| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Canada | 98-0140269 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
| 2525 Speakman Drive, Mississauga, Ontario, Canada | L5K 1B1 | |
| (Address of principal executive offices) | (Postal Code) |
Class
|
Outstanding as of June 30, 2007 | |
Common stock, no par value
|
40,288,074 |
Page 1
Page 2
Page 3
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| 5 | ||||
| 6 | ||||
| 7 | ||||
| 8 | ||||
Page 4
| March 31, | ||||||||
| 2007 | December 31, | |||||||
| (unaudited) | 2006 | |||||||
| As restated | As restated | |||||||
| (note 3) | (note 3) | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 25,252 | $ | 25,123 | ||||
Short-term investments |
2,141 | 2,115 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $3,362
(2006 - $3,253) |
18,725 | 26,017 | ||||||
Financing receivables (note 4) |
65,884 | 65,878 | ||||||
Inventories (note 5) |
26,664 | 26,913 | ||||||
Prepaid expenses |
2,552 | 3,432 | ||||||
Film assets |
1,160 | 1,235 | ||||||
Property, plant and equipment |
23,519 | 24,639 | ||||||
Other assets |
10,623 | 10,365 | ||||||
Deferred income taxes (note 12) |
— | — | ||||||
Goodwill |
39,027 | 39,027 | ||||||
Other intangible assets |
2,558 | 2,547 | ||||||
Total assets |
$ | 218,105 | $ | 227,291 | ||||
Liabilities |
||||||||
Accounts payable |
$ | 5,306 | $ | 11,426 | ||||
Accrued liabilities (notes 8(a), 9(i),13(a), 16(a), 16(c)) |
60,824 | 58,294 | ||||||
Deferred revenue |
56,762 | 55,803 | ||||||
Senior Notes due 2010 (note 6) |
160,000 | 160,000 | ||||||
Total liabilities |
282,892 | 285,523 | ||||||
Commitments and contingencies (notes 8 and 9) |
||||||||
Shareholders’ deficit |
||||||||
Capital stock (note 13) Common shares – no par value. Authorized –
unlimited number. Issued and outstanding – 40,285,574 (2006 –
40,285,574) |
122,024 | 122,024 | ||||||
Other equity |
3,054 | 2,937 | ||||||
Deficit |
(191,208 | ) | (184,375 | ) | ||||
Accumulated other comprehensive income |
1,343 | 1,182 | ||||||
Total shareholders’ deficit |
(64,787 | ) | (58,232 | ) | ||||
Total liabilities and shareholders’ deficit |
$ | 218,105 | $ | 227,291 | ||||
Page 5
| Three months ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| As restated | As restated | |||||||
| (note 3) | (note 3) | |||||||
Revenues |
||||||||
Equipment and product sales |
$ | 7,074 | $ | 7,774 | ||||
Services |
17,657 | 13,469 | ||||||
Rentals |
1,286 | 979 | ||||||
Finance income |
1,186 | 1,112 | ||||||
| 27,203 | 23,334 | |||||||
Cost of goods sold, services and rentals |
||||||||
Equipment and product sales |
3,943 | 4,206 | ||||||
Services |
11,292 | 10,661 | ||||||
Rentals |
560 | 477 | ||||||
| 15,795 | 15,344 | |||||||
Gross margin |
11,408 | 7,990 | ||||||
Selling, general and administrative expenses (note 10) |
10,321 | 10,532 | ||||||
Research and development |
1,495 | 915 | ||||||
Amortization of intangibles |
136 | 192 | ||||||
Receivable provisions net of (recoveries) (note 11) |
6 | 143 | ||||||
Loss from operations |
(550 | ) | (3,792 | ) | ||||
Interest income |
226 | 253 | ||||||
Interest expense |
(4,249 | ) | (4,157 | ) | ||||
Loss from continuing operations before income taxes |
(4,573 | ) | (7,696 | ) | ||||
(Provision for) recovery of income taxes |
(167 | ) | 1,692 | |||||
Net loss from continuing operations |
(4,740 | ) | (6,004 | ) | ||||
Net earnings from discontinued operations |
— | 2,300 | ||||||
Net loss |
$ | (4,740 | ) | $ | (3,704 | ) | ||
Earnings (loss) per share |
||||||||
Earnings (loss) per share – basic and diluted: |
||||||||
Net loss from continuing operations |
$ | (0.12 | ) | $ | (0.15 | ) | ||
Net earnings from discontinued operations |
$ | — | $ | 0.06 | ||||
Net loss |
$ | (0.12 | ) | $ | (0.09 | ) | ||
Other comprehensive income consists of: |
||||||||
Amortization of prior service credits (net of tax provision of $76) |
$ | 161 | $ | — | ||||
Page 6
| Three months ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| As restated | As restated | |||||||
| (note 3) | (note 3) | |||||||
Cash provided by (used in): |
||||||||
Operating Activities |
||||||||
Net loss |
$ | (4,740 | ) | $ | (3,704 | ) | ||
Net (earnings) from discontinued operations |
— | (2,300 | ) | |||||
Items not involving cash: |
||||||||
Depreciation and amortization |
3,006 | 3,402 | ||||||
Write-downs (note 11) |
6 | 143 | ||||||
Change in deferred income taxes |
(76 | ) | (1,387 | ) | ||||
Stock and other non-cash compensation |
1,809 | 1,605 | ||||||
Non-cash foreign exchange gain |
(109 | ) | (29 | ) | ||||
Interest on short-term investments |
(26 | ) | (85 | ) | ||||
Investment in film assets |
(1,340 | ) | (1,651 | ) | ||||
Changes in other non-cash operating assets and liabilities |
2,863 | (1,636 | ) | |||||
Net cash used by operating activities from discontinued operations |
(775 | ) | — | |||||
Net cash provided by (used in) operating activities |
618 | (5,642 | ) | |||||
Investing Activities |
||||||||
Purchases of short-term investments |
(2,124 | ) | (4,098 | ) | ||||
Proceeds from maturities of short-term investments |
2,124 | 4,097 | ||||||
Purchase of property, plant and equipment |
(99 | ) | (92 | ) | ||||
Increase in other assets |
(245 | ) | (187 | ) | ||||
Increase in other intangible assets |
(148 | ) | (91 | ) | ||||
Net cash provided by investing activities from discontinued operations |
— | 3,493 | ||||||
Net cash provided by (used in) investing activities |
(492 | ) | 3,122 | |||||
Financing Activities |
||||||||
Common shares issued |
— | 254 | ||||||
Net cash provided by financing activities |
— | 254 | ||||||
Effects of exchange rate changes on cash |
3 | (35 | ) | |||||
Increase (decrease) in cash and cash equivalents, during the year |
129 | (2,301 | ) | |||||
Cash and cash equivalents, beginning of period |
25,123 | 24,324 | ||||||
Cash and cash equivalents, end of period |
$ | 25,252 | $ | 22,023 | ||||
Page 7
| 1. | Basis of Presentation | |
| IMAX Corporation, together with its subsidiaries, reports its results under United States Generally Accepted Accounting Principles (“U.S. GAAP”). | ||
| The condensed consolidated financial statements include the accounts of IMAX Corporation together with its subsidiaries (the “Company”), except subsidiaries which the Company has identified as variable interest entities (“VIEs”) where the Company is not the primary beneficiary. 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 has evaluated its various variable interests to determine whether they are VIEs in accordance with Financial Accounting Standard Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). The Company has six film production companies that are VIEs. As the Company is exposed to the majority of the expected losses for one of the film production companies, the Company has determined that it is the primary beneficiary of this entity. The Company continues to consolidate this entity, with no material impact on the operating results or financial condition of the Company, as this production company has total assets and total liabilities of $nil as at March 31, 2007 (December 31, 2006 — $nil). For the other five 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. The Company equity accounts for these entities. As of March 31, 2007, these five VIEs have total assets of $0.4 million (December 31, 2006 — $0.4 million) and total liabilities of $0.4 million (December 31, 2006 — $0.4 million). | ||
| All significant intercompany accounts and transactions, including all intercompany profits on transactions with equity-accounted investees, have been eliminated. | ||
| These financial statements should be read in conjunction with the financial statements included in the Company’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2006 (the “2006 Form 10-K/A”) 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, 2006, except as noted below. | ||
| 2. | Change in Accounting Policy | |
| Income Taxes | ||
| In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (an interpretation of FASB Statement No. 109), (“FIN 48”). This interpretation prescribes a more likely than not recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provided guidance on derecognition of a tax position, classification of a liability for unrecognized tax benefits, accounting or interest and penalties, accounting in interim periods, and expanded income tax disclosures. FIN 48 was effective for the Company on January 1, 2007. The cumulative effect of the change in accounting principle recorded in the first quarter of 2007 upon adoption of FIN 48 is an increase to the tax liability of $2.1 million and a charge to opening deficit. For additional information see note 12. |
Page 8
| 3. | Restatement of Previously Issued Financial Statements | |
| As a result of certain transactions occurring during the 2007 fiscal year, the Company identified certain errors related to operating leases for its facilities and sponsorship revenues associated with its owned and operated theaters. In addition, the Company identified an error relating to revenue recognition, resulting from the Company’s review of one theater system arrangement which occurred in 2002 in response to comments received from the Staff of the Division of Corporate Finance of the SEC. As a result, the previously issued consolidated financial statements as at March 31, 2007 and December 31, 2006 and for the three months ended March 2007 and 2006, have been restated (the “Second Restatement”). The previously issued consolidated financial statements included in the Original 2007 First Quarter Form 10-Q, filed on July 20, 2007, had included restatements related to the consolidated financial statements for the three months ended March 31, 2006 (the “First Restatement”). | ||
| a) | First Restatement | |
| In 2006, the Company effected a restatement of its prior period financial results due to discovery of certain errors related to: (a) revenue recognition resulting from the Company’s review of its theater system arrangements over the 5 year period ended December 31, 2006 in response to comments received from the staff of both the United States Securities and Exchange Commission (“SEC”) and the Ontario Securities Commission (“OSC”) which indicated insufficient analysis of various sales and lease transactions and the accounting effect of certain contractual provisions within them; and misallocations of consideration to elements within certain multiple element arrangements; (b) capitalization of costs into inventory and film assets and amortization of film assets in accordance with American Institute of Certified Public Accountants Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SOP 00-2”); (c) income tax liabilities resulting from failure to make certain tax elections on a timely basis and (d) certain other items described under Other Adjustments in this note. In addition, in the preparation of the consolidated financial statements for the year ended December 31, 2006, the Company recorded other adjustments related to prior periods’ unadjusted differences that had been deemed not to be material and adjustments related to prior periods recorded through the 2006 opening shareholders’ deficit. | ||
| b) | Second Restatement | |
| In October 2007, the Company announced that, after a review of its real estate leases, it had identified certain errors related to its accounting practices as they relate to such leases for certain of the Company’s owned and operated theaters and office facilities. The Company conducted this review after performing an analysis of a rent-abatement initiated in connection with the higher level of Finance Department oversight and awareness contemplated by the company’s ongoing remediation plan (see Item 4). The review focused on the Company’s historical accounting practice for recording the impact of rent holidays, abatements, escalation clauses and landlord construction allowances. The Company also reviewed its accounting for theater sponsorship revenue at its owned and operated theaters. As a result of this review, the Company concluded that certain of its prior practices were not in accordance with U.S. GAAP and the Company has restated its consolidated financial statements for prior periods. Information on the restatement of the consolidated balance sheet for the year ended December 31, 2006 is included in the 2006 Amended Annual Report on Form 10-K/A. The overall net impact of these restatement errors was an increase of $5.7 million in the March 31, 2007 closing deficit. | ||
| Furthermore, the Company identified an error relating to the classification of a theater system arrangement. The arrangement was originally treated as a sale with contingent minimums however, after further review of significant terms in the agreement it was determined that the arrangement should have been treated as an operating lease, the correction of which increased the March 31, 2007 closing deficit by $0.4 million. |
Page 9
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| c) | Impact of the First Restatement | |
| Revenue Recognition — Theater Systems | ||
| The Company’s revenue arrangements include multiple elements. In prior years, the Company considered each component of its theater systems to be a separate element. As a result, revenue was recognized when certain components were installed. As part of the review of its revenue recognition policy, the Company concluded its policy for revenue recognition on theater systems should be revised to treat all components of the theater system (including the projector, sound system, and screen system and, if applicable, 3D glasses cleaning machine), theater design support, supervision of installation, projectionist training and the use of that IMAX brand as a single deliverable and a single unit of accounting, (the “System Deliverable”). In addition, the Company revised its policy to recognize revenue only when all of the following conditions have been met: (i) the projector, sound system and screen system have been installed and are in full working condition, (ii) the 3D glasses cleaning machine, if applicable, has been delivered, (iii) projectionist training has been completed and (iv) the earlier of (a) receipt of written customer acceptance certifying the completion of installation and run-in testing of the equipment and the completion of projection training or (b) public opening of the theater. In conjunction with these changes, the Company undertook an extensive review of all of its revenue arrangements for theater systems for the period from 2002 to 2006. Three transactions which were originally recorded in 2005 (revenue and net earnings impact of $5.3 million and $2.7 million, respectively) were moved to the first quarter of 2006. One transaction which was originally recorded in the first quarter of 2006 (revenue and net earnings impact of $1.8 million and $0.4 million, respectively) was moved to the second quarter of 2006. The net impact of these adjustments was an increase in revenue and net earnings of $3.2 million and $2.1 million, respectively, for the quarter ended March 31, 2006. | ||
