2010 ANNUAL REPORT DESTINATION CINEPLEX 1 2 3 4 5 6 1. XSCAPE Entertainment Centres offer fun for everyone 2. Cineplex Digital Media’s Theatre Lobby Network at the Cineplex Odeon Queensway Cinemas in Toronto 3. The new Galaxy Cinemas Chilliwack 4. Alternative Programming like LA Phil Live continues to delight and delivers new audiences 5. The SCENE entertainment rewards program features more than 2.7 million members 6. Cineplex Magazine – Canada’s best read and most popular entertainment magazine Back Cover: The VIP Cinemas at Cineplex Odeon Westmount Cinemas 2010 was the best year on record for Cineplex. For the first time in our history, we surpassed $1 billion in annual revenues. LETTER TO UNITHOLDERS ........................... 2 FINANCIAL STATEMENTS AND NOTES .................65 MANAGEMENT’S DISCUSSION AND ANALYSIS .......... 9 Management’s report to unitholders . 65. Independent auditor’s report . 66. Overview of the Fund . .10 Consolidated balance sheets . 67. Industry overview . .14 Consolidated statements of operations . 68. Business strategy . .15 Consolidated statements of unitholders’ equity Overview of operations . .19 and comprehensive income . 69. Results of operations . .22 Consolidated statements of cash flows . 70. Balance sheets . .32 Notes to consolidated financial statements . 71. Liquidity and capital resources . 34 Distributable cash and distributions . .38 BOARD OF DIRECTORS..............................98 Fund units outstanding . .40 INVESTOR INFORMATION ..........................100 Seasonality and quarterly results . 42 Related party transactions . 43 Critical accounting estimates . .44 Accounting policies . 45 Risk management . 50 Controls and procedures . 54 Subsequent events . .54 Outlook . .55 Non-GAAP measures . 57 Consolidated financial statements of the Partnership . .60 On January 1, 2011, Cineplex Galaxy Income Fund (“the Fund”) completed a plan of arrangement which allowed for the conversion of the Fund from an income trust to a corporation. The Fund now operates as Cineplex Inc., (“Cineplex”). Further details on the conversion are included in the management’s discussion and analysis (“MD&A”) section of this report and on the investor relations pages of our website at cineplex.com. CINEPLEX GALAXY INCOME FUND | 2010 ANNUAL REPORT 1 Letter to Our mission statement is to “Passionately Deliver an Unitholders Exceptional Entertainment Experience.” Each and every one of our approximately 10,000 employees located across the country is committed to delivering on this mission. 2010 was the best year on record for other revenues exceeded $100 million EXHIBITION: Cineplex Entertainment . I am very pleased annually . This increase is attributed to THE ENGINE that DRIVES THE TRAIN to report that we exceeded $1 billion in total increased advertiser spending in our Exhibition represents approximately 60% revenues for the first time in our history! Cineplex Media group in addition to the of our total annual revenues . Our goal is to This represents a 4 .8% increase from 2009, revenues generated by our acquisition of increase attendance through new theatre with record revenues generated in all three Digital Display and Communications Inc . development, expanded offerings, compelling areas of our business: box office up 3 4%;. (“DDC”) during the year . value, innovative marketing and exceptional concessions up 2 7%;. and other revenues up Adjusted EBITDA increased $9 4. million or service . We believe that keeping ticket prices 19 7%. We also continued to generate record 5 .8% to $169 .3 million . Distributable cash affordable encourages repeat visits, which results in several key performance metrics: per unit increased 3 .5% to $2 .22 from $2 14. contributes to the other core businesses . adjusted EBITDA up 5 .8%; net income up in the prior year . Net Income increased 17 .8% At the same time, we are expanding the 17 .8%; and distributable cash per unit up to $63 0. million from $53 4. million and our entertainment experience for our guests by 3 .5% for the year . payout ratio ended the year at 57% . Our introducing premium offerings that drive Box office revenues of $601 1. million company is well positioned with a strong increased revenues per patron . exceeded 2009 by $20 0. million largely due balance sheet giving us the flexibility to In 2010 we achieved two new exhibition to the tremendous performance of Avatar in capitalize on strategic opportunities to records – box office revenue ($601 1. million) the first quarter of the year and the overall continue growing and expanding . and box office per patron (“BPP”) . Our BPP success of many 3D films presented during Our success in 2010 can be attributed to for 2010 was $8 67,. up $0 .37 per person 2010 . While attendance declined marginally