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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
Canada 98-0140269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12B-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerate Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of October 26, 2006
----- ----------------------------------
Common stock, no par value 40,285,574
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Page 1
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 34
Item 3. Quantitative and Qualitative Factors about Market Risk.......... 58
Item 4. Controls and Procedures......................................... 58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 59
Item 1A. Risk Factors.................................................... 61
Item 6. Exhibits........................................................ 61
Signatures............................................................... 62
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
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, references to future capital expenditures
(including the amount and nature thereof), business and technology strategies
and measures to implement strategies, competitive strengths, goals, expansion
and growth of business and operations, 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 results.
These forward-looking statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the expectations and
predictions of the Company is subject to a number of risks and uncertainties,
including, but not limited to, general economic, market or business conditions;
the opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other companies; conditions in the in-home and
out-of-home entertainment industries; changes in laws or regulations; conditions
and developments in the commercial exhibition industry; the acceptance of the
Company's new technologies; risks associated with investments and operations in
foreign jurisdictions and any future international expansion, including those
related to economic, political and regulatory policies of local governments and
laws and policies of the United States and Canada; the potential impact of
increased competition in the markets the Company operates within; and other
factors, many of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this quarterly report are qualified by
these cautionary statements, and actual results or anticipated developments by
the Company may not be realized, and even if substantially realized, may not
have the expected consequences to, or effects on, the Company. The Company
undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future
events or otherwise.
IMAX(R), IMAX(R) Dome, IMAX(R) 3D, IMAX(R) 3D Dome, The IMAX Experience(R), An
IMAX 3D Experience(R), IMAX DMR(R), IMAX MPX(R), IMAX think big(R) and think
big(R) are trademarks and trade names of the Company or its subsidiaries that
are registered or otherwise protected under laws of various jurisdictions.
Page 2
IMAX CORPORATION
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Condensed Consolidated Financial Statements are filed as
part of this Report:
Condensed Consolidated Balance Sheets as at September 30, 2006
and December 31, 2005............................................... 4
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 2006 and 2005................ 5
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2006 and 2005..................... 6
Notes to Condensed Consolidated Financial Statements................ 7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
SEPTEMBER 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
------------- ------------
ASSETS
Cash and cash equivalents $ 22,001 $ 24,324
Short-term investments 4,219 8,171
Accounts receivable, net of allowance for doubtful
accounts of $7,201 (2005 - $5,892) 32,092 26,165
Financing receivables (note 3) 62,529 63,006
Inventories (note 4) 33,110 28,294
Prepaid expenses 4,389 3,825
Film assets 2,946 3,329
Fixed assets 25,619 26,780
Other assets 8,023 11,618
Deferred income taxes (note 11) 6,171 6,171
Goodwill 39,027 39,027
Other intangible assets 2,619 2,701
--------- ---------
Total assets $ 242,745 $ 243,411
========= =========
LIABILITIES
Accounts payable $ 9,469 $ 6,935
Accrued liabilities (note 7(c)) 54,808 55,122
Deferred revenue 51,258 44,397
Senior Notes due 2010 (note 5) 160,000 160,000
--------- ---------
Total liabilities 275,535 266,454
--------- ---------
COMMITMENTS AND CONTINGENCIES (notes 7 and 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 12) Common shares - no par value. Authorized -
unlimited number. Issued and outstanding - 40,285,574 (2005 - 40,213,542) 121,960 121,674
Other equity 3,249 1,758
Deficit (158,623) (144,347)
Accumulated other comprehensive income (loss) 624 (2,128)
--------- ---------
Total shareholders' deficit (32,790) (23,043)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 242,745 $ 243,411
========= =========
(the accompanying notes are an integral part of these condensed consolidated
financial statements)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars, except per share amounts)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2006 2005 2006 2005
-------- ------- -------- --------
REVENUE
IMAX systems (note 9(a)) $ 7,319 $20,236 $ 40,669 $ 62,657
Films 7,671 8,047 26,363 18,295
Theater operations 4,726 4,311 12,434 12,325
Other 1,010 780 3,076 2,343
-------- ------- -------- --------
20,726 33,374 82,542 95,620
COSTS OF GOODS AND SERVICES 14,537 17,600 52,468 47,832
-------- ------- -------- --------
GROSS MARGIN 6,189 15,774 30,074 47,788
Selling, general and administrative expenses (note 9(b)) 9,998 8,966 29,954 29,021
Research and development 878 890 2,457 2,429
Amortization of intangibles 132 164 456 481
Receivable provisions, net of (recoveries) (note 10) 359 (310) 250 (468)
-------- ------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS (5,178) 6,064 (3,043) 16,325
Interest income 227 243 760 741
Interest expense (4,379) (4,185) (12,784) (12,584)
-------- ------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (9,330) 2,122 (15,067) 4,482
Provision for income taxes (note 11) (1,784) (202) (634) (681)
-------- ------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (11,114) 1,920 (15,701) 3,801
Net earnings (loss) from discontinued operations (note 14) (875) 360 1,425 786
-------- ------- -------- --------
NET EARNINGS (LOSS) $(11,989) $ 2,280 $(14,276) $ 4,587
======== ======= ======== ========
EARNINGS (LOSS) PER SHARE (note 12(b)):
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations $ (0.28) $ 0.05 $ (0.39) $ 0.10
Net earnings (loss) from discontinued operations $ (0.02) $ 0.01 $ 0.04 $ 0.02
-------- ------- -------- --------
Net earnings (loss) $ (0.30) $ 0.06 $ (0.35) $ 0.12
======== ======= ======== ========
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations $ (0.28) $ 0.04 $ (0.39) $ 0.09
Net earnings (loss) from discontinued operations $ (0.02) $ 0.01 $ 0.04 $ 0.02
-------- ------- -------- --------
Net earnings (loss) $ (0.30) $ 0.05 $ (0.35) $ 0.11
======== ======= ======== ========
(the accompanying notes are an integral part of these condensed consolidated
financial statements)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2006 2005
-------- --------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $(14,276) $ 4,587
Net (earnings) from discontinued operations (1,425) (786)
Items not involving cash:
Depreciation and amortization 13,888 11,490
Write-downs (recoveries) 250 (468)
Change in deferred income taxes -- (299)
Stock and other non-cash compensation 2,730 3,554
Non-cash foreign exchange loss (gain) (383) 167
Interest on short-term investments (281) (250)
Investment in film assets (8,699) (7,315)
Changes in other non-cash operating assets and liabilities 846 (7,239)
-------- --------
Net cash provided by (used in) operating activities (7,350) 3,441
-------- --------
INVESTING ACTIVITIES
Purchases of short-term investments (14,506) (27,157)
Proceeds from maturities of short-term investments 18,739 15,175
Purchase of fixed assets (1,712) (1,194)
Increase in other assets (753) (562)
Increase in other intangible assets (374) (412)
-------- --------
Net cash provided by (used in) investing activities 1,394 (14,150)
-------- --------
FINANCING ACTIVITIES
Common shares issued 286 3,219
-------- --------
Net cash provided by financing activities 286 3,219
-------- --------
Effects of exchange rate changes on cash (46) 149
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (5,716) (7,341)
Increase in cash and cash equivalents from discontinued operations 3,393 429
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (2,323) (6,912)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,324 28,964
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,001 $ 22,052
======== ========
(the accompanying notes are an integral part of these condensed consolidated
financial statements)
Page 6
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company"), except subsidiaries which the Company has identified as
variable interest entities ("VIE's") where the Company is not the primary
beneficiary ("PB") (note 2). The nature of the Company's business is such
that the results of operations for the interim periods presented are not
necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations.
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Significant differences between U.S.
GAAP and Canadian Generally Accepted Accounting Principles ("Canadian
GAAP") are described in note 18.
These financial statements should be read in conjunction with the financial
statements included in the Company's most recent Annual Report on Form 10-K
for the year ended December 31, 2005 which should be consulted for a
summary of the significant accounting policies utilized by the Company.
These interim financial statements are prepared following accounting
policies consistent with the Company's financial statements for the year
ended December 31, 2005, except as noted below.
EMPLOYEE STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Financial Accounting Standards No.
123, "Share-Based Payment," ("FAS 123R") which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to employees and directors for employee stock options based on estimated
fair values. In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 ("SAB 107") relating to FAS 123R. The
Company has applied the provisions of SAB 107 in its adoption of FAS 123R.
The Company adopted FAS 123R using the modified prospective transition
method, which requires the application of the accounting standard as of
January 1, 2006. In accordance with the modified prospective transition
method, the Company's Consolidated Financial Statements for prior periods
have not been restated to reflect, and do not include, the impact of FAS
123R.
FAS 123R requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
Consolidated Statement of Operations. Prior to the adoption of FAS 123R,
the Company accounted for stock-based awards to employees and directors
using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25 Accounting for Stock Issued to Employees, ("APB 25")
as allowed under Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Company's
Consolidated Statement of Operations because the exercise price of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized in the Company's Consolidated
Statement of Operations for the three and nine months ended September 30,
2006 includes compensation expense for share-based payment awards granted
prior to, but not yet vested as of January 1, 2006 based on the grant date
fair value estimated in accordance with the pro forma provisions of FAS 123
and compensation expense for the share-based payment awards granted
subsequent to January 1, 2006 based on the grant date fair value estimated
in accordance with the provisions of FAS 123R. In conjunction with the
adoption of FAS 123R, the Company changed its method of attributing the
value of stock-based compensation to expense from a method which recognized
the expense as the options vest to the straight-line single option method.
Compensation expense for all share-based payment awards granted on or prior
to January 1, 2006 will continue to be recognized using the historic method
while compensation expense for all share-based payment awards granted
subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the three and nine months ended
September 30, 2006 is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. FAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the Company's
pro forma information required under FAS 123 for the periods prior to 2006,
the Company also estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods.
The Company utilizes a lattice-binomial option-pricing model ("Binomial
Model") to determine the fair value of share-based payment awards.
Prior to January 1, 2006, the Company followed the intrinsic value method
of accounting for employee stock options as prescribed by APB 25. If the
fair value methodology prescribed by FAS 123 had been adopted by the
Company, pro forma results for the three and nine months ended September
30, 2005 would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2005
------------------ -----------------
Net earnings as reported $2,280 $ 4,587
Stock based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (723) (2,247)
------ -------
Adjusted net earnings $1,557 $ 2,340
====== =======
Earnings (loss) per share - basic:
Net earnings as reported $ 0.06 $ 0.12
FAS 123 stock based compensation expense $(0.02) $ (0.06)
------ -------
Adjusted net earnings $ 0.04 $ 0.06
====== =======
Earnings (loss) per share - diluted:
Net earnings as reported $ 0.05 $ 0.11
FAS 123 stock based compensation expense $(0.01) $ (0.05)
------ -------
Adjusted net earnings $ 0.04 $ 0.06
====== =======
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized under FAS 123R for the three
and nine months ended September 30, 2006 was $0.4 million and $1.2 million
respectively.
The weighted average fair value of common share options granted to
employees for the three and nine months ended September 30, 2006 at the
time of grant was $3.28 and $3.70 respectively (2005 - $3.70 and $3.60 per
share). The Company uses a Binomial Model to determine the fair value of
common share options at the grant date. For the three and nine months ended
September 30, the following assumptions were used:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2006 2005 2006 2005
----------- ------------- ------------ ------------
Average risk-free interest rate 5.00% 4.14% 4.86% 4.14%
Market risk premium 5.35% 6.79% - 6.93% 5.24% - 5.60% 5.57% - 7.38%
Beta 0.99 1.27 0.99 - 1.28 1.06 - 1.31
Expected option life (in years) 4.45 - 5.46 5.37 - 5.43 2.47 - 5.46 2.23 - 5.43
Average expected volatility 60% 62% 60% 62%
Annual termination probability 8.06% 8.06% - 9.62% 8.06% 8.06% - 9.62%
Dividend yield 0% 0% 0% 0%
As the Company stratifies its employees into two groups in order to
calculate fair value under the Binomial Model, ranges of assumptions used
are presented for equity risk premium, Beta, expected option life and
annual termination probability. The Company uses the historical data to
estimate option exercise and employee termination within the valuation
model; separate groups of employees that have similar historical exercise
behavior are considered separately for valuation purposes.
The Company's policy is to issue new shares to satisfy stock options which
are exercised.
Total stock-based compensation expense related to non-vested employee stock
options not yet recognized at September 30, 2006 and the weighted average
period over which the awards are expected to vest is $3.9 million and 3.3
years, respectively.
Page 9
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
2. VARIABLE INTEREST ENTITIES
The Company has evaluated its various variable interests to determine
whether they are Variable Interest Entities ("VIEs") in accordance with the
revised FASB issued Financial Interpretation 46 ("FIN 46R"). The Company
reviewed its management agreements relating to theaters which the Company
manages, and has no equity interest, and concluded that such arrangements
were not variable interests since the Company's fees are commensurate with
the level of service and the theater owner retains the right to terminate
the service. The Company has also reviewed its financial arrangements with
theaters where it shares in the profit or losses of the theater. The
Company has not considered these arrangements under FIN 46R as the
arrangements meet the scope exceptions defined in the pronouncement. The
Company has determined that certain of its film production companies are
VIEs. Since in two cases the Company absorbs a majority of the VIE's
losses, the Company has determined that it is the primary beneficiary
("PB"), of these entities. The Company continues to consolidate these
entities with no material impact on the operating results or financial
condition of the Company as the production companies have total assets of
less than $0.1 million and total liabilities of less than $0.1 million as
at September 30, 2006. The Company also has interests in four other film
production companies which are VIEs, however the Company did not
consolidate these film entities since it does not bear the majority of the
expected losses or expected residual returns. As of September 30, 2006,
these four VIEs have total assets of $4.3 million (December 31, 2005 - $0.3
million) and total liabilities of $4.3 million (December 31, 2005 - $0.3
million).
3. FINANCING RECEIVABLES
The Company generally provides its theater systems to customers on a
long-term lease basis, typically with initial lease terms of 10 to 20
years. Financing receivables consisting of net investment in leases and
long term receivables are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Gross minimum lease amounts receivable $ 83,483 $ 88,894
Residual value of equipment 496 635
Unearned finance income (30,302) (33,933)
-------- --------
Present value of minimum lease amounts receivable 53,677 55,596
Accumulated allowance for uncollectible amounts (995) (1,478)
-------- --------
Net investment in leases $ 52,682 $ 54,118
Long-term receivables 9,847 8,888
-------- --------
Total financing receivables $ 62,529 $ 63,006
======== ========
Page 10
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
4. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Raw materials $13,000 $10,464
Work-in-process 8,469 6,893
Finished goods 11,641 10,937
------- -------
$33,110 $28,294
======= =======
5. SENIOR NOTES DUE 2010
As at September 30, 2006, the Company had outstanding $159.0 million
aggregate principal of Registered Senior Notes and $1.0 million aggregate
principal of Unregistered Senior Notes.
