IMAX Annual Report 2010 | Quarterlytics

Plain-text annual report

Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549Form 10-K(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the fiscal year ended December 31, 2010 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934Commission file Number 001-35066IMAX Corporation(Exact name of registrant as specified in its charter) Canada(State or other jurisdiction of incorporation or organization) 98-0140269(I.R.S. EmployerIdentification Number) 2525 Speakman Drive, Mississauga, Ontario, Canada(Address of principal executive offices) L5K 1B1(Postal Code)Registrant’s telephone number, including area code:(905) 403-6500Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which RegisteredCommon Shares, no par value The New York Stock ExchangeSecurities 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 o 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 o 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 1934during 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 filingrequirements for the past 90 days. Yes  No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requiredto 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 thatthe registrant was required to submit and post such files). Yes o No o 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 thebest 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 tothis Form 10-K o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions 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 o Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes o 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 ofsuch shares as of the close of trading on June 30, 2010 was $763.6 million (52,302,294 common shares times $14.60). As of January 31, 2011, there were 64,164,723, common shares of the registrant outstanding. As of January 31, 2011, there were 64,164,723, 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, 2010,with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors and the annual meeting of the stockholders of theregistrant (the “Proxy Statement”) are incorporated by reference in Part III of this Form 10-K to the extent described therein. IMAX CORPORATIONDecember 31, 2010Table of Contents Page PART IItem 1. Business 4 Item 1A. Risk Factors 16 Item 1B. Unresolved Staff Comments 23 Item 2. Properties 23 Item 3. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 26 PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6. Selected Financial Data 30 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 67 Item 8. Financial Statements and Supplementary Data 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 123 Item 9A. Controls and Procedures 123 Item 9B. Other Information 123 PART IIIItem 10. Directors, Executive Officers and Corporate Governance 124 Item 11. Executive Compensation 124 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 124 Item 13. Certain Relationships and Related Transactions, and Director Independence 124 Item 14. Principal Accounting Fees and Services 124 PART IVItem 15. Exhibits, Financial Statement Schedules 124 Signatures 127 EX-10.1 EX-10.9 EX-10.16 EX-10.24 EX-10.32 EX-10.34 EX-21 EX-23 EX-24 EX-31.1 EX-31.2 EX-32.1 EX-32.22Table of ContentsIMAX CORPORATIONEXCHANGE 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 theperiods indicated, certain exchange rates based on the noon buying rate in the City of New York for cable transfers in foreign currencies as certified forcustoms 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 theinverse 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 onthe last day of each month during such periods. The Noon Buying Rate on December 31, 2010 was U.S. $1.0054. Years Ended December 31, 2010 2009 2008 2007 2006Exchange rate at end of period 1.0054 0.9555 0.8170 1.0120 0.8582 Average exchange rate during period 0.9709 0.8757 0.9381 0.9425 0.8818 High exchange rate during period 1.0054 0.9716 1.0291 1.0908 0.9100 Low exchange rate during period 0.9278 0.7692 0.7710 0.8437 0.8528 SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION Certain statements included in this quarterly report may constitute “forward-looking statements” within the meaning of the United States Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements include, but are not limited to, references to future capital expenditures (including theamount and nature thereof), business and technology strategies and measures to implement strategies, competitive strengths, goals, expansion and growth ofbusiness, operations and technology, plans and references to the future success of IMAX Corporation together with its wholly-owned subsidiaries (the“Company”) and expectations regarding the Company’s future operating, financial and technological results. These forward-looking statements are based oncertain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expectedfuture developments, as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conformwith the expectations and predictions of the Company is subject to a number of risks and uncertainties, including, but not limited to, general economic,market or business conditions; including the length and severity of the current economic downturn, the opportunities (or lack thereof) that may be presented toand pursued by the Company; competitive actions by other companies; the performance of IMAX DMR films; conditions in the in-home and out-of-homeentertainment industries; the signing of theater system agreements; changes in laws or regulations; conditions, changes and developments in the commercialexhibition industry; the failure to convert theater system backlog into revenue; risks related to new business initiatives; risks associated with investments andoperations in foreign jurisdictions and any future international expansion, including those related to economic, political and regulatory policies of localgovernments and laws and policies of the United States and Canada; the potential impact of increased competition in the markets the Company operateswithin; risks related to foreign currency transactions; risks related to the Company’s prior restatements and the related litigation and investigation by theSecurities and Exchange Commission (the “SEC”) and the ongoing inquiry by the Ontario Securities Commission (the “OSC”); and other factors, many ofwhich are beyond the control of the Company. Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionarystatements, and actual results or anticipated developments by the Company may not be realized, and even if substantially realized, may not have the expectedconsequences 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 3DExperience®, IMAX DMR®, DMR®, IMAX MPX®, IMAX think big® and think big® are trademarks and trade names of the Company or its subsidiariesthat are registered or otherwise protected under laws of various jurisdictions.3Table of ContentsPART IItem 1. BusinessGENERAL IMAX Corporation, together with its wholly-owned subsidiaries (the “Company”), is one of the world’s leading entertainment technology companies,specializing in motion picture technologies and presentations. The Company’s principal business is the design and manufacture of premium digital theatersystems (“IMAX theater systems”) and the sale or lease of IMAX theater systems or the contribution of IMAX theater systems under revenue-sharingarrangements to its customers. The IMAX theater systems are based on proprietary and patented technology developed over the course of the Company’s 43-year history. The Company’s customers who purchase, lease or otherwise acquire the IMAX theater systems are theater exhibitors that operate commercialtheaters (particularly multiplex cinemas), 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 its equipment. The Company refers to all theaters using the IMAX theatersystem as “IMAX theaters.” The Company is also engaged in the production and distribution of original large-format films, the provision of post-production services for large-formatfilms, the conversion of two-dimensional (“2D”) and three-dimensional (“3D”) Hollywood feature films for exhibition on IMAX theater systems around theworld, the provision of services in support of IMAX theaters and the IMAX theater network throughout the globe and the operation of four IMAX theaters. The Company believes the IMAX theater network is the most extensive premium theater network in the world with 518 theater systems (396 commercial,122 institutional) operating in 46 countries as at December 31, 2010. This compares to 430 theater systems (309 commercial, 121 institutional) operating in 48countries as at December 31, 2009. The success of the Company’s digital and joint revenue sharing strategies and the strength of its film slate has enabled theCompany’s theater network to expand significantly since 2008, with the Company’s overall network increasing by 47.6% and the Company’s commercialnetwork increasing by 71.4%. This network growth has increased revenue in several of the Company’s segments. In 2010, the Company achieved a recordnumber of theater signings, which is expected to drive additional growth in 2011 and thereafter. IMAX theater systems combine: (i) IMAX DMR (Digital Re-Mastering) conversion technology, which results in higher image and sound fidelity thanconventional cinema experiences; (ii) advanced, high-resolution projectors with film handling equipment and automated theater control systems, which resultin significantly more contrast and brightness than conventional theater systems; (iii) sound system components, which result in more expansive soundimagery and pinpointed origination of sound to any specific spot in an IMAX theatre; (iv) large screens and proprietary theatre geometry, which result in asubstantially larger field of view so that the screen extends to the edge of a viewer’s peripheral vision and creates more realistic images; and (v) theatreacoustics, which results in a four-fold reduction in background noise. The combination of these components causes audiences in IMAX theaters to feel as ifthey are a part of the on-screen action, creating a more intense, immersive and exciting experience than in a traditional theater. In addition, the Company’sIMAX 3D theater systems combine the same theater systems with 3D images that further enhance the audience’s feeling of being immersed in the film. AnIMAX film can also benefit from enhancements made by individual filmmakers exclusively for the IMAX release, including by using IMAX cameras in selectscenes to further enhance the audience’s immersion in the film. Filmmakers such as Christopher Nolan and Michael Bay have used IMAX cameras to filmselect scenes in their films The Dark Knight: The IMAX Experience and Transformers: Revenge of the Fallen: The IMAX Experience. Brad Bird is usingIMAX cameras to film certain sequences in his upcoming Mission: Impossible — Ghost Protocol: The IMAX Experience, set for release in December 2011.Mr. Nolan is also using IMAX cameras to film sequences in his upcoming film, The Dark Knight Rises: The IMAX Experience, set for release in July 2012. While the Company’s roots are in the institutional market, such as museums and science centers, the Company’s expanded commercial theater networkand its initiatives to facilitate the production and reduce the cost of exhibiting IMAX content have permitted IMAX to evolve into a key distribution platformfor Hollywood blockbuster films. The Company believes that one of the key steps to becoming an important distribution platform for Hollywood’s biggest event films was the Company’sdevelopment of a proprietary technology known as IMAX DMR (Digital Re-Mastering) that can digitally convert live-action 35mm or digital films 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 will receive apercentage of box-office receipts of the film, which generally range from 10-15%, from a film studio for conversion of the film to the IMAX DMR format. AtJanuary 31, 2011, the Company had released 60 IMAX DMR films since the introduction of IMAX DMR in 2002. As digital technology has been introducedto the DMR process and improvements have been made in conversion time, the number of films converted through the DMR process that have4Table of Contentsbeen released annually has increased as well. Accordingly, 15 films converted through the IMAX DMR process were released in 2010 (2009 — 12), ascompared to 4 in 2005. An important step in becoming a distribution platform for Hollywood’s biggest event films was the Company’s development of an IMAX digital projectionsystem. Prior to 2008, when the Company’s digital projector was introduced, all of IMAX’s large format projectors were film-based and required analog filmprints. The IMAX digital projection system, which operates without the need for such film prints, was designed specifically for use by commercial multiplexoperators 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“The IMAX Experience.” By making The IMAX Experience more accessible for commercial multiplex operators, the introduction of the IMAX digitalprojection system paved the way for several important joint revenue sharing arrangements which have allowed the Company to rapidly expand its theaternetwork. Since announcing that the Company was developing digital projection technology, the vast majority of the Company’s theater system signings havebeen for digital systems. As at January 31, 2011, the Company has signed agreements for 498 digital systems since 2007 (including the upgrade of film-basedsystems and agreements), 219 of which were signed in 2010 alone. As at December 31, 2010, 276 IMAX digital projection systems were in operation, an 83%increase compared to the 151 digital projection systems in operation as at December 31, 2009. As a result of the immersiveness and superior image and sound quality of The IMAX Experience, the Company’s exhibitor customers typically charge apremium for IMAX DMR films over films exhibited in their conventional auditoriums. The premium pricing, combined with higher attendance levelsassociated with IMAX films, generates incremental box office for the Company’s exhibitor customers and for the movie studios releasing their films to theIMAX network. The incremental box office generated by IMAX DMR films has also helped to establish IMAX as a key premium distribution platform forHollywood blockbuster films. The Company continues to expand its international business, with more than half of 2010 theater signings coming from outside the United States andCanada, as the Company believes growth in international markets will be an important driver of future revenues. The Company also intends to explore newareas of brand extension in: 3D in-home entertainment technology, such as 3net, a new 3D television channel operated by a Limited Liability Corporationowned by the Company, Discovery Communications and Sony Corporation; alternative theater content; and partnerships with technology, studio,programming, content and consumer electronics companies. IMAX Corporation, a Canadian corporation, was formed in March 1994 as a result of an amalgamation between WGIM Acquisition Corp. and the formerIMAX Corporation (“Predecessor IMAX”). Predecessor IMAX was incorporated in 1967. On January 31, 2011, the Company provided notice to the NASDAQ Global Select Market (“NASDAQ”) that the Company intended to voluntarily delistits common shares, without par value, from NASDAQ and intended to subsequently list such common shares on the New York Stock Exchange (“NYSE”).Trading commenced on the NYSE on February 11, 2011 under the Company’s current trading symbol, “IMAX.” The Company’s common shares continuedto trade on NASDAQ until the transfer of listing to the NYSE was completed. The trading of the Company’s common shares on the Toronto Stock Exchange(“TSX”), under the ticker symbol “IMX” remains unchanged.PRODUCT LINES The Company is the pioneer and leader in the large-format film industry. The Company believes it is the world’s largest designer and manufacturer ofspecialty projection and sound system components for large-format theaters around the world, as well as a significant producer and distributor of large-formatfilms. The Company’s theater systems include specialized IMAX projectors, advanced sound systems and specialty screens. The Company derives itsrevenues from: IMAX theater systems (the sale and 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 services for films); joint revenue sharing arrangements (theprovision of its theater system to an exhibitor in exchange for a certain percentage of theater revenue); theater system maintenance (the use of maintenanceservices related to its theater systems); theater operations (owning equipment, operating, managing or participating in the revenues of IMAX theaters); andother activities, which include the sale of after market parts and camera rentals. Segmented information is provided in note 20 to the accompanying auditedconsolidated financial statements in Item 8.IMAX Systems, Theater System Maintenance and Joint Revenue Sharing Arrangements The Company’s primary products are its theater systems. Traditional IMAX film-based theater systems include a unique rolling loop 15/70-formatprojector that offers superior image quality and stability and a digital theater control system; a 6-channel, digital audio system delivering up to 12,000 watts ofsound; a screen with a proprietary coating technology; and, if applicable, 3D glasses5Table of Contentscleaning equipment. The Company’s digital projection system includes all of the above components (including a digital projector rather than a rolling-loopprojector) and operates without the need for analog film prints. Since its introduction in 2008, the majority of the Company’s theater sales have been digitalsystems and the Company expects a majority of its future theater systems sales to be IMAX digital systems. As part of the arrangement to sell or lease itstheater systems, the Company provides extensive advice on theater planning and design and supervision of installation services. Theater systems are alsoleased or sold with a license for the use of the world-famous IMAX brand. IMAX theater systems come in five configurations: • the GT projection systems, film-based theater systems for the largest IMAX theaters; • the SR system, film-based theater systems for smaller theaters than the GT systems; • the IMAX MPX systems, which are film-based systems targeted for multiplex theaters (“MPX” theater systems); • the IMAX digital systems, which are the replacement to the IMAX MPX systems and which are accordingly targeted for multiplex theaters; and • theater systems featuring heavily curved and tilted screens that are used in dome shaped theaters. The GT, SR, IMAX MPX and 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 theexception of dome configurations, feature a steeply inclined floor to provide each audience member with a clear view of the screen. The Company holds patentson the geometrical design of IMAX theaters. The Company’s analog projectors use the largest commercially available film format (15-perforation film frame, 70mm), which is nearly 10 times largerthan conventional film (4-perforation film frame, 35mm) and therefore are able to project significantly more detail on a larger screen. The Company believesthese projectors, which utilize the Company’s rolling loop technology, are unsurpassed in their ability to project film with maximum steadiness and claritywith minimal film wear, while substantially enhancing the quality of the projected image. As a result, the Company’s projectors deliver a higher level of clarityand detail as compared to conventional movies and competing projectors. In order to compete and evolve with the market, the Company introduced a digital projection system in 2008 that provides a premium and differentiatedexperience to moviegoers that is consistent with what they have come to expect from the IMAX brand. The shift from a film-based projection system to a digitalprojection system for a large portion of the Company’s customer base has been compelling for a number of reasons. The savings to the studios as a result ofeliminating film prints are considerable, as the typical cost of an IMAX film print ranges from $20 thousand per 2D print to $45 thousand per 3D printwhereas a digital file delivery totals approximately $200 per movie per system. Removing those costs significantly increases the profit of an IMAX release for astudio which, the Company believes, has provided more incentive for studios to release their films to IMAX theaters. The Company similarly believes thateconomics change favorably for its exhibition clients since the costs associated with installing and operating an IMAX digital system are lower than those for afilm-based system, the print costs are eliminated (digital file delivery totals approximately $200 per movie per system), and digital delivery provides increasedprogramming flexibility that allows theaters to program significantly more IMAX DMR films per year, thereby increasing customer choice and potentiallyincreasing total box-office revenue. In 2010, 15 films converted through the IMAX DMR process were released to the IMAX theater network (2009 — 12), ascompared to 4 films in 2005. To date, the Company has contracted for the release of 21 DMR films to its theater network in 2011, plus one IMAX originalproduction. The Company remains in active discussions with every major Hollywood studio regarding future titles. Digital projectors also typically requirelower installation costs for exhibitors and potentially allow for the opportunity to show attractive alternate programming, such as live sporting events andconcerts, in the immersive environment of an IMAX theater. Digital systems represent 97% of the Company’s current backlog and 53% of the Company’stheater network. The Company continues to expect a majority of its future theater system arrangements to be for digital systems. To complement its viewing experience, the Company provides digital sound system components which are specifically designed for IMAX theaters. Thesecomponents are among the most advanced in the industry and help to heighten the realistic feeling of an IMAX presentation, thereby providing IMAX theatersystems with an important competitive edge over other theater systems. The Company believes it is a world leader in the design and manufacture of digitalsound system components for applications including traditional movie theaters, auditoriums and IMAX theaters. The Company’s arrangements for theater system equipment involve either a lease or sale. As part of the arrangement for an IMAX theater system, theCompany also advises the customer on theater design, supervises the installation of the theater systems and6Table of Contentsprovides projectionists with training in using the equipment. Theater owners or operators are responsible for providing the theater location, the design andconstruction of the theater building, the installation of the system components and any other necessary improvements, as well as the marketing andprogramming at the theater. The supervision of installation requires that the equipment also be put through a complete functional start-up and test procedure toensure proper operation. The Company’s typical arrangement also includes the trademark license rights which commence on execution of the agreement withterms generally of 10 to 20 years that may be renewed. 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 ofwhat the Company considers the system deliverable (the “System Deliverable”). For a separate fee, the Company provides ongoing maintenance and extendedwarranty services for the theater system. The Company’s contracts are generally denominated in U.S. dollars, except in Canada, Japan and parts of Europe,where contracts are sometimes denominated in local currency. Leases, other than joint revenue sharing arrangements, generally have 10-20 year initial terms and are typically renewable by the customer for one or moreadditional 5 to 10-year terms. Under the terms of the typical lease agreement, the title to the theater system equipment (including the projector, the soundsystem and the projection screen) remains with the Company. The Company has the right to remove the equipment for non-payment or other defaults by thecustomer. The contracts are generally not cancelable by the customer unless the Company fails to perform its obligations. The Company also enters into sale agreements with its customers. Under a sales arrangement, the title to the theater system remains with the customer. Incertain instances, however, the Company retains title or a security interest in the equipment until the customer has made all payments required under theagreement. The typical lease or sales arrangement provides for three major sources of cash flows for the Company: (i) initial fees; (ii) ongoing minimum fixed andcontingent fees; and (iii) ongoing maintenance and extended warranty fees. Initial fees generally are received over the period of time from the date thearrangement is executed to the date the equipment is installed and customer acceptance has been received. However, in certain cases, the payments of the initialfee may be scheduled over a period after the equipment is installed and customer acceptance has been received. Ongoing minimum fixed and contingent feesand ongoing maintenance and extended warranty fees are generally received over the life of the arrangement and are usually adjusted annually based on changesin 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 certainpercentage of the theater box-office. The terms of each arrangement vary according to the configuration of the theater system provided and the geographiclocation of the customer. Over the last several years, the Company has increasingly entered into joint revenue sharing arrangements with customers, pursuant to which theCompany provides the System Deliverable in return for a portion of the customer’s IMAX box-office receipts and concession revenue. Under these revenuesharing arrangements, the Company retains title to the theater system (including the projector, the sound system and the projection screen) and rent paymentsare contingent, instead of fixed or determinable. The Company has the right to remove the equipment for non-payment or other defaults by the customer. Thecontracts are generally not cancelable by the customer unless the Company fails to perform its obligations. In rare cases, the contract provides certainperformance thresholds that, if not met by either party, allows the other party to terminate the agreement. Joint revenue sharing arrangements generally have a 7to 10-year initial term and may be renewed by the customer for an additional term. By offering arrangements whereby exhibitors do not need to invest the initialcapital required in a 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 January 31, 2011, the Company has entered into joint revenue sharing arrangements for 230 systems with 14 partners, 171 of which were in operationas at December 31, 2010. Sales Backlog. Signed contracts for theater systems are listed as sales backlog prior to the time of revenue recognition. The value of sales backlogrepresents the total value of all signed theater system sales and sales-type lease agreements that are expected to be recognized as revenue in the future. Salesbacklog includes initial fees along with the estimated present value of contractual fixed minimum fees due over the term, but excludes contingent fees in excessof contractual minimums and maintenance and extended warranty fees that might be received in the future.7Table of Contents The Company’s sales backlog is as follows: December 31, 2010 December 31, 2009 Number of Dollar Value Number of Dollar Value Systems (in thousands) Systems (in thousands) Sales and sales-type lease arrangements 165 (1) $184,588 94 (1) $117,157 Joint revenue sharing arrangements 59 n/a 42 n/a 224 (2) $184,588 136 $117,157 (1) Includes 25 upgrades from film-based IMAX theater systems to IMAX digital theater systems as at December 31, 2010, and 1 upgrade from a film-based IMAX theater system to an IMAX digital theater system as at December 31, 2009. (2) Reflects the minimum number of theaters arising from signed contracts in backlog. Up to an additional 25 theaters (2009 — 1) may be installedpursuant to certain provisions in signed contracts in backlog. The value of the sales backlog does not include anticipated revenues from theaters in which the Company has an equity-interest, joint revenue sharingarrangements, agreements covered by letters of intent or conditional sale or lease commitments, though the number of systems contracted for under thesearrangements is included. The following chart shows the number of the Company’s theater systems by configuration, opened theater network base and backlog as at December 31: 2010 2009 Theater Theater Network Network Base Backlog Base BacklogFlat Screen (2D) 30 (1) — 36 — Dome Screen (2D) 66 — 65 1 IMAX 3D Dome (3D) 3 — 2 — IMAX 3D GT (3D) 80 (1) 2 88 5 IMAX 3D SR (3D) 44 (1) 1 51 2 IMAX MPX (3D) 19 (1) 4 37 (2) 13 IMAX digital (3D) 276 (1) 217 (3) 151 (2) 115 (3)Total 518 224 430 136 (1) In 2010, the Company upgraded 32 film-based IMAX theater systems across various categories to IMAX digital theater systems (30 sales arrangementsand 2 joint revenue sharing arrangements). (2) In 2009, the Company upgraded 25 film-based IMAX theater systems across various categories to IMAX digital theater systems (14 salesarrangements, 2 treated previously as operating lease arrangements and 9 systems under joint revenue sharing arrangements). (3) Includes 59 and 42 theater systems as at December 31, 2010 and 2009, respectively, under joint revenue sharing arrangements. IMAX Flat Screen and IMAX Dome Systems. IMAX flat screen and IMAX Dome systems comprise 99 of the Company’s opened theater base andprimarily reside in institutions such as museums and science centers. Flat screen IMAX theaters were introduced in 1970, while IMAX Dome theaters, whichare designed for tilted dome screens, were introduced in 1973. There have been several significant proprietary and patented enhancements to these systemssince their introduction. IMAX 3D GT and IMAX 3D SR Systems. IMAX 3D theaters utilize a flat screen 3D system, which produces realistic 3D images on an IMAX screen. TheCompany believes that the IMAX 3D theater systems offer consumers one of the most realistic 3D experiences available today. To create the 3D effect, theaudience uses either polarized or electronic glasses that separate the left-eye and right-eye8Table of Contentsimages. The IMAX 3D projectors can project both 2D and 3D films, allowing theater owners the flexibility to exhibit either type of film. In 1997, the Company launched a smaller IMAX 3D system called IMAX 3D SR, a patented theater system configuration that combines a proprietarytheater design, a more automated projector and specialized sound system components to replicate the experience of a larger IMAX 3D theater in a smaller space. As at December 31, 2010, there were 124 IMAX 3D GT and IMAX 3D SR theaters in operation compared to 139 IMAX 3D GT and IMAX 3D SR theatersin operation as at December 31, 2009. The decrease in the number of 3D GT and 3D SR systems is largely attributable to the conversion of existing 3D GTand 3D SR systems to IMAX digital systems. IMAX MPX. In 2003, the Company launched a large-format theater system designed specifically for use in multiplex theaters. Known as IMAX MPX, thissystem had lower capital and operating costs than other IMAX systems and was intended to improve a multiplex owner’s financial returns and to allow for theinstallation of IMAX theater systems in markets that might previously not have been able to support one. As at December 31, 2010, there were 19 MPXsystems in operation compared to 37 MPX systems as at December 31, 2009. The IMAX digital system has supplanted the MPX system as the Company’smultiplex product. The decrease in the number of MPX systems is largely attributable to the upgrade of existing MPX systems to IMAX digital systems. IMAX Digital. In July 2008, the Company introduced a proprietary IMAX digital projection system operating on a digital platform that it believes delivershigher quality imagery compared with other digital systems and that is consistent with the Company’s brand. As at December 31, 2010, the Company hadinstalled 276 digital theater systems, including 59 digital upgrades, and has an additional 217 digital systems in its backlog. Digital theater systemsrepresent 97% of the total backlog and 53% of the total theater network, and the Company expects a majority of its future theater system arrangements to befor digital systems. Moreover, the Company believes that some of the film-based systems currently in its backlog, particularly uninstalled MPX systems, willultimately become digital installations.Films Film Production and Digital Re-mastering (IMAX DMR) Films produced by the Company are typically financed through third parties, whereby the Company will generally receive a film production fee inexchange 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 filminvestors and/or the Company. In 2002, the Company developed technology that makes it possible for live-action film footage to be digitally transformed into IMAX’s large-format at a costof roughly $1.0 million — $1.5 million per film. This proprietary system, known as IMAX DMR, has opened up the IMAX theater network to film releasesfrom Hollywood’s broad library of films. In a typical IMAX DMR film arrangement, the Company will receive a percentage of box-office receipts of the film,which generally range from 10-15%, from a film studio for the conversion of the film to the IMAX DMR format. In 2010, gross box office from IMAX DMRfilms was $545.9 million, compared to $270.8 million in 2009, an increase of 102%. The Company may also have certain distribution rights to the filmsproduced 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 andremoval of unwanted artifacts; • recording the enhanced digital image onto IMAX 15/70-format film or IMAX digital cinema package (“DCP”) format; • specially re-mastering the sound track to take full advantage of the IMAX theater’s unique sound system; and • in certain instances, performing the Company’s proprietary live-action 2D to 3D conversion.9Table of Contents The first IMAX DMR film, Apollo 13: The IMAX Experience, produced in conjunction with Universal Pictures and Imagine Entertainment, was releasedin September 2002 to 48 IMAX theaters. One of the more recent IMAX DMR films at December 31, 2010, Tron Legacy, was released to 366 IMAX theaters.Since the release of Apollo 13: The IMAX Experience, an additional 59 IMAX DMR films have been released to the IMAX theater network as at January 31,2011. The highly automated IMAX DMR process typically allows the re-mastering process to meet aggressive film production schedules. The Company iscontinuing to decrease the length of time it takes to reformat a film with its IMAX DMR technology. Apollo 13: The IMAX Experience, was re-mastered in16 weeks, while Iron Man 2: The IMAX Experience, released in May 2010, was re-mastered in approximately 7 days. The IMAX DMR conversion ofsimultaneous, 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 IMAXDMR film with the domestic release to conventional theaters. The Company demonstrated its ability to convert computer-generated animation to IMAX 3D with the 1999 release of Cyberworld, the 2004 release of thefull length computer generated imagery (“CGI”) feature, The Polar Express: The IMAX 3D Experience and the release of four CGI 3D features in 2005-2007,including Beowulf: An IMAX 3D Experience released in November 2007. In addition, the Company has developed proprietary technology to convert liveaction 2D films to IMAX 3D films, which the Company believes can offer potential benefits to the Company, studios and the IMAX theater network. Thistechnology was used to convert scenes from 2D to 3D in the film Superman Returns: An IMAX 3D Experience in 2006. In July 2007, Harry Potter and theOrder of the Phoenix: An IMAX 3D Experience, was released with approximately 20 minutes of the film converted from 2D to 3D using such technology. Inaddition, the 2009 release of Harry Potter and the Half-Blood Prince: An IMAX 3D Experience included certain scenes of the film converted to IMAX 3D. For IMAX DMR releases, the original soundtrack of the movie is re-mastered for the IMAX five or six-channel digital sound systems. Unlike thesoundtracks played in conventional theaters, IMAX re-mastered soundtracks are uncompressed and full fidelity. IMAX sound systems use proprietaryloudspeaker systems and proprietary surround sound configurations that ensure every theater seat is in a good listening position. In 2010, 15 films were converted through the IMAX DMR process and released to IMAX theaters by film studios as compared to 12 films in 2009. These15 films were: • Alice In Wonderland: An IMAX 3D Experience (Disney, March 2010); • How To Train Your Dragon: An IMAX 3D Experience (Dreamworks Animation Paramount, March 2010); • Iron Man 2: The IMAX Experience (Marvel and Paramount, May 2010); • Shrek Forever After: An IMAX 3D Experience (Dreamworks Animation Paramount, May 2010); • Prince of Persia: The Sands of Time: The IMAX Experience (Disney, May 2010); • Toy Story 3: An IMAX 3D Experience (Disney, June 2010); • The Twilight Saga: Eclipse: The IMAX Experience (Summit Entertainment, June 2010); • Inception: The IMAX Experience (Warner Bros. Pictures (“WB”)), July 2010); • Aftershock: The IMAX Experience (Huayi Brothers Group, July 2010, primarily distributed in China and other parts of Asia); • Resident Evil: Afterlife: An IMAX 3D Experience (Sony, September 2010); • Legends of the Guardian: The Owls of Ga’Hoole: An IMAX 3D Experience (WB, September 2010); • Paranormal Activity 2: The IMAX Experience (Paramount, October 2010); • Megamind: An IMAX 3D Experience (Dreamworks Animation Paramount, November 2010); • Harry Potter and the Deathly Hallows: Part I: The IMAX Experience (WB, November 2010); and • Tron Legacy: An IMAX 3D Experience (Disney, December 2010). The Company believes that the box-office performance of IMAX DMR releases has positioned IMAX theaters as a key premium distribution platform forHollywood films, which is separate and distinct from their wider theatrical release. IMAX theaters therefore serve as an additional distribution platform forHollywood films, just as home video and pay-per-view are ancillary distribution platforms. In addition, the Company, in conjunction with WB and with the cooperation of National Aeronautics and Space Administration (“NASA”), released theoriginal film Hubble 3D: An IMAX 3D Experience in March 2010. To date, the Company has signed contracts for 21 DMR films that will play in the IMAX theater network in 2011:10Table of Contents • TRON: Legacy: An IMAX 3D Experience (Walt Disney Studios, continued from 2010); • The Green Hornet: An IMAX 3D Experience (Sony, January 2011); • Tangled: An IMAX 3D Experience (Disney, February 2011, released in select Asian markets on respective regional release dates); • Sanctum: An IMAX 3D Experience (Universal, February 2011); • I Am Number Four: The IMAX Experience (Dreamworks Studios Disney, February 2011); • Mars Needs Moms: An IMAX 3D Experience (Disney, March 2011); • Sucker Punch: The IMAX Experience (WB, March 2011); • Fast Five: The IMAX Experience (Universal, April 2011); • Pirates of the Caribbean: On Stranger Tides: An IMAX 3D Experience (Disney, May 2011); • Kung Fu Panda 2: An IMAX 3D Experience (Paramount, May 2011, to be released in select international markets); • Super 8: The IMAX Experience (Paramount, June 2011); • The Founding of a Party: The IMAX Experience (China Film Group, June 2011, to be released in the People’s Republic of China) • Cars 2: An IMAX 3D Experience (Disney, June 2011); • Transformers: Dark of the Moon: An IMAX 3D Experience (Paramount, July 2011); • Harry Potter and the Deathly Hallows: Part II: An IMAX 3D Experience (WB, July 2011); • Real Steel: The IMAX Experience (Dreamworks Studios Disney, October 2011); • Contagion: The IMAX Experience (WB, October 2011); • Puss in Boots: An IMAX 3D Experience (Paramount, November 2011); • Happy Feet 2: An IMAX 3D Experience (WB, November 2011); • Mission: Impossible — Ghost Protocol: The IMAX Experience (Paramount, December 2011); and • The Adventures of Tintin: The Secret of the Unicorn: An IMAX 3D Experience (Paramount, December 2011). The Company remains in active negotiations with all of Hollywood’s studios for additional films to fill out its short and long-term film slate. In addition, the Company, in conjunction with WB, will release the original film Born to be Wild 3D: An IMAX 3D Experience to its network inApril 2011. Film Distribution The Company is a significant distributor of large-format films. The Company distributes films which it has produced or for which it has acquireddistribution rights from independent producers. As a distributor, the Company receives a fixed fee and/or a percentage of the theater box-office receipts. As at December 31, 2010, IMAX’s film library consisted of 274 IMAX original films, which cover such subjects as space, wildlife, music, history andnatural wonders. The Company currently has distribution rights with respect to 44 of such films. Large-format films that have been successfully distributedby the Company include: Hubble 3D: An IMAX 3D Experience, which was released by the Company and WB in March 2010 and has grossed over$25.6 million as at the end of 2010; Under the Sea 3D: An IMAX 3D Experience,which was released by the Company and WB in March 2009 and hasgrossed over $36.8 million as at the end of 2010; Deep Sea 3D: An IMAX 3D Experience, which was released by the Company and WB in March 2006and has grossed more than $89.8 million as at the end of 2010; SPACE STATION, which was released in April 2002 and has grossed over $116.2 million asat the end of 2010 and T-REX: Back to the Cretaceous, which was released by the Company in 1998 and has grossed over $103.8 million as at the end of2010. Large-format films have significantly longer exhibition periods than conventional commercial 35mm films and many of the films in the large-formatlibrary have remained popular for many decades, including the films To Fly! (1976), Grand Canyon — The Hidden Secrets (1984) and The Dream IsAlive (1985). Film Post-Production David Keighley Productions 70MM Inc., a wholly-owned subsidiary of the Company, provides film post-production and quality control services for large-format films (whether produced internally or externally), and digital post-production services.11Table of ContentsTheater Operations As at December 31, 2010, the Company had four owned and operated theaters on leased premises as compared to four owned and operated theaters as atDecember 31, 2009. In addition, the Company has a commercial arrangement with one theater resulting in the sharing of profits and losses. The Companyalso provides management services to two theaters.Other Cameras The Company rents its proprietary 2D and 3D large-format film and digital cameras to third party production companies. The company also providesproduction technical support and post-production services for a fee. All IMAX 2D and 3D film cameras run 65mm negative film, exposing 15 perforationsper frame and resulting in an image area nearly 10x larger than standard 35mm film. The Company’s 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 IMAX3D 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 recently 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 andHollywood 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, Europe, andAsia. In addition, the Company has agreements with consultants, business brokers and real estate professionals to locate potential customers and theater sitesfor the Company on a commission basis. The commercial multiplex theater segment of the Company’s theater network is now its largest segment, comprising 373 theaters, or 72.0%, of the 518theaters open as at December 31, 2010. The Company’s institutional customers include science and natural history museums, zoos, aquaria and othereducational and cultural centers. The Company also sells or leases its theater systems to theme parks, tourist destination sites, fairs and expositions (theCommercial Destination segment). At December 31, 2010, approximately 38.8% of all opened IMAX theaters were in locations outside of the United States andCanada. The following table outlines the breakdown of the theater network by type and geographic location as at December 31: 2010 Theater Network Base 2009 Theater Network Base Commercial Commercial Commercial Commercial Multiplex Destination Institutional Total Multiplex Destination Institutional TotalUnited States 217 9 65 291 175 8 66 249 Canada 17 2 7 26 13 2 7 22 Mexico 8 — 11 19 8 — 11 19 Russia & the CIS 16 — — 16 6 — — 6 Western Europe 35 7 9 51 23 7 10 40 Rest of Europe 9 — — 9 12 — — 12 Japan 9 2 7 18 5 2 7 14 Greater China(1) 22 — 18 40 14 — 15 29 Rest of World 40 3 5 48 32 2 5 39 Total 373 23 122 518 288 21 121 430 (1) Greater China includes China, Hong Kong, Taiwan and Macau. For information on revenue breakdown by geographic area, see note 20 to the accompanying audited consolidated financial statements in Item 8. TheCompany’s foreign operations are subject to certain risks. See “Risk Factors — The company conducts business internationally which exposes it touncertainties and risks that could negatively affect its operations and sales” in Item 1A.12Table of ContentsThe Company’s two largest customers as at December 31, 2010, collectively represent 24.7% of the Company’s network base of theaters and 16.9% ofrevenues.INDUSTRY AND COMPETITION In recent years, as the motion picture industry has transitioned from film projection to digital projection, a number of companies have introduced digital 3Dprojection technology and, since 2008, an increasingly large number of Hollywood features have been exhibited using these technologies. According to theNational Association of Theater Owners, as at December 31, 2010, there were approximately 8,000 conventional-sized screens in U.S. multiplexes equippedwith such digital 3D systems. In 2008, the Company introduced its proprietary digitally-based projector which is capable of 2D and 3D presentations on largescreens and which comprises the majority of its current (and, the Company expects, future) theater system sales. For the films released to both IMAX 3Dtheaters and conventional 3D theaters, the IMAX theaters have significantly outperformed the conventional theaters on a per-screen revenue basis. Over the lastseveral years, a number of commercial exhibitors have introduced their own large screen branded theaters. IMAX theaters in the same markets havecontinually outperformed these theaters as well. In addition, the Company has historically competed with manufacturers of large-format film projectors. TheCompany believes that all of these alternative film formats deliver images and experiences that are inferior to The IMAX Experience. The Company may also face competition in the future from companies in the entertainment industry with new technologies and/or substantially greatercapital resources to develop and support them. The Company also faces in-home competition from a number of alternative motion picture distributionchannels such as home video, pay-per-view, video-on-demand, DVD, Internet and syndicated and broadcast television. The Company further competes for thepublic’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater and restaurants. The Company believes that its competitive strengths include the value of the IMAX brand name, the design, quality and historic reliability rate of IMAXtheater systems, the return on investment of an IMAX theater, the number and quality of IMAX films that it distributes, the quality of the sound systemcomponents included with the IMAX theater, the availability of Hollywood event films to IMAX theaters through IMAX DMR technology, consumer loyaltyand the level of the Company’s service and maintenance and extended warranty efforts. The Company believes that all of the best performing premium theatersin the world are IMAX theaters.THE IMAX BRAND The world-famous IMAX brand stands for the highest-quality, most immersive motion picture entertainment. Consumer research conducted for theCompany in the U.S. by a third-party research firm shows that the IMAX brand is known for cutting-edge technology and an experience that immersesaudiences in the movie. The research also shows that the brand inspires strong consumer loyalty and that consumers place a premium on it, often willing totravel significantly farther and pay more for The IMAX Experience than for a conventional movie. The Company believes that its significant brand loyaltyamong consumers provides it with a strong, sustainable position in the exhibition industry. Recognition of the IMAX brand name cuts across geographic anddemographic boundaries. To date, IMAX DMR films have significantly outperformed other formats on a per screen basis. As the IMAX theater network and film slate grow, so does the visibility of the IMAX brand. In recent years, IMAX has built on its heritage of immersive,high-quality educational movies presented in prestigious institutions and destination centers by increasingly expanding its network into commercialmultiplexes. With a growing number of IMAX theaters based in commercial multiplexes and with a recent history of commercially successful films such as:Avatar: An IMAX 3D Experience, Alice in Wonderland, Inception: The IMAX Experience, The Dark Knight: The IMAX Experience, Transformers:Revenge of the Fallen: The IMAX Experience, Beowulf: An IMAX 3D Experience, 300: The IMAX Experience, Spider-Man 3: The IMAX Experience,Superman Returns: An IMAX 3D Experience and the Harry Potter series, the Company continues to increase its presence in commercial settings. TheCompany believes the strength of the IMAX brand is an asset that has helped to establish the IMAX theater network as a unique and desirable release windowfor Hollywood movies.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 3D. The Company plans to continue to fundresearch and development activity in areas considered important to the Company’s continued commercial success, including further improving the reliabilityof its projectors, enhancing the Company’s 2D and 3D13Table of Contentsimage quality, developing IMAX theater systems’ capabilities in live entertainment, developing its portable theater initiative, and further enhancing the IMAXtheater and sound system design. The motion picture industry has been and will continue to be affected by the development of digital technologies, particularly in the areas of content creation(image capture), post-production, digital re-mastering (such as IMAX DMR), distribution and display (projection). As such, the Company has madesignificant investments in digital technologies, including the development of a proprietary technology to digitally enhance image resolution and quality ofmotion picture films, the conversion of monoscopic (2D) to stereoscopic (3D) images and the creation of an IMAX digital projector. Accordingly, the Companyholds a number of patents, patents pending and other intellectual property rights in these areas. In addition, the Company holds numerous digital patents andrelationships with key manufacturers and suppliers in digital technology. In July 2008, the Company introduced its proprietary, digitally-based projectorwhich operates without the need for analog film prints. In 2009, the Company developed its first digital 3D camera, the prototype of which was used to filmportions of Born to be Wild 3D: An IMAX 3D Experience, which is scheduled for release to theaters in April 2011. In 2010, the Company introduced IMAX nXos, a patent-pending technology designed to tune and automatically monitor IMAX audio systems. The newtechnology applies the equivalent of thousands of bands of equalization to perform a highly detailed tuning of the IMAX audio system. The IMAX nXosCalibrator is designed to significantly exceed the capability of manual equalization processes. IMAX’s audio systems feature proprietary loudspeakertechnology and uncompressed digital sound, with much greater dynamic range than conventional systems. The system is designed to provide a moreimmersive audio environment. The IMAX nXos Calibrator works to ensure that the audience is provided an optimum audio experience in the IMAX theater. InSeptember 2010, the Company made a $1.5 million preferred share investment in Laser Light Engines, Inc. (“LLE”), a developer and manufacturer of laser-driven light sources. The Company also entered into a development agreement with LLE to develop a custom laser engine for use in the IMAX digital projectionsystem. The purpose for the laser engine is to enable the Company to achieve sufficient brightness in its digital projection system to enable digital projection onthe Company’s largest screens. The Company’s participation in 3net, operated by a Limited Liability Corporation owned by the Company, Discovery Communications and SonyCorporation that premiered on February 13, 2011, is an example of its strategic entry into the field of in-home entertainment technology. The Company hasdeployed its proprietary expertise in image technology and 3D technology to help set broadcast and presentation standards for the new channel. The Companyexpects to continue to deploy its proprietary expertise in image technology and 3D technology, as well as the IMAX brand, for further applications in in-homeentertainment technology. For the years ended 2010, 2009, and 2008, the Company recorded research and development expenses of $6.2 million, $3.8 million and $7.5 million,respectively. Over the past three years, the Company has invested significantly in research and development relating to the development, introduction andenhancement of its IMAX digital projector system. As at December 31, 2010, 37 of the Company’s employees were connected with research and developmentprojects.MANUFACTURING AND SERVICE Projector Component Manufacturing The Company assembles the projector of its theater systems at its Corporate Headquarters and Technology Center in Mississauga, Ontario, Canada (nearToronto). A majority of the parts and sub-assemblies for this component are purchased from outside vendors. The Company develops and designs all of thekey elements for the proprietary technology involved in this component. Fabrication of parts and sub-assemblies is subcontracted to a group of carefully pre-qualified suppliers. Manufacture and supply contracts are signed for the delivery of the component on an order-by-order basis. The Company has developedlong-term relationships with a number of significant suppliers, and the Company believes its existing suppliers will continue to supply quality products inquantities sufficient to satisfy its needs. The Company inspects all parts and sub-assemblies, completes the final assembly and then subjects the projector tocomprehensive testing individually and as a system prior to shipment. In 2010, these projectors, including the Company’s digital projection system, hadreliability rates based on scheduled shows of approximately 99.8%. Sound System Component Manufacturing The Company develops, designs and assembles the key elements of its theater sound system component. The standard IMAX theater sound systemcomponent comprises parts from a variety of sources, with approximately 50% of the materials of each sound system attributable to proprietary partsprovided under original equipment manufacturers agreements with outside vendors. These proprietary parts include custom loudspeaker enclosures andhorns, specialized amplifiers, and signal processing and control14Table of Contentsequipment. The Company inspects all parts and sub-assemblies, completes the final assembly and then subjects the sound system component tocomprehensive 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 ofa projection screen manufactured to IMAX specifications and a frame to hang the projection screen. The proprietary glasses cleaning machine is a stand-aloneunit 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 separatefee, although the Company often includes free service in the initial year of an arrangement. The maintenance and extended warranty arrangements includeservice, 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 emergencymaintenance and extended warranty services on existing theater systems. The Company provides various levels of maintenance and warranty services, whichare 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 electto participate in a service partnership program whereby the Company trains a customer’s technician to carry out certain aspects of maintenance. Under suchshared maintenance arrangements, the Company participates in certain of the customer’s maintenance checks each year, provides a specified number ofemergency visits and provides spare parts, as necessary. For digital systems, the Company provides pre-emptive maintenance through minor bug fixes, andalso provides remote system monitoring and a network operations centre that provides continuous access to product experts.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 orapplications filed throughout the world, most significantly in the United States, Canada, Belgium, Japan, France, Germany and the United Kingdom. Thesubject matter covered by these patents, applications and other licenses encompasses theater design and geometry, electronic circuitry and mechanismsemployed in projectors and projection equipment (including 3D projection equipment), a method for synchronizing digital data, a method of generatingstereoscopic (3D) imaging data from a monoscopic (2D) source, a process for digitally re-mastering 35mm films into large-format, a method for increasing thedynamic range and contrast of projectors, a method for visibly seaming or superimposing images from multiple projectors and other inventions relating todigital projectors. The Company has been and will continue to be diligent in the protection of its proprietary interests. The Company currently holds or licenses 39 patents, has 16 patents pending in the United States and has corresponding patents or filed applications inmany countries throughout the world. While the Company considers its patents to be important to the overall conduct of its business, it does not consider anyparticular patent essential to its operations. Certain of the Company’s patents in the United States, Canada and Japan for improvements to the IMAXprojection system components expire between 2016 and 2024. The Company owns or otherwise has rights to trademarks and trade names used in conjunction with the sale of its products, systems and services. Thefollowing trademarks are considered significant in terms of the current and contemplated operations of the Company: IMAX®, Experience It In IMAX®, TheIMAX Experience®, An IMAX Experience®, An IMAX 3D Experience®, IMAX DMR®, IMAX® 3D, IMAX® Dome, IMAX MPX®, IMAX think big® andthink big®. These trademarks are widely protected by registration or common law throughout the world. The Company also owns the service mark IMAXTHEATREtm.EMPLOYEES The Company had 361 employees as at December 31, 2010 compared to 325 employees as at December 31, 2009. Both employee counts exclude hourlyemployees at the Company’s owned and operated theaters.15Table of ContentsAVAILABLE 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 assoon as reasonably practicable after such filings have been made with the United States Securities and Exchange Commission (the “SEC”). Reports may beobtained through the Company’s website at www.imax.com or by calling the Company’s Investor Relations Department at 212-821-0100.