| Revenue Recognition — Other | ||
| As a result of the review of the revenue arrangements, the Company identified additional errors including the following: |
| § | Based on an analysis of fair values of the elements within its arrangements, the Company determined that the allocations of consideration received and receivable to elements of multiple element arrangements were not updated to reflect the current fair values of particular elements, in particular fair values of maintenance and extended warranty services in the periods affected were not updated in accordance with the accounting guidance in Emerging Issues Task Force (“EITF”) Issue 00-21 and other applicable standards. This affected allocations of consideration in various arrangements to the System Deliverable, maintenance and extended warranty services, 3D glasses and film license credits. In addition, in certain arrangements, settlement income was adjusted to reflect the residual amount based on other elements being reflected at their fair values. | ||
| § | The existence of certain non-standard contractual provisions resulted in the reclassification of: certain sales to sales-type lease transactions given lien rights were retained; certain sales-type leases to operating leases given substantially all of the benefits and risks of ownership had not passed to the customer and certain contractual default clauses impacted the timing of recognition of the minimum annual payments under the arrangements. | ||
| § | Finance income continued to be recognized when the related financing receivables were impaired. The Company has corrected the error by discontinuing the recognition of finance income until the impairment issues were resolved. |
| The impact of these adjustments was a decrease to net loss by $0.1 million for the three months ended March 31, 2006. | ||
| Inventory Costs | ||
| During the period from 2001 to 2006, the Company paid certain fees to a professional services firm to assist the Company in identifying sales opportunities and provide assistance in negotiating and concluding contracts in the developing Asian market. These fees were capitalized and allocated to theater systems inventory for various Asian customers. The Company has determined that these fees were promotional and selling expenses which should have been expensed as incurred as the costs were not direct and incremental costs to a contract. The net loss has been increased by less than $0.1 million for the three months ended March 31, 2006. |
Page 10
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| c) | Impact of the First Restatement (cont’d) | |
| Film Accounting | ||
| The Company has determined that it had misclassified certain costs incurred in respect of co-produced film productions between 2004 and the third quarter of 2006. Marketing and advertising costs were co-mingled with film production costs, and both were capitalized to film assets, and subsequently amortized into the income statement over the estimated total ultimate revenues associated with the film productions. Film exploitation costs, which include marketing and advertising costs, as defined in SOP 00-2, should have been expensed in the period incurred and not capitalized to film assets. In addition, certain costs were accrued by the Company prior to being incurred. These costs have been moved to the period they were incurred. On certain co-produced film productions the Company received production fees which should have been deferred and recognized over the film ultimates. These production fees were previously recognized when production of the film was complete. The Company also determined that it had not appropriately applied the individual-film-forecast computation method when it amortized its film assets and deferred production fees and accrued its participation liabilities for the periods between 2002 and the third quarter of 2006. SOP 00-2 requires changes in estimates of ultimate revenues used in the individual-film-forecast computation method to be adjusted prospectively from the beginning of the year of the change. The Company had applied changes in estimates on a retroactive basis from the original release date. In addition, the Company adjusted its amortization of prepaid print costs. The net loss has been increased by $0.3 million for the three months ended March 31, 2006. | ||
| Branch Level Interest Taxes | ||
| The Company did not properly account for tax liabilities for branch level interest tax. For the years ended December 31, 2002, 2003 and 2004, the Company failed to make timely tax elections that would have prevented an allocation of the Company’s interest expense on its long-term indebtedness to the Company’s U.S. branch income tax returns. In 2006, the Company was assessed branch level interest taxes, interest and penalties due to the fact that these tax elections were not filed on a timely basis. The Company has determined that an accrued liability for the tax obligations should have been recorded at the time elections should have been filed and the taxes were due to be paid, which was in the third quarter of each of the years ended December 31, 2003, 2004 and 2005. The net loss has been decreased by $0.2 million for the three months ended March 31, 2006. | ||
| Other Adjustments | ||
| During the preparation of executive compensation information for the 2006 Annual Report on Form 10-K, the Company determined that the two Co-Chief Executive Officers ( Co-CEOs ) were entitled to postretirement health benefits since 2000 for which the obligation had not been included in the prior financial statements as required under SFAS No. 106, “Employer’s Accounting for Postretirement Benefits Other than Pensions”. As a result the Company should have accrued $0.2 million in 2000. SG&A has been increased by less than $0.1 million for the three months ended March 31, 2006. |
Page 11
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| c) | Impact of the First Restatement (cont’d) | |
| The following table presents the impact of the First Restatement on the Company’s previously issued consolidated statements of operations for the three months ended March 31, 2006: |
| As | ||||||||||||||||||||||||||||||||
| Restated | ||||||||||||||||||||||||||||||||
| Revenue | Branch | Per | ||||||||||||||||||||||||||||||
| As | Recognition- | Revenue | Level | Original | ||||||||||||||||||||||||||||
| Previously | Theater | Recognition- | Inventory | Film | Interest | Other | 2007 | |||||||||||||||||||||||||
| Reported(1) | Systems | Other | Costs | Accounting | Taxes | Adjustments | Form 10-Q | |||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||||||
Equipment and product sales |
$ | 4,679 | $ | 3,315 | $ | (174 | ) | $ | — | $ | — | $ | — | $ | — | $ | 7,820 | |||||||||||||||
Services |
13,708 | — | 243 | — | (517 | ) | — | — | 13,434 | |||||||||||||||||||||||
Rentals |
854 | — | 45 | — | — | — | — | 899 | ||||||||||||||||||||||||
Finance income |
1,177 | (81 | ) | 16 | — | — | — | — | 1,112 | |||||||||||||||||||||||
| 20,418 | 3,234 | 130 | — | (517 | ) | — | — | 23,265 | ||||||||||||||||||||||||
Costs of goods sold, services and rentals |
||||||||||||||||||||||||||||||||
Equipment and product sales |
3,121 | 1,085 | — | — | — | — | — | 4,206 | ||||||||||||||||||||||||
Services |
10,828 | 14 | — | — | (225 | ) | — | — | 10,617 | |||||||||||||||||||||||
Rentals |
444 | — | 21 | — | — | — | — | 465 | ||||||||||||||||||||||||
| 14,393 | 1,099 | 21 | — | (225 | ) | — | — | 15,288 | ||||||||||||||||||||||||
Gross margin |
6,025 | 2,135 | 109 | — | (292 | ) | 7,977 | |||||||||||||||||||||||||
Selling, general and administrative expenses |
10,505 | — | — | 45 | — | — | 3 | 10,553 | ||||||||||||||||||||||||
Research and development |
915 | — | — | — | — | — | — | 915 | ||||||||||||||||||||||||
Amortization of intangibles |
192 | — | — | — | — | — | — | 192 | ||||||||||||||||||||||||
Receivable provisions net of (recoveries) |
143 | — | — | — | — | — | — | 143 | ||||||||||||||||||||||||
Earnings from operations |
(5,730 | ) | 2,135 | 109 | (45 | ) | (292 | ) | — | (3 | ) | (3,826 | ) | |||||||||||||||||||
Interest income |
253 | — | — | — | — | — | — | 253 | ||||||||||||||||||||||||
Interest expense |
(4,174 | ) | — | — | — | — | 17 | — | (4,157 | ) | ||||||||||||||||||||||
Earnings (loss) from continuing operations
before income taxes |
(9,651 | ) | 2,135 | 109 | (45 | ) | (292 | ) | 17 | (3 | ) | (7,730 | ) | |||||||||||||||||||
Recovery of (provision for) income taxes |
1,530 | — | — | — | — | 162 | — | 1,692 | ||||||||||||||||||||||||
Net earnings (loss) from continuing operations |
(8,121 | ) | 2,135 | 109 | (45 | ) | (292 | ) | 179 | (3 | ) | (6,038 | ) | |||||||||||||||||||
Net earnings from discontinued operations |
2,300 | — | — | — | — | — | — | 2,300 | ||||||||||||||||||||||||
Net earnings (loss) |
$ | (5,821 | ) | $ | 2,135 | $ | 109 | $ | (45 | ) | $ | (292 | ) | $ | 179 | $ | (3 | ) | $ | (3,738 | ) | |||||||||||
Earnings (loss) per share |
||||||||||||||||||||||||||||||||
Earnings (loss) per share – basic: |
||||||||||||||||||||||||||||||||
Net earnings (loss) from continuing operations |
$ | (0.20 | ) | $ | 0.05 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (0.15 | ) | ||||||||||||||
Net earnings from discontinued operations |
$ | 0.06 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 0.06 | ||||||||||||||||
Net (loss) earnings |
$ | (0.14 | ) | $ | 0.05 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (0.09 | ) | ||||||||||||||
Earnings (loss) per share – diluted: |
||||||||||||||||||||||||||||||||
Net earnings (loss) from continuing operations |
$ | (0.20 | ) | $ | 0.05 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (0.15 | ) | ||||||||||||||
Net earnings from discontinued operations |
$ | 0.06 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 0.06 | ||||||||||||||||
Net earnings (loss) |
$ | (0.14 | ) | $ | 0.05 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (0.09 | ) | ||||||||||||||
| (1) | The Company has changed the presentation of revenues and cost of goods sold, services and rentals to conform to the presentation requirements specified in Regulation S-X of the Securities Exchange Act of 1934. |
Page 12
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| d) | Impact of the Second Restatement | |
| Operating Leases | ||
| FASB Statement No. 13, “Accounting for Leases” (“SFAS 13”), and related interpretations require that rent expense related to operating leases be recognized on a straight-line basis over the term of the lease commencing when a lessee takes possession of or controls the use of the space. In addition, FASB Technical Bulletin 88-1, “Issues Related to Accounting for Leases”, requires lease incentives, such as landlord construction allowances received to defray construction costs incurred by the Company, be reflected as a deferred lease incentive, amortized over the lease term as a reduction to rent expense. Previously, the Company had recognized certain rent reductions and escalation clauses based on cash payments beginning from the date of occupancy or lease commencement date, which had the effect of excluding any rent expense during the build-out period. In addition, in certain cases, the Company had not recorded landlord construction allowances as a deferred lease incentive. The Company has restated the current and prior periods’ consolidated financial statements to recognize net rent expense on a straight-line basis over the period from the date the Company obtains possession and control of the property to the end of the lease term. Net rent expense includes payments as required under the lease adjusted for rent holidays, abatements, escalation clauses and construction allowances. In addition, the Company adjusted depreciation and impairment charges to reflect the full cost of the leaseholds acquired. The net impact of these restatement errors on net earnings was a nominal reduction in the loss for the three months ended March 31, 2007 and the three months ended March 31, 2006. | ||
| Sponsorship Revenue | ||
| The Company also determined the accounting for theater sponsorship revenue should have been recognized on a straight–line basis over the contractual period of the sponsorship. Previously, the Company recorded these revenues based on cash collections. The net impact of these restatement errors was a nominal reduction in the loss for the three months ended March 31, 2007 and 2006. | ||
| Revenue Recognition | ||
| The Company also determined that one theater system revenue transaction had been classified as a sale with contingent minimums, which should have been classified as an operating lease. The Company reached this conclusion after consideration of EITF Issue No. 95-1, “Revenue Recognition on Sales with Guaranteed Minimum Resale Value,” and SFAS 13, since the arrangement contained an option, exercisable by the customer, requiring the Company to repurchase the theater system equipment for a fixed amount under certain conditions. The net impact of this restatement errors was a nominal reduction in the loss for the three months ended March 31, 2007 and 2006. |
