================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
Canada 98-0140269
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
------------------------------------------------- -------------
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
--------------
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12B-2 of the Exchange Act .
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerate Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of April 21, 2006
- -------------------------- --------------------------------
Common stock, no par value 40,285,574
================================================================================
IMAX CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 30
Item 3. Quantitative and Qualitative Factors about Market Risk......... 43
Item 4. Controls and Procedures........................................ 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 45
Item 1A. Risk Factors................................................... 46
Item 4. Submission of Matters to a Vote of Security Holders............ 47
Item 6. Exhibits....................................................... 47
Signatures................................................................ 48
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included in this annual report may constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, references to future capital expenditures
(including the amount and nature thereof), business and technology strategies
and measures to implement strategies, competitive strengths, goals, expansion
and growth of business and operations, plans and references to the future
success of IMAX Corporation together with its wholly-owned subsidiaries (the
"Company") and expectations regarding the Company's future operating results.
These forward-looking statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the expectations and
predictions of the Company is subject to a number of risks and uncertainties,
including, but not limited to, general economic, market or business conditions;
the opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other companies; conditions in the in-home and
out-of-home entertainment industries; changes in laws or regulations; conditions
and developments in the commercial exhibition industry; the acceptance of the
Company's new technologies; risks associated with investments and operations in
foreign jurisdictions and any future international expansion, including those
related to economic, political and regulatory policies of local governments and
laws and policies of the United States and Canada; the potential impact of
increased competition in the markets the Company operates within; and other
factors, many of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this quarterly report are qualified by
these cautionary statements, and actual results or anticipated developments by
the Company may not be realized, and even if substantially realized, may not
have the expected consequences to, or effects on, the Company. The Company
undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future
events or otherwise.
- --------------------------------------------------------------------------------
IMAX(R), IMAX(R) Dome, IMAX(R) 3D, IMAX(R) 3D Dome, The IMAX
Experience(R), An IMAX Experience(R), IMAX DMR(R), IMAX MPX(R), IMAX
think big(R) and think big(R) are trademarks and trade names of the
Company or its subsidiaries that are registered or otherwise protected under
laws of various jurisdictions.
Page 2
IMAX CORPORATION
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Condensed Consolidated Financial Statements are
filed as part of this Report:
Condensed Consolidated Balance Sheets as at March 31, 2006
and December 31, 2005............................................ 4
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2006 and 2005...................... 5
Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2006 and 2005........ 6
Notes to Condensed Consolidated Financial Statements............. 7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
<Table>
<Caption>
MARCH 31,
2006 DECEMBER 31,
(UNAUDITED) 2005
------------- -------------
ASSETS
Cash and cash equivalents $ 22,023 $ 24,324
Short-term investments 8,257 8,171
Accounts receivable, net of allowance for doubtful accounts
of $6,057 (2005 - $5,892) 24,382 26,165
Financing receivables (note 3) 62,281 63,006
Inventories (note 4) 31,050 28,294
Prepaid expenses 3,996 3,825
Film assets 3,578 3,329
Fixed assets 25,777 26,780
Other assets 7,873 11,618
Deferred income taxes (note 11) 7,558 6,171
Goodwill 39,027 39,027
Other intangible assets 2,600 2,701
------------- -------------
Total assets $ 238,402 $ 243,411
============= =============
LIABILITIES
Accounts payable $ 5,586 $ 6,935
Accrued liabilities (note 7(c)) 50,818 55,122
Deferred revenue 47,487 44,397
Senior Notes due 2010 (note 5) 160,000 160,000
------------- -------------
Total liabilities 263,891 266,454
------------- -------------
COMMITMENTS AND CONTINGENCIES (notes 7 and 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 12) Common shares -- no par value.
Authorized -- unlimited number. Issued and outstanding --
40,280,075 (2005 -- 40,213,542) 121,928 121,674
Other equity 2,127 1,758
Deficit (150,168) (144,347)
Accumulated other comprehensive income (loss) 624 (2,128)
------------- -------------
Total shareholders' deficit (25,489) (23,043)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 238,402 $ 243,411
============= =============
</Table>
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars, except per share amounts)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
---------- ----------
REVENUE
IMAX systems (note 9(a)) $ 9,398 $ 22,113
Films 6,521 4,947
Theater operations 3,657 3,816
Other 842 492
---------- ----------
20,418 31,368
COSTS OF GOODS AND SERVICES 14,393 15,223
---------- ----------
GROSS MARGIN 6,025 16,145
Selling, general and administrative expenses (note 9(b)) 10,505 10,243
Research and development 915 653
Amortization of intangibles 192 157
Receivable provisions, net of (recoveries) (note 10) 143 212
---------- ----------
EARNINGS (LOSS) FROM OPERATIONS (5,730) 4,880
Interest income 253 214
Interest expense (4,174) (4,197)
---------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (9,651) 897
Recovery of income taxes (note 11) 1,530 59
---------- ----------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (8,121) 956
Net earnings from discontinued operations (note 14) 2,300 240
---------- ----------
NET EARNINGS (LOSS) (5,821) 1,196
========== ==========
EARNINGS (LOSS) PER SHARE (note 12(b)):
Earnings (loss) per share -- basic and diluted:
Net earnings (loss) from continuing operations $ (0.20) $ 0.02
Net earnings from discontinued operations $ 0.06 $ 0.01
---------- ----------
Net earnings (loss) $ (0.14) $ 0.03
========== ==========
</Table>
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 5
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2006 2005
------------- -------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ (5,821) $ 1,196
Net (earnings) from discontinued operations (2,300) (240)
Items not involving cash:
Depreciation and amortization 3,901 3,584
Write-downs 143 212
Change in deferred income taxes (1,387) (140)
Stock and other non-cash compensation 1,603 1,231
Non-cash foreign exchange (gain) loss (29) 201
Interest on short-term investments (85) (23)
Investment in film assets (2,292) (2,151)
Changes in other non-cash operating assets and liabilities 625 (3,773)
------------- -------------
Net cash provided by (used in) operating activities (5,642) 97
------------- -------------
INVESTING ACTIVITIES
Purchases of short-term investments (4,098) (14,995)
Proceeds from maturities of short-term investments 4,097 --
Purchase of fixed assets (92) (271)
Increase in other assets (187) (187)
Increase in other intangible assets (91) (167)
------------- -------------
Net cash used in investing activities (371) (15,620)
------------- -------------
FINANCING ACTIVITIES
Common shares issued 254 1,267
------------- -------------
Net cash provided by financing activities 254 1,267
------------- -------------
Effects of exchange rate changes on cash (35) 71
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (5,794) (14,185)
Cash provided by investing activities from discontinued operations 3,493 --
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (2,301) (14,185)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,324 28,964
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,023 $ 14,779
============= =============
</Table>
(the accompanying notes are an integral part of these
condensed consolidated financial statements)
Page 6
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
IMAX Corporation together with its wholly-owned subsidiaries (the
"Company"), except subsidiaries which the Company has identified as
variable interest entities ("VIE's") where the Company is not the
primary beneficiary ("PB") (note 2). The nature of the Company's
business is such that the results of operations for the interim periods
presented are not necessarily indicative of results to be expected for
the fiscal year. In the opinion of management, the information
contained herein reflects all adjustments necessary to make the results
of operations for the interim periods a fair statement of such
operations.
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Significant differences between
United States and Canadian Generally Accepted Accounting Principles are
described in note 17.
These financial statements should be read in conjunction with the
financial statements included in the Company's most recent annual
report on Form 10-K for the year ended December 31, 2005 which should
be consulted for a summary of the significant accounting policies
utilized by the Company. These interim financial statements are
prepared following accounting policies consistent with the Company's
financial statements for the year ended December 31, 2005.
EMPLOYEE STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Financial Accounting Standards
No. 123, "Share-Based Payment," ("FAS 123R") which requires the
measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors for employee stock
options based on estimated fair values. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB
107") relating to FAS 123R. The Company has applied the provisions of
SAB 107 in its adoption of FAS 123R.
The Company adopted FAS 123R using the modified prospective transition
method, which requires the application of the accounting standard as of
January 1, 2006. In accordance with the modified prospective transition
method, the Company's Consolidated Financial Statements for prior
periods have not been restated to reflect, and do not include, the
impact of FAS 123R.
FAS 123R requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest
is recognized as expense over the requisite service periods in the
Company's Consolidated Statement of Operations. Prior to the adoption
of FAS 123R, the Company accounted for stock-based awards to employees
and directors using the intrinsic value method in accordance with APB
25 as allowed under Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). Under the intrinsic value
method, no stock-based compensation expense had been recognized in the
Company's Consolidated Statement of Operations because the exercise
price of the Company's stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of
grant.
Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized in the Company's
Consolidated Statement of Operations for the three months ended March
31, 2006 included compensation expense for share-based payment awards
granted prior to, but not yet vested as of January 1, 2006 based on the
grant date fair value estimated in accordance with the pro forma
provisions of FAS 123 and compensation expense for the share-based
payment awards granted subsequent to January 1, 2006 based on the grant
date fair value estimated in accordance with the provisions of FAS
123R. In conjunction with the adoption of FAS 123R, the Company changed
its method of attributing the value of stock-based compensation to
expense from a method which recognized the expense as the options vest
to the straight-line single option method. Compensation expense for all
share-based payment awards granted on or prior to January 1, 2006 will
continue to be recognized using the historic method while compensation
expense for all share-based payment awards granted subsequent to
January 1, 2006 is recognized using the straight-line single-option
method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the first quarter of 2006 is
based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. FAS 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. In the Company's pro
forma information required under FAS 123 for the periods prior to 2006,
the Company also estimated forfeitures at the time of grant and
revised, if necessary, in subsequent periods.
The Company utilizes a lattice-binomial option-pricing model ("binomial
model") to determine the fair value of share-based payment awards.
Prior to January 1, 2006, the Company followed the intrinsic value
method of accounting for employee stock options as prescribed by
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued
to Employees, (APB 25). If the fair value methodology prescribed by
FASB Statement, Accounting for Stock-Based Compensation (FAS 123) had
been adopted by the Company, pro forma results for the quarter ended
March 31, would have been as follows:
<Table>
<Caption>
2005
----------
Net earnings as reported $ 1,196
Stock-based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (700)
----------
Adjusted net earnings $ 496
==========
Earnings per share -- basic and diluted:
Net earnings as reported $ 0.03
FAS 123 stock-based compensation expense (0.02)
----------
Adjusted net earnings $ 0.01
==========
</Table>
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized under FAS 123R for the
three months ended March 31, 2006 was $0.3 million. There was no
stock-based compensation expense related to employee stock options
recognized during the three months ended March 31, 2005.
The weighted average fair value of common share options granted to
employees for the three months ended March 31, 2006 at the time of
grant was $3.81 (2005 - $nil). The Company uses a binomial model to
determine the fair value of common share options at the grant date. For
the three months ended March 31, 2006 the following assumptions were
used:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31, 2006
------------------
Risk-free interest rate 4.83%
Market risk premium 5.33% - 5.60%
Beta 1.11 - 1.28
Expected option life (in years) 3.86 - 5.33
Volatility 60%
Annual termination probability 8.06%
Dividend yield 0%
</Table>
As the Company stratifies its employees into two groups in order to
calculate fair value under the Binomial model, ranges of assumptions
used are presented for equity risk premium, Beta, expected option life
and annual termination probability. The Company uses the historical
data to estimate option exercise and employee termination within the
valuation model; separate groups of employees that have similar
historical exercise behaviour are considered separately for valuation
purposes.
The Company's policy is to issue new shares to satisfy stock options
which are exercised.
Total stock-based compensation expense related to non-vested employee
stock options not yet recognized at March 31, 2006 and the weighted
average period over which the awards are expected to vest is $4.5
million and 3.5 years, respectively.