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.RISKS RELATED TO THE COMPANY’S FINANCIAL PERFORMANCE OR CONDITION The Company depends principally on commercial movie exhibitors to purchase or lease IMAX theater systems, to supply box office revenueunder joint revenue sharing arrangements and under its sales and sales-type lease agreements and to supply venues in which to exhibit IMAXDMR films and 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, who represent 95% of the 224 systems in the Company’s backlog as atDecember 31, 2010. The Company is unable to predict if, or when, they or other exhibitors will purchase or lease IMAX theater systems or enter into jointrevenue sharing arrangements with the Company, or whether any of the Company’s existing customers will continue to do any of the foregoing. If exhibitorschoose to reduce their levels of expansion or decide not to purchase or lease IMAX theater systems or enter into joint revenue sharing arrangements with theCompany, the Company’s revenues would not increase at an anticipated rate and motion picture studios may be less willing to reformat their films into theCompany’s format for exhibition in commercial IMAX theaters. As a result, the Company’s future revenues and cash flows could be adversely affected. The success of the IMAX theater network is directly related to the availability and success of IMAX DMR films for which there can be noguarantee. An important factor affecting the growth and success of the IMAX theater network is the availability of films for IMAX theaters and the box office successof such films. The Company produces only a small number of such films and, as a result, the Company relies principally on films produced by third partyfilmmakers and studios, particularly Hollywood features converted into the Company’s large format using the Company’s IMAX DMR technology. TheCompany’s first IMAX DMR film, Apollo 13: The IMAX Experience, was released to 48 IMAX theaters, and the Company’s most recent IMAX DMR filmat December 31, 2010, Tron: Legacy: An IMAX 3D Experience, was released to 366 IMAX theaters. There is no guarantee that filmmakers and studios willcontinue to release IMAX films, or that the films they produce will be commercially successful. The steady flow and successful box office performance ofIMAX DMR releases have become increasingly important to the Company’s financial performance as the number of joint revenue sharing arrangementsincluded in the overall IMAX network has grown considerably. Not only is the Company increasingly directly impacted by box-office results for the filmsreleased to the IMAX network through its joint revenue sharing arrangements, as well as a percentage of the box-office receipts from the studios releasing IMAXDMR films, but the Company’s continued ability to sell and lease IMAX theater systems also depends on the number and commercial success of filmsreleased 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 and the success of the marketing efforts of the studio releasing the film. 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 andIMAX original films released to the IMAX theater network. The introduction of new 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 NationalAssociation of Theater Owners, as at December 31, 2010, there were approximately 8,000 conventional-sized screens in U.S. multiplexes equipped with digital3D systems. In addition, some commercial exhibitors have recently introduced or announced an intention to introduce their own large-screen 3D auditoriums.The Company may also face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capitalresources to develop and support them. If the Company is unable to continue to remain a premium movie-going experience, or if other technologies surpass16Table of Contentsthose of the Company, the Company may be unable to continue to produce theater systems which are premium to, or differentiated from, other theatersystems. If the Company is unable to produce a premium theater experience, consumers may be unwilling to pay the price premiums associated with the costof IMAX movie theater tickets and box office performance of IMAX films may decline. Declining box office performance of IMAX films would materially andadversely harm the Company’s business and prospects. The Company also faces in-home competition from a number of alternative motion picturedistribution channels such as home video, pay-per-view, video-on-demand, DVD, Internet and syndicated and broadcast television. The Company furthercompetes for the public’s leisure time and disposable income with other forms of entertainment, including gaming, sporting events, concerts, live theater andrestaurants. The Company is undertaking new lines of business and these new business initiatives may not be successful. The Company is actively exploring new areas of brand extension as well as opportunities in alternative theater content. These initiatives represent new areasof growth for the Company, which may not prove to be successful. Some of these initiatives could include the offering of new products and services that maynot be accepted by the market. For instance, the Company cannot provide assurance that 3net, a 3D television channel operated by a Limited LiabilityCorporation owned by the Company, Discovery Communications and Sony Corporation which debuted on February 13, 2011, will be a commercial success.Some areas of potential growth, including 3net, are in the field of in-home entertainment technology, which is an intensively competitive business and which isdependent on consumer demand, over which the Company has no control. If any new business in which the Company invests or attempts to develop does notprogress as planned, the Company may be adversely affected by investment expenses that have not led to the anticipated results, by the distraction ofmanagement 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 structurefor each such business alliance, there is a possibility that the Company may have disagreements with its relevant partner in a joint venture or business withrespect to financing, technological management, product development, management strategies or otherwise. Any such disagreement may cause the joint ventureor business alliance to be terminated. The Company may not be able to adequately protect its intellectual property, and competitors could misappropriate its technology, which couldweaken its competitive position. The Company depends on its proprietary knowledge regarding IMAX theater systems and digital and film technology. The Company relies principallyupon a combination of copyright, trademark, patent and trade secret laws, restrictions on disclosures and contractual provisions to protect its proprietary andintellectual property rights. These laws and procedures may not be adequate to prevent unauthorized parties from attempting to copy or otherwise obtain theCompany’s processes and technology or deter others from developing similar processes or technology, which could weaken the Company’s competitiveposition and require the Company to incur costs to secure enforcement of its intellectual property rights. The protection provided to the Company’s proprietarytechnology by the laws of foreign jurisdictions may not protect it as fully as the laws of Canada or the United States. Finally, some of the underlyingtechnologies of the Company’s products and system components are not covered by patents or patent applications. The Company has patents issued and patent applications pending, including those covering its digital projector and digital conversion technology. TheCompany’s patents are filed in the United States, often with corresponding patents or filed applications in other jurisdictions, such as Canada, 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 anycompetitive advantages. The patent applications may also be challenged by third parties. Several of the Company’s issued patents in the United States,Canada and Japan for improvements to IMAX projectors, IMAX 3D Dome and sound system components expire between 2016 and 2024. Any claims orlitigation initiated by the Company to protect its proprietary technology could be time consuming, costly and divert the attention of its technical andmanagement resources. Current economic conditions beyond the Company’s control could materially affect the Company’s business by reducing both revenuegenerated from existing IMAX theater systems and the demand for new IMAX theater systems. The macro-economic outlook for 2011 remains negative in many markets and the U.S. and global economies could remain significantly challenged for anindeterminate period of time. While historically the movie industry has proved to be somewhat resistant to economic downturns, present economic conditions,which are beyond the Company’s control, could lead to a decrease in discretionary consumer spending. It is difficult to predict the severity and the duration ofany decrease in discretionary consumer spending resulting from the economic downturn and what affect it may have on the movie industry, in general, andbox office results of the Company’s films in particular. In recent years, the majority of the Company’s revenue has been directly derived from the box-17Table of Contentsoffice revenues of its films. Accordingly, any decline in attendance at commercial IMAX theaters could materially and adversely affect several sources of keyrevenue 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 movieexhibitors generate revenues from consumer attendance at their theaters, which depends on the willingness of consumers to spend discretionary income atmovie theaters. While in the past, the movie industry has proven to be somewhat resistant to economic downturns, in the event of declining box office andconcession revenues, commercial exhibitors may be less willing to invest capital in new IMAX theaters. In addition, as a result of continuing tight creditconditions that may limit exhibitors’ access to capital, exhibitors may be unable to invest capital in new IMAX theaters. A decline in demand for new IMAXtheater systems could materially and adversely affect the Company’s results of operations. The issuance of the Company’s common shares and the accumulation of shares by certain shareholders could result in the loss of theCompany’s ability to use certain of the Company’s net operating losses. As at December 31, 2010, the Company had approximately $21.7 million of U.S. consolidated federal tax and state tax net operating loss carryforwards.Realization of some or all of the benefit from these U.S. net tax operating losses is dependent on the absence of certain “ownership changes” of the Company’scommon shares. An “ownership change,” as defined in the applicable federal income tax rules, would place possible limitations, on an annual basis, on theuse of such net operating losses to offset any future taxable income that the Company may generate. Such limitations, in conjunction with the net operatingloss expiration provisions, could significantly reduce or effectively eliminate the Company’s ability to use its U.S. net operating losses to offset any futuretaxable income. 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 revenuesharing arrangements. Exhibitors or other operators may experience financial difficulties that could cause them to be unable to fulfill their contractual paymentobligations 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, 2010, the Company’s sales backlog included 224 theater systems, consisting of arrangements for 165 sales and lease systems and 59theater systems under joint revenue sharing arrangements. The Company lists signed contracts for theater systems for which revenue has not been recognizedas 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 thatare expected to be recognized as revenue in the future (other than those under joint revenue sharing arrangements) and includes initial fees along with the presentvalue 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 thefuture and maintenance and extended warranty fees. Notwithstanding the legal obligation to do so, not all of the Company’s customers with which it hassigned contracts may accept delivery of theater systems that are included in the Company’s backlog. This could adversely affect the Company’s futurerevenues and cash flows. In addition, customers with theater system obligations in backlog sometimes request that the Company agree to modify or reducesuch obligations, which the Company has agreed to in the past under certain circumstances. Customer requested delays in the installation of theater systemsin backlog remain a recurring and unpredictable part of the Company’s business. The Company conducts business internationally, which exposes it to uncertainties and risks that could negatively affect its operations andsales. A significant portion of the Company’s revenues are generated by customers located outside the United States and Canada. Approximately 30%, 35% and32% of its revenues were derived outside of the United States and Canada in 2010, 2009 and 2008, respectively. As at December 31, 2010, approximately66.1% of IMAX theater systems arrangements in backlog are scheduled to be installed in international markets. Accordingly, the Company expects to expandits international operations to account for an increasingly significant portion of its revenues in the future and plans to expand into new markets in the future.The Company does not have significant experience in operating in certain foreign countries and is subject to the risks associated with doing business in thosecountries. The Company currently has theater system installations projected in countries where economies have been unstable in recent years. In addition, theCompany anticipates expanding into new markets in which the Company has no operational experience. The economies of other foreign countries important tothe Company’s operations could also suffer slower economic growth or18Table of Contentsinstability in the future. The following are among the risks that could negatively affect the Company’s operations and sales in foreign markets: • 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; • adverse changes in monetary and/or tax policies; • poor recognition of intellectual property 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. As the Company begins to expand the number of its theaters under joint revenue sharing arrangements in international markets, the Company’s revenuesfrom its international operations will become increasingly dependent on the box office performance of its films. The Company may be unable to select filmswhich will be successful in international markets. Also, conflicts in international release schedules may make it difficult to release every IMAX film in certainmarkets. Finally, box office reporting in certain countries may be less accurate and therefore less reliable than in the United States and Canada. The Company faces risks in connection with the continued expansion of its business in Greater China and other parts of Asia. The first IMAX theater system in a theater in Greater China was installed in December 2001. As at December 31, 2010, the Company had 40 theatersoperating in Greater China with an additional 56 theaters in backlog that are scheduled to be installed in Greater China by 2015, and the Company plans tofurther expand its business in the Greater China region. However, the geopolitical instability of the region comprising Greater China, North Korea and SouthKorea could result in economic embargoes, disruptions in shipping or even military hostilities, which could interfere with both the fulfillment of theCompany’s existing contracts and its pursuit of additional contracts in Greater China. Also, if the Company is unable to navigate Greater China’s heavily-regulated film and cinema business, the Company’s growth prospects in Greater China may be hampered. 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 generally provides financing to customersfor theater systems on a long-term basis through long-term leases or notes receivables. The terms of leases or notes receivable are typically 10 to 20 years. TheCompany’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 amountper annum and a percentage of box-office receipts; and19Table of Contents • ongoing annual maintenance and extended warranty fees, which are generally payable commencing in the second year of theater operations. Initial fees generally make up a majority of cash received 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 underthe 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, initialfees 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 reportedby 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 cashposition. Revenues include the present value of future contracted cash payments and there is no guarantee that the Company will receive such payments underits lease and sale agreements if its customers default on their payment obligations. The Company’s operating results and cash flow can vary substantially from quarter to quarter and could increase the volatility of its shareprice. The Company’s operating results and cash flow can fluctuate substantially from quarter to quarter. In particular, fluctuations in theater systeminstallations can materially affect operating results. Factors that have affected the Company’s operating results and cash flow in the past, and are likely toaffect its operating results and cash flow in the future, include, among other things: • the timing of signing and installation of new theater systems; • 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 timing and commercial success of films produced and distributed by the Company and others; • 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; • 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 • 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 anyunexpected sales shortfall, which would harm quarterly operating results, although the results of any quarterly period are not necessarily indicative of itsresults for any other quarter or for a full fiscal year. The Company’s revenues from existing customers are derived in part from financial reporting provided by its customers, which may beinaccurate or incomplete, resulting in lost or delayed revenues.20Table of Contents The Company’s revenue under its joint revenue sharing arrangements, a portion of the Company’s payments under lease or sales arrangements and its filmlicense fees are based upon financial reporting provided by its customers. If such reporting is inaccurate, incomplete or withheld, the Company’s ability toreceive 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 notrectify payments lost or delayed as a result of customers not fulfilling their contractual obligations with respect to financial reporting. The Company’s stock price has historically been volatile and declines in market price, including as a result a market downturn, may negativelyaffect its ability to raise capital, issue debt, secure customer business and retain employees. The Company’s publicly traded shares have in the past experienced, and may continue to experience, significant price and volume fluctuations. Thismarket volatility could reduce the market price of its common stock, regardless of the Company’s operating performance. A decline in the capital marketsgenerally, or an adjustment in the market price or trading volumes of the Company’s publicly traded securities, may negatively affect its ability to raisecapital, issue debt, secure customer business or retain employees. These factors, as well as general economic and geopolitical conditions, may have a materialadverse 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 andfinancial flexibility. The credit agreement governing the Company’s senior secured credit facility contains certain restrictive covenants that, among other things, limit its abilityto: • 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 inthe Company’s long-term best interests. 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 Canadiandollars. The Company also generates revenues in Euros and Japanese Yen. While the Company periodically enters into forward contracts to hedge its exposureto exchange rate fluctuations between the U.S. and the Canadian dollar, the Company may not be successful in reducing its exposure to these fluctuations. Theuse of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminatevolatility.21Table of Contents 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 filmassets 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 totalrevenues ultimately expected to be received for that title. Management regularly reviews, and revises when necessary, its estimates of ultimate revenues on atitle-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 ofoperations in future years include the amortization of the Company’s film assets and may be significantly affected by periodic adjustments in amortizationrates. The Company is subject to impairment losses on its inventories. The Company records provisions for excess and obsolete inventory based upon current estimates of future events and conditions, including the anticipatedinstallation dates for the current backlog of theater system contracts, technological developments, signings in negotiation and anticipated market acceptance ofthe Company’s current and pending theater systems. Since the Company introduced a proprietary digitally-based IMAX projection system, increasedcustomer acceptance and preference for the Company’s digital projection system may subject existing film-based inventories to further write-downs (resultingin lower margins) as these theater systems become less desirable in the future. 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 orchanges in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually or when events orchanges in circumstances indicate an impairment test is required. Factors that may be considered a change in circumstances include (but are not limited to) adecline in stock price and market capitalization, declines in future cash flows, and slower growth rates in the Company’s industry. The Company may berequired 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 isdetermined. 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, accounting for income taxes, and treatment of goodwill or long lived assets, are highlycomplex and involve many subjective judgments. Changes in these rules, their interpretation, management’s estimates, or changes in the Company’s productsor business could significantly change its reported future earnings and operating income and could add significant volatility to those measures, without acomparable 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 businessstrategy. The Company’s operations and prospects depend in large part on the performance and continued service of its senior management team. The Companymay 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 theCompany’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 uponU.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 itsassets 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 servicewithin 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 UnitedStates 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 difficultfor 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.22Table of ContentsRISKS RELATED TO THE COMPANY’S PRIOR RESTATEMENTS AND RELATED MATTERS The Company is subject to ongoing informal inquiries and a formal investigation by regulatory authorities in the U.S. and Canada, and itcannot predict the timing of developments and outcomes in these matters. The Company is the subject of a formal investigation by the Securities and Exchange Commission (the “SEC”) and an informal inquiry by the OntarioSecurities Commission (the “OSC”) which relate to the Company’s accounting policies and related matters. The Company cannot predict when theinvestigation and inquiry will be completed or the further timing of any other developments in connection with the inquiries. The Company also cannot predicttheir results or outcomes. Expenses incurred in connection with these informal inquiries (which include substantial fees for lawyers and other professional advisors) continue toadversely affect the Company’s cash position and profitability. The Company may also have potential obligations to indemnify officers and directors whocould, at a future date, be parties to such inquiries. The formal investigation and the informal inquiry may adversely affect the course of the pending litigation against the Company. The Company iscurrently defending a consolidated class-action lawsuit in the U.S. and a class-action lawsuit in Ontario (see Item 3. Legal Proceedings). Negative developmentsor outcomes in the formal investigation or the informal inquiries could have an adverse effect on the Company’s defense of lawsuits. Also, the SEC and/orOSC could impose sanctions and/or fines on the Company in connection with the aforementioned investigation and inquiry. Finally, this investigation andinquiry could divert the attention of the Company’s management and other personnel for significant periods of time. The Company is subject to lawsuits that could divert its resources and result in the payment of significant damages and other remedies. The Company’s industry is characterized by frequent claims and related litigation regarding breach of contract and related issues. The Company is subjectto a number of legal proceedings and claims that arise in the ordinary course of its business. In addition, the Company is engaged as a defendant in severalclass action lawsuits filed by certain shareholders of the Company. The Company cannot assure that it will succeed in defending any claims, that judgmentswill not be entered against it with respect to any litigation or that reserves the Company may set aside will be adequate to cover any such judgments. If any ofthese actions or proceedings against the Company is successful, it may be subject to significant damages awards. In addition, the Company is the plaintiff ina number of lawsuits in which it seeks the recovery of substantial payments. The Company is incurring legal fees in prosecuting and defending its lawsuits,and it may not ultimately prevail in such lawsuits or be able to collect on such judgments if it does. Although the Company’s directors and officers liability insurance provides coverage for the class-action, the defense of these claims (as with the defense orprosecution of all of the Company’s litigation) could divert the attention of the Company’s management and other personnel for significant periods of time. The Company has been the subject of anti-trust complaints and investigations in the past and may be sued or investigated on similar grounds in the future. The outcome of informal inquiries and a formal investigation by regulatory authorities in the U.S. and Canada may affect the Company’sbusiness and the market price of its publicly traded common shares. The Company has been the subject of continuing negative publicity in part as a result of the ongoing SEC investigation and OSC inquiry and its priordelay in filing financial statements and restatements of prior results. Continuing negative publicity could have an adverse effect on the Company’s businessand the market price of the Company’s publicly traded securities.Item 1B. Unresolved Staff Comments None.Item 2. Properties The Company’s principal executive offices are located in Mississauga, Ontario, Canada, New York, New York, and Santa Monica, California. TheCompany’s principal facilities are as follows:23Table of Contents Operation Own/Lease ExpirationMississauga, Ontario(1) Headquarters, Administrative, Assembly and Research and Development Own N/ANew York, New York Executive Lease 2014Santa Monica, California Sales, Marketing, Film Production and Post-Production Lease 2013Shanghai, China Sales, Marketing and Maintenance Lease 2012London, United Kingdom Sales, Marketing and Maintenance Lease 2011Tokyo, Japan Sales, Marketing and Maintenance Lease 2011 (1) This facility is subject to a charge in favor of Wells Fargo Capital Finance Corporation Canada (formerly Wachovia Capital Finance Corporation(Canada)) in connection with a secured term and revolving credit facility (see note 12 to the accompanying audited consolidated financial statements inItem 8).Item 3. Legal Proceedings In March 2005, the Company, together with Three-Dimensional Media Group, Ltd. (“3DMG”), filed a complaint in the U.S. District Court for the CentralDistrict of California, Western Division, against In-Three, Inc. (“In-Three”) alleging patent infringement. On March 10, 2006, the Company and In-Threeentered into a settlement agreement settling the dispute between the Company and In-Three. Despite the settlement reached between the Company and In-Three,co-plaintiff 3DMG refused to dismiss its claims against In-Three. Accordingly, the Company and In-Three moved jointly for a motion to dismiss theCompany’s and In-Three’s claims. On August 24, 2010, the Court dismissed all of the claims pending between the Company and In-Three, thus dismissingthe Company from the litigation. On May 15, 2006, the Company initiated arbitration against 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 breachesand asserting counterclaims that the Company breached the parties’ license agreement. On June 21, 2007, the Arbitration Panel unanimously denied 3DMG’sMotion for Summary Judgment filed on April 11, 2007 concerning the Company’s claims and 3DMG’s counterclaims. The proceeding was suspended onMay 4, 2009 due to failure of 3DMG to pay fees associated with the proceeding. The proceeding was further suspended on October 11, 2010 pendingresolution of reexamination proceedings currently pending involving one of 3DMG’s patents. The Company will continue to pursue its claims vigorously andbelieves that all allegations made by 3DMG are without merit. The Company further believes that the amount of loss, if any, suffered in connection with thecounterclaims would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given withrespect 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 theInternational Court of Arbitration of the International Chambers of Commerce (the “ICC”) with respect to the breach by Electronic Media Limited (“EML”) ofits December 2000 agreement with the Company. In June 2004, the Company commenced a related arbitration before the ICC against EML’s affiliate, E-CITIEntertainment (I) PVT Limited (“E-Citi”), seeking damages as a result of E-Citi’s breach of a September 2000 lease agreement. An arbitration hearing tookplace in November 2005 against E-Citi which considered all claims by the Company. On February 1, 2006, the ICC issued an award on liability findingunanimously in the Company’s favor on all claims. Further hearings took place in July 2006 and December 2006. On August 24, 2007, the ICC issued anaward unanimously in favor of the Company in the amount of $9.4 million, consisting of past and future rents owed to the Company under its leaseagreements, plus interest and costs. In the award, the ICC upheld the validity and enforceability of the Company’s theater system contract. The Companythereafter submitted its application to the arbitration panel for interest and costs. On March 27, 2008, the Panel issued a final award in favor of the Companyin the amount of $11,309,496, plus an additional $2,512 each day in interest from October 1, 2007 until the date the award is paid, which the Company isseeking to enforce and collect in full. In June 2004, Robots of Mars, Inc. (“Robots”) initiated an arbitration proceeding against the Company in California with the American ArbitrationAssociation pursuant to arbitration provisions in two film production agreements between Robots’ predecessor-in-interest and a subsidiary of the Company(Ridefilm), asserting claims for breach of contract, fraud, breach of fiduciary duty and intentional interference with the contract. Robots is seeking an awardof contingent compensation that it claims is owed under two production agreements, damages for tort claims, and punitive damages. The arbitration hearing ofthis matter occurred in June and October 2009. The parties are currently awaiting a final award from the arbitrator. The Company believes the amount of loss,if any, that may be suffered in connection with this proceeding, will not have a material impact on the financial position or results of operations of theCompany, although no assurance can be given with respect to the ultimate outcome of such arbitration. The Company and certain of its officers and directors were named as defendants in eight purported class action lawsuits filed between August 11, 2006and September 18, 2006, alleging violations of U.S. federal securities laws. These eight actions were filed in24Table of Contentsthe U.S. District Court for the Southern District of New York. On January 18, 2007, the Court consolidated all eight class action lawsuits and appointedWestchester Capital Management, Inc. as the lead plaintiff and Abbey Spanier Rodd & Abrams, LLP as lead plaintiff’s counsel. On October 2, 2007,plaintiffs filed a consolidated amended class action complaint. The amended complaint, brought on behalf of shareholders who purchased the Company’scommon stock between February 27, 2003 and July 20, 2007, alleges primarily that the defendants engaged in securities fraud by disseminating materiallyfalse and misleading statements during the class period regarding the Company’s revenue recognition of theater system installations, and failing to disclosematerial information concerning the Company’s revenue recognition practices. The amended complaint also added PricewaterhouseCoopers LLP, theCompany’s auditors, as a defendant. The lawsuit seeks unspecified compensatory damages, costs, and expenses. The defendants filed a motion to dismissthe amended complaint on December 10, 2007. On September 16, 2008, the Court issued a memorandum opinion and order, denying the motion. OnOctober 6, 2008, the defendants filed an answer to the amended complaint. On October 31, 2008, the plaintiffs filed a motion for class certification. Factdiscovery on the merits commenced on November 14, 2008. On March 13, 2009, the Court granted a second prospective lead plaintiff’s request to file amotion for reconsideration of the Court’s order naming Westchester Capital Management, Inc. as the lead plaintiff and issued an order denying withoutprejudice plaintiff’s class certification motion pending resolution of the motion for reconsideration. On June 29, 2009, the Court granted the motion forreconsideration and appointed Snow Capital Investment Partners, L.P. as the lead plaintiff and Coughlin Stoia Geller Rudman & Robbins LLP as leadplaintiff’s counsel. Westchester Capital Management, Inc. appealed this decision, but the U.S. Court of Appeals for the Second Circuit denied its petition onOctober 1, 2009. On April 22, 2010, the new lead plaintiff filed its motion for class certification, defendants filed their oppositions to the motion on June 10,2010, and plaintiff filed its reply on July 30, 2010. On December 20, 2010, the Court denied Snow Capital Investment Partners’ motion and ordered that allapplications to be appointed lead plaintiff must be filed within 20 days of the decision. Two applications for lead plaintiff were filed, on January 10, 2011 andJanuary 12, 2011, respectively. The lawsuit is at an early stage and as a result the Company is not able to estimate a potential loss exposure at this time. TheCompany will vigorously defend the matter, although no assurances can be given with respect to the outcome of such proceedings. The Company’s directorsand officers insurance policy provides for reimbursement of costs and expenses incurred in connection with this lawsuit as well as potential damagesawarded, if any, subject to certain policy limits and deductibles. A class action lawsuit was filed on September 20, 2006 in the Ontario Superior Court of Justice against the Company and certain of its officers anddirectors, alleging violations of Canadian securities laws. This lawsuit was brought on behalf of shareholders who acquired the Company’s securities betweenFebruary 17, 2006 and August 9, 2006. The lawsuit is in an early procedural stage and seeks unspecified compensatory and punitive damages, as well ascosts and expenses. As a result, the Company is unable to estimate a potential loss exposure at this time. For reasons released December 14, 2009, the Courtgranted leave to the Plaintiffs to amend their statement of claim to plead certain claims pursuant to the Securities Act (Ontario) against the Company andcertain individuals and granted certification of the action as a class proceeding. These are procedural decisions, and do not contain any binding conclusionson the factual or legal merits of the claim. The Company has brought a motion seeking Court approval to appeal those decisions and it is not known when theOntario court will release a decision on that motion. The Company believes the allegations made against it in the statement of claim are meritless and willvigorously defend the matter, although no assurance can be given with respect to the ultimate outcome of such proceedings. The Company’s directors andofficers insurance policy provides for reimbursement of costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, ifany, subject to certain policy limits and deductibles. On September 7, 2007, Catalyst Fund Limited Partnership II (“Catalyst”), a holder of the Company’s Senior Notes, commenced an application against theCompany in the Ontario Superior Court of Justice for a declaration of oppression pursuant to sections 229 and 241 of the Canada Business Corporations Act(the “CBCA”) and for a declaration that the Company is in default of the indenture governing its now retired Senior Notes (the “Indenture”). In its applicationagainst the Company, Catalyst challenged the validity of the consent solicitation through which the Company requested and obtained a waiver of any and alldefaults arising from a failure to comply with the reporting covenant under the Indenture and alleged common law fraud. On September 26, 2008, on theCompany’s motion, the Ontario Superior Court stayed Catalyst’s application in Canada on the basis of Catalyst having brought similar claims against theCompany in the State of New York, and ordered Catalyst to pay the Company’s costs associated with the motion. On April 27, 2009, the Supreme Court ofthe State of New York disposed of Catalyst’s claims against the Company in the State of New York (see note 10(g) for additional information). The time forCatalyst to appeal the dismissal of its claim by the New York court expired on February 8, 2010, without Catalyst perfecting an appeal. In a related matter, on December 21, 2007, U.S. Bank National Association, trustee under the Indenture, filed a complaint in the Supreme Court of theState of New York against the Company and Catalyst, requesting a declaration that the theory of default asserted by Catalyst before the Ontario SuperiorCourt of Justice is without merit and further that Catalyst has failed to satisfy certain prerequisites to bondholder action, which are contained in the Indenture(the “U.S. Bank Action”). On February 22, 2008, Catalyst served a Verified Answer to the U.S. Bank Action and filed several cross-claims (the “Cross-Claims”) against the Company in the25Table of Contentssame proceeding. On January 16, 2009, the Company moved for summary judgment, seeking a ruling that the Company satisfied the terms of the declaratoryrelief requested by the Trustee and the dismissal of the Cross-Claims. On April 27, 2009, the Court granted the Company’s motion for summary judgment,disposing of the Cross-Claims. On May 7, 2009, Catalyst filed a notice preserving for a period of nine months its right to appeal the Court’s ruling onsummary judgment. The time for Catalyst to perfect its appeal has now expired. On November 4, 2009, Cinemark USA, Inc. (“Cinemark”) filed a complaint in the United States District Court for the Eastern District of Texas againstthe Company seeking a declaratory judgment that Cinemark is not infringing certain of the Company’s patents related to theater geometry and that suchpatents are invalid. On December 22, 2010, the Company and Cinemark entered into a Settlement Agreement in which they agreed to dismiss the Texas actionwith prejudice. As part of the settlement, the Company and Cinemark also agreed to enter into a purchase agreement pursuant to which Cinemark agreed topurchase two IMAX digital theater systems and to upgrade six of its IMAX film-based theaters to IMAX digital theaters. On January 13, 2011, the Courtgranted the parties’ joint motion to dismiss with prejudice. On November 12, 2009, the Company filed a complaint in the Supreme Court of New York against Cinemark alleging breach of contract, fraud, tortiousinterference with existing and prospective economic relations, breach of the implied warranty of good faith and fair dealing, misappropriation of trade secrets,unjust enrichment and deliberate acts of bad faith in connection with the introduction and operation of a new Cinemark theater prototype. The lawsuit wasremoved to federal court in New York and the tort claims were dismissed without prejudice to the Company’s right to replead those claims. On December 22,2010, the Company and Cinemark entered into a Settlement Agreement in which they agreed to dismiss the New York action with prejudice. As part of thesettlement, the Company and Cinemark also agreed to enter into a purchase agreement pursuant to which Cinemark agreed to purchase two IMAX digitaltheater systems and to upgrade six of its IMAX film-based theaters to IMAX digital theaters. On January 4, 2011, the Company filed a voluntary stipulationof dismissal. The matter is now closed. In November 2009, the Company filed suit against Sanborn Theatres (“Sanborn”) in the United States District Court for the Central District of Californiaalleging breach of Sanborn’s agreement to make payments for the purchase of two IMAX theater systems from the Company and seeking $1.7 million incompensatory damages. After granting Sanborn notice of default in connection with the failure to make required payments under the agreement and uponSanborn’s failure to cure, the Company terminated its agreement with Sanborn. On May 11, 2010, Sanborn filed suit against the Company and AMCEntertainment Inc. (“AMC Entertainment”) and Regal Cinemas, Inc. (“Regal”) in the U.S. District Court for the Central District of California alleging breachof contract, fraud and unfair competition against the Company and alleging intentional interference with contractual relations against AMC Entertainment andRegal. The lawsuits are at early stages and as a result the Company is not able to estimate a potential loss exposure, if any, at this time. The Company willvigorously prosecute its claims and defenses in both matters, although no assurances can be given with respect to the outcome of such proceedings. Since June 2006, the Company has been subject to ongoing informal inquiries by the SEC and the OSC. On or about September 3, 2010, the SEC issueda formal order of investigation in connection with its inquiry. The Company has been cooperating with these inquiries and will continue to cooperate with theSEC’s investigation. The Company believes that the inquiry and investigation principally relate to the timing of recognition of the Company’s theater systeminstallation revenue in 2005 and related matters. Although the Company cannot predict the timing of developments and outcomes in these inquiries, they couldresult at any time in developments (including charges or settlement of charges) that could have material adverse effects on the Company. These effects couldinclude payments of fines or disgorgement or other relief with respect to the Company or its officers or employees that could be material to the Company. Suchdevelopments could also have an adverse effect on the Company’s defense of the class action lawsuits referred to above. In addition to the matters described above, the Company is currently involved in other legal proceedings which, in the opinion of the Company’smanagement, will not materially affect the Company’s financial position or future operating results, although no assurance can be given with respect to theultimate outcome of any such proceedings.Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of the security holders during the quarter ended December 31, 2010.26Table of ContentsPART IIItem 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 New York Stock Exchange (“NYSE”). Prior toFebruary 11, 2011, the Company’s common shares were listed for trading on the NASDAQ Global Select Market (“NASDAQ”). The common shares arealso listed on the Toronto Stock Exchange (“TSX”) under the trading symbol “IMX.” The following table sets forth the range of high and low sales prices pershare for the common shares on NASDAQ and the TSX. U.S. Dollars High LowNASDAQ Year ended December 31, 2010 Fourth quarter $32.30 $16.93 Third quarter $17.25 $12.10 Second quarter $21.30 $14.28 First quarter $18.26 $11.50 Year ended December 31, 2009 Fourth quarter $13.87 $9.00 Third quarter $10.14 $7.14 Second quarter $8.49 $4.28 First quarter $5.49 $3.74 Canadian Dollars High LowTSX Year ended December 31, 2010 Fourth quarter $32.56 $17.20 Third quarter $17.69 $12.78 Second quarter $21.45 $15.02 First quarter $18.56 $12.34 Year ended December 31, 2009 Fourth quarter $14.56 $9.68 Third quarter $10.82 $8.39 Second quarter $9.77 $5.45 First quarter $6.66 $4.89 As at January 31, 2011, the Company had approximately 266 registered holders of record of the Company’s common shares. Within the last three years, the Company has not paid and has no current plans to pay, cash dividends on its common shares. The payment of dividendsby the Company is subject to certain restrictions under the terms of the Company’s indebtedness (see notes 11 and 12 to the accompanying auditedconsolidated financial statements in Item 8 and “Liquidity and Capital Resources” in Item 7). The payment of any future dividends will be determined by theBoard of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions infinancing agreements, business conditions and other factors deemed relevant by the Board of Directors.Equity Compensation PlansThe following table sets forth information regarding the Company’s Equity Compensation Plan as at December 31, 2010:27Table of Contents Number of Securities Remaining Available for Number of Securities to be Future Issuance Under Issued Upon Exercise of Weighted Average Equity Compensation Plans Outstanding Options, Exercise Price of (Excluding Securities Warrants and Rights Outstanding Options Reflected in Column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders 6,743,272 $10.79 6,085,843 Equity compensation plans not approved by security holders nil nil nil Total 6,743,272 $10.79 6,085,843 Performance Graph The following graph compares the total cumulative shareholder return for $100 invested (assumes that all dividends were reinvested) in common shares ofthe Company against the cumulative total return of the NASDAQ Composite Index, the S&P/TSX Composite Index and the Bloomberg Hollywood ReporterIndex on December 31, 2005 to the end of the most recently completed fiscal year.CERTAIN INCOME TAX CONSIDERATIONSUnited 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 commonshares 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 discussiondoes 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 aU.S. Holder as dividend income to the extent that such distributions do not exceed the current and accumulated earnings and profits of the Company (asdetermined for U.S. federal income tax purposes). Subject to certain limitations, under current law dividends paid to non-corporate U.S. Holders in taxableyears beginning before January 1, 2013 may be eligible for a reduced rate of taxation as long as the Company is considered to be a “qualified foreigncorporation”. A qualified foreign28Table of Contentscorporation includes a foreign corporation that is eligible for the benefits of an income tax treaty with the United States. The amount of a distribution thatexceeds the earnings and profits of the Company will be treated first as a non-taxable return of capital to the extent of the U.S. Holder’s tax basis in thecommon shares and thereafter as taxable capital gain. Corporate holders generally will not be allowed a deduction for dividends received in respect ofdistributions on common shares. Subject to the limitations set forth in the U.S. Internal Revenue Code, 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 amountrealized on the sale and such holder’s tax basis in the common shares. Gain or loss upon the disposition of the common shares will be long-term if, at the timeof the disposition, the common shares have been held for more than one year. Long-term capital gains of non-corporate U.S. Holders may be eligible for areduced 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 anyapplicable 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 sharesin, 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 Actand regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and the Company’s understanding of theadministrative and assessing practices published in writing by the Canada Revenue Agency. This summary does not otherwise take into account any changein law or administrative practice, whether by judicial, governmental, legislative or administrative action, nor does it take into account provincial, territorial orforeign income 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 commonshares and no representation with respect to Canadian federal income tax consequences to any holder of common shares is made herein. Accordingly,prospective purchasers and holders of the common shares should consult their own tax advisers with respect to their individual circumstances. Dividends on Common Shares Canadian withholding tax at a rate of 25.0% (subject to reduction under the provisions of any relevant tax treaty) will be payable on dividends paid orcredited to a holder of common shares outside of Canada. Under the Canada — U.S. Income Tax Convention (1980), as amended (the “Canada - U.S. IncomeTax 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 thebeneficial owner of the dividends (or 5.0% if the holder is a corporation that owns at least 10.0% of the common shares). Capital Gains and Losses Subject to the provisions of any relevant tax treaty, capital gains realized by a holder on the disposition or deemed disposition of common shares held ascapital property will not be subject to Canadian tax unless the common shares are taxable Canadian property (as defined in the Income Tax Act (Canada)), inwhich case the capital gains will be subject to Canadian tax at rates which will approximate those payable by a Canadian resident. Common shares generallywill 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 adesignated stock exchange (which currently includes the TSX) unless such holder, persons with whom such holder did not deal at arm’s length or such holdertogether with all such persons, owned 25.0% or more of the issued shares of any class or series of shares of the Company at any time within the 60 monthperiod immediately preceding such time and more than 50% of the fair market value of the common shares was derived directly or indirectly from one or anycombination of (i) real or immovable property situated in Canada, (ii) Canadian resource properties, (iii) timber resource properties, and (iv) options in respectof, 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 setout 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, aholder entitled to the29Table of Contentsbenefits 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 thedisposition or deemed disposition of the common shares unless at the time of disposition or deemed disposition, the value of the common shares is derivedprincipally from real property situated in Canada.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 beenprepared 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) 2010 2009 2008 2007 2006 Statements of Operations Data: Revenue Equipment and product sales $72,578 $57,304 $27,853 $32,500 $49,322 Services 123,911 82,052 61,477 64,972 62,927 Rentals 46,936 25,758 8,207 7,107 5,622 Finance income 4,789 4,235 4,300 4,649 5,242 Other revenues(2) 400 1,862 881 2,427 300 248,614 171,211 102,718 111,655 123,413 Costs and expenses applicable to revenues Equipment and product sales(3)(4) 36,394 29,040 17,182 21,546 26,008 Services(3)(4) 63,425 49,891 40,771 46,254 43,679 Rentals(4) 11,111 10,093 7,043 2,987 1,859 Other 32 635 169 50 — 110,962 89,659 65,165 70,837 71,546 Gross margin 137,652 81,552 37,553 40,818 51,867 Selling, general and administrative expenses(5) 78,428 56,207 43,681 44,716 42,543 Research and development 6,249 3,755 7,461 5,789 3,615 Amortization of intangibles 513 546 526 547 602 Receivable provisions, net of recoveries 1,443 1,067 1,977 1,795 1,066 Restructuring costs and asset impairments(6) 45 180 — 485 1,029 Earnings (loss) from operations 50,974 19,797 (16,092) (12,514) 3,012 Interest income 399 98 381 862 1,036 Interest expense (1,885) (13,845) (17,707) (17,093) (16,759)Loss on repurchase of Senior Notes due December 2010(7) — (579) — — — Earnings (loss) from continuing operations before incometaxes 49,488 5,471 (33,418) (28,745) (12,711)Recovery of (provision for) income taxes(8) 51,784 (274) (92) (472) (6,218)Loss from equity-accounted investments (493) — — — — Net earnings (loss) from continuing operations 100,779 5,197 (33,510) (29,217) (18,929)Net (loss) earnings from discontinued operations(1) — (176) (92) 2,277 2,080 Net earnings (loss) $100,779 $5,021 $(33,602) $(26,940) $(16,849)Earnings (loss) per share: Earnings (loss) per share — basic: Net earnings (loss) from continuing operations $1.59 $0.10 $(0.79) $(0.72) $(0.47)Net earnings from discontinued operations $— $— $— $0.05 $0.05 $1.59 $0.10 $(0.79) $(0.67) $(0.42)Earnings (loss) per share — diluted: Net earnings (loss) from continuing operations $1.51 $0.09 $(0.79) $(0.72) $(0.47)Net earnings from discontinued operations $— $— $— $0.05 $0.05 $1.51 $0.09 $(0.79) $(0.67) $(0.42)30Table of Contents (1) In 2009, the Company closed its owned and operated Vancouver and Tempe IMAX theaters. The net (loss) earnings from the operation of the theaters arereflected as discontinued operations and disclosed in note 23(c) to the accompanying audited consolidated financial statements in Item 8, as there are nocontinuing cash flows from either a migration or a continuation of activities. The remaining assets and liabilities of the owned and operated Vancouverand Tempe IMAX theaters are included in the Company’s consolidated balance sheet as at December 31, 2010 and are disclosed in note 23(d) to theaccompanying audited consolidated financial statements in Item 8. (2) The Company enters into theater system arrangements with customers that typically contain customer payment obligations prior to the scheduledinstallation of the theater systems. The Company’s joint revenue sharing arrangements are not included in these arrangements as the Company receives aportion of a theater’s box-office and concession revenue in exchange for contributing a theater system at theater operators’ venues with no upfrontpayment obligations required. During the period of time between signing and theater system installation, certain customers each year are unable to, orelect not to, proceed with the theater system installation for a number of reasons, including business considerations, or the inability to obtain certainconsents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the customer and/or the Companymay terminate the arrangement by default or by entering into a consensual buyout. In these situations the parties are released from their future obligationsunder the arrangement, and the initial payments that the customer previously made to the Company and recognized as revenue are typically notrefunded. In addition, the Company enters into agreements with customers to terminate their obligations for a theater system configuration and enter intoa new arrangement for a different configuration. Included in Other Revenues for the periods 2006 through 2010 are the following types of settlementarrangements: 2010 2009 2008 2007 2006 Theater system configuration conversions $— $136 $— $— $300 Consensual buyouts 400 1,726 881 2,247 — $400 $1,862 $881 $2,247 $300 (3) In recent years, the Company has recorded a charge to costs and expenses to revenues, primarily for its film-based projector inventories, due to areduction in the net realizable value resulting from the Company development of a digital projection system. Included for the periods 2006 through 2010are the following inventory write-downs: 2010 2009 2008 2007 2006 Equipment and product sales $827 $48 $2,397 $3,284 $1,322 Services 172 849 93 564 — $999 $897 $2,490 $3,848 $1,322 (4) The Company recorded advertising, marketing, and commission costs for the periods 2006 through 2010 as listed below: 2010 2009 2008 2007 2006 Equipment and product sales $1,925 $2,041 $1,035 $810 $1,630 Services 2,793 2,381 1,622 1,755 2,142 Rentals 4,236 3,405 1,788 177 — Advertising, marketing, and commission costs $8,954 $7,827 $4,445 $2,742 $3,772 (5) Includes share-based compensation expense of $26.0 million, $17.5 million, $1.0 million, $2.9 million and $0.6 million for 2010, 2009, 2008, 2007and 2006, respectively. (6) In 2010, the Company recorded asset impairment charges of less than $0.1 million related to the impairment of assets of certain theater operations. Assetimpairment charges amounted to $0.2 million, $nil, $0.5 million and $1.0 million in 2009, 2008, 2007 and 2006, respectively, after the Companyassessed the carrying value of certain assets.31Table of Contents(7) In 2009, the Company repurchased all of its outstanding $160.0 million aggregate principal amount of the Company’s 9.625% Senior Notes. TheCompany paid cash to reacquire its bonds, thereby releasing the Company from further obligations to various holders under the Indenture governing theSenior Notes. The Company accounted for the bond repurchase in accordance with the Debt Topic of the FASB Accounting Standards Codificationwhereby the net carrying amount of the debt extinguished was the face value of the bonds adjusted for any unamortized premium, discount and costs ofissuance, which resulted in a loss of $0.6 million. (8) The recovery for income taxes in the year ended December 31, 2010 includes a net non-cash income tax benefit of $54.8 million related to a decrease inthe valuation allowance for the Company’s deferred tax assets and other tax adjustments. This release of the valuation allowance was recorded after itwas determined that realization of this deferred income tax benefit is now more likely than not based on current and anticipated future earnings trends. In2006, the Company recorded an increase to the deferred tax valuation allowance of $6.2 million based on the Company’s recoverability assessments ofdeferred tax balances carried forward from the prior year. As at December 31, 2006, and continuing through to the third quarter of the current year, theCompany determined that based on the weight of available evidence, positive and negative, a full valuation allowance for the net deferred tax assets wasrequired.BALANCE SHEETS DATA As at December 31,(in thousands of U.S. dollars) 2010 2009 2008 2007 2006Cash, cash equivalents and short-terminvestments $30,390 $20,081 $27,017 $16,901 $27,238 Total assets(1) $349,088 $247,545 $228,667 $207,982 $227,291 Total indebtedness $17,500 $50,000 $180,000 $160,000 $160,000 Total shareholders’ equity (deficiency) $158,458 $45,010 $(96,774) $(85,370) $(58,232) (1) Includes the assets of discontinued operations.32Table of ContentsQUARTERLY STATEMENTS OF OPERATIONS SUPPLEMENTARY DATA (UNAUDITED) 2010 (in thousands of U.S. dollars, except per share amounts) Q1 Q2 Q3 Q4(2) Revenues $72,784 $55,598 $51,069 $69,163 Costs and expenses applicable to revenues 24,484 28,558 25,140 32,780 Gross margin $48,300 $27,040 $25,929 $36,383 Net earnings from continuing operations $26,580 $13,302 $6,736 $54,161 Net earnings from discontinued operations — — — — Net earnings $26,580 $13,302 $6,736 $54,161 Net earnings per share — basic $0.42 $0.21 $0.11 $0.85 Net earnings per share — diluted $0.40 $0.20 $0.10 $0.80 2009 Q1(1) Q2(1) Q3(1) Q4(1) Revenues $33,136 $40,362 $43,476 $54,237 Costs and expenses applicable to revenues 18,928 19,679 24,697 26,355 Gross margin $14,208 $20,683 $18,779 $27,882 Net earnings (loss) from continuing operations $(2,565) $2,723 $1,157 $3,882 Net earnings (loss) from discontinued operations (77) (161) (95) 157 Net earnings (loss) $(2,642) $2,562 $1,062 $4,039 Net earnings (loss) per share — basic $(0.06) $0.06 $0.02 $0.07 Net earnings (loss) per share — diluted $(0.06) $0.05 $0.02 $0.06 (1) The Company reclassified the owned and operated Vancouver and Tempe IMAX theaters’ operations from continuing operations to discontinuedoperations as it does not anticipate having significant future cash flows from these theaters or any involvement in the day to day operations of thesetheaters. As a result, the respective prior period’s figures have been reclassified to conform to the current year’s presentation. (2) Net earnings from continuing operations for the fourth quarter includes a release of the valuation allowance on deferred tax assets of $54.8 million. Seenote 9 to the financial statements for further details.33Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsGENERAL IMAX Corporation, together with its wholly-owned subsidiaries (the “Company”), is one of the world’s leading entertainment technology companies,specializing in motion picture technologies and presentations. The Company’s principal business is the design and manufacture of premium digital and film-based theater systems (“IMAX theater systems”) and the sale or lease of IMAX theater systems or the contribution of IMAX theater systems under revenue-sharing arrangements to its customers. The IMAX theater systems are based on proprietary and patented technology developed over the course of theCompany’s 43-year history. The Company’s customers who purchase, lease or otherwise acquire the IMAX theater systems are theater exhibitors that operatecommercial theaters (particularly multiplexes), museums, science centers, or destination entertainment sites. The Company generally does not own IMAXtheaters, but licenses the use of its trademarks along with the sale, lease or contribution of its equipment. The Company refers to all theaters using the IMAXtheater system as “IMAX theaters.” The Company derives revenue principally from the sale or long-term lease of its theater systems and associated maintenance and extended warrantyservices, the installation of IMAX theater systems under joint revenue sharing arrangements, the provision of film production and digital re-masteringservices, the distribution of certain films, and the provision of post-production services, including the conversion of two-dimensional (“2D”) and three-dimensional (“3D”) Hollywood feature films for exhibition on IMAX theater systems around the world. The Company also derives revenue from the operationof its own theaters, camera rentals and the provision of aftermarket parts for its system components. The Company believes the IMAX theater network is the most extensive premium theater network in the world with 518 theater systems (396 commercial,122 institutional) operating in 46 countries as at December 31, 2010. This compares to 430 theater systems (309 commercial, 121 institutional) operating in 48countries as at December 31, 2009. Important factors that the Company’s Chief Executive Officer (“CEO”) Richard L. Gelfond uses in assessing the Company’s business and prospectsinclude revenue, gross margins from the Company’s operating segments, film performance, earnings from operations as adjusted for unusual items that theCompany views as non-recurring, the signing and financial performance of theater system arrangements (particularly its joint revenue sharing arrangements),the success of strategic initiatives such as the securing of new film projects (particularly IMAX DMR films) and the viability of new businesses, the overallexecution, reliability and consumer acceptance of The IMAX Experience and related technologies and short- and long-term cash flow projections.IMAX Systems, Theater System Maintenance and Joint Revenue Sharing Arrangements The Company provides IMAX theater systems to customers on a sales or long-term lease basis, typically with initial terms of approximately 10 years.These agreements typically provide for three major sources of cash flows: initial fees, ongoing fees (which include a fixed minimum amount per annum andcontingent fees in excess of the minimum payments) and maintenance and extended warranty fees. The initial fees vary depending on the system configurationand location of the theater and generally are paid to the Company in installments commencing upon the signing of the agreement. Finance income is derivedover the term of the sales or sales-type lease arrangement as the unearned income on financed sales or sales-type leases is earned. Ongoing fees are paid monthlyover the term of the contract, commencing after the theater system has been installed and are generally equal to the greater of a fixed minimum amount perannum or a percentage of box-office receipts. Both ongoing fees and maintenance and extended warranty fees are typically indexed to a local consumer priceindex. The revenue earned from customers under the Company’s theater system lease or sales agreements can vary from quarter to quarter and year to year basedon a number of factors including the mix of theater system configurations sold or leased, the timing of installation of the theater systems, the nature of thearrangement and other factors specific to individual contracts, although the typical rent or sales price for its various theater system configurations does notgenerally vary significantly from region to region. The Company has taken steps in recent years to accelerate the growth of the global IMAX theater networkand the sale or lease of its products by developing a lower-cost theater system and a new digitally-based theater system, both designed to appeal to broadercustomer bases, particularly in commercial multiplex markets. Although these theater systems are lower-cost, the Company has endeavored to successfullymaintain its per unit margins on a percentage basis and to maintain the aggregate revenues and gross margins through increased volume. Recently, theCompany has signed a number of deals for digital upgrades to its commercial customers and intends to continue to sell these digital upgrades in the future atlower margins than its traditional deals for strategic reasons.34Table of Contents Revenues on theater system sales and sales-type leases are recognized at different times than when cash is collected. Over the last several years, the Company has entered into joint revenue sharing arrangements with customers pursuant to which the Company provides theprojection 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 (the “System Deliverable”) in return for a portion of the customer’s IMAX box-office receipts andconcession revenue. Pursuant to these revenue sharing arrangements, the Company retains title to the theater system (including the projector, the sound systemand the projection screen) and rent payments are contingent, instead of fixed or determinable. 