Page 13
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| d) | Impact of the Second Restatement (cont’d) | |
| The following table presents the impact of the Second Restatement on the Company’s previously issued consolidated balance sheet as of March 31, 2007: |
| As Previously | ||||||||||||||||||||
| Reported | Second Restatement | |||||||||||||||||||
| Per Original | Real Estate | As Restated | ||||||||||||||||||
| 2007 | Operating | Sponsorship | Revenue | Per 2007 | ||||||||||||||||
| Form 10-Q | Leases | Revenue | Recognition | Form 10-Q/A | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 25,252 | $ | — | $ | — | $ | — | $ | 25,252 | ||||||||||
Short-term investments |
2,141 | — | — | — | 2,141 | |||||||||||||||
Accounts Receivable |
18,725 | — | — | — | 18,725 | |||||||||||||||
Financing receivables |
65,884 | — | — | — | 65,884 | |||||||||||||||
Inventories |
26,664 | — | — | — | 26,664 | |||||||||||||||
Prepaid expenses |
2,552 | — | — | — | 2,552 | |||||||||||||||
Film assets |
1,160 | — | — | — | 1,160 | |||||||||||||||
Property, plant and equipment |
23,280 | — | — | 239 | 23,519 | |||||||||||||||
Other assets |
10,623 | — | — | — | 10,623 | |||||||||||||||
Goodwill |
39,027 | — | — | — | 39,027 | |||||||||||||||
Other intangible assets |
2,558 | — | — | — | 2,558 | |||||||||||||||
Total assets |
$ | 217,866 | $ | — | $ | — | $ | 239 | $ | 218,105 | ||||||||||
Liabilities |
||||||||||||||||||||
Accounts payable |
$ | 5,306 | $ | — | $ | — | $ | — | $ | 5,306 | ||||||||||
Accrued liabilities |
53,643 | 7,181 | — | — | 60,824 | |||||||||||||||
Deferred revenue |
57,643 | (1,608 | ) | 44 | 683 | 56,762 | ||||||||||||||
Senior Notes due 2010 |
160,000 | — | — | — | 160,000 | |||||||||||||||
Total liabilities |
276,592 | 5,573 | 44 | 683 | 282,892 | |||||||||||||||
Shareholders’ deficit |
||||||||||||||||||||
Capital Stock |
122,024 | — | — | — | 122,024 | |||||||||||||||
Other equity |
3,054 | — | — | — | 3,054 | |||||||||||||||
Deficit |
(185,147 | ) | (5,573 | ) | (44 | ) | (444 | ) | (191,208 | ) | ||||||||||
Accumulated other
comprehensive income |
1,343 | — | — | — | 1,343 | |||||||||||||||
Total shareholders’ deficit |
(58,726 | ) | (5,573 | ) | (44 | ) | (444 | ) | (64,787 | ) | ||||||||||
Total liabilities and
shareholders’ deficit |
$ | 217,866 | $ | — | $ | — | $ | 239 | $ | 218,105 | ||||||||||
Page 14
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| d) | Impact of the Second Restatement (cont’d) | |
| The following table presents the impact of the Second Restatement on the Company’s previously issued consolidated statements of operations for the three months ended March 31, 2007: |
| As Previously | ||||||||||||||||||||
| Reported | Second Restatement | |||||||||||||||||||
| Per Original | Real Estate | As Restated | ||||||||||||||||||
| 2007 | Operating | Sponsorship | Revenue | Per 2007 | ||||||||||||||||
| Form 10-Q | Leases | Revenue | Recognition | Form 10-Q/A | ||||||||||||||||
Revenues |
||||||||||||||||||||
Equipment and product sales |
$ | 7,105 | $ | — | $ | — | $ | (31 | ) | $ | 7,074 | |||||||||
Services |
17,645 | — | 12 | — | 17,657 | |||||||||||||||
Rentals |
1,221 | — | — | 65 | 1,286 | |||||||||||||||
Finance income |
1,186 | — | — | — | 1,186 | |||||||||||||||
| 27,157 | — | 12 | 34 | 27,203 | ||||||||||||||||
Cost of goods sold, services and rentals |
||||||||||||||||||||
Equipment and product sales |
3,943 | — | — | — | 3,943 | |||||||||||||||
Services |
11,276 | 16 | — | — | 11,292 | |||||||||||||||
Rentals |
549 | — | — | 11 | 560 | |||||||||||||||
| 15,768 | 16 | — | 11 | 15,795 | ||||||||||||||||
Gross margin |
11,389 | (16 | ) | 12 | 23 | 11,408 | ||||||||||||||
Selling, general and administrative expenses |
10,342 | (21 | ) | — | — | 10,321 | ||||||||||||||
Research and development |
1,495 | — | — | — | 1,495 | |||||||||||||||
Amortization of intangibles |
136 | — | — | — | 136 | |||||||||||||||
Receivable provisions net of (recoveries) |
6 | — | — | — | 6 | |||||||||||||||
Earnings (loss) from operations |
(590 | ) | 5 | 12 | 23 | (550 | ) | |||||||||||||
Interest income |
226 | — | — | — | 226 | |||||||||||||||
Interest expense |
(4,249 | ) | — | — | — | (4,249 | ) | |||||||||||||
Earnings (loss) from continuing operations
before income taxes |
(4,613 | ) | 5 | 12 | 23 | (4,573 | ) | |||||||||||||
Provision for income taxes |
(167 | ) | — | — | — | (167 | ) | |||||||||||||
Net loss from continuing operations |
(4,780 | ) | 5 | 12 | 23 | (4,740 | ) | |||||||||||||
Net earnings from discontinued operations |
— | — | — | — | — | |||||||||||||||
Net earnings (loss) |
$ | (4,780 | ) | $ | 5 | $ | 12 | $ | 23 | $ | (4,740 | ) | ||||||||
Earnings (loss) per share |
||||||||||||||||||||
Earnings (loss) per share – basic and diluted: |
||||||||||||||||||||
Net loss from continuing operations |
$ | (0.12 | ) | $ | — | $ | — | $ | — | $ | (0.12 | ) | ||||||||
Net earnings from discontinued operations |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Net loss |
$ | (0.12 | ) | $ | — | $ | — | $ | — | $ | (0.12 | ) | ||||||||
Page 15
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| d) | Impact of the Second Restatement (cont’d) | |
| The following table presents the impact of the Second Restatement on the Company’s previously issued consolidated statements of operations for the three months ended March 31, 2006: |
| As Restated | Second Restatement | |||||||||||||||||||
| Per Original | Real Estate | As Restated | ||||||||||||||||||
| 2007 | Operating | Sponsorship | Revenue | Per 2007 | ||||||||||||||||
| Form 10-Q | Leases | Revenue | Recognition | Form 10-Q/A | ||||||||||||||||
Revenues |
||||||||||||||||||||
Equipment and product sales |
$ | 7,820 | $ | — | $ | — | $ | (46 | ) | $ | 7,774 | |||||||||
Services |
13,434 | — | 35 | — | 13,469 | |||||||||||||||
Rentals |
899 | — | — | 80 | 979 | |||||||||||||||
Finance income |
1,112 | — | — | — | 1,112 | |||||||||||||||
| 23,265 | — | 35 | 34 | 23,334 | ||||||||||||||||
Costs of goods sold, services and rentals |
||||||||||||||||||||
Equipment and product sales |
4,206 | — | — | — | 4,206 | |||||||||||||||
Services |
10,617 | 44 | — | — | 10,661 | |||||||||||||||
Rentals |
465 | — | — | 12 | 477 | |||||||||||||||
| 15,288 | 44 | — | 12 | 15,344 | ||||||||||||||||
Gross margin |
7,977 | (44 | ) | 35 | 22 | 7,990 | ||||||||||||||
Selling, general and administrative expenses |
10,553 | (21 | ) | — | — | 10,532 | ||||||||||||||
Research and development |
915 | — | — | — | 915 | |||||||||||||||
Amortization of intangibles |
192 | — | — | — | 192 | |||||||||||||||
Receivable provisions net of (recoveries) |
143 | — | — | — | 143 | |||||||||||||||
Earnings (loss) from operations |
(3,826 | ) | (23 | ) | 35 | 22 | (3,792 | ) | ||||||||||||
Interest income |
253 | — | — | — | 253 | |||||||||||||||
Interest expense |
(4,157 | ) | — | — | — | (4,157 | ) | |||||||||||||
Earnings (loss) from continuing operations
before income taxes |
||||||||||||||||||||
| (7,730 | ) | (23 | ) | 35 | 22 | (7,696 | ) | |||||||||||||
Recovery of (provision for) income taxes |
1,692 | — | — | — | 1,692 | |||||||||||||||
Net earnings (loss) from continuing
operations |
(6,038 | ) | (23 | ) | 35 | 22 | (6,004 | ) | ||||||||||||
Net earnings from discontinued operations |
2,300 | — | — | — | 2,300 | |||||||||||||||
Net earnings (loss) |
$ | (3,738 | ) | $ | (23 | ) | $ | 35 | $ | 22 | $ | (3,704 | ) | |||||||
Earnings (loss) per share |
||||||||||||||||||||
Earnings (loss) per share – basic and diluted: |
||||||||||||||||||||
Net earnings (loss) from continuing operations |
$ | (0.15 | ) | $ | — | $ | — | $ | — | $ | (0.15 | ) | ||||||||
Net earnings from discontinued operations |
0.06 | — | — | — | 0.06 | |||||||||||||||
Net earnings (loss) |
$ | (0.09 | ) | $ | — | $ | — | $ | — | $ | (0.09 | ) | ||||||||
Page 16
| 3. | Restatement of Previously Issued Financial Statements (cont’d) | |
| e) | Consolidated Condensed Statements of Cash Flows | |
| As part of the Second Restatement, the Company changed the presentation of cash flows from discontinued operations to include cash flows related to operating and investing activities within those respective categories. Previously, the Company presented these cash flows on a net basis as a single caption within the statement of cash flows. | ||
| There were no other errors in the cash flow statements for the quarters ended March 31, 2007 and 2006 other than conforming changes to the components of the reconciliation to net cash provided by or used in operating activities related to the restatement adjustments described above. | ||
| 4. | Financing Receivables | |
| Financing receivables, consisting of net investment in leases and receivables from financed sales of its theater systems are as follows: |
| March 31, | December 31, | |||||||
| 2007 | 2006 | |||||||
Gross minimum lease amounts receivable |
$ | 88,175 | $ | 89,343 | ||||
Residual value of equipment |
368 | 368 | ||||||
Unearned finance income |
(30,303 | ) | (31,182 | ) | ||||
Present value of minimum lease amounts receivable |
58,240 | 58,529 | ||||||
Accumulated allowance for uncollectible amounts |
(2,555 | ) | (2,445 | ) | ||||
Net investment in leases |
55,685 | 56,084 | ||||||
Gross receivables from financed sales |
14,697 | 14,268 | ||||||
Unearned income |
(4,498 | ) | (4,474 | ) | ||||
Present value of financed sale receivables |
10,199 | 9,794 | ||||||
Total financing receivables |
$ | 65,884 | $ | 65,878 | ||||
Present value of financed sale receivables due within one year |
$ | 2,576 | $ | 1,886 | ||||
Present value of financed sale receivables due after one year |
$ | 7,623 | $ | 7,908 | ||||
| As at March 31, 2007 the financed sale receivables had a weighted average effective interest rate of 8.7% (December 31, 2006 — 8.3%). | ||
| 5. | Inventories |
| March 31, | December 31, | |||||||
| 2007 | 2006 | |||||||
Raw materials |
$ | 11,496 | $ | 11,504 | ||||
Work-in-process |
2,612 | 2,677 | ||||||
Finished goods |
12,556 | 12,732 | ||||||
| $ | 26,664 | $ | 26,913 | |||||
Page 17
| 6. | Senior Notes due 2010 | |
| As at March 31, 2007, the Company had outstanding $159.0 million aggregate principal of Registered Senior Notes and $1.0 million aggregate principal of Unregistered Senior Notes. The Registered Senior Notes and the Unregistered Senior Notes are referred to herein as the “Senior Notes”. | ||
| The terms of the Company’s Senior Notes require that annual and quarterly financial statements are filed with the Trustee within 15 days of the required public company filing deadlines. If these financial reporting covenants are breached then this is considered an event of default under the terms of the Senior Notes and the Company has 30 days to cure this default, after which the Senior Notes become due and payable. | ||
| In March 2007, the Company delayed the filing of its Annual Report on Form 10-K for the year ended December 31, 2006 beyond the required public company filing deadline due to the discovery of certain accounting errors, broadened its accounting review to include certain other accounting matters based on comments received by the Company from the SEC and OSC, and ultimately restated financial statements for certain periods during those years. The filing delay resulted in the Company being in default of a financial reporting covenant under the indenture dated as of December 4, 2003, and as thereafter amended and supplemented, governing the Company’s Senior Notes due 2010 (the “Indenture”). | ||
| On April 16, 2007 the Company completed a consent solicitation, receiving consents from holders of approximate 60% aggregate principal amount of the Senior Notes (the “Consenting Holders”) to execute a ninth supplemental indenture (the “Supplemental Indenture”) to the Indenture with the Guarantors named therein and U.S. Bank National Association. The Supplemental Indenture waived any defaults existing at such time arising from a failure by the Company to comply with the reporting covenant and extended until May 31, 2007, or at the Company’s election until June 30, 2007 (the “Covenant Reversion Date”), the date by which the Company’s failure to comply with the reporting covenant shall constitute a default, or be the basis for an event of default under the Indenture. The Company paid consent fees of $1.0 million to the Consenting Holders. On May 30, 2007, the Company provided notice to the holders of the Senior Notes of its election to extend the Covenant Reversion Date to June 30, 2007. The Company paid additional consent fees of $0.5 million to the Consenting Holders. Because the Company did not file its Annual Report on Form 10-K for the year ended December 31, 2006 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 by June 30, 2007, it was in default of the reporting covenant under the Indenture on July 1, 2007, and received notice of such default on July 2, 2007. The Company cured such default under the Indenture, by filing its 2006 Annual Report on Form 10-K and Original 2007 First Quarter Form 10-Q on July 20, 2007. See note 9(f) for more information. |
Page 18
| 7. | Credit Facility | |
