giencourt and the Company. The panel held a final hearing with closing arguments on October 20 and 21, 2016. On February 7, 2017, the panel issued a Partial Final Award (the “Award”), which held that the parties had reached a binding settlement, and therefore the panel did not reach the merits of the dispute. The Company strongly disputes that discussions about a potential resolution of this matter amounted to an enforceable settlement. The Company is currently reviewing the Award and assessing its response and potential next steps, including a potential challenge in Florida court on the grounds that the panel exceeded its jurisdiction. At this time, the Company is unable to determine the amounts that it may owe pursuant to the Award, or the timing of any such payments, and therefore no assurances can be given with respect to the ultimate outcome of the matter.

In addition to the matters described above, the Company is currently involved in other legal proceedings or governmental inquiries which, in the opinion of the Company’s management, will not materially affect the Company’s financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

The Company’s common shares are listed for trading under the trading symbol “IMAX” on the NYSE. The following table sets forth the range of high and low sales prices per share for the common shares on the NYSE.

 

     U.S. Dollars  
     High      Low  

NYSE

     

Year ended December 31, 2016

     

Fourth quarter

   $ 34.80       $ 27.95   

Third quarter

   $ 34.47       $ 28.55   

Second quarter

   $ 33.50       $ 27.63   

First quarter

   $ 33.92       $ 25.99   

Year ended December 31, 2015

     

Fourth quarter

   $ 39.58       $ 33.30   

Third quarter

   $ 39.37       $ 29.18   

Second quarter

   $ 43.22       $ 33.53   

First quarter

   $ 35.54       $ 29.49   

As at January 31, 2017, the Company had approximately 240 registered holders of record of the Company’s common shares.

Over the last two years, the Company has not paid, nor does the Company have any current plans to pay, cash dividends on its common shares. The payment of dividends by the Company is subject to certain restrictions under the terms of the Company’s indebtedness (see note 11 to the accompanying audited consolidated financial statements in Item 8 and “Liquidity and Capital Resources” in Item 7). The payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.

 

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Equity Compensation Plans

The following table sets forth information regarding the Company’s Equity Compensation Plan as at December 31, 2016:

 

     Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
     Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
     Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in  Column (a))
 

Plan Category

   (a)      (b)      (c)  

Equity compensation plans approved by security holders

     6,326,472      $ 29.18        5,696,100  

Equity compensation plans not approved by security holders

     nil        nil        nil  
  

 

 

    

 

 

    

 

 

 

Total

     6,326,472      $ 29.18        5,696,100  
  

 

 

    

 

 

    

 

 

 

Performance Graph

The following graph compares the total cumulative shareholder return for $100 invested on December 31, 2011 (assumes that all dividends were reinvested) in common shares of the Company against the cumulative total return of the NYSE Composite Index, the S&P/TSX Composite Index and the IMAX Peer Group to the end of the most recently completed fiscal year. The IMAX Peer Group consists of DTS, Inc., TIVO Inc., RealD Inc., World Wrestling Entertainment, Inc., Rovi Corporation, DreamWorks Animation SKG, Inc., Corus Entertainment Inc., Take-Two Interactive Software, Inc., Dolby Laboratories, Inc., Six Flags Entertainment Corporation, Lions Gate Entertainment Corp. and Cinemark Holdings, Inc.

CUMULATIVE VALUE OF $100 INVESTMENT

 

LOGO

 

     31-Dec-11      31-Dec-12      31-Dec-13      31-Dec-14      31-Dec-15      31-Dec-16  

IMAX

     100.00        122.64        160.83        168.58        193.89        171.30  

NYSE Composite

     100.00        112.93        139.10        144.97        135.66        147.88  

S&P/TSX Composite

     100.00        104.00        113.94        122.40        108.82        127.88  

Peer Group

     100.00        103.38        141.68        151.37        153.89        202.64  

 

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Issuer Purchases of Equity Securities

The Company’s common stock repurchase program activity for the three months ended December 31, 2016 was as follows:

 

     Total number of shares
purchased
     Average price paid
per share
     Total number of shares
purchased as part of
publicly announced
program (1)
     Maximum value of
shares that may yet be
purchased under the
program
 

October 1 through October 31, 2016

     558,710      $ 28.87        558,710      $ 46,262,874  

November 1 through November 30, 2016

     —          —          —        $ 46,262,874  

December 1 through December 31, 2016

     —          —          —        $ 46,262,874  
  

 

 

    

 

 

    

 

 

    

Total

     558,710      $ 28.87        558,710     
  

 

 

    

 

 

    

 

 

    

 

(1) On June 16, 2014, the Company’s Board of Directors approved a $150.0 million share repurchase program for shares of the Company’s common stock, which program was amended on April 20, 2016 to increase the aggregate purchase allowance to $200.0 million. Purchases under the program commenced during the third quarter of 2014, and the program expires on June 30, 2017. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares, and the share repurchase program may be suspended or discontinued by the Company at any time.

The total number of shares purchased during the three months ended December 31, 2016 does not include any shares received in the administration of employee share-based compensation plans. The Company has $46.3 million available under its approved repurchase program.

CERTAIN INCOME TAX CONSIDERATIONS

United States Federal Income Tax Considerations

The following discussion is a general summary of the material U.S. federal income tax consequences of the ownership and disposition of the common shares by a holder of common shares that is an individual resident of the United States or a United States corporation (a “U.S. Holder”). This discussion does not discuss all aspects of U.S. federal income taxation that may be relevant to investors subject to special treatment under U.S. federal income tax law (including, for example, owners of 10.0% or more of the voting shares of the Company).

Distributions on Common Shares

In general, distributions (without reduction for Canadian withholding taxes) paid by the Company with respect to the common shares will be taxed to a U.S. Holder as dividend income to the extent that such distributions do not exceed the current and accumulated earnings and profits of the Company (as determined for U.S. federal income tax purposes). Subject to certain limitations, under current law dividends paid to non-corporate U.S. Holders may be eligible for a reduced rate of taxation as long as the Company is considered to be a “qualified foreign corporation”. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of an income tax treaty with the United States or a foreign corporation the stock of which is regularly tradable on an established securities market in the United States. The amount of a distribution that exceeds the current and accumulated earnings and profits of the Company will be treated first as a non-taxable return of capital to the extent of the U.S. Holder’s tax basis in the common shares and thereafter as taxable capital gain. Corporate holders generally will not be allowed a deduction for dividends received in respect of distributions on common shares. Subject to the limitations set forth in the U.S. Internal Revenue Code of 1986, as amended, as modified by the U.S.-Canada Income Tax Treaty, U.S. Holders may elect to claim a foreign tax credit against their U.S. federal income tax liability for Canadian income tax withheld from dividends. Alternatively, U.S. Holders may claim a deduction for such amounts of Canadian tax withheld.

Disposition of Common Shares

Upon the sale or other disposition of common shares, a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale or other disposition and such holder’s tax basis in the common shares. Gain or loss upon the sale or other disposition of the common shares will be long-term if, at the time of the sale or other disposition, the common

 

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shares have been held for more than one year. Long-term capital gains of non-corporate U.S. Holders may be eligible for a reduced rate of taxation. The deduction of capital losses is subject to limitations for U.S. federal income tax purposes.

Canadian Federal Income Tax Considerations

This summary is applicable to a holder or prospective purchaser of common shares who, for the purposes of the Income Tax Act (Canada) and any applicable treaty and at all relevant times, is not (and is not deemed to be) resident in Canada, does not (and is not deemed to) use or hold the common shares in, or in the course of, carrying on a business in Canada, and is not an insurer that carries on an insurance business in Canada and elsewhere.

This summary is based on the current provisions of the Income Tax Act (Canada), the regulations thereunder, all specific proposals to amend such Act and regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and the Company’s understanding of the administrative policies and assessing practices published in writing by the Canada Revenue Agency prior to the date hereof. This summary does not otherwise take into account any change in law or administrative policy or assessing practice, whether by judicial, governmental, legislative or administrative decision or action, nor does it take into account other federal or provincial, territorial or foreign tax consequences, which may vary from the Canadian federal income tax considerations described herein.

This summary is of a general nature only and it is not intended to be, nor should it be construed to be, legal or tax advice to any holder of the common shares and no representation with respect to Canadian federal income tax consequences to any holder of common shares is made herein. Accordingly, prospective purchasers and holders of the common shares should consult their own tax advisers with respect to their individual circumstances.

Dividends on Common Shares

Canadian withholding tax at a rate of 25.0% (subject to reduction under the provisions of any applicable tax treaty) will be payable on dividends (or amounts paid or credited on account or in lieu of payment of, or in satisfaction of, dividends) paid or credited to a holder of common shares. Under the Canada-U.S. Income Tax Convention (1980), as amended (the “Canada - U.S. Income Tax Treaty”) the withholding tax rate is generally reduced to 15.0% for a holder entitled to the benefits of the Canada - U.S. Income Tax Treaty who is the beneficial owner of the dividends (or 5.0% if the holder is a company that owns at least 10.0% of the common shares).

Capital Gains and Losses

Subject to the provisions of any relevant tax treaty, capital gains realized by a holder on the disposition or deemed disposition of common shares held as capital property will not be subject to Canadian tax unless the common shares are taxable Canadian property (as defined in the Income Tax Act (Canada)), in which case the capital gains will be subject to Canadian tax at rates which will approximate those payable by a Canadian resident. Common shares generally will not be taxable Canadian property to a holder provided that, at the time of the disposition or deemed disposition, the common shares are listed on a designated stock exchange (which currently includes the NYSE) unless at any time within the 60 month period immediately preceding such time (a) any combination of (i) such holder, (ii) persons with whom such holder did not deal at arm’s length or (iii) a partnership in which such holder or any such persons holds a membership interest either directly or indirectly through one or more partnerships, owned 25.0% or more of the issued shares of any class or series of shares of the Company and (b) more than 50% of the fair market value of the common shares was derived directly or indirectly from one or any combination of (i) real or immovable property situated in Canada, (ii) Canadian resource properties, (iii) timber resource properties, and (iv) options in respect of, or interests in, or for civil law rights in, property described in any of paragraphs (i) to (iii), whether or not the property exists. In certain circumstances set out in the Income Tax Act (Canada), the common shares may be deemed to be taxable Canadian property. Under the Canada-U.S. Income Tax Treaty, a holder entitled to the benefits of the Canada - U.S. Income Tax Treaty and to whom the common shares are taxable Canadian property will not be subject to Canadian tax on the disposition or deemed disposition of the common shares unless at the time of disposition or deemed disposition, the value of the common shares is derived principally from real property situated in Canada.

 

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Item 6. Selected Financial Data

The selected financial data set forth below is derived from the consolidated financial information of the Company. The financial information has been prepared in accordance with U.S. GAAP. All financial information referred to herein is expressed in U.S. dollars unless otherwise noted.

 

     Years Ended December 31,  
(In thousands of U.S. dollars, except per share amounts)    2016     2015     2014     2013     2012  

Statements of Operations Data:

          

Revenues

          

Equipment and product sales

   $ 122,382     $ 118,937     $ 78,705     $ 78,663     $ 78,161  

Services

     166,862       161,964       142,607       139,464       135,071  

Rentals

     77,315       83,651       60,705       61,293       61,268  

Finance income

     9,500       9,112       8,524       8,142       7,523  

Other(1)

     1,275       141       —         375       732  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     377,334       373,805       290,541       287,937       282,755  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses applicable to revenues

          

Equipment and product sales(2)(3)

     69,680       63,635       36,997       37,517       37,538  

Services(2)(3)

     83,780       70,855       62,228       68,844       70,570  

Rentals(3)

     21,086       20,027       17,928       16,973       21,402  

Other

     110       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     174,656       154,517       117,153       123,334       129,510  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     202,678       219,288       173,388       164,603       153,245  

Selling, general and administrative expenses(4)

     124,745       115,345       93,260       84,854       81,560  

Gain on curtailment of postretirement benefit plan(5)

     —         —         —         (2,185     —    

Research and development

     16,315       12,730       16,096       14,771       11,411  

Amortization of intangibles

     2,079       1,860       1,724       1,618       706  

Receivable provisions, net of recoveries

     954       752       918       445       524  

Asset impairments(6)(7)

     417       830       3,520       —         150  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     58,168       87,771       57,870       65,100       58,894  

Interest income

     1,490       968       405       55       85  

Interest expense

     (1,805     (1,661     (924     (1,345     (689
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     57,853       87,078       57,351       63,810       58,290  

Provision for income taxes

     (16,212     (20,052     (14,466     (16,629     (15,079

Loss from equity-accounted investments, net of tax

     (2,321     (2,402     (1,071     (2,757     (1,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     39,320       64,624       41,814       44,424       41,849  

Income (loss) from discontinued operations, net of tax(8)

     —         —         355       (309     (512
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     39,320       64,624       42,169       44,115       41,337  

Less: net income attributable to non-controlling interests(9)

     (10,532     (8,780     (2,433     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

   $ 28,788     $ 55,844     $ 39,736     $ 44,115     $ 41,337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders - basic and diluted:

          

Net income per share - basic:

          

Net income per share from continuing operations

   $ 0.43     $ 0.79     $ 0.57     $ 0.66     $ 0.64  

Net income (loss) per share from discontinued operations

     —         —         0.01       —         (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 0.43     $ 0.79     $ 0.58     $ 0.66     $ 0.63  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share - diluted:

          

Net income per share from continuing operations

   $ 0.42     $ 0.78     $ 0.56     $ 0.64     $ 0.62  

Net loss per share from discontinued operations

     —         —         —         —         (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 0.42     $ 0.78     $ 0.56     $ 0.64     $ 0.61  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) The Company enters into theater system arrangements with customers that typically contain customer payment obligations prior to the scheduled installation of the theater systems. Each year, during the period of time between signing and theater system installation, certain customers are unable to, or elect not to, proceed with the theater system installation for a number of reasons, including business considerations, or the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the customer and/or the Company may terminate the arrangement by default or by entering into a consensual buyout. In these situations, the parties are released from their future obligations under the arrangement, and the initial payments that the customer previously made to the Company and recognized as revenue are typically not refunded. In addition, the Company enters into agreements with customers to terminate their obligations for a theater system configuration and enter into a new arrangement for a different configuration. Other revenues from settlement arrangements were $1.3 million, $0.1 million, $nil, $0.4 million, and $0.7 million in 2016, 2015, 2014, 2013 and 2012, respectively.
(2) In 2016, the Company recognized a charge of $0.5 million in costs and expenses applicable to revenues for the write-down of certain service parts and theater system inventories. Included for the periods 2012 through 2016 are the following inventory write-downs:

 

(In thousands of U.S. dollars)    2016      2015      2014      2013      2012  

Equipment and product sales

   $ 227       $ 537       $ 209       $ 274       $ 795   

Services

     231         35         150         170         103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 458       $ 572       $ 359       $ 444       $ 898   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) The Company recorded advertising, marketing, and commission costs for the periods 2012 through 2016 as listed below:

 

(In thousands of U.S. dollars)    2016      2015      2014      2013      2012  

Equipment and product sales

   $ 4,364       $ 2,985       $ 3,271       $ 2,522       $ 2,690   

Services

     19,696         13,236         7,701         4,552         4,773   

Rentals

     2,714         3,040         2,579         3,582         3,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Advertising, marketing, and commission costs

   $ 26,774       $ 19,261       $ 13,551       $ 10,656       $ 10,845   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(4) Includes share-based compensation expense of $30.5 million, $21.9 million, $15.1 million, $11.9 million and $13.1 million for 2016, 2015, 2014, 2013 and 2012, respectively. Also includes consulting and other professional fees associated with the IMAX China IPO of $1.3 million for 2015.
(5) In 2013, the Company amended its Canadian postretirement plan to reduce future benefits provided under the plan. As a result of this amendment, the Company recognized a pre-tax curtailment gain of $2.2 million.
(6) In 2016, the Company recorded asset impairment charges of $0.2 million related to the impairment of property, plant and equipment. Asset impairment charges related to the impairment of property, plant and equipment amounted to $0.4 million, $0.3 million, $nil and $nil in 2015, 2014, 2013 and 2012, respectively, after the Company assessed the carrying value of certain assets.
(7) In 2016, the Company recognized a $0.2 million other-than-temporary impairment of its investments as the value is not expected to recover based on the length of time and extent to which the market value has been less than cost. See notes 19(e) of the accompanying audited consolidated financial statements in Item 8 for more information. Charges resulting from the impairment of investments amounted to $0.4 million, $3.2 million, $nil and $0.2 million in 2015, 2014, 2013 and 2012, respectively.
(8)

In 2014, the Company discontinued the operations of its owned and operated Nyack IMAX theater. The net income (loss) from the operation of the theater is reflected as a discontinued operation. In the third quarter of 2016, the Company discontinued the operations of its owned and operated Navy Pier IMAX theater. The net income (loss) from the operation of the theater is not reflected as a discontinued operation in accordance with the amended Presentation of Financial Statements: Discontinued Operations Topic of the FASB ASC.

 

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(9) The Company’s consolidated financial statements include the non-controlling interest in the net income of IMAX China resulting from the IMAX China Investment and IMAX China IPO. In addition, the Company recognized the impact of a non-controlling interest in its subsidiary created for the Film Fund activity. See note 21 of the accompanying audited consolidated financial statements in Item 8 for more information.

BALANCE SHEET DATA

 

(in thousands of U.S. dollars)    As at December 31,  
     2016      2015      2014      2013      2012  

Cash and cash equivalents

   $ 204,759      $ 317,449      $ 106,503      $ 29,546      $ 21,336  

Total assets

   $ 857,334      $ 930,629      $ 621,106      $ 481,145      $ 421,872  

Total bank indebtedness

   $ 27,316      $ 29,276      $ 4,283      $ —        $ 11,000  

Total shareholders’ equity

   $ 621,574      $ 673,850      $ 382,775      $ 319,585      $ 253,079  

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

IMAX Corporation, together with its consolidated subsidiaries (the “Company”), is one of the world’s leading entertainment technology companies, specializing in motion picture technologies and presentations. The Company refers to all theaters using the IMAX theater system as “IMAX theaters”. IMAX offers a unique end-to-end cinematic solution combining proprietary software, theater architecture and equipment to create the highest-quality, most immersive motion picture experience for which the IMAX® brand has become known globally. Top filmmakers and studios utilize IMAX theaters to connect with audiences in innovative ways, and, as such, IMAX’s network is among the most important and successful theatrical distribution platforms for major event films around the world. There were 1,215 IMAX theater systems (1,107 commercial multiplexes, 16 commercial destinations, 92 institutional) operating in 75 countries as of December 31, 2016. This compares to 1,061 theater systems (943 commercial multiplexes, 19 commercial destinations, 99 institutional) operating in 67 countries as of December 31, 2015.

The Company’s principal businesses are:

 

    the design and manufacture of premium theater systems (“IMAX theater systems”) and the sale, lease or contribution of those systems to customers under theater system arrangements; and

 

    the Digital Re-Mastering of films into the IMAX format and the exhibition of those films in the IMAX theater network.

IMAX theater systems combine:

 

    IMAX DMR (Digital Re-Mastering) movie conversion technology, which results in higher image and sound fidelity than conventional cinema experiences;

 

    advanced, high-resolution projectors with specialized equipment and automated theater control systems, which generate significantly more contrast and brightness than conventional theater systems;

 

    large screens and proprietary theater geometry, which result in a substantially larger field of view so that the screen extends to the edge of a viewer’s peripheral vision and creates more realistic images;

 

    sound system components, which deliver more expansive sound imagery and pinpointed origination of sound to any specific spot in an IMAX theater; and

 

    specialized theater acoustics, which result in a four-fold reduction in background noise.

Together these components cause audiences in IMAX theaters to feel as if they are a part of the on-screen action, creating a more intense, immersive and exciting experience than in a traditional theater.