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. Incertain cases, the contract provides certain thresholds that, if not met by either party, allow the other party to terminate the agreement. Joint revenue sharingarrangements generally have a 7 to 10-year initial term and may be renewed by the customer for an additional term. The introduction of joint revenue sharingarrangements has been an important factor in the expansion of the Company’s commercial theatre network which has grown by approximately 71% since2008. Joint revenue sharing arrangements allow commercial theatre exhibitors to install IMAX theatre systems without the initial capital investment required ina lease or sale arrangement. Since customers under joint revenue sharing arrangements pay the Company a portion of their ongoing box office and concessionrevenue, joint revenue sharing arrangements also drive recurring cash flows and earnings for the Company. As the Company continues to expand its numberof theaters under joint revenue sharing arrangements, the Company anticipates cash flows and earnings from joint revenue sharing arrangements will be animportant driver of recurring revenue for the Company. The retirement of a significant portion of the Company’s debt during 2009 and increased cash flowsfrom operations during 2009 and 2010 has allowed the Company the financial flexibility to fund the expansion of its joint revenue sharing strategy. As atJanuary 31, 2011, the Company has entered into joint revenue sharing arrangements for 230 systems, 171 of which were in operation as at December 31,2010, a 46.2% increase as compared to the 117 joint revenue sharing arrangements opened as at December 31, 2009. 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 anumber of factors including film performance, the mix of theater system configurations, the timing of installation of the theater systems, the nature of thearrangement, the location, size and management of the theater and other factors specific to individual arrangements. Revenue on theater systems under jointrevenue sharing arrangements is recognized when box-office and concession revenues are reported by the theater operator, provided collection is reasonablyassured. An annual maintenance and extended warranty fee is generally payable, except for theater systems under joint revenue sharing arrangements, commencingin the second year of theater operations. Both ongoing fees and maintenance and extended warranty fees are typically indexed to a local consumer price index. See “Critical Accounting Policies” below for further discussion on the Company’s revenue recognition policies.Theater Network The following chart shows the number of the Company’s theater systems by configuration in the theater network as at December 31: 2010 2009 Theater Theater Network Network Base BaseFlat Screen (2D) 30 (1) 36Dome Screen (2D) 66 65IMAX 3D Dome (3D) 3 2IMAX 3D GT (3D) 80 (1) 88IMAX 3D SR (3D) 44 (1) 51IMAX MPX (3D) 19 (1) 37 (2)IMAX digital (3D) 276 (1) 151 (2)Total 518 43035Table of Contents (1) In 2010, the Company upgraded 32 film-based IMAX theater systems to IMAX digital theater systems (30 sales arrangements and 2 joint revenuesharing arrangements). (2) In 2009, the Company upgraded 25 film-based IMAX theater systems to IMAX digital theater systems (14 sales arrangements, 2 treated previously asoperating lease arrangements and 9 systems under joint revenue sharing arrangements). Approximately 61.2% of IMAX systems in operation are located in the United States and Canada compared to 63.0% last year. Approximately 33.9% ofIMAX theater systems arrangements in backlog are scheduled to be installed in the United States and Canada compared to 33.1% last year. The commercialexhibitor market in the United States and Canada represents an important customer base for the Company in terms of both collections under existingarrangements and potential future theater system contracts. The Company has targeted these operators for the sale or lease of its IMAX digital projectionsystem, as well as for joint revenue sharing arrangements. While the Company is pleased with its recent progress in the U.S. and Canadian commercialexhibitor market, there is no assurance that the Company’s progress in those countries will continue, particularly as a higher percentage of markets arepenetrated, or that the Company’s U.S. and Canadian commercial exhibitors will not encounter future financial difficulties. To minimize the Company’scredit risk in this area, the Company retains title to the underlying theater systems leased, performs initial and ongoing credit evaluations of its customers andmakes ongoing provisions for its estimates of potentially uncollectible amounts. As at December 31, 2010, approximately 38.8% of IMAX systems in operation were located within international markets (defined as all countries other thanthe United States and Canada), as compared to 37.0% as at December 31, 2009. The Company expects growth in international markets to be an increasinglysignificant part of its business. Of the Company’s record 221 theatre signings in 2010, 127 were signings for theatres in international markets. Consequently,approximately 66.1% of IMAX theatre system arrangements in backlog as at December 31, 2010 are scheduled to be installed within international markets,compared with 66.9% as at December 31, 2009.As at December 31, 2010, 145 (2009 — 106) of the 171 (2009 — 117) joint revenue sharing arrangements in operation, or 84.8% (2009 — 90.6%) werelocated in the United States and Canada, with the remaining 26 (2009 — 11) arrangements being located in international markets. The Company continues toseek to expand its number of joint revenue sharing arrangements it has in select international markets.Sales Backlog The Company’s sales backlog fluctuates in both number of systems and dollar value from quarter to quarter depending on the signing of new theatersystem arrangements, which adds to backlog, and the installation and acceptance of theater systems and the settlement of contracts, both of which reducebacklog. Sales backlog typically represents the fixed contracted revenue under signed theater system sale and lease agreements that the Company believes willbe recognized as revenue upon installation and acceptance of the associated theater. Sales backlog includes initial fees along with the estimated present value ofcontractual ongoing fees due over the lease term, but excludes amounts allocated to maintenance and extended warranty revenues as well as fees in excess ofcontractual ongoing fees that might be received in the future. The value of sales backlog does not include revenue from theaters in which the Company has anequity interest, joint revenue sharing arrangements, operating leases, letters of intent or long-term conditional theater commitments. The Company believes thatthe contractual obligations for theater system installations that are listed in sales backlog are valid and binding commitments. The Company’s sales backlog is as follows: December 31, 2010 December 31, 2009 Number of Dollar Value Number of Dollar Value Systems (in thousands) Systems (in thousands) Sales and sale-type lease arrangements 165 (1) $184,588 94 (1) $117,157 Joint revenue sharing arrangements 59 n/a 42 n/a 224 (2) $184,588 136 $117,157 (1) Includes 25 upgrades from film-based IMAX theater systems to IMAX digital theater systems as at December 31, 2010, and 1 upgrade from a film-based IMAX theater system to an IMAX digital theater system as at December 31, 2009. (2) Reflects the minimum number of theaters arisings from signed contracts in backlog. Up to an additional 25 theaters (2009 — 1) may be installedpursuant to certain provisions in signed contracts in backlog.36Table of Contents The Company’s theater signings are as follows: Year Ended December 31, 2010 2009 Number of Dollar Value Number of Dollar Value Systems (in millions) Systems (in millions) Full new sales and sale-type lease arrangements 95 (1) $112.6 20 (1) $27.0 Digital upgrades under sales and sale-type lease arrangements 55 (2) 24.0 12 (2) 5.3 Joint revenue sharing arrangements 71 (3) n/a 3 (3) n/a 221 $136.6 35 $32.3 (1) Includes 24 installations in 2010 and 71 in backlog as at December 31, 2010 (6 installations in 2009 and 14 in backlog as at December 31, 2009). (2) Includes 28 installations in 2010 and 27 in backlog as at December 31, 2010 (11 installations in 2009 and 1 in backlog as at December 31, 2009). (3) Includes 20 installations in 2010 and 51 in backlog as at December 31, 2010 (2 installations and 1 in backlog as at December 31, 2009). The Company’s backlog of sales and sale-type lease arrangements can be segregated both by territory of future installation and by customer type. Thepercentage of backlog relevant to each territory (based on installed dollar value of anticipated theater system revenue as at December 31, 2010) is as follows:Central and South America — 27.2%, Asia — 43.0%, North America (excluding Mexico) — 12.7%, Europe — 14.4%, Africa — 1.0% and Middle East —1.7%. In addition, 97.6% of backlog represents future installations to commercial theater customers and 2.4% to institutional customers. The Company’s backlog of theater systems under joint revenue sharing arrangements can be segregated by both territory of future installation and bycustomer type. The percentage of backlog relevant to each territory (based on the number of systems at December 31, 2010) is as follows: North America(excluding Mexico) — 72.9%, Europe — 5.1%, Asia — 11.9%, Japan — 8.4% and Australia — 1.7%. All 59 theater systems under joint revenue sharingarrangements in backlog are for commercial theater customers. The Company estimates that approximately 80-90 (excluding digital upgrades) of the 224 theater systems arrangements currently in backlog will beinstalled in 2011, with the remainder being installed in subsequent periods. In addition, the Company anticipates that it will install a number of the 25 digitalsystem upgrades in backlog in 2011. The Company also expects additional theater system arrangements not currently in backlog to be signed and installed in2011. The configuration of the Company’s backlog as at December 31, 2010, by product type has been disclosed on page 8 of the Company’s 2010 Form 10-K. In the normal course of its business, the Company will have customers who, for a number of reasons, including the inability to obtain certain consents,approvals or financing, are unable to proceed with a theater system installation. Once the determination is made that the customer will not proceed withinstallation, the agreement with the customer is generally terminated or amended. If the agreement is terminated, once the Company and the customer arereleased 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 arerecognized as revenue.Film Production and Digital Re-Mastering (IMAX DMR) Films produced by the Company are typically financed through third parties, whereby the Company will generally receive a film production fee inexchange 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 filminvestors and/or the Company. In the past, the Company frequently financed film production internally, but has moved to a model utilizing a majority ofthird-party funding for the original films it produces and distributes. In 2011, the Company, along with Warner Bros. Pictures (“WB”), will release Born tobe Wild 3D: An IMAX 3D Experience . In 2010, the Company, along with WB, released Hubble 3D: An IMAX 3D Experience . In 2009, the Company,along with WB, released Under the Sea 3D: An IMAX 3D Experience.37Table of Contents The Company developed a proprietary technology to digitally re-master live-action films into 15/70-format film or IMAX digital cinema package (“DCP”)format at a modest cost for exhibition in IMAX theaters. This system, known as IMAX DMR, digitally enhances the image resolution of motion picture filmsfor 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 opened the IMAX theater network up to releases of Hollywood films, particularly new films which are released to IMAX theaterssimultaneously with their broader domestic release. The Company believes that the development of this technology is key to helping it execute its strategy ofexpanding its commercial theater network by establishing IMAX theaters as a key, premium distribution platform for Hollywood films. In 2010, 15 filmsconverted through the IMAX DMR process were released to IMAX theaters (12 films converted through the IMAX DMR process were released in 2009). TheCompany has announced the release of 21 IMAX DMR titles to IMAX theaters in 2011. The Company remains in active discussions with every majorHollywood studio regarding future titles.Film Distribution The Company is a significant distributor of large-format films. The Company generally distributes films which it produced or for which it has acquireddistribution rights from independent producers. The Company generally receives a percentage of the theater box-office receipts as a distribution fee.Theater Operations As at December 31, 2010, the Company has four owned and operated theaters, compared to four as at December 31, 2009. The results from theaters thathave been closed are presented as discontinued operations in prior years as the continuing cash flows are not generated from either a migration or a continuationof activities. In addition, the Company has a commercial arrangement with one theater resulting in the sharing of profits and losses. The Company alsoprovides management services to two theaters.INTERNATIONAL ACTIVITIES A significant portion of the Company’s sales are made to customers located outside the United States and Canada. During 2010, 2009, and 2008,approximately 30%, 35% and 32%, respectively, of the Company’s revenue was derived outside the United States and Canada. As at December 31, 2010,approximately 66.1% of IMAX theater systems arrangements in backlog were scheduled to be installed in international markets. Accordingly, the Companyexpects that international operations will continue to be a significant portion of the Company’s revenue in the future. In order to minimize exposure to exchangerate risk, the Company prices theater systems (the largest component of revenue) in U.S. dollars except in Canada, Japan and parts of Europe, where theymay be priced in local currency. Annual ongoing fees and maintenance and extended warranty fees follow a similar currency policy. To further minimize itsexposure to foreign exchange risk related to operating expenses denominated in Canadian dollars, the Company has entered into foreign currency derivativecontracts between the U.S. dollar and the Canadian dollar.CRITICAL ACCOUNTING POLICIES 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 ofassets, liabilities, revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to fair values associated with theindividual elements in multiple element arrangements; residual values of leased theater systems; economic lives of leased assets; allowances for potentialuncollectibility of accounts receivable, financing receivables and net investment in leases; provisions for inventory obsolescence; ultimate revenues for filmassets; impairment provisions for film assets, long-lived assets and goodwill; depreciable lives of property, plant and equipment; useful lives of intangibleassets; pension plan and post retirement assumptions; accruals for contingencies including tax contingencies; valuation allowances for deferred income taxassets; and, estimates of the fair value and expected exercise dates of stock-based payment awards. Management bases its estimates on historic experience,future expectations and other assumptions that are believed to be reasonable at the date of the consolidated financial statements. Actual results may differ fromthese 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 the audited consolidated financial statements in Item 8 of the Company’s 2010 Form10-K. The Company considers the following significant estimates, assumptions and judgments to have the most significant effect on its results:38Table of ContentsRevenue 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 institutionalcustomers located in 46 countries as at December 31, 2010; • 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.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 ofinstallation, and projectionist training; a license to use the IMAX brand; 3D glasses; maintenance and extended warranty services; and licensing of films. TheCompany evaluates all elements in an arrangement to determine what are considered typical deliverables for accounting purposes and which of the deliverablesrepresent separate units of accounting based on the applicable accounting standards 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 theFASB ASC; and the Revenue Recognition Topic of the FASB ASC. If separate units of accounting are either required under the relevant accounting standardsor determined to be applicable under the Revenue Recognition Topic, the total consideration received or receivable in the arrangement is allocated based on theapplicable guidance in the above noted standards.Theater Systems The Company has identified the System Deliverable as a single deliverable and a single unit of accounting. When an arrangement does not include all theelements of a System Deliverable, the elements of the System Deliverable included in the arrangement are considered by the Company to be a single deliverableand a single unit of accounting. The Company is not responsible for the physical installation of the equipment in the customer’s facility; however, theCompany supervises the installation by the customer. The customer has the right to use the IMAX brand from the date the Company and the customer enterinto 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 thatare not joint revenue sharing arrangements consists of upfront or initial payments made before and after the final installation of the theater system equipmentand 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 anannual fixed minimum amount or a certain percentage of the theater box-office. Amounts received in excess of the annual fixed minimum amounts areconsidered contingent payments. The Company’s arrangements are non-cancellable, unless the Company fails to perform its obligations. In the absence of amaterial 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 Companyexists, 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 andonly if the Company does not cure the default within a specified period. Recently, the Company has entered into a number of joint revenue sharingarrangements, where the Company receives a portion of a theater’s box-office and concession revenue in exchange for placing a theater system at theateroperators’ venues. Under these arrangements, the Company receives no up-front fee, and the Company retains title to the theater system. Joint revenue sharingarrangements typically have 7 to 10 year terms with renewal provisions. The Company’s joint revenue sharing arrangements are generally not cancelable bythe customer unless the Company fails to perform its obligations. In certain cases, the contract provides certain performance thresholds that, if not met byeither party, allows the other party to terminate the agreement.39Table of ContentsSales Arrangements For arrangements qualifying as sales, the revenue allocated to the System Deliverable is recognized in accordance with the Revenue Recognition Topic of theFASB 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 workingcondition, (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 trainingor (b) public opening of the theater, provided there is persuasive evidence of an arrangement, the price is fixed or determinable and collectibility is reasonablyassured. The initial revenue recognized consists of the initial payments received and the present value of any future initial payments and fixed minimum ongoingpayments that have been attributed to this unit of accounting. Contingent payments in excess of the fixed minimum ongoing payments are recognized whenreported 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 isincluded in revenues from equipment and product sales, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, collectibility isreasonably assured and title to the theater system passes from the Company to the customer. In a limited number of sales arrangements for the theater systems designed for multiplex owners (the “MPX” theater systems), the Company providedcustomers with a right to acquire, for a specified period of time, digital upgrades (each upgrade consisting of a projector, certain sound system componentsand screen enhancements) at a fixed or variable discount towards a future price of such digital upgrades. Up to the end of the second quarter of 2009, theCompany was not able to determine the fair value of a digital upgrade. Accordingly, the Company deferred all consideration received and receivable under sucharrangements for the delivered MPX and the upgrade right, except for the amount allocated to maintenance and extended warranty services provided to thecustomers for the installed system. This revenue was deferred until the upgrade right expired, if applicable, or a digital upgrade was delivered. In the thirdquarter of 2009, the Company determined the fair value of digital upgrades and the upgrade rights. For any such sales arrangements where the upgrade righthas not expired and the digital upgrade has not yet been delivered, the Company has allocated the consideration received and receivable (excluding the amountallocated to maintenance and extended warranty services) to the upgrade right based on its fair value and to the delivered MPX theater system based on theresidual of the consideration received and receivable. The revenue related to the digital upgrade continues to be deferred, until the digital upgrade is deliveredprovided the other revenue recognition criteria are met. The revenue related to the MPX system is recognized at the allocation date as the system was previouslydelivered provided the other revenue recognition criteria are met. Costs related to the installed MPX systems for which revenue has not been recognized areincluded in inventories until the conditions for revenue recognition are met. The Company also provides customers, in certain cases, with sales arrangementsfor multiple systems consisting of a combination of MPX theater systems and complete digital theater systems for a specified price. The Company allocatesthe actual or implied discount between the delivered and undelivered theater systems on a relative fair value basis, provided all of the other conditions forrecognition of a theater system are met.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 notwithin the scope of the accounting standard are accounted for either as a sales or services arrangement, as applicable. 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 basedon the criteria established in the accounting standard; otherwise the lease is classified as an operating lease. Prior to commencement of the lease term for theequipment, the Company may modify certain payment terms or make concessions. If these circumstances occur, the Company reassesses the classification ofthe 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 whenall 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) the3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed, and (iv) the earlier of (a) receipt of the writtencustomer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) publicopening of the theater, provided collectibility is reasonably assured.40Table of Contents The initial revenue recognized for sales-type leases consists of the initial payments received and the present value of future initial payments and fixedminimum ongoing payments computed at the interest rate implicit in the lease. Contingent payments in excess of the fixed minimum payments are recognizedwhen reported by theater operators, provided collectibility is reasonably assured. The determination of the fair value of the leased equipment requires judgment and can impact the split between initial revenue and finance income over thelease term. For operating leases, initial payments and fixed minimum ongoing payments are recognized as revenue on a straight-line basis over the lease term. Foroperating leases, the lease term is considered to commence when all of the following conditions have been met: (i) the projector, sound system and screensystem have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist traininghas been completed, and (iv) the earlier of (a) receipt of the written customer acceptance certifying the completion of installation and run-in testing of theequipment and the completion of projectionist training or (b) public opening of the theater. Contingent payments in excess of fixed minimum ongoing paymentsare recognized as revenue when reported by theater operators, provided collectibility is reasonably assured. For joint revenue sharing arrangements, where the Company receives a portion of a theater’s box-office and concession revenue in exchange for placing atheater system at the theater operator’s venue, revenue is recognized when box-office and concession revenues are reported by the theater operator, providedcollectibility 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 directproduction costs, are included in assets under construction until such equipment is installed and in working condition, at which time the equipment isdepreciated 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 reasonablyassured. Finance income recognition ceases when the Company determines that the associated receivable is not recoverable.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 ofthe theater system. During the period of time between signing and the installation of the theater system, which may extend several years, certain customers maybe unable to, or elect not to, proceed with the theater system installation for a number of reasons including business considerations, or the inability to obtaincertain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the arrangement may beterminated 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 amountspaid 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 furtherobligations under the arrangement or an arbitrated settlement is reached. Any initial payments retained or additional payments received by the Company arerecognized as revenue when the settlement arrangements are executed and the cash is received, respectively. These termination and consensual buyout amountsare 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 toarrangements to acquire or lease the IMAX digital theater system. The Company considers these situations to be a termination of the previous arrangement andorigination of a new arrangement for the IMAX digital theater system. The Company continues to defer an amount of any initial fees received from thecustomer 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 customerequals the fair value of the IMAX digital theater system to be leased or acquired by the customer. Any residual portion of the initial fees received from thecustomer 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 newtheater system arrangement is signed. The Company may offer certain incentives to customers to complete theater system transactions including payment concessions or free services andproducts 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 directreduction in the sales price or a reduction of payments to be discounted in accordance with the Leases or Interest Topics of the FASB ASC. Free products andservices are accounted for as separate units of accounting.41Table of ContentsOther 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 tothese services are deferred and recognized on a straight-line basis over the contract period and are recognized in Services revenues. Maintenance and extendedwarranty services includes maintenance of the customer’s equipment and replacement parts. Under certain maintenance arrangements, maintenance servicesmay include additional training services to the customer’s technicians. All costs associated with this maintenance and extended warranty program are expensedas incurred. A loss on maintenance and extended warranty services is recognized if the expected cost of providing the services under the contracts exceeds therelated deferred revenue.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 Companyobtains 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 overcost of production (the “production fee”). The third parties receive a portion of the revenues received by the Company from distributing the film, which ischarged 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 onthe 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 Services revenue whenperformance of the contractual service is complete, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collectibility isreasonably 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 inthe form of processing fees and recoupments calculated as a percentage of box-office receipts generated from the re-mastered films. Processing fees arerecognized as Services revenue 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 asServices revenues when box-office receipts are reported by the third party that owns or holds the related film right, provided collectibility is reasonablyassured. Losses on film production and IMAX DMR services are recognized as costs and expenses applicable to revenues-services in the period when it isdetermined 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 thefilm 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 beencompleted and delivered, the license period has begun, the fee is fixed or determinable and collectibility is reasonably assured. When license fees are based on apercentage 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 ispersuasive evidence of an arrangement, the fee is fixed or determinable and collectibility is reasonably assured.Theater Operations Revenue The Company recognizes revenue in Services revenue from its owned and operated theaters resulting from box-office ticket and concession sales as ticketsare sold, films are shown and upon the sale of various concessions. The sales are cash or credit card transactions with theatergoers based on fixed prices perseat or per concession item.42Table of Contents In addition, the Company enters into commercial arrangements with third party theater owners resulting in the sharing of profits and losses which arerecognized in Services revenue when reported by such theaters. The Company also provides management services to certain theaters and recognizes revenueover the term of such services.Other 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. Other service revenues are recognized in Services revenues when the performance of contracted services is complete.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 basedupon a review of the customer’s credit worthiness, past collection history and the underlying asset value of the equipment, where applicable. Interest onoverdue 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 factsand circumstances indicate that there is a potential impairment in the accounts receivable, net investment in lease or a financing receivable, the Company willevaluate the potential outcome of either renegotiations involving changes in the terms of the receivable or defaults on the existing lease or financed saleagreements. The Company will record a provision if it is considered probable that the Company will be unable to collect all amounts due under the contractualterms 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 carryingvalue 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 thefinancing 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 thefair value of the equipment. 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 toreduce 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 differfrom 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 issuesare resolved. When finance income is not recognized, any payments received are applied against outstanding gross minimum lease amounts receivable or grossreceivables 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 atthe lower of cost and replacement cost. Finished goods and work-in-process include the cost of raw materials, direct labor, theater design costs, and anapplicable share of manufacturing overhead costs. The costs related to theater systems under sales and sales-type lease arrangement 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 jointrevenue sharing arrangements are transferred from inventory to assets under construction in property, plant and equipment when allocated to a signed jointrevenue sharing arrangement or when the arrangement is first classified as an operating lease. The Company records provisions for excess and obsolete inventory based upon current estimates of future events and conditions, including the anticipatedinstallation dates for the current backlog of theater system contracts, technological developments, signings in negotiation, growth prospects within thecustomers’ ultimate marketplace and anticipated market acceptance of the Company’s current and pending theater systems.43Table of Contents Finished goods inventories can contain theater systems for which title has passed to the Company’s customer, under the contract, but the revenuerecognition criteria as discussed above have not been met.Asset Impairments The Company performs an impairment test on its goodwill on an annual basis, coincident with the year-end, as well as in quarters where events or changesin 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.Significant estimates are involved in the impairment test. The carrying values of each unit are subject to allocations of certain assets and liabilities that theCompany 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 modelis constructed using the Company’s budget and long-range plan as a base. Long-lived asset impairment testing is performed at the lowest level of an asset group at which identifiable cash flows are largely independent. In performingits review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset or asset group and its eventualdisposition. 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 theconsolidated 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 fairvalue 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 tovariability, 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 theCompany’s budget and long-range plan could result in a significantly different result to an impairment test, which could impact earnings.Foreign Currency Translation Monetary assets and liabilities of the Company’s operations which are denominated in currencies other than the functional currency are translated into thefunctional currency at the exchange rates prevailing at the end of the period. Non-monetary items are translated at historical exchange rates. Revenue andexpense transactions are translated at exchange rates prevalent at the transaction date. Such exchange gains and losses are included in the determination ofearnings in the period in which they arise. Foreign currency derivatives are recognized and measured on the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in theconsolidated statement of operations except for derivatives designated and qualifying as foreign currency hedging instruments. For foreign currency hedginginstruments, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to theconsolidated statement of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statement ofoperations.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 theCompensation — Retirement Benefits Topic of the FASB ASC. A critical assumption to this accounting is the discount rate. The Company evaluates thiscritical 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 forsetting this rate is a high-quality long-term corporate bond rate. A lower discount rate increases the present value of benefit obligations and increases pensionexpense. The Company’s discount rate was determined by considering the average of pension yield curves constructed from a large population of high-qualitycorporate 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. At December 31, 2010, a 1.0% change in thediscount rate used could result in a $1.7 — $2.0 million increase or decrease in the pension benefit obligation with a corresponding benefit or chargerecognized in other comprehensive income in the year. A one year delay in Mr. Gelfond’s retirement date would increase the discount rate by 0.3% and have a$0.4 million impact on the expected pension payment.44Table of ContentsDeferred Tax Asset Valuation As at December 31, 2010, the Company had net deferred income tax assets of $57.1 million. The Company’s management assesses realization of itsdeferred 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. Availableevidence considered by the Company includes, but is not limited to, the Company’s historic operating results, projected future operating results, reversingtemporary differences, contracted sales backlog at December 31, 2010, changing business circumstances, and the ability to realize certain deferred tax assetsthrough loss and tax credit carry-back and carry-forward strategies. As at December 31, 2010, the Company has determined that based on the Company’simproved operating results in 2009 and 2010 and the Company’s assessment of projected future results of operations, realization of this deferred income taxbenefit was more likely than not. As a result, the judgment about the need for this valuation allowance has changed and a reduction in the valuation allowanceof $54.8 million has been recorded as a benefit within the recovery for income taxes from continuing operations. 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 theapplicable 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 incuradditional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company adjusts tax expense to reflect the Company’songoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results. TheCompany provides for such exposures in accordance with Income Taxes Topic of the FASB ASC.Stock-Based Compensation The Company utilizes a lattice-binomial option-pricing model (the “Binomial Model”) to determine the fair value of stock-based payment awards. The fairvalue determined by the Binomial Model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price togrant 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 haveno vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options and stock appreciation rights (“SARs”) havecertain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect theestimated value, in management’s opinion, the Binomial Model best provides an accurate measure of the fair value of the Company’s employee stock optionsand SARs. Although the fair value of employee stock options and SARs are 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. See note 15(c) for theassumptions used to determine the fair value of stock-based payment awards.Impact of Recently Issued Accounting Pronouncements See note 3 to the consolidated financial statements in Item 8 of the Company’s 2010 Form 10-K for information regarding the Company’s recent changes inaccounting policies and the impact of recently issued accounting pronouncements impacting the Company.DISCONTINUED OPERATIONS On December 11, 2009, the Company closed its owned and operated Tempe IMAX theater. The Company recognized lease termination and guaranteeobligations of $0.5 million to the landlord, which were offset by derecognition of other liabilities of $0.9 million, for a net gain of $0.4 million. In a relatedtransaction, the Company leased the projection system and inventory of the Tempe IMAX theater to a third party theater exhibitor. Revenue from this operatinglease transaction will be recognized on a straight-line basis over the term of the lease. In the year ended December 31, 2009, revenues for the Tempe IMAXtheater were $0.8 million (2008 — $1.5 million) and the Company recognized a loss of $0.5 million in 2009 (2008 — loss of $0.3 million) from the operationof the theater. The above transactions are reflected as discontinued operations as there are no significant continuing cash flows from either a migration or acontinuation of activities. The remaining assets and liabilities of the owned and operated Tempe45Table of ContentsIMAX theater are included in the Company’s consolidated balance sheet as at December 31, 2010 and are disclosed in note 23(d) to the audited consolidatedfinancial statements in Item 8 of the Company’s 2010 Form 10-K. On September 30, 2009, the Company closed its owned and operated Vancouver IMAX theater. The amount of loss to the Company pertaining to lease andguarantee obligations owing to the landlord was estimated at $0.3 million, which the Company recognized at September 30, 2009. In 2009, revenues for theVancouver IMAX theater were $1.1 million (2008 — $2.0 million) and the Company recognized a loss of $0.1 million in 2009 (2008 — income of$0.2 million) from the operation of the theater. The above transactions are reflected as discontinued operations as there are no continuing cash flows from eithera migration or a continuation of activities. The remaining assets and liabilities of the Vancouver owned and operated theater are included in the Company’sconsolidated balance sheet as at December 31, 2010 and are disclosed in note 23(d) to the audited consolidated financial statements in Item 8 of the Company’s2010 Form 10-K. As a result of the closure of the Tempe and Vancouver IMAX theaters in 2009, the Company currently operates 4 theaters.ASSET IMPAIRMENTS AND OTHER SIGNIFICANT CHARGES The following table identifies the Company’s charges relating to the impairment of assets: Years Ended December 31, (in thousands of U.S. dollars) 2010 2009 2008 Asset impairments Property, plant and equipment (1) $45 $180 $— Other significant charges: Accounts receivable 499 127 382 Financing receivables 944 1,377 1,595 Other intangible assets 64 — — Inventories 999 897 2,489 Total asset impairments and other significant charges $2,551 $2,581 $4,466 (1) The Company reclassified the owned and operated Vancouver and Tempe IMAX theaters’ operations from continuing operations to discontinuedoperations as it does not anticipate having significant future cash flows from these theaters or any involvement in the day to day operations of thesetheaters.Asset Impairments The Company recorded an asset impairment charge of less than $0.1 million against fixed assets after the Company assessed the carrying value of certainasset groups in light of their future expected cash flows. The Company recognized that the carrying values for the assets exceeded the expected undiscountedfuture cash flows. During 2009 and 2008, the Company recorded total asset impairment charges of $0.2 million and $nil, respectively.Other Significant Charges The Company recorded a net provision of $0.5 million in 2010 (2009 — $0.1 million, 2008 — $0.4 million) in accounts receivable. In 2010, the Company also recorded a net provision of $0.9 million in financing receivables (2009 — $1.4 million, 2008 — $1.6 million) as thecollectibility associated with certain financing receivables was uncertain. In 2010, the Company recorded a charge of $1.0 million (2009 —$0.9 million, 2008 — $2.5 million) in costs and expenses applicable to revenues,primarily due to a reduction in the net realizable value of its GT and SR film-based projector inventories and associated parts due to a further market shiftaway from film-based projector systems. In 2009, the charge primarily resulted from a reduction in the net realizable value resulting from the Company’sdevelopment of a proprietary digital projection system in July 2008, and its supplanting of the IMAX MPX projection system.46Table of ContentsRESULTS OF OPERATIONS As identified in note 20 to the audited consolidated financial statements in Item 8 of the Company’s 2010 Form 10-K, the Company has eight reportablesegments identified by category of product sold or service provided: IMAX systems; theater system maintenance; joint revenue sharing arrangements; filmproduction and IMAX DMR; film distribution; film post-production; theater operations; and other. The IMAX systems segment designs, manufactures, sellsor leases IMAX theater projection system equipment. The theater system maintenance segment maintains IMAX theater projection system equipment in theIMAX theater network. The joint revenue sharing arrangements segment installs IMAX theater projection system equipment to an exhibitor in exchange for acertain percentage of box-office and concession revenue. The film production and IMAX DMR segment produces films and performs film re-masteringservices. The film distribution segment distributes films for which the Company has distribution rights. The film post-production segment provides filmpost-production and film print services. The theater operations segment owns and operates certain IMAX theaters. The other segment includes camera rentalsand other miscellaneous items. The accounting policies of the segments are the same as those described in note 2 to the audited consolidated financialstatements in Item 8 of the Company’s 2010 Form 10-K. The Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations have been organized and discussed with respectto the above stated segments. Management feels that a discussion and analysis based on its segments is significantly more relevant as the Company’sConsolidated Statements of Operations captions combine results from several segments. The following table sets forth the breakdown of revenue and gross margin by segment: Revenue Gross Margin Years Ended December 31, Years Ended December 31, (In thousands of U.S. dollars) 2010 2009 2008 2010 2009 2008 IMAX Systems Sales and sales-type leases(1) $63,023 $53,923 $24,476 $31,452 $26,441 $9,284 Ongoing rent, fees, and finance income(2) 12,981 10,581 10,307 12,531 9,075 9,090 76,004 64,504 34,783 43,983 35,516 18,374 Theater System Maintenance 21,444 18,246 16,331 10,084 8,361 7,117 Joint Revenue Sharing Arrangements 41,757 21,598 3,435 31,703 13,261 (1,865) Film Production and IMAX DMR 63,462 35,648 17,944 41,159 19,979 6,992 Distribution 17,937 12,365 9,559 5,205 2,147 3,120 Post-production 7,702 3,604 6,929 2,891 939 3,451 89,101 51,617 34,432 49,255 23,065 13,563 Theater Operations(3) 13,366 11,810 10,532 1,147 649 (39) Other 6,942 3,436 3,205 1,480 700 403 $248,614 $171,211 $102,718 $137,652 $81,552 $37,553 (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 financeincome. (3) Excludes the impact of discontinued operations.47Table of ContentsYear Ended December 31, 2010 versus Year Ended December 31, 2009 The Company reported net income of $100.8 million or $1.59 per basic share and $1.51 per diluted share for the year ended December 31, 2010 ascompared to net income of $5.0 million or $0.10 per basic share and $0.09 per diluted share for the year ended December 31, 2009. Net income for the yearended December 31, 2010 includes a $21.9 million pre-tax charge (2009 — $15.4 million) or $0.33 per diluted share for variable share-based compensationexpense largely due to the increase in the Company’s stock price during the year (from $13.31 per share at year-end 2009 to $28.07 per share at year-end 2010)and its impact on SARs and restricted common shares, which was offset by a non-cash tax recovery of $54.8 million ($0.82 per diluted share) resulting fromthe release of a tax valuation allowance, relating to the expected reversal of future temporary differences (2009 — $nil). Excluding the net impact of variableshare-based compensation expense from both 2010 and 2009 and the non-cash tax benefit, net income would have been $67.8 million or $1.02 per dilutedshare in 2010, as compared to net income of $20.5 million or $0.38 per diluted share in 2009.Revenues and Gross Margin The Company’s revenues for the year ended December 31, 2010, increased by 45.2% to $248.6 million from $171.2 million in 2009 due to increases inrevenue across all business segments. The gross margin across all segments in 2010 was $137.7 million, or 55.4% of total revenue, compared to$81.6 million, or 47.6% of total revenue in 2009. Improvements in margin occurred across all business lines.IMAX Systems IMAX systems revenue increased 17.8% to $76.0 million in 2010 as compared to $64.5 million in 2009, resulting primarily from a 55.8% increase insystems installed and recognized as compared to the prior year. Revenue from sales and sales-type leases increased 16.9% to $63.0 million in 2010 from $53.9 million in 2009. The Company recognized revenue on 35full, new theater systems which qualified as either sales or sales-type leases in 2010, with a total value of $48.0 million, as compared to 24 in 2009 with a totalvalue of $37.0 million. Additionally, the Company recognized revenue on 2 used systems in 2010 with a value of $1.5 million, versus 3 used systems with avalue of $2.6 million that were recognized in 2009. The Company also recognized revenue on 30 digital upgrades in 2010, with a total value of $12.5 million,as compared to 16 in 2009 with a total value of $12.0 million. Included in 2009 are revenues associated with the installation of 4 MPX projection systems andtheir subsequent digital upgrades. The Company’s policy was to defer revenue recognition until such time as the fair value of the digital upgrade becameknown or the digital upgrade was delivered. Digital upgrades also have lower sales prices and gross margin than a full theater installation. The Company hasdecided to offer digital upgrades at lower selling prices for strategic reasons since the Company believes that digital systems increase flexibility andprofitability for the Company’s existing exhibition customers. Average revenue per full, new sales and sales-type lease system was $1.4 million in 2010, which is comparable to the $1.5 million experienced in 2009.Average revenue per digital upgrade was $0.4 million in 2010, as compared to $0.8 million for 2009. Average revenue per digital upgrade was higher during2009 due to revenue associated with the installation of 4 MPX projection systems and their subsequent digital upgrades. Revenues associated with theinstallation of a projection system and its digital upgrade are typically higher than a single digital upgrade installation. The breakdown in mix and value of sales and sales-type lease installations, in 2010 and 2009, is outlined in the table below:48Table of Contents 2010 2009Sales and Sales-type lease systems — installed and recognized 2D SR Dome 1 1IMAX 3D GT 1 3IMAX 3D SR 2 4IMAX digital 63 (1) 35 (2) 67 43Operating lease — installed and operating IMAX 3D MPX(2) — 1Joint revenue sharing arrangements — installed and operating IMAX digital 56 (1) 74 (2) 123 118 (1) Includes the digital upgrade of 32 systems (30 sales arrangements and 2 systems under joint revenue sharing arrangements) from film-based to digital. (2) Includes the digital upgrade of 25 systems (14 sales arrangements, 2 treated previously as operating lease arrangements and 9 systems under jointrevenue sharing arrangements) from film-based to digital. Up to the end of the second quarter of 2009, the Company was not able to determine the fair value of a digital upgrade. Accordingly, the Company deferredall consideration received and receivable under such arrangements for the delivered MPX and the upgrade right, except for the amount allocated to maintenanceand extended warranty services provided to the customers for the installed system. This revenue was deferred until the upgrade right expired, if applicable, ora digital upgrade was delivered. In the third quarter of 2009, the Company determined the fair value of digital upgrades and the upgrade rights. It is theCompany’s policy that once a digital upgrade is provided or the fair value for the upgrade is established, the Company allocates total contract consideration,including any upgrade revenues, between the delivered and undelivered elements on a residual basis and recognizes the revenue allocated to the deliveredelements with their associated costs. The Company did not recognize revenue on any theater systems under a sales arrangement that was previously deferredduring 2010. During 2009, 4 of the digital upgrades recognized related to a sales arrangement that had been previously deferred. At December 31, 2010, andDecember 31, 2009, there were no systems deferred under the Company’s digital upgrade policy. Settlement revenue was $0.4 million in 2010 as compared to $2.0 million in 2009, which related primarily to consensual buyouts for uninstalled theatersystems. Sound systems revenue remained consistent at $0.5 million in 2010 as compared to 2009. IMAX theater systems gross margin from full, new sales and sales-type leases, excluding the impact of settlements and asset impairment charges,increased to 65.7% in 2010 from 62.7% in 2009. The gross margin on digital upgrades, excluding the impact of settlements and asset impairment charges,was $2.6 million in 2010 in comparison with $5.1 million in 2009. The gross margin on used systems was $0.3 million in 2010 in comparison with$0.4 million in 2009. Ongoing rent revenue and finance income increased to $13.0 million in 2010 from $10.6 million in 2009. Gross margin from ongoing rent and financeincome increased to $12.5 million in 2010 from $9.1 million in 2009. The change in revenue and gross margin is a function of finance income on newsystems under sales or lease agreements that began operations in 2010 and additional contingent fees resulting from strong film performance experienced duringthe year. Contingent fees included in this caption amounted to $5.2 million and $3.6 million in 2010 and 2009, respectively. In 2010, the Company did not install and recognize revenue for any new theater systems that qualified as operating leases (excluding joint revenue sharingarrangements), as compared to one in 2009. In 2009, this theater system under an operating lease arrangement was upgraded to a digital theater system under asales arrangement. The Company recognizes revenue on operating leases ratably over the term of the leases.49Table of ContentsTheater System Maintenance Theater system maintenance revenue increased 17.5% to $21.4 million in 2010 as compared to $18.2 million in 2009. Theater system maintenance grossmargin increased to $10.1 million in 2010 from $8.4 million in 2009. In 2010 and 2009, the Company recorded a write-down of its film-based service partsinventories of $0.2 million, and $0.8 million, respectively, due to the accelerated installation of the MPX system upgrades to digital based systems. Absentthis write-down, the margin would have been $10.3 million and $9.2 million in 2010 and 2009, respectively. Maintenance revenue continues to grow as thenumber of theaters in the IMAX network grows. Maintenance margins vary depending on the mix of theater system configurations in the theater network andthe timing and nature of service visits in the period.Joint Revenue Sharing Arrangements Revenue from joint revenue sharing arrangements increased 93.3% to $41.8 million in 2010 compared to $21.6 million in 2009. The Company ended theyear with 171 theaters operating under joint revenue sharing arrangements as compared to 117 theaters at the end of 2009, an increase of 46.2%. The increasein revenues from joint revenue sharing arrangements was due to the greater number of theaters operating in the current year as compared to the prior year, andstronger performance of the films exhibited in 2010 versus 2009, including Avatar: An IMAX 3D Experience, which is the highest grossing IMAX film of alltime, as discussed in the film section below. The gross margin from joint revenue sharing arrangements in 2010 increased to $31.7 million compared to $13.3 million in 2009. The increase was largelydue to an increase in the number of joint revenue sharing theaters operating in the current year as compared to the prior year, and strong film performance.Included in the 2010 gross margin were certain advertising, marketing, and selling expenses of $4.2 million associated with the initial launch of 54 new jointrevenue sharing theaters opened during the year, as compared to $3.4 million associated with the initial launch of 65 new theaters in 2009. Excluding theselaunch expenses, the gross margin would have been $35.9 million in 2010, compared to $16.7 million in 2009.Film The Company’s revenues from its film segments increased 72.6% to $89.1 million in 2010 from $51.6 million in 2009. Film production and IMAX DMR revenues increased 78.0% to $63.5 million in 2010 from $35.6 million in 2009. The increase in film production andIMAX DMR revenues was due primarily to the overall growth of the IMAX theater network and stronger film performance for the films exhibited, includingAvatar: An IMAX 3D Experience. Gross box office generated by IMAX DMR films increased 101.6% to $545.9 million in 2010 versus $270.8 million in2009. In 2010, gross-box office was generated by the exhibition of 16 films listed below, as compared to 14 films exhibited in 2009: 2010 Films Exhibited 2009 Films ExhibitedAvatar: An IMAX 3D ExperienceAlice in Wonderland: An IMAX 3D ExperienceHow To Train Your Dragon: An IMAX 3D ExperienceIron Man 2: The IMAX ExperienceShrek Forever After: An IMAX 3D ExperiencePrince of Persia: The Sands of Time: The IMAX ExperienceToy Story 3: An IMAX 3D ExperienceThe Twilight Saga: Eclipse: The IMAX ExperienceInception: The IMAX ExperienceAftershock: The IMAX ExperienceResident Evil: Afterlife: An IMAX 3D ExperienceLegends of the Guardian: The Owls of Ga’Hoole: An IMAX 3D ExperienceParanormal Activity 2: The IMAX ExperienceMegamind: An IMAX 3D ExperienceHarry Potter and the Deathly Hallows Part I: The IMAX ExperienceTron Legacy: An IMAX 3D Experience The Day the Earth Stood Still: The IMAX ExperienceThe Dark Knight: The IMAX ExperienceJonas Bros: The 3D Concert ExperienceWatchmen: The IMAX ExperienceMonsters vs. Aliens: An IMAX 3D ExperienceStar Trek: The IMAX ExperienceNight at the Museum: Battle of the Smithsonian: The IMAX ExperienceTransformers: Revenge of the Fallen: The IMAX ExperienceHarry Potter and the Half Blood Prince: An IMAX 3D ExperienceCloudy with a Chance of Meatballs: An IMAX 3D ExperienceWhere the Wild Things Are: The IMAX ExperienceMichael Jackson’s This Is It: The IMAX ExperienceDisney’s A Christmas Carol: An IMAX 3D ExperienceAvatar: An IMAX 3D Experience50Table of Contents Avatar: An IMAX 3D Experience has broken all performance records for an IMAX DMR film. Through December 31, 2010, Avatar has generated totalIMAX DMR gross box office revenue of over $242.0 million, with $187.9 million generated in 2010. Film distribution revenues increased 45.1% to $17.9 million in 2010 from $12.4 million in 2009 due to the introduction and continuing performance ofHubble 3D: An IMAX 3D Experience, a movie co-produced by the Company and WB, which was released in March of 2010, and the licensing of certainlibrary titles in ancillary markets. Film post-production revenues increased 113.7% to $7.7 million in 2010 from $3.6 million in 2009 primarily due to an increase in third party business. The Company’s gross margin from its film segments increased 113.6% in 2010 to $49.3 million from $23.1 million in 2009. Film production and IMAXDMR gross margins increased to $41.2 million from $20.0 million in 2009 largely due to an increase in IMAX DMR revenue resulting from a largercommercial IMAX network and stronger film performance, including Avatar: An IMAX 3D Experience. The film distribution margin of $5.2 million in2010 was higher than the $2.1 million experienced in 2009, primarily due to the increase in film distribution revenues. Film post-production gross marginincreased by $2.0 million due to an increase in third party business as compared to the prior year.Theater Operations Theater operations revenue in 2010 increased 13.2% to $13.4 million from $11.8 million in 2009. This increase was attributable to increases in averageticket prices and attendance at certain of the Company’s owned and operated theaters primarily due to the stronger performance of the films exhibited in 2010as compared to 2009. Theater operations margin increased $0.5 million from 2009 primarily due to an increase in revenues largely associated with the stronger performance ofIMAX DMR films exhibited during 2010.Other Other revenue increased to $6.9 million in 2010 compared to $3.4 million in 2009. Other revenue primarily includes revenue generated from theCompany’s camera and rental business and after market sales of projection system parts and 3D glasses. The gross margin on other revenue was $0.8 million higher in 2010 as compared to 2009.Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $78.4 million in 2010, as compared to $56.2 million in 2009. The $22.2 million increaseexperienced from the prior year comparative period was largely the result of the following: • an $8.5 million increase in the Company’s stock-based compensation expense (including a $6.4 million increase in charges for variable share-basedawards) primarily due to an increase in the Company’s stock price during the period (an increase from $13.31 at year-end 2009 to $28.07 per shareat year-end 2010, as compared to an increase from $4.46 per share at year-end 2008 to $13.31 per share at year-end 2009) and its impact on variableawards such as SARs. The Company has no present intention to issue such variable awards in the future; • an $8.7 million increase in staff-related costs and compensation costs including (i) an increase in salaries and benefits of $6.3 million including ahigher average Canadian dollar denominated salary expense ($1.9 million), increased staffing and normal merit increase partially offset by lowerpension plan costs and (ii) a $2.4 million increase in travel and entertainment costs commensurate with business activity; • a $3.1 million increase in legal and professional fees and other expenses, including a multi-jurisdictional patent and contract lawsuit settled at year-end, and work performed relating to new business initiatives, such as 3net, a 3D television channel operated by a Limited Liability Corporationowned by the Company, Discovery Communications and Sony Corporation; • a $1.4 million decrease in gains due to foreign exchange. During the year ended December 31, 2010, the Company recorded a foreign exchange gain of$1.5 million due to the impact of a decrease in exchange rates on foreign currency denominated working capital balances and unmatured and un-hedged foreign currency forward contracts as compared to a gain of $2.9 million51Table of Contents recorded in 2009. See note 16(b) of the audited consolidated financial statements in Item 8 of the Company’s 2010 Form 10-K for more information;and • a $0.5 million increase in other general corporate expenditures, which resulted from an expansion of the Company’s overall business.Research and Development Research and development expenses increased to $6.2 million in 2010 compared to $3.8 million in 2009. The increased research and development expensesfor 2010 compared to 2009 are primarily attributable to ongoing enhancements to the Company’s digital projection technology and the commencement of aportable theater initiative.Receivable Provisions, Net of Recoveries Receivable provisions, net of recoveries for accounts receivable and financing receivables, amounted to a net provision of $1.4 million in 2010, ascompared to $1.1 million in 2009. The Company’s accounts receivables and financing receivables are subject to credit risk. These receivables are concentrated with the leading theaterexhibitors and studios in the film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems thatare 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 Significant Charges The Company recorded an asset impairment charge of less than $0.1 million against fixed assets after the Company assessed the carrying value of certainassets in its theater operations segment in light of their future expected cash flows. During 2009, the Company recorded total asset impairment charges of$0.2 million. The Company recorded a net provision of $0.5 million in 2010 (2009 — $0.1 million) in accounts receivable. In 2010, the Company also recorded a net provision of $0.9 million in financing receivables (2009 — $0.9 million) as the collectibility associated withcertain leases was uncertain. In 2010, the Company recorded a charge of $1.0 million (2009 — $0.9 million) in costs and expenses applicable to revenues, primarily due to a reductionin the net realizable value of its GT and SR film-based projector inventories and associated parts due to a further market shift away from film-based projectorsystems. In 2009, the charge primarily resulted from a reduction in the net realizable value resulting from the Company’s introduction of a proprietary digitalprojection system in July 2008, and its supplanting of the IMAX MPX projection system.Interest Income and Expense Interest income increased to $0.4 million in 2010, as compared to less than $0.1 million in 2009. The increase was largely due to interest recorded during2010 related to tax refunds. Interest expense decreased to $1.9 million in 2010 as compared to $13.8 million in 2009. In 2009, the Company repurchased all $160.0 million aggregateprincipal amount of its outstanding 9.625% Senior Notes which resulted in a decrease in the Company’s interest expense for the year ended December 31,2010. Included in interest expense is the amortization of deferred finance costs in the amount of $0.3 million and $1.0 million in 2010 and 2009, respectively.The Company’s policy is to defer and amortize all the costs relating to a debt financing which are paid directly to the debt provider, over the life of the debtinstrument.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 rateincreases or reductions in the year, changes due to foreign exchange, changes in the52Table of ContentsCompany’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favorable or unfavorable resolution of varioustax examinations. Based on the improvement of the Company’s operating results in 2009 and 2010 and the Company’s assessment of projected future results of operations, itwas determined that realization of a deferred income tax benefit is now more likely than not. As a result, the judgment about the need for a full valuationallowance against deferred tax assets has changed, and a reduction in the valuation allowance has been recorded as a benefit within the recovery for incometaxes from continuing operations. The recovery for income taxes in the year ended December 31, 2010 includes a net non-cash income tax benefit of$54.8 million in continuing operations related to a decrease in the valuation allowance for the Company’s deferred tax assets and other tax adjustments. Thenet income tax benefit during the year ended December 31, 2010 is primarily attributable to the estimated realization of deferred tax assets resulting from theutilization of deductible temporary differences and certain net operating loss carryforwards and tax credits against future years’ taxable income. During theyear ended December 31, 2010, after considering all available evidence, both positive (including recent profits, projected future profitability, backlog,carryforward periods for utilization of net operating loss carryovers and tax credits, discretionary deductions and other factors) and negative (includingcumulative losses in past years and other factors), it was concluded that the valuation allowance against the Company’s deferred tax assets should be furtherreduced by approximately $54.8 million. The remaining $7.9 million balance in the valuation allowance as at December 31, 2010 is primarily attributable tocertain U.S. federal and state net operating loss carryovers and federal tax credits that likely will expire without being utilized. The Company anticipates that it will become a cash tax payer in late 2012 or 2013.Discontinued Operations On December 11, 2009, the Company closed its owned and operated Tempe IMAX theater. The Company recognized lease termination and guaranteeobligations of $0.5 million to the landlord, which were offset by derecognition of other liabilities of $0.9 million, for a net gain of $0.4 million. In a relatedtransaction, the Company leased the projection system and inventory of the Tempe IMAX theater to a third party theater exhibitor. Revenue from this operatinglease transaction will be recognized on a straight-line basis over the term of the lease. For the year ended December 31, 2009, revenues for the Tempe IMAXtheater were $0.8 million and the Company recognized a loss of $0.5 million in 2009 from the operation of the theater. This transaction is reflected asdiscontinued operations as there are no significant continuing cash flows from either a migration or a continuation of activities. The remaining assets andliabilities of the owned and operated Tempe IMAX theater are included in the Company’s consolidated balance sheet as at December 31, 2010 and are disclosedin note 23(d) to the audited consolidated financial statements in Item 8 of the Company’s 2010 Form 10-K. On September 30, 2009, the Company closed its owned and operated Vancouver IMAX theater. The amount of loss to the Company pertaining to lease andguarantee obligations owing to the landlord was estimated at $0.3 million which the Company recognized at December 31, 2009. For the year endedDecember 31, 2009, revenues for the Vancouver IMAX theater were $1.1 million and the Company recognized a loss of $0.1 million in 2009 from theoperation of the theater. This transaction is reflected as discontinued operations as there are no continuing cash flows from either a migration or a continuationof activities. The remaining assets and liabilities of the Vancouver owned and operated theater are included in the Company’s consolidated balance sheet as atDecember 31, 2010 and are disclosed in note 23(d) to the audited consolidated financial statements in Item 8 of the Company’s 2010 Form 10-K.Pension Plan The Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”), covering Messrs. Gelfond andWechsler. As at December 31, 2010, the Company had an unfunded and accrued projected benefit obligation of approximately $18.1 million (December 31,2009 — $29.9 million) in respect of the SERP. At the time the Company established the SERP, it also took out life insurance policies on Messrs. Gelfond andWechsler with coverage amounts of $21.5 million in aggregate. During the quarter ended June 30, 2010, the Company obtained $3.2 million representing thecash surrender value of Mr. Gelfond’s policy. The proceeds were used to pay down the term loan under the Company’s senior secured credit facility. Duringthe quarter ended September 30, 2010, the Company obtained $4.6 million representing the cash surrender value of Mr. Wechsler’s policy. The amount wasused as an offset against the $14.7 million lump sum payment made to Mr. Wechsler on August 1, 2010 under the SERP. As at December 31, 2009, the cashsurrender value of these policies was $7.3 million. The net periodic benefit cost was $0.4 million and $1.4 million in 2010 and 2009, respectively. The components of net periodic benefit cost were asfollows:53Table of Contents Years ended December 31 2010 2009 Service cost $447 $643 Interest cost 351 1,341 Amortization of prior service credit — 145 Amortization of actuarial gain — (681)Realized actuarial gain on settlement of pension liability (385) — Pension expense $413 $1,448 The pension obligation decreased from $29.9 at December 31, 2009, to $18.1 million at December 31, 2010, resulting primarily from Mr. Wechslerreceiving a lump sum payment of $14.7 million on August 1, 2010. The plan experienced an actuarial loss of $2.6 million during 2010, resulting primarily from a decrease in the Pension Benefit Guaranty Corporation(“PBGC”) published annuity interest rates used to determine the lump sum payment under the plan. Under the terms of the SERP, if Mr. Gelfond’s employment had terminated other than for cause prior to August 1, 2010, he would have been entitled toreceive SERP benefits in the form of monthly annuity payments until the earlier of a change in control or August 1, 2010, at which time he would have becomeentitled to receive remaining benefits in the form of a lump sum payment. If Mr. Gelfond’s employment is, or would have been, terminated other than for causeon or after August 1, 2010, he is, or would have been, entitled to receive SERP benefits in the form of a lump sum payment. SERP benefit payments toMr. 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 thedeferred amount credited at the applicable federal rate for short-term obligations. The terms of Mr. Gelfond’s current employment agreement have been extendedto the beginning of 2013. Under the terms of the SERP, monthly annuity payments payable to Mr. Wechsler, whose employment as Co-CEO terminated effective April 1, 2009, weredeferred for six months and were paid in the form of a lump sum plus interest on the deferred amount on October 1, 2009. Thereafter, in accordance with theterms of the SERP, Mr. Wechsler was entitled to receive monthly annuity payments until the earlier of a change in control or August 1, 2010, at which time hewas entitled to receive remaining benefits in the form of a lump sum payment. On August 1, 2010, the Company made a lump sum payment of $14.7 millionto Mr. Wechsler in accordance with the terms of the plan, representing a settlement in full of Mr. Wechsler’s entitlement under the SERP. In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Wechsler upon retirement. As at December 31, 2010, the Companyhad an unfunded benefit obligation recorded of $0.5 million (December 31, 2009 — $0.5 million).Stock-Based Compensation The Company utilizes the Binomial Model to determine the fair value of stock-based payment awards. The fair value determined by the Binomial Model isaffected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, butare not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercisebehaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises areexpected to occur on average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictionsand are fully transferable. Because the Company’s employee stock options and SARs have certain characteristics that are significantly different from tradedoptions, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the Binomial Model bestprovides an accurate measure of the fair value of the Company’s employee stock options and SARs. Although the fair value of employee stock options andSARs are 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 valueobserved in a willing buyer/willing seller market transaction. Stock-based compensation expense recognized under ASC 718 Compensation — Stock Compensation for 2010, 2009 and 2008 was $27.7 million,$17.7 million and $1.5 million, respectively.54Table of ContentsYears Ended December 31, 2009 versus Years Ended December 31, 2008The Company reported net income of $5.0 million or $0.10 per basic share and $0.09 per diluted share for the year ended December 31, 2009 as compared toa net loss of $33.6 million or $0.79 per share on a basic and diluted basis for the year ended December 31, 2008. Net income for the year includes a$15.4 million charge (2008 — less than $0.1 million) or $0.28 per share for variable share-based compensation expense largely due to the increase in theCompany’s stock price during the year (from $4.46 per share to $13.31 per share) and its impact on SARs and restricted common shares. Excluding theimpact of variable share-based compensation expense, net income would have been $20.5 million or $0.38 per share in 2009, as compared to a net loss of$33.6 million or $0.79 per share in 2008.Revenues and Gross Margin The Company’s revenues for the year ended December 31, 2009 increased by 66.7% to $171.2 million from $102.7 million in 2008 due in large part toincreases in revenue from IMAX systems, joint revenue sharing arrangements and film segments. The gross margin across all segments in 2009 was$81.6 million, or 47.6% of total revenue, compared to $37.6 million, or 36.6% of total revenue in 2008.IMAX Systems IMAX systems revenue increased 85.4% to $64.5 million in 2009 as compared to $34.8 million in 2008, resulting primarily from an increase in systemsinstalled and recognized as compared to the prior year. Revenue from sales and sales-type leases increased 120.3% to $53.9 million in 2009 from $24.5 million in 2008. The Company recognized revenue on 43theater systems which qualified as either sales or sales-type leases in 2009 versus 15 in 2008. There were 40 new theater systems with a value of $49.0 millionand 3 used theater systems with an aggregate value of $2.6 million recognized into revenue in 2009, as compared to 15 new theater systems with a total valueof $22.4 million recognized in 2008. The Company’s introduction of the digital projection system in 2008 is the primary reason for the increase in the numberof theater system unit sales and leases, as the digital projection system changes the economics favorably for the Company’s clients by providing increasedprogramming flexibility and lower print costs totaling $200 per movie per system. Average revenue per sales and sales-type lease systems was $1.3 million in 2009 as compared to $1.5 million in 2008. The lower average revenue per salesand sales-type lease systems experienced reflects the digital upgrade of 16 theater systems which were sold at a lower selling price as compared to a full digitalsystem for strategic reasons. Excluding digital upgrades, average revenue per sales and sales-type lease systems was $1.5 million in 2009, which is consistentwith the average of $1.5 million experienced in 2008. The breakdown in mix of sales and sales-type lease, operating lease and joint revenue sharingarrangement (see discussion below) installations by theater system configuration in 2009 and 2008 is outlined in the table below. 2009 2008Sales and Sales-type lease systems — installed and recognized 2D SR Dome 1 — IMAX 3D GT 3 2 IMAX 3D SR 4 1 IMAX 3D MPX — 7 IMAX digital 35 (1) 5 (2) 43 15 IMAX 3D MPX — installed and deferred — 3 43 18 Operating lease — installed and operating IMAX 3D MPX(1) 1 1 Joint revenue sharing arrangements — installed and operating IMAX digital 74 (1) 41 (2) 118 60 (1) Includes the digital upgrade of 25 systems (14 sales arrangements, 2 treated previously as operating lease arrangements and 9 systems under jointrevenue sharing arrangements) from film-based to digital.55Table of Contents(2) Includes the digital upgrade of 2 systems (one sales arrangement and one system under a joint revenue sharing arrangement) from film-based to digital. As noted in the table above, 3 theater systems installed in 2008 were pursuant to sales arrangements that provided the customer with an upgrade to a digitalsystem at a discounted price when available. These discounted upgrades were provided for strategic reasons. Had the transactions not included this digitalupgrade clause, the Company would have recognized $3.8 million in revenue and $2.0 million in gross margin related to these sales in 2008. The Company’spolicy is such that once the digital upgrade is provided or the fair value for the upgrade is established, the Company allocates total contract consideration,including any upgrade revenues, between the delivered and undelivered elements on a residual basis and recognizes the revenue allocated to the deliveredelements with their associated costs. In 2009, the Company installed 3 digital upgrades, as compared to 1 in 2008, where recognition was previously deferredunder the Company’s digital upgrade policy. Settlement revenue was $2.0 million in 2009 as compared to $0.9 million in 2008 which related primarily to consensual buyouts for uninstalled theatersystems. IMAX systems margin fluctuates as a result of the mix of theater system configurations recognized in each respective year. IMAX theater systems grossmargin from sales and sales-type leases, excluding the impact of settlements and asset impairment charges, decreased to 54.1% in 2009, from 59.4% in 2008.The lower gross margin experienced in 2009 reflects the digital upgrade of 16 locations under sales arrangements sold at lower margins for strategic reasons,and lower margins from the sale of 3 used systems. Gross margin on new sales and sales-type leases systems increased to 57.0% in 2009 from 55.3% in 2008which is a direct result of the theater system configurations recognized in each respective period. Excluded from the IMAX systems margin calculation in 2008is a $2.4 million charge as the Company recorded a write-down of its film-based projector inventories primarily due to the introduction of its digital projectionsystem in July 2008. Ongoing rent revenue and finance income increased to $10.6 million in 2009 from $10.3 million in 2008. Gross margin for ongoing rent and financeincome was consistent at $9.1 million in 2009 and 2008. The change in revenue is a function of new systems under sales or lease agreements that beganoperations in 2009. Contingent fees included in this caption amounted to $3.6 million and $3.7 million in 2009 and 2008, respectively. In 2009, the Company installed and recognized revenue for 1 new theater system that qualified as an operating lease, which is consistent with 2008. In2009, these two theater systems under operating lease arrangements were upgraded to digital theater systems under sales arrangements. The Companyrecognizes revenue on operating leases over the term of the leases.Theater System Maintenance Theater system maintenance revenue increased 11.7% to $18.2 million in 2009 as compared to $16.3 million in 2008. Theater system maintenance grossmargin increased to $8.4 million in 2009 from $7.1 million in 2008. In 2009 and 2008, the Company recorded a write-down of its film-based service partsinventories of $0.8 million and $0.1 million, respectively. Absent this write-down, the margin would have been $9.2 million and $7.2 million in 2009 and2008, respectively. Maintenance revenue continues to grow as the number of theaters in the IMAX network grows. Maintenance margins vary depending on themix of theater system configurations in the theater network and the date of installation.Joint Revenue Sharing Arrangements Revenue from joint revenue sharing arrangements increased 528.8% to $21.6 million in 2009 compared to $3.4 million in 2008. The Company ended2009 with 117 theaters operating under joint revenue sharing arrangements as compared to 52 theaters at the end of 2008. In 2008, 40 of the 52 theaters wereinstalled in the third and fourth quarters, resulting in less than a full year of revenues being recorded. The increase in revenues from joint revenue sharingarrangements was due to the greater number of theaters operating in 2009 as compared to 2008, and stronger performance of the films exhibited in 2009 versus2008, as discussed below. The gross margin from joint revenue sharing arrangements in 2009 increased to $13.3 million compared to a loss of $1.9 million in 2008. The increasewas largely due to the increase in the number of joint revenue sharing theaters operating in 2009 as compared to 2008. Included in the 2009 gross margin werecertain advertising, marketing and selling expenses of $3.4 million associated with the initial launch of 65 new theaters opened during the year, similar to the$1.8 million associated with the initial launch of 40 new theaters in 2008. In addition, accelerated depreciation on existing film-based systems of $1.5 millionwas recorded in 2008. Excluding these launch expenses and accelerated depreciation charges, the gross margin would have been $16.7 million in 2009,compared to $1.4 million in 2008.56Table of ContentsFilm The Company’s revenues from its film segments increased 49.9% to $51.6 million in 2009 from $34.4 million in 2008. Film production and IMAX DMR revenues increased 98.7% to $35.6 million in 2009 from $17.9 million in 2008. The increase in film production andIMAX DMR revenues was due primarily to the overall growth of the IMAX theater network and stronger film performance for the films exhibited. Gross boxoffice generated by IMAX DMR films increased 107.8% to $270.8 million in 2009 versus $130.3 million in 2008. In 2009, a significant portion of the gross-box office was generated by the exhibition of 14 films which included The Day The Earth Stood Still: The IMAX Experience, the re-release of The DarkKnight: The IMAX Experience, Jonas Bros: The 3D Concert Experience, Watchmen: The IMAX Experience, Monsters vs. Aliens: An IMAX 3DExperience, Star Trek: The IMAX Experience, Night at the Museum: Battle of the Smithsonian: The IMAX Experience, Transformers: Revenge of theFallen: The IMAX Experience, Harry Potter and the Half Blood Prince: An IMAX 3D Experience, Cloudy with a Chance of Meatballs: An IMAX 3DExperience, Where the Wild Things Are: The IMAX Experience, Michael Jackson’s This Is It: The IMAX Experience, Disney’s A Christmas Carol: AnIMAX 3D Experience and Avatar: An IMAX 3D Experience as compared to 8 primary films exhibited in 2008, which included The SpiderwickChronicles: The IMAX Experience, Shine A Light: The IMAX Experience, Speed Racer: The IMAX Experience, Kung Fu Panda: The IMAXExperience, The Dark Knight: The IMAX Experience, Eagle Eye: The IMAX Experience, Madagascar: Escape 2 Africa: The IMAX Experience andThe Day the Earth Stood Still: The IMAX Experience. Film distribution revenues increased 29.4% to $12.4 million in 2009 from $9.6 million in 2008 due to the introduction and strong performance of Underthe Sea 3D: An IMAX 3D Experience, a movie co-produced by the Company and WB and which was released on February 13, 2009. The Company did notdistribute any original titles in 2008. Film post-production revenues decreased 48.0% to $3.6 million in 2009 from $6.9 million in 2008 primarily due to a decrease in third party business. The Company’s gross margin from its film segments increased 70.0% in 2009 to $23.1 million from $13.6 million in 2008. Film production and IMAXDMR gross margins increased to $20.0 million from $7.0 million in 2008 largely due to an increase in IMAX DMR revenue resulting from the exhibition of 14films in 2009 as compared to 8 in 2008. The increase was partially offset by lower film distribution and film post-production margins. The film distributionmargin of $2.1 million in 2009 was lower than the $3.1 million experienced in 2008. Film post-production gross margin decreased by $2.5 million due to adecrease in third party business as compared to the prior year.Theater Operations Theater operations revenue in 2009 increased 12.1% to $11.8 million compared to $10.5 million in 2008. This increase was attributable to increases inaverage ticket prices and attendance at certain of the Company’s owned theaters primarily due to the stronger performance of the films exhibited in 2009 ascompared to 2008. Theater operations margin increased $0.7 million from 2008 primarily due to an increase in revenues largely associated with IMAX DMR films exhibited.Other Other revenue increased to $3.4 million in 2009 compared to $3.2 million in 2008. Other revenue primarily includes revenue generated from the Company’scamera and rental business and after market sales of projection system parts and 3D glasses. The gross margin on other revenue was $0.3 million higher in 2009 as compared to 2008.Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $56.2 million in 2009, as compared to $43.7 million in 2008. The $12.5 million increaseexperienced from the prior year comparative period was largely the result of the following: • a $16.5 million increase in the Company’s stock-based compensation expense (including $15.4 million for variable share-based awards) primarilydue to an increase in the Company’s stock price during the period (an increase from $4.46 to $13.31 per share in 2009 as compared to a decreasefrom $6.82 per share to $4.46 per share in the prior year) and its impact on variable awards such as SARs. The Company has no present intentionto issue such variable awards in the future; and57Table of Contents • a $2.1 million increase in legal and professional fees, including professional fees of approximately $1.0 million in connection with the termination ofa service arrangement.These increases were partially offset by: • a $1.4 million decrease in staff-related costs and compensation costs, which was the result of a decrease in salaries and benefits primarily due to alower average Canadian dollar denominated salary expense (including a $0.9 million benefit from hedged forward contracts) and a $0.6 milliondecrease in travel and entertainment costs; • a $3.6 million decrease due to a gain from unhedged forward contracts and foreign exchange translation adjustments. In 2009, the Company recordeda foreign exchange gain of $2.9 million due to an increase in the exchange rates of foreign currency denominated receivables, other working capitalbalances and foreign currency unhedged forward contracts, as compared to a loss of $0.7 million recorded in 2008; and • a $1.1 million decrease in other general corporate expenditures.Receivable Provisions, Net of Recoveries Receivable provisions, net of recoveries for accounts receivable and financing receivables, amounted to a net provision of $1.1 million in 2009, ascompared to $2.0 million in 2008. The Company’s accounts receivables and financing receivables are subject to credit risk. The Company’s accounts receivable and financing receivablesare concentrated with the theater exhibition industry and film entertainment industry. To minimize the Company’s credit risk, the Company retains title tounderlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentiallyuncollectible amounts. Accordingly, the Company believes it has adequately protected itself against exposures relating to receivables and contractualcommitments.Asset Impairments and Other Significant Charges The Company recorded an asset impairment charge of $0.2 million against fixed assets after the Company assessed the carrying value of certain assets inlight of their future expected cash flows. The Company recognized that the carrying values for the assets exceeded the expected undiscounted future cash flows.During 2008, the Company recorded total asset impairment charges of $nil. The Company recorded a net provision of $0.1 million in 2009 (2008 — $0.4 million) in accounts receivable. In 2009, the Company also recorded a net provision of $1.4 million in financing receivables (2008 — $1.6 million) as the collectibility associated withcertain leases was uncertain. In 2009, the Company recorded a charge of $0.9 million (2008 —$2.5 million) in costs and expenses applicable to revenues, primarily for its film-basedprojector inventories due to a reduction in the net realizable value resulting from the Company’s development of a proprietary digital projection system inJuly 2008.Interest Income and Expenses Interest income decreased to less than $0.1 million in 2009, as compared to $0.4 million in 2008. Interest expense decreased to $13.8 million in 2009 as compared to $17.7 million in 2008. During the year, the Company repurchased all $160.0 millionaggregate principal amount of the its outstanding 9.625% Senior Notes which resulted in a decrease in the Company’s interest expense for the year endedDecember 31, 2009. Included in interest expense is the amortization of deferred finance costs in the amount of $1.0 million and $1.3 million in 2009 and2008, respectively, relating to the Company’s Senior Notes. The Company’s policy is to defer and amortize, over the life of the debt instrument, all the costsrelating to a debt financing which are paid directly to the debt provider.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 rateincreases or reductions in the year, changes due to foreign exchange, changes in the Company’s valuation allowance based on the Company’s recoverabilityassessments of deferred tax assets, and favorable or unfavorable resolution of various tax examinations. There was no change in the Company’s estimates ofthe recoverability of its deferred tax assets based on an analysis of both positive and negative evidence including projected future earnings.58Table of Contents On March 12, 2009, the Government of Canada enacted Bill C-10, which included legislation allowing corporations to elect to file their Canadian corporatetax returns in the corporation’s functional currency. The Company has submitted an election to file the 2008 and subsequent Canadian corporate tax returns inU.S. dollars. As a result of the election and its impact on the Company’s opening 2008 tax return balances in Canada, the Company has recorded an increasein the gross deferred tax asset of $14.1 million, which has been fully offset by a corresponding valuation allowance. Other significant changes in the effectiverate include the effects of legislative changes regarding enacted rate reductions and extensions of carryforward periods relating to investment tax credits inCanada. In addition, the Company redeemed its Senior Notes in the year resulting in foreign exchange gains and other capital gains, against which theCompany has applied its available capital and net operating losses As at December 31, 2009, the Company had net deferred income tax assets after valuation allowance of $nil (December 31, 2008 — $nil). As atDecember 31, 2009, the Company had a net deferred income tax asset before valuation allowance of $71.6 million, against which the Company is carrying a$71.6 million valuation allowance.Research and Development For the years ended December 31, 2009 and 2008 research and development expenses amounted to $3.8 million and $7.5 million, respectively. Theexpenses primarily reflect significant research and development activities pertaining to the development of the Company’s new proprietary digitally-basedtheater projector which the Company introduced in July of 2008. As at December 31, 2009, the Company had installed 151 IMAX digital theater projectionsystems and had signed contracts to install an additional 115 digital systems.Discontinued Operations On December 11, 2009, the Company closed its owned and operated Tempe IMAX theater. The Company recognized lease termination and guaranteeobligations of $0.5 million to the landlord, which were offset by derecognition of other liabilities of $0.9 million, for a net gain of $0.4 million. In a relatedtransaction, the Company leased the projection system and inventory of the Tempe IMAX theater to a third party theater exhibitor. Revenue from this operatinglease transaction will be recognized on a straight-line basis over the term of the lease. For the year ended December 31, 2009, revenues for the Tempe IMAXtheater were $0.8 million (2008 — $1.5 million) and the Company recognized a loss of $0.5 million in 2009 (2008 —loss of $0.3 million) from the operationof the theater. The above transactions are reflected as discontinued operations as there are no significant continuing cash flows from either a migration or acontinuation of activities. On September 30, 2009, the Company closed its owned and operated Vancouver IMAX theater. The amount of loss to the Company pertaining to lease andguarantee obligations owing to the landlord was estimated at $0.3 million which the Company recognized at December 31, 2009. For the year endedDecember 31, 2009, revenues for the Vancouver IMAX theater were $1.1 million (2008 — $2.0 million) and the Company recognized a loss of $0.1 million in2009 (2008 — income of $0.2 million) from the operation of the theater. The above transactions are reflected as discontinued operations as there are nocontinuing cash flows from either a migration or a continuation of activities.Pension Plan The Company has an unfunded defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”), covering Messrs. Gelfond andWechsler. As at December 31, 2009, the Company had an unfunded and accrued projected benefit obligation of approximately $29.9 million (December 31,2008 — $26.4 million) in respect of the SERP. At the time the Company established the SERP, it also took out life insurance policies on Messrs. Gelfond andWechsler with coverage amounts of $21.5 million in aggregate. As at December 31, 2009, the cash surrender value of the insurance policies is $7.3 million(December 31, 2008 — $6.2 million). The net periodic benefit cost was $1.4 million and $1.8 million in 2009 and 2008, respectively. The components of net periodic benefit cost were asfollows:59Table of Contents Years ended December 31 2009 2008 Service cost $643 $793 Interest cost 1,341 1,251 Amortization of prior service credit 145 (248)Amortization of actuarial gain (681) — Pension expense $1,448 $1,796 The plan experienced an actuarial loss of $2.4 million during 2009, resulting in an increase in the pension obligation from $26.4 million at December 31,2008, to $29.9 million at December 31, 2009. The primary factor contributing to this loss is a decrease in the Pension Benefit Guaranty Corporation(“PBGC”) published annuity interest rates used to determine the lump sum payment under the plan, as well as a decrease in the Citigroup Pension DiscountCurve discount rate from 5.11% in the prior year to 1.50%. As at December 31, 2009, Mr. Wechsler’s benefits were 100% vested while the benefits of Mr. Gelfond were approximately 95.9% vested. The vestingpercentage of a member whose employment terminates other than by voluntary retirement or upon a change in control is 100%. Upon a termination for cause,prior to a change of control, the executive will forfeit any and all benefits to which such executive may have been entitled, whether or not vested. On October 1, 2009, the Company paid benefits of $0.9 million to Mr. Wechsler in accordance with the terms of the SERP.Stock-Based Compensation The Company utilizes the Binomial Model to determine the fair value of stock-based payment awards. The fair value determined by the Binomial Model isaffected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, butare not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercisebehaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises areexpected to occur on average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictionsand are fully transferable. Because the Company’s employee stock options and stock appreciation rights have certain characteristics that are significantlydifferent from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, theBinomial Model best provides an accurate measure of the fair value of the Company’s employee stock options and stock appreciation rights. Although the fairvalue of employee stock options and stock appreciation rights are determined in accordance with the Equity topic of the FASB ASC using an option-pricingmodel, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. Stock-based compensation expense recognized under ASC 718 Compensation — Stock Compensation for 2009, 2008 and 2007 was $17.7 million,$1.5 million and $3.4 million, respectively.60Table of ContentsOutlook The Company achieved record revenues and earnings in 2010. The Company anticipates even higher revenues in 2011, based primarily on the recent andexpected future growth of the Company’s commercial theater network, which drives revenue in several of the Company’s segments and the anticipatedperformance of the 2011 film slate. The recent and expected future growth in the theatre network is being driven in part by the record number of theatersignings the Company achieved in 2010. The Company installed 91 IMAX theater systems, not including digital upgrades, in 2010. At year-end, this reflected an increase of 20.5% for the overallIMAX theater network and 28.2% for the IMAX commercial theater network over the prior year. In addition, the Company entered into new theaterarrangements for a record number of new theater systems in 2010. Of the theater system arrangements in backlog as at December 31, 2010, the Companycurrently estimates that approximately 80-90 theater systems (excluding digital upgrades) will be installed in 2011. As a result, by the end of 2011, theCompany’s total theater network is expected to have increased by approximately 15% over the prior year and its commercial theater network by approximately20% over the prior year as the majority of the new 2011 systems are to be installed in commercial settings. In addition, each year the Company installs anumber of systems that are signed in that same calendar year. However, the Company cautions that theater system installations slip from period to period inthe course of the Company’s business and such slippages remain a recurring and unpredictable part of its business. A substantial portion of the recent commercial theater network growth has come from theaters under joint revenue sharing arrangements both in the UnitedStates and in Canada and, increasingly, in certain international markets. Revenue sharing arrangements allow the Company to capitalize on its theater networkgrowth by providing the Company with higher recurring revenue than under most sales or sales-type lease arrangements. The Company believes that thestrategy of increasing the number of IMAX theaters under joint revenue sharing arrangements has driven increased profitability in recent years and theCompany believes that it will continue to drive profitability in the future. The retirement of a significant portion of the Company’s debt during 2009 andincreased cash flows from operations during 2009 and 2010 has allowed the Company the financial flexibility to fund the expansion of its joint revenuesharing strategy. In recent years, the number of IMAX DMR films released to the IMAX theater network has also increased. The increased number of IMAX DMR films canminimize the impact of an individual film’s relatively weak performance. In addition, the increased number of titles with shorter release windows can mean agreater opportunity to capitalize on the early weeks of a movie’s release, when over half of a given title’s gross box office is typically generated. The increasednumber of films also permits the Company to select a diverse mix of titles to maximize the network’s box office potential. In 2010, 16 IMAX DMR titles wereshown in the IMAX theater network, compared to 14 titles in 2009. To date, the Company has contracted for the release of 21 IMAX DMR titles to IMAXtheaters in 2011. In addition, the Company, in conjunction with WB, will release Born to be Wild 3D: An IMAX 3D Experience to its network inApril 2011. The Company remains in active discussions with every major Hollywood studio regarding future titles. However, the Company cautions thatfilms can be subject to delays in production or changes in release schedule, which can negatively impact the number, timing and type of IMAX DMR andIMAX original films released to the IMAX theater network. The Company intends to continue to try to achieve the optimal film slate, with the appropriatenumber and mix of titles. The Company believes that its international expansion is an important driver of future growth for the Company. During 2010, 39% of the Company’sgross box office from DMR films was generated from IMAX theaters in international markets, as compared with 25% in 2009. In 2010, 127 of theCompany’s record 221 theater signings were for theatres in international markets. Included among these signings were several multi-theater sales transactions,including for theaters in Russia, China, Thailand, Kazakhstan, Ukraine, Philippines, and Israel. The Company also entered into several significant jointrevenue sharing arrangements in international markets in 2010, including in South Korea, France, Germany, Italy and Spain, as well as expansions ofexisting joint revenue sharing arrangements in Japan. In 2011, the Company intends to continue to expand its international presence, including by expandingits number of theaters under international joint revenue sharing arrangements. To support its growth in international markets, the Company has begun, and expects to continue, to evaluate DMR opportunities in international markets.In July 2010, the Company exhibited its first DMR title outside of North America, Aftershock: The IMAX Experience, across IMAX theaters in China, otherparts of Asia and key North American markets pursuant to an agreement between the Company and Huayi Bros. Media Corporation Ltd., China’s largestmedia group. On August 30, 2010, the Company announced that internationally acclaimed director John Woo and producer Terence Chang’s next film, theaction epic Flying Tigers, is intended to be released to select IMAX theaters in early 2012. The film is the second announced Chinese film to be released toIMAX theaters. In December 2010, the Company also announced the release of The Founding of a Party: The IMAX Experience in China in June 2011. TheCompany is also committed to maximizing the productivity of its international theaters through international-only releases. The Company’s first international-only release Prince of Persia: Sands of Time: The IMAX Experience was released in May 2010 and the Company’s second international-only release,Tangled: An IMAX 3D Experience, is being released in select Asian markets beginning in February 2011. The Company anticipates additional international-only releases in the future. Finally, in order to61Table of Contentsfurther strengthen the Company’s film slate internationally, the Company has recently announced certain IMAX-only early releases. For instance, TronLegacy: An IMAX 3D Experience was released in IMAX theaters in France four days prior to its wide release in that country. The Company and its studiopartners also employed this IMAX-only early release strategy with Harry Potter and the Deathly Hallows: Part I: The IMAX Experience in France inNovember and with Tron Legacy: An IMAX 3D Experience in Russia in December. In 2011, the Company also intends to continue to explore new areas of brand extension such as: 3D in-home entertainment technology, including 3net, a 3Dtelevision channel operated by a Limited Liability Corporation owned by the Company, Discovery Communications and Sony Corporation; increased post-production opportunities; alternative theater content, and partnering with technology, studio, programming, content and consumer electronics companies.LIQUIDITY AND CAPITAL RESOURCESCredit Facility On November 16, 2009, the Company amended and restated the terms of its senior secured credit facility, which had been scheduled to mature onOctober 31, 2010. The amended and restated facility, as further amended by the parties on January 21, 2011, (the “Credit Facility”) with a scheduledmaturity of October 31, 2013, has a maximum borrowing capacity of $75.0 million, consisting of a revolving loan facility of $40.0 million, subject to aborrowing base calculation (as described below) and including a sublimit of $20.0 million for letters of credit and a term loan of $35.0 million. Certain of theCompany’s subsidiaries serve as guarantors (the “Guarantors”) of the Company’s obligations under the Credit Facility. The Credit Facility is collateralized bya first priority security interest in all of the present and future assets of the Company and the Guarantors. The Company’s indebtedness under the Credit Facility includes the following: December 31, December 31, 2010 2009 Term Loan $17,500 $35,000 Revolving Credit Facility — 15,000 $17,500 $50,000 As at December 31, 2010, the Company’s current borrowing capacity under the revolving portion of the Credit Facility was $40.0 million after deductionfor the minimum Excess Availability reserve of $5.0 million. Outstanding borrowings and letters of credit and advance payment guarantees were $nil as atDecember 31, 2010. As at December 31, 2009, the borrowing capacity was $24.8 million after deduction for outstanding borrowings of $15.0 million, lettersof credit and advance payment guarantees of $0.3 million and the minimum Excess Availability reserve of $5.0 million. The terms of the Credit Facility are set forth in the Amended and Restated Credit Agreement (the “Credit Agreement”), dated November 16, 2009, betweenthe Company, Wells Fargo Capital Finance Corporation Canada (formerly Wachovia Capital Finance Corporation (Canada)), as agent, lender, sole leadarranger and sole bookrunner, (“Wells Fargo”); and Export Development Canada, as lender (“EDC”, together with Wells Fargo, the “Lenders”) and in variouscollateral and security documents entered into by the Company and the Guarantors. Each of the Guarantors has also entered into a guarantee in respect of theCompany’s obligations under the Credit Facility. The revolving portion of the Credit Facility permits maximum aggregate borrowings equal to the lesser of: (i) $40.0 million, and (ii) a collateral calculation based on the percentages of the book values of the Company’s net investment in sales-type leases, financing receivables, certaintrade accounts receivable, finished goods inventory allocated to backlog contracts and the appraised values of the expected future cash flows related tooperating leases and the Company’s owned real property, reduced by certain accruals and accounts payable and subject to other conditions, limitations andreserve right requirements. It is also reduced by the settlement risk on its foreign currency forward contracts when the notional value exceeds the fair value ofthe forward contracts. The revolving portion of the Credit Facility bears interest, at the Company’s option, at either (i) LIBOR plus a margin of 2.75% per annum, or (ii) WellsFargo’s prime rate plus a margin of 1.25% per annum. The term loan portion of the Credit Facility bears interest at the Company’s option, at either (i) LIBORplus a margin of 3.75% per annum, or (ii) Wells Fargo’s prime rate plus a62Table of Contentsmargin of 2.25% per annum. Under the Credit Facility, the effective interest rate for the year ended December 31, 2010, for the term loan portion was 4.06%(2009 — 4.09%) and 3.56% for the revolving portion (2009 — 2.29%). The Credit Facility provides that so long as the term loan remains outstanding, the Company will be required to maintain: (i) a ratio of funded debt (asdefined in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) of not more than 2:1 through December 31, 2010, and (ii) a ratio of fundeddebt to EBITDA of not more than 1.75:1 thereafter. If the Company repays the term loan in full, it will remain subject to such ratio requirements only ifExcess Availability (as defined in the Credit Agreement) is less than $10.0 million or Cash and Excess Availability (as defined in the Credit Agreement) is lessthan $15.0 million. The ratio of funded debt to EBITDA was 0.17:1 as at December 31, 2010, where Funded Debt (as defined in the Credit Agreement) is thesum of all obligations evidenced by notes, bonds, debentures or similar instruments and was $17.5 million. EBITDA is calculated as follows: EBITDA per Credit Facility: (In thousands of U.S. Dollars) Net earnings $100,779 Add (subtract): Loss from equity accounted investments 493 Recovery of income taxes (51,784)Interest expense net of interest income 1,486 Depreciation and amortization including film asset amortization(1) 20,195 Write-downs net of recoveries including asset impairments and receivable provisions(1) 2,551 Stock and other non-cash compensation 28,195 Other, net (536) $101,379 (1) See note 19 to the accompanying audited consolidated financial statements in Item 8. If Cash and Excess Availability is less than $25.0 million, the Company will also be required to maintain a Fixed Charge Coverage Ratio (as defined inthe Credit Agreement) of not less than 1.1:1.0; provided, however, that if the Company repays the term loan in full, it will remain subject to such ratiorequirement only if Excess Availability is less than $10.0 million or Cash and Excess Availability is less than $15.0 million At all times, under the terms ofthe Credit Facility, the Company is required to maintain minimum Excess Availability of not less than $5.0 million and minimum Cash and ExcessAvailability of not less than $15.0 million. These amounts were $45.0 million and $75.4 million, respectively at December 31, 2010. The Company was incompliance with all of these requirements as at December 31, 2010. The Credit Facility contains typical affirmative and negative covenants, including covenants that limit or restrict the ability of the Company and theGuarantors to: incur certain additional indebtedness; make certain loans, investments or guarantees; pay dividends; make certain asset sales; incur certainliens or other encumbrances; conduct certain transactions with affiliates and enter into certain corporate transactions. The Credit Facility also contains customary events of default, including upon an acquisition or change of control or upon a change in the business andassets of the Company or a Guarantor that in each case is reasonably expected to have a material adverse effect on the Company or Guarantor. If an event ofdefault occurs and is continuing under the Credit Facility, the Lenders may, among other things, terminate their commitments and require immediaterepayment of all amounts owed by the Company.Letters of Credit and Other Commitments As at December 31, 2010, the Company has letters of credit and advance payment guarantees of $nil outstanding (December 31, 2009 — $0.3 million),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 inconjunction with guarantees fully insured by EDC (the “Bank of Montreal Facility”). The Bank of Montreal Facility is unsecured and includes typicalaffirmative and negative covenants, including delivery of annual consolidated financial statements within 120 days of the end of the fiscal year. The Bank ofMontreal Facility is subject to periodic annual reviews. As at December 31,63Table of Contents2010, the Company had letters of credit outstanding of $2.4 million under the Bank of Montreal facility as compared to $3.6 million as at December 31,2009.Senior Notes due December 2010 In 2009, the Company repurchased all $160.0 million aggregate principal amount of its outstanding 9.625% Senior Notes due December 1, 2010, whichrepresented the aggregate principal amount outstanding. The Company paid cash of $159.1 million to reacquire its bonds, thereby releasing the Companyfrom further obligations to various holders under the indenture governing the Senior Notes (the “Indenture”). The Company accounted for the bond repurchasein accordance with the Debt Topic of the FASB ASC, whereby the net carrying amount of the debt extinguished was the face value of the bonds adjusted forany unamortized premium, discount and costs of issuance, which resulted in a loss of $0.6 million in 2009.Cash and Cash Equivalents As at December 31, 2010, the Company’s principal sources of liquidity included cash and cash equivalents of $30.4 million, the Credit Facility,anticipated collection from trade accounts receivable of $39.6 million, anticipated collection from financing receivables due in the next 12 months of$12.8 million, payments expected in the next 12 months on existing backlog deals and cash receipts from theaters under joint revenue sharing arrangements.As at December 31, 2010, the Company had drawn down $nil on the revolving portion of the Credit Facility, and had letters of credit of $nil outstandingunder the Credit Facility and $2.4 million under the Bank of Montreal Facility. During the year ended December 31, 2010, the Company’s operations provided cash of $58.5 million and the Company used cash of $36.8 million tofund capital expenditures, principally to build equipment for use in joint revenue sharing arrangements and to fund its investment in film assets. Based onmanagement’s current operating plan for 2011, the Company expects to continue to use cash to deploy additional theater systems under joint revenue sharingarrangements. Cash flows from joint revenue sharing arrangements are derived from the theater box office and concession revenues and the Company investeddirectly in the roll out of 54 new theater systems and 2 digital upgrades under joint revenue sharing arrangements in 2010. The Company believes that cash flow from operations together with existing cash and borrowing available under the Credit Facility will be sufficient tofund the Company’s business operations, including its strategic initiatives relating to existing joint revenue sharing arrangements 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 productions,installations and film performance are not realized. The Company forecasts its short-term liquidity requirements on a quarterly and annual basis. Since theCompany’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 theCompany’s 2010 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 Companycompletes the performance of its obligations. Similarly, the Company receives cash payments for some of its film productions in advance of related cashexpenditures. 