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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24216
IMAX CORPORATION
(Exact name of registrant as specified in its charter)
Canada 98-0140269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Speakman Drive, Mississauga, Ontario, Canada L5K 1B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 403-6500
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12B-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerate Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of July 14, 2006
- ----- -------------------------------
Common stock, no par value 40,285,574
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Page 1
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....................................... 33
Item 3. Quantitative and Qualitative Factors about Market Risk.......... 54
Item 4. Controls and Procedures......................................... 54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 55
Item 1A. Risk Factors.................................................... 56
Item 5. Other Information............................................... 56
Item 6. Exhibits........................................................ 57
Signatures............................................................... 58
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 3D Experience(R), IMAX DMR(R), IMAX MPX(R), IMAX think big(R) and think
big(R) are trademarks and trade names of the Company or its subsidiaries that
are registered or otherwise protected under laws of various jurisdictions.
Page 2
IMAX CORPORATION
PAGE
----
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 June 30, 2006 and
December 31, 2005.............................................. 4
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 2006 and 2005............. 5
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2006 and 2005..................... 6
Notes to Condensed Consolidated Financial Statements........... 7
Page 3
IMAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars)
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 21,574 $ 24,324
Short-term investments 8,351 8,171
Accounts receivable, net of allowance for doubtful
accounts of $6,598 (2005 - $5,892) 27,314 26,165
Financing receivables (note 3) 65,355 63,006
Inventories (note 4) 29,680 28,294
Prepaid expenses 4,159 3,825
Film assets 4,597 3,329
Fixed assets 25,797 26,780
Other assets 7,943 11,618
Deferred income taxes (note 11) 7,775 6,171
Goodwill 39,027 39,027
Other intangible assets 2,686 2,701
--------- ---------
Total assets $ 244,258 $ 243,411
========= =========
LIABILITIES
Accounts payable $ 7,024 $ 6,935
Accrued liabilities (note 7(c)) 51,329 55,122
Deferred revenue 47,147 44,397
Senior Notes due 2010 (note 5) 160,000 160,000
--------- ---------
Total liabilities 265,500 266,454
--------- ---------
COMMITMENTS AND CONTINGENCIES (notes 7 and 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (note 12) Common shares - no par value
Authorized - unlimited number. Issued and
outstanding - 40,285,574 (2005 - 40,213,542) 121,960 121,674
Other equity 2,808 1,758
Deficit (146,634) (144,347)
Accumulated other comprehensive income (loss) 624 (2,128)
--------- ---------
Total shareholders' deficit (21,242) (23,043)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 244,258 $ 243,411
========= =========
(the accompanying notes are an integral part of these condensed consolidated
financial statements)
Page 4
IMAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of U.S. dollars, except per share amounts)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
REVENUE
IMAX systems (note 9(a)) $23,952 $20,308 $33,350 $42,421
Films 12,171 5,301 18,692 10,248
Theater operations 4,051 4,198 7,708 8,014
Other 1,224 1,071 2,066 1,563
------- ------- ------- -------
41,398 30,878 61,816 62,246
COSTS OF GOODS AND SERVICES 23,538 15,009 37,931 30,232
------- ------- ------- -------
GROSS MARGIN 17,860 15,869 23,885 32,014
Selling, general and administrative expenses
(note 9(b)) 9,451 9,812 19,956 20,055
Research and development 664 886 1,579 1,539
Amortization of intangibles 132 160 324 317
Receivable provisions, net of (recoveries) (note 10) (252) (370) (109) (158)
------- ------- ------- -------
EARNINGS FROM OPERATIONS 7,865 5,381 2,135 10,261
Interest income 280 284 533 498
Interest expense (4,231) (4,202) (8,405) (8,399)
------- ------- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 3,914 1,463 (5,737) 2,360
Recovery of (provision for) income taxes (note 11) (380) (538) 1,150 (479)
------- ------- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 3,534 925 (4,587) 1,881
Net earnings from discontinued operations (note 14) -- 186 2,300 426
------- ------- ------- -------
NET EARNINGS (LOSS) $ 3,534 $ 1,111 $(2,287) $ 2,307
======= ======= ======= =======
EARNINGS (LOSS) PER SHARE (note 12(b)):
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations $ 0.09 $ 0.02 $ (0.11) $ 0.05
Net earnings from discontinued operations $ -- $ 0.01 $ 0.05 $ 0.01
------- ------- ------- -------
Net earnings (loss) $ 0.09 $ 0.03 $ (0.06) $ 0.06
======= ======= ======= =======
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations $ 0.08 $ 0.02 $ (0.11) $ 0.05
Net earnings from discontinued operations $ -- $ 0.01 $ 0.05 $ 0.01
------- ------- ------- -------
Net earnings (loss) $ 0.08 $ 0.03 $ (0.06) $ 0.06
======= ======= ======= =======
(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)
SIX MONTHS
ENDED JUNE 30,
-------------------
2006 2005
-------- --------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ (2,287) $ 2,307
Net (earnings) from discontinued operations (2,300) (426)
Items not involving cash:
Depreciation and amortization 8,761 7,249
Write-downs (recoveries) (109) (158)
Change in deferred income taxes (1,604) (283)
Stock and other non-cash compensation 2,549 2,406
Non-cash foreign exchange loss (gain) (436) 515
Interest on short-term investments (179) (150)
Investment in film assets (6,613) (4,795)
Changes in other non-cash operating assets and liabilities (2,637) (3,057)
-------- --------
Net cash provided by (used in) operating activities (4,855) 3,608
-------- --------
INVESTING ACTIVITIES
Purchase of short-term investments (10,322) (23,118)
Proceeds from maturities of short-term investments 10,321 8,125
Purchase of fixed assets (739) (467)
Increase in other assets (566) (375)
Increase in other intangible assets (309) (290)
-------- --------
Net cash used in investing activities (1,615) (16,125)
-------- --------
FINANCING ACTIVITIES
Common shares issued 286 2,052
-------- --------
Net cash provided by financing activities 286 2,052
-------- --------
Effects of exchange rate changes on cash (59) 90
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (6,243) (10,375)
Cash provided by investing activities from discontinued
operations 3,493 236
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS, DURING THE PERIOD (2,750) (10,139)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,324 28,964
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,574 $ 18,825
======== ========
(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 18.
These financial statements should be read in conjunction with the financial
statements included in the Company's most recent annual report on Form 10-K
for the year ended December 31, 2005 which should be consulted for a
summary of the significant accounting policies utilized by the Company.
These interim financial statements are prepared following accounting
policies consistent with the Company's financial statements for the year
ended December 31, 2005.
EMPLOYEE STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Financial Accounting Standards No.
123, "Share-Based Payment," ("FAS 123R") which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to employees and directors for employee stock options based on estimated
fair values. In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 ("SAB 107") relating to FAS 123R. The
Company has applied the provisions of SAB 107 in its adoption of FAS 123R.
The Company adopted FAS 123R using the modified prospective transition
method, which requires the application of the accounting standard as of
January 1, 2006. In accordance with the modified prospective transition
method, the Company's Consolidated Financial Statements for prior periods
have not been restated to reflect, and do not include, the impact of FAS
123R.
FAS 123R requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
Consolidated Statement of Operations. Prior to the adoption of FAS 123R,
the Company accounted for stock-based awards to employees and directors
using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25 Accounting for Stock Issued to Employees, ("APB 25")
as allowed under Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Company's
Consolidated Statement of Operations because the exercise price of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
Page 7
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized in the Company's Consolidated
Statement of Operations for the three and six months ended June 30, 2006
includes compensation expense for share-based payment awards granted prior
to, but not yet vested as of January 1, 2006 based on the grant date fair
value estimated in accordance with the pro forma provisions of FAS 123 and
compensation expense for the share-based payment awards granted subsequent
to January 1, 2006 based on the grant date fair value estimated in
accordance with the provisions of FAS 123R. In conjunction with the
adoption of FAS 123R, the Company changed its method of attributing the
value of stock-based compensation to expense from a method which recognized
the expense as the options vest to the straight-line single option method.
Compensation expense for all share-based payment awards granted on or prior
to January 1, 2006 will continue to be recognized using the historic method
while compensation expense for all share-based payment awards granted
subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the three and six months ended
June 30, 2006 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. FAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the Company's
pro forma information required under FAS 123 for the periods prior to 2006,
the Company also estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods.
The Company utilizes a lattice-binomial option-pricing model ("binomial
model") to determine the fair value of share-based payment awards.
Prior to January 1, 2006, the Company followed the intrinsic value method
of accounting for employee stock options as prescribed by APB 25. If the
fair value methodology prescribed by FAS 123 had been adopted by the
Company, pro forma results for the three and six months ended June 30, 2005
would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
------------------ ----------------
Net earnings as reported $1,111 $ 2,307
Stock based compensation expense, if the methodology
prescribed by FAS 123 had been adopted (824) (1,524)
------ -------
Adjusted net earnings $ 287 $ 783
====== =======
Earnings per share - basic and diluted:
Net earnings as reported $ 0.03 $ 0.06
FAS 123 stock based compensation expense (0.02) (0.04)
------ -------
Adjusted net earnings $ 0.01 $ 0.02
====== =======
Page 8
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
1. BASIS OF PRESENTATION (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized under FAS 123R for the three
and six months ended June 30, 2006 was $0.5 million and $0.8 million
respectively.
The weighted average fair value of common share options granted to
employees for the three and six months ended June 30, 2006 at the time of
grant was $2.95 and $3.74 respectively (2005 - $2.85 and $2.85 per share).
The Company uses a binomial model to determine the fair value of common
share options at the grant date. For the three and six months ended June
30, the following assumptions were used:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ------------ ----------- ------------
Average risk-free interest rate 5.13% 4.15% 4.85% 4.15%
Market risk premium 5.24% 5.57% - 7.38% 5.24 - 5.60% 5.57% - 7.38%
Beta 1.06 1.06 - 1.31 1.06 - 1.28 1.06 - 1.31
Expected option life (in years) 2.47 - 3.03 2.23 - 5.23 2.47 - 5.33 2.23 - 5.23
Average expected volatility 60% 62% 60% 62%
Annual termination probability 8.06% 8.06% 8.06% 8.06%
Dividend yield 0% 0% 0% 0%
As the Company stratifies its employees into two groups in order to
calculate fair value under the Binomial model, ranges of assumptions used
are presented for equity risk premium, Beta, expected option life and
annual termination probability. The Company uses the historical data to
estimate option exercise and employee termination within the valuation
model; separate groups of employees that have similar historical exercise
behavior are considered separately for valuation purposes.
The Company's policy is to issue new shares to satisfy stock options which
are exercised.
Total stock-based compensation expense related to non-vested employee stock
options not yet recognized at June 30, 2006 and the weighted average period
over which the awards are expected to vest is $4.1 million and 3.4 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 June
30, 2006. The Company also has interests in four other film production
companies which are VIEs, however the Company did not consolidate these
film entities since it does not bear the majority of the expected losses or
expected residual returns. As of June 30, 2006, these four VIEs have total
assets of $3.2 million (December 31, 2005 - $0.3 million) and total
liabilities of $3.2 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:
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
Gross minimum lease amounts receivable $ 87,286 $ 88,894
Residual value of equipment 563 635
Unearned finance income (31,934) (33,933)
-------- --------
Present value of minimum lease amounts receivable 55,915 55,596
Accumulated allowance for uncollectible amounts (995) (1,478)
-------- --------
Net investment in leases $ 54,920 $ 54,118
Long-term receivables 10,435 8,888
-------- --------
Total financing receivables $ 65,355 $ 63,006
======== ========
Page 10
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
4. INVENTORIES
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
Raw materials $11,837 $10,464
Work-in-process 8,078 6,893
Finished goods 9,765 10,937
------- -------
$29,680 $28,294
======= =======
5. SENIOR NOTES DUE 2010
As at June 30, 2006, the Company had outstanding $159.0 million aggregate
principal of Registered Senior Notes and $1.0 million aggregate principal
of Unregistered Senior Notes.