6. CREDIT FACILITY
On February 6, 2004, the Company entered into a Loan Agreement for a
secured revolving credit facility as amended on June 30, 2005 and as
further amended by the Second Amendment to the Loan Agreement which was
entered into with effect from May 16, 2006 (the "Credit Facility"). The
Credit Facility is a revolving credit facility expiring on October 31, 2009
with an optional one year renewal thereafter contingent upon approval by
the lender, permitting maximum aggregate borrowings of $40.0 million,
subject to a borrowing base calculation which includes the Company's
financing receivables, operating leases, finished goods inventory and
capital assets with certain reserve requirements and deductions for
outstanding letters of credit. The Company's current borrowing capacity
under such calculation is $26.1 million after deduction for outstanding
letters of credit of $8.1 million. The Credit Facility bears interest at
the applicable prime rate per annum or Libor plus a margin as specified
therein per annum and is collateralized by a first priority security
interest in all of the current and future assets of the Company. The Credit
Facility contains typical affirmative and negative covenants, including
covenants that restrict the Company's ability to: incur certain additional
indebtedness; make certain loans, investments or guarantees; pay dividends;
make certain asset sales; incur certain liens or other encumbrances;
conduct certain transactions with affiliates and enter into certain
corporate transactions. In addition, the Credit Facility contains customary
events of default, including upon an acquisition or a change of control
that may have a material adverse effect on the Company or a guarantor. The
Credit Facility also requires the Company to maintain a minimum level of
earnings before interest, taxes, depreciation and amortization, and cash
collections. As at September 30, 2006, the Company has not drawn down on
the Credit Facility other than in issuing letters of credit for $8.1
million.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
7. COMMITMENTS
(A) The Company's total minimum annual rental payments to be made under
operating leases for premises as of September 30, 2006 for each of the
years ended December 31, are as follows:
2006 (three months remaining) $ 1,257
2007 5,184
2008 5,086
2009 4,965
2010 5,122
Thereafter 18,985
-------
$40,599
=======
(B) As at September 30, 2006, the Company has letters of credit of $8.1 million
(December 31, 2005 - $7.6 million) secured by the Company's Credit Facility
arrangement (see note 6).
(C) In March 2004, the Company received $5.0 million in cash under a film
financing arrangement which was included in accrued liabilities. During
2005, the Company received another $5.1 million under the same film
financing arrangement. The Company was required to expend these funds
towards the production and distribution of a motion picture title. The film
was released in the third quarter of 2005. During the first nine months of
2006, the Company spent $0.2 million towards the distribution of the film.
As at September 30, 2006, the Company still has $0.1 million (December 31,
2005 - $0.4 million) remaining in accrued liabilities from this financing
for future distribution expenses to be incurred on the film.
8. CONTINGENCIES
The Company is involved in lawsuits, claims, and proceedings, including
those identified below, which arise in the ordinary course of business. In
accordance with SFAS 5, "Accounting for Contingencies," the Company will
make a provision for a liability when it is both probable that a loss has
been incurred and the amount of the loss can be reasonably estimated. The
Company believes it has adequate provisions for any such matters. The
Company reviews these provisions in conjunction with any related provisions
on assets related to the claims at least quarterly and adjusts these
provisions to reflect the impacts of negotiations, settlements, rulings,
advice of legal counsel and other pertinent information related to the
case. Should developments in any of these matters outlined below cause a
change in our 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 judgement or be settled for significant amounts,
they could have a material adverse effect on our results of operations,
cash flows, and financial position in the period or periods in which such a
change in determination, settlement or judgement occurs.
Page 12
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONTINGENCIES (cont'd)
(A) In March 2005, the Company, together with Three-Dimensional Media Group,
Ltd. ("3DMG"), filed a complaint in the U.S. District Court for the Central
District of California, Western Division, against In-Three, Inc.
("In-Three") alleging patent infringement and seeking injunctive relief and
damages. In April 2005, In-Three filed an answer denying infringement and
asserting counterclaims that seek a declaratory judgement of
non-infringement, invalidity and unenforceability of the patent in suit,
and damages for alleged false advertising, false designation of origin,
breach of contract, interference with prospective economic advantage and/or
unfair competition. On March 13, 2006, the Company and In-Three entered
into a settlement agreement, resolving all matters between the parties. On
March 29, 2006, the Company and In-Three filed a joint motion for an order
dismissing with prejudice all claims and counterclaims between the parties.
The U.S. District Court for the Central District of California, Western
Division has stayed a determination on the joint motion at the joint
request of the Company, 3DMG, and In-Three pending a resolution of an
arbitration proceeding between the Company and 3DMG before the
International Centre for Dispute Resolution relating to rights under
agreements between the Company and 3DMG. The Company believes the amount of
the 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 the Company, although no assurance can be given with respect
to the ultimate outcome of such proceedings.
(B) In January 2004, the Company and IMAX Theater Services Ltd., a subsidiary
of the Company, commenced an arbitration seeking damages of approximately
$3.7 million before the International Court of Arbitration of the
International Chambers of Commerce (the "ICC") with respect to the breach
by Electronic Media Limited ("EML") of its December 2000 agreement with the
Company. In June 2004, the Company commenced a related arbitration before
the ICC against EML's affiliate, E-CITI Entertainment (I) PVT Limited
("E-Citi"), seeking $17.8 million in damages as a result of E-Citi's breach
of a September 2000 lease agreement. The arbitration hearing on both claims
took place in November, 2005. On February 1, 2006, the ICC issued an award
finding unanimously in the Company's favor on all claims. The ICC hearing
to determine the amount of damages to be awarded to the Company took place
on July 26 - 28, 2006. The ICC panel has not yet rendered its decision with
respect to such damages and no amount has yet been recorded for these
damages.
(C) In June 2004, Robots of Mars, Inc. ("Robots") initiated an arbitration
proceeding against the Company in California with the American Arbitration
Association pursuant to an arbitration provision in a 1994 film production
agreement between Robots' predecessor-in-interest and a subsidiary of the
Company, asserting claims for breach of contract, fraud, breach of
fiduciary duty and intentional interference with contract. Robots is
seeking an accounting of the Company's revenues and an award of all sums
alleged to be due to Robots under the production agreement, as well as
punitive damages. The Company intends to vigorously defend the arbitration
proceeding and believes the amount of the 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 the Company, although
no assurance can be given with respect to the ultimate outcome of such
arbitration.
Page 13
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONTINGENCIES (cont'd)
(D) The Company and certain of its officers and directors were named as
defendants in eight purported class action lawsuits filed between August
11, 2006 and 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 District of New York. These lawsuits, brought on behalf of
shareholders who purchased the Company's common stock between February 17,
2006 and August 9, 2006, allege primarily that the defendants engaged in
securities fraud by disseminating materially false and misleading
statements during the class period regarding their revenue recognition of
theater system installations, and failing to disclose material information
concerning the Company's revenue recognition practices. Currently there are
motions for consolidation, assignment of lead plaintiff, and appointment of
lead plaintiff counsel pending before the Court. These lawsuits are in very
early stages and seek unspecified compensatory damages, costs, and
expenses. The Company believes the allegations made against it in the
complaints are meritless and will vigorously defend the matter. The Company
believes the amount of the 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 the Company, although no assurance can
be given with respect to the ultimate outcome of such proceedings.
(E) A purported class action lawsuit was filed on September 20, 2006 in the
Ontario Superior Court of Justice against the Company and certain of its
officers and directors, alleging violations of Canadian securities laws.
This lawsuit was brought on behalf of shareholders who acquired the
Company's securities from February 17, 2006 to August 9, 2006. This lawsuit
is in a very early stage and seeks unspecified compensatory and punitive
damages, as well as costs and expenses. The Company believes the
allegations made against it in the complaint are meritless and will
vigorously defend the matter. The Company believes the amount of the 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 the Company, although no assurance can be given with respect to the
ultimate outcome of such proceedings.
(F) In addition to the matters described above and in note 14(a) in respect of
the Miami theater, the Company is currently involved in other legal
proceedings which, in the opinion of the Company's management, will not
materially affect the Company's financial position or future operating
results, although no assurance can be given with respect to the ultimate
outcome of any such proceedings.
Page 14
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
9. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL INFORMATION
(A) The Company generally enters into multi-year theater system agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the theater system. During the period of time
between signing and system installation, certain customers each year
generally are unable, or elect not, to proceed with 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
the Company may enter into a consensual buyout, whereby the parties are
released from their future obligations under the agreement and the
geographic territory granted to the customer reverts to the Company. Once
an agreement is reached by both parties, the initial payments that the
customer previously made to the Company are typically recognized as
revenue. In addition, since the introduction of its IMAX MPX theater system
in 2003, the Company has agreed with several customers to terminate their
original agreements and to sign new system agreements for the MPX system.
Upon finalizing the new agreement, the total consideration received under
both the terminated agreements and the MPX arrangement is allocated first
to the MPX system and the residual amount to settlement revenue. During the
first nine months of 2006, the Company did not recognize any settlement
revenue. Included in IMAX systems revenue for the three and nine months
ended September 30, 2005 are the following types of settlement
arrangements: $0.4 million and $0.6 million respectively related to MPX
conversion agreements; $0.6 million and $11.4 million respectively related
to consensual buyouts; and $1.4 million for both three and nine months
ended September 30, 2005 related to termination of agreements after
customer default. In aggregate: three and nine months ended September 30,
2005 - $2.4 million and $13.4 million respectively.
(B) Included in selling, general and administrative expenses for the three and
nine months ended September 30, 2006 is a loss of $0.1 million and a gain
of $0.3 million, respectively (2005 - $0.2 million gain, $0.5 million loss)
for net foreign exchange gains or losses related to the translation of
foreign currency denominated monetary assets, liabilities and integrated
subsidiaries.
10. RECEIVABLE PROVISIONS, NET OF (RECOVERIES)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
---- ----- ----- -----
Accounts receivable provisions, net
of (recoveries) $359 $(185) $ 733 $(293)
Financing receivables provisions, net
of (recoveries) -- (125) (483) (175)
---- ----- ----- -----
Receivable provisions, net
of (recoveries) $359 $(310) $ 250 $(468)
==== ===== ===== =====
Page 15
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
11. INCOME TAXES
The effective tax rate on earnings differs significantly from the Canadian
statutory rate due to the effect of permanent differences, income taxed at
differing rates in foreign and other provincial jurisdictions, tax
recoveries and charges relating to favourable or unfavourable tax
examinations, and changes in the Company's valuation allowance on deferred
tax assets. The Company has reduced its net deferred tax asset by an amount
of $1.6 million to reflect revisions in the Company's estimates of
projected future earnings and the recoverability of its deferred tax assets
based on an analysis of both positive and negative evidence.
As at September 30, 2006, the Company has net deferred income tax assets of
$6.2 million (December 31, 2005 - $6.2 million), comprised of tax credit
carryforwards, net operating loss and capital loss carryforwards and other
deductible temporary differences, which can be utilized to reduce either
taxable income or taxes otherwise payable in future years. As of September
30, 2006, the Company had a gross deferred income tax asset of $49.0
million, against which the Company is carrying a $42.8 million valuation
allowance.
12. CAPITAL STOCK
(A) STOCK-BASED COMPENSATION
As at September 30, 2006, the Company has reserved a total 6,974,657
(December 31, 2005 - 7,046,689) common shares for future issuance under the
Stock Option Plan, of which options in respect of 5,927,196 common shares
are outstanding at September 30, 2006. The options granted under the Stock
Option Plan generally vest between one and five years and expire 10 years
or less from the date granted. At September 30, 2006, options in respect of
4,557,476 common shares were vested and exercisable.
Under the terms of certain employment agreements dated July 12, 2000, the
Company is required to issue either 360,000 restricted common shares or pay
their cash equivalent. The restricted shares or the related cash obligation
were fully vested effective July 1, 2002. In May 2003, the Company paid
approximately $1.6 million in cash to settle the equivalent of 200,000 of
the total 360,000 restricted common shares under these agreements. The
remaining 160,000 restricted shares are required to be issued, or payment
of their cash equivalent, upon request by the employees. The Company has
recorded a $0.7 million recovery and $0.3 million recovery for the three
and nine months ended September 30, 2006, respectively (2005 - $0.1 million
expense, and $0.3 million expense), due to the changes in the fair value of
these restricted shares in the period. As at September 30, 2006 an amount
of $0.8 million has been recorded in accrued liabilities with respect to
the restricted shares.
Page 16
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK (cont'd)
(A) STOCK-BASED COMPENSATION (cont'd)
The following table summarizes certain information in respect of option
activity under the Stock Option Plan for the periods ended September 30:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
--------------------- ------------------------
2006 2005 2006 2005
--------- --------- ------ ------
Options outstanding, beginning of year 5,504,324 5,593,101 $ 7.26 $ 6.82
Granted 671,105 633,531 10.06 9.62
Exercised (72,032) (600,823) 3.96 5.36
Forfeited or expired (160,368) (2,000) 10.23 6.48
Cancelled (15,833) (28,402) 21.33 20.70
--------- ---------
Options outstanding, end of quarter 5,927,196 5,595,407 7.50 7.23
========= =========
Options exercisable, end of quarter 4,557,476 4,046,279 7.11 7.23
========= =========
The weighted average exercise price per share and number of unvested common
share options granted to employees as at September 30, 2006 is $8.80 and
1,369,720, respectively.
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at September 30, 2006:
NUMBER OF SHARES WEIGHTED
RANGE OF EXERCISE ----------------------- AVERAGE EXERCISE AVERAGE
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE REMAINING TERM
----------------- ----------- --------- ---------------- --------------
$ 0.00 - $ 2.99 172,746 172,746 $ 2.73 2.0 years
$ 3.00 - $ 4.99 1,999,522 1,979,522 4.39 4.2 years
$ 5.00 - $ 9.99 2,771,725 1,878,471 6.83 5.9 years
$10.00 - $14.99 528,901 72,435 10.63 7.2 years
$15.00 - $19.99 28,000 28,000 18.45 0.6 years
$20.00 - $24.99 271,302 271,302 21.86 2.5 years
$25.00 - $28.04 155,000 155,000 27.17 2.6 years
--------- ---------
Total 5,927,196 4,557,476 7.50 5.0 years
========= =========
Page 17
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK (cont'd)
(A) STOCK-BASED COMPENSATION (cont'd)
In the three and nine months ended September 30, 2006, an aggregate of
13,335 and 63,319 respectively, (2005 - 13,335 and 40,005) options with an
average exercise price of $6.61 and $8.55 respectively, (2005 - $10.10 and
$10.03) to purchase the Company's common stock were issued to certain
advisors and strategic partners of the Company. The Company has calculated
the fair value of these options to non-employees on the date of grant to be
less than $0.1 million and $0.3 million (2005 - $0.1 million and $0.2
million), using a Binomial Model with the following underlying assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------------
2006 2005 2006 2005
------- ------- ----------- -------
Average risk-free interest rate 4.90% 4.05% 4.8% 3.96%
Expected option life 5 years 5 years 5 - 7 years 5 years
Average expected volatility 60% 62% 60% 62%
Dividend yield 0% 0% 0% 0%
In the three and nine months ended September 30, 2006, the Company has
recorded a charge of less than $0.1 million and $0.3 million respectively
(2005 - $0.1 million and $0.2 million) to film cost of sales related to
these non-employee stock options.
There were no warrants issued in the three and nine months ended September
30, 2006 (2005 - nil and nil). 550,000 warrants were issued in 2003. In the
first quarter of 2005, 80,872 common shares were issued upon exercise of
200,000 warrants. All remaining warrants have either expired or have been
cancelled.
Page 18
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK (cont'd)
(B) EARNINGS (LOSS) PER SHARE
Reconciliations of the numerators and denominators of the basic and diluted
per-share computations are comprised of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2006 2005 2006 2005
-------- ------- -------- -------
Net earnings applicable to common
shareholders:
Net earnings (loss) $(11,989) $ 2,280 $(14,276) $ 4,587
======== ======= ======== =======
Weighted average number of common shares
(000's):
Issued and outstanding, beginning of period 40,286 39,916 40,213 39,447
Weighted average number of shares issued during
the period -- 109 52 353
-------- ------- -------- -------
Weighted average number of shares used in
computing basic earnings per share 40,286 40,025 40,265 39,800
Assumed exercise of stock options, net of shares
assumed repurchased -- 2,193 -- 2,226
-------- ------- -------- -------
Weighted average number of shares used in
computing diluted earnings per share 40,286 42,218 40,265 42,026
======== ======= ======== =======
The calculation of diluted earnings per share for the nine months ended
September 30, 2006 excludes 5.9 million common shares issuable upon
exercise of options as the impact of these exercises would be antidilutive.