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 theatersystem lease and sale agreements in the year, costs associated with contributing systems under joint revenue sharing arrangements, the box-office performanceof films distributed by the Company and/or exhibited in the Company’s theaters, increases or decreases in the Company’s operating expenses, includingresearch and development, and the level of cash collections received from its customers. Cash provided by operating activities amounted to $58.5 million in 2010. Changes in other non-cash operating assets as compared to 2009 include: anincrease of $11.9 million in financing receivables; an increase of $2.4 million in accounts receivable; an increase of $3.8 million in inventories; an increase of$0.2 million in prepaid expenses; and an increase of $0.3 million in other assets which includes a $0.4 million increase in commissions and other deferredselling expenses and a $0.1 million decrease in insurance recoveries receivable. Changes in other non-cash operating liabilities as compared to December 31,2009 include: an increase in deferred revenue of $15.7 million related to amounts added to deferred revenue for backlog payments received offset by theatersystem installations in the current period; an increase in accounts payable of $0.1 million and a64Table of Contentsdecrease of $25.8 million in accrued liabilities largely due to a payment of pension benefits in the amount of $14.7 million and payments of $14.5 million invariable stock-based compensation expense. Included in accrued liabilities at December 31, 2010, was $18.1 million in respect of accrued pension obligations. Investing Activities Net cash used in investing activities amounted to $23.8 million in 2010 compared to $27.6 million in 2009, which includes an investment in joint revenuesharing equipment of $21.3 million, purchases of $5.3 million in property, plant and equipment, an investment in other assets of $0.7 million, investmentsin new business ventures of $3.6 million, and an increase in other intangible assets of $0.7 million offset by a receipt of $7.8 million representing the cashsurrender value of a life insurance policy. Financing Activities Net cash used in financing activities in 2010, amounted to $24.2 million due to repayment of bank indebtedness of $32.5 million, offset by the proceedsfrom the issuance of common shares from stock option exercises. Capital Expenditures Capital expenditures, including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment, net of salesproceeds, and investments in film assets were $36.8 million in 2010 as compared to $35.7 million in 2009. The Company anticipates a consistent level ofcapital expenditures in 2011 as compared to 2010 related, in part, to the anticipated roll-out of approximately 40 theaters pursuant to joint revenue sharingarrangements in 2011, all of which the Company currently intends to fund through cash on hand, cash from operations and availability under the CreditFacility. Prior Year Cash Flow Activities Net cash provided by operating activities amounted to $13.8 million in the year ended December 31, 2009. Changes in other non-cash operating assets andliabilities included a $7.2 million increase in financing receivables, an increase of $13.4 million in accounts receivable, a decrease in inventories of$10.1 million, a $0.7 million increase in prepaid expenses, a $1.4 million decrease in other assets which includes a $0.7 million decrease in commissions andother deferred selling expenses and a $0.7 million decrease in insurance recoveries receivable, an increase in accounts payable of $1.5 million, a decrease indeferred revenue of $13.5 million, related to amounts relieved from deferred revenue related to theater system installations in 2009 offset by backlog paymentsreceived and a decrease of less than $0.1 million in accrued liabilities. Net cash used in investing activities in the year ended December 31, 2009 amounted to$27.6 million, which includes an investment in joint revenue sharing equipment of $25.1 million, purchases of $1.4 million in property, plant andequipment, an increase in other assets of $0.7 million and an increase in other intangible assets of $0.3 million. Net cash provided by financing activities in2009 amounted to $7.2 million due to the issuance of common shares in 2009, net of common share issuance costs, offset by the proceeds to repurchaseSenior Note indebtedness. Capital expenditures including the Company’s investment in joint revenue sharing equipment, purchase of property, plant and equipment net of salesproceeds and investments in film assets were $35.7 million in the year ended December 31, 2009.CONTRACTUAL OBLIGATIONS The following summarizes the Company’s contractual obligations and commercial commitments at December 31, 2010 that will be settled in futureperiods:65Table of Contents Payments Due by Period Total (In thousands of U.S. Dollars) Obligations 2011 2012 2013 2014 2015 Thereafter Pension obligations (1) $18,813 $— $— $18,813 $— $— $— Credit Facility(2) 17,500 11,667 5,833 — — — — Operating lease obligations (3) 16,253 5,673 5,390 2,064 879 490 1,757 Purchase obligations (4) 13,561 13,561 — — — — — Postretirement benefits obligations 131 13 15 31 34 38 — Capital lease obligations (5) 70 27 23 20 — — — $66,328 $30,941 $11,261 $20,928 $913 $528 $1,757 (1) The SERP assumptions are that Mr. Gelfond will receive a lump sum payment at the beginning of 2013 upon retirement at the end of the current term ofhis employment agreement, although Mr. Gelfond has not informed the Company that he intends to retire at that time. (2) Interest on the Credit Facility is payable monthly in arrears based on the applicable variable rate and is not included above. (3) The Company’s total minimum annual rental payments to be made under operating leases, mostly consisting of rent at the Company’s properties inNew York and Santa Monica, and at the various owned and operated theaters. (4) The Company’s total payments to be made under binding commitments with suppliers and outstanding payments to be made for supplies ordered butyet to be invoiced. (5) The Company’s total minimum annual payments to be made under capital leases, mostly consisting of payments for IT hardware and various otherfixed assets.Pension and Postretirement Obligations The Company has an unfunded defined benefit pension plan, the SERP, covering Messrs. Gelfond and Wechsler. As at December 31, 2010, the Companyhad an unfunded and accrued projected benefit obligation of approximately $18.1 million (December 31, 2009 — $29.9 million) in respect of the SERP. Atthe time the Company established the SERP, it also took out life insurance policies on Messrs. Gelfond and Wechsler with coverage amounts of $21.5 millionin aggregate. During the quarter ended June 30, 2010, the Company obtained $3.2 million representing the cash surrender value of Mr. Gelfond’s policy. Theproceeds were used to pay down the term loan under the Credit Facility. During the quarter ended September 30, 2010, the Company obtained $4.6 millionrepresenting the cash surrender value of Mr. Wechsler’s policy. The amount was used as a part of the $14.7 million lump sum payment made to Mr. Wechsleron August 1, 2010 under the SERP which settled in full Mr. Wechsler’s entitlement under the SERP. At December 31, 2010, the cash surrender value of thesepolicies was $nil. Under the terms of the SERP, if Mr. Gelfond’s employment had been terminated other than for cause prior to August 1, 2010, he would have been entitledto receive SERP benefits in the form of monthly annuity payments until the earlier of a change of control or August 1, 2010, at which time he would havebecome entitled to receive remaining benefits in the form of a lump sum payment. If Mr. Gelfond’s employment is, or would have been, terminated other thanfor cause on or after August 1, 2010, he is, or would have been, entitled to receive SERP benefits in the form of a lump sum payment. SERP benefit paymentsto 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 onthe deferred amount credited at the applicable federal rate for short-term obligations. The terms of Mr. Gelfond’s current employment agreement has beenextended to the beginning of 2013. Under the terms of the SERP, monthly annuity payments payable to Mr. Wechsler, whose employment as Co-CEO terminated effective April 1, 2009, weredeferred for six months and were paid in the form of a lump sum plus interest on the deferred amount on October 1, 2009. These monthly annuity paymentscontinued through to August 1, 2010. On August 1, 2010, the Company made a66Table of Contentslump sum payment of $14.7 million to Mr. Wechsler in accordance with the terms of the plan, representing a settlement in full of Mr. Wechsler’s entitlementunder the SERP. In July 2000, the Company agreed to maintain health benefits for Messrs. Gelfond and Wechsler upon retirement. As at December 31, 2010, the Companyhad an unfunded benefit obligation of $0.5 million (December 31, 2009 — $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’sfinancial condition.Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial positionand cash flows. Market risk is the potential change in an instrument’s value caused by, for example, fluctuations in interest and currency exchange rates. TheCompany’s primary market risk exposure is the risk of unfavorable movements in exchange rates between the U.S. dollar and the Canadian dollar. TheCompany 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 Canadiandollars. 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. InJapan, the Company has ongoing operating expenses related to its operations. Net Japanese yen cash flows are converted to U.S. dollars through the spotmarket. The Company also has cash receipts under leases denominated in Japanese yen, Euros and Canadian dollars. The Company manages its exposure to foreign exchange rate risks through its regular operating and financing activities and, when appropriate, through theuse of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures as well as reduce earnings and cashflow volatility resulting from shifts in market rates. For the year ended December 31, 2010, the Company recorded a foreign exchange gain on translation of foreign currency working capital balances andunhedged foreign currency forward contracts of $1.5 million as compared with a foreign exchange gain of $2.9 million in 2009. During 2010, the Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility offoreign currencies with settlement dates throughout 2011. In addition, at December 31, 2010, the Company held foreign currency forward contracts to manageforeign currency risk on future anticipated Canadian dollar expenditures that were not considered foreign currency hedges by the Company. Foreign currencyderivatives are recognized and measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the consolidatedstatement of operations except for derivatives designated and qualifying 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 consolidatedstatement of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statement of operations.The notional value of these contracts at December 31, 2010 was $12.7 million (December 31, 2009 — $2.8 million). A gain of $0.8 million was recorded toOther Comprehensive Income with respect to the appreciation in the value of these contracts in 2010 (2009 — $1.7 million). A gain of $0.7 million wasreclassified from Accumulated Other Comprehensive Income to selling, general and administrative expenses in 2010 (2009 — $1.3 million). Appreciation ordepreciation on forward contracts not meeting the requirements for hedge accounting in the Derivatives and Hedging Topic of the FASB ASC are recorded toselling, general and administrative expenses. The notional value of forward contracts that do not qualify for hedge accounting at December 31, 2010 was$28.8 million (December 31, 2009 — $4.5 million). For all derivative instruments, the Company is subject to counterparty credit risk to the extent that the counterparty may not meet its obligations to theCompany. To manage this risk, the Company enters into derivative transactions only with major financial institutions.67Table of Contents At December 31, 2010, the Company’s net investment in leases and working capital items denominated in Canadian dollars, Japanese Yen and Eurosaggregated to $2.1 million. Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates atDecember 31, 2010, the potential change in the fair value of foreign currency-denominated net investment in leases and working capital items would be$0.2 million. 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 itsinterest expense from variable-rate borrowings under the Credit Facility. As at December 31, 2010, the Company’s borrowings under the Credit Facility were $17.5 million (December 31, 2009 — $50.0 million). The Company’s largest exposure with respect to variable rate debt comes from changes in the London Interbank Offered Rate (LIBOR). The Company hadvariable rate debt instruments representing approximately 9.2% and 24.7% of its total liabilities at December 31, 2010 and 2009, respectively. If theCompany’s interest rates average 10 percent more in 2011 than they did at December 31, 2010, the Company’s interest expense would increase byapproximately $0.1 million and interest income from cash would increase by approximately less than $0.1 million. These amounts are determined byconsidering the impact of the hypothetical interest rates on the Company’s variable rate debt and cash balances at December 31, 2010. At December 31, 2010, the Company is not exposed to any market risk for fixed rate debt as the Company repurchased all of the remaining $160.0 millionof its Senior Notes due December 2010 in 2009.68Table of Contents Item 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 70 Consolidated Balance Sheets as at December 31, 2010 and 2009 71 Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 72 Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 73 Consolidated Statements of Shareholders’ Equity (Deficiency) for the years ended December 31, 2010, 2009 and 2008 74 Notes to Consolidated Financial Statements 75 ************69Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders of IMAX Corporation:We have audited the accompanying consolidated balance sheets of IMAX Corporation and its subsidiaries as of December 31, 2010 and December 31, 2009,and the related consolidated statements of operations, cash flows and shareholders’ equity (deficiency) for each of the years in the three-year period endedDecember 31, 2010. In addition, we have audited the financial statement schedule listed in the index under Item 15(a)(2). We also have audited IMAXCorporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Imax Corporation’s management is responsible for these financialstatements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financialreporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A of its 2010 Annual Report on Form 10-K. Ourresponsibility is to express an opinion on these consolidated financial statements and an opinion on the corporation’s internal control over financial reportingbased on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reportingincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as weconsidered 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 andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith 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 andits subsidiaries as of December 31, 2010 and December 31, 2009, and the results of its operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, thefinancial statement schedule listed in the index under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read inconjuction with the related consolidated financial statements. Also in our opinion, IMAX Corporation maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO)./s/ PricewaterhouseCoopers LLPChartered Accountants, Licensed Public AccountantsToronto, OntarioFebruary 24, 201170Table of ContentsIMAX CORPORATIONCONSOLIDATED BALANCE SHEETSIn accordance with United States Generally Accepted Accounting Principles(In thousands of U.S. dollars) As at December 31, 2010 2009 Assets Cash and cash equivalents $30,390 $20,081 Accounts receivable, net of allowance for doubtful accounts of $1,988 (December 31, 2009 — $2,770) 39,570 37,652 Financing receivables (note 4, note 21(c)) 73,601 62,585 Inventories (note 5) 15,275 10,271 Prepaid expenses 2,832 2,609 Film assets (note 6) 2,449 3,218 Property, plant and equipment (note 7) 74,035 54,820 Other assets (note 8) 12,350 15,140 Deferred income taxes (note 9) 57,122 — Goodwill 39,027 39,027 Other intangible assets (note 10) 2,437 2,142 Total assets $349,088 $247,545 Liabilities Bank indebtedness (note 12) $17,500 $50,000 Accounts payable 20,384 16,803 Accrued liabilities (notes 6, 9(g), 13(a), 13(c), 15(c), 22, 23(d) and 24) 78,994 77,853 Deferred revenue 73,752 57,879 Total liabilities 190,630 202,535 Commitments and contingencies (notes 13 and 14) Shareholders’ equity Capital stock (note 15) common shares — no par value. Authorized — unlimited number. Issued and outstanding —64,145,573 (December 31, 2009 — 62,831,974) 292,977 280,048 Other equity 7,687 6,044 Deficit (141,209) (241,988)Accumulated other comprehensive income (note 25) (997) 906 Total shareholders’ equity 158,458 45,010 Total liabilities and shareholders’ equity $349,088 $247,545 (the accompanying notes are an integral part of these consolidated financial statements)71Table of ContentsIMAX CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONSIn accordance with United States Generally Accepted Accounting Principles(In thousands of U.S. dollars, except per share amounts) Years Ended December 31, 2010 2009 2008 Revenues Equipment and product sales $72,578 $57,304 $27,853 Services (note 16(c)) 123,911 82,052 61,477 Rentals (note 16(c)) 46,936 25,758 8,207 Finance income 4,789 4,235 4,300 Other (note 16(a)) 400 1,862 881 248,614 171,211 102,718 Costs and expenses applicable to revenues (note 2(n)) Equipment and product sales 36,394 29,040 17,182 Services (note 16(c)) 63,425 49,891 40,771 Rentals 11,111 10,093 7,043 Other 32 635 169 110,962 89,659 65,165 Gross margin 137,652 81,552 37,553 Selling, general and administrative expenses (note 16(b)) (including share-based compensationexpense of $26.0 million, $17.5 million and $1.0 million for 2010, 2009, 2008, respectively) 78,428 56,207 43,681 Research and development 6,249 3,755 7,461 Amortization of intangibles 513 546 526 Receivable provisions, net of recoveries (note 17) 1,443 1,067 1,977 Asset impairments (note 18) 45 180 — Earnings (loss) from operations 50,974 19,797 (16,092)Interest income 399 98 381 Interest expense (1,885) (13,845) (17,707)Loss on repurchase of Senior Notes due December 2010 (note 11) — (579) — Earnings (loss) from continuing operations before income taxes 49,488 5,471 (33,418)Recovery of (provision for) income taxes 51,784 (274) (92)Loss from equity-accounted investments (493) — — Earnings (loss) from continuing operations 100,779 5,197 (33,510)Loss from discontinued operations (note 23(c)) — (176) (92)Net earnings (loss) $100,779 $5,021 $(33,602) Earnings (loss) per share: (note 15(d)) Net earnings (loss) per share — basic: Net earnings (loss) per share from continuing operations $1.59 $0.10 $(0.79)Net loss per share from discontinued operations — — — $1.59 $0.10 $(0.79)Net earnings (loss) per share — diluted: Net earnings (loss) per share from continuing operations $1.51 $0.09 $(0.79)Net loss per share from discontinued operations — — — $1.51 $0.09 $(0.79)(the accompanying notes are an integral part of these consolidated financial statements)72Table of ContentsIMAX CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSIn accordance with United States Generally Accepted Accounting Principles(In thousands of U.S. dollars) Years Ended December 31, 2010 2009 2008 Cash provided by (used in): Operating Activities Net earnings (loss) $100,779 $5,021 $(33,602)Net loss from discontinued operations (note 23(c)) — 176 92 Items not involving cash: Depreciation and amortization (notes 19(c) and 20(a)) 20,536 19,051 18,018 Write-downs, net of recoveries (notes 19(d) and 20(a)) 2,551 2,581 4,466 Change in deferred income taxes (54,275) 8 (749)Stock and other non-cash compensation 28,195 19,183 3,320 Foreign currency exchange (gain) loss (865) (974) 480 Gain on sale of property, plant and equipment — — (43)Loss on repurchase of Senior Notes due December 2010 (note 11) — 579 — Loss from equity-accounted investments 493 — — Change in cash surrender value of life insurance (107) (330) (270)Investment in film assets (10,139) (9,235) (10,145)Changes in other non-cash operating assets and liabilities (note 19(a)) (28,682) (21,885) 11,925 Net cash used in operating activities from discontinued operations — (393) (40)Net cash provided by (used in) operating activities 58,486 13,782 (6,548) Investing Activities Purchase of property, plant and equipment (5,338) (1,426) (2,805)Investment in joint revenue sharing equipment (21,275) (25,072) (18,478)Investment in new business ventures (3,636) — — Cash surrender value of life insurance 7,797 — — Proceeds from sale of property, plant and equipment — — 43 Acquisition of other assets (691) (748) (748)Acquisition of other intangible assets (681) (320) (430)Net cash used in investing activities (23,824) (27,566) (22,418) Financing Activities Increase in bank indebtedness (note 12) — 55,000 20,000 Repayment of bank indebtedness (note 12) (32,500) (25,000) — Repurchase of Senior Notes due December 2010 (note 11) — (159,104) — Common shares issued — public offerings, net of offering expenses paid (note 15(b)) — 130,774 — Common shares issued — private offering — — 17,931 Common shares issued — stock options exercised (note 15(b)) 8,276 6,332 1,202 Shelf registration fees paid — (150) — Debt modification fees paid — — (114)Fees paid pertaining to amended Credit Facility agreement — (671) — Net cash (used in) provided by financing activities (24,224) 7,181 39,019 Effects of exchange rate changes on cash (129) (333) 63 Increase (decrease) in cash and cash equivalents during year 10,309 (6,936) 10,116 Cash and cash equivalents, beginning of year 20,081 27,017 16,901 Cash and cash equivalents, end of year $30,390 $20,081 $27,017 (the accompanying notes are an integral part of these consolidated financial statements)73Table of ContentsIMAX CORPORATIONCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)In accordance with United States Generally Accepted Accounting Principles(In thousands of U.S. dollars) Number of Accumulated Common Other Total Shares Issued Comprehensive Shareholders’ and Capital Other Income (Loss) Equity Comprehensive Outstanding Stock Equity Deficit (note 25) (Deficiency) Income (Loss) Balance as at December 31, 2007 40,423,074 $122,455 $4,088 $(213,407) $1,494 $(85,370) Common shares issued for private offering 2,726,447 17,681 — — — 17,681 Net loss — — — (33,602) — (33,602) $(33,602)Paid-in capital for non-employee stock optionsgranted (note 15(c)) — — 416 — — 416 — Employee stock options exercised 238,745 751 (14) — — 737 — Non-employee stock options exercised 102,365 697 (232) — — 465 — Paid-in capital for employee stock options granted(note 15(c)) — — 925 — — 925 — Unrecognized prior service costs (net of incometax recovery of $66) (note 22) — — — — (181) (181) (181)Unrecognized actuarial gain (net of income taxprovision of $770)(note 22) — — — — 2,029 2,029 2,029 Unrealized net gain on derivative instruments(net of income tax provision of $46) (note 21) — — — — 126 126 126 $(31,628)Balance as at December 31, 2008 43,490,631 $141,584 $5,183 $(247,009) $3,468 $(96,774) Common shares issued for public offering 18,034,706 130,682 — — — 130,682 — Net earnings — — — 5,021 — 5,021 5,021 Paid-in capital for non-employee stock optionsgranted (note 15(c)) — — 215 — — 215 — Employee stock options exercised 1,103,091 6,391 (962) — — 5,429 — Non-employee stock options exercised 203,546 1,391 (488) — — 903 — Paid-in capital for employee stock options granted(note 15(c)) — — 2,096 — — 2,096 — Unrecognized prior service costs (net of incometax provision of $38) (note 22) — — — — 107 107 107 Unrecognized actuarial loss (net of income taxrecovery of $nil) (note 22) — — — — (3,075) (3,075) (3,075)Unrealized net gain on derivative instruments(net of income tax recovery of $46) (note 21) — — — — 406 406 406 $2,459 Balance as at December 31, 2009 62,831,974 $280,048 $6,044 $(241,988) $906 $45,010 Net earnings — — — 100,779 — 100,779 100,779 Paid-in capital for non-employee stock optionsgranted (note 15(c)) — — 383 — — 383 — Employee stock options exercised 1,090,782 8,063 (1,696) — — 6,367 — Non-employee stock options exercised 222,817 3,016 (1,102) — — 1,914 — Paid-in capital for employee stock options granted(note 15(c)) — — 4,058 — — 4,058 — Unrealized actuarial loss (net of income taxrecovery of $662) (note 22) — — — — (1,985) (1,985) (1,985)Unrealized net gain on derivative instruments(net of income tax provision of$182)(note 21) — — — — (50) (50) (50)Tax recovery related to share issuance expenses — 1,850 — — — 1,850 — Realized actuarial gain on settlement of pensionliability (net of income tax provision of$517)(note 22) — — — — 132 132 132 $98,876 Balance as at December 31, 2010 64,145,573 $292,977 $7,687 $(141,209) $(997) $158,458 (The accompanying notes are an integral part of these consolidated financial statements)74Table of ContentsIMAX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSIn accordance with United States Generally Accepted Accounting Principles(Tabular amounts in thousands of U.S. dollars, unless otherwise stated)1. Description of the Business IMAX Corporation together with its consolidated wholly-owned subsidiaries (the “Company”) is an entertainment technology company specializing indigital and film-based motion picture technologies, whose principal activities are the: • design, manufacture, sale and lease of proprietary theater systems for IMAX theaters principally owned and operated by commercial andinstitutional customers located in 46 countries as at December 31, 2010; • production, digital re-mastering, post-production and/or distribution of certain films shown throughout the IMAX theater network; • provision of other services to the IMAX theater network, including ongoing maintenance and extended warranty services for IMAX theatersystems; • operation of certain theaters primarily in the United States; and • other activities, which includes short-term rental of cameras and aftermarket sales of projector system components. The Company refers to all theaters using the IMAX theater system as “IMAX theaters.” The Company’s revenues from equipment and product sales include the sale and sales-type leasing of its theater systems and sales of their associated partsand accessories, contingent rentals on sales-type leases and contingent additional payments on sales transactions. The Company’s revenues from services include the provision of maintenance and extended warranty services, digital re-mastering services, filmproduction and film post-production services, film distribution, and the operation of certain theaters. The Company’s rentals include revenues from the leasing of its theater systems that are operating leases, contingent rentals on operating leases, jointrevenue sharing arrangements and the rental of the Company’s cameras and camera equipment. The Company’s finance income represents interest income arising from the sales-type leasing and financed sale of the Company’s theater systems. The Company’s other revenues include the settlement of contractual obligations with customers.2. Summary of Significant Accounting Policies Significant accounting policies are summarized as follows: The Company prepares its consolidated financial statements in accordance with U.S. GAAP.(a) Basis of Consolidation The consolidated financial statements include the accounts of the Company together with its wholly-owned subsidiaries, except for subsidiaries which theCompany has identified as variable interest entities (“VIEs”) where the Company is not the primary beneficiary. The Company has evaluated its various variable interests to determine whether they are VIEs as required by the Consolidation Topic of the FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”). The Company has 8 film production companies thatare VIEs. As the Company has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has theobligation to absorb losses of the VIE that could potentially be75Table of Contentssignificant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE for 2 of the film production companies, theCompany has determined that it is the primary beneficiary of these entities. The Company continues to consolidate these entities, with no material impact onthe operating results or financial condition of the Company, as these production companies have total assets and total liabilities of $nil as at December 31,2010 (December 31, 2009 — less than $0.1 million). For the other 6 film production companies which are VIEs, the Company did not consolidate these filmentities since it does not have the power to direct activities and does not absorb the majority of the expected losses or expected residual returns. The Companyequity accounts for these entities. As at December 31, 2010, these 6 VIEs have total assets of $11.1 million (December 31, 2009 — $3.8 million) and totalliabilities of $11.1 million (December 31, 2009 — $3.8 million). Earnings of the investees included in the Company’s consolidated statement of operationsamounted to $nil in 2010 (2009 — $nil). The carrying value of these investments in VIEs that are not consolidated is $nil at December 31, 2010(December 31, 2009 — $nil). A loss in value of an investment other than a temporary decline is recognized as a charge to the consolidated statement ofoperations. The Company accounts for investments in new business ventures using the guidance of ASC 323 Investments — Equity Method and Joint Ventures(“ASC 323”) and ASC 320 Investments in Debt and Equity Securities (“ASC 320”), as appropriate. At December 31, 2010, the equity method of accountingis being utilized for an investment with a carrying value of $1.6 million. The Company has determined it is not the primary beneficiary of this VIE, andtherefore it has not been consolidated. In addition, during the year, the Company made an investment in preferred stock of another business venture of$1.5 million which meets the criteria for classification as a debt security under ASC 320 and is recorded at its fair value of $1.5 million at December 31,2010 (December 31, 2009 — $nil). This investment is classified as an available-for-sale investment. The total carrying value of investments in new businessventures at December 31, 2010 and December 31, 2009 is $3.1 million and $nil, respectively, and is recorded in Other Assets. All significant intercompany accounts and transactions, including all unrealized intercompany profits on transactions with equity-accounted investees,have been eliminated.(b) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect thereported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual results could be materially different from these estimates. Significant estimates made bymanagement include, but are not limited to: fair values associated with the individual elements in multiple element arrangements; residual values of leasedtheater systems; economic lives of leased assets; allowances for potential uncollectibility of accounts receivable, financing receivables and net investment inleases; provisions 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 assumptions; accruals for contingencies including taxcontingencies; valuation allowances for deferred income tax assets; and, estimates of the fair value of stock-based payment awards.(c) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.(d) Short-Term Investments Short-term investments have maturities of more than three months and less than one year from the date of purchase. As at December 31, 2010 and 2009, the Company did not hold any short-term investments.(e) 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 basedupon a review of the customer’s credit worthiness, past collection history and the underlying asset value of the equipment, where applicable. Interest onoverdue accounts receivable is recognized as income as the amounts are collected. For trade accounts receivable that have characteristics of both a contractual maturity of one year or less, and arose from the sale of goods or services, theCompany charges off the balance against the allowance for doubtful accounts when it is known that a provided amount will not be collected.76Table of Contents The Company monitors the performance of the theaters to which it has leased or sold theater systems which are subject to ongoing payments. When factsand circumstances indicate that there is a potential impairment in the net investment in lease or a financing receivable, the Company will evaluate the potentialoutcome of either renegotiations involving changes in the terms of the receivable or defaults on the existing lease or financed sale agreements. The Company willrecord 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 arenegotiated 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 carryingvalue 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 thefinancing 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 thefair value of the equipment. 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 toreduce 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 differfrom 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 issuesare resolved. When finance income is not recognized, any payments received are applied against outstanding gross minimum lease amounts receivable or grossreceivables from financed sales. Once the collectability issues are resolved, the Company will once again commence the recognition of interest income.(f) 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 at thelower of cost and replacement cost. Finished goods and work-in-process include the cost of raw materials, direct labor, theater design costs, and an applicableshare of manufacturing overhead costs. The costs related to theater systems under sales and sales-type lease arrangement 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 jointrevenue sharing arrangements are transferred from inventory to assets under construction in property, plant and equipment when allocated to a signed jointrevenue sharing arrangement or when the arrangement is first classified as an operating lease. The Company records provisions for excess and obsolete inventory based upon current estimates of future events and conditions, including the anticipatedinstallation dates for the current backlog of theater system contracts, technological developments, signings in negotiation, growth prospects within thecustomers’ 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 (as the theater system has been delivered tothe customer) but the revenue recognition criteria as discussed in note 2(n) have not been met.(g) Film Assets Costs of producing films, including labor, allocated overhead, capitalized interest, and costs of acquiring film rights are recorded as film assets andaccounted for in accordance with Entertainment-Films Topic of the FASB ASC. Production financing provided by third parties that acquire substantive rightsin the film is recorded as a reduction of the cost of the production. Film assets are amortized and participation costs are accrued using the individual-film-forecast method in the same ratio that current gross revenues bear to current and anticipated future ultimate revenues. Estimates of ultimate revenues areprepared on a title-by-title basis and reviewed regularly by management and revised where necessary to reflect the most current information. Ultimate revenuesfor films include estimates of revenue over a period not to exceed ten years following the date of initial release. Film exploitation costs, including advertising costs, are expensed as incurred. Costs, including labor and allocated overhead, of digitally re-mastering films where the copyright is owned by a third party and the Company shares in therevenue of the third party are included in film assets. These costs are amortized using the individual-film-77Table of Contentsforecast method in the same ratio that current gross revenues bear to current and anticipated future ultimate revenues from the re-mastered film. The recoverability of film assets is dependent upon commercial acceptance of the films. If events or circumstances indicate that the recoverable amount of afilm asset is less than the unamortized film costs, the film asset is written down to its fair value. The Company determines the fair value of its film assetsusing a discounted cash flow model.(h) Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives as follows: Theater system components (1) — Over the equipment’s anticipated useful life (7 to 20 years)Camera equipment — 5 to 10 yearsBuildings — 20 to 25 yearsOffice and production equipment — 3 to 5 yearsLeasehold improvements — over the shorter of the initial term of the underlying leases plus any reasonably assured renewalterms, and the useful life of the asset (1) includes equipment under joint revenue sharing arrangements.Equipment and components allocated to be used in future operating leases and joint revenue sharing arrangements, as well as direct labor costs and anallocation of direct production costs, are included in assets under construction until such equipment is installed and in working condition, at which time theequipment 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.During 2010, the Company signed certain amending agreements which increased the length of the term for all applicable existing and future theaters under jointrevenue sharing arrangement from 7 to 10 years. As a result, the Company adjusted the estimated useful life of its IMAX digital projection systems in use forthose joint revenue sharing theaters, on a prospective basis, to reflect the change in term from 7 years to 10 years. This resulted in decreased depreciationexpense of $1.0 million in 2010 and $1.8 million in each of the next 5 years since the Systems will now be depreciated over a longer useful life. The Company reviews the carrying values of its property, plant and equipment for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset or asset group might not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largelyindependent when testing for, and measuring for, impairment. In performing its review of recoverability, the Company estimates the future cash flows expectedto result from the use of the asset or asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than thecarrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statements of operations. Measurement of the impairment lossis 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. A liability for the fair value of an asset retirement obligation associated with the retirement of tangible long-lived assets and the associated asset retirementcosts are recognized in the period in which the liability and costs are incurred if a reasonable estimate of fair value can be made using a discounted cash flowmodel. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently amortized over the asset’suseful life. The liability is accreted over the period to expected cash outflows.(i) Other Assets Other assets include insurance recoveries, the cash surrender value of life insurance policies, deferred charges on debt financing, deferred selling costs thatare direct and incremental to the acquisition of sales contracts, foreign currency derivatives and investments in new business ventures. Costs of debt financing are deferred and amortized over the term of the debt. Selling costs related to an arrangement incurred prior to recognition of the related revenue are deferred and expensed to costs and expenses applicable torevenues upon (i) recognition of the contract’s theater system revenue or (ii) abandonment of the sale arrangement.78Table of Contents Foreign currency derivatives are accounted for at fair value using quoted prices in closed exchanges (Level 2 input in accordance with the Fair ValueMeasurements Topic of the FASB ASC hierarchy). Investments in new business ventures are accounted for using ASC 32X — Investments. The Company currently accounts for one investment using theequity method of accounting and accounts for another investment at fair value.(j) Goodwill Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a purchase business combination. Goodwill is notsubject to amortization and is tested for impairment annually, or more frequently if events or circumstances indicate that the asset might be impaired.Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of thereporting unit. The fair value of the reporting unit is estimated using a discounted cash flow approach. If the carrying amount of the reporting unit exceeds itsfair value, then a second step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable asset andliability in the reporting unit to the total fair value of the reporting unit. Any impairment loss is expensed in the consolidated statement of operations and is notreversed if the fair value subsequently increases.(k) Other Intangible Assets Patents, trademarks and other intangibles are recorded at cost and are amortized on a straight-line basis over estimated useful lives ranging from 4 to10 years. The Company reviews the carrying values of its other intangible assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset or asset group might not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largelyindependent when testing for, and measuring for, impairment. In performing its review for recoverability, the Company estimates the future cash flowsexpected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than thecarrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statement of operations. Measurement of the impairment lossis 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.(l) Deferred Revenue Deferred revenue represents cash received prior to revenue recognition criteria being met for theater system sales or leases, film contracts, maintenance andextended warranty services, film related services and film distribution.(m) Income Taxes Income taxes are accounted for under the liability method whereby deferred income tax assets and liabilities are recognized for the expected future taxconsequences of temporary differences between the accounting and tax bases of assets and liabilities. Deferred income tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect ondeferred income tax assets and liabilities of a change in tax rates or laws is recognized in the consolidated statement of operations in the period in which thechange is enacted. Investment tax credits are recognized as a reduction of income tax expense. The Company assesses realization of deferred income tax assets and, based on all available evidence, concludes whether it is more likely than not that thenet deferred income tax assets will be realized. A valuation allowance is provided for the amount of deferred income tax assets not considered to be realizable. The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incuradditional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company adjusts tax expense to reflect the Company’songoing assessments of such matters which require judgment and can materially increase or decrease its effective rate as well as impact operating results. TheCompany provides for such exposures in accordance with the Income Taxes Topic of the FASB ASC.79Table of Contents(n) Revenue RecognitionMultiple 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 ofinstallation, 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 thedeliverables represent separate units of accounting based on the applicable accounting guidance in the Leases Topic of the FASB ASC; the Guarantees Topic ofthe FASB; the Entertainment-Film Topic of FASB ASC; and the Revenue Recognition Topic of the FASB. If separate units of accounting are either requiredunder the relevant accounting standards or determined to be applicable under the Revenue Recognition Topic, the total consideration received or receivable in thearrangement 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 “SystemDeliverable”). When an arrangement does not include all the elements of a System Deliverable, the elements of the System Deliverable included in thearrangement are considered by the Company to be a single deliverable and a single unit of accounting. The Company is not responsible for the physicalinstallation of the equipment in the customer’s facility; however, the Company supervises the installation by the customer. The customer has the right to usethe 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, thatare not joint revenue sharing arrangements, consist of upfront or initial payments made before and after the final installation of the theater system equipmentand 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 anannual fixed minimum amount or a certain percentage of the theater box-office. Amounts received in excess of the annual fixed minimum amounts areconsidered contingent payments. The Company’s arrangements are non-cancellable, unless the Company fails to perform its obligations. In the absence of amaterial 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 Companyexists, 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 andonly if the Company does not cure the default within a specified period.Sales Arrangements For arrangements qualifying as sales, the revenue allocated to the System Deliverable is recognized in accordance with the Revenue Recognition Topic of theFASB 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 workingcondition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed and (iv) the earlier of (a) receiptof 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 reasonablyassured. The initial revenue recognized consists of the initial payments received and the present value of any future initial payments and fixed minimum ongoingpayments that have been attributed to this unit of accounting. Contingent payments in excess of the fixed minimum ongoing payments are recognized whenreported 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 isincluded in revenues from equipment and product sales, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, collectibility isreasonably assured and title to the theater system passes from the Company to the customer. In a limited number of sales arrangements for MPX theater systems, the Company provided customers with a right to acquire, for a specified period oftime, digital upgrades (each upgrade consisting of a projector, certain sound system components and screen enhancements) at a fixed or variable discounttowards a future price of such digital upgrades. Up to the end of the second quarter of80Table of Contents2009, the Company was not able to determine the fair value of a digital upgrade. Accordingly, the Company deferred all consideration received and receivableunder such arrangements for the delivered MPX and the upgrade right, except for the amount allocated to maintenance and extended warranty services providedto the customers for the installed system. This revenue was deferred until the upgrade right expired, if applicable, or a digital upgrade was delivered. In thethird quarter of 2009, the Company determined the fair value of digital upgrades and the upgrades rights. For any such sales arrangements where the upgraderight has not expired and the digital upgrade has not yet been delivered, the Company has allocated the consideration received and receivable (excluding theamount allocated to maintenance and extended warranty services) to the upgrade right based on its fair value and to the delivered MPX theater system based onthe residual of the consideration received and receivable. The revenue related to the digital upgrade continues to be deferred, until the digital upgrade is deliveredprovided the other revenue recognition criteria are met. The revenue related to the MPX system is recognized at the allocation date as the system was previouslydelivered provided the other revenue recognition criteria are met. Costs related to the installed MPX systems for which revenue has not been recognized areincluded in inventories until the conditions for revenue recognition are met. The Company also provides customers, in certain cases, with sales arrangementsfor multiple systems consisting of a combination of MPX theater systems and complete digital theater systems for a specified price. The Company allocatesthe actual or implied discount between the delivered and undelivered theater systems on a relative fair value basis, provided all of the other conditions forrecognition of a theater system are met.Lease Arrangements The Company uses the Leases Topic of FASB ASC to evaluate whether an arrangement is a lease within the scope of the accounting standard.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 Lease Topic of FASB ASC. A lease arrangement thattransfers 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 bythe accounting standard; otherwise the lease is classified as an operating lease. Prior to commencement of the lease term for the equipment, the Company maymodify certain payment terms or make concessions. If these circumstances occur, the Company reassesses the classification of the lease based on the modifiedterms 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 whenall 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) the3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed and (iv) the earlier of (a) receipt of the writtencustomer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projectionist training or (b) publicopening 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 fixedminimum ongoing payments computed at the interest rate implicit in the lease. Contingent payments in excess of the fixed minimum payments are recognizedwhen 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. Foroperating leases, the lease term is considered to commence when all of the following conditions have been met: (i) the projector, sound system and screensystem have been installed and in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training hasbeen completed and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation and run-in testing of the equipment andthe completion of projectionist training or (b) public opening of the theater. Contingent payments in excess of fixed minimum ongoing payments are recognizedas revenue when reported by theater operators, provided collectibility is reasonably assured. For joint revenue sharing arrangements, where the Company receives a portion of a theater’s box-office and concession revenues, in exchange for placing atheater system at the theater operator’s venue, revenue is recognized when box-office and concession revenues are reported by the theater operator, providedcollectibility is reasonably assured.Finance Income Finance income is recognized over the term of the sales-type lease or financed sales receivable, provided collectibility is reasonably assured. Finance incomerecognition ceases when the Company determines that the associated receivable is not recoverable.81Table of ContentsImprovements and Modifications Improvements and modifications to the theater system after installation are treated as separate revenue transactions, if and when the Company is requestedto perform these services. Revenue is recognized for these services when the performance of the services has been completed, provided there is persuasiveevidence of an arrangement, the fee is fixed or determinable and collectibility is reasonably assured.Cost of Equipment and Product Sales Theater systems and other equipment subject to sales-type leases or sales arrangements includes the cost of the equipment and costs related to projectmanagement, design, delivery and installation supervision services as applicable. The costs related to theater systems under sales and sales-type leasearrangements are relieved from inventory to costs and expenses applicable to revenues-equipment and product sales when revenue recognition criteria are met.In addition, the Company defers direct selling costs such as sales commissions and other amounts related to these contracts until the related revenue isrecognized. These costs included in costs and expenses applicable to revenues-equipment and product sales, totaled $1.9 million in 2010 (2009 — $2.0million, 2008 — $1.0 million). The cost of equipment and product sales prior to direct selling costs was $34.5 million in 2010 (2009 — $27.0 million, 2008— $16.2 million). The Company may have warranty obligations at or after the time revenue is recognized which require replacement of certain parts that donot affect the functionality of the theater system or services. The costs for warranty obligations for known issues are accrued as charges to costs and expensesapplicable to revenues-equipment and product sales at the time revenue is recognized based on the Company’s past historical experience and cost estimates.Cost of Rentals For theater systems and other equipment subject to an operating lease or placed in a theater operators’ venue under a joint revenue sharing arrangement, thecost of equipment is included within property, plant and equipment. Depreciation and impairment losses, if any, are included in cost of rentals based on theaccounting policy set out in note 2(h). Commissions are recognized as costs and expenses applicable to revenues-rentals in the month they are earned. Thesecosts totaled $2.1 million in 2010 (2009 — $1.6 million, 2008 — $1.0 million). Direct advertising and marketing costs for each theater are charged to costsand expenses applicable to revenues-rentals as incurred. These costs totaled $2.1 million in 2010 (2009 — $1.8 million, 2008 — $0.8 million).Terminations, Consensual Buyouts and Concessions The Company enters into theater system arrangements with customers that contain customer payment obligations prior to the scheduled installation of thetheater system. During the period of time between signing and the installation of the theater system, which may extend several years, certain customers may beunable to, or elect not to, proceed with the theater system installation for a number of reasons including business considerations, or the inability to obtaincertain consents, approvals or financing. Once the determination is made that the customer will not proceed with installation, the arrangement may beterminated 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 amountspaid 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 furtherobligations under the arrangement or an arbitrated settlement is reached. Any initial payments retained or additional payments received by the Company arerecognized as revenue when the settlement arrangements are executed and the cash is received, respectively. These termination and consensual buyout amountsare 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 toarrangements to acquire or lease the IMAX digital theater system. The Company considers these situations to be a termination of the previous arrangement andorigination of a new arrangement for the IMAX digital theater system. The Company continues to defer an amount of any initial fees received from thecustomer 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 customerequals the fair value of the IMAX digital theater system to be leased or acquired by the customer. Any residual portion of the initial fees received from thecustomer 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 newtheater system arrangement is signed.The Company may offer certain incentives to customers to complete theater system transactions including payment concessions or free services and productssuch 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 reductionin the sales price or a reduction of payments to be discounted in accordance with the Leases Topic of the FASB ASC. Free products and services areaccounted for as separate units of accounting. Other82Table of Contentsconsideration 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 tothese services are deferred and recognized on a straight-line basis over the contract period and are recognized in Services revenues. Maintenance and extendedwarranty services includes maintenance of the customer’s equipment and replacement parts. Under certain maintenance arrangements, maintenance servicesmay include additional training services to the customer’s technicians. All costs associated with this maintenance and extended warranty program are expensedas incurred. A loss on maintenance and extended warranty services is recognized if the expected cost of providing the services under the contracts exceeds therelated deferred revenue.