6. CREDIT FACILITY
On February 6, 2004, the Company entered into a Loan Agreement for a
secured revolving credit facility as amended on June 30, 2005 and as
further amended by the Second Amendment to the Loan Agreement which was
entered into with effect from May 16, 2006 (the "Credit Facility"). The
Credit Facility is a revolving credit facility expiring on October 31, 2009
with an optional one year renewal thereafter contingent upon approval by
the lender, permitting maximum aggregate borrowings of $40.0 million,
subject to a borrowing base calculation which includes the Company's
financing receivables, operating leases, finished goods inventory and
capital assets with certain reserve requirements and deductions for
outstanding letters of credit. The Credit Facility bears interest at the
applicable prime rate per annum or Libor plus a margin as specified therein
per annum and is collateralized by a first priority security interest in
all of the current and future assets of the Company. The Credit Facility
contains typical affirmative and negative covenants, including covenants
that restrict the Company's ability to: incur certain additional
indebtedness; make certain loans, investments or guarantees; pay dividends;
make certain asset sales; incur certain liens or other encumbrances;
conduct certain transactions with affiliates and enter into certain
corporate transactions. In addition, the Credit Facility contains customary
events of default, including upon an acquisition or a change of control
that may have a material adverse effect on the Company or a guarantor. The
Credit Facility also requires the Company to maintain a minimum level of
earnings before interest, taxes, depreciation and amortization, and cash
collections. As at June 30, 2006, the Company has not drawn down on the
Credit Facility other than in respect of letters of credit for $9.8
million.
Page 11
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
7. COMMITMENTS
(A) The Company's total minimum annual rental payments to be made under
operating leases for premises as of June 30, 2006 for each of the years
ended December 31, are as follows:
2006 (six months remaining) $ 2,548
2007 5,109
2008 5,023
2009 4,965
2010 5,122
Thereafter 18,982
-------
$41,749
=======
(B) As at June 30, 2006, the Company has letters of credit of $9.8 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 half of 2006,
the Company spent $0.2 million towards the distribution of the film. As at
June 30, 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 judgment 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 judgement of
non-infringement, invalidity and unenforceability of the patent in suit,
and damages for alleged false advertising, false designation of origin,
breach of contract, interference with prospective economic advantage and/or
unfair competition. On March 13, 2006, the Company and In-Three entered
into a settlement agreement, resolving all matters between the parties. On
March 29, 2006, the Company and In-Three filed a joint motion for an order
dismissing with prejudice all claims and counterclaims between the parties.
The U.S. District Court for the Central District of California, Western
Division has stayed a determination on the joint motion at the joint
request of the Company, 3DMG, and In-Three pending a resolution of an
arbitration proceeding between the Company and 3DMG before the
International Centre for Dispute Resolution relating to rights under
agreements between the Company and 3DMG.
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,
which order was denied by the Court so that the judgement remains
executable. On November 30, 2005, Big Screen filed an application for the
opening of insolvency proceedings which were formally opened on May 2,
2006. As a consequence of Big Screen's insolvency, the appeal proceeding
has been put on hold and it is uncertain whether it will continue.
(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. Following the opening of formal
insolvency proceedings, the litigation has been put on hold and it is
unlikely that it will continue.
(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 in November, 2005. On February 1, 2006, the ICC issued an award
finding unanimously in the Company's favor on all claims. The ICC hearing
to determine the amount of damages to be awarded to the Company took place
on July 26 - 28, 2006. The ICC panel has not yet rendered its decision with
respect to such damages and no amount has yet been recorded for these
damages.
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 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 half of
2006, the Company did not recognize any settlement revenue. Included in
IMAX systems revenue for the three and six months ended June 30, 2005 are
the following types of settlement arrangements: $nil and $0.2 million
related to MPX conversion agreements and $3.9 million and $10.8 million
related to consensual lease buyouts. In aggregate the Company recognized
$3.9 million and $11.0 million in the three and six months ended June 30,
2005, respectively.
(B) Included in selling, general and administrative expenses for both the three
and six months ended June 30, 2006 is a gain of $0.4 million (2005 - $0.5
million loss, $0.7 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)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2006 2005 2006 2005
------ ------ ------ ------
Accounts receivable provisions,
net of (recoveries) $ 232 $(370) $ 375 $(108)
Financing receivables provisions,
net of (recoveries) $(484) $ -- $(484) $ (50)
----- ----- ----- -----
Receivable provisions, net of
(recoveries) $(252) $(370) $(109) $(158)
===== ===== ===== =====
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
11% for the 2006 year to quarterly pre-tax income. On June 22, 2006, the
Canadian Federal government passed into law the elimination of the Large
Corporations Tax retroactively as of January 1, 2006. Further, long-term
tax rate reductions were also affirmed for taxation years 2008 through
2010. The Company's tax provision for the quarter reflects both the
retroactive elimination of the Large Corporations Tax and the result of the
long term reductions in the corporate tax rates. The Company has reduced
its gross deferred tax asset with an equal reduction in its gross valuation
allowance to reflect the reduction in long term income tax rates.
As at June 30, 2006, the Company has net deferred income tax assets of $7.8
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 June 30,
2006, the Company had a gross deferred income tax asset of $45.3 million,
against which the Company is carrying a $37.5 million valuation allowance.
12. CAPITAL STOCK
(A) STOCK-BASED COMPENSATION
As at June 30, 2006, the Company has reserved a total 6,974,657 (December
31, 2005 - 7,046,689) common shares for future issuance under the Stock
Option Plan, of which options in respect of 5,916,461 common shares are
outstanding at June 30, 2006. The options granted under the Stock Option
Plan generally vest between one and five years and expire 10 years or less
from the date granted. At June 30, 2006, options in respect of 4,383,947
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 $0.2 million recovery and $0.3 million expense for
the three and six months ended June 30, 2006, respectively (2005 - $0.1
million expense, and $0.3 million expense), due to the changes in the fair
value of these restricted shares in the period.
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 June 30:
WEIGHTED
AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
----------------------- ---------------
2006 2005 2006 2005
---------- ---------- ------ ------
Options outstanding,
beginning of year 5,504,324 5,593,101 $ 7.26 $ 6.82
Granted 607,770 97,446 10.28 9.73
Exercised (72,032) (388,149) 3.96 5.29
Forfeited or expired (107,768) (2,000) 9.56 6.48
Cancelled (15,833) (24,402) 21.33 20.32
--------- ---------
Options outstanding,
end of quarter 5,916,461 5,275,996 7.53 6.93
========= =========
Options exercisable,
end of quarter 4,383,947 3,958,416 7.11 7.15
========= =========
The weighted average exercise price per share and number of unvested common
share options granted to employees as at June 30, 2006 is $8.74 and
1,532,514, respectively.
The following table summarizes certain information in respect of options
outstanding under the Stock Option Plan at June 30, 2006:
NUMBER OF SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE ----------------------- AVERAGE EXERCISE REMAINING
PRICES PER SHARE OUTSTANDING VESTED PRICE PER SHARE TERM
- ----------------- ----------- --------- ---------------- ---------
$ 0.00 - $ 2.99 172,746 172,746 $ 2.73 2.3 Years
$ 3.00 - $ 4.99 1,979,522 1,979,522 4.39 3.0 Years
$ 5.00 - $ 9.99 2,785,390 1,690,662 6.86 5.1 Years
$10.00 - $14.99 508,901 71,115 10.62 6.2 Years
$15.00 - $19.99 43,600 43,600 17.48 0.7 Years
$20.00 - $24.99 271,302 271,302 21.86 2.9 Years
$25.00 - $28.04 155,000 155,000 27.17 3.6 Years
--------- ---------
Total 5,916,461 4,383,947 7.53 3.4 Years
========= =========
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 three and six months ended June 30, 2006, an aggregate of 26,649 and
49,984 respectively, (2005 - 13,335 and 26,670) options with an average
exercise price of $9.35 and 9.07 respectively, (2005 - $9.44 and $10.00) 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 and $0.2 million (2005 - $0.1 million and $0.1 million), using a
Binomial option-pricing model with the following underlying assumptions:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2006 2005 2006 2005
----------- ------- ----------- -------
Risk-free interest rate 5.0% 3.9% 4.8% 3.9%
Expected option life 5 - 7 years 5 years 5 - 7 years 5 years
Volatility 60% 62% 60% 62%
Dividend yield 0% 0% 0% 0%
In the three and six months ended June 30, 2006, the Company has recorded a
charge of $ 0.1 million and $0.2 million respectively (2005 - $0.1 million
and $0.1 million) to film cost of sales related to these non-employee stock
options.
There were no warrants issued in the three and six months ended June 30,
2006 (2005 - nil and nil). 550,000 warrants were issued in 2003. In the
first quarter of 2005, 80,872 common shares were issued upon exercise of
200,000 warrants. All remaining warrants have either expired or have been
cancelled.
Page 17
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
12. CAPITAL STOCK
(B) EARNINGS (LOSS) PER SHARE
Reconciliations of the numerators and denominators of the basic and diluted
per-share computations are comprised of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net earnings applicable to common
shareholders:
Net earnings (loss) $ 3,534 $ 1,111 $(2,287) $ 2,307
======= ======= ======= =======
Weighted average number of common shares
(000's):
Issued and outstanding, beginning of period 40,280 39,758 40,213 39,447
Weighted average number of shares issued during
the period 5 60 42 240
------- ------- ------- -------
Weighted average number of shares used in
computing basic earnings per share 40,285 39,818 40,255 39,687
Assumed exercise of stock options, net of
shares assumed repurchased 1,919 2,123 -- 2,243
------- ------- ------- -------
Weighted average number of shares used in
computing diluted earnings per share 42,204 41,941 40,255 41,930
======= ======= ======= =======
The calculation of diluted earnings per share for the six months ended June
30, 2006 excludes 1.0 million common shares issuable upon exercise of
options as the impact of these exercises would be antidilutive.
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)
13. SEGMENTED INFORMATION
The Company has four reportable segments: IMAX systems, films, theater
operations and other.
There has been no change in the basis of measurement of segment profit or
loss from the Company's most recent annual report on form 10-K for the year
ended December 31, 2005. Inter-segment transactions are not significant.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2006 2005 2006 2005
------- -------- -------- --------
REVENUE
IMAX systems $23,952 $20,308 $ 33,350 $ 42,421
Films 12,171 5,301 18,692 10,248
Theater operations 4,051 4,198 7,708 8,014
Other 1,224 1,071 2,066 1,563
------- ------- -------- --------
TOTAL $41,398 $30,878 $ 61,816 $ 62,246
======= ======= ======== ========
EARNINGS (LOSS) FROM OPERATIONS
IMAX systems $11,444 $11,183 $ 13,832 $ 23,742
Films 1,882 308 831 (563)
Theater operations 623 190 689 (56)
Corporate and other (6,084) (6,300) (13,217) (12,862)
------- ------- -------- --------
TOTAL $ 7,865 $ 5,381 $ 2,135 $ 10,261
======= ======= ======== ========
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 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)
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 June 30, were
comprised of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2006 2005 2006 2005
---- ---- ------ ----
Net earnings from discontinued operations $-- $186 $2,300 $426
=== ==== ====== ====
15. DEFINED BENEFIT PLAN
The Company has an unfunded U.S. defined benefit pension plan covering its
two Co-Chief Executive Officers. The plan provides for a lifetime
retirement benefit from age 55 determined as 75% of the member's best
average 60 consecutive months of earnings during the 120 months preceding
retirement.