As a result of the immersiveness and superior image and sound quality of The IMAX Experience, the Company’s exhibitor customers typically charge a premium for IMAX DMR films over films exhibited in their other auditoriums. The premium pricing, combined with the higher attendance levels associated with IMAX DMR films, generates incremental box-office for the Company’s exhibitor customers and for the movie studios releasing their films to the IMAX network. The incremental box-office generated by IMAX DMR films has helped establish IMAX as a key premium distribution and marketing platform for Hollywood blockbuster films. Driven by the advent of digital technology that reduced the IMAX DMR conversion time and with the strengthening of the Company’s relationships with the major studios, the number of IMAX DMR films released to the theater network per year has increased to 51 films in 2016, up from six films in 2007. The Company expects to release a similar number of IMAX DMR films in 2017 as compared to 2016.

As one of the world’s leaders in entertainment technology, the Company strives to remain at the forefront of advancements in cinema technology. To that end, the Company introduced its next-generation laser-based digital projection system at the end of 2014, which was co-developed with Barco N.V and incorporates exclusive technology developed or otherwise obtained by the Company. The Company believes that the IMAX laser-based projectors present greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology. The laser projection solution is the first IMAX digital projection system capable of illuminating the largest screens in its network. As at December 31, 2016, 39 laser-based digital systems were operational. The Company is in the process of developing a commercial laser-based digital projection system designed for IMAX theaters in multiplexes.

The Company is exploring new lines of business, with a focus on location-based experiences, alternative forms of in-cinema entertainment and in-home entertainment. In the second quarter of 2016, the Company announced its comprehensive virtual reality (“VR”) strategy to develop a premium, location-based VR offering that will deliver immersive, multi-dimensional experiences, including entertainment content and games, to branded VR centers (“IMAX VR Centers”). IMAX VR Centers are expected to be

 

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located in both stand-alone venues as well as multiplexes, malls and other commercial destinations, and will be retrofitted with proprietary VR pods that permit interactive, moveable VR experiences. The Company’s VR initiative is premised on a unique combination of premium content, proprietary design and best-in-class technology.

In order to deliver high quality content to the IMAX VR Centers, the Company has partnered with Google to design and develop a cinema-grade IMAX VR camera, which will enable filmmakers and content creators to capture and deliver high-quality, 360-degree content experiences to audiences. In addition, the Company recently announced the creation of an approximately $50.0 million virtual reality fund (the “VR Fund”) among the Company, its subsidiary IMAX China Holding Inc. (“IMAX China”) and other strategic investors. The VR Fund will help finance the creation of an estimated 25-30 interactive VR content experiences over the next three years for use across all VR platforms, including in the IMAX VR Centers. The VR Fund will target premium productions with its Hollywood studio and filmmaker partners, as well as gaming publishers and other leading content developers.

In January 2017, the Company launched its flagship pilot IMAX VR Center in Los Angeles and has signed agreements for additional IMAX VR center pilots in China, the U.S. and the United Kingdom, which are scheduled to open in the coming months. The Company plans to use these pilot locations to test several factors including the overall customer experience, pricing models, throughput, types of content featured and differences in geographic areas. If successful, the Company’s intent is to roll out IMAX VR Centers globally.

Through its VR initiative, the Company sees a unique opportunity to combine premium equipment, more robust computing power, and specially designed spaces to create a highly differentiated, destination-based VR experience that will draw consumers out of their homes, similar to the strategy it has successfully employed in the cinema space.

The Company is also focusing on alternative forms of in-cinema entertainment, including original content. In November 2016, the Company announced an agreement with Marvel Television Inc. (“Marvel”) and Disney|ABC Television Group to co-produce and exclusively premiere the new ABC series “Marvel’s Inhumans” in IMAX theaters. Under the agreement, the first two episodes of the series are expected to run worldwide exclusively in IMAX theaters for two weeks in September 2017. Several weeks later, the series will premiere on the ABC network in the U.S. and across other networks internationally. As a result of the Company’s significant financing commitment, the Company will have an equity participation both in the pilot and in the television series. This agreement marks the first time a live-action television series has debuted in this manner, and the first time the Company has an economic interest in a television property.

In 2015, the Company announced the creation of the IMAX China Film Fund (the “China Film Fund”) with its subsidiary IMAX China, its partner CMC and several other large investors to help fund Mandarin language commercial films. The China Film Fund, which is expected initially to be capitalized with over $100.0 million, will target productions that can leverage the Company’s brand, relationships, technology and release windows in China. The China Film Fund is expected to co-finance approximately 15 Mandarin-language tent-pole films over three years, and will target contributions of between $3.0 million and $7.0 million per film. The China Film Fund will operate under an IMAX China-CMC controlled greenlight committee.

Also, in 2014, the Company announced the creation of the IMAX Original Film Fund (the “Film Fund”) to co-finance a portfolio of 10 original large format films. The Film Fund, which is intended to be capitalized with up to $50.0 million, will finance an ongoing supply of original films that the Company believes will be more exciting and compelling than traditional documentaries. The initial investment in the Film Fund was committed to by a third party in the amount of $25.0 million, with the possibility of contributing additional funds. The Company agreed to contribute $9.0 million to the Film Fund over five years starting in 2014 and sees the Film Fund as a self-perpetuating vehicle designed to generate a continuous flow of high-quality documentary content. As at December 31, 2016, the Film Fund has invested $13.4 million toward the development of original films.

With respect to in-home entertainment, the Company has announced home theater initiatives, including a joint venture with TCL Multimedia Technology Holding Limited (“TCL”) to design, develop, manufacture and sell a premium home theater system. Since 2013, the joint venture has signed agreements with end users for the sale of more than 140 premium home theater systems, and has signed agreements with distributors for the sale of more than 500 home theater systems. Beyond its premium home theater, the Company is also currently developing other components of broader home entertainment platform designed to allow consumers to experience elements of The IMAX Experience® in their homes.

 

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Important factors that the Company’s Chief Executive Officer (“CEO”) Richard L. Gelfond uses in assessing the Company’s business and prospects include:

 

    the signing, installation and financial performance of theater system arrangements (particularly its joint revenue sharing arrangements and new laser-based projection system);

 

    film performance and the securing of new film projects (particularly IMAX DMR films);

 

    revenue and gross margins from the Company’s operating segments;

 

    earnings from operations as adjusted for unusual items that the Company views as non-recurring;

 

    the success of new business initiatives (including new content initiatives);

 

    short- and long-term cash flow projections;

 

    the continuing ability to invest in and improve the Company’s technology to enhance its differentiation of presentation versus other cinematic experiences; and

 

    the overall execution, reliability and consumer acceptance of The IMAX Experience.

The primary revenue sources for the Company can be categorized into two main groups: theater systems and films. On the theater systems side, the Company derives revenues from theater exhibitors primarily through either a sale or sales-type lease arrangement or a joint revenue sharing arrangement. Theater exhibitors also pay for associated maintenance and extended warranty services. Film revenue is derived primarily from film studios for the provision of film production and digital re-mastering services for exhibition on IMAX theater systems around the world. The Company derives other film revenues from the distribution of certain films and the provision of post-production services. The Company also derives a small portion of other revenues from the operation of its own theaters, the provision of aftermarket parts for its system components, and camera rentals.

IMAX Theater Systems: IMAX Systems (Sales and Sales-type Leases), Joint Revenue Sharing Arrangements and Theater System Maintenance

One of the Company’s principal businesses is the design, manufacture and delivery of premium theater systems (“IMAX theater systems”). The theater system equipment components (including the projection system, sound system, screen system and, if applicable, 3D glasses cleaning machine), theater design support, supervision of installation, projectionist training and the use of the IMAX brand are all elements of what the Company considers the system deliverable. The IMAX theater systems are based on proprietary and patented technology developed over the course of the Company’s 49-year history. The Company provides IMAX theater systems to customers through sales, long-term leases or under joint revenue sharing arrangements. The Company’s customers who purchase, lease or otherwise acquire the IMAX theater systems through joint revenue sharing arrangements are theater exhibitors that operate commercial theaters (particularly multiplexes), museums, science centers, or destination entertainment sites. The Company generally does not own IMAX theaters, but licenses the use of its trademarks along with the sale, lease or contribution of the IMAX theater system.

IMAX Systems

Sales and Sales-Type Lease Arrangements

The Company provides IMAX theater systems to customers on a sales or long-term lease basis, typically with an initial 10-year term. These agreements typically require the payment of initial fees and ongoing fees (which can include a fixed minimum amount per annum and contingent fees in excess of the minimum payments), as well as maintenance and extended warranty fees. The initial fees vary depending on the system configuration and location of the theater. Initial fees are paid to the Company in installments between the time of system signing and the time of system installation, which is when the total of these fees, in addition to the present value of future annual minimum payments, are recognized as revenue. Ongoing fees are paid over the term of the contract, commencing after the theater system has been installed, and are equal to the greater of a fixed minimum amount per annum or a percentage of box-office receipts. Contingent payments in excess of fixed minimum ongoing payments are recognized as revenue when reported by theater operators, provided collectibility is reasonably assured. Typically, ongoing fees are indexed to a local consumer price index. Finance income is derived over the term of a financed sale or sales-type lease arrangement as the unearned income on that financed sale or sales-type lease is earned. Certain maintenance and extended warranty services are provided to the customer for a separate fixed annual fee.

Under the Company’s sales agreements, title to the theater system equipment components passes to the customer. In certain instances, however, the Company retains title or a security interest in the equipment until the customer has made all payments required under the agreement. Under the terms of a sales-type lease agreement, title to the theater system equipment components remains with the Company. The Company has the right to remove the equipment for non-payment or other defaults by the customer.

 

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The revenue earned from customers under the Company’s theater system sales or lease agreements varies from quarter to quarter and year to year based on a number of factors, including the number and mix of theater system configurations sold or leased, the timing of installation of the theater systems, the nature of the arrangement and other factors specific to individual contracts.

Joint Revenue Sharing Arrangements

The Company also provides IMAX theater systems to customers under joint revenue sharing arrangements (“JRSA”). The Company has two basic types of joint revenue sharing arrangements: traditional and hybrid.

Under a traditional joint revenue sharing arrangement, the Company provides the IMAX theater system in return for a portion of the customer’s IMAX box-office receipts and, in some cases, concession revenues, rather than requiring the customer to pay a fixed upfront payment or annual minimum payments. Payments, which are based on box-office receipts, are required throughout the term of the arrangement and are due either monthly or quarterly. Certain maintenance and extended warranty services are provided to the customer for a separate fixed annual fee. The Company retains title to the theater system equipment components, and the equipment is returned to the Company at the conclusion of the arrangement.

Under a hybrid joint revenue sharing arrangement, by contrast, the customer is responsible for making upfront payments prior to the delivery and installation of the IMAX theater system in an amount that is typically half of what the Company would receive from a straight sale transaction. As with a traditional joint revenue sharing arrangement, the customer also pays the Company a portion of the customer’s IMAX box-office receipts over the term of the arrangement, although the percentage of box-office receipts owing to the Company is typically half that of a traditional joint revenue sharing arrangement. The Company generally retains title to the theater system equipment components, and the equipment is returned to the Company at the conclusion of the arrangement. In limited instances, however, title to the theater system equipment components passes to the customer.

Under the significant majority of joint revenue sharing arrangements (both traditional and hybrid), the initial non-cancellable term of IMAX theater systems is 10 years or longer, and is renewable by the customer for one to two additional terms of between three to five years. The Company has the right to remove the equipment for non-payment or other defaults by the customer. The contracts are non-cancellable by the customer unless the Company fails to perform its obligations.

The introduction of joint revenue sharing arrangements has been an important factor in the expansion of the Company’s commercial theater network, which has grown by approximately 527% since the beginning of 2008. Joint revenue sharing arrangements allow commercial theater exhibitors to install IMAX theater systems without the significant initial capital investment required in a sale or sales-type lease arrangement. Joint revenue sharing arrangements drive recurring cash flows and earnings for the Company, as customers under joint revenue sharing arrangements pay the Company a portion of their ongoing box-office. The Company funds its joint revenue sharing arrangements through cash flows from operations. As at December 31, 2016, the Company had 640 theaters in operation under joint revenue sharing arrangements, a 21.0% increase as compared to the 529 joint revenue sharing arrangements open as at December 31, 2015. The Company also had contracts in backlog for an additional 355 theaters under joint revenue sharing arrangements as at December 31, 2016.

The revenue earned from customers under the Company’s joint revenue sharing arrangements can vary from quarter to quarter and year to year based on a number of factors including film performance, the mix of theater system configurations, the timing of installation of these theater systems, the nature of the arrangement, the location, size and management of the theater and other factors specific to individual arrangements.

Theater System Maintenance

For all IMAX theaters, theater owners or operators are also responsible for paying the Company an annual maintenance and extended warranty fee. Under these arrangements, the Company provides proactive and emergency maintenance services to every theater in its network to ensure that each presentation is up to the highest IMAX quality standard. Annual maintenance fees are paid throughout the duration of the term of the theater agreements and are typically indexed to a local consumer price index.

Other Theater Revenues

The Company derives a small portion of its revenues from other sources. As at December 31, 2016, the Company had two owned and operated IMAX theaters (December 31, 2015 — three owned and operated theaters). In addition, the Company has a commercial arrangement with one theater resulting in the sharing of profits and losses and provides management services to three other theaters.

 

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The Company also rents its proprietary 2D and 3D large-format film and digital cameras to third party production companies. The Company maintains cameras and other film equipment and also offers production advice and technical assistance to both documentary and Hollywood filmmakers. Additionally, the Company generates revenues from the sale of after-market parts and 3D glasses.

Revenue from theater system arrangements is recognized at a different time from when cash is collected. See “Critical Accounting Policies” below for further discussion on the Company’s revenue recognition policies.

IMAX Theater Network

The following table outlines the breakdown of the theater network by type and geographic location as at December 31:

 

     2016 Theater Network Base      2015 Theater Network Base  
     Commercial
Multiplex
     Commercial
Destination
     Institutional      Total      Commercial
Multiplex
     Commercial
Destination
     Institutional      Total  

United States

     349        5        41        395        342        6        45        393  

Canada

     37        2        7        46        37        2        8        47  

Greater China(1)

     407        —          17        424        290        —          17        307  

Asia (excluding Greater China)

     93        2        3        98        81        3        6        90  

Western Europe

     76        6        10        92        69        7        10        86  

Russia & the CIS

     56        —          —          56        49        —          —          49  

Latin America(2)

     38        —          12        50        35        —          11        46  

Rest of the World

     51        1        2        54        40        1        2        43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,107        16        92        1,215        943        19        99        1,061  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Greater China includes China, Hong Kong, Taiwan and Macau.
(2) Latin America includes South America, Central America and Mexico.

As of December 31, 2016, 36.3% of IMAX systems in operation were located in the United States and Canada compared to 41.5% as at the end of last year.

To minimize the Company’s credit risk, the Company retains title to the underlying theater systems under lease arrangements, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimates of potentially uncollectible amounts.

The Company believes that over time its commercial multiplex theater network could grow to approximately 2,450 IMAX theaters worldwide from 1,107 commercial multiplex IMAX theaters operating as of December 31, 2016. The Company believes that the majority of its future growth will come from international markets. As at December 31, 2016, 63.7% of IMAX theater systems in operation were located within international markets (defined as all countries other than the United States and Canada), up from 58.5% as at December 31, 2015. Revenues and gross box-office derived from outside the United States and Canada continue to exceed revenues and gross box-office from the United States and Canada. Risks associated with the Company’s international business are outlined in Risk Factors – “The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations, sales and future growth prospects” in Item 1A of Part I.

Greater China continues to be the Company’s second-largest and fastest-growing market, measured by revenues. The Company’s Greater China operations have accounted for an increasingly significant portion of its overall revenues, with nearly 31% of overall revenues generated from the Company’s China operations in 2016. As at December 31, 2016, the Company had 424 theaters operating in Greater China with an additional 334 theaters in backlog that are scheduled to be installed in Greater China by 2022. The Company’s backlog in Greater China represents 67.1% of the Company’s current backlog. The Company continues to invest in joint revenue sharing arrangements with select partners to ensure ongoing revenue in this key market. The Company’s largest single international partnership is in China with Wanda Cinema Line Corporation (“Wanda”). In 2016, the Company and Wanda signed an agreement for an additional 150 theater systems under a joint revenue sharing arrangement. This increases Wanda’s total commitment to the Company to 360 theater systems in Greater China, of which 345 theater systems are under the parties’ joint revenue sharing arrangement. Furthermore, the Company has a partnership with CJ CGV Holdings, Ltd., for a commitment of 120 theater systems, of which 100 theater systems will be located in China. In addition, in 2016, the Company and Guangzhou JinYi Media Corporation

 

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(“JinYi”) expanded its existing commitment to include 40 theater systems under a joint revenue sharing arrangement. With the addition of these theater systems, JinYi’s total commitment to the Company is for 60 theater systems, all of which are located in China. See Risk Factors – “The Company faces risks in connection with the continued expansion of its business in China” in Item 1A of Part I.

In 2014, the Company completed the sale and issuance of 20% of the shares of the Company’s subsidiary, IMAX China Holding, Inc. (“IMAX China”), to entities owned and controlled by CMC Capital Partners (“CMC”), an investment fund that is focused on media and entertainment, and FountainVest Partners (“FountainVest”), a China-focused private equity firm. The sale price for the interest was $80.0 million (collectively, the “IMAX China Investment”). On October 8, 2015, IMAX China completed an initial public offering of its ordinary shares on the Main Board of the Hong Kong Stock Exchange Limited (the “IMAX China IPO”). Following the IMAX China IPO, the Company continues to indirectly own approximately 68.2% of IMAX China, which remains a consolidated subsidiary of the Company.

The following table outlines the breakdown of the Commercial Multiplex theater network by arrangement type and geographic location as at December 31:

 

     2016      2015  
     IMAX Commercial Multiplex Theater Network      IMAX Commercial Multiplex Theater Network  
     JRSA      Sale / Sales-
type lease
     Total      JRSA      Sale / Sales-
type lease
     Total  

Domestic Total (United States & Canada)

     266         120         386         261         118         379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International:

                 

Greater China

     261         146         407         177         113         290   

Asia (excluding Greater China)

     54         39         93         42         39         81   

Western Europe

     44         32         76         39         30         69   

Russia & the CIS

     —           56         56         —           49         49   

Latin America

     —           38         38         —           35         35   

Rest of the World

     15         36         51         10         30         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International Total

     374         347         721         268         296         564   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Worldwide Total

     640         467         1,107         529         414         943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As at December 31, 2016, 266 (2015 – 261) of the 640 (2015 – 529) theaters under joint revenue sharing arrangements in operation, or 41.6% (2015 – 49.3%) were located in the United States and Canada, with the remaining 374 (2015 – 268) or 58.4% (2015 – 50.7%) of arrangements being located in international markets. The Company continues to seek to expand its network of theaters under joint revenue sharing arrangements, particularly in select international markets.

Sales Backlog

The Company’s current sales backlog is as follows:

 

     December 31, 2016     December 31, 2015  
           Fixed           Fixed  
           Contractual           Contractual  
     Number of     Dollar Value     Number of     Dollar Value  
     Systems     (in thousands)     Systems     (in thousands)  

Sales and sales-type lease arrangements

     143      $ 175,331        160      $ 207,858   

Joint revenue sharing arrangements

        

Hybrid arrangements

     92        48,658 (1)      117        62,606 (1) 

Traditional arrangements

     263        3,680 (2)      95        450 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

 
     498 (3)    $ 227,669        372 (4)    $ 270,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Reflects contractual upfront payments. Future contingent payments are not reflected as these are based on negotiated shares of box-office results.
(2) No fixed upfront or annual minimum payments. Future contingent payments are not reflected as these are based on negotiated shares of box-office results.
(3) Includes 20 laser-based digital theater system configurations, including three upgrades. The Company continues to develop and roll out its laser-based digital projection system. See “Research and Development” in Item 1 of Part I for additional information.
(4) Includes 24 laser-based digital theater system configurations, including 13 upgrades.