Page 9
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
2. VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Financial Interpretation 46 ("FIN
46"), Consolidation of Variable Interest Entities ("VIEs"), in an
effort to expand and clarify existing accounting guidance that
addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity. FIN 46 was
effective immediately for all enterprises with variable interests in
VIEs created after January 31, 2003 and on January 1, 2004 for all
previously existing variable interest entities. Under FIN 46, if an
entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the
entity's expected losses if they occur, receives a majority of the
entity's expected residual returns if they occur, or both. On December
24, 2003, the FASB issued a revised FIN 46, defined as FIN 46R.
Commencing January 1, 2004, the Company was required to consolidate the
accounts of all VIEs for which it is the primary beneficiary ("PB"), as
required by FIN 46R. The Company has evaluated its various variable
interests to determine whether they are in VIE's. The Company reviewed
its management agreements relating to theaters which the Company
manages, and has no equity interest, and concluded that such
arrangements were not variable interests since the Company's fees are
commensurate with the level of service and the theater owner retains
the right to terminate the service. The Company has also reviewed its
financial arrangements with theaters where it shares in the profit or
losses of the theater. The Company has not considered these
arrangements under FIN 46R as the arrangements meet the scope
exceptions defined in the pronouncement. The Company has determined
that certain of its film production companies are VIEs. Since in one
case the Company absorbs a majority of the VIE's losses, the Company
has determined that it is the PB of the entity. The Company continues
to consolidate this entity with no material impact on the operating
results or financial condition of the Company as the production company
has total assets of $nil and total liabilities of $nil as at March 31,
2006. The Company also has interests in three other film production
companies which are VIEs, however the Company did not consolidate these
film entities since it does not bear the majority of the expected
losses or expected residual returns. As of March 31, 2006, these three
VIEs have total assets of $0.2 million (December 31, 2005 - $0.3
million) and total liabilities of $0.2 million (December 31, 2005 -
$0.3 million).
3. FINANCING RECEIVABLES
The Company generally provides its theater systems to customers on a
long-term lease basis, typically with initial lease terms of 10 to 20
years. Financing receivables consisting of net investment in leases and
long term receivables are comprised of the following:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
----------- ------------
Gross minimum lease amounts receivable $ 85,471 $ 88,894
Residual value of equipment 597 635
Unearned finance income (32,185) (33,933)
----------- ------------
Present value of minimum lease amounts receivable 53,883 55,596
Accumulated allowance for uncollectible amounts (1,478) (1,478)
----------- ------------
Net investment in leases $ 52,405 $ 54,118
Long-term receivables 9,876 8,888
----------- ------------
Total financing receivables $ 62,281 $ 63,006
=========== ============
</Table>
Page 10
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
4. INVENTORIES
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
Raw materials $ 10,570 $ 10,464
Work-in-process 7,172 6,893
Finished goods 13,308 10,937
------------ ------------
$ 31,050 $ 28,294
============ ============
</Table>
5. SENIOR NOTES DUE 2010
In November 2004, the Company completed an exchange offer wherein
$159.0 million of the Company's 9.625% senior notes due December 1,
2010 (the "Unregistered Senior Notes") were exchanged for 9.625% senior
notes registered under the Securities Act of 1933, as amended (the
"Registered Senior Notes"), pursuant to a registration statement on
Form S-4 that had been declared effective by the Securities and
Exchange Commission on September 30, 2004. Apart from the fact that the
Registered Senior Notes have been registered under the Securities Act,
the Unregistered Senior Notes and the Registered Senior Notes are
substantially identical and are referred to herein as the "Senior
Notes". The Senior Notes are unconditionally guaranteed, jointly and
severally, by certain of the Company's wholly-owned subsidiaries.
As at March 31, 2006, the Company had outstanding $159.0 million
aggregate principal of Registered Senior Notes and $1.0 million
aggregate principal of Unregistered Senior Notes.
6. CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a
secured revolving credit facility (the "Credit Facility"). The Credit
Facility is a three-year revolving credit facility with yearly renewal
options thereafter, permitting maximum aggregate borrowings of $20.0
million, subject to a borrowing base calculation which includes the
Company's financing receivables, and certain reserve requirements and
further reduced by outstanding letters of credit. The Credit Facility
bears interest at Prime + 0.50% per annum or Libor + 2.25% per annum
and is collateralized by a first priority security interest in all of
the current and future assets of the Company. The Credit Facility
contains typical affirmative and negative covenants, including
covenants that restrict the Company's ability to: incur certain
additional indebtedness; make certain loans, investments or guarantees;
pay dividends; make certain asset sales; incur certain liens or other
encumbrances; conduct certain transactions with affiliates and enter
into certain corporate transactions. In addition, the Credit Facility
contains customary events of default, including upon an acquisition or
a change of control that has a material adverse effect on the Company's
financial condition. The Credit Facility also requires the Company to
maintain a minimum level of earnings before interest, taxes,
depreciation and amortization, and cash collections. As at March 31,
2006, the Company has not drawn down on the Credit Facility, and has
letters of credit for $9.2 million secured by the Credit Facility
arrangement.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
7. COMMITMENTS
(a) The Company's total minimum annual rental payments to be made under
operating leases for premises as of March 31, 2006 for each of the
years ended December 31, are as follows:
<Table>
<Caption>
2006 (nine months remaining) $ 3,938
2007 5,001
2008 4,939
2009 4,929
2010 5,119
Thereafter 18,982
----------
$ 42,908
==========
</Table>
(b) As at March 31, 2006, the Company has letters of credit of $9.2 million
(December 31, 2005 - $7.6 million) secured by the Company's Credit
Facility arrangement (see note 6).
(c) In March 2004, the Company received $5.0 million in cash under a film
financing arrangement which was included in accrued liabilities. During
2005, the Company received another $5.1 million under the same film
financing arrangement. The Company was required to expend these funds
towards the production and distribution of a motion picture title. The
film was released in the third quarter of 2005. During the first
quarter of 2006, the Company spent $0.3 million towards the
distribution of the film. As at March 31, 2006, the Company has
recorded $0.1 million (December 31, 2005 - $0.4 million) in accrued
liabilities for future distribution expenses to be incurred on the
film.
8. CONTINGENCIES
The Company is involved in lawsuits, claims, and proceedings, including
those identified below, which arise in the ordinary course of business.
In accordance with SFAS 5, "Accounting for Contingencies," the Company
will make a provision for a liability when it is both probable that a
loss has been incurred and the amount of the loss can be reasonably
estimated. The Company believes it has adequate provisions for any such
matters. The Company reviews these provisions in conjunction with any
related provisions on assets related to the claims at least quarterly
and adjusts these provisions to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other pertinent
information related to the case. Should developments in any of these
matters outlined below cause a change in our determination as to an
unfavorable outcome and result in the need to recognize a material
provision, or, should any of these matters result in a final adverse
judgement or be settled for significant amounts, they could have a
material adverse effect on our results of operations, cash flows, and
financial position in the period or periods in which such a change in
determination, settlement or judgement occurs.
(a) In March 2005, the Company, together with Three-Dimensional Media
Group, Ltd. ("3DMG"), filed a complaint in the U.S. District Court for
the Central District of California, Western Division, against In-Three,
Inc. ("In-Three") alleging patent infringement and seeking injunctive
relief and damages. In April 2005, In-Three filed an answer denying
infringement and asserting counterclaims that seek a declaratory
judgment of non-infringement, invalidity and unenforceability of the
patent in suit, and damages for alleged false advertising, false
designation of origin, breach of contract, interference with
prospective economic advantage and/or unfair competition. On March 13,
2006, the Company and In-Three entered into a settlement agreement,
resolving all matters between the parties. On March 29, 2006, the
Company and In-Three filed a joint motion for an order dismissing with
prejudice all claims and counterclaims between the parties.
Page 12
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONTINGENCIES (cont'd)
(b) In November 2001, the Company filed a complaint with the District Court
of Munich against Big Screen, a German large-screen cinema owner in
Berlin ("Big Screen"), demanding payment of rental payments and certain
other amounts owed to the Company. Big Screen raised a defense based on
alleged infringement of German antitrust rules, relating mainly to an
allegation of excessive pricing. Big Screen had brought a number of
motions for restraining orders in this matter relating to the Company's
provision of films and maintenance, all of which have been rejected by
the courts, including the Berlin Court of Appeals, and for which all
appeals have been exhausted. On November 8, 2005, the District Court of
Munich rendered a judgment in favor of the Company on all accounts. Big
Screen has appealed the judgment to the Munich Court of Appeals and at
the same time asked for an order to stay the execution under the
judgment of the District Court. On November 30, 2005, Big Screen filed
an application for the opening of insolvency proceedings. While the
appeal on the merits is pending, by order of January 12, 2006, the
Court of Appeals has rejected Big Screen's application regarding a stay
of execution so that the judgment remains executable.
(c) In May 2002, the Company filed a complaint with the District Court of
Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg
("Siewert"), demanding payment of rental obligations and other amounts
owed to the Company. Siewert raised a defense based on alleged
infringement of German antitrust rules. By judgement of December 20,
2002, the District Court rejected the defense and awarded judgement in
documentary proceedings in favor of the Company and added further
amounts that had fallen due. Siewert applied for leave to appeal to the
German Supreme Court on matters of law, which was rejected by the
German Supreme Court in March 2004. Siewert subsequently made a partial
payment of amounts awarded to the Company. Siewert has filed follow up
proceedings to the documentary proceedings in the District Court,
essentially repeating the claims rejected in the documentary
proceeding. On September 30, 2004, Siewert filed for insolvency with
the Local Court in Wuerzburg.
(d) 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
as a result of E-Citi's breach of a September 2000 lease agreement. The
arbitration hearing on both claims took place on November 16-18, 2005.
On January 31, 2006, the ICC informed the parties that the liability
stage of the proceedings was closed, and on February 1, 2006, the ICC
issued an award finding unanimously in the Company's favor on all
claims. The amount of damages awarded to the Company will be decided
after a hearing scheduled for July 2006, and no amount has yet been
recorded for these damages.
Page 13
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
8. CONTINGENCIES (cont'd)
(e) 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 filed a cross claim
for indemnity against a third party, SIMEX, Inc. ("SIMEX"). In
response, SIMEX filed an application in Toronto, Ontario, Canada,
seeking a declaration that it is not subject to the arbitration
provision or payment obligations in the production agreement. The
Ontario Superior Court dismissed SIMEX's application, with costs. SIMEX
appealed part of this decision to the Ontario Court of Appeal which
found that SIMEX was not subject to some of the obligations which the
Company contended were set forth the production agreement, including,
specifically, the obligation to pay Robots directly based on the
receipts of proceeds from the distribution of the films produced under
the production agreement. 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.
(f) In addition to the matters described above and in note 14(a) in respect
of the Miami theater, the Company is currently involved in other legal
proceedings which, in the opinion of the Company's management, will not
materially affect the Company's financial position or future operating
results, although no assurance can be given with respect to the
ultimate outcome of any such proceedings.
9. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SUPPLEMENTAL
INFORMATION
(a) The Company generally enters into multi-year theater system lease
agreements with customers that typically contain customer payment
obligations prior to the scheduled installation of the theater system.
During the period of time between lease signing and system
installation, certain customers each year generally are unable, or
elect not, to proceed with system installation for a number of reasons,
including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that
the customer will not proceed with installation, the customer and the
Company may enter into a consensual lease buyout, whereby the parties
are released from their future obligations under the lease and the
geographic territory granted to the customer reverts to the Company.