| Under the Indenture governing the Company’s Senior Notes, the Company is permitted to incur indebtedness pursuant to a credit agreement, or the refinancing or replacement of a credit facility, provided that the aggregate principal amount of indebtedness thereunder outstanding at any time does not exceed the greater of a) $30,000,000 minus the amount of any such indebtedness retired with the proceeds of an Asset Sale and (b) 15% of Total Assets, as defined in the Indenture, of the Company. The Indenture also permits the Company to incur indebtedness solely in respect of performances, surety or appeal bonds, letters of credit and letters of guarantee as required in the ordinary course of business in accordance with customary industry practices. 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 equal to the lesser of (i) $40.0 million, (ii) a collateral calculation based on percentages of the book values for the Company’s net investment in sales-type leases, financing receivables, finished goods inventory allocated to backlog contracts and the appraised values of the expected future cash flows related to operating leases and of the Company’s owned real property, reduced by certain accruals and accounts payable and (iii) a minimum level of trailing cash collections in the preceding twenty–six week period ($59.1 million as of March 31, 2006), and is subject to certain limitations under the Company’s Senior Notes and is reduced for outstanding letters of credit. As at March 31, 2006, the Company’s current borrowing capacity under such calculation is $28.5 million after deduction for outstanding letters of credit of $10.6 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 agreement 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, over a period of time, a minimum level of adjusted earnings before interest, taxes, depreciation and amortization including film asset amortization, stock and other non-cash compensation, write downs (recoveries), asset impairment charges, and other non-cash uses of funds on a trailing four quarter basis calculated quarterly, of not less than $20.0 million. In the event that the Company’s available borrowing base falls below the amount borrowed against the Credit Facility, the excess above the available borrowing base becomes due upon demand by the lender. If the Credit Facility were to be terminated by either the Company or the lender, the Company would have the ability to pursue another source of financing pursuant to the terms of the Indenture. | ||
| Under the terms of the Credit Facility, the Company has to comply with several reporting requirements including the delivery of audited consolidated financial statements within 120 days of the end of the fiscal year. | ||
| In March 2007, the Company delayed the filing of its Annual Report on Form 10-K for the year ended December 31, 2006 beyond the filing deadline in order to restate financial statements for certain periods during the fiscal years 2002 — 2006. On March 27, 2007, the Credit Facility lender waived the requirement for the Company to deliver audited consolidated financial statements within 120 days of the end of the fiscal year ended December 31, 2006, provided such statements and documents were delivered on or before June 30, 2007. On June 27, 2007, the Credit Facility lender agreed that an event of default would not be deemed to have occurred unless the Company’s 2006 Form 10-K filing did not occur by July 31, 2007 or upon the occurrence and continuance of an event of default under the Company’s Indenture governing its Senior Notes, which had not been cured within the applicable grace period. The Company cured such default under the Indenture by filing its 2006 Annual Report on Form 10-K and Original 2007 First Quarter Form 10-Q on July 20, 2007. |
Page 19
| 8. | Commitments | |
| (a) | The Company’s lease commitments consist of rent and equipment under operating lease. The Company accounts for any incentives provided over the term of the lease. Total minimum annual rental payments to be made by the Company under operating leases for premises and equipment as of March 31, 2007 for each of the years ended December 31, are as follows: |
2007 (nine months remaining) |
$ | 4,637 | ||
2008 |
6,036 | |||
2009 |
5,854 | |||
2010 |
5,999 | |||
2011 |
6,136 | |||
Thereafter |
14,636 | |||
| $ | 43,298 | |||
| Recorded in accrued liabilities as at March 31, 2007 is $9.5 million (December 31, 2006 — $9.6 million) related to rent expense recognized in excess of rental payments made and landlord incentives. | ||
| (b) | As at March 31, 2007, the Company has letters of credit of $10.6 million (December 31, 2006 - $9.4 million) outstanding under the Company’s credit facility arrangement, which have been collateralized by cash deposits (see note 7). In addition, as at March 31, 2007, the Company has Performance Security Guarantees of $0.6 million (December 31, 2006 — $0.6 million) outstanding that have been guaranteed through Export Development Canada. | |
| (c) | The Company compensates its sales force with both fixed and variable compensation. Commissions on the sale or lease of the Company’s theater system components are due in graduated amounts from the time of collection of the customer’s first payment to the Company up to the collection of the customer’s last initial payment. At March 31, 2007, $0.2 million (December 31, 2006 — $0.3 million) of commissions will be payable in future periods if the Company collects its initial payments as anticipated. | |
| 9. | Contingencies and Guarantees | |
| The Company is involved in lawsuits, claims, and proceedings, including those identified below, which arise in the ordinary course of business. In accordance with Statements of Financial Accounting Standards No. 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 the Company’s determination as to an unfavorable outcome and result in the need to recognize a material provision, or, should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on the Company’s results of operations, cash flows, and financial position in the period or periods in which such a change in determination, settlement or judgment occurs. | ||
| The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred. |
Page 20
| 9. | Contingencies and Guarantees (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. On March 10, 2006, the Company and In-Three entered into a settlement agreement settling the dispute between the Company and In-Three. On June 12, 2006, the U.S. District Court for the Central District of California, Western Division, entered a stay in the proceedings against In-Three pending the arbitration of disputes between the Company and 3DMG. Arbitration was initiated by the Company against 3DMG on May 15, 2006 before the International Centre for Dispute Resolution in New York, alleging breaches of the license and consulting agreements between the Company and 3DMG. On June 15, 2006, 3DMG filed an answer denying any breaches and asserting counterclaims that the Company breached the parties’ license agreement. On June 21, 2007, the Arbitration Panel unanimously denied 3DMG’s Motion for Summary Judgment filed on April 11, 2007 concerning the Company’s claims and 3DMG’s counterclaims. On October 5, 2007, 3DMG amended its counterclaims and added counterclaims from UNIPAT.ORG relating to fees allegedly owed to UNIPAT.ORG by IMAX. An evidentiary hearing on liability issues has been set for January 2008 with further proceedings on damages issues to be scheduled if and when necessary. The Company will continue to pursue its claims vigorously and believes that all allegations made by 3DMG are without merit. The Company further believes that the amount of loss, if any, suffered in connection with the counterclaims would not have a material impact on the financial position or operations of the Company, although no assurance can be given with respect to the ultimate outcome of the arbitration. | |
| (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 damages sought against E-Citi included the original claim sought against EML. An arbitration hearing took place in November 2005 against E-Citi, which included all claims by the Company. On February 1, 2006, the ICC issued an award on liability finding unanimously in the Company’s favor on all claims. Further hearings took place in July 2006 and December 2006. On August 24, 2007, the ICC issued an award unanimously in favor of the Company in the amount of U.S. $9.4 million, consisting of past and future rents owed to the Company under its lease agreements, plus interest and costs. In the award, the ICC upheld the validity and enforceability of the Company’s theater system contract. The Company has now submitted its application to the arbitration panel for interest and costs and is awaiting the Panel’s decision on that issue. | |
| (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 21
| 9. | Contingencies and Guarantees (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. On January 18, 2007, the Court consolidated all eight class action lawsuits and appointed Westchester Capital Management, Inc. as the lead plaintiff and Abbey Spanier Rodd Abrams & Paradis LLP as lead plaintiff’s counsel. On October 2, 2007, plaintiffs filed a consolidated amended class action complaint. The amended complaint, brought on behalf of shareholders who purchased the Company’s common stock between February 27, 2003 through July 30, 2007, alleges primarily that the defendants engaged in securities fraud by disseminating materially false and misleading statements during the class period regarding the Company’s revenue recognition of theater system installations, and failing to disclose material information concerning the Company’s revenue recognition practices. The amended complaint also adds PricewaterhouseCoopers LLP, the Company’s auditors, as a defendant. The lawsuit seeks unspecified compensatory damages, costs, and expenses. The lawsuit is at a very early stage and as a result the Company is not able to estimate a potential loss exposure. The Company believes the allegations made against it in the amended complaint are meritless and will vigorously defend the matter, although no assurances can be given with respect to the outcome of such proceedings. The Company’s directors and officers insurance policy provides for reimbursement for costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, if any, subject to certain policy limits and deductibles. The deadline for defendants to respond to the amended complaint is currently December 3, 2007. | |
| (e) | A class action lawsuit was filed on September 20, 2006 in the Ontario Superior Court of Justice against the Company and certain of its officers and directors, alleging violations of Canadian securities laws. This lawsuit was brought on behalf of shareholders who acquired the Company’s securities between February 17, 2006 and August 9, 2006. The lawsuit is in a very early stage and seeks unspecified compensatory and punitive damages, as well as costs and expenses. As a result, the Company is unable to estimate a potential loss exposure. The Company believes the allegations made against it in the statement of claim are meritless and will vigorously defend the matter, although no assurance can be given with respect to the ultimate outcome of such proceedings. The Company’s directors and officers insurance policy provides for reimbursement for costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, if any, subject to certain policy limits and deductibles. | |
| (f) | On September 7, 2007, Catalyst Fund Limited Partnership II, a holder of the Company’s Senior Notes (“Catalyst”), commenced an application against the Company in the Ontario Superior Court of Justice for a declaration of oppression pursuant to s. 229 and 241 of the Canada Business Corporations Act (“CBCA”) and for a declaration that the Company is in default of the Indenture governing its Senior Notes. The allegations of oppression are substantially the same as allegations Catalyst made in a May 10, 2007 complaint filed against the Company in the Supreme Court of the State of New York, and subsequently withdrawn on October 12, 2007, wherein Catalyst challenged the validity of the consent solicitation through which the Company requested and obtained a waiver of any and all defaults arising from a failure to comply with the reporting covenant under the Indenture and alleged common law fraud. Catalyst has also requested the appointment of an inspector and an order that an investigation be carried out pursuant to s. 229 of the CBCA. In addition, between March 2007 and October 2007, Catalyst has sent the Company eight purported notices of default or acceleration under the Indenture. It is the Company’s position that no default or event of default (as those terms are defined in the Indenture) has occurred or is continuing under the Indenture and, accordingly, that Catalyst’s purported acceleration notice is of no force or effect. The Company is in the process of responding to the Ontario application and a hearing is scheduled to take place on January 15 and 16, 2008. The litigation is at a preliminary stage and as a result, the Company is not able to estimate a potential loss exposure. The Company believes this application is entirely without merit and plans to contest it vigorously and seek costs from Catalyst, although no assurances can be given with respect to the outcome of the proceedings. | |
| (g) | 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 future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings. |
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| 9. | Contingencies and Guarantees (cont’d) | |
| (h) | In the normal course of business, the Company enters into agreements that may contain features that meet the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) definition of a guarantee. FIN 45 defines a guarantee to be a contract (including an indemnity) that contingently requires the Company to make payments (either in cash, financial instruments, other assets, shares of its stock or provision of services) to a third party based on (a) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, a liability or an equity security of the counterparty, (b) failure of another party to perform under an obligating agreement or (c) failure of another third party to pay its indebtedness when due. | |
| Financial Guarantees | ||
| The Company has provided no significant financial guarantees to third parties. | ||
| Product Warranties | ||
| The following summarizes the accrual for product warranties that was recorded as part of accrued liabilities in the consolidated balance sheets as of March 31, 2007: |
| 2007 | ||||
Balance at the beginning of the year |
$ | 38 | ||
Payments |
— | |||
Warranties issued |
— | |||
Revisions |
— | |||
Balance at the end of the year |
$ | 38 | ||
| Director/Officer Indemnifications | ||