The number of theater systems in the backlog reflects the minimum number of commitments under signed contracts. The dollar value fluctuates depending on the number of new theater system arrangements signed from year to year, which adds to backlog, and the installation and acceptance of theater systems and the settlement of contracts, both of which reduce backlog. Sales backlog typically represents the fixed contracted revenue under signed theater system sale and lease agreements that the Company believes will be recognized as revenue upon installation and acceptance of the associated theater. Sales backlog includes initial fees along with the estimated present value of contractual ongoing fees due over the term; however, it excludes amounts allocated to maintenance and extended warranty revenues as well as fees in excess of contractual ongoing fees that may be received in the future. The value of sales backlog does not include revenue from theaters in which the Company has an equity interest, operating leases, letters of intent or long-term conditional theater commitments. The value of theaters under joint revenue sharing arrangements is excluded from the dollar value of sales backlog, although certain theater systems under joint revenue sharing arrangements provide for contracted upfront payments and therefore carry a backlog value based on those payments. The Company believes that the contractual obligations for theater system installations that are listed in sales backlog are valid and binding commitments.

From time to time, in the normal course of its business, the Company will have customers who are unable to proceed with a theater system installation for a variety of reasons, including the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the agreement with the customer is terminated or amended. If the agreement is terminated, once the Company and the customer are released from all their future obligations under the agreement, all or a portion of the initial rents or fees that the customer previously made to the Company are recognized as revenue.

The following table outlines the breakdown of the total backlog by arrangement type and geographic location as at December 31:

 

     2016      2015  
     IMAX Theater Backlog      IMAX Theater Backlog  
     JRSA      Sale / Lease      Total      JRSA      Sale / Lease      Total  

Domestic Total (United States & Canada)

     51        10        61        23        21        44  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International:

                 

Greater China

     275        59        334        158        57        215  

Asia (excluding Greater China)

     12        20        32        19        17        36  

Western Europe

     12        6        18        7        6        13  

Russia & the CIS

     —          18        18        —          23        23  

Latin America

     —          15        15        —          20        20  

Rest of the World

     5        15        20        5        16        21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International Total

     304        133        437        189        139        328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Worldwide Total

     355        143        498        212        160        372  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Approximately 87.8% of IMAX theater system arrangements in backlog as at December 31, 2016 are scheduled to be installed in international markets (2015 – 88.2%).

 

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The following reflects the Company’s signings and installations for the years ended December 31:

 

     Years Ended December 31,  
     2016     2015  

Theater System Signings:

    

Full new sales and sales-type lease arrangements

     61       55 (1) 

New joint revenue sharing arrangements

     253       78  
  

 

 

   

 

 

 

Total new theaters

     314       133  

Upgrades of IMAX theater systems

     5       5  
  

 

 

   

 

 

 

Total theater signings

     319       138  
  

 

 

   

 

 

 
     Years Ended December 31,  
     2016     2015  

Theater System Installations:

    

Full new sales and sales-type lease arrangements

     56 (2)      56 (2) 

New joint revenue sharing arrangements

     109       80  

Short-term operating lease arrangement

     1       —    
  

 

 

   

 

 

 

Total new theaters

     166       136  

Upgrades of IMAX theater systems

     16 (3)(4)      18 (3)(4) 
  

 

 

   

 

 

 

Total theater installations

     182       154  
  

 

 

   

 

 

 

 

(1) Includes four signings which replaced theaters under an existing arrangement in backlog.
(2) Includes one used theater system (2015 – one used theater system).
(3) Includes 14 installations of an upgrade to a laser-based digital system, 12 under sales and sales-type lease arrangements and two under joint revenue sharing arrangements (2015 – 16 laser-based digital systems, ten under sales and sales-type lease arrangements, one under a short-term operating lease arrangement and five under joint revenue sharing arrangements).
(4) Includes two installations of an upgrade to a xenon-based digital system under sales arrangements (2015 – two xenon-based digital systems, one under a sales and sales-type lease arrangement and one under a short-term operating lease arrangement).

The Company estimates that it will install approximately 150 -155 new theater systems (excluding upgrades) in 2017. The Company’s installation estimates include scheduled systems from backlog, as well as the Company’s estimate of installations from arrangements that will sign and install in the same calendar year. The Company cautions, however, that theater system installations may slip from period to period over the course of the Company’s business, usually for reasons beyond its control.

Films: Digital Re-Mastering (IMAX DMR) and other film revenue

Digital Re-Mastering (IMAX DMR)

In 2002, the Company developed a proprietary technology to digitally re-master Hollywood films into IMAX digital cinema package format or 15/70-format film for exhibition in IMAX theaters at a modest cost that is incurred by the Company. This system, known as IMAX DMR, digitally enhances the image resolution of motion picture films for projection on IMAX screens while maintaining or enhancing the visual clarity and sound quality to levels for which The IMAX Experience is known. This technology enabled the IMAX theater network to release Hollywood films simultaneously with their broader domestic release. The development of this technology was critical in helping the Company execute its strategy of expanding its commercial theater network by establishing IMAX theaters as a key, premium distribution platform for Hollywood films. In a typical IMAX DMR film arrangement, the Company receives a percentage, which in recent years has averaged approximately 12.5%, of box-office receipts of any commercial films released in the IMAX network from the applicable film studio for the conversion of the film to the IMAX DMR format and for access to the Company’s premium distribution platform.

IMAX films benefit from enhancements made by individual filmmakers exclusively for the IMAX release, and filmmakers and studios have sought IMAX-specific enhancements in recent years to generate interest in and excitement for their films. Such enhancements include shooting selected scenes with IMAX cameras to increase the audience’s immersion in the film and taking

 

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advantage of the unique dimensions of the IMAX screen by shooting the film in a larger aspect ratio. Certain films also enjoy early release windows in IMAX, including Everest: An IMAX 3D Experience and The Walk: The IMAX Experience, which were released one week early in IMAX theaters in 2015. Several recent films have featured select sequences shot with IMAX cameras including Captain America: Civil War: An IMAX 3D Experience, released in May 2016; Batman v Superman: Dawn of Justice: An IMAX 3D Experience, released in March 2016; Star Wars: The Force Awakens: An IMAX 3D Experience, released in December 2015; Interstellar: The IMAX Experience, released in November 2014; and Transformers Age of Extinction: An IMAX 3D Experience, released in June 2014 among others. In addition, Marvel’s Avengers: Infinity War Part 1: An IMAX 3D Experience and Avengers: Infinity War Part 2: An IMAX 3D Experience are expected to be shot in their entireties using the IMAX camera, which is the second time a full feature length movie will be filmed with the IMAX cameras. Sully: The IMAX Experience, released in August 2016, was shot with IMAX cameras for a majority of the film.

The original soundtrack of a film to be released to the IMAX theater network is re-mastered for the IMAX digital sound systems in connection with the IMAX DMR release. Unlike the soundtracks played in conventional theaters, IMAX re-mastered soundtracks are uncompressed and full fidelity. IMAX sound systems use proprietary loudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in a good listening position.

The Company believes that the growth in international box-office is an important driver of future growth for the Company. During 2016 61.8% of the Company’s gross box-office from IMAX DMR films was generated in international markets, as compared to 60.8% in 2015. To support growth in international markets, the Company continues to bolster its international film strategy, supplementing the Company’s film slate of Hollywood DMR titles with appealing local IMAX DMR releases in select markets. During 2016, the Company released 12 local language IMAX DMR films, including nine in China, two in Russia and one in Japan. In 2015, 11 local language IMAX DMR films were released, including eight in China and three in Japan.

To date, the Company has announced the following 26 DMR titles to be released in 2017 to the IMAX theater network:

 

    Your Name: The IMAX Experience (Toho Co., Ltd., January 2017);

 

    xXx: Return of Xander Cage: The IMAX Experience (Paramount Pictures, January 2017);

 

    Resident Evil: The Final Chapter: The IMAX Experience (Sony Pictures, February 2017);

 

    Attraction: The IMAX Experience (Art Pictures Studio, January 2017, Russia only);

 

    Journey to The West: The Demons Strike Back: The IMAX Experience (Alibaba Pictures Group, January 2017);

 

    The Lego Batman Movie: The IMAX Experience (Warner Bros. Pictures, February 2017);

 

    Sing: The IMAX Experience (Universal Pictures, February 2017, China and Japan only);

 

    Logan: The IMAX Experience (20th Century Fox, March 2017);

 

    Kong: Skull Island: The IMAX Experience (Warner Bros. Pictures, March 2017);

 

    Beauty and The Beast: The IMAX Experience (Walt Disney Studios, March 2017);

 

    Ghost in the Shell: The IMAX Experience (Paramount Pictures, March 2017);

 

    The Fate of the Furious: The IMAX Experience (Universal Pictures, April 2017);

 

    Guardians of the Galaxy Vol. 2: The IMAX Experience (Walt Disney Studios, May 2017);

 

    Pirates of the Caribbean: Dead Men Tell No Tales: The IMAX Experience (Walt Disney Studios, May 2017);

 

    Wonder Woman: The IMAX Experience (Warner Bros. Pictures, June 2017);

 

    The Mummy: The IMAX Experience (Universal Pictures, June 2017);

 

    Transformers: The Last Knight: The IMAX Experience (Paramount Pictures, June 2017);

 

    Spider-Man: Homecoming: The IMAX Experience (Sony Pictures-distributed and Marvel Studios and Sony Pictures-produced, July 2017);

 

    Dunkirk: The IMAX Experience (Warner Bros. Pictures, July 2017);

 

    The Solutrean: The IMAX Experience (Sony Pictures, September 2017);

 

    The Lego Ninjago Movie: The IMAX Experience (Warner Bros. Pictures, September 2017);

 

    Blade Runner 2049: The IMAX Experience (Warner Bros. Pictures, October 2017);

 

    Geostorm: The IMAX Experience (Warner Bros. Pictures, October 2017);

 

    Thor: Ragnarök: The IMAX Experience (Walt Disney Studios, November 2017);

 

    Justice League: The IMAX Experience (Warner Bros. Pictures, November 2017); and

 

    Star Wars: The Last Jedi: The IMAX Experience (Walt Disney Studios, December 2017).

In addition, in conjunction with Marvel and Disney|ABC Television Group, the Company will be co-producing and exclusively premiering the new ABC series “Marvels Inhumans” in IMAX theaters. The first two episodes of the series are expected to run

 

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worldwide exclusively in IMAX theaters for two weeks in September 2017, and several weeks later, the series will premiere on the ABC network. The Company will have an equity participation both in the pilot and in the television series, representing the first time the Company will have an economic interest in a television property.

The Company remains in active negotiations with all of the major Hollywood studios, as well as international studios, for additional films to fill out its short and long-term film slate, and anticipates that the number of IMAX DMR films to be released to the IMAX network in 2017 will be similar to the IMAX DMR films released to the IMAX network in 2016.

Other Film Revenues: Film Distribution and Post-Production

The Company is also a distributor of large-format films, primarily for its institutional theater partners. The Company generally distributes films which it produces or for which it has acquired distribution rights from independent producers. The Company receives either a percentage of the theater box-office receipts or a fixed amount as a distribution fee.

The Company also provides film post-production and quality control services for large-format films (whether produced internally or externally), and digital post-production services.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company prepares its consolidated financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).

The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to selling prices associated with the individual elements in multiple element arrangements; residual values of leased theater systems; economic lives of leased assets; allowances for potential uncollectibility of accounts receivable, financing receivables and net investment in leases; write-downs for inventory obsolescence; ultimate revenues for film assets; impairment provisions for film assets, long-lived assets and goodwill; depreciable lives of property, plant and equipment; useful lives of intangible assets; pension plan and post retirement assumptions; accruals for contingencies including tax contingencies; valuation allowances for deferred income tax assets; and, estimates of the fair value and expected exercise dates of stock-based payment awards. Management bases its estimates on historical experience, future expectations and other assumptions that are believed to be reasonable at the date of the consolidated financial statements. Actual results may differ from these estimates due to uncertainty involved in measuring, at a specific point in time, events which are continuous in nature, and differences may be material. The Company’s significant accounting policies are discussed in note 2 to its audited consolidated financial statements in Item 8 of the Company’s Annual Report for the Fiscal Year ended December 31, 2016 (this “2016 Form 10-K”).

The Company considers the following significant estimates, assumptions and judgments to have the most significant effect on its results:

Revenue Recognition

The Company generates revenue from various sources as follows:

 

    design, manufacture, sale and lease of proprietary theater systems for IMAX theaters principally owned and operated by commercial and institutional customers located in 75 countries as at December 31, 2016;

 

    production, digital re-mastering, post-production and/or distribution of certain films shown throughout the IMAX theater network;

 

    operation of certain IMAX theaters primarily in the United States;

 

    provision of other services to the IMAX theater network, including ongoing maintenance and extended warranty services for IMAX theater systems; and

 

    other activities, which includes short-term rental of cameras and aftermarket sales of projector system components.

 

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Multiple Element Arrangements

The Company’s revenue arrangements with certain customers may involve multiple elements consisting of a theater system (projector, sound system, screen system and, if applicable, 3D glasses cleaning machine); services associated with the theater system including theater design support, supervision of installation, and projectionist training; a license to use of the IMAX brand; 3D glasses; maintenance and extended warranty services; and licensing of films. The Company evaluates all elements in an arrangement to determine what are considered typical deliverables for accounting purposes and which of the deliverables represent separate units of accounting based on the applicable accounting guidance in the Leases Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”); the Guarantees Topic of the FASB ASC; the Entertainment – Films Topic of the FASB ASC; and the Revenue Recognition Topic of the FASB ASC. If separate units of accounting are either required under the relevant accounting standards or determined to be applicable under the Revenue Recognition Topic, the total consideration received or receivable in the arrangement is allocated based on the applicable guidance in the above noted standards.

Theater Systems

The Company has identified the projection system, sound system, screen system and, if applicable, 3D glasses cleaning machine, theater design support, supervision of installation, projectionist training and the use of the IMAX brand to be a single deliverable and a single unit of accounting (“the System Deliverable”). When an arrangement does not include all the elements of a System Deliverable, the elements of the System Deliverable included in the arrangement are considered by the Company to be a single deliverable and a single unit of accounting. The Company is not responsible for the physical installation of the equipment in the customer’s facility; however, the Company supervises the installation by the customer. The customer has the right to use the IMAX brand from the date the Company and the customer enter into an arrangement.

The Company’s System Deliverable arrangements involve either a lease or a sale of the theater system. Consideration in the Company’s arrangements that are not joint revenue sharing arrangements consists of upfront or initial payments made before and after the final installation of the theater system equipment and ongoing payments throughout the term of the lease or over a period of time, as specified in the arrangement. The ongoing payments are the greater of an annual fixed minimum amount or a certain percentage of the theater box-office. Amounts received in excess of the annual fixed minimum amounts are considered contingent payments. The Company’s arrangements are non-cancellable, unless the Company fails to perform its obligations. In the absence of a material default by the Company, there is no right to any remedy for the customer under the Company’s arrangements. If a material default by the Company exists, the customer has the right to terminate the arrangement and seek a refund only if the customer provides notice to the Company of a material default and only if the Company does not cure the default within a specified period.

For arrangements entered into or materially modified after January 1, 2011, consideration is allocated to each unit of accounting based on the unit’s relative selling prices. The Company uses vendor-specific objective evidence of selling price (VSOE) when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. VSOE is established for the Company’s System Deliverable, maintenance and extended warranty services and film license arrangements. The Company uses a best estimate of selling price (BESP) for units of accounting that do not have VSOE or third party evidence of selling price. The Company determines BESP for a deliverable by considering multiple factors including the Company’s historical pricing practices, product class, market competition and geography.

Sales Arrangements

For arrangements qualifying as sales, the revenue allocated to the System Deliverable is recognized in accordance with the Revenue Recognition Topic of the FASB ASC, when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed, and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater, provided there is persuasive evidence of an arrangement, the price is fixed or determinable and collectibility is reasonably assured.

The initial revenue recognized consists of the initial payments received and the present value of any future initial payments and fixed minimum ongoing payments that have been attributed to this unit of accounting. Contingent payments in excess of the fixed minimum ongoing payments are recognized when reported by theater operators, provided collectibility is reasonably assured.

The Company has also agreed, on occasion, to sell equipment under lease or at the end of a lease term. Consideration agreed to for these lease buyouts is included in revenues from equipment and product sales, when persuasive evidence of an arrangement exists, the

 

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fees are fixed or determinable, collectibility is reasonably assured and title to the theater system passes from the Company to the customer.

Lease Arrangements

The Company uses the Leases Topic of the FASB ASC to evaluate whether an arrangement is a lease and the classification of the lease. Arrangements not within the scope of the accounting standard are accounted for either as a sales or services arrangement, as applicable.

For lease arrangements, the Company determines the classification of the lease in accordance with the Leases Topic of the FASB ASC. A lease arrangement that transfers substantially all of the benefits and risks incident to ownership of the equipment is classified as a sales-type lease based on the criteria established in the accounting standard; otherwise the lease is classified as an operating lease. Prior to commencement of the lease term for the equipment, the Company may modify certain payment terms or make concessions. If these circumstances occur, the Company reassesses the classification of the lease based on the modified terms and conditions.

For sales-type leases, the revenue allocated to the System Deliverable is recognized when the lease term commences, which the Company deems to be when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed, and (iv) the earlier of (a) receipt of the written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater, provided collectibility is reasonably assured.

The initial revenue recognized for sales-type leases consists of the initial payments received and the present value of future initial payments and fixed minimum ongoing payments computed at the interest rate implicit in the lease. Contingent payments in excess of the fixed minimum payments are recognized when reported by theater operators, provided collectibility is reasonably assured.

For operating leases, initial payments and fixed minimum ongoing payments are recognized as revenue on a straight-line basis over the lease term. For operating leases, the lease term is considered to commence when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed, and (iv) the earlier of (a) receipt of the written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) public opening of the theater. Contingent payments in excess of fixed minimum ongoing payments are recognized as revenue when reported by theater operators, provided collectibility is reasonably assured.

Revenues from joint revenue sharing arrangements with upfront payments that qualify for classification as sales and sales-type leases are recognized in accordance with the sales and sales-type lease criteria discussed above. Contingent revenues from joint revenue sharing arrangements are recognized as box-office results and concessions revenues are reported by the theater operator, provided collectibility is reasonably assured.

Equipment and components allocated to be used in future joint revenue sharing arrangements, as well as direct labor costs and an allocation of direct production costs, are included in assets under construction until such equipment is installed and in working condition, at which time the equipment is depreciated on a straight-line basis over the lesser of the term of the joint revenue sharing arrangement and the equipment’s anticipated useful life.

Finance Income

Finance income is recognized over the term of the lease or over the period of time specified in the sales arrangement, provided collectibility is reasonably assured. Finance income recognition ceases when the Company determines that the associated receivable is not collectible.

Finance income is suspended when the Company identifies a theater that is delinquent, non-responsive or not negotiating in good faith with the Company. Once the collectibility issues are resolved the Company will resume recognition of finance income.

Terminations, Consensual Buyouts and Concessions

The Company enters into theater system arrangements with customers that provide for customer payment obligations prior to the scheduled installation of the theater system. During the period of time between signing and the installation of the theater system,

 

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which may extend several years, certain customers may be unable to, or elect not to, proceed with the theater system installation for a number of reasons including business considerations, or the inability to obtain certain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the arrangement may be terminated under the default provisions of the arrangement or by mutual agreement between the Company and the customer (a “consensual buyout”). Terminations by default are situations when a customer does not meet the payment obligations under an arrangement and the Company retains the amounts paid by the customer. Under a consensual buyout, the Company and the customer agree, in writing, to a settlement and to release each other of any further obligations under the arrangement or an arbitrated settlement is reached. Any initial payments retained or additional payments received by the Company are recognized as revenue when the settlement arrangements are executed and the cash is received, respectively. These termination and consensual buyout amounts are recognized in Other revenues.