Under the original terms of the plan, once benefit payments begin, the
benefit is indexed annually to the cost of living and further provides for
100% continuance for life to the surviving spouse. On March 8, 2006, the
Company and the Co-Chief Executives negotiated an amendment to the plan.
Under the terms of the plan amendment, the cost of living adjustment and
surviving spouse benefits previously owed to the Co-Chief Executive
Officers are each reduced by 50%, subject to a recoupment of a percentage
of such benefits upon a change of control of the Company, and the net
present value of the reduced pension benefit payments is accelerated and
paid out upon a change of control of the Company. The benefits were 50%
vested as of July 2000, the plan initiation date. The vesting percentage
increases on a straight-line basis from inception until age 55. The vesting
percentage of a member whose employment terminates other than by voluntary
retirement or upon a change in control shall be 100%. As of June 30, 2006,
one of the Co-Chief Executives was approximately 98.0% vested and the other
Co-Chief Executive was approximately 79.3% vested. The actuarial liability
was remeasured as of March 8, 2006 to reflect the plan changes adopted.
The following assumptions were used in determining the obligation and cost
status of the Company's defined benefit pension plan at the plan
measurement dates of :
MARCH 8, DECEMBER 31,
2006 2005
----------------- ----------------
Discount rate 5.18% 5.50%
Lump sum interest rate:
First 20 years 5.70% N/A
Thereafter 4.75% N/A
Form of payment: 100% Joint and
Modified lump sum survivor annuity
Cost of living adjustment on benefits 1.20% 2.40%
Rate of increase in qualifying compensation levels nil% nil%
Page 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)
The amounts accrued for the plan are determined as follows:
SIX MONTHS ENDED
JUNE 30, 2006
----------------
Projected benefit obligation:
Obligation, beginning of period $31,064
Service cost 821
Interest cost 659
Actuarial gain (8,645)
-------
Obligation, end of period $23,899
=======
Unfunded status:
Obligation, end of period $23,899
Unrecognized gain relating to prior service cost 2,173
Unrecognized actuarial (loss) (21)
-------
Accrued pension liability $26,051
=======
The following table provides disclosure of pension expense for the defined
benefit plan for the periods ended June 30:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2006 2005 2006 2005
----- ------ ------ ------
Service cost $ 364 $ 604 $ 821 $1,208
Interest cost 297 390 659 780
Amortization of prior service cost (237) 349 (83) 698
----- ------ ------ ------
Pension expense $ 424 $1,343 $1,397 $2,686
===== ====== ====== ======
The accumulated benefit obligation for the defined benefit plan was $26.1
million at June 30, 2006 and $31.1 million at December 31, 2005.
No contributions are expected to be made for the plan during 2006.
As a result of the pension plan amendment, an adjustment to the
unrecognized actuarial losses of $2.8 million and unrecognized prior
service cost of $3.4 million was recorded in comprehensive income (loss)
and other assets.
The following benefit payments are expected to be made as per the current
plan assumptions and the terms of the Plan in each of the next five years,
and in the aggregate over the five years thereafter:
2006 $ --
2007 995
2008 1,007
2009 1,019
2010 29,505(1)
2011 to 2015 --
(1) One of the Co-Chief Executive Officers is currently entitled to benefit
payments subsequent to 2010 as a life annuity, subject to an elective right
to a lump sum payment in 2010. The pension plan assumptions assume the
election of a lump sum payment.
Page 21
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
15. DEFINED BENEFIT PLAN (cont'd)
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 June 30, 2006, the cash surrender value of the
insurance policies is $3.7 million (December 31, 2005 - $3.3 million) and
has been included in other assets.
16. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (an interpretation of FASB Statement No. 109),
("FIN 48"), which clarifies the relevant criteria and approach for the
recognition, de-recognition and measurement of uncertain tax positions. FIN
48 will be effective for the Company beginning January 1, 2007. The Company
is currently in the process of assessing the effects of the provisions on
FIN 48.
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes are fully and unconditionally guaranteed,
jointly and severally by specific wholly-owned subsidiaries of the Company
(the "Guarantor Subsidiaries"). The main Guarantor Subsidiaries are David
Keighley Productions 70 MM Inc., Sonics Associates Inc., and the
subsidiaries that own and operate certain theaters. These guarantees are
full and unconditional. The information under the column headed
"Non-Guarantor Subsidiaries" relates to the following subsidiaries of the
Company: IMAX Japan Inc. and IMAX B.V. (the "Non-Guarantor Subsidiaries")
which have not provided any guarantees of the Senior Notes.
Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Some
subsidiaries may be unable to pay dividends due to negative working
capital.
Page 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)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at June 30, 2006:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
ASSETS
Cash and cash equivalents $ 13,132 $ 8,213 $ 229 $ -- $ 21,574
Short-term investments 8,351 -- -- -- 8,351
Accounts receivable 23,235 3,817 262 -- 27,314
Financing receivables 63,305 2,050 -- -- 65,355
Inventories 29,365 239 76 -- 29,680
Prepaid expenses 3,430 619 110 -- 4,159
Inter-company receivables 19,129 30,406 11,406 (60,941) --
Film assets 4,597 -- -- -- 4,597
Fixed assets 24,517 1,276 4 -- 25,797
Other assets 7,943 -- -- -- 7,943
Deferred income taxes 7,771 4 -- -- 7,775
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,686 -- -- -- 2,686
Investments in subsidiaries 33,357 -- -- (33,357) --
--------- -------- ------- -------- ---------
Total assets $ 279,845 $ 46,624 $12,087 $(94,298) $ 244,258
========= ======== ======= ======== =========
LIABILITIES
Accounts payable 3,704 3,235 85 -- 7,024
Accrued liabilities 49,415 1,657 257 -- 51,329
Inter-company payables 47,353 35,599 6,496 (89,448) --
Deferred revenue 41,533 5,418 196 -- 47,147
Senior Notes due 2010 160,000 -- -- -- 160,000
--------- -------- ------- -------- ---------
Total liabilities 302,005 45,909 7,034 (89,448) 265,500
--------- -------- ------- -------- ---------
SHAREHOLDER'S DEFICIT
Capital stock 121,960 -- 117 (117) 121,960
Other equity/Additional paid in
capital/Contributed surplus 1,774 46,960 -- (45,926) 2,808
Deficit (147,132) (45,631) 4,936 41,193 (146,634)
Accumulated other comprehensive income (loss) 1,238 (614) -- -- 624
--------- -------- ------- -------- ---------
Total shareholders' equity (deficit) $ (22,160) $ 715 $ 5,053 $ (4,850) $ (21,242)
--------- -------- ------- -------- ---------
Total liabilities & shareholders' equity
(deficit) $ 279,845 $ 46,624 $12,087 $(94,298) $ 244,258
========= ======== ======= ======== =========
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 June 30, 2006.
Page 23
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Balance Sheets as at December 31, 2005:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
ASSETS
Cash and cash equivalents $ 17,402 $ 6,728 $ 194 $ -- $ 24,324
Short-term investments 8,171 -- -- -- 8,171
Accounts receivable 23,828 2,045 292 -- 26,165
Financing receivables 60,950 2,056 -- -- 63,006
Inventories 27,973 239 82 -- 28,294
Prepaid expenses 3,162 575 88 -- 3,825
Inter-company receivables 14,057 31,929 11,043 (57,029) --
Film assets 3,329 -- -- -- 3,329
Fixed assets 25,403 1,374 3 -- 26,780
Other assets 11,618 -- -- -- 11,618
Deferred income taxes 6,171 -- -- -- 6,171
Goodwill 39,027 -- -- -- 39,027
Other intangible assets 2,701 -- -- -- 2,701
Investments in subsidiaries 31,833 -- -- (31,833) --
--------- -------- ------- -------- ---------
Total assets $ 275,625 $ 44,946 $11,702 $(88,862) $ 243,411
========= ======== ======= ======== =========
LIABILITIES
Accounts payable 4,915 2,017 3 -- 6,935
Accrued liabilities 52,978 1,965 179 -- 55,122
Inter-company payables 42,766 36,088 6,466 (85,320) --
Deferred revenue 38,927 5,330 140 -- 44,397
Senior Notes due 2010 160,000 -- -- -- 160,000
--------- -------- ------- -------- ---------
Total liabilities 299,586 45,400 6,788 (85,320) 266,454
--------- -------- ------- -------- ---------
SHAREHOLDER'S DEFICIT
Capital stock 121,674 -- 117 (117) 121,674
Other equity/Additional paid in
capital/Contributed surplus 724 46,960 -- (45,926) 1,758
Deficit (144,845) (46,800) 4,797 42,501 (144,347)
Accumulated other comprehensive income (loss) (1,514) (614) -- -- (2,128)
--------- -------- ------- -------- ---------
Total shareholders' equity (deficit) $ (23,961) $ (454) $ 4,914 $ (3,542) $ (23,043)
--------- -------- ------- -------- ---------
Total liabilities & shareholders' equity
(deficit) $ 275,625 $ 44,946 $11,702 $(88,862) $ 243,411
========= ======== ======= ======== =========
In certain Guarantor Subsidiaries accumulated losses have exceeded the
original investment balance. As a result of applying equity accounting, the
parent company has consequently reduced inter-company receivable balances
with respect to these Guarantor Subsidiaries in the amounts of $28.4
million.