Once an agreement is reached by both parties, the initial lease
payments that the customer previously made to the Company are typically
recognized as revenue. In addition, since the introduction of its new
IMAX MPX theater system in 2003, the Company has agreed with several
customers to terminate their original agreements and to sign new system
agreements for the MPX system. Upon finalizing the new agreement, the
total consideration received under both the terminated agreements and
the new MPX arrangement is allocated first to the MPX system and the
residual amount to settlement revenue. During the first quarter of
2006, the Company did not recognize any settlement revenue. Included in
IMAX systems revenue for the three months ended March 31, 2005 are the
following types of settlement arrangements: $0.2 million related to MPX
conversion agreements and $6.9 million related to consensual lease
buyouts. In aggregate the Company recognized $7.1 million in settlement
revenue in the first quarter of 2005.
(b) Included in selling, general and administrative expenses for the
quarter ended March 31, 2006 is a gain of less than $0.1 million (2005
- $0.3 million loss) for net foreign exchange gains or losses related
to the translation of foreign currency denominated monetary assets,
liabilities and integrated subsidiaries.
Page 14
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
10. RECEIVABLE PROVISIONS, NET OF (RECOVERIES)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
Accounts receivable provisions $ 143 $ 262
Financing receivables provisions -- (50)
--------- ---------
Receivable provisions (recoveries), net $ 143 $ 212
========= =========
</Table>
11. INCOME TAXES
The effective tax rate on earnings differs significantly from the
Canadian statutory rate due to the effect of permanent differences,
income taxed at differing rates in foreign and other provincial
jurisdictions, tax recoveries and charges relating to favourable or
unfavourable tax examinations, and changes in the Company's valuation
allowance on deferred tax assets. The income tax expense for the
quarter is calculated by applying the estimated average annual
effective tax rate of approximately 10% for the 2006 year to quarterly
pre-tax income. The Company also favorably resolved a provincial income
tax audit resulting in the release of related tax reserves of $0.5
million to the income tax recovery for the quarter.
As at March 31, 2006, the Company has net deferred income tax assets of
$7.6 million (December 31, 2005 - $6.2 million), comprised of tax
credit carryforwards, net operating loss and capital loss carryforwards
and other deductible temporary differences, which can be utilized to
reduce either taxable income or taxes otherwise payable in future
years. As of March 31, 2006, the Company had a gross deferred income
tax asset of $48.4 million, against which the Company is carrying a
$40.8 million valuation allowance.
12. CAPITAL STOCK
(a) STOCK-BASED COMPENSATION
As at March 31, 2006, the Company has reserved a total 6,980,156
(December 31, 2005 -- 7,046,689) common shares for future issuance
under the Stock Option Plan, of which options in respect of 5,949,159
common shares are outstanding at March 31, 2006. The options granted
under the Stock Option Plan generally vest between one and five years
and expire 10 years or less from the date granted. At March 31, 2006,
options in respect of 4,238,422 common shares were vested and
exercisable.
Under the terms of certain employment agreements dated July 12, 2000,
the Company is required to issue either 360,000 restricted common
shares or pay their cash equivalent. The restricted shares or the
related cash obligation were fully vested effective July 1, 2002. In
May 2003, the Company paid approximately $1.6 million in cash to settle
the equivalent of 200,000 of the total 360,000 restricted common shares
under these agreements. The remaining 160,000 restricted shares are
required to be issued, or payment of their cash equivalent, upon
request by the employees. The Company has recorded an additional
expense of $0.5 million for the quarter ended March 31, 2006 (2005 -
$0.2 million), due to the changes in the fair value of these restricted
shares in the period.
Page 15
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK
(a) STOCK-BASED COMPENSATION (cont'd)
The following table summarizes certain information in respect of option
activity under the Stock Option Plan for the periods ended March 31,:
<Table>
<Caption>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
------------------------------- --------------------------
2006 2005 2006 2005
-------------- -------------- ------------ ------------
Options outstanding, beginning of year 5,504,324 5,593,101 $ 7.26 $ 6.82
Granted 535,835 13,335 10.34 10.56
Exercised (66,533) (229,879) 3.81 5.51
Forfeited or expired (24,467) -- 18.46 --
Cancelled -- (6,600) -- 13.82
-------------- --------------
Options outstanding, end of quarter 5,949,159 5,369,957 7.53 6.88
============== ==============
Options exercisable, end of quarter 4,238,422 3,589,427 7.12 7.39
============== ==============
</Table>
In the first quarter of 2006, the Company cancelled nil stock options
(2005 - less than 0.1 million).
The weighted average exercise price per share and number of unvested
common share options granted to employees as at March 31, 2006 is $8.55
and 1,710,737, respectively.
The following table summarizes certain information in respect of
options outstanding under the Stock Option Plan at March 31, 2006:
<Table>
<Caption>
NUMBER OF SHARES
-----------------------------------
WEIGHTED
RANGE OF EXERCISE AVERAGE EXERCISE AVERAGE
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE REMAINING TERM
-------------------- --------------- --------------- ---------------- --------------
$ 0.00 - $ 2.99 172,746 170,746 $ 2.73 2.6 Years
$ 3.00 - $ 4.99 1,981,189 1,981,189 4.39 3.2 Years
$ 5.00 - $ 9.99 2,854,152 1,577,915 6.88 5.3 Years
$ 10.00 - $ 14.99 459,170 26,670 10.68 6.3 Years
$ 15.00 - $ 19.99 55,600 55,600 17.58 0.7 Years
$ 20.00 - $ 24.99 271,302 271,302 21.86 3.1 Years
$ 25.00 - $ 28.04 155,000 155,000 27.17 3.9 Years
--------------- ---------------
Total 5,949,159 4,238,422 7.53 4.5 Years
=============== ===============
</Table>
Page 16
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK
(a) STOCK-BASED COMPENSATION (cont'd)
In the first quarter of 2006, an aggregate of 23,335 (2005 - 13,335)
options with an average exercise price of $8.75 (2005 - $10.56) to
purchase the Company's common stock were issued to certain advisors and
strategic partners of the Company. The Company has calculated the fair
value of these options to non-employees on the date of grant to be $0.1
million (2005 - $0.1 million), using a Binomial option-pricing model
with the following underlying assumptions:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2006 2005
---------- ----------
Risk-free interest rate 4.60% 3.89%
Expected option life 5 - 7 years 5 years
Volatility 60% 62%
Dividend yield 0% 0%
</Table>
In the first quarter of 2006, the Company has recorded a charge of $0.1
million (2005 - $0.1 million) to film cost of sales related to these
non-employee stock options.
There were no warrants issued in the first quarter of 2006 (2005 -
nil). 550,000 warrants were issued in 2003. In the first quarter of
2005, 80,872 common shares were issued upon exercise of 200,000
warrants. All remaining warrants have either expired or have been
cancelled.
(b) EARNINGS (LOSS) PER SHARE
Reconciliations of the numerators and denominators of the basic and
diluted per-share computations, are comprised of the following:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------ ------------
Net earnings applicable to common shareholders:
Net earnings (loss) $ (5,821) $ 1,196
============ ============
Weighted average number of common shares (000's):
Issued and outstanding, beginning of period 40,213 39,447
Weighted average number of shares issued during the period 12 110
------------ ------------
Weighted average number of shares used in computing basic
earnings (loss) per share 40,225 39,557
Assumed exercise of stock options, net of shares assumed repurchased -- 2,363
------------ ------------
Weighted average number of shares used in computing diluted
earnings (loss) per share 40,225 41,920
============ ============
</Table>
The calculation of diluted earnings per share for the first quarter of
2006 excludes common shares issuable upon exercise of options as the
impact of these exercises and conversions would be antidilutive.
Page 17
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
13. SEGMENTED INFORMATION
The Company has four reportable segments: IMAX systems, films, theater
operations and other.
There has been no change in the basis of measurement of segment profit
or loss from the Company's most recent annual report on form 10-K for
the year ended December 31, 2005. Inter-segment transactions are not
significant.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2006 2005
------------- -------------
REVENUE
IMAX systems $ 9,398 $ 22,113
Films 6,521 4,947
Theater operations 3,657 3,816
Other 842 492
------------- -------------
TOTAL $ 20,418 $ 31,368
============= =============
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $ 2,387 $ 12,559
Films (1,052) (871)
Theater operations 66 (246)
Corporate and other (7,131) (6,562)
------------- -------------
TOTAL $ (5,730) $ 4,880
============= =============
</Table>
14. DISCONTINUED OPERATIONS
(a) MIAMI THEATER LLC
On December 23, 2003, the Company closed its owned and operated Miami
IMAX theater. The Company completed its abandonment of assets and
removal of its projection system from the theater in the first quarter
of 2004, with no financial impact. The Company is involved in an
arbitration proceeding with the landlord of the theater with respect to
the amount owing to the landlord by the Company for lease and guarantee
obligations. The amount of loss to the Company has been estimated at
between $0.8 million and $2.3 million. The Company paid out $0.8
million with respect to amounts owing to the landlord during 2003 and
2004. As the Company is uncertain as to the outcome of the proceeding,
no additional amount has been recorded.
(b) DIGITAL PROJECTION INTERNATIONAL
Effective December 11, 2001, the Company completed the sale of its
wholly-owned subsidiary, Digital Projection International, including
its subsidiaries (collectively, "DPI"), to a company owned by members
of DPI management. As part of the transaction, the Company restructured
its advances to DPI, releasing DPI from obligations to repay any
amounts in excess of $12.7 million previously advanced by the Company,
and reorganized the remaining $12.7 million of debt owing to the
Company into two separate loan agreements. The loans receivable were
collateralized by fixed and floating charges over all DPI assets
including intellectual properties. One of the loans was convertible,
upon the occurrence of certain events, into shares representing 49% of
the total share capital of DPI related to these loans. On December 29,
2005, the Company and DPI entered into an agreement to settle the
remaining loans in exchange for a payment of $3.5 million. During the
first quarter of 2006, the Company recognized $2.3 million (2005 - $0.2
million) in income from discontinued operations. The other tranche of
$1.2 million had previously been recognized in 2005.
Page 18
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
14. DISCONTINUED OPERATIONS (cont'd)
(c) CONSOLIDATED STATEMENT OF OPERATIONS FOR DPI
The net earnings from discontinued operations summarized in the
Consolidated Statements of Operations, for the periods ended March 31,
were comprised of the following:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
----------- ----------
Net earnings from discontinued operations $ 2,300 $ 240
=========== ==========
</Table>
15. DEFINED BENEFIT PLAN
The Company has an unfunded U.S. defined benefit pension plan covering
its two Co-Chief Executive Officers. The plan provides for a lifetime
retirement benefit from age 55 determined as 75% of the member's best
average 60 consecutive months of earnings during the 120 months
preceding retirement.
Under the original terms of the plan, once benefit payments begin, the
benefit is indexed annually to the cost of living and further provides
for 100% continuance for life to the surviving spouse. On March 8,
2006, the Company and the Co-Chief Executives negotiated an amendment
to the plan. Under the terms of the plan amendment, the cost of living
adjustment and surviving spouse benefits previously owed to the
Co-Chief Executive Officers are each reduced by 50%, subject to a
recoupment of a percentage of such benefits upon a change of control of
the Company, and the net present value of the reduced pension benefit
payments is accelerated and paid out upon a change of control of the
Company. The benefits were 50% vested as of July 2000, the plan
initiation date. The vesting percentage increases on a straight-line
basis from inception until age 55. The vesting percentage of a member
whose employment terminates other than by voluntary retirement or upon
a change in control shall be 100%, though, as of March 31, 2006, one of
the Co-Chief Executives was approximately 78% vested and the other
Co-Chief Executive was approximately 96% vested. The fiscal 2006
expense was remeasured as of March 8, 2006 to reflect the plan changes
adopted.