In addition, the Company could agree with customers to convert their obligations for other theater system configurations that have not yet been installed to arrangements to acquire or lease the IMAX digital theater system. The Company considers these situations to be a termination of the previous arrangement and origination of a new arrangement for the IMAX digital theater system. For all arrangements entered into or modified prior to the date of adoption of the amended FASB ASC 605-25, the Company continues to defer an amount of any initial fees received from the customer such that the aggregate of the fees deferred and the net present value of the future fixed initial and ongoing payments to be received from the customer equals the selling price of the IMAX digital theater system to be leased or acquired by the customer. Any residual portion of the initial fees received from the customer for the terminated theater system is recorded in Other revenues at the time when the obligation for the original theater system is terminated and the new theater system arrangement is signed. Under the amended FASB ASC 605-25, as described in note 2(m) to the accompanying notes to the audited consolidated financial statements, for all arrangements entered into or materially modified after the date of adoption, the total arrangement consideration to be received is allocated on a relative selling price basis to the digital upgrade and the termination of the previous theater system. The arrangement consideration allocated to the termination of the existing arrangement is recorded in Other revenues at the time when the obligation for the original theater system is terminated and the new theater system arrangement is signed.

The Company may offer certain incentives to customers to complete theater system transactions including payment concessions or free services and products such as film licenses or 3D glasses. Reductions in, and deferral of, payments are taken into account in determining the sales price either by a direct reduction in the sales price or a reduction of payments to be discounted in accordance with the Leases or Interests Topic of the FASB ASC. Free products and services are accounted for as separate units of accounting. Other consideration given by the Company to customers are accounted for in accordance with the Revenue Recognition Topic of the FASB ASC.

Maintenance and Extended Warranty Services

Maintenance and extended warranty services may be provided under a multiple element arrangement or as a separately priced contract. Revenues related to these services are deferred and recognized on a straight-line basis over the contract period and are recognized in Services revenues. Maintenance and extended warranty services includes maintenance of the customer’s equipment and replacement parts. Under certain maintenance arrangements, maintenance services may include additional training services to the customer’s technicians. All costs associated with this maintenance and extended warranty program are expensed as incurred. A loss on maintenance and extended warranty services is recognized if the expected cost of providing the services under the contracts exceeds the related deferred revenue.

Other

The Company recognizes revenue in Services revenue from its owned and operated theaters resulting from box-office ticket and concession sales as tickets are sold, films are shown and upon the sale of various concessions. The sales are cash or credit card transactions with theater goers based on fixed prices per seat or per concession item.

In addition, the Company enters into commercial arrangements with third party theater owners resulting in the sharing of profits and losses which are recognized in Service revenues when reported by such theaters. The Company also provides management services to certain theaters and recognizes revenue over the term of such services.

Revenues on camera rentals are recognized in Rental revenue over the rental period.

Revenue from the sale of 3D glasses is recognized in Equipment and product sales revenue when the 3D glasses have been delivered to the customer.

 

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Other service revenues are recognized in Service revenues when the performance of contracted services is complete.

Film Production and IMAX DMR Services

In certain film arrangements, the Company produces a film financed by third parties, whereby the third party retains the copyright and the Company obtains exclusive distribution rights. Under these arrangements, the Company is entitled to receive a fixed fee or to retain as a fee the excess of funding over cost of production (the “production fee”). The third parties receive a portion of the revenues received by the Company from distributing the film, which is charged to costs and expenses applicable to revenues-services. The production fees are deferred, and recognized as a reduction in the cost of the film, based on the ratio of the Company’s distribution revenues recognized in the current period to the ultimate distribution revenues expected from the film.

Revenue from film production services where the Company does not hold the associated distribution rights are recognized in Service revenues when performance of the contractual service is complete, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collectibility is reasonably assured.

Revenues from digitally re-mastering (IMAX DMR) films where third parties own or hold the copyrights and the rights to distribute the film are derived in the form of processing fees and recoupments calculated as a percentage of box-office receipts generated from the re-mastered films. Processing fees are recognized as Service revenues when the performance of the related re-mastering service is completed, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectibility is reasonably assured. Recoupments, calculated as a percentage of box-office receipts, are recognized as Services revenues when box-office receipts are reported by the third party that owns or holds the related film rights, provided collectibility is reasonably assured.

Losses on film production and IMAX DMR services are recognized as costs and expenses applicable to revenues-services in the period when it is determined that the Company’s estimate of total revenues to be realized by the Company will not exceed estimated total production costs to be expended on the film production and the cost of IMAX DMR services.

Film Distribution

Revenue from the licensing of films is recognized in Services revenues when persuasive evidence of a licensing arrangement exists, the film has been completed and delivered, the license period has begun, the fee is fixed or determinable and collectibility is reasonably assured. When license fees are based on a percentage of box-office receipts, revenue is recognized when box-office receipts are reported by exhibitors, provided collectibility is reasonably assured.

Film Post-Production Services

Revenues from post-production film services are recognized in Services revenue when performance of the contracted services is complete provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectibility is reasonably assured.

Allowances for Accounts Receivable and Financing Receivables

Allowances for doubtful accounts receivable are based on the Company’s assessment of the collectibility of specific customer balances, which is based upon a review of the customer’s credit worthiness, past collection history and the underlying asset value of the equipment, where applicable. Interest on overdue accounts receivable is recognized as income as the amounts are collected.

The Company monitors the performance of the theaters to which it has leased or sold theater systems which are subject to ongoing payments. When facts and circumstances indicate that there is a potential impairment in the accounts receivable, net investment in lease or a financing receivable, the Company will evaluate the potential outcome of either a renegotiation involving changes in the terms of the receivable or defaults on the existing lease or financed sale agreements. The Company will record a provision if it is considered probable that the Company will be unable to collect all amounts due under the contractual terms of the arrangement or a renegotiated lease amount will cause a reclassification of the sales-type lease to an operating lease.

When the net investment in lease or the financing receivable is impaired, the Company will recognize a provision for the difference between the carrying value in the investment and the present value of expected future cash flows discounted using the effective interest rate for the net investment in the lease or the financing receivable. If the Company expects to recover the theater system, the provision is equal to the excess of the carrying value of the investment over the fair value of the equipment.

 

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When the minimum lease payments are renegotiated and the lease continues to be classified as a sales-type lease, the reduction in payments is applied to reduce unearned finance income.

These provisions are adjusted when there is a significant change in the amount or timing of the expected future cash flows or when actual cash flows differ from cash flow previously expected.

Once a net investment in lease or financing receivable is considered impaired, the Company does not recognize interest income until the collectibility issues are resolved. When finance income is not recognized, any payments received are applied against outstanding gross minimum lease amounts receivable or gross receivables from financed sales.

Inventories

Inventories are carried at the lower of cost, determined on an average cost basis, and net realizable value except for raw materials, which are carried out at the lower of cost and replacement cost. Finished goods and work-in-process include the cost of raw materials, direct labor, theater design costs, and an applicable share of manufacturing overhead costs.

The costs related to theater systems under sales and sales-type lease arrangements are relieved from inventory to costs and expenses applicable to revenues-equipment and product sales when revenue recognition criteria are met. The costs related to theater systems under operating lease arrangements and joint revenue sharing arrangements are transferred from inventory to assets under construction in property, plant and equipment when allocated to a signed joint revenue sharing arrangement or when the arrangement is first classified as an operating lease.

The Company records write-downs for excess and obsolete inventory based upon current estimates of future events and conditions, including the anticipated installation dates for the current backlog of theater system contracts, technological developments, signings in negotiation, growth prospects within the customers’ ultimate marketplace and anticipated market acceptance of the Company’s current and pending theater systems.

Finished goods inventories can contain theater systems for which title has passed to the Company’s customer, under the contract, but the revenue recognition criteria as discussed above have not been met.

Asset Impairments

The Company performs a qualitative, and when necessary quantitative, impairment test on its goodwill on an annual basis, coincident with the year-end, as well as in quarters where events or changes in circumstances suggest that the carrying amount may not be recoverable.

Goodwill impairment is assessed at the reporting unit level by comparing the unit’s carrying value, including goodwill, to the fair value of the unit. The Company completed a full quantitative analysis as required by ASC 350 - “Intangibles – Goodwill and Other” (Step 1) in 2014. The carrying values of each unit are subject to allocations of certain assets and liabilities that the Company has applied in a systematic and rational manner. The fair value of the Company’s units is assessed using a discounted cash flow model. The model is constructed using the Company’s budget and long-range plan as a base. The Company performs a qualitative assessment of its reporting units and certain select quantitative calculations against its current long range plan to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount (Step 0).

Long-lived asset impairment testing is performed at the lowest level of an asset group at which identifiable cash flows are largely independent. In performing its review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statement of operations. Measurement of the impairment loss is based on the excess of the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows.

The Company’s estimates of future cash flows involve anticipating future revenue streams, which contain many assumptions that are subject to variability, as well as estimates for future cash outlays, the amounts of which, and the timing of which are both uncertain. Actual results that differ from the Company’s budget and long-range plan could result in a significantly different result to an impairment test, which could impact earnings.

 

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The Company’s investment in debt securities classified as an available-for-sale investment has unrealized holding gains and losses which is excluded from earnings and reported in other comprehensive income until realized. Realization occurs upon the sale of a portion of or the entire investment. The investment is impaired if the value is not expected to recover based on the length of time and extent to which the market value has been less than cost. Furthermore, when the Company intends to sell a specifically identified beneficial interest, a write-down for other-than-temporary impairment shall be recognized in earnings.

Pension Plan and Postretirement Benefit Obligations Assumptions

The Company’s pension plan and postretirement benefit obligations and related costs are calculated using actuarial concepts, within the framework of the Compensation – Retirement Benefits Topic of the FASB ASC. A critical assumption to this accounting is the discount rate. The Company evaluates this critical assumption annually or when otherwise required to by accounting standards. Other assumptions include factors such as expected retirement date, mortality rate, rate of compensation increase, and estimates of inflation.

The discount rate enables the Company to state expected future cash payments for benefits as a present value on the measurement date. The guideline for setting this rate is a high-quality long-term corporate bond rate. A lower discount rate increases the present value of benefit obligations and increases pension expense. The Company’s discount rate was determined by considering the average of pension yield curves constructed from a large population of high-quality corporate bonds. The resulting discount rate reflects the matching of plan liability cash flows to the yield curves.

The discount rate used is a key assumption in the determination of the pension benefit obligation and expense. A 1.0% change in the discount rate used would result in a $2.5 million reduction or a $3.0 million increase in the pension benefit obligation with a corresponding benefit or charge recognized in other comprehensive income in the year.

Deferred Tax Asset Valuation

As at December 31, 2016, the Company had net deferred income tax assets of $20.8 million. The Company’s management assesses realization of its 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 the Company includes, but is not limited to, the Company’s historical operating results, projected future operating results, reversing temporary differences, contracted sales backlog at December 31, 2016, changing business circumstances, and the ability to realize certain deferred tax assets through loss and tax credit carry-back and carry-forward strategies.

When there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, the Company would adjust the applicable valuation allowance in the period when such change occurs.

Tax Exposures

The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company adjusts tax expense to reflect the Company’s ongoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results. The Company provides for such exposures in accordance with Income Taxes Topic of the FASB ASC.

Stock-Based Compensation

The Company’s stock-based compensation generally includes stock options and restricted share units (“RSUs”).

The Company estimates the fair value of stock option awards on the date of grant using fair value measurement techniques. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant.

The Company utilizes a lattice-binomial option-pricing model (the “Binomial Model”) to determine the fair value of stock option awards. The fair value determined by the Binomial Model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises are expected to occur on average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are

 

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significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the Binomial Model best provides an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with the Equity topic of the FASB ASC using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Impact of Recently Issued Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent considerations.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The purpose of ASU 2016-10 is to provide more detailed guidance in the following key areas: identifying performance obligations and licenses of intellectual property.

In May 2016, the FASB issued ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 pursuant to Staff announcements at the March 3, 2016 EITF Meeting” (“ASU 2016-11”). The purpose of ASU 2016-11 is to rescind from the FASB Accounting Standards Codification certain SEC paragraphs as a result of two SEC Staff Announcements at the March 3, 2016 meeting.

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The purpose of ASU 2016-12 is to clarify certain narrow aspects of Topic 606 such as assessing the collectibility criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical corrections.

For public companies, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20, which are all related to Topic 606, are effective for interim and annual reporting periods beginning after December 15, 2017. The Company has performed an analysis of its contracts to determine those in scope of the standard, has performed detailed analyses of those contracts and identified its performance obligations. The Company is currently in the process of determining contract consideration and is determining the appropriate timing for revenue recognition of those performance obligations. Since many of the Company’s contracts involve variable payments tied to box-office, the Company is currently assessing an appropriate constraint to variable revenue streams in determining contract consideration under the new standard. The Company is currently considering adopting the new standard using the modified retrospective method and has begun the process of gathering historical information on its contracts in preparation for the standard’s expanded disclosure requirements.

Please see note 3 to the audited consolidated financial statements in Item 8 of the Company’s 2016 Form 10-K for information regarding the Company’s recent changes in accounting policies and the impact of recently issued accounting pronouncements impacting the Company.

DISCONTINUED OPERATIONS and DISPOSAL OF ASSETS AND COMPONENTS

In 2014, the Company’s lease with respect to its owned and operated Nyack IMAX theater ended and the Company decided not to renew the lease. In 2014, revenues for the Nyack IMAX theater were less than $0.1 million and the Company recognized income of $0.4 million, net of a tax expense of $0.2 million, from the operation of the theater. The transactions of the Company’s owned and operated Nyack theater are reflected as discontinued operations.

In 2016, the Company’s lease with respect to its owned and operated Navy Pier IMAX theater ended and the Company decided not to renew the lease. In 2016, revenues for the Navy Pier IMAX theater were $1.3 million (2015 - $2.5 million, 2014 - $2.1 million) and the Company recognized a loss of $0.2 million (2015 - $0.6 million, 2014 - $0.4 million) from the operation of the theater. The remaining assets and liabilities of the Navy Pier IMAX theater are included in the Company’s consolidated balance sheet as at December 31, 2016. Under the amended Presentation of Financial Statements: Discontinued Operations Topic of the FASB ASC, the Company has not reflected the closure of its owned and operated Navy Pier IMAX theater as a discontinued operation as it is not considered to be a strategic shift that would have a major effect on the Company’s operations and financial results.

 

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ASSET IMPAIRMENTS AND OTHER CHARGES (RECOVERIES)

The following table identifies the Company’s charges (recoveries) relating to the impairment of assets:

 

     Years Ended December 31,  
(in thousands of U.S. dollars)    2016      2015      2014  

Asset impairments

        

Property, plant and equipment

   $ 223       $ 405       $ 314   

Impairment of investments

     194         425         3,206   

Other charges (recoveries):

        

Accounts receivable

     1,029         677         725   

Financing receivables

     (75      75         193   

Inventories

     458         572         359   

Film assets

     3,020         —           —     

Property, plant and equipment

     885         1,485         440   

Other intangible assets

     206         86         57   
  

 

 

    

 

 

    

 

 

 

Total asset impairments and other charges

   $ 5,940       $ 3,725       $ 5,294   
  

 

 

    

 

 

    

 

 

 

Asset Impairments

The Company records asset impairment charges for property, plant and equipment after an assessment of the carrying value of certain asset groups in light of their future expected cash flows. During 2016, the Company recorded total asset impairment charges of $0.2 million (2015 — $0.4 million; 2014 — $0.3 million) as the Company recognized that the carrying values for the assets exceeded the expected undiscounted future cash flows. In addition, the Company recognized a $0.2 million other-than-temporary impairment of its investments in 2016 as the value is not expected to recover based on the length of time and extent to which the market value has been less than cost (2015 — $0.4 million; 2014 — $3.2 million).

Other Charges (Recoveries)

The Company recorded a net provision of $1.0 million in 2016 (2015 — $0.7 million; 2014 —$0.7 million) in accounts receivable based on the Company’s ongoing assessment of the collectibility of specific customer balances.

In 2016, the Company recorded a net recovery of $0.1 million in financing receivables (2015 — net provision of $0.1 million; 2014 — net provision of $0.2 million). Provisions of the Company’s financing receivables is recorded when the collectibility associated with certain financing receivables is uncertain. These provisions are adjusted when there is a significant change in the amount or timing of the expected future cash flows or when actual cash flows differ from cash flows previously expected.

The Company recorded a $0.5 million provision (2015 — $0.6 million; 2014 — $0.4 million) in costs and expenses applicable to revenues due to a reduction in the net realizable value of its inventories. These charges primarily resulted from a reduction in the net realizable value of its theater system equipment inventories and certain service part inventories due to normal operational activity.

In 2016, the Company recorded a charge against film assets of $3.0 million in 2016, after an assessment of the carrying value of certain documentary films and their estimated future box-office was performed. No such charge was recognized in the prior years.

In 2016, the Company recorded a charge of $0.3 million (2015 — $0.4 million; 2014 — $0.5 million) reflecting property, plant and equipment that were no longer in use. In 2016, the Company also recorded a charge of $0.6 million (2015 — $0.6 million) in cost of sales applicable to Equipment and product sales upon the upgrade of xenon-based digital systems under operating lease arrangements to laser-based digital systems under sales or sales-type lease arrangements. In addition, in 2015, the Company recorded a charge of $0.5 million in cost of sales applicable to Rentals upon the upgrade of certain xenon-based digital systems to laser-based digital systems operating under joint revenue sharing arrangements. No such charge was recorded in 2016.

In 2016, the Company recorded a charge of $0.2 million (2015 — $0.1 million; 2014 — $0.1 million) reflecting other intangible assets that were no longer in use.

 

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NON-GAAP FINANCIAL MEASURES

In this report, the Company presents certain data which are not recognized under U.S. GAAP and are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission rules. Specifically, the Company presents the following non-GAAP financial measures as supplemental measures of its performance:

 

    Adjusted net income;

 

    Adjusted net income per diluted share;

 

    Adjusted net income attributable to common shareholders;

 

    Adjusted net income attributable to common shareholders per diluted share; and

 

    EBITDA and adjusted EBITDA.

The Company presents adjusted net income and adjusted net income per diluted share, which excludes stock-based compensation because it believes that they are important supplemental measures of the Company’s comparable controllable operating performance. Although stock-based compensation is an important aspect of the Company’s employee and executive compensation packages, it is mostly a non-cash expense and is excluded from certain internal business performance measures, and the Company wants to ensure that its investors fully understand the impact of its stock-based compensation (net of any related tax impact) on net income.

In addition, the Company presents adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share because it believes that they are important supplemental measures of its comparable financial results. Without the presentation of these adjusted presentation measure the Company believes it could potentially distort the analysis of trends in business performance and it wants to ensure that its investors fully understand the impact of net income attributable to non-controlling interests and its stock-based compensation (net of any related tax impact) in determining net income attributable to common shareholders.

Management uses these measures for internal reporting and forecasting purposes in order to review operating performance on a comparable basis from period to period. However, these non-GAAP measures may not be comparable to similarly titled amounts reported by other companies. The Company’s non-GAAP measures should be considered in addition to, and not as a substitute for, or superior to, net income and net income attributable to common shareholders and other measures of financial performance reported in accordance with U.S. GAAP.

The Company is required to maintain a minimum level of “EBITDA”, as such term is defined in the Company’s credit agreement (and which is referred to herein as “Adjusted EBITDA”, as the credit agreement includes additional adjustments beyond interest, taxes, depreciation and amortization). EBITDA and Adjusted EBITDA (each as defined below) should not be construed as substitutes for net income or as better measures of liquidity than cash flow from operating activities determined in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA do not represent funds available for management’s discretionary use and are not intended to represent cash flow from operations. In addition, EBITDA and Adjusted EBITDA are not terms defined by GAAP and as a result the Company’s measure of EBITDA and Adjusted EBITDA might not be comparable to similarly titled measures used by other companies.