Page 24
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
June 30, 2006
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
REVENUE
IMAX systems $23,609 $ 253 $181 $ (91) $23,952
Films 9,803 3,306 4 (942) 12,171
Theater operations 204 3,877 -- (30) 4,051
Other 1,224 -- -- -- 1,224
------- ------ ---- ------- -------
34,840 7,436 185 (1,063) 41,398
COST OF GOODS AND SERVICES 18,299 6,219 83 (1,063) 23,538
------- ------ ---- ------- -------
GROSS MARGIN 16,541 1,217 102 -- 17,860
Selling, general and administrative expenses 9,229 224 (2) -- 9,451
Research and development 664 -- -- -- 664
Amortization of intangibles 132 -- -- -- 132
Loss (income) from equity-accounted
investees (1,094) -- -- 1,094 --
Receivable provisions, net of (recoveries) (252) -- -- -- (252)
------- ------ ---- ------- -------
EARNINGS (LOSS) FROM OPERATIONS 7,862 993 104 (1,094) 7,865
Interest income 280 -- -- -- 280
Interest expense (4,228) (3) -- -- (4,231)
------- ------ ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 3,914 990 104 (1,094) 3,914
Recovery of (provision for) income taxes (380) -- -- -- (380)
------- ------ ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 3,534 990 104 (1,094) 3,534
Net earnings from discontinued operations -- -- -- -- --
------- ------ ---- ------- -------
NET EARNINGS (LOSS) $ 3,534 $ 990 $104 $(1,094) $ 3,534
======= ====== ==== ======= =======
Page 25
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the six months ended
June 30, 2006:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
REVENUE
IMAX systems $32,631 $ 512 $376 $ (169) $33,350
Films 15,138 5,290 5 (1,741) 18,692
Theater operations 428 7,339 -- (59) 7,708
Other 2,064 -- 2 -- 2,066
------- ------- ---- ------- -------
50,261 13,141 383 (1,969) 61,816
COST OF GOODS AND SERVICES 28,169 11,568 163 (1,969) 37,931
------- ------- ---- ------- -------
GROSS MARGIN 22,092 1,573 220 -- 23,885
Selling, general and administrative expenses 19,474 402 80 -- 19,956
Research and development 1,579 -- -- -- 1,579
Amortization of intangibles 324 -- -- -- 324
Loss (income) from equity-accounted
investees (1,308) -- -- 1,308 --
Receivable provisions, net of (recoveries) (109) -- -- -- (109)
------- ------- ---- ------- -------
EARNINGS (LOSS) FROM OPERATIONS 2,132 1,171 140 (1,308) 2,135
Interest income 533 -- -- -- 533
Interest expense (8,403) (2) -- -- (8,405)
------- ------- ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (5,738) 1,169 140 (1,308) (5,737)
Recovery of income taxes 1,151 -- (1) -- 1,150
------- ------- ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (4,587) 1,169 139 (1,308) (4,587)
Net earnings from discontinued operations 2,300 -- -- -- 2,300
------- ------- ---- ------- -------
NET EARNINGS (LOSS) $(2,287) $ 1,169 $139 $(1,308) $(2,287)
======= ======= ==== ======= =======
Page 26
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the three months ended
June 30, 2005:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
REVENUE
IMAX systems $19,911 $1,647 $209 $(1,459) $20,308
Films 4,193 1,399 5 (296) 5,301
Theater operations 216 4,009 -- (27) 4,198
Other 1,070 -- 1 -- 1,071
------- ------ ---- ------- -------
25,390 7,055 215 (1,782) 30,878
COST OF GOODS AND SERVICES 10,764 5,913 114 (1,782) 15,009
------- ------ ---- ------- -------
GROSS MARGIN 14,626 1,142 101 -- 15,869
Selling, general and administrative expenses 9,463 196 153 -- 9,812
Research and development 886 -- -- -- 886
Amortization of intangibles 160 -- -- -- 160
Loss (income) from equity-accounted
investees (899) -- -- 899 --
Receivable provisions, net of (recoveries) (370) -- -- -- (370)
------- ------ ---- ------- -------
EARNINGS (LOSS) FROM OPERATIONS 5,386 946 (52) (899) 5,381
Interest income 282 -- 2 -- 284
Interest expense (4,203) 1 -- -- (4,202)
------- ------ ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 1,465 947 (50) (899) 1,463
Provision for income taxes (538) -- -- -- (538)
------- ------ ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 927 947 (50) (899) 925
Net earnings from discontinued operations 186 -- -- -- 186
------- ------ ---- ------- -------
NET EARNINGS (LOSS) $ 1,113 $ 947 $(50) $ (899) $ 1,111
======= ====== ==== ======= =======
Page 27
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Operations for the six months ended
June 30, 2005:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
REVENUE
IMAX systems $41,599 $ 1,952 $437 $(1,567) $42,421
Films 7,844 3,189 14 (799) 10,248
Theater Operations 442 7,626 -- (54) 8,014
Other 1,538 -- 25 -- 1,563
------- ------- ---- ------- -------
51,423 12,767 476 (2,420) 62,246
COST OF GOODS AND SERVICES 21,014 11,434 204 (2,420) 30,232
------- ------- ---- ------- -------
GROSS MARGIN 30,409 1,333 272 -- 32,014
Selling, general and administrative expenses 19,335 410 310 -- 20,055
Research and development 1,539 -- -- -- 1,539
Amortization of intangibles 317 -- -- -- 317
Loss (income) from equity-accounted
investees (886) -- -- 886 --
Receivable provisions, net of (recoveries) (158) -- -- -- (158)
------- ------- ---- ------- -------
EARNINGS (LOSS) FROM OPERATIONS 10,262 923 (38) (886) 10,261
Interest income 496 -- 2 -- 498
Interest expense (8,398) (1) -- -- (8,399)
------- ------- ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 2,360 922 (36) (886) 2,360
Provision for income taxes (479) -- -- -- (479)
------- ------- ---- ------- -------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 1,881 922 (36) (886) 1,881
Net earnings from discontinued operations 426 -- -- -- 426
------- ------- ---- ------- -------
NET EARNINGS (LOSS) $ 2,307 $ 922 $(36) $ (886) $ 2,307
======= ======= ==== ======= =======
Page 28
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the six months ended
June 30, 2006:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ (2,287) $1,169 $139 $(1,308) $ (2,287)
Net (earnings) from discontinued
operations (2,300) -- -- -- (2,300)
Items not involving cash:
Depreciation and amortization 8,493 267 1 -- 8,761
Write-downs (recoveries) (109) -- -- -- (109)
Loss (income) from equity-accounted
investees (1,308) -- -- 1,308 --
Change in deferred income taxes (1,600) (4) -- -- (1,604)
Stock and other non-cash compensation 2,549 -- -- -- 2,549
Non-cash foreign exchange gain (436) -- -- -- (436)
Interest on short-term investments (179) -- -- -- (179)
Investment in film assets (6,613) -- -- -- (6,613)
Changes in other non-cash operating assets
and liabilities (2,762) 215 (90) -- (2,637)
-------- ------ ---- ------- --------
Net cash provided by (used in) operating
activities (6,552) 1,647 50 -- (4,855)
-------- ------ ---- ------- --------
INVESTING ACTIVITIES
Purchases of short-term investments (10,322) -- -- -- (10,322)
Proceeds from maturities of short-term
investments 10,321 -- -- -- 10,321
Purchase of fixed assets (568) (169) (2) -- (739)
Increase in other assets (566) -- -- -- (566)
Increase in other intangible assets (309) -- -- -- (309)
-------- ------ ---- ------- --------
Net cash used in investing activities (1,444) (169) (2) -- (1,615)
-------- ------ ---- ------- --------
FINANCING ACTIVITIES
Common shares issued 286 -- -- -- 286
-------- ------ ---- ------- --------
Net cash provided by financing activities 286 -- -- -- 286
-------- ------ ---- ------- --------
Effects of exchange rate changes on cash (53) 7 (13) -- (59)
-------- ------ ---- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (7,763) 1,485 35 -- (6,243)
Cash provided by investing activities from
discontinued operations 3,493 -- -- -- 3,493
-------- ------ ---- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (4,270) 1,485 35 -- (2,750)
Cash and cash equivalents, beginning of
period 17,402 6,728 194 -- 24,324
-------- ------ ---- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,132 $8,213 $229 $ -- $ 21,574
======== ====== ==== ======= ========
Page 29
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (cont'd)
Supplemental Consolidating Statements of Cash Flows for the six months ended
June 30, 2005:
ADJUSTMENTS
IMAX GUARANTOR NON-GUARANTOR AND CONSOLIDATED
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ 2,307 $ 922 $(36) $(886) $ 2,307
Net (earnings) from discontinued
operations (426) -- -- -- (426)
Items not involving cash:
Depreciation and amortization 6,982 267 -- -- 7,249
Write-downs (recoveries) (158) -- -- -- (158)
Loss (income) from equity-accounted
investees (886) -- -- 886 --
Change in deferred income taxes (275) (8) -- -- (283)
Stock and other non-cash compensation 2,406 -- -- -- 2,406
Non-cash foreign exchange loss 515 -- -- -- 515
Interest on short-term investments (150) -- -- -- (150)
Investment in film assets (4,795) -- -- -- (4,795)
Changes in other non-cash operating assets
and liabilities (1,061) (2,054) 58 -- (3,057)
-------- ------- ---- ----- --------
Net cash provided by (used in) operating
activities 4,459 (873) 22 -- 3,608
-------- ------- ---- ----- --------
INVESTING ACTIVITIES
Purchases of short-term investments (23,118) -- -- -- (23,118)
Proceeds from maturities of short-term
investments 8,125 -- -- -- 8,125
Purchase of fixed assets (255) (212) -- -- (467)
Increase in other assets (375) -- -- -- (375)
Increase in other intangible assets (290) -- -- -- (290)
-------- ------- ---- ----- --------
Net cash used in investing activities (15,913) (212) -- -- (16,125)
-------- ------- ---- ----- --------
FINANCING ACTIVITIES
Common shares issued 2,052 -- -- -- 2,052
-------- ------- ---- ----- --------
Net cash provided by financing activities 2,052 -- -- -- 2,052
-------- ------- ---- ----- --------
Effects of exchange rate changes on cash 131 (48) 7 -- 90
-------- ------- ---- ----- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (9,271) (1,133) 29 -- (10,375)
Cash provided by investing activities from
discontinued operations 236 -- -- -- 236
-------- ------- ---- ----- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS, DURING THE PERIOD (9,035) (1,133) 29 -- (10,139)
Cash and cash equivalents, beginning of
period 23,683 5,058 223 -- 28,964
-------- ------- ---- ----- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,648 $ 3,925 $252 $ -- $ 18,825
======== ======= ==== ===== ========
Page 30
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA
The accounting principles followed by the Company conform with U.S. GAAP.
Significant differences affecting the Company between U.S. GAAP and
Canadian 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 six months ended
June 30, 2006 reflect the impact of FAS 123R. In accordance with the
modified prospective transition method, the Company's Consolidated
Financial Statements for prior periods have not been restated to reflect,
and do not include, the impact of FAS 123R. Stock-based compensation
expense recognized under FAS 123R and under CICA Section 3870 for the three
and six months ended June 30, 2006 is aligned with each other and will be
identical for all periods after January 1, 2006.
(B) PENSION ASSET AND LIABILITIES
Under U.S. GAAP, included in accrued liabilities is an unrecognized gain
related to prior service costs resulting from the plan amendment of $2.2
million as at June 30, 2006 and unrecognized prior service costs of $6.4
million as at December 31, 2005. An amount of $nil as at June 30, 2006, and
$3.6 million as at December 31, 2005 is included in other assets,
representing unrecognized prior service costs. In addition, under U.S.
GAAP, an amount of less than $0.1 million as at June 30, 2006 and $2.8
million as at December 31, 2005 is recorded against accumulated other
comprehensive income, resulting from an unrecognized actuarial loss. Under
Canadian GAAP, the minimum pension liability, and the corresponding amounts
recorded in other assets and accumulated other comprehensive income are not
recorded.
Page 31
IMAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts in thousands of U.S. dollars unless otherwise stated)
(UNAUDITED)
18. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
Net earnings (loss) in accordance with U.S. GAAP $3,534 $1,111 $(2,287) $ 2,307
Stock-based compensation(a) -- (653) -- (1,182)
------ ------ ------- -------
Net earnings in accordance with Canadian GAAP $3,534 $ 458 $(2,287) $ 1,125
====== ====== ======= =======
Earnings (loss) per share:
Earnings (loss) per share - basic:
Net earnings (loss) from continuing operations $ 0.09 $ 0.01 $ (0.11) $ 0.02
Net earnings from discontinued operations $ -- $ -- $ 0.05 $ 0.01
------ ------ ------- -------
Net earnings (loss) $ 0.09 $ 0.01 $ (0.06) $ 0.03
====== ====== ======= =======
Earnings (loss) per share - diluted:
Net earnings (loss) from continuing operations $ 0.08 $ 0.01 $ (0.11) $ 0.02
Net earnings from discontinued operations $ -- $ -- $ 0.05 $ 0.01
------ ------ ------- -------
Net earnings (loss) $ 0.08 $ 0.01 $ (0.06) $ 0.03
====== ====== ======= =======
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
The following is a reconciliation of shareholders' equity (deficit)
reflecting the difference between Canadian and U.S. GAAP:
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
Shareholders' equity (deficit) in accordance with U.S. GAAP $(21,242) $(23,043)
Unrecognized actuarial lossb 21 2,773
-------- --------
Shareholders' equity (deficit) in accordance with Canadian GAAP $(21,221) $(20,270)
======== ========
19. FINANCIAL STATEMENT PRESENTATION
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
Page 32
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 274 IMAX theaters
operating in 38 countries worldwide as of June 30, 2006. IMAX Corporation is a
publicly traded company listed on both the TSX and NASDAQ.