The following assumptions were used in determining the obligation and
cost status of the Company's defined benefit pension plan at the plan
measurement dates of:
<Table>
<Caption>
MARCH 8, DECEMBER 31,
2006 2005
----------------- ----------------
Discount rate 5.18% 5.50%
Lump sum interest rate:
First 20 years 5.70% N/A
Thereafter 4.75% N/A
Form of payment: 100% Joint and
Modified lump sum survivor annuity
Cost of living adjustment on benefits 1.20% 2.40%
Rate of increase in qualifying compensation levels nil% nil%
</Table>
Page 19
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. DEFINED BENEFIT PLAN (cont'd)
The amounts accrued for the plan are determined as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31, 2006
-------------------
Projected benefit obligation:
Obligation, beginning of period $ 31,064
Service cost 457
Interest cost 362
Actuarial gain (8,645)
-------------------
Obligation, end of period $ 23,238
===================
Unfunded status:
Obligation, end of period $ 23,238
Unrecognized gain relating to prior service cost 2,411
Unrecognized actuarial (loss) (21)
-------------------
Accrued pension liability $ 25,628
===================
</Table>
The following table provides disclosure of pension expense for the
defined benefit plan for the periods ended March 31:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
---------- -----------
Service cost $ 457 $ 604
Interest cost 362 390
Amortization of prior service cost 153 349
---------- -----------
Pension expense $ 972 $ 1,343
========== ===========
</Table>
The accumulated benefit obligation for the defined benefit plan was
$23.2 million at March 31, 2006 and $31.1 million at December 31, 2005.
No contributions are expected to be made for the plan during 2006.
As a result of the pension plan amendment, an adjustment to the
unrecognized actuarial losses of $2.8 million and unrecognized prior
service cost of $3.4 million was recorded in comprehensive income
(loss) and other assets.
The following benefit payments are expected to be made as per the
current plan assumptions and the terms of the Plan in each of the next
five years, and in the aggregate over the five years thereafter:
<Table>
<Caption>
2006 $ --
2007 995
2008 1,007
2009 1,019
2010 29,505(1)
2011 to 2015 --
</Table>
(1) One of the Co-Chief Executive Officers is currently entitled to
benefit payments subsequent to 2010 as a life annuity, subject to an
elective right to a lump sum payment in 2010. The pension plan
assumptions assume the election of a lump sum payment.
Page 20
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. DEFINED BENEFIT PLAN (cont'd)
At the time the Company established the defined benefit pension plan,
it also took out life insurance policies on its two Co-Chief Executive
Officers with coverage amounts of $21.5 million in aggregate. The
Company intends to use the proceeds of life insurance policies taken on
its Co-Chief Executive Officers to be applied towards the benefits due
and payable under the plan, although there can be no assurance that the
Company will ultimately do so. At March 31, 2006, the cash surrender
value of the insurance policies is $3.5 million (December 31, 2005 -
$3.3 million) and has been included in other assets.
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes are fully and unconditionally guaranteed,
jointly and severally by specific wholly-owned subsidiaries of the
Company (the "Guarantor Subsidiaries"). The main Guarantor Subsidiaries
are David Keighley Productions 70 MM Inc., Sonics Associates Inc., and
the subsidiaries that own and operate certain theaters. These
guarantees are full and unconditional. The information under the column
headed "Non-Guarantor Subsidiaries" relates to the following
subsidiaries of the Company: IMAX Japan Inc. and IMAX B.V. (the
"Non-Guarantor Subsidiaries") which have not provided any guarantees of
the Senior Notes.
Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Some
subsidiaries may be unable to pay dividends due to negative working
capital.
Page 21
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at March 31, 2006:
<Table>
<Caption>
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
ASSETS
Cash and cash equivalents $ 13,167 $ 8,651 $ 205 $ -- $ 22,023
Short-term investments 8,257 -- -- -- 8,257
Accounts receivable 21,965 2,154 263 -- 24,382
Financing receivables 60,226 2,055 -- -- 62,281
Inventories 30,734 237 79 -- 31,050
Prepaid expenses 3,310 600 86 -- 3,996
Intercompany receivables 15,664 34,836 11,129 (61,629) --
Film assets 3,578 -- -- -- 3,578
Fixed assets 24,476 1,299 2 -- 25,777
Other assets 7,873 -- -- -- 7,873
Deferred income taxes 7,554 4 -- -- 7,558
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,600 -- -- -- 2,600
Investments in subsidiaries 32,284 -- -- (32,284) --
------------ -------------- ------------- ------------ -------------
Total assets $ 270,715 $ 49,836 $ 11,764 $ (93,913) $ 238,402
============ ============== ============= ============ =============
LIABILITIES
Accounts payable 2,452 3,134 -- -- 5,586
Accrued liabilities 48,727 1,891 200 -- 50,818
Intercompany payables 43,801 39,792 6,566 (90,159) --
Deferred revenue 42,142 5,295 50 -- 47,487
Senior Notes due 2010 160,000 -- -- -- 160,000
------------ -------------- ------------- ------------ -------------
Total liabilities 297,122 50,112 6,816 (90,159) 263,891
------------ -------------- ------------- ------------ -------------
SHAREHOLDER'S DEFICIT
Common stock 121,928 -- 117 (117) 121,928
Other equity/Additional paid in
capital/Contributed surplus 1,093 46,960 -- (45,926) 2,127
Deficit (150,666) (46,622) 4,831 42,289 (150,168)
Accumulated other comprehensive income
(loss) 1,238 (614) -- -- 624
------------ -------------- ------------- ------------ -------------
Total shareholders' equity (deficit) $ (26,407) $ (276) $ 4,948 $ (3,754) $ (25,489)
------------ -------------- ------------- ------------ -------------
Total liabilities & shareholders'
equity (deficit) $ 270,715 $ 49,836 $ 11,764 $ (93,913) $ 238,402
============ ============== ============= ============ =============
</Table>
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 $28.6 million
as at March 31, 2006.
Page 22
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2005:
<Table>
<Caption>
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
ASSETS
Cash and cash equivalents $ 17,402 $ 6,728 $ 194 $ -- $ 24,324
Short-term investments 8,171 -- -- -- 8,171
Accounts receivable 23,828 2,045 292 -- 26,165
Financing receivables 60,950 2,056 -- -- 63,006
Inventories 27,973 239 82 -- 28,294
Prepaid expenses 3,162 575 88 -- 3,825
Inter-company receivables 14,057 31,929 11,043 (57,029) --
Film assets 3,329 -- -- -- 3,329
Fixed assets 25,403 1,374 3 -- 26,780
Other assets 11,618 -- -- -- 11,618
Deferred income taxes 6,171 -- -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,701 -- -- -- 2,701
Investments in subsidiaries 31,833 -- -- (31,833) --
----------- ----------- ------------- ------------ -------------
Total assets $ 275,625 $ 44,946 $ 11,702 $ (88,862) $ 243,411
=========== =========== ============= ============ =============
LIABILITIES
Accounts payable 4,915 2,017 3 -- 6,935
Accrued liabilities 52,978 1,965 179 -- 55,122
Inter-company payables 42,766 36,088 6,466 (85,320) --
Deferred revenue 38,927 5,330 140 -- 44,397
Senior Notes due 2010 160,000 -- -- -- 160,000
----------- ----------- ------------- ------------ -------------
Total liabilities 299,586 45,400 6,788 (85,320) 266,454
----------- ----------- ------------- ------------ -------------
SHAREHOLDER'S DEFICIT
Capital stock 121,674 -- 117 (117) 121,674
Other equity/Additional paid in
capital/Contributed surplus 724 46,960 -- (45,926) 1,758
Deficit (144,845) (46,800) 4,797 42,501 (144,347)
Accumulated other comprehensive income
(loss) (1,514) (614) -- -- (2,128)
----------- ----------- ------------- ------------ -------------
Total shareholders' equity (deficit) $ (23,961) $ (454) $ 4,914 $ (3,542) $ (23,043)
----------- ----------- ------------- ------------ -------------
Total liabilities & shareholders'
equity (deficit) $ 275,625 $ 44,946 $ 11,702 $ (88,862) $ 243,411
=========== =========== ============= ============ =============
</Table>
In certain Guarantor Subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced inter-company receivable balances
with respect to these Guarantor Subsidiaries in the amounts of $28.4
million.
Page 23
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2006:
<Table>
<Caption>
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
REVENUE
IMAX systems $ 9,024 $ 259 $ 194 $ (79) $ 9,398
Films 5,336 1,984 1 (800) 6,521
Theater operations 224 3,462 -- (29) 3,657
Other 840 -- 2 -- 842
------------ ------------- ------------- ------------- -------------
15,424 5,705 197 (908) 20,418
COST OF GOODS AND SERVICES 9,872 5,349 80 (908) 14,393
------------ ------------- ------------- ------------- -------------
GROSS MARGIN 5,552 356 117 -- 6,025
Selling, general and administrative expenses 10,245 178 82 -- 10,505
Research and development 915 -- -- -- 915
Amortization of intangibles 192 -- -- -- 192
Loss (income) from equity-accounted
investees (212) -- -- 212 --
Receivable provisions, net of (recoveries) 143 -- -- -- 143
------------ ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (5,731) 178 35 (212) (5,730)
Interest income 253 -- -- -- 253
Interest expense (4,174) -- -- -- (4,174)
------------ ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (9,652) 178 35 (212) (9,651)
Recovery of (provision for) income taxes 1,531 -- (1) -- 1,530
------------ ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (8,121) 178 34 (212) (8,121)
Net earnings from discontinued operations 2,300 -- -- -- 2,300
------------ ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (5,821) $ 178 $ 34 $ (212) $ (5,821)
============ ============= ============= ============= =============
</Table>
Page 24
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2005:
<Table>
<Caption>
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
REVENUE
IMAX systems $ 21,688 $ 305 $ 228 $ (108) $ 22,113
Films 3,651 1,790 9 (503) 4,947
Theater operations 226 3,617 -- (27) 3,816
Other 468 -- 24 -- 492
------------- ------------- ------------- ------------- -------------
26,033 5,712 261 (638) 31,368
COST OF GOODS AND SERVICES 10,249 5,522 90 (638) 15,223
------------- ------------- ------------- ------------- -------------
GROSS MARGIN 15,784 190 171 -- 16,145
Selling, general and administrative expenses 9,871 214 158 -- 10,243
Research and development 653 -- -- -- 653
Amortization of intangibles 157 -- -- -- 157
Loss (income) from equity-accounted
investees 13 -- -- (13) --
Receivable provisions (recoveries), net 212 -- -- -- 212
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 4,878 (24) 13 13 4,880
Interest income 214 -- -- -- 214
Interest expense (4,195) (2) -- -- (4,197)
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 897 (26) 13 13 897
Recovery of income taxes 59 -- -- -- 59
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 956 (26) 13 13 956
Net earnings from discontinued operations 240 -- -- -- 240
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 1,196 $ (26) $ 13 $ 13 $ 1,196
============= ============= ============= ============= =============
</Table>
Page 25
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the three months ended
March 31, 2006:
<Table>
<Caption>
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ (5,821) $ 178 $ 34 $ (212) $ (5,821)
Net (earnings) from discontinued operations (2,300) -- -- -- (2,300)
Items not involving cash:
Depreciation and amortization 3,768 132 1 -- 3,901
Write-downs 143 -- -- 143
Loss (income) from equity-accounted
investees (212) -- -- 212 --
Change in deferred income taxes (1,383) (4) -- -- (1,387)
Stock and other non-cash compensation 1,603 -- -- -- 1,603
Non-cash foreign exchange loss (29) -- -- -- (29)
Interest on short-term investments (85) -- -- -- (85)
Investment in film assets (2,292) -- -- -- (2,292)
Changes in other non-cash operating assets and
liabilities (1,022) 1,658 (11) -- 625
------------- ---------- ---------- ---------- ----------
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 used in investing activities (314) (57) -- -- (371)
------------- ---------- ---------- ---------- ----------
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)
------------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (7,728) 1,923 11 -- (5,794)
Cash provided by investing activities from
discontinued operations 3,493 -- -- -- 3,493
------------- ---------- ---------- ---------- ----------
INCREASE (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
============= ========== ========== ========== ==========
</Table>
Page 26
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
16. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the three months ended
March 31, 2005:
<Table>
<Caption>
IMAX GUARANTOR NON- ADJUSTMENTS CONSOLIDATED
CORPORATION SUBSIDIARIES GUARANTOR AND TOTAL
SUBSIDIARIES ELIMINATIONS
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ 1,196 $ (26) $ 13 $ 13 $ 1,196
Net (earnings) from discontinued operations (240) -- -- -- (240)
Items not involving cash:
Depreciation and amortization 3,453 131 -- -- 3,584
Write-downs 212 -- -- -- 212
Loss (income) from equity-accounted
investees 13 -- -- (13) --
Change in deferred income taxes (136) (4) -- -- (140)
Stock and other non-cash compensation 1,231 -- -- -- 1,231
Non-cash foreign exchange loss 201 -- -- -- 201
Interest on short-term investments (23) -- -- -- (23)
Investment in film assets (2,151) -- -- -- (2,151)
Changes in other non-cash operating assets and
liabilities (2,508) (1,364) 99 -- (3,773)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 1,248 (1,263) 112 -- 97
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Purchases of short-term investments (14,995) -- -- -- (14,995)
Purchase of fixed assets (107) (164) -- -- (271)
Increase in other assets (187) -- -- -- (187)
Increase in other intangible assets (167) -- -- -- (167)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (15,456) (164) -- -- (15,620)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Common shares issued 1,267 -- -- -- 1,267
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities 1,267 -- -- -- 1,267
------------- ------------- ------------- ------------- -------------
Effects of exchange rate changes on cash 103 (39) 7 -- 71
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (12,838) (1,466) 119 -- (14,185)
Cash and cash equivalents, beginning of period 23,683 5,058 223 -- 28,964
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,845 $ 3,592 $ 342 $ -- $ 14,779
============= ============= ============= ============= =============
</Table>
Page 27
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA
The accounting principles followed by the Company conform with U.S.