However, EBITDA and Adjusted EBITDA are used by management to evaluate, assess and benchmark the Company’s operational results, as well as meet borrowing requirements, and the Company believes that EBITDA and Adjusted EBITDA are relevant and useful information widely used by analysts, investors and other interested parties in the Company’s industry. Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of its operating performance, to provide an additional measure of performance and liquidity and to provide additional information with respect to the Company’s ability to meet future debt service, capital expenditure and working capital requirements.

EBITDA is defined as net income with adjustments for depreciation and amortization, interest income (expense)-net, and income tax provision (benefit). Adjusted EBITDA used by the Company is defined as EBITDA plus adjustments for loss from equity accounted investments, stock and other non-cash compensation and adjusted EBITDA attributable to non-controlling interests.

 

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RESULTS OF OPERATIONS

Management, including the Company’s CEO, who is the Company’s Chief Operating Decision Maker (as defined in the Segment Reporting Topic of the FASB ASC), assesses segment performance based on segment revenues, gross margins and film performance. Selling, general and administrative expenses, research and development costs, amortization of intangibles, receivables provisions (recoveries), write-downs net of recoveries, interest income, interest expense and tax (provision) recovery are not allocated to the segments. As identified in note 18 to the audited consolidated financial statements in Item 8 of the Company’s 2016 Form 10-K, the Company has the following seven reportable segments identified by category of product sold or service provided:

 

    IMAX Theater Systems

 

    The IMAX systems segment, which is comprised of the design, manufacture, sale or lease of IMAX theater projection system equipment.

 

    The theater system maintenance segment, which is comprised of the maintenance of IMAX theater projection system equipment in the IMAX theater network.

 

    The joint revenue sharing arrangements segment, which is comprised of the provision of IMAX theater projection system equipment to exhibitors in exchange for a certain percentage of box-office receipts, and in some cases, concession revenue and/or a small upfront or initial payment.

 

    The other segment, which includes certain IMAX theaters that the Company owns and operates, camera rentals and other miscellaneous items.

 

    Film

 

    The film production and IMAX DMR segment, which is comprised of the production of films and performance of film re-mastering services.

 

    The film distribution segment, which includes the distribution of films for which the Company has distribution rights.

 

    The film post-production segment, which includes the provision of film post-production and film print services.

The accounting policies of the segments are the same as those described in note 2 to the audited consolidated financial statements in Item 8 of the Company’s 2016 Form 10-K.

The Company’s Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations has been organized by the Company into two primary reporting groups – IMAX Theater Systems and Film. Each of the Company’s reportable segments, as identified above, has been classified into one of these broader reporting groups for purposes of MD&A discussion. The Company believes that this approach is consistent with how management historically has evaluated the business and is not expected to have an impact on the readers’ ability to understand the Company’s business. Management feels that a discussion and analysis based on its reporting groups presents a clearer view of the business as the Company’s consolidated statements of operations captions combine results from several segments.

Following recent changes in senior management, the Company is in the process of re-evaluating how it assesses the performance of the business. As a result of this process, modifications are being made to the CEO’s reporting package to support a revised reporting structure which will move away from the Company’s historical two primary reporting groups – IMAX Theater Systems and Film. The changes being contemplated will result in four primary reporting groups, comprising (1) Network Business, representing revenue generated by box-office results and which will include the reportable segments of DMR and JRSAs excluding hybrid fixed payments; (2) Theater Business, representing revenue generated by the sale and installation of theater systems and maintenance services, primarily related to the IMAX Systems and Theater System Maintenance reportable segments and which will also include the fixed hybrid payments from the JRSA segment; (3) New Business, which will include VR, IMAX Shift and IMAX Home Entertainment and (4) Other. The new reporting groups are expected to be implemented in the first quarter of 2017. The new reporting structure is expected to assist users of the financial statements with an enhanced understanding of how management views the business.

 

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The following table sets forth the breakdown of revenue and gross margin by category:

 

     Revenue      Gross Margin  
(In thousands of U.S. dollars)    Years Ended December 31,      Years Ended December 31,  
     2016      2015      2014      2016     2015      2014  

IMAX Theater Systems

                

IMAX systems

                

Sales and sales-type leases(1)

   $ 89,524       $ 86,935       $ 58,875       $ 44,786      $ 44,790       $ 34,483   

Ongoing rent, fees, and finance income(2)

     16,003         15,193         14,117         15,304        14,378         13,445   

Other

     19,434         17,579         12,154         76        279         129   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     124,961         119,707         85,146         60,166        59,447         48,057   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Theater System Maintenance

     40,430         36,944         34,042         13,659        12,702         12,375   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Joint Revenue Sharing Arrangements

     91,413         99,120         68,418         59,837        68,372         44,714   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Film

                

Production and IMAX DMR

     106,403         107,089         83,172         69,196        77,645         62,922   

Film distribution and post-production

     14,127         10,945         19,763         (180     1,122         5,320   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     120,530         118,034         102,935         69,016        78,767         68,242   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 377,334       $ 373,805       $ 290,541       $ 202,678      $ 219,288       $ 173,388   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes initial payments and the present value of fixed minimum payments from equipment, sales and  sales-type lease transactions.
(2) Includes rental income from operating leases, contingent rents from operating and sales-type leases, contingent fees from sales arrangements and finance income.

 

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Year Ended December 31, 2016 Versus Year Ended December 31, 2015

The Company reported net income of $39.3 million, or $0.58 per basic and diluted share, for the year ended December 31, 2016, as compared to net income of $64.6 million, or $0.92 per basic share and $0.90 per diluted share, for the year ended December 31, 2015. Net income for the year ended December 31, 2016 includes a $30.5 million charge, or $0.45 per diluted share (2015 — $21.9 million, or $0.31 per diluted share), for stock-based compensation. Adjusted net income, which consists of net income excluding the impact of stock-based compensation and the related tax impact, was $61.1 million, or $0.90 per diluted share, for the year ended December 31, 2016 as compared to adjusted net income of $82.4 million, or $1.15 per diluted share, for the year ended December 31, 2015. The Company reported net income attributable to common shareholders of $28.8 million, or $0.43 per basic share and $0.42 per diluted share for the year ended December 31, 2016 (2015 — $55.8 million, or $0.79 per basic share and $0.78 per diluted share). Adjusted net income attributable to common shareholders, which consists of net income attributable to common shareholders excluding the impact of stock-based compensation and the related tax impact, was $50.0 million, or $0.73 per diluted share, for the year ended December 31, 2016 as compared to adjusted net income attributable to common shareholders of $73.0 million, or $1.02 per diluted share, for the year ended December 31, 2015. A reconciliation of net income and net income attributable to common shareholders, the most directly comparable U.S. GAAP measure, to adjusted net income, adjusted net income per diluted share, adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share is presented in the table below:

 

     Years Ended December 31,  
     2016      2015  
     Net Income      Diluted EPS      Net Income      Diluted EPS  

Reported net income

   $ 39,320      $ 0.58      $ 64,624      $ 0.90 (1) 

Adjustments:

           

Stock-based compensation

     30,523        0.45        21,880        0.31  

Tax impact on items listed above

     (8,783      (0.13      (4,056      (0.06
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income

     61,060        0.90        82,448        1.15 (1) 

Net income attributable to non-controlling interests

     (10,532      (0.16      (8,780      (0.12

Stock-based compensation (net of tax of $0.2 million and $0.2 million, respectively) attributable to non-controlling interests

     (533      (0.01      (703      (0.01
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income attributable to common shareholders

   $ 49,995      $ 0.73      $ 72,965      $ 1.02 (1) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted shares outstanding

        68,263           71,058  
     

 

 

       

 

 

 

 

(1) Includes impact of $0.8 million of accretion charges associated with redeemable Class C shares of IMAX China.

Revenues and Gross Margin

The Company’s revenues for the year ended December 31, 2016 increased to $377.3 million from $373.8 million in 2015, largely due to an increase in revenues from the Company’s IMAX systems and theater system maintenance segments. The gross margin across all segments in 2016 was $202.7 million, or 53.7% of total revenue, compared to $219.3 million, or 58.7% of total revenue in 2015. Impacting the gross margin in 2016 was the lower revenues experienced in the Company’s joint revenue sharing and film segments as a result of weaker box-office performance, particularly in the China region. Gross box-office is a significant driver of the Company’s business as the impact of film performance affects multiple reporting segments. Film performance is impacted by the timing of a release to the IMAX theater network and customer reaction to the film, among other factors that may be outside of the Company’s direct control, including fluctuations in the value of foreign currencies versus the U.S. dollar and potential currency devaluations. The distribution window for the release of films in theaters has been compressing and may continue to change in the future. A further reduction in timing between film releases could adversely affect box-office performance and consequently future revenues and gross margin.

IMAX Systems

IMAX systems revenue increased 4.4% to $125.0 million in 2016 as compared to $119.7 million in 2015, primarily due to the mix of theater system configurations installed and respective consideration available as per the Company’s arrangements within each year. The Company installed 70 theater systems under sales or sales-type lease arrangements in 2016 versus 67 theater systems in 2015.

 

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Revenue from sales and sales-type leases increased 3.0% to $89.5 million in 2016 from $86.9 million in 2015. The Company recognized revenue on 55 full, new theater systems which qualified as either sales or sales-type leases in 2016, with a total value of $69.4 million, versus 55 full, new theater systems in 2015 with a total value of $68.6 million. The Company also recognized revenue on the installation of 14 theater system upgrades in 2016, of which 12 were laser-based and two were xenon-based, with a total value of $18.0 million, as compared to 11 theater system upgrades in 2015, of which 10 were laser-based and one was xenon-based, with a total value of $15.0 million. Theater system upgrades typically have lower selling prices and gross margin than full, new theater system installations. One used xenon-based digital system was installed in the year ended December 31, 2016, with a total value of $0.3 million, as compared to one used xenon-based digital system installed and recognized 2015 with a total value of $0.2 million.

Average revenue per full, new sales and sales-type lease systems was $1.3 million in 2016 and $1.2 million in 2015. The average revenue per full, new sales and sales-type lease systems varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location or other various factors. Average revenue per theater system upgrade was $1.3 million in 2016, as compared to $1.4 million in 2015.

The installation of theater systems in newly-built theaters or multiplexes, which make up a large portion of the Company’s theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company’s control. The breakdown in mix of sales and sales-type lease and joint revenue sharing arrangements (see discussion below) installations by theater system configuration for 2016 and 2015 is outlined in the table below:

 

     2016     2015  

New IMAX digital theater systems - installed and recognized

    

Sales and sales-types lease arrangements

     56 (1)      56 (2) 

Short-term operating lease arrangement

     1        —     

Joint revenue sharing arrangements

     109 (1)      80   
  

 

 

   

 

 

 

Total new theater systems

     166        136   
  

 

 

   

 

 

 

IMAX digital theater system upgrades - installed and recognized

    

Sales and sales-types lease arrangements

     14 (1)      11 (2) 

Short-term operating lease arrangements

     —          2 (2) 

Joint revenue sharing arrangements

     2 (1)      5 (2) 
  

 

 

   

 

 

 

Total upgraded theater systems

     16        18   
  

 

 

   

 

 

 

Total theater systems installed

     182        154   
  

 

 

   

 

 

 

 

(1) Includes 21 laser-based digital system configurations (seven new laser-based digital systems,  five under sales arrangements and two under joint revenue sharing arrangements and 14 laser-based digital system upgrades, 12 under sales arrangements and two under joint revenue sharing arrangements).
(2) Includes 17 laser-based digital system configurations (one new laser-based digital system under sales arrangement and 16 laser-based digital system upgrades, 10 under sales arrangements, one under a short-term operating lease arrangement and five under joint revenue sharing arrangements).

IMAX theater system margin from full, new sales and sales-type lease systems was 63.7% in 2016, which was lower than the 65.9% experienced in 2015. On average, the Company experiences lower margins from the installation of laser-based digital systems. The Company expects these margins to improve through further development of its commercial laser-based projection system. Gross margin from theater system upgrades was $1.7 million in 2016, as compared to $0.8 million in 2015, primarily due to the nature of the theater system components required for each respective upgrade. In addition, the Company recorded a charge of $0.6 million upon the upgrade of xenon-based digital systems under operating lease arrangements to laser-based digital systems under sales or sales-type lease arrangements in IMAX Systems margin, as compared to a charge of $0.7 million in 2015 for components there were not used in the upgrade and cannot be used for future installations. Furthermore, in 2016 the Company incurred a charge of $0.2 million, as compared to $0.1 million in 2015, due to a reduction in the net realizable value of its inventories. Gross margin varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location and other various factors.

 

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Revenues from sales and sales-type leases includes settlement revenue of $1.3 million in 2016 as compared to $0.1 million in 2015. Costs associated with settlements consist primarily of commission costs. Gross margin from sales and sales-type leases include settlement margin of $1.2 million in 2016, as compared to $0.1 million in 2015.

Ongoing rent revenue and finance income increased to $16.0 million in 2016 compared to $15.2 million in 2015, due to continued growth in the Company’s theater network. Gross margin for ongoing rent and finance income increased to $15.3 million in 2016 compared to $14.4 million in 2015. Contingent fees included in this caption amounted to $4.3 million and $3.8 million in 2016 and 2015, respectively.

Other revenue increased to $19.4 million in 2016 as compared to $17.6 million in 2015. Other revenue primarily includes revenue generated from the Company’s theater operations, camera rental business and after-market sales of projection system parts and 3D glasses. The growth in revenue is primarily the result of an increase in revenue from after-market sales of 3D glasses and camera rentals, as compared to the prior year.

The gross margin recognized from other revenue decreased to less than $0.1 million in 2016 as compared to $0.3 million in 2015, primarily due to new business initiatives which are in development and/or the start-up phase, offset by an increase in camera rentals gross margin compared to the prior year.

Theater System Maintenance

Theater system maintenance revenue increased 9.4% to $40.4 million in 2016 from $36.9 million in 2015. Theater system maintenance gross margin increased to $13.7 million in 2016 from $12.7 million in 2015. The Company recorded a write-down of $0.2 million and less than $0.1 million for certain service parts inventories in 2016 and 2015, respectively. Maintenance revenue continues to grow as the number of theaters in the IMAX theater network grows. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.

Joint Revenue Sharing Arrangements

Revenues from joint revenue sharing arrangements decreased 7.8% to $91.4 million in 2016 from $99.1 million in 2015. The Company ended the year with 640 theaters operating under joint revenue sharing arrangements, as compared to 529 theaters at the end of 2015, an increase of 21.0%. The decrease in revenues from joint revenue sharing arrangements was due to weaker film performance in 2016, partly a result of unfavourable exchange rates between applicable local currencies and the U.S. dollar, partially offset by an increase in the number of theaters under joint revenue sharing arrangements in operation as compared to the prior year. During 2016, the Company installed 109 full, new theaters under joint revenue sharing arrangements, as compared to 80 full new theaters during 2015.

The gross margin from joint revenue sharing arrangements was $59.8 million in 2016, as compared to $68.4 million in 2015. Included in the calculation of the 2016 gross margin were certain advertising, marketing and commission costs primarily associated with new theater launches of $4.1 million, as compared to $4.3 million for such expenses in 2015. The lower gross margin experienced in 2016 is primarily a result of the weaker film performance (as discussed above) over the prior year comparative period, as well as higher depreciation expense resulting from continuous growth in the number of operational theaters under joint revenue sharing arrangements.

Film

Revenue from the Company’s film segments increased to $120.5 million in 2016 from $118.0 million in 2015, primarily due to an increase in film distribution revenue from IMAX original films. Film production and IMAX DMR revenues decreased to $106.4 million in 2016 from $107.1 million in 2015. Gross box-office generated by IMAX DMR films decreased 2.1% to $965.6 million in 2016 from $985.3 million in 2015, which has a direct correlation with revenue. The Company experienced weaker gross box-office particularly in the China region resulting from both film performance and unfavourable exchange rates. Gross box-office per screen for 2016 averaged $963,800, in comparison to $1,155,800 in 2015. In 2016, gross box-office was generated primarily from the exhibition of 58 films (51 new and 7 carryovers), as compared to 57 films (44 new and 13 carryover) exhibited in 2015.

Other revenues attributable to the film segment increased 29.1% to $14.1 million in 2016 from $10.9 million in 2015, primarily due to an increase in film distribution revenue from IMAX original films. The year ended December 31, 2016, includes the release of two IMAX original productions, A Beautiful Planet and Voyage of Time, whereas no original films were released in 2015.

 

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The Company’s gross margin from its film segments decreased 12.4% in 2016 to $69.0 million from $78.8 million in 2015. Film production and IMAX DMR gross margins decreased to $69.2 million from $77.6 million primarily due to higher costs, including marketing and post-production. Other gross margin attributable to the film segment was a loss of $0.2 million in 2016 as compared to $1.1 million in 2015, primarily due to a charge against film assets of $3.0 million in 2016, to reflect the carrying value of certain documentary film assets that exceeded the expected revenues generated from estimated future box-office. No similar charge was recorded in 2015. This was partially offset by revenue earned from the release of two IMAX original productions, A Beautiful Planet and Voyage of Time, in the current year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $124.7 million in 2016, as compared to $115.3 million in 2015. Selling, general and administrative expenses excluding the impact of stock-based compensation were $94.2 million in 2016, as compared to $93.4 million in 2015. The following reflects the significant items impacting selling, general and administrative expenses as compared to the prior year period:

 

    an $8.6 million increase in the Company’s stock-based compensation;

 

    a $3.6 million increase in staff costs related to the core business, including salaries and benefits; partially offset by

 

    a $1.5 million decrease due to a change in foreign exchange rates. During the year ended December 31, 2016, the Company recorded a foreign exchange loss of $0.9 million for net foreign exchange gains/losses related to the translation of foreign currency denominated monetary assets and liabilities as compared to a loss of $2.4 million recorded in 2015. See note 15(b) of the audited consolidated financial statements in Item 8 of the Company’s 2016 Form 10-K for more information; and

 

    a $1.3 million net decrease in other general corporate expenditures including professional fees, travel and entertainment.

Selling, general and administrative expenses also includes asset impairment charges and write-offs, if any, and miscellaneous items, other than interest

Research and Development

Research and development expenses increased to $16.3 million in 2016 compared to $12.7 million in 2015 and are primarily attributable to the continued development of the Company’s new commercial laser-based digital projection system and other new business initiatives which commenced in 2016, including the Google camera and virtual reality. In 2014, the Company developed its next-generation laser-based digital projector, which provides greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, while consuming less power and lasting longer than existing digital technology, to ensure that the Company continues to provide the highest quality, premier movie going experience available to consumers. As of December 31, 2016, the Company had 39 laser-based digital theater systems in operation and 20 laser-based digital theater systems in backlog.

The Company intends for additional research and development to continue throughout 2017 as the Company supports further development of the commercial laser-based projection system. In addition to continued research and development with respect to its core business, the Company intends to continue research and development in connection with the previously-announced cinema-grade VR camera to be developed in partnership with Google. In 2016, the Company began research and development in connection with its exploration of a comprehensive VR strategy to deliver immersive and interactive experiences to consumers through pilot IMAX VR Centers, which the Company expects to continue in 2017. The Company also plans to conduct research and development activity in the future in other areas considered important to the Company’s continued commercial success, including further improving the reliability of its projectors, developing and manufacturing more IMAX cameras, enhancing the Company’s 2D and 3D image quality, expanding the applicability of the Company’s digital technology, developing IMAX theater systems’ capabilities in both home and live entertainment, improvements to the DMR process and the ability to deliver DMR releases digitally to its theater network, without the requirement for hard drives.

 

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Receivable Provisions, Net of Recoveries

Receivable provisions, net of recoveries for accounts receivable and financing receivables amounted to a net provision of $1.0 million in 2016, as compared to $0.8 million in 2015.