ACCOUNTING POLICIES AND ESTIMATES
The Company reports its results under United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Significant differences between United
States and Canadian Generally Accepted Accounting Principles are summarized in
note 18 of the Consolidated Financial Statements.
The preparation of these financial statements requires management to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
its estimates, including those related to accounts receivable, net investment in
leases, inventories, fixed and film assets, investments, intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, future expectations and other assumptions that are
believed to be reasonable at the date of the financial statements. Actual
results may differ from these estimates due to uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
The Company's significant accounting policies are discussed in note 2 of the
Consolidated Financial Statements in the Company's most recent annual report on
Form 10-K for the year ended December 31, 2005, and are summarized below.
CRITICAL ACCOUNTING POLICIES
The Company considers the following critical accounting policies to have the
most significant effect on its estimates, assumptions and judgements:
REVENUE RECOGNITION
The Company's system sales and lease transactions typically involve the delivery
of several products and services, including the projector, projection screen and
sound system, supervision of installation, training of theater personnel, and
advice on theater design and custom assemblies. In addition, on occasion, the
Company will include film licenses or other specified elements as part of these
transactions.
When the elements of theater systems meet the criteria for treatment as separate
units of accounting, the Company generally allocates revenue to each individual
element based on the relative fair values of each element. Where objective and
reliable evidence of the fair values of the undelivered items in a multiple
element arrangement is available but no such evidence is available for the
delivered items, the Company will use the residual method of allocation in those
instances. Under the residual method, the amount of consideration allocated to
the delivered items equals the total arrangement consideration less the
aggregate fair value of the undelivered items. Revenue allocated to an
individual element is recognized when revenue recognition criteria for that
element is met.
SALES-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 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)
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.
Page 34
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
REVENUE RECOGNITION (cont'd)
SALES AND SALES-TYPE LEASES OF THEATER SYSTEMS (cont'd)
Where these agreements have multiple elements meeting the criteria for treatment
as separate units of accounting, the total consideration to be received in these
situations generally is allocated to each individual element based on the
relative fair values of each element. Where objective and reliable evidence of
the fair values of the undelivered items in a multiple element arrangement is
available but no such evidence is available for the delivered items, the Company
will use the residual method of allocation in those instances. Under the
residual method, the amount of consideration allocated to the delivered items
equals the total arrangement consideration less the aggregate fair value of the
undelivered items. Each element is then accounted for based on applicable
revenue recognition criteria.
OPERATING LEASES OF THEATER SYSTEMS
Leases that do not transfer substantially all of the benefits and risks of
ownership to the customer are classified as operating leases. For these leases,
initial rental fees and minimum lease payments are recognized as revenue on a
straight-line basis over the lease term. Additional rentals in excess of minimum
annual amounts are recognized as revenue when reported by theater operators,
provided that collection is reasonably assured.
FILM LICENSING
Revenue from licensing of films is recognized when a contractual licensing
arrangement exists, the film has been completed and delivered, the license
period has begun, the fee is fixed or determinable and collection is reasonably
assured. Where the license fees are based on a share of the customer's revenue,
and all other revenue recognition criteria stated in the preceding sentence are
met, the Company recognizes revenue as the customer exhibits the film.
DMR FILM REVENUE
Revenues from digitally re-mastering film where third parties own the related
film rights are derived in the form of processing fees and recoupments
calculated as a percentage of box office receipts from the re-mastered films.
Processing fees are recognized as revenues as the related re-mastering service
is performed. Recoupments as a percentage of box office receipts are recognized
as revenue when the contracted portions of box office receipts due to the
Company are reported by theater operators, provided that collection is
reasonably assured.
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 June 30, 2006, the
Company had $8.4 million (December 31, 2005 - $6.1 million) invested in Canadian
government securities and $nil (December 31, 2005 - $2.1 million) invested in
U.S. government securities.
Page 35
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
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 recoverable amount. In developing the
estimates for an allowance, the Company considers general and industry economic
and market conditions as well as other credit information available for the
customer. The Company only records recoveries of provisions when objective
verifiable evidence supports the change in the original provision.
INVENTORIES
In establishing the appropriate provisions for theater systems inventory,
management must make estimates of future events and conditions including the
anticipated installation dates for the current backlog of theater system
contracts, potential future signings, general economic conditions, technology
factors, growth prospects within the customers' ultimate marketplace and the
market acceptance of the Company's current and pending projection systems and
film library. If management estimates of these events and conditions prove to be
incorrect, it could result in inventory losses in excess of the provisions
determined to be adequate as at the balance sheet date.
FILM ASSETS
Estimates of ultimate revenues are prepared on a title by title basis and
reviewed regularly by management and revised where necessary to reflect the most
current information. Ultimate revenue for films includes estimates of revenues
over a period not to exceed 10 years following the date of initial release.
GOODWILL
The Company performs an impairment test on at least an annual basis and
additionally, whenever events or changes in circumstances suggest that the
carrying amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of
the reporting units are estimated using a discounted cash flows approach. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the statement of operations.
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.
Page 36
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
OVERVIEW (cont'd)
CRITICAL ACCOUNTING POLICIES (cont'd)
PENSION PLAN ACTUARIAL ASSUMPTIONS
The Company's pension benefit obligations and related costs are calculated using
actuarial concepts, within the framework of Statement of Financial Accounting
Standards No. 87, "Employer's Accounting for Pensions". A critical assumption,
the discount rate, is an important element of expense and/or liability
measurement. The Company evaluates this critical assumption annually or when
otherwise required to by accounting standards. Other assumptions include factors
such as expected retirement, mortality, rate of compensation increase, and
estimates of inflation.
The discount rate enables the Company to state expected future cash payments for
benefits as a present value on the measurement date. The guideline for setting
this rate is a high-quality long-term corporate bond rate. A lower discount rate
increases the present value of benefit obligations and increases pension
expense. The Company's discount rate was determined by considering the average
of pension yield curves constructed of a large population of high-quality
corporate bonds. The resulting discount rate reflects the matching of plan
liability cash flows to the yield curves.
TAX ASSET VALUATION
As at June 30, 2006, the Company had net deferred income tax assets of $7.8
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 June 30, 2006,
and the ability to realize certain deferred income tax assets through loss and
tax credit carryback strategies. If and when the Company's operations in some
jurisdictions were to reach a requisite level of profitability or where the
Company's future profitability estimates increase due to changes in positive
evidence, the Company would reduce all or a portion of the applicable valuation
allowance in the period when such determination is made. This would result in an
increase to reported earnings and a decrease to the Company's effective tax rate
in such period. However, if the Company's projected future earnings do not
materialize, or if the Company operates at a loss in certain jurisdictions, or
if there is a material change in actual effective tax rates or time period
within which the Company's underlying temporary differences become taxable or
deductible, the Company could be required to increase the valuation allowance
against all or a significant portion of the Company's deferred tax assets
resulting in a substantial increase to the Company's effective tax rate for the
period of the change and a material adverse impact on its operating results for
the period.
The Company is subject to ongoing tax examinations and assessments in various
jurisdictions. Accordingly, the Company may incur additional tax expense based
upon the outcomes of such matters. In addition, when applicable, the Company
adjusts tax expense to reflect both favorable and unfavorable examination
results. The Company's ongoing assessments of the probable outcomes of
examinations and related tax positions require judgement and can materially
increase or decrease its effective rate as well as impact operating results.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (an interpretation of FASB Statement No. 109), ("FIN 48"),
which clarifies the relevant criteria and approach for the recognition,
de-recognition and measurement of uncertain tax positions. FIN 48 will be
effective for the Company beginning January 1, 2007. The Company is currently in
the process of assessing the effects of the provisions on FIN 48.
Page 37
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
The Company reported net earnings from continuing operations before income taxes
of $3.9 million or $0.09 per share on a diluted basis and net earnings from
continuing operations after taxes of $3.5 million or $0.08 per share on a
diluted basis for the second quarter of 2006. For the second quarter of 2005,
the Company reported net earnings from continuing operations before income taxes
of $1.5 million or $0.03 per share on a diluted basis and net earnings from
continuing operations after taxes of $0.9 million or $0.02 per share on a
diluted basis.
REVENUE
The Company's revenues for the second quarter of 2006 increased 34.1% to $41.4
million from $30.9 million in the same period last year.
Systems revenue increased to $24.0 million in the second quarter of 2006 from
$20.3 million in the second quarter of 2005, an increase of 17.9%. The Company
recognized revenue on 11 theater systems which qualified as either sales or
sales-type leases in the second quarter of 2006 compared to nine theater systems
in the second quarter of 2005. Revenue from sales and leases increased to $17.6
million in the second quarter of 2006 from $13.9 million in 2005, an increase of
26.4%. This increase was due to the increase in the number and mix of system
recognitions and partially offset by a decrease in settlement revenues. The
Company recognized $3.9 million in settlement revenue during the second quarter
of 2005, compared to $nil in the same period in 2006.
Four of the systems recognized in the second quarter of 2005 related to the sale
of used theater systems compared to nil used systems in the same period of 2006.
Average revenue per sales and sales-type systems increased in the second quarter
of 2006 compared to 2005 due to the four used systems sold in the second quarter
of 2005, compared to nil in the same period of 2006, and due to a difference in
the mix of systems.
THREE MONTHS ENDED
JUNE 30,
------------------
2006 2005
---- ----
Sales and Sales-type lease systems recognized
IMAX 2D GT................................... -- 1
IMAX 3D...................................... 3 4
IMAX 3D SR................................... 3 1
IMAX MPX..................................... 5 3
--- ---
11 9
=== ===
In addition, the Company installed and began recognizing revenue on one theater
system that qualified as an operating lease in the second quarter of 2006 versus
two in the same period in 2005. The Company recognizes revenue on operating
leases over the term of the leases.
The Company believes that it is possible that its installation of theater
systems in 2006 could be negatively impacted by (a) the difficulty it is
experiencing in effecting "sign and install" transactions, which are agreements
for theater systems that are installed in the same calendar year in which they
are signed, which difficulty it believes is due in part to the disappointing
performance of the films V for Vendetta: The IMAX Experience, Poseidon: The IMAX
Experience and The Ant Bully: An IMAX 3D Experience and (b) the potential
slipping of some installations scheduled for the fourth quarter of 2006 into
2007. If this occurs, and there are not sufficient offsets to such installations
in other areas of the Company's business, the Company could potentially be
required to increase the valuation allowance against a portion of the Company's
deferred tax assets resulting in an increase to the Company's effective tax rate
for the period of the change in the estimate.