Page 19
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
13. SEGMENTED INFORMATION
The Company has four reportable segments: IMAX systems, films, theater
operations and other.
There has been no change in the basis of measurement of segment profit or
loss from the Company's most recent Annual Report on Form 10-K for the year
ended December 31, 2005. Inter-segment transactions are not significant.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2006 2005 2006 2005
-------- ------- -------- --------
REVENUE
IMAX systems $ 7,319 $20,236 $ 40,669 $ 62,657
Films 7,671 8,047 26,363 18,295
Theater operations 4,726 4,311 12,434 12,325
Other 1,010 780 3,076 2,343
------- ------- -------- --------
TOTAL $20,726 $33,374 $ 82,542 $ 95,620
======= ======= ======== ========
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 903 $10,481 $ 14,734 $ 34,223
Films (436) 1,084 394 521
Theater operations 221 3 910 (53)
Corporate and other (5,866) (5,504) (19,081) (18,366)
------- ------- -------- --------
TOTAL $(5,178) $ 6,064 $ (3,043) $ 16,325
======= ======= ======== ========
14. DISCONTINUED OPERATIONS
(A) MIAMI THEATER LLC
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company completed its abandonment of assets and removal of its
projection system from the theater in the first quarter of 2004, with no
financial impact. The Company is involved in an arbitration proceeding with
the landlord of the theater with respect to the amount owing to the
landlord by the Company for lease and guarantee obligations. The amount of
loss to the Company has been estimated at between $0.9 million and $2.3
million. Prior to 2006, the Company paid out $0.8 million with respect to
amounts owing to the landlord. The Company paid out an additional $0.1
million and also accrued an additional $0.8 million in net loss from
discontinued operations related to Miami IMAX theater in the third quarter
of 2006.
(B) DIGITAL PROJECTION INTERNATIONAL
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including its
subsidiaries (collectively, "DPI"), to a company owned by members of DPI
management. As part of the transaction, the Company restructured its
advances to DPI, releasing DPI from obligations to repay any amounts in
excess of $12.7 million previously advanced by the Company, and reorganized
the remaining $12.7 million of debt owing to the Company into two separate
loan agreements. The loans receivable were collateralized by fixed and
floating charges over all DPI assets including intellectual properties. One
of the loans was convertible, upon the occurrence of certain events, into
shares representing 49% of the total share capital of DPI related to these
loans. On December 29, 2005, the Company and DPI entered into an agreement
to settle the remaining loans in exchange for a payment of $3.5 million.
During the first quarter of 2006, the Company recognized $2.3 million (2005
- $0.2 million) in income from discontinued operations. The other tranche
of $1.2 million had previously been recognized in 2005.
Page 20
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
14. DISCONTINUED OPERATIONS (cont'd)
(C) CONSOLIDATED STATEMENT OF OPERATIONS FOR MIAMI THEATER LLC AND DPI
The net earnings from discontinued operations summarized in the
Consolidated Statements of Operations, for the periods ended September 30,
were comprised of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
----- ---- ------ -----
Revenue from DPI $ -- $360 $2,300 $ 786
Loss from Miami Theater LLC (875) -- (875) --
----- ---- ------ -----
Net earnings (loss) from
discontinued operations
$(875) $360 $1,425 $ 786
===== ==== ====== =====
15. DEFINED BENEFIT PLAN
The Company has an unfunded U.S. defined benefit pension plan covering its
two Co-Chief Executive Officers. The plan provides for a lifetime
retirement benefit from age 55 determined as 75% of the member's best
average 60 consecutive months of earnings during the 120 months preceding
retirement.
Under the original terms of the plan, once benefit payments begin, the
benefit is indexed annually to the cost of living and further provides for
100% continuance for life to the surviving spouse. On March 8, 2006, the
Company and the Co-Chief Executives negotiated an amendment to the plan.
Under the terms of the plan amendment, the cost of living adjustment and
surviving spouse benefits previously owed to the Co-Chief Executive
Officers are each reduced by 50%, subject to a recoupment of a percentage
of such benefits upon a change of control of the Company, and the net
present value of the reduced pension benefit payments is accelerated and
paid out upon a change of control of the Company. The benefits were 50%
vested as of July 2000, the plan initiation date. The vesting percentage
increases on a straight-line basis from inception until age 55. The vesting
percentage of a member whose employment terminates other than by voluntary
retirement or upon a change in control shall be 100%. As of September 30,
2006, one of the Co-Chief Executives was 100% vested and the other Co-Chief
Executive was approximately 81% vested. The actuarial liability was
remeasured as of March 8, 2006 to reflect the plan changes adopted.
The following assumptions were used in determining the obligation and cost
status of the Company's defined benefit pension plan at the plan
measurement dates of:
MARCH 8, DECEMBER 31,
2006 2005
----------------- ----------------
Discount rate 5.18% 5.50%
Lump sum interest rate:
First 20 years 5.70% N/A
Thereafter 4.75% N/A
Form of payment: 100% Joint and
Modified lump sum survivor annuity
Cost of living adjustment on benefits 1.20% 2.40%
Rate of increase in qualifying
compensation levels nil% nil%
Page 21
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. DEFINED BENEFIT PLAN (cont'd)
The amounts recorded in accrued liabilities for the plan are determined as
follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2006
------------------
Projected benefit obligation:
Obligation, beginning of period $31,064
Service cost 1,185
Interest cost 956
Actuarial gain (8,645)
-------
Obligation, end of period $24,560
=======
Unfunded status:
Obligation, end of period $24,560
Unrecognized gain relating to prior service cost 1,936
Unrecognized actuarial (loss) (21)
-------
Accrued pension liability $26,475
=======
The following table provides disclosure of pension expense for the defined
benefit plan for the periods ended September 30:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------
2006 2005 2006 2005
----- ------ ------ ------
Service cost $ 364 $ 604 $1,185 $1,812
Interest cost 297 390 956 1,169
Amortization of prior service cost (237) 349 (320) 1,048
----- ------ ------ ------
Pension expense $ 424 $1,343 $1,821 $4,029
===== ====== ====== ======
The accumulated benefit obligation for the defined benefit plan was $26.5
million at September 30, 2006 and $31.1 million at December 31, 2005.
No contributions are expected to be made for the plan during 2006.
As a result of the pension plan amendment, an adjustment to the
unrecognized actuarial losses of $2.8 million and unrecognized prior
service cost of $3.4 million was recorded in comprehensive income (loss)
and other assets.
The following benefit payments are expected to be made as per the current
plan assumptions and the terms of the Plan in each of the next five years,
and in the aggregate over the five years thereafter:
2006 $ --
2007 995
2008 1,007
2009 1,019
2010 29,505(1)
2011 to 2015 --
(1) One of the Co-Chief Executive Officers is currently entitled to benefit
payments subsequent to 2010 as a life annuity, subject to an elective right
to a lump sum payment in 2010. The pension plan assumptions assume the
election of a lump sum payment.
Page 22
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. DEFINED BENEFIT PLAN (cont'd)
At the time the Company established the defined benefit pension plan, it
also took out life insurance policies on its two Co-Chief Executive
Officers with coverage amounts of $21.5 million in aggregate. The Company
intends to use the proceeds of life insurance policies taken on its
Co-Chief Executive Officers to be applied towards the benefits due and
payable under the plan, although there can be no assurance that the Company
will ultimately do so. At September 30, 2006, the cash surrender value of
the insurance policies is $4.1 million (December 31, 2005 - $3.3 million)
and has been included in other assets.
16. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (an interpretation of FASB Statement No. 109),
("FIN 48"), which clarifies the relevant criteria and approach for the
recognition, de-recognition and measurement of uncertain tax positions. FIN
48 will be effective for the Company beginning January 1, 2007. The Company
is currently in the process of assessing the effects of the provisions of
FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements", which is effective for fiscal
years beginning after November 15, 2007 and for interim periods within
those years. This statement defines fair value, establishes a framework for
measuring fair value and expands the related disclosure requirements. The
Company is currently evaluating the potential impact of this statement.
The FASB also issued in September 2006 Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans" (an amendment of FASB Statement No. 87, 88, 106
and 132R), ("FAS 158"). This Standard requires recognition of the funded
status of a benefit plan in the statement of financial position. The
Standard also requires recognition in other comprehensive income certain
gains and losses that arise during the period but are deferred under
pension accounting rules, as well as modifies the timing of reporting and
adds certain disclosures. FAS 158 provides recognition and disclosure
elements to be effective as of the end of the fiscal year after December
15, 2006 and measurement elements to be effective for fiscal years ending
after December 15, 2008. The Company does not believe that the adoption of
FAS 158 will have a material impact on its results of operations or
financial position.
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes are fully and unconditionally guaranteed,
jointly and severally by specific wholly-owned subsidiaries of the Company
(the "Guarantor Subsidiaries"). The main Guarantor Subsidiaries are David
Keighley Productions 70 MM Inc., Sonics Associates Inc., and the
subsidiaries that own and operate certain theaters. These guarantees are
full and unconditional. The information under the column headed
"Non-Guarantor Subsidiaries" relates to the following subsidiaries of the
Company: IMAX Japan Inc. and IMAX B.V. (the "Non-Guarantor Subsidiaries")
which have not provided any guarantees of the Senior Notes.
Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Some
subsidiaries may be unable to pay dividends due to negative working
capital.
Page 23
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at September 30, 2006:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 13,400 $ 8,499 $ 102 $ -- $ 22,001
Short-term investments 4,219 -- -- -- 4,219
Accounts receivable 29,621 2,109 362 -- 32,092
Financing receivables 60,501 2,028 -- -- 62,529
Inventories 32,804 236 70 -- 33,110
Prepaid expenses 3,720 643 26 -- 4,389
Inter-company receivables 24,152 32,441 11,196 (67,789) --
Film assets 2,946 -- -- -- 2,946
Fixed assets 24,356 1,245 18 -- 25,619
Other assets 8,023 -- -- -- 8,023
Deferred income taxes 6,163 8 -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,619 -- -- -- 2,619
Investments in subsidiaries 33,704 -- -- (33,704) --
--------- -------- ------- --------- ---------
Total assets $ 285,255 $ 47,209 $11,774 $(101,493) $ 242,745
========= ======== ======= ========= =========
LIABILITIES
Accounts payable 4,119 5,347 3 -- 9,469
Accrued liabilities 51,797 2,803 208 -- 54,808
Inter-company payables 57,163 33,236 6,339 (96,738) --
Deferred revenue 45,884 5,177 197 -- 51,258
Senior Notes due 2010 160,000 -- -- -- 160,000
--------- -------- ------- --------- ---------
Total liabilities 318,963 46,563 6,747 (96,738) 275,535
--------- -------- ------- --------- ---------
SHAREHOLDER'S DEFICIT
Capital stock 121,960 -- 117 (117) 121,960
Other equity/Additional paid in
capital/Contributed surplus 2,215 46,960 -- (45,926) 3,249
Deficit (159,121) (45,700) 4,910 41,288 (158,623)
Accumulated other comprehensive
income (loss) 1,238 (614) -- -- 624
--------- -------- ------- --------- ---------
Total shareholders'
equity (deficit) $ (33,708) $ 646 $ 5,027 $ (4,755) $ (32,790)
--------- -------- ------- --------- ---------
Total liabilities & shareholders'
equity (deficit) $ 285,255 $ 47,209 $11,774 $(101,493) $ 242,745
========= ======== ======= ========= =========
In certain Guarantor Subsidiaries, accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced intercompany receivable balances
with respect to these Guarantor Subsidiaries in the amounts of $29.1
million as at September 30, 2006.
Page 24
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2005:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 17,402 $ 6,728 $ 194 $ -- $ 24,324
Short-term investments 8,171 -- -- -- 8,171
Accounts receivable 23,828 2,045 292 -- 26,165
Financing receivables 60,950 2,056 -- -- 63,006
Inventories 27,973 239 82 -- 28,294
Prepaid expenses 3,162 575 88 -- 3,825
Inter-company receivables 14,057 31,929 11,043 (57,029) --
Film assets 3,329 -- -- -- 3,329
Fixed assets 25,403 1,374 3 -- 26,780
Other assets 11,618 -- -- -- 11,618
Deferred income taxes 6,171 -- -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,701 -- -- -- 2,701
Investments in subsidiaries 31,833 -- -- (31,833) --
--------- -------- ------- -------- ---------
Total assets $ 275,625 $ 44,946 $11,702 $(88,862) $ 243,411
========= ======== ======= ======== =========
LIABILITIES
Accounts payable 4,915 2,017 3 -- 6,935
Accrued liabilities 52,978 1,965 179 -- 55,122
Inter-company payables 42,766 36,088 6,466 (85,320) --
Deferred revenue 38,927 5,330 140 -- 44,397
Senior Notes due 2010 160,000 -- -- -- 160,000
--------- -------- ------- -------- ---------
Total liabilities 299,586 45,400 6,788 (85,320) 266,454
--------- -------- ------- -------- ---------
SHAREHOLDER'S DEFICIT
Capital stock 121,674 -- 117 (117) 121,674
Other equity/Additional paid in
capital/Contributed surplus 724 46,960 -- (45,926) 1,758
Deficit (144,845) (46,800) 4,797 42,501 (144,347)
Accumulated other comprehensive
income (loss) (1,514) (614) -- -- (2,128)
--------- -------- ------- -------- ---------
Total shareholders'
equity (deficit) $ (23,961) $ (454) $ 4,914 $ (3,542) $ (23,043)
--------- -------- ------- -------- ---------
Total liabilities & shareholders'
equity (deficit) $ 275,625 $ 44,946 $11,702 $(88,862) $ 243,411
========= ======== ======= ======== =========
In certain Guarantor Subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced inter-company receivable balances
with respect to these Guarantor Subsidiaries in the amounts of $28.4
million.