The Company’s accounts receivables and financing receivables are subject to credit risk, as a result of geographical location, exchange rate fluctuations, and other unforeseeable financial difficulties. These receivables are concentrated with the leading theater exhibitors and studios in the film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has adequately protected itself against exposures relating to receivables and contractual commitments.

Asset Impairments and Other Charges

The Company recorded a charge related to property, plant and equipment of $0.2 million and $0.4 million in 2016 and 2015, respectively, reflecting assets that no longer meet the capitalization requirements.

In 2016, the Company recognized a $0.2 million other-than-temporary impairment of its investments as the value is not expected to recover based on the length of time and extent to which the market value has been less than cost, as compared to $0.4 million in 2015.

Interest Income and Expense

Interest income was $1.5 million in 2016, as compared to $1.0 million in 2015.

Interest expense was $1.8 million in 2016, as compared to $1.7 million in 2015. Consistent with its historical financial reporting, the Company has elected to classify interest and penalties related to income tax liabilities, when applicable, as part of the interest expense in its consolidated statements of operations rather than income tax expense. In 2016 and 2015, the Company recovered less than $0.1 million, respectively, in potential interest and penalties associated with its provision for uncertain tax positions. Also included in interest expense is the amortization of deferred finance costs in the amount of $0.5 million and $1.0 million in 2016 and 2015, respectively. The Company’s policy is to defer and amortize all the costs relating to debt financing which are paid directly to the debt provider, over the life of the debt instrument.

Income Taxes

The Company’s effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations.

The Company’s effective tax rate increased in 2016 due to changes in the mix of income in foreign jurisdictions and an increase in permanent differences as compared to 2015.

The Company recorded an income tax provision of $16.2 million for 2016, of which $1.6 million is related to a decrease in its provision for uncertain tax positions. For 2015, the Company recorded an income tax provision of $20.1 million, of which $0.5 million was related to an increase in its provision for uncertain tax positions.

The provision for income taxes in the year ended December 31, 2016 includes a net income tax recovery of $0.1 million (2015 – less than $0.1 million provision) in continuing operations related to a decrease in the valuation allowance for the Company’s deferred tax assets and other tax adjustments. In 2015, the Company recorded an adjustment of $14.0 million to the deferred tax assets, $5.9 million to the income tax provision and $8.1 million to shareholders’ equity related to tax benefits generated on the exercise of certain employee stock options. In conjunction with this, a provision for uncertain tax positions of $3.9 million was also recorded to the income tax provision and $7.9 million was recorded against shareholders’ equity.

During the year ended December 31, 2016, after considering all available evidence, both positive (including recent profits, projected future profitability, backlog, carry forward periods for, and utilization of net operating loss carryovers and tax credits, discretionary deductions and other factors) and negative (including cumulative losses in past years and other factors), the Company

 

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concluded that the valuation allowance against the Company’s deferred tax assets should decrease by $0.1 million. The remaining $0.2 million balance in the valuation allowance as at December 31, 2016 is primarily attributable to certain U.S. state net operating loss carryovers that may expire without being utilized.

The Company’s Chinese subsidiary has made certain enquiries of the Chinese State Administration of Taxation regarding the potential deductibility of certain stock based compensation for stock options issued by the Chinese subsidiary’s parent company, IMAX China Holding, Inc. In addition, Chinese regulatory authorities responsible for capital and exchange controls will need to review and approve the proposed transactions before they can be completed. There may be a requirement for future investment of funds into China in order to secure the deduction. Should the Company proceed, any such future investment would come from existing capital invested in the IMAX China group of companies being redeployed amongst the IMAX China group of companies, including the Chinese subsidiary. The Company is unable to reliably estimate the magnitude of the related tax benefits at this time.

Equity-Accounted Investments

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. At December 31, 2016, the equity method of accounting is being utilized for investments with a total carrying value of $nil (December 31, 2015 — $1.0 million). The Company’s accumulated losses in excess of its equity investment were $0.5 million as at December 31, 2016, and are classified in Accrued and other liabilities. For the year ended December 31, 2016, gross revenues, cost of revenue and net loss for these investments were $0.6 million, $6.8 million and $6.2 million, respectively (2015 — $nil, $9.3 million and $9.1 million, respectively). The Company recorded its proportionate share of the net loss which amounted to $2.3 million for 2016 as compared to $2.4 million in 2015.

Non-Controlling Interests

The Company’s consolidated financial statements include the non-controlling interest in the net income of IMAX China resulting from the IMAX China Investment and the IMAX China IPO as well as the impact of a non-controlling interest in its subsidiary created for the Film Fund activity. For the year ended December 31, 2016, the net income attributable to non-controlling interests of the Company’s subsidiaries was $10.5 million (2015 — $8.8 million).

Pension Plan

The Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”), covering the Company’s CEO, Mr. Gelfond. As at December 31, 2016, the Company had an unfunded and accrued projected benefit obligation of approximately $19.6 million (December 31, 2015 — $19.5 million) in respect of the SERP.

The net periodic benefit cost was $0.3 million in 2016 and 2015, respectively. The components of net periodic benefit cost were as follows:

 

     Years ended December 31  
     2016      2015  

Interest cost

   $ 261      $ 253  
  

 

 

    

 

 

 

Pension expense

   $ 261      $ 253  
  

 

 

    

 

 

 

The plan experienced an actuarial gain of $0.2 million during 2016 and 2015, respectively, resulting primarily from the continuing change in the Pension Benefit Guaranty Corporation (“PBGC”) published annuity interest rates year-over-year used to determine the lump sum payment under the plan.

Under the terms of the SERP, if Mr. Gelfond’s employment is terminated other than for cause (as defined in his employment agreement), he is entitled to receive SERP benefits in the form of a lump sum payment. SERP benefit payments to Mr. Gelfond are subject to a deferral for six months after the termination of his employment, at which time Mr. Gelfond will be entitled to receive interest on the deferred amount credited at the applicable federal rate for short-term obligations. Pursuant to an employment agreement dated November 8, 2016, the term of Mr. Gelfond’s employment was extended through December 31, 2019, although Mr. Gelfond has not informed the Company that he intends to retire at that time. Under the terms of the arrangement, no compensation earned beginning in 2011 is to be included in calculating this entitlement under the SERP.

The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As at December 31, 2016, the Company had an unfunded benefit obligation of $1.7 million (December 31, 2015 — $1.8 million).

 

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In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Company’s former Co-CEO and current Chairman of its Board of Directors, upon retirement. As at December 31, 2016, the Company had an unfunded benefit obligation recorded of $0.6 million (December 31, 2015 — $0.8 million).

In September 2016, the Company entered into a new employment agreement with Greg Foster, CEO of IMAX Entertainment and Senior Executive Vice President of the Company, which provides for an employment term from July 2, 2016 through July 2, 2019. Under the agreement, the Company agreed to create a deferred compensation retirement plan (the “Retirement Plan”) covering Mr. Foster, and to make a total contribution of $3.2 million over the three-year employment term. The Retirement Plan is subject to a vesting schedule based on continued employment with the Company, such that 25% will vest July 2019; 50% will vest July 2022; 75% will vest July 2025; and Mr. Foster will be 100% vested in July 2027. As at December 31, 2016, the Company had an unfunded benefit obligation recorded of $0.5 million.

Stock-Based Compensation

The Company estimates the fair value of stock option awards on the date of grant using fair value measurement techniques. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant.

Stock-based compensation expense recognized under FASB ASC 718, “Compensation – Stock Compensation” (“ASC 718”) for 2016 and 2015 was $30.5 million and $21.9 million, respectively.

 

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Year Ended December 31, 2015 versus Year Ended December 31, 2014

The Company reported net income of $64.6 million, or $0.92 per basic share and $0.90 per diluted share, for the year ended December 31, 2015 as compared to net income of $42.2 million, or $0.61 per basic share and $0.59 per diluted share, for the year ended December 31, 2014. Net income for the year ended December 31, 2015 includes a $21.9 million charge, or $0.31 per diluted share (2014 — $15.1 million, or $0.22 per diluted share), for stock-based compensation. Adjusted net income, which consists of net income excluding the impact of stock-based compensation and the related tax impact, was $82.4 million, or $1.15 per diluted share, for the year ended December 31, 2015 as compared to adjusted net income of $54.9 million, or $0.78 per diluted share, for the year ended December 31, 2014. The Company reported net income attributable to common shareholders of $55.8 million, or $0.79 per basic share and $0.78 per diluted share for the year ended December 31, 2015 (2014 — $39.7 million, or $0.57 per basic share and $0.56 per diluted share). Adjusted net income attributable to common shareholders, which consists of net income attributable to common shareholders excluding the impact of stock-based compensation and the related tax impact, was $73.0 million, or $1.02 per diluted share, for the year ended December 31, 2015 as compared to adjusted net income attributable to common shareholders of $52.5 million, or $0.75 per diluted share, for the year ended December 31, 2014. A reconciliation of net income and net income attributable to common shareholders, the most directly comparable U.S. GAAP measure, to adjusted net income, adjusted net income per diluted share, adjusted net income attributable to common shareholders and adjusted net income attributable to common shareholders per diluted share is presented in the table below:

 

     Years Ended December 31,  
     2015     2014  
     Net Income      Diluted EPS     Net Income      Diluted EPS  

Reported net income

   $ 64,624       $ 0.90 (1)    $ 42,169       $ 0.59 (1) 

Adjustments:

          

Stock-based compensation

     21,880         0.31        15,128         0.22   

Tax impact on items listed above

     (4,056      (0.06     (2,370      (0.03
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted net income

     82,448         1.15 (1)      54,927         0.78 (1) 

Net income attributable to non-controlling interests

     (8,780      (0.12     (2,433      (0.03

Stock-based compensation (net of tax of $0.2 million) attributable to non-controlling interests

     (703      (0.01     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted net income attributable to common shareholders

   $ 72,965       $ 1.02 (1)    $ 52,494       $ 0.75 (1) 
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average diluted shares outstanding

        71,058           69,754   
     

 

 

      

 

 

 

 

(1) Includes impact of $0.8 million (2014 — $0.4 million) of accretion charges associated with redeemable Class C shares of IMAX China.

Revenues and Gross Margin

The Company’s revenues for the year ended December 31, 2015 increased 28.7% to $373.8 million from $290.5 million in 2014, primarily due to an increase in revenues from the Company’s IMAX systems, joint revenue sharing arrangements and film production and IMAX DMR segments. The gross margin across all segments in 2015 was $219.3 million, or 58.7% of total revenue, compared to $173.4 million, or 59.7% of total revenue in 2014. Impacting the gross margin in 2015 was the installation of 10 laser-based digital upgrades under sales or sales-type lease arrangements which had lower margins. Gross margin, excluding the impact of these laser-based digital upgrades, was 60.9% of total revenue in 2015.

IMAX Systems

IMAX systems revenue increased 40.6% to $119.7 million in 2015 as compared to $85.1 million in 2014 resulting primarily from the installation in 2015 of nine additional full, new theater systems and 11 digital upgrades including 10 laser-based digital upgrades and one xenon-based digital upgrade under sales or sales-type lease arrangements versus the prior year.

Revenue from sales and sales-type leases increased 47.7% to $86.9 million in 2015 from $58.9 million in 2014. The Company recognized revenue on 55 full, new theater systems which qualified as either sales or sales-type leases in 2015, with a total value of $68.6 million, versus 46 full, new theater systems in 2014 with a total value of $55.6 million. The Company also recognized revenue on the installation of 11 theater system upgrades in 2015, of which 10 were laser-based and one was xenon-based, with a total value of

 

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$15.0 million, as compared to three xenon-based digital upgrades in 2014, with a total value of $2.3 million. Theater system upgrades typically have lower sales prices and gross margin than full, new theater system installations. One used xenon-based digital system was installed in the year ended December 31, 2015 with a total value of $0.2 million while  no used systems were installed and recognized in 2014.

Average revenue per full, new sales and sales-type lease systems was $1.2 million in 2015, which was consistent with the prior year. The average revenue per full, new sales and sales-type lease systems varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location or other various factors. Average revenue per theater system upgrade was $1.4 million in 2015, as compared to $0.8 million in 2014. For 2015, the average revenue per upgrade was higher as 10 of the 11 system upgrades were for laser-based digital system configurations which are priced higher than xenon-based digital upgrades.

The installation of theater systems in newly-built theaters or multiplexes, which make up a large portion of the Company’s theater system backlog, depends primarily on the timing of the construction of those projects, which is not under the Company’s control. The breakdown in mix of sales and sales-type lease and joint revenue sharing arrangements (see discussion below) installations by theater system configuration for 2015 and 2014 is outlined in the table below:

 

     2015     2014  

New IMAX xenon-based digital theater systems - installed and recognized

    

Sales and sales-types lease arrangements

     56 (1)      46   

Joint revenue sharing arrangements

     80        67   
  

 

 

   

 

 

 

Total new theater systems

     136        113   
  

 

 

   

 

 

 

IMAX xenon-based digital theater system upgrades - installed and recognized

    

Sales and sales-types lease arrangements

     11 (1)      3   

Short-term operating lease arrangements

     2 (1)      3 (2) 

Joint revenue sharing arrangements

     5 (1)      2   
  

 

 

   

 

 

 

Total upgraded theater systems

     18        8   
  

 

 

   

 

 

 

Total theater systems installed

     154        121   
  

 

 

   

 

 

 

 

(1) Includes 17 laser-based digital system configurations (one new laser-based digital system under a sales arrangement and 16 laser-based digital system upgrades, 10 under sales arrangements, one under a short-term operating lease arrangement and five under joint revenue sharing arrangements).
(2) Reflects xenon-based digital system configurations under short-term operating lease arrangements, which will be upgraded to a laser-based digital system configuration at a future date.

Revenues from sales and sales-type leases include settlement revenue of $0.1 million in 2015 as compared to $nil in 2014.

IMAX theater system margin from full, new sales and sales-type lease systems, excluding the impact of settlements, was 65.9% in 2015, which was higher than the 63.4% experienced in 2014. Gross margin from theater system upgrades was $0.8 million in 2015, as compared to $1.2 million in 2014. In addition, the Company recorded a charge of $0.7 million upon the upgrade of xenon-based digital systems under operating lease arrangements to laser-based digital systems under sales or sales-type lease arrangements in IMAX Systems margin. Furthermore, included in IMAX systems margin is a charge of $0.1 million and $0.2 million in 2015 and 2014, respectively, due to a reduction in the net realizable value of its inventories. Gross margin varies depending upon the number of theater system commitments with a single respective exhibitor, an exhibitor’s location and other various factors. Gross margin from the sale of a used system was a loss of $0.2 million in 2015 as compared to $nil in 2014.

In 2015, due to change in agreement terms, an IMAX theater that had been operating under a joint revenue sharing arrangement became a sales-type lease arrangement. As a result of this transaction, the Company recorded revenue and margin of $1.2 million and $0.9 million, respectively. Furthermore, one of the Company’s customers acquired an IMAX theater from another customer that had been operating under an operating lease arrangement. This theater was purchased from the Company under a sale arrangement. As result of this sale transaction, the Company recorded revenue and margin of $0.8 million and $0.4 million, respectively. The above-referenced theaters were included in the Company’s 2014 network total.

 

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In 2014, the Company donated, and recognized the associated costs, of a full, new xenon-based digital theater system to the University of Southern California’s School of Cinematic Arts. The theater, which is the first teaching lab of its kind in a collegiate setting, will give students the opportunity to learn about the latest innovations in filmmaking, set design, sound and post-production.

Ongoing rent revenue and finance income increased to $15.2 million in 2015 compared to $14.1 million in 2014. Gross margin for ongoing rent and finance income increased to $14.4 million in 2015 compared to $13.4 million in 2014. Contingent fees included in this caption amounted to $3.8 million and $3.0 million in 2015 and 2014, respectively.

Other revenue increased to $17.6 million in 2015 as compared to $12.2 million in 2014. Other revenue primarily includes revenue generated from the Company’s theater operations, camera rental business and after-market sales of projection system parts and 3D glasses. The growth in revenue is primarily the result of an increase in revenue from 3D glasses and higher box-office generated by the films exhibited in the IMAX owned and operated theaters during 2015 as compared to the prior year period.

The gross margin recognized from other revenue increased to $0.3 million 2015, as compared to $0.1 million in 2014.

Theater System Maintenance

Theater system maintenance revenue increased 8.5% to $36.9 million in 2015 from $34.0 million in 2014. Theater system maintenance gross margin increased to $12.7 million in 2015 from $12.4 million in 2014. The Company recorded a write-down of less than $0.1 million and $0.2 million for certain service parts inventories in 2015 and 2014, respectively. Maintenance revenue continues to grow as the number of theaters in the IMAX theater network grows. Maintenance margins vary depending on the mix of theater system configurations in the theater network, volume-pricing related to larger relationships and the timing and the date(s) of installation and/or service.

Joint Revenue Sharing Arrangements

Revenues from joint revenue sharing arrangements increased 44.9% to $99.1 million in 2015 from $68.4 million in 2014. The Company ended the year with 529 theaters operating under joint revenue sharing arrangements, as compared to 451 theaters at the end of 2014, an increase of 17.3%. The increase in revenues from joint revenue sharing arrangements was largely due to the greater number of theaters under joint revenue sharing arrangements in operation as compared to the prior year and stronger film performance. During 2015, the Company installed 80 full, new theaters under joint revenue sharing arrangements, as compared to 67 full new theaters during 2014.

The gross margin from joint revenue sharing arrangements was $68.4 million in 2015 as compared to $44.7 million in 2014. Included in the calculation of the 2015 gross margin were certain advertising, marketing and commission costs primarily associated with new theater launches of $4.3 million, as compared to $3.2 million for such expenses in 2014.

Film

Revenue from the Company’s film segments increased $118.0 million in 2015 and $102.9 million in 2014 primarily due to stronger film performance and continued network growth. Gross box-office generated by IMAX DMR films increased 31.3% to $985.3 million in 2015 from $750.2 million in 2014. With the addition of gross box-office from IMAX original films, the Company’s gross box-office exceeded $1 billion in 2015. Film production and IMAX DMR revenues increased 28.8% to $107.1 million in 2015 from $83.2 million in 2014. Gross box-office per screen for 2015 averaged $1,155,800 in comparison to $1,020,600 in 2014. In 2015, gross box-office was generated primarily from the exhibition of 57 films (44 new and 13 carryovers), as compared to 50 films (40 new and 10 carryover) exhibited in 2014.

Other revenues attributable to the film segment decreased 44.6% to $10.9 million in 2015 from $19.8 million in 2014. This decrease was attributable to the wide release of two IMAX original productions, Journey to the South Pacific and Island of Lemurs: Madagascar, in 2014, whereas in 2015, the Company did not release any IMAX original productions as well as a decrease in post-production revenues as compared to the prior year.

The Company’s gross margin from its film segments increased 15.4% in 2015 to $78.8 million from $68.2 million in 2014. Film production and IMAX DMR gross margins increased to $77.6 million from $62.9 million primarily due to continued network growth and stronger film performance. Other gross margin attributable to the film segment was $1.1 million in 2015 as compared to $5.3 million in 2014, since no original productions were released in 2015, as described above, and a decrease in post-production business.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $115.3 million in 2015, as compared to $93.3 million in 2014. Selling, general and administrative expenses excluding the impact of stock-based compensation were $93.4 million in 2015, as compared to $78.1 million in 2014. The following reflects the significant items impacting selling, general and administrative expenses as compared to the prior year period:

 

    an $8.8 million increase in staff costs related to the core business, including salaries and benefits and certain incentive awards based on the Company’s performance, the completion of the IMAX China IPO, and the achievement of pre-determined performance metrics;

 

    a $6.8 million increase in the Company’s stock-based compensation;

 

    a $2.6 million net increase in staff costs and other expenses associated with new business initiatives, from $0.7 million in 2014 to $3.3 million in 2015;

 

    a $0.9 million increase due to a change in foreign exchange rates. During the year ended December 31, 2015, the Company recorded a foreign exchange loss of $2.4 million for net foreign exchange gains/losses related to the translation of foreign currency denominated monetary assets and liabilities as compared to a loss of $1.5 million recorded in 2014;

 

    a $0.8 million net increase in advertising and promotion related activities; and

 

    a $2.1 million net increase in other general corporate expenditures including an increase in consulting and other professional fees and costs associated with the IMAX China IPO.