| The Company’s General By-law contains an indemnification of its directors/officers, former directors/officers and persons who have acted at its request to be a director/officer of an entity in which the Company is a shareholder or creditor, to indemnify them, to the extent permitted by the Canada Business Corporations Act, against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by them in connection with any action, suit or proceeding in which the directors and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view to the best interests of the Company. The nature of the indemnification prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Company has purchased directors’ and officers’ liability insurance. No amount has been accrued in the consolidated balance sheet as of December 31, 2006, with respect to this indemnity. | ||
| Other Indemnification Agreements | ||
| In the normal course of the Company’s operations, it provides indemnifications to counterparties in transactions such as: theater system lease and sale agreements and the supervision of installation or servicing of the theater systems; film production, exhibition and distribution agreements; real property lease agreements; and employment agreements. These indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of litigation claims that may be suffered by the counterparty as a consequence of the transaction or the Company’s breach or non-performance under these agreements. While the terms of these indemnification agreements vary based upon the contract, they normally extend for the life of the agreements. A small number of agreements do not provide for any limit on the maximum potential amount of indemnification, however virtually all of the Company’s system lease and sale agreements limit such maximum potential liability to the purchase price of the system. The fact that the maximum potential amount of indemnification required by the Company is not specified in some cases prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnifications and no amount has been accrued in the accompanying consolidated financial statements with respect to the contingent aspect of these indemnities. |
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| 10. | Condensed Consolidated Statements of Operations Supplemental Information | |
| Included in selling, general and administrative expenses for the three months ended March 31, 2007 is a gain of $0.1 million (2006 – less than $0.1 million gain), for net foreign exchange gains or losses related to the translation of foreign currency denominated monetary assets, liabilities and integrated subsidiaries. | ||
| 11. | Receivable Provisions, Net of (Recoveries) |
| Three months ended | ||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
Accounts receivable provisions, net of (recoveries) |
$ | (11 | ) | $ | 203 | |||
Financing receivables, net of (recoveries) |
17 | (60 | ) | |||||
Receivable provisions, net of (recoveries) |
$ | 6 | $ | 143 | ||||
| 12. | 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, investment and other tax credits, the provision for income taxes at different rates in foreign and other provincial jurisdictions, enacted Statutory tax rate increases or reductions in the year, changes in the Company’s valuation allowance based on the Company’s recoverability assessments of deferred tax assets, and favourable or unfavourable resolution of various tax examinations. There was no change 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 March 31, 2007, the Company has net deferred income tax assets of $nil (December 31, 2006 - $nil). As of March 31, 2007, the Company had a gross deferred income tax asset of $56.3 million, against which the Company is carrying a $56.3 million valuation allowance. | ||
| In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In connection with the Company’s adoption of FIN 48, as of January 1, 2007, the Company recorded a net decrease to retained earnings of $2.1 million (including approximately $0.9 million related to accrued interest and penalties) related to the measurement of potential international withholding tax requirements and a decrease in reserves for income taxes. As of March 31, 2007 and January 1, 2007, the Company had total unrecognized tax benefits of $3.8 million and $3.7 comprised of (i) $3.6 million and $3.5 million for international withholding taxes, respectively, and (ii) $0.2 million related to Large Corporations’ Tax as of both periods. All of the unrecognized tax benefits could impact the Company’s effective tax rate if recognized. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company’s accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. |
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| 12. | Income Taxes (cont’d) | |
| Consistent with its historical financial reporting, the Company has elected to classify interest and penalties related to income tax liabilities, when applicable, as part of the interest expense in its Consolidated Statements of Operations rather than income tax expense. In conjunction with the adoption of FIN 48, the Company recognized approximately $0.1 million in potential interest and penalties associated with uncertain tax positions for the three months ended March 31, 2007. | ||
| 13. | Capital Stock | |
| (a) | Stock-Based Compensation | |
| The Company has four stock-based compensation plans that are described below. The compensation costs charged to the statement of operations for these plans were $1.0 million and $0.8 million for the first quarters ended March 31, 2007 and 2006, respectively. No income tax benefit is recorded in the consolidated statement of operations for these costs. | ||
| Stock Option Plan | ||
| The Company’s Stock Option Plan, which is shareholder approved, permits the grant of options to employees, directors and consultants. | ||
| The Company’s policy is to issue new shares from treasury to satisfy stock options which are exercised. | ||
| The weighted average fair value of all common share options granted to employees in the first quarter of 2007 at the date of grant was $2.42 per share (2006 — $3.75 per share). The Company utilizes a Binomial Model to determine the fair value of common share options at the grant date. For the three months ended March 31, the following assumptions were used: |
| 2007 | 2006 | |||||||
Average risk-free interest rate |
4.72 | % | 4.83 | % | ||||
Market risk premium |
5.73 | % | 5.33% - 5.60 | % | ||||
Beta |
0.82 | 1.11 - 1.28 | ||||||
Expected option life (in years) |
5.34 | 3.86 - 5.33 | ||||||
Expected volatility |
61 | % | 60 | % | ||||
Annual termination probability |
11.87 | % | 8.06 | % | ||||
Dividend yield |
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 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 expected volatility rate is estimated based on the Company’s historical share-price volatility. The market risk premium reflects the amount by which the return on the market portfolio exceeds the risk-free rate, where the return on the market portfolio is based on the Standard and Poors 500 index. The Company utilizes an expected term method to determine expected option life based on such data as vesting periods of awards, historical data that includes past exercise and post-vesting cancellations and stock price history. |
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| 13. | Capital Stock (cont’d) | |
| (a) | Stock-Based Compensation (cont’d) | |
| Stock Option Plan (cont’d) | ||
| As at March 31, 2007, the Company has reserved a total of 6,974,657 (December 31, 2006 – 6,974,657) common shares for future issuance under the Stock Option Plan, of which options in respect of 5,087,985 common shares are outstanding at March 31, 2007. Options are granted with an exercise price equal to the market value of the Company’s stock at the grant date. The options generally vest between one and five years and expire 10 years or less from the date granted. The Plan provides that vesting will be accelerated if there is a change of control, as defined in the plan. At March 31, 2007, options in respect of 4,625,132 common shares were vested and exercisable. | ||
| The following table summarizes certain information in respect of option activity under the Stock Option Plan for the periods ended March 31: |
| Weighted average | ||||||||||||||||
| exercise | ||||||||||||||||
| Number of shares | price per share | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Options outstanding, beginning of period |
5,100,995 | 5,262,824 | $ | 7.12 | $ | 6.82 | ||||||||||
Granted |
16,390 | 33,335 | 4.40 | 9.06 | ||||||||||||
Exercised |
— | (66,533 | ) | — | 3.81 | |||||||||||
Forfeited |
(16,350 | ) | (14,000 | ) | 8.12 | 20.65 | ||||||||||
Expired |
— | (8,000 | ) | — | 13.95 | |||||||||||
Cancelled |
(13,050 | ) | (2,467 | ) | 6.87 | — | ||||||||||
Options outstanding, end of period |
5,087,985 | 5,205,159 | 7.11 | 7.16 | ||||||||||||
Options exercisable, end of period |
4,625,132 | 4,238,422 | 7.07 | 7.12 | ||||||||||||
| In the first quarter of 2007, the Company cancelled 13,050 stock options from its Stock Option Plan (2006 – 2,467) surrendered by Company employees for $nil consideration. | ||
| As at March 31, 2007 4,945,309 options are fully vested or are expected to vest with a weighted average exercise price of $7.09, aggregate intrinsic value of $1.7 million and weighted average remaining contractual life of 4.3 years. As at March 31, 2007, options that are exercisable have an intrinsic value of $1.7 million and a weighted average remaining contractual life of 4.2 years. The intrinsic value of options exercised in the first quarter of 2006 was $0.4 million. | ||
| Not included in the table above are 502,500 options granted in the first quarter of 2006 that the Company determined in the fourth quarter of 2006, exceeded, by approximately 1.6%, certain cap limits for grants set by its Stock Option Plan. These options were granted with a weighted average exercise price of $10.43. Of these options, 10,000 options with a weighted average exercise price of $10.69 were forfeited. The number of these options outstanding as at March 31, 2007 was 492,500 (2006 – 502,500) with a weighted average exercise price of $10.42 (2006 — $10.43). The number of these options exercisable as at March 31, 2007 was 216,250 (2006 – nil) with a weighted average exercise price of $10.63 (2006 – nil). As the Company intended to settle the obligations for a significant number of these options in cash, these options have been treated as liability-based awards based on fair values as at March 31, 2007. 5,000 of these options were forfeited in May 2007, 150,000 of these options were voluntarily surrendered by the Co-CEOs for no consideration in June 2007; and 337,500 of these options were settled for cash in June 2007 in an amount of $0.3 million. Compensation cost recognized up to the cancellation date was not reversed for the options cancelled. | ||
| Options to Non-Employees | ||
| In the first quarter of 2007, an aggregate of 8,890 (2006 — 23,335) options to purchase the Company’s common stock with an average exercise price of $4.31 (2006 — $8.75) were issued to certain advisors and strategic partners of the Company. These options have a maximum contractual life of seven years. Certain of these options vest immediately and others upon the occurrence of certain events. These options were granted under the Stock Option Plan. |
Page 26
| 13. | Capital Stock (cont’d) | |
| (a) | Stock-Based Compensation (cont’d) | |
| Stock Option Plan (cont’d) | ||
| Options to Non-Employees (cont’d) | ||
| As at March 31, 2007, non-employee options outstanding amounted to 125,549 options (2006 — 63,340) with a weighted-average exercise price of $8.24 (2006 — $9.51). 115,549 options (2006 – 53,340) were exercisable with an average weighted exercise price of $8.18 (2006 — $9.62) and the vested options have an aggregate intrinsic value of less than $0.1 million. The Company has calculated the fair value of these options to non-employees to be less than $0.1 million (2006 — $0.1 million), using a Binomial option-pricing model with the following underlying assumptions for periods ended March 31: |
| 2007 | 2006 | |||||||
Average risk-free interest rate |
4.71 | % | 4.60 | % | ||||
Contractual option life |
6 years | 5-7 years | ||||||
Average expected volatility |
60 | % | 60 | % | ||||
Dividend yield |
0 | % | 0 | % | ||||
| In the first quarter of 2007, the Company has recorded a charge of less than $0.1 million (2006 - $0.1 million) to film cost of sales related to the non-employee stock options. | ||
| Restricted Common Shares | ||
| Under the terms of certain employment agreements dated July 12, 2000, the Company is required to issue either 160,000 restricted common shares or pay their cash equivalent. The restricted shares are required to be issued, or payment of their cash equivalent, upon request by the employees at any time. The aggregate intrinsic value of the awards outstanding is $0.8 million. The Company accounts for the obligation as a liability, which is classified within accrued liabilities. The Company has recorded an expense of $0.2 million for the quarter ended March 31, 2007 (2006 — $0.5 million), due to the changes in the Company’s stock price during the period. | ||
| Stock Appreciation Rights | ||
| On February 15, 2007, 600,000 stock appreciation rights with an exercise price of $4.34 per right were granted to Company executives. Half of the rights vested and were exercisable immediately and the other 300,000 rights will vest and be exercisable by the end of 2007. These rights were measured at fair value at the date of grant and are remeasured each period until settled. At March 31, 2007, these rights had weighted average fair value of $1.12 based on the fair value of $nil for the rights that vested on date of grant and a fair value of $2.23 for the rights that vest during 2007. The Company has recorded a charge of $0.3 million to SG&A related to these rights. The following assumptions were used at March 31, 2007 for measuring the fair value of the rights that vest during 2007: |
Risk-free interest rate |
4.72 | % | ||
Market risk premium |