GAAP. Significant differences affecting the Company between U.S. GAAP
and Canadian Generally Accepted Accounting Principles ("Canadian GAAP")
are summarized below.
(a) STOCK-BASED COMPENSATION
Under U.S. GAAP, prior to January 1, 2006, the Company accounted for
stock-based compensation under the intrinsic value method set out in
APB 25 and has made pro forma disclosures of net earnings (loss) and
earnings (loss) per share as if the methodology prescribed by FAS 123
had been adopted. Under Canadian GAAP, the Company adopted the fair
value provisions of CICA Section 3870, "Stock-based Compensation and
Other Stock-based Payments" ("CICA Section 3870"), effective January 1,
2003. As of this date, stock options granted to employees or directors
are recorded as an expense in the consolidated statement of operations
and credited to other equity.
Effective January 1, 2006, under U.S. GAAP, the Company adopted FAS
123R using the modified prospective transition method. The Company's
Consolidated Financial Statements as of and for the three months ended
March 31, 2006 reflect the impact of FAS 123R. In accordance with the
modified prospective transition method, the Company's Consolidated
Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of FAS 123R. Stock-based
compensation expense recognized under FAS 123R and under CICA Section
3870 for the three months ended March 31, 2006 is now aligned with each
other and will be identical for all periods after January 1, 2006.
(b) PENSION ASSET AND LIABILITIES
Under U.S. GAAP, included in accrued liabilities is an unrecognized
gain related to prior service costs resulting from the plan amendment
of $2.4 million as at March 31, 2006 and unrecognized prior service
costs of $6.4 million as at December 31, 2005. An amount of $nil as at
March 31, 2006, and $3.6 million as at December 31, 2005 is included in
other assets, representing unrecognized prior service costs. In
addition, under U.S. GAAP, an amount of less than $0.1 million as at
March 31, 2006 and $2.8 million as at December 31, 2005 is recorded
against accumulated other comprehensive income, resulting from an
unrecognized actuarial loss. Under Canadian GAAP, the minimum pension
liability, and the corresponding amounts recorded in other assets and
accumulated other comprehensive income are not recorded.
Page 28
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (cont'd)
RECONCILIATION TO CANADIAN GAAP
CONSOLIDATED STATEMENTS OF OPERATIONS
The following is a reconciliation of net earnings (loss) reflecting the
differences between U.S. and Canadian GAAP:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------- ------------
Net earnings (loss) in accordance with U.S. GAAP $ (5,821) $ 1,196
Stock-based compensation(a) -- $ (529)
------------ ============
Net earnings (loss) in accordance with Canadian GAAP $ (5,821) $ 667
============ ============
Earnings (loss) per share (note 12):
Earnings (loss) per share -- basic and diluted:
Net earnings (loss) from continuing operations $ (0.20) $ 0.02
Net earnings from discontinued operations $ 0.06 $ --
------------ -------------
Net earnings (loss) $ (0.14) $ 0.02
============ =============
</Table>
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
The following is a reconciliation of shareholders' equity (deficit)
reflecting the difference between Canadian and U.S. GAAP:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
------------- ---------------
Shareholders' equity (deficit) in accordance with U.S. GAAP $ (25,489) $ (23,043)
Unrecognized actuarial loss(b) 21 2,773
------------- ---------------
Shareholders' equity (deficit) in accordance with Canadian GAAP $ (25,468) $ (20,270)
============= ===============
</Table>
18. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Page 29
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's principal business is the design, manufacture, sale and lease of
projector systems for giant screen theaters for customers including commercial
theaters, museums and science centers, and destination entertainment sites. In
addition, the Company designs and manufactures high-end sound systems and
produces and distributes large format films. There are 266 IMAX theaters
operating in 36 countries worldwide as of March 31, 2006. IMAX Corporation is a
publicly traded company listed on both the TSX and NASDAQ.
ACCOUNTING POLICIES AND ESTIMATES
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Significant differences between United
States and Canadian Generally Accepted Accounting Principles are summarized in
note 17 of the Consolidated Financial Statements.
The preparation of these financial statements requires management to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
its estimates, including those related to accounts receivable, net investment in
leases, inventories, fixed and film assets, investments, intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, future expectations and other assumptions that are
believed to be reasonable at the date of the financial statements. Actual
results may differ from these estimates due to uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
Consolidated Financial Statements in the Company's most recent annual report on
Form 10-K for the year ended December 31, 2005, and are summarized below.
CRITICAL ACCOUNTING POLICIES
The Company considers the following critical accounting policies to have the
most significant effect on its estimates, assumptions and judgements:
REVENUE RECOGNITION
The Company's system sales and lease transactions typically involve the delivery
of several products and services, including the projector, projection screen and
sound system, supervision of installation, training of theater personnel, and
advice on theater design and custom assemblies. In addition, on occasion, the
Company will include film licenses or other specified elements as part of these
transactions.
When the elements of theater systems meet the criteria for treatment as separate
units of accounting, the Company generally allocates revenue to each element
based on its relative fair value. Revenue allocated to an individual element is
recognized when revenue recognition criteria for that element is met.
SALES-TYPE LEASES OF THEATER SYSTEMS
Theater system leases that transfer substantially all of the benefits and risks
of ownership to customers are classified as sales-type leases as a result of
meeting the criteria established by FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("FAS 13"). When revenue is
recognized, the initial rental fees due under the contract, along with the
present value of minimum ongoing rental payments, are recorded as revenues for
the period, and the related theater system costs including installation expenses
are recorded as cost of goods and services. Additional ongoing rentals in excess
of minimums are recognized in future periods as revenue when reported by the
theater operator, provided that collection is reasonably assured. Maintenance
revenues are recognized when the services are rendered.
Page 30
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES AND SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
The Company recognizes revenue from sales and sales type leases when the
installation of the respective theater system element is substantially complete
and all of the following criteria are met: persuasive evidence of an agreement
exists; the price is fixed or determinable; and collection is reasonably
assured.
The timing of installation of the theater system is largely dependent on the
timing of the construction of the customer's theater. Therefore, while revenue
for theater systems is generally predictable on a long-term basis, it can vary
from quarter to quarter or year to year depending on the timing of
installations.
The critical estimates that the Company considers with respect to the Company's
lease accounting are the determination of economic useful life and the fair
value of the projection equipment, including its residual value. These estimates
are based upon historical experience with all of its projection systems.
Residual values are established at lease inception using estimates of fair value
at the end of the lease term with consideration for forecasted supply and demand
for various systems, future product launch plans, end of lease customer
behavior, refurbishment strategies and changes in technology.
The Company monitors the performance of the theaters to which it has leased
equipment. When facts and circumstances indicate that it may need to change the
terms of a lease, which had previously been recorded as a sales-type lease, the
Company evaluates the likely outcome of such negotiations using the criteria
under FAS 13. A provision is recorded against the net investment in leases if
the Company believes that it is probable that the negotiation will result in a
reduction in the minimum lease payments such that the lease will be reclassified
as an operating lease. The provision is equal to the excess of the carrying
value of the net investment in lease over the fair value of the equipment. Any
adjustments which result from a change in classification from a sales-type lease
to an operating lease are reported as a charge to income during the period the
change occurs.
In the normal course of its business, the Company will from time to time
determine that a provision it had previously taken against the net investment in
leases in connection with a customer's lease agreement should be reversed due to
a change in the circumstances that led to the original provision.
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from all
their future obligations under the lease and the geographic territory granted to
the customer reverts to the Company. Once an agreement is reached by both
parties, the initial lease payments that the customer previously made to the
Company are typically recognized as revenue. For this reason, the Company has a
high degree of certainty of collecting a substantial value of a signed contract,
either through the installation of a theater system or a consensual lease
buyout. In addition, since the introduction of its new IMAX MPX theater system
in 2003, the Company has agreed with several customers to terminate their
existing lease agreements, which were in the Company's backlog, and sign new MPX
system agreements.
Where these agreements have multiple elements meeting the criteria for treatment
as separate units of accounting, the total consideration to be received in these
situations generally is allocated to each individual element based on the
relative fair values of each element. Each element is then accounted for based
on applicable revenue recognition criteria.
Page 31
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
SHORT-TERM INVESTMENTS
The Company has short-term investments, which generally have maturities of more
than three months and less than one year from the date of purchase. The
short-term investments are classified as held to maturity based on the Company's
positive intent and ability to hold the securities to maturity. The Company
invests primarily in Canadian and U.S. government securities and commercial
paper rated "A1+" by Standard & Poor's and these investments are stated at
amortized cost, which approximates fair market value. Income related to these
securities is reported as a component of interest income. At March 31, 2006, the
Company had $2.0 million (2005 - $2.1 million) invested in U.S. government
securities, $6.3 million (2005 - $6.1 million) in Canadian government
securities.
ACCOUNTS RECEIVABLE AND FINANCING RECEIVABLES
The allowance for doubtful accounts receivable and provision against the
financing receivables are based on the Company's assessment of the
collectibility of specific customer balances and the underlying asset value of
the equipment under lease where applicable. If there is a deterioration in a
customer's credit worthiness or actual defaults under the terms of the leases
are higher than the Company's historical experience, the Company's estimates of
recoverability for these assets could be adversely affected.