Research and Development

Research and development expenses decreased to $12.7 million in 2015 compared to $16.1 million in 2014 and are primarily attributable to the development of the Company’s new laser-based digital projection system and its new private home theater. In 2014, the Company developed its next-generation laser-based digital projector, which provides greater brightness and clarity, higher contrast, a wider color gamut and deeper blacks, while consuming less power and lasting longer than existing digital technology, to ensure that the company continues to provide the highest quality, premier movie going experience available to consumers. As of December 31, 2015, the Company had 18 laser-based digital theater systems in operation.

Receivable Provisions, Net of Recoveries

Receivable provisions, net of recoveries for accounts receivable and financing receivables amounted to a net provision of $0.8 million in 2015, as compared to $0.9 million in 2014.

The Company’s accounts receivables and financing receivables are subject to credit risk. These receivables are concentrated with the leading theater exhibitors and studios in the film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. Accordingly, the Company believes it has adequately protected itself against exposures relating to receivables and contractual commitments.

Asset Impairments and Other Charges

The Company recorded an asset impairment charge of $0.4 million and $0.3 million in 2015 and 2014, respectively, against property, plant and equipment after the Company assessed the carrying value of certain assets in light of their future expected cash flows.

In 2015, the Company recognized a $0.4 million other-than-temporary impairment of its investments as the value is not expected to recover based on the length of time and extent to which the market value has been less than cost as compared to $3.2 million in 2014.

 

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In 2015 and 2014, the Company recorded a charge of $0.3 million and $0.5 million, respectively, reflecting assets that no longer meet capitalization requirements as the assets were no longer in use.

Interest Income and Expense

Interest income was $1.0 million in 2015, as compared to $0.4 million in 2014.

Interest expense was $1.7 million in 2015, as compared to $0.9 million in 2014. Consistent with its historical financial reporting, the Company has elected to classify interest and penalties related to income tax liabilities, when applicable, as part of the interest expense in its consolidated statements of operations rather than income tax expense. In 2015 and 2014, the Company recovered less than $0.1 million, respectively, in potential interest and penalties associated with its provision for uncertain tax positions. Also included in interest expense is the amortization of deferred finance costs in the amount of $1.0 million and $0.5 million in 2015 and 2014, respectively. The Company’s policy is to defer and amortize all the costs relating to debt financing which are paid directly to the debt provider, over the life of the debt instrument.

Income Taxes

The Company’s effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted statutory tax rate increases or reductions in the year, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations.

The Company recorded an income tax provision of $20.1 million for 2015, of which $0.5 million is related to an increase in its provision for uncertain tax positions. For 2014, the Company recorded an income tax provision of $14.5 million, of which $0.2 million was related to a decrease in its provision for uncertain tax positions.

The provision for income taxes in the year ended December 31, 2015 includes a net income tax charge of less than $0.1 million (2014 — $0.4 million recovery) in continuing operations related to an increase in the valuation allowance for the Company’s deferred tax assets and other tax adjustments. In 2015, the Company recorded an adjustment of $14.0 million to the deferred tax assets, $5.9 million to the income tax provision and $8.1 million to shareholders’ equity related to tax benefits generated on the exercise of certain employee stock options. In conjunction with this, a provision for uncertain tax positions of $3.9 million was also recorded to the income tax provision and $7.9 million was recorded against shareholders’ equity.

During the year ended December 31, 2015, after considering all available evidence, both positive (including recent profits, projected future profitability, backlog, carry forward periods for, and utilization of net operating loss carryovers and tax credits, discretionary deductions and other factors) and negative (including cumulative losses in past years and other factors), the Company concluded that the valuation allowance against the Company’s deferred tax assets should increase by less than $0.1 million. The remaining $0.3 million balance in the valuation allowance as at December 31, 2015 is primarily attributable to certain U.S. state net operating loss carryovers that may expire without being utilized.

Equity-Accounted Investments

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323. At December 31, 2015, the equity method of accounting is being utilized for investments with a total carrying value of $1.0 million (December 31, 2014 — $2.8 million). For the year ended December 31, 2015, gross revenues, cost of revenue and net loss for these investments were $nil, $9.3 million and $9.1 million, respectively (2014 — $3.1 million, $5.9 million and $4.9 million, respectively). The Company recorded its proportionate share of the net loss which amounted to $2.4 million for 2015 compared to $1.1 million in 2014. In 2014, the Company recognized a gain of $0.1 million resulting from the sale of its interest in an equity-accounted investment. No such transactions were recorded in 2015.

Discontinued Operations

On January 30, 2014, the Company’s lease with respect to its owned and operated Nyack IMAX theater ended and the Company decided not to renew the lease. In 2014, revenues for the Nyack IMAX theater were less than $0.1 million and the Company recognized income of $0.4 million, net of a tax expense of $0.2 million from the operation of the theater. The transactions of the Company’s owned and operated Nyack theater are reflected as discontinued operations.

 

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Non-Controlling Interests

The Company’s consolidated financial statements include the non-controlling interest in the net income of IMAX China resulting from the IMAX China Investment and the IMAX China IPO as well as the impact of a non-controlling interest in its subsidiary created for the Film Fund activity. For the year ended December 31, 2015, the net income attributable to non-controlling interests of the Company’s subsidiaries was $8.8 million (2014 — $2.4 million).

Pension Plan

The Company has an unfunded defined benefit pension plan, the SERP, covering Messrs. Gelfond and Bradley J. Wechsler, the Company’s former Co-CEO and Chairman of its Board of Directors. As at December 31, 2015, the Company had an unfunded and accrued projected benefit obligation of approximately $19.5 million (December 31, 2014 — $19.4 million) in respect of the SERP.

The net periodic benefit cost was $0.3 million in 2015 and 2014, respectively. The components of net periodic benefit cost were as follows:

 

     Years ended December 31  
     2015      2014  

Interest cost

   $ 253       $ 264   
  

 

 

    

 

 

 

Pension expense

   $ 253       $ 264   
  

 

 

    

 

 

 

The plan experienced an actuarial gain of $0.2 million and an actuarial loss of $0.9 million during 2015 and 2014, respectively, resulting primarily from the continuing change in the Pension Benefit Guaranty Corporation (“PBGC”) published annuity interest rates year-over-year used to determine the lump sum payment under the plan.

Under the terms of the SERP, if Mr. Gelfond’s employment is terminated other than for cause (as defined in his employment agreement), he is entitled to receive SERP benefits in the form of a lump sum payment. SERP benefit payments to Mr. Gelfond are subject to a deferral for six months after the termination of his employment, at which time Mr. Gelfond will be entitled to receive interest on the deferred amount credited at the applicable federal rate for short-term obligations. Pursuant to an employment agreement dated November 8, 2016, the term of Mr. Gelfond’s employment was extended through December 31, 2019, although Mr. Gelfond has not informed the Company that he intends to retire at that time. Under the terms of the arrangement, no compensation earned beginning in 2011 is to be included in calculating this entitlement under the SERP.

The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As at December 31, 2015, the Company had an unfunded benefit obligation of $1.8 million (December 31, 2014 — $2.1 million).

In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Wechsler upon retirement. As at December 31, 2015, the Company had an unfunded benefit obligation recorded of $0.8 million (December 31, 2014 — $0.8 million).

Stock-Based Compensation

The Company estimates the fair value of stock option and SAR awards on the date of grant using fair value measurement techniques. The fair value of RSU awards is equal to the closing price of the Company’s common stock on the date of grant.

Stock-based compensation expense recognized under FASB ASC 718, “Compensation – Stock Compensation” (“ASC 718”) for 2015 and 2014 was $21.9 million and $15.1 million, respectively.

 

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LIQUIDITY AND CAPITAL RESOURCES

Credit Facility

The Company maintains a senior secured credit facility (the “Credit Facility”) with a maximum borrowing capacity of $200.0 million and a scheduled maturity of March 3, 2020. The Credit Facility is collateralized by a first priority security interest in substantially all of the present and future assets of the Company and the Guarantors. Certain of the Company’s subsidiaries serve as guarantors (the “Guarantors”) of the Company’s obligations under the Credit Facility.

The terms of the Credit Facility are set forth in the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”), dated March 3, 2015, among the Company, the Guarantors, the lenders named therein, Wells Fargo Bank, National Association (“Wells Fargo”), as agent and issuing lender (Wells Fargo, together with the lenders named therein, the “Lenders”) and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner and in various collateral and security documents entered into by the Company and the Guarantors. Each of the Guarantors has also entered into a guarantee in respect of the Company’s obligations under the Credit Facility. On February 22, 2016, the Company amended the terms of the Credit Agreement to increase the general restricted payment basket thereunder (which covers, among other things, the repurchase of shares) from $150.0 million to $350.0 million in the aggregate after the amendment date.

Total amounts drawn and available under the Credit Facility at December 31, 2016 were $nil and $200.0 million, respectively (December 31, 2015 – $nil and $200.0 million, respectively).

Under the Credit Facility, the effective interest rate for the year ended December 31, 2016 was nil, as no amounts were outstanding during the period (2015 – nil).

The Credit Agreement provides that the Company is required at all times to satisfy a Minimum Liquidity Test (as defined in the Credit Agreement) of at least $50.0 million. The Company is also required to maintain minimum Adjusted EBITDA (as defined in the Credit Agreement as EBITDA and referred to herein as Adjusted EBITDA) of $100.0 million. The Company is also required to maintain a Maximum Total Leverage Ratio (as defined in the Credit Agreement) of 2.0:1.0, which requirement decreases to 1.75:1.0 on December 31, 2017. The Company was in compliance with all of these requirements at December 31, 2016. The Maximum Total Leverage Ratio was 0.23:1 as at December 31, 2016, where Total Debt (as defined in the Credit Agreement) is the sum of all obligations evidenced by notes, bonds, debentures or similar instruments and was $27.7 million. Adjusted EBITDA is calculated as follows:

Adjusted EBITDA per Credit Facility:

 

(In thousands of U.S. Dollars)       

Net income

   $ 39,320  

Add (subtract):

  

Provision for income taxes

     16,212  

Interest expense, net of interest income

     315  

Depreciation and amortization, including film asset amortization(1)

     45,953  
  

 

 

 

EBITDA

   $ 101,800  

Write-downs, net of recoveries including asset impairments and receivable provisions(1)

     5,940  

Loss from equity accounted investments

     2,321  

Stock and other non-cash compensation

     31,586  

Adjusted EBITDA attributable to non-controlling interests(2)

     (19,743
  

 

 

 
   $ 121,904  
  

 

 

 

 

(1) See note 17 to the audited consolidated financial statements in Item 8 of the Company’s 2016 Form 10-K.
(2) The Adjusted EBITDA calculation specified for purposes of the minimum Adjusted EBITDA covenant excludes the reduction in Adjusted EBITDA from the Company’s non-controlling interests.

 

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Playa Vista Financing

On October 6, 2014, IMAX PV Development Inc., a Delaware corporation (“PV Borrower”) and wholly-owned subsidiary of the Company, entered into a construction loan agreement with Wells Fargo. The construction loan (the “Playa Vista Construction Loan”) was used to fund $22.3 million of the costs of development and construction of the new West Coast headquarters of the Company, located in the Playa Vista neighborhood of Los Angeles, California (the “Playa Vista Project”).

On October 19, 2015, PV Borrower converted the Playa Vista Construction Loan from a construction loan into a permanent loan (“Playa Vista Loan”) pursuant to the terms of the loan documents. Pursuant to the conversion, PV Borrower increased the principal balance of the loan by an additional $7.7 million, to $30.0 million. Prior to the conversion, the Playa Vista Construction Loan bore interest at a variable interest rate per annum equal to 2.25% above the 30-day LIBOR rate, and PV Borrower was required to make monthly payments of interest only. As a result of the conversion, the interest rate decreased from 2.25% to 2.0% above the 30-day LIBOR rate, and PV Borrower will be required to make monthly payments of combined principal and interest over a 10-year term with a lump sum payment at the end of year 10. The Playa Vista Loan is being amortized over 15 years. The Playa Vista Loan will be fully due and payable on October 19, 2025 (the “Maturity Date”) and may be prepaid at any time without premium, but with all accrued interest and other applicable payments.

The Playa Vista Loan is secured by a deed of trust from PV Borrower in favor of Wells Fargo and other documents evidencing and securing the loan (the “Loan Documents”), granting a first lien on and security interest in the Playa Vista property and the Playa Vista Project, including all improvements to be constructed thereon. The Loan Documents include absolute and unconditional payment and completion guarantees provided by the Company, including an environmental indemnity, to Wells Fargo for the performance by PV Borrower of all the terms and provisions of the Playa Vista Loan.

Total amount drawn under the Playa Vista Loan as at December 31, 2016 was $27.7 million (December 31, 2015 – $29.7 million). Under the Playa Vista Loan, the effective interest rate for December 31, 2016 was 2.52% (December 31, 2015 — 2.40%).

Letters of Credit and Other Commitments

As at December 31, 2016, the Company did not have any letters of credit and advance payment guarantees outstanding (December 31, 2015 — $nil), under the Credit Facility.

The Company also has a $10.0 million facility for advance payment guarantees and letters of credit through the Bank of Montreal for use solely in conjunction with guarantees fully insured by Export Development Canada (the “Bank of Montreal Facility”). The Bank of Montreal Facility is unsecured and includes typical affirmative and negative covenants, including delivery of annual consolidated financial statements within 120 days of the end of the fiscal year. The Bank of Montreal Facility is subject to periodic annual reviews. As at December 31, 2016, the Company had letters of credit and advance payment guarantees outstanding of $0.1 million under the Bank of Montreal Facility as compared to $0.3 million as at December 31, 2015.

Cash and Cash Equivalents

As at December 31, 2016, the Company’s principal sources of liquidity included cash and cash equivalents of $204.8 million, the Credit Facility, anticipated collection from trade accounts receivable of $96.3 million including receivables from theaters under joint revenue sharing arrangements and DMR agreements with studios, anticipated collection from financing receivables due in the next 12 months of $23.3 million and payments expected in the next 12 months on existing backlog deals. As at December 31, 2016, the Company did not have any amount drawn on the Credit Facility (remaining availability of $200.0 million). As at December 31, 2016, the Company had $27.7 million drawn on the Playa Vista Loan. There were $nil letters of credit and advance payment guarantees outstanding under the Credit Facility and $0.1 million under the Bank of Montreal Facility. Cash held outside of Canada as at December 31, 2016 was $148.0 million (December 31, 2015 — $122.2 million), of which $31.5 million was held in the People’s Republic of China (“PRC”) (December 31, 2015 — $24.4 million). The Company’s intent is to permanently reinvest these amounts outside of Canada and the Company does not currently anticipate that it will need funds generated from foreign operations to fund North American operations. In the event funds from foreign operations are needed to fund operations in North America and if withholding taxes have not already been previously provided, the Company would be required to accrue and pay these additional withholding tax amounts on repatriation of funds from China to Canada. The Company currently estimates this amount to be $4.9 million.

During the year ended December 31, 2016, the Company’s operations provided cash of $77.9 million. The Company used cash of $64.9 million to fund capital expenditures, to build equipment for use in joint revenue sharing arrangements, to purchase other

 

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intangible assets, to invest in new business ventures such as its VR initiatives and to purchase property, plant and equipment. Based on management’s current operating plan for 2017, the Company expects to continue to use cash to deploy additional theater systems under joint revenue sharing arrangements, to fund DMR agreements with studios, invest in new business ventures and continued share repurchases. Cash flows from joint revenue sharing arrangements are derived from the theater box-office and concession revenues and the Company invested directly in the roll out of 109 new theater systems under joint revenue sharing arrangements in 2016, of which 77 new theater systems were capitalized by the Company.

In 2014, the Company’s Board of Directors approved a $150.0 million share repurchase program for shares of the Company’s common stock, which program was amended on April 20, 2016 to increase the aggregate purchase allowance to $200.0 million. Purchases under the program commenced in 2014, and the program expires June 30, 2017. The repurchases may be made either in the open market or through private transactions, subject to market conditions, applicable legal requirements and other relevant factors. The Company has no obligation to repurchase shares, and the share repurchase program may be suspended or discontinued by the Company at any time. In 2016, the Company repurchased 3,849,222 common shares under the repurchase program at an average price of $30.25 per share. The retired shares were purchased for $116.5 million. The Company has $46.3 million available under its approved repurchase program.

The Company believes that cash flow from operations together with existing cash and borrowing available under the Credit Facility will be sufficient to fund the Company’s business operations, including its strategic initiatives relating to existing joint revenue sharing arrangements and new business ventures for the next 12 months.

The Company’s operating cash flow will be adversely affected if management’s projections of future signings for theater systems and film performance, theater installations and film productions are not realized. The Company forecasts its short-term liquidity requirements on a quarterly and annual basis. Since the Company’s future cash flows are based on estimates and there may be factors that are outside of the Company’s control (see “Risk Factors” in Item 1A in the Company’s 2016 Form 10-K), there is no guarantee that the Company will continue to be able to fund its operations through cash flows from operations. Under the terms of the Company’s typical sale and sales-type lease agreement, the Company receives substantial cash payments before the Company completes the performance of its obligations. Similarly, the Company receives cash payments for some of its film productions in advance of related cash expenditures.

Operating Activities

The Company’s net cash provided by operating activities is affected by a number of factors, including the proceeds associated with new signings of theater system lease and sale agreements in the year, costs associated with contributing systems under joint revenue sharing arrangements, the box-office performance of films distributed by the Company and/or released to IMAX theaters, increases or decreases in the Company’s operating expenses, including research and development and new business initiatives, and the level of cash collections received from its customers.

Cash provided by operating activities amounted to $77.9 million in 2016. Changes in other non-cash operating assets as compared to 2015 include:

 

    an increase of $1.4 million in accounts receivable resulting from amounts billed in the year offset by cash receipts;

 

    an increase of $4.6 million in financing receivables primarily due to the installation and recognition of IMAX theater systems under sales or sales-type lease arrangements offset by ongoing minimum rent payments received;

 

    an increase of $3.8 million in inventories;

 

    an increase of $0.1 million in prepaid expenses; and

 

    an increase of $6.7 million in other assets which includes a decrease of $0.2 million in commissions and other deferred selling expenses, a decrease of $0.1 million in insurance recoveries, an increase of $5.7 million in prepaid tax and an increase of $1.3 million in other assets.

 

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Changes in other operating liabilities as compared to December 31, 2015 include: a decrease in deferred revenue of $14.7 million related to amounts relieved from deferred revenue due to theater system installations, offset partially by payments received in the current year related to theater systems not yet installed; a decrease in accounts payable of $3.4 million; and an increase of $3.9 million in accrued liabilities.

Investing Activities

Capital expenditures, including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, net of sales proceeds, other intangible assets and investments in film assets were $85.3 million in 2016 as compared to $91.9 million in 2015. The Company expects its investment in capital expenditures to remain fairly consistent as the nature of these cash outlays in particular, joint revenue sharing arrangements and film assets, exist to strengthen operational performances.

Net cash used in investing activities amounted to $64.9 million in 2016, which includes purchases of $15.3 million in property, plant and equipment, an investment in joint revenue sharing equipment of $42.9 million, an investment in new business ventures of $1.9 million and an investment in other intangible assets of $4.8 million, primarily related to expanding the functionality of the Company’s enterprise resource planning system and deploying it throughout the organization.