5.66 | % | ||
Beta |
0.90 | |||
Expected option life (in years) |
4.51 | |||
Expected volatility |
61 | % | ||
Annual termination probability |
0 | % | ||
Dividend yield |
0 | % |
| Warrants to Non-Employees | ||
| There were no warrants issued during the three months ended or outstanding as of March 31, 2007 and 2006. |
Page 27
| 13. | 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 | ||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
| As restated | As restated | |||||||
Net loss from continuing operations applicable to common shareholders |
$ | (4,740 | ) | $ | (6,004 | ) | ||
Weighted average number of common shares (000’s): |
||||||||
Issued and outstanding, beginning of period |
40,286 | 40,213 | ||||||
Weighted average number of shares issued during the period |
— | 12 | ||||||
Weighted
average number of shares used in computing basic earnings per share |
40,286 | 40,225 | ||||||
Assumed exercise of stock options, net of shares assumed repurchased |
— | — | ||||||
Weighted average number of shares used in computing diluted earnings
per share |
40,286 | 40,225 | ||||||
| The calculation of diluted earnings per share for the three months ended March 31, 2007 excludes 0.2 million (2006 — 1.8 million) common shares issuable upon exercise of options as the impact of these exercises would be antidilutive. | ||
| (c) | Shareholders’ Deficit | |
| The following summarizes the movement of Shareholders’ Deficit for the three months ended March 31, 2007: |
Balance as of December 31, 2006 (as restated) |
$ | (58,232 | ) | |
Net loss |
(4,740 | ) | ||
Adjustment to paid-in-capital for employee stock options granted |
96 | |||
Adjustment to paid-in-capital for non-employee stock options granted |
21 | |||
Adjustment for adoption of FIN 48 |
(2,093 | ) | ||
Adjustment to amortize the prior service credit |
161 | |||
Balance as of March 31, 2007 (as restated) |
$ | (64,787 | ) | |
| 14. | Segmented Information | |
| The Company has six reportable segments identified by category of product sold or service provided: IMAX systems; film production and IMAX DMR; film distribution; film post-production; theater operations; and other. The IMAX systems segment designs, manufactures, sells or leases and maintains IMAX theater projection system equipment. The film production and IMAX DMR segment produces films and performs film re-mastering services. The film distribution segment distributes films for which the Company has distribution rights. The film post-production segment provides film post-production and film print services. The theater operations segment owns and operates certain IMAX theaters. The other segment includes camera rentals and other miscellaneous items. The accounting policies of the segments are the same as those described in note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company has conformed its segment information in the current year to the current information used by the Company’s Chief Operating Design Makers (“CODM”), as defined in SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”. | ||
| Transactions between the film production and IMAX DMR segment and the film post-production segment are valued at exchange value. Inter-segment profits are eliminated upon consolidation, as well as for the disclosures below. | ||
| Transactions between the other segments are not significant. |
Page 28
| 14. | Segmented Information (cont’d) | |
| The CODM assess segment performance based on segment gross margins. Selling, general and administrative expenses, research and development costs, amortization of intangibles, receivables provisions (recoveries), interest revenue, interest expense and tax provision (recovery) are not allocated to the segments. |
| Three months ended | ||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
| As restated | As restated | |||||||
Revenue |
||||||||
IMAX systems |
$ | 13,118 | $ | 12,797 | ||||
Films |
||||||||
Production and IMAX DMR |
4,592 | 1,097 | ||||||
Distribution |
3,410 | 3,424 | ||||||
Post-production |
1,074 | 1,482 | ||||||
Theater operations |
4,487 | 3,692 | ||||||
Other |
522 | 842 | ||||||
Total |
$ | 27,203 | $ | 23,334 | ||||
Gross margins |
||||||||
IMAX systems |
$ | 7,566 | $ | 7,367 | ||||
Films |
||||||||
Production and IMAX DMR |
2,382 | (538 | ) | |||||
Distribution |
1,356 | 544 | ||||||
Post-production |
102 | 429 | ||||||
Theater operations |
194 | 297 | ||||||
Other |
(192 | ) | (109 | ) | ||||
Total |
$ | 11,408 | $ | 7,990 | ||||
| 15. | 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 was 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 had 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 $0.8 million in net loss from discontinued operations related to Miami IMAX Theater in the fourth quarter of 2006. On January 4, 2007, as a result of a settlement negotiated between both parties, the Company paid out a final $0.8 million, extinguishing its obligations to the landlord. | ||
| (b) | Digital Projection International | |
| On December 29, 2005, the Company and a previously wholly-owned subsidiary, Digital Projection International (“DPI”), entered into an agreement to settle its loan agreements in exchange for a payment of $3.5 million. During the first quarter of 2006, the Company recognized $2.3 million in income from discontinued operations as a result of this settlement. The other $1.2 million was recognized in 2005. |
Page 29
| 16. | Employees Pension and Postretirement Benefits | |
| (a) | Defined Benefit Plan | |
| The Company has an unfunded U.S. defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”), covering its two Co-CEOs. The SERP 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 SERP, 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-CEOs negotiated an amendment to the SERP effective January 1, 2006, which reduced the related pension expense to the Company. The Company was represented by the independent directors (as defined in Rule 4200(a)(15) of the NASDAQ Marketplace Rules and Section 1.4 of Multilateral Instrument 52-110 (“Independent Directors”)), who retained Mercer Human Resources Consulting (“Mercer”) and outside legal counsel to advise them on certain analyses regarding the SERP. Under the terms of the SERP amendment, the cost of living adjustment and surviving spouse benefits previously owed to the Co-CEOs 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 SERP 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%. The actuarial liability was remeasured as of March 8, 2006 to reflect the SERP changes adopted. As of March 31, 2007, one of the Co-CEO’s benefits was 100% vested and the other Co-CEO’s benefits were approximately 83% vested. | ||
| The amount accrued for the SERP as at March 31, 2007 is determined as follows: |
| 2007 | ||||
Projected benefit obligation: |
||||
Obligation, beginning of period |
$ | 26,109 | ||
Service cost |
172 | |||
Interest cost |
339 | |||
Actuarial gain |
(237 | ) | ||
Obligation, end of period |
$ | 26,383 | ||
Unfunded status: |
||||
Obligation, end of period |
$ | 26,383 | ||
Unrecognized gain relating to prior service cost |
— | |||
Unrecognized actuarial (loss) |
— | |||
Accrued pension liability |
$ | 26,383 | ||
| The following table provides disclosure of pension expense for the SERP for quarters ended March 31: |
| 2007 | 2006 | |||||||
Service cost |
$ | 172 | $ | 457 | ||||
Interest cost |
339 | 362 | ||||||
Amortization of prior service cost |
— | 153 | ||||||
Pension expense |
$ | 511 | $ | 972 | ||||
| The accumulated benefit obligation for the SERP was $26.4 million at March 31, 2007 and $26.1 million at December 31, 2006. | ||
| No contributions are expected to be made for the SERP during 2007. | ||
| As a result of the SERP amendment, in the first quarter of 2006, 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. |
Page 30
| 16. | Employees Pension and Postretirement Benefits (cont’d) | |
| Defined Benefit Plan (cont’d) | ||
| The following benefit payments are expected to be made as per the current SERP assumptions and the terms of the SERP in each of the next five years, and in the aggregate over the five years thereafter: |
2007 |
$ | — | ||
2008 |
1,007 | |||
2009 |
1,016 | |||
2010 |
31,894 | |||
2011 |
— | |||
2012 to 2016 |
— |
| At the time the Company established the SERP, it also took out life insurance policies on its two Co-CEOs with coverage amounts of $21.5 million in aggregate. The Company intends to use the cash surrender value proceeds of life insurance policies taken on its Co-CEOs to be applied towards the benefits due and payable under the SERP, although there can be no assurance that the Company will ultimately do so. At March 31, 2007, the cash surrender value of the insurance policies is $4.5 million (December 31, 2006 — $4.3 million) and has been included in other assets. | ||
| (b) | Defined Contribution Plan | |
| The Company also maintains defined contribution pension plans for its employees, including its executive officers. The Company makes contributions to these plans on behalf of employees in an amount up to 5% of their base salary subject to certain prescribed maximums. During the three months ended March 31, 2007 and 2006, the Company contributed and expensed an aggregate of $0.2 million and $0.2 million, respectively, to its Canadian plan and an aggregate of $0.1 million and $0.1 million, respectively, to its defined contribution employee pension plan under Section 401(k) of the U.S. Internal Revenue Code. | ||
| (c) | Postretirement Benefits | |
| The Company has an unfunded postretirement plan covering its two Co-CEOs. The plan provides that the Company will maintain health benefits for the Co-CEOs until they become eligible for Medicare and, thereafter, the Company will provide Medicare supplement coverage as selected by the Co-CEO. The postretirement benefits obligation as of March 31, 2007 is $0.4 million. | ||
| 17. | Impact of Recently Issued Accounting Pronouncements | |
| 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. | ||
| In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statements No. 115” (“SFAS 159”). SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. The Company is currently evaluating if it will elect the fair value option for any of its eligible financial instruments and other items. |
Page 31
| 18. | 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 70MM 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. | ||
| Supplemental consolidating balance sheets as at March 31, 2007: |
| Non- | Adjustments | |||||||||||||||||||
| IMAX | Guarantor | Guarantor | and | Consolidated | ||||||||||||||||
| Corporation | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| As restated | As restated | As restated | As restated | |||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 17,246 | $ | 7,844 | $ | 162 | $ | — | $ | 25,252 | ||||||||||
Short-term investments |
2,141 | — | — | — | 2,141 | |||||||||||||||
Accounts receivable |
16,732 | 1,697 | 296 | — | 18,725 | |||||||||||||||
Financing receivables |
63,860 | 2,024 | — | — | 65,884 | |||||||||||||||
Inventories |
26,344 | 238 | 82 | — | 26,664 | |||||||||||||||
Prepaid expenses |
2,104 | 428 | 20 | — | 2,552 | |||||||||||||||
Intercompany receivables |
29,168 | 35,511 | 11,321 | (76,000 | ) | — | ||||||||||||||
Film assets |
1,160 | — | — | — | 1,160 | |||||||||||||||
Property, plant and equipment |
22,391 | 1,117 | 11 | — | 23,519 | |||||||||||||||
Other assets |
10,623 | — | — | — | 10,623 | |||||||||||||||
Deferred income taxes |
— | — | — | — | — | |||||||||||||||
Goodwill |
39,027 | — | — | — | 39,027 | |||||||||||||||
Other intangible assets |
2,558 | — | — | — | 2,558 | |||||||||||||||
Investments in subsidiaries |
29,984 | — | — | (29,984 | ) | — | ||||||||||||||
Total assets |
$ | 263,338 | $ | 48,859 | $ | 11,892 | $ | (105,984 | ) | $ | 218,105 | |||||||||
Liabilities |
||||||||||||||||||||
Accounts payable |
$ | 2,540 | $ | 2,756 | $ | 10 | $ | — | $ | 5,306 | ||||||||||
Accrued liabilities |
52,943 | 7,657 | 224 | — | 60,824 | |||||||||||||||
Intercompany payables |
59,328 | 39,395 | 6,490 | (105,213 | ) | — | ||||||||||||||
Deferred revenue |
53,734 | 2,973 | 55 | — | 56,762 | |||||||||||||||
Senior Notes due 2010 |
160,000 | — | — | — | 160,000 | |||||||||||||||
Total liabilities |
328,545 | 52,781 | 6,779 | (105,213 | ) | 282,892 | ||||||||||||||
Shareholder’s equity (deficit) |
||||||||||||||||||||
Capital stock |
122,024 | — | 117 | (117 | ) | 122,024 | ||||||||||||||
Other equity / additional paid in capital /
contributed surplus |
2,020 | 46,960 | — | (45,926 | ) | 3,054 | ||||||||||||||
Deficit |
(191,208 | ) | (50,268 | ) | 4,996 | 45,272 | (191,208 | ) | ||||||||||||
Accumulated other comprehensive income (loss) |
1,957 | (614 | ) | — | — | 1,343 | ||||||||||||||
Total shareholders’ equity (deficit) |
$ | (65,207 | ) | $ | (3,922 | ) | $ | 5,113 | $ | (771 | ) | $ | (64,787 | ) | ||||||
Total liabilities & shareholders’ equity (deficit) |
$ | 263,338 | $ | 48,859 | $ | 11,892 | $ | (105,984 | ) | $ | 218,105 | |||||||||
| 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 $29.8 million as at March 31, 2007. |
Page 32
| 18. | Supplemental Consolidating Financial Information (cont’d) | |
| Supplemental consolidating balance sheets as at December 31, 2006: |
| Non- | Adjustments | |||||||||||||||||||
| IMAX | Guarantor | Guarantor | and | Consolidated | ||||||||||||||||
| Corporation | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| As restated | As restated | As restated | As restated | As restated | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 16,402 | $ | 8,556 | $ | 165 | $ | — | $ | 25,123 | ||||||||||
Short-term investments |
2,115 | — | — | — | 2,115 | |||||||||||||||
Accounts receivable |
23,902 | 1,866 | 249 | — | 26,017 | |||||||||||||||
Financing receivables |
63,831 | 2,047 | — | — | 65,878 | |||||||||||||||
Inventories |
26,592 | 237 | 84 | — | 26,913 | |||||||||||||||
Prepaid expenses |
3,098 | 312 | 22 | — | 3,432 | |||||||||||||||
Intercompany receivables |
25,799 | 36,182 | 11,164 | (73,145 | ) | — | ||||||||||||||