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 JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
(cont'd)
REVENUE (cont'd)
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. During the second quarter
of 2006, the Company did not recognize any settlement revenue. Included in IMAX
systems revenue for the three months ended June 30, 2005 is $3.9 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 decrease throughout 2006 in
comparison to 2005.
Ongoing rental revenue increased to $2.8 million in the second quarter of 2006
from $2.1 million in 2005 an increase of 35.3%. Maintenance revenue remained
consistent at $3.6 million in both second quarters of 2006 and 2005.
Film revenues increased to $12.2 million in the second quarter of 2006 from $5.3
million in the second quarter of 2005, due primarily to an increase in film
distribution, film post-production and DMR revenues. Film distribution revenues
increased to $5.0 million in the second quarter of 2006 from $2.7 million in the
second quarter of 2005, an increase of 88.0%. The increase is 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 to $3.0 million in the
second quarter of 2006 from $1.1 million in the second quarter of 2005, mainly
due to an increase in third party business relating to Superman Returns: An IMAX
3D Experience at the Company's post-production unit. IMAX DMR revenues, which
are revenues to the Company generated from the gross box office performance and
conversion services performed on IMAX DMR films, increased to $4.1 million in
the second quarter of 2006 from $1.4 million in the prior year quarter. The
increase in DMR revenue is due primarily to the releases of Superman Returns:
The IMAX 3D Experience in June 2006 and Poseidon: The IMAX Experience, in May
2006. Film production revenues remained consistent at $0.1 million in both the
second quarters of 2006 and 2005.
The Company believes it may see lower film revenues in 2006 due to the
disappointing performance of the films V for Vendetta: The IMAX Experience,
Poseidon: The IMAX Experience, and The Ant Bully: An IMAX 3D Experience. The
Company intends to release in conjunction with studios at least seven new films
in 2006 including the already released V for Vendetta: The IMAX Experience
(March 2006), Deep Sea 3D (March 2006), Poseidon: The IMAX Experience (May
2006), Superman Returns: An IMAX 3D Experience (June 2006) and The Ant Bully: An
IMAX 3D Experience (July 2006) and the still to be released Open Season: An IMAX
3D Experience (September 2006) and Happy Feet: An IMAX 3D Experience (November
2006).
Theater operations revenue decreased slightly to $4.1 million in the second
quarter of 2006 from $4.2 million in the second quarter of 2005. The Company
believes that it may see lower attendance rates in 2006 compared to the prior
year due to the disappointing performance of the films V for Vendetta: The IMAX
Experience, Poseidon: The IMAX Experience and The Ant Bully: An IMAX 3D
Experience.
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 JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
(cont'd)
REVENUE (cont'd)
Other revenue increased slightly to $1.2 million in the second quarter of 2006
compared to $1.1 million in the same period in 2005. Other revenue primarily
includes revenue generated from the Company's camera and rental business and
after market sales of projection system parts.
GROSS MARGIN
Gross margin in the second quarter of 2006 was $17.9 million, or 43.1% of total
revenue, compared to $15.9 million, or 51.4% of total revenue in the second
quarter of 2005.
Systems margins increased slightly in the second quarter of 2006 by $0.3 million
or 2.0%. Average gross margin on sales and sales-type lease of projection
systems increased in the second quarter of 2006 versus the same period in 2005
by 42.3%, primarily due to the mix of recognitions as four customers exercised
an option to convert their existing leases into outright purchases in the second
quarter of 2005, compared to none in the same period of 2006. The increase was
partially offset by a decrease in settlement revenue. The Company recognized
$3.9 million in settlement gross margin in the second quarter of 2005, compared
to $nil in the same period of 2006. The settlement amounts recognized in 2005
are related to consensual lease buyouts.
The Company's film gross margin increased in the second quarter of 2006 by $1.7
million. The Company's DMR gross margin increased by $1.6 million due primarily
to the gross box office performance and conversion services performed on
Superman Returns: An IMAX 3D Experience, and film post-production gross margin
increased by $0.3 million also primarily due to the level of third party
business resulting from Superman Returns: An IMAX 3D Experience. Film
distribution margin decreased by $0.2 million primarily due to lower margins
earned on the mix of films in release during the current quarter.
The Company's owned and operated theater gross margin increased by $0.4 million
in the second 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 $0.4 million in the second quarter of 2006,
primarily as result of the Company's decision to subsidize some of its after
market components and upgrades to a number of theaters showing Superman Returns:
An IMAX 3D Experience.
Page 40
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
(cont'd)
OTHER
Selling, general and administrative expenses were $9.5 million in the second
quarter of 2006 versus $9.8 million in the same period of 2005. Legal fees for
the second quarter of 2006 decreased by $0.7 million due to a reduction in the
number of outstanding legal matters in which the Company is involved. The
Company also amended its executive pension plan on March 8, 2006 to reduce
certain benefits, resulting in a savings of $0.9 million in compensation expense
for the second quarter of 2006 compared to the previous year quarter. Other
non-cash stock-based compensation decreased by $0.3 million in the second
quarter of 2006, due to changes in the Company's share price. Offsetting these
decreases, were $0.8 million of costs in connection with the Company's process
of seeking strategic alternatives, including a potential sale. Salaries and
benefits expense also increased by $0.6 million compared to the prior year
quarter due to the strengthening of the Canadian dollar. In addition, the
Company expensed $0.5 million for stock options granted in accordance with the
adoption of FAS 123R. In addition, the Company recorded a capital tax expense of
$0.1 million in the second quarter of 2006, compared to a $0.5 million recovery
in the prior year quarter. The Company recorded a foreign exchange gain of $0.4
million in the second quarter of 2006, compared to a loss of $0.5 million in the
second 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.
Receivable provisions net of recoveries for accounts receivable amounted to a
net provision of $0.2 million in the second quarter of 2006, compared to a net
recovery of $0.4 million in the second quarter of 2005. The Company recorded a
net recovery of $0.5 million in the second quarter of 2006 compared to $nil in
the second quarter of 2005 on financing receivables due to favorable outcomes on
lease amendments.
Interest income remained consistent at $0.3 million for both second quarters of
2006 and 2005.
Interest expense remained consistent at $4.2 million in the second 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 second 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 11% for the 2006 year to
quarterly pre-tax income. As of June 30, 2006, the Company had a gross deferred
income tax asset of $45.3 million, against which the Company is carrying a $37.5
million valuation allowance. On June 22, 2006, the Canadian Federal government
passed into law the elimination of the Large Corporations Tax retroactively as
of January 1, 2006. Further, long-term tax rate reductions were also affirmed
for taxation years 2008 through 2010. The Company's tax provision for the
quarter reflects both the retroactive elimination of the Large Corporations Tax
and the result of the long term reductions in the corporate tax rates. The
Company has reduced its gross deferred tax asset with an equal reduction in its
gross valuation allowance to reflect the reduction in long term income tax
rates.
Page 41
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
(cont'd)
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $0.7 million in the second
quarter of 2006, compared to $0.9 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. The Company believes that
the motion picture industry will be affected by the development of digital
technologies, particularly in the areas of content creation (image capture),
post-production (editing and special effects), distribution and display.
Consequently, the Company has made significant investments in digital
technologies, including the development of proprietary, patent-pending
technology 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.
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 second
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%. As of June
30, 2006, one of the Co-Chief Executives was approximately 98.0% vested and the
other Co-Chief Executive was approximately 79.3% vested.
Page 42
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
(cont'd)
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. Stock-based compensation
expense recognized under FAS 123R in the second quarter of 2006 was $0.5
million.
FAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Consolidated
Statement of Operations. Prior to the adoption of FAS 123R, the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with 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 June 30, 2006 included
compensation expense for share-based payment awards granted prior to, but not
yet vested as of January 1, 2006 based on the grant date fair value estimated in
accordance with the pro forma provisions of FAS 123 and compensation expense for
the share-based payment awards granted subsequent to January 1, 2006 based on
the grant date fair value estimated in accordance with the provisions of FAS
123R. In conjunction with the adoption of FAS 123R, the Company changed its
method of attributing the value of stock-based compensation to expense from a
method which recognized the expense as the options vest to the straight-line
single option method. Compensation expense for all share-based payment awards
granted on or prior to January 1, 2006 will continue to be recognized using the
historic method while compensation expense for all share-based payment awards
granted subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the second quarter of 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company's pro forma information required under FAS
123 for the periods prior to 2006, the Company also estimated forfeitures at the
time of grant and revised, if necessary, in subsequent periods.
Page 43
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005
(cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
The Company utilizes a lattice-binomial option-pricing model ("binomial model")
to determine the fair value of share-based payment awards. The fair value
determined by the binomial model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the Company's
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in management's opinion, the binomial
model best provides an accurate measure of the fair value of the Company's
employee stock options. Although the fair value of employee stock options is
determined in accordance with FAS 123R and SAB 107 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005
The Company reported net loss from continuing operations before income taxes of
$5.7 million or $0.14 per share on a diluted basis and net loss from continuing
operations after taxes of $4.6 million or $0.11 per share on a diluted basis for
the first half of 2006. For the first half of 2005 the Company reported net
earnings from continuing operations before income taxes of $2.4 million or $0.06
per share on a diluted basis and net earnings from continuing operations after
taxes of $1.9 million or $0.05 per share on a diluted basis.
REVENUE
The Company's revenues for the first half of 2006 decreased 1.0% to $61.8
million from $62.2 million in the same period last year.
Systems revenue decreased to $33.4 million in the first half of 2006 from $42.4
million in the first half of 2005, a decrease of 21.4%. The Company recognized
revenue on 14 theater systems which qualified as either sales or sales-type
leases in each of the first halves of 2006 and 2005. Revenue from sales and
leases decreased to $21.4 million in the first half of 2006 from $30.4 million
in 2005, a decrease of 29.6%. This decrease was due to the decrease in
settlement revenues from $11.0 million in the first half of 2005 compared to
$nil in the same period in 2006.
Two of the systems recognized in the first half of 2006 related to the sale of
used theater systems compared to four used systems in the same period of 2005.
Average revenue per sales and sales-type systems increased due to a difference
in the mix of systems recognized as outlined in the table below:
SIX MONTHS ENDED
JUNE 30,
----------------
2006 2005
---- ----
Sales and Sales-type lease systems recognized
IMAX 2D GT................................... -- 1
IMAX 3D...................................... 6 5
IMAX 3D SR................................... 3 4
IMAX MPX..................................... 5 4
--- ---
14 14
=== ===
Page 44
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 (cont'd)
REVENUE (cont'd)
In addition, the Company installed and began recognizing revenue on one theater
system that qualified as an operating lease in the first half of 2006 versus
three in the same period in 2005. The Company recognizes revenue on operating
leases over the term of the leases.
The Company generally enters into multi-year system 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. During the first half of
2006, the Company did not recognize any settlement revenue. Included in IMAX
systems revenue for the six months ended June 30, 2005 are the following types
of settlement arrangements: $0.2 related to MPX conversion agreements and $10.8
million related to consensual lease buyouts. In aggregate the Company recognized
$11.0 million in the six months ended June 30, 2005. 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.
Ongoing rental revenue decreased slightly by 1.4% in the first half of 2006
compared to the same period in 2005. Maintenance revenue remained consistent at
$7.1 million in both the first halves of 2006 and 2005.