The evaluation of collectibility of customer accounts is typically done on an
individual account basis. If, based on an evaluation of accounts, the Company
concludes that it is probable that a customer will not be able to pay all
amounts due, the Company estimates the expected loss. In developing the
estimates for an allowance, the Company considers general and industry economic
and market conditions as well as other credit information available for the
customer. The Company only records recoveries of provisions when objective
verifiable evidence supports the change in the original provision.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions prove to be
incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
FILM ASSETS
Estimates of ultimate revenues are prepared on a title by title basis and
reviewed regularly by management and revised where necessary to reflect the most
current information. Ultimate revenue for films includes estimates of revenues
over a period not to exceed 10 years following the date of initial release.
Page 32
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
GOODWILL
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
FIXED ASSETS
Management reviews the carrying values of its fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. In performing its review for recoverability,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of impairment losses is based on the excess of the
carrying amount of the asset over the fair value calculated using discounted
expected future cash flows. If the actual future cash flows are less than the
Company's estimates, future earnings could be adversely affected.
PENSION PLAN ACTUARIAL ASSUMPTIONS
The Company's pension benefit obligations and related costs are calculated using
actuarial concepts, within the framework of Statement of Financial Accounting
Standards No. 87, "Employer's Accounting for Pensions". A critical assumption,
the discount rate, is an important element of expense and/or liability
measurement. The Company evaluates this critical assumption annually or when
otherwise required to by accounting standards. Other assumptions include factors
such as expected retirement, mortality, rate of compensation increase, and
estimates of inflation.
The discount rate enables the Company to state expected future cash payments for
benefits as a present value on the measurement date. The guideline for setting
this rate is a high-quality long-term corporate bond rate. A lower discount rate
increases the present value of benefit obligations and increases pension
expense. The Company's discount rate was determined by considering the average
of pension yield curves constructed of a large population of high-quality
corporate bonds. The resulting discount rate reflects the matching of plan
liability cash flows to the yield curves.
Page 33
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
TAX ASSET VALUATION
As at March 31, 2006, the Company had net deferred income tax assets of $7.6
million, comprised of tax credit carryforwards, net operating loss and capital
loss carryforwards and other deductible temporary differences, which can be
utilized to reduce either taxable income or taxes otherwise payable in future
years. The Company's management assesses realization of these net deferred
income tax assets based on all available evidence and has concluded that it is
more likely than not that these net deferred income tax assets will be realized.
Positive evidence includes, but is not limited to, the Company's historical
earnings, projected future earnings, contracted sales backlog at March 31, 2006,
and the ability to realize certain deferred income tax assets through loss and
tax credit carryback strategies. If and when the Company's operations in some
jurisdictions were to reach a requisite level of profitability or where the
Company's future profitability estimates increase due to changes in positive
evidence, the Company would reduce all or a portion of the applicable valuation
allowance in the period when such determination is made. This would result in an
increase to reported earnings and a decrease to the Company's effective tax rate
in such period. However, if the Company's projected future earnings do not
materialize, or if the Company operates at a loss in certain jurisdictions, or
if there is a material change in actual effective tax rates or time period
within which the Company's underlying temporary differences become taxable or
deductible, the Company could be required to increase the valuation allowance
against all or a significant portion of the Company's deferred tax assets
resulting in a substantial increase to the Company's effective tax rate for the
period of the change and a material adverse impact on its operating results for
the period.
The Company is subject to ongoing tax examinations and assessments in various
jurisdictions. Accordingly, the Company may incur additional tax expense based
upon the outcomes of such matters. In addition, when applicable, the Company
adjusts tax expense to reflect both favorable and unfavorable examination
results. The Company's ongoing assessments of the probable outcomes of
examinations and related tax positions require judgement and can materially
increase or decrease its effective rate as well as impact operating results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
The Company reported net loss from continuing operations before income taxes of
$9.7 million or $0.24 per share on a diluted basis and net loss from continuing
operations after taxes of $8.1 million or $0.20 per share on a diluted basis for
the first quarter of 2006. For the first quarter of 2005 the Company reported
net earnings from continuing operations before income taxes of $0.9 million or
$0.02 per share on a diluted basis and net earnings from continuing operations
after taxes of $1.0 million or $0.02 per share on a diluted basis.
REVENUE
The Company's revenues for the first quarter of 2006 decreased 34.9% to $20.4
million from $31.4 million in the same period last year.
Systems revenue decreased to $9.4 million in the first quarter of 2006 from
$22.1 million in the first quarter of 2005, a decrease of 57.5%. The Company
recognized revenue on three theater systems which qualified as either sales or
sales-type leases in the first quarter of 2006 compared to five theater systems
in the first quarter of 2005. Revenue from sales and leases decreased to $3.8
million in the first quarter of 2006 from $16.5 million in 2005, a decrease of
76.7%. This decrease was due to the decrease in the number and mix of system
recognitions and a decrease in settlement revenues. The Company recognized $nil
in settlement revenue during the first quarter of 2006, compared to $7.1 million
in the same period in 2005.
Page 34
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
(cont'd)
REVENUE (cont'd)
Two of the systems recognized in the first quarter of 2006 related to the sale
of used theater systems to two customers which exercised an option to convert
their leases into outright purchases compared to nil used systems in the same
period of 2005.
Average revenue per sales and sales-type systems decreased due to the two used
systems sold in the first quarter of 2006, compared to nil in the same period of
2005 and due to a difference in the mix of systems.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
---------- ----------
Sales and Sales-type leases
IMAX 3D .............................................. 3 1
IMAX 3D SR ........................................... -- 3
IMAX MPX ............................................. -- 1
---------- ----------
3 5
========== ==========
</Table>
In addition, the Company installed and began recognizing revenue on one theater
system that qualified as an operating lease in the first quarter of 2005 versus
nil in the same period in 2006. The Company recognizes revenue on operating
leases over the term of the leases.
The Company generally enters into multi-year system lease agreements with
customers that typically contain customer payment obligations prior to the
scheduled installation of the system. During the period of time between lease
signing and system installation, certain customers each year generally are
unable, or elect not, to proceed with system installation for a number of
reasons, including business considerations, or the inability to obtain certain
consents, approvals or financing. Once the determination is made that the
customer will not proceed with installation, the customer and the Company may
enter into a consensual lease buyout, whereby the parties are released from
their future obligations under the lease, the initial lease payments that the
customer previously made to the Company are typically recognized as revenue and
the geographic territory granted to the customer reverts to the Company. For
this reason, the Company has a high degree of certainty of collecting a
substantial value of a signed contract, either through the installation of a
theater system or a consensual lease buyout. In addition, since the introduction
of its new IMAX MPX theater system in 2003, the Company has agreed with several
customers to terminate their existing lease agreements, which were in the
Company's backlog, and sign new MPX system agreements. The Company did not
recognize any settlement revenue during the first quarter of 2006 compared to
$7.1 million for the same period in 2005. The settlement amounts recognized in
the first quarter of 2005 are detailed as follows: $0.2 million related to MPX
conversion agreements and $6.9 million related to consensual lease buyouts. The
Company anticipates that, while MPX conversion agreements may continue as MPX
systems continue to prove popular with commercial customers, overall revenue
from consensual lease buyouts and terminations of agreements by customer default
will likely continue to decrease throughout 2006 in comparison to 2005.
Page 35
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
(cont'd)
REVENUE (cont'd)
Ongoing rental revenue decreased slightly by 1.7% in the first quarter of 2006
compared to the same period in 2005. Maintenance revenue remained consistent at
$3.5 million in both the first quarters of 2006 and 2005. The Company expects to
see an increase throughout 2006 compared to 2005 in both ongoing rent and
maintenance revenue as the Company's theater network continues to grow in 2006.
Film revenues increased to $6.5 million in the first quarter of 2006 from $4.9
million in the first quarter of 2005, due primarily to an increase in film
distribution and film production revenues. Film distribution revenues increased
to $3.4 million in the first quarter of 2006 from $2.1 million in the first
quarter of 2005, an increase of 66.7%, and film production revenues increased to
$0.5 million in the first quarter of 2006 from $0.1 million in the first quarter
of 2005, both increases primarily due to the production and release of Deep Sea
3D in March 2006 and the continued performance of Magnificent Desolation:
Walking on the Moon 3D released in September 2005. Film post-production revenues
increased slightly to $1.5 million in the first quarter of 2006 from $1.4
million in the first quarter of 2005. IMAX DMR revenues, which are revenues to
the Company generated from the gross box office performance of IMAX DMR films,
decreased by 26.9% in the first quarter of 2006. The decrease in DMR revenue is
due primarily to the success of The Polar Express: The IMAX 3D Experience,
released in November 2004, which led to a stronger box office performance in the
first quarter of 2005 compared to the same period in 2006, and due to the March
2005 release of Robots: The IMAX Experience. This decrease is partially offset
by the success of Harry Potter and the Goblet of Fire: The IMAX Experience
released in November 2005.
The Company believes it will continue to see higher film revenues in 2006 due to
the increase in the number of new films expected to be released during the year.
The Company intends to release in conjunction with studios at least seven new
films in 2006 including the already released V for Vendetta: The IMAX Experience
(March 2006) and Deep Sea 3D (March 2006), and the still to be released
Poseidon: The IMAX Experience (May 2006), Superman Returns: An IMAX 3D
Experience (June 2006), The Ant Bully: An IMAX 3D Experience (August 2006), Open
Season: An IMAX 3D Experience (September 2006), and Happy Feet: An IMAX 3D
Experience (November 2006).
Theater operations revenue decreased slightly to $3.7 million in the first
quarter of 2006 from $3.8 million in the first quarter of 2005, due to a
decrease in average ticket prices of 3.0% and a slight decrease in attendance of
3.3% due primarily to the success of the IMAX 3D version of The Polar Express:
The IMAX 3D Experience, in the first quarter of 2005. Although a decrease in the
first quarter of 2006, the Company believes it will see higher attendance rates
in 2006 compared to the prior year due to the Company's 2006 film slate.
Other revenue increased to $0.8 million in the first quarter of 2006 compared to
$0.5 million in the same period in 2005, largely due to an increase in the
Company's after market sales. Other revenue primarily includes revenue generated
from the Company's camera and rental business and after market sales of
projection system parts.
Based on the Company's expectation of the remaining 2006 system installations
and its films to be released throughout the remainder of 2006, the Company
believes it will see higher revenues in 2006 in comparison to 2005.
GROSS MARGIN
Gross margin in the first quarter of 2006 was $6.0 million, or 29.5% of total
revenue, compared to $16.1 million, or 51.5% of total revenue in the first
quarter of 2005.
Page 36
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
(cont'd)
GROSS MARGIN (cont'd)
Systems margins declined in the first quarter of 2006 by $10.0 million or 66.2%.
Average gross margin on sales and sales-type lease of projection systems
decreased in the first quarter of 2006 versus the same period in 2005 by 43.6%,
primarily due to the decline in the number of system recognitions and a change
in the mix of recognitions as two customers exercised an option to convert their
leases into outright purchases compared to nil in the same period of 2005. In
addition, the Company recognized $nil in settlement gross margin in the first
quarter of 2006 compared to $7.1 million in the same period of 2005. The
settlement amounts recognized in 2005 are detailed as follows: $0.2 million
related to MPX conversion agreements and $6.9 million related to consensual
lease buyouts.
The Company's film gross margin decreased in the first quarter of 2006 by $0.1
million. Film distribution margin decreased by $0.1 million primarily due to
decreased activity from the Company's 15/70 library to which the Company has
distribution rights. The Company's DMR gross margin decreased slightly by $0.3
million due to a lower performance of DMR pictures in the current year and
post-production gross margin increased slightly by $0.3 million.
The Company's owned and operated theater gross margin increased by $0.3 million
in the first quarter of 2006 compared to the same period in 2005 primarily as a
result of lower rental fees for films in 2006.