focusing on growth in our core Exhibition (4 .5%) versus 2009 . This was predominantly to 69 4. million from 70 0. million in 2009, business along with diversification and a result of the success of premium-priced the premiums charged for 3D films offset growth in our other core businesses: 3D movies . the attendance decline . Merchandising, Loyalty, Media, Alternative During the year we opened two new Concession revenues grew 2 7%. to Programming, and Interactive . theatres . SilverCity CrossIron Mills and XSCAPE $296 0. million in 2010 . This was due Expanding and diversifying our business Entertainment Centre located north of Calgary, primarily to increased concession per beyond Exhibition also offers us the Alberta has seven screens and a 15,000 patron (“CPP”) of $4 .27 for the year, up opportunity to “touch” the customer on square foot interactive gaming area . Galaxy from $4 12. in 2009 . many levels beyond the theatre experience . Cinemas Chilliwack is an eight-screen theatre Other revenues increased 19 7%. to When Canadians think of movies, we want located in Chilliwack, British Columbia . $113 7. million in 2010, the first time that them to think of Cineplex! 2 CINEPLEX GALAXY INCOME FUND | 2010 ANNUAL REPORT ELLIS JACOB PRESIDENT AND CHIEF EXecUTIVE OFFICER In Vernon, British Columbia, we completely superb digital surround sound featuring the priced entertainment options commanding a renovated and retrofitted our existing latest in Dolby digital sound technology, and $3 00. price premium over a traditional movie seven-screen theatre by converting all reserved seating featuring extra-wide, ticket . Seven of the top 10 grossing movies in auditoriums to stadium seating and adding high-back rocker seats . We installed 11 2010 were presented in 3D including Avatar, digital projectors and RealD® 3D technology . UltraAVX™ auditoriums in 2010 and plan to Toy Story 3, Alice in Wonderland, Despicable This created a first class entertainment install several more in 2011 . Guests have Me, Shrek Forever After, How to Train Your complex for our guests . embraced this new entertainment experience Dragon and Tangled . In 2011, more than 30 generating higher seat utilization at a 3D movies are currently scheduled to be We also acquired four theatres . Two are premium price . released . Our focus on adding multiple 3D located in Quebec: the eight-screen Cineplex screens to our theatres resulted in Cineplex Odeon Cavendish Mall Cinemas in Montreal During 2010, Cineplex continued to replace delivering better than average 3D box office and StarCite Gatineau Cinemas, a 16-screen 35mm film projectors with digital projectors versus other circuits . In addition to these 3D complex in Gatineau . Mid-year we acquired and added RealD 3D projection systems . titles, traditional movies that led the release a six-screen theatre in Chatham, Ontario . We added 225 digital projectors and 217 schedule included Inception, Iron Man 2, In late November, we acquired a 12-screen RealD 3D systems bringing our total to 415 The Twilight Saga: Eclipse and Harry Potter theatre in downtown Vancouver, British digital and 366 RealD 3D systems located and the Deathly Hallows Part 1 . Columbia renaming it Cineplex Odeon in 118 theatres . At December 31, 2010 more International Village Cinemas . than 30% of our screens were digital and During 2010 we signed an agreement with 27% were 3D capable . This enabled us to D-Box Technologies Inc . to install up to At December 31, 2010, we owned and capitalize on the many 3D movies that were 250 motion simulator seats in 10 theatre operated 131 theatres with 1,362 screens released last year . The 2010 schedule locations across Canada . D-Box is another from British Columbia to Quebec . Today, featured 25 3D movies, up from 12 in premium-priced entertainment offering for we have one of the most modern circuits 2009, including the most successful movie our guests . Two D-Box installations were in the Industry with 84% of our screens of all time – Avatar, which grossed added to our theatres in Quebec bringing our featuring stadium seating . approximately $750 million in North total installations to three . Eight additional In 2010, we premiered UltraAVX™, our American box office revenue . installations are scheduled to occur in 2011 . new enhanced audio visual entertainment Revenue from 3D and IMAX® presentations In last year’s annual report we announced experience . UltraAVX features screens that more than doubled in 2010 to represent the opening of our third VIP Cinemas . All extend wall to wall and are significantly larger 28 .3% of total box office revenues compared these have been outstanding performers . on average than our traditional screens, to 14 4%. in 2009 . 3D is one of our premium- Given the success