Film assets |
1,235 | — | — | — | 1,235 | |||||||||||||||
Property, plant and equipment |
23,412 | 1,212 | 15 | — | 24,639 | |||||||||||||||
Other assets |
10,365 | — | — | — | 10,365 | |||||||||||||||
Deferred income taxes |
— | — | — | — | — | |||||||||||||||
Goodwill |
39,027 | — | — | — | 39,027 | |||||||||||||||
Other intangible assets |
2,547 | — | — | — | 2,547 | |||||||||||||||
Investments in subsidiaries |
29,543 | — | — | (29,543 | ) | — | ||||||||||||||
Total assets |
$ | 267,868 | $ | 50,412 | $ | 11,699 | $ | (102,688 | ) | $ | 227,291 | |||||||||
Liabilities |
||||||||||||||||||||
Accounts payable |
$ | 4,259 | $ | 7,164 | $ | 3 | $ | — | $ | 11,426 | ||||||||||
Accrued liabilities |
49,792 | 8,293 | 209 | — | 58,294 | |||||||||||||||
Intercompany payables |
60,049 | 35,601 | 6,306 | (101,956 | ) | — | ||||||||||||||
Deferred revenue |
52,420 | 3,261 | 122 | — | 55,803 | |||||||||||||||
Senior Notes due 2010 |
160,000 | — | — | — | 160,000 | |||||||||||||||
Total liabilities |
326,520 | 54,319 | 6,640 | (101,956 | ) | 285,523 | ||||||||||||||
Shareholder’s equity (deficit) |
||||||||||||||||||||
Capital stock |
122,024 | — | 117 | (117 | ) | 122,024 | ||||||||||||||
Other equity |
1,903 | 46,960 | — | (45,926 | ) | 2,937 | ||||||||||||||
Deficit |
(184,375 | ) | (50,253 | ) | 4,942 | 45,311 | (184,375 | ) | ||||||||||||
Accumulated other comprehensive income (loss) |
1,796 | (614 | ) | — | — | 1,182 | ||||||||||||||
Total shareholders’ equity (deficit) |
$ | (58,652 | ) | $ | (3,907 | ) | $ | 5,059 | $ | (732 | ) | $ | (58,232 | ) | ||||||
Total liabilities & shareholders’ equity (deficit) |
$ | 267,868 | $ | 50,412 | $ | 11,699 | $ | (102,688 | ) | $ | 227,291 | |||||||||
| 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 $29.4 million. |
Page 33
| 18. | Supplemental Consolidating Financial Information (cont’d) | |
| Supplemental consolidating statements of operations for the three months ended March 31, 2007: |
| Non- | Adjustments | |||||||||||||||||||
| IMAX | Guarantor | Guarantor | and | Consolidated | ||||||||||||||||
| Corporation | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| As restated | As restated | As restated | As restated | |||||||||||||||||
Revenues |
||||||||||||||||||||
Equipment and product sales |
$ | 7,050 | $ | 450 | $ | 2 | $ | (428 | ) | $ | 7,074 | |||||||||
Services |
12,155 | 6,119 | 161 | (778 | ) | 17,657 | ||||||||||||||
Rentals |
1,264 | 19 | 3 | — | 1,286 | |||||||||||||||
Finance income |
1,134 | 52 | — | — | 1,186 | |||||||||||||||
Other revenues |
— | — | — | — | — | |||||||||||||||
| 21,603 | 6,640 | 166 | (1,206 | ) | 27,203 | |||||||||||||||
Cost of goods sold, services and rentals |
||||||||||||||||||||
Equipment and product sales |
3,874 | 428 | 1 | (360 | ) | 3,943 | ||||||||||||||
Services |
5,988 | 6,075 | 75 | (846 | ) | 11,292 | ||||||||||||||
Rentals |
560 | — | — | — | 560 | |||||||||||||||
| 10,422 | 6,503 | 76 | (1,206 | ) | 15,795 | |||||||||||||||
Gross margin |
11,181 | 137 | 90 | — | 11,408 | |||||||||||||||
Selling, general and administrative expenses |
10,081 | 204 | 36 | — | 10,321 | |||||||||||||||
Research and development |
1,495 | — | — | — | 1,495 | |||||||||||||||
Amortization of intangibles |
136 | — | — | — | 136 | |||||||||||||||
Loss (income) from equity-accounted investees |
(39 | ) | — | — | 39 | — | ||||||||||||||
Receivable provisions, net of (recoveries) |
10 | (4 | ) | — | — | 6 | ||||||||||||||
Earnings (loss) from operations |
(502 | ) | (63 | ) | 54 | (39 | ) | (550 | ) | |||||||||||
Interest income |
178 | 48 | — | — | 226 | |||||||||||||||
Interest expense |
(4,249 | ) | — | — | — | (4,249 | ) | |||||||||||||
Net earnings (loss) from continuing
operations before income taxes |
(4,573 | ) | (15 | ) | 54 | (39 | ) | (4,573 | ) | |||||||||||
Provision for income taxes |
(167 | ) | — | — | — | (167 | ) | |||||||||||||
Net earnings (loss) |
$ | (4,740 | ) | $ | (15 | ) | $ | 54 | $ | (39 | ) | $ | (4,740 | ) | ||||||
Page 34
| 18. | Supplemental Consolidating Financial Information (cont’d) | |
| Supplemental consolidating statements of operations for the three months ended March 31, 2006: |
| Non- | Adjustments | |||||||||||||||||||
| IMAX | Guarantor | Guarantor | and | Consolidated | ||||||||||||||||
| Corporation | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| As restated | As restated | As restated | As restated | As restated | ||||||||||||||||
Revenues |
||||||||||||||||||||
Equipment and product sales |
$ | 7,772 | $ | — | $ | 2 | $ | — | $ | 7,774 | ||||||||||
Services |
8,524 | 5,662 | 191 | (908 | ) | 13,469 | ||||||||||||||
Rentals |
911 | 64 | 4 | — | 979 | |||||||||||||||
Finance income |
1,058 | 54 | — | — | 1,112 | |||||||||||||||
Other revenues |
— | — | — | — | — | |||||||||||||||
| 18,265 | 5,780 | 197 | (908 | ) | 23,334 | |||||||||||||||
Cost of goods sold, services and rentals |
||||||||||||||||||||
Equipment and product sales |
4,168 | — | 5 | 33 | 4,206 | |||||||||||||||
Services |
6,101 | 5,426 | 75 | (941 | ) | 10,661 | ||||||||||||||
Rentals |
477 | — | — | — | 477 | |||||||||||||||
| 10,746 | 5,426 | 80 | (908 | ) | 15,344 | |||||||||||||||
Gross margin |
7,519 | 354 | 117 | — | 7,990 | |||||||||||||||
Selling, general and administrative expenses |
10,272 | 178 | 82 | — | 10,532 | |||||||||||||||
Research and development |
915 | — | — | — | 915 | |||||||||||||||
Amortization of intangibles |
192 | — | — | — | 192 | |||||||||||||||
Loss (income) from equity-accounted investees |
(210 | ) | — | — | 210 | — | ||||||||||||||
Receivable provisions, net of (recoveries) |
143 | — | — | — | 143 | |||||||||||||||
Earnings (loss) from operations |
(3,793 | ) | 176 | 35 | (210 | ) | (3,792 | ) | ||||||||||||
Interest income |
253 | — | — | — | 253 | |||||||||||||||
Interest expense |
(4,157 | ) | — | — | — | (4,157 | ) | |||||||||||||
Net earnings (loss) from continuing
operations before income taxes |
(7,697 | ) | 176 | 35 | (210 | ) | (7,696 | ) | ||||||||||||
(Provision for) recovery of income taxes |
1,693 | — | (1 | ) | — | 1,692 | ||||||||||||||
Net
earnings (loss) from continuing operations |
(6,004 | ) | 176 | 34 | (210 | ) | (6,004 | ) | ||||||||||||
Net earnings from discontinued operations |
2,300 | — | — | — | 2,300 | |||||||||||||||
Net earnings (loss) |
$ | (3,704 | ) | $ | 176 | $ | 34 | $ | (210 | ) | $ | (3,704 | ) | |||||||
Page 35
| 18. | Supplemental Consolidating Financial Information (cont’d) | |
| Supplemental consolidating statements of cash flows for the three months ended March 31, 2007: |
| Non- | Adjustments | |||||||||||||||||||
| IMAX | Guarantor | Guarantor | and | Consolidated | ||||||||||||||||
| Corporation | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| As restated | As Restated | As restated | As restated | |||||||||||||||||
Cash provided by (used in): |
||||||||||||||||||||
Operating Activities |
||||||||||||||||||||
Net earnings (loss) |
$ | (4,740 | ) | $ | (15 | ) | $ | 54 | $ | (39 | ) | $ | (4,740 | ) | ||||||
Items not involving cash: |
||||||||||||||||||||
Depreciation and amortization |
2,901 | 100 | 5 | — | 3,006 | |||||||||||||||
Write-downs (recoveries) |
10 | (4 | ) | — | — | 6 | ||||||||||||||
Loss (income) from equity-accounted investees |
(39 | ) | — | — | 39 | — | ||||||||||||||
Change in deferred income taxes |
(76 | ) | — | — | — | (76 | ) | |||||||||||||
Stock and other non-cash compensation |
1,809 | — | — | — | 1,809 | |||||||||||||||
Non-cash foreign exchange gain |
(109 | ) | — | — | — | (109 | ) | |||||||||||||
Interest on short-term investments |
(26 | ) | — | — | — | (26 | ) | |||||||||||||
Investment in film assets |
(1,340 | ) | — | — | — | (1,340 | ) | |||||||||||||
Changes in other non-cash operating assets and liabilities |
3,705 | (785 | ) | (57 | ) | — | 2,863 | |||||||||||||
Net cash used by operating activities from discontinued
operations |
(775 | ) | — | — | — | (775 | ) | |||||||||||||
Net cash provided by (used in) operating activities |
1,320 | (704 | ) | 2 | — | 618 | ||||||||||||||
Investing Activities |
||||||||||||||||||||
Purchases of short-term investments |
(2,124 | ) | — | — | — | (2,124 | ) | |||||||||||||
Proceeds from maturities of short-term investments |
2,124 | — | — | — | 2,124 | |||||||||||||||
Purchase of fixed assets |
(93 | ) | (5 | ) | (1 | ) | — | (99 | ) | |||||||||||
Increase in other assets |
(245 | ) | — | — | — | (245 | ) | |||||||||||||
Increase in other intangible assets |
(148 | ) | — | — | — | (148 | ) | |||||||||||||
Net cash used in investing activities |
(486 | ) | (5 | ) | (1 | ) | — | (492 | ) | |||||||||||
Financing Activities |
||||||||||||||||||||
Net cash provided by financing activities |
— | — | — | — | — | |||||||||||||||
Effects of exchange rate changes on cash |
10 | (3 | ) | (4 | ) | — | 3 | |||||||||||||
Increase (decrease) in cash and cash equivalents, during
the period |
844 | (712 | ) | (3 | ) | — | 129 | |||||||||||||
Cash and cash equivalents, beginning of period |
16,402 | 8,556 | 165 | — | 25,123 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 17,246 | $ | 7,844 | $ | 162 | $ | — | $ | 25,252 | ||||||||||
Page 36
| 18. | Supplemental Consolidating Financial Information (cont’d) | |
| Supplemental consolidating statements of cash flows for the three months ended March 31, 2006: |
| Non- | Adjustments | |||||||||||||||||||
| IMAX | Guarantor | Guarantor | and | Consolidated | ||||||||||||||||
| Corporation | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| As restated | As restated | As restated | As restated | As restated | ||||||||||||||||
Cash provided by (used in): |
||||||||||||||||||||
Operating Activities |
||||||||||||||||||||
Net earnings (loss) |
$ | (3,704 | ) | $ | 176 | $ | 34 | $ | (210 | ) | $ | (3,704 | ) | |||||||
Net earnings from discontinued operations |
(2,300 | ) | — | — | — | (2,300 | ) | |||||||||||||
Items not involving cash: |
||||||||||||||||||||
Depreciation and amortization |
3,269 | 132 | 1 | — | 3,402 | |||||||||||||||
Write-downs |
143 | — | — | — | 143 | |||||||||||||||
Loss (income) from equity-accounted investees |
(210 | ) | — | — | 210 | — | ||||||||||||||
Change in deferred income taxes |
(1,383 | ) | (4 | ) | — | — | (1,387 | ) | ||||||||||||
Stock and other non-cash compensation |
1,605 | — | — | — | 1,605 | |||||||||||||||
Unrealized foreign exchange loss |
(29 | ) | — | — | — | (29 | ) | |||||||||||||
Interest on short-term investments |
(85 | ) | — | — | — | (85 | ) | |||||||||||||
Investment in film assets |
(1,651 | ) | — | — | — | (1,651 | ) | |||||||||||||
Changes in other non-cash operating assets and liabilities |
(3,285 | ) | 1,660 | (11 | ) | — | (1,636 | ) | ||||||||||||
Net cash used by operating activities from discontinued
operations |
— | — | — | — | — | |||||||||||||||
Net cash provided by (used in) operating activities |
(7,630 | ) | 1,964 | 24 | — | (5,642 | ) | |||||||||||||
Investing Activities |
||||||||||||||||||||
Purchases of short-term investments |
(4,098 | ) | — | — | — | (4,098 | ) | |||||||||||||
Proceeds from maturities of short-term investments |
4,097 | — | — | — | 4,097 | |||||||||||||||
Purchase of fixed assets |
(35 | ) | (57 | ) | — | — | (92 | ) | ||||||||||||
Increase in other assets |
(187 | ) | — | — | — | (187 | ) | |||||||||||||
Increase in other intangible assets |
(91 | ) | — | — | — | (91 | ) | |||||||||||||
Net cash provided by investing activities from
discontinued operations |
3,493 | — | — | — | 3,493 | |||||||||||||||
Net cash provided by (used in) investing activities |
3,179 | (57 | ) | — | — | 3,122 | ||||||||||||||
Financing Activities |
||||||||||||||||||||
Common shares issued |
254 | — | — | — | 254 | |||||||||||||||
Net cash provided by financing activities |
254 | — | — | — | 254 | |||||||||||||||
Effects of exchange rate changes on cash |
(38 | ) | 16 | (13 | ) | — | (35 | ) | ||||||||||||
Decrease in cash and cash equivalents, during the period |
(4,235 | ) | 1,923 | 11 | — | (2,301 | ) | |||||||||||||
Cash and cash equivalents, beginning of period |
17,402 | 6,728 | 194 | — | 24,324 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 13,167 | $ | 8,651 | $ | 205 | $ | — | $ | 22,023 | ||||||||||
| 19. | Financial Statement Presentation | |
| Certain comparative figures have been reclassified to conform with the presentation adopted in the current year and certain 2006 figures have been restated as set out in note 3. |
Page 37
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| • | Design, manufacture, sale and lease of proprietary theater systems for IMAX theaters principally owned and operated by commercial and institutional customers located in 40 countries as of March 31, 2007; | ||
| • | Production, digital re-mastering, post-production and/or distribution of certain films shown throughout the IMAX theater network; | ||
| • | Operation of certain IMAX theaters primarily in the United States and Canada; | ||
| • | Provision of other services to the IMAX theater network including ongoing maintenance and extended warranty services for IMAX theater systems; and | ||
| • | Other activities, which includes short-term rental of cameras and aftermarket sales of projector system components. |
Page 39
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| Three months ended March 31 | ||||||||
| 2007 | 2006 | |||||||
| (In thousands of U.S. dollars) | As restated | As restated | ||||||
IMAX Systems Revenue |
||||||||
Sales and sales-type leases(1) |
$ | 6,412 | $ | 6,771 | ||||
Ongoing rent(2) |
2,612 | 2,253 | ||||||
Maintenance |
4,094 | 3,773 | ||||||
| 13,118 | 12,797 | |||||||
Films Revenue |
||||||||
Production and IMAX DMR |
4,592 | 1,097 | ||||||
Distribution |
3,410 | 3,424 | ||||||
Post-production |
1,074 | 1,482 | ||||||
| 9,076 | 6,003 | |||||||
Theater Operations |
4,487 | 3,692 | ||||||
Other Revenue |
522 | 842 | ||||||
| $ | 27,203 | $ | 23,334 | |||||
| (1) | Includes initial rents and fees and the present value of fixed minimum rents and fees from equipment, sales and sales-type lease transactions. | |