Other gross margin decreased by $0.3 million in the first quarter of 2006,
primarily due to a sales tax refund received in the first quarter of 2005.
The Company anticipates higher gross margins for the full year of 2006 in
comparison to 2005, due to a combination of higher system installations and DMR
film releases, as commercial exhibitors continue to install new projection
systems in their multiplexes.
OTHER
Selling, general and administrative expenses were $10.5 million in the first
quarter of 2006 versus $10.2 million in the same period of 2005. Legal fees for
the first quarter of 2006 decreased by $0.4 million due to a reduction in the
number of outstanding legal matters in which the Company is involved.
Professional fees increased by $0.3 million as the Company incurred costs to
implement the accounting for Financial Accounting Standards No. 123,
"Share-Based Payment," ("FAS 123R") to pay the fees of the independent
compensation and legal advisers that advised the Company on the modification of
its pension plan. Moreover, additional professional fees and other expenses were
incurred in connection with the Company's process of seeking strategic
alternatives, including a potential sale. In addition, the Company expensed $0.3
million for stock options granted in accordance with the adoption of FAS 123R.
Other non-cash stock-based compensation increased by $0.3 million in the first
quarter of 2006 due to changes in the Company's share price. Offsetting these
increases, the Company also amended its executive pension plan on March 8, 2006
to reduce certain benefits, resulting in a savings of $0.4 million in
compensation expense for the first quarter of 2006 compared to the previous year
quarter. The Company recorded a foreign exchange gain of less than $0.1 million
in the first quarter of 2006 compared to a loss of $0.3 million in the first
quarter of 2005. The Company records foreign exchange translation gains and
losses primarily on a portion of its financing receivable balances which are
denominated in Canadian dollars, Euros and Japanese Yen.
Page 37
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
(cont'd)
OTHER (cont'd)
Receivable provisions net of recoveries for accounts receivable amounted to a
net provision of $0.1 million in the first quarter of 2006 compared to a net
provision of $0.3 million in the first quarter of 2005. The Company recorded a
net recovery of $0.1 million in the first quarter of 2005 on financing
receivables due to favorable outcomes on lease amendments.
Interest income increased to $0.3 million in the first quarter of 2006 from $0.2
million in the first quarter of 2005, primarily due to higher average short-term
investments balance and overall higher yields.
Interest expense remained consistent at $4.2 million in the first quarters of
2006 and 2005. Included in interest expense is the amortization of deferred
finance costs in the amount of $0.2 million in the first quarters of 2006 and
2005 relating to the Senior Notes due 2010. The Company's policy is to defer and
amortize all the costs relating to a debt financing over the life of the debt
instrument.
INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate and will
vary from year to year primarily as a result of numerous permanent differences,
investments and other tax credits, the provision for income taxes at different
rates in foreign and other provincial jurisdictions, enacted statutory tax rate
increases or reductions in the year, changes in the Company's valuation
allowance based on the Company's recoverability assessments of deferred tax
assets, and favorable or unfavorable resolution of various tax examinations. The
income tax expense for the quarter is calculated by applying the estimated
average annual effective tax rate of approximately 10% for the 2006 year to
quarterly pre-tax income. As of March 31, 2006, the Company had a gross deferred
income tax asset of $48.4 million, against which the Company is carrying a $40.8
million valuation allowance. In the quarter the Company favorably resolved a
provincial income tax audit resulting in the release of related tax reserves of
$0.5 million to the income tax recovery for the period.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $0.9 million in the first quarter
of 2006, compared to $0.7 million in 2005. The expenses primarily reflect
research and development activities pertaining to the Company's new IMAX
digitally-based theater projection system. Through research and development, the
Company continues to design and develop cinema-based equipment, software and
other technologies to enhance its product offering, including the continued
enhancement of a method of generating stereoscopic (3D) imaging data from a
monoscopic (2D) source. The Company believes that the motion picture industry
will be affected by the development of digital technologies, particularly in the
areas of content creation (image capture), post-production (editing and special
effects), digital re-mastering distribution and display. Consequently, the
Company has made significant investments in digital technologies, including the
development of proprietary, patent-pending technology such as a digitally-based
projection system, as well as technologies to digitally enhance image resolution
and quality of motion picture films, and convert monoscopic (2D) to stereoscopic
(3D) images. The Company also holds a number of patents, patents pending and
intellectual property rights in these areas. In addition, the Company holds
numerous digital patents in the large-format field of use.
Page 38
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
(cont'd)
DISCONTINUED OPERATIONS
On December 23, 2003, the Company closed its owned and operated Miami IMAX
theater. The Company abandoned or removed all of its assets from the theater in
the first quarter of 2004. The Company is involved in a legal proceeding with
the landlord of the theater with respect to the amount owing to the landlord by
the Company for lease and guarantee obligations. The amount of loss to the
Company has been estimated as between $0.8 million and $2.3 million. The Company
paid out $0.8 million with respect to amounts owing to the landlord during 2003
and 2004. As the Company is uncertain as to the outcome of the proceeding, no
additional amount has been recorded. The Company recorded $nil in net earnings
from discontinued operations related to Miami IMAX theater in the first quarters
of 2006 and 2005.
Effective December 11, 2001, the Company completed the sale of its wholly-owned
subsidiary, Digital Projection International, including its subsidiaries
(collectively, "DPI"), to a company owned by members of DPI management. As part
of the transaction, the Company restructured its advances to DPI, releasing DPI
from obligations to repay any amounts in excess of $12.7 million previously
advanced by the Company, and reorganized the remaining $12.7 million of debt
owing to the Company into two separate loan agreements. The loans receivable
were collateralized by fixed and floating charges over all DPI assets including
intellectual properties. One of the loans was convertible, upon the occurrence
of certain events, into shares representing 49% of the total share capital of
DPI related to these loans. On December 29, 2005, the Company and DPI entered
into an agreement to settle the remaining loans in exchange for a payment of
$3.5 million. During the first quarter of 2006, the Company recognized $2.3
million (2005 - $0.2 million) in income from discontinued operations. The other
tranche of $1.2 million had previously been recognized in 2005.
PENSION PLAN AMENDMENT
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the unfunded U.S. defined benefit pension plan covering its two
Co-Chief Executive Officers. Under the original terms of the plan, once benefit
payments begin, the benefit is indexed annually to the cost of living and
further provides for 100% continuance for life to the surviving spouse. Under
the terms of the plan amendment, the cost of living adjustment and surviving
spouse benefits previously owed to the Co-Chief Executive Officers are each
reduced by 50%, subject to a recoupment of a percentage of such benefits upon a
change of control of the Company, and the net present value of the reduced
benefit payments is accelerated and paid out upon a change of control of the
Company. The benefits were 50% vested as of July 2000, the plan initiation date.
The vesting percentage increases on a straight-line basis from inception until
age 55. The vesting percentage of a member whose employment terminates other
than by voluntary retirement or upon change of control shall be 100%, though, as
of March 31, 2006, one of the Co-Chief Executives was approximately 78% vested
and the other Co-Chief Executive was approximately 96% vested.
EMPLOYEE STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Financial Accounting Standards No. 123,
"Share-Based Payment," ("FAS 123R") which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors for employee stock options based on estimated fair
values. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to FAS 123R. The Company has
applied the provisions of SAB 107 in its adoption of FAS 123R.
Page 39
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
(cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
The Company adopted FAS 123R using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006.
In accordance with the modified prospective transition method, the Company's
Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of FAS 123R. Stock-based compensation
expense recognized under FAS 123R for the three months ended March 31, 2006 was
$0.3 million. There was no stock-based compensation expense related to employee
stock options recognized during the three months ended March 31, 2005.
FAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Consolidated
Statement of Operations. Prior to the adoption of FAS 123R, the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Under
the intrinsic value method, no stock-based compensation expense had been
recognized in the Company's Consolidated Statement of Operations because the
exercise price of the Company's stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized in the Company's Consolidated
Statement of Operations for the three months ended March 31, 2006 included
compensation expense for share-based payment awards granted prior to, but not
yet vested as of January 1, 2006 based on the grant date fair value estimated in
accordance with the pro forma provisions of FAS 123 and compensation expense for
the share-based payment awards granted subsequent to January 1, 2006 based on
the grant date fair value estimated in accordance with the provisions of FAS
123R. In conjunction with the adoption of FAS 123R, the Company changed its
method of attributing the value of stock-based compensation to expense from a
method which recognized the expense as the options vest to the straight-line
single option method. Compensation expense for all share-based payment awards
granted on or prior to January 1, 2006 will continue to be recognized using the
historic method while compensation expense for all share-based payment awards
granted subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the first quarter of 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company's pro forma information required under FAS
123 for the periods prior to 2006, the Company also estimated forfeitures at the
time of grant and revised, if necessary, in subsequent periods.
The Company utilizes a lattice-binomial option-pricing model ("binomial model")
to determine the fair value of share-based payment awards. The fair value
determined by the binomial model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the Company's
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in management's opinion, the binomial
model best provides an accurate measure of the fair value of the Company's
employee stock options. Although the fair value of employee stock options is
determined in accordance with FAS 123R and SAB 107 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
Page 40
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY
On February 6, 2004, the Company entered into a loan agreement for a secured
revolving credit facility (the "Credit Facility") The Credit Facility is a
three-year revolving credit facility with yearly renewal options thereafter,
permitting maximum aggregate borrowings of $20.0 million, subject to a borrowing
base calculation which includes the Company's financing receivables, and certain
reserve requirements and further reduced by outstanding letters of credit. The
Credit Facility bears interest at Prime + 0.50% per annum or Libor + 2.25% per
annum and is collateralized by a first priority security interest in all of the
current and future assets of the Company. The Credit Facility contains typical
affirmative and negative covenants, including covenants that restrict the
Company's ability to: incur certain additional indebtedness; make certain loans,
investments or guarantees; pay dividends; make certain asset sales; incur
certain liens or other encumbrances; conduct certain transactions with
affiliates and enter into certain corporate transactions. In addition, the
Credit Facility contains customary events of default, including upon an
acquisition or a change of control that has a material adverse effect on the
Company's financial condition. The Credit Facility also requires the Company to
maintain a minimum level of earnings before interest, taxes, depreciation and
amortization, and cash collections.
CASH AND CASH EQUIVALENTS
As at March 31, 2006, the Company's principal sources of liquidity included cash
and cash equivalents of $22.0 million, short-term investments of $8.3 million,
the Credit Facility, trade accounts receivable of $24.4 million and anticipated
collection from net investment in leases due in the next 12 months of $8.2
million. As at March 31, 2006, the Company has not drawn down on the Credit
Facility, and has letters of credit for $9.2 million secured by the Credit
Facility arrangement.
The Company believes that cashflow from operations together with existing cash
and borrowing available under the Credit Facility will be sufficient to meet
operating needs for the foreseeable future. However, the Company's operating
cashflow can be impacted if management's projections of future signings and
installations are not realized. The Company forecasts its short-term liquidity
requirements on a quarterly and annual basis. Since the Company's future
cashflows are based on estimates and there may be factors that are outside of
the Company's control, there is no guarantee the Company will continue to be
able to fund its operations through cash flows from operations. Under the terms
of the Company's typical theater system lease agreement, the Company receives
substantial cash payments before the Company completes the performance of its
obligations. Similarly, the Company receives cash payments for some of its film
productions in advance of related cash expenditures.
The Company's net cash provided by (used in) operating activities is impacted by
a number of factors, including the proceeds associated with new signings of
theater system lease and sale agreements in the year, the box office performance
of large format films distributed by the Company and/or exhibited in the
Company's theaters, increases or decreases in the Company's operating expenses,
and the level of cash collections received from its customers.