Financing Activities

Net cash used in financing activities in 2016 amounted to $125.8 million as compared to $204.7 million provided in 2015. In 2016, the Company paid $116.5 million for the repurchase of common shares under the Company’s share repurchase program and $19.9 million to purchase treasury stock for the settlement of restricted share units and options. In addition, the Company paid $2.4 million of taxes relating to secondary sales and repatriation dividends and $0.5 million of taxes relating to employee stock award vesting. Furthermore, the Company also made $2.0 million in repayments under the Playa Vista Loan. These cash outlays were offset by $13.1 million received from the issuance of common shares resulting from stock option exercises, and $2.5 million received from a capital contribution to the Film Fund made by third parties.

Prior Year Cash Flow Activities

Net cash provided by operating activities amounted to $84.2 million in the year ended December 31, 2015. Changes in other non-cash operating assets as compared to 2014 included: an increase of $22.5 million in accounts receivable; an increase of less than $13.6 million in financing receivables; an increase of $21.1 million in inventories; an increase of $1.6 million in prepaid expenses; and an increase of $0.7 million in other assets which includes an increase of $0.2 million in commissions and other deferred selling expenses and an increase of $0.5 million in other assets. Changes in other operating liabilities as compared to December 31, 2014 included: an increase in deferred revenue of $16.2 million related to backlog payments received in 2015, offset partially by amounts relieved from deferred revenue related to theater system installations; an increase in accounts payable of $9.2 million; and a decrease of $2.1 million in accrued liabilities.

Net cash used in investing activities amounted to $78.8 million in 2015, which included purchases of $43.3 million in property, plant and equipment, an investment in joint revenue sharing equipment of $28.5 million, net investment in new business ventures of $2.0 million and an increase in other intangible assets of $5.1 million. Included in the Company’s purchase of purchase of property, plant and equipment for 2015 was $27.7 million for the construction of the Playa Vista Project. Net cash used in investment activities amounted to $61.9 million in 2014.

Net cash provided by financing activities in 2015 amounted to $204.7 million as compared to cash used in financing activities of $52.0 million in 2014. In 2015, the Company received cash proceeds for the issuance of common shares net of related issuance costs of $38.0 million related to the IMAX China Investment by CMC and Fountain Vest, which represented a non-controlling interest in the Company’s subsidiary. The Company also received $35.6 million from the issuance of common shares resulting from stock option exercises offset by $34.3 million paid for the repurchase of common shares under the Company’s share repurchase program. The Company spent $10.0 million to purchase treasury stock for the settlement of restricted share units and stock options and paid $9.5 million in dividends to the non-controlling interest shareholders of IMAX China as a result of the IMAX China IPO. The Company also borrowed $25.3 million under the Playa Vista Loan.

Capital expenditures including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment net of sales proceeds and investments in film assets were $91.9 million in the year ended December 31, 2015.

 

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CONTRACTUAL OBLIGATIONS

Payments to be made by the Company under contractual obligations as of December 31, 2016 are as follows:

 

     Payments Due by Fiscal Year  
     Total                                            
     Obligations      2017      2018      2019      2020      2021      Thereafter  

Purchase obligations(1)

   $ 25,283       $ 25,283       $ —         $ —         $ —         $ —         $ —     

Pension obligations(2)

     21,115         —           —           —           21,115         —           —     

Operating lease obligations(3)

     18,670         6,203         5,033         2,831         674         498         3,431   

Playa Vista Loan(4)

     27,667         2,000         2,000         2,000         2,000         2,000         17,667   

Postretirement benefits obligations

     5,042         1,138         1,197         680         140         145         1,742   

Other financial commitments(5)

     39,173         39,173         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 136,950       $ 73,797       $ 8,230       $ 5,511       $ 23,929       $ 2,643       $ 22,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company’s total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered but yet to be invoiced.
(2) The SERP assumptions are that Mr. Gelfond will receive a lump sum payment six months after retirement at the end of the current term of his employment agreement (December 31, 2019), although Mr. Gelfond has not informed the Company that he intends to retire at that time.
(3) The Company’s total minimum annual rental payments to be made under operating leases, mostly consisting of rent at the Company’s property in New York and at the various owned and operated theaters.
(4) The Playa Vista Loan is fully due and payable on October 19, 2025. The Company is required to make monthly payments of combined principal and interest.
(5) Other financial commitments include the Company’s total minimum commitment toward the development, production, post-production and marketing, related to certain film and new content initiatives.

Subsequent to December 31, 2016, the Company entered into a premises lease arrangement, related to the New York corporate office, with a commitment of approximately $17.1 million over a 12-year term. The term is expected to begin in January 2018.

Pension and Postretirement Obligations

The Company has an unfunded defined benefit pension plan, the SERP, covering Mr. Gelfond. As at December 31, 2016, the Company had an unfunded and accrued projected benefit obligation of approximately $19.6 million (December 31, 2015 — $19.5 million) in respect of the SERP.

Pursuant to an employment agreement dated November 8, 2016, the term of Mr. Gelfond’s employment was extended through December 31, 2019, although Mr. Gelfond has not informed the Company that he intends to retire at that time. Under the terms of the arrangement, no compensation earned beginning in 2011 is to be included in calculating his entitlement under the SERP.

The Company has a postretirement plan to provide health and welfare benefits to Canadian employees meeting certain eligibility requirements. As at December 31, 2016, the Company had an unfunded benefit obligation of $1.7 million (December 31, 2015 — $1.8 million).

In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Bradley J. Wechsler, the Company’s former Co-CEO and current Chairman of its Board of Directors, upon retirement. As at December 31, 2016, the Company had an unfunded benefit obligation of $0.6 million (December 31, 2015 — $0.8 million).

 

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In September 2016, the Company entered into a new employment agreement with Greg Foster, CEO of IMAX Entertainment and Senior Executive Vice President of the Company, which provides for an employment term from July 2, 2016 through July 2, 2019. Under the agreement, the Company agreed to create a deferred compensation retirement plan (the “Retirement Plan”) covering Mr. Foster, and to make a total contribution of $3.2 million over the three-year employment term. The Retirement Plan is subject to a vesting schedule based on continued employment with the Company, such that 25% will vest July 2019; 50% will vest July 2022; 75% will vest July 2025; and Mr. Foster will be 100% vested in July 2027. As at December 31, 2016, the Company had an unfunded benefit obligation recorded of $0.5 million.

OFF-BALANCE SHEET ARRANGEMENTS

There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition.

 

Item 7A. Quantitative and Qualitative Factors about Market Risk

The Company is exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. Market risk is the potential change in an instrument’s value caused by, for example, fluctuations in interest and currency exchange rates. The Company’s primary market risk exposure is the risk of unfavorable movements in exchange rates between the U.S. dollar, the Canadian dollar and the Chinese Yuan Renminbi. The Company does not use financial instruments for trading or other speculative purposes.

Foreign Exchange Rate Risk

A majority of the Company’s revenue is denominated in U.S. dollars while a significant portion of its costs and expenses is denominated in Canadian dollars. A portion of the Company’s net U.S. dollar cash flows is converted to Canadian dollars to fund Canadian dollar expenses through the spot market. The Company has incoming cash flows from its revenue generating theaters and ongoing operating expenses in China through its majority-owned subsidiary IMAX Shanghai Multimedia Technology Co., Ltd. In Japan, the Company has ongoing Yen-denominated operating expenses related to its Japanese operations. Net Renminbi and Japanese Yen cash flows are converted to U.S. dollars through the spot market. The Company also has cash receipts under leases denominated in Renminbi, Japanese Yen, Euros and Canadian dollars. In addition, because IMAX films generate box-office in 74 different countries, unfavourable exchange rates between applicable local currencies, and the U.S. dollar could affect the Company’s reported gross box-office and revenues, further impacting the Company’s results of operations.

The Company manages its exposure to foreign exchange rate risks through the Company’s regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures as well as reduce earnings and cash flow volatility resulting from shifts in market rates.

The Company’s subsidiaries, IMAX (Shanghai) Multimedia Technology Co., Ltd. and IMAX (Shanghai) Theatre Technology Services Co. Ltd., held approximately 218.2 million Renminbi ($31.5 million U.S dollars) in cash and cash equivalents in the PRC as at December 31, 2016 (December 31, 2015 – 158.0 million Renminbi or $24.4 million U.S. dollars) and are required to transact locally in Renminbi. Foreign currency exchange transactions, including the remittance of any funds into and out of the PRC, are subject to controls and require the approval of the China State Administrative of Foreign Exchange to complete. Any developments relating to the Chinese economy and any actions taken by the China government are beyond the control of the Company, however, the Company monitors and manages its capital and liquidity requirements to ensure compliance with local regulatory and policy requirements.

For the year ended December 31, 2016, the Company recorded a foreign exchange net loss of $0.9 million as compared to a foreign exchange net loss of $2.4 million in 2015, associated with the translation of foreign currency denominated monetary assets and liabilities.

The Company has entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. The forward contracts have settlement dates throughout 2016 and 2017. Foreign currency derivatives are recognized and measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the consolidated statement of operations except for derivatives designated and qualifying as foreign currency hedging instruments. All foreign currency forward contracts held by the Company as at December 31, 2016, are designated and qualify as foreign currency hedging instruments. For foreign currency hedging instruments, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to the consolidated statement of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statement of operations. The notional value of foreign currency hedging instruments at December 31, 2016 was $37.8 million (December 31, 2015 — $30.7 million). A gain of

 

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$1.0 million was recorded to Other Comprehensive Income with respect to the depreciation/appreciation in the value of these contracts in 2016 (2015 — loss of $5.9 million). A loss of $3.1 million was reclassified from Accumulated Other Comprehensive Income to selling, general and administrative expenses in 2016 (2015 — loss of $3.2 million). Appreciation or depreciation on forward contracts not meeting the requirements for hedge accounting in the Derivatives and Hedging Topic of the FASB Accounting Standards Codification are recorded to selling, general and administrative expenses.

For all derivative instruments, the Company is subject to counterparty credit risk to the extent that the counterparty may not meet its obligations to the Company. To manage this risk, the Company enters into derivative transactions only with major financial institutions.

At December 31, 2016, the Company’s financing receivables and working capital items denominated in Canadian dollars, Renminbi, Yen and Euros translated into U.S. dollars was $52.4 million. Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2016, the potential change in the fair value of foreign currency-denominated financing receivables and working capital items would have been $5.2 million. A significant portion of the Company’s selling, general, and administrative expenses is denominated in Canadian dollars. Assuming a 1% change appreciation or depreciation in foreign currency exchange rates at December 31, 2016, the potential change in the amount of selling, general, and administrative expenses would be $0.1 million for every $10.0 million in Canadian denominated expenditures.

Interest Rate Risk Management

The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash, and its interest expense from variable-rate borrowings under the Credit Facility.

As at December 31, 2016, the Company had not drawn down on its Credit Facility (December 31, 2015 — $nil).

As at December 31, 2016, the Company had drawn down $27.7 million on its Playa Vista Loan (December 31, 2015 — $29.7 million).

The Company’s largest exposure with respect to variable rate debt comes from changes in LIBOR. The Company had variable rate debt instruments representing 12.0% and 11.7% of its total liabilities at December 31, 2016 and 2015, respectively. If the interest rates available to the Company increased by 10%, the Company’s interest expense would increase by approximately $0.1 million and interest income from cash would increase by approximately $0.1 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable rate debt and cash balances at December 31, 2016.

 

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     80   

Consolidated Balance Sheets as at December 31, 2016 and 2015

     81   

Consolidated Statements of Operations for the years ended December  31, 2016, 2015 and 2014

     82   

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     83   

Consolidated Statements of Cash Flows for the years ended December  31, 2016, 2015 and 2014

     84   

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014

     85   

Notes to Consolidated Financial Statements

     86   

************

 

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Report of Independent Registered Public Accounting Firm

To the Shareholders of IMAX Corporation

We have audited the accompanying consolidated balance sheets of IMAX Corporation and its subsidiaries as of December 31, 2016 and December 31, 2015 and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the years in the three-year period ended December 31, 2016. In addition, we have audited the financial statements schedule listed in the index appearing under item 15 (a) (2). We also have audited IMAX Corporation’s and its subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements, the financial statements schedule and the company’s internal control over financial reporting based on our integrated audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements and the financial statement schedule are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IMAX Corporation and its subsidiaries as of December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statements schedule listed in the index appearing under item 15 (a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, IMAX Corporation and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for Stock Compensation in 2016.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

February 23, 2017

 

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IMAX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars)

 

     As at December 31,  
     2016     2015  

Assets

    

Cash and cash equivalents

   $ 204,759     $ 317,449  

Accounts receivable, net of allowance for doubtful accounts of $1,250 (December 31, 2015 — $1,146)

     96,349       97,981  

Financing receivables (notes 4 and 19(c))

     122,125       117,231  

Inventories (note 5)

     42,121       38,753  

Prepaid expenses

     6,626       6,498  

Film assets (note 6)

     16,522       14,571  

Property, plant and equipment (note 7)

     245,415       218,267  

Other assets (notes 8 and 19(e))

     33,195       26,136  

Deferred income taxes (note 9)

     20,779       25,766  

Other intangible assets (note 10)

     30,416       28,950  

Goodwill

     39,027       39,027  
  

 

 

   

 

 

 

Total assets

   $ 857,334     $ 930,629  
  

 

 

   

 

 

 

Liabilities

    

Bank indebtedness (note 11)

   $ 27,316     $ 29,276  

Accounts payable

     19,990       23,455  

Accrued and other liabilities (notes 6, 12, 13, 14(c), 19(b), 19(d), 20 and 22)

     93,208       95,748  

Deferred revenue

     90,266       104,993  
  

 

 

   

 

 

 

Total liabilities

     230,780       253,472  
  

 

 

   

 

 

 

Commitments and contingencies (notes 12 and 13)

    

Non-controlling interests (note 21)

     4,980       3,307  
  

 

 

   

 

 

 

Shareholders’ equity

    

Capital stock (note 14) common shares — no par value. Authorized — unlimited number. 66,224,467 — issued and 66,159,902 — outstanding (December 31, 2015 — 69,673,244 — issued and outstanding)

     439,213       448,310  

Less: Treasury stock, 64,565 shares at cost (December 31, 2015 — nil)

     (1,939     —    

Other equity

     177,304       163,094  

Accumulated (deficit) earnings

     (47,366     19,930  

Accumulated other comprehensive loss

     (5,200     (7,443
  

 

 

   

 

 

 

Total shareholders’ equity attributable to common shareholders

     562,012       623,891  

Non-controlling interests (note 21)

     59,562       49,959  
  

 

 

   

 

 

 

Total shareholders’ equity

     621,574       673,850  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 857,334     $ 930,629  
  

 

 

   

 

 

 

(the accompanying notes are an integral part of these consolidated financial statements)

 

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IMAX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars, except per share amounts)

 

     Years Ended December 31,  
     2016     2015     2014  

Revenues

      

Equipment and product sales (note 15(c))

   $ 122,382     $ 118,937     $ 78,705  

Services (note 15(c))

     166,862       161,964       142,607  

Rentals (note 15(c))

     77,315       83,651       60,705  

Finance income

     9,500       9,112       8,524  

Other (note 15(a))

     1,275       141       —    
  

 

 

   

 

 

   

 

 

 
     377,334       373,805       290,541  
  

 

 

   

 

 

   

 

 

 

Costs and expenses applicable to revenues (note 2(m))

      

Equipment and product sales

     69,680       63,635       36,997  

Services (note 15(c))

     83,780       70,855       62,228  

Rentals

     21,086       20,027       17,928  

Other

     110       —         —    
  

 

 

   

 

 

   

 

 

 
     174,656       154,517       117,153  
  

 

 

   

 

 

   

 

 

 

Gross margin

     202,678       219,288       173,388  

Selling, general and administrative expenses (note 15(b)) (including share-based compensation expense of $30.5 million, $21.9 million and $15.1 million for 2016, 2015 and 2014, respectively)

     124,745       115,345       93,260  

Research and development

     16,315       12,730       16,096  

Amortization of intangibles

     2,079       1,860       1,724  

Receivable provisions, net of recoveries (note 16)

     954       752       918  

Asset impairments (notes 7 and 19(e))

     417       830       3,520  
  

 

 

   

 

 

   

 

 

 

Income from operations

     58,168       87,771       57,870  

Interest income

     1,490       968       405  

Interest expense (note 9(g))

     (1,805     (1,661     (924
  

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     57,853       87,078       57,351  

Provision for income taxes

     (16,212     (20,052     (14,466

Loss from equity-accounted investments, net of tax

     (2,321     (2,402     (1,071
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     39,320       64,624       41,814  

Income from discontinued operations, net of tax

     —         —         355  
  

 

 

   

 

 

   

 

 

 

Net income

     39,320       64,624       42,169  

Less: net income attributable to non-controlling interests (note 21)

     (10,532     (8,780     (2,433
  

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

   $ 28,788     $ 55,844     $ 39,736  
  

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders - basic and diluted: (note 14(d))

      

Net income per share - basic:

      

Net income per share from continuing operations

   $ 0.43     $ 0.79     $ 0.57  

Net income per share from discontinued operations

     —         —         0.01  
  

 

 

   

 

 

   

 

 

 
   $ 0.43     $ 0.79     $ 0.58  
  

 

 

   

 

 

   

 

 

 

Net income per share - diluted:

      

Net income per share from continuing operations

   $ 0.42     $ 0.78     $ 0.56  

Net income per share from discontinued operations

     —         —         —    
  

 

 

   

 

 

   

 

 

 
   $ 0.42     $ 0.78     $ 0.56  
  

 

 

   

 

 

   

 

 

 

(the accompanying notes are an integral part of these consolidated financial statements)

 

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IMAX CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

 

     Years Ended December 31,  
     2016     2015     2014  

Net income

   $ 39,320     $ 64,624     $ 42,169  
  

 

 

   

 

 

   

 

 

 

Unrealized defined benefit plan actuarial gain (loss) (note 20(a))

     159       180       (857

Unrealized postretirement benefit plans actuarial gain (loss) (notes 20(c) and 20(d))

     184       79       (574

Amortization of postretirement benefit plan actuarial loss (gain) (note 20(c))

     69       135       (32

Unrealized net gain (loss) from cash flow hedging instruments (note 19(d))

     1,049       (5,881     (2,524

Realization of cash flow hedging net loss upon settlement (note 19(d))

     3,078       3,217       1,186  

Foreign currency translation adjustments (note 2)

     (2,851     (2,121     (259

Other-than-temporary impairment of available-for-sale investment

     —         —         350  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     1,688       (4,391     (2,710

Income tax (expense) benefit related to other comprehensive (loss) income (note 9(h))

     (1,180     511       750  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     508       (3,880     (1,960
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     39,828       60,744       40,209  

Less: Comprehensive income attributable to non-controlling interests

     (8,797     (9,196     (2,491
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to common shareholders

   $ 31,031     $ 51,548     $ 37,718  
  

 

 

   

 

 

   

 

 

 

(the accompanying notes are an integral part of these consolidated financial statements)

 

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Table of Contents

IMAX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

 

     Years Ended December 31,  
     2016     2015     2014  

Cash provided by (used in):

      

Operating Activities

      

Net income

   $ 39,320     $ 64,624     $ 42,169  

Income from discontinued operations, net of tax

     —         —         (355

Adjustments to reconcile net income to cash from operations:

      

Depreciation and amortization (notes 17(c) and 18(a))

     46,485       42,803       33,756  

Write-downs, net of recoveries (notes 17(d) and 18(a))

     5,940       3,725       5,294  

Change in deferred income taxes

     4,940       (1,336     627  

Stock and other non-cash compensation

     31,586       22,379       15,467  

Unrealized foreign currency exchange loss

     462       785       1,180  

Loss from equity-accounted investments

     2,685       3,838       1,774  

Gain on non-cash contribution to equity-accounted investees

     (364     (1,436     (703

Investment in film assets

     (22,308     (15,119     (19,233

Changes in other non-cash operating assets and liabilities (note 17(a))

     (30,874     (36,058     6,357  

Net cash provided by operating activities from discontinued operations

     —         —         572