Page 25
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
September 30, 2006:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
REVENUE
IMAX systems $ 7,043 $ 265 $ 176 $(165) $ 7,319
Films 7,204 1,058 -- (591) 7,671
Theater operations 220 4,536 -- (30) 4,726
Other 1,049 -- 5 (44) 1,010
-------- ------ ----- ----- --------
15,516 5,859 181 (830) 20,726
COST OF GOODS AND SERVICES 10,458 4,829 80 (830) 14,537
-------- ------ ----- ----- --------
GROSS MARGIN 5,058 1,030 101 -- 6,189
Selling, general and
administrative expenses 9,646 224 128 -- 9,998
Research and development 878 -- -- -- 878
Amortization of intangibles 132 -- -- -- 132
Loss (income) from equity-accounted
investees 95 -- -- (95) --
Receivable provisions, net
of (recoveries) 359 -- -- -- 359
-------- ------ ----- ----- --------
EARNINGS (LOSS) FROM OPERATIONS (6,052) 806 (27) 95 (5,178)
Interest income 227 -- -- -- 227
Interest expense (4,380) 1 -- -- (4,379)
-------- ------ ----- ----- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (10,205) 807 (27) 95 (9,330)
Provision for income taxes (1,784) -- -- -- (1,784)
-------- ------ ----- ----- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (11,989) 807 (27) 95 (11,114)
Net (loss) from discontinued
operations -- (875) -- -- (875)
-------- ------ ----- ----- --------
NET EARNINGS (LOSS) $(11,989) $ (68) $ (27) $ 95 $(11,989)
======== ====== ===== ===== ========
Page 26
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the nine months ended
September 30, 2006:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
REVENUE
IMAX systems $ 39,674 $ 777 $552 $ (334) $ 40,669
Films 22,342 6,348 5 (2,332) 26,363
Theater operations 648 11,875 -- (89) 12,434
Other 3,112 -- 8 (44) 3,076
-------- ------- ---- ------- --------
65,776 19,000 565 (2,799) 82,542
COST OF GOODS AND SERVICES 38,627 16,397 243 (2,799) 52,468
-------- ------- ---- ------- --------
GROSS MARGIN 27,149 2,603 322 -- 30,074
Selling, general and
administrative expenses 29,120 626 208 -- 29,954
Research and development 2,457 -- -- -- 2,457
Amortization of intangibles 456 -- -- -- 456
Loss (income) from equity-accounted
investees (1,213) -- -- 1,213 --
Receivable provisions, net
of (recoveries) 250 -- -- -- 250
-------- ------- ---- ------- --------
EARNINGS (LOSS) FROM OPERATIONS (3,921) 1,977 114 (1,213) (3,043)
Interest income 760 -- -- -- 760
Interest expense (12,782) (2) -- -- (12,784)
-------- ------- ---- ------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (15,943) 1,975 114 (1,213) (15,067)
Provision for income taxes (633) -- (1) -- (634)
-------- ------- ---- ------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (16,576) 1,975 113 (1,213) (15,701)
Net earnings (loss) from discontinued
operations 2,300 (875) -- -- 1,425
-------- ------- ---- ------- --------
NET EARNINGS (LOSS) $(14,276) $ 1,100 $113 $(1,213) $(14,276)
======== ======= ==== ======= ========
Page 27
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
September 30, 2005:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
REVENUE
IMAX systems $19,885 $ 244 $205 $ (98) $20,236
Films 6,650 1,634 2 (239) 8,047
Theater operations 192 4,147 -- (28) 4,311
Other 780 -- -- -- 780
------- ------ ---- ----- -------
27,507 6,025 207 (365) 33,374
COST OF GOODS AND SERVICES 12,119 5,742 104 (365) 17,600
------- ------ ---- ----- -------
GROSS MARGIN 15,388 283 103 -- 15,774
Selling, general and
administrative expenses 8,602 256 108 -- 8,966
Research and development 890 -- -- -- 890
Amortization of intangibles 164 -- -- -- 164
Loss (income) from equity-accounted
investees 954 -- -- (954) --
Receivable provisions, net
of (recoveries) (1,287) 977 -- -- (310)
------- ------ ---- ----- -------
EARNINGS (LOSS) FROM OPERATIONS 6,065 (950) (5) 954 6,064
Interest income 243 -- -- -- 243
Interest expense (4,186) 1 -- -- (4,185)
------- ------ ---- ----- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 2,122 (949) (5) 954 2,122
Provision for income taxes (202) -- -- -- (202)
------- ------ ---- ----- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 1,920 (949) (5) 954 1,920
Net earnings from discontinued
operations 360 -- -- -- 360
------- ------ ---- ----- -------
NET EARNINGS (LOSS) $ 2,280 $ (949) $ (5) $ 954 $ 2,280
======= ====== ==== ===== =======
Page 28
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the nine months ended
September 30, 2005:
NON- ADJUSTMENTS
IMAX GUARANTOR GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ ------------
REVENUE
IMAX systems $ 61,483 $ 2,197 $642 $(1,665) $ 62,657
Films 14,494 4,823 16 (1,038) 18,295
Theater Operations 634 11,773 -- (82) 12,325
Other 2,318 -- 25 -- 2,343
-------- ------- ---- ------- --------
78,929 18,793 683 (2,785) 95,620
COST OF GOODS AND SERVICES 33,133 17,176 308 (2,785) 47,832
-------- ------- ---- ------- --------
GROSS MARGIN 45,796 1,617 375 -- 47,788
Selling, general and
administrative expenses 27,937 666 418 -- 29,021
Research and development 2,429 -- -- -- 2,429
Amortization of intangibles 481 -- -- -- 481
Loss (income) from equity-accounted
investees 67 -- -- (67) --
Receivable provisions, net
of (recoveries) (1,445) 977 -- -- (468)
-------- ------- ---- ------- --------
EARNINGS (LOSS) FROM OPERATIONS 16,327 (26) (43) 67 16,325
Interest income 739 -- 2 -- 741
Interest expense (12,584) -- -- -- (12,584)
-------- ------- ---- ------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 4,482 (26) (41) 67 4,482
Provision for income taxes (681) -- -- -- (681)
-------- ------- ---- ------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 3,801 (26) (41) 67 3,801
Net earnings from discontinued
operations 786 -- -- -- 786
-------- ------- ---- ------- --------
NET EARNINGS (LOSS) $ 4,587 $ (26) $(41) $ 67 $ 4,587
======== ======= ==== ======= ========
Page 29
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the nine months ended
September 30, 2006:
IMAX GUARANTOR NON-GUARANTOR ADJUSTMENTS AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- --------------- -----------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $(14,276) $1,100 $ 113 $(1,213) $(14,276)
Net (earnings) loss from discontinued operations (2,300) 875 -- -- (1,425)
Items not involving cash:
Depreciation and amortization 13,485 402 1 -- 13,888
Write-downs (recoveries) 250 -- -- -- 250
Loss (income) from equity-accounted investees (1,213) -- -- 1,213 --
Change in deferred income taxes 8 (8) -- -- --
Stock and other non-cash compensation 2,730 -- -- -- 2,730
Non-cash foreign exchange gain (383) -- -- -- (383)
Interest on short-term investments (281) -- -- -- (281)
Investment in film assets (8,699) -- -- -- (8,699)
Changes in other non-cash operating assets and
liabilities 1,262 (237) (179) -- 846
-------- ------ ----- ------- --------
Net cash provided by (used in) operating activities (9,417) 2,132 (65) -- (7,350)
-------- ------ ----- ------- --------
INVESTING ACTIVITIES
Purchases of short-term investments (14,506) -- -- -- (14,506)
Proceeds from maturities of short-term investments 18,739 -- -- -- 18,739
Purchase of fixed assets (1,423) (273) (16) -- (1,712)
Increase in other assets (753) -- -- -- (753)
Increase in other intangible assets (374) -- -- -- (374)
-------- ------ ----- ------- --------
Net cash provided by (used in) investing activities 1,683 (273) (16) -- 1,394
-------- ------ ----- ------- --------
FINANCING ACTIVITIES
Common shares issued 286 -- -- -- 286
-------- ------ ----- ------- --------
Net cash provided by financing activities 286 -- -- -- 286
-------- ------ ----- ------- --------
Effects of exchange rate changes on cash (47) 12 (11) -- (46)
-------- ------ ----- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (7,495) 1,871 (92) -- (5,716)
Increase (decrease) in cash and cash equivalents
from discontinued operations 3,493 (100) -- -- 3,393
-------- ------ ----- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (4,002) 1,771 (92) -- (2,323)
Cash and cash equivalents, beginning of period 17,402 6,728 194 -- 24,324
-------- ------ ----- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,400 $8,499 $ 102 $ -- $ 22,001
======== ====== ===== ======= ========
Page 30
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the nine months ended
September 30, 2005:
IMAX GUARANTOR NON-GUARANTOR ADJUSTMENTS AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- --------------- -----------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ 4,587 $ (26) $ (41) $ 67 $ 4,587
Net (earnings) from discontinued operations (786) -- -- -- (786)
Items not involving cash:
Depreciation and amortization 11,086 403 1 -- 11,490
Write-downs (1,445) 977 -- -- (468)
Loss (income) from equity-accounted investees 67 -- -- (67) --
Change in deferred income taxes (287) (12) -- -- (299)
Stock and other non-cash compensation 3,554 -- -- -- 3,554
Unrealized foreign exchange loss 167 -- -- -- 167
Interest on short-term investments (250) -- -- -- (250)
Investment in film assets (7,315) -- -- -- (7,315)
Changes in other non-cash operating assets and
liabilities (5,593) (1,542) (104) -- (7,239)
-------- ------- ----- ---- --------
Net cash provided by (used in) operating activities 3,785 (200) (144) -- 3,441
-------- ------- ----- ---- --------
INVESTING ACTIVITIES
Purchases of short-term investments (27,157) -- -- -- (27,157)
Proceeds from maturities of short-term investments 15,175 -- -- -- 15,175
Purchase of fixed assets (877) (317) -- -- (1,194)
Increase in other assets (562) -- -- -- (562)
Increase in other intangible assets (412) -- -- -- (412)
-------- ------- ----- ---- --------
Net cash used in investing activities (13,833) (317) -- -- (14,150)
-------- ------- ----- ---- --------
FINANCING ACTIVITIES
Common shares issued 3,219 -- -- -- 3,219
-------- ------- ----- ---- --------
Net cash provided by financing activities 3,219 -- -- -- 3,219
-------- ------- ----- ---- --------
Effects of exchange rate changes on cash 132 3 14 -- 149
-------- ------- ----- ---- --------
DECREASE IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (6,697) (514) (130) -- (7,341)
Increase in cash and cash equivalents from
discontinued operations 429 -- -- -- 429
-------- ------- ----- ---- --------
DECREASE IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (6,268) (514) (130) -- (6,912)
Cash and cash equivalents, beginning of period 23,683 5,058 223 -- 28,964
-------- ------- ----- ---- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,415 $ 4,544 $ 93 $ -- $ 22,052
======== ======= ===== ==== ========
Page 31
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA
The accounting principles followed by the Company conform with U.S. GAAP.
Significant differences affecting the Company between U.S. GAAP and
Canadian GAAP are summarized below.
(A) STOCK-BASED COMPENSATION
Under U.S. GAAP, prior to January 1, 2006, the Company accounted for
stock-based compensation under the intrinsic value method set out in APB 25
and has made pro forma disclosures of net earnings (loss) and earnings
(loss) per share as if the methodology prescribed by FAS 123 had been
adopted. Under Canadian GAAP, the Company adopted the fair value provisions
of CICA Section 3870, "Stock-based Compensation and Other Stock-based
Payments" ("CICA Section 3870"), effective January 1, 2003. As of this
date, stock options granted to employees or directors are recorded as an
expense in the consolidated statement of operations and credited to other
equity.
Effective January 1, 2006, under U.S. GAAP, the Company adopted FAS 123R
using the modified prospective transition method. The Company's
Consolidated Financial Statements as of and for the three and nine months
ended September 30, 2006 reflect the impact of FAS 123R. In accordance with
the modified prospective transition method, the Company's Consolidated
Financial Statements for prior periods have not been restated to reflect,
and do not include, the impact of FAS 123R. Stock-based compensation
expense recognized under FAS 123R and under CICA Section 3870 for the three
and nine months ended September 30, 2006 is aligned with each other and
will be identical for all periods after January 1, 2006.
(B) PENSION ASSET AND LIABILITIES
Under U.S. GAAP, included in accrued liabilities is an unrecognized gain
related to prior service costs resulting from the plan amendment of $1.9
million as at September 30, 2006 and unrecognized prior service costs of
$6.4 million as at December 31, 2005. An amount of $nil as at September 30,
2006, and $3.6 million as at December 31, 2005 is included in other assets,
representing unrecognized prior service costs. In addition, under U.S.
GAAP, an amount of less than $0.1 million as at September 30, 2006 and $2.8
million as at December 31, 2005 is recorded against accumulated other
comprehensive income, resulting from an unrecognized actuarial loss. Under
Canadian GAAP, the minimum pension liability, and the corresponding amounts
recorded in other assets and accumulated other comprehensive income are not
recorded.
Page 32
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
RECONCILIATION TO CANADIAN GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS
The following is a reconciliation of net earnings (loss) reflecting the
differences between U.S. GAAP and Canadian GAAP:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2006 2005 2006 2005
-------- ------- -------- -------
Net earnings (loss) in accordance with U.S. GAAP $(11,989) $2,280 $(14,276) $ 4,587
Stock-based compensation(a) -- (552) -- (1,734)
-------- ------ -------- -------
Net earnings (loss) in accordance with Canadian GAAP $(11,989) $1,728 $(14,276) $ 2,853
======== ====== ======== =======
Earnings (loss) per share:
Earnings (loss) per share - basic and diluted:
Net earnings (loss) from continuing operations $ (0.28) $ 0.03 $ (0.39) $ 0.05
Net earnings (loss) from discontinued operations $ (0.02) $ 0.01 $ 0.04 $ 0.02
-------- ------ -------- -------
Net earnings (loss) $ (0.30) $ 0.04 $ (0.35) $ 0.07
======== ====== ======== =======
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
The following is a reconciliation of shareholders' equity (deficit)
reflecting the difference between U.S. GAAP and Canadian GAAP:
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Shareholders' equity (deficit) in accordance with
U.S. GAAP $(32,790) $(23,043)
Unrecognized actuarial loss(b) 21 2,773
-------- --------
Shareholders' equity (deficit) in accordance with
Canadian GAAP $(32,769) $(20,270)
======== ========
19. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Page 33
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's principal business is the design, manufacture, sale and lease of
projector systems for giant screen theaters for customers including commercial
theaters, museums and science centers, and destination entertainment sites. In
addition, the Company designs and manufactures high-end sound systems and
produces and distributes large format films. There are 280 IMAX theaters
operating in 40 countries worldwide as of September 30, 2006. IMAX Corporation
is a publicly traded company listed on both the TSX and NASDAQ.
ACCOUNTING POLICIES AND ESTIMATES
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Significant differences between U.S. GAAP
and Canadian Generally Accepted Accounting Principles ("Canadian GAAP") are
summarized in note 18 of the Consolidated Financial Statements.
The preparation of these financial statements requires management to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
its estimates, including those related to accounts receivable, net investment in
leases, inventories, fixed and film assets, investments, intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, future expectations and other assumptions that are
believed to be reasonable at the date of the financial statements. Actual
results may differ from these estimates due to uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
Consolidated Financial Statements in the Company's most recent Annual Report on
Form 10-K for the year ended December 31, 2005, and are summarized below.
CRITICAL ACCOUNTING POLICIES
The Company considers the following critical accounting policies to have the
most significant effect on its estimates, assumptions and judgements:
REVENUE RECOGNITION
The Company's system sales and lease transactions typically involve the delivery
of several products and services, including the projector, projection screen and
sound system, supervision of installation, training of theater personnel, and
advice on theater design and custom assemblies. In addition, on occasion, the
Company will include film licenses or other specified elements as part of these
transactions.
When the elements of theater systems meet the criteria for treatment as separate
units of accounting, the Company generally allocates revenue to each individual
element based on the relative fair values of each element. Where objective and
reliable evidence of the fair values of the undelivered items in a multiple
element arrangement is available but no such evidence is available for the
delivered items, the Company will use the residual method of allocation in those
instances. Under the residual method, the amount of consideration allocated to
the delivered items equals the total arrangement consideration less the
aggregate fair value of the undelivered items. Revenue allocated to an
individual element is recognized when revenue recognition criteria for that
element is met.
SALES AND SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and risks
of ownership to customers are classified as sales-type leases as a result of
meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is
recognized, the initial rental fees due under the contract, along with the
present value of minimum ongoing rental payments, are recorded as revenues for
the period, and the related theater system costs including installation expenses
are recorded as cost of goods and services. Additional ongoing rentals in excess
of minimums are recognized in future periods as revenue when reported by the
theater operator, provided that collection is reasonably assured. Maintenance
revenues are recognized when the services are rendered.
Page 34
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES AND SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
The Company recognizes revenue from sales and sales type leases when the
installation of the respective theater system element is substantially complete
and all of the following criteria are met: persuasive evidence of an agreement
exists; the price is fixed or determinable; and collection is reasonably
assured.
The timing of installation of the theater system is largely dependent on the
timing of the construction of the customer's theater. Therefore, while revenue
for theater systems is generally predictable on a long-term basis, it can vary
from quarter to quarter or year to year depending on the timing of
installations.
The critical estimates that the Company considers with respect to the Company's
lease accounting are the determination of economic useful life and the fair
value of the projection equipment, including its residual value. These estimates
are based upon historical experience with all of its projection systems.
Residual values are established at lease inception using estimates of fair value
at the end of the lease term with consideration for forecasted supply and demand
for various systems, future product launch plans, end of lease customer
behavior, refurbishment strategies and changes in technology.