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 Companyobtains 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 overcost of production (the “production fee”). The third parties receive a portion of the revenues received by the Company from distributing the film, which ischarged 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 onthe ratio of the Company’s distribution revenues recognized in the current period to the ultimate distribution revenues expected from the film. Film exploitationcosts, including advertising and marketing totaled $2.1 million in 2010 (2009 — $1.6 million, 2008 — $0.9 million) and are recorded in costs and expensesapplicable to revenues-services as incurred. Revenue from film production services where the Company does not hold the associated distribution rights are recognized in Services revenues whenperformance of the contractual service is complete, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collectibility isreasonably 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 inthe form of processing fees and recoupments calculated as a percentage of box-office receipts generated from the re-mastered films. Processing fees arerecognized as Services 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 asServices revenue when box-office receipts are reported by the third party that owns or holds the related film rights, provided collectibility is reasonablyassured. Losses on film production and IMAX DMR services are recognized as costs and expenses applicable to revenues-services in the period when it isdetermined 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 thefilm 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 beencompleted and delivered, the license period has begun, the fee is fixed or determinable and collectibility is reasonably assured. When license fees are based on apercentage of box-office receipts, revenue is recognized when box-office receipts are reported by exhibitors, provided collectibility is reasonably assured. Filmexploitation costs, including advertising and marketing, totaled $0.7 million in 2010 (2009 — $0.8 million, 2008 — $0.7 million) and are recorded in costsand expenses applicable to revenues-services as incurred.Film Post-Production Services Revenues from post-production film services are recognized in Services revenues when performance of the contracted services is complete provided there ispersuasive evidence of an arrangement, the fee is fixed or determinable and collectibility is reasonably assured.83Table of ContentsTheater Operations Revenue The Company recognizes revenue in Services revenues from its owned and operated theaters resulting from box-office ticket and concession sales as ticketsare sold, films are shown and upon the sale of various concessions. The sales are cash or credit card transactions with theatergoers based on fixed prices perseat 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 arerecognized in Services revenues when reported by such theaters. The Company also provides management services to certain theaters and recognizes revenueover the term of such services.Other Revenues on camera rentals are recognized in Rental revenues 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. Other service revenues are recognized in Service revenues when the performance of contracted services is complete.(o) Research and Development Research and development costs are expensed as incurred and primarily include projector and sound parts, labor, consulting fees, allocation of overheadsand other related materials which pertain to the Company’s development of ongoing product and services.(p) Foreign Currency Translation Monetary assets and liabilities of the Company’s operations which are denominated in currencies other than the functional currency are translated into thefunctional currency at the exchange rates prevailing at the end of the period. Non-monetary items are translated at historical exchange rates. Revenue andexpense transactions are translated at exchange rates prevalent at the transaction date. Such exchange gains and losses are included in the determination ofearnings in the period in which they arise. 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 theconsolidated statement of operations except for derivatives designated and qualifying as foreign currency hedging instruments. For foreign currency hedginginstruments, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income and reclassified to theconsolidated statement of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statement ofoperations.(q) Stock-Based Compensation The Company’s stock-based compensation is recognized in accordance with the FASB ASC Topic 505, “Equity” and Topic 718, “Compensation-StockCompensation.” The Company estimates the fair value of employee stock-based payment awards on the date of grant using fair value measurement techniques such as anoption-pricing model. The value of the portion of the employee award that is ultimately expected to vest is recognized as expense over the requisite serviceperiods in the Company’s consolidated statement of operations. The Company utilizes a lattice-binomial option-pricing model (“Binomial Model”) to determine the fair value of stock-based payment awards. The fairvalue determined by the Binomial Model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price togrant 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 haveno vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantlydifferent from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, theBinomial Model best provides a fair measure of the fair value of the Company’s employee stock options. See note 15(c) for the assumptions used to determinethe fair value of stock-based payment awards. Stock-based compensation expense includes compensation cost for new employee stock-based payment awards granted and employee awards modified,repurchased or cancelled. In addition, compensation expense includes the compensation cost, based on the84Table of Contentsgrant-date fair value calculated for pro forma disclosures under Topic 718, for the portion of awards for which required service had not been rendered thatwere outstanding. Compensation expense for these employee awards is recognized using the straight-line single-option method. As stock-based compensationexpense recognized after January 1, 2006 is based on awards ultimately expected to vest, it has been adjusted for estimated forfeitures. The Codificationrequires forfeitures to be estimated at the time of grant and revised, if subsequent information indicates that the actual forfeitures are likely to be different fromprevious estimates. The Company utilizes the market yield on U.S. treasury securities (also known as nominal rate) over the contractual term of theinstrument being issued.Stock Option Plan As the Company stratifies its employees into homogeneous groups in order to calculate fair value under the Binomial Model, ranges of assumptions usedare presented for expected option life and annual termination probability. The Company uses historical data to estimate option exercise and employeetermination within the valuation model; various groups of employees that have similar historical exercise behavior are considered separately for valuationpurposes. The expected volatility rate is estimated based on a blended volatility method which takes into consideration the Company’s historical share pricevolatility, the Company’s implied volatility which is implied by the observed current market prices of the Company’s traded options and the Company’s peergroup volatility. The Company utilizes an expected term method to determine expected option life based on such data as vesting periods of awards, historicaldata that includes past exercise and post-vesting cancellations and stock price history. The Company’s policy is to issue new shares from treasury to satisfy stock options which are exercised.Restricted Common Shares and Stock Appreciation Rights The Company’s restricted common shares and SARs have been classified as liabilities in accordance with Topic 505. The Company utilizes the BinomialModel to determine the value of these instruments settleable in cash.Awards to Non-Employees Stock-based awards for services provided by non-employees are accounted for based on the fair value of the services received or the stock-based award,whichever is more reliably determinable. If the fair value of the stock-based award is used, the fair value is measured at the date of the award and remeasureduntil the earlier of the date that the Company has a performance commitment from the non-employees, the date performance is completed, or the date theawards vest.(r) Pension Plans and Postretirement Benefits The Company has a defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”). As the Company’s SERP is unfunded, as atDecember 31, 2010, a liability is recognized for the projected benefit obligation. Assumptions used in computing the defined benefit obligations are reviewed annually by management in consultation with its actuaries and adjusted forcurrent conditions. Actuarial gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodicbenefits cost are recognized as a component of other comprehensive income. Amounts recognized in accumulated other comprehensive income includingunrecognized actuarial gains or losses and prior service costs are adjusted as they are subsequently recognized in the consolidated statement of operations ascomponents of net periodic benefit cost. Prior service costs resulting from the pension plan inception or amendments are amortized over the expected futureservice life of the employees, cumulative actuarial gains and losses in excess of 10% of the projected benefit obligation are amortized over the expected averageremaining service life of the employees, and current service costs are expensed when earned. The remaining weighted average future service life of the employeefor the year ended December 31, 2010 was 2.0 years. For defined contribution pension plans, amounts contributed by the Company are recorded as an expense. A liability is recognized for the unfunded accumulated benefit obligation of the postretirement benefits plan. Assumptions used in computing theaccumulated benefit obligation are reviewed by management in consultation with its actuaries and adjusted for current conditions. Current service cost isrecognized as earned and actuarial gains and losses are recognized in the consolidated statement of operations immediately.85Table of Contents(s) Guarantees The FASB ASC Guarantees Topic requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees.Disclosures as required under the accounting guidance have been included in note 14(m).3. New Accounting Standards and Accounting ChangesChanges in Accounting Standards In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets—an amendment toFASB Statement No. 140” (“SFAS 166”). SFAS 166 amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” (“SFAS 140”) to improve the relevance, representational faithfulness, and comparability of the information that a reportingentity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cashflows; and a transferor’s continuing involvement in transferred financial assets. It also removes the concept of qualifying special-purpose entities (“SPEs”)from SFAS 140 and removes the exception from applying FIN 46R to VIEs that are qualifying SPEs. SFAS 166 applies to all entities and is effective for thefirst annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annualreporting periods thereafter, with earlier application prohibited. In December 2009, the FASB issued ASU No. 2009-16, “Accounting for Transfers ofFinancial Assets” (“ASU 2009-16”). The purpose of this ASU is to bring SFAS 166 into the Codification. The application of ASU 2009-16 did not have amaterial impact on the Company’s financial condition or results of operations. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).SFAS 167 amends certain requirements of FIN 46R to improve financial reporting by enterprises involved with VIEs and provides more relevant and reliableinformation to users of financial statements. Specifically, SFAS 167 eliminates the quantitative approach previously required under FIN 46R for determiningthe primary beneficiary of a VIE. SFAS 167 has the same scope as FIN 46R, with the addition of entities previously considered qualifying SPEs and iseffective for the first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interimand annual reporting periods thereafter, with earlier application prohibited. In December 2009, the FASB issued ASU No. 2009-17, “Improvements toFinancial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). The purpose of this ASU is to bring SFAS 167 into theCodification. The application of ASU 2009-17 did not have a material impact on the Company’s financial condition or results of operations. In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” (“ASU 2010-06”) to amend topic ASC820 “Fair Value Measurements and Disclosures,” by improving disclosure requirements in order to increase transparency in financial reporting. ASU 2010-06requires that an entity disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons forthe transfers. Furthermore, an entity should present information about purchases, sales, issuances, and settlements for Level 3 fair value measurements. ASU2010-06 also clarifies existing disclosures for the level of disaggregation and disclosures about input and valuation techniques. The new disclosures andclarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures aboutpurchases, sales, issuances, and settlements for the activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning afterDecember 15, 2010, and for interim periods within those fiscal years. On January 1, 2010, the Company adopted the disclosure amendments in ASU 2010-06, except for the amendments to Level 3 fair value measurements as described above, and has expanded disclosures as presented in note 21. In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and theAllowance for Credit Losses” (“ASU 2010-20”). The objective of ASU 2010-20 is to provide financial statement users with greater transparency about anentity’s allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so thatfinancial statement users can evaluate the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed andassessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 isapplicable to all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fairvalue. It is effective for interim and annual reporting periods ending on or after December 15, 2010. Comparative disclosure for earlier reporting periods thatended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods endingafter initial adoption. On December 31, 2010, the Company adopted the disclosure requirements in ASU 2010-20 and has expanded disclosures as presentedin note 21(c).86Table of ContentsRecently Issued FASB Accounting Standard Codification Updates In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of theFASB Emerging Issues Task Force)” (“ASU 2009-13”) which amends ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.” ASU 2009-13addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocateconsideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term sellingprice and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method fordetermining the allocation of arrangement consideration. Additionally, ASU 2009-13 requires expanded disclosures and is effective for fiscal years beginningon or after June 15, 2010. Earlier application is permitted with required transition disclosures based on the period of adoption. The Company is currentlyevaluating the potential impact of ASU 2009-13 on its consolidated financial statements. In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (aconsensus of the FASB Emerging Issues Task Force)” (“ASU 2009-14”). ASU 2009-14 amends ASC 985-605, “Software: Revenue Recognition,” such thattangible products, containing both software and non-software components that function together to deliver the tangible product’s essential functionality, are nolonger within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a multiple-deliverable revenue arrangement. The amendments in this update are effective, on a prospective basis, for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. Earlier application is permitted with required transition disclosures based on the period ofadoption. Both ASU 2009-13 and ASU 2009-14 must be adopted in the same period and must use the same transition disclosures. This standard will have noimpact on the Company’s consolidated financial statements. In December 2010, the FASB issued ASU No. 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the GoodwillImpairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). The objective of ASU 2010-28 is to address questionsabout entities with reporting units with zero or negative carrying amounts. The amendments in ASU 2010-28 modify Step 1 of the goodwill impairment test forreporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it ismore likely than not that a goodwill impairment exists by considering whether there are any adverse qualitative factors indicating that an impairment mayexist. ASU 2010-28 is applicable to all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes ofperforming Step 1 of the goodwill impairment test is zero or negative. For public entities, the amendments are effective for fiscal years, and interim periodswithin those years, beginning after December 15, 2010. Early adoption is not permitted. This standard will have no impact on the Company’s consolidatedfinancial statements. During 2010, the FASB has issued several ASU’s — ASU No. 2010-01 through ASU No. 2010-29. Except for ASU No. 2010-06, ASU No. 2010-20 andASU No. 2010-28 discussed above, the ASU’s entail technical corrections to existing guidance or affect guidance related to specialized industries or entitiesand therefore have minimal, if any, impact on the Company.4. Lease Arrangements(a) General Terms of Lease Arrangements A number of the Company’s leases are classified as sales-type leases. Certain arrangements that are legal sales are also classified as sales-type leases ascertain clauses within the arrangements limit transfer of title or provide the Company with conditional rights to the system. The customer’s rights under theCompany’s lease arrangements are described in note 2(n). The Company classifies its lease arrangements at inception of the arrangement and, if required, aftera modification of the lease arrangement, to determine whether they are sales-type leases or operating leases. Under the Company’s lease arrangements, thecustomer has the ability and the right to operate the hardware components or direct others to operate them in a manner determined by the customer. TheCompany’s lease terms are typically non-cancellable for 10 to 20 years with renewal provisions. Except for those sales arrangements that are classified assales-type leases, the Company’s leases generally do not contain an automatic transfer of title at the end of the lease term. The Company’s lease arrangementsdo not contain a guarantee of residual value at the end of the lease term. The customer is required to pay for executory costs such as insurance and taxes and isrequired to pay the Company for maintenance and extended warranty generally after the first year of the lease until the end of the lease term. The customer isresponsible for obtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on thedate the theater systems are delivered back to the Company.87Table of Contents The Company has assessed the nature of its joint revenue sharing arrangements and concluded that, based on the guidance in the Revenue Recognition Topicof the ASC, the arrangements contain a lease. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardwarecomponents or direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 7 to 10 years with renewal provisions. Title to equipment under joint revenue sharing arrangements does not transfer to the customer. TheCompany’s joint revenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay forexecutory costs such as insurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer isresponsible for obtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on thedate the theater systems are delivered back to the Company.(b) Financing Receivables Financing receivables, consisting of net investment in sales-type leases and receivables from financed sales of theater systems are as follows: As at December 31, 2010 2009 Gross minimum lease payments receivable $49,977 $64,779 Unearned finance income (15,158) (18,939)Minimum lease payments receivable 34,819 45,840 Accumulated allowance for uncollectible amounts (4,838) (5,734)Net investment in leases 29,981 40,106 Gross financed sales receivables 62,127 32,526 Unearned finance income (18,441) (9,869)Financed sales receivables 43,686 22,657 Accumulated allowance for uncollectible amounts (66) (178)Net financed sales receivables 43,620 22,479 Total financing receivables $73,601 $62,585 Net financed sales receivables due within one year $6,166 $4,304 Net financed sales receivables due after one year $37,454 $18,175 In 2010, the financed sales receivables had a weighted average effective interest rate of 8.8% (2009 — 9.4%).(c) Contingent Fees Contingent fees that meet the Company’s revenue recognition policy, from customers under various arrangements, have been reported in revenue as follows: Years Ended December 31, 2010 2009 2008 Sales $1,629 $406 $285 Sales-type leases 1,970 1,717 1,730 Operating leases 1,616 1,483 1,681 Subtotal — sales, sales-type leases and operating leases 5,215 3,606 3,696 Joint revenue sharing arrangements 41,646 21,598 3,435 $46,861 $25,204 $7,131 88Table of Contents(d) Future Minimum Rental Payments Future minimum rental payments receivable from operating and sales-type leases at December 31, 2010, for each of the next five years are as follows: Operating Leases Sales-Type Leases 2011 $2,041 $6,597 2012 1,962 5,565 2013 1,834 5,316 2014 1,747 4,965 2015 1,736 4,563 Thereafter 6,896 19,479 Total $16,216 $46,485 Total future minimum rental payments receivable from sales-type leases at December 31, 2010 exclude $3.5 million which represents amounts billed butnot yet received.5. Inventories As at December 31, 2010 2009 Raw materials $4,693 $4,045 Work-in-process 2,293 983 Finished goods 8,289 5,243 $15,275 $10,271 At December 31, 2010, finished goods inventory for which title had passed to the customer and revenue was deferred amounted to $3.2 million(December 31, 2009 — $1.6 million). Inventories at December 31, 2010 include provisions for excess and obsolete inventory based upon current estimates of net realizable value consideringfuture events and conditions of $4.4 million (December 31, 2009 — $3.8 million).6. Film Assets As at December 31, 2010 2009 Completed and released films, net of accumulated amortization of $38,914 (2009 — $28,015) $1,704 $1,897 Films in production 532 1,136 Films in development 213 185 $2,449 $3,218 The Company expects to amortize film costs of $1.6 million for released films within three years from December 31, 2010 (December 31, 2009 —$1.7 million). The amount of participation payments to third parties related to these films that the Company expects to pay during 2011 is $7.4 million (2010— $5.0 million).89Table of Contents7. Property, Plant and Equipment As at December 31, 2010 Accumulated Net Book Cost Depreciation Value Equipment leased or held for use Theater system components(1)(2) $86,249 $33,775 $52,474 Camera equipment(5) 6,355 6,008 347 92,604 39,783 52,821 Assets under construction(3) 8,305 — 8,305 Other property, plant and equipment Land 1,593 — 1,593 Buildings 14,723 8,906 5,817 Office and production equipment(4) 27,172 23,454 3,718 Leasehold improvements 8,603 6,822 1,781 52,091 39,182 12,909 $153,000 $78,965 $74,035 As at December 31, 2009 Accumulated Net Book Cost Depreciation Value Equipment leased or held for use Theater system components(1)(2) $68,349 $30,240 $38,109 Camera equipment(5) 5,954 5,954 — 74,303 36,194 38,109 Assets under construction(3) 3,700 — 3,700 Other property, plant and equipment Land 1,593 — 1,593 Buildings 14,723 8,404 6,319 Office and production equipment(4) 27,145 24,347 2,798 Leasehold improvements 8,421 6,120 2,301 51,882 38,871 13,011 $129,885 $75,065 $54,820 (1) Included in theater system components are assets with costs of $19.9 million (2009 — $21.3 million) and accumulated depreciation of $19.0 million(2009 — $20.2 million) that are leased to customers under operating leases. (2) Included in theater system components are assets with costs of $62.8 million (2009 — $42.7 million) and accumulated depreciation of $12.0 million(2009 — $6.7 million) that are used in joint revenue sharing arrangements. (3) Included in assets under construction are components with costs of $6.2 million (2009 — $3.1 million) that will be utilized to construct assets to beused in joint revenue sharing arrangements. (4) Included in office and production equipment are assets under capital lease with costs of $1.5 million (2009 — $1.5 million) and accumulateddepreciation of $1.4 million (2009 —$1.3 million). (5) Fully amortized camera equipment is still in use by the Company.90Table of Contents8. Other Assets As at December 31, 2010 2009 Cash surrender value of life insurance policies $— $7,313 Commissions and other deferred selling expenses 3,349 2,828 Deferred charges on debt financing 1,174 1,489 Insurance recoveries 1,896 2,053 Foreign currency derivatives 1,913 1,389 Shelf registration fees — 68 Investment in new business ventures 1,500 — Equity-accounted investments 1,643 — Other 875 — $12,350 $15,140 9. Income Taxes (a) Earnings (loss) from continuing operations before income taxes by tax jurisdiction are comprised of the following: Years Ended December 31, 2010 2009 2008 Canada $47,954 $4,833 $(42,285)United States 2,088 497 7,723 Other (554) 141 1,144 $49,488 $5,471 $(33,418) (b) The (provision) recovery for income taxes related to income (loss) from continuing operations is comprised of the following: Years Ended December 31, 2010 2009 2008 Current: Canada $(1,027) $(104) $(865)Foreign (1,465) (162) 24 (2,492) (266) (841) Deferred:(1) Canada 49,612 (8) 749 Foreign 4,664 — — 54,276 (8) 749 $51,784 $(274) $(92) (1) For the year ended December 31, 2010 the Company has released a valuation allowance of $54.8 million relating to the future utilization of deductibletemporary differences, tax credits, and certain net operating loss carryforwards. Offsetting this recovery for income taxes is the deferred tax provisionrelated to a partial pension settlement reclassed from other comprehensive income in the year of $0.5 million.91Table of Contents (c) The (provision for) recovery of income taxes from continuing operations differs from the amount that would have resulted by applying the combinedCanadian federal and provincial statutory income tax rates to earnings (losses) due to the following: Years Ended December 31, 2010 2009 (1) 2008 (1) Income tax (provision) recovery at combined statutory rates $(15,343) $(1,806) $11,225Adjustments resulting from: Non-taxable portion of capital gains and losses — 142 —Non-deductible stock based compensation (1,713) (704) (467)Other non-deductible/non-includable items 420 14 (131)Decrease (increase) in valuation allowance relating to current year temporary differences 12,708 (7,327) (11,560)Decrease in valuation allowance relating to reversal of future temporary differences 54,793 — —Tax effect of pension settlement reclassed from other comprehensive income (517) — —Withholding and other taxes (1,041) (490) (455)Changes to tax reserves 13 413 (323)US federal and state taxes (1,465) (107) 88Income tax at different rates in foreign and other provincial jurisdictions (374) (76) (648)Impact of changes in future enacted tax rates on current year temporary differences 4,444 (259) (1,877)Carryforward of investment and other tax credits (non-refundable) 1,642 819 883Effect of changes in legislation relating to enacted tax rate reductions — (3,652) —Effect of changes in legislation relating to foreign currency election — 14,147 —Effect of changes in legislation relating to tax credits — 928 511Changes to deferred tax assets and liabilities resulting from audit and other tax return adjustments 14 (2,216) 1,435Expiration of losses and credits carried forward (1,558) (7) (549)Changes to deferred tax assets and liabilities resulting from foreign exchange — 6 1,911Tax effect of loss from equity-accounted investments 168 — —Other (407) (99) (135)Recovery (provision) for income taxes, as reported $51,784 $(274) $(92) (1) Prior years’ comparatives have been restated to conform to the current year’s presentation. (d) The net deferred income tax asset is comprised of the following: As at December 31, 2010 2009 Net operating loss carryforwards $16,245 $19,404 Investment tax credit and other tax credit carryforwards 4,837 5,186 Write-downs of other assets 651 651 Excess tax over accounting basis in property, plant and equipment and inventories 36,373 45,941 Accrued pension liability 4,799 7,887 Other accrued reserves 8,133 6,134 Total deferred income tax assets 71,038 85,203 Income recognition on net investment in leases (6,167) (7,639)Other 180 (284) 65,051 77,280 Valuation allowance (7,929) (77,280)Net deferred income tax asset $57,122 $— 92Table of Contents The gross deferred tax assets include a liability of $0.1 million relating to the remaining tax effect resulting from the Company’s defined benefit pensionplan, the related actuarial gains and losses, and unrealized net gains on derivative instruments recorded in accumulated other comprehensive income. The Company has not provided Canadian taxes on cumulative earnings of non-Canadian affiliates and associated companies that have been reinvestedindefinitely. Taxes are provided for earnings of non-Canadian affiliates and associated companies when the Company determines that such earnings are nolonger indefinitely reinvested. (e) Estimated net operating loss carryforwards and estimated tax credit carryforwards expire as follows: Investment Tax Credits and Other Net Operating Tax Credit Loss Carryforwards Carryforwards 2011 $— $— 2012 — — 2013 393 — 2014 — 9 2015 — 16 Thereafter 5,742 53,207 $6,135 $53,232 Estimated net operating loss carryforwards can be carried forward to reduce taxable income through to 2021. Investment tax credits and other tax creditscan be carried forward to reduce income taxes payable through to 2030. As at December 31, 2010, the Company had approximately $21.7 million of U.S. consolidated federal tax net operating loss carryforwards and certainstate tax net loss carryforwards. Realization of some or all of the benefit from these U.S. net tax operating losses is dependent on the absence of certain“ownership changes” of the Company’s common shares. An “ownership change,” as defined in the applicable federal income tax rules, would place possiblelimitations, on an annual basis, on the use of such net operating losses to offset any future taxable income that the Company may generate. Such limitations,in conjunction with the net operating loss expiration provisions, could significantly reduce or effectively eliminate the Company’s ability to use its U.S. netoperating losses to offset any future taxable income. (f) Valuation allowance Based on the improvement of the Company’s operating results in 2009 and 2010 and the Company’s assessment of projected future results of operations, itwas determined that realization of a deferred income tax benefit was more likely than not. As a result, the judgment about the need for a full valuationallowance against deferred tax assets has changed, and a reduction in the valuation allowance has been recorded as a benefit within the recovery for incometaxes from continuing operations. The recovery for income taxes in the year ended December 31, 2010 includes a net income tax benefit of $54.8 million incontinuing operations related to a decrease in the valuation allowance for the Company’s deferred tax assets and other tax adjustments. The net deferred incometax benefit during the year ended December 31, 2010 is primarily attributable to the estimated realization of deferred tax assets resulting from the utilization offuture deductible temporary differences and certain net operating loss carryforwards and tax credits against future years’ taxable income. The Company alsoutilized an additional $12.7 million in tax benefits against current year income. During the year ended December 31, 2010, after considering all availableevidence, both positive (including recent profits, projected future profitability, backlog, carryforward periods for utilization of net operating loss carryoversand tax credits, discretionary deductions and other factors) and negative (including cumulative losses in past years and other factors), it was concluded thatthe valuation allowance against the Company’s deferred tax assets should be reduced by approximately $54.8 million. The remaining $7.9 million balance inthe valuation allowance as at December 31, 2010 is primarily attributable to certain U.S. federal and state net operating loss carryovers and federal tax creditsthat are likely to expire unutilized.93Table of Contents (g) Uncertain tax positions In connection with the Company’s adoption of FIN 48, as of January 1, 2007, the Company recorded a net increase to its deficit of $2.1 million (includingapproximately $0.9 million related to accrued interest and penalties) related to the measurement of potential international withholding tax requirements and adecrease in reserves for income taxes. As at December 31, 2010 and December 31, 2009, the Company had total unrecognized tax benefits (including interestand penalties) of $4.4 million and $4.4 million, respectively, for international withholding taxes. All of the unrecognized tax benefits could impact theCompany’s effective tax rate if recognized. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authoritiescould differ from the Company’s accrued position. Accordingly, additional provisions on federal, provincial, state and foreign tax-related matters could berecorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows: (In thousands of U.S. Dollars) Balance at January 1, 2010 $3,237 Additions based on tax positions related to the current year 410 Additions for tax positions of prior years — Reductions for tax positions of prior years (10)Settlements — Reductions resulting from lapse of applicable statute of limitations (418)Balance at December 31, 2010 $3,219 Consistent with its historical financial reporting, the Company has classified interest and penalties related to income tax liabilities, when applicable, as partof interest expense in its consolidated statements of operations rather than income tax expense. The Company recognized approximately $nil and $0.1 millionin potential interest and penalties associated with unrecognized tax benefits for the years ended December 31, 2010 and December 31, 2009, respectively. The number of years with open tax audits varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions include Canada, theprovince of Ontario and the United States (including multiple states). The Company’s 2004 through 2010 tax years remain subject to examination by the IRS for U.S. federal tax purposes, and the 2006 through 2010 tax yearsremain subject to examination by the appropriate governmental agencies for Canadian federal tax purposes. There are other on-going audits in various otherjurisdictions that are not material to the financial statements.10. Other Intangible Assets As at December 31, 2010 Accumulated Net Book Cost Amortization Value Patents and trademarks $7,289 $4,852 $2,437 Other 250 250 — $7,539 $5,102 $2,437 As at December 31, 2009 Accumulated Net Book Cost Amortization Value Patents and trademarks $6,543 $4,452 $2,091 Intellectual property rights 100 49 51 Other 250 250 — $6,893 $4,751 $2,142 The Company expects to amortize an average of $0.3 million for each of the next 5 years, respectively. Fully amortized other intangible assets are still in useby the Company.94Table of Contents During 2010, the Company acquired $0.8 million in patents and trademarks. The net book value of these patents and trademarks was $0.8 million as atDecember 31, 2010. The weighted average amortization period for these additions was 10 years. During 2010, the Company disposed of its remaining intellectual property rights. The net book value of these intellectual property rights was $0.1 millionas at December 31, 2009. During 2010, the Company incurred costs of $0.1 million to renew or extend the term of acquired other intangible assets which were recorded in selling,general and administrative expenses.11. Senior Notes due December 2010 In 2009, the Company repurchased all $160.0 million aggregate principal amount of its outstanding 9.625% Senior Notes due December 1, 2010, whichrepresented the aggregate principal amount outstanding. The Company paid cash of $159.1 million to reacquire its bonds, thereby releasing the Companyfrom further obligations to various holders under the Indenture governing the Senior Notes. The Company accounted for the bond repurchase in accordancewith the Debt Topic of the FASB ASC whereby the net carrying amount of the debt extinguished was the face value of the bonds adjusted for any unamortizedpremium, discount and costs of issuance, which resulted in a loss of $0.6 million in 2009.12. Credit Facility On November 16, 2009, the Company amended and restated the terms of its senior secured credit facility, which had been scheduled to mature onOctober 31, 2010. The amended and restated facility, as further amended by the parties on January 21, 2011 (the “Credit Facility”), with a scheduledmaturity of October 31, 2013, has a maximum borrowing capacity of $75.0 million, consisting of a revolving loan facility subject to a borrowing basecalculation (as described below) and including a sublimit of $20.0 million for letters of credit and a term loan of $35.0 million. Certain of the Company’ssubsidiaries serve as guarantors (the “Guarantors”) of the Company’s obligations under the Credit Facility. The Credit Facility is collateralized by a firstpriority security interest in all of the present and future assets of the Company and the Guarantors. The terms of the Credit Facility are set forth in the Amended and Restated Credit Agreement (the “Credit Agreement”), dated November 16, 2009, betweenthe Company; Wells Fargo Capital Finance Corporation Canada (formerly Wachovia Capital Finance Corporation (Canada)), as agent, lender, sole leadarranger and sole bookrunner, (“Wells Fargo”); and Export Development Canada, as lender (“EDC”, together with Wells Fargo, the “Lenders”) and in variouscollateral and security documents entered into by the Company and the Guarantors. Each of the Guarantors has also entered into a guarantee in respect of theCompany’s obligations under the Credit Facility. The revolving portion of the Credit Facility permits maximum aggregate borrowings equal to the lesser of: (i) $40.0 million, and (ii) a collateral calculation based on the percentages of the book values of the Company’s net investment in sales-type leases, financing receivables, certaintrade accounts receivable, finished goods inventory allocated to backlog contracts and the appraised values of the expected future cash flows related tooperating leases and the Company’s owned real property, reduced by certain accruals and accounts payable and subject to other conditions, limitations andreserve right requirements. It is also reduced by the settlement risk on its foreign currency forward contracts when the notional value exceeds the fair value ofthe forward contracts. The revolving portion of the Credit Facility bears interest at either (i) LIBOR plus a margin of 2.75% per annum, or (ii) Wells Fargo’s prime rate plus amargin of 1.25% per annum, at the Company’s option. The term loan portion of the Credit Facility bears interest at the Company’s option, at either (i) LIBORplus a margin of 3.75% per annum, or (ii) Wells Fargo’s prime rate plus a margin of 2.25% per annum. Under the Credit Facility, the effective interest rate forthe year ended December 31, 2010 for the term loan portion was 4.06% (2009 — 4.09%) and 3.56% for the revolving portion (2009 — 2.29%). The Credit Facility provides that so long as the term loan remains outstanding, the Company will be required to maintain: (i) a ratio of funded debt (asdefined in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) of not more than 2:1 through December 31, 2010, and (ii) a ratio of fundeddebt to EBITDA of not more than 1.75:1 thereafter. If the Company repays the term loan in full, it will remain subject to such ratio requirements only ifExcess Availability (as defined in the Credit Agreement) is less than $10.0 million or Cash and Excess Availability (as defined in the Credit Agreement) is lessthan $15.0 million. If Cash and Excess Availability is less than $25.0 million,95Table of Contentsthe Company will also be required to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.1:1.0; provided, however,that if the Company repays the term loan in full, it will remain subject to such ratio requirement only if Excess Availability is less than $10.0 million or Cashand Excess Availability is less than $15.0 million. At all times, under the terms of the Credit Facility, the Company is required to maintain minimum ExcessAvailability of not less than $5.0 million and minimum Cash and Excess Availability of not less than $15.0 million. These amounts were $45.0 million and$75.4 million at December 31, 2010, respectively. The Company was in compliance with all of these requirements at December 31, 2010. The Credit Facility contains typical affirmative and negative covenants, including covenants that limit or restrict the ability of the Company and theGuarantors to: incur certain additional indebtedness; make certain loans, investments or guarantees; pay dividends; make certain asset sales; incur certainliens or other encumbrances; conduct certain transactions with affiliates and enter into certain corporate transactions. The Credit Facility also contains customary events of default, including upon an acquisition or change of control or upon a change in the business andassets of the Company or a Guarantor that in each case is reasonably expected to have a material adverse effect on the Company or Guarantor. If an event ofdefault occurs and is continuing under the Credit Facility, the Lenders may, among other things, terminate their commitments and require immediaterepayment of all amounts owed by the Company. Bank indebtedness includes the following: December 31, December 31, 2010 2009 Term Loan $17,500 $35,000 Revolving Credit Facility — 15,000 $17,500 $50,000 During 2010, the Company repaid $15.0 million of its remaining outstanding indebtedness under the revolving portion of the Credit Facility and$17.5 million of its term loan. Total amounts drawn and available under the Credit Facility at December 31, 2010, were $17.5 million and $40.0 million,respectively (December 31, 2009 — $50.0 million and $24.8 million, respectively). At December 31, 2010, the Company’s current borrowing capacity under the revolving portion of the Credit Facility was $40.0 million after deduction forthe minimum Excess Availability reserve of $5.0 million. Outstanding borrowings and letters of credit and advance payment guarantees were $nil as atDecember 31, 2010. At December 31, 2009, the borrowing capacity was $24.8 million after deduction for outstanding borrowings of $15.0 million, letters ofcredit and advanced payment guarantees of $0.3 million and the minimum Excess Availability reserve of $5.0 million. In accordance with the loan agreement, the Company is obligated to make payments on the principal of the term loan as follows: 2011 $11,667 2012 5,833 2013 — 2014 — 2015 — Thereafter — $17,500 Wells Fargo Foreign Exchange Facility Within the Credit Facility entered into on November 16, 2009, the Company has a $10.0 million sublimit to cover the Company’s settlement risk on itspurchased foreign currency forward contracts and/or other swap arrangements as defined in the Credit Facility. The settlement risk on its foreign currencyforward contracts was $nil as at December 31, 2010 as the fair value exceeded the notional value of the forward contracts. The Company can enter into sucharrangements up to a notional amount of $50.0 million, of which $8.5 million is remaining.96Table of ContentsBank of Montreal Facilities As at December 31, 2010, the Company has available a $10.0 million facility (December 31, 2009 — $10.0 million) with the Bank of Montreal for usesolely in conjunction with the issuance of performance guarantees and letters of credit fully insured by EDC (the “Bank of Montreal Facility”). As atDecember 31, 2010, the Company has letters of credit outstanding of $2.4 million (2009 — $3.6 million) under the Bank of Montreal Facility. During 2009, the Company had available a $5.0 million facility solely used to cover the Company’s settlement risk on its purchased foreign currencyforward contracts entered into prior to December 2009. The facility was fully insured by EDC. As at December 31, 2010, all of the foreign currency contractssubject to the $5.0 million facility have matured and the facility is no longer available to the Company. The settlement risk on its foreign currency forwardcontracts was $nil on December 31, 2009 as the fair value exceeded the notional value of the forward contracts.13. Commitments (a) The Company’s lease commitments consist of rent and equipment under operating leases. The Company accounts for any incentives provided over theterm of the lease. Total minimum annual rental payments to be made by the Company under operating leases are as follows: Operating Leases Capital Leases 2011 $5,673 $27 2012 5,390 23 2013 2,064 20 2014 879 — 2015 490 — Thereafter 1,757 — $16,253 $70 Rent expense was $4.8 million for 2010 (2009 — $4.9 million, 2008 — $5.1 million) net of sublease rental of $0.4 million (2009 — $0.4 million, 2008— $0.2 million). Recorded in the accrued liabilities balance as at December 31, 2010 is $4.2 million (December 31, 2009 — $5.0 million) related to accrued rent and leaseinducements being recognized as an offset to rent expense over the term of the lease. Purchase obligations under long-term supplier contracts as at December 31, 2010 were $13.6 million (December 31, 2009 — $9.3 million). (b) As at December 31, 2010 the Company has letters of credit and advance payment guarantees secured by the Credit Facility of $nil (December 31, 2009— $0.3 million) outstanding. As at December 31, 2010 the Company also has letters of credit outstanding of $2.4 million as compared to $3.6 million as atDecember 31, 2009, under the Bank of Montreal Facility. (c) The Company compensates its sales force with both fixed and variable compensation. Commissions on the sale or lease of the Company’s theatersystems are payable in graduated amounts from the time of collection of the customer’s first payment to the Company up to the collection of the customer’s lastinitial payment. At December 31, 2010, $1.5 million (December 31, 2009—$0.6 million) of commissions have been accrued and will be payable in futureperiods.14. Contingencies and Guarantees The Company is involved in lawsuits, claims, and proceedings, including those identified below, which arise in the ordinary course of business. Inaccordance with the Contingencies Topic of the FASB ASC, the Company will make a provision for a liability when it is both probable that a loss has beenincurred and the amount of the loss can be reasonably estimated. The Company believes it has adequate provisions for any such matters. The Companyreviews these provisions in conjunction with any related provisions on assets related to the claims at least quarterly and adjusts these provisions to reflect theimpacts of negotiations, settlements, rulings, advice of legal counsel and other pertinent information related to the case. Should developments in any of thesematters outlined below cause a change in the Company’s determination as to an unfavorable outcome and result in the need to recognize a material provision,or, should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on theCompany’s results of operations, cash flows, and financial position in the period or periods in which such a change in determination, settlement or judgmentoccurs.97Table of Contents The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred. (a) In March 2005, the Company, together with Three-Dimensional Media Group, Ltd. (“3DMG”), filed a complaint in the U.S. District Court for theCentral District of California, Western Division, against In-Three, Inc. (“In-Three”) alleging patent infringement. On March 10, 2006, the Company and In-Three entered into a settlement agreement settling the dispute between the Company and In-Three. Despite the settlement reached between the Company and In-Three, co-plaintiff 3DMG refused to dismiss its claims against In-Three. Accordingly, the Company and In-Three moved jointly for a motion to dismiss theCompany’s and In-Three’s claims. On August 24, 2010, the Court dismissed all of the claims pending between the Company and In-Three, thus dismissingthe Company from the litigation. On May 15, 2006, the Company initiated arbitration against 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 breachesand asserting counterclaims that the Company breached the parties’ license agreement. On June 21, 2007, the Arbitration Panel unanimously denied 3DMG’sMotion for Summary Judgment filed on April 11, 2007 concerning the Company’s claims and 3DMG’s counterclaims. The proceeding was suspended onMay 4, 2009 due to failure of 3DMG to pay fees associated with the proceeding. The proceeding was further suspended on October 11, 2010 pendingresolution of reexamination proceedings currently pending involving one of 3DMG’s patents. The Company will continue to pursue its claims vigorously andbelieves that all allegations made by 3DMG are without merit. The Company further believes that the amount of loss, if any, suffered in connection with thecounterclaims would not have a material impact on the financial position or results of operations of the Company, although no assurance can be given withrespect to the ultimate outcome of the arbitration. (b) In January 2004, the Company and IMAX Theatre Services Ltd., a subsidiary of the Company, commenced an arbitration seeking damages before theInternational Court of Arbitration of the International Chambers of Commerce (the “ICC”) with respect to the breach by Electronic Media Limited (“EML”) ofits December 2000 agreement with the Company. In June 2004, the Company commenced a related arbitration before the ICC against EML’s affiliate, E-CITIEntertainment (I) PVT Limited (“E-Citi”), seeking damages as a result of E-Citi’s breach of a September 2000 lease agreement. An arbitration hearing tookplace in November 2005 against E-Citi which considered all claims by the Company. On February 1, 2006, the ICC issued an award on liability findingunanimously in the Company’s favor on all claims. Further hearings took place in July 2006 and December 2006. On August 24, 2007, the ICC issued anaward unanimously in favor of the Company in the amount of $9.4 million, consisting of past and future rents owed to the Company under its leaseagreements, plus interest and costs. In the award, the ICC upheld the validity and enforceability of the Company’s theater system contract. The Companythereafter submitted its application to the arbitration panel for interest and costs. On March 27, 2008, the Panel issued a final award in favor of the Companyin the amount of $11,309,496, plus an additional $2,512 each day in interest from October 1, 2007 until the date the award is paid, which the Company isseeking to enforce and collect in full. (c) In June 2004, Robots of Mars, Inc. (“Robots”) initiated an arbitration proceeding against the Company in California with the American ArbitrationAssociation pursuant to arbitration provisions in two film production agreements between Robots’ predecessor-in-interest and a subsidiary of the Company(Ridefilm), asserting claims for breach of contract, fraud, breach of fiduciary duty and intentional interference with the contract. Robots is seeking an awardof contingent compensation that it claims is owed under two production agreements, damages for tort claims, and punitive damages. The arbitration hearing ofthis matter occurred in June and October 2009. The parties are currently awaiting a final award from the arbitrator. The Company believes the amount of loss,if any, that may be suffered in connection with this proceeding, will not have a material impact on the financial position or results of operations of theCompany, although no assurance can be given with respect to the ultimate outcome of such arbitration. (d) The Company and certain of its officers and directors were named as defendants in eight purported class action lawsuits filed between August 11, 2006and September 18, 2006, alleging violations of U.S. federal securities laws. These eight actions were filed in the U.S. District Court for the Southern Districtof New York. On January 18, 2007, the Court consolidated all eight class action lawsuits and appointed Westchester Capital Management, Inc. as the leadplaintiff and Abbey Spanier Rodd & Abrams, LLP as lead plaintiff’s counsel. On October 2, 2007, plaintiffs filed a consolidated amended class actioncomplaint. The amended complaint, brought on behalf of shareholders who purchased the Company’s common stock between February 27, 2003 andJuly 20, 2007, alleges primarily that the defendants engaged in securities fraud by disseminating materially false and misleading statements during the classperiod regarding the Company’s revenue recognition of theater system installations, and failing to disclose material information concerning the Company’srevenue recognition practices. The amended complaint also added PricewaterhouseCoopers LLP, the Company’s auditors, as a defendant. The lawsuit seeks98Table of Contentsunspecified compensatory damages, costs, and expenses. The defendants filed a motion to dismiss the amended complaint on December 10, 2007. OnSeptember 16, 2008, the Court issued a memorandum opinion and order, denying the motion. On October 6, 2008, the defendants filed an answer to theamended complaint. On October 31, 2008, the plaintiffs filed a motion for class certification. Fact discovery on the merits commenced on November 14, 2008.On March 13, 2009, the Court granted a second prospective lead plaintiff’s request to file a motion for reconsideration of the Court’s order namingWestchester Capital Management, Inc. as the lead plaintiff and issued an order denying without prejudice plaintiff’s class certification motion pendingresolution of the motion for reconsideration. On June 29, 2009, the Court granted the motion for reconsideration and appointed Snow Capital InvestmentPartners, L.P. as the lead plaintiff and Coughlin Stoia Geller Rudman & Robbins LLP as lead plaintiff’s counsel. Westchester Capital Management, Inc.appealed this decision, but the U.S. Court of Appeals for the Second Circuit denied its petition on October 1, 2009. On April 22, 2010, the new lead plaintifffiled its motion for class certification, defendants filed their oppositions to the motion on June 10, 2010, and plaintiff filed its reply on July 30, 2010. OnDecember 20, 2010, the Court denied Snow Capital Investment Partners’ motion and ordered that all applications to be appointed lead plaintiff must be filedwithin 20 days of the decision. Two applications for lead plaintiff were filed, on January 10, 2011 and January 12, 2011, respectively. The lawsuit is at anearly stage and as a result the Company is not able to estimate a potential loss exposure at this time. The Company will vigorously defend the matter, althoughno assurances can be given with respect to the outcome of such proceedings. The Company’s directors and officers insurance policy provides forreimbursement of costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, if any, subject to certain policy limits anddeductibles. (e) A class action lawsuit was filed on September 20, 2006 in the Ontario Superior Court of Justice against the Company and certain of its officers anddirectors, alleging violations of Canadian securities laws. This lawsuit was brought on behalf of shareholders who acquired the Company’s securities betweenFebruary 17, 2006 and August 9, 2006. The lawsuit is in an early procedural stage and seeks unspecified compensatory and punitive damages, as well ascosts and expenses. As a result, the Company is unable to estimate a potential loss exposure at this time. For reasons released December 14, 2009, the Courtgranted leave to the Plaintiffs to amend their statement of claim to plead certain claims pursuant to the Securities Act (Ontario) against the Company andcertain individuals and granted certification of the action as a class proceeding. These are procedural decisions, and do not contain any binding conclusionson the factual or legal merits of the claim. The Company has brought a motion seeking Court approval to appeal those decisions and it is not known when theOntario court will release a decision on that motion. The Company believes the allegations made against it in the statement of claim are meritless and willvigorously defend the matter, although no assurance can be given with respect to the ultimate outcome of such proceedings. The Company’s directors andofficers insurance policy provides for reimbursement of costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, ifany, subject to certain policy limits and deductibles. (f) On September 7, 2007, Catalyst Fund Limited Partnership II (“Catalyst”), a holder of the Company’s Senior Notes, commenced an application againstthe Company in the Ontario Superior Court of Justice for a declaration of oppression pursuant to sections 229 and 241 of the Canada Business CorporationsAct (the “CBCA”) and for a declaration that the Company is in default of the Indenture governing its now retired Senior Notes. In its application against theCompany, Catalyst challenged the validity of the consent solicitation through which the Company requested and obtained a waiver of any and all defaultsarising from a failure to comply with the reporting covenant under the Indenture and alleged common law fraud. On September 26, 2008, on the Company’smotion, the Ontario Superior Court stayed Catalyst’s application in Canada on the basis of Catalyst having brought similar claims against the Company inthe State of New York, and ordered Catalyst to pay the Company’s costs associated with the motion. On April 27, 2009, the Supreme Court of the State ofNew York disposed of Catalyst’s claims against the Company in the State of New York (see note 14(g) for additional information). The time for Catalyst toappeal the dismissal of its claim by the New York court expired on February 8, 2010, without Catalyst perfecting an appeal. (g) In a related matter, on December 21, 2007, U.S. Bank National Association, trustee under the Indenture, filed a complaint in the Supreme Court of theState of New York against the Company and Catalyst, requesting a declaration that the theory of default asserted by Catalyst before the Ontario SuperiorCourt of Justice is without merit and further that Catalyst has failed to satisfy certain prerequisites to bondholder action, which are contained in the Indenture(the “U.S. Bank Action”). On February 22, 2008, Catalyst served a Verified Answer to the U.S. Bank Action and filed several cross-claims (the “Cross-Claims”) against the Company in the same proceeding. On January 16, 2009, the Company moved for summary judgment, seeking a ruling that theCompany satisfied the terms of the declaratory relief requested by the Trustee and the dismissal of the Cross-Claims. On April 27, 2009, the Court grantedthe Company’s motion for summary judgment, disposing of the Cross-Claims. On May 7, 2009, Catalyst filed a notice preserving for a period of ninemonths its right to appeal the Court’s ruling on summary judgment. The time for Catalyst to perfect its appeal has now expired.99Table of Contents (h) On November 4, 2009, Cinemark USA, Inc. (“Cinemark”) filed a complaint in the United States District Court for the Eastern District of Texasagainst the Company seeking a declaratory judgment that Cinemark is not infringing certain of the Company’s patents related to theater geometry and thatsuch patents are invalid. On December 22, 2010, the Company and Cinemark entered into a Settlement Agreement in which they agreed to dismiss the Texasaction with prejudice. As part of the settlement, the Company and Cinemark also agreed to enter into a purchase agreement pursuant to which Cinemark agreedto purchase two IMAX digital theater systems and to upgrade six of its IMAX film-based theaters to IMAX digital theaters. On January 13, 2011, the Courtgranted the parties’ joint motion to dismiss with prejudice. (i) On November 12, 2009, the Company filed a complaint in the Supreme Court of New York against Cinemark alleging breach of contract, fraud,tortious interference with existing and prospective economic relations, breach of the implied warranty of good faith and fair dealing, misappropriation of tradesecrets, unjust enrichment and deliberate acts of bad faith in connection with the introduction and operation of a new Cinemark theater prototype. The lawsuitwas removed to federal court in New York and the tort claims were dismissed without prejudice to the Company’s right to replead those claims. OnDecember 22, 2010, the Company and Cinemark entered into a Settlement Agreement in which they agreed to dismiss the New York action with prejudice. Aspart of the settlement, the Company and Cinemark also agreed to enter into a purchase agreement pursuant to which Cinemark agreed to purchase two IMAXdigital theater systems and to upgrade six of its IMAX film-based theaters to IMAX digital theaters. On January 4, 2011, the Company filed a voluntarystipulation of dismissal. The matter is now closed. (j) In November 2009, the Company filed suit against Sanborn Theatres (“Sanborn”) in the United States District Court for the Central District ofCalifornia alleging breach of Sanborn’s agreement to make payments for the purchase of two IMAX theater systems from the Company and seeking$1.7 million in compensatory damages. After granting Sanborn notice of default in connection with the failure to make required payments under the agreementand upon Sanborn’s failure to cure, the Company terminated its agreement with Sanborn. On May 11, 2010, Sanborn filed suit against the Company andAMC Entertainment Inc. (“AMC Entertainment”) and Regal Cinemas, Inc. (“Regal”) in the U.S. District Court for the Central District of California allegingbreach of contract, fraud and unfair competition against the Company and alleging intentional interference with contractual relations against AMCEntertainment and Regal. The lawsuits are at early stages and as a result the Company is not able to estimate a potential loss exposure, if any, at this time. TheCompany will vigorously prosecute its claims and defenses in both matters, although no assurances can be given with respect to the outcome of suchproceedings. (k) Since June 2006, the Company has been subject to ongoing informal inquiries by the SEC and the OSC. On or about September 3, 2010, the SECissued a formal order of investigation in connection with its inquiry. The Company has been cooperating with these inquiries and will continue to cooperatewith the SEC’s investigation. The Company believes that the inquiry and investigation principally relate to the timing of recognition of the Company’s theatersystem installation revenue in 2005 and related matters. Although the Company cannot predict the timing of developments and outcomes in these inquiries,they could result at any time in developments (including charges or settlement of charges) that could have material adverse effects on the Company. Theseeffects could include payments of fines or disgorgement or other relief with respect to the Company or its officers or employees that could be material to theCompany. Such developments could also have an adverse effect on the Company’s defense of the class action lawsuits referred to above. (l) In addition to the matters described above, the Company is currently involved in other legal proceedings which, in the opinion of the Company’smanagement, will not materially affect the Company’s financial position or future operating results, although no assurance can be given with respect to theultimate outcome of any such proceedings. (m) In the normal course of business, the Company enters into agreements that may contain features that meet the definition of a guarantee. The GuaranteesTopic of the FASB ASC defines a guarantee to be a contract (including an indemnity) that contingently requires the Company to make payments (either incash, financial instruments, other assets, shares of its stock or provision of services) to a third party based on (a) changes in an underlying interest rate,foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, a liability or an equity security of the counterparty,(b) failure of another party to perform under an obligating agreement or (c) failure of another third party to pay its indebtedness when due.Financial Guarantees The Company has provided no significant financial guarantees to third parties.Product Warranties The following summarizes the accrual for product warranties that was recorded as part of accrued liabilities in the consolidated balance sheet:100Table of Contents As at December 31, 2010 2009 Balance at the beginning of the year $36 $33 Warranty redemptions (87) (41)Warranties issued 211 115 Revisions — (71)Balance at the end of the year $160 $36 Director/Officer Indemnifications The Company’s General By-law contains an indemnification of its directors/officers, former directors/officers and persons who have acted at its request tobe a director/officer of an entity in which the Company is a shareholder or creditor, to indemnify them, to the extent permitted by the Canada BusinessCorporations Act, against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by them in connection withany action, suit or proceeding in which the directors and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view tothe best interests of the Company. The nature of the indemnification prevents the Company from making a reasonable estimate of the maximum potentialamount it could be required to pay to counterparties. The Company has purchased directors’ and officers’ liability insurance. No amount has been accrued inthe consolidated balance sheet as at December 31, 2010 and December 31, 2009 with respect to this indemnity.Other Indemnification Agreements In the normal course of the Company’s operations, the Company provides indemnifications to counterparties in transactions such as: theater system leaseand sale agreements and the supervision of installation or servicing of the theater systems; film production, exhibition and distribution agreements; realproperty lease agreements; and employment agreements. These indemnification agreements require the Company to compensate the counterparties for costsincurred as a result of litigation claims that may be suffered by the counterparty as a consequence of the transaction or the Company’s breach or non-performance under these agreements. While the terms of these indemnification agreements vary based upon the contract, they normally extend for the life of theagreements. A small number of agreements do not provide for any limit on the maximum potential amount of indemnification; however, virtually all of theCompany’s system lease and sale agreements limit such maximum potential liability to the purchase price of the system. The fact that the maximum potentialamount of indemnification required by the Company is not specified in some cases prevents the Company from making a reasonable estimate of the maximumpotential amount it could be required to pay to counterparties. During the second quarter of 2009, the Company provided an indemnity to a third party inconnection with a terminated service arrangement. Historically, the Company has not made any significant payments under such indemnifications and lessthan $0.1 million has been accrued in the consolidated financial statements with respect to the contingent aspect of these indemnities.15. Capital Stock(a) AuthorizedCommon Shares The authorized capital of the Company consists of an unlimited number of common shares. The following is a summary of the rights, privileges,restrictions and conditions of the common shares. The holders of common shares are entitled to receive dividends if, as and when declared by the directors of the Company, subject to the rights of theholders of any other class of shares of the Company entitled to receive dividends in priority to the common shares. The holders of the common shares are entitled to one vote for each common share held at all meetings of the shareholders.