| (2) | Includes rental income from operating leases, revenues from joint revenue sharing arrangements, contingent rents from sales-type leases, contingent fees from sales arrangements and finance income. |
Page 46
| Three months ended | ||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
Sales and Sales-type lease systems recognized |
||||||||
IMAX 2D GT |
1 | 1 | ||||||
IMAX 3D GT |
— | 4 | ||||||
IMAX 2D SR |
1 | — | ||||||
IMAX 3D MPX |
3 | — | ||||||
| 5 | 5 | |||||||
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| 1. | The Company did not maintain adequate controls, including period-end controls, over the analysis and review of revenue recognition for sales and lease transactions in accordance with U.S. GAAP. Specifically, effective controls were not maintained to correctly assess the identification of deliverables and their aggregation into units of accounting and in certain cases the point when certain units of accounting were substantially complete to allow for revenue recognition on a theater system. | ||
| In addition, the Company did not have effective controls over other aspects of such transactions including identifying the fair values of certain future deliverables, identifying certain clauses in arrangements that impact revenue recognition, accounting for warranty costs, the appropriate accounting for certain settlement agreements and the recognition of finance income on impaired receivables. | |||
| 2. | The Company did not maintain effective controls, including period-end controls, over accounting for film transactions in accordance with U.S. GAAP. Specifically, effective controls were not maintained related to the classification and accurate recording of marketing and advertising costs of co-produced film productions, production fees on co-produced films and the application of the individual-film forecast computation method to film assets, participation liabilities and deferred production fees. |
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| 3. | The Company did not maintain effective controls, including period-end controls, over the accounting for contract origination costs in accordance with U.S. GAAP. Specifically, effective controls were not maintained related to the classification of fees paid to a professional services firm. | ||
| 4. | The Company did not maintain adequate controls over the complete and accurate recording of post-retirement benefits other than pensions in accordance with U.S. GAAP. Specifically, effective controls were not maintained over the complete identification of all relevant contractual provisions within its executive employment contracts. |
| 5. | The Company did not maintain effective controls over the intraperiod allocation of the provision for income taxes in accordance with U.S. GAAP. Specifically, effective controls were not in place such that the tax provisions were appropriately allocated to continuing operations, discontinued operations, and accumulated other comprehensive income. | ||
| 6. | The Company did not maintain adequate controls, including period-end controls, over the complete and accurate recording of transactions related to real estate lease arrangements for owned and operated theaters or corporate offices in accordance with U.S. GAAP. Specifically, effective controls were not maintained over the complete identification of all relevant contractual provisions including lease inducements, construction allowances, rent holidays, escalation clauses and lease commencement dates. In addition, adequate controls were not maintained over the accurate recording of rent abatements received in subsequent periods. |
| Two of the Company’s material weaknesses relate to controls over the lines of communication between different departments. These material weaknesses are: | |||
| 7. | The Company did not maintain adequate controls over the lines of communication between operational departments and the Finance Department related to revenue recognition for sales and lease transactions. Specifically, effective controls were not maintained to raise on a timely basis certain issues relating to observations of the installation process, any remaining installation or operating obligations, and concessions on contractual terms that may impact the accuracy and timing of revenue recognition. | ||
| 8. | The Company did not maintain adequate controls over the timely communication between departments of information relating to developing issues that may impact the Company’s financial reporting. Specifically, effective controls were not maintained over the status of a review of cap limits under the Company’s Stock Option Plan that affected the recording and related disclosure of stock-based compensation benefits. | ||
| In addition to the restatements and audit adjustments discussed in the Company’s 2006 Form 10-K/A, each of these control deficiencies above could result in a misstatement of certain account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Management determined that each of these control deficiencies set forth above constitutes a material weakness at March 31, 2007. |
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| (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. On March 10, 2006, the Company and In-Three entered into a settlement agreement settling the dispute between the Company and In-Three. On June 12, 2006, the U.S. District Court for the Central District of California, Western Division, entered a stay in the proceedings against In-Three pending the arbitration of disputes between the Company and 3DMG. Arbitration was initiated by the Company against 3DMG on May 15, 2006 before the International Centre for Dispute Resolution in New York, alleging breaches of the license and consulting agreements between the Company and 3DMG. On June 15, 2006, 3DMG filed an answer denying any breaches and asserting counterclaims that the Company breached the parties’ license agreement. On June 21, 2007, the Arbitration Panel unanimously denied 3DMG’s Motion for Summary Judgment filed on April 11, 2007 concerning the Company’s claims and 3DMG’s counterclaims. On October 5, 2007, 3DMG amended its counterclaims and added counterclaims from UNIPAT.ORG relating to fees allegedly owed to UNIPAT.ORG by IMAX. An evidentiary hearing on liability issues has been set for January 2008 with further proceedings on damages issues to be scheduled if and when necessary. The Company will continue to pursue its claims vigorously and believes that all allegations made by 3DMG are without merit. The Company further believes that the amount of loss, if any, suffered in connection with the counterclaims would not have a material impact on the financial position or operations of the Company, although no assurance can be given with respect to the ultimate outcome of the arbitration. | |
| (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 damages sought against E-Citi included the original claim sought against EML. An arbitration hearing took place in November 2005 against E-Citi, which included all claims by the Company. On February 1, 2006, the ICC issued an award on liability finding unanimously in the Company’s favor on all claims. Further hearings took place in July 2006 and December 2006. On August 24, 2007, the ICC issued an award unanimously in favor of the Company in the amount of $9.4 million, consisting of past and future rents owed to the Company under its lease agreements, plus interest and costs. In the award, the ICC upheld the validity and enforceability of the Company’s theater system contract. The Company has now submitted its application to the arbitration panel for interest and costs and is awaiting the Panel’s decision on that issue. | |
| (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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| (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. On January 18, 2007, the Court consolidated all eight class action lawsuits and appointed Westchester Capital Management, Inc. as the lead plaintiff and Abbey Spanier Rodd Abrams & Paradis LLP as lead plaintiff’s counsel. On October 2, 2007, plaintiffs filed a consolidated amended class action complaint. The amended complaint, brought on behalf of shareholders who purchased the Company’s common stock between February 27, 2003 through July 30, 2007, alleges primarily that the defendants engaged in securities fraud by disseminating materially false and misleading statements during the class period regarding the Company’s revenue recognition of theater system installations, and failing to disclose material information concerning the Company’s revenue recognition practices. The amended complaint also adds PricewaterhouseCoopers LLP, the Company’s auditors, as a defendant. The lawsuit seeks unspecified compensatory damages, costs, and expenses. The lawsuit is at a very early stage and as a result the Company is not able to estimate a potential loss exposure. The Company believes the allegations made against it in the amended complaint are meritless and will vigorously defend the matter, although no assurances can be given with respect to the outcome of such proceedings. The Company’s directors and officers insurance policy provides for reimbursement for costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, if any, subject to certain policy limits and deductibles. The deadline for defendants to respond to the amended complaint is currently December 3, 2007. | |
| (e) | A class action lawsuit was filed on September 20, 2006 in the Ontario Superior Court of Justice against the Company and certain of its officers and directors, alleging violations of Canadian securities laws. This lawsuit was brought on behalf of shareholders who acquired the Company’s securities between February 17, 2006 and August 9, 2006. The lawsuit is in a very early stage and seeks unspecified compensatory and punitive damages, as well as costs and expenses. As a result, the Company is unable to estimate a potential loss exposure. The Company believes the allegations made against it in the statement of claim are meritless and will vigorously defend the matter, although no assurance can be given with respect to the ultimate outcome of such proceedings. The Company’s directors and officers insurance policy provides for reimbursement for costs and expenses incurred in connection with this lawsuit as well as potential damages awarded, if any, subject to certain policy limits and deductibles . | |
| (f) | On September 7, 2007, Catalyst Fund Limited Partnership II, a holder of the Company’s Senior Notes (“Catalyst”), commenced an application against the Company in the Ontario Superior Court of Justice for a declaration of oppression pursuant to s. 229 and 241 of the Canada Business Corporations Act (“CBCA”) and for a declaration that the Company is in default of the Indenture governing its Senior Notes. The allegations of oppression are substantially the same as allegations Catalyst made in a May 10, 2007 complaint filed against the Company in the Supreme Court of the State of New York, and subsequently withdrawn on October 12, 2007, wherein Catalyst challenged the validity of the consent solicitation through which the Company requested and obtained a waiver of any and all defaults arising from a failure to comply with the reporting covenant under the Indenture and alleged common law fraud. Catalyst has also requested the appointment of an inspector and an order that an investigation be carried out pursuant to s. 229 of the CBCA. In addition, between March 2007 and October 2007, Catalyst has sent the Company eight purported notices of default or acceleration under the Indenture. It is the Company’s position that no default or event of default (as those terms are defined in the Indenture) has occurred or is continuing under the Indenture and, accordingly, that Catalyst’s purported acceleration notice is of no force or effect. The Company is in the process of responding to the Ontario application and a hearing is scheduled to take place on January 15 and 16, 2008. The litigation is at a preliminary stage and as a result, the Company is not able to estimate a potential loss exposure. The Company believes this application is entirely without merit and plans to contest it vigorously and seek costs from Catalyst, although no assurances can be given with respect to the outcome of the proceedings. | |
| (g) | On June 19, 2007, the Ontario Superior Court of Justice granted the Company’s application to call its Annual General Meeting between June 30, 2007 and September 30, 2007. | |
| (h) | 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 future operating results, although no assurance can be given with respect to the ultimate outcome of any such proceedings. |
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| 31.1 | Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002, dated November 5, 2007, by Bradley J. Wechsler. | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002, dated November 5, 2007, by Richard L. Gelfond. | |
| 31.3 | Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002, dated November 5, 2007, by Joseph Sparacio. | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002, dated November 5, 2007, by Bradley J. Wechsler. | |
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002, dated November 5, 2007, by Richard L. Gelfond. | |
| 32.3 | Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002, dated November 5, 2007, by Joseph Sparacio. |
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| IMAX CORPORATION |
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| Date: November 5, 2007 | By: | /s/ Joseph Sparacio | ||
| Joseph Sparacio | ||||
| Chief Financial Officer (Principal Financial Officer) |
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| Date: November 5, 2007 | By: | /s/ Jeffrey Vance | ||
| Jeffrey Vance | ||||
| Co-Controller (Principal Accounting Officer) |
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| Date: November 5, 2007 | By: | /s/ Vigna Vivekanand | ||
| Vigna Vivekanand | ||||
| Co-Controller (Principal Accounting Officer) |
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