The Company monitors the performance of the theaters to which it has leased
equipment. When facts and circumstances indicate that it may need to change the
terms of a lease, which had previously been recorded as a sales-type lease, the
Company evaluates the likely outcome of such negotiations using the criteria
under FAS 13. A provision is recorded against the net investment in leases if
the Company believes that it is probable that the negotiation will result in a
reduction in the minimum lease payments such that the lease will be reclassified
as an operating lease. The provision is equal to the excess of the carrying
value of the net investment in lease over the fair value of the equipment. Any
adjustments which result from a change in classification from a sales-type lease
to an operating lease are reported as a charge to income during the period the
change occurs.
In the normal course of its business, the Company will from time to time
determine that a provision it had previously taken against the net investment in
leases in connection with a customer's lease agreement should be reversed due to
a change in the circumstances that led to the original provision.
The Company generally enters into multi-year system agreements with customers
that typically contain customer payment obligations prior to the scheduled
installation of the system. During the period of time between signing and system
installation, certain customers each year generally are unable, or elect not, to
proceed with 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 the Company may enter into a consensual
buyout, whereby the parties are released from all their future obligations under
the agreement and the geographic territory granted to the customer reverts to
the Company. Once an agreement is reached by both parties, the initial payments
that the customer previously made to the Company are typically recognized as
revenue. For this reason, the Company has a high degree of certainty of
collecting a substantial value of a signed contract, either through the
installation of a theater system or a consensual buyout. In addition, since the
introduction of its IMAX MPX theater system in 2003, the Company has agreed with
several customers to terminate their existing agreements, which were in the
Company's backlog, and sign new MPX system agreements.
Page 35
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES AND SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
Where these agreements have multiple elements meeting the criteria for treatment
as separate units of accounting, the total consideration to be received in these
situations generally is allocated to each individual element based on the
relative fair values of each element. Where objective and reliable evidence of
the fair values of the undelivered items in a multiple element arrangement is
available but no such evidence is available for the delivered items, the Company
will use the residual method of allocation in those instances. Under the
residual method, the amount of consideration allocated to the delivered items
equals the total arrangement consideration less the aggregate fair value of the
undelivered items. Each element is then accounted for based on applicable
revenue recognition criteria.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
FILM LICENSING
Revenue from licensing of films is recognized when a contractual licensing
arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collection is reasonably
assured. Where the license fees are based on a share of the customer's revenue,
and all other revenue recognition criteria stated in the preceding sentence are
met, the Company recognizes revenue as the customer exhibits the film.
DMR FILM REVENUE
Revenues from digitally re-mastering film where third parties own the related
film rights are derived in the form of processing fees and recoupments
calculated as a percentage of box office receipts from the re-mastered films.
Processing fees are recognized as revenues as the related re-mastering service
is performed. Recoupments as a percentage of box office receipts are recognized
as revenue when the contracted portions of box office receipts due to the
Company are reported by theater operators, provided that collection is
reasonably assured.
THEATER OPERATIONS REVENUE
The Company recognizes revenue from its owned and operated theaters resulting
from box office ticket and concession sales as tickets are sold, films are shown
and upon the sale of various concessions. In addition, the Company enters into
commercial arrangements with theaters resulting in sharing of profits and
losses. The Company also provides management services to certain theaters and
recognizes revenue as services are provided.
Page 36
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
SHORT-TERM INVESTMENTS
The Company has short-term investments, which generally have maturities of more
than three months and less than one year from the date of purchase. The
short-term investments are classified as held to maturity based on the Company's
positive intent and ability to hold the securities to maturity. The Company
invests primarily in Canadian and U.S. government securities and commercial
paper rated "A1+" by Standard & Poor's and these investments are stated at
amortized cost, which approximates fair market value. Income related to these
securities is reported as a component of interest income. At September 30, 2006,
the Company had $4.2 million (December 31, 2005 - $6.1 million) invested in
Canadian government securities and $nil (December 31, 2005 - $2.1 million)
invested in U.S. government securities.
ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
The allowance for doubtful accounts receivable and provision against the
financing receivables are based on the Company's assessment of the
collectibility of specific customer balances and the underlying asset value of
the equipment under lease where applicable. If there is deterioration in a
customer's credit worthiness or actual defaults under the terms of the leases
are higher than the Company's historical experience, the Company's estimates of
recoverability for these assets could be adversely affected.
The evaluation of collectibility of customer accounts is typically done on an
individual account basis. If, based on an evaluation of accounts, the Company
concludes that it is probable that a customer will not be able to pay all
amounts due, the Company estimates the recoverable amount. In developing the
estimates for an allowance, the Company considers general and industry economic
and market conditions as well as other credit information available for the
customer. The Company only records recoveries of provisions when objective
verifiable evidence supports the change in the original provision.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions prove to be
incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
FILM ASSETS
Estimates of ultimate revenues are prepared on a title by title basis and
reviewed regularly by management and revised where necessary to reflect the most
current information. Ultimate revenue for films includes estimates of revenues
over a period not to exceed 10 years following the date of initial release.
GOODWILL
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. 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 the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
Page 37
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
FIXED ASSETS
Management reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. In performing its review for recoverability,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of impairment losses is based on the excess of the
carrying amount of the asset over the fair value calculated using discounted
expected future cash flows. If the actual future cash flows are less than the
Company's estimates, future earnings could be adversely affected.
PENSION PLAN ACTUARIAL ASSUMPTIONS
The Company's pension benefit obligations and related costs are calculated using
actuarial concepts, within the framework of Statement of Financial Accounting
Standards No. 87, "Employer's Accounting for Pensions". A critical assumption,
the discount rate, is an important element of expense and/or liability
measurement. The Company evaluates this critical assumption annually or when
otherwise required to by accounting standards. Other assumptions include factors
such as expected retirement, mortality, rate of compensation increase, and
estimates of inflation.
The discount rate enables the Company to state expected future cash payments for
benefits as a present value on the measurement date. The guideline for setting
this rate is a high-quality long-term corporate bond rate. A lower discount rate
increases the present value of benefit obligations and increases pension
expense. The Company's discount rate was determined by considering the average
of pension yield curves constructed of a large population of high-quality
corporate bonds. The resulting discount rate reflects the matching of plan
liability cash flows to the yield curves.
TAX ASSET VALUATION
As at September 30, 2006, the Company had net deferred income tax assets of $6.2
million, comprised of tax credit carryforwards, net operating loss and capital
loss carryforwards and other deductible temporary differences, which can be
utilized to reduce either taxable income or taxes otherwise payable in future
years. The Company's management assesses realization of these net deferred
income tax assets based on all available evidence and has concluded that it is
more likely than not that these net deferred income tax assets will be realized.
Positive evidence includes, but is not limited to, the Company's historical
earnings, projected future earnings, contracted sales backlog at September 30,
2006, and the ability to realize certain deferred income tax assets through loss
and tax credit carryback strategies. If and when the Company's operations in
some jurisdictions were to reach a requisite level of profitability or where the
Company's future profitability estimates increase due to changes in positive
evidence, the Company would reduce all or a portion of the applicable valuation
allowance in the period when such determination is made. This would result in an
increase to reported earnings and a decrease to the Company's effective tax rate
in such period. However, if the Company's projected future earnings do not
materialize, or if the Company operates at a loss in certain jurisdictions, or
if there is a material change in actual effective tax rates or time period
within which the Company's underlying temporary differences become taxable or
deductible, the Company could be required to increase the valuation allowance
against all or a significant portion of the Company's deferred tax assets
resulting in a substantial increase to the Company's effective tax rate for the
period of the change and a material adverse impact on its operating results for
the period.
Page 38
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
TAX ASSET VALUATION (cont'd)
The Company is subject to ongoing tax examinations and assessments in various
jurisdictions. Accordingly, the Company may incur additional tax expense based
upon the outcomes of such matters. In addition, when applicable, the Company
adjusts tax expense to reflect both favorable and unfavorable examination
results. The Company's ongoing assessments of the probable outcomes of
examinations and related tax positions require judgement and can materially
increase or decrease its effective rate as well as impact operating results.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (an interpretation of FASB Statement No. 109), ("FIN 48"),
which clarifies the relevant criteria and approach for the recognition,
de-recognition and measurement of uncertain tax positions. FIN 48 will be
effective for the Company beginning January 1, 2007. The Company is currently in
the process of assessing the effects of the provisions of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements", which is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those years.
This statement defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements. The Company is currently
evaluating the potential impact of this statement.
The FASB also issued in September 2006 Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" (an amendment of FASB Statement No. 87, 88, 106 and 132R),
("FAS 158"). This Standard requires recognition of the funded status of a
benefit plan in the statement of financial position. The Standard also requires
recognition in other comprehensive income certain gains and losses that arise
during the period but are deferred under pension accounting rules, as well as
modifies the timing of reporting and adds certain disclosures. FAS 158 provides
recognition and disclosure elements to be effective as of the end of the fiscal
year after December 15, 2006 and measurement elements to be effective for fiscal
years ending after December 15, 2008. The Company does not believe that the
adoption of FAS 158 will have a material impact on its results of operations or
financial position.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005
The Company reported a net loss from continuing operations before income taxes
of $9.3 million or $0.23 per share on a diluted basis and a net loss from
continuing operations after taxes of $11.1 million or $0.28 per share on a
diluted basis for the third quarter of 2006. For the third quarter of 2005, the
Company reported net earnings from continuing operations before income taxes of
$2.1 million or $0.05 per share on a diluted basis and net earnings from
continuing operations after taxes of $1.9 million or $0.05 per share on a
diluted basis.
Page 39
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
REVENUE
The Company's revenues for the third quarter of 2006 decreased 37.9% to $20.7
million from $33.4 million in the same period last year.
Systems revenue decreased to $7.3 million in the third quarter of 2006 from
$20.2 million in the third quarter of 2005, a decrease of 63.8%. Revenue from
sales and leases decreased to $1.2 million in the third quarter of 2006 from
$13.5 million in 2005, a decrease of 91.0%. This decrease was due to the
decrease in the number of system recognitions and a decrease in settlement
revenues. The Company recognized revenue on one theater system which qualified
as either a sale or sales-type lease in the third quarter of 2006 compared to
six systems in the third quarter of 2005. The Company also recognized $2.4
million in settlement revenue during the third quarter of 2005, compared to $nil
in the same period of 2006.
The system recognized in the third quarter of 2006 related to the sale of a used
theater system. There was also a sale of one used system in the third quarter of
2005.
The table below illustrates the mix of systems recognized in the third quarter
of 2006 compared to the same period in 2005.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2006 2005
---- ----
Sales and Sales-type lease systems recognized
IMAX 2D ............................................ 1 1
IMAX 3D............................................. -- 4
IMAX 3D SR.......................................... -- --
IMAX MPX............................................ -- 1
--- ---
1 6
=== ===
In addition, the Company installed and began recognizing revenue on two theater
systems that qualified as operating leases in the third quarter of 2005 versus
none in the same period in 2006. The Company recognizes revenue on operating
leases over the term of the lease.
Page 40
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
REVENUE (cont'd)
The Company generally enters into multi-year system agreements with customers
that typically contain customer payment obligations prior to the scheduled
installation of the system. During the period of time between signing and system
installation, certain customers each year generally are unable, or elect not, to
proceed with 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 the Company may enter into a consensual
buyout, whereby the parties are released from their future obligations under the
arrangement, the initial payments that the customer previously made to the
Company are typically recognized as revenue and the geographic territory granted
to the customer reverts to the Company. For this reason, the Company has a high
degree of certainty of collecting a substantial value of a signed contract,
either through the installation of a theater system or a consensual buyout. In
addition, since the introduction of its IMAX MPX theater system in 2003, the
Company has agreed with several customers to terminate their existing
agreements, which were in the Company's backlog, and sign new MPX system
agreements. During the third quarter of 2006, the Company did not recognize any
settlement revenue. Amounts relating to settlement revenue for the third quarter
in 2005 total $2.4 million. The settlement amounts are detailed as follows: $0.4
million related to MPX conversion agreements, $0.6 million related to consensual
buyouts, and $1.4 million related to terminations of agreements after customer
default. Overall settlement revenue will likely decrease for the full year of
2006 in comparison to 2005.
Ongoing rental revenue decreased to $2.5 million in the third quarter of 2006
from $3.2 million in 2005 a decrease of 21.8%. Maintenance revenue remained
consistent at $3.6 million in both third quarters of 2006 and 2005.
Film revenues decreased to $7.7 million in the third quarter of 2006 from $8.0
million in the third quarter of 2005, due primarily to a decrease in film
production and film post-production revenues, slightly offset by an increase in
DMR and film distribution revenues. Film post-production revenues decreased to
$0.7 million in the third quarter of 2006 from $1.5 million in the third quarter
of 2005, mainly due to a decrease in third party business at the Company's
post-production unit. Film production revenues decreased to less than $0.1
million in the third quarter of 2006 compared to $0.3 million in the third
quarter of 2005. IMAX DMR revenues, which are revenues to the Company generated
from the gross box office performance and conversion services performed on IMAX
DMR films, increased to $3.4 million in the third quarter of 2006 from $3.0
million in the prior year quarter. The increase in DMR revenue is due primarily
to the gross box office performance of Superman Returns: The IMAX 3D Experience,
released in June 2006 and The Ant Bully: The IMAX 3D Experience, released in
July 2006 which together performed better than the 2005 releases of Batman
Begins: The IMAX Experience, released in June 2005, and Charlie and the
Chocolate Factory: The IMAX Experience, released in July 2005. Film distribution
revenues increased to $3.6 million in the third quarter of 2006 from $3.3
million in the third quarter of 2005, an increase of 8.4%. The increase is
primarily due to the release of Deep Sea 3D in March 2006 which performed better
than the combination of Magnificent Desolation: Walking on the Moon 3D, and
Space Station 3D, in the third quarter of 2005.
Page 41
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
REVENUE (cont'd)
The Company believes it may see lower overall film revenues in 2006 than planned
due to the disappointing performance of the films V for Vendetta: The IMAX
Experience, Poseidon: The IMAX Experience, and The Ant Bully: An IMAX 3D
Experience. The Company intends to release in conjunction with studios at least
eight new films in 2006 including the already released V for Vendetta: The IMAX
Experience (March 2006), Deep Sea 3D (March 2006), Poseidon: The IMAX Experience
(May 2006), Superman Returns: An IMAX 3D Experience (June 2006), The Ant Bully:
An IMAX 3D Experience (July 2006) and Open Season: An IMAX 3D Experience
(September 2006), and the still to be released Happy Feet: The IMAX Experience
(November 2006) and Night at the Museum: The IMAX Experience (December 2006).
Theater operations revenue increased to $4.7 million in the third quarter of
2006 from $4.3 million in the third quarter of 2005, due to an increase in
attendance and average ticket prices of approximately 8% and 2%, respectively.
The Company believes that it may see lower overall attendance rates in 2006 than
planned due to the disappointing performance of the films V for Vendetta: The
IMAX Experience, Poseidon: The IMAX Experience and The Ant Bully: An IMAX 3D
Experience.
Other revenue increased slightly to $1.0 million in the third quarter of 2006
compared to $0.8 million in the same period in 2005. Other revenue primarily
includes revenue generated from the Company's camera and rental business and
after market sales of projection system parts.
OUTLOOK
System installations slip from period to period in the course of the Company's
business, and the Company has seen a significant number of system installations
originally anticipated for the third and fourth quarters of 2006 move to
anticipated installations for 2007. The Company now has 24 systems in its
backlog that are currently scheduled for installation in 2007 and an additional
eight systems that could be installed as early as December of that year, however
it cautions that slippages remain a recurring and unpredictable part of its
business.