(b) Changes during the Year In 2010, the Company issued 1,313,599 (2009 — 1,306,637, 2008 — 341,110) common shares pursuant to the exercise of stock options for cashproceeds of $8.3 million (2009 — $6.3 million, 2008 — $1.2 million).101Table of Contents On June 5, 2009 and August 17, 2009, the Company completed public offerings of 9,800,000 and 5,882,353 common shares, respectively, pursuant to aregistration statement declared effective by the SEC. On June 26, 2009 and August 31, 2009, the Company completed the sale of an additional 1,470,000 and882,353 common shares, respectively, pursuant to the over-allotment options exercised in full by the underwriter of the offerings. The 11,270,000 commonshares sold in the June offerings were sold at a public offering price of $7.15. The 6,764,706 common shares sold in the August offerings were sold at apublic offering price of $8.50. The aggregate net proceeds of the offerings in 2009 was $130.7 million. The Company used the proceeds of the offerings for therepayment of debt, including a portion of the Senior Notes, and for general corporate purposes.(c) Stock-Based Compensation The Company has five stock-based compensation plans that are described below. The compensation costs recorded in the consolidated statement ofoperations for these plans were $27.7 million in 2010 (2009 — $17.7 million, 2008 — $1.5 million). Total stock-based compensation expense related tononvested employee stock-based payment awards not yet recognized at December 31, 2010 and the weighted average period over which the awards are expectedto be recognized is $18.0 million and 2.7 years, respectively (2009 —$6.8 million and 3.8 years, 2008 — $4.5 million and 3.2 years).Stock Option Plan The Company’s Stock Option Plan, which is shareholder approved, permits the grant of options to employees, directors and consultants. The Companyrecorded an expense of $4.1 million in 2010 (2009 — $2.1 million, 2008 — $0.9 million), related to grants issued to employees and directors in the plan. Noincome tax benefit is recorded in the consolidated statement of operations for these costs. The Company’s policy is to issue new shares from treasury to satisfy stock options which are exercised. The Company utilizes the Binomial Model to determine the fair value of stock-based payment awards. The fair value determined by the Binomial Model isaffected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, butare not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercisebehaviors. The Binomial Model also considers the expected exercise multiple which is the multiple of exercise price to grant price at which exercises areexpected to occur on average. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictionsand are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, andbecause changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the Binomial Model best provides a fairmeasure of the fair value of the Company’s employee stock options. The weighted average fair value of all common share options, granted to employees and directors in 2010 at the measurement date was $8.01 per share(2009 — $4.45 per share, 2008 — $1.72 per share). For the years ended December 31, the following assumptions were used: 2010 2009 2008Average risk-free interest rate 3.18% 3.14% 2.68%Expected option life (in years) 2.82 - 5.41 4.94 - 5.85 3.49 - 5.85 Expected volatility 50% - 61% 62% 61% - 62%Annual termination probability 0% - 9.69% 0% - 10.30% 9.52% - 11.20%Dividend yield 0% 0% 0% As at December 31, 2010, the Company has reserved a total of 12,829,115 (December 31, 2009— 12,566,395) common shares for future issuanceunder the Stock Option Plan, of which options in respect of 6,743,272 common shares are outstanding December 31, 2010. All awards of stock options aremade at fair market value of the Company’s common shares on the date of grant. The fair market value of a Common Share on a given date means the higherof the closing price of a Common Share on the grant date (or the most recent trading date if the grant date is not a trading date) on the NYSE, the TSX andsuch national exchange, as may be designated by the Company’s Board of Directors (the “Fair Market Value”). The options generally vest between one and5 years and expire 10 years or less from the date granted. The Stock Option Plan provides that vesting will be accelerated if there is a change of control, asdefined in the plan and upon certain conditions. At December 31, 2010, options in respect of 3,090,755 common shares were vested and exercisable.102Table of Contents The following table summarizes certain information in respect of all option activity under the Stock Option Plan: Weighted Average Exercise Number of Shares Price Per Share 2010 2009 2008 2010 2009 2008Options outstanding, beginning of year 6,173,795 6,686,182 5,908,080 $6.52 $5.97 $6.71 Granted 2,001,703 1,051,217 1,472,038 21.72 10.00 4.47 Exercised (1,313,599) (1,306,637) (341,110) 6.30 4.85 3.52 Forfeited (23,825) (35,488) (84,608) 8.35 6.48 5.83 Expired (94,802) (212,229) (158,000) 26.08 16.18 23.95 Cancelled — (9,250) (110,218) — 18.51 7.51 Options outstanding, end of period 6,743,272 6,173,795 6,686,182 10.79 6.52 5.97 Options exercisable, end of period 3,090,755 3,618,618 4,451,715 5.64 6.22 6.50 In 2010, the Company did not cancel any stock options from its Stock Option Plan (2009 — 9,250, 2008 — 110,218) surrendered by Companyemployees. Compensation cost which is fully recognized at the cancellation date was not reversed for options cancelled in 2009 and 2008. As at December 31, 2010, 6,325,114 options were fully vested or are expected to vest with a weighted average exercise price of $10.83, aggregate intrinsicvalue of $109.2 million and weighted average remaining contractual life of 4.9 years. As at December 31, 2010, options that are exercisable have an intrinsicvalue of $69.3 million and a weighted average remaining contractual life of 3.1 years. The intrinsic value of options exercised in 2010 was $15.0 million(2009 — $5.8 million, 2008 — $1.2 million).Options to Non-Employees During 2010, an aggregate of 135,217 (2009 — 100,000, 2008 — 119,875) common share options to purchase the Company’s common stock with anaverage exercise price of $15.92 (2009 — $4.05, 2008 — $4.50) were granted to certain advisors and strategic partners of the Company. Of these grants,20,000 common share options are subject to vesting based on a performance commitment which has not been completed as at December 31, 2010 and noexpense has been recorded. These options have a maximum contractual life of 10 years or less. The option vesting ranges from immediately to five years.These options were granted under the Stock Option Plan. As at December 31, 2010 non-employee options outstanding amounted to 132,168 options (2009 — 219,768, 2008 — 323,314) with a weighted averageexercise price of $13.53 (2009 — $7.05, 2008 — $6.33). 4,500 options (2009 — 154,434, 2008 — 296,584) were exercisable with an average weightedexercise price of $14.60 (2009 — $8.31, 2008 — $6.49) and the vested options have an aggregate intrinsic value of $0.1 million (2009 — $0.8 million, 2008— $nil). The weighted average fair value of options granted to non-employees during 2010 at the measurement date was $12.71 per share (2009 — $2.34 pershare, 2008 — $2.58 per share), utilizing a Binomial Model with the following underlying assumptions: Years Ended December 31 2010 2009 2007Average risk-free interest rate 2.09% 2.03% 1.71%Contractual option life 1.70 - 6.25 years 6 years 6 yearsAverage expected volatility 50% - 61% 62% 62%Dividend yield 0% 0% 0%103Table of Contents In 2010, the Company recorded a charge of $1.8 million, (2009 — $0.2 million 2008 — $0.6 million) to costs and expenses applicable to revenues —services and selling, general and administrative expenses related to the non-employee stock options. Included in accrued liabilities is $1.5 million for non-employee stock options granted or to be granted.Restricted Common Shares Under the terms of certain employment agreements dated July 12, 2000, the Company was required to issue either 160,000 restricted common shares orpay their cash equivalent upon request by the employees at any time. The Company accounted for the obligation as a liability, which is classified withinaccrued liabilities. In December 2010, upon request by the employees, the Company paid $4.2 million in cash to settle the equivalent of the remaining 160,000restricted common shares under these agreements. The Company recorded an expense of $2.0 million in 2010 (2009 — $1.4 million expense, 2008 —$0.4 million recovery), due to the changes in the Company’s stock price during the period. The aggregate intrinsic value of the awards outstanding atDecember 31, 2010 is $nil (December 31, 2009 — $2.1 million).Stock Appreciation Rights There were no stock appreciation rights (“SARs”) granted during 2010 and 2009. During 2007, 2,280,000 SARs with a weighted average exercise price of$6.20 per right were granted to certain Company executives. For the year ended December 31, 2010, 877,500 SARs were cash settled for $10.3 million. Theaverage exercise price for the settled SARs for the year ended December 31, 2010 was $5.91 per SAR. As at December 31, 2010, 1,132,500 SARs wereoutstanding, of which 1,099,500 SARs were exercisable. None of the SARs were forfeited, cancelled, or expired for the years ended December 31, 2010 and2009. The SARs vesting period ranges from immediately upon granting to 5 years, with a remaining contractual life ranging from 5.00 to 7.01 years as atDecember 31, 2010. The outstanding SARs had an average fair value of $21.21 per right as at December 31, 2010 (December 31, 2009 — $7.37). TheCompany accounts for the obligation of these SARs as a liability (December 31, 2010 — $23.7 million, December 31, 2009 — $14.1 million), which isclassified within accrued liabilities. The Company has recorded a $19.8 million expense for 2010 (2009 — $14.0 million, 2008 — $0.4 million) to selling,general and administrative expenses related to these SARs. The following assumptions were used for measuring the fair value of the SARs: As at December 31, 2010 2009Average risk-free interest rate 0.65% 1.17%Expected option life (in years) 0.24 to 2.51 0.15 to 3.48 Expected volatility 50% to 61% 62%Annual termination probability 0% - 8.31% 0% - 9.69%Dividend yield 0% 0%Warrants There were no warrants issued or outstanding during 2010 or 2009.104Table of Contents(d) Earnings (loss) per share Reconciliations of the numerator and denominator of the basic and diluted per-share computations are comprised of the following: Years Ended December 31, 2010 2009 2008 Net earnings (loss) from continuing operations applicable to common shareholders $100,779 $5,197 $(33,510)Weighted average number of common shares (000’s): Issued and outstanding, beginning of period 62,831,974 43,490,631 40,423,074 Weighted average number of shares issued during the period 743,499 9,330,152 1,970,011 Weighted average number of shares used in computing basic earnings per share 63,575,473 52,820,783 42,393,085 Assumed exercise of stock options, net of shares assumed 3,108,130 1,697,358 — Weighted average number of shares used in computing diluted earnings per share 66,683,603 54,518,141 42,393,085 The calculation of diluted earnings (loss) per share for 2008 excludes 1,206,050 shares that are issuable upon exercise of stock options, net of sharesassumed as the impact of these exercises would be antidilutive.16. Consolidated Statements of Operations Supplemental Information(a) Other Revenues The Company enters into theater system arrangements with customers that typically contain customer payment obligations prior to the scheduledinstallation of the theater systems. During the period of time between signing and theater system installation, certain customers each year are unable to, or electnot 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 terminatethe arrangement by default or by entering into a consensual buyout. In these situations the parties are released from their future obligations under thearrangement, and the initial payments that the customer previously made to the Company are typically not refunded and are recognized as Other Revenues. Inaddition, the Company enters into agreements with customers to terminate their obligations for additional theater system configurations, which were in theCompany’s backlog. Included in Other Revenues are the following types of settlement arrangements: Years Ended December 31, 2010 2009 2008 Theater system configuration conversions $— $136 $— Consensual buyouts 400 1,726 881 $400 $1,862 $881 (b) Foreign Exchange Included in selling, general and administrative expenses for the December 31, 2010 is a $1.5 million gain, for net foreign exchange gains/losses related tothe translation of foreign currency denominated monetary assets and liabilities and unhedged foreign exchange contracts compared with a gain of $2.9 millionfor the year ended December 31, 2009 and a $0.7 million expense for the year ended December 31, 2008, respectively. See note 21(d) for additionalinformation.(c) Collaborative Arrangements105Table of Contents Joint Revenue Sharing Arrangements In a joint revenue sharing arrangement, the Company receives a portion of a theater’s box-office and concession revenues, in exchange for placing a theatersystem at the theater operator’s venue. Under joint revenue sharing arrangements, the customer has the ability and the right to operate the hardware componentsor direct others to operate them in a manner determined by the customer. The Company’s joint revenue sharing arrangements are typically non-cancellable for 7to 10 years with renewal provisions. Title to equipment under joint revenue sharing arrangements does not transfer to the customer. The Company’s jointrevenue sharing arrangements do not contain a guarantee of residual value at the end of the term. The customer is required to pay for executory costs such asinsurance and taxes and is required to pay the Company for maintenance and extended warranty throughout the term. The customer is responsible forobtaining insurance coverage for the theater systems commencing on the date specified in the arrangement’s shipping terms and ending on the date the theatersystems are delivered back to the Company. The Company has signed joint revenue sharing agreements with 14 exhibitors for a total of 230 theater systems, of which 171 theaters were operating as atDecember 31, 2010, the terms of which are similar in nature, rights and obligations. The accounting policy for the Company’s joint revenue sharingarrangements is disclosed in note 2(n). Amounts attributable to transactions arising between the Company and its customers under joint revenue sharing arrangements are included in Rentalsrevenue and for the December 31, 2010 amounted to $41.8 million (2009 — $21.6 million, 2008 — $3.4 million).IMAX DMR In an IMAX DMR arrangement, the Company transforms conventional motion pictures into the Company’s large screen format, allowing the release ofHollywood content to the IMAX theater network. In a typical IMAX DMR film arrangement, the Company will absorb its costs for the digital re-mastering andthen recoup this cost from a percentage of the gross box-office receipts of the film, which generally range from 10-15%. The Company does not typically holddistribution rights or the copyright to these films. In 2010, 16 IMAX DMR films were exhibited through the IMAX theater network. Amounts attributable to transactions arising between the Company and its customers under IMAX DMR arrangements are included in Services revenueand for December 31, 2010 amounted to $63.5 million (2009 — $35.6 million, 2008 — $17.9 million).Co-Produced Film Arrangements In certain film arrangements, the Company co-produces a film with a third party whereby the third party retains the copyright and rights to the film, exceptthat the Company obtains exclusive theatrical distribution rights to the film. Under these arrangements, both parties contribute funding to the Company’swholly-owned production company for the production of the film and for associated exploitation costs. Clauses in the film arrangements generally provide forthe third party to take over the production of the film if the cost of the production exceeds its approved budget or if it appears as though the film will not bedelivered on a timely basis. As at December 31, 2010, the Company has 2 significant co-produced film arrangements which make up greater than 50% of the VIE total assets andliabilities balance of $11.1 million and 2 other co-produced film arrangements, the terms of which are similar. In 2010, amounts totaling $7.7 million (2009 —$6.4 million, 2008 — $3.8 million) attributable to transactions between the Company and other partiesinvolved in the production of the films have been included in cost and expenses applicable to revenues-services.17. Receivable Provisions, Net of Recoveries Years Ended December 31, 2010 2009 2008 Accounts receivable provisions, net of recoveries $499 $127 $382 Financing receivables, net of recoveries 944 940 1,595 Receivable provisions, net of recoveries $1,443 $1,067 $1,977 106Table of Contents18. Asset Impairments Years Ended December 31, 2010 2009 2008 Property, plant and equipment $45 $180 $— Total $45 $180 $— The Company recorded an asset impairment charge of less than $0.1 million against property, plant and equipment after the Company assessed the carryingvalue of certain groups in light of their future expected cash flows (2009 — $0.2 million, 2008 — $nil).19. Consolidated Statements of Cash Flows Supplemental Information (a) Changes in other non-cash operating assets and liabilities are comprised of the following: Years Ended December 31, 2010 2009 2008 Decrease (increase) in: Accounts receivable $(2,423) $(13,444) $1,944 Financing receivables (11,874) (7,162) (199)Inventories (3,828) 10,082 837 Prepaid expenses (223) (686) 189 Commissions and other deferred selling expenses (432) 708 (749)Insurance recoveries 156 694 (122)Other assets (25) — — Increase (decrease) in: Accounts payable 100 1,500 145 Accrued and other liabilities (1) (25,823) (42) (2,487)Deferred revenue 15,690 (13,535) 12,367 $(28,682) $(21,885) $11,925 (1) Decrease in accruals largely due to a payment of pension benefits in the amount of $14.7 million and payments of $14.5 million in variable stock-basedcompensation. (b) Cash payments made on account of: Years Ended December 31, 2010 2009 2008 Income taxes $682 $519 $518 Interest $1,719 $13,864 $15,961 107Table of Contents (c) Depreciation and amortization are comprised of the following: Years Ended December 31, 2010 2009 2008 Film assets (1) $10,900 $8,592 $8,305 Property, plant and equipment Joint revenue sharing arrangements 5,315 4,625 3,512 Other property, plant and equipment 3,525 4,156 4,255 Other intangible assets 448 546 526 Other assets 7 — — Deferred financing costs 341 1,132 1,420 $20,536 $19,051 $18,018 (1) Included in film asset amortization is a charge of less than $0.1 million (2009 — $0.2 million, 2008 — $2.1 million) relating to changes in estimatesbased on the ultimate recoverability of future films. (d) Write-downs, net of recoveries, are comprised of the following: Years Ended December 31, 2010 2009 2008 Asset impairments Property, plant and equipment(1) $45 $180 $— Other significant charges Accounts receivables 499 127 382 Financing receivables 944 1,377 1,595 Inventories(2) 998 897 2,489 Other intangible assets 65 — — $2,551 $2,581 $4,466 Inventory Charges Recorded in costs and expenses applicable to revenues — product & equip. sales $827 $48 $2,396 Recorded in costs and expenses applicable to revenues — services 172 849 93 $999 $897 $2,489 (1) The Company reclassified the owned and operated Vancouver and Tempe IMAX theaters’ operations from continuing operations to discontinuedoperations as it does not anticipate having significant future cash flows from these theaters or any involvement in the day to day operations of thesetheaters. (2) In 2010, the Company recorded a charge of $1.0 million (2009 — $0.9 million, 2008 — $2.5 million, respectively) in costs and expenses applicable torevenues, primarily for its film-based projector inventories due to lower net realizable values resulting from the Company’s development of a digitalprojection system. Specifically, IMAX systems includes inventory write-downs of $0.8 million (2009 — less than $0.1 million, 2008 — $2.4 million).Theater system maintenance includes inventory write-downs of $0.2 million (2009 — $0.8 million, 2008 — $0.1 million).108Table of Contents20. Segmented Information The Company has 8 reportable segments identified by category of product sold or service provided: IMAX systems; theater system maintenance; jointrevenue sharing arrangements; film production and IMAX DMR; film distribution; film post-production; theater operations; and other. The IMAX systemssegment designs, manufactures, sells or leases IMAX theater projection system equipment. The theater system maintenance segment maintains IMAX theaterprojection system equipment in the IMAX theater network. The joint revenue sharing arrangements segment provides IMAX theater projection systemequipment to an exhibitor in exchange for a share of the box-office and concession revenues. The film production and IMAX DMR segment produces films andperforms film re-mastering services. The film distribution segment distributes films for which the Company has distribution rights. The film post-productionsegment provides film post-production and film print services. The theater operations segment operates certain IMAX theaters. The other segment includescamera rentals and other miscellaneous items. The accounting policies of the segments are the same as those described in note 2. The Company’s Chief Operating Decision Maker (“CODM”), as defined in the Segment Reporting Topic of the FASB ASC, assesses segment performancebased on segment revenues, gross margins and film performance. Selling, general and administrative expenses, research and development costs, amortizationof intangibles, receivables provisions (recoveries), interest revenue, interest expense and tax provision (recovery) are not allocated to the segments. Transactions between the film production and IMAX DMR segment and the film post-production segment are valued at exchange value. Inter-segmentprofits are eliminated upon consolidation, as well as for the disclosures below. Transactions between the other segments are not significant. (a) Operating Segments Years Ended December 31, 2010 2009 2008 Revenue(1) IMAX systems $76,004 $64,504 $34,783 Theater system maintenance 21,444 18,246 16,331 Joint revenue sharing arrangements 41,757 21,598 3,435 Films Production and IMAX DMR 63,462 35,648 17,944 Distribution 17,937 12,365 9,559 Post-production 7,702 3,604 6,929 Theater operations(2) 13,366 11,810 10,532 Other 6,942 3,436 3,205 Total $248,614 $171,211 $102,718 Gross margins IMAX systems(3)(5) $43,983 35,516 18,374 Theater system maintenance(3) 10,084 8,361 7,117 Joint revenue sharing arrangements(4)(5) 31,703 13,261 (1,865)Films Production and IMAX DMR(5) 41,159 19,979 6,992 Distribution(5) 5,205 2,147 3,120 Post-production 2,891 939 3,451 Theater operations(2) 1,147 649 (39)Other 1,480 700 403 Total $137,652 $81,552 $37,553 109Table of Contents Years Ended December 31, 2010 2009 2008 Depreciation and amortization IMAX systems $2,253 $4,133 $4,507 Theater systems maintenance — 191 149 Joint revenue sharing arrangements 5,322 4,625 3,512 Films Production and IMAX DMR 10,360 9,338 9,040 Distribution 1,334 229 309 Post-production 588 456 416 Theater operations(2) 78 79 85 Other 54 — — Corporate and other non-segment specific assets 547 — — Total $20,536 $19,051 $18,018 Years Ended December 31, 2010 2009 2008 Asset Impairments and Write-Downs, Net of Recoveries IMAX systems $2,271 $1,734 $4,373 Theater systems maintenance 171 847 93 Films Production and IMAX DMR 64 — — Theater operations(2) 45 — — Total $2,551 $2,581 $4,466 Years Ended December 31, 2010 2009 2008 Purchase of property, plant and equipment IMAX systems $3,441 $862 $1,575 Theater system maintenance 18 12 22 Joint revenue sharing arrangements 21,275 25,072 18,478 Films Production and IMAX DMR 450 313 571 Distribution 90 63 114 Post-production 514 131 362 Theater operation 98 45 161 Other 443 — — Corporate and other non-segment specific assets 284 — — Total $26,613 $26,498 $21,283 110Table of Contents As at December 31, 2010 2009 Assets IMAX systems $119,708 $98,530 (6)Theater system maintenance 13,548 12,415 (6)Joint revenue sharing arrangements 81,376 62,812 (6)Films Production and IMAX DMR 17,229 15,357 Distribution 5,313 5,688 Post-production 2,877 7,554 Theater operations 582 776 Other 1,785 1,864 Corporate and other non-segment specific assets 106,670 42,549 Total $349,088 $247,545 (1) The Company’s two largest customers as at December 31, 2010 collectively represent 16.9% of total revenues (2009 — 14.5, 2008 — 4.9%). (2) In 2009, the Company closed its operated Vancouver and Tempe IMAX theaters and reclassified the operations from continuing operations todiscontinued operations. (3) Includes a charge of $1.0 million in 2010 (2009 — $0.9 million, 2008 — $2.5 million), in costs and expenses applicable to revenues, primarily forfilm-based projector inventories. Specifically, IMAX systems includes inventory write-downs of $0.8 million in 2010 (2009 — less than $0.1 million,2008 — $2.4 million). Theater system maintenance includes inventory write-downs of $0.2 million in 2010 (2009 — $0.8 million, 2008 —$0.1 million). (4) The Company adjusted the estimated useful life of its IMAX digital projection systems in use for those joint revenue sharing theaters, on a prospectivebasis, to reflect the change in term from 7 years to 10 years. This resulted in decreased depreciation expense of $1.0 million in 2010. Previously, theCompany adjusted the estimated useful life of its film-based IMAX MPX projection systems in use by existing joint revenue sharing theaters, on aprospective basis, to reflect the Company’s accelerated transition to a digital projection system for these theaters resulting in increased depreciationexpense of less than $0.1 million and $1.5 million in 2009 and 2008, respectively. (5) IMAX systems includes commission costs of $1.9 million, $2.0 million and $1.0 million in 2010, 2009 and 2008, respectively. Joint revenue sharingarrangements includes advertising, marketing, and selling costs of $4.2 million, $3.4 million and $1.8 million in 2010, 2009 and 2008, respectively.Production and DMR includes marketing costs of $2.1 million, $1.6 million and $0.9 million in 2010, 2009 and 2008, respectively. Distributionincludes marketing costs of $0.7 million, $0.8 million and $0.7 million in 2010, 2009 and 2008, respectively. (6) As a result of the classification of theater system maintenance and joint revenue sharing arrangement segments in 2008, goodwill was reallocated on arelative fair market value basis to the IMAX systems segment, theater system maintenance segment and joint revenue sharing arrangements segment.Goodwill had previously been wholly allocated to the IMAX systems segment.111Table of Contents(b) Geographic InformationRevenue by geographic area is based on the location of the theater. Years Ended December 31, 2010 2009 2008 Revenue Canada $5,683 $4,592 $3,131 United States 168,781 106,715 66,390 Russia and the CIS 14,640 3,771 3,830 Western Europe 18,805 9,150 9,292 Rest of Europe 2,640 3,063 1,338 Asia (excluding China) 11,082 6,610 5,030 Greater China 17,604 17,907 3,861 Mexico 2,611 5,163 5,000 Rest of World 6,768 14,240 4,846 Total $248,614 $171,211 $102,718 No single country in the Rest of the World, Western Europe or Asia (excluding China) classifications comprises more than 5% of total revenue. As at December 31, 2010 2009 Property, plant and equipment Canada $22,881 $14,931 United States 42,756 35,358 Western Europe 2,679 1,030 Rest of Europe 656 698 Japan 3,220 1,553 Rest of World 1,843 1,250 Total $74,035 $54,820 21. Financial Instruments(a) Financial Instruments The Company maintains cash with various major financial institutions. The Company’s cash is invested with highly rated financial institutions. The Company’s accounts receivables and financing receivables are subject to credit risk. The Company’s accounts receivable and financing receivablesare concentrated with the theater exhibition industry and film entertainment industry. To minimize the Company’s credit risk, the Company retains title tounderlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentiallyuncollectible amounts. The Company believes it has adequately provided for related exposures surrounding receivables and contractual commitments.(b) Fair Value Measurements The carrying values of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities due within one yearapproximate fair values due to the short-term maturity of these instruments. The Company’s other financial instruments at December 31, are comprised of thefollowing:112Table of Contents 2010 2009 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair ValueBorrowings under Credit Facility $17,500 $17,500 $50,000 $50,000 Financed sales receivable $43,620 $43,615 $22,479 $22,745 Net investment in sales-type leases $29,981 $32,613 $40,106 $40,910 Foreign exchange contracts — designated forwards $664 $664 $532 $532 Foreign exchange contracts — non-designated forwards $1,249 $1,249 $857 $857 The carrying value of borrowings under the Credit Facility approximates fair value as the interest rates offered under the Credit Facility are close toDecember 31, 2010 and 2009 market rates for the Company for debt of the same remaining maturities (Level 2 input in accordance with the Fair ValueMeasurements Topic of the FASB ASC hierarchy) as at December 31, 2010. The estimated fair values of the Financed sales receivable and Net investment in sales-type leases are estimated based on discounting future cash flows atcurrently available interest rates with comparable terms (Level 2 input in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy) asat December 31, 2010 and 2009. The fair value of foreign currency derivatives are determined using quoted prices in active markets (Level 2 input in accordance with the Fair ValueMeasurements Topic of the FASB ASC hierarchy) for identical instruments at the measurement date. These identical instruments are traded on a closedexchange.(c) Financing Receivables The Company’s net investment in leases and its financed sale receivables are subject to the disclosure requirements of ASC 310 “Receivables”. Due todiffering risk profiles of its net investment in leases and its financed sales receivables, the Company views its net investment in leases and its financed salereceivables as separate classes of financing receivables. The Company does not aggregate financing receivables to assess impairment. The Company monitors the credit quality of each customer on a frequent basis through collections and aging analyses. The Company also holds meetingsmonthly in order to identify credit concerns and whether a change in credit quality classification is required for the customer. A customer may improve in theircredit quality classification once a substantial payment is made on overdue balances or the customer has agreed to a payment plan with the Company andpayments have commenced in accordance to the payment plan. The change in credit quality indicator is dependant upon management approval. The Company classifies its customers into three categories to indicate their credit quality internally: Good standing — Theater continues to be in good standing with the Company as the client’s payments and reporting are up-to-date. Pre-approved transactions only — Theater operator has begun to demonstrate a delay in payments with little or no communication with the Company. Allservice or shipments to the theater must be reviewed and approved by management. These financing receivables are considered to be in better condition thanthose receivables related to theaters in the “All transactions suspended” category, but not in as good of condition as those receivables in “Good standing”.Depending on the individual facts and circumstances of each customer, finance income recognition may be suspended if management believes the receivable tobe impaired. All transactions suspended — Theater is severely delinquent, non-responsive or not negotiating in good faith with the Company. Once a theater is classifiedas “All transactions suspended”, the theater is placed on nonaccrual status and all revenue recognitions related to the theater are stopped. The following table discloses the recorded investment in financing receivables by credit quality indicator as at December 31, 2010:113Table of Contents Net Net Financed Investment Sales in Leases Receivables Total In good standing $26,839 $42,528 $69,367 Pre-approved transactions 2,939 649 3,588 Transactions suspended 5,041 509 5,550 $34,819 $43,686 $78,505 While recognition of finance income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments aresufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cashreceived. Once the collectibility issues are resolved and the customer has returned to being in good standing, the Company will resume recognition of financeincome. The Company’s investment in financing receivables on nonaccrual status as at December 31, 2010 is as follows: Recorded Related Investment Allowance Net investment in leases $6,228 $(4,505)Net financed sales receivables 251 (66) Total $6,479 $(4,571) The Company considers financing receivables with aging between 60-89 days as indications of theaters with potential collection concerns. The Companywill begin to focus its review on these financing receivables and increase its discussions internally and with the theater regarding payment status. Once atheater’s aging exceeds 90 days, the Company’s policy is to review and assess collectibility on theater’s past due accounts. Over 90 days past due is used bythe Company as an indicator of potential impairment as invoices up to 90 days outstanding could be considered reasonable due to the time required for disputeresolution or for the provision of further information or supporting documentation to the customer. The Company’s aged financing receivables are as follows: Related Recorded Billed Unbilled Total Investment Financing Recorded Recorded Related Net of Current 30-89 Days 90+ Days Receivables Investment Investment Allowances Allowances Net investment in leases $602 $287 $2,012 $2,901 $31,918 $34,819 $(4,838) $29,981 Net financed sales receivables 646 349 366 1,361 42,325 43,686 (66) 43,620 Total $1,248 $636 $2,378 $4,262 $74,243 $78,505 $(4,904) $73,601 114Table of Contents The Company’s recorded investment in past due financing receivables for which the Company continues to accrue finance income is as follows: Related Recorded Billed Unbilled Investment Financing Recorded Related Past Due Current 30-89 Days 90+ Days Receivables Investment Allowance and Accruing Net investment in leases $88 $97 $730 $915 $2,207 $(333) $2,789 Net financed sales receivables 100 161 197 458 6,094 — 6,552 Total $188 $258 $927 $1,373 $8,301 $(333) $9,341 The Company considers financing receivables to be impaired when it believes it to be probable that it will not recover the full amount of principal andinterest owing under the arrangement. The Company uses its knowledge of the industry and economic trends, as well as its prior experiences to determine theamount recoverable for impaired financing receivables. The following table discloses information regarding the Company’s impaired financing receivables: Impaired Financing Receivables For the Year Ended December 31, 2010 Average Interest Recorded Unpaid Related Recorded Income Investment Principal Allowanced Investment Recognized Recorded investment for which there is a related allowance: Net financed sales receivables 246 5 (66) 246 — Total recorded investment in impaired loans: Net financed sales receivables $246 $5 $(66) $246 $— (d) Foreign Exchange Risk Management The Company is exposed to market risk from changes in foreign currency rates. A majority portion of the Company’s revenues is denominated in U.S.dollars while a substantial portion of its costs and expenses is denominated in Canadian dollars. A portion of the net U.S. dollar cash flows of the Company isperiodically converted to Canadian dollars to fund Canadian dollar expenses through the spot market. In Japan, the Company has ongoing operating expensesrelated to its operations in Japanese yen. Net Japanese yen cash flows are converted to U.S. dollars generally through the spot market. The Company also hascash receipts under leases denominated in Japanese yen, Canadian dollar and Euros which are converted to U.S. dollars generally through the spot market.The Company’s policy is to not use any financial instruments for trading or other speculative purposes. The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreigncurrencies. Certain of these foreign currency forward contracts met the criteria required for hedge accounting under the Derivatives and Hedging Topic of theFASB ASC at inception, and continue to meet hedge effectiveness tests at December 31, 2010 (the “Foreign Currency Hedges”), with settlement datesthroughout 2011. In addition, at December 31, 2010, the Company held foreign currency forward contracts to manage foreign currency risk on futureanticipated Canadian dollar expenditures that were not considered Foreign Currency Hedges by the Company. Foreign currency derivatives are recognized andmeasured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the consolidated statement of operations except forderivatives designated and qualifying as foreign currency hedging instruments. For foreign currency hedging instruments, the effective portion of the gain orloss in a hedge of a forecasted transaction is reported in other comprehensive income (“OCI”) and reclassified to the consolidated statement of operations whenthe forecasted transaction occurs. Any ineffective portion is recognized immediately in the consolidated statement of operations. The following tabular disclosures reflect the impact that derivative instruments and hedging activities have on the Company’s consolidated financialstatements:115Table of Contents Notional value of foreign exchange contracts: As at December 31, 2010 2009 Derivatives designated as hedging instruments: Foreign exchange contracts — Forwards $12,671 $2,815 Derivatives not designated as hedging instruments: Foreign exchange contracts — Forwards 28,842 4,500 $41,513 $7,315 Fair value of foreign exchange contracts: As at December 31, Balance Sheet Location 2010 2009 Derivatives designated as hedging instruments: Foreign exchange contracts — Forwards Other assets $664 $532 Derivatives not designated as hedging instruments: Foreign exchange contracts — Forwards Other assets 1,249 857 $1,913 $1,389 Derivatives in Foreign Currency Hedging relationships for the: Years Ended December 31, 2010 2009 2008 Foreign exchange contracts — Forwards Derivative Gain Recognized in OCI (EffectivePortion) $797 $1,656 $172 $797 $1,656 $172 Location of Derivative Gain Reclassified from AOCI into Income Years Ended December 31, (Effective Portion) 2010 2009 2008 Foreign exchange contracts — Forwards Selling, general and administrative expenses $665 $1,296 $— $665 $1,296 $— Non Designated Derivatives in Foreign Currency relationships for the: Years Ended December 31, Location of Derivative Gain 2010 2009 2008 Foreign exchange contracts — Forwards Selling, general and administrative expenses $2,036 $2,257 $226 $2,036 $2,257 $226 116Table of Contents(e) Investments in New Business Ventures The Company accounts for investments in new business ventures using the guidance of ASC 323 Investments — Equity Method and Joint Ventures(“ASC 323”) and ASC 320 Investments in Debt and Equity Securities (“ASC 320”), as appropriate. At December 31, 2010, the equity method of accountingis being utilized for an investment with a carrying value of $1.6 million. The Company has determined it is not the primary beneficiary of this VIE, andtherefore it has not been consolidated. In addition, during the year, the Company made an investment in preferred stock of another business venture of$1.5 million which meets the criteria for classification as a debt security under ASC 320 and is recorded at its fair value of $1.5 million at December 31,2010 (December 31, 2009 — $nil). This investment is classified as an available-for-sale investment. The total carrying value of investments in new businessventures at December 31, 2010 and December 31, 2009 is $3.1 million and $nil, respectively, and is recorded in Other Assets.22. Employees Pension and Postretirement Benefits (a) Defined Benefit Plan The Company has an unfunded U.S. defined benefit pension plan, the SERP, covering Richard L. Gelfond, CEO of the Company and Bradley J.Wechsler, Chairman of the Company’s Board of Directors. The SERP provides for a lifetime retirement benefit from age 55 determined as 75% of themember’s best average 60 consecutive months of earnings over the member’s employment history. The benefits were 50% vested as at July 2000, the SERPinitiation date. The vesting percentage increases on a straight-line basis from inception until age 55. As at December 31, 2010, the benefits of Mr. Gelfond were100% vested. Upon a termination for cause, prior to a change of control, the executive shall forfeit any and all benefits to which such executive may have beenentitled, whether or not vested. Under the terms of the SERP, if Mr. Gelfond’s employment terminated other than for cause prior to August 1, 2010, he would have been entitled to receiveSERP benefits in the form of monthly annuity payments until the earlier of a change of control or August 1, 2010, at which time he would have becomeentitled to receive remaining benefits in the form of a lump sum payment. If Mr. Gelfond’s employment is, or would have been, terminated other than for causeon or after August 1, 2010, he is, or would have been, entitled to receive SERP benefits in the form of a lump sum payment. SERP benefit payments toMr. 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 thedeferred amount credited at the applicable federal rate for short-term obligations. The terms of Mr. Gelfond’s current employment agreement has been extendedto the beginning of 2013. Under the terms of the SERP, monthly annuity payments payable to Mr. Wechsler, whose employment as Co-CEO terminated effective April 1, 2009, weredeferred for six months and were paid in the form of a lump sum plus interest on the deferred amount on October 1, 2009. Thereafter, in accordance with theterms of the SERP, Mr. Wechsler was entitled to receive monthly annuity payments until the earlier of a change of control or August 1, 2010, at which time hewas entitled to receive remaining benefits in the form of a lump sum payment. On August 1, 2010, the Company made a lump sum payment of $14.7 millionto Mr. Wechsler in accordance with the terms of the plan, representing a settlement in full of Mr. Wechsler’s entitlement under the SERP.117Table of Contents The following assumptions were used to determine the obligation and cost status of the Company’s SERP at the plan measurement dates: As at December 31, 2010 2009Discount rate 1.54% 1.50%Lump sum interest rate: First 25 years 4.07% n/a First 20 years n/a 4.89%Thereafter 3.93% 4.63%Cost of living adjustment on benefits 1.20% 1.20%Rate of increase in qualifying compensation levels 0.00% 0.00% The amounts accrued for the SERP are determined as follows: Years Ended December 31, 2010 2009 Projected benefit obligation: Obligation, beginning of year $29,862 $26,381 Service cost 448 643 Interest cost 351 1,341 Benefits paid (15,199) (894)Actuarial loss 2,646 2,391 Obligation, end of year and unfunded status $18,108 $29,862 The following table provides disclosure of the pension benefit obligation recorded in the consolidated balance sheet: As at December 31, 2010 2009 Accrued benefits cost $(18,108) $(29,862)Accumulated other comprehensive income 2,239 (793)Net amount recognized in the consolidated balance sheets $(15,869) $(30,655)The following table provides disclosure of pension expense for the SERP for the year ended December 31: Years ended December 31 2010 2009 2008 Service cost $448 $643 $793 Interest cost 351 1,341 1,251 Amortization of prior service credit — 145 (248)Amortization of actuarial gain — (681) — Realized actuarial gain of settlement of pension liability (385) — — Pension expense $414 $1,448 $1,796 The accumulated benefit obligation for the SERP was $18.1 million at December 31, 2010 (2009 — $29.9 million).118Table of Contents The following amounts were included in accumulated other comprehensive income and will be recognized as components of net periodic benefit cost infuture periods: As at December 31, 2010 2009 2008 Prior service cost (credits) $— $— $145 Unrecognized actuarial (gain) loss 2,239 (793) (3,868) $2,239 $(793) $(3,723) No contributions are expected to be made for the SERP during 2011 except to meet benefit payment obligations as they come due. The Company expectsprior service costs of $nil, interest costs of $0.3 million and actuarial losses of $0.2 million to be recognized as a component of net periodic benefit cost in2011. The following benefit payments are expected to be made as per the current SERP assumptions and the terms of the SERP in each of the next five years, andin the aggregate: 2011 $— 2012 — 2013 18,813 2014 — 2015 — Thereafter — $18,813 At the time the Company established the SERP, it also took out life insurance policies on Messrs. Gelfond and Wechsler with coverage amounts of$21.5 million in aggregate to which the Company was the beneficiary. The value of these policies was $7.3 million at December 31, 2009. During 2010, theCompany obtained $3.2 million representing the cash surrender value of Mr. Gelfond’s policy and $4.6 million representing the cash surrender value ofMr. Wechsler’s policy. (b) Defined Contribution Pension Plan The Company also maintains defined contribution pension plans for its employees, including its executive officers. The Company makes contributions tothese plans on behalf of employees in an amount up to 5% of their base salary subject to certain prescribed maximums. During 2010, the Companycontributed and expensed an aggregate of $0.9 million (2009 — $0.8 million, 2008 — $0.9 million) to its Canadian plan and an aggregate of $0.2 million(2009 — $0.2 million, 2008 — $0.1 million) to its defined contribution employee pension plan under Section 401(k) of the U.S. Internal Revenue Code. (c) Postretirement Benefits The Company has an unfunded postretirement plan for Messrs. Gelfond and Wechsler. The plan provides that the Company will maintain health benefitsfor Messrs. Gelfond and Wechsler until they become eligible for Medicare and, thereafter, the Company will provide Medicare supplemental coverage asselected by Messrs. Gelfond and Wechsler.119Table of Contents The amounts accrued for the plan are determined as follows: As at December 31, 2010 2009 Obligation, beginning of year $456 $438 Interest cost 26 26 Actuarial gain (6) (8)Obligation, end of year $476 $456 The following details the net cost components, all related to continuing operations, and underlying assumptions of postretirement benefits other thanpensions: Years Ended December 31, 2010 2009 2008 Interest cost $26 $26 $25 Actuarial (gain) loss (6) (8) 11 $20 $18 $36 Weighted average assumptions used to determine the benefit obligation are: As at December 31, 2010 2009 2008Discount rate 5.30% 5.75% 6.00%Weighted average assumptions used to determine the net postretirement benefit expense are: Years Ended December 31 2010 2009 2008Discount rate 4.50% 4.50% 5.00% The following benefit payments are expected to be made as per the current plan assumptions in each of the next five years: 2011 $13 2012 $15 2013 $31 2014 $34 2015 $38 Thereafter $— 23. Discontinued Operations (a) Tempe Theater On December 11, 2009, the Company closed its owned and operated Tempe IMAX theater. The Company recognized lease termination and guaranteeobligations of $0.5 million to the landlord, which were offset by derecognition of other liabilities of $0.9 million, for a net gain of $0.4 million. In a relatedtransaction, the Company leased the projection system and inventory of the Tempe IMAX theater to a third party theater exhibitor. Revenue from this operatinglease transaction will be recognized on a straight-line basis over the term of the lease. For the year ended December 31, 2009, revenues for the Tempe IMAXtheater were $0.8 million (2008 — $1.5 million) and the Company recognized a loss of $0.5 million in 2009 (2008 — loss of $0.3 million) from the operationof the theater. This transaction is reflected as discontinued operations as there are no significant continuing cash flows from120Table of Contentseither a migration or a continuation of activities. The remaining assets and liabilities of the owned and operated Tempe IMAX theater are included in theCompany’s consolidated balance sheets are disclosed in note 23(d). In addition, the prior years’ amounts in the consolidated statements of operations and the consolidated statements of cash flows have been adjusted toreflect the reclassification of the owned and operated Tempe IMAX theater as a discontinued operation. (b) Starboard Theater Ltd On September 30, 2009, the Company closed its owned and operated Vancouver IMAX theater. The amount of loss to the Company pertaining to lease andguarantee obligations owing to the landlord was estimated at $0.3 million which the Company recognized as at September 30, 2009. In 2009, revenues for theVancouver IMAX theater were $1.1 million (2008 — $2.0 million). The Company recognized a loss of $0.1 million (net of income tax provision of $nil), andincome of $0.2 million (net of income tax recovery of $nil) in 2009 and 2008, respectively, from the operation of the theater. This transaction is reflected asdiscontinued operations as there are no continuing cash flows from either a migration or a continuation of activities. The remaining assets and liabilities of theowned and operated Vancouver IMAX theater included in the Company’s consolidated balance sheets are disclosed in note 23(d). In addition, the prior years’ amounts in the consolidated statements of operations and the consolidated statements of cash flows have been adjusted toreflect the reclassification of the owned and operated Vancouver IMAX theater as a discontinued operation. (c) Operating Results for Discontinued Operations The net earnings from discontinued operations summarized in the consolidated statements of operations, were comprised of the following: Years Ended December 31, 2010 2009 2008 Gain on termination of Tempe theater lease (net of tax recovery of $nil) $— $437 $— Loss from Tempe Theater (net of tax recovery of $nil, respectively) — (525) (263)(Loss) earnings from Vancouver Theater (net of tax recovery of $nil, respectively) — (88) 171 Net loss from discontinued operations $— $(176) $(92)121Table of Contents (d) Assets and Liabilities of Discontinued Operations The assets and liabilities related to the Tempe and Vancouver theaters are included in the consolidated balance sheet of IMAX Corporation and arecomprised of the following: As at December 31, 2010 2009 Cash $— $299 Accounts receivable — 129 Total assets $— $428 Accounts payable $— $149 Accrued liabilities — 1,018 Total liabilities $— $1,167 24. Asset Retirement Obligations The Company has accrued costs related to obligations in respect of required reversion costs for its owned and operated theaters under long-term real estateleases which will become due in the future. The Company does not have any legal restrictions with respect to settling any of these long-term leases. Areconciliation of the Company’s liability in respect of required reversion costs is shown below: Years Ended December 31, 2010 2009 2008 Beginning balance, January 1 $267 $297 $301 Accretion expense 19 24 13 Reduction in asset retirement obligation due to lease renegotiation — (54) (17)Ending balance, December 31 $286 $267 $297 25. Accumulated Other Comprehensive Income (Loss) Supplemental Information Components of accumulated other comprehensive income consist of: As at December 31, 2010 2009 Unrecognized actuarial loss on defined benefit pension plan (net of income tax recovery (provision) of $115, 2009 —($1,064)) $(2,124) $(271)Foreign currency translation adjustments 645 645 Unrealized hedging gain (net of income tax provision of $182, 2009 — $nil) 482 532 Accumulated other comprehensive (loss) income $(997) $906 122Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NoneItem 9A. Controls and ProceduresEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods and that such information isaccumulated and communicated to management, including the CEO and CFO, to allow timely discussions regarding required disclosure. There are inherentlimitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention oroverriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achievingtheir control objectives. The Company’s management, with the participation of its CEO and its CFO, has evaluated the effectiveness of the Company’s “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as at December 31, 2010 and has concluded that, as of the endof the period covered by this report, the Company’s disclosure controls and procedures were adequate and effective. The Company will continue toperiodically evaluate its disclosure controls and procedures and will make modifications from time to time as deemed necessary to ensure that information isrecorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has used the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework in Internal Control-IntegratedFramework to assess the effectiveness of the Company’s internal control over financial reporting. Management has assessed the effectiveness of the Company’s internal control over financial reporting, as at December 31, 2010, and has concluded thatsuch internal control over financial reporting was effective as at that date. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. PricewaterhouseCoopers LLP, which has audited the Company’s consolidated financial statements for the year ended December 31, 2010 accompanyingthis Annual Report, has also audited the effectiveness of the Company’s internal control over financial reporting as at December 31, 2010 as stated in theirreport on page 70.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in the Company’s internal control over financial reporting which occurred during the year ended December 31, 2010, that havematerially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Item 9 B. Other Information None.123Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate Governance The information required by Item 10 is incorporated by reference from the information under the following captions in the Company’s Proxy Statement:“Item No. 1 — Election of Directors;” “Executive Officers;” “Section 16(a) Beneficial Ownership Reporting Compliance;” “Code of Ethics;” and “AuditCommittee.”Item 11. Executive Compensation The information required by Item 11 is incorporated by reference from the information under the following captions in the Company’s Proxy Statement:“Compensation Discussion and Analysis;” “Summary Compensation Table;” “Grant of Plan-Based Awards;” “Outstanding Equity Awards at Fiscal Year-End;” “Options Exercised;” “Pension Benefits;” “Employment Agreements and Potential Payments upon Termination or Change-in-Control;” “Compensationof Directors;” and “Compensation Committee Interlocks and Insider Participation.”Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by Item 12 is incorporated by reference from the information under the following captions in the Company’s Proxy Statement:“Equity Compensation Plans;” “Principal Shareholders of Voting Shares;” and “Security Ownership of Directors and Management.”Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by Item 13 is incorporated by reference from the information under the following caption in the Company’s Proxy Statement:“Certain Relationships and Related Transactions,” “Review, Approval and Ratification of Transactions with Related Persons,” and “Director Independence.”Item 14. Principal Accounting Fees and Services The information required by Item 14 is incorporated by reference from the information under the following captions in the Company’s Proxy Statement:“Audit Fees;” “Audit-Related Fees;” “Tax Fees;” “All Other Fees;” and “Audit Committee’s Pre-Approved Policies and Procedures.”PART IVItem 15. Exhibits and Financial Statement Schedules(a)(1) Financial Statements The consolidated financial statements filed as part of this Report are included under Item 8 in Part II.Report of Independent Registered Public Accounting Firm, which covers both the financial statements and financial statement schedule in (a)(2), is includedunder Item 8 in Part II.(a)(2) Financial Statement Schedules Financial statement schedule for each year in the three-year period ended December 31, 2010. II. Valuation and Qualifying Accounts.(a)(3) Exhibits The items listed as Exhibits 10.1 to 10.32 relate to management contracts or compensatory plans or arrangements.124Table of Contents Exhibit No. Description 3.1 Articles of Amalgamation of IMAX Corporation, dated January 1, 2002, as amended by the Articles of Amendment of IMAX Corporation,dated June 25, 2004. Incorporated by reference to Exhibit 4.1 to IMAX Corporation’s Registration statement on Form S-3 (File No. 333-157300). 3.2 By-Law No. 1 of IMAX Corporation enacted on June 3, 2004. Incorporated by reference to Exhibit 3.2 to IMAX Corporation’s Form 10-Kfor the year ended December 31, 2009 (File No. 000-24216). 4.1 Shareholders’ Agreement, dated as of January 3, 1994, among WGIM Acquisition Corporation, the Selling Shareholders as definedtherein, Wasserstein Perella Partners, L.P., Wasserstein Perella Offshore Partners, L.P., Bradley J. Wechsler, Richard L. Gelfond andDouglas Trumbull (the “Selling Shareholders’ Agreement”). Incorporated by reference to Exhibit 4.1 to IMAX Corporation’s Form 10-K forthe year ended December 31, 2006 (File No. 000-24216). 4.2 Amendment, dated as of March 1, 1994, to the Selling Shareholders’ Agreement. Incorporated by reference to Exhibit 4.2 to IMAXCorporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 4.3 Registration Rights Agreement, dated as of February 9, 1999, by and among IMAX Corporation, Wasserstein Perella Partners, L.P.,Wasserstein Perella Offshore Partners, L.P., WPPN Inc., the Michael J. Biondi Voting Trust, Bradley J. Wechsler and Richard L. Gelfond.Incorporated by reference to Exhibit 4.3 to IMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). *10.1 Stock Option Plan of IMAX Corporation, dated June 18, 2008. 10.2 IMAX Corporation Supplemental Executive Retirement Plan, as amended and restated as of January 1, 2006. Incorporated by reference toExhibit 10.2 to IMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 10.3 Employment Agreement, dated July 1, 1998, between IMAX Corporation and Bradley J. Wechsler. Incorporated by reference toExhibit 10.3 to IMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 10.4 Amended Employment Agreement, dated July 12, 2000, between IMAX Corporation and Bradley J. Wechsler. Incorporated by reference toExhibit 10.4 to IMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 10.5 Amended Employment Agreement, dated March 8, 2006, between IMAX Corporation and Bradley J. Wechsler. Incorporated by reference toExhibit 10.8 to IMAX Corporations Form 10-K for the year ended December 31, 2005 (File No. 000-24216). 10.6 Amended Employment Agreement, dated February 15, 2007, between IMAX Corporation and Bradley, J. Wechsler. Incorporated byreference to Exhibit 10.31 to IMAX Corporation’s Form 8-K dated February 16, 2007 (File No. 000-24216). 10.7 Amended Employment Agreement, dated December 31, 2007, between IMAX Corporation and Bradley J. Wechsler. Incorporated byreference to Exhibit 10.7 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.8 Services Agreement, dated December 11, 2008, between IMAX Corporation and Bradley J. Wechsler. Incorporated by reference toExhibit 10.8 to IMAX Corporation’s Form 10-K for the year ended December 31, 2008 (File No. 000-24216). *10.9 Services Agreement Amendment, dated February 14, 2011, between IMAX Corporation and Bradley J. Wechsler. 10.10 Employment Agreement, dated July 1, 1998, between IMAX Corporation and Richard L. Gelfond. Incorporated by reference toExhibit 10.7 to IMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 10.11 Amended Employment Agreement, dated July 12, 2000, between IMAX Corporation and Richard L. Gelfond. Incorporated by reference toExhibit 10.8 to IMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 10.12 Amended Employment Agreement, dated March 8, 2006, between IMAX Corporation and Richard L. Gelfond. Incorporated by reference toExhibit 10.14 to IMAX Corporation’s Form 10-K dated December 31, 2005 (File No. 000-24216). 10.13 Amended Employment Agreement, dated February 15, 2007, between IMAX Corporation and Richard L. Gelfond. Incorporated byreference to Exhibit 10.30 to IMAX Corporation’s Form 8-K dated February 16, 2007 (File No. 000-24216). 10.14 Amended Employment Agreement, dated December 31, 2007, between IMAX Corporation and Richard L. Gelfond. Incorporated byreference to Exhibit 10.12 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.15 Amended Employment Agreement, dated December 11, 2008, between IMAX Corporation and Richard L. Gelfond. Incorporated byreference to Exhibit 10.14 to IMAX Corporation’s Form 10-K for the year ended December 31, 2008 (File No. 000-2416). *10.16 Amended Employment Agreement, dated December 20, 2010, between IMAX Corporation and Richard L. Gelfond. 10.17 Employment Agreement, dated March 9, 2006, between IMAX Corporation and Greg Foster. Incorporated by reference to Exhibit 10.18 toIMAX Corporation’s Form 10-K for the year ended December 31, 2005 (File No. 000-24216).125Table of Contents Exhibit No. Description 10.18 First Amending Agreement, dated December 31, 2007, between IMAX Corporation and Greg Foster. Incorporated by reference toExhibit 10.14 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.19 Second Amending Agreement, dated April 29, 2010, between IMAX Corporation and Greg Foster. Incorporated by reference to IMAXCorporation’s Form 10-Q for the quarter ended June 30, 2010 (File No. 000-24216). 10.20 Employment Agreement, dated May 17, 1999, between IMAX Corporation and Robert D. Lister. Incorporated by reference toExhibit 10.15 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.21 Letter Agreement, dated August 21, 2000 between IMAX Corporation and Robert D. Lister. Incorporated by reference to Exhibit 10.15 toIMAX Corporation’s Form 10-K for the year ended December 31, 2006 (File No. 000-24216). 10.22 Amended Employment Agreement, dated April 4, 2001 between IMAX Corporation and Robert D. Lister. Incorporated by reference toExhibit 10.17 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.23 Amended Employment Agreement, dated January 1, 2004, between IMAX Corporation and Robert D. Lister. Incorporated by reference toExhibit 10.17 to IMAX Corporation’s Registration Statement on Form S-4 (File No. 333-113141). *10.24 Third Amending Agreement, dated February 14, 2006, between IMAX Corporation and Robert D. Lister. 10.25 Fourth Amending Agreement, dated October 5, 2006, between IMAX Corporation and Robert D. Lister. Incorporated by reference toExhibit 10.28 to IMAX Corporation’s Form 10-Q for the quarter ended September 30, 2006 (File No. 000-24216). 10.26 Fifth Amending Agreement, dated December 31, 2007, between IMAX Corporation and Robert D. Lister. Incorporated by reference toExhibit 10.21 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.27 Stock Appreciation Rights Agreement, dated December 31, 2007, between IMAX Corporation and Robert D. Lister. Incorporated byreference to Exhibit 10.22 to IMAX Corporation’s Form 10-K for the year ended December 31, 2007 (File No. 000-24216). 10.28 Sixth Amending Agreement, dated December 31, 2009, between IMAX Corporation and Robert D. Lister. Incorporated by reference toIMAX Corporation’s Form 10-K for the year ended December 31, 2009 (File No. 000-24216). 10.29 Employment Agreement, dated May 14, 2007, between IMAX Corporation and Joseph Sparacio. Incorporated by reference to Exhibit 10.25to IMAX Corporation’s Form 10-Q for the quarter ended September 30, 2007 (File No. 000-24216). 10.30 First Amending Agreement, dated May 14, 2009, between IMAX Corporation and Joseph Sparacio. Incorporated by reference to IMAXCorporation’s Form 10-K for the year ended December 31, 2009 (File No. 000-24216). 10.31 Second Amending Agreement, dated May 14, 2010, between IMAX Corporation and Joseph Sparacio. Incorporated by reference to IMAXCorporation’s Form 10-Q for the quarter ended June 30, 2010 (File No. 000-24216). *10.32 Statement of Directors’ Compensation, dated August 11, 2005. 10.33 Amended and Restated Credit Agreement, dated November 16, 2009 by and between IMAX Corporation and Wells Fargo Capital FinanceCorporation Canada (formerly Wachovia Capital Finance Corporation (Canada)) and Export Development Canada. Incorporated byreference to IMAX Corporation’s Form 10-K for the year ended December 31, 2009 (File No. 000-24216). *10.34 First Amendment to the Amended and Restated Credit Agreement, dated January 21, 2011 between IMAX Corporation and Wells FargoCapital Finance Corporation Canada (formerly known as Wachovia Capital Finance Corporation (Canada)). 10.35 Securities Purchase Agreement, dated as of May 5, 2008, by and between IMAX Corporation, Douglas Family Trust, James Douglas andJean Douglas Irrevocable Descendants’ Trust, James E. Douglas, III, and K&M Douglas Trust. Incorporated by reference to Exhibit 10.32to IMAX Corporation’s Form 10-Q for the quarter ended March 31, 2008 (File No. 000-24216). 10.36 Amendment No. 1 to Securities Purchase Agreement, dated December 1, 2008, by and between IMAX Corporation, Douglas Family Trust,James Douglas and Jean Douglas Irrevocable Descendants’ Trust, James E. Douglas, III, and K&M Douglas Trust. Incorporated byreference to Exhibit 10.34 to IMAX Corporation’s Form 10-K for the year ended December 31, 2008 (File No. 000-24216). *21 Subsidiaries of IMAX Corporation. *23 Consent of PricewaterhouseCoopers LLP. *24 Power of Attorney of certain directors. *31.1 Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002, dated February 24, 2011, by Richard L. Gelfond. *31.2 Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002, dated February 24, 2011, by Joseph Sparacio. *32.1 Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002, dated February 24, 2011, by Richard L. Gelfond. *32.2 Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002, dated February 24, 2011, by Joseph Sparacio. * Filed herewith126Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. IMAX CORPORATION By /s/ JOSEPH SPARACIO Joseph Sparacio Executive Vice-President & Chief Financial Officer Date: February 24, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities indicated on February 24, 2011. /s/ RICHARD L. GELFOND /s/ JOSEPH SPARACIO /s/ JEFFREY VANCERichard L. Gelfond Chief Executive Officer &Director(Principal Executive Officer) Joseph SparacioExecutive Vice President &Chief Financial Officer(Principal Financial Officer) Jeffrey VanceVice-President,Finance & Controller(Principal Accounting Officer) * * *Bradley J. Wechsler Chairman of the Board & Director Neil S. Braun Director Kenneth G. Copland Director * * *Eric A. Demirian Director Garth M. Girvan Director David W. Leebron Director * Marc A. Utay Director By * /s/ JOSEPH SPARACIO Joseph Sparacio (as attorney-in-fact) 127Table of Contents IMAX CORPORATIONSchedule IIValuation and Qualifying Accounts(In thousands of U.S. dollars) Additions/ Balance at (recoveries) Other beginning charged to additions/ Balance at of year expenses (deductions)(1) end of yearAllowance for net investment in leases Year ended December 31, 2008 $4,152 $1,595 $(863) $4,884 Year ended December 31, 2009 $4,884 $761 $89 $5,734 Year ended December 31, 2010 $5,734 $1,056 $(1,952) $4,838 Allowance for financed sale receivables Year ended December 31, 2008 $— $— $— $— Year ended December 31, 2009 $— $178 $— $178 Year ended December 31, 2010 $178 $(112) $— $66 Allowance for doubtful accounts receivable Year ended December 31, 2008 $3,045 $382 $(526) $2,901 Year ended December 31, 2009 $2,901 $127 $(258) $2,770 Year ended December 31, 2010 $2,770 $499 $(1,281) $1,988 Inventories valuation allowance Year ended December 31, 2008 $4,287 $2,489 $(1,435) $5,341 Year ended December 31, 2009 $5,341 $897 $(2,488) $3,750 Year ended December 31, 2010 $3,750 $665 $(16) $4,399 Deferred income tax valuation allowance Year ended December 31, 2008 $55,639 $11,560 $834 $68,033 Year ended December 31, 2009 $68,033 $7,327 $1,920 $77,280 Year ended December 31, 2010 $77,280 $(67,501) $(1,850) $7,929 (1) Deductions represent write-offs of amounts previously charged to the provision.128IMAX CorporationExhibit 10.1IMAX CORPORATIONStock Option PlanJune 2008 IMAX CORPORATIONAMENDED & RESTATED STOCK OPTION PLAN1. Purpose The purposes of the IMAX Stock Option Plan (the “Plan”) are to attract, retain and motivate directors, officers, key employees and consultants of theCompany and its Subsidiaries and to provide to such persons incentives and awards for superior performance.2. Definitions As used in this Plan the following terms have the following meanings: “Agreement” has the meaning set forth in Section 6 below. “Award” means an Option. “Blackout Period” means any period during which a policy of the Company prevents an Insider from trading in the Common Shares. “Board” means the Board of Directors of the Company. “Cause” means a termination of the Participant’s employment with the Company or one of its Subsidiaries (a) for “cause” as defined in an employmentagreement applicable to the Participant, or (b) in the case of a Participant who does not have an employment agreement that defines “cause”, because of:(i) any act or omission that constitutes a material breach by the Participant of any of his obligations under his employment agreement with the Company orone of its Subsidiaries or the applicable Agreement; (ii) the continued failure or refusal of the Participant to substantially perform the duties reasonablyrequired of him as an employee of the Company or one of its Subsidiaries; (iii) any wilful and material violation by the Participant of any law or regulationapplicable to the business of the Company or one of its Subsidiaries, or the Participant’s conviction of a felony, or any wilful perpetration by theParticipant of a common law fraud; or (iv) any other wilful misconduct by the Participant which is materially injurious to the financial condition orbusiness reputation of, or is otherwise materially injurious to, the Company or any of its Subsidiaries. “Change of Control” means an event or series of events where any person, or group of persons acting in concert, not including Bradley J. Wechsler andRichard L. Gelfond, acquire greater than fifty percent (50%) of the outstanding Common Shares of the Company whether by direct or indirect acquisition oras a result of a merger, reorganization or sale of substantially all of the assets of the Company. “Code” means the U.S. Internal Revenue Code of 1986, as amended. “Committee” means a committee of the Board comprised of at least two directors selected by the Board to administer the Plan. “Common Share” means a share of common stock, no par value, of the Company. “Company” means IMAX Corporation, a corporation organized under the laws of Canada. “Date of Grant” means the date specified by the Board or the Committee on which an Award shall become effective (which date shall not be earlier thanthe date on which the Board or the Committee takes action with respect thereto). The “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time. “Fair Market Value” of a Common Share on a given date means the higher of the closing price of a Common Share on such date (or the most recenttrading date if such date is not a trading date) on Stock Exchanges. “Insider” means any person who is a director or an officer of the Company or any Subsidiary, or who is directly or indirectly the beneficial owner of, orwho exercises control or direction, more than 10% of total Common Shares issued by the Company. “Option” means the right to purchase a Common Share upon exercise of a stock option granted pursuant to the Plan. “Option Price” means the purchase price per Common Share payable on exercise of an Option, as determined by the Committee in its sole discretion(subject to the terms of the Plan) and as set forth in the applicable Agreement. “Participant” means a person to whom an Award is to be made under the Plan and who is at the time of such Award an employee or consultant of theCompany, or any of its Subsidiaries, or a person who is a director of the Company or any of its Subsidiaries and who is not also an employee of theCompany or any of its Subsidiaries at the Date of Grant, or a person who has agreed to commence serving in any such capacity within 90 days of the Dateof Grant, or any personal holding corporation controlled by any such person, the shares of which are held directly or indirectly by such person or suchperson’s spouse, minor children or minor grandchildren, or any registered retirement savings plan or registered educational savings plan for the sole benefit ofany such person. “Permanent Disability” means a physical or mental disability or infirmity of the Participant that prevents the normal performance of substantially allhis duties as an employee of the Company or any Subsidiary, which disability or infirmity shall exist for any continuous period of 180 days within anytwelve-month period. “Stock Exchanges” means one or more, as the context requires, of the New York Stock Exchange, the Toronto Stock Exchange and such securitiesexchange, if any, as may be designated by the Board, from time to time. “Subsidiary” means any corporation or other entity in which the Company owns or controls, directly or indirectly, not less than 50% of the totalcombined voting power represented by all voting securities or other voting interests in such entity. “Vested Options” means, as of any date, Options which by their terms are exercisable on such date.3. Administration of the Plan (a) The Plan shall be administered, and Awards shall be granted hereunder, by the Board or by or under the authority of the Committee. Amajority of the Committee shall constitute a quorum, and the action of the members of the Committee present at any meeting at which a quorumis present, or acts unanimously approved in writing, shall be the acts of the Committee. (b) The interpretation and construction by the Committee of any provision of the Plan or of any Agreement, and any determination by theCommittee pursuant to any provision of this Plan or of any Agreement shall be final and conclusive. No member of the Committee shall beliable for any such action or determination made in good faith. 4. Shares Available Under Plan The maximum number of Common Shares which may be issued upon the exercise of Options granted under the Plan is 20% of the issued andoutstanding Common Shares, subject to adjustment as provided in Section 10. Such Common Shares may be shares previously issued or treasury sharesor a combination of the foregoing. Any Common Shares which are subject to Options which have been exercised, have expired or which have beensurrendered without being exercised in full shall again be available for issuance under this Plan, resulting in a “reloading” of the Plan up to this maximumpercentage of issued and outstanding Common Shares.5. Limitations on Certain Grants Section 162(m) of the Code requires that the Plan include a limitation on the number of Options which may be granted to certain Participants. TheBoard or Committee may, from time to time and upon such terms and conditions as it may determine, grant Options to Participants provided, however, themaximum number of Options intended to qualify for exemption under Section 162(m) of the Code that may be awarded to any Participant in any calendaryear shall not exceed 4,000,000.6. Agreement The terms and conditions of each Option shall be embodied in a written agreement (the “Agreement”) in a form approved by the Committee which shallcontain terms and conditions not inconsistent with the Plan and which shall incorporate the Plan by reference. Options granted under the Plan shall complywith the following terms and conditions: (a) Each Agreement shall specify the number of Common Shares for which Options have been granted. (b) Each Agreement shall specify the Option Price, which shall not be less than 100% of the Fair Market Value per Common Share on the Dateof Grant. (c) Each Agreement shall specify that the Option Price shall be payable in cash or by cheque acceptable to the Company or by a combination ofsuch methods of payment. (d) Successive grants may be made to the same Participant whether or not any Options previously granted to such Participant remain unexercised. (e) Each Agreement shall specify the applicable vesting schedule and the effective term of the Option. In the event of a termination of aParticipant’s employment by reason of death or Permanent Disability, 50% of such Participant’s Options shall become Vested Options ifsuch Options were less than 50% vested at the time of such termination. (f) Options granted under the Plan are not intended to qualify as “incentive stock options” within the meaning of Section 422A of the Code. (g) No Option issued prior to June 18, 2008 shall be exercisable more than ten years from the Date of Grant. No Options issued on or afterJune 18, 2008, subject to earlier cancellation, shall be exercisable for the later of ten years from the Date of Grant, or in the event the 10 yearanniversary of the Date of Grant falls within a Blackout Period, the date which is ten days after the date on which the Blackout Period hasended. (h) Each Option granted under the Plan shall be subject to such additional terms and conditions, not inconsistent with the Plan, which areprescribed by the Board or the Committee and set forth in the applicable Agreement. (i) As soon as practicable following the exercise of any Options, the Common Shares subject to the exercised Options shall be issued in the nameof the Participant or as the Participant shall otherwise, in writing, direct.7. Termination of Employment, Consulting Agreement or Term of Office (a) In the event that a Participant’s employment, consulting arrangement or term of office with the Company or one of its Subsidiaries terminatesfor any reason, unless the Board or the Committee determines otherwise, any Options which have not become Vested Options shall terminateand be cancelled without any consideration being paid therefor. (b) In the event that a Participant’s employment with the Company or one of its Subsidiaries is terminated without Cause, or the Participant’semployment is terminated by reason of the Participant’s voluntary resignation (including by reason of retirement), death or PermanentDisability, or upon the termination of a Participant’s consulting arrangement or term of office, the Participant (or the Participant’s estate) shallbe entitled to exercise the Participant’s Options which have become Vested Options as of the date of termination for a period of 30 days, or suchlonger period as the Board or the Committee determines, following the date of termination. (c) In the event that a Participant’s employment, consulting arrangement or term of office with the Company or one of its Subsidiaries is terminatedfor Cause, such Participant’s Vested Options shall terminate and be cancelled without any consideration being paid therefor.8. Transferability No Option shall be transferable by a Participant other than by will or the laws of descent and distribution, provided, however, that Options may betransferred if approved by the Board or the Committee and by any regulatory authority having jurisdiction or stock exchange on which the Common Sharessubject to Options are listed. Options shall be exercisable during the Participant’s lifetime only by the Participant or by the Participant’s guardian or legalrepresentative.9. Change of Control All Options granted under the Plan (or any predecessor of the Plan) shall immediately vest and become fully exercisable upon the occurrence of (a) aChange of Control; and (b) the occurrence of one or more of the following: (i) the Participant’s employment or term of office with the Company, or one ofits Subsidiaries, is terminated without Cause; (ii) the diminution of the Participant’s title and/or responsibilities; and (iii) the Participant is asked torelocate more than twenty-five (25) miles from his/her existing office.10. Adjustments The Committee shall make or provide for such adjustments in the maximum number of Common Shares specified in Section 4, in the number ofCommon Shares or other securities or consideration covered by outstanding Options granted hereunder, and/or in the Option Price applicable to suchOptions as the Board or the Committee in their sole discretion may determine is equitably required to prevent dilution or enlargement of the rights ofParticipants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structureof the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or anyother corporate transaction or event having an effect similar to any of the foregoing.11. Fractional Shares The Company shall not be required to issue any fractional Common Shares pursuant to the Plan. The Committee may provide for the elimination offractions or for the settlement of fractions in cash. 12. Withholding Taxes The Company and its Subsidiaries shall have the right to require any individual entitled to receive Common Shares pursuant to an Option to remit tothe Company, prior to the issuance of any Common Share following the exercise of any Options, any amount sufficient to satisfy any Canadian or UnitedStates federal, state, provincial or local tax withholding requirements. Prior to the Company’s determination of such withholding liability, such individualmay make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold Common Shares thatwould otherwise be received by such individual. Such election may be denied by the Company in its discretion, or may be made subject to certain conditionsspecified by the Company, including, without limitation, conditions intended to avoid accounting charges and the imposition of liability against the individualunder Section 16(b) of the Exchange Act, as amended, and the rules and regulations thereunder.13. Registration Restrictions An Option shall not be exercisable unless and until (i) a registration statement under the Securities Act of 1933, as amended, has been duly filed anddeclared effective pertaining to the Common Shares subject to such Option, or (ii) the Committee, in its sole discretion determines that such registration,qualification and status is not required as a result of the availability of an exemption from such registration, qualification, and status under such laws.14. Shareholder Rights A Participant shall have no rights as a shareholder with respect to any Common Shares issuable upon exercise of an Option until the Participant hasduly exercised the Option in accordance with its terms and this Plan, and the Common Shares have been paid for in full and issued to the Participant.15. Breach of Restrictive Covenants If (i) a Participant is a party to an employment agreement with the Company or any of its Subsidiaries or affiliates and (ii) such Participant materiallybreaches any of the restrictive covenants set forth in such employment agreement (including, without limitation, any restrictive covenants relating to non-competition, non-solicitation or confidentiality), then all of such Participant’s Options (whether or not Vested Options) shall terminate and be cancelledwithout consideration being paid therefor.16. Section 409A of the Code If any provision of the Plan or any Agreement contravenes any regulations or Treasury guidance promulgated under Section 409A of the Code or wouldcause the Awards to be subject to the interest and penalties under Section 409A of the Code, such provision of the Plan or any Agreement shall be modifiedto maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Section 409A of the Code.17. Amendments The Board or the Committee reserves the right, in its sole discretion, to amend, suspend or terminate the Plan or any portion thereof at any time, andoutstanding Options or Agreements thereunder, in accordance with applicable legislation, without obtaining the approval of shareholders; provided,however, that no termination or amendment of the Plan or any waiver of any provision of any Option or Agreement may, without the consent of theParticipant to whom any Award shall have been granted, adversely affect the rights of such Participant in such Award; provided further, however thatamendments shall be subject to (i) the approval of a majority of the Common Shares entitled to vote if the Committee determines that such approval isnecessary in order for the Company to rely on the exemptive relief provided under Rule 16b-3 under the Exchange Act and (ii) all other approvals, whetherregulatory, shareholder or otherwise, which are required by regulatory authority having jurisdiction or a Stock Exchange. Notwithstanding the foregoing, theCompany will be required to obtain the approval of the shareholders of the Company for any amendment related to: a) reduces the Option Price of an Award held by an Insider; b) extends the term of an Award held by an Insider, except as otherwise provided in Section 19; or c) increases the number of Common Shares reserved under the Plan.18. Miscellaneous The Plan shall not confer upon a Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary,nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate such Participant’s employment or otherservice at any time.19. Black Out Periods Except as otherwise provided in Section 6(g) or in any Option Agreement, if the date on which an Option expires occurs during or within 10 days afterthe last day of a Blackout Period, the expiry date for the Option will be 10 days after the date on which the Blackout Period has ended.20. Effective Date The Plan, as amended, shall be effective as of June 18, 2008.21. Governing Law The Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the Province of Ontario and the laws of Canadaapplicable therein.June 2008 IMAX CORPORATIONEXHIBIT 10.9AMENDING AGREEMENTThis Amendment to Services Agreement dated as of February 14, 2011 (the “Amending Agreement”) is made between:IMAX CORPORATION, a corporation incorporated under the laws of Canada (hereinafter referred to as the “Company”),andBRAD WECHSLER (the “Executive”)WHEREAS, the Company wishes to enter into this Amending Agreement to amend and extend the Services Agreement dated as of December 11, 2008 (the“Agreement”).NOWTHEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto agree as follows:Section 1 of the Agreement shall be deleted and replaced with the following:1. Term. The term of the Agreement shall begin on the Effective Date and run through the earlier of (i) such date that Chairman is not re-elected to theBoard, and (ii) April 1, 2013 (the “Term") provided, however, that the Board agrees to use its best efforts to cause Chairman to be re-elected to theBoard in 2013 provided the Agreement has been renewed for an additional term, unless Chairman has engaged in activity that would have constituteddismissal for Cause as that term is defined in the Employment Agreement. 2. General. Except as amended herein, all other terms of the Agreement shall remain in full force and unamended. DATED as of February 14, 2011. AGREED AND ACCEPTED: /s/ Bradley J. Wechsler Bradley J. Wechsler IMAX CORPORATION Per /s/ Garth M. Girvan Name: Garth M. Girvan Title: Director IMAX CORPORATIONEXHIBIT 10.16AMENDED EMPLOYMENT AGREEMENT This agreement amends the amended employment agreement (the “Agreement”) between Richard L. Gelfond (the “Executive”) and IMAX Corporation(the “Company”) dated July 1, 1998, as amended, on the same terms and conditions except as set out below:1. Term. The term of the Agreement (the “Term”) is extended until December 31, 2012 (the “Term End”). 2. Cash Compensation. Effective January 1, 2011 (the “Renewal Commencement Date”), the Executive shall be paid a base salary at the rate of$750,000 per year. Executive’s bonus shall continue to be up to two times salary. Such bonus shall be at the discretion of the Board of Directors andshall be based upon the success of the Company in achieving the goals and objectives set by the Board after consultation with the Executive. 3. SERP. In connection with that July 2000 Supplemental Executive Retirement Plan, as amended (the “SERP”), the Executive and the Company agree thatno compensation paid to Executive between the Renewal Commencement Date and the Term End shall be included in the calculation of benefits payableto Executive under the SERP (the “Gelfond SERP Payout”). The Company agrees that it will investigate in good faith the notion of fixing the GelfondSERP Payout and will proceed to fix the Gelfond SERP Payout provided, and to the extent, (a) the Company’s Board of Directors concludes it is in thereasonable best interests of the Company to do so and (b) Executive agrees. 4. Incentive Compensation. On December 31, 2010, the Executive shall be granted, in accordance with the terms of the IMAX Stock Option Plan (the“Plan”), stock options to purchase 800,000 common shares of the Company (the “Options”) at an exercise price per Common Share equal to the FairMarket Value, as defined in the Plan. The Options shall have a 10-year term and vest as follows: Number of Options Vesting Date 160,000 May 1, 2011160,000 September 1, 2011160,000 January 1, 2012160,000 May 1, 2012160,000 September 1, 2012 The vesting of the Options shall be accelerated upon a “change of control” as defined in the Agreement, and shall be governed, to the extent applicable, bythe provisions in the Agreement regarding change of control.1 5. The entering into this agreement shall not prejudice any rights or waive any obligations under any other agreement between the Executive and theCompany. DATED as of December 20, 2010. AGREED AND ACCEPTED: /s/ Richard L. GelfondRichard L. Gelfond IMAX CORPORATION Per: /s/ Garth M. GirvanName: Garth M. Girvan Title: Director 2IMAX CORPORATIONEXHIBIT 10.24THIRD AMENDING AGREEMENTThis Amendment to Employment Agreement dated as of February 14, 2006 (the “Amending Agreement”) is made between:IMAX CORPORATION, a corporation incorporated under the laws of Canada (hereinafter referred to as the “Company”),andROBERT D. LISTER (the “Executive”)WHEREAS, the Company wishes to enter into this Amending Agreement to amend and extend the Employment Agreement dated as of May 17, 1999between Imax Ltd, the Company and Executive, as modified and amended by those Amending Agreements dated as of April 4, 2001 and January 1, 2004,(together, the “Agreement”), whereunder the Executive provides services to the Company, and the Executive wishes to so continue such engagement, ashereinafter set forth;AND WHEREAS, on January 1, 2001 Imax Ltd. assigned all of its rights and obligations pursuant to the Agreement to the Company, and the Executive hasconsented to such assignment;NOW, THEREFORE, in consideration of good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties heretoagree as follows:1. Section 1.3 of the Agreement shall be deleted and replaced with the following:“Section 1.3 Term of Employment. The Employee’s employment under this Agreement commenced on the 17th day of May, 1999 (the “CommencementDate”) and shall terminate on the earlier of (i) January 1, 2008, or (ii) the termination of the Employee’s employment pursuant to this Agreement. The periodcommencing as of the Commencement Date and ending on January 1, 2008 or such later date to which the term of the Employee’s employment under thisAgreement shall have been extended is hereinafter referred to as the “Employment Term.”2. Section 2.1 of the Agreement shall be deleted and replaced with the following:“Section 2.1 Base Salary. Effective January 1, 2006, the Executive’s Base Salary shall beUS$ 365,700. Effective January 1, 2007, the Executive’s Base Salary shall be US$ 402,270.” 3. Section 6 of the Agreement shall be deleted and replaced with the following:Subject to Section 7.1 and 7.2, the Executive shall be required to mitigate the amount of any payment provided for in Section 4.1.1 (other than the TerminationPayment) by seeking other employment or remunerative activity reasonably comparable to his duties hereunder, and, upon Executive’s obtaining such otheremployment or remunerative activity any payment to be made by the Company under Section 4.1.1 (other than the Termination Payment) will be reduced by atotal of one-quarter (1/4) of the amount of such payment prior to the Executive’s obtaining new employment or remunerative activity. Notwithstanding anythingherein to the contrary, in the event that there is either (a) a change in control of the Company i.e. any person, or group of persons acting in concert, other thanBradley J. Wechsler and Richard L. Gelfond, acquiring greater than fifty percent (50%) of the outstanding common shares of the Company, whether by director indirect acquisition or as a result of a merger or reorganization; or (b) a significant change in the Executive’s reporting relationship (either, a “Non-MitigationEvent”), then, if at any time subsequent to the occurrence of such Non-Mitigation Event the Executive is terminated from the Company Without Cause,(i) Executive shall have no obligation to mitigate the amounts provided in Section 4.1.1, and (ii) the Severance Period (as defined in Section 4.1.1) shall be aminimum of eighteen (18) months in duration. For clarity, a termination of Executive’s employment Without Cause shall include, but not be limited to, theevents cited in Section 2.3(b)(iii) and (iv), and a termination by virtue of the expiry of the Agreement.4. The parties confirm that the August 21, 2000 letter agreement with regard to Executive’s incentive payments and benefits remains in full force and effect andExecutive shall be entitled to US$ 107,500 thereunder from the Company upon a termination Without Cause within two (2) years of the completion of aTransaction (as defined therein).5. Effective as soon as is practicable after the date hereof, the Executive shall be granted non-qualified options (the “Options”) to purchase 50,000 shares ofcommon stock of the Company (the “Common Shares”), at an exercise price per Common Share equal to the Fair Market Value, as defined in the Company’sStock Option Plan. The Options shall vest as to 10% on the first anniversary of the grant date, 15% on the second anniversary of the grant date, 20% on thethird anniversary of the grant date, 25% on the fourth anniversary of the grant date and 30% on the fifth anniversary of the grant date, and shall otherwise betreated in accordance with the terms of Section 2.3 of the Agreement. Except as amended herein, all other terms of the Agreement shall remain in full force, unamended.IN WITNESS WHEREOF, the Company and the Executive have duly executed and delivered this Amending Agreement on this 14th day of February, 2006. IMAX CORPORATION By: “Richard L. Gelfond” Name: Richard L. Gelfond Title: Co-Chief Executive Officer By: “Bradley J. Wechsler”Name: Bradley J. Wechsler Title: Co-Chief Executive Officer SIGNED, SEALED AND DELIVERED EXECUTIVE: in the presence of: “Stephen G. Abraham”Witness Stephen G. Abraham “ Robert D. Lister”Robert D. Lister IMAX CORPORATIONExhibit 10.32Summary of Directors’ Compensation1. In respect of each year during which an Eligible Director serves as a Director of the Corporation, he shall receive: a. $20,000 (Cdn.) per year payable quarterly in arrears provided that an Eligible Director may elect, at the commencement of each year of office, oras soon as practicable thereafter, to receive such number of options to purchase an equivalent number of Common Shares of the Corporationunder the terms of the IMAX Stock Option Plan (the “Plan”). The options will be granted annually and will vest in equal amounts quarterly, inarrears; b. $1,500 (Cdn.) for every Board meeting attended in which an Eligible Director participates whether in person or by telephone; c. $1,200 (Cdn.) for any Committee of the Board meetings in which the Eligible Director participates, whether in person or by telephone; d. at the commencement of each year of office or upon joining the Board, or as soon as practicable thereafter, a grant of options to purchase 8,000Common Shares of the Corporation under the terms of the IMAX Stock Option Plan at an exercise price equal to the Fair Market Value of theshares, as defined in the Plan; and e. reimbursement of any expenses incurred by the Eligible Director in connection with participation in Board or Committee meetings.2. The Chair of the Audit Committee shall receive $8,000 (Cdn.) per year payable quarterly, in arrears. 3. The annual compensation for Directors, as set out above, shall remain in effect until it is amended or revoked by further resolution.August 11, 2005IMAX CORPORATIONEXHIBIT 10.34 THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED CREDIT AGREEMENT is made as of the 21st day of January, 2011BETWEEN:IMAX CORPORATION(“Borrower”)- and -WELLS FARGO CAPITAL FINANCE CORPORATION CANADA (formerly known asWACHOVIA CAPITAL FINANCE CORPORATION (CANADA))(“Agent” and a “Lender”)- and —EXPORT DEVELOPMENT CANADA(a “Lender”) WHEREAS Borrower and Lenders entered into an amended and restated credit agreement dated November 16, 2009 (as amended, amended and restated,modified, supplemented, extended, renewed, restated or replaced, the “Credit Agreement”), pursuant to which certain credit facilities were established infavour of Borrower; AND WHEREAS the parties hereto wish to amend certain terms and conditions of the Credit Agreement as provided herein; NOW THEREFORE THIS AGREEMENT WITNESSES THAT in consideration of the covenants and agreements contained herein and for othergood and valuable consideration, the parties hereto agree to amend the Credit Agreement as provided herein:1. General In this Agreement, unless otherwise defined or the context otherwise requires, all capitalized terms shall have the respective meanings specified in the CreditAgreement. 2. To be Read with Credit Agreement Unless the context of this Agreement otherwise requires, the Credit Agreement and this Agreement shall be read together and shall have effect as if theprovisions of the Credit Agreement and this Agreement were contained in one agreement. The term “Agreement” when used in the Credit Agreement meansthe Credit Agreement as - 2 - amended by this Agreement, together with all amendments, amendments and restatements, modifications, supplements, extensions, renewals, restatementsand replacements thereto from time to time. This Agreement is a Financing Agreement.3. No Novations Nothing in this Agreement, nor in the Credit Agreement when read together with this Agreement, shall constitute a novation, payment, re-advance orreduction or termination in respect of any Obligations. 4. Amendments to the Credit Agreement Section 9.13 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: “9.13 Fixed Charge Coverage Ratio (a) Subject to Section 9.13(b) below, if, at any time prior to the indefeasible payment in full of the Term Loan, the Cash and Excess Availability ofBorrower is less than $25,000,000, Borrower shall thereafter maintain a Fixed Charge Coverage Ratio of not less than 1.1:1.0 calculated at the end of eachFiscal Quarter (commencing with the December 31, 2009 Fiscal Quarter) on a quarterly cumulative basis until the December 31, 2010 Fiscal Quarter andthereafter on a rolling four (4) Fiscal Quarter basis. (b) Upon indefeasible payment in full of the Term Loan, Borrower shall only be required to maintain the Fixed Charge Coverage Ratio set out inSection 9.13(a) above if, at any time, (i) Excess Availability is less than $10,000,000 or (ii) Cash and Excess Availability of Borrower is less than$15,000,000.”5. Representations and Warranties In order to induce Agent and Lenders to enter into this Agreement, Borrower represents and warrants to Agent and Lenders the following, whichrepresentations and warranties shall survive the execution and delivery hereof: (a) the execution, delivery and performance of this Agreement and the transactions contemplated hereunder are all within Borrower’s powers, have beenduly authorized and are not in contravention of law or the terms of Borrower’s certificate of incorporation, by-laws or other organizationaldocumentation, or any indenture, agreement or undertaking to which Borrower is a party or by which Borrower’s property is bound; (b) Borrower has duly executed and delivered this Agreement; (c) this Agreement is a legal, valid and binding obligation of Borrower, enforceable against it by Agent and Lenders in accordance with its terms, exceptto the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium, reorganization and other laws of generalapplication - 3 - limiting the enforcement of creditor’s rights generally and the fact that the courts may deny the granting or enforcement of equitable remedies; (d) the representations and warranties set forth in Section 8 of the Credit Agreement continue to be true and correct as of the date hereof; and (e) no Default or Event of Default exists.6. Fees and Expenses; Further Assurances Borrower shall pay to Agent and Lenders on demand all reasonable fees and expenses, including, without limitation, legal fees, incurred by or payable toAgent and Lenders in connection with the preparation, negotiation, completion, execution, delivery and review of this Agreement and all other documents,registrations and instruments arising therefrom and/or executed in connection therewith. Borrower shall execute and deliver such documents and take suchactions as may be necessary or desirable by Agent or any Lender to give effect to the provisions and purposes of this Agreement, all at the expense ofBorrower. 7. Continuance of the Credit Agreement and Security The Credit Agreement, as amended this Agreement, shall be and continue in full force and effect and is hereby confirmed and the rights and obligations ofall parties thereunder shall not be affected or prejudiced in any manner except as specifically provided for herein. It is agreed and confirmed that aftergiving effect to this Agreement, all security and guarantees delivered by Borrower and/or any Obligor secures the payment of all of the Obligationsincluding, without limitation, the obligations arising under the Credit Agreement, as amended by the terms of this Agreement. 8. Counterparts This Agreement may be executed in any number of counterparts, by original, pdf or facsimile signature, each of which shall be deemed an original and allof such counterparts taken together shall be deemed to constitute one and the same instrument. 9. Governing Law The validity, interpretation and enforcement of this Agreement and any dispute arising out of the relationship between the parties hereto, whether incontract, tort, equity or otherwise, shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.(Signature Page Follows) IN WITNESS WHEREOF the parties hereto have executed this Agreement as of and with effect from the day and year first above written. WELLS FARGO CAPITAL FINANCECORPORATION CANADA EXPORT DEVELOPMENT CANADA By: Name: /s/ Sean M. NoonanSean M. Noonan By:Name: /s/ Geoff BleichGeoff Bleich Title: Relationship Manager Title: Senior Asset Manager By:Name: /s/ Samuel Asiedu , P.h.D., CFA, CMASamuel Asiedu, P.h.D., CFA, CMA Title: Loan Portfolio Manager IMAX CORPORATION By: /s/ Joseph Sparacio Name: Joseph Sparacio Title: Executive Vice President and ChiefFinancial Officer By: /s/ Ed MacNeil Name: Ed MacNeil Title: Senior Vice President, Finance Each of the undersigned Obligors hereby: (a) acknowledges, confirms, and agrees that such Obligor’s obligations under the Credit Agreement and the other Financing Agreements remain in fullforce and effect as of the date hereof; and (b) acknowledges and confirms that such Obligor has received a copy of the Credit Agreement and this Agreement and understands and consents to theterms thereof and hereof.Dated this 21st day of January 2011. IMAX U.S.A INC. 1329507 ONTARIO INC. By: Name: /s/ Joseph SparacioJoseph Sparacio By:Name: /s/ Joseph SparacioJoseph Sparacio Title: Vice President, Finance Title: Vice President, Finance By: Name: /s/ Ed MacNeilEd MacNeil By:Name: /s/ Ed MacNeilEd MacNeil Title: Vice President Title: Vice President IMAX II U.S.A. INC. DAVID KEIGHLEY PRODUCTIONS70 MM INC. By: Name: /s/ Joseph SparacioJoseph Sparacio By:Name: /s/ Joseph SparacioJoseph Sparacio Title: Vice President, Finance Title: Vice President, Finance By: Name: /s/ Ed MacNeilEd MacNeil By:Name: /s/ Ed MacNeilEd MacNeil Title: Vice President Title: Vice President IMAX CorporationExhibit 21Subsidiaries of IMAX CorporationSignificant and other major subsidiary companies of the Company, as at December 31, 2010, comprise of the following: Jurisdiction of Percentage heldName of Subsidiary Organization by the Company3183 Films Ltd. Canada 100%1329507 Ontario Inc. Ontario 100%4507592 Canada Ltd. Canada 100%6822967 Canada Ltd. Canada 100%7096267 Canada Ltd. (formerly 3D Sea II Ltd.) Canada 100%7103077 Canada Ltd. Canada 100%7109857 Canada Ltd. Canada 100%7214316 Canada Ltd. Canada 100%7550324 Canada Inc. Canada 100%Animal Orphans 3D Ltd. Ontario 100%Arizona Big Frame Theatres, L.L.C. Arizona 100%Big Engine Films Inc. Delaware 100%Coral Sea Films Ltd. Canada 100%David Keighley Productions 70 MM Inc. Delaware 100%IMAX Chicago Theatre LLC Delaware 100%IMAX 3D TV Ventures, LLC Delaware 100%IMAX II U.S.A. Inc. Delaware 100%IMAX Indianapolis LLC Indiana 100%IMAX International Sales Corporation Canada 100%IMAX Japan Inc. Japan 100%IMAX Minnesota Holding Co. Delaware 100%IMAX Rhode Island Limited Partnership Rhode Island 100%IMAX Scribe Inc. Delaware 100%IMAX Space Ltd. Ontario 100%IMAX Space Productions Ltd. Canada 100%IMAX Theatre Holding Co. Delaware 100%IMAX Theatre Holdings (OEI), Inc. Delaware 100%IMAX Theatre Management Company Delaware 100%IMAX Theatre Services Ltd. Ontario 100%IMAX U.S.A. Inc. Delaware 100%Magnitude II Productions Ltd. Canada 100%Magnitude Productions Ltd. Canada 100%Nyack Theatre LLC New York 100%Raining Arrows Productions Ltd. Canada 100%Ridefilm Corporation Delaware 100%Ruth Quentin Films Ltd. (formerly Acorn Rain Productions Ltd.) Canada 100%Sacramento Theatre LLC Delaware 100%Starboard Theatres Ltd. Canada 100%Sonics Associates, Inc. Alabama 100%Strategic Sponsorship Corporation Delaware 100%Taurus-Littrow Productions Inc. Delaware 100%The Deep Magic Company Ltd. Canada 100%Walking Bones Pictures Ltd. Canada 100%IMAX CORPORATIONExhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in (i) the Registration Statements on Form S-8 (No. 333-2076; No. 333-5720; No. 333-30970; No. 333-44412; No. 333-155262, No. 333-165400), (ii) the Post-Effective Amendment No. 1 to Form S-8 (No. 333-5720) as amended, and (iii) the RegistrationStatements on Form S-3 (No. 333-157300, No. 333-171823) of IMAX Corporation of our report dated February 24, 2011, relating to the financial statements,financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPChartered Accountants, Licensed Public AccountantsToronto, OntarioFebruary 24, 2011IMAX CORPORATIONEXHIBIT 24POWER OF ATTORNEY Each of the persons whose signature appears below hereby constitutes and appoints Joseph Sparacio and Robert D. Lister, and each of them severally,as his true and lawful attorney or attorneys with power of substitution and re-substitution to sign in his name, place and stead in any and all such capacitiesthe 10-K, including the French language version thereof, and any and all amendments thereto and documents in connection therewith, and to file the same withthe United States Securities Exchange Commission (the “SEC”) and such other regulatory authorities as may be required, each of said attorneys to have powerto act with and without the other, and to have full power and authority to do and perform, in the name and on behalf of each of the directors of theCorporation, every act whatsoever which such attorneys, or either of them, may deem necessary of desirable to be done in connection therewith as fully and toall intent and purposes as such directors of the Corporation might or could do in person.Dated this 23rd day of February, 2011 Signature Title /s/ Bradley J. Wechsler Chairman of the Board & DirectorBradley J. Wechsler /s/ Richard L. Gelfond Chief Executive OfficerRichard L. Gelfond (Principal Executive Officer) /s/ Neil S. Braun DirectorNeil S. Braun /s/ Kenneth G. Copland DirectorKenneth G. Copland /s/ Eric A. Demirian DirectorEric A. Demirian /s/ Garth M. Girvan DirectorGarth M. Girvan /s/ David W. Leebron DirectorDavid W. Leebron /s/ Marc A. Utay DirectorMarc A. Utay /s/ Joseph Sparacio Chief Financial OfficerJoseph Sparacio (Principal Financial Officer) /s/ Jeffrey Vance ControllerJeffrey Vance (Principal Accounting Officer)IMAX CORPORATIONEXHIBIT 31.1Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002I, Richard L. Gelfond, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 of the registrant, IMAX Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: February 24, 2011 By: /s/ Richard L. Gelfond Richard L. Gelfond Chief Executive Officer IMAX CORPORATIONEXHIBIT 31.2Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002I, Joseph Sparacio, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 of the registrant, IMAX Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: February 24, 2011 By: /s/ Joseph Sparacio Joseph Sparacio Executive Vice President andChief Financial Officer IMAX CORPORATIONEXHIBIT 32.1CERTIFICATIONSPursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Subsections (A) and (B) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, RichardL. Gelfond, Chief Executive Officer of IMAX Corporation, a Canadian corporation (the “Company”), hereby certify, to my knowledge, that: The Annual Report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”) of the Company fully complies with the requirements of section13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-K fairly presents, in all material respects, the financialcondition and results of operations of the Company. Date: February 24, 2011 /s/ Richard L. Gelfond Richard L. Gelfond Chief Executive Officer IMAX CORPORATIONEXHIBIT 32.2CERTIFICATIONSPursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Subsections (A) and (B) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, JosephSparacio, Chief Financial Officer of IMAX Corporation, a Canadian corporation (the “Company”), hereby certify, to my knowledge, that: The Annual Report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”) of the Company fully complies with the requirements of section13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-K fairly presents, in all material respects, the financialcondition and results of operations of the Company. Date: February 24, 2011 /s/ Joseph Sparacio Joseph Sparacio Executive Vice President &Chief Financial Officer

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