Cash used in operating activities amounted to $5.6 million for the period ended
March 31, 2006. Changes in other non-cash operating assets as compared to
December 31, 2005 include an increase of $2.8 million in inventories, a decrease
of $0.8 million in financing receivables, a $0.4 million decrease in accounts
receivable and a $0.2 million increase in prepaid expenses, which mostly relates
to prepaid film print costs that will be expensed over the period to be
benefited. Changes in other non-cash operating liabilities as compared to
December 31, 2005 include an increase in deferred revenue of $3.1 million, a
decrease in accounts payable of $1.3 million and an increase of $0.6 million in
accrued liabilities. Included in accrued liabilities for the period ended March
31, 2006 were $23.2 million in respect of accrued pension obligations which are
mostly long-term in nature.
Page 41
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENTS (cont'd)
Cash used in investing activities amounted to $0.4 million in the first three
months of 2006, which includes purchases of short-term investments of $4.1
million, proceeds from maturities of short-term investments of $4.1 million,
purchases of $0.1 million in fixed assets, an increase in other assets of $0.2
million and an increase in other intangible assets of $0.1 million.
Cash provided by financing activities in the first three months of 2006 amounted
to $0.3 million, due to the issuance of common shares through the exercise of
stock options.
The Company also received $3.5 million in cash on a note receivable from a
discontinued operation.
Capital expenditures including the purchase of fixed assets and investments in
film assets were $2.4 million for the first quarter of 2006.
Cash provided by operating activities amounted to $0.1 million for the period
ended March 31, 2005. Changes in other non-cash operating assets and liabilities
included an increase in deferred revenue of $3.7 million, and a decrease of $4.1
million in accrued liabilities. Cash used by investing activities for the first
quarter of 2005 amounted to $15.6 million, primarily consisting of $15.0 million
invested in short-term investments and $0.3 million invested in fixed assets.
Cash provided by financing activities amounted to $1.3 million primarily due to
the issuance of common shares through the exercise of stock options. Capital
expenditures including the purchase of fixed assets net of sales proceeds and
investments in film assets were $2.4 million for the first quarter of 2005.
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at March 31, 2006, the Company has letters of credit of $9.2 million
outstanding, of which the entire balance has been secured by the Credit
Facility.
SENIOR NOTES DUE 2010
In November 2004, the Company completed an exchange offer wherein $159.0 million
of the Company's 9.625% senior notes due December 1, 2010 (the "Unregistered
Senior Notes") were exchanged for 9.625% senior notes registered under the
Securities Act of 1933, as amended (the "Registered Senior Notes"), pursuant to
a registration statement on Form S-4 that had been declared effective by the
Securities and Exchange Commission on September 30, 2004. Apart from the fact
that the Registered Senior Notes have been registered under the Securities Act,
the Unregistered Senior Notes and the Registered Senior Notes are substantially
identical and are referred to herein as the "Senior Notes". The Senior Notes are
unconditionally guaranteed, jointly and severally, by certain of the Company's
wholly-owned subsidiaries.
The terms of the Company's Senior Notes impose certain restrictions on its
operating and financing activities, including certain restrictions on the
Company's ability to: incur certain additional indebtedness; make certain
distributions or certain other restricted payments; grant liens; create certain
dividend and other payment restrictions affecting the Company's subsidiaries;
sell certain assets or merge with or into other companies; and enter into
certain transactions with affiliates. The Company believes these restrictions
will not have a material impact on its financial condition or results of
operations.
As at March 31, 2006, the Company had outstanding $159.0 million aggregate
principal of Registered Senior Notes and $1.0 million aggregate principal of
Unregistered Senior Notes.
Page 42
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As at March 31, 2006, the Company had an unfunded and
accrued projected benefit obligation of approximately $23.2 million (2005 -
$31.1 million) in respect of this defined benefit pension plan. At the time the
Company established the defined benefit pension plan, it also took out life
insurance policies on its two Co-Chief Executive Officers with coverage amounts
of $21.5 million in aggregate. The Company intends to use the proceeds of life
insurance policies taken on its Co-Chief Executive Officers to be applied
towards the benefits due and payable under the plan, although there can be no
assurance that the Company will ultimately do so. As at March 31, 2006, the cash
surrender value of the insurance policies is $3.5 million (December 31, 2005 -
$3.3 million).
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the plan. Under the terms of the plan amendment, the cost of living
adjustment and surviving spouse benefits previously owed to the Co-Chief
Executive Officers are each reduced by 50%, subject to a recoupment of a
percentage of such benefits upon a change of control of the Company, and the net
present value of the reduced pension benefit payments is accelerated and paid
out upon a change of control of the Company. The benefits were 50% vested as of
the plan initiation date. The vesting percentage increases on a straight-line
basis from inception until age 55. The vesting percentage of a member whose
employment terminates other than by voluntary retirement or upon change in
control shall be 100%, though, as of March 31, 2006, one of the Co-Chief
Executives was approximately 78% vested and the other Co-Chief Executive was
approximately 96% vested.
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses is denominated in Canadian
dollars. A portion of the Company's net U.S. dollar flows is converted to
Canadian dollars to fund Canadian dollar expenses through the spot market. In
Japan, the Company has ongoing operating expenses related to its operations. Net
Japanese yen flows are converted to U.S. dollars through the spot market. The
Company also has cash receipts under leases denominated in Japanese yen, Euros
and Canadian dollars. The Company plans to convert Japanese yen and Euros lease
cash flows to U.S. dollars through the spot markets on a go-forward basis.
Page 43
IMAX CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Co-Chief Executive Officers and Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d- 15(e)) as of the end of the period covered by this report, have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequate and effective. The
Company will continue to periodically evaluate its disclosure controls and
procedures and will make modifications from time to time as deemed necessary to
ensure that information is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of the end of the period covered by this report there was no change in the
Company's internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Page 44
IMAX CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) In March 2005, the Company, together with Three-Dimensional Media Group,
Ltd. ("3DMG"), filed a complaint in the U.S. District Court for the Central
District of California, Western Division, against In-Three, Inc.
("In-Three") alleging patent infringement and seeking injunctive relief and
damages. In April 2005, In-Three filed an answer denying infringement and
asserting counterclaims that seek a declaratory judgment of
non-infringement, invalidity and unenforceability of the patent in suit,
and damages for alleged false advertising, false designation of origin,
breach of contract, interference with prospective economic advantage and/or
unfair competition. On March 13, 2006, the Company and In-Three entered
into a settlement agreement, resolving all matters between the parties. On
March 29, 2006, the Company and In-Three filed a joint motion for an order
dismissing with prejudice all claims and counterclaims between the parties.
(b) In November 2001, the Company filed a complaint with the District Court of
Munich against Big Screen, a German large-screen cinema owner in Berlin
("Big Screen"), demanding payment of rental payments and certain other
amounts owed to the Company. Big Screen raised a defense based on alleged
infringement of German antitrust rules, relating mainly to an allegation of
excessive pricing. Big Screen had brought a number of motions for
restraining orders in this matter relating to the Company's provision of
films and maintenance, all of which have been rejected by the courts,
including the Berlin Court of Appeals, and for which all appeals have been
exhausted. On November 8, 2005, the District Court of Munich rendered a
judgment in favor of the Company on all accounts. Big Screen has appealed
the judgment to the Munich Court of Appeals and at the same time asked for
an order to stay the execution under the judgment of the District Court. On
November 30, 2005, Big Screen filed an application for the opening of
insolvency proceedings. While the appeal on the merits is pending, by order
of January 12, 2006, the Court of Appeals has rejected Big Screen's
application regarding a stay of execution so that the judgment remains
executable.
(c) In May 2002, the Company filed a complaint with the District Court of
Nuremberg-Furth, Germany against Siewert Holding in Wuerzburg ("Siewert"),
demanding payment of rental obligations and other amounts owed to the
Company. Siewert raised a defense based on alleged infringement of German
antitrust rules. By judgement of December 20, 2002, the District Court
rejected the defense and awarded judgement in documentary proceedings in
favor of the Company and added further amounts that had fallen due. Siewert
applied for leave to appeal to the German Supreme Court on matters of law,
which was rejected by the German Supreme Court in March 2004. Siewert
subsequently made a partial payment of amounts awarded to the Company.
Siewert has filed follow up proceedings to the documentary proceedings in
the District Court, essentially repeating the claims rejected in the
documentary proceeding. On September 30, 2004, Siewert filed for insolvency
with the Local Court in Wuerzburg.
(d) 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 as a result of E-Citi's breach of a
September 2000 lease agreement. The arbitration hearing on both claims took
place on November 16-18, 2005. On January 31, 2006, the ICC informed the
parties that the liability stage of the proceedings was closed, and on
February 1, 2006, the ICC issued an award finding unanimously in the
Company's favor on all claims. The amount of damages awarded to the Company
will be decided after a hearing scheduled for July 2006, and no amount has
yet been recorded for these damages.
Page 45
IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 1. LEGAL PROCEEDINGS (cont'd)
(e) 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 filed a cross claim for indemnity against a
third party, SIMEX, Inc. ("SIMEX"). In response, SIMEX filed an application
in Toronto, Ontario, Canada, seeking a declaration that it is not subject
to the arbitration provision or payment obligations in the production
agreement. The Ontario Superior Court dismissed SIMEX's application, with
costs. SIMEX appealed part of this decision to the Ontario Court of Appeal
which found that SIMEX was not subject to some of the obligations which the
Company contended were set forth the production agreement, including,
specifically, the obligation to pay Robots directly based on the receipts
of proceeds from the distribution of the films produced under the
production agreement. 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.
(f) In addition to the matters described above, the Company is currently
involved in other legal proceedings which, in the opinion of the Company's
management, will not materially affect the Company's financial position or
future operating results, although no assurance can be given with respect
to the ultimate outcome of any such proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2005.
Page 46
IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company's shareholders held on April 11, 2006,
shareholders represented at the meeting: voted on the following matters:
Election of Directors
By a vote by way of show of hands, Neil S. Braun, Kenneth G. Copland and Garth
M. Girvan were elected as Class I directors of the Company for a term expiring
in 2009. Management received proxies from the shareholders to vote for the three
directors nominated for election as follows:
<Table>
<Caption>
Director Votes For Votes Withheld
- ------------------- ---------- --------------
Neil S. Braun 33,527,658 403,615
Kenneth G. Copland 33,524,867 406,406
Garth M. Girvan 28,959,943 4,970,730
</Table>
In addition to the foregoing directors, the following directors continued in
office: David W. Leebron, Richard L. Gelfond, Bradley J. Wechsler and Marc A.
Utay
Appointment of Auditor
By a vote by way of show of hands, PricewaterhouseCoopers, LLP ("PWC") were
appointed auditors of the Company to hold office until the next annual meeting
of shareholders and authorizing the directors to fix their remuneration.
Management received proxies from the shareholders to vote for the re-appointment
of PWC as follows:
<Table>
<Caption>
Votes For Votes Withheld
---------- --------------
Appointment of Auditor 33,629,178 55,677
</Table>
ITEM 6. EXHIBITS
(a) EXHIBITS
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated May 9, 2006, by Bradley J. Wechsler.
31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated May 9, 2006, by Richard L. Gelfond.
31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated May 9, 2006, by Francis T. Joyce
32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated May 9, 2006, by Bradley J. Wechsler.
32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated May 9, 2006, by Richard L. Gelfond.
32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated May 9, 2006, by Francis T. Joyce
Page 47
IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: May 9, 2006 By: /s/ Francis T. Joyce
-----------------------------------
Francis T. Joyce
Chief Financial Officer
(Principal Financial Officer)
Date: May 9, 2006 By: /s/ Kathryn A. Gamble
-----------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
Page 48