The Company has signed agreements with Sony Pictures and Warner Bros. Pictures,
respectively, for the release of IMAX DMR versions of Spider Man 3: The IMAX
Experience in May of 2007 and Harry Potter and the Order of the Phoenix: The
IMAX Experience in July of 2007.
The Company is planning to supplement its sale and lease of theatre systems by
offering clients joint box office sharing arrangements, whereby the Company
contributes its theatre system at its cost of goods sold, the client contributes
its retrofitted auditorium and there is a negotiated split of box office
revenues. The Company believes that by offering such arrangements where
exhibitors do not need to pay the initial capital required in a lease or a sale,
the Company's theatre network can be expanded more rapidly, and provide the
Company with a significant part of the IMAX box office from its theatres, as
well as greater revenue from the studios releasing IMAX DMR films, for which the
Company typically receives a percentage of the studio's box office receipts.
The Company believes that digital technology has evolved sufficiently that it
can develop an IMAX digital projection system to deliver to theatres by the
middle to end of 2008 that delivers high quality imagery consistent with the
Company's brand. The Company believes that the dramatic print cost savings that
would result from an IMAX digital system could lead to more profitability for
the Company by increasing the number of films released to the IMAX network,
which in turn could result in more theatres in the Company's network, more
profits per theatre and more profits for studios amortizing their films over the
network. There are a number of risks inherent in the Company's digital strategy
including the risk of exhibitors delaying theatre system purchases during the
transition period and the need to finance the Company's investments necessary
for implementing this strategy.
Page 42
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
GROSS MARGIN
Gross margin in the third quarter of 2006 was $6.2 million, or 29.9% of total
revenue, compared to $15.8 million, or 47.3% of total revenue in the third
quarter of 2005.
Systems margins decreased in the third quarter of 2006 by $8.5 million or 68.0%.
Average gross margin on sales and sales-type lease of projection systems
decreased in the third quarter of 2006 versus the same period in 2005 by 31.4%,
primarily due to the change in number and mix of systems. In addition, the
Company recognized $2.3 million in settlement gross margin in the third quarter
of 2005, compared to $nil in the same period of 2006. The settlement amounts are
detailed as follows: $0.4 million related to MPX conversion agreements, $0.6
million related to consensual buyouts, and $1.3 million related to terminations
of agreements after customer default.
The Company's film gross margin decreased in the third quarter of 2006 by $1.4
million. The Company's DMR gross margin decreased by $1.1 million due primarily
to the disappointing gross box office performance of The Ant Bully: An IMAX 3D
Experience and Open Season: An IMAX 3D Experience. The Company recorded
impairments on these two films in the third quarter of 2006 for a total of $0.8
million. The decrease in DMR margin was partially offset by the strong
performance of Superman Returns: An IMAX 3D Experience. Film distribution margin
decreased by $0.9 million primarily due to lower margins earned on the mix of
films in release during the current quarter versus the prior year quarter.
Offsetting the decrease in film gross margin was the increase in film
post-production gross margin, which increased by $0.7 million primarily due to a
change in mix between internal and third party business.
The Company's owned and operated theater gross margin increased by $0.2 million
in the third quarter of 2006 compared to the same period in 2005, primarily as a
result of lower rental fees for films in 2006.
Other gross margin increased slightly by $0.1 million in the third quarter of
2006, primarily as a result of increased activity from the Company's camera and
rental business.
OTHER
Selling, general and administrative expenses were $10.0 million in the third
quarter of 2006 versus $9.0 million in the same period of 2005. During the third
quarter of 2006, the Company incurred $0.3 million in expenses related to the
Company's process of seeking strategic alternatives. Professional fees increased
by $0.8 million for the third quarter of 2006 compared to the previous year
quarter as the Company is in the process of responding to inquiries made by the
Securities and Exchange Commission and the Ontario Securities Commission.
Salaries and benefits expense also increased by $0.2 million during the third
quarter of 2006 due to a higher Canadian dollar denominated salary expense on
the strengthening of the Canadian dollar compared to the same period in the
prior year. The Company expensed $0.4 million for stock options granted compared
to $nil in the same period of 2005 in accordance with the adoption of accounting
for Financial Accounting Standards No. 123, "Share-Based Payment" ("FAS 123R").
Offsetting these increases the Company amended its executive pension plan on
March 8, 2006 to reduce certain benefits, resulting in a savings of $0.9 million
in compensation expense for the third quarter of 2006 compared to the previous
year quarter. Other non-cash stock-based compensation also decreased by $0.8
million in the third quarter of 2006, due to changes in the Company's share
price. The Company recorded a foreign exchange loss of $0.1 million in the third
quarter of 2006, compared to a gain of $0.2 million in the third quarter of
2005. The Company records foreign exchange translation gains and losses
primarily on a portion of its financing receivable balances which are
denominated in Canadian dollars, Euros and Japanese Yen.
Page 43
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
OTHER (cont'd)
Receivable provisions net of recoveries for accounts receivable amounted to a
net provision of $0.4 million in the third quarter of 2006, compared to a net
recovery of $0.2 million in the third quarter of 2005. The Company did not
record any charges or recoveries related to financing receivables in the third
quarter of 2006 compared to a $0.1 million recovery in the third quarter of 2005
due to favorable outcomes on lease amendments.
Interest income remained consistent at $0.2 million for both third quarters of
2006 and 2005.
Interest expense increased to $4.4 million in the third quarter of 2006 compared
to $4.2 million in the prior year quarter. Included in interest expense is the
amortization of deferred finance costs in the amount of $0.2 million in the
third quarters of 2006 and 2005 relating to the Senior Notes due 2010. The
Company's policy is to defer and amortize all the costs relating to a debt
financing over the life of the debt instrument.
INCOME TAXES
The Company believes that its installation of theater systems in 2006 will be
negatively impacted by (a) effecting fewer "sign and install" transactions than
it had anticipated, which are agreements for theater systems that are installed
in the same calendar year in which they are signed, which difficulty the Company
believes is due in part to the disappointing performance of the films V for
Vendetta: The IMAX Experience, Poseidon:The IMAX Experience and The Ant Bully:
An IMAX 3D Experience, and (b) the slipping of some installations scheduled for
the fourth quarter of 2006 into 2007. Since the Company does not anticipate that
there will be sufficient offsets to such installations in other areas of the
Company's business, the Company has increased the valuation allowance by an
amount of $1.6 million in the quarter against a portion of the Company's
deferred tax assets resulting in a significant increase to the Company's
effective tax rate for the period.
The Company's effective tax rate differs from the statutory tax rate and will
vary from year to year primarily as a result of numerous permanent differences,
investments and other tax credits, the provision for income taxes at different
rates in foreign and other provincial jurisdictions, enacted statutory tax rate
increases or reductions in the year, changes in the Company's valuation
allowance based on the Company's recoverability assessments of deferred tax
assets, and favorable or unfavorable resolution of various tax examinations. As
of September 30, 2006, the Company had a gross deferred income tax asset of
$49.0 million, against which the Company is carrying a $42.8 million valuation
allowance. Further, long-term tax rate reductions were also affirmed last
quarter for taxation years 2008 through 2010.
Page 44
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
RESEARCH AND DEVELOPMENT
Research and development expenses remained consistent at $0.9 million in both
the third quarters of 2006 and 2005. The expenses primarily reflect research and
development activities pertaining to a new digitally-based theater projection
system. Through research and development, the Company continues to design and
develop cinema-based equipment, software and other technologies to enhance its
product offering. The Company believes that the motion picture industry will be
affected by the development of digital technologies, particularly in the areas
of content creation (image capture), post-production (editing and special
effects), distribution and display. Consequently, the Company has made
significant investments in digital technologies, including the development of
proprietary, patent-pending technology relating to a digitally-based projection
system, as well as technologies to digitally enhance image resolution and
quality of motion picture films, and convert monoscopic (2D) to stereoscopic
(3D) images. The Company also holds a number of patents, patents pending and
intellectual property rights in these areas.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company abandoned or removed all of its assets from the theater in
the first quarter of 2004. The Company is involved in a legal proceeding with
the landlord of the theater with respect to the amount owing to the landlord by
the Company for lease and guarantee obligations. The amount of loss to the
Company has been estimated as between $0.9 million and $2.3 million. Prior to
2006, the Company paid out $0.8 million with respect to amounts owing to the
landlord. The Company paid out an additional $0.1 million and also accrued an
additional $0.8 million in net loss from discontinued operations related to
Miami IMAX theater in the third quarter of 2006.
Effective December 11, 2001, the Company completed the sale of its wholly-owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively, "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company restructured its advances to DPI, releasing DPI
from obligations to repay any amounts in excess of $12.7 million previously
advanced by the Company, and reorganized the remaining $12.7 million of debt
owing to the Company into two separate loan agreements. The loans receivable
were collateralized by fixed and floating charges over all DPI assets including
intellectual properties. One of the loans was convertible, upon the occurrence
of certain events, into shares representing 49% of the total share capital of
DPI related to these loans. On December 29, 2005, the Company and DPI entered
into an agreement to settle the remaining loans in exchange for a payment of
$3.5 million. During the first quarter of 2006, the Company recognized $2.3
million (2005 - $0.2 million) in income from discontinued operations. The other
tranche of $1.2 million had previously been recognized in 2005.
PENSION PLAN AMENDMENT
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the unfunded U.S. defined benefit pension plan covering its two
Co-Chief Executive Officers. Under the original terms of the plan, once benefit
payments begin, the benefit is indexed annually to the cost of living and
further provides for 100% continuance for life to the surviving spouse. Under
the terms of the plan amendment, the cost of living adjustment and surviving
spouse benefits previously owed to the Co-Chief Executive Officers are each
reduced by 50%, subject to a recoupment of a percentage of such benefits upon a
change of control of the Company, and the net present value of the reduced
benefit payments is accelerated and paid out upon a change of control of the
Company. The benefits were 50% vested as of July 2000, the plan initiation date.
The vesting percentage increases on a straight-line basis from inception until
age 55. The vesting percentage of a member whose employment terminates other
than by voluntary retirement or upon change of control shall be 100%. As of
September 30, 2006, one of the Co-Chief Executives was 100% vested and the other
Co-Chief Executive was approximately 81% vested.
Page 45
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted FAS 123R, which requires the measurement
and recognition of compensation expense for all share-based payment awards made
to employees and directors for employee stock options based on estimated fair
values. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to FAS 123R. The Company has
applied the provisions of SAB 107 in its adoption of FAS 123R.
The Company adopted FAS 123R using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006.
In accordance with the modified prospective transition method, the Company's
Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of FAS 123R. Stock-based compensation
expense recognized under FAS 123R in the third quarter of 2006 was $0.4 million.
FAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Consolidated
Statement of Operations. Prior to the adoption of FAS 123R, the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with Financial Option No. 25 Accounting for Stock
Issued to Employees, ("APB 25") as allowed under Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Under the
intrinsic value method, no stock-based compensation expense had been recognized
in the Company's Consolidated Statement of Operations because the exercise price
of the Company's stock options granted to employees and directors equaled the
fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized in the Company's Consolidated
Statement of Operations for the three months ended September 30, 2006 included
compensation expense for share-based payment awards granted prior to, but not
yet vested as of January 1, 2006 based on the grant date fair value estimated in
accordance with the pro forma provisions of FAS 123 and compensation expense for
the share-based payment awards granted subsequent to January 1, 2006 based on
the grant date fair value estimated in accordance with the provisions of FAS
123R. In conjunction with the adoption of FAS 123R, the Company changed its
method of attributing the value of stock-based compensation to expense from a
method which recognized the expense as the options vest to the straight-line
single option method. Compensation expense for all share-based payment awards
granted on or prior to January 1, 2006 will continue to be recognized using the
historic method while compensation expense for all share-based payment awards
granted subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the third quarter of 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company's pro forma information required under FAS
123 for the periods prior to 2006, the Company also estimated forfeitures at the
time of grant and revised, if necessary, in subsequent periods.
Page 46
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2005 (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
The Company utilizes a lattice-binomial option-pricing model ("Binomial Model")
to determine the fair value of share-based payment awards. The fair value
determined by the Binomial Model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the Company's
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in management's opinion, the Binomial
Model best provides an accurate measure of the fair value of the Company's
employee stock options. Although the fair value of employee stock options is
determined in accordance with FAS 123R and SAB 107 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
The Company reported a net loss from continuing operations before income taxes
of $15.1 million or $0.37 per share on a diluted basis and a net loss from
continuing operations after taxes of $15.7 million or $0.39 per share on a
diluted basis for the first nine months of 2006. For the first nine months of
2005 the Company reported net earnings from continuing operations before income
taxes of $4.5 million or $0.11 per share on a diluted basis and net earnings
from continuing operations after taxes of $3.8 million or $0.09 per share on a
diluted basis.
REVENUE
The Company's revenues for the first nine months of 2006 decreased 13.7% to
$82.5 million from $95.6 million in the same period last year.
Systems revenue decreased to $40.7 million in the first nine months of 2006 from
$62.7 million in the first nine months of 2005, a decrease of 35.1%. The Company
recognized revenue on 15 theater systems which qualified as either sales or
sales-type leases in the first nine months of 2006 compared to 20 theater
systems in the same period last year. Revenue from sales and leases decreased to
$22.6 million in the first nine months of 2006 from $43.9 million in 2005, a
decrease of 48.5%. This decrease was due primarily to the decrease in settlement
revenues from $13.4 million in the first nine months of 2005 compared to $nil in
the same period in 2006.
Three of the systems recognized in the first nine months of 2006 related to the
sale of used theater systems compared to five used systems in the same period of
2005.
Page 47
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
REVENUE (cont'd)
Average revenue per system sales and sales-type leases decreased slightly due to
a difference in the mix of systems recognized as outlined in the table below:
NINE MONTHS ENDED
SEPTEMBER 30, .
-----------------
2006 2005
---- ----
Sales and Sales-type lease systems recognized
IMAX 2D GT...................................... 1 1
IMAX 2D SR...................................... -- 1
IMAX 3D GT...................................... 6 9
IMAX 3D SR...................................... 3 4
IMAX MPX........................................ 5 5
--- ---
15 20
=== ===
In addition, the Company installed and began recognizing revenue on one theater
system that qualified as an operating lease in the first nine months of 2006
versus five in the same period in 2005. The Company recognizes revenue on
operating leases over the term of the leases.
The Company generally enters into multi-year system agreements with customers
that typically contain customer payment obligations prior to the scheduled
installation of the system. During the period of time between signing and system
installation, certain customers each year generally are unable, or elect not, to
proceed with 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 the Company may enter into a consensual
buyout, whereby the parties are released from their future obligations under the
arrangement, the initial payments that the customer previously made to the
Company are typically recognized as revenue and the geographic territory granted
to the customer reverts to the Company. For this reason, the Company has a high
degree of certainty of collecting a substantial value of a signed contract,
either through a consensual buyout or the installation of a theater system. In
addition, since the introduction of its IMAX MPX theater system in 2003, the
Company has agreed with several customers to terminate their existing agreements
which were in the Company's backlog and sign new MPX system agreements. During
the first nine months of 2006, the Company did not recognize any settlement
revenue. Amounts relating to settlement revenue for the first nine months in
2005 total $13.4 million. The settlement amounts for the first nine months of
2005 are detailed as follows: $0.6 million related to MPX conversion agreements;
$11.4 million related to consensual buyouts; and $1.4 million related to
termination of agreements after customer default. Overall settlement revenue
will likely decrease for the full year of 2006 in comparison to 2005.
Ongoing rental revenue decreased by 9.5% in the first nine months of 2006
compared to the same period in 2005. Maintenance revenue increased slightly to
$10.8 million in the first nine months of 2006 compared to $10.7 million for the
same period in 2005.
Page 48
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
REVENUE (cont'd)
Film revenues increased to $26.4 million in the first nine months of 2006 from
$18.3 million in the same period of 2005, as all segments of film increased.