Film revenues increased to $18.7 million in the first half of 2006 from $10.2
million in the first half of 2005, due primarily to an increase in film
distribution, film post-production and DMR revenues. Film distribution revenues
increased to $8.4 million in the first half of 2006 from $4.7 million in the
first half of 2005, an increase of 78.7%, and film production revenues increased
to $0.6 million in the first half of 2006 from $0.1 million in the first half 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 to $4.5 million in the first half of 2006 from $2.5 million in the
first half of 2005, mainly due to an increase in third party business at the
Company's post-production unit. IMAX DMR revenues, which are revenues to the
Company generated from the gross box office performance of IMAX DMR films,
increased by 76.7% in the first half of 2006. The increase in DMR revenue is due
primarily to the gross box office performance and conversion services performed
on Superman Returns: The IMAX 3D Experience, released in June 2006, and revenue
from the March 2006 release of V for Vendetta: The IMAX Experience, the May 2006
release of Poseidon: The IMAX Experience, and the continued success of Harry
Potter and the Goblet of Fire: The IMAX Experience re-released in November
2005. This increase is partially offset by the performance of Robots: The IMAX
Experience released in March 2005, Batman Begins: The IMAX Experience released
in June 2005 and The Polar Express: The IMAX 3D Experience released in November
2004.
Page 45
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 (cont'd)
REVENUE (cont'd)
The Company believes it may see lower film revenues in 2006 due to the
disappointing performance of the films V for Vendetta: The IMAX Experience,
Poseidon: The IMAX Experience and The Ant Bully: An IMAX 3D Experience. The
Company intends to release in conjunction with studios at least seven new films
in 2006 including the already released V for Vendetta: The IMAX Experience
(March 2006), Deep Sea 3D (March 2006), Poseidon: The IMAX Experience (May
2006), Superman Returns: An IMAX 3D Experience (June 2006) and The Ant Bully: An
IMAX 3D Experience (July 2006) and the still to be released Open Season: An IMAX
3D Experience (September 2006) and Happy Feet: An IMAX 3D Experience (November
2006).
Theater operations revenue decreased slightly to $7.7 million in the first half
of 2006 from $8.0 million in the first half of 2005, due to a decrease in
average ticket prices of 2.3% and a slight decrease in attendance of 2.8% due
primarily to the success of the IMAX 3D version of The Polar Express: The IMAX
3D Experience in the first half of 2005. The Company believes it may see lower
attendance rates in 2006 compared to the prior year due to the disappointing
performance of the films V for Vendetta: The IMAX Experience, Poseidon: The IMAX
Experience and The Ant Bully: An IMAX 3D Experience.
Other revenue increased to $2.1 million in the first half of 2006 compared to
$1.6 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.
GROSS MARGIN
Gross margin in the first half of 2006 was $23.9 million, or 38.6% of total
revenue, compared to $32.0 million, or 51.4% of total revenue in the first half
of 2005.
Systems margins declined in the first half of 2006 by $9.7 million or 34.4%.
Average gross margin on sales and sales-type lease of projection systems
increased by 7.9% in the first half of 2006 versus the same period in 2005,
primarily due to the difference in the mix of recognitions and to the sale of
two used systems in 2006, compared to four used systems in the same period of
2005. Partially offsetting this increase, the Company recognized $11.0 million
in settlement gross margin in the first half of 2005, compared to $nil in the
same period of 2006. The settlement amounts recognized in the first half of 2005
are detailed as follows: $0.2 million related to MPX conversion agreements and
$10.8 million related to consensual lease buyouts.
The Company's film gross margin increased in the first half of 2006 by $1.6
million. The Company's DMR gross margin increased by $1.4 million, due primarily
to the gross box office performance and conversion services performed on
Superman Returns: An IMAX 3D Experience, and post-production gross margin
increased by $0.5 million, also primarily due to the level of third party
business resulting from Superman Returns: An IMAX 3D Experience. Film
distribution margin decreased by $1.0 million, primarily due to lower margins
earned on the mix of films in release during the year.
The Company's owned and operated theater gross margin increased by $0.7 million
in the first half 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 $0.8 million in the first half of 2006,
primarily as result of the Company's decision to subsidize some of its after
market components and upgrades to a number of theaters showing Superman Returns:
An IMAX 3D Experience.
Page 46
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 (cont'd)
OTHER
Selling, general and administrative expenses were $20.0 million in the first
half of 2006 versus $20.1 million in the same period of 2005. Legal fees for the
first half of 2006 decreased by $0.9 million due to a reduction in the number of
outstanding legal matters in which the Company is involved. The Company also
amended its executive pension plan on March 8, 2006 to reduce certain benefits,
resulting in a savings of $1.3 million in compensation expense for the first
half of 2006 compared to the same period in 2005. Partially offsetting these
decreases, the Company incurred expenses of $0.9 million in connection with the
Company's process of seeking strategic alternatives, including a potential sale.
Professional fees also increased by $0.4 million as the Company incurred costs
to implement the accounting for Financial Accounting Standards No. 123,
"Share-Based Payment" ("FAS 123R"), and to amend the Company's pension plan. In
addition, the Company expensed $0.8 million for stock options granted in
accordance with the adoption of FAS 123R. Salaries and benefits expense also
increased by $0.8 million during the first half of 2006 due to a higher Canadian
dollar denominated salary expense on the strengthening of the Canadian dollar
compared to the same period in the prior year. In addition, the Company recorded
a capital tax expense of $0.3 million in the first half of 2006, compared to a
$0.3 million recovery in the same period in 2005. The Company recorded a foreign
exchange gain of $0.4 million in the first half of 2006, compared to a loss of
$0.7 million in the first half of 2005. The Company records foreign exchange
translation gains and losses primarily on a portion of its financing receivable
balances which are denominated in Canadian dollars, Euros and Japanese Yen.
Receivable provisions net of recoveries for accounts receivable amounted to a
net provision of $0.4 million in the first half of 2006, compared to a net
recovery of $0.1 million in the first half of 2005. The Company recorded a net
recovery of $0.5 million and $0.1 million in the first halves of 2006 and 2005,
respectively, on financing receivables due to favorable outcomes on lease
amendments.
Interest income remained consistent at $0.5 million in the first halves of 2006
and 2005.
Interest expense remained consistent at $8.4 million in the first halves of 2006
and 2005. Included in interest expense is the amortization of deferred finance
costs in the amount of $0.4 million in the first halves 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 11% for the 2006 year to
quarterly pre-tax income. As of June 30, 2006, the Company had a gross deferred
income tax asset of $45.3 million, against which the Company is carrying a $37.5
million valuation allowance. In the six month period the Company favorably
resolved a provincial income tax audit resulting in the release of related tax
reserves of $0.5 million to the income tax recovery for the period. Also, on
June 22, 2006, the Canadian Federal government passed into law the elimination
of the Large Corporations Tax retroactively as of January 1, 2006. Further,
long-term tax rate reductions were also affirmed for taxation years 2008 through
2010. The Company's tax provision for the quarter reflects both the retroactive
elimination of the Large Corporations Tax and the result of the long term
reductions in the corporate tax rates. The Company has reduced its gross
deferred tax asset with an equal reduction in its gross valuation allowance to
reflect the reduction in long term income tax rates.
Page 47
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 (cont'd)
RESEARCH AND DEVELOPMENT
Research and development expenses remained consistent at $1.6 million in the
first halves of 2006 and 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. The Company believes that the
motion picture industry will be affected by the development of digital
technologies, particularly in the areas of content creation (image capture),
post-production (editing and special effects), distribution and display.
Consequently, the Company has made significant investments in digital
technologies, including the development of proprietary, patent-pending
technology 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.
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 halves
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.
Page 48
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 (cont'd)
PENSION PLAN AMENDMENT
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the unfunded U.S. defined benefit pension plan covering its two
Co-Chief Executive Officers. Under the original terms of the plan, once benefit
payments begin, the benefit is indexed annually to the cost of living and
further provides for 100% continuance for life to the surviving spouse. Under
the terms of the plan amendment, the cost of living adjustment and surviving
spouse benefits previously owed to the Co-Chief Executive Officers are each
reduced by 50%, subject to a recoupment of a percentage of such benefits upon a
change of control of the Company, and the net present value of the reduced
benefit payments is accelerated and paid out upon a change of control of the
Company. The benefits were 50% vested as of July 2000, the plan initiation date.
The vesting percentage increases on a straight-line basis from inception until
age 55. The vesting percentage of a member whose employment terminates other
than by voluntary retirement or upon change of control shall be 100%. As of June
30, 2006, one of the Co-Chief Executives was approximately 98.0% vested and the
other Co-Chief Executive was approximately 79.3% 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.
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 six months ended June 30, 2006 was
$0.8 million.
FAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Consolidated
Statement of Operations. Prior to the adoption of FAS 123R, the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with 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 49
IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
RESULTS OF OPERATIONS (cont'd)
SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 (cont'd)
EMPLOYEE STOCK-BASED COMPENSATION (cont'd)
Stock-based compensation expense recognized in the Company's Consolidated
Statement of Operations for the first half of 2006 includes compensation expense
for share-based payment awards granted prior to, but not yet vested as of
January 1, 2006 based on the grant date fair value estimated in accordance with
the pro forma provisions of FAS 123 and compensation expense for the share-based
payment awards granted subsequent to January 1, 2006 based on the grant date
fair value estimated in accordance with the provisions of FAS 123R. In
conjunction with the adoption of FAS 123R, the Company changed its method of
attributing the value of stock-based compensation to expense from a method which
recognized the expense as the options vest to the straight-line single option
method. Compensation expense for all share-based payment awards granted on or
prior to January 1, 2006 will continue to be recognized using the historic
method while compensation expense for all share-based payment awards granted
subsequent to January 1, 2006 is recognized using the straight-line
single-option method. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the first quarter of 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company's pro forma information required under FAS
123 for the periods prior to 2006, the Company also estimated forfeitures at the
time of grant and revised, if necessary, in subsequent periods.
The Company utilizes a lattice-binomial option-pricing model ("binomial model")
to determine the fair value of share-based payment awards. The fair value
determined by the binomial model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the Company's
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in management's opinion, the binomial
model best provides an accurate measure of the fair value of the Company's
employee stock options. Although the fair value of employee stock options is
determined in accordance with FAS 123R and SAB 107 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
OTHER
The Company is in the process of responding to an informal inquiry from the
U.S. Securities and Exchange Commission regarding the Company's timing of
revenue recognition, including its application of multiple element
arrangement accounting in its revenue recognition for theater systems. Under
multiple element arrangement accounting, the revenues associated with different
elements of an IMAX theater system contract are segregated and can be recognized
in different periods. (See "Critical Accounting Policies," above, for a more
detailed explanation of its accounting policies with regard to theater system
installations). As reported in the Company's 2005 10-K, the Company recognized
revenue in the fourth quarter of 2005 on 10 theater installations in theaters
which did not open in that quarter. In three of the ten installations, all of
the constituent elements of the projection systems were installed in the fourth
quarter. Of the remaining seven installations, revenue associated with the
screen element of the system was deferred until the final screen was installed.
Of these seven installations, three theaters had their screens completed in the
first quarter of 2006, two in the second quarter of 2006, and screens in the
remaining two theaters have either since been completed or are expected to be
completed over the remainder of 2006. The value associated with the elements
other than the screen elements of those system installations was recognized in
the fourth quarter when they were substantially completed. Finally, on one of
these ten installations, the Company has an obligation to de-install and move
the theater system. The fair value of this obligation of $0.1 million has not
been recognized into income. The Company believes its application of the above
accounting policy is, and has historically been, in accordance with GAAP, and
the Company's position is supported by its auditors, PricewaterhouseCoopers LLP.