Film distribution revenues increased to $12.0 million in the first nine months
of 2006 from $8.0 million in the first nine months of 2005, an increase of
49.9%, and film production revenues increased to $0.6 million in the first nine
months of 2006 from $0.5 million in the same period of 2005. Both increases were
primarily due to the production and release of Deep Sea 3D, in March 2006 and
the continued gross box office performance of Magnificent Desolation: Walking on
the Moon 3D released in September 2005. Film post-production revenues increased
to $5.2 million in the first nine months of 2006 from $3.9 million in the first
nine months of 2005, mainly due to an increase in third party business at the
Company's post-production unit. IMAX DMR revenues, which are revenues to the
Company generated from the gross box office performance and conversion services
performed on IMAX DMR films, increased by 45.4% in the first nine months of
2006. The increase in DMR revenue is due primarily to better gross box office
performance and conversion services performed on films in the first nine months
of 2006 compared to same period in 2005. The films contributing to the increased
DMR revenue include Superman Returns: The IMAX 3D Experience, released in June
2006, the July 2006 release of The Ant Bully: An IMAX 3D Experience, the March
2006 release of V for Vendetta: The IMAX Experience, the May 2006 release of
Poseidon: The IMAX Experience, and the continued success of Harry Potter and the
Goblet of Fire: The IMAX Experience released in November 2005. Films
contributing to the DMR revenue for the nine months ended 2005 include Robots:
The IMAX Experience, released in March 2005, Batman Begins: The IMAX Experience,
released in June 2005, Charlie and the Chocolate Factory: The IMAX Experience,
released in July 2005 and The Polar Express: The IMAX 3D Experience released in
November 2004.
The Company believes it may see lower overall film revenues in 2006 than planned
due to the disappointing performance of the films V for Vendetta: The IMAX
Experience, Poseidon: The IMAX Experience and The Ant Bully: An IMAX 3D
Experience. The Company intends to release in conjunction with studios at least
eight new films in 2006 including the already released V for Vendetta: The IMAX
Experience (March 2006), Deep Sea 3D (March 2006), Poseidon: The IMAX Experience
(May 2006), Superman Returns: An IMAX 3D Experience (June 2006), The Ant Bully:
An IMAX 3D Experience (July 2006) and Open Season: An IMAX 3D Experience
(September 2006) and the still to be released Happy Feet: The IMAX Experience
(November 2006) and Night at the Museum: The IMAX Experience (December 2006).
Theater operations revenue increased to $12.4 million in the first nine months
of 2006 from $12.3 million in the first nine months of 2005. Attendance and
average ticket prices in the first nine months of 2006 were comparable to the
same period in 2005. The Company believes it may see lower overall attendance
rates in 2006 than planned due to the disappointing performance of the films V
for Vendetta: The IMAX Experience, Poseidon: The IMAX Experience and The Ant
Bully: An IMAX 3D Experience.
Other revenue increased to $3.1 million in the first nine months of 2006
compared to $2.3 million in the same period in 2005, largely due to an increase
in the Company's after market sales. Other revenue primarily includes revenue
generated from the Company's camera and rental business and after market sales
of projection system parts.
OUTLOOK
System installations slip from period to period in the course of the Company's
business, and the Company has seen a significant number of system installations
originally anticipated for the third and fourth quarters of 2006 move to
anticipated installations for 2007. The Company now has 24 systems in its
backlog that are currently scheduled for installation in 2007 and an additional
eight systems that could be installed as early as December of that year, however
it cautions that slippages remain a recurring and unpredictable part of its
business.
Page 49
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
OUTLOOK (cont'd)
The Company has signed agreements with Sony Pictures and Warner Bros. Pictures,
respectively, for the release of IMAX DMR versions of Spider Man 3: The IMAX
Experience in May of 2007 and Harry Potter and the Order of the Phoenix: The
IMAX Experience in July of 2007.
The Company is planning to supplement its sale and lease of theatre systems by
offering clients joint box office sharing arrangements, whereby the Company
contributes its theatre system at its cost of goods sold, the client contributes
its retrofitted auditorium and there is a negotiated split of box office
revenues. The Company believes that by offering such arrangements where
exhibitors do not need to pay the initial capital required in a lease or a sale,
the Company's theatre network can be expanded more rapidly, and provide the
Company with a significant part of the IMAX box office from its theatres, as
well as greater revenue from the studios releasing IMAX DMR films, for which the
Company typically receives a percentage of the studio's box office receipts.
The Company believes that digital technology has evolved sufficiently that it
can develop an IMAX digital projection system to deliver to theatres by the
middle to end of 2008 that delivers high quality imagery consistent with the
Company's brand. The Company believes that the dramatic print cost savings that
would result from an IMAX digital system could lead to more profitability for
the Company by increasing the number of films released to the IMAX network,
which in turn could result in more theatres in the Company's network, more
profits per theatre and more profits for studios amortizing their films over the
network. There are a number of risks inherent in the Company's digital strategy
including the risk of exhibitors delaying theatre system purchases during the
transition period and the need to finance the Company's investments necessary
for implementing this strategy.
GROSS MARGIN
Gross margin in the first nine months of 2006 was $30.1 million, or 36.4% of
total revenue, compared to $47.8 million, or 50.0% of total revenue in the first
nine months of 2005.
Systems margins declined in the first nine months of 2006 by $18.2 million or
44.8%. Average gross margin on sales and sales-type lease of projection systems
decreased by 3.6% in the first nine months of 2006 versus the same period in
2005, primarily due to the difference in the mix of recognitions. In addition,
the Company recognized $13.2 million in settlement gross margin in the first
nine months of 2005, compared to $nil in the same period of 2006. The settlement
amounts recognized in the first nine months of 2005 are detailed as follows:
$1.3 million related to termination of agreements after customer default, $0.6
million related to MPX conversion agreements and $11.3 million related to
consensual buyouts.
The Company's film gross margin increased in the first nine months of 2006 by
$0.2 million. Post-production gross margin increased by $1.3 million, primarily
due to the level of third party business resulting from Superman Returns: An
IMAX 3D Experience and the Company's DMR gross margin increased by $0.2 million,
also due primarily to the gross box office performance and conversion services
performed on Superman Returns: An IMAX 3D Experience. Film production gross
margin increased by $0.5 million in the first nine months of 2006 compared to
the same period in 2005 primarily due to Deep Sea 3D, released in March 2006.
Film distribution margin decreased by $1.8 million, primarily due to lower
margins earned on the mix of films in release during the year.
The Company's owned and operated theater gross margin increased by $1.0 million
in the first nine months of 2006 compared to the same period in 2005, primarily
as a result of lower rental fees for films in 2006.
Other gross margin decreased by $0.6 million in the first nine months of 2006,
primarily as result of the Company's decision to subsidize some of its after
market components and upgrades to a number of theaters showing Superman Returns:
An IMAX 3D Experience.
Page 50
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
OTHER
Selling, general and administrative expenses were $30.0 million in the first
nine months of 2006 versus $29.0 million in the same period of 2005. During the
first nine months of 2006, the Company incurred expenses of $1.1 million in
connection with the Company's process of seeking strategic alternatives.
Professional services excluding legal fees increased by $1.0 million as the
Company incurred costs to implement FAS 123R, to amend the Company's pension
plan and to respond to inquiries made by the Securities and Exchange Commission
and the Ontario Securities Commission. Expenses relating to legal fees for the
first nine months of 2006 decreased by $1.0 million as the Company incurred
legal costs in the first nine months of 2005 related to patent infringement
matters and settled certain litigation matters. In addition, the Company
expensed $1.2 million in the first nine months of 2006 for stock options granted
in accordance with the adoption of FAS 123R. Salaries and benefits expense also
increased by $1.8 million during the first nine months of 2006 due to a higher
Canadian dollar denominated salary expense on the strengthening of the Canadian
dollar compared to the same period in the prior year. The Company also recorded
a capital tax expense of $0.5 million in the first nine months of 2006, compared
to a $0.1 million recovery in the same period in 2005. Offsetting these
increases, the Company amended its executive pension plan on March 8, 2006 to
reduce certain benefits, resulting in a savings of $2.2 million in compensation
expense for the first nine months of 2006 compared to the same period in 2005.
In addition, other non-cash stock-based compensation decreased by $0.7 million
during the first nine months of 2006, due to changes in the Company's share
price. The Company recorded a foreign exchange gain of $0.3 million in the first
nine months of 2006, compared to a loss of $0.5 million in the first nine months
of 2005. The Company records foreign exchange translation gains and losses
primarily on a portion of its financing receivable balances which are
denominated in Canadian dollars, Euros and Japanese Yen.
Receivable provisions net of recoveries for accounts receivable amounted to a
net provision of $0.7 million in the first nine months of 2006, compared to a
net recovery of $0.3 million in the first nine months of 2005. The Company
recorded a net recovery of $0.5 million in the first nine months of 2006 and
$0.2 million in the first nine months of 2005, on financing receivables due to
favorable outcomes on lease amendments.
Interest income amounted to $0.8 million in the first nine months of 2006
compared to $0.7 million in the same period of 2005.
Interest expense amounted to $12.8 million in the first nine months of 2006
compared to $12.6 million in the same period in 2005. Included in interest
expense is the amortization of deferred finance costs in the amount of $0.7
million in the first nine months of 2006 and 2005 relating to the Senior Notes
due 2010. The Company's policy is to defer and amortize all the costs relating
to a debt financing over the life of the debt instrument.
Page 51
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate and will
vary from year to year primarily as a result of numerous permanent differences,
investments and other tax credits, the provision for income taxes at different
rates in foreign and other provincial jurisdictions, enacted statutory tax rate
increases or reductions in the year, changes in the Company's valuation
allowance based on the Company's recoverability assessments of deferred tax
assets, and favorable or unfavorable resolution of various tax examinations. As
of September 30, 2006, the Company had a gross deferred income tax asset of
$49.0 million, against which the Company is carrying a $42.8 million valuation
allowance. Further, long-term tax rate reductions were also affirmed last
quarter for taxation years 2008 through 2010. In the nine month period the
Company favorably resolved a provincial income tax audit resulting in the
release of related tax reserves of $0.5 million to the income tax recovery for
the period. Also, on June 22, 2006, the Canadian Federal government passed into
law the elimination of the Large Corporations Tax retroactively as of January 1,
2006. Further, long-term tax rate reductions were also affirmed for taxation
years 2008 through 2010. The Company's tax provision for the nine month period
reflects both the retroactive elimination of the Large Corporations Tax and the
result of the long term reductions in the corporate tax rates. The Company has
reduced its gross deferred tax asset with an equal reduction in its gross
valuation allowance to reflect the reduction in long term income tax rates.
RESEARCH AND DEVELOPMENT
Research and development expenses amounted to $2.5 million in the first nine
months of 2006 compared to $2.4 million in the same period of 2005. The expenses
primarily reflect research and development activities pertaining to a new
digitally-based theater projection system. Through research and development, the
Company continues to design and develop cinema-based equipment, software and
other technologies to enhance its product offering. The Company believes that
the motion picture industry will be affected by the development of digital
technologies, particularly in the areas of content creation (image capture),
post-production (editing and special effects), distribution and display.
Consequently, the Company has made significant investments in digital
technologies, including the development of proprietary, patent-pending
technology related to a digitally-based projection system, as well as
technologies to digitally enhance image resolution and quality of motion picture
films, and convert monoscopic (2D) to stereoscopic (3D) images. The Company also
holds a number of patents, patents pending and intellectual property rights in
these areas.
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company abandoned or removed all of its assets from the theater in
the first quarter of 2004. The Company is involved in a legal proceeding with
the landlord of the theater with respect to the amount owing to the landlord by
the Company for lease and guarantee obligations. The amount of loss to the
Company has been estimated as between $0.9 million and $2.3 million. Prior to
2006, the Company paid out $0.8 million with respect to amounts owing to the
landlord. The Company paid out an additional $0.1 million and also accrued an
additional $0.8 million in net loss from discontinued operations related to
Miami IMAX theater in the third quarter of 2006.
Page 52
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
DISCONTINUED OPERATIONS (cont'd)
Effective December 11, 2001, the Company completed the sale of its wholly-owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively, "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company restructured its advances to DPI, releasing DPI
from obligations to repay any amounts in excess of $12.7 million previously
advanced by the Company, and reorganized the remaining $12.7 million of debt
owing to the Company into two separate loan agreements. The loans receivable
were collateralized by fixed and floating charges over all DPI assets including
intellectual properties. One of the loans was convertible, upon the occurrence
of certain events, into shares representing 49% of the total share capital of
DPI related to these loans. On December 29, 2005, the Company and DPI entered
into an agreement to settle the remaining loans in exchange for a payment of
$3.5 million. During the first quarter of 2006, the Company recognized $2.3
million (2005 - $0.2 million) in income from discontinued operations. The other
tranche of $1.2 million had previously been recognized in 2005.
PENSION PLAN AMENDMENT
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the unfunded U.S. defined benefit pension plan covering its two
Co-Chief Executive Officers. Under the original terms of the plan, once benefit
payments begin, the benefit is indexed annually to the cost of living and
further provides for 100% continuance for life to the surviving spouse. Under
the terms of the plan amendment, the cost of living adjustment and surviving
spouse benefits previously owed to the Co-Chief Executive Officers are each
reduced by 50%, subject to a recoupment of a percentage of such benefits upon a
change of control of the Company, and the net present value of the reduced
benefit payments is accelerated and paid out upon a change of control of the
Company. The benefits were 50% vested as of July 2000, the plan initiation date.
The vesting percentage increases on a straight-line basis from inception until
age 55. The vesting percentage of a member whose employment terminates other
than by voluntary retirement or upon change of control shall be 100%. As of
September 30, 2006, one of the Co-Chief Executives was 100% vested and the other
Co-Chief Executive was approximately 81% vested.
EMPLOYEE STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted FAS 123R which requires the measurement
and recognition of compensation expense for all share-based payment awards made
to employees and directors for employee stock options based on estimated fair
values. In March 2005, the Securities and Exchange Commission issued SAB 107
relating to FAS 123R. The Company has applied the provisions of SAB 107 in its
adoption of FAS 123R.
The Company adopted FAS 123R using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006.
In accordance with the modified prospective transition method, the Company's
Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of FAS 123R. Stock-based compensation
expense recognized under FAS 123R for the nine months ended September 30, 2006
was $1.2 million.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2005
(cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
FAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Consolidated
Statement of Operations. Prior to the adoption of FAS 123R, the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under FAS 123. Under the
intrinsic value method, no stock-based compensation expense had been recognized
in the Company's Consolidated Statement of Operations because the exercise price
of the Company's stock options granted to employees and directors equaled the
fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized in the Company's Consolidated
Statement of Operations for the first nine months of 2006 includes compensation
expense for share-based payment awards granted prior to, but not yet vested as
of January 1, 2006 based on the grant date fair value estimated in accordance
with the pro forma provisions of FAS 123 and compensation expense for the
share-based payment awards granted subsequent to January 1, 2006 based on the
grant date fair value estimated in accordance with the provisions of FAS 123R.
In conjunction with the adoption of FAS 123R, the Company changed its method of
attributing the value of stock-based compensation to expense from a method which
recognized the expense as the options vest to the straight-line single option
method. Compensation expense for all share-based payment awards granted on or
prior to January 1, 2006 will continue to be recognized using the historic
method while compensation expense for all share-based payment awards granted
subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the first quarter of 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company's pro forma information required under FAS
123 for the periods prior to 2006, the Company also estimated forfeitures at the
time of grant and revised, if necessary, in subsequent periods.
The Company utilizes a lattice-binomial option-pricing model ("Binomial Model")
to determine the fair value of share-based payment awards. The fair value
determined by the Binomial Model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the Company's
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in management's opinion, the Binomial
Model best provides an accurate measure of the fair value of the Company's
employee stock options. Although the fair value of employee stock options is
determined in accordance with FAS 123R and SAB 107 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OTHER
The Company is in the process of responding to an informal inquiry from the U.S.
Securities and Exchange Commission regarding the Company's timing of revenue
recognition, including its application of multiple element arrangement
accounting in its revenue recognition for theater systems. Under multiple
element arrangement accounting, the revenues associated with different elements
of an IMAX theater system contract are segregated and can be recognized in
different periods (see "Critical Accounting Policies" above, for a more detailed
explanation of its accounting policies with regard to theater system
installations). In the fourth quarter of 2005, seven theatre systems were
installations, where revenue associated with the screen element of the system
was deferred until the final screen was installed. Of these seven installations,
three theaters had their screens completed in the first quarter of 2006, two in
the second quarter of 2006, and one screen was installed subsequent to the end
of the third quarter. The screen element in the remaining theater is expected to
be completed by the end of 2006. The value associated with the elements other
than the screen elements of those system installations was recognized in the
fourth quarter when they were substantially completed. Finally, on one of these
ten installations, the Company has an obligation to de-install and move the
theater system and the fair value of this obligation of $0.1 million has not
been recognized into income. The Company believes its application of the above
accounting policy is, and has historically been, in accordance with U.S. GAAP,
and the Company's position is supported by its auditors, PricewaterhouseCoopers
LLP. This accounting policy has similarly been applied to one theater
installation in the second quarter of 2006, where revenue associated with the
screen element has been deferred to a future period. The screen element was
completed in the third quarter for this installation. The Company is continuing
to cooperate in this inquiry.
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY
On February 6, 2004, the Company entered into a Loan Agreement for a secured
revolving credit facility as amended on September 30, 2005 and as further
amended by the Second Amendment to the Loan Agreement which was entered into
with effect from May 16th, 2006 (the "Credit Facility"). The Credit Facility is
a revolving credit facility expiring on October 31, 2009 with an optional one
year renewal thereafter contingent upon approval by the lender, permitting
maximum aggregate borrowings of $40.0 million, subject to a borrowing base
calculation which includes the Company's financing receivables, operating
leases, finished goods inventory, and capital assets with certain reserve
requirements and deductions for outstanding letters of credit. The Company's
current borrowing capacity under such calculation is $26.1 million after
deduction for outstanding letters of credit of $8.1 million, although continued
availability of this facility in the future is dependent upon improvements over
current financial performance. The Credit Facility bears interest at the
applicable prime rate per annum or Libor plus a margin as specified therein per
annum and is collateralized by a first priority security interest in all of the
current and future assets of the Company. The Credit Facility contains typical
affirmative and negative covenants, including covenants that restrict the
Company's ability to: incur certain additional indebtedness; make certain loans,
investments or guarantees; pay dividends; make certain asset sales; incur
certain liens or other encumbrances; conduct certain transactions with
affiliates and enter into certain corporate transactions. In addition, the
Credit Facility contains customary events of default, including upon an
acquisition or a change of control that may have a material adverse effect on
the Company or a guarantor. The Credit Facility also requires the Company to
maintain a minimum level of earnings before interest, taxes, depreciation and
amortization, and cash collections.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENTS
As at September 30, 2006, the Company's principal sources of liquidity included
cash and cash equivalents of $22.0 million, short-term investments of $4.2
million, the Credit Facility, trade accounts receivable of $32.1 million and
anticipated collection from net investment in leases due in the next 12 months
of $7.9 million. As at September 30, 2006, the Company has not drawn down on the
Credit Facility, and has letters of credit for $8.1 million secured by the
Credit Facility arrangement.
The Company believes that cash flow from operations together with existing cash
and borrowing available under the Credit Facility will be sufficient to meet
operating needs for the foreseeable future. However, the Company's operating
cash flow can be impacted if management's projections of future signings and
installations are not realized. The Company forecasts its short-term liquidity
requirements on a quarterly and annual basis. Since the Company's future cash
flows are based on estimates and there may be factors that are outside of the
Company's control, there is no guarantee the Company will continue to be able to
fund its operations through cash flows from operations. Under the terms of the
Company's typical theater system agreement, the Company receives substantial
cash payments before the Company completes the performance of its obligations.
Similarly, the Company receives cash payments for some of its film productions
in advance of related cash expenditures.
The Company's net cash provided by (used in) operating activities is impacted by
a number of factors, including the proceeds associated with new signings of
theater system lease and sale agreements in the year, the box office performance
of large format films distributed by the Company and/or exhibited in the
Company's theaters, increases or decreases in the Company's operating expenses
and the level of cash collections received from its customers.
Cash used in operating activities amounted to $7.3 million for the period ended
September 30, 2006. Changes in other non-cash operating assets as compared to
December 31, 2005 include an increase of $5.3 million in inventories, a decrease
of $1.3 million in financing receivables, a $7.9 million increase in accounts
receivable and a $0.6 million increase in prepaid expenses, which mostly relates
to prepaid film print costs that will be expensed over the period to be
benefited. Changes in other non-cash operating liabilities as compared to
December 31, 2005 include an increase in deferred revenue of $6.9 million, an
increase in accounts payable of $2.5 million and an increase of $3.8 million in
accrued liabilities. Included in accrued liabilities for the period ended
September 30, 2006 were $26.5 million in respect of accrued pension obligations
which are mostly long-term in nature.
Cash provided by investing activities amounted to $1.4 million in the first nine
months of 2006, which includes purchases of short-term investments of $14.5
million, proceeds from maturities of short-term investments of $18.7 million,
purchases of $1.7 million in fixed assets, an increase in other assets of $0.8
million and an increase in other intangible assets of $0.4 million.
Cash provided by financing activities in the first nine months of 2006 amounted
to $0.3 million, due to the issuance of common shares through the exercise of
stock options.
The Company also received $3.5 million in cash on a note receivable from a
discontinued operation and made a $0.1 million payment on discontinued
operations related to Miami IMAX Theater.
Capital expenditures including the purchase of fixed assets and investments in
film assets were $10.4 million for the first nine months of 2006.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENTS (cont'd)
Cash provided by operating activities amounted to $3.4 million for the period
ended September 30, 2005. Changes in other non-cash operating assets and
liabilities included an increase in deferred revenue of $6.7 million, and a
decrease of $4.7 million in accrued liabilities. Cash used by investing
activities for the first nine months of 2005 amounted to $14.1 million,
primarily consisting of $27.2 million invested in short-term investments and
$15.2 million received from proceeds of short-term investments. Cash provided by
financing activities amounted to $3.2 million due to the issuance of common
shares through the exercise of stock options. Capital expenditures including the
purchase of fixed assets net of sales proceeds and investments in film assets
were $8.5 million for the first nine months of 2005.
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at September 30, 2006, the Company has letters of credit of $8.1 million
outstanding, of which the entire balance has been secured by the Credit
Facility.
SENIOR NOTES DUE 2010
As at September 30, 2006, the Company had outstanding $159.0 million aggregate
principal of Registered Senior Notes and $1.0 million aggregate principal of
Unregistered Senior Notes.
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As at September 30, 2006, the Company had an unfunded and
accrued projected benefit obligation of approximately $26.5 million (2005 -
$31.1 million) in respect of this defined benefit pension plan. At the time the
Company established the defined benefit pension plan, it also took out life
insurance policies on its two Co-Chief Executive Officers with coverage amounts
of $21.5 million in aggregate. The Company intends to use the proceeds of life
insurance policies taken on its Co-Chief Executive Officers to be applied
towards the benefits due and payable under the plan, although there can be no
assurance that the Company will ultimately do so. As at September 30, 2006, the
cash surrender value of the insurance policies is $4.1 million (December 31,
2005 - $3.3 million).
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the plan. Under the terms of the plan amendment, the cost of living
adjustment and surviving spouse benefits previously owed to the Co-Chief
Executive Officers are each reduced by 50%, subject to a recoupment of a
percentage of such benefits upon a change of control of the Company, and the net
present value of the reduced pension benefit payments is accelerated and paid
out upon a change of control of the Company. The benefits were 50% vested as of
the plan initiation date. The vesting percentage increases on a straight-line
basis from inception until age 55. The vesting percentage of a member whose
employment terminates other than by voluntary retirement or upon change in
control shall be 100%. As of September 30, 2006, one of the Co-Chief Executives
was 100% vested and the other Co-Chief Executive was approximately 81% vested.
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
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IMAX CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses is denominated in Canadian
dollars. A portion of the Company's net U.S. dollar flows is converted to
Canadian dollars to fund Canadian dollar expenses through the spot market. In
Japan, the Company has ongoing operating expenses related to its operations. Net
Japanese yen flows are converted to U.S. dollars through the spot market. The
Company also has cash receipts under leases denominated in Japanese yen, Euros
and Canadian dollars. The Company plans to convert Japanese yen and Euros lease
cash flows to U.S. dollars through the spot markets on a go-forward basis.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION 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 the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods.
As discussed in the Company's June 30, 2006 Form 10-Q filing, the Company's
management, with the participation of its Co-Chief Executive Officers and its
Chief Financial Officer, evaluated the effectiveness of the Company's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) or 15d-15(e)) as not effective at the reasonable
assurance level because of the identification of a material weakness in the
Company's internal control over financial reporting, which management views as
an integral part of the Company's disclosure controls and procedures. This
material weakness related to the controls surrounding the analysis and recording
of complex film accounting transactions in the three months ended June 30, 2006.
This control deficiency resulted in an adjustment to the Company's Consolidated
Statement of Operations for the three months ended June 30, 2006 of
approximately $0.8 million, which adjustment was identified and made prior to
the release of the Company's June 30, 2006 Form 10-Q.
As of the third quarter of 2006, management is implementing controls to
strengthen the analysis of complex film accounting transactions and to remediate
the identified material weakness, including engaging independent third party
experts to analyze the Company's proposed accounting treatment of such
transactions.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than indicated above, there were no changes in the Company's internal
control over financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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IMAX CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(A) In March 2005, the Company, together with Three-Dimensional Media Group,
Ltd. ("3DMG"), filed a complaint in the U.S. District Court for the Central
District of California, Western Division, against In-Three, Inc.
("In-Three") alleging patent infringement and seeking injunctive relief and
damages. In April 2005, In-Three filed an answer denying infringement and
asserting counterclaims that seek a declaratory judgement of
non-infringement, invalidity and unenforceability of the patent in suit,
and damages for alleged false advertising, false designation of origin,
breach of contract, interference with prospective economic advantage and/or
unfair competition. On March 13, 2006, the Company and In-Three entered
into a settlement agreement, resolving all matters between the parties. On
March 29, 2006, the Company and In-Three filed a joint motion for an order
dismissing with prejudice all claims and counterclaims between the parties.
The U.S. District Court for the Central District of California, Western
Division has stayed a determination on the joint motion at the joint
request of the Company, 3DMG, and In-Three pending a resolution of an
arbitration proceeding between the Company and 3DMG before the
International Centre for Dispute Resolution relating to rights under
agreements between the Company and 3DMG. The Company believes the amount of
the 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 the Company, although no assurance can be given with respect
to the ultimate outcome of such proceedings.
(B) In January 2004, the Company and IMAX Theater Services Ltd., a subsidiary
of the Company, commenced an arbitration seeking damages of approximately
$3.7 million before the International Court of Arbitration of the
International Chambers of Commerce (the "ICC") with respect to the breach
by Electronic Media Limited ("EML") of its December 2000 agreement with the
Company. In June 2004, the Company commenced a related arbitration before
the ICC against EML's affiliate, E-CITI Entertainment (I) PVT Limited
("E-Citi"), seeking $17.8 million in damages as a result of E-Citi's breach
of a September 2000 lease agreement. The arbitration hearing on both claims
took place in November 2005. On February 1, 2006, the ICC issued an award
finding unanimously in the Company's favor on all claims. The ICC hearing
to determine the amount of damages to be awarded to the Company took place
on July 26 - 28, 2006. The ICC panel has not yet rendered its decision with
respect to such damages and no amount has yet been recorded for these
damages.
(C) In June 2004, Robots of Mars, Inc. ("Robots") initiated an arbitration
proceeding against the Company in California with the American Arbitration
Association pursuant to an arbitration provision in a 1994 film production
agreement between Robots' predecessor-in-interest and a subsidiary of the
Company, asserting claims for breach of contract, fraud, breach of
fiduciary duty and intentional interference with contract. Robots is
seeking an accounting of the Company's revenues and an award of all sums
alleged to be due to Robots under the production agreement, as well as
punitive damages. The Company intends to vigorously defend the arbitration
proceeding and believes the amount of the 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 the Company, although
no assurance can be given with respect to the ultimate outcome of such
arbitration.
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IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(D) The Company and certain of its officers and directors were named as
defendants in eight purported class action lawsuits filed between August
11, 2006 and 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 District of New York. These lawsuits, brought on behalf of
shareholders who purchased the Company's common stock between February 17,
2006 and August 9, 2006, allege primarily that the defendants engaged in
securities fraud by disseminating materially false and misleading
statements during the class period regarding their revenue recognition of
theater system installations, and failing to disclose material information
concerning the Company's revenue recognition practices. Currently there are
motions for consolidation, assignment of lead plaintiff, and appointment of
lead plaintiff counsel pending before the Court. These lawsuits are in very
early stages and seek unspecified compensatory damages, costs, and
expenses. The Company believes the allegations made against it in the
complaints are meritless and will vigorously defend the matter. The Company
believes the amount of the 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 the Company, although no assurance can
be given with respect to the ultimate outcome of such proceedings.
(E) A purported class action lawsuit was filed on September 20, 2006 in the
Ontario Superior Court of Justice against the Company and certain of its
officers and directors, alleging violations of Canadian securities laws.
This lawsuit was brought on behalf of shareholders who acquired the
Company's securities from February 17, 2006 to August 9, 2006. This lawsuit
is in a very early stage and seeks unspecified compensatory and punitive
damages, as well as costs and expenses. The Company believes the
allegations made against it in the complaint are meritless and will
vigorously defend the matter. The Company believes the amount of the 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 the Company, although no assurance can be given with respect to the
ultimate outcome of such proceedings.
(F) In addition to the matters described above, the Company is currently
involved in other legal proceedings which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
results of operations, although no assurance can be given with respect to
the ultimate outcome of any such proceedings.
(G) The Company is in the process of responding to informal inquiries from the
U.S. Securities and Exchange Commission and the Ontario Securities
Commission regarding the Company's timing of revenue recognition, including
its application of multiple element arrangement accounting in its revenue
recognition for theater systems. The Company believes its application of
its accounting policies is, and has historically been, in accordance with
U.S. GAAP, and the Company's position is supported by its auditors,
PricewaterhouseCoopers LLP. The Company is cooperating in these inquiries.
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IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A. Risk
Factors in the Company's Annual Report on Form 10-K for the year ended December
31, 2005.
ITEM 6. EXHIBITS
(A) EXHIBITS
10.28 Fourth Amending Agreement dated October 5, 2006 between IMAX Corporation
and Robert D. Lister.
10.29 Summary of Employment Arrangement dated November 6, 2006 between IMAX
Corporation and Edward MacNeil.
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated November 9, 2006, by Bradley J. Wechsler.
31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated November 9, 2006, by Richard L. Gelfond.
31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated November 9, 2006, by Edward MacNeil.
32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated November 9, 2006, by Bradley J. Wechsler.
32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated November 9, 2006, by Richard L. Gelfond.
32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated November 9, 2006, by Edward MacNeil.
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IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: November 9, 2006 By: /s/ Edward MacNeil
------------------------------------
Edward MacNeil
Chief Financial Officer
(Principal Financial Officer)
Date: November 9, 2006 By: /s/ Kathryn A. Gamble
------------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
Page 62