This accounting policy has similarly been applied to one theater installation in
the second quarter of 2006, where revenue associated with the screen element has
been deferred to a future period. The Company is cooperating in this inquiry.
Page 50
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 as amended on June 30, 2005 and as further amended by
the Second Amendment to the Loan Agreement which was entered into with effect
from May 16th, 2006 (the "Credit Facility"). The Credit Facility is a revolving
credit facility expiring on October 31, 2009 with an optional one year renewal
thereafter contingent upon approval by the lender, permitting maximum aggregate
borrowings of $40.0 million, subject to a borrowing base calculation which
includes the Company's financing receivables, operating leases, finished goods
inventory, and capital assets with certain reserve requirements and deductions
for outstanding letters of credit. The Credit Facility bears interest at the
applicable prime rate per annum or Libor plus a margin as specified therein per
annum and is collateralized by a first priority security interest in all of the
current and future assets of the Company. The Credit Facility contains typical
affirmative and negative covenants, including covenants that restrict the
Company's ability to: incur certain additional indebtedness; make certain loans,
investments or guarantees; pay dividends; make certain asset sales; incur
certain liens or other encumbrances; conduct certain transactions with
affiliates and enter into certain corporate transactions. In addition, the
Credit Facility contains customary events of default, including upon an
acquisition or a change of control that may have a material adverse effect on
the Company or a guarantor. The Credit Facility also requires the Company to
maintain a minimum level of earnings before interest, taxes, depreciation and
amortization, and cash collections.
CASH AND CASH EQUIVALENTS
As at June 30, 2006, the Company's principal sources of liquidity included cash
and cash equivalents of $21.6 million, short-term investments of $8.4 million,
the Credit Facility, trade accounts receivable of $27.3 million and anticipated
collection from net investment in leases due in the next 12 months of $6.5
million. As at June 30, 2006, the Company has not drawn down on the Credit
Facility, and has letters of credit for $9.8 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.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
CASH AND CASH EQUIVALENTS (cont'd)
Cash used in operating activities amounted to $4.9 million for the period ended
June 30, 2006. Changes in other non-cash operating assets as compared to
December 31, 2005 include an increase of $1.9 million in inventories, an
increase of $1.4 million in financing receivables, a $2.7 million increase in
accounts receivable and a $0.3 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 $2.7 million, an
increase in accounts payable of $0.1 million and an increase of $0.9 million in
accrued liabilities. Included in accrued liabilities for the period ended June
30, 2006 were $26.1 million in respect of accrued pension obligations which are
mostly long-term in nature.
Cash used in investing activities amounted to $1.6 million in the first half of
2006, which includes purchases of short-term investments of $10.3 million,
proceeds from maturities of short-term investments of $10.3 million, purchases
of $0.7 million in fixed assets, an increase in other assets of $ 0.6 million
and an increase in other intangible assets of $0.3 million.
Cash provided by financing activities in the first half 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 $7.4 million for the first half of 2006.
Cash provided by operating activities amounted to $3.6 million for the period
ended June 30, 2005. Changes in other non-cash operating assets and liabilities
included an increase in deferred revenue of $6.0 million, and a decrease of $3.4
million in accrued liabilities. Cash used by investing activities for the first
half of 2005 amounted to $16.1 million, primarily consisting of $23.1 million
invested in short-term investments and $8.1 million received from proceeds of
short-term investments. Cash provided by financing activities amounted to $2.1
million due to the issuance of common shares through the exercise of stock
options. Capital expenditures including the purchase of fixed assets net of
sales proceeds and investments in film assets were $5.3 million for the first
half of 2005.
LETTERS OF CREDIT AND OTHER COMMITMENTS
As at June 30, 2006, the Company has letters of credit of $9.8 million
outstanding, of which the entire balance has been secured by the Credit
Facility.
SENIOR NOTES DUE 2010
As at June 30, 2006, the Company had outstanding $159.0 million aggregate
principal of Registered Senior Notes and $1.0 million aggregate principal of
Unregistered Senior Notes.
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IMAX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont'd)
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
PENSION OBLIGATIONS
The Company has a defined benefit pension plan covering its two Co-Chief
Executive Officers. As at June 30, 2006, the Company had an unfunded and accrued
projected benefit obligation of approximately $26.1 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 June 30, 2006, the cash
surrender value of the insurance policies is $3.7 million (December 31, 2005 -
$3.3 million).
On March 8, 2006, the Company and the Co-Chief Executives negotiated an
amendment to the plan. Under the terms of the plan amendment, the cost of living
adjustment and surviving spouse benefits previously owed to the Co-Chief
Executive Officers are each reduced by 50%, subject to a recoupment of a
percentage of such benefits upon a change of control of the Company, and the net
present value of the reduced pension benefit payments is accelerated and paid
out upon a change of control of the Company. The benefits were 50% vested as of
the plan initiation date. The vesting percentage increases on a straight-line
basis from inception until age 55. The vesting percentage of a member whose
employment terminates other than by voluntary retirement or upon change in
control shall be 100%. As of June 30, 2006, one of the Co-Chief Executives was
approximately 98.0% vested and the other Co-Chief Executive was approximately
79.3% vested.
OFF-BALANCE SHEET ARRANGEMENTS
There are currently no off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on the Company's
financial condition.
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IMAX CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency rates.
The Company does not use financial instruments for trading or other speculative
purposes.
A majority of the Company's revenue is denominated in U.S. dollars while a
significant portion of its costs and expenses is denominated in Canadian
dollars. A portion of the Company's net U.S. dollar flows is converted to
Canadian dollars to fund Canadian dollar expenses through the spot market. In
Japan, the Company has ongoing operating expenses related to its operations. Net
Japanese yen flows are converted to U.S. dollars through the spot market. The
Company also has cash receipts under leases denominated in Japanese yen, Euros
and Canadian dollars. The Company plans to convert Japanese yen and Euros lease
cash flows to U.S. dollars through the spot markets on a go-forward basis.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods.
The Company's management, with the participation of its Co-Chief Executive
Officers and its Chief Financial Officer, evaluated the effectiveness of the
Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of June 30, 2006. Based on
that evaluation, the Company's Co-Chief Executive Officers and Chief Financial
Officer have concluded that, as of that date, the Company's disclosure controls
and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15
were not effective at the reasonable assurance level because of the
identification of a material weakness in the Company's internal control over
financial reporting, which management views as an integral part of the Company's
disclosure controls and procedures. This material weakness related to the
controls surrounding the analysis and recording of complex film accounting
transactions in the three months ended June 30, 2006. This control deficiency
resulted in an adjustment to the Company's Consolidated Statement of Operations
for the three months ended June 30, 2006 of approximately $0.8 million.
As of the third quarter of 2006, management is implementing controls to
strengthen the analysis of complex film accounting transactions, including
engaging independent third party experts to analyze the Company's proposed
accounting treatment of such transactions.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than indicated above, there were no changes in the Company's internal
control over financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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IMAX CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(A) In March 2005, the Company, together with Three-Dimensional Media Group,
Ltd. ("3DMG"), filed a complaint in the U.S. District Court for the Central
District of California, Western Division, against In-Three, Inc.
("In-Three") alleging patent infringement and seeking injunctive relief and
damages. In April 2005, In-Three filed an answer denying infringement and
asserting counterclaims that seek a declaratory 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.
The U.S. District Court for the Central District of California, Western
Division has stayed a determination on the joint motion at the joint
request of the Company, 3DMG, and In-Three pending a resolution of an
arbitration proceeding between the Company and 3DMG before the
International Centre for Dispute Resolution relating to rights under
agreements between the Company and 3DMG.
(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,
which order was denied by the Court so that the judgement remains
executable. On November 30, 2005, Big Screen filed an application for the
opening of insolvency proceedings which were formally opened on May 2,
2006. As a consequence of Big Screen's insolvency, the appeal proceeding
has been put on hold and it is uncertain whether it will continue.
(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. Following the opening of formal
insolvency proceedings, the litigation has been put on hold and it is
unlikely that it will continue.
(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 in November 2005. On February 1, 2006, the ICC issued an award
finding unanimously in the Company's favor on all claims. The ICC hearing
to determine the amount of damages to be awarded to the Company took place
on July 26 - 28, 2006. The ICC panel has not yet rendered its decision with
respect to such damages and no amount has yet been recorded for these
damages.
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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 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.
(G) The Company is in the process of responding to informal inquiries from
the U.S. Securities and Exchange Commission and the Ontario Securities
Commission regarding the Company's timing of revenue recognition, including
its application of multiple element arrangement accounting in its revenue
recognition for theater systems. The Company believes its application of
its accounting policies is, and has historically been, in accordance with
GAAP, and the Company's position is supported by its auditors,
PricewaterhouseCoopers LLP. The Company is cooperating in these inquiries.
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A. Risk
Factors in the Company's Annual Report on Form 10-K for the year ended December
31, 2005.
ITEM 5. OTHER INFORMATION
On May 11, 2006, a special committee of the Board was formed to review the terms
of possible transactions in connection with the Company's exploration of
strategic alternatives, including the possible sale or merger of the business
(the "Special Committee"). On August 8, 2006, the Board of Directors approved
the following compensation for the Directors who were appointed to the Special
Committee. The Chairman of the Special Committee shall receive a one-time
payment of $35,000 and other Special Committee members shall receive a one-time
payment of $30,000. Any expenses incurred in connection with participation in
Special Committee meetings shall be reimbursed.
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IMAX CORPORATION
PART II OTHER INFORMATION (cont'd)
ITEM 6. EXHIBITS
(A) EXHIBITS
4.10 Fourth Supplemental Indenture dated April 10, 2006 among IMAX
Corporation, the Existing Guarantors (as defined therein), the First
Supplemental Guarantors named in the Supplemental Indenture, the Second
Supplemental Guarantors named in the Second Supplemental Indenture,
Conversion Films Ltd., Feathered Films Ltd. and Great Ant Productions
Ltd. and U.S. Bank National Association, as trustee under the Indenture.
4.11 Fifth Supplemental Indenture dated June 19, 2006 among IMAX Corporation,
the Existing Guarantors (as defined therein), First Supplemental
Guarantors named in the Supplemental Indenture, the Second Supplemental
Guarantor named in the Second Supplemental Indenture, the Fourth
Supplemental Guarantors named in the Fourth Supplemental Indenture,
Acorn Rain Productions Ltd. (the "Guaranteeing Subsidiary") and U.S.
Bank National Association, as trustee under the Indenture.
10.27 Second Amendment to the Loan Agreement as of and with effect May 16,
2006, between IMAX Corporation and Wachovia Capital Finance Corporation
(Canada) (formerly, Congress Financial Corporation (Canada)).
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated August 9, 2006, by Bradley J. Wechsler.
31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated August 9, 2006, by Richard L. Gelfond.
31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002, dated August 9, 2006, by Francis T. Joyce
32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated August 9, 2006, by Bradley J. Wechsler.
32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated August 9, 2006, by Richard L. Gelfond.
32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002, dated August 9, 2006, by Francis T. Joyce
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IMAX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAX CORPORATION
Date: August 9, 2006 By: /s/ Francis T. Joyce
------------------------------------
Francis T. Joyce
Chief Financial Officer
(Principal Financial Officer)
Date: August 9, 2006 By: /s/ Kathryn A. Gamble
------------------------------------
Kathryn A. Gamble
Vice President, Finance, Controller
(Principal Accounting Officer)
Page 58